PACIFIC DRILLING S.A., 20-F filed on 3/4/2014
Annual and Transition Report (foreign private issuer)
Document and Entity Information
12 Months Ended
Dec. 31, 2013
Document Information [Line Items]
 
Document Type
20-F 
Amendment Flag
false 
Document Period End Date
Dec. 31, 2013 
Document Fiscal Year Focus
2013 
Document Fiscal Period Focus
FY 
Trading Symbol
PACD 
Entity Registrant Name
PACIFIC DRILLING S.A. 
Entity Central Index Key
0001517342 
Current Fiscal Year End Date
--12-31 
Entity Well-known Seasoned Issuer
Yes 
Entity Current Reporting Status
Yes 
Entity Filer Category
Accelerated Filer 
Entity Common Stock, Shares Outstanding
217,035,183 
Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2011
Revenues
 
 
 
Contract drilling
$ 745,574 
$ 638,050 
$ 65,431 
Costs and expenses
 
 
 
Contract drilling
(337,277)
(331,495)
(32,142)
General and administrative expenses
(48,614)
(45,386)
(52,614)
Depreciation expense
(149,465)
(127,698)
(11,619)
Costs and Expenses
(535,356)
(504,579)
(96,375)
Loss of hire insurance recovery
 
23,671 
18,500 
Operating income (loss)
210,218 
157,142 
(12,444)
Other income (expense)
 
 
 
Costs on interest rate swap termination
(38,184)
 
 
Interest expense, other
(94,027)
(104,685)
(10,384)
Total interest expense
(132,211)
(104,685)
(10,384)
Costs on extinguishment of debt
(28,428)
 
 
Equity in earnings of Joint Venture
 
 
18,955 
Interest income from Joint Venture
 
 
495 
Other income (expense)
(1,554)
3,245 
3,675 
Income before income taxes
48,025 
55,702 
297 
Income tax expense
(22,523)
(21,713)
(3,200)
Net income (loss)
$ 25,502 
$ 33,989 
$ (2,903)
Earnings (loss) per common share, basic (Note 8)
$ 0.12 
$ 0.16 
$ (0.01)
Weighted-average number of common shares, basic (Note 8)
216,964 
216,901 
195,448 
Earnings (loss) per common share, diluted (Note 8)
$ 0.12 
$ 0.16 
$ (0.01)
Weighted-average number of common shares, diluted (Note 8)
217,421 
216,903 
195,448 
Consolidated Statements of Comprehensive Income (Loss) (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2011
Net income (loss)
$ 25,502 
$ 33,989 
$ (2,903)
Other comprehensive income (loss):
 
 
 
Reclassification adjustment for loss on derivative instruments realized in net income
 
 
(3,000)
Total other comprehensive income (loss)
49,859 
1,868 
(56,568)
Total comprehensive income (loss)
75,361 
35,857 
(59,471)
Joint Venture
 
 
 
Net income (loss)
 
 
9,135 
Other comprehensive income (loss):
 
 
 
Unrecognized gain (loss) on derivative instruments
 
 
720 
Reclassification adjustment for loss on derivative instruments realized in net income
 
 
2,996 
Other Comprehensive Income (Loss), Derivatives Qualifying as Hedges, Net of Tax, Total
 
 
3,716 
Total other comprehensive income (loss)
 
 
3,716 
All Other
 
 
 
Net income (loss)
 
 
(12,038)
Other comprehensive income (loss):
 
 
 
Unrecognized gain (loss) on derivative instruments
2,139 
(22,551)
(62,086)
Reclassification adjustment for loss on derivative instruments realized in net income
47,720 
24,419 
1,802 
Other Comprehensive Income (Loss), Derivatives Qualifying as Hedges, Net of Tax, Total
49,859 
1,868 
(60,284)
Total other comprehensive income (loss)
 
 
$ (60,284)
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2013
Dec. 31, 2012
Assets:
 
 
Cash and cash equivalents
$ 204,123 
$ 605,921 
Restricted cash
 
47,444 
Accounts receivable
206,078 
152,299 
Materials and supplies
65,709 
49,626 
Deferred financing costs
14,857 
17,707 
Current portion of deferred costs
48,202 
37,519 
Prepaid expenses and other current assets
13,889 
13,930 
Total current assets
552,858 
924,446 
Property and equipment, net
4,512,154 
3,760,421 
Restricted cash
 
124,740 
Deferred financing costs
53,300 
32,157 
Other assets
45,728 
52,164 
Total assets
5,164,040 
4,893,928 
Liabilities and shareholders' equity:
 
 
Accounts payable
54,235 
30,230 
Accrued expenses
66,026 
39,345 
Current portion of long-term debt
7,500 
218,750 
Accrued interest
21,984 
29,594 
Derivative liabilities, current
4,984 
17,995 
Current portion of deferred revenue
96,658 
66,142 
Total current liabilities
251,387 
402,056 
Long-term debt, net of current maturities
2,423,337 
2,034,958 
Deferred revenue
88,465 
97,014 
Other long-term liabilities
927 
44,652 
Total long-term liabilities
2,512,729 
2,176,624 
Commitments and contingencies
   
   
Shareholders' equity:
 
 
Common shares, $0.01 par value per share, 5,000,000 shares authorized, 224,100 shares issued and 217,035 and 216,902 shares outstanding as of December 31, 2013 and December 31, 2012, respectively
2,170 
2,169 
Additional paid-in capital
2,358,858 
2,349,544 
Accumulated other comprehensive loss
(8,557)
(58,416)
Retained earnings
47,453 
21,951 
Total shareholders' equity
2,399,924 
2,315,248 
Total liabilities and shareholders' equity
$ 5,164,040 
$ 4,893,928 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Per Share data, unless otherwise specified
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2010
Common shares, par value
$ 0.01 
$ 0.01 
$ 0.001 
Common shares, shares authorized
5,000,000 
5,000,000 
2,000 
Common shares, shares issued
224,100 
224,100 
1,900 
Common shares, shares outstanding
217,035 
216,902 
 
Consolidated Statements of Shareholders' Equity (USD $)
Total
USD ($)
All Other
USD ($)
Joint Venture
USD ($)
Common Shares
USD ($)
Common Shares
Restructuring share issuance, net
USD ($)
Common Shares
All Other
USD ($)
Treasury Shares
Additional Paid-In Capital
USD ($)
Additional Paid-In Capital
Restructuring share issuance, net
USD ($)
Additional Paid-In Capital
All Other
USD ($)
Accumulated Other Comprehensive Loss
USD ($)
Accumulated Other Comprehensive Loss
All Other
USD ($)
Accumulated Other Comprehensive Loss
Joint Venture
USD ($)
Retained Earnings (Accumulated Deficit)
USD ($)
Retained Earnings (Accumulated Deficit)
All Other
USD ($)
Retained Earnings (Accumulated Deficit)
Joint Venture
USD ($)
Balance at January 1, 2011 at Dec. 31, 2010
$ 1,775,207,000 
 
 
$ 2,000 
 
 
 
$ 1,697,608,000 
 
 
$ (13,458,000)
 
 
$ 91,055,000 
 
 
Balance at January 1, 2011 (in shares) at Dec. 31, 2010
 
 
 
1,921,000 
 
 
 
 
 
 
 
 
 
 
 
 
Issuance of shares, net (in shares)
 
 
 
 
148,079,000 
66,900,000 
 
 
 
 
 
 
 
 
 
 
Issuance of shares, net
 
625,816,000 
 
 
1,498,000 
669,000 
 
 
(1,498,000)
625,147,000 
 
 
 
 
 
 
Issuance of common shares to treasury
 
 
 
 
 
 
7,200,000 
 
 
 
 
 
 
 
 
 
Contribution from shareholder
142,759,000 
 
 
 
 
 
 
142,759,000 
 
 
 
 
 
 
 
 
Joint Venture interests assigned to shareholder
(215,368,000)
 
 
 
 
 
 
(124,920,000)
 
 
9,742,000 
 
 
(100,190,000)
 
 
Share-based compensation liability modification
2,290,000 
 
 
 
 
 
 
2,290,000 
 
 
 
 
 
 
 
 
Share-based compensation
2,840,000 
 
 
 
 
 
 
2,840,000 
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
(56,568,000)
(60,284,000)
3,716,000 
 
 
 
 
 
 
 
 
(60,284,000)
3,716,000 
 
 
 
Net income (loss)
(2,903,000)
(12,038,000)
9,135,000 
 
 
 
 
 
 
 
 
 
 
 
(12,038,000)
9,135,000 
Ending Balance at Dec. 31, 2011
2,274,073,000 
 
 
2,169,000 
 
 
 
2,344,226,000 
 
 
(60,284,000)
 
 
(12,038,000)
 
 
Ending Balance (in shares) at Dec. 31, 2011
 
 
 
216,900,000 
 
 
7,200,000 
 
 
 
 
 
 
 
 
 
Shares issued under share-based compensation plan (in shares)
 
 
 
2,000 
 
 
(2,000)
 
 
 
 
 
 
 
 
 
Share-based compensation
5,318,000 
 
 
 
 
 
 
5,318,000 
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
1,868,000 
 
 
 
 
 
 
 
 
 
1,868,000 
 
 
 
 
 
Net income (loss)
33,989,000 
 
 
 
 
 
 
 
 
 
 
 
 
33,989,000 
 
 
Ending Balance at Dec. 31, 2012
2,315,248,000 
 
 
2,169,000 
 
 
 
2,349,544,000 
 
 
(58,416,000)
 
 
21,951,000 
 
 
Ending Balance (in shares) at Dec. 31, 2012
 
 
 
216,902,000 
 
 
7,198,000 
 
 
 
 
 
 
 
 
 
Shares issued under share-based compensation plan (in shares)
 
 
 
133,000 
 
 
(133,000)
 
 
 
 
 
 
 
 
 
Shares issued under share-based compensation plan
 
 
 
1,000 
 
 
 
(1,000)
 
 
 
 
 
 
 
 
Share-based compensation
9,315,000 
 
 
 
 
 
 
9,315,000 
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
49,859,000 
 
 
 
 
 
 
 
 
 
49,859,000 
 
 
 
 
 
Net income (loss)
25,502,000 
 
 
 
 
 
 
 
 
 
 
 
 
25,502,000 
 
 
Ending Balance at Dec. 31, 2013
$ 2,399,924,000 
 
 
$ 2,170,000 
 
 
 
$ 2,358,858,000 
 
 
$ (8,557,000)
 
 
$ 47,453,000 
 
 
Ending Balance (in shares) at Dec. 31, 2013
 
 
 
217,035,000 
 
 
7,065,000 
 
 
 
 
 
 
 
 
 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2011
Cash flow from operating activities:
 
 
 
Net income (loss)
$ 25,502 
$ 33,989 
$ (2,903)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Depreciation expense
149,465 
127,698 
11,619 
Amortization of deferred revenue
(72,515)
(95,750)
(8,566)
Amortization of deferred costs
39,479 
70,660 
4,288 
Amortization of deferred financing costs
10,106 
13,926 
1,067 
Amortization of debt discount
445 
 
 
Provision for materials and supplies obsolescence
1,115 
 
 
Write-off of unamortized deferred financing costs
27,644 
 
 
Costs on interest rate swap termination
38,184 
 
 
Deferred income taxes
(3,119)
(3,766)
(3,169)
Share-based compensation expense
9,315 
5,318 
4,471 
Equity in earnings of Joint Venture
 
 
(18,955)
Interest income from Joint Venture
 
 
(495)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(53,779)
(89,721)
(45,051)
Materials and supplies
(17,198)
(6,640)
(35,031)
Prepaid expenses and other assets
(30,840)
(61,548)
(108,593)
Accounts payable and accrued expenses
12,301 
33,865 
39,437 
Deferred revenue
94,482 
156,967 
97,550 
Net cash provided by (used in) operating activities
230,587 
184,998 
(64,331)
Cash flow from investing activities:
 
 
 
Capital expenditures
(876,142)
(449,951)
(1,539,630)
Decrease (increase) in restricted cash
172,184 
204,784 
(315,286)
Net cash used in investing activities
(703,958)
(245,167)
(1,854,916)
Cash flow from financing activities:
 
 
 
Proceeds from issuance of common shares, net
 
 
625,816 
Proceeds from long-term debt
1,656,250 
797,415 
1,275,000 
Payments on long-term debt
(1,480,000)
(218,750)
(50,000)
Payment for costs on interest rate swap termination
(41,993)
 
 
Deferred financing costs
(62,684)
(19,853)
(6,803)
Proceeds from related-party loan
 
 
142,205 
Net cash provided by financing activities
71,573 
558,812 
1,986,218 
Increase (decrease) in cash and cash equivalents
(401,798)
498,643 
66,971 
Cash and cash equivalents, beginning of period
605,921 
107,278 
40,307 
Cash and cash equivalents, end of period
$ 204,123 
$ 605,921 
$ 107,278 
Nature of Business
Nature of Business

Note 1—Nature of Business

Pacific Drilling S.A. and its subsidiaries (“Pacific Drilling,” the “Company,” “we,” “us” or “our”) is an international offshore drilling contractor committed to becoming the preferred provider of ultra-deepwater drilling services to the oil and natural gas industry through the use of high-specification rigs. Our primary business is to contract our ultra-deepwater rigs, related equipment and work crews, primarily on a dayrate basis, to drill wells for our clients. As of December 31, 2013, we were operating five drillships under client contract and have three drillships under construction at Samsung Heavy Industries (“SHI”), one of which is under client contract.

