e10vk
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2006
OR
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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 1-13926
DIAMOND OFFSHORE DRILLING, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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76-0321760 |
(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
15415 Katy Freeway
Houston, Texas 77094
(Address and zip code of principal executive offices)
(281) 492-5300
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
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Name of each exchange on which registered |
Common Stock, $0.01 par value per share
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
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 þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one): Large Accelerated Filer þ Accelerated
Filer o Non-Accelerated Filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
State the aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was last sold as
of the last business day of the registrants most recently completed second fiscal quarter.
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As of June 30, 2006
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$4,956,973,448 |
Indicate the number of shares outstanding of each of the registrants classes of common stock,
as of the latest practicable date.
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As of February 20, 2007
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Common Stock, $0.01 par value per share
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138,347,072 shares |
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement relating to the 2007 Annual Meeting of
Stockholders of Diamond Offshore Drilling, Inc., which will be filed within 120 days of
December 31, 2006, are incorporated by reference in Part III of this report.
DIAMOND OFFSHORE DRILLING, INC.
FORM 10-K for the Year Ended December 31, 2006
TABLE OF CONTENTS
2
PART I
Item 1. Business.
General
Diamond Offshore Drilling, Inc. is a leading, global offshore oil and gas drilling contractor
with a current fleet of 44 offshore rigs consisting of 30 semisubmersibles, 13 jack-ups and one
drillship. In addition, we have two jack-up drilling units on order at shipyards in Brownsville,
Texas and Singapore. We expect delivery of both of these units during the first quarter 2008.
Unless the context otherwise requires, references in this report to Diamond Offshore, we, us
or our mean Diamond Offshore Drilling, Inc. and our consolidated subsidiaries. We were
incorporated in Delaware in 1989.
The Fleet
Our fleet includes some of the most technologically advanced rigs in the world, enabling us to
offer a broad range of services worldwide in various markets, including the deep water, harsh
environment, conventional semisubmersible and jack-up markets.
Semisubmersibles. We own and operate 30 semisubmersibles, consisting of nine
high-specification and 21 intermediate semisubmersible rigs. Semisubmersible rigs consist of an
upper working and living deck resting on vertical columns connected to lower hull members. Such
rigs operate in a semi-submerged position, remaining afloat, off bottom, in a position in which
the lower hull is approximately 55 feet to 90 feet below the water line and the upper deck
protrudes well above the surface. Semisubmersibles are typically anchored in position and remain
stable for drilling in the semi-submerged floating position due in part to their wave transparency
characteristics at the water line. Semisubmersibles can also be held in position through the use
of a computer controlled thruster (dynamic-positioning) system to maintain the rigs position over
a drillsite. We have three semisubmersible rigs in our fleet with this capability.
Our high specification semisubmersibles have high-capacity deck loads and are generally
capable of working in water depths of 4,000 feet or greater or in harsh environments and have other
advanced features, as compared to intermediate semisubmersibles. As of January 29, 2007, seven of
our nine high-specification semisubmersibles were located in the U.S. Gulf of Mexico, or GOM, while
the remaining two rigs were located offshore Brazil and Malaysia.
Our intermediate semisubmersibles generally work in maximum water depths up to 4,000 feet, and
many have diverse capabilities that enable them to provide both shallow and deep water service in
the U.S. and in other markets outside the U.S. As of January 29, 2007, we had 19 intermediate
semisubmersible rigs drilling offshore various locations around the world. Five of these
semisubmersibles were located in the GOM; three were located in the Gulf of Mexico offshore Mexico,
or Mexican GOM, four were located in the North Sea, two were located offshore Australia, two were
located offshore Brazil and one was located offshore each of New Zealand, Vietnam and Egypt.
Our remaining two intermediate semisubmersibles, the Ocean Endeavor and Ocean Monarch, are
currently in Singapore. The shipyard portion of the upgrade of the Ocean Endeavor has been
completed, and the rig is currently undergoing sea trials and commissioning. The upgrade of the
Ocean Monarch commenced in mid-2006. See Fleet Enhancements and Additions.
Jack-ups. We currently own and operate 13 jack-up drilling rigs. Jack-up rigs are mobile,
self-elevating drilling platforms equipped with legs that are lowered to the ocean floor until a
foundation is established to support the drilling platform. The rig hull includes the drilling rig,
jacking system, crew quarters, loading and unloading facilities, storage areas for bulk and liquid
materials, heliport and other related equipment. Our jack-ups are used for drilling in water
depths from 20 feet to 350 feet. The water depth limit of a particular rig is principally
determined by the length of the rigs legs. A jack-up rig is towed to the drillsite with its hull
riding in the sea, as a vessel, with its legs retracted. Once over a drillsite, the legs are
lowered until they rest on the seabed and jacking continues until the hull is elevated above the
surface of the water. After completion of drilling operations, the hull is lowered until it rests
in the water and then the legs are retracted for relocation to another drillsite.
3
Most of our jack-up rigs are equipped with a cantilever system that enables the rig to
cantilever or extend its drilling package over the aft end of the rig. This is particularly
important when attempting to drill over existing platforms. Cantilever rigs have historically
earned higher dayrates and achieved greater utilization compared to slot rigs.
As of January 29, 2007, nine of our 13 jack-up rigs were located in the GOM. Six of those
rigs are independent-leg cantilevered units, two are mat-supported cantilevered units, and one is a
mat-supported slot unit. Of our four remaining jack-up rigs, three are internationally based and
are independent-leg cantilevered rigs; one was located offshore Indonesia, one was located offshore
Africa and the other rig was located offshore Qatar. Our remaining jack-up rig was located in the
Mexican GOM and is also an independent-leg cantilever unit.
In addition, we have two premium jack-up rigs currently under construction. We expect
delivery of both of these units during the first quarter of 2008. See Fleet Enhancements and
Additions.
Drillship. We have one high-specification drillship, the Ocean Clipper, which was located
offshore Brazil as of January 29, 2007. Drillships, which are typically self-propelled, are
positioned over a drillsite through the use of either an anchoring system or a dynamic-positioning
system similar to those used on certain semisubmersible rigs. Deepwater drillships compete in many
of the same markets as do high-specification semisubmersible rigs.
Fleet Enhancements and Additions. Our strategy is to economically upgrade our fleet to meet
customer demand for advanced, efficient, high-tech rigs, particularly deepwater semisubmersibles,
in order to maximize the utilization and dayrates earned by the rigs in our fleet. Since 1995, we
have increased the number of our rigs capable of operating in 3,500 feet or more of water from
three rigs to 12 (nine of which are high-specification units), primarily by upgrading our existing
fleet. Five of these upgrades were to our Victory-class semisubmersible rigs, the design of which
we believe is well-suited for significant upgrade projects. We have recently completed the
shipyard portion of the upgrade of one of our remaining Victory-class rigs and another upgrade is
currently underway in Singapore. We have two additional Victory-class rigs that are currently
operating as intermediate semisubmersibles.
In 2006, we began a major upgrade of the Ocean Monarch, a Victory-class semisubmersible that
we acquired in August 2005 for $20.0 million. The modernized rig is being designed to operate in
up to 10,000 feet of water in a moored configuration for an estimated cost of approximately $300
million. Through December 31, 2006, we had spent $33.9 million related to this project. The Ocean
Monarch is expected to be ready for deepwater service in the fourth quarter of 2008.
In addition, the shipyard portion of the upgrade of the Ocean Endeavor has been completed.
The rig is currently undergoing sea trials and commissioning. The unit will remain in Singapore
until the arrival of a heavy-lift vessel, anticipated late in the first quarter of 2007, which will
return the rig to the GOM. The Ocean Endeavor is expected to commence drilling operations in the
GOM in mid-2007. We estimate that the total cost of the upgrade will be approximately $253 million
of which $208.4 million had been spent through December 31, 2006.
In the second quarter of 2005, we entered into agreements to construct two high-performance,
premium jack-up rigs. The two new drilling units, the Ocean Scepter and the Ocean Shield, are
being constructed in Brownsville, Texas and Singapore, respectively, at an aggregate expected cost
of approximately $320 million, including drill pipe and capitalized interest, of which $176.1
million had been spent through December 31, 2006. Each newbuild jack-up rig will be equipped with
a 70-foot cantilever package, be capable of drilling depths of up to 35,000 feet and have a hook
load capacity of two million pounds. We expect delivery of both of these units during the first
quarter of 2008. See Risk Factors in Item 1A of this report.
We will evaluate further rig acquisition and upgrade opportunities as they arise. However, we
can provide no assurance whether or to what extent we will continue to make rig acquisitions or
upgrades to our fleet. See Managements Discussion and Analysis of Financial Condition and
Results of Operations Liquidity and Capital Requirements in Item 7 of this report.
4
More detailed information concerning our fleet of mobile offshore drilling rigs, as of
January 29, 2007, is set forth in the table below.
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Nominal |
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Water Depth |
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Year Built/Latest |
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Current |
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Type and Name |
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Rating (a) |
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Attributes |
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Enhancement (b) |
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Location (c) |
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Customer (d) |
High-Specification Floaters |
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Semisubmersibles (9): |
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Ocean Confidence |
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7,500 |
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DP; 15K; 4M |
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2001 |
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GOM |
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BP |
Ocean Baroness |
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7,000 |
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VC; 15K; 4M |
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1973/2002 |
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GOM |
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Amerada Hess |
Ocean Rover |
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7,000 |
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VC; 15K; 4M |
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1973/2003 |
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Malaysia |
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Murphy Exploration |
Ocean America |
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5,500 |
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SP; 15K; 3M |
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1988/1999 |
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GOM |
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Mariner Energy |
Ocean Valiant |
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5,500 |
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SP; 15K; 3M |
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1988/1999 |
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GOM |
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Anadarko |
Ocean Victory |
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5,500 |
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VC; 15K; 3M |
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1972/1997 |
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GOM |
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Dominion E&P |
Ocean Star |
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5,500 |
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VC; 15K; 3M |
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1974/1999 |
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GOM |
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Anadarko |
Ocean Alliance |
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5,000 |
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DP; 15K; 3M |
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1988/1999 |
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Brazil |
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Petrobras |
Ocean Quest |
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3,500 |
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VC; 15K; 3M |
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1973/1996 |
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GOM |
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ATP Oil & Gas |
Drillship (1): |
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Ocean Clipper |
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7,500 |
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DP; 15K; 3M |
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1976/1999 |
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Brazil |
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Petrobras |
Intermediate Semisubmersibles (19): |
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Ocean Winner |
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4,000 |
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3M |
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1977/2004 |
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Brazil |
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Petrobras |
Ocean Worker |
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3,500 |
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3M |
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1982/1992 |
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Mexican GOM |
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PEMEX |
Ocean Yatzy |
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3,300 |
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DP |
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1989/1998 |
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Brazil |
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Petrobras |
Ocean Voyager |
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3,200 |
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VC |
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1973/1995 |
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GOM |
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Woodside Energy |
Ocean Patriot |
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3,000 |
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15K; 3M |
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1982/2003 |
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New Zealand |
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NZOP |
Ocean Yorktown |
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2,200 |
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3M |
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1976/1996 |
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Mexican GOM |
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PEMEX |
Ocean Concord |
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2,200 |
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3M |
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1975/1999 |
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GOM |
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Pogo Producing |
Ocean Lexington |
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2,200 |
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3M |
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1976/1995 |
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Egypt |
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BP Egypt |
Ocean Saratoga |
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2,200 |
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3M |
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1976/1995 |
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GOM |
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Shipyard; Life extension project |
Ocean Epoch |
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1,640 |
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3M |
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1977/2000 |
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Australia |
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Shell Australia |
Ocean General |
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1,640 |
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3M |
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1976/1999 |
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Vietnam |
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Premier Oil |
Ocean Bounty |
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1,500 |
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VC; 3M |
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1977/1992 |
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Australia |
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Woodside Energy |
Ocean Guardian |
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1,500 |
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15K; 3M |
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1985 |
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North Sea |
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Shell |
Ocean New Era |
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1,500 |
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1974/1990 |
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GOM |
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W&T Offshore |
Ocean Princess |
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1,500 |
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15K; 3M |
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1977/1998 |
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North Sea |
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Talisman |
Ocean Whittington |
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1,500 |
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3M |
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1974/1995 |
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GOM |
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Shipyard; Life extension project |
Ocean Vanguard |
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1,500 |
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15K; 3M |
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1982 |
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North Sea |
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Total |
Ocean Nomad |
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1,200 |
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3M |
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1975/2001 |
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North Sea |
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Talisman |
Ocean Ambassador |
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1,100 |
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3M |
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1975/1995 |
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Mexican GOM |
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PEMEX |
Jack-ups (13): |
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Ocean Titan |
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350 |
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IC; 15K; 3M |
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1974/2004 |
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GOM |
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Actively Marketing |
Ocean Tower |
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350 |
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IC; 3M |
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1972/2003 |
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GOM |
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Chevron |
Ocean King |
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300 |
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IC; 3M |
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1973/1999 |
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GOM |
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El Paso Production |
Ocean Nugget |
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300 |
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IC |
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1976/1995 |
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Mexican GOM |
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PEMEX |
Ocean Summit |
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300 |
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IC |
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1972/2003 |
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GOM |
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Newfield Exploration |
Ocean Heritage |
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300 |
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IC |
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1981/2002 |
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Qatar |
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Maersk Oil |
Ocean Spartan |
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300 |
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IC |
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1980/2003 |
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GOM |
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Walter Oil & Gas |
Ocean Spur |
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300 |
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IC |
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1981/2003 |
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Tunisia |
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Soco Tunisia |
Ocean Sovereign |
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300 |
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IC |
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1981/2003 |
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Indonesia |
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Kodeco |
Ocean Champion |
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250 |
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MS |
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1975/2004 |
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GOM |
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Apache |
Ocean Columbia |
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250 |
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IC |
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1978/1990 |
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GOM |
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Newfield Exploration |
Ocean Crusader |
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200 |
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MC |
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1982/1992 |
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GOM |
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Walter Oil & Gas |
Ocean Drake |
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200 |
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MC |
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1983/1986 |
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GOM |
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Chevron |
Under Construction (4): |
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Ocean Endeavor |
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10,000 |
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VC; 15K; 4M |
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1975/2007 |
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Singapore |
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Construction completed: Sea trials and commissioning |
Ocean Monarch |
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1,500 |
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VC |
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1974/2008 |
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Singapore |
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Shipyard; Upgrade to 10,000' |
Ocean Scepter |
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350 |
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IC; 15K; 3M |
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2008 |
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GOM/Brownsville, TX |
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New; Under Construction |
Ocean Shield |
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350 |
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IC; 15K; 3M |
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2008 |
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Singapore |
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New; Under Construction |
Attributes
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DP
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Dynamically-Positioned/Self-Propelled
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MS
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Mat-Supported Slot Rig
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3M
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Three Mud Pumps |
IC
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Independent-Leg Cantilevered Rig
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VC
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Victory-Class
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4M
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Four Mud Pumps |
MC
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Mat-Supported Cantilevered Rig
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SP
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Self-Propelled
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15K
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15,000 psi well control system |
See the footnotes to this table on the following page.
5
(a) |
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Nominal water depth (in feet), as described above for semisubmersibles and drillships,
reflects the current outfitting for each drilling unit. In many cases, individual rigs are
capable of achieving, or have achieved, greater water depths. In all cases, floating rigs are
capable of working successfully at greater depths than their nominal water depth. On a case
by case basis, we may achieve a greater depth capacity by providing additional equipment. |
(b) |
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Such enhancements may include the installation of top-drive drilling systems, water depth
upgrades, mud pump additions and increases in deck load capacity. Top-drive drilling
systems are included on all rigs included in the table above. |
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(c) |
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GOM means U.S. Gulf of Mexico. Mexican GOM means the Gulf of Mexico offshore Mexico. |
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(d) |
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For ease of presentation in this table, customer names have been shortened or abbreviated. |
Markets
The principal markets for our offshore contract drilling services are the following:
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the Gulf of Mexico, including the United States and Mexico; |
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Europe, principally in the United Kingdom, or U.K., and Norway; |
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the Mediterranean Basin, including Egypt, Libya and Tunisa and other parts of Africa; |
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South America, principally in Brazil; |
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Australia and Asia, including Malaysia, Indonesia and Vietnam; and |
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the Middle East, including Kuwait, Qatar and Saudi Arabia. |
We actively market our rigs worldwide. From time to time our fleet operates in various other
markets throughout the world as the market demands. See Note 16 Segments and Geographic Area
Analysis to our Consolidated Financial Statements in Item 8 of this report.
We believe our presence in multiple markets is valuable in many respects. For example, we
believe that our experience with safety and other regulatory matters in the U.K. has been
beneficial in Australia and in the Gulf of Mexico, while production experience we have gained
through our Brazilian and North Sea operations has potential application worldwide. Additionally,
we believe our performance for a customer in one market segment or area enables us to better
understand that customers needs and better serve that customer in different market segments or
other geographic locations.
Offshore Contract Drilling Services
Our contracts to provide offshore drilling services vary in their terms and provisions. We
typically obtain our contracts through competitive bidding, although it is not unusual for us to be
awarded drilling contracts without competitive bidding. Our drilling contracts generally provide
for a basic drilling rate on a fixed dayrate basis regardless of whether or not such drilling
results in a productive well. Drilling contracts may also provide for lower rates during periods
when the rig is being moved or when drilling operations are interrupted or restricted by equipment
breakdowns, adverse weather conditions or other conditions beyond our control. Under dayrate
contracts, we generally pay the operating expenses of the rig, including wages and the cost of
incidental supplies. Historically, dayrate contracts have accounted for a substantial portion of
our revenues. In addition, from time to time, our dayrate contracts may also provide for the
ability to earn an incentive bonus from our customer based upon performance.
A dayrate drilling contract generally extends over a period of time covering either the
drilling of a single well or a group of wells, which we refer to as a well-to-well contract, or a
fixed term, which we refer to as a term contract, and may be terminated by the customer in the
event the drilling unit is destroyed or lost or if drilling operations are suspended for a period
of time as a result of a breakdown of equipment or, in some cases, due to other events beyond the
control of either party to the contract. In addition, certain of our contracts permit the customer
to terminate the contract early by giving notice, and in some circumstances may require the payment
of an early termination fee by the customer. The contract term in many instances may also be
extended by the customer exercising options for the drilling of additional wells or for an
additional length of time, generally at competitive market rates and mutually agreeable terms at
the time of the extension. See Risk Factors The terms of some of our dayrate drilling
contracts may limit our ability to benefit from increasing dayrates in an improving market and
6
Risk Factors Our business involves numerous operating hazards, and we are not fully
insured against all of them in Item 1A of this report, which are incorporated herein by
reference.
Customers
We provide offshore drilling services to a customer base that includes major and independent
oil and gas companies and government-owned oil companies. Several customers have accounted for
10.0% or more of our annual consolidated revenues, although the specific customers may vary from
year to year. During 2006, we performed services for 51 different customers with Anadarko
Petroleum Corporation (which acquired Kerr-McGee Oil & Gas Corporation, or Kerr-McGee, in mid-2006)
and Petróleo Brasileiro S.A., or Petrobras, accounting for 10.6% and 10.4% of our annual total
consolidated revenues, respectively. During 2005, we performed services for 53 different customers
with Petrobras and Kerr-McGee accounting for 10.7% and 10.3% of our annual total consolidated
revenues, respectively. During 2004, we performed services for 53 different customers with
Petrobras and PEMEX Exploración Y Producción, or PEMEX, accounting for 12.6% and 10.5% of our
annual total consolidated revenues, respectively.
We principally market our services in North America through our Houston, Texas office, with
support for activities in the GOM provided by our regional office in New Orleans, Louisiana. We
market our services in other geographic locations principally from our office in The Hague, The
Netherlands with support from our regional offices in Aberdeen, Scotland and Perth, Western
Australia. We provide technical and administrative support functions from our Houston office.
Competition
The offshore contract drilling industry is highly competitive and is influenced by a number of
factors, including current and anticipated prices of oil and natural gas, expenditures by oil and
gas companies for exploration and development of oil and natural gas and the availability of
drilling rigs. See Risk Factors Our industry is highly competitive and cyclical, with intense
price competition in Item 1A of this report, which is incorporated herein by reference.
Governmental Regulation
Our operations are subject to numerous international, U.S., state and local laws and
regulations that relate directly or indirectly to our operations, including regulations controlling
the discharge of materials into the environment, requiring removal and clean-up under some
circumstances, or otherwise relating to the protection of the environment. See Risk Factors
Compliance with or breach of environmental laws can be costly and could limit our operations in
Item 1A of this report, which is incorporated herein by reference.
Operations Outside the United States
Our operations outside the United States accounted for approximately 43%, 45% and 56% of our
total consolidated revenues for the years ended December 31, 2006, 2005 and 2004, respectively.
See Risk Factors A significant portion of our operations are conducted outside the United
States and involve additional risks not associated with domestic operations, Risk Factors Our
drilling contracts in the Mexican GOM expose us to greater risks than we normally assume and Risk
Factors Fluctuations in exchange rates and nonconvertibility of currencies could result in
losses to us in Item 1A of this report, which are incorporated herein by reference.
Employees
As of December 31, 2006, we had approximately 4,800 workers, including international crew
personnel furnished through independent labor contractors. We have experienced satisfactory labor
relations and provide comprehensive benefit plans for our employees.
Access to Company Filings
We are subject to the informational requirements of the Securities Exchange Act of 1934, as
amended, or the Exchange Act, and accordingly file annual, quarterly and current reports, any
amendments to those reports, proxy
7
statements and other information with the United States Securities and Exchange Commission, or SEC.
You may read and copy the information we file with the SEC at the public reference facilities
maintained by the SEC at 100 F Street, N.E., Washington, DC 20549. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference room. Our SEC
filings are also available to the public from the SECs Internet site at www.sec.gov or from our
Internet site at www.diamondoffshore.com. Our website provides a hyperlink to a third-party SEC
filings website where these reports may be viewed and printed at no cost as soon as reasonably
practicable after we have electronically filed such material with, or furnished it to, the SEC.
The information contained on our website, or on other websites linked to our website, is not part
of this report.
Item 1A. Risk Factors.
Our business is subject to a variety of risks, including the risks described below. You
should carefully consider these risks when evaluating us and our securities. The risks and
uncertainties described below are not the only ones facing our company. We are also subject to a
variety of risks that affect many other companies generally, as well as additional risks and
uncertainties not known to us or that we currently believe are not as significant as the risks
described below. If any of the following risks actually occur, our business, financial condition,
results of operations and cash flows, and the trading prices of our securities, may be materially
and adversely affected.
Our business depends on the level of activity in the oil and gas industry, which is significantly
affected by volatile oil and gas prices.
Our business depends on the level of activity in offshore oil and gas exploration,
development and production in markets worldwide. Oil and gas prices, market expectations of
potential changes in these prices and a variety of political and economic factors significantly
affect this level of activity. However, higher commodity prices do not necessarily translate into
increased drilling activity since our customers expectations of future commodity prices typically
drive demand for our rigs. Oil and gas prices are extremely volatile and are affected by numerous
factors beyond our control, including:
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the political environment of oil-producing regions, including uncertainty or
instability resulting from an escalation or additional outbreak of armed hostilities in
the Middle East or other geographic areas or further acts of terrorism in the United
States or elsewhere; |
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worldwide demand for oil and gas; |
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the cost of exploring for, producing and delivering oil and gas; |
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the discovery rate of new oil and gas reserves; |
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the rate of decline of existing and new oil and gas reserves; |
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available pipeline and other oil and gas transportation capacity; |
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the ability of oil and gas companies to raise capital; |
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weather conditions in the United States and elsewhere; |
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the ability of the Organization of Petroleum Exporting Countries, commonly called
OPEC, to set and maintain production levels and pricing; |
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the level of production in non-OPEC countries; |
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the policies of the various governments regarding exploration and development of
their oil and gas reserves; and |
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advances in exploration and development technology. |
Our industry is highly competitive and cyclical, with intense price competition.
The offshore contract drilling industry is highly competitive with numerous industry
participants, none of which at the present time has a dominant market share. Some of our
competitors may have greater financial or other resources than we do. Drilling contracts are
traditionally awarded on a competitive bid basis. Intense price competition is often the primary
factor in determining which qualified contractor is awarded a job, although rig availability and
location, a drilling contractors safety record and the quality and technical capability of service
and equipment may also be considered. Mergers among oil and natural gas exploration and production
companies have reduced the number of available customers.
Our industry has historically been cyclical. There have been periods of high demand,
short rig supply and high dayrates (such as we are currently experiencing in many of the markets in
which we operate), followed by periods of
8
lower demand, excess rig supply and low dayrates. Periods of excess rig supply intensify the
competition in the industry and often result in rigs being idle for long periods of time.
Current oil and natural gas prices are significantly above historical averages, which has
resulted in higher utilization and dayrates earned by our drilling units, generally beginning in
the third quarter of 2004. However, we can provide no assurance that the current industry cycle of
high demand, short rig supply and higher dayrates will continue. We may be required to idle rigs
or to enter into lower rate contracts in response to market conditions in the future.
Significant new rig construction and upgrades of existing drilling units could also intensify
price competition. We believe that there are currently more than 100 jack-up rigs and floaters
(semisubmersible rigs and drillships) on order and scheduled for delivery between 2007 and 2010.
Improvements in dayrates and expectations of sustained improvements in rig utilization rates and
dayrates may result in the construction of additional new rigs. These increases in rig supply
could result in depressed rig utilization and greater price competition from both existing
competitors, as well as new entrants into the offshore drilling market. As of the date of this
report, not all of the rigs currently under construction have been contracted for future work,
which may further intensify price competition as scheduled delivery dates occur. In addition,
competing contractors are able to adjust localized supply and demand imbalances by moving rigs from
areas of low utilization and dayrates to areas of greater activity and relatively higher dayrates.
Prolonged periods of low utilization and dayrates could also result in the recognition of
impairment charges on certain of our drilling rigs if future cash flow estimates, based upon
information available to management at the time, indicate that the carrying value of these rigs may
not be recoverable.
Failure to obtain and retain highly skilled personnel could hurt our operations.
We require highly skilled personnel to operate and provide technical services and support for
our business. To the extent that demand for drilling services and the size of the worldwide
industry fleet increase (including the impact of newly constructed rigs), shortages of qualified
personnel could arise, creating upward pressure on wages and difficulty in staffing and servicing
our rigs, which could adversely affect our results of operations. In addition, the entrance of
new participants into the offshore drilling market would cause further competition for qualified
and experienced personnel as these entities seek to hire personnel with expertise in the offshore
drilling industry.
We have experienced and continue to experience upward pressure on salaries and wages and
increased competition for skilled workers as a result of the strengthening offshore drilling
market. We have also sustained the loss of experienced personnel to our competitors. In response
to these market conditions we have implemented retention programs, including increases in
compensation. The heightened competition for skilled personnel could adversely impact our
financial position, results of operations and cash flows by limiting our operations or further
increasing our costs.
The terms of some of our dayrate drilling contracts may limit our ability to benefit from
increasing dayrates in an improving market.
The duration of offshore drilling contracts is generally determined by market demand and the
respective management strategies of the offshore drilling contractor and its customers. In periods
of rising demand for offshore rigs, contractors typically prefer well-to-well contracts that allow
them to profit from increasing dayrates. In contrast, during these periods customers with
reasonably definite drilling programs typically prefer longer term contracts to maintain dayrate
prices at a consistent level. Conversely, in periods of decreasing demand for offshore rigs,
contractors generally prefer longer term contracts to preserve dayrates at existing levels and
ensure utilization, while customers prefer well-to-well contracts that allow them to obtain the
benefit of lower dayrates.
To the extent possible, we seek to have a foundation of long-term contracts with a reasonable
balance of single-well, well-to-well and short-term contracts to attempt to limit the downside
impact of a decline in the market while still participating in the benefit of increasing dayrates
in an improving market. However, we can provide no assurance that we will be able to achieve or
maintain such a balance from time to time. Our inability to fully benefit from increasing dayrates
in an improving market, due to the long-term nature of some of our contracts, may adversely affect
our profitability.
9
Contracts for our drilling units are generally fixed dayrate contracts, and increases in our
operating costs could adversely affect our profitability on those contracts.
Our contracts for our drilling units provide for the payment of a fixed dayrate per
rig operating day, although some contracts do provide for a limited escalation in dayrate due to
increased operating costs incurred by us. Many of our operating costs, such as labor costs, are
unpredictable and fluctuate based on events beyond our control. The gross margin that we realize
on these fixed dayrate contracts will fluctuate based on variations in our operating costs over the
terms of the contracts. In addition, for contracts with dayrate escalation clauses, we may not be
able to fully recover increased or unforeseen costs from our customers. Our inability to recover
these increased or unforeseen costs from our customers could adversely affect our financial
position, results of operations and cash flows.
Our drilling contracts may be terminated due to events beyond our control.
Our customers may terminate some of our term drilling contracts if the drilling unit
is destroyed or lost or if drilling operations are suspended for a specified period of time as a
result of a breakdown of major equipment or, in some cases, due to other events beyond the control
of either party. In addition, some of our drilling contracts permit the customer to terminate the
contract after specified notice periods by tendering contractually specified termination amounts.
These termination payments may not fully compensate us for the loss of a contract. In addition,
the early termination of a contract may result in a rig being idle for an extended period of time,
which could adversely affect our financial position, results of operations and cash flows.
During depressed market conditions, our customers may also seek renegotiation of firm drilling
contracts to reduce their obligations. The renegotiation of our drilling contracts could adversely
affect our financial position, results of operations and cash flows.
We can provide no assurance that our current backlog of contract drilling revenue will be
ultimately realized.
As of the date of this report, our contract drilling backlog was $7.4 billion for expected
future work extending until 2013, which includes future earnings under both firm commitments and
anticipated commitments for which definitive agreements have not yet been executed. We can provide
no assurance that we will be able to perform under these contracts due to events beyond our control
or that we will be able to ultimately execute a definitive agreement where one does not currently
exist. Our inability to perform under our contractual obligations or to execute definitive
agreements may have a material adverse effect on our financial position, results of operations and
cash flows. See Managements Discussion and Analysis of Financial Condition and Results of
Operations Overview Contract Drilling Backlog included in Item 7 of this report.
Rig conversions, upgrades or newbuilds may be subject to delays and cost overruns.
From time to time we may undertake to add new capacity through conversions or upgrades to our
existing rigs or through new construction. We have entered into agreements to upgrade two of our
semisubmersible drilling units to ultra-deepwater capability at an estimated aggregate cost of
approximately $553 million. The shipyard portion of the upgrade of one rig has been completed, and
we expect that the unit will return to the GOM in mid-2007. We expect delivery of our other
semisubmersible unit during the fourth quarter of 2008. We have also entered into agreements to
construct two new jack-up drilling units with expected delivery dates in the first quarter of 2008
at an aggregate cost of approximately $320 million, including drill pipe and capitalized interest.
These projects and other projects of this type are subject to risks of delay or cost overruns
inherent in any large construction project resulting from numerous factors, including the
following:
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shortages of equipment, materials or skilled labor; |
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work stoppages; |
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unscheduled delays in the delivery of ordered materials and equipment; |
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unanticipated cost increases; |
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weather interferences; |
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difficulties in obtaining necessary permits or in meeting permit conditions; |
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design and engineering problems; |
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shipyard failures; and |
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failure or delay of third party service providers and labor disputes. |
Failure to complete a rig upgrade or new construction on time, or failure to complete a rig
conversion or new construction in accordance with its design specifications may, in some
circumstances, result in the delay, renegotiation or cancellation of a drilling contract.
Our business involves numerous operating hazards, and we are not fully insured against all of them.
Our operations are subject to the usual hazards inherent in drilling for oil and gas offshore,
such as blowouts, reservoir damage, loss of production, loss of well control, punchthroughs,
craterings and natural disasters such as
10
hurricanes or fires. The occurrence of these events could result in the suspension of drilling
operations, damage to or destruction of the equipment involved and injury or death to rig
personnel, damage to producing or potentially productive oil and gas formations and environmental
damage. Operations also may be suspended because of machinery breakdowns, abnormal drilling
conditions, failure of subcontractors to perform or supply goods or services or personnel
shortages. In addition, offshore drilling operators are subject to perils peculiar to marine
operations, including capsizing, grounding, collision and loss or damage from severe weather.
Damage to the environment could also result from our operations, particularly through oil spillage
or extensive uncontrolled fires. We may also be subject to damage claims by oil and gas companies
or other parties.
Pollution and environmental risks generally are not fully insurable, and we do not typically
retain loss-of-hire insurance policies to cover our rigs. Our insurance policies and contractual
rights to indemnity may not adequately cover our losses, or may have exclusions of coverage for
some losses. We do not have insurance coverage or rights to indemnity for all risks, including,
among other things, war risk, liability risk for certain amounts of excess coverage and certain
physical damage risk. If a significant accident or other event occurs and is not fully covered by
insurance or contractual indemnity, it could adversely affect our financial position, results of
operations or cash flows. There can be no assurance that we will continue to carry the insurance we
currently maintain or that those parties with contractual obligations to indemnify us will
necessarily be financially able to indemnify us against all these risks. In addition, no assurance
can be made that we will be able to maintain adequate insurance in the future at rates we consider
to be reasonable or that we will be able to obtain insurance against some risks.
We have significantly increased our insurance deductibles and have elected to self-insure for a
portion of our liability exposure and for physical damage to rigs and equipment caused by named
windstorms in the GOM.
Because the amount of insurance coverage available to us has been significantly limited and
the cost for such coverage has increased substantially, we have elected to self-insure for a
portion of our liability exposure and for physical damage to rigs and equipment caused by named
windstorms in the GOM. Although we continue to carry physical damage insurance for certain other
losses, we have significantly increased our deductibles to offset or mitigate premium increases.
Our deductible for physical damage insurance is currently $150.0 million per occurrence (or lower
for some rigs if they are declared a constructive total loss). We continue to carry liability
insurance with coverages similar to prior years, except that we have elected to self-insure for a
portion of our excess liability coverage related to named windstorms in the GOM. Our deductible for
liability coverage generally has increased to $5.0 million per occurrence, but our deductibles
arising in connection with certain liabilities relating to named windstorms in the GOM have
increased to $10.0 million per occurrence, with no annual aggregate deductible. To the extent that
we incur certain liabilities related to named windstorms in the GOM in excess of $75.0 million, we
are self-insured for up to a maximum retention of $17.5 million per occurrence in addition to these
deductibles. These changes result in a higher risk of losses that are not covered by third party
insurance contracts. If named windstorms in the GOM cause significant damage to our rigs or
equipment or to the property of others for which we may be liable, it could have a material adverse
effect on our financial position, results of operations or cash flows.
A significant portion of our operations are conducted outside the United States and involve
additional risks not associated with domestic operations.
We operate in various regions throughout the world which may expose us to political and other
uncertainties, including risks of:
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terrorist acts, war and civil disturbances; |
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piracy; |
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kidnapping of personnel; |
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expropriation of property or equipment; |
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foreign and domestic monetary policy; |
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the inability to repatriate income or capital; |
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regulatory or financial requirements to comply with foreign bureaucratic actions; and |
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changing taxation policies. |
In addition, international contract drilling operations are subject to various laws and
regulations in countries in which we operate, including laws and regulations relating to:
11
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the equipping and operation of drilling units; |
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repatriation of foreign earnings; |
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oil and gas exploration and development; |
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taxation of offshore earnings and earnings of expatriate personnel; and |
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use and compensation of local employees and suppliers by foreign contractors. |
No prediction can be made as to what governmental regulations may be enacted in the future
that could adversely affect the international drilling industry. The actions of foreign
governments, including initiatives by OPEC, may adversely affect our ability to compete.
Our drilling contracts in the Mexican GOM expose us to greater risks than we normally assume.
As of the date of this report, we have three intermediate semisubmersible rigs and one jack-up
rig drilling offshore Mexico for PEMEX, the national oil company of Mexico, and have two additional
intermediate semisubmersibles contracted to begin working for PEMEX in the third quarter of 2007.
The terms of these contracts expose us to greater risks than we normally assume, such as exposure
to greater environmental liability. In addition, each contract can be terminated by PEMEX on
short-term notice, contractually or by statute, subject to certain conditions. While we believe
that the financial terms of these contracts and our operating safeguards in place mitigate these
risks, we can provide no assurance that the increased risk exposure will not have a negative impact
on our future operations or financial results.
Fluctuations in exchange rates and nonconvertibility of currencies could result in losses to us.
Due to our international operations, we may experience currency exchange losses where revenues
are received and expenses are paid in nonconvertible currencies or where we do not hedge
an exposure to a foreign currency. We may also incur losses as a result of an inability to collect
revenues because of a shortage of convertible currency available to the country of operation,
controls over currency exchange or controls over the repatriation of income or capital. We can
provide no assurance that financial hedging arrangements will effectively hedge any foreign
currency fluctuation losses that may arise.
We may be required to accrue additional tax liability on certain of our foreign earnings.
Certain of our international rigs are owned and operated, directly or indirectly, by Diamond
Offshore International Limited, our wholly-owned Cayman Islands subsidiary. We do not intend to
remit earnings from this subsidiary to the U.S., and we plan to indefinitely reinvest these
earnings internationally. We have not provided for U.S. taxes on these earnings nor have we
recognized any U.S. tax benefits on losses generated by the subsidiary. Should a distribution be
made from the unremitted earnings of our subsidiary, we may be required to record additional U.S.
income taxes that, if material, could have an adverse effect on our financial position, results of
operations and cash flows.
We may be subject to litigation that could have an adverse effect on us.
We are, from time to time, involved in various litigation matters. These matters may include,
among other things, contract disputes, personal injury claims, environmental claims or proceedings,
asbestos and other toxic tort claims, employment and tax matters and other litigation that arises
in the ordinary course of our business. Although we intend to defend these matters vigorously, we
cannot predict with certainty the outcome or effect of any claim or other litigation matter, and
there can be no assurance as to the ultimate outcome of any litigation. Litigation may have an
adverse effect on us because of potential adverse outcomes, defense costs, the diversion of our
managements resources and other factors.
Governmental laws and regulations may add to our costs or limit our drilling activity.
Our operations are affected from time to time in varying degrees by governmental laws and
regulations. The drilling industry is dependent on demand for services from the oil and gas
exploration industry and, accordingly, is affected by changing tax and other laws relating to the
energy business generally. We may be required to make significant capital expenditures to comply
with governmental laws and regulations. It is also possible that these laws
12
and regulations may in the future add significantly to our operating costs or may significantly
limit drilling activity.
Hurricanes Katrina and Rita caused damage to a number of rigs in the GOM and rigs that were
moved off location by the storms may have done damage to platforms, pipelines, wellheads and other
drilling rigs. We believe that we are currently in compliance with the existing regulations set
forth by the Minerals Management Service of the U.S. Department of the Interior regarding our
operations in the GOM. However, these regulations are currently under review by various other
government agencies and industry groups. We can provide no assurance that these groups will not
take other steps or implement additional requirements that could increase the cost of operating, or
reduce the area of operation, in the GOM.
Compliance with or breach of environmental laws can be costly and could limit our operations.
In the United States, regulations controlling the discharge of materials into the environment,
requiring removal and cleanup of materials that may harm the environment or otherwise relating to
the protection of the environment apply to some of our operations. For example, we, as an operator
of mobile offshore drilling units in navigable United States waters and some offshore areas, may be
liable for damages and costs incurred in connection with oil spills related to those operations.
Laws and regulations protecting the environment have become increasingly stringent, and may in some
cases impose strict liability, rendering a person liable for environmental damage without regard
to negligence or fault on the part of that person. These laws and regulations may expose us to
liability for the conduct of or conditions caused by others or for acts that were in compliance
with all applicable laws at the time they were performed.
The United States Oil Pollution Act of 1990, or OPA 90, and similar legislation enacted in
Texas, Louisiana and other coastal states, addresses oil spill prevention and control and
significantly expands liability exposure across all segments of the oil and gas industry. OPA 90
and such similar legislation and related regulations impose a variety of obligations on us related
to the prevention of oil spills and liability for damages resulting from such spills. OPA 90
imposes strict and, with limited exceptions, joint and several liability upon each responsible
party for oil removal costs and a variety of public and private damages.
The application of these requirements or the adoption of new requirements could have a
material adverse effect on our financial position, results of operations or cash flows.
We are controlled by a single stockholder, which could result in potential conflicts of interest.
Loews Corporation, which we refer to as Loews, beneficially owns approximately 50.7% of our
outstanding shares of common stock as of February 20, 2007 and is in a position to control actions
that require the consent of stockholders, including the election of directors, amendment of our
Restated Certificate of Incorporation and any merger or sale of substantially all of our assets. In
addition, three officers of Loews serve on our Board of Directors. One of those, James S. Tisch,
the Chief Executive Officer and Chairman of the Board of our company, is also the Chief Executive
Officer and a director of Loews. We have also entered into a services agreement and a registration
rights agreement with Loews and we may in the future enter into other agreements with Loews.
Loews and its subsidiaries and we are generally engaged in businesses sufficiently different
from each other as to make conflicts as to possible corporate opportunities unlikely. However, it
is possible that Loews may in some circumstances be in direct or indirect competition with us,
including competition with respect to certain business strategies and transactions that we may
propose to undertake. In addition, potential conflicts of interest exist or could arise in the
future for our directors that are also officers of Loews with respect to a number of areas relating
to the past and ongoing relationships of Loews and us, including tax and insurance matters,
financial commitments and sales of common stock pursuant to registration rights or otherwise.
Although the affected directors may abstain from voting on matters in which our interests and those
of Loews are in conflict so as to avoid potential violations of their fiduciary duties to
stockholders, the presence of potential or actual conflicts could affect the process or outcome of
Board deliberations. We cannot assure you that these conflicts of interest will not materially
adversely affect us.
Item 1B. Unresolved Staff Comments.
Not applicable.
13
Item 2. Properties.
We own an eight-story office building containing approximately 182,000-net rentable square
feet on approximately 6.2 acres of land located in Houston, Texas, where our corporate headquarters
are located, two buildings totaling 39,000 square feet and 20 acres of land in New Iberia,
Louisiana, for our offshore drilling warehouse and storage facility, and a 13,000-square foot
building and five acres of land in Aberdeen, Scotland, for our North Sea operations. Additionally,
we currently lease various office, warehouse and storage facilities in Louisiana, Australia,
Brazil, Indonesia, Norway, The Netherlands, Malaysia, Qatar, Singapore and Mexico to support our
offshore drilling operations.
Item 3. Legal Proceedings.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Executive Officers of the Registrant
We have included information on our executive officers in Part I of this report in reliance on
General Instruction G(3) to Form 10-K. Our executive officers are elected annually by our Board of
Directors to serve until the next annual meeting of our Board of Directors, or until their
successors are duly elected and qualified, or until their earlier death, resignation,
disqualification or removal from office. Information with respect to our executive officers is set
forth below.
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Age as of |
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Name |
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January 31, 2007 |
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Position |
James S. Tisch
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54 |
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Chairman of the Board of Directors and Chief
Executive Officer |
Lawrence R. Dickerson
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54 |
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President, Chief Operating Officer and Director |
Gary T. Krenek
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48 |
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Senior Vice President and Chief Financial Officer |
William C. Long
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40 |
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Senior Vice President, General Counsel & Secretary |
Beth G. Gordon
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51 |
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Controller Chief Accounting Officer |
Mark F. Baudoin
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54 |
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Senior Vice President Administration |
Lyndol L. Dew
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52 |
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Senior Vice President Worldwide Operations |
John L. Gabriel, Jr.
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53 |
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Senior Vice President Contracts & Marketing |
John M. Vecchio
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56 |
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Senior Vice President Technical Services |
James S. Tisch has served as our Chief Executive Officer since March 1998. Mr. Tisch has also
served as Chairman of the Board since 1995 and as a director since June 1989. Mr. Tisch has served
as Chief Executive Officer of Loews, a diversified holding company and our controlling stockholder,
since January 1999. Mr. Tisch, a director of Loews since 1986, also serves as a director of CNA
Financial Corporation, an 89% owned subsidiary of Loews.
Lawrence R. Dickerson has served as our President, Chief Operating Officer and Director since
March 1998. Mr. Dickerson served on the United States Commission on Ocean Policy from 2001 to
2004.
Gary T. Krenek has served as a Senior Vice President and our Chief Financial Officer since
October 2006. Mr. Krenek previously served as our Vice President and Chief Financial Officer
since March 1998.
William C. Long has served as a Senior Vice President and our General Counsel and Secretary
since October 2006. Mr. Long previously served as our Vice President, General Counsel and
Secretary since March 2001 and as our General Counsel and Secretary from March 1999 through
February 2001.
Beth G. Gordon has served as our Controller and Chief Accounting Officer since April 2000.
14
Mark F. Baudoin has served as a Senior Vice President since October 2006. Mr. Baudoin
previously served as our Vice President Administration and Operations Support since March 1996.
Lyndol L. Dew has served as a Senior Vice President since September 2006. Previously, Mr. Dew
served as our Vice President International Operations from January 2006 to August 2006 and as
our Vice President North American Operations from January 2003 to December 2005. Mr. Dew
previously served as an Area Manager for our domestic operations since February 2002.
John L. Gabriel, Jr. has served as a Senior Vice President since November 1999.
John M. Vecchio has served as a Senior Vice President since April 2002. Previously, Mr.
Vecchio served as our Technical Services Vice President from October 2000 through March 2002 and as
our Engineering Vice President from July 1997 through September 2000.
15
PART II
Item 5. Market for the Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
Price Range of Common Stock
Our common stock is listed on the New York Stock Exchange, or NYSE, under the symbol DO.
The following table sets forth, for the calendar quarters indicated, the high and low closing
prices of our common stock as reported by the NYSE.
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Common Stock |
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High |
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Low |
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2006 |
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|
|
First Quarter |
|
$ |
90.70 |
|
|
$ |
72.75 |
|
Second Quarter |
|
|
96.15 |
|
|
|
72.49 |
|
Third Quarter |
|
|
85.44 |
|
|
|
67.46 |
|
Fourth Quarter |
|
|
84.43 |
|
|
|
63.90 |
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
50.89 |
|
|
$ |
38.25 |
|
Second Quarter |
|
|
55.90 |
|
|
|
40.40 |
|
Third Quarter |
|
|
62.40 |
|
|
|
52.10 |
|
Fourth Quarter |
|
|
71.31 |
|
|
|
51.46 |
|
As of February 20, 2007 there were approximately 238 holders of record of our common stock.
Dividend Policy
In 2006, we paid cash dividends of $0.125 per share of our common stock on March 1, June 1,
September 1 and December 1 and a special cash dividend of $1.50 per share of our common stock on
March 1. In 2005, we paid cash dividends of $0.0625 per share of our common stock on March 1 and
June 1 and cash dividends of $0.125 per share on September 1 and December 1.
On January 30, 2007, we declared a quarterly cash dividend of $0.125 per share of our common
stock and a special cash dividend of $4.00 per share of our common stock, both of which are payable
March 1, 2007 to stockholders of record on February 14, 2007. Any future determination as to
payment of quarterly dividends will be made at the discretion of our Board of Directors. In
addition, our Board of Directors may, in subsequent years, consider paying additional annual
special dividends, in amounts to be determined, if it believes that our financial position,
earnings, and capital spending plans and other relevant factors warrant such action at that time.
16
CUMULATIVE TOTAL STOCKHOLDER RETURN
The following graph shows the cumulative total stockholder return for our common stock, the
Standard & Poors 500 Index, a Competitor/Service Industry Group Index and a Peer Group Index over
the five year period ended December 31, 2006.
Comparison of 2002 2006 Cumulative Total Return (1)
|
|
|
(1) |
|
Total return assuming reinvestment of dividends. Dividends for the periods reported include
quarterly dividends of $0.125 per share of our common stock that we paid during 2002, the
first three quarters of 2003, the last two quarters of 2005 and all four quarters of 2006.
Beginning in the fourth quarter of 2003 through the first two quarters of 2005, we paid a
quarterly dividend of .0625 per share. Assumes $100 invested on December 31, 2001 in our
common stock, the S&P 500 Index, a competitor/service industry group index that we constructed
and a peer group index comprised of a group of other companies in the contract drilling
industry. The new peer group index is comprised of companies that we believe provide a more
accurate reflection of our industry peers than the competitor/service industry group index
that we have included in the past. Therefore, we believe that the new peer group index
provides a more meaningful comparison of our relative stock performance. |
|
(2) |
|
The competitor/service industry group that we constructed consists of the following
companies: Baker Hughes Incorporated, ENSCO International Incorporated, Halliburton Company,
Noble Drilling Corporation, Schlumberger Ltd., Tidewater Inc. and Transocean Inc. Total
return calculations were weighted according to the respective companys market capitalization. |
|
(3) |
|
The peer group is comprised of the following companies: ENSCO International Incorporated,
GlobalSantaFe, Noble Drilling Corporation, Pride International, Inc., Rowan Companies, Inc.
and Transocean Inc. Total return calculations were weighted according to the respective
companys market capitalization. |
17
Item 6. Selected Financial Data.
The following table sets forth certain historical consolidated financial data relating to
Diamond Offshore. We prepared the selected consolidated financial data from our consolidated
financial statements as of and for the periods presented. Prior periods have been reclassified to
conform to the classifications we currently follow. Such reclassifications do not affect earnings.
The selected consolidated financial data below should be read in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of Operations in Item 7 and our
Consolidated Financial Statements (including the Notes thereto) in Item 8 of this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
|
(In thousands, except per share and ratio data) |
|
Income Statement Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
2,052,572 |
|
|
$ |
1,221,002 |
|
|
$ |
814,662 |
|
|
$ |
680,941 |
|
|
$ |
752,561 |
|
Operating income (loss) |
|
|
940,432 |
|
|
|
374,399 |
|
|
|
3,928 |
|
|
|
(38,323 |
) |
|
|
51,984 |
|
Net income (loss) |
|
|
706,847 |
|
|
|
260,337 |
|
|
|
(7,243 |
) |
|
|
(48,414 |
) |
|
|
62,520 |
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
5.47 |
|
|
|
2.02 |
|
|
|
(0.06 |
) |
|
|
(0.37 |
) |
|
|
0.48 |
|
Diluted |
|
|
5.12 |
|
|
|
1.91 |
|
|
|
(0.06 |
) |
|
|
(0.37 |
) |
|
|
0.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drilling and other property and
equipment, net |
|
$ |
2,628,453 |
|
|
$ |
2,302,020 |
|
|
$ |
2,154,593 |
|
|
$ |
2,257,876 |
|
|
$ |
2,164,627 |
|
Total assets |
|
|
4,132,839 |
|
|
|
3,606,922 |
|
|
|
3,379,386 |
|
|
|
3,135,019 |
|
|
|
3,256,308 |
|
Long-term debt (excluding current
maturities) (1) |
|
|
964,310 |
|
|
|
977,654 |
|
|
|
709,413 |
|
|
|
928,030 |
|
|
|
924,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Financial Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
$ |
551,237 |
|
|
$ |
293,829 |
|
|
$ |
89,229 |
|
|
$ |
272,026 |
|
|
$ |
340,805 |
|
Cash dividends declared per share |
|
|
2.00 |
|
|
|
0.375 |
|
|
|
0.25 |
|
|
|
0.438 |
|
|
|
0.50 |
|
Ratio of earnings to fixed charges (2) |
|
|
28.26x |
|
|
|
9.19x |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
4.51x |
|
|
|
|
(1) |
|
See Managements Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital Requirements in Item 7 and Note 8 Long-Term Debt to our
Consolidated Financial Statements included in Item 8 of this report for a discussion of changes in
our long-term debt. |
|
(2) |
|
The deficiency in our earnings available for fixed charges for the years ended December 31,
2004 and 2003 was approximately $2.3 million and $55.3 million, respectively. For all periods
presented, the ratio of earnings to fixed charges has been computed on a total enterprise basis.
Earnings represent income from continuing operations plus income taxes and fixed charges. Fixed
charges include (i) interest, whether expensed or capitalized, (ii) amortization of debt issuance
costs, whether expensed or capitalized, and (iii) a portion of rent expense, which we believe
represents the interest factor attributable to rent. |
18
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with our Consolidated Financial
Statements (including the Notes thereto) in Item 8 of this report.
We provide contract drilling services to the energy industry around the globe and are a leader
in deepwater drilling with a fleet of 44 offshore drilling rigs. Our fleet currently consists of
30 semisubmersibles, 13 jack-ups and one drillship. In addition, we have two jack-up drilling
units on order at shipyards in Brownsville, Texas and Singapore. We expect both of these units to
be delivered during the first quarter of 2008.
Overview
Industry Conditions
Worldwide demand for our mid-water (intermediate) and deepwater (high-specification)
semisubmersible rigs and international jack-up rigs remained strong during the fourth quarter of
2006. However, the jack-up market in the GOM continues to experience downward pricing pressure,
with the potential for a given rig to be ready-stacked for a period of time between wells. As of
January 29, 2007, we had one ready-stacked jack-up unit. Exclusive of the GOM jack-up market,
which accounted for 12 percent of our total revenue for the quarter ended December 31, 2006, solid
fundamental market conditions remain in place for all classes of offshore drilling rigs worldwide,
and both dayrates and term contract opportunities have continued to slowly increase.
Gulf of Mexico. In the GOM, the market for our semisubmersible equipment remains firm. The
dayrate on one of our seven high-specification floaters in the GOM, for which we have received a
letter of intent, or LOI, is as high as $500,000 for future work. However, the pace of contracting
for these rigs has slowed due to the backlog of our existing agreements, all of which extend into
2008 or 2009, except for the most recent agreement which extends into 2012.
Dayrates for our five intermediate semisubmersibles currently located in the GOM are as high
as $300,000 for a current one-well contract and a future three-well contract. We continue to view
the deepwater and intermediate markets in the GOM as under-supplied and believe that the GOM
semisubmersible market will remain strong in 2007.
Our jack-up fleet in the GOM experienced somewhat lower utilization during the fourth quarter
of 2006, coupled with increasing downward pressure on dayrates, compared to the third quarter of
2006. This situation began in the second quarter of 2006. We believe that the current pricing
pressure on jack-up rigs in the GOM will extend at least until the second quarter of 2007.
We expect two of our intermediate semisubmersibles, the Ocean New Era and Ocean Voyager, to
mobilize from the GOM to the Mexican GOM in the third quarter of 2007 under approximately 21/2-year
contracts both ending in early 2010. The rigs have commitments at dayrates of $265,000 and
$335,000, respectively. The terms of our drilling contracts with PEMEX for these rigs expose us to
greater risks than we normally assume, such as exposure to increased environmental liability. In
addition, each contract can be terminated by PEMEX on short-term notice, contractually or by
statute, subject to certain conditions, although we view this eventuality as unlikely. We expect
the market for the Mexican GOM to remain strong in 2007.
Brazil. Two of our rigs operating in Brazil are currently working under term contracts with
Petrobras that expire in 2009, and two additional rigs are operating under contracts expiring in
2010. Petrobras is continuing to seek additional intermediate semisubmersible rigs, and we expect
the Brazilian semisubmersible demand to remain strong in 2007.
North Sea. Effective industry utilization remains at 100 percent in the North Sea where we
have three intermediate semisubmersible rigs in the U.K. and one intermediate unit in Norway.
Indicating the strength of this market, one of our four rigs in the North Sea recently received a
term contract extending until the second quarter of 2009, with an option until late March 2007 to
convert to a two-year contract ending in 2010. The other three rigs have term contracts that
extend into 2010.
Australia/Asia/Middle East/Mediterranean. We currently have five semisubmersible rigs and one
jack-up unit operating in the Australia/Asia market, and two jack-up rigs and one intermediate
floater operating in the Middle
19
East/Mediterranean sector. All nine of these rigs are operating under contracts for work
extending into 2007, 2008 or 2009. During the third quarter of 2006, one of our new-build jack-up
rigs, the Ocean Shield, which is currently under construction in Singapore, received a one-year
term contract at a dayrate of $265,000, with the option until late March 2007 to convert to a
two-year contract, but at a slightly lower dayrate. Under the agreement, the rig is scheduled to
begin work offshore Australia upon completion of construction and commissioning of the rig, which
is estimated to occur in the first quarter of 2008. We believe that the Australia/Asia and Middle
East/Mediterranean markets will remain strong in 2007.
Contract Drilling Backlog
The following table reflects our contract drilling backlog as of February 19, 2007 and
February 6, 2006 (the date reported in our Annual Report on Form 10-K for the year ended December
31, 2005) and reflects both firm commitments (typically represented by signed contracts), as well
as LOIs. An LOI is subject to customary conditions, including the execution of a definitive
agreement. Contract drilling backlog is based on the full contractual dayrate for our drilling
rigs and is calculated assuming full utilization of our drilling equipment for the contract period.
The amount of actual revenue earned and the actual periods during which revenues are earned will be
different than the amounts and periods shown in the tables below due to various factors.
Utilization rates, which generally approach 95-98% can be adversely impacted by downtime due to
various operating factors including, but not limited to, unscheduled repairs, maintenance and
weather. Our contract backlog is calculated by multiplying the contracted operating dayrate by the
firm contract period, excluding revenues for mobilization, demobilization, contract preparation and
customer reimbursables. Changes in our contract drilling backlog between periods is a function of
both the performance of work on term contracts, as well as the extension or modification of
existing term contracts and the execution of additional contracts.
|
|
|
|
|
|
|
|
|
|
|
February 19, |
|
|
February 6, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands) |
|
Contract Drilling Backlog |
|
|
|
|
|
|
|
|
High-Specification Floaters |
|
$ |
4,115,000 |
|
|
$ |
2,606,000 |
|
Intermediate Semisubmersibles |
|
|
2,895,000 |
|
|
|
1,603,000 |
|
GOM Jack-ups (including offshore Mexico) |
|
|
114,000 |
|
|
|
210,000 |
|
International Jack-ups |
|
|
318,000 |
|
|
|
124,000 |
|
|
|
|
|
|
|
|
Total |
|
$ |
7,442,000 |
|
|
$ |
4,543,000 |
|
|
|
|
|
|
|
|
The following table reflects the amount of our contract drilling backlog by year as of
February 19, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ending December 31, |
|
|
|
Total |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 - 2013 |
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Contract Drilling Backlog |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High-Specification Floaters (1) |
|
$ |
4,115,000 |
|
|
$ |
903,000 |
|
|
$ |
1,210,000 |
|
|
$ |
876,000 |
|
|
$ |
1,126,000 |
|
Intermediate Semisubmersibles |
|
|
2,895,000 |
|
|
|
964,000 |
|
|
|
1,025,000 |
|
|
|
742,000 |
|
|
|
164,000 |
|
GOM Jack-ups (including offshore Mexico) |
|
|
114,000 |
|
|
|
98,000 |
|
|
|
16,000 |
|
|
|
|
|
|
|
|
|
International Jack-ups |
|
|
318,000 |
|
|
|
134,000 |
|
|
|
155,000 |
|
|
|
29,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
7,442,000 |
|
|
$ |
2,099,000 |
|
|
$ |
2,406,000 |
|
|
$ |
1,647,000 |
|
|
$ |
1,290,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes an aggregate $1.1 billion in contract drilling revenue of which approximately
$255 million, $347 million and $457 million is expected to be earned during 2008, 2009 and
between 2010 and 2013, respectively, relating to expected future work under LOIs. |
20
The following table reflects the percentage of rig days committed by year as of February 19,
2007. The percentage of rig days committed is calculated as the ratio of total days committed
under contracts and LOIs and scheduled shipyard and survey days for all rigs in our fleet to total
available days (number of rigs multiplied by the number of days in a particular year). Total
available days have been calculated based on the expected delivery dates for the Ocean Endeavor,
Ocean Monarch, and our two newbuild jack-up rigs, the Ocean Scepter and Ocean Shield.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ending December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 - 2013 |
|
Contract Drilling Backlog |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High-Specification Floaters |
|
|
100 |
% |
|
|
90 |
% |
|
|
58 |
% |
|
|
17 |
% |
Intermediate Semisubmersibles |
|
|
91 |
% |
|
|
54 |
% |
|
|
39 |
% |
|
|
2 |
% |
GOM Jack-ups (including offshore Mexico) |
|
|
34 |
% |
|
|
3 |
% |
|
|
|
|
|
|
|
|
International Jack-ups |
|
|
77 |
% |
|
|
44 |
% |
|
|
8 |
% |
|
|
|
|
Impact of 2005 Hurricanes
In the third quarter of 2005, two major hurricanes, Katrina and Rita, struck the U.S. Gulf
Coast and Gulf of Mexico. In late August 2005, one of our jack-up drilling rigs, the Ocean
Warwick, was seriously damaged during Hurricane Katrina and other rigs in our fleet, as well as our
warehouse in New Iberia, Louisiana, sustained lesser damage in Hurricane Katrina or Rita, or both
storms. We believe that the physical damage to our rigs, as well as related removal and recovery
costs, are primarily covered by insurance, after applicable deductibles. At December 31, 2006, we
had filed several insurance claims related to the 2005 storms which are currently under review by
insurance adjusters or are pending underwriter approval. Our results for 2005, and to a lesser
extent 2006, reflect the impact of Hurricanes Katrina and Rita.
The Ocean Warwick, with a net book value of $14.0 million, was declared a constructive total
loss effective August 29, 2005. We issued a proof of loss in the amount of $50.5 million to our
insurers, representing the insured value of the rig less a $4.5 million deductible. We received
all insurance proceeds related to this claim in 2005. Recovery and removal of the Ocean Warwick
are subject to separate insurance deductibles which were estimated at the time of loss to be $2.5
million in the aggregate.
In the third quarter of 2005, we recorded a net $33.6 million casualty gain for the Ocean
Warwick, representing net insurance proceeds of $50.5 million, less the write-off of the $14.0
million net carrying value of the drilling rig and $0.4 million in rig-based spare parts and
supplies, and estimated insurance deductibles aggregating $2.5 million for salvage and wreck
removal. We have presented this as Casualty Gain on Ocean Warwick in our Consolidated Statements
of Operations for the year ended December 31, 2005 included in Item 8 of this report.
During 2006, we subsequently revised our estimate of expected deductibles related to salvage
and wreck removal of the Ocean Warwick to $2.0 million and recorded a $0.5 million adjustment to
Casualty Gain on Ocean Warwick in our Consolidated Statements of Operations for the year ended
December 31, 2006 included in Item 8 of this report.
Damage to our other affected rigs and warehouse was less severe. At the time of loss, we
estimated insurance deductibles related to the remaining rigs damaged during Hurricane Katrina and
our rigs and facility damaged by Hurricane Rita to total $2.6 million in the aggregate, of which
$1.2 million and $1.4 million were recorded as additional contract drilling expense and loss on
disposition of assets, respectively, for the year ended December 31, 2005 in our Consolidated
Statements of Operations included in Item 8 of this report. Subsequently, during 2006, we revised
our estimate of the applicable deductibles related to these damages and recorded a $0.4 million
gain on disposition of assets in our Consolidated Statements of Operations for the year ended
December 31, 2006 included in Item 8 of this report.
In addition, in the third quarter of 2005 and during 2006, we wrote off the aggregate net book
value of approximately $14.3 million in rig equipment that was either lost or damaged beyond repair
during these storms as loss on disposition of assets and recorded a corresponding insurance
receivable in an amount equal to our expected recovery from insurers. The write-off of this
equipment and recognition of insurance receivables had no net effect on our consolidated results of
operations for the years ended December 31, 2006 and 2005.
During the third and fourth quarters of 2005, we incurred additional operating expenses,
including but not limited to the cost of rig crew over-time and employee assistance, hurricane
relief supplies, temporary housing and office space and the rental of mooring equipment, of $5.1
million relating to relief and recovery efforts in the aftermath of Hurricanes Katrina and Rita,
which we do not expect to be recoverable through our insurance.
In late 2006 we received $3.1 million from certain of our customers primarily related to the
replacement or repair of equipment damaged during the 2005 hurricanes. We recorded $0.3 million of
this recovery as a credit to
21
contract drilling expense, $1.1 million as a gain on disposition of assets and the remaining $1.8
million as other income in our Consolidated Statements of Operations for the year ended December
31, 2006 included in Item 8 of this report.
General
Our revenues vary based upon demand, which affects the number of days our fleet is utilized
and the dayrates earned. When a rig is idle, no dayrate is earned and revenues will decrease as a
result. Revenues can also be affected as a result of the acquisition or disposal of rigs, required
surveys and shipyard upgrades. In order to improve utilization or realize higher dayrates, we may
mobilize our rigs from one market to another. However, during periods of mobilization, revenues
may be adversely affected. As a response to changes in demand, we may withdraw a rig from the
market by stacking it or may reactivate a rig stacked previously, which may decrease or increase
revenues, respectively.
The two most significant variables affecting revenues are dayrates for rigs and rig
utilization rates, each of which is a function of rig supply and demand in the marketplace. As
utilization rates increase, dayrates tend to increase as well, reflecting the lower supply of
available rigs, and vice versa. Demand for drilling services is dependent upon the level of
expenditures set by oil and gas companies for offshore exploration and development, as well as a
variety of political and economic factors. The availability of rigs in a particular geographical
region also affects both dayrates and utilization rates. These factors are not within our control
and are difficult to predict.
We recognize revenue from dayrate drilling contracts as services are performed. In connection
with such drilling contracts, we may receive lump-sum fees for the mobilization of equipment. We
earn these fees as services are performed over the initial term of the related drilling contracts.
We defer mobilization fees received, as well as direct and incremental mobilization costs incurred,
and amortize each, on a straight-line basis, over the term of the related drilling contracts (which
is the period estimated to be benefited from the mobilization activity). Straight-line
amortization of mobilization revenues and related costs over the term of the related drilling
contracts (which generally range from two to 60 months) is consistent with the timing of net cash
flows generated from the actual drilling services performed. Absent a contract, mobilization costs
are recognized currently.
From time to time, we may receive fees from our customers for capital improvements to our
rigs. We defer such fees and recognize them into income on a straight-line basis over the period
of the related drilling contract as a component of contract drilling revenue. We capitalize the
costs of such capital improvements and depreciate them over the estimated useful life of the
improvement.
We receive reimbursements for the purchase of supplies, equipment, personnel services and
other services provided at the request of our customers in accordance with a contract or agreement.
We record these reimbursements at the gross amount billed to the customer, as Revenues related to
reimbursable expenses in our Consolidated Statements of Operations included in Item 8 of this
report.
Operating Income. Our operating income is primarily affected by revenue factors, but is also
a function of varying levels of operating expenses. Our operating expenses represent all direct
and indirect costs associated with the operation and maintenance of our drilling equipment. The
principal components of our operating costs are, among other things, direct and indirect costs of
labor and benefits, repairs and maintenance, freight, regulatory inspections, boat and helicopter
rentals and insurance. Labor and repair and maintenance costs represent the most significant
components of our operating expenses. In general, our labor costs increase primarily due to higher
salary levels, rig staffing requirements, inflation and costs associated with labor regulations in
the geographic regions in which our rigs operate. We have experienced and continue to experience
upward pressure on salaries and wages as a result of the strengthening offshore drilling market and
increased competition for skilled workers. In response to these market conditions we have
implemented retention programs, including increases in compensation.
Costs to repair and maintain our equipment fluctuate depending upon the type of activity the
drilling unit is performing, as well as the age and condition of the equipment.
Operating expenses generally are not affected by changes in dayrates and may not be
significantly affected by short-term fluctuations in utilization. For instance, if a rig is to be
idle for a short period of time, few decreases in operating expenses may actually occur since the
rig is typically maintained in a prepared or ready-stacked state
22
with a full crew. In addition, when a rig is idle, we are responsible for certain operating
expenses such as rig fuel and supply boat costs, which are typically costs of the operator when a
rig is under contract. However, if the rig is to be idle for an extended period of time, we may
reduce the size of a rigs crew and take steps to cold stack the rig, which lowers expenses and
partially offsets the impact on operating income. We recognize, as incurred, operating expenses
related to activities such as inspections, painting projects and routine overhauls that meet
certain criteria and which maintain rather than upgrade our rigs. These expenses vary from period
to period. Costs of rig enhancements are capitalized and depreciated over the expected useful
lives of the enhancements. Higher depreciation expense decreases operating income in periods
subsequent to capital upgrades.
Periods of high, sustained utilization may result in cost increases for maintenance and
repairs in order to maintain our equipment in proper, working order. In addition, during periods
of high activity and dayrates, higher prices generally pervade the entire offshore drilling
industry and its support businesses, which cause our costs for goods and services to increase.
Our operating income is negatively impacted when we perform certain regulatory inspections,
which we refer to as a 5-year survey, or special survey, that are due every five years for each of
our rigs. Operating revenue decreases because these surveys are performed during scheduled
downtime in a shipyard. Operating expenses increase as a result of these surveys due to the cost
to mobilize the rigs to a shipyard, inspection costs incurred and repair and maintenance costs.
Repair and maintenance costs may be required resulting from the survey or may have been previously
planned to take place during this mandatory downtime. The number of rigs undergoing a 5-year
survey will vary from year to year.
In addition, operating income may be negatively impacted by intermediate surveys, which are
performed at interim periods between 5-year surveys. Intermediate surveys are generally less
extensive in duration and scope than a 5-year survey. Although an intermediate survey may require
some downtime for the drilling rig, it normally does not require dry-docking or shipyard time.
During 2007, we expect to spend an aggregate of approximately $46 million for 5-year surveys
and intermediate surveys, including estimated mobilization costs, but excluding any resulting
repair and maintenance costs, which could be significant. Costs of mobilizing our rigs to
shipyards for scheduled surveys, which were a major component of our survey-related costs during
2006, are indicative of higher prices commanded by support businesses to the offshore drilling
industry. We expect mobilization costs to be a significant component of our survey-related costs
in 2007.
When we renewed our principal insurance policies effective May 1, 2006, coverage for offshore
drilling rigs, if available, was offered at substantially higher premiums than in the past and was
subject to an increasing number of coverage limitations, due in part to underwriting losses
suffered by the insurance industry as a result of damage caused by hurricanes in the Gulf of Mexico
in 2004 and 2005. In some cases, quoted renewal premiums increased by more than 200%, with the
addition of substantial deductibles and limits on the amount of claims payable for losses arising
from named windstorms. In light of these factors, we determined that retention of additional risk
was preferable to paying dramatically higher premiums for limited coverage. Accordingly, we have
elected to self-insure for physical damage to rigs and equipment caused by named windstorms in the
U.S. Gulf of Mexico. For our other physical damage coverage, our deductible is $150.0 million per
occurrence (or lower for some rigs if they are declared a constructive total loss). As a result of
our reduced coverage, our premiums for this coverage were reduced from the amounts we paid in 2005
and were lower than the renewal rates quoted by our insurance carriers. We also renewed our
liability policies in May 2006, with an increase in premiums and deductibles. Our new deductibles
under these policies have generally increased to $5.0 million per occurrence, but our deductibles
arising in connection with certain liabilities relating to named windstorms in the U.S. Gulf of
Mexico have increased to $10.0 million per occurrence, with no annual aggregate deductible. In
addition, we elected to self-insure a portion of our excess liability coverage related to named
windstorms in the U.S. Gulf of Mexico. To the extent that we incur certain liabilities related to
named windstorms in the U.S. Gulf of Mexico in excess of $75.0 million, we are self-insured for up
to a maximum retention of $17.5 million per occurrence in addition to these deductibles. We are
currently in the early stages of renewing our insurance policies that expire on May 1, 2007.
Currently we are unable to predict what changes, if any, we may make to our insurance coverage on
or after May 1, 2007.
23
If named windstorms in the U.S. Gulf of Mexico cause significant damage to our rigs or
equipment or to the property of others for which we may be liable, it could have a material adverse
effect on our financial position, results of operations or cash flows.
Insurance premiums will be amortized as expense over the applicable policy periods which
generally expire at the end of April 2007.
Construction and Capital Upgrade Projects. We capitalize interest cost for the construction
and upgrade of qualifying assets in accordance with Statement of Financial Accounting Standards, or
SFAS, No. 34, Capitalization of Interest Cost, or SFAS 34. During 2006 and 2005, we began
capitalizing interest on our two capital upgrade projects and the construction of our two new
jack-up rigs. Pursuant to SFAS 34, the period of interest capitalization covers the duration of
the activities required to make the asset ready for its intended use, and the capitalization period
ends when the asset is substantially complete and ready for its intended use. In 2006 we began
capitalizing interest on expenditures related to the capital upgrade of the Ocean Monarch and the
construction of our two jack-up rigs, and in 2005, we began capitalizing interest on expenditures
related to the upgrade of the Ocean Endeavor. See Note 1 General Information Capitalized
Interest to our Consolidated Financial Statements included in Item 8 of this report.
As of December 31, 2006, the shipyard portion of the Ocean Endeavors upgrade had been
completed, and the rig is currently undergoing sea trials and commissioning in Singapore. We will
continue to capitalize interest costs related to this upgrade until sea trials and commissioning
are completed and the rig is loaded-out on a heavy-lift vessel for its return to the GOM, which we
anticipate will occur at the end of the first quarter of 2007. We believe that this point in time
represents the completion of the construction phase of the upgrade project, as the newly upgraded
rig will be ready for its intended use. Accordingly, we will then cease capitalizing interest
costs related to this upgrade and will begin depreciating the newly upgraded rig. As a result of
the scheduled delivery of the Ocean Endeavor, we anticipate that depreciation and interest expense
in 2007 will increase by approximately $6 million (representing nine months of expense) and $2.5
million, respectively.
Critical Accounting Estimates
Our significant accounting policies are included in Note 1 General Information to our
Consolidated Financial Statements in Item 8 of this report. Judgments, assumptions and estimates
by our management are inherent in the preparation of our financial statements and the application
of our significant accounting policies. We believe that our most critical accounting estimates are
as follows:
Property, Plant and Equipment. We carry our drilling and other property and equipment at
cost. Maintenance and routine repairs are charged to income currently while replacements and
betterments, which meet certain criteria, are capitalized. Depreciation is amortized up to
applicable salvage values by applying the straight-line method over the remaining estimated useful
lives. Our management makes judgments, assumptions and estimates regarding capitalization, useful
lives and salvage values. Changes in these judgments, assumptions and estimates could produce
results that differ from those reported.
We evaluate our property and equipment for impairment whenever changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. We utilize a
probability-weighted cash flow analysis in testing an asset for potential impairment. Our
assumptions and estimates underlying this analysis include the following:
|
|
|
dayrate by rig; |
|
|
|
|
utilization rate by rig (expressed as the actual percentage of time per year that the rig would be used); |
|
|
|
|
the per day operating cost for each rig if active, ready-stacked or cold-stacked; and |
|
|
|
|
salvage value for each rig. |
Based on these assumptions and estimates, we develop a matrix by assigning probabilities to various
combinations of assumed utilization rates and dayrates. We also consider the impact of a 5%
reduction in assumed dayrates for the cold-stacked rigs (holding all other assumptions and
estimates in the model constant), or alternatively the impact of a 5% reduction in utilization
(again holding all other assumptions and estimates in the model constant) as part of our analysis.
24
As of December 31, 2006, all of our drilling rigs were either under contract, in shipyards for
surveys and/or life extension projects or undergoing a major upgrade. Based on this knowledge, we
determined that an impairment test of our drilling equipment was not needed as we are currently
marketing all of our drilling units. We did not have any cold-stacked rigs at December 31, 2006.
We do not believe that current circumstances indicate that the carrying amount of our property and
equipment may not be recoverable.
Managements assumptions are an inherent part of our asset impairment evaluation and the use
of different assumptions could produce results that differ from those reported.
Personal Injury Claims. Effective May 1, 2006, in conjunction with our insurance policy
renewals, we increased our deductible for liability coverage for personal injury claims, which
primarily result from Jones Act liability in the Gulf of Mexico, to $5.0 million per occurrence,
with no aggregate deductible. The Jones Act is a federal law that permits seamen to seek
compensation for certain injuries during the course of their employment on a vessel and governs the
liability of vessel operators and marine employers for the work-related injury or death of an
employee. Prior to this renewal, our uninsured retention of liability for personal injury claims
was $0.5 million per claim with an additional aggregate annual deductible of $1.5 million. Our
in-house claims department estimates the amount of our liability for our retention. This
department establishes a reserve for each of our personal injury claims by evaluating the existing
facts and circumstances of each claim and comparing the circumstances of each claim to historical
experiences with similar past personal injury claims. Our claims department also estimates our
liability for personal injuries that are incurred but not reported by using historical data. From
time to time, we may also engage experts to assist us in estimating our reserve for such personal
injury claims. In 2006 we engaged an actuary to estimate our liability for personal injury claims
based on our historical losses and utilizing various actuarial models. We reduced our reserve for
personal injury claims by $8.0 million during the fourth quarter of 2006 based on an actuarial
review from which we determined that our aggregate reserve for personal injury claims should be
$35.0 million at December 31, 2006.
The eventual settlement or adjudication of these claims could differ materially from our
estimated amounts due to uncertainties such as:
|
|
|
the severity of personal injuries claimed; |
|
|
|
|
significant changes in the volume of personal injury claims; |
|
|
|
|
the unpredictability of legal jurisdictions where the claims will ultimately be litigated; |
|
|
|
|
inconsistent court decisions; and |
|
|
|
|
the risks and lack of predictability inherent in personal injury litigation. |
Income Taxes. We account for income taxes in accordance with SFAS No. 109, Accounting for
Income Taxes, or SFAS 109, which requires the recognition of the amount of taxes payable or
refundable for the current year and an asset and liability approach in recognizing the amount of
deferred tax liabilities and assets for the future tax consequences of events that have been
currently recognized in our financial statements or tax returns. In each of our tax jurisdictions
we recognize a current tax liability or asset for the estimated taxes payable or refundable on tax
returns for the current year and a deferred tax asset or liability for the estimated future tax
effects attributable to temporary differences and carryforwards. Deferred tax assets are reduced
by a valuation allowance, if necessary, which is determined by the amount of any tax benefits that,
based on available evidence, are not expected to be realized under a more likely than not
approach. For interim periods, we estimate our annual effective tax rate by forecasting our annual
income before income tax, taxable income and tax expense in each of our tax jurisdictions. We make
judgments regarding future events and related estimates especially as they pertain to forecasting
of our effective tax rate, the potential realization of deferred tax assets such as utilization of
foreign tax credits, and exposure to the disallowance of items deducted on tax returns upon audit.
During 2006 we were able to utilize all of the foreign tax credits available to us and we had
no foreign tax credit carryforwards as of December 31, 2006. At the end of 2005, we had a
valuation allowance of $0.8 million for certain of our foreign tax credit carryforwards which was
reversed during 2006 as the valuation allowance was no longer necessary.
In June 2006, the Financial Accounting Standards Board, or FASB, issued FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes, or FIN 48, which clarifies the accounting for
uncertainty in income taxes recognized in financial statements in accordance with SFAS 109. FIN 48
prescribes a recognition threshold
25
and measurement attribute for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return and also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition.
FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently
evaluating the guidance provided in FIN 48 and expect to adopt FIN 48 in the first quarter of 2007.
Although our assessment has not yet been finalized, upon adoption of FIN 48 we expect to recognize
a cumulative effect adjustment for uncertain tax positions of approximately $30 million, which will
be charged to results of operations and equity.
Results of Operations
Years Ended December 31, 2006 and 2005
Comparative data relating to our revenues and operating expenses by equipment type are
presented below. We have reclassified certain amounts applicable to the prior periods to conform
to the classifications we currently follow. These reclassifications do not affect earnings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
|
|
December 31, |
|
|
Favorable/ |
|
|
|
2006 |
|
|
2005 |
|
|
(Unfavorable) |
|
|
|
(In thousands) |
|
CONTRACT DRILLING REVENUE |
|
|
|
|
|
|
|
|
|
|
|
|
High-Specification Floaters |
|
$ |
766,873 |
|
|
$ |
448,937 |
|
|
$ |
317,936 |
|
Intermediate Semisubmersibles |
|
|
785,047 |
|
|
|
456,734 |
|
|
|
328,313 |
|
Jack-ups |
|
|
435,194 |
|
|
|
271,809 |
|
|
|
163,385 |
|
Other |
|
|
|
|
|
|
1,535 |
|
|
|
(1,535 |
) |
|
|
|
Total Contract Drilling Revenue |
|
$ |
1,987,114 |
|
|
$ |
1,179,015 |
|
|
$ |
808,099 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues Related to Reimbursable Expenses |
|
$ |
65,458 |
|
|
$ |
41,987 |
|
|
$ |
23,471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONTRACT DRILLING EXPENSE |
|
|
|
|
|
|
|
|
|
|
|
|
High-Specification Floaters |
|
$ |
236,276 |
|
|
$ |
179,248 |
|
|
$ |
(57,028 |
) |
Intermediate Semisubmersibles |
|
|
391,092 |
|
|
|
325,579 |
|
|
|
(65,513 |
) |
Jack-ups |
|
|
159,424 |
|
|
|
123,833 |
|
|
|
(35,591 |
) |
Other |
|
|
25,265 |
|
|
|
9,880 |
|
|
|
(15,385 |
) |
|
|
|
Total Contract Drilling Expense |
|
$ |
812,057 |
|
|
$ |
638,540 |
|
|
$ |
(173,517 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reimbursable Expenses |
|
$ |
57,465 |
|
|
$ |
35,549 |
|
|
$ |
(21,916 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
High-Specification Floaters |
|
$ |
530,597 |
|
|
$ |
269,689 |
|
|
$ |
260,908 |
|
Intermediate Semisubmersibles |
|
|
393,955 |
|
|
|
131,155 |
|
|
|
262,800 |
|
Jack-ups |
|
|
275,770 |
|
|
|
147,976 |
|
|
|
127,794 |
|
Other |
|
|
(25,265 |
) |
|
|
(8,345 |
) |
|
|
(16,920 |
) |
Reimbursables, net |
|
|
7,993 |
|
|
|
6,438 |
|
|
|
1,555 |
|
Depreciation |
|
|
(200,503 |
) |
|
|
(183,724 |
) |
|
|
(16,779 |
) |
General and Administrative Expense |
|
|
(41,551 |
) |
|
|
(37,162 |
) |
|
|
(4,389 |
) |
(Loss) gain on Sale and Disposition of Assets |
|
|
(1,064 |
) |
|
|
14,767 |
|
|
|
(15,831 |
) |
Casualty gain on Ocean Warwick |
|
|
500 |
|
|
|
33,605 |
|
|
|
(33,105 |
) |
|
|
|
Total Operating Income |
|
$ |
940,432 |
|
|
$ |
374,399 |
|
|
$ |
566,033 |
|
|
|
|
Continued strong demand for our rigs in all markets and geographic regions resulted in
high utilization and historically high dayrates during 2006. Due to this continuing strong demand,
our operating income in 2006 increased $566.0 million, or 151%, to $940.4 million, compared to
$374.4 million in 2005. Dayrates have generally increased during 2006, compared to 2005, resulting
in the generation of additional contract drilling revenues by our fleet. However, overall revenue
increases were negatively impacted by the effect of downtime associated with mandatory surveys and
related repair time and lower dayrates earned by some of our semisubmersible rigs due to
26
previously established job sequencing that caused the units to temporarily roll to older
contracts with lower dayrates. Total contract drilling revenues in 2006 increased $808.1 million,
or 69%, to $1,987.1 million compared to 2005.
Our results in 2006 were also impacted by higher expenses related to our mooring enhancement
and other hurricane preparedness activities, wage increases in late 2005 and the first quarter of
2006 and surveys performed during 2006. The increase in survey costs included higher expenses for
survey-related services and higher boat charges associated with moving rigs to and from shipyards.
In addition, overall cost increases for maintenance and repairs between 2005 and 2006 reflect the
impact of high, sustained utilization of our drilling units across our fleet and in all geographic
locations in which we operate. The increase in overall operating and overhead costs also reflects
the impact of higher prices throughout the offshore drilling industry and its support businesses.
Total contract drilling expenses in 2006 increased $173.5 million, or 27%, to $812.1 million,
compared to the same period in 2005. The increase in our operating expenses in 2006, as compared
to 2005, was partially offset by an $8.0 million reduction in our reserve for personal injury
claims based on an actuarial review.
Our operating results in 2005 included a $33.6 million casualty gain due to the constructive
total loss of the Ocean Warwick as a result of Hurricane Katrina in August 2005 and an $8.0 million
gain related to the June 2005 sale of the Ocean Liberator.
High-Specification Floaters.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
|
|
December 31, |
|
|
Favorable/ |
|
|
|
2006 |
|
|
2005 |
|
|
(Unfavorable) |
|
|
|
(In thousands) |
|
CONTRACT DRILLING REVENUE |
|
|
|
|
|
|
|
|
|
|
|
|
GOM |
|
$ |
574,594 |
|
|
$ |
304,642 |
|
|
$ |
269,952 |
|
Australia/Asia/Middle East |
|
|
65,682 |
|
|
|
68,349 |
|
|
|
(2,667 |
) |
South America |
|
|
126,597 |
|
|
|
75,946 |
|
|
|
50,651 |
|
|
|
|
Total Contract Drilling Revenue |
|
$ |
766,873 |
|
|
$ |
448,937 |
|
|
$ |
317,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONTRACT DRILLING EXPENSE |
|
|
|
|
|
|
|
|
|
|
|
|
GOM |
|
$ |
143,447 |
|
|
$ |
88,107 |
|
|
$ |
(55,340 |
) |
Australia/Asia/Middle East |
|
|
24,465 |
|
|
|
35,891 |
|
|
|
11,426 |
|
South America |
|
|
68,364 |
|
|
|
55,250 |
|
|
|
(13,114 |
) |
|
|
|
Total Contract Drilling Expense |
|
$ |
236,276 |
|
|
$ |
179,248 |
|
|
$ |
(57,028 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME |
|
$ |
530,597 |
|
|
$ |
269,689 |
|
|
$ |
260,908 |
|
|
|
|
GOM. Revenues generated by our high-specification floaters operating in the GOM
increased $270.0 million in 2006 compared to 2005, primarily due to higher average dayrates earned
during the period and revenues generated by the Ocean Baroness, which relocated to the GOM from the
Australia/Asia market in the latter half of 2005 ($58.1 million). Excluding the Ocean Baroness,
average operating revenue per day for our rigs in this market increased to $242,000 during 2006,
compared to $142,600 during 2005, generating additional revenues of $211.6 million. The higher
overall dayrates achieved for our high-specification floaters reflect the continuing high demand
for this class of rig in the GOM.
Average utilization for our high-specification rigs operating in the GOM, excluding the
contribution from the Ocean Baroness, increased slightly to 96% in 2006 compared to 2005, and
resulted in $0.2 million in revenue.
Operating costs during 2006 for our high-specification floaters in the GOM increased $55.3
million over operating costs incurred during 2005. The increase in operating costs is primarily
due to the inclusion of normal operating costs and amortization of mobilization expenses for the
Ocean Baroness during 2006 ($30.6 million) compared to the prior year when this drilling rig
operated offshore Indonesia. In addition, our operating expenses for 2006, compared to 2005,
reflect higher labor and benefits costs related to late 2005 and first quarter of 2006 wage
increases, higher repair and maintenance costs, and higher miscellaneous operating expenses,
including catering costs. Our operating expenses in 2005 reflect a $2.0 million reduction in costs
due to a recovery from a
27
customer for damages sustained by one of our GOM rigs during Hurricane Ivan in 2004, partially
offset by the recognition of $0.5 million in deductibles for damages sustained during Hurricane
Katrina in 2005.
Australia/Asia. Revenues generated by our high-specification rigs in the
Australia/Asia/Middle East market decreased $2.7 million in 2006 compared to 2005, primarily due to
the relocation of the Ocean Baroness from this market to the GOM in the latter half of 2005. Prior
to its relocation to the GOM, the Ocean Baroness generated $18.2 million in revenues during 2005.
The decrease in revenues in 2006 was partially offset by additional revenue ($13.7 million)
generated by an increase in the dayrate earned by the Ocean Rover compared to the prior year. The
average operating revenue per day for this rig increased from $143,500 in 2005 to $181,500 in 2006
as a result of a new drilling program which began in the second quarter of 2006. Utilization
improvements for the Ocean Rover during 2006, as compared to 2005 when the unit had 11 days of
downtime for repairs, generated an additional $1.8 million in revenues.
Operating costs for our rigs in the Australia/Asia/Middle East market decreased $11.4 million
in 2006 compared to 2005 primarily due to the relocation of the Ocean Baroness to the GOM ($15.5
million). This decrease was partially offset by an increase in operating costs for the Ocean Rover
during 2006, compared to the prior year, primarily related to higher personnel-related costs as a
result of late 2005 and March 2006 pay increases, increased agency fee costs (which are based on a
percentage of revenues) and higher other miscellaneous operating expenses.
South America. Revenues for our high-specification rigs operating offshore Brazil increased
$50.7 million in 2006 compared to 2005, primarily due to higher average dayrates earned by our rigs
in this market ($44.1 million). Average operating revenue per day earned by the Ocean Alliance and
the Ocean Clipper increased to $180,100 during 2006 up from $117,300 during the prior year as a
result of contract renewals for both rigs in the latter part of 2005. Utilization for our rigs
offshore Brazil increased from 89% in 2005 to 96% in 2006, contributing $6.6 million in additional
revenues in 2006, primarily due to less downtime during 2006 for repairs.
Contract drilling expenses for our operations offshore Brazil increased $13.1 million in 2006
compared to 2005. The increase in costs is primarily due to higher labor, benefits and other
personnel-related costs as a result of 2005 and March 2006 pay increases and other compensation
enhancement programs, increased agency fee costs (which are based on a percentage of revenues),
higher freight costs and higher maintenance and project costs.
Intermediate Semisubmersibles.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
|
|
December 31, |
|
|
Favorable/ |
|
|
|
2006 |
|
|
2005 |
|
|
(Unfavorable) |
|
|
|
(In thousands) |
|
CONTRACT DRILLING REVENUE |
|
|
|
|
|
|
|
|
|
|
|
|
GOM |
|
$ |
224,344 |
|
|
$ |
99,500 |
|
|
$ |
124,844 |
|
Mexican GOM |
|
|
80,487 |
|
|
|
85,594 |
|
|
|
(5,107 |
) |
Australia/Asia/Middle East |
|
|
196,180 |
|
|
|
111,811 |
|
|
|
84,369 |
|
Europe/Africa |
|
|
207,295 |
|
|
|
106,251 |
|
|
|
101,044 |
|
South America |
|
|
76,741 |
|
|
|
53,578 |
|
|
|
23,163 |
|
|
|
|
Total Contract Drilling Revenue |
|
$ |
785,047 |
|
|
$ |
456,734 |
|
|
$ |
328,313 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONTRACT DRILLING EXPENSE |
|
|
|
|
|
|
|
|
|
|
|
|
GOM |
|
$ |
80,498 |
|
|
$ |
49,947 |
|
|
$ |
(30,551 |
) |
Mexican GOM |
|
|
60,467 |
|
|
|
57,246 |
|
|
|
(3,221 |
) |
Australia/Asia/Middle East |
|
|
87,535 |
|
|
|
83,768 |
|
|
|
(3,767 |
) |
Europe/Africa |
|
|
109,741 |
|
|
|
93,253 |
|
|
|
(16,488 |
) |
South America |
|
|
52,851 |
|
|
|
41,365 |
|
|
|
(11,486 |
) |
|
|
|
Total Contract Drilling Expense |
|
$ |
391,092 |
|
|
$ |
325,579 |
|
|
$ |
(65,513 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME |
|
$ |
393,955 |
|
|
$ |
131,155 |
|
|
$ |
262,800 |
|
|
|
|
28
GOM. Revenues generated by our intermediate semisubmersible rigs operating in the GOM
during 2006 increased $124.8 million over the prior year primarily due to higher average operating
dayrates and the operation of the Ocean New Era ($53.9 million) which was reactivated in December
2005. Average operating dayrates for the remainder of our GOM fleet of intermediate rigs increased
from $77,300 in 2005 to $149,300 in 2006 and generated additional revenues of $82.2 million during
2006. Excluding the Ocean New Era, utilization fell from 87% in 2005 to 75% in 2006, resulting in
an $11.3 million reduction in revenues generated in 2006 compared to 2005. Average utilization in
2006 was negatively impacted by approximately five months of downtime for the Ocean Saratoga in
connection with its survey and related repairs, as well as a life enhancement upgrade that
commenced in the third quarter of 2006 and approximately one month of downtime for both the Ocean
Voyager and Ocean Concord for mooring upgrades. Partially offsetting the decline in average
utilization in 2006 was an improvement in utilization for the Ocean Lexington, which worked nearly
all of 2006 prior to its move to Egypt at the beginning of the fourth quarter. During 2005, the
Ocean Lexington incurred over four months of downtime for a survey and life enhancement upgrade.
Contract drilling expense for our GOM operations increased $30.6 million in 2006 compared to
2005, primarily due to normal operating costs for the Ocean New Era in 2006 ($7.6 million) and
repair and other normal operating costs for the Ocean Whittington ($6.4 million) in the latter half
of 2006 after its return from the Mexican GOM. Higher operating costs in 2006, as compared to
2005, reflect higher labor and benefits costs as a result of September 2005 and March 2006 wage
increases for our rig-based personnel, mobilization costs associated with mooring upgrades for the
Ocean Concord and Ocean Voyager, survey and related repair costs for the Ocean Saratoga and higher
maintenance and other miscellaneous operating costs for our semisubmersible rigs in this market
segment. In addition, during 2006, we incurred $2.4 million in costs associated with the rental of
mooring lines and chains as temporary replacements for equipment lost during the 2005 hurricanes in
the GOM. Partially offsetting the increased operating costs in 2006 was the absence of
reactivation costs for the Ocean New Era, which returned to service in December 2005.
Mexican GOM. Revenues generated by our intermediate semisubmersibles operating in the Mexican
GOM during 2006 decreased $5.1 million compared to 2005, primarily due to PEMEXs early
cancellation of its contract for the Ocean Whittington in July 2006, partially offset by increased
revenues for the Ocean Worker as a result of a small dayrate increase received in December 2005.
Our remaining three rigs in this market continue operating under contracts with PEMEX, two of which
expire in mid-2007 and one that extends until late 2007. Operating costs in the Mexican GOM
increased $3.2 million during 2006 compared to 2005, primarily due to the effect of 2005 and March
2006 wage increases for our rig-based personnel, as well as higher repair and maintenance costs,
other miscellaneous operating costs and overheads, partially offset by lower operating costs for
the Ocean Whittington pursuant to its third quarter relocation to the GOM after termination of its
drilling contract by PEMEX. In addition, we incurred $1.9 million in costs associated with the
demobilization of the Ocean Whittington from offshore Mexico to the GOM.
Australia/Asia. Our intermediate semisubmersible rigs operating in the Australia/Asia market
during 2006 generated an additional $84.4 million in revenues compared to 2005 primarily due to
higher average operating dayrates ($84.3 million). Average operating dayrates increased from
$76,300 in 2005 to $135,600 in 2006. In addition, the over 95% utilization of both the Ocean Epoch
and Ocean Patriot during 2006, as compared to 2005 when the average utilization for these two rigs
was 84%, contributed an additional $6.6 million to 2006 revenues. During 2005 the Ocean Epoch had
over two months of downtime associated with a scheduled 5-year survey, other regulatory inspections
and contract preparation work prior to its relocation to Malaysia and the Ocean Patriot incurred
over one month of downtime associated with an intermediate inspection and repairs.
These favorable revenue variances in 2006 were partially offset by the lower recognition of
deferred mobilization, capital upgrade and other fees in 2006 compared to 2005. During 2006, we
recognized $2.3 million in lump-sum mobilization revenue related to the Ocean Patriots move
offshore New Zealand at the beginning of the fourth quarter of 2006 and equipment upgrade fees from
two customers in connection with customer-requested capital improvements to the Ocean Patriot.
However, during 2005, we recognized $5.7 million and $0.9 million in connection with the Ocean
Patriots 2004 mobilization from South Africa to New Zealand and the Bass Strait and equipment
upgrade fees, respectively. Additionally, we received a fee from another customer in this market
for a drilling option for another rig, of which $0.6 million and $3.7 million were recognized in
2006 and 2005, respectively.
29
Contract drilling expense for the Australia/Asia/Middle East region increased slightly from
$83.8 million in 2005 to $87.5 million in 2006. The $3.8 million net increase in costs for 2006 is
primarily the result of higher labor costs (due to wage increases in late 2005 and March 2006),
higher repair and maintenance costs, higher revenue-based agency fees and higher other operating
costs. These unfavorable cost trends were partially offset by lower survey and inspection costs in
2006 and the recognition of an insurance deductible in 2005 related to an anchor winch failure on
the Ocean Patriot. In addition, we recognized $1.1 million and $5.2 million in mobilization
expenses for our rigs in this region during 2006 and 2005, respectively. The amount of
mobilization expenses recognized during a period is dependent upon the duration of the rig move and
the contract period over which the mobilization costs are to be recognized.
Europe/Africa. Revenues generated by our intermediate semisubmersibles operating in this
market increased $101.0 million in 2006 compared to 2005, primarily due to an increase in the
average operating revenue per day earned by our rigs in this market. Excluding the Ocean
Lexington, which began operating in this market sector during the fourth quarter of 2006 and
contributed revenues of $5.6 million, the average operating revenue per day for our rigs operating
in this market increased from $87,500 in 2005 to $144,500 in 2006. This increase in average
revenue per day generated additional revenues of $70.6 million in 2006 compared to 2005. All three
of our rigs operating in the U.K. sector of the North Sea received operating dayrate increases
during 2006 and the Ocean Vanguard began a drilling program in the fourth quarter of 2006 at a
higher dayrate than it previously earned.
Average utilization for our rigs in the Europe/Africa region increased from 83% in 2005 to 94%
in 2006, excluding the Ocean Lexington, generating $20.7 million in additional revenues. The
increase in average utilization is primarily due to higher utilization in 2006 for the Ocean
Vanguard, compared to 2005 when this unit incurred more than five months of downtime due to an
anchor winch failure and for a 5-year survey and related repairs. Additionally, average
utilization for our three rigs operating in the U.K. sector of the North Sea increased slightly,
reflecting the nearly full utilization of the Ocean Nomad during 2006 compared to 2005, when the
rig was ready-stacked for almost three weeks and incurred nearly a full month of downtime for
repairs. These favorable utilization trends were partially offset by 48 days of downtime for the
Ocean Princess which was in a shipyard for an intermediate survey during 2006. In comparison, the
Ocean Princess operated for nearly all of 2005.
During 2006, we also recognized $4.4 million in revenues related to the amortization of
lump-sum fees received from customers for capital improvements to the Ocean Guardian and Ocean
Vanguard.
Contract drilling expenses for our intermediate semisubmersible rigs operating in the
Europe/Africa region increased $16.5 million during 2006 compared to 2005, primarily due to the
inclusion of $4.2 million of normal operating costs for the Ocean Lexington in Egypt and costs
associated with scheduled surveys for the Ocean Guardian and Ocean Princess, including mobilization
and related repair costs during 2006. Also contributing to the increase in costs during 2006 were
higher personnel and related costs (including administrative and support personnel in the region),
reflecting the impact of wage increases after September 2005 and higher overall other operating
costs. These cost increases in 2006 were partially offset by lower maintenance costs for the Ocean
Vanguard in 2006 compared to 2005 and the absence of mobilization costs in 2006 related to the
Ocean Nomads relocation from Gabon to the North Sea at the end of 2004, which were fully
recognized in 2005, as well as the 2005 recognition of mobilization costs incurred in connection
with the Ocean Guardians first quarter 2006 survey.
South America. Revenues generated by our two intermediate semisubmersible rigs operating in
Brazil increased $23.2 million to $76.7 million in 2006 from $53.6 million in 2005, primarily due
to higher average operating dayrates earned by both of our rigs in this market. Average operating
revenue per day rose from $75,100 in 2005 to $113,700 in 2006, contributing $26.4 million in
additional revenues.
Reduced utilization for our two intermediate semisubmersible rigs operating offshore Brazil
during 2006, compared to 2005, is primarily the result of additional downtime for repairs during
2006, including 45 days of downtime for a thruster change-out on the Ocean Yatzy. This overall
decrease in average utilization in 2006 resulted in a $3.2 million reduction in revenues compared
to the prior year.
Operating expenses for the Ocean Yatzy and Ocean Winner increased $11.5 million in 2006
compared to the prior year, primarily due to increased labor costs for our rig-based and
shore-based personnel as a result of wage increases and other compensation enhancement programs
implemented after the third quarter of 2005, higher
30
revenue-based agency fees, as well as higher repair, maintenance and freight costs and
increases in other routine operating costs in 2006 compared to 2005.
Jack-Ups.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
|
|
December 31, |
|
|
Favorable/ |
|
|
|
2006 |
|
|
2005 |
|
|
(Unfavorable) |
|
|
|
(In thousands) |
|
CONTRACT DRILLING REVENUE |
|
|
|
|
|
|
|
|
|
|
|
|
GOM |
|
$ |
315,279 |
|
|
$ |
222,365 |
|
|
$ |
92,914 |
|
Mexican GOM |
|
|
15,966 |
|
|
|
|
|
|
|
15,966 |
|
Australia/Asia/Middle East |
|
|
61,141 |
|
|
|
49,444 |
|
|
|
11,697 |
|
Europe/Africa |
|
|
42,808 |
|
|
|
|
|
|
|
42,808 |
|
|
|
|
Total Contract Drilling Revenue |
|
$ |
435,194 |
|
|
$ |
271,809 |
|
|
$ |
163,385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONTRACT DRILLING EXPENSE |
|
|
|
|
|
|
|
|
|
|
|
|
GOM |
|
$ |
112,524 |
|
|
$ |
98,866 |
|
|
$ |
(13,658 |
) |
Mexican GOM |
|
|
4,373 |
|
|
|
|
|
|
|
(4,373 |
) |
Australia/Asia/Middle East |
|
|
27,721 |
|
|
|
24,967 |
|
|
|
(2,754 |
) |
Europe/Africa |
|
|
14,806 |
|
|
|
|
|
|
|
(14,806 |
) |
|
|
|
Total Contract Drilling Expense |
|
$ |
159,424 |
|
|
$ |
123,833 |
|
|
$ |
(35,591 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME |
|
$ |
275,770 |
|
|
$ |
147,976 |
|
|
$ |
127,794 |
|
|
|
|
GOM. Revenues generated by our jack-up rigs in the GOM increased $92.9 million in 2006
compared to 2005 primarily due to an improvement in average operating dayrates for our rigs in this
region. Excluding the Ocean Warwick, which was declared a constructive total loss in the third
quarter of 2005, our average operating revenue per day increased to $100,800 in 2006 from $59,100
in 2005, generating additional revenues of $141.9 million. GOM revenues were reduced $37.2 million
due to changes in average utilization which fell to 79% in 2006 from 96% in 2005 (excluding the
Ocean Warwick). During 2006, utilization in the GOM was negatively impacted primarily by the
relocation of the Ocean Spur to Tunisia in the first quarter of 2006 and over five months of
downtime for the Ocean Nugget for a special survey, related repairs and contract preparation work
prior to its relocation to the Mexican GOM in the fourth quarter of 2006. Also during 2006, the
Ocean Spartan underwent leg repairs and was ready-stacked from mid-September 2006 until
mid-December 2006 for total downtime of approximately four months, and the Ocean Summit incurred
over three months of downtime for a special survey and related repairs. During 2005, the Ocean
Warwick generated revenues of $11.8 million.
Contract drilling expense in the GOM during 2006 increased $13.7 million compared to 2005.
The increase in 2006 operating costs is primarily due to higher labor and other personnel-related
costs as a result of late 2005 and March 2006 wage increases, costs associated with special surveys
and related repairs for the Ocean Summit and Ocean Nugget, leg repairs for the Ocean Nugget,
leg/spud can repairs for the Ocean Spartan and higher overhead, catering and other miscellaneous
operating expenses. The overall increase in contract drilling expenses was partially offset by the
absence of operating costs for the Ocean Warwick during 2006 and reduced operating costs in the GOM
for the Ocean Spur (which only operated in the GOM for 45 days in 2006 before relocating to
Tunisia) and the Ocean Nugget (which was relocated to the Mexican GOM at the beginning of the
fourth quarter of 2006). Both the Ocean Spur and Ocean Nugget operated solely in the GOM during
2005. Also partially offsetting these negative cost trends was a reduction in survey and related
mobilization costs during 2006 associated with the Ocean Spartans survey in late 2005. We also
recognized a $1.0 million insurance deductible for a leg punchthrough incident on the Ocean Spartan
in 2005.
Mexican GOM. Our jack-up rig the Ocean Nugget, which relocated to the Mexican GOM at the
beginning of the fourth quarter of 2006, generated $16.0 million there in 2006. This unit is
contracted to work for PEMEX through March 2009. Contract drilling expenses related to this rig
were $4.4 million. We had no jack-up units operating in this market during 2005.
31
Australia/Asia/Middle East. Revenues generated by our jack-up rigs in the Australia/Asia and
Middle East regions were $61.1 million in 2006 compared to $49.4 million in 2005. The $11.7
million increase in revenues in this region during 2006 compared to the prior year is primarily
attributable to higher average operating dayrates for both of our jack-up rigs in this region
($15.1 million). Average dayrates for our jack-up rigs in this region increased from $71,900 in
2005 to $95,600 in 2006. The favorable contribution to operating revenues by the increase in
average operating dayrates was partially offset by the reduced recognition of deferred mobilization
revenues in 2006, as compared to 2005 ($3.1 million) and the effect of slightly lower average
utilization in this region in 2006 compared to 2005 ($0.3 million).
Contract drilling expenses for our jack-up rigs in the Australia/Asia and Middle East regions
increased slightly from $25.0 million in 2005 to $27.7 million in 2006. Higher labor costs in 2006
(resulting from late 2005 and early 2006 wage increases), higher maintenance, inspection costs and
revenue-based agency fees were partially offset by the 2005 recognition of an insurance deductible
for leg damage to the Ocean Heritage and the recognition of mobilization costs related to
relocation of the Ocean Sovereign to locations offshore Bangladesh and Indonesia during 2005.
Europe/Africa. The Ocean Spur began operating offshore Tunisia in mid-March 2006 and
generated $42.8 million in revenues, including the recognition of $5.3 million in deferred
mobilization revenue, and incurred operating expenses of $14.8 million during 2006. We did not
have any of our jack-up rigs working in this region during 2005.
Other Contract Drilling.
Other contract drilling expenses increased $15.4 million during 2006 compared to 2005,
primarily due to the inclusion of $12.7 million in costs related to anchor boat rental and other
costs associated with our mooring enhancement and hurricane preparedness activities, which were
implemented in response to mooring issues which arose during the 2005 hurricane season.
Reimbursable expenses, net.
Revenues related to reimbursable items, offset by the related expenditures for these items,
were $8.0 million and $6.4 million for 2006 and 2005, respectively. Reimbursable expenses include
items that we purchase, and/or services we perform, at the request of our customers. We charge our
customers for purchases and/or services performed on their behalf at cost, plus a mark-up where
applicable. Therefore, net reimbursables fluctuate based on customer requirements, which vary.
Depreciation.
Depreciation expense increased $16.8 million to $200.5 million during 2006 compared to $183.7
million during the same period in 2005 primarily due to depreciation associated with capital
additions in 2005 and 2006, partially offset by lower depreciation expense resulting from the
declaration of a constructive total loss of the Ocean Warwick in the third quarter of 2005.
General and Administrative Expense.
We incurred general and administrative expense of $41.6 million during 2006 compared to $37.2
million during 2005. The $4.4 million increase in overhead costs between the periods was primarily
due to the recognition of stock-based compensation expense pursuant to our adoption of SFAS No.
123(R), effective January 1, 2006.
Gain (Loss) on Sale of Assets.
We recognized a net loss of $1.1 million on the sale and disposal of assets, including
disposal costs, during 2006 compared to a net gain of $14.8 million during 2005. The loss
recognized in 2006 is primarily the result of costs associated with the removal of production
equipment from the Ocean Monarch, which was subsequently sold to a third party, partially offset by
a $1.1 million recovery from certain of our customers related to the involuntary conversion of
assets damaged during the 2005 hurricanes. Results for 2005 included a gain of $8.0 million
related to the June 2005 sale of the Ocean Liberator, $5.6 million in insurance proceeds related to
the involuntary conversion of certain assets damaged during Hurricane Ivan in 2004 and gains on the
sale of used drill pipe during the period, partially offset by a $1.4 million loss due to the
retirement of equipment lost or damaged during
32
Hurricanes Katrina and Rita in 2005.
Casualty Gain on Ocean Warwick.
We recorded a $33.6 million casualty gain in 2005 as a result of the constructive total loss
of the Ocean Warwick, resulting from damages sustained during Hurricane Katrina in August 2005.
Subsequently in 2006, we revised our estimate of expected deductibles related to this incident and
recorded a $0.5 million favorable adjustment to Casualty Gain on Ocean Warwick. See
OverviewImpact of 2005 Hurricanes.
Interest Income.
We earned interest income of $37.9 million during 2006 compared to $26.0 million in 2005. The
$11.9 million increase in interest income is primarily the result of the combined effect of
slightly higher interest rates earned on higher average invested cash balances in 2006, as compared
to 2005. See Liquidity and Capital Requirements and Historical Cash Flows.
Interest Expense.
We recorded interest expense of $24.1 million during 2006, reflecting a $17.7 million decrease
in interest cost compared to 2005. The decrease in interest cost was primarily attributable to
lower interest expense in 2006 related to our Zero Coupon Convertible Debentures due 2020, or Zero
Coupon Debentures, as a result of our June 2005 repurchase of $774.1 million in aggregate principal
amount at maturity of Zero Coupon Debentures, the associated write-off of $6.9 million of debt
issuance costs in June 2005 and the conversion of $22.4 million in aggregate principal amount at
maturity of Zero Coupon Debentures into shares of our common stock during 2006. In addition we
capitalized an additional $9.1 million in interest costs in connection with qualifying upgrades and
construction projects during 2006 compared to 2005. The decrease in interest cost was partially
offset by additional interest expense on our 4.875% Senior Notes due July 1, 2015, or 4.875% Senior
Notes, which we issued in June 2005.
Other Income and Expense (Other, net).
Included in Other, net are foreign currency translation adjustments and transaction gains
and losses and other income and expense items, among other things, which are not attributable to
our drilling operations. The components of Other, net fluctuate based on the level of activity,
as well as fluctuations in foreign currencies. We recorded other income, net, of $12.1 million
during 2006 and other expense, net, of $1.1 million in 2005.
Effective October 1, 2005, we changed the functional currency of certain of our subsidiaries
operating outside the United States to the U.S. dollar to more appropriately reflect the primary
economic environment in which these subsidiaries operate. Prior to this date, these subsidiaries
utilized the local currency of the country in which they conducted business as their functional
currency. During the years ended December 31, 2006 and 2005, we recognized net foreign currency
exchange gains of $10.3 million and net foreign currency exchange losses of $0.8 million,
respectively. Prior to the fourth quarter of 2005, we accounted for foreign currency translation
gains and losses as a component of Accumulated other comprehensive losses in our Consolidated
Balance Sheets included in Item 8 of this report.
Income Tax Expense.
Our net income tax expense is a function of the mix of our domestic and international pre-tax
earnings, as well as the mix of earnings from the international tax jurisdictions in which we
operate. We recognized $259.5 million of tax expense on pre-tax income of $966.3 million for the
year ended December 31, 2006 compared to tax expense of $96.1 million on a pre-tax income of $356.4
million in 2005.
Certain of our rigs that operate internationally are owned and operated, directly or
indirectly, by Diamond Offshore International Limited, a Cayman Islands subsidiary that we wholly
own. We do not intend to remit earnings from this subsidiary to the U.S. and we plan to
indefinitely reinvest these earnings internationally. Consequently, we provided no U.S. taxes on
earnings and recognized no U.S. benefits on losses generated by this subsidiary during 2006 and
2005.
33
During 2006 we were able to utilize all of the foreign tax credits available to us and we had
no foreign tax credit carryforwards as of December 31, 2006. At the end of 2005, we had a
valuation allowance of $0.8 million for certain of our foreign tax credit carryforwards which was
reversed during 2006 as the valuation allowance was no longer necessary. During 2005, we reversed
$9.6 million of the previously established $10.3 million valuation allowance for certain of our
foreign tax credit carryforwards.
During 2006 we recorded an $8.3 million tax benefit related to the deduction allowable under
Internal Revenue Code Section 199 for domestic production activities. During the second quarter of
2006, the Treasury Department and Internal Revenue Service issued guidelines regarding the
deduction allowable under Internal Revenue Code Section 199 which was previously believed to be
unavailable to the drilling industry with respect to qualified production activities income. The
$8.3 million tax benefit recognized included $2.2 million related to the year 2005.
During 2005, we reversed a previously established reserve of $8.9 million ($1.7 million
included with Current Taxes Payable and $7.2 million in Other Liabilities in our Consolidated
Balance Sheets) associated with exposure related to the disallowance of goodwill deductibility
associated with a 1996 acquisition which we believed was no longer necessary.
During 2005, we settled an income tax dispute in East Timor (formerly part of Indonesia) for
approximately $0.2 million. At December 31, 2004, our books reflected an accrued liability of $4.4
million related to potential East Timor and Indonesian income tax liabilities covering the period
1992 through 2000. Subsequent to the tax settlement, we determined that the accrual was no longer
necessary and reversed the accrued liability in the fourth quarter of 2005.
During 2004 and 2005, the Internal Revenue Service, or IRS, examined our federal income tax
returns for tax years 2000 and 2002. The examination was concluded during the fourth quarter of
2005. We and the IRS agreed to a limited number of adjustments for which we recorded additional
income tax of $1.9 million in 2005.
34
Results of Operations
Years Ended December 31, 2005 and 2004
Comparative data relating to our revenues and operating expenses by equipment type are
presented below. We have reclassified certain amounts applicable to the prior periods to conform
to the classifications we currently follow. These reclassifications do not affect earnings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
|
|
December 31, |
|
|
Favorable/ |
|
|
|
2005 |
|
|
2004 |
|
|
(Unfavorable) |
|
|
|
(In thousands) |
|
CONTRACT DRILLING REVENUE |
|
|
|
|
|
|
|
|
|
|
|
|
High-Specification Floaters |
|
$ |
448,937 |
|
|
$ |
281,866 |
|
|
$ |
167,071 |
|
Intermediate Semisubmersibles |
|
|
456,734 |
|
|
|
319,053 |
|
|
|
137,681 |
|
Jack-ups |
|
|
271,809 |
|
|
|
178,391 |
|
|
|
93,418 |
|
Other |
|
|
1,535 |
|
|
|
3,095 |
|
|
|
(1,560 |
) |
|
|
|
Total Contract Drilling Revenue |
|
$ |
1,179,015 |
|
|
$ |
782,405 |
|
|
$ |
396,610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues Related to Reimbursable Expenses |
|
$ |
41,987 |
|
|
$ |
32,257 |
|
|
$ |
9,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONTRACT DRILLING EXPENSE |
|
|
|
|
|
|
|
|
|
|
|
|
High-Specification Floaters |
|
$ |
179,248 |
|
|
$ |
172,182 |
|
|
$ |
(7,066 |
) |
Intermediate Semisubmersibles |
|
|
325,579 |
|
|
|
277,728 |
|
|
|
(47,851 |
) |
Jack-ups |
|
|
123,833 |
|
|
|
114,466 |
|
|
|
(9,367 |
) |
Other |
|
|
9,880 |
|
|
|
4,252 |
|
|
|
(5,628 |
) |
|
|
|
Total Contract Drilling Expense |
|
$ |
638,540 |
|
|
$ |
568,628 |
|
|
$ |
(69,912 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reimbursable Expenses |
|
$ |
35,549 |
|
|
$ |
28,899 |
|
|
$ |
(6,650 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS) |
|
|
|
|
|
|
|
|
|
|
|
|
High-Specification Floaters |
|
$ |
269,689 |
|
|
$ |
109,684 |
|
|
$ |
160,005 |
|
Intermediate Semisubmersibles |
|
|
131,155 |
|
|
|
41,325 |
|
|
|
89,830 |
|
Jack-ups |
|
|
147,976 |
|
|
|
63,925 |
|
|
|
84,051 |
|
Other |
|
|
(8,345 |
) |
|
|
(1,157 |
) |
|
|
(7,188 |
) |
Reimbursables, net |
|
|
6,438 |
|
|
|
3,358 |
|
|
|
3,080 |
|
Depreciation |
|
|
(183,724 |
) |
|
|
(178,835 |
) |
|
|
(4,889 |
) |
General and Administrative Expense |
|
|
(37,162 |
) |
|
|
(32,759 |
) |
|
|
(4,403 |
) |
Gain (Loss) on Sale and Disposition of Assets |
|
|
14,767 |
|
|
|
(1,613 |
) |
|
|
16,380 |
|
Casualty gain on Ocean Warwick |
|
|
33,605 |
|
|
|
|
|
|
|
33,605 |
|
|
|
|
Total Operating Income |
|
$ |
374,399 |
|
|
$ |
3,928 |
|
|
$ |
370,471 |
|
|
|
|
35
High-Specification Floaters.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
|
|
December 31, |
|
|
Favorable/ |
|
|
|
2005 |
|
|
2004 |
|
|
(Unfavorable) |
|
|
|
(In thousands) |
|
CONTRACT DRILLING REVENUE |
|
|
|
|
|
|
|
|
|
|
|
|
GOM |
|
$ |
304,642 |
|
|
$ |
144,077 |
|
|
$ |
160,565 |
|
Australia/Asia |
|
|
68,349 |
|
|
|
80,666 |
|
|
|
(12,317 |
) |
South America |
|
|
75,946 |
|
|
|
57,123 |
|
|
|
18,823 |
|
|
|
|
Total Contract Drilling Revenue |
|
$ |
448,937 |
|
|
$ |
281,866 |
|
|
$ |
167,071 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONTRACT DRILLING EXPENSE |
|
|
|
|
|
|
|
|
|
|
|
|
GOM |
|
$ |
88,107 |
|
|
$ |
81,083 |
|
|
$ |
(7,024 |
) |
Australia/Asia |
|
|
35,891 |
|
|
|
40,732 |
|
|
|
4,841 |
|
South America |
|
|
55,250 |
|
|
|
50,367 |
|
|
|
(4,883 |
) |
|
|
|
Total Contract Drilling Expense |
|
$ |
179,248 |
|
|
$ |
172,182 |
|
|
$ |
(7,066 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME |
|
$ |
269,689 |
|
|
$ |
109,684 |
|
|
$ |
160,005 |
|
|
|
|
GOM. Revenues for our high-specification floaters in the GOM increased $160.6 million
in 2005, primarily due to higher average dayrates earned ($128.0 million) and higher utilization of
our fleet in this market ($31.9 million), as compared to 2004. The higher overall dayrates
achieved for our high-specification floaters reflected the continuing high demand for this class of
rig in the GOM. Average dayrates for these rigs increased to $143,800 in 2005 compared to $82,000
in 2004.
Fleet utilization for our high-specification rigs in the GOM increased to 91% in 2005 from 80%
in 2004. Higher utilization in 2005 compared to the prior year reflects the return to drilling
operations of several rigs which did not operate in 2004 due to scheduled inspections and repairs
(Ocean Confidence and Ocean America) and upgrade projects (Ocean America) and the ready-stacking of
the Ocean Star for the first five months of 2004. In the late third quarter of 2005, we relocated
the Ocean Baroness from the Australia/Asia market to the GOM for a long-term contract extending
until November 2009. The Ocean Baroness began operating under contract in the GOM in November 2005
and generated revenues of $9.8 million in 2005, which are included in the utilization factors
discussed above.
Operating costs during 2005 for our high-specification floaters in the GOM increased $7.0
million over operating costs in 2004. The increase in operating costs is primarily attributable to
higher labor and benefits costs related to higher utilization of our rigs and the effect of
December 2004 and September 2005 wage increases. Costs in 2005 also include operating expenses for
the Ocean Baroness in the GOM, including mobilization costs from Southeast Asia. Increased
operating costs in 2005 were partially offset by our recovery from a customer for damages sustained
to one of our high-specification rigs during Hurricane Ivan in 2004.
Australia/Asia. Revenues generated by our rigs in the Australia/Asia region decreased $12.3
million to $68.3 million in 2005, as compared to revenues of $80.7 million in 2004. Utilization in
this region decreased from 95% in 2004 to 80% in 2005, primarily due to the relocation of the Ocean
Baroness from this market to the GOM. Prior to its departure to the GOM, the Ocean Baroness was
mobilized to a shipyard in Singapore in mid-May 2005 for an intermediate inspection and preparation
for the rigs dry tow to the GOM, which resulted in additional unpaid downtime for the drilling
unit as compared to 2004. The decline in utilization in 2005, as compared to 2004, resulted in a
$23.9 million reduction in revenues in 2005. Average operating dayrates in this region increased
from $116,600 in 2004 to $141,000 in 2005 and resulted in additional revenues of $11.6 million in
2005 compared to 2004.
Contract drilling expenses in the region decreased $4.8 million in 2005, as compared to 2004,
primarily due to the relocation of the Ocean Baroness to the GOM in the third quarter of 2005. The
overall decline in operating costs in the region was partially offset by higher insurance costs
associated with increased premiums for the 2005/2006 policy year and additional loss-of-hire
insurance coverage.
36
South America. Revenues for our high-specification rig operations offshore Brazil increased
$18.8 million in 2005, as compared to 2004, primarily as a result of increased utilization for the
Ocean Alliance in 2005 as compared to the prior year, when this rig experienced approximately five
months of unpaid downtime. Utilization for these rigs offshore Brazil increased from 76% in 2004
to 89% in 2005 and contributed $9.5 million in additional revenues. Additionally, we negotiated a
contract extension, including a dayrate increase, for the Ocean Alliance in the third quarter of
2005. Average dayrates earned by our high-specification rigs in this region increased to $117,300
in 2005 from $102,900 in 2004, which contributed $9.3 million in additional revenues during 2005.
Contract drilling expense for these operations in Brazil increased $4.9 million in 2005
compared to the prior year. The increase in costs in 2005 was primarily due to higher labor and
benefit costs as a result of December 2004 and September 2005 pay increases, increased local
shorebase support costs due to the completion of a local training program in Brazil and higher
insurance costs associated with increased premiums for the 2005/2006 policy year and additional
loss-of-hire insurance.
Intermediate Semisubmersibles.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
|
|
December 31, |
|
|
Favorable/ |
|
|
|
2005 |
|
|
2004 |
|
|
(Unfavorable) |
|
|
|
(In thousands) |
|
CONTRACT DRILLING REVENUE |
|
|
|
|
|
|
|
|
|
|
|
|
GOM |
|
$ |
99,500 |
|
|
$ |
42,425 |
|
|
$ |
57,075 |
|
Mexican GOM |
|
|
85,594 |
|
|
|
85,383 |
|
|
|
211 |
|
Australia/Asia |
|
|
111,811 |
|
|
|
77,187 |
|
|
|
34,624 |
|
Europe/Africa |
|
|
106,251 |
|
|
|
69,285 |
|
|
|
36,966 |
|
South America |
|
|
53,578 |
|
|
|
44,773 |
|
|
|
8,805 |
|
|
|
|
Total Contract Drilling Revenue |
|
$ |
456,734 |
|
|
$ |
319,053 |
|
|
$ |
137,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONTRACT DRILLING EXPENSE |
|
|
|
|
|
|
|
|
|
|
|
|
GOM |
|
$ |
49,947 |
|
|
$ |
37,300 |
|
|
$ |
(12,647 |
) |
Mexican GOM |
|
|
57,246 |
|
|
|
56,948 |
|
|
|
(298 |
) |
Australia/Asia |
|
|
83,768 |
|
|
|
63,969 |
|
|
|
(19,799 |
) |
Europe/Africa |
|
|
93,253 |
|
|
|
82,864 |
|
|
|
(10,389 |
) |
South America |
|
|
41,365 |
|
|
|
36,647 |
|
|
|
(4,718 |
) |
|
|
|
Total Contract Drilling Expense |
|
$ |
325,579 |
|
|
$ |
277,728 |
|
|
$ |
(47,851 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME |
|
$ |
131,155 |
|
|
$ |
41,325 |
|
|
$ |
89,830 |
|
|
|
|
GOM. Revenues generated in 2005 by our intermediate semisubmersible fleet operating in
the GOM increased $57.1 million due to higher average dayrates earned ($31.3 million) and higher
utilization of our fleet in this market ($27.5 million), as compared to 2004. Average dayrates
earned increased to $77,300 in 2005 compared to $44,600 in 2004, reflecting the tightening market
for intermediate semisubmersibles in the GOM. During 2004, we recognized $1.8 million in lump-sum
mobilization fees for the Ocean Concord.
Overall utilization for our intermediate semisubmersibles in this region (excluding the Ocean
Endeavor, which was cold-stacked during 2004 prior to commencing a major upgrade in 2005, and the
cold-stacked Ocean Monarch, which we acquired in August 2005) increased to 71% in 2005 from 50% in
2004. The increase in utilization in 2005, as compared to 2004, is primarily due to the nearly
full utilization of the Ocean Voyager in 2005 compared to 2004, when this unit was cold-stacked for
most of the year, and increased utilization for the Ocean Concord, which was out of service for
almost six months in 2004 for a 5-year survey and maintenance projects. Additionally, we
reactivated the Ocean New Era from cold-stack status in the last half of 2005, and this drilling
unit returned to active service in late December 2005. Partially offsetting the overall increase
in utilization in 2005, as compared to 2004,
was approximately four months of unpaid downtime for the Ocean Lexington in 2005 associated with
inspections and a life enhancement project.
37
Contract drilling expense for our intermediate semisubmersibles operations in the GOM
increased $12.6 million in 2005, as compared to 2004, primarily due to higher labor and benefits
costs as a result of December 2004 and September 2005 wage increases for our rig-based personnel,
normal operating costs for the Ocean Voyager and Ocean New Era in 2005 and higher inspection and
maintenance project costs for the Ocean Lexington, which was in a shipyard for inspections and a
life enhancement project during 2005. These cost increases were partially offset by lower
reactivation costs for the Ocean New Era in 2005, as compared to costs incurred to reactivate the
Ocean Voyager in 2004.
Australia/Asia. Our intermediate semisubmersibles working offshore Australia/Asia generated
revenues of $111.8 million in 2005 compared to revenues of $77.2 million in 2004. The $34.6
million increase in operating revenues was primarily due to an increase in average operating
dayrates to $76,300 in 2005 compared to $62,900 in 2004, which generated $16.9 million in
additional revenues in 2005. Our results in this region in 2005 also reflect the favorable impact
of the Ocean Patriot operating for the majority of the year following its relocation to the region
in the second half of 2004. However, excluding the Ocean Patriot, our average utilization for
these rigs in the Australia/Asia region decreased from 96% in 2004 to 92% in 2005, primarily due to
unpaid downtime for the Ocean Epoch which was in a shipyard for approximately 70 days in 2005 for a
scheduled 5-year survey and associated repairs. The net effect of changes in utilization in this
region was the generation of $10.7 million in additional revenues in 2005 compared to 2004.
During 2005 we recognized $5.7 million in lump-sum mobilization fees for the Ocean Patriot
related to its 2004 mobilization from South Africa to New Zealand and the Bass Strait, compared to
$3.3 million in similar fees recognized in 2004. In 2005 we also recognized $3.7 million in
revenue related to the extension of a contract option period for one of our rigs in this region and
$0.9 million in revenues for the amortization of lump-sum fees received from a customer for rig
modifications.
Contract drilling expense for the Australia/Asia region increased $19.8 million from 2004 to
2005, primarily due to costs associated with the Ocean Patriot operating offshore Australia for all
of 2005, including the amortization of deferred mobilization expenses.