Pacific Drilling S.A. was formed on March 11, 2011, as a Luxembourg company under the form of a société anonyme to act as an indirect holding company for its predecessor, Pacific Drilling Limited (our “Predecessor”), a company organized under the laws of Liberia, and its subsidiaries in connection with a corporate reorganization completed on March 30, 2011, referred to as the “Restructuring.” In connection with the Restructuring, our Predecessor was contributed to a wholly-owned subsidiary of the Company by a subsidiary of Quantum Pacific International Limited, a British Virgin Islands company and parent company of an investment holdings group (the “Quantum Pacific Group”). The Company did not engage in any business or other activities prior to the Restructuring except in connection with its formation and the Restructuring.

Significant Accounting Policies
Significant Accounting Policies

Note 2—Significant Accounting Policies

Principles of Consolidation—The consolidated financial statements include the accounts of Pacific Drilling S.A. and consolidated subsidiaries that we control by ownership of a majority voting interest. We apply the equity method of accounting for investments in entities when we have the ability to exercise significant influence over an entity that does not meet the variable entity criteria or meets the variable interest entity criteria, but for which we are not deemed to be the primary beneficiary. We eliminate all intercompany transactions and balances in consolidation.

The Restructuring was a business combination limited to entities that were all under the control of the Quantum Pacific Group and its affiliates, and, as a result, the Restructuring was accounted for as a transaction between entities under common control. Accordingly, the consolidated financial statements for the year ended December 31, 2011 are presented using the historical values of the Predecessor’s financial statements on a combined basis prior to the Restructuring as if Pacific Drilling S.A. was formed and the Restructuring was completed on January 1, 2011.

We currently are party to a Nigerian joint venture, Pacific International Drilling West Africa Limited (“PIDWAL”), which is fully controlled and 90% owned by us with 10% owned by Derotech Offshore Services Limited (“Derotech”), a privately-held Nigerian registered limited liability company. Derotech will not accrue the economic benefits of its interest in PIDWAL unless and until it satisfies certain outstanding obligations to us and a certain pledge is cancelled by us. Accordingly, we consolidate all PIDWAL interests and no portion of PIDWAL’s operating results is allocated to the noncontrolling interests. In addition to the joint venture agreement, we are a party to marketing and logistic services agreements with Derotech and an affiliated company of Derotech. During the years ended December 31, 2013, 2012 and 2011, we incurred fees of $9.4 million, $7.0 million and $3.1 million under the marketing and logistic services agreements, respectively.

Accounting Estimates—The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”) requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the balance sheet date and the amounts of revenues and expenses recognized during the reporting period. On an ongoing basis, we evaluate our estimates and assumptions, including those related to allowance for doubtful accounts, financial instruments, depreciation of property and equipment, impairment of long-lived assets, income taxes, share-based compensation and contingencies. We base our estimates and assumptions on historical experience and on various other factors we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from such estimates.

Revenues and Operating Expenses—Contract drilling revenues are recognized as earned, based on contractual dayrates. In connection with drilling contracts, we may receive fees for preparation and mobilization of equipment and personnel or for capital improvements to rigs. Fees and incremental costs incurred directly related to contract preparation and mobilization along with reimbursements received for capital expenditures are deferred and amortized to revenue over the primary term of the drilling contract. The actual cost incurred for reimbursed capital expenditures are depreciated over the estimated useful life of the asset. We may also receive fees upon completion of a drilling contract that are conditional based on the occurrence of an event, such as demobilization of a rig. These conditional fees and related expenses are reported in income upon completion of the drilling contract. If receipt of such fees is not conditional, they are recognized as revenue over the primary term of the drilling contract. Amortization of deferred revenue

and deferred mobilization costs are recorded on a straight-line basis over the primary drilling contract term, which is consistent with the general pace of activity, level of services being provided and dayrates being earned over the life of the contract.

Cash and Cash Equivalents—Cash equivalents are highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash.

Accounts Receivable—We record trade accounts receivable at the amount we invoice our clients. We provide an allowance for doubtful accounts, as necessary, based on a review of outstanding receivables, historical collection information and existing economic conditions. We do not generally require collateral or other security for receivables. As of December 31, 2013 and 2012, we had no allowance for doubtful accounts.

Materials and Supplies—Materials and supplies held for consumption are carried at average cost, net of allowances for excess or obsolete materials and supplies of $1.1 million and $0 as of December 31, 2013 and 2012, respectively.

Property and Equipment—Deepwater drillships are recorded at cost of construction, including any major capital improvements, less accumulated depreciation and impairment. Other property and equipment is recorded at cost and consists of purchased software systems, furniture, fixtures and other equipment. Planned major maintenance, ongoing maintenance, routine repairs and minor replacements are expensed as incurred.

Interest is capitalized based on the costs of new borrowings attributable to qualifying new construction or at the weighted-average cost of debt outstanding during the period of construction. We capitalize interest costs for qualifying new construction from the point borrowing costs are incurred for the qualifying new construction and cease when substantially all the activities necessary to prepare the qualifying asset for its intended use are complete.

Property and equipment are depreciated to its salvage value on a straight-line basis over the estimated useful lives of each class of assets. Our estimated useful lives of property and equipment are as follows:

 

     Years

Drillships and related equipment

   15-35

Other property and equipment

   2-7

 

Long-Lived Assets—We review our long-lived assets, including property and equipment, for impairment when events or changes in circumstances indicate that the carrying amounts of our assets held and used may not be recoverable. Potential impairment indicators include rapid declines in commodity prices and related market conditions, actual or expected declines in rig utilization, increases in idle time, cancellations of contracts or credit concerns of clients. We assess impairment using estimated undiscounted cash flows for the long-lived assets being evaluated by applying assumptions regarding future operations, market conditions, dayrates, utilization and idle time. An impairment loss is recorded in the period if the carrying amount of the asset is not recoverable. During 2013, 2012 and 2011, there were no long-lived asset impairments.

Deferred Financing Costs—Deferred financing costs associated with long-term debt are carried at cost and are amortized to interest expense using the effective interest rate method over the term of the applicable long-term debt.

Foreign Currency Transactions—The consolidated financial statements are stated in U.S. dollars. We have designated the U.S. dollar as the functional currency for our foreign subsidiaries in international locations because we contract with clients, purchase equipment and finance capital using the U.S. dollar. Transactions in other currencies have been translated into U.S. dollars at the rate of exchange on the transaction date. Any gain or loss arising from a change in exchange rates subsequent to the transaction date is included as an exchange gain or loss. Monetary assets and liabilities denominated in currencies other than U.S. dollars are reported at the rates of exchange prevailing at the end of the reporting period. During 2013, 2012 and 2011, total foreign exchange gains and (losses) were $(2.1) million, $2.4 million and $1.4 million, respectively, and recorded in other income (expense) within our consolidated statements of operations.

Earnings per Share—Basic earnings (loss) per common share (“EPS”) is computed by dividing the net income (loss) by the weighted-average number of common shares outstanding for the period. Basic and diluted EPS are retrospectively adjusted for the effects of stock dividends or stock splits. Diluted EPS reflects the potential dilution from securities that could share in the earnings of the Company. Anti-dilutive securities are excluded from diluted EPS.

Fair Value Measurements—We estimate fair value at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market for the asset or liability. Our valuation techniques require inputs that are categorized using a three-level hierarchy as follows: (1) unadjusted quoted prices for identical assets or liabilities in active markets (“Level 1”), (2) direct or indirect observable inputs, including quoted prices or other market data, for similar assets or liabilities in active markets or identical assets or liabilities in less active markets (“Level 2”) and (3) unobservable inputs that require significant judgment for which there is little or no market data (“Level 3”). When multiple input levels are required for a valuation, we categorize the entire fair value measurement according to the lowest level input that is significant to the measurement even though we may have also utilized significant inputs that are more readily observable.

Share-Based Compensation—The grant date fair value of share-based awards granted to employees is recognized as an employee compensation expense over the requisite service period on a straight-line basis. The amount of compensation expense recognized is adjusted to reflect the number of awards for which the related vesting conditions are expected to be met. The amount of compensation expense ultimately recognized is based on the number of awards that do meet the vesting conditions at the vesting date. To the extent the share-based awards were to be settled in cash upon exercise, the awards were accounted for as a liability. The liability was remeasured at each reporting date and any changes in the fair value of the liability were recognized as employee compensation expense. All share-based compensation awards accounted for as liabilities were cancelled and replaced on March 31, 2011.

 

Derivatives—We apply cash flow hedge accounting to interest rate swaps that are designated as hedges of the variability of future cash flows. The derivative financial instruments are recorded in our consolidated balance sheet at fair value as either assets or liabilities. Changes in the fair value of derivatives designated as cash flow hedges, to the extent the hedge is effective, are recognized in accumulated other comprehensive income until the hedged item is recognized in earnings.

Hedge effectiveness is measured on an ongoing basis to ensure the validity of the hedges based on the relative cumulative changes in fair value between the derivative contract and the hedged item over time. Any change in fair value resulting from ineffectiveness is recognized immediately in earnings. Hedge accounting is discontinued prospectively if it is determined that the derivative is no longer effective in offsetting changes in the cash flows of the hedged item.

For interest rate hedges related to interest capitalized in the construction of fixed assets, other comprehensive income is released to earnings as the asset is depreciated over its useful life. For all other interest rate hedges, other comprehensive income is released to earnings as interest expense is accrued on the underlying debt.

Contingencies—We record liabilities for estimated loss contingencies when we believe a loss is probable and the amount of the probable loss can be reasonably estimated. Once established, we adjust the estimated contingency loss accrual for changes in facts and circumstances that alter our previous assumptions with respect to the likelihood or amount of loss.

We recognize loss of hire insurance recovery once realized or contingencies related to the realizability of the amount earned are resolved.

Income Taxes—Income taxes are provided based upon the tax laws and rates in the countries in which our subsidiaries are registered and where their operations are conducted and income and expenses are earned and incurred, respectively. We recognize deferred tax assets and liabilities for the anticipated future tax effects of temporary differences between the financial statement basis and the tax basis of our assets and liabilities using the applicable enacted tax rates in effect the year in which the asset is realized or the liability is settled. A valuation allowance for deferred tax assets is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized.

We recognize tax benefits from an uncertain tax position only if it is more likely than not that the position will be sustained upon examination by taxing authorities based on the technical merits of the position. The amount recognized is the largest benefit that we believe has greater than a 50% likelihood of being realized upon settlement. Actual income taxes paid may vary from estimates depending upon changes in income tax laws, actual results of operations and the final audit of tax returns by taxing authorities. We recognize interest and penalties related to uncertain tax positions in income tax expense.

Investment Accounted for Using the Equity Method—Our Predecessor had a 50% ownership in Transocean Pacific Drilling Inc. (“TPDI” or the “Joint Venture”), a joint venture company formed with Transocean Ltd. (“Transocean”) and its subsidiaries. The investment was accounted for using the equity method based upon the level of ownership and our ability to exercise significant influence over the operating and financial policies of the investee. The investment was adjusted periodically to recognize our proportionate share of the investee’s net income or losses. On March 30, 2011, our Predecessor assigned its equity interest in TPDI to a subsidiary of the Quantum Pacific Group.

 

Interest Income from Joint Venture—Interest income from the Joint Venture was earned on promissory notes based on stated interest rates.

Recently Issued Accounting Standards

Presentation of Comprehensive Income—In February 2013, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update on the reporting of amounts reclassified out of accumulated other comprehensive income. This guidance requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required to be reclassified in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional details about those amounts. We adopted the accounting standards update effective January 1, 2013. The adoption of the accounting standards update concerns presentation and disclosure only and did not have an impact on our consolidated financial position or results of operations.

Balance Sheet Offsetting—In December 2011, the FASB issued an accounting standards update that expands the disclosure requirements for the offsetting of assets and liabilities related to certain financial instruments and derivative instruments. The update requires disclosures of gross and net information for financial instruments and derivative instruments that are eligible for net presentation due to a right of offset, an enforceable master netting arrangement or similar agreement. We adopted the accounting standards update effective January 1, 2013. The adoption of the accounting standards update concerns presentation and disclosure only and did not have an impact on our consolidated financial position or results of operations.

Property and Equipment
Property and Equipment

Note 3—Property and Equipment

Property and equipment consisted of the following:

 

     December 31,  
     2013     2012  
     (in thousands)  

Drillships and related equipment

   $ 4,020,792     $ 3,278,861  

Assets under construction

     769,131       613,762  

Other property and equipment

     10,260       7,025  
  

 

 

   

 

 

 

Property and equipment, cost

     4,800,183       3,899,648  

Accumulated depreciation

     (288,029 )     (139,227 )
  

 

 

   

 

 

 

Property and equipment, net

   $ 4,512,154     $ 3,760,421  
  

 

 

   

 

 

 

On March 15, 2011, March 16, 2012 and January 25, 2013, we entered into contracts for the construction of the Pacific Sharav, the Pacific Meltem and the Pacific Zonda, respectively. The SHI contracts for the Pacific Sharav, the Pacific Meltem and the Pacific Zonda provide for an aggregate purchase price of approximately $1.5 billion for the acquisition of these three vessels, payable in installments during the construction process, of which we have made payments of approximately $429.2 million through December 31, 2013. With respect to our three undelivered vessels, we anticipate making payments of approximately $756.3 million in 2014 and approximately $336.4 million in 2015.

 

During the years ended December 31, 2013, 2012 and 2011, we capitalized interest costs of $78.5 million, $33.2 million and $71.0 million, respectively, on assets under construction.