Europe/Africa. Operating revenues for our intermediate semisubmersibles working in this
region increased $37.0 million in 2005 primarily due to an increase in the average operating
dayrates from $54,400 in 2004 to $87,500 in 2005. This increase in average operating dayrates
contributed $40.6 million in additional revenues in 2005, as compared to 2004.
With the exception of the Ocean Patriot, which relocated from this region to Australia in
mid-2004, average utilization increased slightly in 2005 compared to 2004, primarily due to higher
utilization of the Ocean Nomad in 2005 as compared to 2004, when this drilling unit was both
ready-stacked and mobilizing between Africa and the U.K. for a total of approximately five months
during the year. The net effect of changes in average utilization between 2005 and 2004 was a $1.9
million decrease in operating revenues in 2005. In 2004, we also recognized $2.0 million in
mobilization revenue for the Ocean Nomad.
Contract drilling expense for our intermediate semisubmersible rigs operating offshore Europe
increased $10.4 million in 2005 primarily due to increased labor and related costs and shorebase
support costs for our operations in Norway, mostly due to Norwegian pay allowances and additional
personnel required to comply with Norwegian regulations. Normal operating expenses for the Ocean
Nomad increased in 2005, as compared to 2004, mainly due to higher labor costs associated with its
operations in the U.K., as compared to the prior year when this unit worked a portion of the year
offshore western Africa, as well as the recognition of mobilization expenses in 2005 related to the
rigs relocation from western Africa to the U.K. Our operating costs in this region in 2004
included $8.7 million in costs for the Ocean Patriot which relocated to the Australia/Asia region
in mid-2004.
South America. Our intermediate semisubmersibles working in Brazil generated revenues of
$53.6 million in 2005 compared to revenues of $44.8 million in 2004. The $8.8 million increase in
operating revenues was primarily due to a contract extension for the Ocean Yatzy at a higher
average dayrate than it previously earned. Average operating dayrates increased to $75,100, as
compared to an average dayrate of $70,300 in 2004, and resulted in
additional revenues of $4.3 million in 2005. Average utilization of our rigs in this region
increased from 87% in
38
2004 to 98% in 2005, which resulted in additional revenues in 2005 of $4.5
million. The lower utilization in 2004 was primarily due to additional downtime for special
surveys and inspections of both of our rigs in this region.
Operating expenses for the Ocean Yatzy and Ocean Winner increased $4.7 million in 2005, as
compared to 2004, primarily due to increased labor costs for our rig-based personnel as a result of
December 2004 and September 2005 wage increases and higher national labor and local shorebase
support costs resulting from completion of a local competency program in Brazil.
Jack-Ups.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
|
|
December 31, |
|
|
Favorable/ |
|
|
|
2005 |
|
|
2004 |
|
|
(Unfavorable) |
|
|
|
(In thousands) |
|
CONTRACT DRILLING REVENUE |
|
|
|
|
|
|
|
|
|
|
|
|
GOM |
|
$ |
222,365 |
|
|
$ |
138,886 |
|
|
$ |
83,479 |
|
Australia/Asia/Middle East |
|
|
49,444 |
|
|
|
21,290 |
|
|
|
28,154 |
|
South America |
|
|
|
|
|
|
18,215 |
|
|
|
(18,215 |
) |
|
|
|
Total Contract Drilling Revenue |
|
$ |
271,809 |
|
|
$ |
178,391 |
|
|
$ |
93,418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONTRACT DRILLING EXPENSE |
|
|
|
|
|
|
|
|
|
|
|
|
GOM |
|
$ |
98,866 |
|
|
$ |
89,906 |
|
|
$ |
(8,960 |
) |
Australia/Asia/Middle East |
|
|
24,967 |
|
|
|
15,546 |
|
|
|
(9,421 |
) |
South America |
|
|
|
|
|
|
9,014 |
|
|
|
9,014 |
|
|
|
|
Total Contract Drilling Expense |
|
$ |
123,833 |
|
|
$ |
114,466 |
|
|
$ |
(9,367 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME |
|
$ |
147,976 |
|
|
$ |
63,925 |
|
|
$ |
84,051 |
|
|
|
|
GOM. Our operating results in this region reflected the improvement in average
operating dayrates and utilization for jack-up rigs in the GOM during 2005. Average operating
dayrates increased to $54,600 in 2005 from $36,300 in 2004, which resulted in additional revenues
of $75.5 million in 2005. Utilization of our jack-up fleet in the GOM continued to improve in 2005
compared to the average utilization achieved by our rigs in 2004. Average utilization in 2005
increased to 96% from 87% in 2004, resulting in additional revenues of $8.0 million in 2005. The
improvement in utilization was primarily due to the nearly full utilization of the Ocean Champion
in 2005 as compared to 2004, when it completed its reactivation from cold-stacked status, and the
full utilization of the Ocean Nugget in 2005, as compared to 60 days of unpaid downtime in 2004 for
a spud can inspection and related repair work.
In late August 2005, the Ocean Warwick was declared a constructive total loss by our insurers
as a result of damage it sustained during Hurricane Katrina. During 2005 and 2004, this drilling
rig generated $11.8 million and $9.3 million in revenues, respectively, which are included in the
revenue variances discussed above. See Overview Impact of 2005 Hurricanes.
Contract drilling expenses for our jack-up rigs operating in the GOM increased $9.0 million in
2005 compared to 2004, primarily due to higher labor and benefits costs for our rig-based personnel
as a result of December 2004 and September 2005 wage increases, higher normal operating costs in
2005 for the Ocean Champion compared to 2004 when the rig was being reactivated and higher
operating and overhead costs for most of our jack-ups in this region due to increased utilization.
Australia/Asia/Middle East. Revenues for jack-up rigs in the Australasian and Middle East
regions were $49.4 million in 2005 compared to $21.3 million in 2004. The $28.2 million increase
in revenues in this region in 2005 is primarily attributable to revenues generated by the Ocean
Heritage ($17.0 million), which worked in this region for the entire year, compared to working in
this region during only the last quarter of 2004, and an operating dayrate increase for the Ocean
Sovereign ($11.2 million) after its second quarter 2005 relocation within the region to Indonesia.
39
Contract drilling expense for our jack-up rigs in the Australasian and Middle East regions
increased $9.4 million to $25.0 million in 2005, as compared 2004, primarily due to normal
operating costs associated with the Ocean Heritage operating in the region for the entire year, and
higher normal repair and maintenance, travel and shore-based costs for the Ocean Sovereign.
South America. The Ocean Heritage operated offshore Ecuador for almost eight months in 2004.
During its contract the rig generated $18.2 million in revenues, including the recognition of $8.5
million in lump-sum mobilization fees, and incurred operating expenses of $9.0 million before
returning to the Australasia/Middle East region in the fourth quarter of 2004.
Other Operating Revenue and Expenses, net.
Other operating expenses, net of other revenues, were $8.3 million in 2005 compared to $1.2
million in 2004. The $7.2 million increase in net costs in 2005, as compared to 2004, relates
primarily to costs associated with relief and recovery efforts in the aftermath of the 2005 GOM
hurricanes, increased rig crew training costs due to higher staffing and recruiting levels in 2005
and higher costs in 2005 to repair and replace non-rig-specific spare equipment.
Reimbursable expenses, net.
Revenues related to reimbursable items, offset by the related expenditures for these items,
were $6.4 million and $3.4 million in 2005 and 2004, respectively. Reimbursable expenses include
items that we purchase, and/or services we perform, at the request of our customers. We charge our
customers for purchases and/or services performed on their behalf at cost, plus a mark-up where
applicable. Therefore, net reimbursables fluctuate based on customer requirements, which vary.
Depreciation.
Depreciation expense increased $4.9 million to $183.7 million in 2005 compared to $178.8
million in 2004 primarily due to depreciation recorded in 2005 associated with capital additions in
2004 and 2005. The increase in depreciation expense attributable to capital additions was
partially offset by lower depreciation due to the constructive total loss of the Ocean Warwick in
the third quarter of 2005 and the transfer of the Ocean Liberator to assets held for sale in
December 2004.
General and Administrative Expense.
We incurred general and administrative expense of $37.2 million in 2005 compared to $32.8
million in 2004. The $4.4 million increase in overhead costs between the periods was primarily due
to higher compensation expense related to our management bonus plan, higher fees paid to our
external auditors and higher engineering consulting fees. Partially offsetting these higher
expenses were lower legal fees in 2005 compared to 2004, primarily due to the settlement of
litigation in December 2004, and the capitalization of certain costs associated with the upgrade of
the Ocean Endeavor, which commenced in 2005.
Gain on Sale and Disposition of Assets.
We recognized a net gain of $14.8 million on the sale and disposition of assets in 2005
compared to a net loss of $1.6 million in 2004. Net gains recognized in 2005 include an $8.0
million gain on the June 2005 sale of the Ocean Liberator, $5.6 million in insurance proceeds
related to the involuntary conversion of certain assets damaged during Hurricane Ivan in 2004 and
gains on the sale of used drill pipe during the period. Partially offsetting the net gain in 2005
was a $1.4 million loss due to the retirement of equipment lost or damaged during Hurricanes
Katrina and Rita. The loss on sale of assets in 2004 relates primarily to the retirement of
equipment damaged during Hurricane Ivan.
Casualty Gain on Ocean Warwick.
We recorded a $33.6 million casualty gain in 2005 as a result of the constructive total loss
of one of our jack-up rigs, the Ocean Warwick, resulting from damages sustained during Hurricane
Katrina in August 2005. See Overview Impact of 2005 Hurricanes.
40
Interest Income.
We earned interest income of $26.0 million in 2005 compared to $12.2 million in 2004. The
$13.8 million increase in interest income is primarily the result of the combined effect of
slightly higher interest rates earned on higher average cash and investment balances in 2005, as
compared to 2004. See Liquidity and Capital Requirements and Historical Cash Flows.
Interest Expense.
Interest expense for 2005 was $41.8 million, or an $11.5 million increase in interest cost
compared to 2004. This increase was primarily attributable to interest related to our 4.875%
Senior Notes and our 5.15% Senior Notes Due September 1, 2014, or 5.15% Senior Notes, which we
issued in June 2005 and August 2004, respectively. In addition, interest expense for 2005 included
a write-off of $6.9 million in debt issuance costs associated with our June 2005 repurchase of
approximately 96% of our then outstanding Zero Coupon Debentures. This increase in interest cost
was partially offset by lower interest expense on our Zero Coupon Debentures subsequent to our
partial repurchase of the outstanding debentures in June 2005 and approximately $0.7 million in
interest costs which were capitalized in 2005 related to qualifying upgrade and construction
projects. See Liquidity and Capital Requirements Contractual Cash Obligations.
Other Income and Expense (Other, net).
Included in Other, net are foreign currency translation adjustments and transaction gains
and losses and other income and expense items, among other things, which are not attributable to
our drilling operations. The components of Other, net fluctuate based on the level of activity,
as well as fluctuations in foreign currencies. We recorded other expense, net, of $1.1 million in
both 2005 and 2004.
Effective October 1, 2005, we changed the functional currency of certain of our subsidiaries
operating outside the United States to the U.S. dollar to more appropriately reflect the primary
economic environment in which these subsidiaries operate. Prior to this date, these subsidiaries
utilized the local currency of the country in which they conduct business as their functional
currency. During 2005 and 2004, we recognized net foreign currency exchange losses of $0.8 million
and $1.4 million, respectively, including $3.5 million in additional expense in 2005 as a result of
our change in functional currency to the U.S. dollar. Prior to the fourth quarter of 2005, we
accounted for foreign currency translation gains and losses as a component of Accumulated other
comprehensive losses in our Consolidated Balance Sheets included in Item 8 of this report.
Income Tax Expense.
Our net income tax expense is a function of the mix of our domestic and international pre-tax
earnings, as well as the mix of earnings from the international tax jurisdictions in which we
operate. We recognized $96.1 million of tax expense on pre-tax income of $356.4 million for the
year ended December 31, 2005 compared to tax expense of $3.7 million on a pre-tax loss of $3.5
million in 2004.
Certain of our rigs that operate internationally are owned and operated, directly or
indirectly, by Diamond Offshore International Limited, a Cayman Islands subsidiary that we wholly
own. We do not intend to remit earnings from this subsidiary to the U.S. and we plan to
indefinitely reinvest these earnings internationally. Consequently, we provided no U.S. taxes on
earnings and recognized no U.S. benefits on losses generated by this subsidiary during 2005 and
2004.
At the end of 2004 we had established a valuation allowance of $10.3 million for certain of
our foreign tax credit carryforwards which were scheduled to expire beginning in 2011. At December
31, 2005, we had $15.3 million of foreign tax credit carryforwards. During 2005, we were able to
utilize most of our net operating loss carryforwards to offset taxable income generated during the
year. As a result, we expected to be able to utilize $14.5 million of our available foreign tax
credit carryforwards prior to their expiration dates, and determined that a valuation allowance was
no longer necessary for those credits. Consequently, we reversed $9.6 million of the
previously established valuation allowance during 2005. With respect to the remaining $0.8
million of foreign tax credit carryforwards, we determined that a valuation allowance was necessary
and as a result had a valuation allowance of $0.8 million at December 31, 2005.
41
At December 31, 2004 we had a reserve of $8.9 million ($1.7 million included with Current
Taxes Payable and $7.2 in Other Liabilities in our Consolidated Balance Sheets) for the exposure
related to the disallowance of goodwill deductibility associated with a 1996 acquisition. During
2005 we concluded that the reserve was no longer necessary and eliminated the reserve, which
resulted in an income tax benefit of $8.9 million.
During 2005, we settled an income tax dispute in East Timor (formerly part of Indonesia) for
approximately $0.2 million. At December 31, 2004, our books reflected an accrued liability of $4.4
million related to potential East Timor and Indonesian income tax liabilities covering the period
1992 through 2000. Subsequent to the tax settlement, we determined that the accrual was no longer
necessary and wrote off the accrued liability in the fourth quarter of 2005.
During 2004 and 2005, the IRS examined our federal income tax returns for tax years 2000 and
2002. The examination was concluded during the fourth quarter of 2005. We and the IRS agreed to a
limited number of adjustments for which we recorded additional income tax of $1.9 million in 2005.
Our tax expense in 2004 included $2.5 million associated with a revision to estimates in tax
balance sheet accounts, a tax benefit of $5.2 million related to goodwill arising from a 1996
merger, and a tax benefit of $4.5 million due to the reversal of a tax liability associated with
the Ocean Alliance lease-leaseback.
On October 22, 2004, the American Jobs Creation Act, or AJCA, was signed into law. The AJCA
includes a provision allowing a deduction of 85% for certain foreign earnings that are repatriated.
The AJCA provided us a potential opportunity to elect to apply this provision to qualifying
earnings repatriations in 2005. Based on the language in the AJCA and subsequent guidance issued
by the U.S. Treasury Department, and after considering our history of foreign earnings, we did not
have undistributed foreign earnings that would qualify for the 85% deduction upon repatriation.
Consequently, we did not repatriate any undistributed earnings in 2005 pursuant to the AJCA.
42
Sources of Liquidity and Capital Resources
Our principal sources of liquidity and capital resources are cash flows from our operations,
proceeds from the issuance of debt securities and our cash reserves. We may also make use of our
$285 million credit facility for cash liquidity. See $285 Million Revolving Credit Facility.
At December 31, 2006, we had $524.7 million in Cash and cash equivalents and $301.2 million
in Investments and marketable securities, representing our investment of cash available for
current operations.
Cash Flows from Operations. We operate in an industry that has been, and we expect to
continue to be, extremely competitive and highly cyclical. The dayrates we receive for our
drilling rigs and rig utilization rates are a function of rig supply and demand in the marketplace,
which is generally correlated with the price of oil and natural gas. Demand for drilling services
is dependent upon the level of expenditures by oil and gas companies for offshore exploration and
development, a variety of political and economic factors and availability of rigs in a particular
geographic region. As utilization rates increase, dayrates tend to increase as well reflecting the
lower supply of available rigs, and vice versa. These factors are not within our control and are
difficult to predict. For a description of other factors that could affect our cash flows from
operations, see Overview Industry Conditions, Forward-Looking Statements and Risk
Factors in Item 1A of this report.
$285 Million Revolving Credit Facility. In November 2006, we entered into a $285 million
syndicated, 5-year senior unsecured revolving credit facility, or Credit Facility, for general
corporate purposes, including loans and performance or standby letters of credit.
Loans under the Credit Facility bear interest at our option at a rate per annum equal to (i)
the higher of the prime rate or the federal funds rate plus 0.5% or (ii) the London Interbank
Offered Rate, or LIBOR, plus an applicable margin, varying from 0.20% to 0.525%, based on our
current credit ratings. Under our Credit Facility, we also pay, based on our current credit
ratings, and as applicable, other customary fees, including, but not limited to, a facility fee on
the total commitment under the Credit Facility regardless of usage and a utilization fee that
applies if the aggregate of all loans outstanding under the Credit Facility equals or exceeds 50%
of the total commitment under the facility. Changes in credit ratings could lower or raise the
fees that we pay under the Credit Facility.
The Credit Facility contains customary covenants, including, but not limited to, the
maintenance of a ratio of consolidated indebtedness to total capitalization, as defined in the
Credit Facility, of not more than 60% at the end of each fiscal quarter and limitations on liens,
mergers, consolidations, liquidation and dissolution, changes in lines of business, swap
agreements, transactions with affiliates and subsidiary indebtedness.
Based on our current credit ratings at December 31, 2006, the applicable margin on LIBOR loans
would have been 0.27%. As of December 31, 2006, there were no amounts outstanding under the Credit
Facility.
Shelf Registration. We have the ability to issue an aggregate of approximately $117.5 million
in debt, equity and other securities under a shelf registration statement. In addition, from time
to time we may issue up to eight million shares of common stock which are registered under an
acquisition shelf registration statement, after giving effect to the two-for-one stock split we
declared in July 1997, in connection with one or more acquisitions by us of securities or assets of
other businesses.
Liquidity and Capital Requirements
Our liquidity and capital requirements are primarily a function of our working capital needs,
capital expenditures and debt service requirements. We determine the amount of cash required to
meet our capital commitments by evaluating the need to upgrade rigs to meet specific customer
requirements and by evaluating our ongoing rig equipment replacement and enhancement programs,
including water depth and drilling capability upgrades. We believe that our operating cash flows
and cash reserves will be sufficient to meet these capital commitments; however, we will continue
to make periodic assessments based on industry conditions. In addition, we may, from time to time,
issue debt or equity securities, or a combination thereof, to finance capital expenditures, the
acquisition of assets and businesses or for general corporate purposes. Our ability to effect any
such issuance will be dependent on our results of operations, our current financial condition,
current market conditions and other
43
factors beyond our control. Additionally, we may also make use of our Credit Facility to
finance capital expenditures or for other general corporate purposes.
We believe that we have the financial resources needed to meet our business requirements in
the foreseeable future, including capital expenditures for rig upgrades and enhancements, as well
as our working capital requirements.
Contractual Cash Obligations. The following table sets forth our contractual cash obligations
at December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period |
|
|
|
|
|
|
Less than 1 |
|
|
|
|
|
|
|
|
|
After 5 |
Contractual Obligations |
|
Total |
|
year |
|
1 3 years |
|
4 5 years |
|
years |
|
|
(In thousands) |
Long-term debt (principal and interest) (1) |
|
$ |
1,177,056 |
|
|
$ |
31,963 |
|
|
$ |
513,542 |
|
|
$ |
56,098 |
|
|
$ |
575,453 |
|
Forward exchange contracts |
|
|
22,463 |
|
|
|
22,463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase obligations related to
rig upgrade/modifications |
|
|
456,022 |
|
|
|
263,213 |
|
|
|
192,809 |
|
|
|
|
|
|
|
|
|
Operating leases |
|
|
3,227 |
|
|
|
2,460 |
|
|
|
767 |
|
|
|
|
|
|
|
|
|
|
|
|
Total obligations |
|
$ |
1,658,768 |
|
|
$ |
320,099 |
|
|
$ |
707,118 |
|
|
$ |
56,098 |
|
|
$ |
575,453 |
|
|
|
|
|
|
|
(1) |
|
See 1.5% Debentures and Zero Coupon Debentures and Note 18 Subsequent Events to
our Consolidated Financial Statements included in Item 8 of this report for a discussion of
changes in our long-term debt subsequent to December 31, 2006. |
Payments of our long-term debt, including interest, could be accelerated due to certain
rights that holders of our debentures have to put the securities to us. See the discussion below
related to our 1.5% Convertible Senior Debentures Due 2031, or 1.5% Debentures, and Zero Coupon
Debentures.
As of December 31, 2006, we had purchase obligations aggregating approximately $456 million
related to the major upgrades of the Ocean Endeavor and Ocean Monarch and construction of two new
jack-up rigs, the Ocean Scepter and Ocean Shield. We anticipate that expenditures related to these
shipyard projects will be approximately $263 million and $193 million in 2007 and 2008,
respectively. However, the actual timing of these expenditures will vary based on the completion
of various construction milestones, which are beyond our control.
We had no other purchase obligations for major rig upgrades or any other significant
obligations at December 31, 2006, except for those related to our direct rig operations, which
arise during the normal course of business.
4.875% Senior Notes.
On June 14, 2005, we issued $250.0 million aggregate principal amount of 4.875% Senior Notes
at an offering price of 99.785% of the principal amount, which resulted in net proceeds to us of
$247.6 million. These notes bear interest at 4.875% per year, payable semiannually in arrears on
January 1 and July 1 of each year and mature on July 1, 2015. The 4.875% Senior Notes are
unsecured and unsubordinated obligations of Diamond Offshore Drilling, Inc. We have the right to
redeem all or a portion of the 4.875% Senior Notes for cash at any time or from time to time on at
least 15 days but not more than 60 days prior written notice, at the redemption price specified in
the governing indenture plus accrued and unpaid interest to the date of redemption.
5.15% Senior Notes.
On August 27, 2004, we issued $250.0 million aggregate principal amount of 5.15% Senior Notes
at an offering price of 99.759% of the principal amount, which resulted in net proceeds to us of
$247.6 million. These notes bear interest at 5.15% per year, payable semiannually in arrears on
March 1 and September 1 of each year and mature on September 1, 2014. The 5.15% Senior Notes are
unsecured and unsubordinated obligations of Diamond Offshore Drilling, Inc. We have the right to
redeem all or a portion of the 5.15% Senior Notes for cash at any time or from time to time on at
least 15 days but not more than 60 days prior written notice, at the redemption price specified in
the governing indenture plus accrued and unpaid interest to the date of redemption.
44
1.5% Debentures.
On April 11, 2001, we issued $460.0 million principal amount of 1.5% Debentures, which are due
April 15, 2031. The 1.5% Debentures are convertible into shares of our common stock at an initial
conversion rate of 20.3978 shares per $1,000 principal amount of the 1.5% Debentures, or $49.02 per
share, subject to adjustment in certain circumstances. Upon conversion, we have the right to
deliver cash in lieu of shares of our common stock. Holders may require us to purchase all or a
portion of their 1.5% Debentures on April 15, 2008, at a price equal to 100% of the principal
amount of the 1.5% Debentures to be purchased plus accrued and unpaid interest. We may choose to
pay the purchase price in cash or shares of our common stock or a combination of cash and common
stock. See 1.5% Debentures in Note 8 Long-Term Debt to our Consolidated Financial Statements
in Item 8 of this report. The 1.5% Debentures are senior unsecured obligations of Diamond Offshore
Drilling, Inc.
During 2006 and 2005, the holders of $20,000 and $13,000, respectively, in principal amount of
our 1.5% Debentures elected to convert their outstanding debentures into shares of our common
stock, resulting in the issuance of 404 shares and 264 shares of our common stock in 2006 and 2005,
respectively.
Subsequent to December 31, 2006 and through February 14, 2007, the holders of $438.4 million
in principal amount of our 1.5% Debentures converted their outstanding debentures into 8,943,284
shares of our common stock. As a result of these conversions, $21.5 million aggregate principal
amount of the 1.5% Debentures remained outstanding as of February 14, 2007. The cash requirements
for the interest payable to holders of our 1.5% Debentures will decrease due to the decrease in the
outstanding principal amount.
Zero Coupon Debentures.
We issued our Zero Coupon Debentures on June 6, 2000 at a price of $499.60 per $1,000
principal amount at maturity, which represents a yield to maturity of 3.50% per year. The Zero
Coupon Debentures mature on June 6, 2020, and, as of December 31, 2006, the aggregate accreted
value of our outstanding Zero Coupon Debentures was $5.3 million. We will not pay interest prior
to maturity unless we elect to convert the Zero Coupon Debentures to interest-bearing debentures
upon the occurrence of certain tax events. The Zero Coupon Debentures are convertible at the option
of the holder at any time prior to maturity, unless previously redeemed, into our common stock at a
fixed conversion rate of 8.6075 shares of common stock per $1,000 principal amount at maturity of
Zero Coupon Debentures, subject to adjustments in certain events. See Zero Coupon Debentures in
Note 8 Long-Term Debt to our Consolidated Financial Statements in Item 8 of this report. The
Zero Coupon Debentures are senior unsecured obligations of Diamond Offshore Drilling, Inc.
On June 7, 2005, we repurchased $460.0 million accreted value, or $774.1 million in aggregate
principal amount at maturity, of our Zero Coupon Debentures at a purchase price of $594.25 per
$1,000 principal amount at maturity, which represented 96% of our then outstanding Zero Coupon
Debentures. Additionally, in connection with the June 2005 repurchase, we expensed $6.9 million in
debt issuance costs associated with the retired debentures, which we have included in interest
expense in our Consolidated Statements of Operations for the year ended December 31, 2005.
During 2006, holders of $13.7 million accreted value, or $22.4 million in aggregate principal
amount at maturity, of our Zero Coupon Debentures elected to convert their outstanding debentures
into shares of our common stock. We issued 193,147 shares of our common stock upon conversion of
these debentures.
Subsequent to December 31, 2006 and through February 14, 2007, the holders of $1.5 million
accreted value at the dates of conversion, or $2.4 million aggregate principal amount at maturity,
of our Zero Coupon Debentures converted their outstanding debentures into 20,658 shares of our
common stock. As a result of these conversions, $3.8 million in accreted value, or $6.0 million
aggregate principal amount at maturity, of the Zero Coupon Debentures remained outstanding as of
February 14, 2007.
Letters of Credit.
We are contingently liable as of December 31, 2006 in the amount of $122.0 million under
certain performance, bid, supersedeas and custom bonds and letters of credit. We purchased three
of these performance bonds totaling $73.2 million from a related party after obtaining competitive
quotes. Agreements relating to approximately $107.3
45
million of performance bonds can require
collateral at any time. As of December 31, 2006, we had not been required to make any collateral
deposits with respect to these agreements. The remaining agreements cannot require
collateral except in events of default. On our behalf, banks have issued letters of credit
securing certain of these bonds. See Note 12 Related-Party Transactions to our Consolidated
Financial Statements included in Item 8 of this report.
Credit Ratings.
Our current credit rating is Baa2 for Moodys Investors Services and A- for Standard & Poors.
Although our long-term ratings continue at investment grade levels, lower ratings would result in
higher rates for borrowings under our Credit Facility and could also result in higher interest
rates on future debt issuances.
Capital Expenditures.
In 2006, we began a major upgrade of the Ocean Monarch, a Victory-class semisubmersible that
we acquired in August 2005 for $20.0 million. The modernized rig will be designed to operate in up
to 10,000 feet of water in a moored configuration for an estimated cost of approximately $300
million of which we had spent $33.9 million through December 31, 2006. We expect to spend an
additional $150.0 million and $116.1 million on this upgrade in 2007 and 2008, respectively.
In addition, the shipyard portion of the upgrade of the Ocean Endeavor has been completed.
The newly upgraded rig is currently undergoing sea trials and commissioning. The unit will remain
in Singapore until the arrival of a heavy-lift vessel, anticipated late in the first quarter of
2007, which will return the rig to the GOM. The Ocean Endeavor is expected to commence drilling
operations in the GOM in mid-2007. We estimate that the total cost of the upgrade will be
approximately $253 million of which $208.4 million had been spent through December 31, 2006. We
expect to spend the remaining $44.0 million in 2007.
In the second quarter of 2005, we entered into agreements to construct two high-performance,
premium jack-up rigs. The two new drilling units, the Ocean Scepter and the Ocean Shield, are
being constructed in Brownsville, Texas and Singapore, respectively, at an aggregate expected cost of approximately
$320 million, including drill pipe and capitalized interest, of which $176.1 million had been spent
through December 31, 2006. Each newbuild jack-up rig will be equipped with a 70-foot cantilever
package, be capable of drilling depths of up to 35,000 feet and have a hook load capacity of two
million pounds. We expect to spend approximately $69 million and $77 million towards the
construction of these two units in 2007 and 2008, respectively. Delivery of both the Ocean Scepter
and Ocean Shield are expected in the first quarter of 2008.
We have budgeted approximately $316 million in additional capital expenditures in 2007
associated with our ongoing rig equipment replacement and enhancement programs, and other corporate
requirements. We expect to finance our 2007 capital expenditures through the use of our existing
cash balances or internally generated funds. From time to time, however, we may also make use of
our Credit Facility to finance capital expenditures.
During 2006, we spent approximately $273.2 million on our continuing rig capital maintenance
program (other than rig upgrades and new construction) and to meet other corporate capital
expenditure requirements.
Off-Balance Sheet Arrangements.
At December 31, 2006 and 2005, we had no off-balance sheet debt or other arrangements.
Historical Cash Flows
The following is a discussion of our historical cash flows from operating, investing and
financing activities for the year ended December 31, 2006 compared to 2005.
46
Net Cash Provided by Operating Activities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
2006 |
|
2005 |
|
Change |
|
|
(In thousands) |
Net income |
|
$ |
706,847 |
|
|
$ |
260,337 |
|
|
$ |
446,510 |
|
Net changes in operating assets and liabilities |
|
|
(154,068 |
) |
|
|
(84,906 |
) |
|
|
(69,162 |
) |
Loss on sale of marketable securities |
|
|
31 |
|
|
|
1,180 |
|
|
|
(1,149 |
) |
Depreciation and other non-cash items, net |
|
|
207,279 |
|
|
|
211,960 |
|
|
|
(4,681 |
) |
|
|
|
|
|
$ |
760,089 |
|
|
$ |
388,571 |
|
|
$ |
371,518 |
|
|
|
|
Our cash flows from operations in 2006 increased $371.5 million or 96% over net cash generated
by our operating activities in 2005. The increase in cash flow from operations in 2006 is
primarily the result of higher average dayrates and, to a lesser extent, higher utilization earned
by our offshore drilling units as a result of an increase in worldwide demand for offshore contract
drilling services in 2006 as compared to 2005. These favorable trends were impacted by an increase
in cash required to satisfy our working capital requirements, including an increase in our trade
accounts receivable, which is primarily driven by higher dayrates earned by our drilling rigs in
2006 as compared to 2005. These trade receivables generate cash as the billing cycle is completed,
customarily within 30 to 45 days of invoicing. In addition, we paid $248.7 million and $10.8
million in U.S. federal and foreign income taxes, respectively, each net of refunds received,
during 2006. We received $7.7 million in refunds of U.S. federal income taxes and paid $5.3
million in foreign income taxes, net of refunds received, during 2005.
Net Cash (Used in) Provided by Investing Activities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
2006 |
|
2005 |
|
Change |
|
|
(In thousands) |
Purchase of marketable securities |
|
$ |
(2,472,431 |
) |
|
$ |
(4,956,560 |
) |
|
$ |
2,484,129 |
|
Proceeds from sale of marketable securities |
|
|
2,187,766 |
|
|
|
5,610,907 |
|
|
|
(3,423,141 |
) |
Capital expenditures |
|
|
(551,237 |
) |
|
|
(293,829 |
) |
|
|
(257,408 |
) |
Insurance proceeds from casualty loss of
Ocean Warwick |
|
|
|
|
|
|
50,500 |
|
|
|
(50,500 |
) |
Proceeds from sale/involuntary conversion of
assets |
|
|
4,731 |
|
|
|
26,047 |
|
|
|
(21,316 |
) |
Proceeds from maturities of Australian dollar
time deposits |
|
|
|
|
|
|
11,761 |
|
|
|
(11,761 |
) |
Proceeds from settlement of forward contracts |
|
|
7,289 |
|
|
|
1,136 |
|
|
|
6,153 |
|
|
|
|
|
|
$ |
(823,882 |
) |
|
$ |
449,962 |
|
|
$ |
(1,273,844 |
) |
|
|
|
Our investing activities used $823.9 million in 2006, as compared to generating $450.0 million
in 2005. During 2006, we purchased marketable securities, net of sales, of $284.7 million compared
to net sales of $654.3 million during 2005. Our level of investment activity is dependent on our
working capital and other capital requirements during the year, as well as a response to actual or
anticipated events or conditions in the securities markets. The high level of marketable
securities transactions during 2005, primarily during the first half of the year, was primarily in
response to an increase in our short-term cash requirements in 2005 to partially fund the
repurchase of $460.0 million accreted value of Zero Coupon Debentures in June 2005 and capital
additions.
During 2006, we spent approximately $278.0 million related to the major upgrades of the Ocean
Endeavor and Ocean Monarch and construction of the Ocean Scepter and Ocean Shield. During 2005, we
spent approximately $140.4 million related to the major upgrade of the Ocean Endeavor and
construction of our two new jack-up drilling rigs. Expenditures for our ongoing capital
maintenance programs were $273.2 million in 2006 compared to $133.4 million in 2005. The increase
in expenditures related to our ongoing capital maintenance program in 2006 compared to 2005 is
related to an increase in discretionary funds available for capital spending in 2006, and, to a
lesser extent, in response to the high sustained utilization of our drilling rigs in 2006. Our
capital expenditures in 2005 also included $20.0 million for the purchase of the Ocean Monarch and
its related equipment. See Liquidity and Capital Requirements Capital Expenditures.
47
We collected $50.5 million in insurance proceeds related to the casualty loss of the Ocean
Warwick in 2005. Additionally, in 2005 we sold one of our then cold-stacked intermediate
semisubmersible rigs, the Ocean Liberator, for net cash proceeds of $13.6 million and received $5.6
million in insurance proceeds (total proceeds of $14.5
million of which $8.9 million is included in net cash provided by operating activities) related to
the involuntary conversion of assets damaged during Hurricane Ivan in 2004.
During 2006, we received $2.1 million in insurance proceeds (total proceeds of $10.8 million
of which $8.7 million is included in net cash provided by operating activities) related to the
involuntary conversion of riser equipment damaged on the Ocean Vanguard in December 2004 and
recovered an additional $1.1 million from our customers (total recovery of $3.1 million of which
$2.0 million is included in net cash provided by operating activities) related to the involuntary
conversion of assets damaged during the 2005 hurricanes.
During 2005, our remaining investments in Australian dollar time deposits, which we originally
entered into in 2004, matured, resulting in proceeds to us of $11.8 million. In the latter half of
2005, we stepped up our ongoing program of entering into foreign currency forward exchange
contracts to reduce our forward exchange risk. During 2006, we realized net gains totaling $7.3
million on the settlement of several forward exchange contracts in various currencies. We realized
net gains of $1.1 million on similar forward exchange transactions during 2005.
As of December 31, 2006, we had foreign currency exchange contracts outstanding, which
aggregated $22.5 million, that require us to purchase the equivalent of $5.7 million in Brazilian
reais, $2.7 million in British pounds sterling, $10.3 million in Mexican pesos and $3.8 million in
Norwegian kroner at various times through June 2007.
Net Cash Used in Financing Activities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
2006 |
|
2005 |
|
Change |
|
|
(In thousands) |
Proceeds from issuance of senior notes |
|
$ |
|
|
|
$ |
249,462 |
|
|
$ |
(249,462 |
) |
Payment of debt issuance costs |
|
|
|
|
|
|
(1,866 |
) |
|
|
1,866 |
|
Redemption of Zero Coupon Debentures |
|
|
|
|
|
|
(460,015 |
) |
|
|
460,015 |
|
Payment of dividends |
|
|
(258,155 |
) |
|
|
(48,260 |
) |
|
|
(209,895 |
) |
Ocean Alliance lease-leaseback agreement |
|
|
|
|
|
|
(12,818 |
) |
|
|
12,818 |
|
Proceeds from stock options exercised |
|
|
3,263 |
|
|
|
11,547 |
|
|
|
(8,284 |
) |
Other |
|
|
793 |
|
|
|
|
|
|
|
793 |
|
|
|
|
|
|
$ |
(254,099 |
) |
|
$ |
(261,950 |
) |
|
$ |
7,851 |
|
|
|
|
In June 2005, we issued $250.0 million principal amount of our 4.875% Senior Notes for net
cash proceeds of $247.6 million. We repurchased $460.0 million accreted value, or approximately
96%, of our then outstanding Zero Coupon Debentures for cash in June 2005. We did not issue debt
or repurchase any outstanding debentures during 2006.
During 2006, we paid cash dividends totaling $258.2 million (consisting of quarterly dividends
of $64.6 million in the aggregate, or $0.125 per share of our common stock per quarter, and a
special cash dividend of $1.50 per share of our common stock, totaling $193.6 million). We paid
$48.3 million in quarterly cash dividends to our shareholders during 2005. Our quarterly dividend
payments in the last half of 2005 reflected a $.0625 per share increase over dividends paid during
the first half of 2005.
On January 30, 2007, we declared a quarterly cash dividend and a special cash dividend of
$0.125 and $4.00, respectively, per share of our common stock. Both the quarterly and special cash
dividends are payable on March 1, 2007 to stockholders of record on February 14, 2007. Any future
determination as to payment of quarterly dividends will be made at the discretion of our Board of
Directors. In addition, our Board of Directors may, in subsequent years, consider paying
additional annual special dividends, in amounts to be determined, if it believes that our financial
position, earnings outlook, capital spending plans and other relevant factors warrant such action
at that time.
48
Depending on market conditions, we may, from time to time, purchase shares of our common stock
in the open market or otherwise. We did not repurchase any shares of our outstanding common stock
during the years ended December 31, 2006 and 2005.
We paid the final installment of $12.8 million on our lease-leaseback arrangement for the
Ocean Alliance in December 2005.
Other
Currency Risk. Some of our subsidiaries conduct a portion of their operations in the local
currency of the country where they conduct operations. Currency environments in which we have
significant business operations include Mexico, Brazil, the U.K., Australia and Malaysia. When
possible, we attempt to minimize our currency exchange risk by seeking international contracts
payable in local currency in amounts equal to our estimated operating costs payable in local
currency with the balance of the contract payable in U.S. dollars. At present, however, only a
limited number of our contracts are payable both in U.S. dollars and the local currency.
We also utilize foreign exchange forward contracts to reduce our forward exchange risk. A
forward currency exchange contract obligates a contract holder to exchange predetermined amounts of
specified foreign currencies at specified foreign exchange rates on specific dates.
We record currency translation adjustments and transaction gains and losses as Other income
(expense) in our Consolidated Statements of Operations. The effect on our results of operations
from these translation adjustments and transaction gains and losses has not been material and are
not expected to have a significant effect in the future.
Recent Accounting Pronouncements
In September 2006, the SEC issued Staff Accounting Bulletin, or SAB, No. 108, Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements, or SAB 108. SAB 108 requires a registrant to quantify the impact of correcting all
misstatements on its current year financial statements using two approaches, the rollover and iron
curtain approaches. A registrant is required to adjust its current year financial statements if
either approach to accumulate and identify misstatements results in quantifying a misstatement that
is material, after considering all relevant quantitative and qualitative factors. SAB 108 is
required to be considered for financial statements for fiscal years ending after November 15, 2006;
however, earlier application of the guidance in SAB 108 to interim financial statements issued for
fiscal years ending after November 15, 2006 is encouraged. The adoption of SAB 108 had no impact
on our consolidated results of operations, financial position or cash flows.
In September 2006, the FASB issued SFAS No. 158, Accounting for Defined Benefit Pension or
Other Postretirement Plans, or SFAS 158. SFAS 158 amends existing guidance to require (1) balance
sheet recognition of the funded status of defined benefit plans, (2) recognition in other
comprehensive income of various items before they are recognized in periodic benefit cost, (3) the
measurement date for plan assets and the benefit obligation to be the balance sheet date, and (4)
additional disclosures regarding the effects on periodic benefit cost for the following fiscal year
arising from delayed recognition in the current period. SFAS 158 also includes guidance regarding
selection of assumed discount rates for use in measuring the benefit obligation. SFAS 158
provides different effective dates for various aspects of the new rules. For public companies,
requirements to recognize the funded status of the plan and to comply with the disclosure
provisions of SFAS 158 are effective as of the end of the fiscal year ending after December 15,
2006, and the requirement to measure plan assets and benefit obligations as of the balance sheet
date is effective for fiscal years ending after December 15, 2008. Early adoption of SFAS 158 is
encouraged and must be applied to all of an entitys benefit plans. During the fourth quarter of
2006, we adopted the requirement to recognize the funded status of our defined benefit pension
plan, as well as the disclosure provisions. See Note 14 Employee Benefit Plans to our
Consolidated Financial Statements included in Item 8 of this report.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, or SFAS 157, which
establishes a separate framework for measuring fair value in generally accepted accounting
principles in the U.S., or GAAP, and expands disclosures about fair value measurements. SFAS 157
was issued to eliminate the diversity in practice that exists due to the different definitions of
fair value and the limited guidance for applying those definitions in GAAP that are dispersed among
the many accounting pronouncements that require fair value measurements. SFAS 157 does not require
any new fair value measurements; however, its adoption may result in changes to current practice.
49
Changes resulting from the application of SFAS 157 relate to the definition of fair value, the
methods used to measure fair value and the expanded disclosures about fair value measurements.
SFAS 157 emphasizes that fair value is a market-based measurement, rather than an entity-specific
measurement. It also establishes a fair value hierarchy that distinguishes between (i) market
participant assumptions developed based on market data obtained from independent
sources and (ii) the reporting entitys own assumptions about market participant assumptions
developed based on the best information available under the circumstances. SFAS 157 is effective
for financial statements issued for fiscal years beginning after November 15, 2007, including
interim periods within those fiscal years. Earlier application is encouraged, provided that the
reporting entity has not yet issued financial statements for that fiscal year, including interim
periods. We are in the process of evaluating the impact, if any, of applying SFAS 157 on our
financial statements; however, we do not expect the adoption of SFAS 157 to have a material impact
on our consolidated results of operations, financial position or cash flows.
In June 2006, the FASB issued FIN 48, which clarifies the accounting for uncertainty in income
taxes recognized in financial statements in accordance with SFAS 109. FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return and also provides
guidance on derecognition, classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006.
We are currently evaluating the guidance provided in FIN 48 and expect to adopt FIN 48 in the
first quarter of 2007. Although our assessment has not yet been finalized, upon adoption of FIN 48
we expect to recognize a cumulative effect adjustment for uncertain tax positions of approximately
$30 million, which will be charged to results of operations and equity.
Forward-Looking Statements
We or our representatives may, from time to time, make or incorporate by reference certain
written or oral statements that are forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities
Exchange Act of 1934, as amended, or the Exchange Act. All statements other than statements of
historical fact are, or may be deemed to be, forward-looking statements. Forward-looking
statements include, without limitation, any statement that may project, indicate or imply future
results, events, performance or achievements, and may contain or be identified by the words
expect, intend, plan, predict, anticipate, estimate, believe, should, could,
may, might, will, will be, will continue, will likely result, project, forecast,
budget and similar expressions. Statements made by us in this report that contain
forward-looking statements include, but are not limited to, information concerning our possible or
assumed future results of operations and statements about the following subjects:
|
|
|
future market conditions and the effect of such conditions on our future results of
operations (see Overview Industry Conditions); |
|
|
|
|
future uses of and requirements for financial resources (see Liquidity and
Capital Requirements and Sources of Liquidity and Capital Resources); |
|
|
|
|
interest rate and foreign exchange risk (see Liquidity and Capital Requirements
Credit Ratings and Quantitative and Qualitative Disclosures About Market Risk); |
|
|
|
|
future contractual obligations (see Overview Industry Conditions, Business
Operations Outside the United States and Liquidity and Capital Requirements); |
|
|
|
|
future operations outside the United States including, without limitation, our
operations in Mexico (see Overview Industry Conditions and Risk Factors); |
|
|
|
|
business strategy; |
|
|
|
|
growth opportunities; |
|
|
|
|
competitive position; |
|
|
|
|
expected financial position; |
|
|
|
|
future cash flows; |
|
|
|
|
future quarterly or special dividends (see Market for the Registrants Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Dividend Policy); |
|
|
|
|
financing plans; |
|
|
|
|
tax planning (See Overview Critical Accounting Estimates Income Taxes,
Years Ended December 31, 2006 and 2005 Income Tax Expense and Years Ended
December 31, 2005 and 2004 Income Tax Expense); |
50
|
|
|
budgets for capital and other expenditures (see Liquidity and Capital
Requirements); |
|
|
|
|
timing and cost of completion of rig upgrades and other capital projects (see
Liquidity and Capital Requirements); |
|
|
|
|
delivery dates and drilling contracts related to rig conversion and upgrade projects
(see Overview Industry Conditions and Liquidity and Capital Requirements); |
|
|
|
|
plans and objectives of management; |
|
|
|
|
performance of contracts (see Overview Industry Conditions and Risk Factors); |
|
|
|
|
outcomes of legal proceedings; |
|
|
|
|
compliance with applicable laws; and |
|
|
|
|
adequacy of insurance or indemnification (see Risk Factors). |
These types of statements inherently are subject to a variety of assumptions, risks and
uncertainties that could cause actual results to differ materially from those expected, projected
or expressed in forward-looking statements. These risks and uncertainties include, among others,
the following:
|
|
|
general economic and business conditions; |
|
|
|
|
worldwide demand for oil and natural gas; |
|
|
|
|
changes in foreign and domestic oil and gas exploration, development and production activity; |
|
|
|
|
oil and natural gas price fluctuations and related market expectations; |
|
|
|
|
the ability of OPEC to set and maintain production levels and pricing, and the level
of production in non-OPEC countries; |
|
|
|
|
policies of the various governments regarding exploration and development of oil and gas reserves; |
|
|
|
|
advances in exploration and development technology; |
|
|
|
|
the political environment of oil-producing regions; |
|
|
|
|
casualty losses; |
|
|
|
|
operating hazards inherent in drilling for oil and gas offshore; |
|
|
|
|
industry fleet capacity; |
|
|
|
|
market conditions in the offshore contract drilling industry, including dayrates and utilization levels; |
|
|
|
|
competition; |
|
|
|
|
changes in foreign, political, social and economic conditions; |
|
|
|
|
risks of international operations, compliance with foreign laws and taxation policies
and expropriation or nationalization of equipment and assets; |
|
|
|
|
risks of potential contractual liabilities pursuant to our various drilling contracts
in effect from time to time; |
|
|
|
|
foreign exchange and currency fluctuations and regulations, and the inability to
repatriate income or capital; |
|
|
|
|
risks of war, military operations, other armed hostilities, terrorist acts and
embargoes; |
|
|
|
|
changes in offshore drilling technology, which could require significant capital
expenditures in order to maintain competitiveness; |
|
|
|
|
regulatory initiatives and compliance with governmental regulations; |
|
|
|
|
compliance with environmental laws and regulations; |
|
|
|
|
customer preferences; |
|
|
|
|
effects of litigation; |
|
|
|
|
cost, availability and adequacy of insurance; |
|
|
|
|
adequacy of our sources of liquidity; |
|
|
|
|
the availability of qualified personnel to operate and service our drilling rigs; and |
|
|
|
|
various other matters, many of which are beyond our control. |
The risks and uncertainties included here are not exhaustive. Other sections of this report
and our other filings with the SEC include additional factors that could adversely affect our
business, results of operations and financial performance. Given these risks and uncertainties,
investors should not place undue reliance on forward-looking statements. Forward-looking
statements included in this report speak only as of the date of this report. We expressly disclaim
any obligation or undertaking to release publicly any updates or revisions to any forward-looking
statement to reflect any change in our expectations with regard to the statement or any change in
events, conditions or circumstances on which any forward-looking statement is based.
51
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information included in this Item 7A is considered to constitute forward-looking
statements for purposes of the statutory safe harbor provided in Section 27A of the Securities Act
and Section 21E of the Exchange Act. See Managements Discussion and Analysis of Financial
Condition and Results of Operations Forward-Looking Statements in Item 7 of this report.
Our measure of market risk exposure represents an estimate of the change in fair value of our
financial instruments. Market risk exposure is presented for each class of financial instrument
held by us at December 31, 2006 and December 31, 2005, assuming immediate adverse market movements
of the magnitude described below. We believe that the various rates of adverse market movements
represent a measure of exposure to loss under hypothetically assumed adverse conditions. The
estimated market risk exposure represents the hypothetical loss to future earnings and does not
represent the maximum possible loss or any expected actual loss, even under adverse conditions,
because actual adverse fluctuations would likely differ. In addition, since our investment
portfolio is subject to change based on our portfolio management strategy as well as in response to
changes in the market, these estimates are not necessarily indicative of the actual results that
may occur.
Exposure to market risk is managed and monitored by our senior management. Senior management
approves the overall investment strategy that we employ and has responsibility to ensure that the
investment positions are consistent with that strategy and the level of risk acceptable to us. We
may manage risk by buying or selling instruments or entering into offsetting positions.
Interest Rate Risk
We have exposure to interest rate risk arising from changes in the level or volatility of
interest rates. Our investments in marketable securities are primarily in fixed maturity
securities. We monitor our sensitivity to interest rate risk by evaluating the change in the value
of our financial assets and liabilities due to fluctuations in interest rates. The evaluation is
performed by applying an instantaneous change in interest rates by varying magnitudes on a static
balance sheet to determine the effect such a change in rates would have on the recorded market
value of our investments and the resulting effect on stockholders equity. The analysis presents
the sensitivity of the market value of our financial instruments to selected changes in market
rates and prices which we believe are reasonably possible over a one-year period.
The sensitivity analysis estimates the change in the market value of our interest sensitive
assets and liabilities that were held on December 31, 2006 and December 31, 2005, due to
instantaneous parallel shifts in the yield curve of 100 basis points, with all other variables held
constant.
The interest rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag behind changes in
market rates. Accordingly, the analysis may not be indicative of, is not intended to provide, and
does not provide a precise forecast of the effect of changes in market interest rates on our
earnings or stockholders equity. Further, the computations do not contemplate any actions we could
undertake in response to changes in interest rates.
Our long-term debt, as of December 31, 2006 and December 31, 2005, is denominated in U.S.
dollars. Our debt has been primarily issued at fixed rates, and as such, interest expense would not
be impacted by interest rate shifts. The impact of a 100-basis point increase in interest rates on
fixed rate debt would result in a decrease in market value of $270.8 million and $173.8 million as
of December 31, 2006 and 2005, respectively. A 100-basis point decrease would result in an
increase in market value of $33.0 million and $40.0 million as of December 31, 2006 and 2005,
respectively.
52
Foreign Exchange Risk
Foreign exchange rate risk arises from the possibility that changes in foreign currency
exchange rates will impact the value of financial instruments. During 2006 and 2005, we entered
into various foreign currency forward exchange contracts that required us to purchase predetermined
amounts of foreign currencies at predetermined dates. As of December 31, 2006, we had foreign
currency exchange contracts outstanding, which aggregated $22.5 million, that require us to
purchase the equivalent of $5.7 million in Brazilian reais, $2.7 million in British pounds
sterling, $10.3 million in Mexican pesos and $3.8 million in Norwegian kroner at various times
through June 2007. At December 31, 2005, we had foreign currency forward exchange contracts
outstanding, which aggregated $122.5 million, that required us to purchase the equivalent of $17.1
million in Mexican pesos, the equivalent of $7.7 million in Australian dollars, the equivalent of
$67.2 million in British pounds sterling and the equivalent of $30.5 million in Brazilian reais at
various times through March 2007. These forward exchange contracts were included in Prepaid
expenses and other in our Consolidated Balance Sheets at December 31, 2006 and 2005 at fair value
in accordance with SFAS No. 133, Accounting for Derivatives and Hedging Activities.
The sensitivity analysis assumes an instantaneous 20% change in foreign currency exchange
rates versus the U.S. dollar from their levels at December 31, 2006 and 2005.
The following table presents our exposure to market risk by category (interest rates and
foreign currency exchange rates):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Asset (Liability) |
|
|
Market Risk |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
Interest rate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities |
|
$ |
301,159 |
(a) |
|
$ |
2,281 |
(a) |
|
$ |
400 |
(c) |
|
$ |
200 |
(c) |
Long-term debt |
|
|
(1,231,689 |
) (b) |
|
|
(1,159,941 |
) (b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Exchange: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward exchange contracts |
|
|
2,600 |
(d) |
|
|
400 |
(d) |
|
|
7,400 |
(d) |
|
|
21,500 |
(d) |
|
|
|
(a) |
|
The fair market value of our investment in marketable securities, excluding repurchase
agreements, is based on the quoted closing market prices on December 31, 2006 and 2005. |
|
(b) |
|
The fair values of our 4.875% Senior Notes, 5.15% Senior Notes, 1.5% Debentures and Zero
Coupon Debentures are based on the quoted closing market prices on December 31, 2006 and 2005. |
|
(c) |
|
The calculation of estimated market risk exposure is based on assumed adverse changes in
the underlying reference price or index of an increase in interest rates of 100 basis points at
December 31, 2006 and 2005. |
|
(d) |
|
The calculation of estimated foreign exchange risk is based on assumed adverse changes in
the underlying reference price or index of an increase in foreign exchange rates of 20% at December
31, 2006 and a decrease in foreign exchange rates of 20% at December 31, 2005. |
53
Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Diamond Offshore Drilling, Inc. and Subsidiaries
Houston, Texas
We have audited the accompanying consolidated balance sheets of Diamond Offshore Drilling,
Inc. and subsidiaries (the Company) as of December 31, 2006 and 2005, and the related
consolidated statements of operations, stockholders equity, comprehensive income (loss), and cash
flows for each of the three years in the period ended December 31, 2006. These financial
statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on the financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of Diamond Offshore Drilling, Inc. and subsidiaries as of December
31, 2006 and 2005, and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2006, in conformity with accounting principles generally
accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Companys internal control over financial
reporting as of December 31, 2006, based on the criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 22, 2007 expressed an unqualified opinion on managements
assessment of the effectiveness of the Companys internal control over financial reporting (such
management assessment is included in Item 9A of this Form 10-K) and an unqualified opinion on the
effectiveness of the Companys internal control over financial reporting.
Deloitte & Touche LLP
Houston, Texas
February 22, 2007
54
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Diamond Offshore Drilling, Inc. and Subsidiaries
Houston, Texas
We have audited managements assessment, included in Item 9A of this Form 10-K under the
heading Managements Annual Report on Internal Control Over Financial Reporting, that Diamond
Offshore Drilling, Inc. and subsidiaries (the Company) maintained effective internal control over
financial reporting as of December 31, 2006, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Companys management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion on managements assessment and an
opinion on the effectiveness of the Companys internal control over financial reporting based on
our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinions.
A companys internal control over financial reporting is a process designed by, or under the
supervision of, the companys principal executive and principal financial officers, or persons
performing similar functions, and effected by the companys board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A companys internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including
the possibility of collusion or improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that the Company maintained effective internal control
over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based
on the criteria established in Internal ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as of December 31,
2006, based on the criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States) the consolidated financial statements as of and for the year ended
December 31, 2006 of the Company and our report dated February 22, 2007 expressed an unqualified
opinion on those financial statements.
Deloitte & Touche LLP
Houston, Texas
February 22, 2007
55
DIAMOND OFFSHORE DRILLING, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
524,698 |
|
|
$ |
842,590 |
|
Marketable securities |
|
|
301,159 |
|
|
|
2,281 |
|
Accounts receivable |
|
|
567,474 |
|
|
|
357,104 |
|
Rig spare parts and supplies |
|
|
48,801 |
|
|
|
47,196 |
|
Prepaid expenses and other |
|
|
39,415 |
|
|
|
32,707 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
1,481,547 |
|
|
|
1,281,878 |
|
Drilling and other property and equipment, net of
accumulated depreciation |
|
|
2,628,453 |
|
|
|
2,302,020 |
|
Other assets |
|
|
22,839 |
|
|
|
23,024 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
4,132,839 |
|
|
$ |
3,606,922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
122,000 |
|
|
$ |
60,976 |
|
Accrued liabilities |
|
|
184,978 |
|
|
|
169,037 |
|
Taxes payable |
|
|
26,531 |
|
|
|
38,973 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
333,509 |
|
|
|
268,986 |
|
Long-term debt |
|
|
964,310 |
|
|
|
977,654 |
|
Deferred tax liability |
|
|
448,227 |
|
|
|
445,094 |
|
Other liabilities |
|
|
67,285 |
|
|
|
61,861 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,813,331 |
|
|
|
1,753,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Preferred stock (par value $0.01, 25,000,000 shares authorized, none
issued and outstanding) |
|
|
|
|
|
|
|
|
Common stock (par value $0.01, 500,000,000 shares authorized;
134,133,776 shares issued and 129,216,976 shares outstanding at
December 31, 2006; 133,842,429 shares issued and 128,925,629 shares
outstanding at December 31, 2005) |
|
|
1,341 |
|
|
|
1,338 |
|
Additional paid-in capital |
|
|
1,299,846 |
|
|
|
1,277,934 |
|
Retained earnings |
|
|
1,137,151 |
|
|
|
688,459 |
|
Accumulated other comprehensive (losses) gains |
|
|
(4,417 |
) |
|
|
9 |
|
Treasury stock, at cost (4,916,800 shares at December 31, 2006
and 2005) |
|
|
(114,413 |
) |
|
|
(114,413 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
2,319,508 |
|
|
|
1,853,327 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
4,132,839 |
|
|
$ |
3,606,922 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
56
DIAMOND OFFSHORE DRILLING, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Contract drilling |
|
$ |
1,987,114 |
|
|
$ |
1,179,015 |
|
|
$ |
782,405 |
|
Revenues related to reimbursable expenses |
|
|
65,458 |
|
|
|
41,987 |
|
|
|
32,257 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
2,052,572 |
|
|
|
1,221,002 |
|
|
|
814,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Contract drilling |
|
|
812,057 |
|
|
|
638,540 |
|
|
|
568,628 |
|
Reimbursable expenses |
|
|
57,465 |
|
|
|
35,549 |
|
|
|
28,899 |
|
Depreciation and amortization |
|
|
200,503 |
|
|
|
183,724 |
|
|
|
178,835 |
|
General and administrative |
|
|
41,551 |
|
|
|
37,162 |
|
|
|
32,759 |
|
Casualty gain on Ocean Warwick |
|
|
(500 |
) |
|
|
(33,605 |
) |
|
|
|
|
(Gain) loss on disposition of assets |
|
|
1,064 |
|
|
|
(14,767 |
) |
|
|
1,613 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
1,112,140 |
|
|
|
846,603 |
|
|
|
810,734 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
940,432 |
|
|
|
374,399 |
|
|
|
3,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
37,880 |
|
|
|
26,028 |
|
|
|
12,205 |
|
Interest expense |
|
|
(24,096 |
) |
|
|
(41,799 |
) |
|
|
(30,257 |
) |
Gain (loss) on sale of marketable securities |
|
|
(31 |
) |
|
|
(1,180 |
) |
|
|
254 |
|
Settlement of litigation |
|
|
|
|
|
|
|
|
|
|
11,391 |
|
Other, net |
|
|
12,147 |
|
|
|
(1,053 |
) |
|
|
(1,054 |
) |
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense |
|
|
966,332 |
|
|
|
356,395 |
|
|
|
(3,533 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
(259,485 |
) |
|
|
(96,058 |
) |
|
|
(3,710 |
) |
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
706,847 |
|
|
$ |
260,337 |
|
|
$ |
(7,243 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
5.47 |
|
|
$ |
2.02 |
|
|
$ |
(0.06 |
) |
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
5.12 |
|
|
$ |
1.91 |
|
|
$ |
(0.06 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Shares of common stock |
|
|
129,129 |
|
|
|
128,690 |
|
|
|
129,021 |
|
Dilutive potential shares of common stock |
|
|
9,652 |
|
|
|
12,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted-average shares
outstanding assuming dilution |
|
|
138,781 |
|
|
|
141,351 |
|
|
|
129,021 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
57
DIAMOND OFFSHORE DRILLING, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(In thousands, except number of shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Total |
|
|
Common Stock |
|
Paid-in |
|
Retained |
|
Comprehensive |
|
Treasury Stock |
|
Stockholders' |
|
|
Shares |
|
Amount |
|
Capital |
|
Earnings |
|
Gains (Losses) |
|
Shares |
|
Amount |
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2004 |
|
|
133,457,055 |
|
|
|
1,335 |
|
|
|
1,263,692 |
|
|
|
515,906 |
|
|
|
(4,117 |
) |
|
|
4,134,600 |
|
|
|
(96,336 |
) |
|
|
1,680,480 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,243 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,243 |
) |
Treasury stock purchase |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
782,200 |
|
|
|
(18,077 |
) |
|
|
(18,077 |
) |
Dividends to stockholders
($0.25 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,281 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,281 |
) |
Stock options exercised |
|
|
26,765 |
|
|
|
|
|
|
|
820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
820 |
|
Exchange rate changes, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,649 |
|
|
|
|
|
|
|
|
|
|
|
1,649 |
|
Gain on investments, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
480 |
|
|
|
|
|
|
|
|
|
|
|
480 |
|
|
|
|
December 31, 2004 |
|
|
133,483,820 |
|
|
|
1,335 |
|
|
|
1,264,512 |
|
|
|
476,382 |
|
|
|
(1,988 |
) |
|
|
4,916,800 |
|
|
|
(114,413 |
) |
|
|
1,625,828 |
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
260,337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
260,337 |
|
Dividends to stockholders
($0.375 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(48,260 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(48,260 |
) |
Conversion of long-term debt |
|
|
264 |
|
|
|
|
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 |
|
Stock options exercised |
|
|
358,345 |
|
|
|
3 |
|
|
|
13,409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,412 |
|
Reversal of cumulative
foreign
currency translation loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,077 |
|
|
|
|
|
|
|
|
|
|
|
2,077 |
|
Loss on investments, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(80 |
) |
|
|
|
|
|
|
|
|
|
|
(80 |
) |
|
|
|
December 31, 2005 |
|
|
133,842,429 |
|
|
|
1,338 |
|
|
|
1,277,934 |
|
|
|
688,459 |
|
|
|
9 |
|
|
|
4,916,800 |
|
|
|
(114,413 |
) |
|
|
1,853,327 |
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
706,847 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
706,847 |
|
Dividends to stockholders
($2.00 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(258,155 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(258,155 |
) |
Conversion of long-term debt |
|
|
193,551 |
|
|
|
2 |
|
|
|
13,734 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,736 |
|
Stock options exercised |
|
|
97,796 |
|
|
|
1 |
|
|
|
3,295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,296 |
|
Stock-based compensation, net |
|
|
|
|
|
|
|
|
|
|
4,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,883 |
|
Gain on investments, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
100 |
|
|
|
|
December 31, 2006, before
adoption of SFAS 158 |
|
|
134,133,776 |
|
|
|
1,341 |
|
|
|
1,299,846 |
|
|
|
1,137,151 |
|
|
|
109 |
|
|
|
4,916,800 |
|
|
|
(114,413 |
) |
|
|
2,324,034 |
|
|
|
|
Adjustment to initially
apply SFAS 158, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,526 |
) |
|
|
|
|
|
|
|
|
|
|
(4,526 |
) |
|
|
|
December 31, 2006 |
|
|
134,133,776 |
|
|
$ |
1,341 |
|
|
$ |
1,299,846 |
|
|
$ |
1,137,151 |
|
|
$ |
(4,417 |
) |
|
|
4,916,800 |
|
|
$ |
(114,413 |
) |
|
$ |
2,319,508 |
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
58
DIAMOND OFFSHORE DRILLING, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
706,847 |
|
|
$ |
260,337 |
|
|
$ |
(7,243 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive gains (losses), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain |
|
|
|
|
|
|
2,077 |
|
|
|
1,649 |
|
Unrealized holding gain on investments |
|
|
162 |
|
|
|
10 |
|
|
|
532 |
|
Reclassification adjustment for loss included in net income |
|
|
(62 |
) |
|
|
(90 |
) |
|
|
(52 |
) |
|
|
|
|
|
|
|
|
|
|
Total other comprehensive gain |
|
|
100 |
|
|
|
1,997 |
|
|
|
2,129 |
|
Comprehensive income (loss) before adoption of SFAS 158,
net of tax |
|
|
706,947 |
|
|
|
262,334 |
|
|
|
(5,114 |
) |
|
|
|
|
|
|
|
|
|
|
Adjustment to initially apply SFAS 158, net of tax |
|
|
(4,526 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
702,421 |
|
|
$ |
262,334 |
|
|
$ |
(5,114 |
) |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
59
DIAMOND OFFSHORE DRILLING, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2006 |
|
2005 |
|
2004 |
|
|
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
706,847 |
|
|
$ |
260,337 |
|
|
$ |
(7,243 |
) |
Adjustments to reconcile net income (loss) to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
200,503 |
|
|
|
183,724 |
|
|
|
178,835 |
|
Casualty gain on Ocean Warwick |
|
|
(500 |
) |
|
|
(33,605 |
) |
|
|
|
|
Loss (gain) on disposition of assets |
|
|
1,064 |
|
|
|
(14,767 |
) |
|
|
1,613 |
|
Loss (gain) on sale of marketable securities, net |
|
|
31 |
|
|
|
1,180 |
|
|
|
(254 |
) |
Deferred tax provision |
|
|
610 |
|
|
|
65,159 |
|
|
|
726 |
|
Accretion of discounts on marketable securities |
|
|
(14,090 |
) |
|
|
(7,683 |
) |
|
|
(4,979 |
) |
Amortization of debt issuance costs |
|
|
848 |
|
|
|
7,742 |
|
|
|
1,126 |
|
Amortization of debt discounts |
|
|
392 |
|
|
|
7,523 |
|
|
|
16,073 |
|
Stock-based compensation expense |
|
|
3,106 |
|
|
|
|
|
|
|
|
|
Excess tax benefits from stock-based payment arrangements |
|
|
(1,313 |
) |
|
|
|
|
|
|
|
|
Deferred income, net |
|
|
13,373 |
|
|
|
935 |
|
|
|
4,240 |
|
Deferred expenses, net |
|
|
6,317 |
|
|
|
(1,010 |
) |
|
|
(6,275 |
) |
Other Items, net |
|
|
(3,031 |
) |
|
|
3,942 |
|
|
|
9,730 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(190,054 |
) |
|
|
(174,659 |
) |
|
|
(32,828 |
) |
Rig spare parts and supplies and other current assets |
|
|
(12,078 |
) |
|
|
(4,752 |
) |
|
|
154 |
|
Accounts payable and accrued liabilities |
|
|
58,762 |
|
|
|
66,011 |
|
|
|
39,464 |
|
Taxes payable |
|
|
(10,698 |
) |
|
|
28,494 |
|
|
|
7,900 |
|
|
|
|
Net cash provided by operating activities |
|
|
760,089 |
|
|
|
388,571 |
|
|
|
208,282 |
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures (including rig acquisitions) |
|
|
(551,237 |
) |
|
|
(293,829 |
) |
|
|
(89,229 |
) |
Proceeds from casualty loss of Ocean Warwick |
|
|
|
|
|
|
50,500 |
|
|
|
|
|
Proceeds from sale/involuntary conversion of assets |
|
|
4,731 |
|
|
|
26,047 |
|
|
|
6,900 |
|
Proceeds from sale and maturities of marketable securities |
|
|
2,187,766 |
|
|
|
5,610,907 |
|
|
|
4,466,377 |
|
Purchase of marketable securities |
|
|
(2,472,431 |
) |
|
|
(4,956,560 |
) |
|
|
(4,606,400 |
) |
Purchases of Australian dollar time deposits |
|
|
|
|
|
|
|
|
|
|
(45,456 |
) |
Proceeds from maturities of Australian dollar time deposits |
|
|
|
|
|
|
11,761 |
|
|
|
34,120 |
|
Proceeds from settlement of forward contracts |
|
|
7,289 |
|
|
|
1,136 |
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities |
|
|
(823,882 |
) |
|
|
449,962 |
|
|
|
(233,688 |
) |
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of 4.875% senior unsecured notes |
|
|
|
|
|
|
249,462 |
|
|
|
|
|
Issuance of 5.15% senior unsecured notes |
|
|
|
|
|
|
|
|
|
|
249,397 |
|
Debt issuance costs and arrangement fees |
|
|
(520 |
) |
|
|
(1,866 |
) |
|
|
(1,751 |
) |
Redemption of zero coupon debentures |
|
|
|
|
|
|
(460,015 |
) |
|
|
|
|
Acquisition of treasury stock |
|
|
|
|
|
|
|
|
|
|
(18,077 |
) |
Payment of dividends |
|
|
(258,155 |
) |
|
|
(48,260 |
) |
|
|
(32,281 |
) |
Payments under lease-leaseback agreement |
|
|
|
|
|
|
(12,818 |
) |
|
|
(11,969 |
) |
Proceeds from stock options exercised |
|
|
3,263 |
|
|
|
11,547 |
|
|
|
168 |
|
Excess tax benefits from share-based payment arrangements |
|
|
1,313 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(254,099 |
) |
|
|
(261,950 |
) |
|
|
185,487 |
|
|
|
|
Effect of exchange rate changes on cash |
|
|
|
|
|
|
|
|
|
|
(419 |
) |
|
|
|
Net change in cash and cash equivalents |
|
|
(317,892 |
) |
|
|
576,583 |
|
|
|
159,662 |
|
Cash and cash equivalents, beginning of year |
|
|
842,590 |
|
|
|
266,007 |
|
|
|
106,345 |
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
524,698 |
|
|
$ |
842,590 |
|
|
$ |
266,007 |
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
60
DIAMOND OFFSHORE DRILLING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General Information
Diamond Offshore Drilling, Inc. is a leading, global offshore oil and gas drilling contractor
with a current fleet of 44 offshore rigs consisting of 30 semisubmersibles, 13 jack-ups and one
drillship. In addition, we have two jack-up drilling units under construction at shipyards in
Brownsville, Texas and Singapore, which we expect to be completed in the first quarter of 2008.
Unless the context otherwise requires, references in these Notes to Diamond Offshore, we, us
or our mean Diamond Offshore Drilling, Inc. and our consolidated subsidiaries. We were
incorporated in Delaware in 1989.
As of February 20, 2007, Loews Corporation, or Loews, owned 50.7% of the outstanding shares of
our common stock.
Principles of Consolidation
Our consolidated financial statements include the accounts of Diamond Offshore Drilling, Inc.
and our subsidiaries after elimination of significant intercompany transactions and balances.
Cash and Cash Equivalents, Marketable Securities
We consider short-term, highly liquid investments that have an original maturity of three
months or less and deposits in money market mutual funds that are readily convertible into cash to
be cash equivalents.
We classify our investments in marketable securities as available for sale and they are stated
at fair value in our Consolidated Balance Sheets. Accordingly, any unrealized gains and losses,
net of taxes, are reported in our Consolidated Balance Sheets in Accumulated other comprehensive
gains (losses) until realized. The cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity and such adjustments are included in our
Consolidated Statements of Operations in Interest income. The sale and purchase of securities are
recorded on the date of the trade. The cost of debt securities sold is based on the specific
identification method. Realized gains or losses, as well as any declines in value that are judged
to be other than temporary, are reported in our Consolidated Statements of Operations in Other
income (expense).
Derivative Financial Instruments
Our derivative financial instruments include foreign currency forward exchange contracts and a
contingent interest provision that is embedded in our 1.5% Convertible Senior Debentures Due 2031,
or 1.5% Debentures, issued on April 11, 2001. See Note 5.
Supplementary Cash Flow Information
We paid interest totaling $32.5 million on long-term debt for the year ended December 31,
2006. For the year ended December 31, 2005, we paid interest totaling $94.1 million on long-term
debt, which included $73.3 million in accreted interest paid in connection with the June 2005
partial redemption of our Zero Coupon Convertible Debentures due 2020, or Zero Coupon Debentures.
See Note 8. For the year ended December 31, 2004 we paid interest totaling $8.7 million on
long-term debt.
We paid $10.8 million, $5.3 million and $3.1 million in foreign income taxes, net of foreign
tax refunds, during the years ended December 31, 2006, 2005 and 2004, respectively. We paid $262.4
million in U.S. income taxes during the year ended December 31, 2006. We received refunds of $13.7
million and $7.7 million in U.S. income taxes during the years ended December 31, 2006 and 2005,
respectively. There were no U.S. income taxes paid or refunded during the year ended December 31,
2004.
We recorded income tax benefits of $1.7 million, $2.4 million and $0.1 million related to the
exercise of
61
employee stock options in 2006, 2005 and 2004, respectively.
During 2006, the holders of $13.7 million accreted value, or $22.4 million in principal amount
at maturity, of our Zero Coupon Debentures and $20,000 in principal amount of our 1.5% Debentures
elected to convert their outstanding debentures into shares of our common stock. During 2005, the
holders of $13,000 in principal amount of our 1.5% Debentures elected to convert their outstanding
debentures into shares of our common stock. See Note 8.
Rig Spare Parts and Supplies
Rig spare parts and supplies consist primarily of replacement parts and supplies held for use
in our operations and are stated at the lower of cost or estimated value.
Drilling and Other Property and Equipment
Our drilling and other property and equipment is carried at cost. We charge maintenance and
routine repairs to income currently while replacements and betterments, which meet certain
criteria, are capitalized. Costs incurred for major rig upgrades are accumulated in construction
work-in-progress, with no depreciation recorded on the additions, until the month the upgrade is
completed and the rig is placed in service. Upon retirement or sale of a rig, the cost and related
accumulated depreciation are removed from the respective accounts and any gains or losses are
included in our results of operations. Depreciation is recognized up to applicable salvage values
by applying the straight-line method over the remaining estimated useful lives from the year the
asset is placed in service. Drilling rigs and equipment are depreciated over their estimated
useful lives ranging from three to 30 years.
Capitalized Interest
We capitalize interest cost for the construction and upgrade of qualifying assets. In April
2005 and July 2006 we began capitalizing interest on expenditures related to the upgrade of the
Ocean Endeavor and the Ocean Monarch, respectively, for ultra-deepwater service. In December 2005
and January 2006 we began capitalizing interest on expenditures related to the construction of our
two jack-up rigs, the Ocean Scepter and Ocean Shield, respectively.
A reconciliation of our total interest cost to Interest expense as reported in our
Consolidated Statements of Operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, |
|
|
2006 |
|
2005 |
|
2004 |
|
|
|
|
|
(In thousands)
|
Total interest cost including amortization of debt
issuance costs |
|
$ |
33,892 |
|
|
$ |
42,541 |
|
|
$ |
30,257 |
|
Capitalized interest |
|
|
(9,796 |
) |
|
|
(742 |
) |
|
|
|
|
|
|
|
Total interest expense as reported |
|
$ |
24,096 |
|
|
$ |
41,799 |
|
|
$ |
30,257 |
|
|
|
|
Asset Retirement Obligations
Statement of Financial Accounting Standards, or SFAS, No. 143, Accounting for Asset
Retirement Obligations requires the fair value of a liability for an asset retirement legal
obligation to be recognized in the period in which it is incurred. At December 31, 2006 and 2005,
we had no asset retirement obligations.
62
Impairment of Long-Lived Assets
We evaluate our property and equipment for impairment whenever changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. We utilize a
probability-weighted cash flow analysis in testing an asset for potential impairment. Our
assumptions and estimates underlying this analysis include the following:
|
|
|
dayrate by rig; |
|
|
|
|
utilization rate by rig (expressed as the actual percentage of time per year that the rig would be used); |
|
|
|
|
the per day operating cost for each rig if active, ready-stacked or cold-stacked; and |
|
|
|
|
salvage value for each rig. |
Based on these assumptions and estimates, we develop a matrix by assigning probabilities to various
combinations of assumed utilization rates and dayrates. We also consider the impact of a 5%
reduction in assumed dayrates for the cold-stacked rigs (holding all other assumptions and
estimates in the model constant), or alternatively the impact of a 5% reduction in utilization
(again holding all other assumptions and estimates in the model constant) as part of our analysis.
2006. As of December 31, 2006, all of our drilling rigs were either under contract, in
shipyards for surveys and/or life extension projects or undergoing a major upgrade. Based on this
knowledge, we determined that an impairment test of our drilling equipment was not needed as we are
currently marketing all of our drilling units. We did not have any cold-stacked rigs at December
31, 2006. We do not believe that current circumstances indicate that the carrying amount of our
property and equipment may not be recoverable.
2005. In December 2005, we reviewed our single cold-stacked rig, the Ocean Monarch, for
impairment. Based on our decision to upgrade this drilling unit to high-specification capabilities
at an estimated cost of approximately $300 million and the low net book value of this rig, we did
not consider this asset to be impaired.
2004. In December 2004, we reviewed our three cold-stacked rigs for impairment and determined
that none of the drilling units was impaired. On January 10, 2005, we announced that we would
upgrade one of these cold-stacked rigs, the Ocean Endeavor, to a high-specification drilling unit
for an estimated cost of approximately $250 million. As a result of this decision and the low net
book value of this rig, we did not consider this asset to be impaired.
During 2004, we were marketing another of our cold-stacked rigs, the Ocean Liberator, for sale
to a third party, and we classified the rig as an asset-held-for-sale in our Consolidated Balance
Sheets at December 31, 2004 included in Item 8 of this report. The estimated market value of this
rig, based on offers from third parties, was higher than its current carrying value; therefore, no
write-down was deemed necessary as a result of the reclassification to an asset-held-for-sale. We
sold the Ocean Liberator in the second quarter of 2005 for a net gain of $8.0 million.
We evaluated our then remaining cold-stacked rig for impairment using the probability-weighted
cash flow analysis discussed above. At December 31, 2004, the probability-weighted cash flow for
the Ocean New Era significantly exceeded its net carrying value of $3.2 million. We reactivated
the Ocean New Era from cold-stacked status in the fourth quarter of 2005 and it began operating
under contract in the GOM in December 2005.
Managements assumptions are an inherent part of our asset impairment evaluation and the use
of different assumptions could produce results that differ from those reported.
Fair Value of Financial Instruments
We believe that the carrying amount of our current financial instruments approximates fair
value because of the short maturity of these instruments. For non-current financial instruments we
use quoted market prices, when available, and discounted cash flows to estimate fair value. See
Note 11.
Debt Issuance Costs
Debt issuance costs are included in our Consolidated Balance Sheets in Other assets and are
amortized over
63
the respective terms of the related debt. Interest expense for the year ended
December 31, 2005 includes $6.9 million in debt issuance costs that we wrote off in connection with
the June 2005 redemption of approximately 96%
of our then outstanding Zero Coupon Debentures.
Income Taxes
We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes,
which requires the recognition of the amount of taxes payable or refundable for the current year
and an asset and liability approach in recognizing the amount of deferred tax liabilities and
assets for the future tax consequences of events that have been currently recognized in our
financial statements or tax returns. In each of our tax jurisdictions we recognize a current tax
liability or asset for the estimated taxes payable or refundable on tax returns for the current
year and a deferred tax asset or liability for the estimated future tax effects attributable to
temporary differences and carryforwards. Deferred tax assets are reduced by a valuation allowance,
if necessary, which is determined by the amount of any tax benefits that, based on available
evidence, are not expected to be realized under a more likely than not approach. We make
judgments regarding future events and related estimates especially as they pertain to the
forecasting of our effective tax rate, the potential realization of deferred tax assets such as
utilization of foreign tax credits, and exposure to the disallowance of items deducted on tax
returns upon audit.
Our net income tax expense or benefit is a function of the mix between our domestic and
international pre-tax earnings or losses, respectively, as well as the mix of international tax
jurisdictions in which we operate. Certain of our international rigs are owned or operated,
directly or indirectly, by Diamond Offshore International Limited, a Cayman Islands company which
is one of our wholly owned subsidiaries. Earnings from this subsidiary are reinvested
internationally and remittance to the U.S. is indefinitely postponed. See Note 13.
Treasury Stock
Depending on market conditions, we may, from time to time, purchase shares of our common stock
in the open market or otherwise. We account for the purchase of treasury stock using the cost
method, which reports the cost of the shares acquired in Treasury stock as a deduction from
stockholders equity in our Consolidated Balance Sheets. We did not repurchase any shares of our
outstanding common stock during 2006 or 2005. During the year ended December 31, 2004, we
purchased 782,200 shares of our common stock at an aggregate cost of $18.1 million, or at an
average cost of $23.11 per share.
Comprehensive Income (Loss)
Comprehensive income (loss) is the change in equity of a business enterprise during a period
from transactions and other events and circumstances except those transactions resulting from
investments by owners and distributions to owners. Comprehensive income (loss) for the three years
ended December 31, 2006 includes net income (loss), foreign currency translation gains and losses,
unrealized holding gains and losses on marketable securities and an adjustment to initially adopt
SFAS No. 158, Accounting for Defined Benefit Pension or Other Postretirement Plans, or SFAS 158,
in 2006. See Note 9.
Currency Translation
Our functional currency is the U.S. dollar. Effective October 1, 2005, we changed the
functional currency of certain of our subsidiaries operating outside the United States to the U.S.
dollar to more appropriately reflect the primary economic environment in which our subsidiaries
operate. Prior to this date, these subsidiaries utilized the local currency of the country in
which they conduct business as their functional currency. As a result of this change, currency
translation adjustments and transaction gains and losses, including gains and losses on our forward
currency exchange contracts, are reported as Other income (expense) in our Consolidated
Statements of Operations. For the year ended December 31, 2006, we recognized net foreign currency
exchange gains of $10.3 million. During the years ended December 31, 2005 and 2004, we recognized
net foreign currency exchange losses of $0.8 million and $1.4 million, respectively. See Note 5.
64
Revenue Recognition
Revenue from our dayrate drilling contracts is recognized as services are performed. In
connection with such drilling contracts, we may receive lump-sum fees for the mobilization of
equipment. These fees are earned as services are performed over the initial term of the related
drilling contracts. We previously accounted for the excess of mobilization fees received over
costs incurred to mobilize an offshore rig from one market to another as revenue over the term of
the related drilling contracts. Effective July 1, 2004 we changed our accounting to defer
mobilization fees received, as well as direct and incremental mobilization costs incurred, and
began to amortize each, on a straight line basis, over the term of the related drilling contracts
(which is the period estimated to be benefited from the mobilization activity). Straight line
amortization of mobilization revenues and related costs over the initial term of the related
drilling contracts (which generally range from two to 60 months) is consistent with the timing of
net cash flows generated from the actual drilling services performed. If we had used this method
of accounting in periods prior to July 1, 2004, our previously reported operating income (loss) and
net income (loss) would not have changed, and the impact on contract drilling revenues and expenses
would have been immaterial. Absent a contract, mobilization costs are recognized currently.
From time to time, we may receive fees from our customers for capital improvements to our
rigs. We defer such fees received in Other liabilities in our Consolidated Balance Sheets and
recognize these fees into income on a straight-line basis over the period of the related drilling
contract. We capitalize the costs of such capital improvements and depreciate them over the
estimated useful life of the asset.
We record reimbursements received for the purchase of supplies, equipment, personnel services
and other services provided at the request of our customers in accordance with a contract or
agreement, for the gross amount billed to the customer, as Revenues related to reimbursable
expenses in our Consolidated Statements of Operations.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amount of revenues and
expenses during the reporting period. Actual results could differ from those estimated.
Reclassifications
Certain amounts applicable to the prior periods have been reclassified to conform to the
classifications currently followed. Such reclassifications do not affect earnings.
Recent Accounting Pronouncements
In September 2006, the United States Securities and Exchange Commission, issued Staff Accounting
Bulletin, or SAB, No. 108, Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements, or SAB 108. SAB 108 requires
a registrant to quantify the impact of correcting all misstatements on its current year
financial statements using two approaches, the rollover and iron curtain approaches. A
registrant is required to adjust its current year financial statements if either approach to
accumulate and identify misstatements results in quantifying a misstatement that is material,
after considering all relevant quantitative and qualitative factors. SAB 108 is required to
be considered for financial statements for fiscal years ending after November 15, 2006;
however, earlier application of the guidance in SAB 108 to interim financial statements issued
for fiscal years ending after November 15, 2006 is encouraged. The adoption of SAB 108 had no
impact on our consolidated results of operations, financial position or cash flows.
In September 2006, the Financial Accounting Standards Board, or FASB, issued SFAS 158. SFAS 158
amends existing guidance to require (1) balance sheet recognition of the funded status of
defined benefit plans, (2) recognition in other comprehensive income of various items before
they are recognized in periodic benefit cost, (3) the measurement date for plan assets and the
benefit obligation to be the balance sheet date, and (4) additional disclosures regarding the
effects on periodic benefit cost for the following fiscal year arising from delayed
recognition in the
65
current period. SFAS 158 also includes guidance regarding selection of
assumed discount rates for use in measuring the benefit obligation. SFAS 158 provides
different effective dates for various aspects of the new rules. For
public companies, requirements to recognize the funded status of the plan and to comply with the disclosure
provisions of SFAS 158 are effective as of the end of the fiscal year ending after December 15,
2006, and the requirement to measure plan assets and benefit obligations as of the balance sheet
date is effective for fiscal years ending after December 15, 2008. Early adoption of SFAS 158 is
encouraged and must be applied to all of an entitys benefit plans. During the fourth quarter of
2006, we adopted the requirement to recognize the funded status of our defined benefit pension
plan, as well as the disclosure provisions. See Note 14.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, or SFAS 157, which
establishes a separate framework for measuring fair value in generally accepted accounting
principles in the U.S., or GAAP, and expands disclosures about fair value measurements. SFAS
157 was issued to eliminate the diversity in practice that exists due to the different
definitions of fair value and the limited guidance for applying those definitions in GAAP that
are dispersed among the many accounting pronouncements that require fair value measurements.
SFAS 157 does not require any new fair value measurements; however, its adoption may result in
changes to current practice. Changes resulting from the application of SFAS 157 relate to the
definition of fair value, the methods used to measure fair value and the expanded disclosures
about fair value measurements. SFAS 157 emphasizes that fair value is a market-based
measurement, rather than an entity-specific measurement. It also establishes a fair value
hierarchy that distinguishes between (i) market participant assumptions developed based on
market data obtained from independent sources and (ii) the reporting entitys own assumptions
about market participant assumptions developed based on the best information available under
the circumstances. SFAS 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, including interim periods within those fiscal years.
Earlier application is encouraged, provided that the reporting entity has not yet issued
financial statements for that fiscal year, including interim periods. We are in the process
of evaluating the impact, if any, of applying SFAS 157 on our financial statements; however,
we do not expect the adoption of SFAS 157 to have a material impact on our consolidated
results of operations, financial position or cash flows.
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, or FIN 48, which clarifies the accounting for uncertainty in income taxes recognized
in financial statements in accordance with SFAS 109. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return and also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition.
FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently
evaluating the guidance provided in FIN 48 and expect to adopt FIN 48 in the first quarter of 2007.
Although our assessment has not yet been finalized, upon adoption of FIN 48 we expect to recognize
a cumulative effect adjustment for uncertain tax positions of approximately $30 million, which will
be charged to results of operations and equity.
66
2. Stock-Based Compensation
Our Second Amended and Restated 2000 Stock Option Plan, or Stock Plan, provides for the
issuance of either incentive stock options or non-qualified stock options to our employees,
consultants and non-employee directors. Our Stock Plan also authorizes the award of stock
appreciation rights, or SARs, in tandem with stock options or separately. The aggregate number of
shares of our common stock for which stock options or SARs may be granted is 1,500,000 shares. The
exercise price per share may not be less than the fair market value of the common stock on the date
of grant. Generally, stock options and SARs vest ratably over a four year period and expire in ten
years.
Effective January 1, 2006, we adopted the FASBs revised SFAS No. 123, Accounting for
Stock-Based Compensation, or SFAS 123(R), using the modified prospective application transition
method. SFAS 123(R) requires that compensation cost related to share-based payment transactions be
recognized in financial statements. The effect of adopting SFAS 123(R) as of January 1, 2006 is as
follows:
|
|
|
|
|
|
|
Year Ended December 31, 2006 |
|
|
|
(In thousands, except per |
|
|
|
share data) |
|
|
|
|
Decrease in income from continuing operations |
|
$ |
3,106 |
|
Decrease in income before income taxes |
|
|
3,106 |
|
Decrease in income tax expense |
|
|
(1,087 |
) |
Decrease in net income |
|
|
2,109 |
|
|
|
|
|
|
Decrease in cash flow from operations |
|
$ |
(1,313 |
) |
Increase in cash flow from financing activities |
|
|
1,313 |
|
|
|
|
|
|
Decrease in earnings per share |
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.02 |
|
Diluted |
|
|
0.04 |
|
Prior to the adoption of SFAS 123(R) on January 1, 2006, we accounted for our Stock Plan in
accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. Accordingly, no compensation expense was recognized for the options granted to our
employees in periods prior to January 1, 2006. If compensation expense had been recognized for
stock options granted to our employees based on the fair value of the options at the grant dates
our net income and earnings per share, or EPS, would have been as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands, except per share data) |
|
|
|
|
|
|
|
|
|
|
Net income (loss) as reported |
|
$ |
260,337 |
|
|
$ |
(7,243 |
) |
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects |
|
|
(1,411 |
) |
|
|
(1,175 |
) |
|
|
|
|
|
|
|
Pro forma net income (loss) |
|
$ |
258,926 |
|
|
$ |
(8,418 |
) |
|
|
|
|
|
|
|
Earnings (loss) per share of common stock: |
|
|
|
|
|
|
|
|
As reported |
|
$ |
2.02 |
|
|
$ |
(0.06 |
) |
|
|
|
|
|
|
|
Pro forma |
|
$ |
2.01 |
|
|
$ |
(0.07 |
) |
|
|
|
|
|
|
|
Earnings (loss) per share of common
stock-assuming dilution: |
|
|
|
|
|
|
|
|
As reported |
|
$ |
1.91 |
|
|
$ |
(0.06 |
) |
|
|
|
|
|
|
|
Pro forma |
|
$ |
1.90 |
|
|
$ |
(0.07 |
) |
|
|
|
|
|
|
|
67
The fair value of options and SARs granted under the Stock Plan was estimated using the
Binomial Option pricing model with the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Expected life of stock options/SARs (in years) |
|
|
6 |
|
|
|
7 |
|
|
|
7 |
|
Expected volatility |
|
|
30.72 |
% |
|
|
29.53 |
% |
|
|
28.24 |
% |
Dividend yield |
|
|
.62 |
% |
|
|
.56 |
% |
|
|
.77 |
% |
Risk free interest rate |
|
|
4.85 |
% |
|
|
4.16 |
% |
|
|
3.93 |
% |
Expected life of stock options and SARs is based on historical data as is the expected
volatility. The dividend yield is based on the current approved regular dividend rate in effect
and the current market price at the time of grant. Risk free interest rates are determined using
the U.S. Treasury yield curve at time of grant with a term equal to the expected life of the
options and SARs.
A summary of the status of stock option and SARs transactions in 2006 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
Aggregate Intrinsic |
|
|
|
|
|
|
|
Weighted-Average |
|
|
Remaining |
|
|
Value |
|
|
|
Number of Awards |
|
|
Exercise Price |
|
|
Contractual Term |
|
|
(In Thousands) |
|
|
|
|
Awards outstanding at January 1, 2006 |
|
|
556,590 |
|
|
$ |
36.79 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
183,900 |
|
|
$ |
82.03 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(97,796 |
) |
|
$ |
34.05 |
|
|
|
|
|
|
|
|
|
Canceled |
|
|
(47,404 |
) |
|
$ |
54.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards outstanding at December 31, 2006 |
|
|
595,290 |
|
|
$ |
49.81 |
|
|
|
7.7 |
|
|
$ |
17,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards exercisable at December 31, 2006 |
|
|
224,844 |
|
|
$ |
34.33 |
|
|
|
5.6 |
|
|
$ |
10,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant date fair values of options granted during the years ended December
31, 2006, 2005 and 2004 were $39.24, $25.80 and $12.51, respectively. The total intrinsic value of
options exercised during the years ended December 31, 2006, 2005 and 2004 was $5.0 million, $10.5
million and $0.3 million, respectively. As of December 31, 2006 there was $10.0 million of total
unrecognized compensation cost related to nonvested stock options and SARs granted under the Stock
Plan which we expect to recognize over a weighted average period of 3.09 years.
68
3. Earnings (Loss) Per Share
A reconciliation of the numerators and the denominators of the basic and diluted per-share
computations follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2006 |
|
2005 |
|
2004 |
|
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) basic (numerator): |
|
$ |
706,847 |
|
|
$ |
260,337 |
|
|
$ |
(7,243 |
) |
Effect of dilutive potential shares |
|
|
|
|
|
|
|
|
|
|
|
|
Zero Coupon Debentures |
|
|
236 |
|
|
|
4,880 |
|
|
|
|
|
1.5% Debentures |
|
|
3,293 |
|
|
|
4,583 |
|
|
|
|
|
|
|
|
Net income (loss) including conversions
diluted (numerator): |
|
$ |
710,376 |
|
|
$ |
269,800 |
|
|
$ |
(7,243 |
) |
|
|
|
Weighted-average shares basic (denominator): |
|
|
129,129 |
|
|
|
128,690 |
|
|
|
129,021 |
|
Effect of dilutive potential shares |
|
|
|
|
|
|
|
|
|
|
|
|
Zero Coupon Debentures |
|
|
119 |
|
|
|
3,114 |
|
|
|
|
|
1.5% Debentures |
|
|
9,383 |
|
|
|
9,383 |
|
|
|
|
|
Stock options |
|
|
150 |
|
|
|
164 |
|
|
|
|
|
|
|
|
Weighted-average shares including conversions
diluted (denominator): |
|
|
138,781 |
|
|
|
141,351 |
|
|
|
129,021 |
|
|
|
|
Earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
5.47 |
|
|
$ |
2.02 |
|
|
$ |
(0.06 |
) |
|
|
|
Diluted |
|
$ |
5.12 |
|
|
$ |
1.91 |
|
|
$ |
(0.06 |
) |
|
|
|
Our computation of diluted EPS for the year ended December 31, 2006 excludes stock
options representing 82,257 shares of common stock and 56,916 SARs. The inclusion of such
potentially dilutive shares in the computation of diluted EPS would have been antidilutive for the
period.
The computation of diluted EPS for the year ended December 31, 2005 excludes stock options
representing 22,088 shares of common stock because the options exercise prices were higher than
the average market price per share of our common stock for the period.
The computation of diluted EPS for the year ended December 31, 2004 excludes approximately 9.4
million and 6.9 million potentially dilutive shares of common stock issuable upon conversion of our
1.5% Debentures and our Zero Coupon Debentures, respectively. Such shares were not included in the
EPS computations for 2004 because the inclusion of such potentially dilutive shares would have been
antidilutive. See Note 8 for a description of our long-term debt.
For the year ended December 31, 2004 we excluded stock options representing 291,447 shares of
common stock from the computation of diluted EPS because the options exercise prices were higher
than the average market price per share of our common stock for the period. We also excluded other
stock options representing 138,319 shares of common stock in 2004 with an average market price in
excess of their exercise prices from the computation of diluted EPS because there was a net loss
for the period.
69
4. Investments and Marketable Securities
We report our investments as current assets in our Consolidated Balance Sheets in Marketable
securities, representing the investment of cash available for current operations.
Our other investments in marketable securities are classified as available for sale and are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
|
|
Amortized |
|
Unrealized |
|
Market |
|
|
Cost |
|
Gain (Loss) |
|
Value |
|
|
|
|
|
(In thousands)
|
Debt securities issued by the U.S. Treasury
and other U.S. government agencies: |
|
|
|
|
|
|
|
|
|
|
|
|
Due within one year |
|
$ |
299,252 |
|
|
$ |
170 |
|
|
$ |
299,422 |
|
Mortgage-backed securities |
|
|
1,740 |
|
|
|
(3 |
) |
|
|
1,737 |
|
|
|
|
Total |
|
$ |
300,992 |
|
|
$ |
167 |
|
|
$ |
301,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
|
|
|
|
|
Unrealized |
|
Market |
|
|
Cost |
|
Gain |
|
Value |
|
|
|
|
|
(In thousands)
|
Debt securities issued by the U.S. Treasury
and other U.S. government agencies: |
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
$ |
2,267 |
|
|
$ |
14 |
|
|
$ |
2,281 |
|
|
|
|
In November 2005, the FASB issued FASB Staff Position, or FSP, No. 115-1 and 124-1, The
Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments, or FSP
115-1, which applies to debt and equity securities that are within the scope of SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities. FSP 115-1 replaces guidance
set forth in Emerging Issues Task Force Issue No. 03-01, The Meaning of Other-Than-Temporary
Impairment and its Application to Certain Investments and requires additional disclosure related
to factors considered in concluding that an impairment is not other-than-temporary. FSP 115-1 was
effective for reporting periods beginning after December 15, 2005, and we adopted this standard on
January 1, 2006. Our adoption of this standard had no significant effect on our consolidated
results of operations for the year ended December 31, 2006.
We considered the requirements of FSP 115-1 related to our unrealized loss position on our
mortgage-backed securities at December 31, 2006 and determined that it was not significant.
Proceeds from maturities and sales of marketable securities and gross realized gains and
losses are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2006 |
|
2005 |
|
2004 |
|
|
|
|
|
(In thousands)
|
Proceeds from maturities |
|
$ |
950,000 |
|
|
$ |
2,550,000 |
|
|
$ |
1,520,000 |
|
Proceeds from sales |
|
|
1,237,766 |
|
|
|
3,060,907 |
|
|
|
2,946,377 |
|
Gross realized gains |
|
|
188 |
|
|
|
220 |
|
|
|
2,781 |
|
Gross realized losses |
|
|
(219 |
) |
|
|
(1,400 |
) |
|
|
(2,527 |
) |
70
5. Derivative Financial Instruments
Forward Exchange Contracts
Our international operations expose us to foreign exchange risk, primarily associated with our
costs payable in foreign currencies for employee compensation and for purchases from foreign
suppliers. We utilize foreign exchange forward contracts to reduce our forward exchange risk. A
forward currency exchange contract obligates a contract holder to exchange predetermined amounts of
specified foreign currencies at specified foreign exchange rates on specified dates.
During 2006 and 2005, we entered into various foreign currency forward exchange contracts
which resulted in net realized gains totaling $7.3 million and $1.1 million, respectively. As of
December 31, 2006, we had foreign currency exchange contracts outstanding, which aggregated $22.5
million, that require us to purchase the equivalent of $5.7 million in Brazilian reais, $2.7
million in British pounds sterling, $10.3 million in Mexican pesos and $3.8 million in Norwegian
kroner at various times through June 2007.
These forward contracts are derivatives as defined by SFAS No. 133, Accounting for
Derivatives and Hedging Activities, or SFAS 133. SFAS 133 requires that each derivative be stated
in the balance sheet at its fair value with gains and losses reflected in the income statement
except that, to the extent the derivative qualifies for hedge accounting, the gains and losses are
reflected in income in the same period as offsetting losses and gains on the qualifying hedged
positions. The forward contracts we entered into in 2006 and 2005 did not qualify for hedge
accounting. In accordance with SFAS 133, we recorded net unrealized gains of $2.6 million and $0.4
million in our Consolidated Statements of Operations for the years ended December 31, 2006 and
2005, respectively, as Other income (expense) to adjust the carrying value of these derivative
financial instruments to their fair value. We have presented the $2.6 million and $0.4 million
fair value of these foreign currency forward exchange contracts at December 31, 2006 and 2005,
respectively, as Prepaid expenses and other in our Consolidated Balance Sheets.
Contingent Interest
Our 1.5% Debentures, of which an aggregate principal amount of $460.0 million were outstanding
at December 31, 2006, contain a contingent interest provision. The contingent interest component
is an embedded derivative as defined by SFAS 133 and accordingly must be split from the host
instrument and recorded at fair value on the balance sheet. The contingent interest component had
no fair value at issuance or at December 31, 2006 or at December 31, 2005.
6. Drilling and Other Property and Equipment
Cost and accumulated depreciation of drilling and other property and equipment are summarized
as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2006 |
|
2005 |
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
Drilling rigs and equipment |
|
$ |
3,896,585 |
|
|
$ |
3,639,239 |
|
Construction work-in-progress |
|
|
459,824 |
|
|
|
195,412 |
|
Land and buildings |
|
|
17,353 |
|
|
|
16,280 |
|
Office equipment and other |
|
|
27,132 |
|
|
|
24,351 |
|
|
|
|
Cost |
|
|
4,400,894 |
|
|
|
3,875,282 |
|
Less accumulated depreciation |
|
|
(1,772,441 |
) |
|
|
(1,573,262 |
) |
|
|
|
Drilling and other property and equipment, net |
|
$ |
2,628,453 |
|
|
$ |
2,302,020 |
|
|
|
|
Construction work-in-progress at December 31, 2006 consisted of $249.8 million, including
accrued capital expenditures of $41.4 million, related to the major upgrade of the Ocean Endeavor
to ultra-deepwater service and $176.1 million related to the construction of two new jack-up
drilling units, the Ocean Scepter and the Ocean Shield. The shipyard portion of the upgrade of the
Ocean Endeavor was complete at December 31, 2006 and we expect to relocate this rig from Singapore
to the U.S. where it is scheduled to operate under a four-year contract beginning in
71
mid-2007. We
anticipate that both the Ocean Scepter and Ocean Shield will be delivered during the first quarter
of 2008. Construction work-in-progress related to these projects was $195.4 million at December
31, 2005.
At December 31, 2006, construction work-in-progress also included $33.9 million related to the
major upgrade of the Ocean Monarch to ultra-deepwater service. We expect the project to be
completed during the fourth quarter of 2008 and to relocate this rig to the U.S. where it is
scheduled to operate under a four-year contract.
7. Accrued Liabilities
Accrued liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2006 |
|
2005 |
|
|
|
|
|
(In thousands)
|
Payroll and benefits |
|
$ |
42,496 |
|
|
$ |
27,265 |
|
Personal injury and other claims |
|
|
9,934 |
|
|
|
8,284 |
|
Interest payable |
|
|
11,823 |
|
|
|
12,384 |
|
Deferred revenue |
|
|
13,794 |
|
|
|
8,732 |
|
Customer prepayments |
|
|
93 |
|
|
|
21,390 |
|
Accrued project/upgrade expenses |
|
|
67,308 |
|
|
|
62,628 |
|
Hurricane-related expenses and deferred gains |
|
|
8,328 |
|
|
|
3,508 |
|
Other |
|
|
31,202 |
|
|
|
24,846 |
|
|
|
|
Total |
|
$ |
184,978 |
|
|
$ |
169,037 |
|
|
|
|
8. Long-Term Debt
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2006 |
|
2005 |
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
Zero Coupon Debentures (due 2020) |
|
$ |
5,302 |
|
|
$ |
18,720 |
|
1.5% Debentures (due 2031) |
|
|
459,967 |
|
|
|
459,987 |
|
5.15% Senior Notes (due 2014) |
|
|
249,513 |
|
|
|
249,462 |
|
4.875% Senior Notes (due 2015) |
|
|
249,528 |
|
|
|
249,485 |
|
|
|
|
Total |
|
$ |
964,310 |
|
|
$ |
977,654 |
|
|
|
|
Certain of our long-term debt payments may be accelerated due to rights that the holders
of our debt securities have to put the securities to us. The holders of our outstanding 1.5%
Debentures and Zero Coupon Debentures have the right to require us to purchase all or a portion of
their outstanding debentures on April 15, 2008 and June 6, 2010, respectively. See Zero Coupon
Debentures and 1.5% Debentures for further discussion of the rights that the holders of these
debentures have to put the securities to us.
72
The aggregate maturities of long-term debt for each of the five years subsequent to December
31, 2006, are as follows:
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
2007 |
|
$ |
|
|
2008 |
|
|
459,967 |
|
2009 |
|
|
|
|
2010 |
|
|
5,302 |
|
2011 |
|
|
|
|
Thereafter |
|
|
499,041 |
|
|
|
|
|
|
|
|
|
|
964,310 |
|
|
|
|
|
|
Less: Current maturities |
|
|
|
|
|
Total |
|
$ |
964,310 |
|
|
$285 Million Revolving Credit Facility.
In November 2006, we entered into a $285 million syndicated, 5-year senior unsecured revolving
credit facility, or Credit Facility, for general corporate purposes, including loans and
performance or standby letters of credit.
Loans under the Credit Facility bear interest at our option at a rate per annum equal to (i)
the higher of the prime rate or the federal funds rate plus 0.5% or (ii) the London Interbank
Offered Rate, or LIBOR, plus an applicable margin, varying from 0.20% to 0.525%, based on our
current credit ratings. Under our Credit Facility, we also pay, based on our current credit
ratings, and as applicable, other customary fees, including, but not limited to, a facility fee on
the total commitment under the Credit Facility regardless of usage and a utilization fee that
applies if the aggregate of all loans outstanding under the Credit Facility equals or exceeds 50%
of the total commitment under the facility. Changes in credit ratings could lower or raise the
fees that we pay under the Credit Facility.
The Credit Facility contains customary covenants, including, but not limited to, the
maintenance of a ratio of consolidated indebtedness to total capitalization, as defined in the
Credit Facility, of not more than 60% at the end of each fiscal quarter and limitations on liens,
mergers, consolidations, liquidation and dissolution, changes in lines of business, swap
agreements, transactions with affiliates and subsidiary indebtedness.
Based on our current credit ratings at December 31, 2006, the applicable margin on LIBOR loans
would have been 0.27%. As of December 31, 2006, there were no amounts outstanding under the Credit
Facility.
4.875% Senior Notes
On June 14, 2005, we issued $250.0 million aggregate principal amount of 4.875% Senior Notes
Due July 1, 2015, or 4.875% Senior Notes, at an offering price of 99.785% of the principal amount
resulting in net proceeds to us of $247.6 million, exclusive of accrued issuance costs.
Our 4.875% Senior Notes bear interest at 4.875% per year, payable semiannually in arrears on
January 1 and July 1 of each year and mature on July 1, 2015. The 4.875% Senior Notes are
unsecured and unsubordinated obligations of Diamond Offshore Drilling, Inc., and they rank equal in
right of payment to our existing and future unsecured and unsubordinated indebtedness, although the
4.875% Senior Notes will be effectively subordinated to all existing and future obligations of our
subsidiaries. We have the right to redeem all or a portion of the 4.875% Senior Notes for cash at
any time or from time to time on at least 15 days but not more than 60 days prior written notice,
at the redemption price specified in the governing indenture plus accrued and unpaid interest to
the date of redemption.
73
5.15% Senior Notes
On August 27, 2004, we issued $250.0 million aggregate principal amount of 5.15% Senior Notes
Due September 1, 2014, or 5.15% Senior Notes, at an offering price of 99.759% of the principal
amount resulting in net proceeds to us of $247.6 million.
Our 5.15% Senior Notes bear interest at 5.15% per year, payable semiannually in arrears on
March 1 and September 1 of each year and mature on September 1, 2014. The 5.15% Senior Notes are
unsecured and unsubordinated obligations of Diamond Offshore Drilling, Inc., and they rank equal in
right of payment to our existing and future unsecured and unsubordinated indebtedness, although the
5.15% Senior Notes will be effectively subordinated to all existing and future obligations of our
subsidiaries. We have the right to redeem all or a portion of the 5.15% Senior Notes for cash at
any time or from time to time on at least 15 days but not more than 60 days prior written notice,
at the redemption price specified in the governing indenture plus accrued and unpaid interest to
the date of redemption.
Zero Coupon Debentures
We issued our Zero Coupon Debentures on June 6, 2000 at a price of $499.60 per $1,000
principal amount at maturity, which represents a yield to maturity of 3.50% per year. The Zero
Coupon Debentures mature on June 6, 2020. We will not pay interest prior to maturity unless we
elect to convert the Zero Coupon Debentures to interest-bearing debentures upon the occurrence of
certain tax events. The Zero Coupon Debentures are convertible at the option of the holder at any
time prior to maturity, unless previously redeemed, into our common stock at a fixed conversion
rate of 8.6075 shares of common stock per $1,000 principal amount at maturity of Zero Coupon
Debentures, subject to adjustments in certain events. In addition, holders may require us to
purchase, for cash, all or a portion of their Zero Coupon Debentures upon a change in control (as
defined in the governing indenture) for a purchase price equal to the accreted value through the
date of repurchase. The Zero Coupon Debentures are senior unsecured obligations of Diamond
Offshore Drilling, Inc.
We also have the right to redeem the Zero Coupon Debentures, in whole or in part, for a price
equal to the issuance price plus accrued original issue discount through the date of redemption.
Holders have the right to require us to repurchase the Zero Coupon Debentures on June 6, 2010 and
June 6, 2015, at the accreted value through the date of repurchase. We may pay any such repurchase
price with either cash or shares of our common stock or a combination of cash and shares of common
stock.
During 2006, holders of $13.7 million accreted value, or $22.4 million in aggregate principal
amount at maturity, of our Zero Coupon Debentures elected to convert their outstanding debentures
into shares of our common stock. We issued 193,147 shares of our common stock upon conversion of
these debentures.
On June 7, 2005, we repurchased $460.0 million accreted value, or $774.1 million in aggregate
principal amount at maturity, of our Zero Coupon Debentures at a purchase price of $594.25 per
$1,000 principal amount at maturity, which represented 96% of our then outstanding Zero Coupon
Debentures. Additionally, in connection with the June 2005 repurchase, we expensed $6.9 million in
debt issuance costs associated with the retired debentures, which we have included in interest
expense in our Consolidated Statements of Operations for the year ended December 31, 2005.
As of December 31, 2006, the aggregate accreted value of our outstanding Zero Coupon
Debentures was $5.3 million, which is classified as long-term debt in our Consolidated Balance
Sheets. The aggregate principal amount at maturity of those Zero Coupon Debentures would be $8.4
million assuming no additional conversions or redemptions occur prior to the maturity date.
See Note 18 for a discussion of conversions of our long-term debt subsequent to December 31,
2006.
1.5% Debentures
On April 11, 2001, we issued $460.0 million principal amount of 1.5% Debentures, which are due
April 15, 2031. The 1.5% Debentures are convertible into shares of our common stock at an initial
conversion rate of 20.3978 shares per $1,000 principal amount of the 1.5% Debentures, or $49.02 per
share, subject to adjustment in certain
74
circumstances. Upon conversion, we have the right to
deliver cash in lieu of shares of our common stock. The 1.5% Debentures are senior unsecured
obligations of Diamond Offshore Drilling, Inc.
We pay interest of 1.5% per year on the outstanding principal amount of the 1.5% Debentures,
semiannually in arrears on April 15 and October 15 of each year. In addition we will pay
contingent interest to holders of our 1.5% Debentures during any six-month period commencing after
April 14, 2008, if the average market price of a 1.5% Debenture for a measurement period preceding
such six-month period equals 120% or more of the principal amount of such 1.5% Debenture and we pay
a regular cash dividend during such six-month period. The contingent interest payable per $1,000
principal amount of 1.5% Debentures, in respect of any quarterly period, will equal 50% of regular
cash dividends we pay per share on our common stock during that quarterly period multiplied by the
conversion rate. This contingent interest component is an embedded derivative, which had no fair
value at issuance or at December 31, 2005 or December 31, 2004.
Holders may require us to purchase all or a portion of their 1.5% Debentures on April 15,
2008, at a price equal to 100% of the principal amount of the 1.5% Debentures to be purchased plus
accrued and unpaid interest. We may choose to pay the purchase price in cash or shares of our
common stock or a combination of cash and common stock. In addition, holders may require us to
purchase, for cash, all or a portion of their 1.5% Debentures upon a change in control (as defined
in the governing indenture) for a purchase price equal to 100% of the principal amount plus accrued
and unpaid interest. Additionally, we have the option to redeem all or a portion of the 1.5%
Debentures at any time on or after April 15, 2008, at a price equal to 100% of the principal amount
plus accrued and unpaid interest.
During 2006 and 2005, the holders of $20,000 and $13,000, respectively, in principal amount of
our 1.5% Debentures elected to convert their outstanding debentures into shares of our common
stock, resulting in the issuance of 404 shares and 264 shares of our common stock in 2006 and 2005,
respectively.
See Note 18 for a discussion of conversions of our long-term debt subsequent to December 31,
2006.
9. Other Comprehensive Income (Loss)
The income tax effects allocated to the components of our other comprehensive income (loss)
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006 |
|
|
Before Tax |
|
Tax Effect |
|
Net-of-Tax |
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on investments: |
|
|
|
|
|
|
|
|
|
|
|
|
Gain arising during 2006 |
|
$ |
249 |
|
|
$ |
(87 |
) |
|
$ |
162 |
|
Reclassification adjustment |
|
|
(95 |
) |
|
|
33 |
|
|
|
(62 |
) |
|
|
|
Net unrealized gain |
|
|
154 |
|
|
|
(54 |
) |
|
|
100 |
|
|
|
|
Other comprehensive income before
adoption of SFAS 158 |
|
|
154 |
|
|
|
(54 |
) |
|
|
100 |
|
Adjustment to initially apply SFAS 158 |
|
|
(6,963 |
) |
|
|
2,437 |
|
|
|
(4,526 |
) |
|
|
|
Other comprehensive (loss) |
|
$ |
(6,809 |
) |
|
$ |
2,383 |
|
|
$ |
(4,426 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005 |
|
|
Before Tax |
|
Tax Effect |
|
Net-of-Tax |
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal of cumulative foreign
currency translation loss |
|
$ |
3,600 |
|
|
$ |
(1,523 |
) |
|
$ |
2,077 |
|
Unrealized gain (loss) on investments: |
|
|
|
|
|
|
|
|
|
|
|
|
Gain arising during 2005 |
|
|
14 |
|
|
|
(5 |
) |
|
|
9 |
|
Reclassification adjustment |
|
|
(137 |
) |
|
|
48 |
|
|
|
(89 |
) |
|
|
|
Net unrealized loss |
|
|
(123 |
) |
|
|
43 |
|
|
|
(80 |
) |
|
|
|
Other comprehensive income |
|
$ |
3,477 |
|
|
$ |
(1,480 |
) |
|
$ |
1,997 |
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2004 |
|
|
Before Tax |
|
Tax Effect |
|
Net-of-Tax |
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain |
|
$ |
2,346 |
|
|
$ |
(697 |
) |
|
$ |
1,649 |
|
Unrealized gain (loss) on investments: |
|
|
|
|
|
|
|
|
|
|
|
|
Gain arising during 2004 |
|
|
818 |
|
|
|
(286 |
) |
|
|
532 |
|
Reclassification adjustment |
|
|
(80 |
) |
|
|
28 |
|
|
|
(52 |
) |
|
|
|
Net unrealized gain |
|
|
738 |
|
|
|
(258 |
) |
|
|
480 |
|
|
|
|
Other comprehensive income |
|
$ |
3,084 |
|
|
$ |
(955 |
) |
|
$ |
2,129 |
|
|
|
|
The components of our accumulated other comprehensive income (loss) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
Adjustment to |
|
|
|
|
|
|
Currency |
|
Initially Apply |
|
Unrealized Gain |
|
Total Other |
|
|
Translation |
|
SFAS 158, Net of |
|
(Loss) on |
|
Comprehensive |
|
|
Adjustments |
|
Tax |
|
Investments |
|
Income (Loss) |
|
|
|
Balance at January 1, 2004 |
|
$ |
(3,726 |
) |
|
$ |
|
|
|
$ |
(391 |
) |
|
$ |
(4,117 |
) |
Other comprehensive gain |
|
|
1,649 |
|
|
|
|
|
|
|
480 |
|
|
|
2,129 |
|
|
|
|
Balance at December 31, 2004 |
|
|
(2,077 |
) |
|
|
|
|
|
|
89 |
|
|
|
(1,988 |
) |
Other comprehensive gain |
|
|
2,077 |
|
|
|
|
|
|
|
(80 |
) |
|
|
1,997 |
|
|
|
|
Balance at December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
9 |
|
|
|
9 |
|
Other comprehensive loss |
|
|
|
|
|
|
(4,526 |
) |
|
|
100 |
|
|
|
(4,426 |
) |
|
|
|
Balance at December 31, 2006 |
|
$ |
|
|
|
$ |
(4,526 |
) |
|
$ |
109 |
|
|
$ |
(4,417 |
) |
|
|
|
10. Commitments and Contingencies
Various claims have been filed against us in the ordinary course of business, including claims
by offshore workers alleging personal injuries. In accordance with SFAS No. 5, Accounting for
Contingencies, we have assessed each claim or exposure to determine the likelihood that the
resolution of the matter might ultimately result in an adverse effect on our financial condition,
results of operations or cash flows. When we determine that an unfavorable resolution of a matter
is probable and such amount of loss can be determined, we record a reserve for the estimated loss
at the time that both of these criteria are met. Our management believes that we have established
adequate reserves for any liabilities that may reasonably be expected to result from these claims.
Litigation. We are a defendant in a lawsuit filed in January 2005 in the U.S. District Court
for the Eastern District of Louisiana on behalf of Total E&P USA, Inc. and several oil companies
alleging that our semisubmersible rig, the Ocean America, damaged a natural gas pipeline in the
Gulf of Mexico during Hurricane Ivan. The plaintiffs seek damages from us including, but not
limited to, loss of revenue, that are currently estimated to be in excess of $100 million, together
with interest, attorneys fees and costs. We deny any liability for plaintiffs alleged loss and
do not believe that ultimate liability, if any, resulting from this litigation will have a material
adverse effect on our financial condition, results of operations or cash flows.
We are one of several unrelated defendants in a lawsuit filed in the Circuit Courts of the
State of Mississippi alleging that defendants manufactured, distributed or utilized drilling mud
containing asbestos and, in our case, allowed such drilling mud to have been utilized aboard our
offshore drilling rigs. The plaintiffs seek, among other things, an award of unspecified
compensatory and punitive damages. We expect to receive complete defense and indemnity from Murphy
Exploration & Production Company pursuant to the terms of our 1992 asset purchase agreement with
them. We are unable to estimate our potential exposure, if any, to these lawsuits at this time but
do not believe that ultimate liability, if any, resulting from this litigation will have a material
adverse effect on our financial condition, results of operations or cash flows.
Various other claims have been filed against us in the ordinary course of business. In the
opinion of our management, no pending or known threatened claims, actions or proceedings against us
are expected to have a material adverse effect on our consolidated financial position, results of
operations or cash flows.
76
Other. Our operations in Brazil have exposed us to various claims and assessments related to
our personnel, customs duties and municipal taxes, among other things, that have arisen in the
ordinary course of business. At
December 31, 2006, our loss reserves related to our Brazilian operations aggregated $14.2 million,
of which $0.5 million and $13.7 million were recorded in Accrued liabilities and Other
liabilities, respectively, in our Consolidated Balance Sheets. Loss reserves related to our
Brazilian operations totaled $14.1 million at December 31, 2005, of which $0.8 million was recorded
in Accrued liabilities and $13.3 million was recorded in Other liabilities in our Consolidated
Balance Sheets.
We intend to defend these matters vigorously; however, we cannot predict with certainty the
outcome or effect of any litigation matters specifically described above or any other pending
litigation or claims. There can be no assurance as to the ultimate outcome of these lawsuits.
Personal Injury Claims. Effective May 1, 2006, in conjunction with our insurance policy
renewals, we increased our deductible for liability coverage for personal injury claims, which
primarily result from Jones Act liability in the Gulf of Mexico, to $5.0 million per occurrence,
with no aggregate deductible. The Jones Act is a federal law that permits seamen to seek
compensation for certain injuries during the course of their employment on a vessel and governs the
liability of vessel operators and marine employers for the work-related injury or death of an
employee. Prior to this renewal, our uninsured retention of liability for personal injury claims
was $0.5 million per claim with an additional aggregate annual deductible of $1.5 million. Our
in-house claims department estimates the amount of our liability for our retention. This
department establishes a reserve for each of our personal injury claims by evaluating the existing
facts and circumstances of each claim and comparing the circumstances of each claim to historical
experiences with similar past personal injury claims. Our claims department also estimates our
liability for personal injuries that are incurred but not reported by using historical data. From
time to time, we may also engage experts to assist us in estimating our reserve for such personal
injury claims. In 2006, we engaged an actuary to estimate our liability for personal injury claims
based on our historical losses and utilizing various actuarial models. We reduced our reserve for
personal injury claims by $8.0 million during the fourth quarter of 2006 based on an actuarial
review from which we determined that our aggregate reserve for personal injury claims should be
$35.0 million at December 31, 2006.
At December 31, 2006, our estimated liability for personal injury claims was $35.0 million, of
which $9.9 million and $25.1 million were recorded in Accrued liabilities and Other
liabilities, respectively, in our Consolidated Balance Sheets. At December 31, 2005, our
estimated liability for personal injury claims was $38.9 million, of which $8.3 million and $30.6
million were recorded in Accrued liabilities and Other liabilities, respectively, in our
Consolidated Balance Sheets. The eventual settlement or adjudication of these claims could differ
materially from our estimated amounts due to uncertainties such as:
|
|
|
the severity of personal injuries claimed; |
|
|
|
|
significant changes in the volume of personal injury claims; |
|
|
|
|
the unpredictability of legal jurisdictions where the claims will ultimately be litigated; |
|
|
|
|
inconsistent court decisions; and |
|
|
|
|
the risks and lack of predictability inherent in personal injury litigation. |
Purchase Obligations. As of December 31, 2006, we had purchase obligations aggregating
approximately $456 million related to the major upgrades of the Ocean Endeavor and Ocean Monarch
and construction of two new jack-up rigs, the Ocean Scepter and Ocean Shield. We anticipate that
expenditures related to these shipyard projects will be approximately $263 million and $193 million
in 2007 and 2008, respectively. However, the actual timing of these expenditures will vary based
on the completion of various construction milestones, which are beyond our control.
We had no other purchase obligations for major rig upgrades or any other significant
obligations at December 31, 2006 and 2005, except for those related to our direct rig operations,
which arise during the normal course of business.
Operating Leases. We lease office facilities and equipment under operating leases, which
expire at various times through the year 2009. Total rent expense amounted to $3.8 million, $3.1
million and $2.9 million for the years ended December 31, 2006, 2005 and 2004, respectively.
Future minimum rental payments under leases are
77
approximately $2.4 million, $0.7 million and $0.1
million for the years ending December 31, 2007, 2008 and 2009, respectively. There are no minimum
future rental payments under leases after 2009.
Letters of Credit and Other. We are contingently liable as of December 31, 2006 in the amount
of $122.0 million under certain performance, bid, supersedeas and custom bonds and letters of
credit. We purchased three of these performance bonds totaling $73.2 million from a related party
after obtaining competitive quotes. Agreements relating to approximately $107.3 million of
performance bonds can require collateral at any time. As of December 31, 2006 we had not been
required to make any collateral deposits with respect to these agreements. The remaining
agreements cannot require collateral except in events of default. On our behalf, banks have issued
letters of credit securing certain of these bonds.
11. Financial Instruments
Concentrations of Credit and Market Risk
Financial instruments which potentially subject us to significant concentrations of credit or
market risk consist primarily of periodic temporary investments of excess cash, trade accounts
receivable and investments in debt securities, including mortgage-backed securities. We place our
excess cash investments in high quality short-term money market instruments through several
financial institutions. At times, such investments may be in excess of the insurable limit. We
periodically evaluate the relative credit standing of these financial institutions as part of our
investment strategy.
Concentrations of credit risk with respect to our trade accounts receivable are limited
primarily due to the entities comprising our customer base. Since the market for our services is
the offshore oil and gas industry, this customer base consists primarily of major independent oil
and gas producers and government-owned oil companies. We provide allowances for potential credit
losses when necessary. No such allowances were deemed necessary for the years presented and,
historically, we have not experienced significant losses on our trade receivables.
All of our investments in debt securities are U.S. government securities or U.S.
government-backed with minimal credit risk. However, we are exposed to market risk due to price
volatility associated with interest rate fluctuations.
Fair Values
The amounts reported in our Consolidated Balance Sheets for cash and cash equivalents,
marketable securities, accounts receivable, and accounts payable approximate fair value. Fair
values and related carrying values of our debt instruments are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2006 |
|
2005 |
|
|
Fair Value |
|
Carrying Value |
|
Fair Value |
|
Carrying Value |
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zero Coupon Debentures |
|
$ |
5.0 |
|
|
$ |
5.3 |
|
|
$ |
19.6 |
|
|
$ |
18.7 |
|
1.5% Debentures |
|
|
749.7 |
|
|
|
460.0 |
|
|
|
648.6 |
|
|
|
460.0 |
|
4.875% Senior Notes |
|
|
234.9 |
|
|
|
249.5 |
|
|
|
242.9 |
|
|
|
249.5 |
|
5.15% Senior Notes |
|
|
242.0 |
|
|
|
249.5 |
|
|
|
248.9 |
|
|
|
249.5 |
|
We have estimated the fair value amounts by using appropriate valuation methodologies and
information available to management as of December 31, 2006 and 2005, respectively. Considerable
judgment is required in developing these estimates, and accordingly, no assurance can be given that
the estimated values are indicative of the amounts that would be realized in a free market
exchange. The following methods and assumptions were used to estimate the fair value of each class
of financial instrument for which it was practicable to estimate that value:
|
|
|
Cash and cash equivalents The carrying amounts approximate fair value because of
the short maturity of these instruments. |
78
|
|
|
Marketable securities The fair values of the debt securities, including
mortgage-backed securities, available for sale were based on the quoted closing market
prices on December 31, 2006 and 2005, respectively. |
|
|
|
|
Accounts receivable and accounts payable The carrying amounts approximate fair
value based on the nature of the instruments. |
|
|
|
|
Long-term debt The fair value of our Zero Coupon Debentures, 1.5% Debentures,
4.875% Senior Notes and 5.15% Senior Notes was based on the quoted closing market price
on December 31, 2006 and 2005, respectively, from brokers of these instruments. |
12. Related-Party Transactions
Transactions with Loews. We are party to a services agreement with Loews, or the Services
Agreement, pursuant to which Loews performs certain administrative and technical services on our
behalf. Such services include personnel, telecommunications, purchasing, internal auditing,
accounting, data processing and cash management services, in addition to advice and assistance with
respect to preparation of tax returns and obtaining insurance. Under the Services Agreement, we are
required to reimburse Loews for (i) allocated personnel costs (such as salaries, employee benefits
and payroll taxes) of the Loews personnel actually providing such services and (ii) all
out-of-pocket expenses related to the provision of such services. The Services Agreement may be
terminated at our option upon 30 days notice to Loews and at the option of Loews upon six months
notice to us. In addition, we have agreed to indemnify Loews for all claims and damages arising
from the provision of services by Loews under the Services Agreement unless due to the gross
negligence or willful misconduct of Loews. We were charged $0.4 million, $0.4 million and $0.3
million by Loews for these support functions during the years ended December 31, 2006, 2005 and
2004, respectively.
In addition, during 2006 we purchased three performance bonds in support of our drilling
operations offshore Mexico totaling $73.2 million from a majority-owned subsidiary of Loews after
obtaining competitive quotes. Premiums and fees associated with these bonds totaled $1.0 million
in 2006.
Transactions with Other Related-Parties. During 2006, we hired marine vessels and helicopter
transportation services at the prevailing market rate from subsidiaries of SEACOR Holdings Inc.
The Chairman of the Board of Directors, President and Chief Executive Officer of SEACOR Holdings
Inc. is also a member of our Board of Directors. For the year ended December 31, 2006, we paid
$0.7 million for the hire of such vessels and such services.