Debt
Debt

Note 4—Debt

Debt consisted of the following:

 

     December 31,  
     2013      2012  
     (in thousands)  

Due within one year:

     

Project Facilities Agreement

   $ —        $ 218,750  

2018 Senior Secured Term Loan B

     7,500        —    
  

 

 

    

 

 

 

Total current debt

     7,500        218,750  

Long-term debt:

     

Project Facilities Agreement

   $ —        $ 1,237,500  

2015 Senior Unsecured Bonds

     300,000        300,000  

2017 Senior Secured Bonds

     497,892        497,458  

2018 Senior Secured Term Loan B

     735,445        —    

Senior Secured Credit Facility

     140,000        —    

2020 Senior Secured Notes

     750,000        —    
  

 

 

    

 

 

 

Total long-term debt

     2,423,337        2,034,958  
  

 

 

    

 

 

 

Total debt

   $ 2,430,837      $ 2,253,708  
  

 

 

    

 

 

 

Project Facilities Agreement and Temporary Import Bond Facilities (Terminated)

Project Facilities Agreement

On September 9, 2010, certain of our subsidiaries and Pacific Drilling Limited, as the guarantor, entered into a project facilities agreement with a group of lenders to finance the construction, operation and other costs associated with the Pacific Bora, the Pacific Mistral, the Pacific Scirocco and the Pacific Santa Ana (the “Project Facilities Agreement” or “PFA”). During 2010 and 2011, we borrowed an aggregate $1.725 billion under the PFA.

Borrowings under the PFA bore interest at the London Interbank Offered Rate (“LIBOR”) plus an applicable margin ranging from 3% to 4% per annum and were due to mature on October 31, 2015. Under the PFA we made quarterly principal amortization payments of $54.7 million.

Prior to termination, we incurred $19.6 million, $64.4 million and $57.2 million of interest expense on the PFA, of which $0, $8.7 million and $51.5 million was recorded to property and equipment as capitalized interest during the years ended December 31, 2013, 2012 and 2011, respectively.

Temporary Import Bond Facilities

For each of our vessels operating in Nigeria, local regulations require us to either (i) permanently import the vessel into Nigeria and pay import duties or (ii) apply for a Temporary Importation (“TI”) permit and put up a bond in favor of the Nigeria Customs Service for the value of the import duties.

 

On April 19, 2012, we entered into a Letter of Credit Facility and Guaranty Agreement for both the Pacific Bora and the Pacific Scirocco (collectively, the “TI Facilities”). Under the TI Facilities, we issued letters of credit (to support the required bonds) in an amount equal to the value of the import duties for the Pacific Bora and Pacific Scirocco.

Prior to termination, we incurred $2.2 million, $5.5 million and $0.7 million in interest expense on the TI Facilities during the years ended December 31, 2013, 2012 and 2011, respectively.

PFA and TI Facilities Refinancing

On June 3, 2013, we completed a private placement of 2020 Senior Secured Notes (as defined below) and entered into a Senior Secured Term Loan B (as defined below). A portion of the net proceeds from the 2020 Senior Secured Notes and the Senior Secured Term Loan B were used to repay existing borrowings under the Project Facilities Agreement, after which it was terminated and all related collateral released (the “PFA Refinancing”). In addition, in connection with the PFA Refinancing and in accordance with the terms of the Revolving Credit Facility (as defined below), the TI Facilities were also terminated and the letters of credit then outstanding under the TI Facilities were deemed to be automatically re-issued under the Revolving Credit Facility. As a result of the PFA Refinancing, we recognized $28.4 million in costs on extinguishment of debt in our statement of operations for year ended December 31, 2013, of which $27.6 million was a non-cash write off of unamortized deferred financing costs as reflected in our statement of cash flows.

2015 Senior Unsecured Bonds

In February 2012, we completed a private placement of $300.0 million in aggregate principal amount of 8.25% senior unsecured U.S. dollar denominated bonds due 2015 (the “2015 Senior Unsecured Bonds”). The bonds bear interest at 8.25% per annum, payable semiannually on February 23 and August 23, and mature on February 23, 2015.

During the years ended December 31, 2013 and 2012, we incurred $24.8 million and $21.1 million, respectively, of interest expense on the 2015 Senior Unsecured Bonds, of which $24.5 million and $17.0 million, respectively, was recorded to property and equipment as capitalized interest. We did not incur interest expense on the 2015 Senior Unsecured Bonds during the year ended December 31, 2011.

The 2015 Senior Unsecured Bonds are general unsecured, senior obligations that rank: (i) senior in right of payment to all of the Company’s subordinated indebtedness, if any; (ii) pari passu in right of payment with any of the Company’s existing and future unsecured indebtedness that is not by its terms subordinated to the 2015 Senior Unsecured Bonds; (iii) effectively junior to the Company’s existing and future senior debt facilities, any future customary senior secured debt facilities provided by banks and/or financial institutions and any future first priority senior secured bond financing obtained to finance our fleet, including any refinancing, amendments or replacements of the debt facilities.

The Company may acquire 2015 Senior Unsecured Bonds in the open market, or otherwise, at any time without restriction. Within 60 days after notification of a specified change in control event, each bondholder has the right to exercise an early repayment option at a price equal to 101% of par, plus accrued interest.

The 2015 Senior Unsecured Bonds contain provisions that limit, with certain exceptions, the ability of the Company and our subsidiaries to (i) merge or demerge, (ii) dispose of assets, (iii) incur financial indebtedness and (iv) pay dividends or make distributions exceeding 50% of consolidated net income for the preceding fiscal year.

 

The 2015 Senior Unsecured Bonds also require compliance with financial covenants including (i) a minimum equity to total assets ratio of 35%, (ii) a minimum liquidity of $25.0 million and (iii) a leverage restriction limiting the outstanding secured and unsecured borrowings on a consolidated basis to an average of $475.0 million per drillship. The 2015 Senior Unsecured Bonds contain events of default that are usual and customary for a financing of this type, size and purpose. Upon the occurrence of an event of default, borrowings under the 2015 Senior Unsecured Bonds are subject to acceleration.

As of December 31, 2013, we were in compliance with all 2015 Senior Unsecured Bonds covenants.

2017 Senior Secured Notes

In November 2012, Pacific Drilling V Limited (“PDV”), an indirect, wholly-owned subsidiary of the Company, completed a private placement of $500 million in aggregate principal amount of 7.25% senior secured notes due 2017 (the “2017 Senior Secured Notes”). The 2017 Senior Secured Notes are fully and unconditionally guaranteed by Pacific Drilling S.A. on a senior unsecured basis.

The 2017 Senior Secured Notes were sold at 99.483% of par. The 2017 Senior Secured Notes bear interest at 7.25% per annum, payable semiannually on June 1 and December 1, commencing on June 1, 2013, and mature on December 1, 2017.

During the years ended December 31, 2013 and 2012, we incurred $36.7 million and $3.4 million, respectively, of interest expense on the 2017 Senior Secured Notes, of which $35.2 million and $3.4 million, respectively, was recorded to property and equipment as capitalized interest. We did not incur interest expense on the 2017 Senior Secured Notes during the year ended December 31, 2011.

The 2017 Senior Secured Notes are secured by a first-priority security interest (subject to certain exceptions) in the Pacific Khamsin, and substantially all of the other assets of PDV, including an assignment of earnings and insurance proceeds related to the Pacific Khamsin.

As of December 31, 2013, PDV had no subsidiaries. Any future subsidiary of PDV that holds or will hold the Pacific Khamsin or certain related assets, or is or becomes party to a drilling contract in respect of the Pacific Khamsin, will guarantee the notes on a senior secured basis. No other subsidiary of the Company will be guarantors of the 2017 Senior Secured Notes. The 2017 Senior Secured Notes and the note guarantees will be PDV’s and each guarantor subsidiary’s senior obligation, respectively, will rank equal in right of payment to all existing and future senior indebtedness of PDV and such guarantor, and will rank senior in right of payment to all existing and future subordinated indebtedness of PDV and such guarantor.

On or after December 1, 2015, PDV has the option to redeem the 2017 Senior Secured Notes, in whole or in part, at one time or from time to time, at the redemption prices plus accrued and unpaid interests and additional amounts, if any, specified in the indenture for the Notes. Prior to December 1, 2015, PDV may redeem all or any portion of the 2017 Senior Secured Notes at a redemption price equal to 100% of the principal amount of the outstanding notes plus accrued and unpaid interest and additional amounts, if any, to the redemption date, plus a “make-whole” premium. In addition, prior to December 1, 2015, PDV may, at its option, on one or more occasions redeem up to 35% of the aggregate original principal amount of the 2017 Senior Secured Notes with the net cash proceeds from certain equity offerings of the Company at a redemption price of 107.25% of the principal amount of the outstanding notes plus accrued and unpaid interest and additional amounts, if any, to the redemption date. PDV may also, prior to December 1, 2015, redeem up to 10% of the original aggregate principal amount of the 2017 Senior Secured Notes in any 12 month period at a redemption price equal to 103% of the aggregate principal amount thereof plus accrued and unpaid interest and additional amounts, if any, to the redemption date.

 

The 2017 Senior Secured Notes contain provisions that limit, with certain exceptions, the ability of Pacific Drilling S.A., PDV and Pacific Drilling S.A.’s other restricted subsidiaries to (i) pay dividends, make distributions, purchase or redeem Pacific Drilling S.A.’s capital stock or subordinated indebtedness of PDV or any guarantor or make other restricted payments, provided that, so long as there is no default under the indenture for the Notes and the Company meets a 2.0 to 1.0 consolidated interest coverage ratio test, the Company may pay dividends and make other restricted payments in a cumulative amount that does not exceed 50% of the Company’s consolidated net income for the period beginning October 1, 2012 and ending on last day of the Company’s most recently ended fiscal quarter for which internal financial statements are available at the time of such dividend or distribution (subject to certain adjustments), (ii) incur or guarantee additional indebtedness or issue preferred stock, (iii) create or incur liens, (iv) create unrestricted subsidiaries, (v) enter into transactions with affiliates, (vi) enter into new lines of business, (vii) transfer or sell the Pacific Khamsin and other related assets and (viii) merge or demerge. These covenants are subject to exceptions and qualifications set forth in the indenture for the Notes, including the ability to incur certain amounts of secured indebtedness to finance the construction of additional drillships.

As of December 31, 2013, we were in compliance with all 2017 Senior Secured Notes covenants.

Senior Secured Credit Facility Agreement

On February 19, 2013, Pacific Sharav S.à r.l. and Pacific Drilling VII Limited (collectively, the “SSCF Borrowers”) and the Company, as guarantor, entered into a senior secured credit facility agreement to finance the construction, operation and other costs associated with the Pacific Sharav and the Pacific Meltem (the “SSCF Vessels”) and on September 13, 2013, the credit facility was amended and restated (the “SSCF”). The SSCF consists of two principal tranches, one of which is divided into two sub-tranches: (i) a Commercial Tranche of $500.0 million provided by a syndicate of commercial banks and (ii) a Garanti — Instituttet for Eksportkreditt (“GIEK”) Tranche guaranteed by GIEK, comprised of (x) the Eksportkreditt Norge AS (“EKN”) Sub-Tranche and (y) the Bank Sub-Tranche.

The EKN Sub-Tranche is a $250.0 million tranche held by EKN, available solely to finance costs associated with the construction of the Pacific Meltem and the Bank Sub-Tranche is a $250.0 million tranche held by commercial lenders available solely to finance costs associated with the construction of the Pacific Sharav. As a result of amending and restating the SSCF, we reduced the margin on the GIEK Tranche from 1.50% to 1.25%.

The table below summarizes the current composition of the SSCF:

 

     Amount     

Finance Purpose

     (in thousands)       

Commercial Tranche

   $ 500,000      The Pacific Sharav and the Pacific Meltem

GIEK Tranche:

     

EKN Sub-Tranche

   $ 250,000      The Pacific Meltem

Bank Sub-Tranche

     250,000      The Pacific Sharav
  

 

 

    

Total

   $ 1,000,000     
  

 

 

    

Prior to delivery of each SSCF Vessel, the SSCF is primarily secured on a first priority basis by liens on the construction contracts and refund guarantees for the SSCF Vessels and a pledge of the equity of each of the SSCF Borrowers. Upon delivery of each SSCF Vessel, the SSCF will be primarily secured on a first priority basis by liens on such vessel, by an assignment of earnings and insurance proceeds relating thereto and by and other customary types of collateral.

 

Borrowings under the SSCF are available upon the satisfaction of customary conditions precedent, including, without limitation, a maximum amount borrowed under the SSCF relative to the amount contributed by the Company for each SSCF Vessel. Initially, the maximum debt threshold is set at 65% of total project cost which will increase to 72% on the first date that all of the following conditions shall have been satisfied: (i) the Pacific Sharav has been delivered, (ii) a drilling contract has been entered into for the Pacific Meltem such that, when combined with the contract for the Pacific Sharav, there is an aggregate original duration of at least 6 years with a minimum average rate of at least $500,000 per day and (iii) the aggregate principal amount under the SSCF, the 2020 Senior Secured Notes and the Senior Secured Term Loan B does not exceed 65% of the value of the SSCF Vessels and the Shared Collateral Vessels (as defined below).