During the years ended December 31, 2006, 2005 and 2004 we made payments of $0.6 million, $1.2
million and $0.9 million, respectively, to Ernst & Young LLP for tax and other consulting services.
The wife of our President and Chief Operating Officer is an audit partner at this firm.
79
13. Income Taxes
The components of income tax expense (benefit) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2006 |
|
2005 |
|
2004 |
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. current |
|
$ |
230,914 |
|
|
$ |
28,106 |
|
|
$ |
(2,753 |
) |
Non-U.S. current |
|
|
27,961 |
|
|
|
2,793 |
|
|
|
5,737 |
|
|
|
|
Total current |
|
|
258,875 |
|
|
|
30,899 |
|
|
|
2,984 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. deferred |
|
|
5,006 |
|
|
|
63,408 |
|
|
|
(3,611 |
) |
U.S. deferred to reduce goodwill |
|
|
|
|
|
|
|
|
|
|
11,099 |
|
Non-U.S. deferred |
|
|
(4,396 |
) |
|
|
1,751 |
|
|
|
(6,762 |
) |
|
|
|
Total deferred |
|
|
610 |
|
|
|
65,159 |
|
|
|
726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
259,485 |
|
|
$ |
96,058 |
|
|
$ |
3,710 |
|
|
|
|
The difference between actual income tax expense and the tax provision computed by
applying the statutory federal income tax rate to income before taxes is attributable to the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2006 |
|
2005 |
|
2004 |
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense
(benefit): |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
$ |
765,583 |
|
|
$ |
324,390 |
|
|
$ |
16,770 |
|
Non U.S. |
|
|
200,749 |
|
|
|
32,005 |
|
|
|
(20,303 |
) |
|
|
|
Worldwide |
|
$ |
966,332 |
|
|
$ |
356,395 |
|
|
$ |
(3,533 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected income tax expense (benefit) at
federal statutory rate |
|
$ |
338,216 |
|
|
$ |
124,738 |
|
|
$ |
(1,237 |
) |
Foreign earnings indefinitely reinvested |
|
|
(60,624 |
) |
|
|
529 |
|
|
|
11,988 |
|
Foreign taxes domestic companies |
|
|
15,200 |
|
|
|
1,806 |
|
|
|
1,652 |
|
Foreign tax credits |
|
|
(15,087 |
) |
|
|
(1,811 |
) |
|
|
|
|
Valuation allowance foreign tax credits |
|
|
(831 |
) |
|
|
(9,574 |
) |
|
|
104 |
|
Reduction of deferred tax liability related
to Arethusa goodwill deduction |
|
|
(8,850 |
) |
|
|
(8,850 |
) |
|
|
(5,175 |
) |
Reduction of contingent tax liability
related to Arethusa goodwill deduction |
|
|
|
|
|
|
(8,850 |
) |
|
|
|
|
Domestic production activities deduction |
|
|
(8,339 |
) |
|
|
|
|
|
|
|
|
Reduction of deferred tax liability related
to the Ocean Alliance Lease-Leaseback |
|
|
|
|
|
|
|
|
|
|
(4,538 |
) |
East Timor Indonesia tax settlement |
|
|
|
|
|
|
(4,365 |
) |
|
|
|
|
Revision of estimated tax balance |
|
|
1,039 |
|
|
|
843 |
|
|
|
2,507 |
|
IRS audit adjustments |
|
|
|
|
|
|
1,931 |
|
|
|
|
|
Amortization of deferred tax liability
related to transfer of drilling rigs to
different taxing jurisdictions |
|
|
(1,580 |
) |
|
|
(1,763 |
) |
|
|
(1,748 |
) |
Other |
|
|
341 |
|
|
|
1,424 |
|
|
|
157 |
|
|
|
|
Income tax expense |
|
$ |
259,485 |
|
|
$ |
96,058 |
|
|
$ |
3,710 |
|
|
|
|
80
Significant components of our deferred income tax assets and liabilities are as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2006 |
|
2005 |
|
|
|
|
|
(In thousands)
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
2,761 |
|
|
$ |
3,692 |
|
Capital loss carryback/carryforward |
|
|
412 |
|
|
|
|
|
Goodwill |
|
|
13,643 |
|
|
|
16,791 |
|
Workers compensation and other current accruals (1) |
|
|
14,733 |
|
|
|
14,652 |
|
Foreign tax credits |
|
|
|
|
|
|
15,345 |
|
Nonqualified stock options. |
|
|
1,044 |
|
|
|
|
|
Other |
|
|
7,269 |
|
|
|
5,898 |
|
|
|
|
Total deferred tax assets |
|
|
39,862 |
|
|
|
56,378 |
|
Valuation allowance for foreign tax credits |
|
|
|
|
|
|
(831 |
) |
|
|
|
Net deferred tax assets |
|
|
39,862 |
|
|
|
55,547 |
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
(418,703 |
) |
|
|
(444,086 |
) |
Contingent interest |
|
|
(53,399 |
) |
|
|
(42,593 |
) |
Non-U.S. deferred taxes |
|
|
(3,128 |
) |
|
|
(7,524 |
) |
Other |
|
|
(3,253 |
) |
|
|
(1,738 |
) |
|
|
|
Total deferred tax liabilities |
|
|
(478,483 |
) |
|
|
(495,941 |
) |
|
|
|
Net deferred tax liability |
|
$ |
(438,621 |
) |
|
$ |
(440,394 |
) |
|
|
|
|
|
|
(1) |
|
$9.6 million and $4.7 million reflected in Prepaid expenses and other in
our Consolidated Balance Sheets at December 31, 2006 and 2005, respectively. |
Certain of our international rigs are owned and operated, directly or indirectly, by
Diamond Offshore International Limited, a Cayman Islands subsidiary which we wholly own. We do
not intend to remit earnings from this subsidiary to the U.S. and we plan to indefinitely
reinvest these earnings internationally. Consequently, no U.S. taxes have been provided on
earnings and no U.S. tax benefits have been recognized on losses generated by this subsidiary.
We have certain other non-U.S. subsidiaries for which U.S. taxes have been provided to the
extent a U.S. tax liability could arise upon remittance of earnings from the non-U.S.
subsidiaries. As of December 31, 2006, we provided $0.3 million of U.S. taxes attributable to
undistributed earnings of the non-U.S. subsidiaries. On actual remittance, certain countries
may impose withholding taxes that, subject to certain limitations, are then available for use as
tax credits against a U.S. tax liability, if any.
During 2006 we were able to utilize all of the foreign tax credits available to us and we
had no foreign tax credit carryforwards as of December 31, 2006. At the end of 2005, we had a
valuation allowance of $0.8 million for certain of our foreign tax credit carryforwards which
was reversed during 2006 as the valuation allowance was no longer necessary.
As of December 31, 2006, we had net operating loss, or NOL, carryforwards of approximately
$7.9 million available to offset future taxable income. The NOL carryforwards consist entirely
of losses that were acquired in our merger with Arethusa (Off-Shore) Limited, or Arethusa, in
1996. The utilization of the NOL carryforwards acquired in the Arethusa merger is limited
pursuant to Section 382 of the Internal Revenue Code of 1986, as amended, or the Code. We expect
to fully utilize all of the NOL carryforwards in future tax years. During 2006, we were able to
utilize approximately $2.7 million of the NOL carryforwards.
81
We have recorded a deferred tax asset of $2.8 million for the benefit of the NOL
carryforwards. The NOL carryforwards will expire as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Benefit of |
|
|
Net Operating |
|
Net Operating |
Year |
|
Losses |
|
Losses |
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
5.5 |
|
|
|
1.9 |
|
2010 |
|
|
2.4 |
|
|
|
0.9 |
|
|
|
|
Total |
|
$ |
7.9 |
|
|
$ |
2.8 |
|
|
|
|
During 2006 we recorded an $8.3 million tax benefit related to the deduction allowable under
Code Section 199 for domestic production activities. During the second quarter of 2006, the
Treasury Department and Internal Revenue Service issued guidelines regarding the deduction
allowable under Code Section 199, which was previously believed to be unavailable to the drilling
industry with respect to qualified production activities income. The $8.3 million tax benefit
recognized included $2.2 million related to the year 2005.
During 2005, we reversed a previously established reserve of $8.9 million ($1.7 million
included with Current Taxes Payable and $7.2 million in Other Liabilities in our Consolidated
Balance Sheets) associated with exposure related to the disallowance of goodwill deductibility
associated with a 1996 acquisition which we believed was no longer necessary.
During 2005, we settled an income tax dispute in East Timor (formerly part of Indonesia) for
approximately $0.2 million. At December 31, 2004, our books reflected an accrued liability of $4.4
million related to potential East Timor and Indonesian income tax liabilities covering the period
1992 through 2000. Subsequent to the tax settlement, we determined that the accrual was no longer
necessary and wrote off the accrued liability in the fourth quarter of 2005.
14. Employee Benefit Plans
Defined Contribution Plans
We maintain defined contribution retirement plans for our U.S., U.K. and third-country
national, or TCN, employees. The plan for our U.S. employees, or the 401k Plan, is designed to
qualify under Section 401(k) of the Code. Under the 401k Plan, each participant may elect to defer
taxation on a portion of his or her eligible earnings, as defined by the 401k Plan, by directing
his or her employer to withhold a percentage of such earnings. A participating employee may also
elect to make after-tax contributions to the 401k Plan. During the three years ended December 31,
2006 we contributed 3.75% of a participants defined compensation and matched 25% of the first 6%
of each employees compensation contributed to the 401k Plan. Participants are fully vested
immediately upon enrollment in the 401k Plan. For the years ended December 31, 2006, 2005 and
2004, our provision for contributions was $9.0 million, $7.3 million and $6.9 million,
respectively.
The defined contribution retirement plan for our U.K. employees, or U.K. Plan, provides that
we make annual contributions in an amount equal to the employees contributions, generally up to a
maximum of 5.25% of the employees defined compensation per year for employees working in the U.K.
sector of the North Sea and up to a maximum of 9% of the employees defined compensation per year
for U.K. nationals working in the Norwegian sector of the North Sea. Our provision for
contributions was $1.2 million, $0.8 million and $0.7 million for the years ended December 31,
2006, 2005 and 2004, respectively.
The defined contribution retirement plan for our TCN employees, or TCN Plan, is similar to the
401k Plan. During the three years ended December 31, 2006 we contributed 3.75% of a participants
defined compensation and matched 25% of the first 6% of each employees compensation contributed to
the TCN Plan. Our provision for contributions was $0.9 million, $0.8 million and $0.7 million for
the years ended December 31, 2006, 2005 and 2004, respectively.
82
Deferred Compensation and Supplemental Executive Retirement Plan
We established our Deferred Compensation and Supplemental Executive Retirement Plan, or
Supplemental Plan, in December 1996. Participants in the Supplemental Plan are a select group of
our management or other highly compensated employees. During the three years ended December 31,
2006 we contributed to the Supplemental Plan any portion of the 3.75% base salary contribution and the matching
contribution under our 401k Plan that could not be contributed to that plan because of limitations
within the Code. The Supplemental Plan also provides that participants may defer up to 10% of
their base compensation and/or up to 100% of any performance bonus. Each participant is fully
vested in all amounts paid into the Supplemental Plan. Our provision for contributions for the
years ended December 31, 2006, 2005 and 2004 was not material.
Pension Plan
The defined benefit pension plan established by Arethusa effective October 1, 1992 was frozen
on April 30, 1996. At that date all participants were deemed fully vested in the plan, which
covered substantially all U.S. citizens and U.S. permanent residents who were employed by Arethusa.
Benefits are calculated and paid based on an employees years of credited service and average
compensation at the date the plan was frozen using an excess benefit formula integrated with social
security covered compensation. As a result of freezing the plan, no service cost has been accrued
for the years presented.
Pension costs are determined actuarially and at a minimum funded as required by the Code.
During 2005 we made a voluntary contribution to the plan of $0.2 million. During the fourth
quarter of 2006 we began the process of terminating the plan and have entered into a letter
agreement with an insurance company to transfer the responsibility for making payments of plan
benefits to the insurance company. Under the terms of the agreement, all of the assets of the plan
were transferred to the insurance company along with our additional payment of approximately $0.3
million. We are seeking Pension Benefit Guarantee Corporation, or PBGC, approval to terminate the
plan which we expect to obtain in the second quarter of 2007. Once termination has been approved
by the PBGC we will enter into an irrevocable contract with the insurance company. The insurance
company will issue their annuity certificates to the plan participants and we will no longer have
any benefit liability under the plan.
During the fourth quarter of 2006 we adopted the provision of SFAS 158 requiring that we
recognize the funded status of our benefit plan. We did not adopt the requirement under SFAS 158
to measure our plan assets and benefit obligations as of December 31, our fiscal year-end, as this
is not required until years ending after December 15, 2008. We expect our plan to be terminated in
the second quarter of 2007 and we therefore continued to use a September 30 measurement date for
the plan.
The incremental effect of applying SFAS 158 on individual line items in our Consolidated
Balance Sheets at December 31, 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before |
|
|
|
|
|
After |
|
|
Application of |
|
|
|
|
|
Application of |
|
|
SFAS 158 |
|
Adjustments |
|
SFAS 158 |
|
|
|
|
|
(In thousands)
|
Other assets prepaid
benefit cost |
|
$ |
7,734 |
|
|
$ |
(6,963 |
) |
|
$ |
771 |
|
Total assets |
|
|
4,139,802 |
|
|
|
(6,963 |
) |
|
|
4,132,839 |
|
Deferred income taxes |
|
|
450,664 |
|
|
|
(2,437 |
) |
|
|
448,227 |
|
Total liabilities |
|
|
1,815,768 |
|
|
|
(2,437 |
) |
|
|
1,813,331 |
|
Accumulated other
comprehensive income
(losses) |
|
|
109 |
|
|
|
(4,526 |
) |
|
|
(4,417 |
) |
Total stockholders equity |
|
|
2,324,034 |
|
|
|
(4,526 |
) |
|
|
2,319,508 |
|
83
The following provides a reconciliation of benefit obligations, fair value of plan assets
and funded status of the plan:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
2006 |
|
2005 |
|
|
(In thousands) |
Change in benefit obligation: |
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year |
|
$ |
19,467 |
|
|
$ |
17,615 |
|
Interest cost |
|
|
1,054 |
|
|
|
1,040 |
|
Actuarial gain |
|
|
275 |
|
|
|
1,470 |
|
Benefits paid |
|
|
(681 |
) |
|
|
(658 |
) |
|
|
|
Benefit obligation at end of year |
|
$ |
20,115 |
|
|
$ |
19,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets: |
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year |
|
$ |
19,770 |
|
|
$ |
17,735 |
|
Actual return (loss) on plan assets |
|
|
1,797 |
|
|
|
2,493 |
|
Contributions |
|
|
|
|
|
|
200 |
|
Benefits paid |
|
|
(681 |
) |
|
|
(658 |
) |
|
|
|
Fair value of plan assets at end of year |
|
$ |
20,886 |
|
|
$ |
19,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status of plan |
|
$ |
771 |
|
|
$ |
304 |
|
|
|
|
Items not yet recognized as a component of net periodic pension cost:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
2006 |
|
2005 |
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
Net actuarial loss |
|
$ |
6,963 |
|
|
$ |
7,426 |
|
|
|
|
The estimated net actuarial loss, prior service cost and transition obligation for our
plan that we would expect to amortize from Other Comprehensive Income into net periodic pension
cost during the 2007 fiscal year are $281,000, $0 and $0, respectively. However, when we terminate
the plan, which we expect to do in 2007, the entire unamortized portion of the $7.0 million of net
actuarial loss as of September 30, 2006, which is included in Other Comprehensive Losses (Gain) at
December 31, 2006, will be recognized as periodic pension cost.
The accumulated benefit obligation was as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
2006 |
|
2005 |
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation |
|
$ |
20,115 |
|
|
$ |
19,467 |
|
|
|
|
Amounts recognized in our Consolidated Balance Sheets consisted of prepaid benefit cost
as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
2006 |
|
2005 |
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
Other assets |
|
$ |
771 |
|
|
$ |
7,730 |
|
|
|
|
84
Components of net periodic benefit costs were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
2006 |
|
2005 |
|
2004 |
|
|
(In thousands) |
Interest cost |
|
$ |
1,054 |
|
|
$ |
1,040 |
|
|
$ |
1,022 |
|
Expected return on plan assets |
|
|
(1,362 |
) |
|
|
(1,222 |
) |
|
|
(1,187 |
) |
Amortization of unrecognized loss |
|
|
303 |
|
|
|
306 |
|
|
|
306 |
|
|
|
|
Net periodic pension benefit (income) loss |
|
$ |
(5 |
) |
|
$ |
124 |
|
|
$ |
141 |
|
|
|
|
Amounts recognized in Other Comprehensive (Losses) Gains:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
2006 |
|
2005 |
|
2004 |
|
|
(In thousands) |
Net actuarial loss |
|
$ |
6,963 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
Weighted-average assumptions used to determine benefit obligations were:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
2006 |
|
2005 |
|
|
|
Discount rate |
|
|
5.75 |
% |
|
|
5.50 |
% |
Expected long-term rate |
|
|
7.00 |
% |
|
|
7.00 |
% |
The long-term rate of return for plan assets is determined based on widely accepted
capital market principles, long-term return analysis for global fixed income and equity markets as
well as the active total return oriented portfolio management style. Long-term trends are
evaluated relative to current market factors such as inflation, interest rates and fiscal and
monetary policies, in order to assess the capital market assumptions as applied to the plan.
Weighted-average assumptions used to determine net periodic benefit costs were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
2006 |
|
2005 |
|
2004 |
|
|
|
Discount rate |
|
|
5.50 |
% |
|
|
6.00 |
% |
|
|
6.25 |
% |
Expected long-term rate |
|
|
7.00 |
% |
|
|
7.00 |
% |
|
|
7.25 |
% |
The weighted-average asset allocation for our pension plan by asset category is as
follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
2006 |
|
2005 |
|
|
|
Equity securities |
|
|
|
|
|
|
64 |
% |
Debt securities |
|
|
|
|
|
|
29 |
% |
Money market fund |
|
|
|
|
|
|
6 |
% |
Insurance contracts |
|
|
100 |
% |
|
|
|
|
Other |
|
|
|
|
|
|
1 |
% |
We have historically employed a total return approach whereby a mix of equities and fixed
income investments were used to maximize the long-term return of plan assets for a prudent level of
risk. The intent of the strategy was to minimize plan expenses by outperforming plan liabilities
over the long run. During the fourth quarter of 2006, in anticipation of the 2007 termination of
the plan, all of the assets of the plan were transferred to an insurance company.
The plan assets at September 30, 2006 and 2005 do not include any of our own securities.
85
The benefits expected to be paid by the pension plan by fiscal year are (in thousands):
|
|
|
|
|
2007 |
|
$ |
705 |
|
2008 |
|
|
753 |
|
2009 |
|
|
782 |
|
2010 |
|
|
813 |
|
2011 |
|
|
858 |
|
2012-2016 |
|
|
5,441 |
|
Under the terms of our letter agreement with an insurance company, these payments have become
the responsibility of that insurance company until the plan is terminated. Once the plan is
terminated, plan participants will receive annuity contracts from the insurance company and benefit
payments will be made to the participants pursuant to the terms of those contracts.
We do not expect to make a contribution to our pension plan in 2007.
15. Hurricane Damage
2005 Storms
In the third quarter of 2005, two major hurricanes, Katrina and Rita, struck the U.S. Gulf
Coast and Gulf of Mexico. In late August 2005, one of our jack-up drilling rigs, the Ocean
Warwick, was seriously damaged during Hurricane Katrina and other rigs in our fleet, as well as our
warehouse in New Iberia, Louisiana, sustained lesser damage in Hurricane Katrina or Rita, or both
storms. We believe that the physical damage to our rigs, as well as related removal and recovery
costs, are primarily covered by insurance, after applicable deductibles. At December 31, 2006, we
had filed several insurance claims related to the 2005 storms which are currently under review by
insurance adjusters or are pending underwriter approval.
Ocean Warwick The Ocean Warwick, with a net book value of $14.0 million, was declared a
constructive total loss effective August 29, 2005. We issued a proof of loss in the amount of
$50.5 million to our insurers, representing the insured value of the rig less a $4.5 million
deductible. We received all insurance proceeds related to this claim in 2005. Recovery and
removal of the Ocean Warwick are subject to separate insurance deductibles which were estimated at
the time of loss to be $2.5 million in the aggregate.
In the third quarter of 2005, we recorded a net $33.6 million casualty gain for the Ocean
Warwick, representing net insurance proceeds of $50.5 million, less the write-off of the $14.0
million net carrying value of the drilling rig and $0.4 million in rig-based spare parts and
supplies, and estimated insurance deductibles aggregating $2.5 million for salvage and wreck
removal. We have presented this as Casualty Gain on Ocean Warwick in our Consolidated Statements
of Operations for the year ended December 31, 2005.
During 2006, we subsequently revised our estimate of expected deductibles related to salvage
and wreck removal of the Ocean Warwick to $2.0 million and recorded a $0.5 million adjustment to
Casualty Gain on Ocean Warwick in our Consolidated Statements of Operations for the year ended
December 31, 2006.
Other Rigs and Facilities Damages to our other affected rigs and warehouse was less severe.
At the time of loss, we estimated insurance deductibles related to the remaining rigs damaged
during Hurricane Katrina and our rigs and facility damaged by Hurricane Rita to total $2.6 million
in the aggregate, of which $1.2 million and $1.4 million were recorded as additional contract
drilling expense and loss on disposition of assets, respectively, for the year ended December 31,
2005 in our Consolidated Statements of Operations. Subsequently, during 2006, we revised our
estimate of the applicable insurance deductibles related to these damages and recorded a $0.4
million gain on disposition of assets.
In addition, in the third quarter of 2005 and during 2006, we wrote-off the aggregate net book
value of approximately $14.3 million in rig equipment that was either lost or damaged beyond repair
during these storms as loss on disposition of assets and recorded a corresponding insurance
receivable in an amount equal to our expected recovery from insurers. The write-off of this
equipment and recognition of insurance receivables had no net effect on our consolidated results of
operations for the years ended December 31, 2006 and 2005.
86
In late 2006 we received $3.1 million from certain of our customers primarily related to the
replacement or repair of equipment damaged during the 2005 hurricanes. We recorded $0.3 million of
this recovery as a credit to contract drilling expense, $1.1 million as a gain on disposition of assets and the remaining $1.8
million as other income.
2004 Storm
During the third quarter of 2004, our operations in the Gulf of Mexico were impacted by
Hurricane Ivan, resulting in damage to several of our rigs. During 2004, we recorded an insurance
deductible of $6.1 million related to damage from this hurricane of which $4.5 million and $1.6
million were recorded as additional contract drilling expense and loss on disposition of assets,
respectively.
Our insurance claim relating to damages sustained during Hurricane Ivan was settled in the
fourth quarter of 2005, resulting in net insurance proceeds to us of $14.5 million. We recognized
an insurance gain of $5.6 million as Gain on disposition of assets in our Consolidated Statements
of Operations for the year ended December 31, 2005, resulting from the involuntary conversion of
assets lost during the hurricane in 2004. We accounted for the remaining portion of the insurance
proceeds as a reduction in an insurance receivable for hurricane-related repair costs which we
believed were reimbursable by insurance.
In addition in the fourth quarter of 2005 we received $2.4 million from a customer related to
equipment damaged on one of our high-specification rigs during Hurricane Ivan. We recorded $2.0
million of this recovery as a credit to contract drilling expense and $0.4 million as a gain on
disposition of assets.
16. Segments and Geographic Area Analysis
We manage our business on the basis of one reportable segment, contract drilling of offshore
oil and gas wells. Although we provide contract drilling services with different types of offshore
drilling rigs and also provide such services in many geographic locations, we have aggregated these
operations into one reportable segment based on the similarity of economic characteristics among
all divisions and locations, including the nature of services provided and the type of customers of
such services.
Revenues from contract drilling services by equipment-type are listed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2006 |
|
2005 |
|
2004 |
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
High-Specification Floaters |
|
$ |
766,873 |
|
|
$ |
448,937 |
|
|
$ |
281,866 |
|
Intermediate Semisubmersibles |
|
|
785,047 |
|
|
|
456,734 |
|
|
|
319,053 |
|
Jack-ups |
|
|
435,194 |
|
|
|
271,809 |
|
|
|
178,391 |
|
Other |
|
|
|
|
|
|
1,535 |
|
|
|
3,095 |
|
|
|
|
Total contract drilling revenues. |
|
|
1,987,114 |
|
|
|
1,179,015 |
|
|
|
782,405 |
|
Revenues related to reimbursable expenses |
|
|
65,458 |
|
|
|
41,987 |
|
|
|
32,257 |
|
|
|
|
Total revenues |
|
$ |
2,052,572 |
|
|
$ |
1,221,002 |
|
|
$ |
814,662 |
|
|
|
|
Geographic Areas
At December 31, 2006, our drilling rigs were located offshore twelve countries in addition to
the United States. As a result, we are exposed to the risk of changes in social, political and
economic conditions inherent in foreign operations and our results of operations and the value of
our foreign assets are affected by fluctuations in foreign currency exchange rates. Revenues by
geographic area are presented by attributing revenues to the individual country or areas where the
services were performed.
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2006 |
|
2005 |
|
2004 |
|
|
(In thousands) |
United States |
|
$ |
1,179,676 |
|
|
$ |
668,423 |
|
|
$ |
358,741 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign: |
|
|
|
|
|
|
|
|
|
|
|
|
Europe/Africa |
|
|
250,103 |
|
|
|
106,188 |
|
|
|
69,643 |
|
South America |
|
|
203,338 |
|
|
|
129,524 |
|
|
|
120,112 |
|
Australia/Asia/Middle East |
|
|
323,003 |
|
|
|
231,273 |
|
|
|
180,783 |
|
Mexico |
|
|
96,452 |
|
|
|
85,594 |
|
|
|
85,383 |
|
|
|
|
|
|
|
872,896 |
|
|
|
552,579 |
|
|
|
455,921 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
2,052,572 |
|
|
$ |
1,221,002 |
|
|
$ |
814,662 |
|
|
|
|
An individual foreign country may, from time to time, comprise a material percentage of
our total contract drilling revenues from unaffiliated customers. For the years ended December 31,
2006, 2005 and 2004, individual countries that comprised 5% or more of our total contract drilling
revenues from unaffiliated customers are listed below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2006 |
|
2005 |
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brazil |
|
|
9.9 |
% |
|
|
10.6 |
% |
|
|
12.5 |
% |
United Kingdom |
|
|
7.5 |
% |
|
|
6.3 |
% |
|
|
5.5 |
% |
Malaysia |
|
|
6.3 |
% |
|
|
6.9 |
% |
|
|
5.2 |
% |
Mexico |
|
|
4.7 |
% |
|
|
7.0 |
% |
|
|
10.5 |
% |
Australia |
|
|
4.2 |
% |
|
|
5.1 |
% |
|
|
5.3 |
% |
Indonesia |
|
|
1.3 |
% |
|
|
3.0 |
% |
|
|
6.3 |
% |
The following table presents our long-lived tangible assets by geographic location as of
December 31, 2006 and 2005. A substantial portion of our assets are mobile, therefore asset
locations at the end of the period are not necessarily indicative of the geographic distribution of
the earnings generated by such assets during the periods.
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2006 |
|
2005 |
|
|
(In thousands) |
Drilling and other property and equipment,
net: |
|
|
|
|
|
|
|
|
United States |
|
$ |
1,335,329 |
|
|
$ |
1,278,146 |
|
Foreign: |
|
|
|
|
|
|
|
|
South America |
|
|
269,821 |
|
|
|
279,284 |
|
Europe/Africa |
|
|
183,242 |
|
|
|
136,378 |
|
Australia/Asia/Middle East |
|
|
728,383 |
|
|
|
481,381 |
|
Mexico |
|
|
111,678 |
|
|
|
126,831 |
|
|
|
|
|
|
|
1,293,124 |
|
|
|
1,023,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,628,453 |
|
|
$ |
2,302,020 |
|
|
|
|
Besides the United States, Brazil and Singapore are currently the only countries with a
material concentration of our assets. Approximately 10.3% and 14.8% of our drilling and other
property and equipment were located offshore Brazil and Singapore, respectively, as of December 31,
2006. Approximately 12.1% and 6.1% of our drilling and other property and equipment were located
offshore Brazil and Singapore, respectively, as of December 31, 2005.
88
Major Customers
Our customer base includes major and independent oil and gas companies and government-owned
oil companies. Revenues from our major customers for the periods presented that contributed more
than 10% of our total revenues are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
Customer |
|
2006 |
|
2005 |
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anadarko Petroleum |
|
|
10.6 |
% |
|
|
10.3 |
% |
|
|
3.5 |
% |
Petróleo Brasileiro S.A. |
|
|
10.4 |
% |
|
|
10.7 |
% |
|
|
12.6 |
% |
PEMEX Exploración Y Producción |
|
|
4.7 |
% |
|
|
7.0 |
% |
|
|
10.5 |
% |
17. Unaudited Quarterly Financial Data
Unaudited summarized financial data by quarter for the years ended December 31, 2006 and 2005
is shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First |
|
Second |
|
Third |
|
Fourth |
|
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
|
|
(In thousands, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
447,730 |
|
|
$ |
512,188 |
|
|
$ |
514,456 |
|
|
$ |
578,198 |
|
Operating income |
|
|
202,943 |
|
|
|
238,095 |
|
|
|
216,147 |
|
|
|
283,247 |
|
Income before income tax expense |
|
|
206,691 |
|
|
|
242,167 |
|
|
|
223,047 |
|
|
|
294,427 |
|
Net income |
|
|
145,321 |
|
|
|
175,721 |
|
|
|
164,450 |
|
|
|
221,355 |
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.13 |
|
|
$ |
1.36 |
|
|
$ |
1.27 |
|
|
$ |
1.71 |
|
Diluted |
|
$ |
1.06 |
|
|
$ |
1.27 |
|
|
$ |
1.19 |
|
|
$ |
1.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
258,758 |
|
|
$ |
283,399 |
|
|
$ |
310,522 |
|
|
$ |
368,323 |
|
Operating income |
|
|
48,006 |
|
|
|
64,897 |
|
|
|
120,579 |
|
|
|
140,917 |
|
Income before income tax expense |
|
|
43,358 |
|
|
|
55,791 |
|
|
|
119,419 |
|
|
|
137,827 |
|
Net income |
|
|
30,118 |
|
|
|
41,282 |
|
|
|
82,039 |
|
|
|
106,898 |
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.23 |
|
|
$ |
0.32 |
|
|
$ |
0.64 |
|
|
$ |
0.83 |
|
Diluted |
|
$ |
0.23 |
|
|
$ |
0.31 |
|
|
$ |
0.60 |
|
|
$ |
0.78 |
|
18. Subsequent Events
Debt Conversions. Subsequent to December 31, 2006 and through February 14, 2007, the holders
of $438.4 million in aggregate principal amount of our 1.5% Debentures and the holders of $1.5
million accreted value through the date of conversion, or $2.4 million in aggregate principal
amount, of our Zero Coupon Debentures elected to convert their outstanding debentures into shares
of our common stock. We issued 8,963,942 shares of our common stock pursuant to these conversions
in 2007. At February 14, 2007, there was $21.5 million in aggregate principal amount and $3.8
million accreted value, or $6.0 million aggregate principal amount at maturity, of our 1.5%
Debentures and Zero Coupon Debentures, respectively, outstanding.
As a result of the conversions of our 1.5% Debentures, we will reverse in 2007 a non-current
deferred tax liability of approximately $50 million related to interest expense imputed on these
bonds for U.S. federal income tax return purposes.
89
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
We maintain a system of disclosure controls and procedures which are designed to ensure that
information required to be disclosed by us in reports that we file or submit under the federal
securities laws, including this report, is recorded, processed, summarized and reported on a timely
basis. These disclosure controls and procedures include controls and procedures designed to ensure
that information required to be disclosed by us under the federal securities laws is accumulated
and communicated to our management on a timely basis to allow decisions regarding required
disclosure.
Our principal executive officer and principal financial officer evaluated our disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of December
31, 2006 and concluded that our controls and procedures were effective.
Internal Control Over Financial Reporting
Managements Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for Diamond Offshore
Drilling, Inc. Our internal control system was designed to provide reasonable assurance to our
management and Board of Directors regarding the preparation and fair presentation of published
financial statements.
There are inherent limitations to the effectiveness of any control system, however well
designed, including the possibility of human error and the possible circumvention or overriding of
controls. Further, the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their costs. Management
must make judgments with respect to the relative cost and expected benefits of any specific control
measure. The design of a control system also is based in part upon assumptions and judgments made
by management about the likelihood of future events, and there can be no assurance that a control
will be effective under all potential future conditions. As a result, even an effective system of
internal controls can provide no more than reasonable assurance with respect to the fair
presentation of financial statements and the processes under which they were prepared.
Our management assessed the effectiveness of our internal control over financial reporting as
of December 31, 2006. In making this assessment, our management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control
Integrated Framework. Based on managements assessment our management believes that, as of December
31, 2006, our internal control over financial reporting was effective based on those criteria.
Deloitte & Touche LLP, the registered public accounting firm that audited our financial
statements included in this Annual Report on Form 10-K, has issued an attestation report on
managements assessment of our internal control over financial reporting. The attestation report of
Deloitte & Touche LLP is included at the beginning of Item 8 of this Form 10-K.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting identified in
connection with the foregoing evaluation that occurred during our last fiscal quarter that have
materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
90
Item 9B. Other Information.
Not applicable.
PART III
Reference is made to the information responsive to Items 10, 11, 12, 13 and 14 of this Part
III contained in our definitive proxy statement for our 2007 Annual Meeting of Stockholders, which
is incorporated herein by reference.
Item 10. Directors, Executive Officers and Corporate Governance.
Item 11. Executive Compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Item 14. Principal Accountant Fees and Services.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) Index to Financial Statements, Financial Statement Schedules and Exhibits
(1) Financial Statements
|
|
|
|
|
|
|
|
Page |
|
|
|
|
|
Report of Independent Registered Public Accounting Firm |
|
|
55 |
|
Consolidated Balance Sheets |
|
|
56 |
|
Consolidated Statements of Operations |
|
|
57 |
|
Consolidated Statements of Stockholders Equity |
|
|
58 |
|
Consolidated Statements of Comprehensive Income (Loss) |
|
|
59 |
|
Consolidated Statements of Cash Flows |
|
|
60 |
|
Notes to Consolidated Financial Statements |
|
|
61 |
|
(2) Financial Statement Schedules
No schedules have been included herein because the information required to be submitted has
been included in our Consolidated Financial Statements or the notes thereto or the required
information is inapplicable.
See the Index of Exhibits for a list of those exhibits filed herewith, which index also
includes and identifies management contracts or compensatory plans or arrangements required to be
filed as exhibits to this Form 10-K by Item 601 of Regulation S-K.
91
(c) Index of Exhibits
|
|
|
|
|
Exhibit No. |
|
Description |
|
|
|
|
|
|
3.1 |
|
|
Amended and Restated Certificate of Incorporation of Diamond Offshore Drilling, Inc.
(incorporated by reference to Exhibit 3.1 to our Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 2003). |
|
|
|
|
|
|
3.2 |
|
|
Amended and Restated By-laws of Diamond Offshore Drilling, Inc. (incorporated by
reference to Exhibit 3.2 to our Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 2001) (SEC File No. 1-13926). |
|
|
|
|
|
|
4.1 |
|
|
Indenture, dated as of February 4, 1997, between Diamond Offshore Drilling, Inc. and
The Chase Manhattan Bank, as Trustee (incorporated by reference to Exhibit 4.1 to our
Annual Report on Form 10-K for the fiscal year ended December 31, 2001) (SEC File No.
1-13926). |
|
|
|
|
|
|
4.2 |
|
|
Second Supplemental Indenture, dated as of June 6, 2000, between Diamond Offshore
Drilling, Inc. and The Chase Manhattan Bank, as Trustee (incorporated by reference to
Exhibit 4.2 to our Quarterly Report on Form 10-Q/A for the quarterly period ended
June 30, 2000) (SEC File No. 1-13926). |
|
|
|
|
|
|
4.3 |
|
|
Third Supplemental Indenture, dated as of April 11, 2001, between Diamond Offshore
Drilling, Inc. and The Chase Manhattan Bank, as Trustee (incorporated by reference to
Exhibit 4.2 to our Quarterly Report on Form 10-Q for the quarterly period ended March
31, 2001) (SEC File No. 1-13926). |
|
|
|
|
|
|
4.4 |
|
|
Fourth Supplemental Indenture, dated as of August 27, 2004, between Diamond Offshore
Drilling, Inc. and JPMorgan Chase Bank, as Trustee (incorporated by reference to
Exhibit 4.2 to our Current Report on Form 8-K filed September 1, 2004). |
|
|
|
|
|
|
4.5 |
|
|
Fifth Supplemental Indenture, dated as of June 14, 2005, between Diamond Offshore
Drilling, Inc. and JPMorgan Chase Bank, National Association, as Trustee
(incorporated by reference to Exhibit 4.2 to our Current Report on Form 8-K filed
June 16, 2005). |
|
|
|
|
|
|
4.6 |
|
|
Exchange and Registration Rights Agreement, dated June 14, 2005, between Diamond
Offshore Drilling, Inc. and the initial purchaser of the 4.875% Senior Notes
(incorporated by reference to Exhibit 4.3 to our Current Report on Form 8-K filed
June 16, 2005). |
|
|
|
|
|
|
10.1 |
|
|
Registration Rights Agreement (the Registration Rights Agreement) dated October 16,
1995 between Loews and Diamond Offshore Drilling, Inc. (incorporated by reference to
Exhibit 10.1 to our Annual Report on Form 10-K for the fiscal year ended December 31,
2001) (SEC File No. 1-13926). |
|
|
|
|
|
|
10.2 |
|
|
Amendment to the Registration Rights Agreement, dated September 16, 1997, between
Loews and Diamond Offshore Drilling, Inc. (incorporated by reference to Exhibit 10.2
to our Annual Report on Form 10-K for the fiscal year ended December 31, 1997) (SEC
File No. 1-13926). |
|
|
|
|
|
|
10.3 |
|
|
Services Agreement, dated October 16, 1995, between Loews and Diamond Offshore
Drilling, Inc. (incorporated by reference to Exhibit 10.3 to our Annual Report on
Form 10-K for the fiscal year ended December 31, 2001) (SEC File No. 1-13926). |
|
|
|
|
|
|
10.4*+ |
|
|
Amended
and Restated Diamond Offshore Management Company Supplemental Executive Retirement Plan effective
as of January 1, 2007. |
|
|
|
|
|
|
10.5+ |
|
|
Diamond Offshore Management Bonus Program, as amended and restated, and dated as of
December 31, 1997 (incorporated by reference to Exhibit 10.6 to our Annual Report on
Form 10-K for the fiscal year ended December 31, 1997) (SEC File No. 1-13926). |
|
|
|
|
|
|
10.6+ |
|
|
Second Amended and Restated Diamond Offshore Drilling, Inc. 2000 Stock Option Plan
(incorporated by reference to Exhibit A attached to our definitive proxy statement on
Schedule 14A filed on March 31, 2005). |
92
|
|
|
|
|
Exhibit No. |
|
Description |
|
|
|
|
|
|
10.7+ |
|
|
Form of Stock Option Certificate for grants to executive officers, other employees
and consultants pursuant to the Second Amended and Restated Diamond Offshore
Drilling, Inc. 2000 Stock Option Plan (incorporated by reference to Exhibit 10.1 to
our Current Report on Form 8-K filed October 1, 2004). |
|
|
|
|
|
|
10.8+ |
|
|
Form of Stock Option Certificate for grants to non-employee directors pursuant to the
Second Amended and Restated Diamond Offshore Drilling, Inc. 2000 Stock Option Plan
(incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed
October 1, 2004). |
|
|
|
|
|
|
10.9+ |
|
|
Diamond Offshore Drilling, Inc. Incentive Compensation Plan for Executive Officers
(incorporated by reference to Exhibit B attached to our definitive proxy statement on
Schedule 14A filed on March 31, 2005). |
|
|
|
|
|
|
10.10+ |
|
|
Form of Award Certificate for stock appreciation right grants to the Companys
executive officers, other employees and consultants pursuant to the Second Amended
and Restated Diamond Offshore Drilling, Inc. 2000 Stock Option Plan (incorporated by
reference to Exhibit 10.1 to our Current Report on Form 8-K filed April 28, 2006). |
|
|
|
|
|
|
10.11 |
|
|
5-Year Revolving Credit Agreement, dated as of November 2, 2006, among Diamond
Offshore Drilling, Inc., JPMorgan Chase Bank, N.A., as administrative agent, The Bank
of Tokyo-Mitsubishi UFJ, Ltd. Houston Agency, Fortis Capital Corp., HSBC Bank USA,
National Association, Wells Fargo Bank, N.A. and Bayerische Hypo-Und Vereinsbank AG,
Munich Branch, as co-syndication agents, and the lenders named therein (incorporated
by reference to Exhibit 10.1 to our Current Report on Form 8-K filed November 3,
2006). |
|
|
|
|
|
|
10.12+ |
|
|
Employment Agreement between Diamond Offshore Management Company and Lawrence R.
Dickerson dated as of December 15, 2006 (incorporated by reference to Exhibit 10.1 to
our Current Report on Form 8-K filed December 21, 2006). |
|
|
|
|
|
|
10.13+ |
|
|
Employment Agreement between Diamond Offshore Management Company and Gary T. Krenek
dated as of December 15, 2006 (incorporated by reference to Exhibit 10.2 to our
Current Report on Form 8-K filed December 21, 2006). |
|
|
|
|
|
|
10.14+ |
|
|
Employment Agreement between Diamond Offshore Management Company and John L. Gabriel
dated as of December 15, 2006 (incorporated by reference to Exhibit 10.3 to our
Current Report on Form 8-K filed December 21, 2006). |
|
|
|
|
|
|
10.15*+ |
|
|
Employment Agreement between Diamond Offshore Management Company and John M. Vecchio
dated as of December 15, 2006. |
|
|
|
|
|
|
10.16*+ |
|
|
Employment Agreement between Diamond Offshore Management Company and William C. Long
dated as of December 15, 2006. |
|
|
|
|
|
|
10.17*+ |
|
|
Employment Agreement between Diamond Offshore Management Company and Lyndol L. Dew
dated as of December 15, 2006. |
|
|
|
|
|
|
10.18*+ |
|
|
Employment Agreement between Diamond Offshore Management Company and Mark F. Baudoin
dated as of December 15, 2006. |
|
|
|
|
|
|
10.19*+ |
|
|
Employment Agreement between Diamond Offshore Management Company and Beth G. Gordon
dated as of January 3, 2007. |
|
|
|
|
|
|
12.1* |
|
|
Statement re Computation of Ratios. |
|
|
|
|
|
|
21.1* |
|
|
List of Subsidiaries of Diamond Offshore Drilling, Inc. |
|
|
|
|
|
|
23.1* |
|
|
Consent of Deloitte & Touche LLP. |
|
|
|
|
|
|
24.1* |
|
|
Powers of Attorney. |
|
|
|
|
|
|
31.1* |
|
|
Rule 13a-14(a) Certification of the Chief Executive Officer. |
|
|
|
|
|
|
31.2* |
|
|
Rule 13a-14(a) Certification of the Chief Financial Officer. |
|
|
|
|
|
|
32.1* |
|
|
Section 1350 Certification of the Chief Executive Officer and Chief Financial Officer. |
|
|
|
|
|
|
|
|
|
* Filed or furnished herewith. |
|
|
|
|
+ Management contracts or compensatory plans or arrangements. |
93
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, on February 23, 2007.
|
|
|
|
|
|
DIAMOND OFFSHORE DRILLING, INC.
|
|
|
By: |
/s/ GARY T. KRENEK
|
|
|
|
Gary T. Krenek |
|
|
|
Senior Vice President and Chief Financial Officer |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
/s/ JAMES S. TISCH*
|
|
Chairman of the Board and
|
|
February 23, 2007 |
|
|
Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
|
|
|
/s/ LAWRENCE R. DICKERSON*
|
|
President, Chief Operating Officer and
|
|
February 23, 2007 |
|
|
Director |
|
|
|
|
|
|
|
/s/ GARY T. KRENEK*
|
|
Senior Vice President and
|
|
February 23, 2007 |
|
|
Chief Financial Officer
(Principal Financial Officer) |
|
|
|
|
|
|
|
/s/ BETH G. GORDON*
|
|
Controller (Principal Accounting Officer)
|
|
February 23, 2007 |
|
|
|
|
|
|
|
|
|
|
/s/ ALAN R. BATKIN*
|
|
Director
|
|
February 23, 2007 |
|
|
|
|
|
|
|
|
|
|
/s/ JOHN R. BOLTON*
|
|
Director
|
|
February 23, 2007 |
|
|
|
|
|
|
|
|
|
|
/s/ CHARLES L. FABRIKANT*
|
|
Director
|
|
February 23, 2007 |
|
|
|
|
|
|
|
|
|
|
/s/ PAUL G. GAFFNEY II*
|
|
Director
|
|
February 23, 2007 |
|
|
|
|
|
|
|
|
|
|
/s/ HERBERT C. HOFMANN*
|
|
Director
|
|
February 23, 2007 |
|
|
|
|
|
|
|
|
|
|
/s/ ARTHUR L. REBELL*
|
|
Director
|
|
February 23, 2007 |
|
|
|
|
|
|
|
|
|
|
/s/ RAYMOND S. TROUBH*
|
|
Director
|
|
February 23, 2007 |
|
|
|
|
|
|
|
|
|
|
*By:
|
|
/s/ WILLIAM C. LONG
|
|
|
|
|
William C. Long |
|
|
|
|
Attorney-in-fact |
|
|
94
EXHIBIT INDEX
|
|
|
|
|
Exhibit No. |
|
Description |
|
|
|
|
|
|
3.1 |
|
|
Amended and Restated Certificate of Incorporation of Diamond Offshore Drilling, Inc.
(incorporated by reference to Exhibit 3.1 to our Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 2003). |
|
|
|
|
|
|
3.2 |
|
|
Amended and Restated By-laws of Diamond Offshore Drilling, Inc. (incorporated by
reference to Exhibit 3.2 to our Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 2001) (SEC File No. 1-13926). |
|
|
|
|
|
|
4.1 |
|
|
Indenture, dated as of February 4, 1997, between Diamond Offshore Drilling, Inc. and
The Chase Manhattan Bank, as Trustee (incorporated by reference to Exhibit 4.1 to our
Annual Report on Form 10-K for the fiscal year ended December 31, 2001) (SEC File No.
1-13926). |
|
|
|
|
|
|
4.2 |
|
|
Second Supplemental Indenture, dated as of June 6, 2000, between Diamond Offshore
Drilling, Inc. and The Chase Manhattan Bank, as Trustee (incorporated by reference to
Exhibit 4.2 to our Quarterly Report on Form 10-Q/A for the quarterly period ended
June 30, 2000) (SEC File No. 1-13926). |
|
|
|
|
|
|
4.3 |
|
|
Third Supplemental Indenture, dated as of April 11, 2001, between Diamond Offshore
Drilling, Inc. and The Chase Manhattan Bank, as Trustee (incorporated by reference to
Exhibit 4.2 to our Quarterly Report on Form 10-Q for the quarterly period ended March
31, 2001) (SEC File No. 1-13926). |
|
|
|
|
|
|
4.4 |
|
|
Fourth Supplemental Indenture, dated as of August 27, 2004, between Diamond Offshore
Drilling, Inc. and JPMorgan Chase Bank, as Trustee (incorporated by reference to
Exhibit 4.2 to our Current Report on Form 8-K filed September 1, 2004). |
|
|
|
|
|
|
4.5 |
|
|
Fifth Supplemental Indenture, dated as of June 14, 2005, between Diamond Offshore
Drilling, Inc. and JPMorgan Chase Bank, National Association, as Trustee
(incorporated by reference to Exhibit 4.2 to our Current Report on Form 8-K filed
June 16, 2005). |
|
|
|
|
|
|
4.6 |
|
|
Exchange and Registration Rights Agreement, dated June 14, 2005, between Diamond
Offshore Drilling, Inc. and the initial purchaser of the 4.875% Senior Notes
(incorporated by reference to Exhibit 4.3 to our Current Report on Form 8-K filed
June 16, 2005). |
|
|
|
|
|
|
10.1 |
|
|
Registration Rights Agreement (the Registration Rights Agreement) dated October 16,
1995 between Loews and Diamond Offshore Drilling, Inc. (incorporated by reference to
Exhibit 10.1 to our Annual Report on Form 10-K for the fiscal year ended December 31,
2001) (SEC File No. 1-13926). |
|
|
|
|
|
|
10.2 |
|
|
Amendment to the Registration Rights Agreement, dated September 16, 1997, between
Loews and Diamond Offshore Drilling, Inc. (incorporated by reference to Exhibit 10.2
to our Annual Report on Form 10-K for the fiscal year ended December 31, 1997) (SEC
File No. 1-13926). |
|
|
|
|
|
|
10.3 |
|
|
Services Agreement, dated October 16, 1995, between Loews and Diamond Offshore
Drilling, Inc. (incorporated by reference to Exhibit 10.3 to our Annual Report on
Form 10-K for the fiscal year ended December 31, 2001) (SEC File No. 1-13926). |
|
|
|
|
|
|
10.4*+ |
|
|
Amended
and Restated Diamond Offshore Management Company Supplemental Executive Retirement Plan effective
as of January 1, 2007. |
|
|
|
|
|
|
10.5+ |
|
|
Diamond Offshore Management Bonus Program, as amended and restated, and dated as of
December 31, 1997 (incorporated by reference to Exhibit 10.6 to our Annual Report on
Form 10-K for the fiscal year ended December 31, 1997) (SEC File No. 1-13926). |
|
|
|
|
|
|
10.6+ |
|
|
Second Amended and Restated Diamond Offshore Drilling, Inc. 2000 Stock Option Plan
(incorporated by reference to Exhibit A attached to our definitive proxy statement on
Schedule 14A filed on March 31, 2005). |
95
|
|
|
|
|
Exhibit No. |
|
Description |
|
|
|
|
|
|
10.7+ |
|
|
Form of Stock Option Certificate for grants to executive officers, other employees
and consultants pursuant to the Second Amended and Restated Diamond Offshore
Drilling, Inc. 2000 Stock Option Plan (incorporated by reference to Exhibit 10.1 to
our Current Report on Form 8-K filed October 1, 2004). |
|
|
|
|
|
|
10.8+ |
|
|
Form of Stock Option Certificate for grants to non-employee directors pursuant to the
Second Amended and Restated Diamond Offshore Drilling, Inc. 2000 Stock Option Plan
(incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed
October 1, 2004). |
|
|
|
|
|
|
10.9+ |
|
|
Diamond Offshore Drilling, Inc. Incentive Compensation Plan for Executive Officers
(incorporated by reference to Exhibit B attached to our definitive proxy statement on
Schedule 14A filed on March 31, 2005). |
|
|
|
|
|
|
10.10+ |
|
|
Form of Award Certificate for stock appreciation right grants to the Companys
executive officers, other employees and consultants pursuant to the Second Amended
and Restated Diamond Offshore Drilling, Inc. 2000 Stock Option Plan (incorporated by
reference to Exhibit 10.1 to our Current Report on Form 8-K filed April 28, 2006). |
|
|
|
|
|
|
10.11 |
|
|
5-Year Revolving Credit Agreement, dated as of November 2, 2006, among Diamond
Offshore Drilling, Inc., JPMorgan Chase Bank, N.A., as administrative agent, The Bank
of Tokyo-Mitsubishi UFJ, Ltd. Houston Agency, Fortis Capital Corp., HSBC Bank USA,
National Association, Wells Fargo Bank, N.A. and Bayerische Hypo-Und Vereinsbank AG,
Munich Branch, as co-syndication agents, and the lenders named therein (incorporated
by reference to Exhibit 10.1 to our Current Report on Form 8-K filed November 3,
2006). |
|
|
|
|
|
|
10.12+ |
|
|
Employment Agreement between Diamond Offshore Management Company and Lawrence R.
Dickerson dated as of December 15, 2006 (incorporated by reference to Exhibit 10.1 to
our Current Report on Form 8-K filed December 21, 2006). |
|
|
|
|
|
|
10.13+ |
|
|
Employment Agreement between Diamond Offshore Management Company and Gary T. Krenek
dated as of December 15, 2006 (incorporated by reference to Exhibit 10.2 to our
Current Report on Form 8-K filed December 21, 2006). |
|
|
|
|
|
|
10.14+ |
|
|
Employment Agreement between Diamond Offshore Management Company and John L. Gabriel
dated as of December 15, 2006 (incorporated by reference to Exhibit 10.3 to our
Current Report on Form 8-K filed December 21, 2006). |
|
|
|
|
|
|
10.15*+ |
|
|
Employment Agreement between Diamond Offshore Management Company and John M. Vecchio
dated as of December 15, 2006. |
|
|
|
|
|
|
10.16*+ |
|
|
Employment Agreement between Diamond Offshore Management Company and William C. Long
dated as of December 15, 2006. |
|
|
|
|
|
|
10.17*+ |
|
|
Employment Agreement between Diamond Offshore Management Company and Lyndol L. Dew
dated as of December 15, 2006. |
|
|
|
|
|
|
10.18*+ |
|
|
Employment Agreement between Diamond Offshore Management Company and Mark F. Baudoin
dated as of December 15, 2006. |
|
|
|
|
|
|
10.19*+ |
|
|
Employment Agreement between Diamond Offshore Management Company and Beth G. Gordon
dated as of January 3, 2007. |
|
|
|
|
|
|
12.1* |
|
|
Statement re Computation of Ratios. |
|
|
|
|
|
|
21.1* |
|
|
List of Subsidiaries of Diamond Offshore Drilling, Inc. |
|
|
|
|
|
|
23.1* |
|
|
Consent of Deloitte & Touche LLP. |
|
|
|
|
|
|
24.1* |
|
|
Powers of Attorney. |
|
|
|
|
|
|
31.1* |
|
|
Rule 13a-14(a) Certification of the Chief Executive Officer. |
|
|
|
|
|
|
31.2* |
|
|
Rule 13a-14(a) Certification of the Chief Financial Officer. |
|
|
|
|
|
|
32.1* |
|
|
Section 1350 Certification of the Chief Executive Officer and Chief Financial Officer. |
|
|
|
|
|
|
|
|
|
* Filed or furnished herewith. |
|
|
|
|
+ Management contracts or compensatory plans or arrangements. |
96
exv10w4
Exhibit 10.4
Diamond Offshore Management Company
Supplemental Executive Retirement Plan
IMPORTANT NOTE
This document has not been approved by the Department of Labor, Internal Revenue Service or any
other governmental entity. An adopting Employer must determine whether the Plan is subject to the
Federal securities laws and the securities laws of the various states. An adopting Employer may
not rely on this document to ensure any particular tax consequences or to ensure that the Plan is
unfunded and maintained primarily for the purpose of providing deferred compensation to a select
group of management or highly compensated employees under Title I of the Employee Retirement
Income Security Act of 1974, as amended, with respect to the Employers particular situation.
Fidelity Investments Institutional Operations Company, Inc., its affiliates and employees cannot
provide you with legal advice in connection with the execution of this document. This document
should be reviewed by the Employers attorney prior to execution.
October 2006
TABLE OF CONTENTS
PREAMBLE
|
|
|
ARTICLE 1 GENERAL |
1.1
|
|
Plan |
1.2
|
|
Effective Dates |
1.3
|
|
Grandfathering of Amounts Not Subject to Code Section 409A |
|
|
|
ARTICLE 2 DEFINITIONS |
2.1
|
|
Account |
2.2
|
|
Administrator |
2.3
|
|
Adoption Agreement |
2.4
|
|
Beneficiary |
2.5
|
|
Board or Board of Directors |
2.6
|
|
Bonus |
2.7
|
|
Change in Control |
2.8
|
|
Code |
2.9
|
|
Compensation |
2.10
|
|
Director |
2.11
|
|
Disabled |
2.12
|
|
Eligible Employee |
2.13
|
|
Employer |
2.14
|
|
ERISA |
2.15
|
|
Identification Date |
2.16
|
|
Key Employee |
2.17
|
|
Participant |
2.18
|
|
Plan |
2.19
|
|
Plan Sponsor |
2.20
|
|
Plan Year |
2.21
|
|
Related Employer |
2.22
|
|
Retirement |
2.23
|
|
Separation from Service |
2.24
|
|
Unforeseeable Emergency |
2.25
|
|
Valuation Date |
2.26
|
|
Years of Service |
|
|
|
ARTICLE 3 PARTICIPATION |
3.1
|
|
Participation |
3.2
|
|
Termination of Participation |
i
|
|
|
ARTICLE 4 PARTICIPANT CONTRIBUTIONS |
|
|
|
4.1
|
|
Deferral Agreement |
4.2
|
|
Amount of Deferral |
4.3
|
|
Timing of Election to Defer |
4.4
|
|
Election of Payment Schedule and Form of Payment |
4.5
|
|
2005 Transitional Rules |
4.6
|
|
2006 Transitional Rule |
4.7
|
|
2007 Transitional Rule |
|
|
|
ARTICLE 5 EMPLOYER CONTRIBUTIONS |
5.1
|
|
Matching Contributions |
5.2
|
|
Other Contributions |
|
|
|
ARTICLE 6 ACCOUNTS AND CREDITS |
6.1
|
|
Establishment of Account |
6.2
|
|
Credits to Account |
|
|
|
ARTICLE 7 INVESTMENT OF CONTRIBUTIONS |
7.1
|
|
Investment Options |
7.2
|
|
Adjustment of Accounts |
|
|
|
ARTICLE 8 RIGHT TO BENEFITS |
8.1
|
|
Vesting |
8.2
|
|
Death |
8.3
|
|
Disability |
|
|
|
ARTICLE 9 DISTRIBUTION OF BENEFITS |
9.1
|
|
Amount of Benefits |
9.2
|
|
Method and Timing of Distributions |
9.3
|
|
Unforeseeable Emergency |
9.4
|
|
Termination Before Retirement |
9.5
|
|
Cashouts of Amounts Not Exceeding Stated Limit |
9.6
|
|
Key Employees |
9.7
|
|
Change in Control |
9.8
|
|
Permissible Delays in Payment |
ii
|
|
|
ARTICLE 10 AMENDMENT AND TERMINATION |
10.1
|
|
Amendment by Plan Sponsor |
10.2
|
|
Plan Termination Following Change in Control or Corporate Dissolution |
10.3
|
|
Other Plan Terminations |
|
|
|
ARTICLE 11 THE TRUST |
11.1
|
|
Establishment of Trust |
11.2
|
|
Grantor Trust |
11.3
|
|
Investment of Trust Funds |
|
|
|
ARTICLE 12 PLAN ADMINISTRATION |
12.1
|
|
Powers and Responsibilities of the Administrator |
12.2
|
|
Claims and Review Procedures |
12.3
|
|
Plan Administrative Costs |
|
|
|
ARTICLE 13 MISCELLANEOUS |
13.1
|
|
Unsecured General Creditor of the Employer |
13.2
|
|
Employers Liability |
13.3
|
|
Limitation of Rights |
13.4
|
|
Anti-Assignment |
13.5
|
|
Facility of Payment |
13.6
|
|
Notices |
13.7
|
|
Tax Withholding |
13.8
|
|
Indemnification |
13.9
|
|
Permitted Acceleration of Payment |
13.10
|
|
Governing Law |
iii
PREAMBLE
The Plan is intended to be a plan which is unfunded and is maintained by an employer primarily
for the purpose of providing deferred compensation for a select group of management or highly
compensated employees within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of the
Employee Retirement Income Security Act of 1974, as amended, and is further intended to conform
with the requirements of Internal Revenue Code Section 409A and shall be implemented and
administered in a manner consistent therewith.
ARTICLE 1 GENERAL
1.1 |
|
Plan. The Plan will be referred to by the name specified in the Adoption
Agreement. |
|
1.2 |
|
Effective Dates. |
|
(a) |
|
Original Effective Date. The Original Effective Date is the date as
of which the Plan was initially adopted. |
|
|
(b) |
|
Amendment Effective Date. The Amendment Effective Date is the
date specified in the Adoption Agreement as of which the Plan is
amended and restated. |
|
|
(c) |
|
Special Effective Date. A Special Effective Date may apply to any
given provision if so specified in Appendix C of the Adoption
Agreement. A Special Effective Date will control over the Original
Effective Date or Amendment Effective Date, whichever is
applicable, with respect to such provision of the Plan. |
1.3 |
|
Grandfathering of Amounts Not Subject to Code Section 409A |
|
|
|
Amounts deferred before January 1, 2005 that are earned and vested on December 31, 2004
will be separately accounted for and administered in accordance with the terms of the
Plan as in effect on December 31, 2004, except as otherwise provided in this Plan
document. A summary of the grandfathered provisions is set forth in Appendix B of the
Adoption Agreement. |
1-1
ARTICLE 2 DEFINITIONS
Pronouns used in the Plan are in the masculine gender but include the feminine gender unless the
context clearly indicates otherwise. Wherever used herein, the following terms have the meanings
set forth below, unless a different meaning is clearly required by the context:
2.1 |
|
Account means an account established for the purpose of recording amounts credited on behalf
of a Participant and any income, expenses, gains, losses or distributions included thereon. The
Account shall be a bookkeeping entry only and shall be utilized solely as a device for the
measurement and determination of the amounts to be paid to a Participant pursuant to the Plan. |
|
2.2 |
|
Administrator means the person or persons designated by the Plan
Sponsor in Section 1.05 of the Adoption Agreement to be responsible for
the administration of the Plan. If no Administrator is designated in the
Adoption Agreement, the Administrator is the Plan Sponsor. |
|
2.3 |
|
Adoption Agreement means the agreement adopted by the Plan
Sponsor that establishes the Plan. |
|
2.4 |
|
Beneficiary means the persons, trusts, estates or other entities
entitled under Section 8.2 to receive benefits under the Plan upon the
death of a Participant. |
|
2.5 |
|
Board or Board of Directors means the Board of Directors of the
Plan Sponsor. |
|
2.6 |
|
Bonus means an amount of incentive remuneration payable by the
Employer to a Participant. |
|
2.7 |
|
Change in Control means the occurrence of an event involving the
Plan Sponsor that is described in Section 9.7. |
|
2.8 |
|
Code means the Internal Revenue Code of 1986, as amended. |
|
2.9 |
|
Compensation has the meaning specified in Section 3.01 of the
Adoption Agreement. |
|
2.10 |
|
Director means a non-employee member of the Board who has been designated by the
Employer as eligible to participate in the Plan. |
2-1
2.11 |
|
Disabled means a determination by the Administrator that the Participant is either
(a) unable to engage in any substantial gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to result in death or can be expected to last
for a continuous period of not less than 12 months, or (b) is, by reason of any medically
determinable physical or mental impairment which can be expected to result in death or last for a
continuous period of not less than twelve months, receiving income replacement benefits for a
period of not less than three months under an accident and health plan covering employees of the
Employer. A Participant will be considered Disabled if he is determined to be totally disabled by
the Social Security Administration. |
|
2.12 |
|
Eligible Employee means an employee of the Employer who is determined by the Administrator
to be a member of a select group of management or highly
compensated employees within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA and
who satisfies the requirements in Section 2.01 of the Adoption Agreement. |
|
2.13 |
|
Employer means the Plan Sponsor and any other entity which is authorized by the Plan
Sponsor to participate in and, in fact, does adopt the Plan. |
|
2.14 |
|
ERISA means the Employee Retirement Income Security Act of 1974, as amended. |
|
2.15 |
|
Identification Date means the date as of which Key Employees are determined which is
specified in Section 1.06 of the Adoption Agreement. |
|
2.16 |
|
Key Employee means an employee who satisfies the conditions set forth in Section 9.6. |
|
2.17 |
|
Participant means an Eligible Employee or Director who commences participation in
the Plan in accordance with Article 3. |
|
2.18 |
|
Plan means the unfunded plan of deferred compensation set forth herein, including the
Adoption Agreement and any trust agreement, as adopted by the Plan Sponsor and as amended from time
to time. |
|
2.19 |
|
Plan Sponsor means the entity identified in Section 1.03 of the Adoption
Agreement. |
|
2.20 |
|
Plan Year means the period identified in Section 1.02 of the Adoption Agreement. |
2-2
2.21 |
|
Related Employer means the Employer and (a) any corporation that is a member of a
controlled group of corporations as defined in Section 414(b) of the Code that includes the
Employer and (b) any trade or business that is under common control as defined in Section 414(c)
of the Code that includes the Employer. |
|
2.22 |
|
Retirement has the meaning specified in 6.01(f) of the Adoption Agreement. |
|
2.23 |
|
Separation from Service means the date that the Participant dies, retires or otherwise
has a termination of employment with respect to all entities comprising the Related Employer. A
Separation from Service does not occur if the Participant is on military leave, sick leave or
other bona fide leave of absence if the period of leave does not exceed six months or such
longer period during which the Participants right to re-employment is provided by statute or
contract. If the period of leave exceeds six months and the Participants right to re-employment
is not provided either by statute or contract, a Separation from Service will be deemed to have
occurred on the first day
following the six-month period. |
|
|
|
Whether a termination of employment has occurred is based on the facts and circumstances.