Borrowings under the Commercial Tranche bear interest at LIBOR plus a margin of 3.5%. Borrowings under the EKN Sub-Tranche bear interest, at our option, at (i) LIBOR plus a margin of 1.25% (which margin may be reset on May 31, 2019) or (ii) at a Commercial Interest Reference Rate of 2.37%. Borrowings under the Bank Sub-Tranche bear interest at LIBOR plus a margin of 1.25%. Borrowings under both sub-tranches will also be subject to a guarantee fee of 2% per annum. Undrawn commitments under the SSCF bear a fee equal to (i) in the case of the Commercial Tranche, 40% of the margin for such tranche and (ii) in the case of the GIEK Tranche, 40% of the applicable margin for such tranche. In addition, the GIEK Tranche bears a commitment fee equal to 40% of the guarantee fee. Interest is payable quarterly.

The Commercial Tranche matures on the earlier of (i) five years following the delivery of the Pacific Meltem and (ii) May 31, 2019. Loans made with respect to each vessel under the GIEK Tranche mature twelve years following the delivery of the applicable vessel. The GIEK Tranche contains a put option exercisable if the Commercial Tranche is not refinanced or renewed on or before February 28, 2019. If the GIEK Tranche put option is exercised, each SSCF Borrower must prepay, in full, the portion of all outstanding loans that relate to the GIEK Tranche, on or before May 31, 2019, without any premium, penalty or fees of any kind. Amortization payments under the SSCF are calculated on a 12 year repayment schedule and must be made every six months following the delivery of the relevant vessel.

During the year ended December 31, 2013, we incurred and capitalized interest expense, including guarantee and commitment fees, of $12.2 million on the SSCF. We did not incur interest expense on the SSCF during the years ended December 31, 2012 and 2011.

Borrowings under the SSCF may be prepaid in whole or in part at any time, without any premium or penalty other than LIBOR or CIRR breakage payments, as applicable.

The SSCF requires compliance with certain affirmative and negative covenants that are customary for such financings. These include, but are not limited to, restrictions on (i) the ability of the Company to pay dividends or make distributions to its shareholders or transact with affiliates (except for certain specified exceptions) and (ii) the ability of the SSCF Borrowers to incur additional indebtedness or liens, sell assets, make investments or transact with affiliates (except for certain specified exceptions).

The SSCF also requires maintenance by the Company of (i) a $1.0 billion consolidated tangible net worth, (ii) a net debt to EBITDA (as defined in the SSCF) ratio no greater than 5.5 to 1.00 beginning on December 31, 2013 5.00 to 1.00 during the period from June 30, 2014 through December 31, 2014, 4.50 to 1.00 during the period from March 31, 2015 through September 30, 2015, 4.00 to 1.00 during the period from December 31, 2015 and thereafter, each on the last day of any fiscal quarter, (iii) a projected debt service coverage ratio for the next twelve months of at least 1.125x beginning on December 31, 2013 and stepping up to 1.25x on March 31, 2014 and 1.5x on March 31, 2015, (iv) a total debt to total capitalization ratio of 3.0 to 5.0, (v) minimum liquidity for the Company and its subsidiaries of $50.0 million and (vi) a required level of collateral maintenance whereby the aggregate appraised collateral value must not be less than a certain percentage of the total outstanding balances under the SSCF. Net debt (as defined in the SSCF) excludes (i) temporary importation bond indebtedness and (ii) prior to December 31, 2014, SSCF indebtedness.

The SSCF contains events of default that are usual and customary for a financing of this type, size and purpose. Upon the occurrence of an event of default, borrowings under the SSCF are subject to acceleration.

As of December 31, 2013, we were in compliance with all SSCF covenants.

Project Facilities Agreement Refinancing Transactions

On June 3, 2013, we completed three related but distinct financing transactions totaling $2.0 billion. The transactions included (i) a $750.0 million private placement of 5.375% senior secured notes due 2020 (the “2020 Senior Secured Notes”), (ii) a $750.0 million senior secured institutional term loan with a 2018 maturity (the “Senior Secured Term Loan B”) and (iii) a $500.0 million senior secured revolving credit facility maturing in 2018 (the “Revolving Credit Facility”). The Revolving Credit Facility provides up to $200.0 million in future incremental funding intended for general corporate purposes, including working capital requirements, and the balance of $300.0 million is provided for the issuance of letters of credit, primarily anticipated to be used as credit support for the temporary importation bonds issued for our vessels working in Nigeria as a replacement to the TI Facilities. A portion of the net proceeds from the 2020 Senior Secured Notes and the Senior Secured Term Loan B were used to fully repay the outstanding borrowings under the PFA, after which the PFA and TI Facilities were terminated and all related collateral released.

2020 Senior Secured Notes

The 2020 Senior Secured Notes are guaranteed by each subsidiary of the Company that owns the Pacific Bora, the Pacific Mistral, the Pacific Scirocco or the Pacific Santa Ana (the “Shared Collateral Vessels”), each subsidiary that owns equity in a Shared Collateral Vessel-owning subsidiary, certain other subsidiaries that are parties to charters in respect of the Shared Collateral Vessels and in the future will be guaranteed by certain other future subsidiaries. The indenture for the 2020 Senior Secured Notes allows for the issuance of up to $100.0 million of additional notes provided no default is continuing and the Company is otherwise in compliance with all applicable covenants.

The 2020 Senior Secured Notes are secured, on an equal and ratable, first priority basis, with the obligations under the Senior Secured Term Loan B, the Revolving Credit Facility and certain future obligations (together with the 2020 Senior Secured Notes, the “Pari Passu Obligations”), subject to the terms of an intercreditor agreement (the “Intercreditor Agreement”), by liens on the Shared Collateral Vessels, a pledge of the equity of the entities that own the Shared Collateral Vessels, assignments of earnings and insurance proceeds with respect to the Shared Collateral Vessels, and certain other assets of the subsidiary guarantors (collectively, the “Shared Collateral”).

The 2020 Senior Secured Notes were sold at par. The 2020 Senior Secured Notes bear interest at 5.375% per annum, payable semiannually on June 1 and December 1, commencing on December 1, 2013, and mature on June 1, 2020.

During the year ended December 31, 2013, we incurred $23.3 million of interest expense on the 2020 Senior Secured Notes. We did not incur interest expense on the 2020 Senior Secured Notes during the years ended December 31, 2012 and 2011.

 

On or after June 1, 2016, the Company has the option to redeem the 2020 Senior Secured Notes, in whole or in part, at one time or from time to time, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interests and additional amounts, if any, on the notes redeemed, if redeemed during the twelve-month period beginning on June 1 of the years indicated below:

 

Year       

2016

     104.031

2017

     102.688

2018

     101.344

2019 and thereafter

     100

Prior to June 1, 2016, the Company may redeem all or any portion of the notes at a redemption price equal to 100% of the principal amount of the outstanding notes plus accrued and unpaid interest and additional amounts, if any, to the redemption date, plus a “make-whole” premium.

In addition, prior to June 1, 2016, the Company may, at its option, on one or more occasions redeem up to 35% of the aggregate original principal amount of the notes (including any additional notes) with the net cash proceeds from certain equity offerings at a redemption price of 105.375% of the principal amount of the outstanding notes plus accrued and unpaid interest and additional amounts, if any, to the redemption date.

The Company may also, prior to June 1, 2016, redeem up to 10% of the original aggregate principal amount of the notes in any 12-month period at a redemption price equal to 103% of the aggregate principal amount thereof plus accrued and unpaid interest and additional amounts, if any, to the redemption date.

The Company may from time to time issue additional notes under the indenture for the 2020 Senior Secured Notes in an aggregate amount not to exceed $100.0 million, which additional notes will have identical terms and conditions as the original notes, other than issue date, issue price and, in certain circumstances, the date from which interest will accrue.

The indenture for the 2020 Senior Secured Notes contains covenants that, among other things, limits the Company’s and its restricted subsidiaries’ ability to (i) pay dividends, make distributions, purchase or redeem the Company’s capital stock or its or its subsidiary guarantors’ subordinated indebtedness or make other restricted payments, provided that, so long as there is no default under the indenture and the Company meets a 2.0 to 1.0 consolidated interest coverage ratio test, the Company may pay dividends and make other restricted payments in a cumulative amount that does not exceed 50% of the Company’s consolidated net income for the period beginning October 1, 2012 and ending on the last day of the Company’s most recently ended fiscal quarter for which internal financial statements are available at the time of such dividend or distribution (subject to certain adjustments more fully described in the indenture), (ii) incur or guarantee additional indebtedness or issue preferred stock, (iii) create or incur liens, (iv) create unrestricted subsidiaries, (v) enter into transactions with affiliates, (vi) enter into new lines of business and (vii) transfer or sell assets or enter into mergers.

These covenants are subject to important exceptions and qualifications set forth in the indenture for the 2020 Senior Secured Notes, including the ability to incur certain amounts of secured indebtedness to finance the construction of additional drillships. Many of these covenants will cease to apply to the 2020 Senior Secured Notes during any period that the Notes have investment grade ratings from both Moody’s Investors Service, Inc. and Standard & Poor’s Ratings Group, Inc. and no default has occurred and is continuing under the Indenture.

The indenture for the 2020 Senior Secured Notes contains events of default that are usual and customary for a financing of this type, size and purpose. Upon the occurrence of an event of default, the 2020 Senior Secured Notes are subject to acceleration.

As of December 31, 2013, we were in compliance with all 2020 Senior Secured Notes covenants.

 

2018 Senior Secured Institutional Term Loan – Term Loan B

The Senior Secured Term Loan B is secured by the Shared Collateral and subject to the terms and provisions of the Intercreditor Agreement.

The Senior Secured Term Loan B was issued at 99.5% of its face value and bears interest, at the Company’s election, at either (1) LIBOR, which will not be less than a floor of 1% plus a margin of 3.5% per annum, or (2) a rate of interest per annum equal to the highest of (i) the prime rate for such day, (ii) the sum of the federal funds rate plus 0.5% and (iii) 1% per annum above the one-month LIBOR, in each case plus a margin of 2.5% per annum. Interest is payable quarterly.

The Senior Secured Term Loan B requires quarterly amortization payments of $1.9 million and matures on June 3, 2018.

During the year ended December 31, 2013, we incurred $20.3 million of interest expense on the Senior Secured Term Loan B. We did not incur interest expense on the Senior Secured Term Loan B during the years ended December 31, 2012 and 2011.

The Senior Secured Term Loan B also has an accordion feature that would permit additional loans to be extended so long as the Company’s total outstanding obligations in connection with the Senior Secured Term Loan B and the 2020 Senior Secured Notes do not exceed $1.7 billion.

Borrowings under the Senior Secured Term Loan B may be prepaid, on or prior to June 3, 2014, so long as such prepayments are, in the event of a refinancing or reduction in the pricing of the Senior Secured Term Loan B, accompanied by a prepayment fee equal to 1% of the aggregate principal amount of such prepayment. After June 3, 2014, borrowings under the Senior Secured Term Loan B may be prepaid without any premium or penalty.

The Senior Secured Term Loan B requires compliance with certain affirmative and negative covenants that are customary for such financings. These include, but are not limited to, restrictions on the Company’s and its restricted subsidiaries’ ability to (i) pay dividends, make distributions, purchase or redeem the Company’s capital stock or its or its subsidiary guarantors’ subordinated indebtedness or make other restricted payments, provided that, so long as there is no default under the Senior Secured Term Loan B and the Company meets a 2.0 to 1.0 consolidated interest coverage ratio test, the Company may pay dividends and make other restricted payments in a cumulative amount that does not exceed 50% of the Company’s consolidated net income for the period beginning October 1, 2012 and ending on the last day of the Company’s most recently ended fiscal quarter for which internal financial statements are available at the time of such dividend or distribution (subject to certain adjustments), (ii) incur or guarantee additional indebtedness or issue preferred stock, (iii) create or incur liens, (iv) create unrestricted subsidiaries, (v) enter into transactions with affiliates, (vi) enter into new lines of business and (vii) transfer or sell assets or enter into mergers. These covenants are subject to important exceptions and qualifications set forth in the Senior Secured Term Loan B, including the ability to incur certain amounts of secured indebtedness to finance the construction of additional drillships.

The Senior Secured Term Loan B contains events of default that are usual and customary for a financing of this type, size and purpose. Upon the occurrence of an event of default, borrowings under the Senior Secured Term Loan B are subject to acceleration.

As of December 31, 2013, we were in compliance with all Senior Secured Term Loan B covenants.

 

Revolving Credit Facility

The Revolving Credit Facility is secured by the Shared Collateral and subject to the provisions of the Intercreditor Agreement.

Borrowings under the Revolving Credit Facility bear interest, at the Company’s option, at either (1) LIBOR plus a margin ranging from 2.5% to 3.25% based on the Company’s leverage ratio, or (2) a rate of interest per annum equal to the highest of (i) the prime rate for such day, (ii) the sum of the federal funds rate plus 0.5% and (iii) 1% per annum above the one-month LIBOR, in each case plus a margin ranging from 1.5% to 2.25% based on the Company’s leverage ratio. Undrawn commitments accrue a fee ranging from 0.7% to 1% per annum based on the Company’s leverage ratio. Interest is payable quarterly.

The Revolving Credit Facility permits loans to be extended up to a maximum sublimit of $200.0 million and permits letters of credit to be issued up to a maximum sublimit of $300.0 million. Outstanding but undrawn letters of credit accrue a fee at a rate equal to the margin on LIBOR loans minus 1%. The Revolving Credit Facility has a maturity date of June 3, 2018.

As of December 31, 2013, no amounts were outstanding under the Revolving Credit Facility and approximately $198.2 million of letters of credit were issued under the Revolving Credit Facility as credit support for temporary import bonds issued in favor of the Government of Nigeria Customs Service.

During the year ended December 31, 2013, we incurred $4.7 million of interest expense on the Revolving Credit Facility. We did not incur interest expense on the Revolving Credit Facility during the years ended December 31, 2012 and 2011.

Borrowings under the Revolving Credit Facility may be prepaid, and commitments under the Revolving Credit Facility may be reduced, in whole or in part at any time, without any premium or penalty other than LIBOR breakage payments.

The Revolving Credit Facility requires compliance with certain affirmative and negative covenants that are customary for such financings. These include, but are not limited to, restrictions on (i) the Company’s ability to pay dividends or make distributions to its shareholders (except for certain specified exceptions, including that the Company may pay dividends or make distributions so long as there is no default under the Revolving Credit Facility and the Company is in pro forma compliance with the leverage ratio and minimum liquidity tests described below after giving effect to such dividend or distribution) and (ii) the Company’s and its subsidiaries’ ability to incur additional indebtedness or liens, sell assets, make investments or engage in transactions with affiliates (except for certain specified exceptions, including the ability to incur certain amounts of secured indebtedness to finance the construction of additional drillships).

The Revolving Credit Facility also requires the Company to maintain (i) a leverage ratio (adjusted net debt to adjusted EBITDA) no greater than 5.75 to 1.00 during the period from December 31, 2013 through March 31, 2014, 5.25 to 1.00, during the period from June 30, 2014 and December 31, 2014, 4.75 to 1.00, during the period from March 31, 2015 through September 30, 2015, 4.25 to 1.00, during the period from December 31, 2015 and thereafter, each on the last day of any fiscal quarter; and (ii) minimum liquidity of $100.0 million (including undrawn capacity for loans under the Revolving Credit Facility); provided that, if at any time following the repayment in full of the SSCF entered into by subsidiaries of the Company to finance the construction, operation and other costs associated with the Pacific Sharav and the Pacific Meltem no non-U.S. dollar denominated letters of credit are outstanding, then such amount will be reduced to $50.0 million.

 

The Revolving Credit Facility contains events of default that are usual and customary for a financing of this type, size and purpose. Upon the occurrence of an event of default, (i) commitments and letters of credit under the Revolving Credit Facility will be subject to termination, (ii) borrowings under the Revolving Credit Facility will be subject to acceleration, and (iii) outstanding letters of credit will be subject to cash collateralization.

As of December 31, 2013, we were in compliance with all Revolving Credit Facility covenants.

Maturities of Long-Term Debt

As of December 31, 2013, the aggregate maturities of our debt, including net unamortized discounts of $5.4 million, was as follows:

 

     (in thousands)  

Years ending December 31,

  

2014

   $ 7,500  

2015

     307,500  

2016

     7,500  

2017

     507,500  

2018

     716,250  

Thereafter

     890,000  
  

 

 

 

Total

   $ 2,436,250  
  

 

 

 
Income Taxes
Income Taxes

Note 5—Income Taxes

Pacific Drilling S.A., a holding company and Luxembourg resident, is subject to Luxembourg corporate income tax and municipal business tax at a combined rate of 29.2% commencing January 1, 2013. For the years ended December 31, 2012 and 2011, the combined Luxembourg corporate income tax and municipal business tax rate was 28.8%. Qualifying dividend income and capital gains on the sale of qualifying investments in subsidiaries are exempt from Luxembourg corporate income tax and municipal business tax. Consequently, Pacific Drilling S.A. expects dividends from its subsidiaries and capital gains from sales of investments in its subsidiaries to be exempt from Luxembourg corporate income tax and municipal business tax.

Income taxes have been provided based on the laws and rates in effect in the countries in which our operations are conducted or in which our subsidiaries are considered residents for income tax purposes. Our income tax expense or benefit arises from our mix of pretax earnings or losses, respectively, in the international tax jurisdictions in which we operate. Because the countries in which we operate have different statutory tax rates and tax regimes with respect to one another, there is no expected relationship between the provision for income taxes and our income or loss before income taxes.

Income / (loss) before income taxes consisted of the following:

 

     Years ended December 31,  
     2013     2012     2011  
     (in thousands)  

Luxembourg

   $ 55,904     $ (24,451 )   $ (1,281 )

United States

     206       (444 )     (2,753 )

Other Jurisdictions

     (8,085 )     80,597       4,331  
  

 

 

   

 

 

   

 

 

 

Total

   $ 48,025     $ 55,702     $ 297  
  

 

 

   

 

 

   

 

 

 

 

The components of income tax (provision) / benefit consisted of the following:

 

     Years ended December 31,  
     2013     2012     2011  
     (in thousands)  

Current income tax expense:

      

Luxembourg

   $ (816 )   $ (535 )   $ —    

United States

     (1,885 )     (4,404 )     (164 )

Other Foreign

     (22,941 )     (20,540 )     (6,205 )
  

 

 

   

 

 

   

 

 

 

Total current

   $ (25,642 )   $ (25,479 )   $ (6,369 )

Deferred tax benefit:

      

Luxembourg

   $ (32 )   $ 32     $ —    

United States

     2,053       4,646       782  

Other Foreign

     1,098       (912 )     2,387  
  

 

 

   

 

 

   

 

 

 

Total deferred

   $ 3,119     $ 3,766     $ 3,169  
  

 

 

   

 

 

   

 

 

 

Income tax expense

   $ (22,523 )   $ (21,713 )   $ (3,200 )
  

 

 

   

 

 

   

 

 

 

A reconciliation between the Luxembourg statutory rate of 29.2% for the year ended December 31, 2013 (and 28.8% for the years ended 2012 and 2011) and our effective tax rate is as follows:

 

     Years ended December 31,  
         2013             2012         2011  

Statutory rate

     29.2     28.8     28.8

Effect of tax rates different than the Luxembourg statutory tax rate

     27.1     6.8     108.5

Change in valuation allowance

     (9.0 )%      3.4     934.1

Adjustments related to prior years

     (0.4 )%      —         6.0
  

 

 

   

 

 

   

 

 

 

Effective tax rate

     46.9     39.0     1,077.4
  

 

 

   

 

 

   

 

 

 

The components of deferred tax assets and liabilities consisted of the following:

 

     December 31,  
     2013     2012  
     (in thousands)  

Deferred tax assets:

    

Net operating loss carryforwards

   $ 26,402     $ 4,671  

Accrued payroll expenses

     7,048       4,644  

Deferred revenue

     6,184       5,592  

Other

     13       23  
  

 

 

   

 

 

 

Deferred tax assets

     39,647       14,930  

Less: valuation allowance

     (14,999 )     (4,476 )
  

 

 

   

 

 

 

Total deferred tax assets

   $ 24,648     $ 10,454  

Deferred tax liabilities:

    

Depreciation and amortization

   $ (958 )   $ (1,125 )

Deferred expenses

     (12,309 )     (2,024 )

Deferred expenses

     (32 )     —    
  

 

 

   

 

 

 

Total deferred tax liabilities

   $ (13,299 )   $ (3,149 )
  

 

 

   

 

 

 

Net deferred tax assets

   $ 11,349     $ 7,305  
  

 

 

   

 

 

 

 

As of December 31, 2013 and 2012, the Company had gross deferred tax assets of $26.4 million and $4.7 million, respectively, related to loss carry forwards in various worldwide tax jurisdictions. The majority of the loss carry forwards have no expiration.

A valuation allowance for deferred tax assets is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. As of December 31, 2013 and 2012, the valuation allowance for deferred tax assets was $15.0 million and $4.5 million, respectively. The increase in our valuation allowance primarily resulted from losses incurred in Brazil and Luxembourg, for which we believe it is more likely than not that a tax benefit will not be realized.

We consider the earnings of certain of our subsidiaries to be indefinitely reinvested. Accordingly, we have not provided for taxes on these unremitted earnings. Should we make a distribution from the unremitted earnings of these subsidiaries, we would be subject to taxes payable to various jurisdictions. At December 31, 2013, the amount of indefinitely reinvested earnings was approximately $5.4 million. If all of these indefinitely reinvested earnings were distributed, we would be subject to estimated taxes of approximately $0.3 million as of December 31, 2013.

We recognize tax benefits from an uncertain tax position only if it is more likely than not that the position will be sustained upon examination by taxing authorities based on the technical merits of the position. The amount recognized is the largest benefit that we believe has greater than a 50% likelihood of being realized upon settlement. As of December 31, 2013, we had $0.7 million of unrecognized tax benefits which was included in other long-term liabilities on our consolidated balance sheet, of which $0.7 million would impact our consolidated effective tax rate if realized. For the year ended December 31, 2013, we recognized interest and penalties of $0.2 million related to uncertain tax positions in income tax expense. A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2013 and 2012 is as follows:

 

     December 31,  
     2013      2012  
     (in thousands)  

Balance, beginning of year

   $ —        $ —    

Increases in unrecognized tax benefits as a result of tax positions taken during prior years

     736        —    
  

 

 

    

 

 

 

Balance, end of year

   $   736      $   —    
  

 

 

    

 

 

 

The Company is subject to taxation in various U.S., foreign, and state jurisdictions in which it conducts business. Tax years as early as 2009 remain subject to examination. As of December 31, 2013, the Company’s only ongoing tax audits were in Nigeria and there were no other known pending tax audits.

The Federal Inland Revenue Service of Nigeria (the “FIRS”) is currently auditing the 2011 and 2012 tax years of our subsidiaries operating in Nigeria. The FIRS has raised several issues during the course of the audits. We are currently under discussion with the FIRS to resolve all outstanding issues.

Shareholder's Equity
Shareholder's Equity

Note 6—Shareholder’s Equity

As of December 31, 2010, the common stock of Pacific Drilling Limited consisted of 2.0 million shares authorized with $0.001 par value per share of which 1.9 million shares were issued.

 

On March 11, 2011, Pacific Drilling S.A. was incorporated under the form of a société anonyme governed by the laws of the Grand Duchy of Luxembourg with a share capital of $50,000 represented by 50,000 common shares.

On March 23, 2011, Quantum Pacific Group was assigned all outstanding principal and accrued interest of a related-party loan in the amount of $142.8 million (see Note 15), which was then converted to equity in the Company by means of it being contributed as additional consideration for the existing shares held by it as sole shareholder of the Company.

On March 30, 2011, in connection with the Restructuring, our Predecessor assigned its interests in TPDI’s equity, promissory notes to Joint Venture and accrued interest on promissory notes from Joint Venture to another subsidiary of the Quantum Pacific Group, which is referred to as the “TPDI Transfer,” to enable the Company to focus on the operation and marketing of the Company’s wholly-owned fleet. The assignment was recorded and presented as a dividend in-kind within our consolidated financial statements. As a result, neither the Company nor any of its subsidiaries owned any interest in TPDI following March 30, 2011.

Additionally, on March 30, 2011, the Board of Pacific Drilling S.A. resolved to split the 50,000 incorporation common shares into 5.0 million common shares. The Board also resolved for Quantum Pacific (Gibraltar) Limited to become the indirect sole shareholder of all issued Pacific Drilling Limited common shares in exchange for the issuance of 145.0 million common shares of Pacific Drilling S.A. Further, on March 30, 2011, the Company’s Articles were amended to authorize the Board of Directors, for a period of five years, to issue up to $50.0 million of share capital (inclusive of current share capital of the Company).

On April 5, 2011, Pacific Drilling completed a private placement of 60.0 million common shares for net proceeds of approximately $575.5 million.

In November 2011, the Company completed an initial public offering of 6.0 million common shares. In December 2011, the underwriters purchased an additional 0.9 million common shares pursuant to the full exercise of an over-allotment option. The initial public offering resulted in net proceeds of approximately $50.3 million.

In December 2011, the Company also issued 7.2 million common shares to one of our wholly-owned subsidiaries. These common shares are held in treasury for purposes of administering our Pacific Drilling S.A. 2011 Omnibus Stock Incentive Plan.

As of December 31, 2013, the Company’s share capital consisted of 5.0 billion common shares authorized, $0.01 par value per share, 224.1 million common shares issued and 217.0 million common shares outstanding of which approximately 69.1% is held by Quantum Pacific (Gibraltar) Limited.

Share-Based Compensation
Share-Based Compensation

Note 7—Share-Based Compensation

We recorded share-based compensation expense and related tax benefit within our statement of operations as follows:

 

     Years Ended December 31,  
     2013     2012     2011  
     (in thousands)  

Contract drilling costs

   $ 2,087     $ —       $ —    

General and administrative expenses

     7,228       5,318       4,471  
  

 

 

   

 

 

   

 

 

 

Share-based compensation expense

     9,315       5,318       4,471  

Tax benefit (a)

     (2,113 )     (1,360 )     (1,050 )
  

 

 

   

 

 

   

 

 

 

Total

   $ 7,202     $ 3,958     $ 3,421  
  

 

 

   

 

 

   

 

 

 

 

  (a) The effects of tax benefits from share-based compensation expense are included within income tax expense in our consolidated statements of operations.

Stock Options

On April 24, 2009, the Board of our Predecessor approved the creation of the Pacific Drilling Limited 2009 Omnibus Stock Incentive Plan (the “2009 Stock Plan”), which provided for issuance of common stock options, as well as share appreciation rights, restricted shares, restricted share units, and other equity based or equity related awards to directors, officers, employees and consultants of Pacific Drilling. During 2010 and 2009, awards of common stock options were made to certain executives and employees. Pursuant to the terms of the options granted, our Predecessor could elect to settle the stock options upon exercise in cash instead of issuing shares of our common stock. The Company anticipated settling any of the 2010 and 2009 stock options in cash. As such, the stock options were accounted for as liability awards at fair value.