Where an employee continues to provide services to the Related Employer at an annual rate
that is less than twenty percent of the services he rendered, on average, during the
immediately preceding three full calendar years of employment (or, if employed less than
three years, such lesser period) and the annual remuneration he receives for such services
is less than twenty percent of the average annual remuneration he earned during his final
three full calendar years of employment (or, if less, such lesser period), the employee
will be treated as having incurred a Separation from Service. Where an employee continues
to provide services to the Related Employer in a capacity other than as an employee, a
Separation from Service will not be deemed to have occurred if the former employee
provides services at an annual rate that is fifty percent or more of the services he
rendered, on average, during the immediately preceding three full calendar years of
employment (or, if employed less than three years, such lesser period) and the annual
remuneration he receives for such services is fifty percent or more of the annual
remuneration he earned during his final three full calendar years of employment for the
Related Employer. For purposes of the foregoing, the annual rate of providing services is
determined based upon the measurement used to determine the service providers base
compensation. An independent contractor is considered to experience a Separation of
Service from the Related Employer upon the expiration of the contract (or contracts) under
which services are performed for the Related Employer if the expiration constitutes a good
faith and complete termination of the contractual relationship. An expiration does not
constitute a good faith and complete termination of the contractual |
2-3
|
|
relationship if the Related Employer anticipates a renewal of a contractual
relationship or the independent contractor becoming an employee. The Related Employer will
be considered to anticipate the renewal of the contractual relationship with an
independent contractor if it intends to contract again for the services provided under the
expired contract and neither the Related Employer nor the independent contractor has
eliminated the independent contractor as a possible provider of services under any such
new contract. A Related Employer is considered to intend to contract again for the
services provided under an expired contract if the Related Employers doing so is
conditioned only upon incurring a need for the services, the availability of funds, or
both. All determinations of whether a Separation from Service has occurred will be made in
a manner consistent with Code Section 409A. |
|
2.24 |
|
Unforeseeable Emergency means a severe financial hardship of the Participant
resulting from an illness or accident of the Participant, the Participants spouse, or the
Participants dependent (as defined in Code Section 152(a)); loss of the Participants
property due to casualty; or other similar extraordinary and unforeseeable circumstances
arising as a result of events
beyond the control of the Participant. |
|
2.25 |
|
Valuation Date means each business day of the Plan Year. |
|
2.26 |
|
Years of Service means each one year period for which the Participant receives service
credit in accordance with the provisions of Section 7.01(d) of the Adoption Agreement. |
2-4
ARTICLE 3 PARTICIPATION
3.1 |
|
Participation. The Participants in the Plan shall be those Directors and those
management or highly compensated employees of the Employer within the meaning of
Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA who satisfy the requirements of Section
2.01 of the Adoption Agreement. |
|
3.2 |
|
Termination of Participation. The Administrator may terminate a Participants
participation in the Plan in a manner consistent with Code Section 409A. |
3-1
ARTICLE 4 PARTICIPANT CONTRIBUTIONS
4.1 |
|
Deferral Agreement. Each Eligible Employee and Director may elect to defer his
Compensation within the meaning of Section 3.01 of the Adoption Agreement by executing
in writing or electronically, a deferral agreement in accordance with rules and
procedures established by the Administrator and the provisions of this Article 4. |
|
|
|
A new deferral agreement must be timely executed for each Plan Year during which the
Eligible Employee or Director desires to defer Compensation. An Eligible Employee or
Director who does not timely execute a deferral agreement shall be deemed to have
elected zero deferrals of Compensation for such Plan Year. |
|
|
|
If an Eligible Employee or Director fails to have an executed deferral agreement in effect
for a Plan Year during which an Employer contribution pursuant to Article 5 is made on his
behalf, the Eligible Employee or Director will be deemed to have elected to receive a lump
sum distribution upon Separation from Service. |
|
|
|
A deferral agreement may be changed or revoked during the period specified by the
Administrator. Except as provided in Section 9.3 or in Section 4.01(c)
of the Adoption Agreement, a deferral agreement becomes irrevocable at the close of
the specified period. |
|
4.2 |
|
Amount of Deferral. An Eligible Employee or Director may elect to defer Compensation in
any amount permitted by Section 4.01(a) of the Adoption Agreement. |
|
4.3 |
|
Timing of Election to Defer. Each Eligible Employee or Director who desires to defer
Compensation otherwise payable during a Plan Year must execute a deferral agreement within
the period preceding the Plan Year specified by the Administrator. Each Eligible Employee
who desires to defer Compensation that is a Bonus must execute a deferral agreement within
the period preceding the Plan Year during which the Bonus is earned that is specified by
the Administrator, except that if the Bonus can be treated as performance based
compensation as described in Code Section 409A(a)(4)(B)(iii), the deferral agreement may
be executed within the period specified by the Administrator, which period, in no event,
shall end after the date which is six months prior to the end of the period during which
the Bonus is earned. |
4-1
|
|
Except as otherwise provided below, an employee who is classified or designated as an
Eligible Employee during a Plan Year or a Director who is designated as eligible to
participate during a Plan Year may elect to defer Compensation otherwise payable during
the remainder of such Plan Year in accordance with the rules of this Section 4.3 by
executing a deferral agreement within the thirty (30) day period beginning on the date the
employee is classified or designated as an Eligible Employee or the date the Director is
designated as eligible, whichever is applicable, if permitted by Section 2.01 of the
Adoption Agreement. If Compensation is based on a specified performance period that begins
before the Eligible Employee or Director executes his deferral agreement, the election
will be deemed to apply to the portion of such Compensation equal to the total amount of
Compensation for the performance period multiplied by the ratio of the number of days
remaining in the performance period after the election over the total number of days in
the performance period. The rules of this paragraph shall not apply if the Eligible
Employee or Director has ever participated or is participating in a Plan within the
meaning of Prop. Reg. Sec. 1.409A-1(c) sponsored by the Employer. |
|
4.4 |
|
Election of Payment Schedule and Form of Payment. |
|
|
|
At the time an Eligible Employee or Director completes a deferral agreement,
the Eligible Employee or Director must elect a distribution event (which includes a
specified time) and a form of payment for the Compensation subject to the deferral
agreement from among the options the Administrator has made available for this purpose
and which are specified in 6.01(b) of the Adoption Agreement. |
|
4.5 |
|
2005 Transitional Rules |
|
|
|
If elected by the Plan Sponsor in Section 13.01 of the Adoption Agreement, one or more
of the following transitional rules set forth in Notice 2005-1 shall apply during
calendar year 2005. Each transitional rule that applies during calendar year 2005 will
be implemented in accordance with rules and procedures established by the Administrator. |
|
(a) |
|
New Payment Elections. |
|
|
|
|
A Participant may make new payment elections with respect to amounts subject to
Code Section 409A provided the elections are made no later than December 31, 2005. The new
payment elections may apply to amounts deferred before the date of the election and can be
made without regard to Code Sections 409A(a)(3) and (4) and any inconsistent provisions in
the Plan to the contrary. A Participant who fails to make a new payment election in
accordance with this Section 4.5(a) with respect any |
4-2
|
|
|
amount subject to Code Section 409A for which a valid payment election was
not made in accordance with the Plan and the requirements of Code Section 409A
will be deemed to have made the default elections provided in Section 13.01(a)
of the Adoption Agreement. |
|
|
|
|
If the Plan Sponsor elects not to permit new payment elections in accordance
with this Section 4.5(a), the default elections specified in Section 13.01(a) of
the Adoption Agreement will apply to all amounts subject to Code Section 409A
that were deferred prior to December 31, 2005 for which a valid payment election
was not made in accordance with the Plan and the requirements of Code Section
409A. |
|
|
(b) |
|
Elections to terminate participation or cancel an outstanding election. |
|
|
|
|
A Participant may elect to terminate participation or cancel a deferral election
with respect to amounts subject to Code Section 409A. An election made pursuant to
this Section 4.5(b) may apply: (i) to all or part of calendar year 2005; (ii) to
elective and/or nonelective deferred compensation under the Plan; (iii) to all or
any portion of the Plan; and/or (iv) to one or more outstanding deferral elections
with regard to amounts subject to Code Section 409A. An election made pursuant to
this Section 4.5(b) includes a termination or cancellation that results in a lower
amount of deferral for the period without a complete elimination of deferrals. Any
election made pursuant to this Section 4.5(b) may be made without regard to Code
Sections 409A(a)(2), (3) and (4) and any inconsistent provisions in the Plan to
the contrary. |
|
|
(c) |
|
Prospective Deferral Elections. |
|
|
|
|
A Participant may make a deferral election with respect to
Compensation that has not yet been paid or become payable at the time of the
election, provided the election is made no later than March 15, 2005. The prospective
deferral election may be made without regard to Code Section 409A(a)(4) and any
inconsistent provisions in the Plan to the contrary. |
4.6 |
|
2006 Transitional Rule |
|
|
|
If elected by the Plan Sponsor in accordance with Section 13.02 of the Adoption
Agreement, the following transitional rule will apply during calendar year 2006. The
rule will be implemented in accordance with rules and procedures established by the
Administrator. |
4-3
|
|
A Participant may make new payment elections with respect to amounts subject to Code
Section 409A provided: (a) the elections are made no later than December 31, 2006 and,
(b) a Participant cannot in 2006 change payment elections with respect to payments that
would otherwise have become payable in 2006 or cause payments to be made in 2006. |
|
|
|
A Participant who fails to make a new payment election in accordance with amount subject
to Code Section 409A for which a valid payment election was not made in accordance with
the Plan and the requirements of Code Section 409A will be deemed to have made the
default elections provided in Section 13.01(a) of the Adoption Agreement. |
|
|
|
If the Plan Sponsor elects not to permit new payment elections in accordance with this
Section 4.6, the default elections in Section 13.01(a) of the Adoption Agreement will
apply to all amounts subject to Code Section 409A for which a valid payment election was
not made in accordance with the Plan and the requirements of Code Section 409A. |
|
4.7 |
|
2007 Transitional Rule |
|
|
|
If elected by the Plan Sponsor in accordance with Section 13.03 of the Adoption
Agreement, the following transitional rule will apply during calendar year 2007. The
rule will be implemented in accordance with rules and procedures established by the
Administrator. |
|
|
|
A Participant may make new payment elections with respect to amounts subject to Code
Section 409A provided: (a) the elections are made no later than December 31, 2007 and,
(b) a Participant cannot in 2007 change payment
elections with respect to payments that would otherwise have become payable in 2007 or
cause payments to be made in 2007. |
|
|
|
A Participant who fails to make a new payment election in accordance with amount subject
to Code Section 409A for which a valid payment election was not made in accordance with
the Plan and the requirements of Code Section 409A will be deemed to have made the
default elections provided in Section 13.01(a) of the Adoption Agreement. |
|
|
|
If the Plan Sponsor elects not to permit new payment elections in accordance with this
Section 4.7, the default elections in Section 13.01(a) of the Adoption Agreement will
apply to all amounts subject to Code Section 409A for which a valid payment election was
not made in accordance with the Plan and the requirements of Code Section 409A. |
4-4
ARTICLE 5 EMPLOYER CONTRIBUTIONS
5.1 |
|
Matching Contributions. If elected by the Plan Sponsor in Section 5.01(a) of the Adoption
Agreement, the Employer will credit the Participants Account with a matching contribution
determined in accordance with the formula specified in Section 5.01(a) of the Adoption
Agreement. The matching contribution will be credited to the Participants Account at the
time specified in Section 5.01(a)(iii) of the Adoption Agreement. |
|
5.2 |
|
Other Contributions. If elected by the Plan Sponsor in Section 5.01(b) of the Adoption
Agreement, the Employer will credit the Participants Account with a contribution
determined in accordance with the formula or method specified in Section 5.01(b) of the
Adoption Agreement. The contribution will be credited to the Participants Account at the
time specified in Section 5.01(b)(iii) of the Adoption Agreement. |
5-1
ARTICLE 6 ACCOUNTS AND CREDITS
6.1 |
|
Establishment of Account. For accounting and computational purposes only, the
Administrator will establish and maintain an Account for each Participant which will
reflect the credits made pursuant to Section 6.2 along with the earnings, expenses, gains
and losses allocated thereto, attributable to the hypothetical investments made with the
amounts in the Participants Account as provided in Article 7. The Administrator will
establish and maintain such other
records and accounts, as it decides in its discretion to be reasonably required or
appropriate to discharge its duties under the Plan. |
|
6.2 |
|
Credits to Account. A Participants Account will be credited for each Plan Year with the
amount of his elective deferrals under Section 4.1 at the time the amount subject to the
deferral election would otherwise have been payable to the Participant and the amount of
Employer contributions made on his behalf under Article 5. Such amounts will be credited
to the Participants Account at the times specified, respectively, in Sections
5.01(a)(iii) and 5.01(b)(iii) of the Adoption Agreement. |
6-1
ARTICLE 7 INVESTMENT OF CONTRIBUTIONS
7.1 |
|
Investment Options. The amount in a Participants Account shall be treated as invested in
the investment options designated for this purpose by the Administrator and set forth in
Appendix A to the Adoption Agreement. |
|
7.2 |
|
Adjustment of Accounts. The amount in a Participants Account shall be adjusted for
hypothetical investment earnings, expenses, gains or losses in an amount equal to the
earnings, expenses, gains or losses attributable to the investment options selected by the
party designated in Section 9.01 of the Adoption Agreement from among the investment
options provided in Section 7.1. If permitted by Section 9.01 of the Adoption Agreement, a
Participant may, in accordance with rules and procedures established by the Administrator,
select the investments from among the options provided in Section 7.1 to be used for the
purpose of calculating future hypothetical investment adjustments to the Participants
Account or to future credits to the Account under Section 6.2 effective as the Valuation
Date coincident with or next following notice to the Administrator. The Account of each
Participant shall be adjusted as of each Valuation Date to reflect: (a) the hypothetical
earnings, expenses, gains and losses described above; (b) amounts credited pursuant to
Section 6.2; and (c) distributions or withdrawals. In addition, the Account of each
Participant may be adjusted for its allocable share of the hypothetical costs and expenses
associated with the maintenance of the hypothetical investments provided in Section 7.1. |
7-1
ARTICLE 8 RIGHT TO BENEFITS
8.1 |
|
Vesting. A Participant, at all times, has the 100% nonforfeitable interest in the amounts
credited to his Account attributable to his elective deferrals made in accordance with
Section 4.1. |
|
|
|
A Participants right to the amounts credited to his Account attributable to Employer
contributions made in accordance with Article 5 shall be determined in accordance with
the relevant schedule specified in Section 7.01 of the Adoption Agreement. |
|
8.2 |
|
Death. The balance or remaining balance credited to a Participants vested Account shall
be paid to his Beneficiary at the time specified in Section 6.01(a) of the Adoption
Agreement in a single lump sum payment following the date of death, unless additional
forms of payment have been made available for this purpose in Section 6.01(b) of the
Adoption Agreement and the Participant has made a valid election (or valid elections) of a
form of payment in accordance with the provisions of Article
4. If additional forms have been made available, payment to the
Beneficiary shall be made at the time specified in Section 6.01(a) of the Adoption
Agreement in the form elected by the Participant in accordance with the provisions of
Article 4. If multiple Beneficiaries have been designated, each Beneficiary shall receive
payment of his specified portion of the Account at the time specified in Section 6.01(a)
of the Adoption Agreement in the form elected by the Participant. |
|
|
|
A Participant may designate a Beneficiary or Beneficiaries, or change any prior
designation of Beneficiary or Beneficiaries in accordance with rules and procedures
established by the Administrator. |
|
|
|
A copy of the death notice or other sufficient documentation must be filed with and
approved by the Administrator. If upon the death of the
Participant there is, in the opinion of the Administrator, no designated Beneficiary for
part or all of the Participants vested Account, such amount will be paid to his estate
(such estate shall be deemed to be the Beneficiary for purposes of the Plan) in a single
lump sum payment. |
8-1
8.3 |
|
Disability. The balance or remaining balance credited to a Participants vested Account
shall be paid to the Participant at the time specified in Section 6.01(a) of the Adoption
Agreement in a single lump sum cash payment following the date a
Participant incurs a Disability as defined in Section 2.11, unless additional forms of
payment have been made available for this purpose in Section 6.01(b) of the Adoption
Agreement and the Participant has made a valid election of a different form of payment.
If additional forms have been made available, payment shall be made at the time specified
in Section 6.01(a) of the Adoption Agreement and in the form elected by the Participant
in accordance with the provisions of Article 4. The Administrator, in its sole
discretion, shall determine whether a Participant has experienced a disability for
purposes of this Section 8.3. |
8-2
ARTICLE
9 DISTRIBUTION OF BENEFITS
9.1 |
|
Amount of Benefits. The vested amount credited to a Participants Account as
determined under Articles 6, 7 and 8 shall determine and constitute the basis for the
value of benefits payable to the Participant under the Plan. |
|
9.2 |
|
Method and Timing of Distributions. Except as otherwise provided in this Article 9,
distributions under the Plan shall be made in accordance with the elections made by the
Participant under Article 4. Distributions following a payment event shall commence at the
time specified in Section 6.01(a) of the Adoption Agreement. If permitted by Section
6.01(g) of the Adoption Agreement, a Participant may elect, at least twelve months before a
scheduled distribution event, to delay the payment date for a minimum period of sixty
months from the originally scheduled date of payment. The re-deferral election must be made
in accordance with procedures and rules established by the Administrator. The Participant
may, at the same time the date of payment is deferred, change the form of payment but such
change in the form of payment may not effect an acceleration of payment in violation of
Section 409A of the Code. For purposes of this Section 9.2, a series of installment
payments is always treated as a single payment and not as a series of separate payments. |
|
9.3 |
|
Unforeseeable Emergency. A Participant may request a distribution due to an Unforeseeable
Emergency if the Plan Sponsor has elected to permit Unforeseeable Emergency withdrawals
under Section 8.01(a) of the Adoption Agreement. The request must be in writing and must be
submitted to the Administrator along with evidence that the circumstances constitute an
Unforeseeable Emergency. The Administrator has the discretion to require whatever evidence
it deems necessary to determine whether a distribution is warranted. Whether a Participant
has incurred an Unforeseeable Emergency will be determined by the Administrator on the
basis of the relevant facts and circumstances in its sole discretion, but, in no event,
will an Unforeseeable Emergency be deemed to exist if the hardship can be relieved: (a)
through reimbursement or compensation by insurance or otherwise, (b) by liquidation of the
Participants assets to the extent such liquidation would not itself cause severe financial
hardship, or (c) by cessation of deferrals under the Plan. A distribution due to an
Unforeseeable Emergency must be limited to the amount reasonably necessary to satisfy the
emergency need and may include any amounts necessary to pay any federal, state or local
income tax penalties
reasonably anticipated to result from the distribution. The distribution will be made in
the form of a single lump sum cash payment. If permitted by Section 8.01(b) of the Adoption
Agreement, a Participants deferral |
9-1
|
|
elections for the remainder of the Plan Year will be cancelled upon a
withdrawal due to Unforeseeable Emergency. |
|
9.4 |
|
Termination Before Retirement. If the Plan Sponsor has elected a Separation from Service
override in accordance with Section 6.01(d) of the Adoption Agreement, the following
provisions apply. A Participant who experiences a Separation from Service before
Retirement for any reason other than death shall receive the vested amount credited to his
Account at the time specified in Section 6.01(a) of the Adoption Agreement in a single
lump sum payment following such termination or cessation of service regardless of whether
the Participant had made different elections of time or form of payment as to the vested
amounts credited to his Account or whether the Participant was receiving installment
payouts at the time of such termination. |
|
9.5 |
|
Cashouts Of Amounts Not Exceeding Stated Limit. If the vested amount credited to the
Participants Account does not exceed the limit established for this purpose by the Plan
Sponsor in Section 6.01(e) of the Adoption Agreement at the time he separates from service
with the Employer for any reason, the Employer shall distribute such amount to the
Participant at the time specified in Section 6.01(a) of the Adoption Agreement in a single
lump sum cash payment following such termination regardless of whether the Participant had
made different elections of time or form of payment as to the vested amount credited to
his Account or whether the Participant was receiving installments at the time of such
termination. A Participants Account, for purposes of this Section 9.5, shall include any
amounts described in Section 1.3. |
|
9.6 |
|
Key Employees. In no event shall a distribution made to a Key Employee due to Separation
from Service (or Retirement, if applicable) occur before the date which is six months
after the date of his Separation from Service (or Retirement, if applicable) with the
Employer. For purposes of this Section 9.6, a Key Employee means an employee of an
Employer any of whose stock is publicly traded on an established securities market or
otherwise who satisfies the requirements of Section 416(i)(1)(A)(i), (ii) or (iii), of the
Code, determined without regard to Section 416(i)(5) of the Code, at any time during the
twelve-month period ending on the Identification Date. An employee who is determined to be
a Key
Employee on an Identification Date shall be treated as a Key Employee for purposes of the
six-month delay in distributions set forth in this Section 9.6 for the twelve-month period
beginning on the first day of the fourth month following the Identification Date. Whether
any stock of the Employer is traded on an established securities market or otherwise is
determined on the date a Participant experiences a Separation from Service. Installment
distributions to a Key Employee that are delayed due to the application of the
requirements of this Section 9.6 shall commence as of the earliest |
9-2
|
|
date permitted by Code Section 409A. |
|
9.7 |
|
Change in Control. If the Plan Sponsor has elected to permit distributions upon a Change
in Control, the following provisions shall apply. A distribution made upon a Change in
Control will be made at the time specified in Section 6.01(a) of the Adoption Agreement in
the form elected by the Participant in accordance with the procedures described in Article
4. Alternatively, if the Plan Sponsor has elected in accordance with Section 11.02 of the
Adoption Agreement to require distributions upon a Change in Control, the Participants
remaining vested Account shall be paid to the Participant or the Participants Beneficiary
at the time specified in Section 6.01(a) of the Adoption Agreement as a single lump sum
payment. A Change in Control, for purposes of the Plan, will occur upon a change in the
ownership of the Plan Sponsor, a change in the effective control of the Plan Sponsor or a
change in the ownership of a substantial portion of the assets of the Plan Sponsor, but
only if elected by the Plan Sponsor in Section 11.03 of the Adoption Agreement. The Plan
Sponsor, for this purpose, includes any corporation identified in this Section 9.7. |
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If a Participant continues to make deferrals in accordance with Article 4 after he has
received a distribution due to a Change in Control, the residual amount payable to the
Participant shall be paid at the time and in the form specified in the elections he makes
in accordance with Article 4 or upon his Death or Disability as provided in Article 8. |
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Whether a Change in Control has occurred will be determined by the Administrator in
accordance with the rules and definitions set forth in this Section 9.7. A distribution
to the Participant will be treated as occurring upon a Change in Control if the Plan
Sponsor terminates the Plan in accordance with Section 10.02 and distributes the
Participants benefits within twelve months of a Change in Control as provided in Section
10.3. |
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(a) |
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Relevant Corporations. To constitute a Change in Control for purposes of the Plan,
the event must relate to (i) the corporation for whom the Participant is performing
services at the time of the Change in Control, (ii) the corporation that is liable for the
payment of the Participants benefits under the Plan (or all corporations liable if more
than one corporation is liable), or (iii) a corporation that is a majority shareholder of
a corporation identified in (i) or (ii), or any corporation in a chain of corporations in
which each corporation is a majority corporation of another corporation in the chain,
ending in a corporation identified in (i) or (ii). A majority shareholder is defined as a
shareholder owning more than fifty percent (50%) of the total fair market value and voting
power of such corporation. |
9-3
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(b) |
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Stock Ownership. Code Section 318(a) applies for purposes of determining stock
ownership. Stock underlying a vested option is considered owned by the individual who owns
the vested option (and the stock underlying an unvested option is not considered owned by
the individual who holds the unvested option). If, however, a vested option is exercisable
for stock that is not substantially vested (as defined by Treasury Regulation Section
1.83-3(b) and (j)) the stock underlying the option is not treated as owned by the
individual who holds the option. Mutual and cooperative corporations are treated as having
stock for purposes of this Section 9.7. |
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(c) |
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Change in the Ownership of a Corporation. A change in the ownership of a corporation
occurs on the date that any one person or more than one person acting as a group, acquires
ownership of stock of the corporation that, together with stock held by such person or
group, constitutes more than fifty percent (50%) of the total fair market value or total
voting power of the stock of such corporation. If any one person or more than one person
acting as a proxy is considered to own more than fifty percent (50%) of the total fair
market value or total voting power of the stock of a corporation, the acquisition of
additional stock by the same person or persons is not considered to cause a change in the
ownership of the corporation (or to cause a change in the effective control of the
corporation as discussed below in Section 9.7(d)). An increase in the percentage of stock
owned by any one person, or persons acting as a group, as a result of a transaction in
which the corporation acquires its stock in exchange for property will be treated as an
acquisition of stock.
Section 9.7(c) applies only when there is a transfer of stock of a corporation (or
issuance of stock of a corporation) and stock in such corporation remains
outstanding after the transaction. For purposes of this Section 9.7(c), persons will
not be considered to be acting as a group solely because they purchase or own stock
of the same corporation at the same time or as a result of a public offering.
Persons will, however, be considered to be
acting as a group if they are owners of a corporation that enters into a merger,
consolidation, purchase or acquisition of stock, or similar business transaction
with the corporation. If a person, including an entity, owns stock in both
corporations that enter into a merger, consolidation, purchase or acquisition of
stock, or similar transaction, such shareholder is considered to be acting as a
group with other shareholders in a corporation prior to the transaction giving rise
to the change and not with respect to the ownership interest in the other
corporation. |
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(d) |
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Change in the effective control of a corporation. A change in the effective control of
a corporation occurs on the date that either (i) any one person, or more than one person
acting as a group, acquires (or |
9-4
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has acquired during the twelve month period ending on the date of the most
recent acquisition by such person or persons) ownership of stock of the corporation
possessing thirty-five (35%) or more of the total voting power of the stock of such
corporation, or (ii) a majority of members of the corporations board of directors
is replaced during any twelve month period by directors whose appointment or
election is not endorsed by a majority of the members of the corporations board of
directors prior to the date of the appointment or election, provided that for
purposes of this paragraph (ii), the term corporation refers solely to the relevant
corporation identified in Section 9.7(a) for which no other corporation is a
majority shareholder for purposes of Section 9.7(a). In the absence of an event
described in Section 9.7(d)(i) or (ii), a change in the effective control of a
corporation will not have occurred. A change in effective control may also occur in
any transaction in which either of the two corporations involved in the transaction
has a change in the ownership of such corporation as described in Section 9.7(c) or
a change in the ownership of a substantial portion of the assets of such corporation
as described in Section 9.7(e). If any one person, or more than one person acting as
a group, is considered to effectively control a corporation within the meaning of
this Section 9.7(d), the acquisition of additional control of the corporation by the
same person or persons is not considered to cause a change in the effective control
of the corporation or to cause a change in the ownership of the corporation within
the meaning of Section 9.7(c). For purposes of this Section 9.7(d), persons will or
will not be considered to be acting as a group in accordance with rules similar to
those set forth in Section 9.7(c) with the following exception. If a person,
including an entity, owns stock in both corporations that enter into a merger,
consolidation, purchase or acquisition of stock, or similar transaction, such
shareholder is considered to be acting as a group with other shareholders in a
corporation only with respect to the ownership in that corporation prior to the
transaction giving rise to the change and not with respect to the ownership interest
in the other corporation. |
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(e) |
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Change in the ownership of a substantial portion of a corporations assets. A
change in the ownership of a substantial portion of a corporations assets occurs on the
date that any one person, or more than one person acting as a group (as determined in
accordance with rules similar to those set forth in Section 9.7(d)), acquires (or has
acquired during the twelve month period ending on the date of the most recent acquisition
by such person or persons) assets from the corporation that have a total gross fair market
value equal to or more than forty percent (40%) of the total gross fair market value of
all of the assets of the corporation immediately prior to such acquisition or
acquisitions. For this purpose, gross fair market value means the value of the assets of
the corporation of the |
9-5
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value of the assets being disposed of determined without regard to any
liabilities associated with such assets. There is no Change in Control event under
this Section 9.7(e) when there is a transfer to an entity that is controlled by the
shareholders of the transferring corporation immediately after the transfer. A
transfer of assets by a corporation is not treated as a change in ownership of such
assets if the assets are transferred to (i) a shareholder of the corporation
(immediately before the asset transfer) in exchange for or with respect to its
stock, (ii) an entity, fifty percent (50%) or more of the total value or voting
power of which is owned, directly or indirectly, by the corporation, (iii) a person,
or more than one person acting as a group, that owns, directly or indirectly, fifty
percent (50%) or more of the total value or voting power of all the outstanding
stock of the corporation, or (iv) an entity, at least fifty (50%) of the total value
or voting power of which is owned, directly or indirectly, by a person described in
Section 9.7(e)(iii). For purposes of the foregoing, and except as otherwise
provided, a persons status is determined immediately after the transfer of assets. |
9.8 |
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Permissible Delays in Payment. Distributions may be delayed beyond the date payment would
otherwise occur in accordance with the provisions of Articles 8 and 9 in any of the
following circumstances. The Employer may delay payment if it reasonably anticipates that
its deduction with respect to such payment would be limited or eliminated by the
application of Section 162(m) of the Code. Payment must be made at the earliest date at
which the Employer reasonably anticipates that the deduction of the payment amount will
not be eliminated or limited by Section 162(m) of the Code or the calendar year in which
the Participant Separates from Service. The Employer may also delay payment if it
reasonably anticipates that the payment will violate a term of a loan agreement or other
similar contract to which the Employer is a party and such violation will cause material
harm to the Employer. Payment must be made at the earliest date on which the Employer
reasonably anticipates that the making of the payment will not cause a violation or the
violation will no longer cause material harm to the Employer. Payment cannot be delayed if
the facts and circumstances indicate that the Employer entered into the loan agreement or
similar contract not for
legitimate business reasons but to avoid the restrictions on deferral elections and
subsequent deferral elections under Section 409A of the Code. The Employer may also delay
payment if it reasonably anticipates that the making of the payment will violate Federal
Securities Laws or other applicable laws provided payment is made at the earliest date on
which the Employer reasonably anticipates that the making of the payment will not cause
such violation. The
Employer reserves the right to amend the Plan to provide for a delay in payment upon such
other events and conditions as the Secretary of the Treasury may prescribe in generally
applicable guidance published in the |
9-6
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Internal Revenue Bulletin. Once a provision permitting delay of payment is applicable
to an amount of deferred compensation, the failure to apply such provision or the
modification of the Plan to remove such provision will constitute an acceleration of any
payment to which such provision applied. |
9-7
ARTICLE 10 AMENDMENT AND TERMINATION
10.1 |
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Amendment by Plan Sponsor. The Plan Sponsor reserves the right to amend the Plan (for itself
and each Employer) through action of its Board of Directors. No amendment can directly or
indirectly deprive any current or former Participant or Beneficiary of all or any portion of his
Account which had accrued prior to the amendment. |
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10.2 |
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Plan Termination Following Change in Control or Corporate
Dissolution. If so elected by the in 11.01 of the Adoption Agreement, the Plan Sponsor
reserves the right to terminate the Plan and distribute all amounts credited to all
Participant Accounts within the 30 days preceding or the twelve months following a Change
in Control as determined in accordance with the rules set forth in Section 9.7. For this
purpose, the Plan will be treated as terminated only if all substantially similar
arrangements sponsored by the Plan Sponsor are terminated so that all participants under
the Plan and all similar arrangements are required to receive all amounts deferred under
the terminated arrangements within twelve months of the date of termination of the
arrangements. In addition, the Plan Sponsor reserves the right to terminate the Plan
within twelve months of a corporate dissolution taxed under Section 331 of the Code or
with the approval of a bankruptcy court pursuant to United States Code Section
503(b)(1)(A) provided that amounts deferred under the Plan are included in the gross
incomes of Participants in the latest of (a) the calendar year in which the termination
occurs, (b) the calendar year in which the amount is no longer subject to a substantial
risk of forfeiture, or (c) the first calendar year in which payment is administratively
practicable. |
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10.3 |
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Other Plan Terminations. The Plan Sponsor retains the discretion to terminate the Plan if
(a) all arrangements sponsored by the Plan Sponsor that would be aggregated with any terminated
arrangement under Prop.
Reg. Section 1.409A-1(c) are terminated, (b) no payments other than payments that would be
payable under the terms of the arrangements if the termination had not occurred are made
within twelve months of the termination of the arrangements, (c) all payments are made
within twenty-four months of the termination of the arrangements, (d) the Plan Sponsor
does not adopt a new arrangement that would be aggregated with any terminated arrangement
under Prop. Reg. Section 1.409A-1(c) at any time within the five year period following the
date of termination of the arrangement. The Plan Sponsor also reserves the right to amend
the Plan to provide that termination of the Plan will occur under such conditions and
events as may be prescribed by the Secretary of the Treasury in generally applicable
guidance published in the Internal Revenue Bulletin. |
10-1
ARTICLE 11 THE TRUST
11.1 Establishment of Trust. The Plan Sponsor may but is not required to establish a trust to
hold amounts which the Plan Sponsor may contribute from time to time to correspond to some or all
amounts credited to Participants under Section 6.2. If the Plan Sponsor elects to establish a
trust in accordance with Section 10.01 of the Adoption Agreement, the provisions of Sections 11.2
and 11.3 shall become operative.
11.2 Grantor Trust. Any trust established by the Plan Sponsor shall be between the Plan Sponsor and
a trustee pursuant to a separate written agreement under which assets are held, administered and
managed, subject to the claims of the Plan Sponsors creditors in the event of the Plan Sponsors
insolvency, until paid to the Participant and/or his Beneficiaries specified in the Plan. The trust
is intended to be treated as a grantor trust under the Code, and the establishment of the trust
shall not cause the Participant to realize current income on amounts contributed thereto. The Plan
Sponsor must notify the trustee in the event of a bankruptcy or insolvency.
11.3 Investment of Trust Funds. Any amounts contributed to the trust by the
Plan Sponsor shall be invested by the trustee in accordance with the provisions of the
trust and the instructions of the Administrator. Trust investments need not reflect the
hypothetical investments selected by Participants under Section 7.1 for the purpose of
adjusting Accounts and the earnings or investment results of the trust shall not affect the
hypothetical investment adjustments to Participant Accounts under the Plan.
11-1
ARTICLE 12 PLAN ADMINISTRATION
12.1 |
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Powers and Responsibilities of the Administrator. The Administrator has the full power and
the full responsibility to administer the Plan in all of its details, subject, however, to the
applicable requirements of ERISA.
The Administrators powers and responsibilities include, but are not limited to, the
following: |
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(a) |
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To make and enforce such rules and procedures as it deems necessary or proper
for the efficient administration of the Plan; |
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(b) |
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To interpret the Plan, its interpretation thereof to be final on all persons
claiming benefits under the Plan; |
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(c) |
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To decide all questions concerning the Plan and the eligibility of any person to
participate in the Plan; |
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(d) |
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To administer the claims and review procedures specified in Section 12.2; |
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(e) |
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To compute the amount of benefits which will be payable to any Participant, former
Participant or Beneficiary in accordance with the provisions of the Plan; |
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(f) |
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To determine the person or persons to whom such benefits will be paid; |
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(g) |
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To authorize the payment of benefits; |
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(h) |
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To comply with the reporting and disclosure requirements of Part 1 of Subtitle B of
Title I of ERISA; |
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(i) |
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To appoint such agents, counsel, accountants, and consultants as may be required to
assist in administering the Plan; |
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(j) |
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By written instrument, to allocate and delegate its responsibilities, including the
formation of an Administrative Committee to administer the Plan. |
12-1
12.2 |
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Claims and Review Procedures. |
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(a) |
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Claims Procedure. |
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If any person believes he is being denied any rights or benefits under the Plan,
such person may file a claim in writing with the Administrator. If any such claim
is wholly or partially denied, the Administrator will notify such person of its
decision in writing. Such notification will contain (i) specific reasons for the
denial, (ii) specific reference to pertinent Plan provisions, (iii) a description
of any additional material or information necessary for such person to perfect such
claim and an explanation of why such material or information is necessary, and (iv)
a description of the Plans review procedures and the time limits applicable to
such procedures, including a statement of the persons right to bring a civil
action following an adverse decision on review. Such notification will be given
within 90 days after the claim is received by the Administrator (or within 180
days, if special circumstances require an extension of time for processing the
claim, and if written notice of such extension and circumstances is given to such
person within the initial 90-day period). If such notification is not given within
such period, the claim will be considered denied as of the last day of such period
and such person may request a review of his claim. |
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(b) |
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Review Procedure. |
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Within 60 days after the date on which a person receives a written notification of
denial of claim (or, if written notification is not provided, within 60 days of the
date denial is considered to have occurred), such person (or his duly authorized
representative) may (i) file a written request with the Administrator for a review
of his denied claim and of pertinent documents and (ii) submit written issues and
comments to the Administrator. The Administrator will notify such person of its
decision in writing. Such notification will be written in a manner calculated to be
understood by such person and will contain specific reasons for the decision as
well as specific references to pertinent Plan provisions. The notification will
explain that the person is entitled to receive, upon request and free of charge,
reasonable access to and copies of all pertinent documents and has the right to
bring a civil action following an adverse decision on review. The decision on
review will be made within 60 days after the request for review is received by the
Administrator (or within 120 days, if special circumstances require an extension of
time for processing the request, such as an election by the
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12-2
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Administrator to hold a hearing, and if written notice of such extension and
circumstances is given to such person within the initial 60-day period). If the
decision on review is not made within such period, the claim will be considered
denied. |
12.3 |
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Plan Administrative Costs. All reasonable costs and expenses
(including legal, accounting, and employee communication fees) incurred by the
Administrator in administering the Plan shall be paid by Plan to the extent not paid by
the Employer. |
12-3
ARTICLE 13 MISCELLANEOUS
13.1 |
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Unsecured General Creditor of the Employer. Participants and their
Beneficiaries, heirs, successors and assigns shall have no legal or equitable rights,
interests or claims in any property or assets of the Employer. For purposes of the payment
of benefits under the Plan, any and all of the Employers assets shall be, and shall
remain, the general, unpledged, unrestricted assets of the Employer. Each Employers
obligation under the Plan shall be merely that of an unfunded and unsecured promise to pay
money in the future. |
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13.2 |
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Employers Liability. Each Employers liability for the payment of benefits under the Plan
shall be defined only by the Plan and by the deferral agreements entered into between a Participant
and the Employer. An Employer shall have no obligation or liability to a Participant under the Plan except as
provided by the Plan and a deferral agreement or agreements. An Employer shall have no
liability to Participants employed by other Employers. |
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13.3 |
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Limitation of Rights. Neither the establishment of the Plan, nor any amendment thereof, nor
the creation of any fund or account, nor the payment of any benefits, will be construed as giving
to the Participant or any other person any legal or equitable right against the Employer, the Plan
or the Administrator, except as provided herein; and in no event will the terms of employment or
service of the Participant be modified or in any way affected hereby. |
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13.4 |
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Anti-Assignment. Except as may be necessary to fulfill a domestic relations order within the
meaning of Section 414(p) of the Code, none of the benefits or rights of a Participant or any
Beneficiary of a Participant shall be subject to the claim of any creditor. In particular, to the
fullest extent permitted by law, all such benefits and rights shall be free from attachment,
garnishment, or any other legal or equitable process available to any creditor of the Participant
and his or her Beneficiary. Neither the Participant nor his or her Beneficiary shall have the right
to alienate, anticipate, commute, pledge, encumber, or assign any of the payments which he or she
may expect to receive, contingently or otherwise, under the Plan, except the right to designate a
Beneficiary to receive death benefits provided hereunder. Notwithstanding the preceding, the
benefit payable from a Participants Account may be reduced, at the discretion of the
administrator, to satisfy any debt or liability to the Employer. |
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13.5 |
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Facility of Payment. If the Administrator determines, on the basis of medical reports or other
evidence satisfactory to the Administrator, that the recipient of any benefit payments under the
Plan is incapable of handling his affairs by reason of minority, illness, infirmity or other
incapacity, the Administrator may |
13-1
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direct the Employer to disburse such payments to a person or institution designated by a
court which has jurisdiction over such recipient or a person or institution otherwise
having the legal authority under State law for the care and control of such recipient. The
receipt by such person or institution of any such payments therefore, and any such payment
to the extent thereof, shall discharge the liability of the Employer, the Plan and the
Administrative Committee for the payment of benefits hereunder to such recipient. |
13.6 |
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Notices. Any notice or other communication to the Employer or Administrator in connection with
the Plan shall be deemed delivered in writing if addressed to the Plan Sponsor at the address
specified in Section 1.03 of the Adoption Agreement and if either actually delivered at said
address or, in the case or a letter, 5 business days shall have elapsed after the same shall have
been deposited in the United States mails, first-class postage prepaid and registered or certified.
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13.7 |
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Tax Withholding. If the Employer concludes that tax is owing with respect to any deferral or
payment hereunder, the Employer shall withhold such amounts from any payments due the Participant,
as permitted by law, or otherwise make appropriate arrangements with the Participant or his
Beneficiary for satisfaction of such obligation. Tax, for purposes of this
Section 13.7 means any federal, state, local or any other governmental income tax,
employment or payroll tax, excise tax, or any other tax or assessment owing with respect to
amounts deferred, any earnings thereon, and any payments made to Participants under the
Plan. |
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13.8 |
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Indemnification. Each Employer shall indemnify and hold harmless each employee, officer, or
director of an Employer to whom is delegated duties, responsibilities, and authority with respect
to the Plan against all claims, liabilities, fines and penalties, and all expenses reasonably
incurred by or imposed upon him (including but not limited to reasonable attorney fees) which arise
as a result of his actions or failure to act in connection with the operation and administration of
the Plan to the extent lawfully allowable and to the extent that such claim, liability, fine,
penalty, or expense is not paid for by liability insurance purchased or paid for by an Employer.
Notwithstanding the foregoing, an Employer shall not indemnify any person for any such amount
incurred through any settlement or compromise of any action unless the Employer consents in writing
to such settlement or compromise.
Indemnification under this Section 13.8 shall not be applicable to any person if the cost,
loss, liability, or expense is due to the persons gross negligence, fraud or willful
misconduct or if the person refuses to assist in the defense of the claim against him. |
13-2
13.9 |
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Permitted Acceleration of Payment. The Plan may permit acceleration of the time or schedule of
any payment or amount scheduled to be paid pursuant to a payment under the Plan as provided in
Section 10.2 or 10.3 and this Section 13.9. The Plan may permit acceleration of payment (a) to an
individual other than the Participant as may be necessary to fulfill a domestic relations order
within the meaning of Section 414(p)(1)(B) of the Code, (b) to comply with a certificate of
divestiture as defined in Section 1043(b)(2) of the Code, (c) to pay the Federal Insurance
Contributions Act (FICA) tax imposed under Sections 3101, 3121(a) and 3121(v)(2) of the Code on
compensation deferred under the Plan, (d) to pay the income tax under Section 3401 of the Code or
the corresponding withholding provisions of the applicable state, local or foreign tax laws as a
result of the payment of any FICA tax described in (c) and to pay the additional income tax at
source on wages attributable to the pyramiding Section 3401 of the Code, wages and taxes, and (e)
to pay the amount required to be included in gross income as a result of the failure of the Plan to
comply with the requirements of Section 409A of the Code.
The total payment under (c) or (d) shall, in no event, exceed the aggregate of the FICA tax
and the income tax withholding related to such FICA tax. The total payment under (e) shall,
in no event, exceed the amount required to be included in income as a result of the failure
to comply with requirements of Section 409A of the Code. |
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13.10 |
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Governing Law. The Plan will be construed, administered and enforced according to the laws of
the State specified by the Plan Sponsor in Section 12.01 of the Adoption Agreement. |
13-3
ADOPTION AGREEMENT
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1.01 |
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PREAMBLE |
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By the execution of this Adoption Agreement the Plan Sponsor
hereby [complete (a) or (b)] |
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(a)
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o
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adopts a new plan as of [month, day, year] |
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(b)
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þ
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amends and restates its existing plan as of 01/01/2007 which is the
Amendment Restatement Date. |
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Original Effective Date: 01/01/1996 |
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Pre-409A Grandfathering: þ Yes o No [If yes, complete Appendix B,
Summary of Grandfathered Provisions] |
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1.02 |
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PLAN |
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Plan Name: Diamond Offshore Management Company Supplemental Executive
Retirement Plan (formerly known as the Diamond Offshore Management Company
Deferred Compensation and Supplemental Executive Retirement Plan) |
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Plan Year: January 1 through December 31. |
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1.03
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PLAN SPONSOR |
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Name:
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Diamond Offshore Management Company
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Address:
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15415 Katy Freeway, Suite 100, Houston TX 77094-1810
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Phone # :
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281-492-5300
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EIN:
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13-3560049
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Fiscal Yr:
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01/01 through 12/31
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Form of Entity:
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Corporation
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If Plan Sponsor is a Corporation is stock publicly traded? |
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þ Yes
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oNo |
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1.04 |
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EMPLOYER |
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The following entities have been authorized by the Plan Sponsor to participate in and
have adopted the Plan: |
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Entity |
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Publicly Traded Corporation |
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Yes
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No |
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Diamond Offshore Management Company
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þ
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o |
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o
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o
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o |
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o
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October
2006
-1-
1.05 |
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ADMINISTRATOR |
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The Plan Sponsor has designated the following party or parties to be responsible for the
administration of the Plan: |
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Committee appointed by the Board of Directors. |
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Note:
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The Administrator is the person or persons designated by the Plan Sponsor to be
responsible for the administration of the Plan. This is not Fidelity Investments
Institutional Operations Company, Inc. nor any other Fidelity affiliate. |
1.06 |
|
IDENTIFICATION DATE |
|
|
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The Employer has designated 09/30 as the Identification Date for purposes of
determining Key Employees. |
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In the absence of a designation, the Identification Date is December 31. |
October
2006
-2-
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2.01 |
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PARTICIPATION |
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(a) |
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Employees [complete (i), (ii) or (iii)] |
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(i)
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þ
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Eligible Employees are selected by the Employer. |
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(ii)
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o
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Eligible Employees are those employees of the Employer who satisfy the
following criteria: |
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(iii)
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o
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Employees are not eligible to participate. |
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(b) |
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Directors [complete (i), (ii) or (iii)] |
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(i)
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o
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All Directors are eligible to participate. |
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(ii)
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o
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Only Directors selected by the Employer are eligible to participate. |
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(iii)
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o
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Directors are not eligible to participate. |
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October
2006
-3-
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3.01 |
|
COMPENSATION |
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For purposes of determining Participant contributions under Article 4 and Employer
contributions under Article 5, Compensation shall be defined in the following manner
[complete (a) or (b) and select (c) and/or (d), if applicable]: |
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(a)
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þ
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Compensation is defined as: |
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Base salary |
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(b)
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o
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Compensation as defined in [insert name of qualified
plan] without regard to the limitation captured in Section
401(a)(17) of the Code for such Plan Year: |
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(c)
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o
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Director Compensation is defined as: |
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(d)
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o
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Compensation shall, for all Plan purposes, be limited to
$ . |
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(e)
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o
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Not Applicable. |
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3.02 |
|
BONUSES |
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Compensation, as defined in Section 3.01 of the Adoption Agreement, includes the
following type of bonuses: |
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Will be treated as Performance |
Type |
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Based Compensation |
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Yes |
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No |
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o |
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o |
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o |
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o |
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o |
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o |
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o |
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o |
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o |
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o |
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o Not Applicable. |
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October 2006
- 4 -
4.01 |
|
PARTICIPANT CONTRIBUTIONS |
|
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|
If Participant contributions are permitted, complete (a), (b), and (c). Otherwise
complete (d). |
|
(a) |
|
Amount of Deferrals |
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|
A Participant may elect within the period specified in Section 4.01(b) of the
Adoption Agreement to defer the following amounts of remuneration. For each type of
remuneration listed, complete dollar amount or percentage amount but not both.
(i) Compensation Other than Bonuses [do not complete if you complete (iii)] |
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Dollar Amount |
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% Amount |
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Type of Remuneration |
|
Min |
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Max |
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Min |
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Max |
|
Increment |
|
(a) |
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(b) |
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(c) |
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Note: The increment is required to determine the permissible deferral amounts. For example,
a minimum of 0% and maximum of 20% with a 5% increment would allow an individual to defer
0%, 5%, 10%, 15% or 20%.
(ii) Bonuses [do not complete if you complete (iii)]
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Dollar Amount |
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% Amount |
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Type of Bonus |
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Min |
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Min |
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Min |
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Max |
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Increment |
|
(a) |
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(b) |
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(c) |
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(iii) Compensation [do not complete if you completed (i) and (ii)]
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Dollar Amount |
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% Amount |
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Min |
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Max |
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Min |
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Max |
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Increment |
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(iv) Director Compensation
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Dollar Amount |
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% Amount |
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Type of Compensation |
|
Min |
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Min |
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Min |
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Max |
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Increment |
|
Annual Retainer |
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Meeting Fees |
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Other: |
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Other: |
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October 2006
- 5 -
|
(i) |
|
Performance Based Compensation |
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|
A special election period |
|
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|
o Does o Does Not |
|
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|
|
apply to each eligible type of performance based compensation
referenced in
Section 3.02 of the Adoption Agreement. |
|
|
|
|
The special election period, if applicable, will be
determined by the Employer. |
|
|
(ii) |
|
Newly Eligible Participants |
|
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|
|
An employee who is classified or designated as an Eligible Employee during
a Plan Year |
|
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|
o May o May Not |
|
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|
|
elect to defer Compensation otherwise payable during the remainder of the
Plan Year by completing a deferral agreement within the 30 day period
beginning on the date he is eligible to participate in the Plan. |
(c) |
|
Revocation of Deferral Agreement |
|
|
|
A Participants deferral agreement |
|
|
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o Will |
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|
|
o Will Not |
|
|
|
be cancelled for the remainder of any Plan Year during which he receives a
hardship distribution of elective deferrals from a qualified cash or deferred
arrangement maintained by the Employer. |
|
(d) |
|
No Participant Contributions |
|
|
|
þ Participant contributions are not permitted under the Plan. |
October 2006
- 6 -
5.01 |
|
EMPLOYER CONTRIBUTIONS |
|
|
|
If Employer contributions are permitted, complete (a) and/or (b). Otherwise
complete (c). |
|
(a) |
|
Matching Contributions |
|
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|
(i) |
|
Amount |
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|
For each Plan Year, the Employer shall make a Matching Contribution on
behalf of each Participant who satisfies the requirements of Section 5.01(a)(ii)
of the Adoption Agreement equal to [complete one]: |
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(A) |
|
þ |
|
6% of the Compensation for the Plan Year in excess of the IRC
401(a)(17) limit |
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(B) |
|
o |
|
An amount determined by the Employer in its sole discretion |
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(C) |
|
o |
|
Matching Contributions for each Participant shall be limited to
$ and/or % of Compensation. |
|
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(D)
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|
o
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Other: |
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(E) |
|
o |
|
Not Applicable [Proceed to Section 5.01(b)] |
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(ii) |
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Eligibility for Matching Contribution |
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|
A Participant shall receive an allocation of Matching Contributions determined
in accordance with Section 5.01(a)(i) provided he satisfies the following
requirements [complete the ones that are applicable]: |
|
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|
(A) |
|
þ |
|
Describe requirements: |
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|
Receives Compensation in excess of the IRC
401(a)(17) compensation limit for the Plan Year and
has elected to make elective deferrals to the Diamond
Offshore 401(k) Plan by the last day of the Plan Year. |
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(B) |
|
þ |
|
Is selected by the Employer in its sole discretion to
receive an allocation of Matching Contributions |
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(C) |
|
o |
|
No requirements |
October 2006
- 7 -
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(iii) |
|
Time of Allocation |
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Matching Contributions, if made, shall be treated as allocated [select one]: |
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(A) |
|
þ |
|
As of the last day of the Plan Year |
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(B) |
|
o |
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At such times as the Employer shall determine in it
sole discretion |
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(C) |
|
o |
|
At the time the Compensation on account of which
the Matching Contribution is being made would
otherwise have been paid to the Participant |
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(D) |
|
o |
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Other: |
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(b) |
|
Other Contributions |
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(i)
|
|
Amount |
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|
The Employer shall make a contribution on behalf of each Participant who
satisfies the requirements of Section 5.01(b)(ii) equal to [complete one]: |
|
|
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|
(A) |
|
þ |
|
An amount equal to 5% of the Participants
Compensation in excess of the 401(a)(17) limit |
|
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(B) |
|
o |
|
An amount determined by the Employer in its sole
discretion |
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(C) |
|
o |
|
Contributions for each Participant shall be limited to $
|
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(D) |
|
o |
|
Other: |
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(E) |
|
o |
|
Not Applicable [Proceed to Section 6.01] |
October 2006
- 8 -
|
(ii) |
|
Eligibility for Other Contributions |
A Participant shall receive an allocation of other Employer contributions
determined in accordance with Section 5.01(b)(i) for the Plan Year if he
satisfies the following requirements [complete the one that is applicable]:
|
|
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|
|
(A)
|
|
o
|
|
Describe requirements: |
|
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(B) |
|
þ |
|
Is selected by the
Employer in its sole discretion to receive an allocation of other Employer contributions |
|
|
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|
|
(C)
|
|
o
|
|
No requirements |
|
|
Employer contributions, if made, shall be treated as allocated
[select one]:
|
|
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|
|
|
(A)
|
|
þ
|
|
As of the last day of the Plan Year |
|
|
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|
(B) |
|
o |
|
At such time or times
as the Employer shall determine in its sole discretion |
|
|
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|
(C)
|
|
o
|
|
Other: |
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|
(c) |
|
No Employer Contributions |
|
|
|
|
|
|
|
o
|
|
Employer contributions are not permitted under the Plan |
October 2006
- 9 -
The timing and form of payment of distributions made from the Participants vested Account
shall be made in accordance with the elections made in this Section 6.01 of the Adoption
Agreement except when Section 9.6 of the Plan requires a six month delay for certain
distributions to Key Employees of publicly traded companies.
|
(a) |
|
Timing of Distributions |
|
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|
(i) |
|
All distributions shall commence in accordance with the following [choose one]: |
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|
|
(A) |
|
þ |
|
As of the distribution event |
|
|
(B) |
|
o |
|
Monthly on specified day [insert day] |
|
|
(C) |
|
o |
|
Annually on specified
month and day [insert month and day] |
|
|
(D) |
|
o |
|
Calendar quarter on specified day [insert day] |
|
|
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|
(ii) |
|
The timing of distributions as determined in Section 6.01(a)(i) shall be modified
by the adoption of: |
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(A) |
|
o |
|
Event Delay Distribution events other than those based on Specified
Date or Specified Age will be treated as not having occurred for
30 days. |
|
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|
(B) |
|
o |
|
Hold Until Next Year
Distribution events other than those based on Specified Date or
Specified Age will be treated as not having occurred for twelve months from the date of the event. |
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(C) |
|
o |
|
Immediate Processing
The timing method selected by the Plan Sponsor under
Section 6.01(a)(i) shall be overridden for the following distribution events [insert events]: |
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October 2006
- 10 -
(b) |
|
Distribution Events |
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If multiple events are selected, the earliest to occur will trigger payment. |
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Lump |
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Sum |
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Installments |
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(i)
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o
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Specified Date
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years to
years |
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(ii)
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o
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Specified Age
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years to
years |
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(iii)
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þ
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Separation from Service
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X
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2 years to 15 years |
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(iv)
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o
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Separation from Service plus 6 months
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years to
years |
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(v)
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o
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Separation from Service plus
months [not to
exceed months]
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years to
years |
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(vi)
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o
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Retirement
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years to
years |
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(vii)
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o
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Retirement plus 6 months
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years to years |
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(viii)
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o
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Retirement
plus months [not to
exceed
months]
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years to
years |
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(ix)
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o
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Later of Separation from Service or
Specified Age
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years to years |
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(x)
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o
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Later of Separation from Service or
Specified Date
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years to years |
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(xi)
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o
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Later of Retirement or Specified Age
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years to
years |
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(xii)
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o
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Later of Retirement or Specified Date
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years to years |
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(xiii)
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o
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Disability
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years to years |
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(xiv)
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o
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Death
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years to years |
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(xv)
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o
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Change in Control
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years to years |
If payment is made due to Disability, payment shall be made at the time and in the form
elected by the Participant for payment in the event of Separation from Service.
Installments may be paid [select each that applies]
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o
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Monthly |
o
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Quarterly |
þ
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|
Annually |
(c) |
|
Specified Date and Specified Age elections may not extend
beyond age
[insert age]. |
October 2006
- 11 -
(d) |
|
Separation from Service Override |
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|
A Separation from Service override |
|
o |
|
Shall apply. [If this is elected, Separation from Service cannot be selected
as a distribution event in Section 6.01(b)] |
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|
þ |
|
Shall not apply. |
A Separation from Service override provides that a Participant, whose Separation from
Service occurs before Retirement, shall receive the vested amount credited to his Account
as a lump sum payment.
|
o |
|
If the Participants vested Account at the time of his Separation from
Service does not exceed $__ (insert dollar amount) distribution of the
vested Account shall automatically be made in the form of a single lump
sum in accordance with Section 9.5 of the Plan. |
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þ |
|
There are no involuntary cashouts. |
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o
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|
Retirement shall be defined as a Separation from Service that occurs
on or after the Participant [insert description of requirements]:
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þ
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|
No special definition of Retirement applies. |
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(g) |
|
Redeferrals |
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|
A Participant |
be permitted to modify a scheduled distribution date and/or payment option in
accordance with Section 9.2 of the Plan.
A
Participant shall generally be permitted to elect such modification
number
of times.
Administratively, allowable distribution events will be modified to reflect all options
necessary to fulfill the redeferrals provision.
October 2006
- 12 -
|
(a) |
|
Matching Contributions |
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|
The Participants vested interest in the amount credited to his Account attributable to
Matching Contributions shall be based on the following schedule: |
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|
Years of Service |
|
Vesting % |
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0 |
|
100 |
|
(insert 100 if there
is immediate vesting) |
1 |
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2 |
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3 |
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4 |
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5 |
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6 |
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7 |
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8 |
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9 |
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(b) |
|
Other Employer Contributions |
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|
The Participants vested interest in the amount credited to his Account attributable to
Employer contributions other than Matching Contributions shall be based on the following
schedule: |
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|
Years of Service |
|
Vesting % |
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|
0 |
|
100 |
|
(insert
100 if there is immediate vesting) |
1 |
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2 |
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3 |
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4 |
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5 |
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6 |
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7 |
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8 |
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9 |
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|
October 2006
- 13 -
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(c) |
|
Acceleration of Vesting |
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|
A Participants vested interest in his Account will automatically be 100% upon the
occurrence of the following events: [select the ones that are applicable]: |
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(i) |
|
o |
|
Death |
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(ii) |
|
o |
|
Disability |
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(iii) |
|
o |
|
Change in Control |
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(iv) |
|
o |
|
Eligibility for Retirement |
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(v)
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|
o
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|
Other: |
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(vi) |
|
þ |
|
Not applicable. |
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(d) |
|
Years of Service |
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(i) |
|
A Participants Years of Service shall include all service performed for the Employer and |
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o
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Shall |
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o |
|
Shall Not |
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include service performed for the Related Employer. |
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(ii) |
|
Years of Service shall also include service performed for the following entities: |
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(iii) |
Years of Service shall be determined in accordance with (select one) |
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(A) o |
|
The elapsed time method in Treas. Reg. Se(c) 1.410(a)(7) |
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(B) o |
|
The general method in DOL Reg. Se(c) 2530.200b-1 through b-4 |
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(C) o |
|
The Participants Years of Service credited under [insert |
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|
name of plan] |
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(D) o
|
|
Other: |
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(iv)
|
|
þ
|
|
Not applicable. |
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|
October 2006
- 14 -
|
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|
|
8.01 |
|
UNFORESEEABLE
EMERGENCY |
|
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|
(a) |
|
A withdrawal due to an Unforeseeable Emergency as defined in Section 2.24: |
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|
þ
|
|
Will |
|
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|
o
|
|
Will Not [if Unforeseeable Emergency withdrawals are not
permitted, proceed to Section 9.01] |
|
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|
be allowed. |
|
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|
(b) |
|
Upon a withdrawal due to an Unforeseeable Emergency, a Participants deferral
election for the remainder of the Plan Year: |
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|
o
|
|
Will |
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|
o
|
|
Will not |
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þ
|
|
Not applicable |
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|
be cancelled. |
October 2006
- 15 -
|
|
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|
9.01 |
|
INVESTMENT
DECISIONS |
|
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|
Investment decisions regarding the hypothetical amounts credited to a Participants
Account shall be made by [select one]: |
|
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|
(a)
|
|
o
|
|
The Participant or his Beneficiary |
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|
(b)
|
|
þ
|
|
The Employer |
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|
|
|
Investment options are set forth in Appendix (A) |
October 2006
- 16 -
|
|
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|
10.01 |
|
GRANTOR TRUST |
|
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|
The Employer [select one]: |
|
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|
o
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Does |
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þ |
|
Does Not |
|
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|
intend to establish a grantor trust in connection with the Plan. |
October 2006
- 17 -
|
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|
11.01 |
|
TERMINATION UPON
CHANGE IN CONTROL |
|
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|
The Plan Sponsor |
|
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|
þ |
|
Reserves |
|
|
o |
|
Does Not Reserve |
|
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|
the right to terminate the Plan and distribute all vested amounts credited to Participant
Accounts upon a Change in Control as described in Section 9.7. |
|
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|
11.02 |
|
AUTOMATIC
DISTRIBUTION UPON CHANGE IN CONTROL |
|
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|
Distribution of the remaining vested balance of each Participants Account |
|
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|
o
|
|
Shall |
|
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|
þ
|
|
Shall Not |
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|
|
automatically be paid as a lump sum payment upon the occurrence of a Change in Control as
provided in Section 9.7. |
|
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|
11.03 |
|
CHANGE IN
CONTROL |
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|
A Change in Control for Plan purposes includes the following: |
|
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|
|
(a)
|
|
þ
|
|
A change in the ownership of the Employer as described in Section 9.7(c)
of the Plan. |
|
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|
|
|
|
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|
(b)
|
|
þ
|
|
A change in the effective control of the Employer as described in Section
9.7(d) of the Plan. |
|
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|
|
|
|
|
|
(c)
|
|
þ
|
|
A change in the ownership of a substantial portion of the assets of the
Employer as described in Section 9.7(e) of the Plan. |
October 2006
- 18 -
12.01 |
|
GOVERNING STATE LAW |
|
|
|
The laws of Texas shall apply in the administration of the Plan to the extent not
preempted by ERISA. |
October 2006
- 19 -
13.01 |
|
2005 TRANSITIONAL RULES |
The Plan Sponsor has made the following elections regarding the 2005 Transitional Rules set
forth in Section 4.5. The Plan Sponsor must specify default payment elections in 13.01(a)
whether or not the new payment elections are permitted.
|
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|
(a) |
|
New Payment Elections described in Section 4.5(a) of the Plan |
|
|
|
|
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|
|
|
|
|
|
|
|
|
þ |
|
Will Be Permitted until
12/31/2006 as described in Appendix B. |
|
|
o |
|
Will Not Be Permitted |
|
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|
|
|
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|
|
The default payment elections will be: |
|
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|
|
Lump sum upon separation from service. |
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|
(b) |
|
Elections to terminate participation or cancel an outstanding election as described in Section 4.5(b) of the Plan |
|
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|
o
|
|
Will |
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þ
|
|
Will Not |
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|
be permitted. |
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|
|
(c) |
|
Prospective Deferral Elections as described in Section 4.5(c) of the Plan |
|
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|
o
|
|
Will |
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þ
|
|
Will Not |
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be permitted. |
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|
Only a plan in existence on or before December 31, 2004 may offer Prospective Deferral Elections. |
|
|
13.02 |
|
2006 TRANSITIONAL RULE |
New payment elections as described in Section 4.6 of the Plan
|
|
|
þ
|
|
Will Be Permitted until 12/31/2006 as described in Appendix B. |
o
|
|
Will Not Be Permitted |
October 2006
- 20 -
EXECUTION PAGE
The Plan Sponsor has caused this
Adoption Agreement to be executed this
14th day of December, 2006.
|
|
|
|
|
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|
|
|
PLAN SPONSOR:
|
|
Diamond
Offshore Management Company
|
|
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|
By:
|
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|
Title:
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|
|
October 2006
- 21 -
APPENDIX
A
INVESTMENT
OPTIONS
|
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|
Fund Name |
|
|
Fund Number |
|
|
|
Ø Interest Credit Fund |
|
|
Ø UN2X |
|
|
|
|
Ø |
|
|
Ø |
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|
|
Ø |
|
|
Ø |
|
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|
Ø |
|
|
Ø |
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|
Ø |
|
|
Ø |
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|
Ø |
|
|
Ø |
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Note:
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Participant Accounts in the Interest Credit Fund maintained for the Plan shall be
adjusted to reflect hypothetical interest during each Plan Year based on the Moodys Aa Long Term
Corporate Bond Yield Average as of the last business day of the month of November of the
immediately preceding Plan Year. |
October 2006
- 22 -
APPENDIX B
SUMMARY OF GRANDFATHERED PROVISIONS
Notwithstanding any other provision of the Plan, amounts described in Section 1.3 of the Base
Plan Document that are earned and vested on December 31, 2004 shall be grandfathered under the
pre-409A provisions of the Diamond Offshore Management Company Deferred Compensation and
Supplemental Executive Retirement Plan through December 31, 2006. On and after January 1, 2007
amounts that were earned and vested on December 31, 2004 and earnings thereon shall no longer be
grandfathered and shall be subject to new payment elections as to time and form of payment that are
to be made by December 31, 2006 in accordance with transition relief provided by IRS in proposed
regulations issued September 29, 2005 and later amended. A single election as to time and form of
payment shall be applicable with respect to the amounts deferred prior to December 31, 2004
together with amounts deferred during 2005, and amounts deferred during 2006, and all earnings
thereon.