On March 31, 2011, as part of the Restructuring, the Company cancelled the 2009 Stock Plan. Further, the Board approved the creation of the Pacific Drilling S.A. 2011 Omnibus Stock Incentive Plan (the “2011 Stock Plan”), which provides for issuance of common stock options, as well as share appreciation rights, restricted shares, restricted share units and other equity based or equity related awards to directors, officers, employees and consultants. The Board also resolved that 7.2 million common shares of Pacific Drilling S.A. be reserved and authorized for issuance pursuant to the terms of the 2011 Stock Plan.

In conjunction with the Restructuring and cancellation of stock option grants under the 2009 Stock Plan, the Company issued 1.5 million common stock options in Pacific Drilling S.A. as a replacement of the 2010 and 2009 stock options. The replacement awards were recorded as a modification of an existing award. As exercises of replacement awards will be settled in common shares, the $2.3 million liability for stock options issued under the 2009 Stock Plan on the date of modification was extinguished and the balance reclassified to additional paid-in capital. Additionally, on March 31, 2011, the Company granted 1.3 million common stock options to certain executives and employees pursuant to the 2011 Stock Plan.

The 2009 replacement option grants vested 50%, 25% and 25% on March 31, 2011, 2012, and 2013, respectively. The 2010 replacement option grants and the 2011 option grants vest 25% annually over four years commencing on March 31, 2011 and March 31, 2012, respectively. The 2009 replacement option grants, 2010 replacement option grants and the 2011 option grants were issued at an exercise price of $10.00 and have a 10-year contractual term.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model utilizing the assumptions noted in the table below. Given the insufficient historical data available regarding the volatility of the Company’s traded share price, expected volatility of the Company’s share price does not solely provide a reasonable basis for estimating volatility. Instead, the expected volatility utilized in our Black-Scholes valuation model is based on the volatility of the Company’s traded share price for the period available following the initial public offering of our shares and the implied volatilities from the expected volatility of a representative group of our publicly listed industry peer group for prior periods. Additionally, given the lack of historical data available, the expected terms of the options is calculated using the simplified method because the historical option exercise experience of the Company does not provide a reasonable basis for estimating expected term. Options granted generally vest 25% annually over four years, have a 10-year contractual term and will be settled in shares of our stock. The risk free interest rates are determined using the implied yield currently available for zero-coupon U.S. government issues with a remaining term equal to the expected life of the options.

The fair value of the 2011, 2010 and 2009 stock option grants as of March 31, 2011, the date of modification and grant, was calculated using the following assumptions:

 

     2011     2010     2009  
     Stock Options     Stock Options     Stock Options  

Expected volatility

     52.3     52.7     53.2

Expected term (in years)

     6.25       6.00       5.75  

Expected dividends

     —         —         —    

Risk-free interest rate

     2.7     2.6     2.5

During the years ended December 31, 2013 and 2012, the fair value of the options granted was calculated using the following weighted-average assumptions:

 

     2013     2012  
     Stock Options     Stock Options  

Expected volatility

     47.3     48.5

Expected term (in years)

     6.25       6.25  

Expected dividends

     —         —    

Risk-free interest rate

     1.2     1.4

A summary of option activity under the 2011 Stock Plan as of and for the year ended December 31, 2013 is as follows:

 

    Number of Shares
Under Option
    Weighted-Average
Exercise Price
    Weighted-Average
Remaining
Contractual Term
    Aggregate
Intrinsic
Value
 
    (in thousands)     (per share)     (in years)     (in thousands)  

Outstanding — January 1, 2013

    3,976     $ 10.04      

Granted

    1,359       9.58      

Exercised

    —         —        

Cancelled or forfeited

    (86 )     9.97      
 

 

 

       

Outstanding — December 31, 2013

    5,249     $ 9.91       7.7     $ 8,121  

Exercisable — December 31, 2013

    2,107     $ 10.01       6.7     $ 3,054  

The weighted-average grant date fair value of options granted during the years ended December 31, 2013, 2012 and 2011 was $4.46, $4.85 and $5.24, respectively. There were no options exercised during the years ended December 31, 2013, 2012 and 2011. As of December 31, 2013, total compensation costs related to nonvested option awards not yet recognized was $10.1 million and was expected to be recognized over 2.4 years.

 

Restricted Stock Units

Pursuant to the 2011 Stock Plan, the Company has granted restricted stock units to certain members of our Board of Directors, executives and employees. Restricted stock units granted by the Company will be settled in shares of our stock and generally vest over a period of two to four years. The fair value of restricted stock units is determined using the market value of our shares on the date of grant.

A summary of restricted stock units activity under the 2011 Stock Plan as of and for the year ended December 31, 2013 was as follows:

 

     Number of
Restricted Stock
Units
    Weighted-Average
Grant-Date Fair
Value
 
     (in thousands)     (per share)  

Nonvested—January 1, 2013

     290     $ 10.07  

Granted

     1,013       9.93  

Vested

     (170 )     10.19  

Cancelled or forfeited

     (108 )     9.94  
  

 

 

   

Nonvested—December 31, 2013

     1,025     $ 9.93  
  

 

 

   

As of December 31, 2013, total compensation costs related to nonvested restricted stock units not yet recognized was $7.2 million and is expected to be recognized over a weighted-average period of 2.3 years.

Earnings per Share
Earnings per Share

Note 8—Earnings per Share

In computing EPS, the reported share and per share amounts for the year ended December 31, 2011 have been retrospectively restated to reflect the Restructuring that occurred on March 30, 2011. The following reflects the income and the share data used in the basic and diluted EPS computations:

 

     Years Ended December 31,  
     2013      2012      2011  
     (in thousands, except per share amounts)  

Numerator:

        

Net income (loss), basic and diluted

   $ 25,502       $ 33,989       $ (2,903

Denominator:

        

Weighted-average number of common shares outstanding, basic

     216,964         216,901         195,448   

Effect of share-based compensation awards

     457         2         —     
  

 

 

    

 

 

    

 

 

 

Weighted-average number of common shares outstanding, diluted

     217,421         216,903         195,448   

Earnings (loss) per share:

        

Basic

   $ 0.12       $ 0.16       $ (0.01

Diluted

   $ 0.12       $ 0.16       $ (0.01

 

The following table presents the share effects of share-based compensation awards excluded from our computations of diluted EPS as their effect would have been anti-dilutive for the periods presented:

 

     Years Ended December 31,  
     2013      2012      2011  
     (in thousands)  

Share-based compensation awards

     5,817         4,263         2,789   
Derivatives
Derivatives

Note 9—Derivatives

We are currently exposed to market risk from changes in interest rates. From time to time, we may enter into a variety of derivative financial instruments in connection with the management of our exposure to fluctuations in interest rates. We do not enter into derivative transactions for speculative purposes; however, for accounting purposes, certain transactions may not meet the criteria for hedge accounting.

We entered into four interest rate swaps to reduce the variability of future cash flows in the interest payments for the variable-rate debt under the PFA (the “PFA Interest Rate Swaps”). In connection with the PFA Refinancing, on May 28, 2013, we paid $42.0 million to terminate the PFA Interest Rate Swaps and their related liabilities. The Company made an accounting policy election to present the payment for the termination of the PFA Interest Rate Swaps as a financing activity within our statement of cash flows. As a result of the termination, we reclassified $38.2 million of losses on the hedge designated portion of the PFA Interest Rate Swaps previously recognized in accumulated other comprehensive income to interest expense.

On May 30, 2013, we entered into an interest rate swap as a cash flow hedge against future fluctuations in LIBOR rates with an effective date of June 3, 2013. The interest rate swap has a notional value of $712.5 million, does not amortize and matures on December 3, 2017. On a quarterly basis, we pay a fixed rate of 1.56% and receive the greater of 1% or three-month LIBOR.

On June 10, 2013, we entered into an interest rate swap as a cash flow hedge against future fluctuations in LIBOR rates with an effective date of July 1, 2014. The interest rate swap has a notional value of $400.0 million, does not amortize and matures on July 1, 2018. On a quarterly basis, we pay a fixed rate of 1.66% and receive three-month LIBOR.

The following table summarizes the fair values of derivatives that are designated as hedge instruments:

 

Derivatives Designated as
Hedging Instruments

        December 31,  
  

Balance Sheet Location

   2013     2012  
          (in thousands)  
Long-term—Interest rate swaps    Other assets    $ 9,726      $ —     
Short-term—Interest rate swaps    Derivative liabilities, current      (4,984     (17,017
Long-term—Interest rate swaps    Other long-term liabilities      —          (27,437
     

 

 

   

 

 

 

Total

      $ 4,742      $ (44,454
     

 

 

   

 

 

 

The Company has elected to not offset the fair value of derivatives subject to master netting agreements, but report them gross on our consolidated balance sheets.

On December 28, 2012, management de-designated a portion of PFA Interest Rate Swaps from hedge accounting due to the change in payment frequency of principal under an amendment to the PFA. Subsequent to de-designation, we accounted for the de-designated portion of the interest rate swaps on a mark-to-market basis, with both realized and unrealized gains and losses on the de-designated portion recorded currently in earnings in interest expense in our consolidated statements of operations through the date of the termination of the PFA Interest Rate Swaps. The following table summarizes the fair values of derivatives that are not designated as hedge instruments:

 

Derivatives Not Designated as
Hedging Instruments

        December 31,  
  

Balance Sheet Location

       2013              2012      
          (in thousands)  

Short-term—Interest rate swaps

   Derivative liabilities, current    $ —         $ (978

Long-term—Interest rate swaps

   Other long-term liabilities      —           (1,574
     

 

 

    

 

 

 

Total

      $ —         $ (2,552
     

 

 

    

 

 

 

The following table summarizes the cash flow hedge gains and losses:

 

Derivatives in Cash Flow
Hedging Relationships
  Amount of Gain (Loss) Recognized
in Equity for the Years Ended
December 31,
    Amount of Loss Reclassified
from Equity into
Income for the Years Ended
December 31,
    Amount Recognized in Income
(Ineffective Portion and Amount
Excluded from Effectiveness
Testing) for the Years ended
December 31,
 
        2013             2012             2011             2013             2012             2011             2013             2012             2011      
    (in thousands)  

Interest rate swaps

  $ 49,859      $ 1,868      $ (60,284   $ 47,720      $ 24,419      $ 1,802      $ —        $ —        $ —     

During the years ended December 31, 2013, 2012 and 2011, we reclassified $47.1 million, $23.9 million and $1.8 million to interest expense and $0.6 million, $0.5 million and $0.1 million to depreciation from accumulated other comprehensive income, respectively.

As of December 31, 2013, the estimated amount of net losses associated with derivative instruments that would be reclassified from accumulated comprehensive loss to earnings during the next twelve months was $5.6 million.

Fair Value Measurements
Fair Value Measurements

Note 10—Fair Value Measurements

We estimated fair value by using appropriate valuation methodologies and information available to management as of December 31, 2013 and 2012. Considerable judgment was required in developing these estimates, and accordingly, estimated values may differ from actual results.

The estimated fair value of accounts receivable, accounts payable and accrued expenses approximated their carrying value due to their short-term nature. The estimated fair value of our SSCF debt approximated carrying value because the variable-rates approximate current market rates. The following table presents the carrying value and estimated fair value of our other long-term debt instruments:

 

     December 31,  
     2013      2012  
     Carrying
Value
     Estimated
Fair Value
     Carrying
Value
     Estimated
Fair Value
 
     (in thousands)  

2015 Senior Unsecured Bonds

   $ 300,000      $ 313,500      $ 300,000      $ 308,850  

2017 Senior Secured Bonds

     497,892        540,000        497,458        512,500  

2020 Senior Secured Notes

     750,000        756,563        —          —    

2018 Senior Secured Term Loan B

     742,945        758,910        —          —    

 

We estimate the fair values of our variable-rate and fixed-rate debts using quoted market prices to the extent available and significant other observable inputs, which represent Level 2 fair value measurements.

The following table presents the carrying value and estimated fair value of our financial instruments recognized at fair value on a recurring basis:

 

     December 31, 2013  
           Fair Value Measurements Using  
     Carrying Value     Level 1      Level 2     Level 3  
     (in thousands)  

Assets:

         

Interest rate swaps

   $ 9,726       —        $ 9,726       —    

Liabilities:

         

Interest rate swaps

   $ (4,984     —        $ (4,984     —    
     December 31, 2012  
           Fair Value Measurements Using  
     Carrying Value     Level 1      Level 2     Level 3  
     (in thousands)  

Liabilities:

         

Interest rate swaps

   $ (47,006     —        $ (47,006     —    

We used an income approach to value assets and liabilities for outstanding interest rate swaps. These contracts are valued using a discounted cash flow model that calculates the present value of future cash flows under the terms of the contracts using market information as of the reporting date, such as prevailing interest rates. The determination of the fair values above incorporated various factors, including the impact of the counterparty’s non-performance risk with respect to the Company’s financial assets and the Company’s non-performance risk with respect to the Company’s financial liabilities.

Refer to Note 9 for further discussion of the Company’s use of derivative instruments and their fair values.

Commitments and Contingencies
Commitments and Contingencies

Note 11—Commitments and Contingencies

Operating Leases—The Company leases office space in countries in which it operates. As of December 31, 2013, the future minimum lease payments under the non-cancelable operating leases with lease terms in excess of one year was as follows:

 

     (In thousands)  

Years Ending December 31,

  

2014

   $ 1,163  

2015

     1,097  

2016

     1,069  

2017

     966  

2018

     858  

Thereafter

     1,600  
  

 

 

 

Total future minimum lease payments

   $ 6,753  
  

 

 

 

During the years ended December 31, 2013, 2012 and 2011, rent expense was $2.0 million, $1.7 million and $1.1 million, respectively.

 

Commitments—As of December 31, 2013 and 2012, Pacific Drilling had no material commitments other than commitments related to deepwater drillship construction purchase commitments discussed in Note 3.

Our ability to meet these commitments and ongoing working capital needs will depend in part on our future operating and financial performance, which is dependent on cash flow generated from operating and financing activities and our available cash balances. Our liquidity fluctuates depending on a number of factors, including, among others, our revenue efficiency and the timing of collecting accounts receivable as well as amounts paid for operating costs. We believe that our cash on hand and cash flows generated from operating and financing activities will provide sufficient liquidity over the next twelve months to fund our working capital needs, amortization payments on our long-term debt and capital expenditures.

Letters of Credit—As of December 31, 2013, we were contingently liable under certain performance, bid and custom bonds and letters of credit totaling approximately $284.5 million related to letters of credit issued as security in the normal course of our business.

Contingencies—It is to be expected that we and our subsidiaries will be routinely involved in litigation and disputes arising in the ordinary course of our business. On April 16, 2013, Transocean filed a complaint against us in the United States District Court for the Southern District of Texas alleging infringement of their dual activity patents. Transocean seeks relief in the form of a permanent injunction, compensatory damages, enhanced damages, court costs and fees. We do not believe that the ultimate liability, if any, resulting from any such pending litigation will have a material adverse effect on our financial condition, results of operations or cash flows.

We entered into a drilling contract for the Pacific Bora with a subsidiary of Chevron Corporation (“Chevron”). Under the contract terms, Chevron agreed to reimburse us for certain capital upgrades to the drillship. At the end of the contract, we are obligated to refund a portion of these costs; however, the ultimate amount of the refund liability to be paid is subject to reductions if the contract is extended beyond its initial term. As of December 31,2013 and 2012, we recorded within our consolidated balance sheets a liability of $17.8 million in accrued expenses and $15.6 million in other long-term liabilities, respectively, for our payable to Chevron that represents the maximum amount that could be ultimately paid.

We maintain loss of hire insurance that becomes effective 45 days after an accident or major equipment failure covered by hull and machinery insurance, resulting in a downtime event and extends for 180 days. In the third quarter 2011, the Pacific Scirocco underwent repairs and upgrades to ensure engine reliability, which was a covered event under our loss of hire policy that resulted in the $23.7 million and $18.5 million of loss of hire insurance recovery recognized during the years ended December 31, 2012 and 2011. During the year ended December 31, 2013, there was no loss of hire insurance recovery.

Concentrations of Credit and Market Risk
Concentrations of Credit and Market Risk

Note 12—Concentrations of Credit and Market Risk

Financial instruments that potentially subject the Company to credit risk are primarily cash equivalents and accounts receivable. At times, cash equivalents may be in excess of FDIC insurance limits. With regards to accounts receivable, we have an exposure from our concentration of clients within the oil and natural gas industry. This industry concentration has the potential to impact our exposure to credit and market risks as our clients could be affected by similar changes in economic, industry or other conditions. However, we believe that the credit risk posed by this industry concentration is largely offset by the creditworthiness of our client base. During the years ended December 31, 2013, 2012 and 2011, the percentage of revenues earned from our clients was as follows:

 

     Years Ended December 31,  
         2013             2012             2011      

Chevron

     55.6     45.0     100

Total

     22.6     32.9     —    

Petrobras

     21.8     22.1     —    
Segments and Geographic Areas
Segments and Geographic Areas

Note 13—Segments and Geographic Areas

Pacific Drilling is an international offshore drilling contractor providing drilling services to the oil and natural gas industry through the use of high-specification rigs. Our primary business is to contract our ultra-deepwater rigs, related equipment and work crews, primarily on a dayrate basis, to drill wells for our clients.

Our drillships are part of a single, global market for contract drilling services and can be redeployed globally due to changing demands. We consider the operations of each of our drillships to be an operating segment. We evaluate the financial performance of each of our drillships and our overall fleet based on several factors, including revenues from clients and operating profit. The consolidation of our operating segments into one reportable segment is attributable to how we manage our fleet, including the nature of our services provided, type of clients we serve and the ability of our drillships to operate in a single, global market. The accounting policies of our operating segments are the same as those described in the summary of significant accounting policies (Note 2).

As of December 31, 2013, the Pacific Bora, the Pacific Scirocco and the Pacific Khamsin were located offshore Nigeria, the Pacific Mistral was located offshore Brazil and the Pacific Santa Ana was located offshore the United States. The Pacific Sharav, the Pacific Meltem and the Pacific Zonda were located in South Korea, where they are under construction by SHI.

During the years ended December 31, 2013, 2012 and 2011, the percentage of revenues earned by geographic area, based on drilling location, is as follows:

 

     Years Ended December 31,  
         2013             2012             2011      

Nigeria

     52.1     63.6     100

Gulf of Mexico

     26.1     14.3     —    

Brazil

     21.8     22.1     —    
Investment In and Notes Receivable from Joint Venture
Investment In and Notes Receivable from Joint Venture

Note 14—Investment In and Notes Receivable from Joint Venture

On March 30, 2011, our Predecessor assigned its interests in TPDI to a subsidiary of the Quantum Pacific Group. As a result, neither the Company nor any of its subsidiaries owned any interest in TPDI following March 30, 2011.

In 2007, our Predecessor entered into various agreements with Transocean, which culminated in the formation of a joint venture company, TPDI, which was owned 50% by our Predecessor and 50% by a subsidiary of Transocean. TPDI was formed to construct, own, and operate or charter two deepwater drillships, named the Dhirubai Deepwater KG1 that started operating in July 2009 and Dhirubai Deepwater KG2 that started operating in March 2010.

We determined that the Joint Venture met the criteria of a variable interest entity a (“VIE”) as TPDI’s equity investment at risk was not sufficient for the entity to finance its activities without additional subordinated financial support. We determined that TPDI was a VIE and Transocean was the primary beneficiary for accounting purposes since Transocean a) had the power to direct the marketing and operating activities, which were the activities that most significantly impact TPDI’s economic performance and b) had the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. As a result, we accounted for TPDI as an equity method investment in our consolidated financial statements.

The Joint Venture shareholders entered into promissory note agreements with TPDI to fund the formation of the Joint Venture. The promissory notes accrued interest at LIBOR plus 2% per annum with semi-annual interest payments. The Joint Venture was not required to make any payments of principal or interest prior to the TPDI Transfer.

The Joint Venture entered into interest rate swaps, which are designated as cash flow hedges of the future interest payments on variable-rate borrowings under its bank credit facilities. During the year ended December 31, 2011, Pacific Drilling reclassified $3.0 million of losses previously recognized as accumulated other comprehensive income to equity in earnings of Joint Venture. The Joint Venture recognized gains and losses associated with the ineffective portion of the cash flow hedges in interest expense in the period in which they are realized. During the year ended December 31, 2011, the Joint Venture recorded ineffectiveness gains of $0.6 million to interest expense.

Transocean and Pacific Drilling also entered into a letter of credit fee agreement whereby Transocean agreed to provide a letter of credit as needed for purposes of TPDI’s compliance with the terms under TPDI’s bank credit facility. In return, Pacific Drilling agreed to pay Transocean our 50% share of a 4.2% per annum fee on the required letter of credit amount. During the year ended December 31, 2011, Pacific Drilling incurred $0.3 million of fees related to this agreement that was recorded as interest expense in our consolidated statement of operations.

The TPDI Transfer was recorded and presented as a dividend in-kind within our consolidated financial statements on March 31, 2011, which date was used for convenience after our conclusion that there were no material intervening transactions between March 30, 2011 and March 31, 2011.

 

Summarized TPDI consolidated results of operations are as follows:

 

     For the Three
Months Ended
March 31, 2011
 
     (in thousands)  

Operating revenues

   $ 90,414  

Operating expenses

     35,492  
  

 

 

 

Operating income

     54,922  

Interest expense, net

     (13,958 )

Other expense

     (99 )
  

 

 

 

Income before income taxes

     40,865  

Income tax expense

     4,166  
  

 

 

 

Net income

   $ 36,699  
  

 

 

 
Related-Party Transactions
Related-Party Transactions

Note 15—Related-Party Transactions

During the year ended December 31, 2011, Pacific Drilling borrowed $142.2 million under a related-party loan provided by a subsidiary of the Quantum Pacific Group. Borrowings under the loan agreement accrued interest at the rate of six percent per annum. During the year ended December 31, 2011, Pacific Drilling incurred and capitalized interest expense of $0.6 million on the related-party loan as a cost of property and equipment. On March 23, 2011, all outstanding related–party loan principal and accrued interest, in the amount of $142.8 million, was converted into equity of Pacific Drilling Limited. Following the conversion, the related-party loan agreement was terminated.

Prior to the TPDI Transfer, the Company entered into promissory note agreements with TPDI and Transocean to fund TPDI as presented in our consolidated financial statements and described in Note 14. During the year ended December 31, 2011, the Company recorded related-party interest income from the Joint Venture of $0.5 million on the promissory notes.

On March 30, 2011, the Company assigned its interests in TPDI, including promissory notes, to a subsidiary of the Quantum Pacific Group. We did not receive any consideration for the TPDI Transfer. In connection with the TPDI Transfer, we entered into a management agreement pursuant to which we provided day-to-day oversight and management services with respect to the Quantum Pacific Group’s equity interest in TPDI for a fee of $8,000 per day. On May 31, 2012, as a result of Quantum Pacific’s divestiture of their equity position in TPDI, this management agreement was terminated. During the years ended December 31, 2012 and 2011, management fee income of $1.2 million and $2.2 million, respectively, was recorded in other income within our consolidated statements of operations.

The joint venture agreements relating to TPDI provided Quantum Pacific Group with a put option that allowed it to exchange its 50% interest in TPDI for shares of Transocean or cash at a purchase price based on an appraisal of the fair value of the two vessels owned by TPDI, subject to various customary adjustments. In conjunction with the TPDI Transfer, a subsidiary of the Quantum Pacific Group provided a guarantee to Project Facilities Agreement lenders. In consideration for the guarantee, we agreed to pay the Quantum Pacific Group a fee of 0.25% per annum on the outstanding borrowings on the Project Facilities Agreement. During the years ended December 31, 2012 and 2011, guarantee fees of $1.3 million and $1.9 million were incurred of which $0.5 million and $1.5 million were recorded to property and equipment as capitalized interest costs, respectively. On April 24, 2012, the guarantee was terminated and the Quantum Pacific Group was released from its obligations thereunder. In connection with the termination and release of the guarantee, our related agreement with the Quantum Pacific Group was terminated.

In February 2012, the Quantum Pacific Group purchased $40.0 million of the 2015 Senior Unsecured Bonds. Following their initial purchase, the Quantum Pacific Group sold the 2015 Senior Unsecured Bonds purchased to unrelated parties during the year ended December 31, 2012. See Note 5 for a description of the 2015 Senior Unsecured Bonds.

Restricted Cash
Restricted Cash

Note 16—Restricted Cash

Following the PFA and TI Facilities Refinancing, we had no restricted cash as of December 31, 2013. As of December 31 2012, restricted cash consisted primarily of bank accounts held with financial institutions as security for the PFA and TI Facilities.

Retirement Plans
Retirement Plans

Note 17—Retirement Plans

Pacific Drilling sponsors a defined contribution retirement plan covering substantially all U.S. employees (the “U.S. Savings Plan”) and an international savings plan (the “International Savings Plan”). Under the U.S. Savings Plan, the Company matches 100% of employee contributions up to 6% of eligible compensation per participant. Under the International Savings Plan, we contribute 6% of base compensation (limited to a contribution of $15,000 per participant). During the years ended December 31, 2013, 2012 and 2011, our total employer contributions to both plans amounted to $4.5 million, $3.7 million and $2.8 million, respectively.

Supplemental Cash Flow Information
Supplemental Cash Flow Information

Note 18—Supplemental Cash Flow Information

During the years ended December 31, 2013, 2012 and 2011, we paid $87.7 million, $70.9 million and $3 million of interest, net of amounts capitalized, respectively. During the years ended December 31, 2013, 2012 and 2011, we paid income taxes of $22 million, $19.3 million, and $0.5 million, respectively.

Capital expenditures in our consolidated statements of cash flows include the effect of changes in accrued capital expenditures, which are capital expenditures that were accrued but unpaid at period end. We have included these amounts in accounts payable, accrued expenses and accrued interest in our consolidated balance sheets as of December 31, 2013 and 2012. During the years ended December 31, 2013, 2012 and 2011, capital expenditures do not include the impacts of an increase in accrued capital expenditures of $17.3 million, decrease in accrued capital expenditures of $4.0 million and increase in accrued capital expenditures of $1.3 million in our consolidated statements of cash flows, respectively.

During the years ended December 31, 2013, 2012 and 2011, non-cash amortization of deferred financing costs and accretion of debt discount totaling $7.1 million, $3.6 million and $13.2 million were capitalized to property and equipment, respectively. Accordingly, these amounts are excluded from capital expenditures in our consolidated statements of cash flows for the years ended December 31, 2013, 2012 and 2011.