October 2006
- 23 -
APPENDIX C
SPECIAL EFFECTIVE DATES
October 2006
- 24 -
exv10w15
EXHIBIT 10.15
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (Agreement) is made by and between Diamond Offshore Management
Company. (Company), and John M. Vecchio (Executive), and is dated as of December 15, 2006.
WITNESSETH:
WHEREAS, Company desires to continue the employment of Executive and Executive desires to
remain in the employment of Company on the Effective Date, in each case on the terms and
conditions set forth herein;
NOW, THEREFORE, for and in consideration of the mutual promises, covenants and obligations
contained herein, Company and Executive agree as follows:
ARTICLE 1: EMPLOYMENT AND DUTIES
1.1 Employment; Effective Date. Company agrees to continue the employment of Executive
and Executive desires to remain in the employment of Company beginning on October 1, 2006 (the
Effective Date) and continuing for the period of time set forth in Article 2 of this Agreement,
subject to the terms and conditions of this Agreement.
1.2 Position. Company shall employ Executive in the position of Senior Vice
President-Technical Services (Job Title). In such capacity, Executive will, as reasonably
requested by the Board of Directors/President of Company from time to time, carry out the functions
of his office and furnish his best advice, information, judgment and knowledge with respect to the
business of the Company and its subsidiaries. During the term of his employment, Executive shall
be furnished with a private office and such other facilities and services as are commensurate with
his position with Company and adequate for the performance of his duties under this Agreement.
1.3 Business Expenses. Executive is authorized to incur reasonable expenses for the
discharge of his duties hereunder and the promotion of Companys business, including expenses for
entertainment, travel and related items. Company shall reimburse Executive for all such expenses
upon presentation by Executive from time to time of itemized accounts of expenditures incurred in
accordance with customary Company policies.
1.4 Exclusivity of Employment. Executive agrees his position with the Company will be
his sole employment and he will use his best efforts to discharge his duties and responsibilities
in such capacity and to act subject to the direction of the Chief Executive Officer/President.
Part-time activities that do not interfere with Executives duties and responsibilities pursuant to
this Agreement shall not constitute employment. Participation by Executive as a member of a board
of directors not related to the Company in any way, or such similar participation, shall require
the
consent of the President. During the Term of this Agreement, Executive shall not, directly or
knowingly indirectly, either as an Executive, officer, director, or in any other individual or
representative capacity, either for his own benefit or the benefit of any other person or entity
solicit, recruit, induce, entice, encourage or in any way cause any employee of Company (or an
affiliate) to terminate his/her employment with Company (or such affiliate). This Article is not
intended to limit the ability of Executive to terminate the employment of Company employees in the
course and scope of his position with Company.
ARTICLE 2: TERM AND TERMINATION OF EMPLOYMENT
2.1 Term. Unless sooner terminated pursuant to other provisions hereof, Company
agrees to employ Executive for a thirty-nine (39) month period beginning on the Effective Date and
concluding on December 31, 2009 (Term).
2.2 Companys Right to Terminate. Notwithstanding the provisions of paragraph 2.1,
Company shall have the right to terminate Executives employment under this Agreement at any time
for any of the following reasons:
(a) upon Executives death;
(b) upon Executives becoming unable to perform his duties hereunder due to sickness
or injury for a period of at least 180 consecutive days as a result of incapacity
due to mental or physical illness which is determined to be total and permanent by a
physician selected by the Company or its insurers and acceptable to Executive or
Executives legal representatives (a Disability);
(c) if Executive engages in conduct that constitutes: (i) a breach of his fiduciary
duty to Company or its shareholders; (ii) in carrying out his duties hereunder
engages in conduct that constitutes acts of fraud; (iii) in carrying out his duties
hereunder engages in conduct that constitutes gross neglect; (iv) in carrying out
his duties hereunder engages in conduct that constitutes gross misconduct resulting,
in any case, in economic harm to Company; or (v) upon the conviction of Executive
for a felony; and
(d) for any other reason whatsoever, in the sole discretion of Company.
For purposes of this Agreement, a termination by Company under clause (c) above shall
constitute a termination by Company for Cause. Cause, however, shall not include bad judgment or
any act or omission believed by the Executive in good faith to have been in or not opposed to the
interest of Company (without intent by the Executive to gain, directly or indirectly, a profit to
which he was not legally entitled).
2.3 Executives Right to Terminate. Notwithstanding the provisions of Article 2.1,
Executive shall have the right to terminate his employment under this Agreement at any time for any
of the following reasons:
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(a) without Executives consent, a substantial and material diminishment of
Executives duties, responsibilities and status with the Company as described in
Article 1.2, above;
(b) a reduction in Executives Base Salary and/or Job Title;
(c) the Companys requiring Executive to relocate anywhere other than Houston,
Texas, except in the event Executives office is moved no more than 50 miles from
its present location, or, in the event Executive consents to such relocation out of
Houston, Texas, the failure by Company to pay or reimburse Executive for all
reasonable moving expenses incurred by Executive relating to a change of Executives
principal residence in connection with such relocation and to indemnify Executive
against any loss (defined as the difference between the actual bona fide sale price
of such residence and the fair market value of such residence as determined by a
member of the Society of Real Estate Appraisers designated by Executive and
satisfactory to Company) realized in the sale of Executives principal residence in
connection with any such change of residence; and
(d) for any other reason whatsoever, in the sole discretion of Executive.
For purposes of this Agreement: (i) a termination of employment by Executive under clauses (a)
through (c) above shall constitute a termination of employment by Executive for Good Reason; and
(ii) a termination of employment by Executive under clause (d) above shall constitute a termination
of employment by Executive without Good Reason.
2.4 Notice of Termination. Notwithstanding the provisions in Article 2.1 herein
relating to the Term of this Agreement, if Company or Executive desires to terminate Executives
employment hereunder at any time prior to expiration of the Term of employment as provided in
Article 2.1, it or he shall do so by giving a minimum of fifteen (15) days written notice to the
other party that it or he has elected to terminate Executives employment hereunder and stating the
effective date and reason for such termination, provided that no such action shall alter or amend
any other provisions hereof or rights arising hereunder. Executive must provide fifteen (15) days
notice of separation to be eligible for the benefits described in Article 4.1.
2.5 Extension of Agreement. Following expiration of the Term of this Agreement, the
Term will be automatically extended for successive terms of one (1) year commencing on the
anniversary of the Effective Date.
ARTICLE 3: COMPENSATION AND BENEFITS
3.1 Base Salary. During the Term, Executive shall receive an annual base salary equal
to $350,000 (Base Salary), subject to increases as the Chief Executive Officer/President of the
Company may, in their sole discretion, from time to time determine. Executives Base Salary shall
be paid in equal installments in accordance with Companys standard practices and
3
pay dates regarding payment of compensation to executives and shall be subject to applicable
withholding and deductions.
3.2 Executive Health and Welfare Benefits. Executive shall be entitled to participate
in Companys insurance plans (medical, dental, life and disability), during the term of this
Agreement. Upon termination of Executives employment under Articles 2.2(a), 2.2(b), 2.2(d),
2.3(a), 2.3(b) or 2.3(c) and for the remaining Term under this Agreement but not less than two (2)
years thereafter, Company shall continue to provide Executive with insurance benefits (medical,
dental, life and disability) which Executive was receiving or entitled to receive at the time of
his termination of employment, with all costs paid by Company. Company, shall, however, issue
Executive a COBRA notice upon the termination of his employment. Such insurance benefits shall be
discontinued to the extent Executive is eligible to receive comparable coverage from a subsequent
employer and/or except to the extent that the subsequent employers plan does not cover the
preexisting medical conditions of the Executive or a previously covered member of the Executives
family.
3.3 Other Benefits/Compensation. During the term of this Agreement, Executive shall
be entitled to participate in such employee benefit and compensation programs, plans and policies
as are maintained by Company and as may be established for employees of Company from time to time
on the same basis as other executive employees are entitled thereto. These include plans or
policies relating to funded and unfunded executive benefits, such as bonus compensation, vacation
time, leave time, retirement plans and stock plans. It is understood that the establishment,
termination or change in any such executive employee benefit program, plan or policy may be made by
the Company in the exercise of its sole discretion, from time to time, and any such termination or
change in such program, plan or policy will not constitute a modification to this Agreement so long
as Executive is permitted to participate in such program, plan or policy, as the case may be, as is
available to other executives. Upon termination of employment, without regard to the manner in
which the termination was brought about, Executives rights in such employee benefit and
compensation programs, plans or policies shall be governed solely by the terms of the program, plan
or policy itself unless otherwise stated to the contrary herein.
3.4 Management Performance Bonus Program. Unless sooner terminated by operation of
this Agreement, the provisions of this article 3.4 shall apply during the initial-three year term
of this Agreement and terminate on September 30, 2009 (the Bonus Term).
During the Bonus Term, Executive shall be eligible to participate in bonus plans made
available to executive employees of the Company in a position commensurate with Executives
position (Bonus Plans). Under the terms of the Companys current Bonus Plans, Executive has an
opportunity to earn an annual cash bonus (Bonus Amount) measured against objective financial
performance criteria to be determined by the board of directors of Diamond Offshore Drilling, Inc.
(or a committee thereof), at its sole discretion. The desired but not guaranteed target Bonus
Amount is equal to a range between 60% and 65% of Executives Base Salary, and in no event shall
the Bonus Amount payable in any given year exceed 100% of Executives Base Salary. Any Bonus Amount
awarded to Executive under the Bonus Plans shall be paid in full each February.
4
Except as otherwise provided for in this article 3.4, the provisions hereof shall not be
construed to, or actually, amend or modify the terms of any established Bonus Plan, which terms
shall control and govern any Bonus Amount awarded pursuant thereto.
ARTICLE 4: EFFECT OF TERMINATION ON COMPENSATION
4.1 By Company Without Cause, By Company as a Result of Executives Death or Disability,
or By Executive for Good Reason Prior to Expiration of Term. If Executives employment
hereunder shall terminate on a date (Date of Termination) (i) by Company without Cause prior to
the expiration of the Term (ii) as a result of Executives death or Disability prior to the
Expiration of the Term, or (iii) by Executive for Good Reason (and, giving Company no less than
fifteen (15) days notice) prior to the expiration of the Term, then, upon such termination, the
payments and benefits described below will be provided to Executive, or in the event of Executives
death, to his spouse (or his estate if he is not married or his spouse does not survive him):
(a) Within thirty (30) days after the Date of Termination, Company shall pay any
Accrued Obligations and/or any amounts owed but unpaid to Executive under any plan,
policy or program of Company as of the Date of Termination provided by, and in
accordance with the terms of, such plan, policy or program;
(b) Company shall pay Executive severance consisting of an amount equal to
Executives Base Salary (less lawful deductions, as set forth in Article 3.1) for
the remaining Term of this Agreement, or for twenty-four (24) months, whichever is
greater. The severance shall be payable not less frequently than in equal monthly
installments following termination or in the case of Executives death, the
severance shall be payable in a lump sum;
(c) Any unexercised and/or unvested stock option grant or equivalent (SARS paid in
stock) held by Executive upon termination of employment shall be fully vested on the
date of termination and be eligible for exercise as provided for in the applicable
plan document; and
(d) Company shall, at its sole expense as incurred, provide the Executive with
customary outplacement services commensurate with Executives position but in no
event shall the provision of such services exceed twelve (12) months or $25,000.
4.2 By Executive Without Good Reason or By Company for Cause. If Executives
employment hereunder shall be terminated by Company for Cause or by Executive without Good Reason,
then within thirty (30) days of the Date of Termination Company shall pay any Accrued Obligations
and/or any amounts owed but unpaid to Executive under any plan, policy or program of Company as of
the Date of Termination provided by, and in accordance with the terms of, such plan, policy or
program. All compensation and benefits to Executive hereunder shall terminate
5
contemporaneously with the termination of such employment. Additionally, Company shall provide
employee with a COBRA notice and other legally required notices.
4.3 Payment Obligations Absolute/Release of Claims. Except as set forth in the
following Article, Companys obligation to pay Executive the amounts and to make the arrangements
provided in this Article 4 shall be absolute and unconditional and shall not be affected by any
circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or
other right which Company (including its subsidiaries and affiliates) may have against him or
anyone else. All amounts payable by Company shall be paid without notice or demand. Executive shall
not be obligated to seek other employment in mitigation of the amounts payable or arrangements made
under any provision of this Article 4, and the obtaining of any such other employment (or the
engagement in any endeavor as an independent contractor, sole proprietor, partner, or joint
venturer) shall in no event effect any reduction of Companys obligations to make (or cause to be
made) the payments and arrangements required to be made under this Article 4.
Executive acknowledges and agrees that the payments and benefits provided for in Article 4.1
constitute the exclusive remedy of Executive upon termination of employment for any reason.
Executive further agrees that, as a condition to receiving such payments and benefits, Executive
(or, if deceased or disabled, his estate or legal guardian) shall execute a complete and global
release of claims relating to or arising out of his employment with, and termination of employment
from, Company in a reasonable and customary form acceptable to Company. In the absence of
Executives execution and delivery to Company of such a release, Company shall have no obligation
to Executive to make any payment of the benefits as provided for in Article 4.1.
4.4 Accrued Obligations. For purposes of this Agreement, Accrued Obligations shall
mean, as of the Date of Termination, the sum of (i) Executives Base Salary through the Date of
Termination to the extent not previously paid, (ii) except as otherwise previously requested by
Executive, the amount of any compensation accrued by Executive as of the Date of Termination to the
extent not previously paid, and (iii) any expense reimbursements and any other cash entitlements
accrued by Executive as of the Date of Termination to the extent not previously paid.
4.5 Section 409A of the Internal Revenue Code. Notwithstanding any other provision of
this Agreement, if Internal Revenue Code Section 409A is applicable to this Agreement and Executive
is determined to be a Specified Employee for purposes of Section 409A, payments and benefits
under article 4.1 shall be paid no earlier than a date which is six months following Executives
Date of Termination. Any amounts that were otherwise scheduled to be paid during such six (6) month
period shall be paid in a lump sum upon expiration of such six (6) month period with all accrued
interest calculated from the Date of Termination until such lump sum payment and equal to the
average six (6) month U.S. Treasury Rate for the year. To the extent that the provision of any
other payments or benefits under this Agreement are governed by Section 409A, as amended, the
parties will work together in good faith to amend any provisions necessary for compliance or make
payments in a manner to avoid or minimize excise tax,
6
penalties or interest as a result of the provisions of Section 409A, while maintaining the basic
financial provisions of this Agreement.
4.6 Confidentiality and Nondisclosure. Executive agrees that he will not, at any
time during or after the Term, make use of or divulge to any other person, firm or corporation any
trade or business secret, process, method or means, or any other confidential information,
including personnel information, concerning the business policies of the Company, which he may have
learned in connection with his employment hereunder. For purposes of this Agreement, a trade or
business secret, process, method or means, or any other confidential information, including
personnel information shall mean and include information treated either as confidential or as a
trade secret by the Company. Executives obligation under this Article 4.6 shall not apply to any
information which (a) is known publicly; (b) is in the public domain or hereafter enters the public
domain without the fault of Executive; (c) is known to Executive prior to his receipt of such
information from the Company, as evidenced by written records of Executive; or (d) is hereafter
disclosed to Executive by a third party not under an obligation of confidence to Company.
Executive agrees not to remove from the premises of Company, except as an Executive of Company in
pursuit of the business of Company or except as specifically permitted in writing by Company, any
document or other object containing or reflecting any such confidential information. Executive
recognizes that all such documents and objects, whether developed by him or by someone else, will
be the sole and exclusive property of Company. Upon termination of his employment hereunder,
Executive shall forthwith deliver to Company all such confidential information, including without
limitation all lists of lessees, customers, correspondence, employees, accounts, records and any
other documents or property made or held by him or under his control in relation to the business or
affairs of Company, and no copy of any such confidential information shall be retained by him.
4.7 Non-Solicitation of Employees/Former Employees. In the event this Agreement is
terminated or once Executive ceases to be an employee at any time for any reason, Executive agrees
that for a period of two (2) years after such termination, Executive shall not, directly or
knowingly indirectly, either as an executive, employer, independent contractor, consultant, agent,
principal, partner, stockholder, officer, director, or in any other individual or representative
capacity, either for his own benefit or the benefit of any other person or entity: (a) solicit,
recruit, induce, entice, encourage or in any way cause any executive or management level person who
is or was an employee of Company (or affiliate) within the six (6) months prior to Executives
termination of employment with Company or thereafter to terminate his/her employment with Company
(or such affiliate); or (b) directly solicit for hire, directly entice for hire, hire, or directly
recruit any person who is or was an employee of Company within the six (6) months prior to
Executives termination of employment with Company or thereafter.
ARTICLE 5: MISCELLANEOUS
5.1 Notices. For purposes of this Agreement, notices and all other communications
provided for herein shall be in writing and shall be deemed to have been duly given when personally
delivered or three days after the date mailed by United States registered or certified mail, return
receipt requested, or by a nationally known overnight courier, in either case postage prepaid and
addressed as follows: If to Company, to its General Counsel and its President at its
7
corporate address of record. If to Executive, to the most recent home address on file with
Company, or to such other address as either party may furnish to the other in writing in accordance
herewith, except that notices of changes of address shall be effective only upon receipt.
5.2 Applicable Law/Venue. This contract is entered into under, and shall be governed
for all purposes by, the laws of the State of Texas without reference to the principles of
conflicts of laws. Executive and Company agree that Harris County, Texas will be the exclusive
venue for any lawsuit or dispute between the parties relating to this Agreement, the relationship
between the parties and/or the termination thereof.
5.3 No Waiver. No failure by either party hereto at any time to give notice of any
breach by the other party of, or to require compliance with, any condition or provision of this
Agreement shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or
at any prior or subsequent time.
5.4 Severability. If a court of competent jurisdiction determines that any provision
of this Agreement is invalid or unenforceable, then the invalidity or unenforceability of that
provision shall not affect the validity or enforceability of any other provision of this Agreement,
and all other provisions shall remain in full force and effect.
5.5 Counterparts. This Agreement may be executed in one or more counterparts, each of
which shall be deemed to be original, but all of which together will constitute one and the same
Agreement.
5.6 Withholding of Taxes and Other Executive Deductions. Company may withhold from any
benefits and payments made pursuant to this Agreement all federal, state, city and other taxes as
may be required pursuant to any law or governmental regulation or ruling and all other normal
executive deductions made with respect to Companys executives generally.
5.7 Headings. The paragraph headings have been inserted for purposes of convenience
and shall not be used for interpretive purposes.
5.8 Gender and Plurals. Wherever the context so requires, the masculine gender
includes the feminine or neuter, and the singular number includes the plural and conversely.
5.9 Parent. All the benefits received by Company in this Agreement shall also inure
to the benefit of Diamond Offshore Drilling, Inc, parent of Company.
5.10 Successors. This Agreement shall be binding upon and inure to the benefit of
Company and any successor of Company, including without limitation any person, association, or
entity which may hereafter acquire or succeed to all or substantially all of the business or assets
of Company by any means whether direct or indirect, by purchase, merger, consolidation, or
otherwise. Except as provided in the preceding sentence, this Agreement, and the rights and
obligations of the parties hereunder, are personal and neither this Agreement, nor any right,
benefit or obligation of either party hereto, shall be subject to voluntary or involuntary
8
assignment, alienation or transfer, whether by operation of law or otherwise, without the
prior written consent of the other party.
5.11 Vested Rights/Reemployment. The term of this Agreement is co-extensive with the
Term of employment as set forth in Article 2.1. Termination shall not affect any right or
obligation of any party which is accrued or vested prior to or upon such termination or by its
terms continues following the termination of the Term, including without limitation Articles 4.6,
4.7, 5.1, and 5.2 of this Agreement. Executive further agrees that upon termination of his
employment by the Company, he shall not re-apply or otherwise seek employment with Company in the
future and that Company has no obligation to re-hire him.
5.12 Entire Agreement; Conflict. This Agreement sets forth the entire agreement of the
parties with respect to the subject matter hereof and expressly supersedes all oral or written
agreements between the parties; except, this Agreement is not intended to modify, abrogate or
supersede any of the parties obligations as reflected in benefit or compensation plans, policies
or programs in which Executive participates as set forth in Article 3.3 herein. Any modification of
this Agreement shall be effective only if it is in writing and signed by the party to be charged.
In the event of any conflict between the terms of this Agreement and the terms of any policy, plan
or program of Company not heretofore specified, the terms of this Agreement shall govern.
5.13 Specific Performance. Company and Executive, jointly and severally, acknowledge
that it would be impossible to calculate or ascertain accurately and definitively the damages
Company would sustain from a breach by Executive of the provisions of Articles 4.6 and 4.7 of this
Agreement and that no adequate remedy at law exists. Accordingly, in the event of a threatened
breach by Executive of said provisions, Company shall be entitled to an injunction restraining such
prohibited activity. Nothing herein, however, shall be construed as prohibiting Company from
pursuing any other remedies available to Company for such breach or threatened breach, including
recovery of damages from Executive.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date set forth
above.
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Diamond Offshore Management Company
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By: |
/s/ Lawrence R. Dickerson
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Name: |
Lawrence R. Dickerson |
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Title: |
President and Chief Operating Officer |
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EXECUTIVE:
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/s/ John M. Vecchio
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9
exv10w16
EXHIBIT 10.16
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (Agreement) is made by and between Diamond Offshore Management
Company. (Company), and William C. Long (Executive), and is dated as of December 15, 2006.
WITNESSETH:
WHEREAS, Company desires to continue the employment of Executive and Executive desires to
remain in the employment of Company on the Effective Date, in each case on the terms and
conditions set forth herein;
NOW, THEREFORE, for and in consideration of the mutual promises, covenants and obligations
contained herein, Company and Executive agree as follows:
ARTICLE 1: EMPLOYMENT AND DUTIES
1.1 Employment; Effective Date. Company agrees to continue the employment of Executive
and Executive desires to remain in the employment of Company beginning on October 1, 2006 (the
Effective Date) and continuing for the period of time set forth in Article 2 of this Agreement,
subject to the terms and conditions of this Agreement.
1.2 Position. Company shall employ Executive in the position of Senior Vice President,
General Counsel and Secretary (Job Title). In such capacity, Executive will, as reasonably
requested by the Board of Directors/President of Company from time to time, carry out the functions
of his office and furnish his best advice, information, judgment and knowledge with respect to the
business of the Company and its subsidiaries. During the term of his employment, Executive shall
be furnished with a private office and such other facilities and services as are commensurate with
his position with Company and adequate for the performance of his duties under this Agreement.
1.3 Business Expenses. Executive is authorized to incur reasonable expenses for the
discharge of his duties hereunder and the promotion of Companys business, including expenses for
entertainment, travel and related items. Company shall reimburse Executive for all such expenses
upon presentation by Executive from time to time of itemized accounts of expenditures incurred in
accordance with customary Company policies.
1.4 Exclusivity of Employment. Executive agrees his position with the Company will be
his sole employment and he will use his best efforts to discharge his duties and responsibilities
in such capacity and to act subject to the direction of the Chief Executive Officer/President.
Part-time activities that do not interfere with Executives duties and responsibilities pursuant to
this Agreement shall not constitute employment. Participation by Executive as a member of a board
of directors not related to the Company in any way, or such similar participation, shall require
the
consent of the President. During the Term of this Agreement, Executive shall not, directly or
knowingly indirectly, either as an Executive, officer, director, or in any other individual or
representative capacity, either for his own benefit or the benefit of any other person or entity
solicit, recruit, induce, entice, encourage or in any way cause any employee of Company (or an
affiliate) to terminate his/her employment with Company (or such affiliate). This Article is not
intended to limit the ability of Executive to terminate the employment of Company employees in the
course and scope of his position with Company.
ARTICLE 2: TERM AND TERMINATION OF EMPLOYMENT
2.1 Term. Unless sooner terminated pursuant to other provisions hereof, Company
agrees to employ Executive for a thirty-nine (39) month period beginning on the Effective Date and
concluding on December 31, 2009 (Term).
2.2 Companys Right to Terminate. Notwithstanding the provisions of paragraph 2.1,
Company shall have the right to terminate Executives employment under this Agreement at any time
for any of the following reasons:
(a) upon Executives death;
(b) upon Executives becoming unable to perform his duties hereunder due to sickness
or injury for a period of at least 180 consecutive days as a result of incapacity
due to mental or physical illness which is determined to be total and permanent by a
physician selected by the Company or its insurers and acceptable to Executive or
Executives legal representatives (a Disability);
(c) if Executive engages in conduct that constitutes: (i) a breach of his fiduciary
duty to Company or its shareholders; (ii) in carrying out his duties hereunder
engages in conduct that constitutes acts of fraud; (iii) in carrying out his duties
hereunder engages in conduct that constitutes gross neglect; (iv) in carrying out
his duties hereunder engages in conduct that constitutes gross misconduct resulting,
in any case, in economic harm to Company; or (v) upon the conviction of Executive
for a felony; and
(d) for any other reason whatsoever, in the sole discretion of Company.
For purposes of this Agreement, a termination by Company under clause (c) above shall
constitute a termination by Company for Cause. Cause, however, shall not include bad judgment or
any act or omission believed by the Executive in good faith to have been in or not opposed to the
interest of Company (without intent by the Executive to gain, directly or indirectly, a profit to
which he was not legally entitled).
2.3 Executives Right to Terminate. Notwithstanding the provisions of Article 2.1,
Executive shall have the right to terminate his employment under this Agreement at any time for any
of the following reasons:
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(a) without Executives consent, a substantial and material diminishment of
Executives duties, responsibilities and status with the Company as described in
Article 1.2, above;
(b) a reduction in Executives Base Salary and/or Job Title;
(c) the Companys requiring Executive to relocate anywhere other than Houston,
Texas, except in the event Executives office is moved no more than 50 miles from
its present location, or, in the event Executive consents to such relocation out of
Houston, Texas, the failure by Company to pay or reimburse Executive for all
reasonable moving expenses incurred by Executive relating to a change of Executives
principal residence in connection with such relocation and to indemnify Executive
against any loss (defined as the difference between the actual bona fide sale price
of such residence and the fair market value of such residence as determined by a
member of the Society of Real Estate Appraisers designated by Executive and
satisfactory to Company) realized in the sale of Executives principal residence in
connection with any such change of residence; and
(d) for any other reason whatsoever, in the sole discretion of Executive.
For purposes of this Agreement: (i) a termination of employment by Executive under clauses (a)
through (c) above shall constitute a termination of employment by Executive for Good Reason; and
(ii) a termination of employment by Executive under clause (d) above shall constitute a termination
of employment by Executive without Good Reason.
2.4 Notice of Termination. Notwithstanding the provisions in Article 2.1 herein
relating to the Term of this Agreement, if Company or Executive desires to terminate Executives
employment hereunder at any time prior to expiration of the Term of employment as provided in
Article 2.1, it or he shall do so by giving a minimum of fifteen (15) days written notice to the
other party that it or he has elected to terminate Executives employment hereunder and stating the
effective date and reason for such termination, provided that no such action shall alter or amend
any other provisions hereof or rights arising hereunder. Executive must provide fifteen (15) days
notice of separation to be eligible for the benefits described in Article 4.1.
2.5 Extension of Agreement. Following expiration of the Term of this Agreement, the
Term will be automatically extended for successive terms of one (1) year commencing on the
anniversary of the Effective Date.
ARTICLE 3: COMPENSATION AND BENEFITS
3.1 Base Salary. During the Term, Executive shall receive an annual base salary equal
to $320,000 (Base Salary), subject to increases as the Chief Executive Officer/President of the
Company may, in their sole discretion, from time to time determine. Executives Base Salary shall
be paid in equal installments in accordance with Companys standard practices and
3
pay dates regarding payment of compensation to executives and shall be subject to applicable
withholding and deductions.
3.2 Executive Health and Welfare Benefits. Executive shall be entitled to participate
in Companys insurance plans (medical, dental, life and disability), during the term of this
Agreement. Upon termination of Executives employment under Articles 2.2(a), 2.2(b), 2.2(d),
2.3(a), 2.3(b) or 2.3(c) and for the remaining Term under this Agreement but not less than two (2)
years thereafter, Company shall continue to provide Executive with insurance benefits (medical,
dental, life and disability) which Executive was receiving or entitled to receive at the time of
his termination of employment, with all costs paid by Company. Company, shall, however, issue
Executive a COBRA notice upon the termination of his employment. Such insurance benefits shall be
discontinued to the extent Executive is eligible to receive comparable coverage from a subsequent
employer and/or except to the extent that the subsequent employers plan does not cover the
preexisting medical conditions of the Executive or a previously covered member of the Executives
family.
3.3 Other Benefits/Compensation. During the term of this Agreement, Executive shall
be entitled to participate in such employee benefit and compensation programs, plans and policies
as are maintained by Company and as may be established for employees of Company from time to time
on the same basis as other executive employees are entitled thereto. These include plans or
policies relating to funded and unfunded executive benefits, such as bonus compensation, vacation
time, leave time, retirement plans and stock plans. It is understood that the establishment,
termination or change in any such executive employee benefit program, plan or policy may be made by
the Company in the exercise of its sole discretion, from time to time, and any such termination or
change in such program, plan or policy will not constitute a modification to this Agreement so long
as Executive is permitted to participate in such program, plan or policy, as the case may be, as is
available to other executives. Upon termination of employment, without regard to the manner in
which the termination was brought about, Executives rights in such employee benefit and
compensation programs, plans or policies shall be governed solely by the terms of the program, plan
or policy itself unless otherwise stated to the contrary herein.
3.4 Management Performance Bonus Program. Unless sooner terminated by operation of
this Agreement, the provisions of this article 3.4 shall apply during the initial-three year term
of this Agreement and terminate on September 30, 2009 (the Bonus Term).
During the Bonus Term, Executive shall be eligible to participate in bonus plans made
available to executive employees of the Company in a position commensurate with Executives
position (Bonus Plans). Under the terms of the Companys current Bonus Plans, Executive has an
opportunity to earn an annual cash bonus (Bonus Amount) measured against objective financial
performance criteria to be determined by the board of directors of Diamond Offshore Drilling, Inc.
(or a committee thereof), at its sole discretion. The desired but not guaranteed target Bonus
Amount is equal to a range between 60% and 65% of Executives Base Salary, and in no event shall
the Bonus Amount payable in any given year exceed 100% of Executives Base Salary. Any Bonus Amount
awarded to Executive under the Bonus Plans shall be paid in full each February.
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Except as otherwise provided for in this article 3.4, the provisions hereof shall not be
construed to, or actually, amend or modify the terms of any established Bonus Plan, which terms
shall control and govern any Bonus Amount awarded pursuant thereto.
ARTICLE 4: EFFECT OF TERMINATION ON COMPENSATION
4.1 By Company Without Cause, By Company as a Result of Executives Death or Disability,
or By Executive for Good Reason Prior to Expiration of Term. If Executives employment
hereunder shall terminate on a date (Date of Termination) (i) by Company without Cause prior to
the expiration of the Term (ii) as a result of Executives death or Disability prior to the
Expiration of the Term, or (iii) by Executive for Good Reason (and, giving Company no less than
fifteen (15) days notice) prior to the expiration of the Term, then, upon such termination, the
payments and benefits described below will be provided to Executive, or in the event of Executives
death, to his spouse (or his estate if he is not married or his spouse does not survive him):
(a) Within thirty (30) days after the Date of Termination, Company shall pay any
Accrued Obligations and/or any amounts owed but unpaid to Executive under any plan,
policy or program of Company as of the Date of Termination provided by, and in
accordance with the terms of, such plan, policy or program;
(b) Company shall pay Executive severance consisting of an amount equal to
Executives Base Salary (less lawful deductions, as set forth in Article 3.1) for
the remaining Term of this Agreement, or for twenty-four (24) months, whichever is
greater. The severance shall be payable not less frequently than in equal monthly
installments following termination or in the case of Executives death, the
severance shall be payable in a lump sum;
(c) Any unexercised and/or unvested stock option grant or equivalent (SARS paid in
stock) held by Executive upon termination of employment shall be fully vested on the
date of termination and be eligible for exercise as provided for in the applicable
plan document; and
(d) Company shall, at its sole expense as incurred, provide the Executive with
customary outplacement services commensurate with Executives position but in no
event shall the provision of such services exceed twelve (12) months or $25,000.
4.2 By Executive Without Good Reason or By Company for Cause. If Executives
employment hereunder shall be terminated by Company for Cause or by Executive without Good Reason,
then within thirty (30) days of the Date of Termination Company shall pay any Accrued Obligations
and/or any amounts owed but unpaid to Executive under any plan, policy or program of Company as of
the Date of Termination provided by, and in accordance with the terms of, such plan, policy or
program. All compensation and benefits to Executive hereunder shall terminate
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contemporaneously with the termination of such employment. Additionally, Company shall provide
employee with a COBRA notice and other legally required notices.
4.3 Payment Obligations Absolute/Release of Claims. Except as set forth in the
following Article, Companys obligation to pay Executive the amounts and to make the arrangements
provided in this Article 4 shall be absolute and unconditional and shall not be affected by any
circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or
other right which Company (including its subsidiaries and affiliates) may have against him or
anyone else. All amounts payable by Company shall be paid without notice or demand. Executive shall
not be obligated to seek other employment in mitigation of the amounts payable or arrangements made
under any provision of this Article 4, and the obtaining of any such other employment (or the
engagement in any endeavor as an independent contractor, sole proprietor, partner, or joint
venturer) shall in no event effect any reduction of Companys obligations to make (or cause to be
made) the payments and arrangements required to be made under this Article 4.
Executive acknowledges and agrees that the payments and benefits provided for in Article 4.1
constitute the exclusive remedy of Executive upon termination of employment for any reason.
Executive further agrees that, as a condition to receiving such payments and benefits, Executive
(or, if deceased or disabled, his estate or legal guardian) shall execute a complete and global
release of claims relating to or arising out of his employment with, and termination of employment
from, Company in a reasonable and customary form acceptable to Company. In the absence of
Executives execution and delivery to Company of such a release, Company shall have no obligation
to Executive to make any payment of the benefits as provided for in Article 4.1.
4.4 Accrued Obligations. For purposes of this Agreement, Accrued Obligations shall
mean, as of the Date of Termination, the sum of (i) Executives Base Salary through the Date of
Termination to the extent not previously paid, (ii) except as otherwise previously requested by
Executive, the amount of any compensation accrued by Executive as of the Date of Termination to the
extent not previously paid, and (iii) any expense reimbursements and any other cash entitlements
accrued by Executive as of the Date of Termination to the extent not previously paid.
4.5 Section 409A of the Internal Revenue Code. Notwithstanding any other provision of
this Agreement, if Internal Revenue Code Section 409A is applicable to this Agreement and Executive
is determined to be a Specified Employee for purposes of Section 409A, payments and benefits
under article 4.1 shall be paid no earlier than a date which is six months following Executives
Date of Termination. Any amounts that were otherwise scheduled to be paid during such six (6) month
period shall be paid in a lump sum upon expiration of such six (6) month period with all accrued
interest calculated from the Date of Termination until such lump sum payment and equal to the
average six (6) month U.S. Treasury Rate for the year. To the extent that the provision of any
other payments or benefits under this Agreement are governed by Section 409A, as amended, the
parties will work together in good faith to amend any provisions necessary for compliance or make
payments in a manner to avoid or minimize excise tax,
6
penalties or interest as a result of the provisions of Section 409A, while maintaining the basic
financial provisions of this Agreement.
4.6 Confidentiality and Nondisclosure. Executive agrees that he will not, at any
time during or after the Term, make use of or divulge to any other person, firm or corporation any
trade or business secret, process, method or means, or any other confidential information,
including personnel information, concerning the business policies of the Company, which he may have
learned in connection with his employment hereunder. For purposes of this Agreement, a trade or
business secret, process, method or means, or any other confidential information, including
personnel information shall mean and include information treated either as confidential or as a
trade secret by the Company. Executives obligation under this Article 4.6 shall not apply to any
information which (a) is known publicly; (b) is in the public domain or hereafter enters the public
domain without the fault of Executive; (c) is known to Executive prior to his receipt of such
information from the Company, as evidenced by written records of Executive; or (d) is hereafter
disclosed to Executive by a third party not under an obligation of confidence to Company.
Executive agrees not to remove from the premises of Company, except as an Executive of Company in
pursuit of the business of Company or except as specifically permitted in writing by Company, any
document or other object containing or reflecting any such confidential information. Executive
recognizes that all such documents and objects, whether developed by him or by someone else, will
be the sole and exclusive property of Company. Upon termination of his employment hereunder,
Executive shall forthwith deliver to Company all such confidential information, including without
limitation all lists of lessees, customers, correspondence, employees, accounts, records and any
other documents or property made or held by him or under his control in relation to the business or
affairs of Company, and no copy of any such confidential information shall be retained by him.
4.7 Non-Solicitation of Employees/Former Employees. In the event this Agreement is
terminated or once Executive ceases to be an employee at any time for any reason, Executive agrees
that for a period of two (2) years after such termination, Executive shall not, directly or
knowingly indirectly, either as an executive, employer, independent contractor, consultant, agent,
principal, partner, stockholder, officer, director, or in any other individual or representative
capacity, either for his own benefit or the benefit of any other person or entity: (a) solicit,
recruit, induce, entice, encourage or in any way cause any executive or management level person who
is or was an employee of Company (or affiliate) within the six (6) months prior to Executives
termination of employment with Company or thereafter to terminate his/her employment with Company
(or such affiliate); or (b) directly solicit for hire, directly entice for hire, hire, or directly
recruit any person who is or was an employee of Company within the six (6) months prior to
Executives termination of employment with Company or thereafter.
ARTICLE 5: MISCELLANEOUS
5.1 Notices. For purposes of this Agreement, notices and all other communications
provided for herein shall be in writing and shall be deemed to have been duly given when personally
delivered or three days after the date mailed by United States registered or certified mail, return
receipt requested, or by a nationally known overnight courier, in either case postage prepaid and
addressed as follows: If to Company, to its General Counsel and its President at its
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corporate address of record. If to Executive, to the most recent home address on file with
Company, or to such other address as either party may furnish to the other in writing in accordance
herewith, except that notices of changes of address shall be effective only upon receipt.
5.2 Applicable Law/Venue. This contract is entered into under, and shall be governed
for all purposes by, the laws of the State of Texas without reference to the principles of
conflicts of laws. Executive and Company agree that Harris County, Texas will be the exclusive
venue for any lawsuit or dispute between the parties relating to this Agreement, the relationship
between the parties and/or the termination thereof.
5.3 No Waiver. No failure by either party hereto at any time to give notice of any
breach by the other party of, or to require compliance with, any condition or provision of this
Agreement shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or
at any prior or subsequent time.
5.4 Severability. If a court of competent jurisdiction determines that any provision
of this Agreement is invalid or unenforceable, then the invalidity or unenforceability of that
provision shall not affect the validity or enforceability of any other provision of this Agreement,
and all other provisions shall remain in full force and effect.
5.5 Counterparts. This Agreement may be executed in one or more counterparts, each of
which shall be deemed to be original, but all of which together will constitute one and the same
Agreement.
5.6 Withholding of Taxes and Other Executive Deductions. Company may withhold from any
benefits and payments made pursuant to this Agreement all federal, state, city and other taxes as
may be required pursuant to any law or governmental regulation or ruling and all other normal
executive deductions made with respect to Companys executives generally.
5.7 Headings. The paragraph headings have been inserted for purposes of convenience
and shall not be used for interpretive purposes.
5.8 Gender and Plurals. Wherever the context so requires, the masculine gender
includes the feminine or neuter, and the singular number includes the plural and conversely.
5.9 Parent. All the benefits received by Company in this Agreement shall also inure
to the benefit of Diamond Offshore Drilling, Inc, parent of Company.
5.10 Successors. This Agreement shall be binding upon and inure to the benefit of
Company and any successor of Company, including without limitation any person, association, or
entity which may hereafter acquire or succeed to all or substantially all of the business or assets
of Company by any means whether direct or indirect, by purchase, merger, consolidation, or
otherwise. Except as provided in the preceding sentence, this Agreement, and the rights and
obligations of the parties hereunder, are personal and neither this Agreement, nor any right,
benefit or obligation of either party hereto, shall be subject to voluntary or involuntary
8
assignment, alienation or transfer, whether by operation of law or otherwise, without the
prior written consent of the other party.
5.11 Vested Rights/Reemployment. The term of this Agreement is co-extensive with the
Term of employment as set forth in Article 2.1. Termination shall not affect any right or
obligation of any party which is accrued or vested prior to or upon such termination or by its
terms continues following the termination of the Term, including without limitation Articles 4.6,
4.7, 5.1, and 5.2 of this Agreement. Executive further agrees that upon termination of his
employment by the Company, he shall not re-apply or otherwise seek employment with Company in the
future and that Company has no obligation to re-hire him.
5.12 Entire Agreement; Conflict. This Agreement sets forth the entire agreement of the
parties with respect to the subject matter hereof and expressly supersedes all oral or written
agreements between the parties; except, this Agreement is not intended to modify, abrogate or
supersede any of the parties obligations as reflected in benefit or compensation plans, policies
or programs in which Executive participates as set forth in Article 3.3 herein. Any modification of
this Agreement shall be effective only if it is in writing and signed by the party to be charged.
In the event of any conflict between the terms of this Agreement and the terms of any policy, plan
or program of Company not heretofore specified, the terms of this Agreement shall govern.
5.13 Specific Performance. Company and Executive, jointly and severally, acknowledge
that it would be impossible to calculate or ascertain accurately and definitively the damages
Company would sustain from a breach by Executive of the provisions of Articles 4.6 and 4.7 of this
Agreement and that no adequate remedy at law exists. Accordingly, in the event of a threatened
breach by Executive of said provisions, Company shall be entitled to an injunction restraining such
prohibited activity. Nothing herein, however, shall be construed as prohibiting Company from
pursuing any other remedies available to Company for such breach or threatened breach, including
recovery of damages from Executive.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date set forth
above.
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Diamond Offshore Management Company
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By: |
/s/ Lawrence R. Dickerson
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Name: |
Lawrence R. Dickerson |
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Title: |
President and Chief Operating Officer |
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EXECUTIVE:
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/s/ William C. Long
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9
exv10w17
EXHIBIT 10.17
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (Agreement) is made by and between Diamond Offshore Management
Company. (Company), and Lyndol L. Dew (Executive), and is dated as of December 15, 2006.
WITNESSETH:
WHEREAS, Company desires to continue the employment of Executive and Executive desires to
remain in the employment of Company on the Effective Date, in each case on the terms and
conditions set forth herein;
NOW, THEREFORE, for and in consideration of the mutual promises, covenants and obligations
contained herein, Company and Executive agree as follows:
ARTICLE 1: EMPLOYMENT AND DUTIES
1.1 Employment; Effective Date. Company agrees to continue the employment of Executive
and Executive desires to remain in the employment of Company beginning on October 1, 2006 (the
Effective Date) and continuing for the period of time set forth in Article 2 of this Agreement,
subject to the terms and conditions of this Agreement.
1.2 Position. Company shall employ Executive in the position of Senior Vice
President-Worldwide Operations (Job Title). In such capacity, Executive will, as reasonably
requested by the Board of Directors/President of Company from time to time, carry out the functions
of his office and furnish his best advice, information, judgment and knowledge with respect to the
business of the Company and its subsidiaries. During the term of his employment, Executive shall
be furnished with a private office and such other facilities and services as are commensurate with
his position with Company and adequate for the performance of his duties under this Agreement.
1.3 Business Expenses. Executive is authorized to incur reasonable expenses for the
discharge of his duties hereunder and the promotion of Companys business, including expenses for
entertainment, travel and related items. Company shall reimburse Executive for all such expenses
upon presentation by Executive from time to time of itemized accounts of expenditures incurred in
accordance with customary Company policies.
1.4 Exclusivity of Employment. Executive agrees his position with the Company will be
his sole employment and he will use his best efforts to discharge his duties and responsibilities
in such capacity and to act subject to the direction of the Chief Executive Officer/President.
Part-time activities that do not interfere with Executives duties and responsibilities pursuant to
this Agreement shall not constitute employment. Participation by Executive as a member of a board
of directors not related to the Company in any way, or such similar participation, shall require
the
consent of the President. During the Term of this Agreement, Executive shall not, directly or
knowingly indirectly, either as an Executive, officer, director, or in any other individual or
representative capacity, either for his own benefit or the benefit of any other person or entity
solicit, recruit, induce, entice, encourage or in any way cause any employee of Company (or an
affiliate) to terminate his/her employment with Company (or such affiliate). This Article is not
intended to limit the ability of Executive to terminate the employment of Company employees in the
course and scope of his position with Company.
ARTICLE 2: TERM AND TERMINATION OF EMPLOYMENT
2.1 Term. Unless sooner terminated pursuant to other provisions hereof, Company
agrees to employ Executive for a thirty-nine (39) month period beginning on the Effective Date and
concluding on December 31, 2009 (Term).
2.2 Companys Right to Terminate. Notwithstanding the provisions of paragraph 2.1,
Company shall have the right to terminate Executives employment under this Agreement at any time
for any of the following reasons:
(a) upon Executives death;
(b) upon Executives becoming unable to perform his duties hereunder due to sickness
or injury for a period of at least 180 consecutive days as a result of incapacity
due to mental or physical illness which is determined to be total and permanent by a
physician selected by the Company or its insurers and acceptable to Executive or
Executives legal representatives (a Disability);
(c) if Executive engages in conduct that constitutes: (i) a breach of his fiduciary
duty to Company or its shareholders; (ii) in carrying out his duties hereunder
engages in conduct that constitutes acts of fraud; (iii) in carrying out his duties
hereunder engages in conduct that constitutes gross neglect; (iv) in carrying out
his duties hereunder engages in conduct that constitutes gross misconduct resulting,
in any case, in economic harm to Company; or (v) upon the conviction of Executive
for a felony; and
(d) for any other reason whatsoever, in the sole discretion of Company.
For purposes of this Agreement, a termination by Company under clause (c) above shall
constitute a termination by Company for Cause. Cause, however, shall not include bad judgment or
any act or omission believed by the Executive in good faith to have been in or not opposed to the
interest of Company (without intent by the Executive to gain, directly or indirectly, a profit to
which he was not legally entitled).
2.3 Executives Right to Terminate. Notwithstanding the provisions of Article 2.1,
Executive shall have the right to terminate his employment under this Agreement at any time for any
of the following reasons:
2
(a) without Executives consent, a substantial and material diminishment of
Executives duties, responsibilities and status with the Company as described in
Article 1.2, above;
(b) a reduction in Executives Base Salary and/or Job Title;
(c) the Companys requiring Executive to relocate anywhere other than Houston,
Texas, except in the event Executives office is moved no more than 50 miles from
its present location, or, in the event Executive consents to such relocation out of
Houston, Texas, the failure by Company to pay or reimburse Executive for all
reasonable moving expenses incurred by Executive relating to a change of Executives
principal residence in connection with such relocation and to indemnify Executive
against any loss (defined as the difference between the actual bona fide sale price
of such residence and the fair market value of such residence as determined by a
member of the Society of Real Estate Appraisers designated by Executive and
satisfactory to Company) realized in the sale of Executives principal residence in
connection with any such change of residence; and
(d) for any other reason whatsoever, in the sole discretion of Executive.
For purposes of this Agreement: (i) a termination of employment by Executive under clauses (a)
through (c) above shall constitute a termination of employment by Executive for Good Reason; and
(ii) a termination of employment by Executive under clause (d) above shall constitute a termination
of employment by Executive without Good Reason.
2.4 Notice of Termination. Notwithstanding the provisions in Article 2.1 herein
relating to the Term of this Agreement, if Company or Executive desires to terminate Executives
employment hereunder at any time prior to expiration of the Term of employment as provided in
Article 2.1, it or he shall do so by giving a minimum of fifteen (15) days written notice to the
other party that it or he has elected to terminate Executives employment hereunder and stating the
effective date and reason for such termination, provided that no such action shall alter or amend
any other provisions hereof or rights arising hereunder. Executive must provide fifteen (15) days
notice of separation to be eligible for the benefits described in Article 4.1.
2.5 Extension of Agreement. Following expiration of the Term of this Agreement, the
Term will be automatically extended for successive terms of one (1) year commencing on the
anniversary of the Effective Date.
ARTICLE 3: COMPENSATION AND BENEFITS
3.1 Base Salary. During the Term, Executive shall receive an annual base salary equal
to $320,000 (Base Salary), subject to increases as the Chief Executive Officer/President of the
Company may, in their sole discretion, from time to time determine. Executives Base Salary shall
be paid in equal installments in accordance with Companys standard practices and
3
pay dates regarding payment of compensation to executives and shall be subject to applicable
withholding and deductions.
3.2 Executive Health and Welfare Benefits. Executive shall be entitled to participate
in Companys insurance plans (medical, dental, life and disability), during the term of this
Agreement. Upon termination of Executives employment under Articles 2.2(a), 2.2(b), 2.2(d),
2.3(a), 2.3(b) or 2.3(c) and for the remaining Term under this Agreement but not less than two (2)
years thereafter, Company shall continue to provide Executive with insurance benefits (medical,
dental, life and disability) which Executive was receiving or entitled to receive at the time of
his termination of employment, with all costs paid by Company. Company, shall, however, issue
Executive a COBRA notice upon the termination of his employment. Such insurance benefits shall be
discontinued to the extent Executive is eligible to receive comparable coverage from a subsequent
employer and/or except to the extent that the subsequent employers plan does not cover the
preexisting medical conditions of the Executive or a previously covered member of the Executives
family.
3.3 Other Benefits/Compensation. During the term of this Agreement, Executive shall
be entitled to participate in such employee benefit and compensation programs, plans and policies
as are maintained by Company and as may be established for employees of Company from time to time
on the same basis as other executive employees are entitled thereto. These include plans or
policies relating to funded and unfunded executive benefits, such as bonus compensation, vacation
time, leave time, retirement plans and stock plans. It is understood that the establishment,
termination or change in any such executive employee benefit program, plan or policy may be made by
the Company in the exercise of its sole discretion, from time to time, and any such termination or
change in such program, plan or policy will not constitute a modification to this Agreement so long
as Executive is permitted to participate in such program, plan or policy, as the case may be, as is
available to other executives. Upon termination of employment, without regard to the manner in
which the termination was brought about, Executives rights in such employee benefit and
compensation programs, plans or policies shall be governed solely by the terms of the program, plan
or policy itself unless otherwise stated to the contrary herein.
3.4 Management Performance Bonus Program. Unless sooner terminated by operation of
this Agreement, the provisions of this article 3.4 shall apply during the initial-three year term
of this Agreement and terminate on September 30, 2009 (the Bonus Term).
During the Bonus Term, Executive shall be eligible to participate in bonus plans made
available to executive employees of the Company in a position commensurate with Executives
position (Bonus Plans). Under the terms of the Companys current Bonus Plans, Executive has an
opportunity to earn an annual cash bonus (Bonus Amount) measured against objective financial
performance criteria to be determined by the board of directors of Diamond Offshore Drilling, Inc.
(or a committee thereof), at its sole discretion. The desired but not guaranteed target Bonus
Amount is equal to a range between 60% and 65% of Executives Base Salary, and in no event shall
the Bonus Amount payable in any given year exceed 100% of Executives Base Salary. Any Bonus Amount
awarded to Executive under the Bonus Plans shall be paid in full each February.
4
Except as otherwise provided for in this article 3.4, the provisions hereof shall not be
construed to, or actually, amend or modify the terms of any established Bonus Plan, which terms
shall control and govern any Bonus Amount awarded pursuant thereto.
ARTICLE 4: EFFECT OF TERMINATION ON COMPENSATION
4.1 By Company Without Cause, By Company as a Result of Executives Death or Disability,
or By Executive for Good Reason Prior to Expiration of Term. If Executives employment
hereunder shall terminate on a date (Date of Termination) (i) by Company without Cause prior to
the expiration of the Term (ii) as a result of Executives death or Disability prior to the
Expiration of the Term, or (iii) by Executive for Good Reason (and, giving Company no less than
fifteen (15) days notice) prior to the expiration of the Term, then, upon such termination, the
payments and benefits described below will be provided to Executive, or in the event of Executives
death, to his spouse (or his estate if he is not married or his spouse does not survive him):
(a) Within thirty (30) days after the Date of Termination, Company shall pay any
Accrued Obligations and/or any amounts owed but unpaid to Executive under any plan,
policy or program of Company as of the Date of Termination provided by, and in
accordance with the terms of, such plan, policy or program;
(b) Company shall pay Executive severance consisting of an amount equal to
Executives Base Salary (less lawful deductions, as set forth in Article 3.1) for
the remaining Term of this Agreement, or for twenty-four (24) months, whichever is
greater. The severance shall be payable not less frequently than in equal monthly
installments following termination or in the case of Executives death, the
severance shall be payable in a lump sum;
(c) Any unexercised and/or unvested stock option grant or equivalent (SARS paid in
stock) held by Executive upon termination of employment shall be fully vested on the
date of termination and be eligible for exercise as provided for in the applicable
plan document; and
(d) Company shall, at its sole expense as incurred, provide the Executive with
customary outplacement services commensurate with Executives position but in no
event shall the provision of such services exceed twelve (12) months or $25,000.
4.2 By Executive Without Good Reason or By Company for Cause. If Executives
employment hereunder shall be terminated by Company for Cause or by Executive without Good Reason,
then within thirty (30) days of the Date of Termination Company shall pay any Accrued Obligations
and/or any amounts owed but unpaid to Executive under any plan, policy or program of Company as of
the Date of Termination provided by, and in accordance with the terms of, such plan, policy or
program. All compensation and benefits to Executive hereunder shall terminate
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contemporaneously with the termination of such employment. Additionally, Company shall provide
employee with a COBRA notice and other legally required notices.
4.3 Payment Obligations Absolute/Release of Claims. Except as set forth in the
following Article, Companys obligation to pay Executive the amounts and to make the arrangements
provided in this Article 4 shall be absolute and unconditional and shall not be affected by any
circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or
other right which Company (including its subsidiaries and affiliates) may have against him or
anyone else. All amounts payable by Company shall be paid without notice or demand. Executive shall
not be obligated to seek other employment in mitigation of the amounts payable or arrangements made
under any provision of this Article 4, and the obtaining of any such other employment (or the
engagement in any endeavor as an independent contractor, sole proprietor, partner, or joint
venturer) shall in no event effect any reduction of Companys obligations to make (or cause to be
made) the payments and arrangements required to be made under this Article 4.
Executive acknowledges and agrees that the payments and benefits provided for in Article 4.1
constitute the exclusive remedy of Executive upon termination of employment for any reason.
Executive further agrees that, as a condition to receiving such payments and benefits, Executive
(or, if deceased or disabled, his estate or legal guardian) shall execute a complete and global
release of claims relating to or arising out of his employment with, and termination of employment
from, Company in a reasonable and customary form acceptable to Company. In the absence of
Executives execution and delivery to Company of such a release, Company shall have no obligation
to Executive to make any payment of the benefits as provided for in Article 4.1.
4.4 Accrued Obligations. For purposes of this Agreement, Accrued Obligations shall
mean, as of the Date of Termination, the sum of (i) Executives Base Salary through the Date of
Termination to the extent not previously paid, (ii) except as otherwise previously requested by
Executive, the amount of any compensation accrued by Executive as of the Date of Termination to the
extent not previously paid, and (iii) any expense reimbursements and any other cash entitlements
accrued by Executive as of the Date of Termination to the extent not previously paid.
4.5 Section 409A of the Internal Revenue Code. Notwithstanding any other provision of
this Agreement, if Internal Revenue Code Section 409A is applicable to this Agreement and Executive
is determined to be a Specified Employee for purposes of Section 409A, payments and benefits
under article 4.1 shall be paid no earlier than a date which is six months following Executives
Date of Termination. Any amounts that were otherwise scheduled to be paid during such six (6) month
period shall be paid in a lump sum upon expiration of such six (6) month period with all accrued
interest calculated from the Date of Termination until such lump sum payment and equal to the
average six (6) month U.S. Treasury Rate for the year. To the extent that the provision of any
other payments or benefits under this Agreement are governed by Section 409A, as amended, the
parties will work together in good faith to amend any provisions necessary for compliance or make
payments in a manner to avoid or minimize excise tax,
6
penalties or interest as a result of the provisions of Section 409A, while maintaining the basic
financial provisions of this Agreement.
4.6 Confidentiality and Nondisclosure. Executive agrees that he will not, at any
time during or after the Term, make use of or divulge to any other person, firm or corporation any
trade or business secret, process, method or means, or any other confidential information,
including personnel information, concerning the business policies of the Company, which he may have
learned in connection with his employment hereunder. For purposes of this Agreement, a trade or
business secret, process, method or means, or any other confidential information, including
personnel information shall mean and include information treated either as confidential or as a
trade secret by the Company. Executives obligation under this Article 4.6 shall not apply to any
information which (a) is known publicly; (b) is in the public domain or hereafter enters the public
domain without the fault of Executive; (c) is known to Executive prior to his receipt of such
information from the Company, as evidenced by written records of Executive; or (d) is hereafter
disclosed to Executive by a third party not under an obligation of confidence to Company.
Executive agrees not to remove from the premises of Company, except as an Executive of Company in
pursuit of the business of Company or except as specifically permitted in writing by Company, any
document or other object containing or reflecting any such confidential information. Executive
recognizes that all such documents and objects, whether developed by him or by someone else, will
be the sole and exclusive property of Company. Upon termination of his employment hereunder,
Executive shall forthwith deliver to Company all such confidential information, including without
limitation all lists of lessees, customers, correspondence, employees, accounts, records and any
other documents or property made or held by him or under his control in relation to the business or
affairs of Company, and no copy of any such confidential information shall be retained by him.
4.7 Non-Solicitation of Employees/Former Employees. In the event this Agreement is
terminated or once Executive ceases to be an employee at any time for any reason, Executive agrees
that for a period of two (2) years after such termination, Executive shall not, directly or
knowingly indirectly, either as an executive, employer, independent contractor, consultant, agent,
principal, partner, stockholder, officer, director, or in any other individual or representative
capacity, either for his own benefit or the benefit of any other person or entity: (a) solicit,
recruit, induce, entice, encourage or in any way cause any executive or management level person who
is or was an employee of Company (or affiliate) within the six (6) months prior to Executives
termination of employment with Company or thereafter to terminate his/her employment with Company
(or such affiliate); or (b) directly solicit for hire, directly entice for hire, hire, or directly
recruit any person who is or was an employee of Company within the six (6) months prior to
Executives termination of employment with Company or thereafter.
ARTICLE 5: MISCELLANEOUS
5.1 Notices. For purposes of this Agreement, notices and all other communications
provided for herein shall be in writing and shall be deemed to have been duly given when personally
delivered or three days after the date mailed by United States registered or certified mail, return
receipt requested, or by a nationally known overnight courier, in either case postage prepaid and
addressed as follows: If to Company, to its General Counsel and its President at its
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corporate address of record. If to Executive, to the most recent home address on file with
Company, or to such other address as either party may furnish to the other in writing in accordance
herewith, except that notices of changes of address shall be effective only upon receipt.
5.2 Applicable Law/Venue. This contract is entered into under, and shall be governed
for all purposes by, the laws of the State of Texas without reference to the principles of
conflicts of laws. Executive and Company agree that Harris County, Texas will be the exclusive
venue for any lawsuit or dispute between the parties relating to this Agreement, the relationship
between the parties and/or the termination thereof.
5.3 No Waiver. No failure by either party hereto at any time to give notice of any
breach by the other party of, or to require compliance with, any condition or provision of this
Agreement shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or
at any prior or subsequent time.
5.4 Severability. If a court of competent jurisdiction determines that any provision
of this Agreement is invalid or unenforceable, then the invalidity or unenforceability of that
provision shall not affect the validity or enforceability of any other provision of this Agreement,
and all other provisions shall remain in full force and effect.
5.5 Counterparts. This Agreement may be executed in one or more counterparts, each of
which shall be deemed to be original, but all of which together will constitute one and the same
Agreement.
5.6 Withholding of Taxes and Other Executive Deductions. Company may withhold from any
benefits and payments made pursuant to this Agreement all federal, state, city and other taxes as
may be required pursuant to any law or governmental regulation or ruling and all other normal
executive deductions made with respect to Companys executives generally.
5.7 Headings. The paragraph headings have been inserted for purposes of convenience
and shall not be used for interpretive purposes.
5.8 Gender and Plurals. Wherever the context so requires, the masculine gender
includes the feminine or neuter, and the singular number includes the plural and conversely.
5.9 Parent. All the benefits received by Company in this Agreement shall also inure
to the benefit of Diamond Offshore Drilling, Inc, parent of Company.
5.10 Successors. This Agreement shall be binding upon and inure to the benefit of
Company and any successor of Company, including without limitation any person, association, or
entity which may hereafter acquire or succeed to all or substantially all of the business or assets
of Company by any means whether direct or indirect, by purchase, merger, consolidation, or
otherwise. Except as provided in the preceding sentence, this Agreement, and the rights and
obligations of the parties hereunder, are personal and neither this Agreement, nor any right,
benefit or obligation of either party hereto, shall be subject to voluntary or involuntary
8
assignment, alienation or transfer, whether by operation of law or otherwise, without the
prior written consent of the other party.
5.11 Vested Rights/Reemployment. The term of this Agreement is co-extensive with the
Term of employment as set forth in Article 2.1. Termination shall not affect any right or
obligation of any party which is accrued or vested prior to or upon such termination or by its
terms continues following the termination of the Term, including without limitation Articles 4.6,
4.7, 5.1, and 5.2 of this Agreement. Executive further agrees that upon termination of his
employment by the Company, he shall not re-apply or otherwise seek employment with Company in the
future and that Company has no obligation to re-hire him.
5.12 Entire Agreement; Conflict. This Agreement sets forth the entire agreement of the
parties with respect to the subject matter hereof and expressly supersedes all oral or written
agreements between the parties; except, this Agreement is not intended to modify, abrogate or
supersede any of the parties obligations as reflected in benefit or compensation plans, policies
or programs in which Executive participates as set forth in Article 3.3 herein. Any modification of
this Agreement shall be effective only if it is in writing and signed by the party to be charged.
In the event of any conflict between the terms of this Agreement and the terms of any policy, plan
or program of Company not heretofore specified, the terms of this Agreement shall govern.
5.13 Specific Performance. Company and Executive, jointly and severally, acknowledge
that it would be impossible to calculate or ascertain accurately and definitively the damages
Company would sustain from a breach by Executive of the provisions of Articles 4.6 and 4.7 of this
Agreement and that no adequate remedy at law exists. Accordingly, in the event of a threatened
breach by Executive of said provisions, Company shall be entitled to an injunction restraining such
prohibited activity. Nothing herein, however, shall be construed as prohibiting Company from
pursuing any other remedies available to Company for such breach or threatened breach, including
recovery of damages from Executive.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date set forth
above.
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Diamond Offshore Management Company
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By: |
/s/ Lawrence R. Dickerson
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Name: |
Lawrence R. Dickerson |
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Title: |
President and Chief Operating Officer |
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EXECUTIVE:
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/s/ Lyndol L. Dew
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9
exv10w18
EXHIBIT 10.18
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (Agreement) is made by and between Diamond Offshore Management
Company. (Company), and Mark F. Baudoin (Executive), and is dated as of December 15, 2006.
WITNESSETH:
WHEREAS, Company desires to continue the employment of Executive and Executive desires to
remain in the employment of Company on the Effective Date, in each case on the terms and
conditions set forth herein;
NOW, THEREFORE, for and in consideration of the mutual promises, covenants and obligations
contained herein, Company and Executive agree as follows:
ARTICLE 1: EMPLOYMENT AND DUTIES
1.1 Employment; Effective Date. Company agrees to continue the employment of Executive
and Executive desires to remain in the employment of Company beginning on October 1, 2006 (the
Effective Date) and continuing for the period of time set forth in Article 2 of this Agreement,
subject to the terms and conditions of this Agreement.
1.2 Position. Company shall employ Executive in the position of Senior Vice
President-Administration (Job Title). In such capacity, Executive will, as reasonably requested
by the Board of Directors/President of Company from time to time, carry out the functions of his
office and furnish his best advice, information, judgment and knowledge with respect to the
business of the Company and its subsidiaries. During the term of his employment, Executive shall
be furnished with a private office and such other facilities and services as are commensurate with
his position with Company and adequate for the performance of his duties under this Agreement.
1.3 Business Expenses. Executive is authorized to incur reasonable expenses for the
discharge of his duties hereunder and the promotion of Companys business, including expenses for
entertainment, travel and related items. Company shall reimburse Executive for all such expenses
upon presentation by Executive from time to time of itemized accounts of expenditures incurred in
accordance with customary Company policies.
1.4 Exclusivity of Employment. Executive agrees his position with the Company will be
his sole employment and he will use his best efforts to discharge his duties and responsibilities
in such capacity and to act subject to the direction of the Chief Executive Officer/President.
Part-time activities that do not interfere with Executives duties and responsibilities pursuant to
this Agreement shall not constitute employment. Participation by Executive as a member of a board
of directors not related to the Company in any way, or such similar participation, shall require
the
consent of the President. During the Term of this Agreement, Executive shall not, directly or
knowingly indirectly, either as an Executive, officer, director, or in any other individual or
representative capacity, either for his own benefit or the benefit of any other person or entity
solicit, recruit, induce, entice, encourage or in any way cause any employee of Company (or an
affiliate) to terminate his/her employment with Company (or such affiliate). This Article is not
intended to limit the ability of Executive to terminate the employment of Company employees in the
course and scope of his position with Company.
ARTICLE 2: TERM AND TERMINATION OF EMPLOYMENT
2.1 Term. Unless sooner terminated pursuant to other provisions hereof, Company
agrees to employ Executive for a thirty-nine (39) month period beginning on the Effective Date and
concluding on December 31, 2009 (Term).
2.2 Companys Right to Terminate. Notwithstanding the provisions of paragraph 2.1,
Company shall have the right to terminate Executives employment under this Agreement at any time
for any of the following reasons:
(a) upon Executives death;
(b) upon Executives becoming unable to perform his duties hereunder due to sickness
or injury for a period of at least 180 consecutive days as a result of incapacity
due to mental or physical illness which is determined to be total and permanent by a
physician selected by the Company or its insurers and acceptable to Executive or
Executives legal representatives (a Disability);
(c) if Executive engages in conduct that constitutes: (i) a breach of his fiduciary
duty to Company or its shareholders; (ii) in carrying out his duties hereunder
engages in conduct that constitutes acts of fraud; (iii) in carrying out his duties
hereunder engages in conduct that constitutes gross neglect; (iv) in carrying out
his duties hereunder engages in conduct that constitutes gross misconduct resulting,
in any case, in economic harm to Company; or (v) upon the conviction of Executive
for a felony; and
(d) for any other reason whatsoever, in the sole discretion of Company.
For purposes of this Agreement, a termination by Company under clause (c) above shall
constitute a termination by Company for Cause. Cause, however, shall not include bad judgment or
any act or omission believed by the Executive in good faith to have been in or not opposed to the
interest of Company (without intent by the Executive to gain, directly or indirectly, a profit to
which he was not legally entitled).
2.3 Executives Right to Terminate. Notwithstanding the provisions of Article 2.1,
Executive shall have the right to terminate his employment under this Agreement at any time for any
of the following reasons:
2
(a) without Executives consent, a substantial and material diminishment of
Executives duties, responsibilities and status with the Company as described in
Article 1.2, above;
(b) a reduction in Executives Base Salary and/or Job Title;
(c) the Companys requiring Executive to relocate anywhere other than Houston,
Texas, except in the event Executives office is moved no more than 50 miles from
its present location, or, in the event Executive consents to such relocation out of
Houston, Texas, the failure by Company to pay or reimburse Executive for all
reasonable moving expenses incurred by Executive relating to a change of Executives
principal residence in connection with such relocation and to indemnify Executive
against any loss (defined as the difference between the actual bona fide sale price
of such residence and the fair market value of such residence as determined by a
member of the Society of Real Estate Appraisers designated by Executive and
satisfactory to Company) realized in the sale of Executives principal residence in
connection with any such change of residence; and
(d) for any other reason whatsoever, in the sole discretion of Executive.
For purposes of this Agreement: (i) a termination of employment by Executive under clauses (a)
through (c) above shall constitute a termination of employment by Executive for Good Reason; and
(ii) a termination of employment by Executive under clause (d) above shall constitute a termination
of employment by Executive without Good Reason.
2.4 Notice of Termination. Notwithstanding the provisions in Article 2.1 herein
relating to the Term of this Agreement, if Company or Executive desires to terminate Executives
employment hereunder at any time prior to expiration of the Term of employment as provided in
Article 2.1, it or he shall do so by giving a minimum of fifteen (15) days written notice to the
other party that it or he has elected to terminate Executives employment hereunder and stating the
effective date and reason for such termination, provided that no such action shall alter or amend
any other provisions hereof or rights arising hereunder. Executive must provide fifteen (15) days
notice of separation to be eligible for the benefits described in Article 4.1.
2.5 Extension of Agreement. Following expiration of the Term of this Agreement, the
Term will be automatically extended for successive terms of one (1) year commencing on the
anniversary of the Effective Date.
ARTICLE 3: COMPENSATION AND BENEFITS
3.1 Base Salary. During the Term, Executive shall receive an annual base salary equal
to $300,000 (Base Salary), subject to increases as the Chief Executive Officer/President of the
Company may, in their sole discretion, from time to time determine. Executives Base Salary shall
be paid in equal installments in accordance with Companys standard practices and
3
pay dates regarding payment of compensation to executives and shall be subject to applicable
withholding and deductions.
3.2 Executive Health and Welfare Benefits. Executive shall be entitled to participate
in Companys insurance plans (medical, dental, life and disability), during the term of this
Agreement. Upon termination of Executives employment under Articles 2.2(a), 2.2(b), 2.2(d),
2.3(a), 2.3(b) or 2.3(c) and for the remaining Term under this Agreement but not less than two (2)
years thereafter, Company shall continue to provide Executive with insurance benefits (medical,
dental, life and disability) which Executive was receiving or entitled to receive at the time of
his termination of employment, with all costs paid by Company. Company, shall, however, issue
Executive a COBRA notice upon the termination of his employment. Such insurance benefits shall be
discontinued to the extent Executive is eligible to receive comparable coverage from a subsequent
employer and/or except to the extent that the subsequent employers plan does not cover the
preexisting medical conditions of the Executive or a previously covered member of the Executives
family.
3.3 Other Benefits/Compensation. During the term of this Agreement, Executive shall
be entitled to participate in such employee benefit and compensation programs, plans and policies
as are maintained by Company and as may be established for employees of Company from time to time
on the same basis as other executive employees are entitled thereto. These include plans or
policies relating to funded and unfunded executive benefits, such as bonus compensation, vacation
time, leave time, retirement plans and stock plans. It is understood that the establishment,
termination or change in any such executive employee benefit program, plan or policy may be made by
the Company in the exercise of its sole discretion, from time to time, and any such termination or
change in such program, plan or policy will not constitute a modification to this Agreement so long
as Executive is permitted to participate in such program, plan or policy, as the case may be, as is
available to other executives. Upon termination of employment, without regard to the manner in
which the termination was brought about, Executives rights in such employee benefit and
compensation programs, plans or policies shall be governed solely by the terms of the program, plan
or policy itself unless otherwise stated to the contrary herein.
3.4 Management Performance Bonus Program. Unless sooner terminated by operation of
this Agreement, the provisions of this article 3.4 shall apply during the initial-three year term
of this Agreement and terminate on September 30, 2009 (the Bonus Term).
During the Bonus Term, Executive shall be eligible to participate in bonus plans made
available to executive employees of the Company in a position commensurate with Executives
position (Bonus Plans). Under the terms of the Companys current Bonus Plans, Executive has an
opportunity to earn an annual cash bonus (Bonus Amount) measured against objective financial
performance criteria to be determined by the board of directors of Diamond Offshore Drilling, Inc.
(or a committee thereof), at its sole discretion. The desired but not guaranteed target Bonus
Amount is equal to a range between 60% and 65% of Executives Base Salary, and in no event shall
the Bonus Amount payable in any given year exceed 100% of Executives Base Salary. Any Bonus Amount
awarded to Executive under the Bonus Plans shall be paid in full each February.
4
Except as otherwise provided for in this article 3.4, the provisions hereof shall not be
construed to, or actually, amend or modify the terms of any established Bonus Plan, which terms
shall control and govern any Bonus Amount awarded pursuant thereto.
ARTICLE 4: EFFECT OF TERMINATION ON COMPENSATION
4.1 By Company Without Cause, By Company as a Result of Executives Death or Disability,
or By Executive for Good Reason Prior to Expiration of Term. If Executives employment
hereunder shall terminate on a date (Date of Termination) (i) by Company without Cause prior to
the expiration of the Term (ii) as a result of Executives death or Disability prior to the
Expiration of the Term, or (iii) by Executive for Good Reason (and, giving Company no less than
fifteen (15) days notice) prior to the expiration of the Term, then, upon such termination, the
payments and benefits described below will be provided to Executive, or in the event of Executives
death, to his spouse (or his estate if he is not married or his spouse does not survive him):
(a) Within thirty (30) days after the Date of Termination, Company shall pay any
Accrued Obligations and/or any amounts owed but unpaid to Executive under any plan,
policy or program of Company as of the Date of Termination provided by, and in
accordance with the terms of, such plan, policy or program;
(b) Company shall pay Executive severance consisting of an amount equal to
Executives Base Salary (less lawful deductions, as set forth in Article 3.1) for
the remaining Term of this Agreement, or for twenty-four (24) months, whichever is
greater. The severance shall be payable not less frequently than in equal monthly
installments following termination or in the case of Executives death, the
severance shall be payable in a lump sum;
(c) Any unexercised and/or unvested stock option grant or equivalent (SARS paid in
stock) held by Executive upon termination of employment shall be fully vested on the
date of termination and be eligible for exercise as provided for in the applicable
plan document; and
(d) Company shall, at its sole expense as incurred, provide the Executive with
customary outplacement services commensurate with Executives position but in no
event shall the provision of such services exceed twelve (12) months or $25,000.
4.2 By Executive Without Good Reason or By Company for Cause. If Executives
employment hereunder shall be terminated by Company for Cause or by Executive without Good Reason,
then within thirty (30) days of the Date of Termination Company shall pay any Accrued Obligations
and/or any amounts owed but unpaid to Executive under any plan, policy or program of Company as of
the Date of Termination provided by, and in accordance with the terms of, such plan, policy or
program. All compensation and benefits to Executive hereunder shall terminate
5
contemporaneously with the termination of such employment. Additionally, Company shall provide
employee with a COBRA notice and other legally required notices.
4.3 Payment Obligations Absolute/Release of Claims. Except as set forth in the
following Article, Companys obligation to pay Executive the amounts and to make the arrangements
provided in this Article 4 shall be absolute and unconditional and shall not be affected by any
circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or
other right which Company (including its subsidiaries and affiliates) may have against him or
anyone else. All amounts payable by Company shall be paid without notice or demand. Executive shall
not be obligated to seek other employment in mitigation of the amounts payable or arrangements made
under any provision of this Article 4, and the obtaining of any such other employment (or the
engagement in any endeavor as an independent contractor, sole proprietor, partner, or joint
venturer) shall in no event effect any reduction of Companys obligations to make (or cause to be
made) the payments and arrangements required to be made under this Article 4.
Executive acknowledges and agrees that the payments and benefits provided for in Article 4.1
constitute the exclusive remedy of Executive upon termination of employment for any reason.
Executive further agrees that, as a condition to receiving such payments and benefits, Executive
(or, if deceased or disabled, his estate or legal guardian) shall execute a complete and global
release of claims relating to or arising out of his employment with, and termination of employment
from, Company in a reasonable and customary form acceptable to Company. In the absence of
Executives execution and delivery to Company of such a release, Company shall have no obligation
to Executive to make any payment of the benefits as provided for in Article 4.1.
4.4 Accrued Obligations. For purposes of this Agreement, Accrued Obligations shall
mean, as of the Date of Termination, the sum of (i) Executives Base Salary through the Date of
Termination to the extent not previously paid, (ii) except as otherwise previously requested by
Executive, the amount of any compensation accrued by Executive as of the Date of Termination to the
extent not previously paid, and (iii) any expense reimbursements and any other cash entitlements
accrued by Executive as of the Date of Termination to the extent not previously paid.
4.5 Section 409A of the Internal Revenue Code. Notwithstanding any other provision of
this Agreement, if Internal Revenue Code Section 409A is applicable to this Agreement and Executive
is determined to be a Specified Employee for purposes of Section 409A, payments and benefits
under article 4.1 shall be paid no earlier than a date which is six months following Executives
Date of Termination. Any amounts that were otherwise scheduled to be paid during such six (6) month
period shall be paid in a lump sum upon expiration of such six (6) month period with all accrued
interest calculated from the Date of Termination until such lump sum payment and equal to the
average six (6) month U.S. Treasury Rate for the year. To the extent that the provision of any
other payments or benefits under this Agreement are governed by Section 409A, as amended, the
parties will work together in good faith to amend any provisions necessary for compliance or make
payments in a manner to avoid or minimize excise tax,
6
penalties or interest as a result of the provisions of Section 409A, while maintaining the basic
financial provisions of this Agreement.
4.6 Confidentiality and Nondisclosure. Executive agrees that he will not, at any
time during or after the Term, make use of or divulge to any other person, firm or corporation any
trade or business secret, process, method or means, or any other confidential information,
including personnel information, concerning the business policies of the Company, which he may have
learned in connection with his employment hereunder. For purposes of this Agreement, a trade or
business secret, process, method or means, or any other confidential information, including
personnel information shall mean and include information treated either as confidential or as a
trade secret by the Company. Executives obligation under this Article 4.6 shall not apply to any
information which (a) is known publicly; (b) is in the public domain or hereafter enters the public
domain without the fault of Executive; (c) is known to Executive prior to his receipt of such
information from the Company, as evidenced by written records of Executive; or (d) is hereafter
disclosed to Executive by a third party not under an obligation of confidence to Company.
Executive agrees not to remove from the premises of Company, except as an Executive of Company in
pursuit of the business of Company or except as specifically permitted in writing by Company, any
document or other object containing or reflecting any such confidential information. Executive
recognizes that all such documents and objects, whether developed by him or by someone else, will
be the sole and exclusive property of Company. Upon termination of his employment hereunder,
Executive shall forthwith deliver to Company all such confidential information, including without
limitation all lists of lessees, customers, correspondence, employees, accounts, records and any
other documents or property made or held by him or under his control in relation to the business or
affairs of Company, and no copy of any such confidential information shall be retained by him.
4.7 Non-Solicitation of Employees/Former Employees. In the event this Agreement is
terminated or once Executive ceases to be an employee at any time for any reason, Executive agrees
that for a period of two (2) years after such termination, Executive shall not, directly or
knowingly indirectly, either as an executive, employer, independent contractor, consultant, agent,
principal, partner, stockholder, officer, director, or in any other individual or representative
capacity, either for his own benefit or the benefit of any other person or entity: (a) solicit,
recruit, induce, entice, encourage or in any way cause any executive or management level person who
is or was an employee of Company (or affiliate) within the six (6) months prior to Executives
termination of employment with Company or thereafter to terminate his/her employment with Company
(or such affiliate); or (b) directly solicit for hire, directly entice for hire, hire, or directly
recruit any person who is or was an employee of Company within the six (6) months prior to
Executives termination of employment with Company or thereafter.
ARTICLE 5: MISCELLANEOUS
5.1 Notices. For purposes of this Agreement, notices and all other communications
provided for herein shall be in writing and shall be deemed to have been duly given when personally
delivered or three days after the date mailed by United States registered or certified mail, return
receipt requested, or by a nationally known overnight courier, in either case postage prepaid and
addressed as follows: If to Company, to its General Counsel and its President at its
7
corporate address of record. If to Executive, to the most recent home address on file with
Company, or to such other address as either party may furnish to the other in writing in accordance
herewith, except that notices of changes of address shall be effective only upon receipt.
5.2 Applicable Law/Venue. This contract is entered into under, and shall be governed
for all purposes by, the laws of the State of Texas without reference to the principles of
conflicts of laws. Executive and Company agree that Harris County, Texas will be the exclusive
venue for any lawsuit or dispute between the parties relating to this Agreement, the relationship
between the parties and/or the termination thereof.
5.3 No Waiver. No failure by either party hereto at any time to give notice of any
breach by the other party of, or to require compliance with, any condition or provision of this
Agreement shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or
at any prior or subsequent time.
5.4 Severability. If a court of competent jurisdiction determines that any provision
of this Agreement is invalid or unenforceable, then the invalidity or unenforceability of that
provision shall not affect the validity or enforceability of any other provision of this Agreement,
and all other provisions shall remain in full force and effect.
5.5 Counterparts. This Agreement may be executed in one or more counterparts, each of
which shall be deemed to be original, but all of which together will constitute one and the same
Agreement.
5.6 Withholding of Taxes and Other Executive Deductions. Company may withhold from any
benefits and payments made pursuant to this Agreement all federal, state, city and other taxes as
may be required pursuant to any law or governmental regulation or ruling and all other normal
executive deductions made with respect to Companys executives generally.
5.7 Headings. The paragraph headings have been inserted for purposes of convenience
and shall not be used for interpretive purposes.
5.8 Gender and Plurals. Wherever the context so requires, the masculine gender
includes the feminine or neuter, and the singular number includes the plural and conversely.
5.9 Parent. All the benefits received by Company in this Agreement shall also inure
to the benefit of Diamond Offshore Drilling, Inc, parent of Company.
5.10 Successors. This Agreement shall be binding upon and inure to the benefit of
Company and any successor of Company, including without limitation any person, association, or
entity which may hereafter acquire or succeed to all or substantially all of the business or assets
of Company by any means whether direct or indirect, by purchase, merger, consolidation, or
otherwise. Except as provided in the preceding sentence, this Agreement, and the rights and
obligations of the parties hereunder, are personal and neither this Agreement, nor any right,
benefit or obligation of either party hereto, shall be subject to voluntary or involuntary
8
assignment, alienation or transfer, whether by operation of law or otherwise, without the
prior written consent of the other party.
5.11 Vested Rights/Reemployment. The term of this Agreement is co-extensive with the
Term of employment as set forth in Article 2.1. Termination shall not affect any right or
obligation of any party which is accrued or vested prior to or upon such termination or by its
terms continues following the termination of the Term, including without limitation Articles 4.6,
4.7, 5.1, and 5.2 of this Agreement. Executive further agrees that upon termination of his
employment by the Company, he shall not re-apply or otherwise seek employment with Company in the
future and that Company has no obligation to re-hire him.
5.12 Entire Agreement; Conflict. This Agreement sets forth the entire agreement of the
parties with respect to the subject matter hereof and expressly supersedes all oral or written
agreements between the parties; except, this Agreement is not intended to modify, abrogate or
supersede any of the parties obligations as reflected in benefit or compensation plans, policies
or programs in which Executive participates as set forth in Article 3.3 herein. Any modification of
this Agreement shall be effective only if it is in writing and signed by the party to be charged.
In the event of any conflict between the terms of this Agreement and the terms of any policy, plan
or program of Company not heretofore specified, the terms of this Agreement shall govern.
5.13 Specific Performance. Company and Executive, jointly and severally, acknowledge
that it would be impossible to calculate or ascertain accurately and definitively the damages
Company would sustain from a breach by Executive of the provisions of Articles 4.6 and 4.7 of this
Agreement and that no adequate remedy at law exists. Accordingly, in the event of a threatened
breach by Executive of said provisions, Company shall be entitled to an injunction restraining such
prohibited activity. Nothing herein, however, shall be construed as prohibiting Company from
pursuing any other remedies available to Company for such breach or threatened breach, including
recovery of damages from Executive.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date set forth
above.
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Diamond Offshore Management Company
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By: |
/s/ Lawrence R. Dickerson
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Name: |
Lawrence R. Dickerson |
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Title: |
President and Chief Operating Officer |
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EXECUTIVE:
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/s/ Mark F. Baudoin
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9
exv10w19
EXHIBIT 10.19
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (Agreement) is made by and between Diamond Offshore Management
Company. (Company), and Beth G. Gordon (Executive), and is dated as of January 3, 2007.
WITNESSETH:
WHEREAS, Company desires to continue the employment of Executive and Executive desires to
remain in the employment of Company on the Effective Date, in each case on the terms and
conditions set forth herein;
NOW, THEREFORE, for and in consideration of the mutual promises, covenants and obligations
contained herein, Company and Executive agree as follows:
ARTICLE 1: EMPLOYMENT AND DUTIES
1.1 Employment; Effective Date. Company agrees to continue the employment of Executive
and Executive desires to remain in the employment of Company beginning on January 1, 2007 (the
Effective Date) and continuing for the period of time set forth in Article 2 of this Agreement,
subject to the terms and conditions of this Agreement.
1.2 Position. Company shall employ Executive in the position of Controller (Job
Title). In such capacity, Executive will, as reasonably requested by the Board of
Directors/President of Company from time to time, carry out the functions of his office and furnish
his best advice, information, judgment and knowledge with respect to the business of the Company
and its subsidiaries. During the term of his employment, Executive shall be furnished with a
private office and such other facilities and services as are commensurate with his position with
Company and adequate for the performance of his duties under this Agreement.
1.3 Business Expenses. Executive is authorized to incur reasonable expenses for the
discharge of his duties hereunder and the promotion of Companys business, including expenses for
entertainment, travel and related items. Company shall reimburse Executive for all such expenses
upon presentation by Executive from time to time of itemized accounts of expenditures incurred in
accordance with customary Company policies.
1.4 Exclusivity of Employment. Executive agrees his position with the Company will be
his sole employment and he will use his best efforts to discharge his duties and responsibilities
in such capacity and to act subject to the direction of the Chief Executive Officer/President.
Part-time activities that do not interfere with Executives duties and responsibilities pursuant to
this Agreement shall not constitute employment. Participation by Executive as a member of a board
of directors not related to the Company in any way, or such similar participation, shall require
the consent of the President. During the Term of this Agreement, Executive shall not, directly or
knowingly indirectly, either as an Executive, officer, director, or in any other individual or
representative capacity, either for his own benefit or the benefit of any other person or entity
solicit, recruit, induce, entice, encourage or in any way cause any employee of Company (or an
affiliate) to terminate his/her employment with Company (or such affiliate). This Article is not
intended to limit the ability of Executive to terminate the employment of Company employees in the
course and scope of his position with Company.
ARTICLE 2: TERM AND TERMINATION OF EMPLOYMENT
2.1 Term. Unless sooner terminated pursuant to other provisions hereof, Company
agrees to employ Executive for a thirty-six (36) month period beginning on the Effective Date and
concluding on December 31, 2009 (Term).
2.2 Companys Right to Terminate. Notwithstanding the provisions of paragraph 2.1,
Company shall have the right to terminate Executives employment under this Agreement at any time
for any of the following reasons:
(a) upon Executives death;
(b) upon Executives becoming unable to perform his duties hereunder due to sickness
or injury for a period of at least 180 consecutive days as a result of incapacity
due to mental or physical illness which is determined to be total and permanent by a
physician selected by the Company or its insurers and acceptable to Executive or
Executives legal representatives (a Disability);
(c) if Executive engages in conduct that constitutes: (i) a breach of his fiduciary
duty to Company or its shareholders; (ii) in carrying out his duties hereunder
engages in conduct that constitutes acts of fraud; (iii) in carrying out his duties
hereunder engages in conduct that constitutes gross neglect; (iv) in carrying out
his duties hereunder engages in conduct that constitutes gross misconduct resulting,
in any case, in economic harm to Company; or (v) upon the conviction of Executive
for a felony; and
(d) for any other reason whatsoever, in the sole discretion of Company.
For purposes of this Agreement, a termination by Company under clause (c) above shall
constitute a termination by Company for Cause. Cause, however, shall not include bad judgment or
any act or omission believed by the Executive in good faith to have been in or not opposed to the
interest of Company (without intent by the Executive to gain, directly or indirectly, a profit to
which he was not legally entitled).
2.3 Executives Right to Terminate. Notwithstanding the provisions of Article 2.1,
Executive shall have the right to terminate his employment under this Agreement at any time for any
of the following reasons:
2
(a) without Executives consent, a substantial and material diminishment of
Executives duties, responsibilities and status with the Company as described in
Article 1.2, above;
(b) a reduction in Executives Base Salary and/or Job Title;
(c) the Companys requiring Executive to relocate anywhere other than Houston,
Texas, except in the event Executives office is moved no more than 50 miles from
its present location, or, in the event Executive consents to such relocation out of
Houston, Texas, the failure by Company to pay or reimburse Executive for all
reasonable moving expenses incurred by Executive relating to a change of Executives
principal residence in connection with such relocation and to indemnify Executive
against any loss (defined as the difference between the actual bona fide sale price
of such residence and the fair market value of such residence as determined by a
member of the Society of Real Estate Appraisers designated by Executive and
satisfactory to Company) realized in the sale of Executives principal residence in
connection with any such change of residence; and
(d) for any other reason whatsoever, in the sole discretion of Executive.
For purposes of this Agreement: (i) a termination of employment by Executive under clauses (a)
through (c) above shall constitute a termination of employment by Executive for Good Reason; and
(ii) a termination of employment by Executive under clause (d) above shall constitute a termination
of employment by Executive without Good Reason.
2.4 Notice of Termination. Notwithstanding the provisions in Article 2.1 herein
relating to the Term of this Agreement, if Company or Executive desires to terminate Executives
employment hereunder at any time prior to expiration of the Term of employment as provided in
Article 2.1, it or he shall do so by giving a minimum of fifteen (15) days written notice to the
other party that it or he has elected to terminate Executives employment hereunder and stating the
effective date and reason for such termination, provided that no such action shall alter or amend
any other provisions hereof or rights arising hereunder. Executive must provide fifteen (15) days
notice of separation to be eligible for the benefits described in Article 4.1.
2.5 Extension of Agreement. Following expiration of the Term of this Agreement, the
Term will be automatically extended for successive terms of one (1) year commencing on the
anniversary of the Effective Date.
ARTICLE 3: COMPENSATION AND BENEFITS
3.1 Base Salary. During the Term, Executive shall receive an annual base salary equal
to $175,000 (Base Salary), subject to increases as the Chief Executive Officer/President of the
Company may, in their sole discretion, from time to time determine. Executives Base Salary shall
be paid in equal installments in accordance with Companys standard practices and
3
pay dates regarding payment of compensation to executives and shall be subject to applicable
withholding and deductions.
3.2 Executive Health and Welfare Benefits. Executive shall be entitled to participate
in Companys insurance plans (medical, dental, life and disability), during the term of this
Agreement. Upon termination of Executives employment under Articles 2.2(a), 2.2(b), 2.2(d),
2.3(a), 2.3(b) or 2.3(c) and for the remaining Term under this Agreement but not less than two (2)
years thereafter, Company shall continue to provide Executive with insurance benefits (medical,
dental, life and disability) which Executive was receiving or entitled to receive at the time of
his termination of employment, with all costs paid by Company. Company, shall, however, issue
Executive a COBRA notice upon the termination of his employment. Such insurance benefits shall be
discontinued to the extent Executive is eligible to receive comparable coverage from a subsequent
employer and/or except to the extent that the subsequent employers plan does not cover the
preexisting medical conditions of the Executive or a previously covered member of the Executives
family.
3.3 Other Benefits/Compensation. During the term of this Agreement, Executive shall
be entitled to participate in such employee benefit and compensation programs, plans and policies
as are maintained by Company and as may be established for employees of Company from time to time
on the same basis as other executive employees are entitled thereto. These include plans or
policies relating to funded and unfunded executive benefits, such as bonus compensation, vacation
time, leave time, retirement plans and stock plans. It is understood that the establishment,
termination or change in any such executive employee benefit program, plan or policy may be made by
the Company in the exercise of its sole discretion, from time to time, and any such termination or
change in such program, plan or policy will not constitute a modification to this Agreement so long
as Executive is permitted to participate in such program, plan or policy, as the case may be, as is
available to other executives. Upon termination of employment, without regard to the manner in
which the termination was brought about, Executives rights in such employee benefit and
compensation programs, plans or policies shall be governed solely by the terms of the program, plan
or policy itself unless otherwise stated to the contrary herein.
3.4 Management Performance Bonus Program. Unless sooner terminated by operation of
this Agreement, the provisions of this article 3.4 shall terminate on September 30, 2009 (the
Bonus Term).
During the Bonus Term, Executive shall be eligible to participate in bonus plans made
available to executive employees of the Company in a position commensurate with Executives
position (Bonus Plans). Under the terms of the Companys current Bonus Plans, Executive has an
opportunity to earn an annual cash bonus (Bonus Amount) measured against objective financial
performance criteria to be determined by the board of directors of Diamond Offshore Drilling, Inc.
(or a committee thereof), at its sole discretion. The desired but not guaranteed target Bonus
Amount is equal to a range between 60% and 65% of Executives Base Salary, and in no event shall
the Bonus Amount payable in any given year exceed 100% of Executives Base Salary. Any Bonus Amount
awarded to Executive under the Bonus Plans shall be paid in full each February.
4
Except as otherwise provided for in this article 3.4, the provisions hereof shall not be
construed to, or actually, amend or modify the terms of any established Bonus Plan, which terms
shall control and govern any Bonus Amount awarded pursuant thereto.
ARTICLE 4: EFFECT OF TERMINATION ON COMPENSATION
4.1 By Company Without Cause, By Company as a Result of Executives Death or Disability,
or By Executive for Good Reason Prior to Expiration of Term. If Executives employment
hereunder shall terminate on a date (Date of Termination) (i) by Company without Cause prior to
the expiration of the Term (ii) as a result of Executives death or Disability prior to the
Expiration of the Term, or (iii) by Executive for Good Reason (and, giving Company no less than
fifteen (15) days notice) prior to the expiration of the Term, then, upon such termination, the
payments and benefits described below will be provided to Executive, or in the event of Executives
death, to his spouse (or his estate if he is not married or his spouse does not survive him):
(a) Within thirty (30) days after the Date of Termination, Company shall pay any
Accrued Obligations and/or any amounts owed but unpaid to Executive under any plan,
policy or program of Company as of the Date of Termination provided by, and in
accordance with the terms of, such plan, policy or program;
(b) Company shall pay Executive severance consisting of an amount equal to
Executives Base Salary (less lawful deductions, as set forth in Article 3.1) for
the remaining Term of this Agreement, or for twenty-four (24) months, whichever is
greater. The severance shall be payable not less frequently than in equal monthly
installments following termination or in the case of Executives death, the
severance shall be payable in a lump sum;
(c) Any unexercised and/or unvested stock option grant or equivalent (SARS paid in
stock) held by Executive upon termination of employment shall be fully vested on the
date of termination and be eligible for exercise as provided for in the applicable
plan document; and
(d) Company shall, at its sole expense as incurred, provide the Executive with
customary outplacement services commensurate with Executives position but in no
event shall the provision of such services exceed twelve (12) months or $25,000.
4.2 By Executive Without Good Reason or By Company for Cause. If Executives
employment hereunder shall be terminated by Company for Cause or by Executive without Good Reason,
then within thirty (30) days of the Date of Termination Company shall pay any Accrued Obligations
and/or any amounts owed but unpaid to Executive under any plan, policy or program of Company as of
the Date of Termination provided by, and in accordance with the terms of, such plan, policy or
program. All compensation and benefits to Executive hereunder shall terminate
5
contemporaneously with the termination of such employment. Additionally, Company shall provide
employee with a COBRA notice and other legally required notices.
4.3 Payment Obligations Absolute/Release of Claims. Except as set forth in the
following Article, Companys obligation to pay Executive the amounts and to make the arrangements
provided in this Article 4 shall be absolute and unconditional and shall not be affected by any
circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or
other right which Company (including its subsidiaries and affiliates) may have against him or
anyone else. All amounts payable by Company shall be paid without notice or demand. Executive shall
not be obligated to seek other employment in mitigation of the amounts payable or arrangements made
under any provision of this Article 4, and the obtaining of any such other employment (or the
engagement in any endeavor as an independent contractor, sole proprietor, partner, or joint
venturer) shall in no event effect any reduction of Companys obligations to make (or cause to be
made) the payments and arrangements required to be made under this Article 4.
Executive acknowledges and agrees that the payments and benefits provided for in Article 4.1
constitute the exclusive remedy of Executive upon termination of employment for any reason.
Executive further agrees that, as a condition to receiving such payments and benefits, Executive
(or, if deceased or disabled, his estate or legal guardian) shall execute a complete and global
release of claims relating to or arising out of his employment with, and termination of employment
from, Company in a reasonable and customary form acceptable to Company. In the absence of
Executives execution and delivery to Company of such a release, Company shall have no obligation
to Executive to make any payment of the benefits as provided for in Article 4.1.
4.4 Accrued Obligations. For purposes of this Agreement, Accrued Obligations shall
mean, as of the Date of Termination, the sum of (i) Executives Base Salary through the Date of
Termination to the extent not previously paid, (ii) except as otherwise previously requested by
Executive, the amount of any compensation accrued by Executive as of the Date of Termination to the
extent not previously paid, and (iii) any expense reimbursements and any other cash entitlements
accrued by Executive as of the Date of Termination to the extent not previously paid.
4.5 Section 409A of the Internal Revenue Code. Notwithstanding any other provision of
this Agreement, if Internal Revenue Code Section 409A is applicable to this Agreement and Executive
is determined to be a Specified Employee for purposes of Section 409A, payments and benefits
under article 4.1 shall be paid no earlier than a date which is six months following Executives
Date of Termination. Any amounts that were otherwise scheduled to be paid during such six (6) month
period shall be paid in a lump sum upon expiration of such six (6) month period with all accrued
interest calculated from the Date of Termination until such lump sum payment and equal to the
average six (6) month U.S. Treasury Rate for the year. To the extent that the provision of any
other payments or benefits under this Agreement are governed by Section 409A, as amended, the
parties will work together in good faith to amend any provisions necessary for compliance or make
payments in a manner to avoid or minimize excise tax,
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penalties or interest as a result of the provisions of Section 409A, while maintaining the basic
financial provisions of this Agreement.
4.6 Confidentiality and Nondisclosure. Executive agrees that he will not, at any
time during or after the Term, make use of or divulge to any other person, firm or corporation any
trade or business secret, process, method or means, or any other confidential information,
including personnel information, concerning the business policies of the Company, which he may have
learned in connection with his employment hereunder. For purposes of this Agreement, a trade or
business secret, process, method or means, or any other confidential information, including
personnel information shall mean and include information treated either as confidential or as a
trade secret by the Company. Executives obligation under this Article 4.6 shall not apply to any
information which (a) is known publicly; (b) is in the public domain or hereafter enters the public
domain without the fault of Executive; (c) is known to Executive prior to his receipt of such
information from the Company, as evidenced by written records of Executive; or (d) is hereafter
disclosed to Executive by a third party not under an obligation of confidence to Company.
Executive agrees not to remove from the premises of Company, except as an Executive of Company in
pursuit of the business of Company or except as specifically permitted in writing by Company, any
document or other object containing or reflecting any such confidential information. Executive
recognizes that all such documents and objects, whether developed by him or by someone else, will
be the sole and exclusive property of Company. Upon termination of his employment hereunder,
Executive shall forthwith deliver to Company all such confidential information, including without
limitation all lists of lessees, customers, correspondence, employees, accounts, records and any
other documents or property made or held by him or under his control in relation to the business or
affairs of Company, and no copy of any such confidential information shall be retained by him.
4.7 Non-Solicitation of Employees/Former Employees. In the event this Agreement is
terminated or once Executive ceases to be an employee at any time for any reason, Executive agrees
that for a period of two (2) years after such termination, Executive shall not, directly or
knowingly indirectly, either as an executive, employer, independent contractor, consultant, agent,
principal, partner, stockholder, officer, director, or in any other individual or representative
capacity, either for his own benefit or the benefit of any other person or entity: (a) solicit,
recruit, induce, entice, encourage or in any way cause any executive or management level person who
is or was an employee of Company (or affiliate) within the six (6) months prior to Executives
termination of employment with Company or thereafter to terminate his/her employment with Company
(or such affiliate); or (b) directly solicit for hire, directly entice for hire, hire, or directly
recruit any person who is or was an employee of Company within the six (6) months prior to
Executives termination of employment with Company or thereafter.
ARTICLE 5: MISCELLANEOUS
5.1 Notices. For purposes of this Agreement, notices and all other communications
provided for herein shall be in writing and shall be deemed to have been duly given when personally
delivered or three days after the date mailed by United States registered or certified mail, return
receipt requested, or by a nationally known overnight courier, in either case postage prepaid and
addressed as follows: If to Company, to its General Counsel and its President at its
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corporate address of record. If to Executive, to the most recent home address on file with
Company, or to such other address as either party may furnish to the other in writing in accordance
herewith, except that notices of changes of address shall be effective only upon receipt.
5.2 Applicable Law/Venue. This contract is entered into under, and shall be governed
for all purposes by, the laws of the State of Texas without reference to the principles of
conflicts of laws. Executive and Company agree that Harris County, Texas will be the exclusive
venue for any lawsuit or dispute between the parties relating to this Agreement, the relationship
between the parties and/or the termination thereof.
5.3 No Waiver. No failure by either party hereto at any time to give notice of any
breach by the other party of, or to require compliance with, any condition or provision of this
Agreement shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or
at any prior or subsequent time.
5.4 Severability. If a court of competent jurisdiction determines that any provision
of this Agreement is invalid or unenforceable, then the invalidity or unenforceability of that
provision shall not affect the validity or enforceability of any other provision of this Agreement,
and all other provisions shall remain in full force and effect.
5.5 Counterparts. This Agreement may be executed in one or more counterparts, each of
which shall be deemed to be original, but all of which together will constitute one and the same
Agreement.
5.6 Withholding of Taxes and Other Executive Deductions. Company may withhold from any
benefits and payments made pursuant to this Agreement all federal, state, city and other taxes as
may be required pursuant to any law or governmental regulation or ruling and all other normal
executive deductions made with respect to Companys executives generally.
5.7 Headings. The paragraph headings have been inserted for purposes of convenience
and shall not be used for interpretive purposes.
5.8 Gender and Plurals. Wherever the context so requires, the masculine gender
includes the feminine or neuter, and the singular number includes the plural and conversely.
5.9 Parent. All the benefits received by Company in this Agreement shall also inure
to the benefit of Diamond Offshore Drilling, Inc, parent of Company.
5.10 Successors. This Agreement shall be binding upon and inure to the benefit of
Company and any successor of Company, including without limitation any person, association, or
entity which may hereafter acquire or succeed to all or substantially all of the business or assets
of Company by any means whether direct or indirect, by purchase, merger, consolidation, or
otherwise. Except as provided in the preceding sentence, this Agreement, and the rights and
obligations of the parties hereunder, are personal and neither this Agreement, nor any right,
benefit or obligation of either party hereto, shall be subject to voluntary or involuntary
8
assignment, alienation or transfer, whether by operation of law or otherwise, without the
prior written consent of the other party.
5.11 Vested Rights/Reemployment. The term of this Agreement is co-extensive with the
Term of employment as set forth in Article 2.1. Termination shall not affect any right or
obligation of any party which is accrued or vested prior to or upon such termination or by its
terms continues following the termination of the Term, including without limitation Articles 4.6,
4.7, 5.1, and 5.2 of this Agreement. Executive further agrees that upon termination of his
employment by the Company, he shall not re-apply or otherwise seek employment with Company in the
future and that Company has no obligation to re-hire him.
5.12 Entire Agreement; Conflict. This Agreement sets forth the entire agreement of the
parties with respect to the subject matter hereof and expressly supersedes all oral or written
agreements between the parties; except, this Agreement is not intended to modify, abrogate or
supersede any of the parties obligations as reflected in benefit or compensation plans, policies
or programs in which Executive participates as set forth in Article 3.3 herein. Any modification of
this Agreement shall be effective only if it is in writing and signed by the party to be charged.
In the event of any conflict between the terms of this Agreement and the terms of any policy, plan
or program of Company not heretofore specified, the terms of this Agreement shall govern.
5.13 Specific Performance. Company and Executive, jointly and severally, acknowledge
that it would be impossible to calculate or ascertain accurately and definitively the damages
Company would sustain from a breach by Executive of the provisions of Articles 4.6 and 4.7 of this
Agreement and that no adequate remedy at law exists. Accordingly, in the event of a threatened
breach by Executive of said provisions, Company shall be entitled to an injunction restraining such
prohibited activity. Nothing herein, however, shall be construed as prohibiting Company from
pursuing any other remedies available to Company for such breach or threatened breach, including
recovery of damages from Executive.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date set forth
above.
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Diamond Offshore Management Company
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By: |
/s/ Lawrence R. Dickerson
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Name: |
Lawrence R. Dickerson |
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Title: |
President and Chief Operating Officer |
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EXECUTIVE:
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/s/ Beth G. Gordon
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9
exv12w1
Exhibit 12.1
DIAMOND OFFSHORE DRILLING, INC.
Statement re Computation of Ratios
(Thousands of Dollars)
Ratio of Earnings to Fixed Charges:
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Year Ended December 31, |
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2006 |
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2002 |
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Computation of Earnings: |
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Pretax income (loss) from continuing operations |
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966,332 |
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|
$ |
356,395 |
|
|
$ |
(3,533 |
) |
|
$ |
(54,237 |
) |
|
$ |
96,174 |
|
Less Interest capitalized during the period and actual
preferred dividend requirements of majority-owned
subsidiaries and 50%-owned persons included in
fixed charges but not deducted from pretax income
from above |
|
|
(9,796 |
) |
|
|
(742 |
) |
|
|
|
|
|
|
(2,201 |
) |
|
|
(2,878 |
) |
Add: Previously capitalized interest amortized during
the period |
|
|
1,249 |
|
|
|
1,249 |
|
|
|
1,249 |
|
|
|
1,166 |
|
|
|
1,304 |
|
|
|
|
Total earnings (losses), before fixed charge addition |
|
|
957,785 |
|
|
|
356,902 |
|
|
|
(2,284 |
) |
|
|
(55,272 |
) |
|
|
94,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computation of Fixed Charges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest, including interest capitalized |
|
|
35,132 |
|
|
|
43,574 |
|
|
|
30,330 |
|
|
|
26,737 |
|
|
|
26,933 |
|
|
|
|
Total fixed charges |
|
|
35,132 |
|
|
|
43,574 |
|
|
|
30,330 |
|
|
|
26,737 |
|
|
|
26,933 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Earnings (Losses) and Fixed Charges |
|
$ |
992,917 |
|
|
$ |
400,476 |
|
|
$ |
28,046 |
|
|
$ |
(28,535 |
) |
|
$ |
121,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of Earnings (Losses) to Fixed Charges (1) |
|
|
28.26 |
|
|
|
9.19 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
4.51 |
|
|
|
|
(1) The deficiency in our earnings available for fixed charges for the years ended December
31, 2004 and 2003 was approximately $2.3 million and $55.3 million, respectively.
exv21w1
Exhibit 21.1
SUBSIDIARIES
|
|
|
Subsidiary |
|
Jurisdiction of Organization |
|
|
|
Diamond M Corporation
|
|
Texas |
Diamond Offshore Development Company
|
|
Delaware |
Diamond Offshore Finance Company
|
|
Delaware |
Diamond Offshore Management Company
|
|
Delaware |
Diamond Offshore Company
|
|
Delaware |
Diamond Offshore General Company
|
|
Delaware |
Diamond Offshore Services Company
|
|
Delaware |
Arethusa Off-Shore Company
|
|
Delaware |
Arethusa/Zapata Off-Shore Brasil Ltda.
|
|
Brazil |
Diamond M Servicios, S.A.
|
|
Venezuela |
Diamond Offshore Contract Services, S.A.
|
|
Panama |
Diamond Offshore International Limited
|
|
Cayman Islands |
Diamond Hungary Leasing, L.L.C.
|
|
Hungary |
Diamond Offshore (Bermuda) Limited
|
|
Bermuda |
Diamond Offshore Drilling (Bermuda) Limited
|
|
Bermuda |
Diamond Offshore (Brazil) L.L.C.
|
|
Delaware |
Brasdril-Sociedade de Perfuracoes Ltda.
|
|
Brazil |
Diamond Offshore Drilling (Overseas) L.L.C.
|
|
Delaware |
Diamond Offshore Drilling (Nigeria) Limited
|
|
Nigeria |
Mexdrill, L.L.C.
|
|
Delaware |
Mexdrill Offshore, S. de R.L. de C.V.
|
|
Mexico |
Offshore Drilling Services of Mexico, S. de R.L. de C.V.
|
|
Mexico |
Diamond Offshore Drilling Company N.V.
|
|
Netherlands Antilles |
Diamond Offshore Netherlands B.V.
|
|
The Netherlands |
Offshore Drilling Services (Netherlands) B.V.
|
|
The Netherlands |
Diamond Offshore Drilling Limited
|
|
Cayman Islands |
Diamond Offshore (Australia) L.L.C.
|
|
Delaware |
Diamond Offshore Holding, L.L.C.
|
|
Delaware |
Diamond Offshore Drilling Sdn. Bhd.
|
|
Malaysia |
Diamond Offshore Leasing Ltd.
|
|
Malaysia |
Diamond Offshore Limited
|
|
England |
Diamond Offshore Drilling (UK) Ltd.
|
|
England |
Diamond Offshore Services Limited
|
|
Bermuda |
Diamond Offshore (USA) L.L.C.
|
|
Delaware |
Diamond Offshore (Trinidad) L.L.C.
|
|
Delaware |
M-S Drilling S.A.
|
|
Panama |
Storm Nigeria Limited
|
|
Nigeria |
Z North Sea, Ltd.
|
|
Delaware |
Diamond Offshore Drilling (Netherlands) B.V.
|
|
The Netherlands |
Afcons Arethusa Off-Shore Services Ltd.
|
|
India |
Pt Aqza Dharma
|
|
Indonesia |
Diamond Offshore (Singapore) Pte. Ltd.
|
|
Singapore |
exv23w1
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-19987 on Form
S-3, Registration Statement No. 333-22745 on Form S-8, Registration Statement No. 333-23547 on Form
S-4, Registration Statement No. 333-63443 on Form S-3, Registration Statement No. 333-42930 on Form
S-8, Registration Statement No. 333-44960 on Form S-3, Registration Statement No. 333-63980 on Form
S-3, Registration Statement No. 333-117512 on Form S-8, Registration Statement No. 333-121762 on
Form S-4 and Registration Statement No. 333-127229 on Form S-4 of Diamond Offshore Drilling, Inc.
(the Company) of our reports dated February 22, 2007, relating to the financial statements of the
Company and managements report on the effectiveness of internal control over financial reporting,
appearing in this Annual Report on Form 10-K of the Company for the year ended December 31, 2006.
DELOITTE & TOUCHE LLP
Houston, Texas
February 22, 2007
exv24w1
EXHIBIT 24.1
POWER OF ATTORNEY
James S. Tisch hereby designates and appoints William C. Long and Gary T. Krenek and each
of them (with full power to each of them to act alone) as his attorney-in-fact, with full power of
substitution and re-substitution (the Attorneys-in-Fact), for him and in his name, place and
stead, in any and all capacities, to execute the Annual Report on Form 10-K (the Annual Report)
to be filed by Diamond Offshore Drilling, Inc. with the Securities and Exchange Commission and any
amendment(s) to the Annual Report, which amendment(s) may make such changes in the Annual Report as
either Attorney-in-Fact deems appropriate, and to file the Annual Report and each such amendment to
the Annual Report together with all exhibits thereto and any and all documents in connection
therewith.
|
|
|
|
|
|
|
|
|
Signature
|
|
|
|
Title
|
|
Date |
|
|
|
|
|
|
|
|
|
|
|
/s/ James S. Tisch
|
|
|
|
Chief Executive Officer
|
|
February 1, 2007
|
|
|
|
|
|
|
& Chairman of the Board |
|
|
|
|
EXHIBIT 24.1
POWER OF ATTORNEY
Lawrence R. Dickerson hereby designates and appoints William C. Long and Gary T.
Krenek and each of them (with full power to each of them to act alone) as his attorney-in-fact,
with full power of substitution and re-substitution (the Attorneys-in-Fact), for him and in his
name, place and stead, in any and all capacities, to execute the Annual Report on Form 10-K (the
Annual Report) to be filed by Diamond Offshore Drilling, Inc. with the Securities and Exchange
Commission and any amendment(s) to the Annual Report, which amendment(s) may make such changes in
the Annual Report as either Attorney-in-Fact deems appropriate, and to file the Annual Report and
each such amendment to the Annual Report together with all exhibits thereto and any and all
documents in connection therewith.
|
|
|
|
|
|
|
|
|
Signature
|
|
|
|
Title
|
|
Date |
|
|
|
|
|
|
|
|
|
|
|
/s/ Lawrence R. Dickerson
|
|
|
|
Director, President and
|
|
February 1, 2007
|
|
|
|
|
|
|
Chief Operating Officer |
|
|
|
|
EXHIBIT 24.1
POWER OF ATTORNEY
Gary T. Krenek hereby designates and appoints William C. Long as his
attorney-in-fact, with full power of substitution and re-substitution (the Attorney-in-Fact), for
him and in his name, place and stead, in any and all capacities, to execute the Annual Report on
Form 10-K (the Annual Report) to be filed by Diamond Offshore Drilling, Inc. with the Securities
and Exchange Commission and any amendment(s) to the Annual Report, which amendment(s) may make such
changes in the Annual Report as the Attorney-in-Fact deems appropriate, and to file the Annual
Report and each such amendment to the Annual Report together with all exhibits thereto and any and
all documents in connection therewith.
|
|
|
|
|
|
|
|
|
Signature
|
|
|
|
Title
|
|
Date |
|
|
|
|
|
|
|
|
|
|
|
/s/ Gary T. Krenek
|
|
|
|
Senior Vice President and
|
|
February 1, 2007
|
|
|
|
|
|
|
Chief Financial Officer |
|
|
|
|
EXHIBIT 24.1
POWER OF ATTORNEY
Beth G. Gordon hereby designates and appoints William C. Long and Gary T. Krenek
and each of them (with full power to each of them to act alone) as her attorney-in-fact, with full
power of substitution and re-substitution (the Attorneys-in-Fact), for her and in her name, place
and stead, in any and all capacities, to execute the Annual Report on Form 10-K (the Annual
Report) to be filed by Diamond Offshore Drilling, Inc. with the Securities and Exchange Commission
and any amendment(s) to the Annual Report, which amendment(s) may make such changes in the Annual
Report as either Attorney-in-Fact deems appropriate, and to file the Annual Report and each such
amendment to the Annual Report together with all exhibits thereto and any and all documents in
connection therewith.
|
|
|
|
|
|
|
|
|
Signature
|
|
|
|
Title
|
|
Date |
|
|
|
|
|
|
|
|
|
|
|
/s/ Beth G. Gordon
|
|
|
|
Controller
|
|
February 1, 2007
|
|
|
|
|
|
|
|
|
|
|
|
EXHIBIT 24.1
POWER OF ATTORNEY
Alan R. Batkin hereby designates and appoints William C. Long and Gary T. Krenek
and each of them (with full power to each of them to act alone) as his attorney-in-fact, with full
power of substitution and re-substitution (the Attorneys-in-Fact), for him and in his name, place
and stead, in any and all capacities, to execute the Annual Report on Form 10-K (the Annual
Report) to be filed by Diamond Offshore Drilling, Inc. with the Securities and Exchange Commission
and any amendment(s) to the Annual Report, which amendment(s) may make such changes in the Annual
Report as either Attorney-in-Fact deems appropriate, and to file the Annual Report and each such
amendment to the Annual Report together with all exhibits thereto and any and all documents in
connection therewith.
|
|
|
|
|
|
|
|
|
Signature
|
|
|
|
Title
|
|
Date |
|
|
|
|
|
|
|
|
|
|
|
/s/ Alan R. Batkin
|
|
|
|
Director
|
|
February 1, 2007
|
|
|
|
|
|
|
|
|
|
|
|
EXHIBIT 24.1
POWER OF ATTORNEY
John R. Bolton hereby designates and appoints William C. Long and Gary T. Krenek
and each of them (with full power to each of them to act alone) as his attorney-in-fact, with full
power of substitution and re-substitution (the Attorneys-in-Fact), for him and in his name, place
and stead, in any and all capacities, to execute the Annual Report on Form 10-K (the Annual
Report) to be filed by Diamond Offshore Drilling, Inc. with the Securities and Exchange Commission
and any amendment(s) to the Annual Report, which amendment(s) may make such changes in the Annual
Report as either Attorney-in-Fact deems appropriate, and to file the Annual Report and each such
amendment to the Annual Report together with all exhibits thereto and any and all documents in
connection therewith.
|
|
|
|
|
|
|
|
|
Signature
|
|
|
|
Title
|
|
Date |
|
|
|
|
|
|
|
|
|
|
|
/s/ John R. Bolton
|
|
|
|
Director
|
|
February 5, 2007
|
|
|
|
|
|
|
|
|
|
|
|
EXHIBIT 24.1
POWER OF ATTORNEY
Charles L. Fabrikant hereby designates and appoints William C. Long and Gary T.
Krenek and each of them (with full power to each of them to act alone) as his attorney-in-fact,
with full power of substitution and re-substitution (the Attorneys-in-Fact), for him and in his
name, place and stead, in any and all capacities, to execute the Annual Report on Form 10-K (the
Annual Report) to be filed by Diamond Offshore Drilling, Inc. with the Securities and Exchange
Commission and any amendment(s) to the Annual Report, which amendment(s) may make such changes in
the Annual Report as either Attorney-in-Fact deems appropriate, and to file the Annual Report and
each such amendment to the Annual Report together with all exhibits thereto and any and all
documents in connection therewith.
|
|
|
|
|
|
|
|
|
Signature
|
|
|
|
Title
|
|
Date |
|
|
|
|
|
|
|
|
|
|
|
/s/ Charles L. Fabrikant
|
|
|
|
Director
|
|
February 1, 2007
|
|
|
|
|
|
|
|
|
|
|
|
EXHIBIT 24.1
POWER OF ATTORNEY
Paul G. Gaffney II hereby designates and appoints William C. Long and Gary T.
Krenek and each of them (with full power to each of them to act alone) as his attorney-in-fact,
with full power of substitution and re-substitution (the Attorneys-in-Fact), for his and in his
name, place and stead, in any and all capacities, to execute the Annual Report on Form 10-K (the
Annual Report) to be filed by Diamond Offshore Drilling, Inc. with the Securities and Exchange
Commission and any amendment(s) to the Annual Report, which amendment(s) may make such changes in
the Annual Report as either Attorney-in-Fact deems appropriate, and to file the Annual Report and
each such amendment to the Annual Report together with all exhibits thereto and any and all
documents in connection therewith.
|
|
|
|
|
|
|
|
|
Signature
|
|
|
|
Title
|
|
Date |
|
|
|
|
|
|
|
|
|
|
|
/s/ Paul G. Gaffney II
|
|
|
|
Director
|
|
February 1, 2007
|
|
|
|
|
|
|
|
|
|
|
|
EXHIBIT 24.1
POWER OF ATTORNEY
Herbert C. Hofmann hereby designates and appoints William C. Long and Gary T.
Krenek and each of them (with full power to each of them to act alone) as his attorney-in-fact,
with full power of substitution and re-substitution (the Attorneys-in-Fact), for him and in his
name, place and stead, in any and all capacities, to execute the Annual Report on Form 10-K (the
Annual Report) to be filed by Diamond Offshore Drilling, Inc. with the Securities and Exchange
Commission and any amendment(s) to the Annual Report, which amendment(s) may make such changes in
the Annual Report as either Attorney-in-Fact deems appropriate, and to file the Annual Report and
each such amendment to the Annual Report together with all exhibits thereto and any and all
documents in connection therewith.
|
|
|
|
|
|
|
|
|
Signature
|
|
|
|
Title
|
|
Date |
|
|
|
|
|
|
|
|
|
|
|
/s/ Herbert C. Hofmann
|
|
|
|
Director
|
|
February 1, 2007
|
|
|
|
|
|
|
|
|
|
|
|
EXHIBIT 24.1
POWER OF ATTORNEY
Arthur L. Rebell hereby designates and appoints William C. Long and Gary T. Krenek and
each of them (with full power to each of them to act alone) as his attorney-in-fact, with full
power of substitution and re-substitution (the Attorneys-in-Fact), for him and in his name, place
and stead, in any and all capacities, to execute the Annual Report on Form 10-K (the Annual
Report) to be filed by Diamond Offshore Drilling, Inc. with the Securities and Exchange Commission
and any amendment(s) to the Annual Report, which amendment(s) may make such changes in the Annual
Report as either Attorney-in-Fact deems appropriate, and to file the Annual Report and each such
amendment to the Annual Report together with all exhibits thereto and any and all documents in
connection therewith.
|
|
|
|
|
|
|
|
|
Signature
|
|
|
|
Title
|
|
Date |
|
|
|
|
|
|
|
|
|
|
|
/s/ Arthur L. Rebell
|
|
|
|
Director
|
|
February 1, 2007
|
|
|
|
|
|
|
|
|
|
|
|
EXHIBIT 24.1
POWER OF ATTORNEY
Raymond S. Troubh hereby designates and appoints William C. Long and Gary T. Krenek
and each of them (with full power to each of them to act alone) as his attorney-in-fact, with full
power of substitution and re-substitution (the Attorneys-in-Fact), for him and in his name, place
and stead, in any and all capacities, to execute the Annual Report on Form 10-K (the Annual
Report) to be filed by Diamond Offshore Drilling, Inc. with the Securities and Exchange Commission
and any amendment(s) to the Annual Report, which amendment(s) may make such changes in the Annual
Report as either Attorney-in-Fact deems appropriate, and to file the Annual Report and each such
amendment to the Annual Report together with all exhibits thereto and any and all documents in
connection therewith.
|
|
|
|
|
|
|
|
|
Signature
|
|
|
|
Title
|
|
Date |
|
|
|
|
|
|
|
|
|
|
|
/s/ Raymond S. Troubh
|
|
|
|
Director
|
|
February 1, 2007
|
|
|
|
|
|
|
|
|
|
|
|
exv31w1
Exhibit 31.1
|
|
I, James S. Tisch, certify that: |
|
1. |
|
I have reviewed this Annual Report on Form 10-K for the fiscal year ended December 31, 2006
of Diamond Offshore Drilling, Inc.; |
|
2. |
|
Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report; |
|
3. |
|
Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this
report; |
|
4. |
|
The registrants other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have: |
|
|
|
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared; |
|
|
|
(b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles; |
|
|
|
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and |
|
|
|
(d) Disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth
fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrants internal control over financial reporting; and |
|
5. |
|
The registrants other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the
audit committee of the registrants board of directors (or persons performing the equivalent
functions): |
|
|
|
(a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrants
ability to record, process, summarize and report financial information; and |
|
|
|
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrants internal control over financial reporting. |
Date: February 23, 2007
|
|
|
/s/ James S. Tisch
|
|
|
|
|
|
James S. Tisch |
|
|
Chief Executive Officer |
|
|
exv31w2
Exhibit 31.2
|
|
I, Gary T. Krenek, certify that: |
|
1. |
|
I have reviewed this Annual Report on Form 10-K for the fiscal year ended December 31, 2006
of Diamond Offshore Drilling, Inc.; |
|
2. |
|
Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report; |
|
3. |
|
Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this
report; |
|
4. |
|
The registrants other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have: |
|
|
|
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared; |
|
|
|
(b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles; |
|
|
|
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and |
|
|
|
(d) Disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth
fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrants internal control over financial reporting; and |
|
5. |
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The registrants other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the
audit committee of the registrants board of directors (or persons performing the equivalent
functions): |
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(a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrants
ability to record, process, summarize and report financial information; and |
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(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrants internal control over financial reporting. |
Date: February 23, 2007
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/s/ Gary T. Krenek
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Gary T. Krenek |
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Chief Financial Officer |
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exv32w1
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED BY SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
Each of the undersigned hereby certifies, pursuant to 18 U.S.C. § 1350, in his capacity as an
officer of Diamond Offshore Drilling, Inc. (the Company), that, to his knowledge:
(1) the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2006, as
filed with the U.S. Securities and Exchange Commission on the date hereof (the Report), fully
complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended; and
(2) the information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company.
Dated: February 23, 2007
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/s/ James S. Tisch
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James S. Tisch, |
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Chief Executive Officer of the Company |
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/s/ Gary T. Krenek
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Gary T. Krenek, |
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Chief Financial Officer of the Company |
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