Significant Accounting Policies (Policies)

Principles of Consolidation—The consolidated financial statements include the accounts of Pacific Drilling S.A. and consolidated subsidiaries that we control by ownership of a majority voting interest. We apply the equity method of accounting for investments in entities when we have the ability to exercise significant influence over an entity that does not meet the variable entity criteria or meets the variable interest entity criteria, but for which we are not deemed to be the primary beneficiary. We eliminate all intercompany transactions and balances in consolidation.

The Restructuring was a business combination limited to entities that were all under the control of the Quantum Pacific Group and its affiliates, and, as a result, the Restructuring was accounted for as a transaction between entities under common control. Accordingly, the consolidated financial statements for the year ended December 31, 2011 are presented using the historical values of the Predecessor’s financial statements on a combined basis prior to the Restructuring as if Pacific Drilling S.A. was formed and the Restructuring was completed on January 1, 2011.

We currently are party to a Nigerian joint venture, Pacific International Drilling West Africa Limited (“PIDWAL”), which is fully controlled and 90% owned by us with 10% owned by Derotech Offshore Services Limited (“Derotech”), a privately-held Nigerian registered limited liability company. Derotech will not accrue the economic benefits of its interest in PIDWAL unless and until it satisfies certain outstanding obligations to us and a certain pledge is cancelled by us. Accordingly, we consolidate all PIDWAL interests and no portion of PIDWAL’s operating results is allocated to the noncontrolling interests. In addition to the joint venture agreement, we are a party to marketing and logistic services agreements with Derotech and an affiliated company of Derotech. During the years ended December 31, 2013, 2012 and 2011, we incurred fees of $9.4 million, $7.0 million and $3.1 million under the marketing and logistic services agreements, respectively.

Accounting Estimates—The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”) requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the balance sheet date and the amounts of revenues and expenses recognized during the reporting period. On an ongoing basis, we evaluate our estimates and assumptions, including those related to allowance for doubtful accounts, financial instruments, depreciation of property and equipment, impairment of long-lived assets, income taxes, share-based compensation and contingencies. We base our estimates and assumptions on historical experience and on various other factors we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from such estimates.

Revenues and Operating Expenses—Contract drilling revenues are recognized as earned, based on contractual dayrates. In connection with drilling contracts, we may receive fees for preparation and mobilization of equipment and personnel or for capital improvements to rigs. Fees and incremental costs incurred directly related to contract preparation and mobilization along with reimbursements received for capital expenditures are deferred and amortized to revenue over the primary term of the drilling contract. The actual cost incurred for reimbursed capital expenditures are depreciated over the estimated useful life of the asset. We may also receive fees upon completion of a drilling contract that are conditional based on the occurrence of an event, such as demobilization of a rig. These conditional fees and related expenses are reported in income upon completion of the drilling contract. If receipt of such fees is not conditional, they are recognized as revenue over the primary term of the drilling contract. Amortization of deferred revenue

and deferred mobilization costs are recorded on a straight-line basis over the primary drilling contract term, which is consistent with the general pace of activity, level of services being provided and dayrates being earned over the life of the contract.

Cash and Cash Equivalents—Cash equivalents are highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash.

Accounts Receivable—We record trade accounts receivable at the amount we invoice our clients. We provide an allowance for doubtful accounts, as necessary, based on a review of outstanding receivables, historical collection information and existing economic conditions. We do not generally require collateral or other security for receivables. As of December 31, 2013 and 2012, we had no allowance for doubtful accounts.

Materials and Supplies—Materials and supplies held for consumption are carried at average cost, net of allowances for excess or obsolete materials and supplies of $1.1 million and $0 as of December 31, 2013 and 2012, respectively.

Property and Equipment—Deepwater drillships are recorded at cost of construction, including any major capital improvements, less accumulated depreciation and impairment. Other property and equipment is recorded at cost and consists of purchased software systems, furniture, fixtures and other equipment. Planned major maintenance, ongoing maintenance, routine repairs and minor replacements are expensed as incurred.

Interest is capitalized based on the costs of new borrowings attributable to qualifying new construction or at the weighted-average cost of debt outstanding during the period of construction. We capitalize interest costs for qualifying new construction from the point borrowing costs are incurred for the qualifying new construction and cease when substantially all the activities necessary to prepare the qualifying asset for its intended use are complete.

Property and equipment are depreciated to its salvage value on a straight-line basis over the estimated useful lives of each class of assets. Our estimated useful lives of property and equipment are as follows:

 

     Years

Drillships and related equipment

   15-35

Other property and equipment

   2-7

Long-Lived Assets—We review our long-lived assets, including property and equipment, for impairment when events or changes in circumstances indicate that the carrying amounts of our assets held and used may not be recoverable. Potential impairment indicators include rapid declines in commodity prices and related market conditions, actual or expected declines in rig utilization, increases in idle time, cancellations of contracts or credit concerns of clients. We assess impairment using estimated undiscounted cash flows for the long-lived assets being evaluated by applying assumptions regarding future operations, market conditions, dayrates, utilization and idle time. An impairment loss is recorded in the period if the carrying amount of the asset is not recoverable. During 2013, 2012 and 2011, there were no long-lived asset impairments.

Deferred Financing Costs—Deferred financing costs associated with long-term debt are carried at cost and are amortized to interest expense using the effective interest rate method over the term of the applicable long-term debt.

Foreign Currency Transactions—The consolidated financial statements are stated in U.S. dollars. We have designated the U.S. dollar as the functional currency for our foreign subsidiaries in international locations because we contract with clients, purchase equipment and finance capital using the U.S. dollar. Transactions in other currencies have been translated into U.S. dollars at the rate of exchange on the transaction date. Any gain or loss arising from a change in exchange rates subsequent to the transaction date is included as an exchange gain or loss. Monetary assets and liabilities denominated in currencies other than U.S. dollars are reported at the rates of exchange prevailing at the end of the reporting period. During 2013, 2012 and 2011, total foreign exchange gains and (losses) were $(2.1) million, $2.4 million and $1.4 million, respectively, and recorded in other income (expense) within our consolidated statements of operations.

Earnings per Share—Basic earnings (loss) per common share (“EPS”) is computed by dividing the net income (loss) by the weighted-average number of common shares outstanding for the period. Basic and diluted EPS are retrospectively adjusted for the effects of stock dividends or stock splits. Diluted EPS reflects the potential dilution from securities that could share in the earnings of the Company. Anti-dilutive securities are excluded from diluted EPS.

Fair Value Measurements—We estimate fair value at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market for the asset or liability. Our valuation techniques require inputs that are categorized using a three-level hierarchy as follows: (1) unadjusted quoted prices for identical assets or liabilities in active markets (“Level 1”), (2) direct or indirect observable inputs, including quoted prices or other market data, for similar assets or liabilities in active markets or identical assets or liabilities in less active markets (“Level 2”) and (3) unobservable inputs that require significant judgment for which there is little or no market data (“Level 3”). When multiple input levels are required for a valuation, we categorize the entire fair value measurement according to the lowest level input that is significant to the measurement even though we may have also utilized significant inputs that are more readily observable.

Share-Based Compensation—The grant date fair value of share-based awards granted to employees is recognized as an employee compensation expense over the requisite service period on a straight-line basis. The amount of compensation expense recognized is adjusted to reflect the number of awards for which the related vesting conditions are expected to be met. The amount of compensation expense ultimately recognized is based on the number of awards that do meet the vesting conditions at the vesting date. To the extent the share-based awards were to be settled in cash upon exercise, the awards were accounted for as a liability. The liability was remeasured at each reporting date and any changes in the fair value of the liability were recognized as employee compensation expense. All share-based compensation awards accounted for as liabilities were cancelled and replaced on March 31, 2011.

Derivatives—We apply cash flow hedge accounting to interest rate swaps that are designated as hedges of the variability of future cash flows. The derivative financial instruments are recorded in our consolidated balance sheet at fair value as either assets or liabilities. Changes in the fair value of derivatives designated as cash flow hedges, to the extent the hedge is effective, are recognized in accumulated other comprehensive income until the hedged item is recognized in earnings.

Hedge effectiveness is measured on an ongoing basis to ensure the validity of the hedges based on the relative cumulative changes in fair value between the derivative contract and the hedged item over time. Any change in fair value resulting from ineffectiveness is recognized immediately in earnings. Hedge accounting is discontinued prospectively if it is determined that the derivative is no longer effective in offsetting changes in the cash flows of the hedged item.

For interest rate hedges related to interest capitalized in the construction of fixed assets, other comprehensive income is released to earnings as the asset is depreciated over its useful life. For all other interest rate hedges, other comprehensive income is released to earnings as interest expense is accrued on the underlying debt.

Contingencies—We record liabilities for estimated loss contingencies when we believe a loss is probable and the amount of the probable loss can be reasonably estimated. Once established, we adjust the estimated contingency loss accrual for changes in facts and circumstances that alter our previous assumptions with respect to the likelihood or amount of loss.

We recognize loss of hire insurance recovery once realized or contingencies related to the realizability of the amount earned are resolved.

Income Taxes—Income taxes are provided based upon the tax laws and rates in the countries in which our subsidiaries are registered and where their operations are conducted and income and expenses are earned and incurred, respectively. We recognize deferred tax assets and liabilities for the anticipated future tax effects of temporary differences between the financial statement basis and the tax basis of our assets and liabilities using the applicable enacted tax rates in effect the year in which the asset is realized or the liability is settled. A valuation allowance for deferred tax assets is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized.

We recognize tax benefits from an uncertain tax position only if it is more likely than not that the position will be sustained upon examination by taxing authorities based on the technical merits of the position. The amount recognized is the largest benefit that we believe has greater than a 50% likelihood of being realized upon settlement. Actual income taxes paid may vary from estimates depending upon changes in income tax laws, actual results of operations and the final audit of tax returns by taxing authorities. We recognize interest and penalties related to uncertain tax positions in income tax expense.

Investment Accounted for Using the Equity Method—Our Predecessor had a 50% ownership in Transocean Pacific Drilling Inc. (“TPDI” or the “Joint Venture”), a joint venture company formed with Transocean Ltd. (“Transocean”) and its subsidiaries. The investment was accounted for using the equity method based upon the level of ownership and our ability to exercise significant influence over the operating and financial policies of the investee. The investment was adjusted periodically to recognize our proportionate share of the investee’s net income or losses. On March 30, 2011, our Predecessor assigned its equity interest in TPDI to a subsidiary of the Quantum Pacific Group.

Interest Income from Joint Venture—Interest income from the Joint Venture was earned on promissory notes based on stated interest rates.

Recently Issued Accounting Standards

Presentation of Comprehensive Income—In February 2013, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update on the reporting of amounts reclassified out of accumulated other comprehensive income. This guidance requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required to be reclassified in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional details about those amounts. We adopted the accounting standards update effective January 1, 2013. The adoption of the accounting standards update concerns presentation and disclosure only and did not have an impact on our consolidated financial position or results of operations.

Balance Sheet Offsetting—In December 2011, the FASB issued an accounting standards update that expands the disclosure requirements for the offsetting of assets and liabilities related to certain financial instruments and derivative instruments. The update requires disclosures of gross and net information for financial instruments and derivative instruments that are eligible for net presentation due to a right of offset, an enforceable master netting arrangement or similar agreement. We adopted the accounting standards update effective January 1, 2013. The adoption of the accounting standards update concerns presentation and disclosure only and did not have an impact on our consolidated financial position or results of operations.

Significant Accounting Policies (Tables)
Estimated Useful Lives of Property And Equipment

Our estimated useful lives of property and equipment are as follows:

 

     Years

Drillships and related equipment

   15-35

Other property and equipment

   2-7
Property and Equipment (Tables)
Property And Equipment

Property and equipment consisted of the following:

 

     December 31,  
     2013     2012  
     (in thousands)  

Drillships and related equipment

   $ 4,020,792     $ 3,278,861  

Assets under construction

     769,131       613,762  

Other property and equipment

     10,260       7,025  
  

 

 

   

 

 

 

Property and equipment, cost

     4,800,183       3,899,648  

Accumulated depreciation

     (288,029 )     (139,227 )
  

 

 

   

 

 

 

Property and equipment, net

   $ 4,512,154     $ 3,760,421  
  

 

 

   

 

 

 
Debt (Tables)

Debt consisted of the following:

 

     December 31,  
     2013      2012  
     (in thousands)  

Due within one year:

     

Project Facilities Agreement

   $ —        $ 218,750  

2018 Senior Secured Term Loan B

     7,500        —    
  

 

 

    

 

 

 

Total current debt

     7,500        218,750  

Long-term debt:

     

Project Facilities Agreement

   $ —        $ 1,237,500  

2015 Senior Unsecured Bonds

     300,000        300,000  

2017 Senior Secured Bonds

     497,892        497,458  

2018 Senior Secured Term Loan B

     735,445        —    

Senior Secured Credit Facility

     140,000        —    

2020 Senior Secured Notes

     750,000        —    
  

 

 

    

 

 

 

Total long-term debt

     2,423,337        2,034,958  
  

 

 

    

 

 

 

Total debt

   $ 2,430,837      $ 2,253,708  
  

 

 

    

 

 

 

The table below summarizes the current composition of the SSCF:

 

     Amount     

Finance Purpose

     (in thousands)       

Commercial Tranche

   $ 500,000      The Pacific Sharav and the Pacific Meltem

GIEK Tranche:

     

EKN Sub-Tranche

   $ 250,000      The Pacific Meltem

Bank Sub-Tranche

     250,000      The Pacific Sharav
  

 

 

    

Total

   $ 1,000,000     
  

 

 

    

On or after June 1, 2016, the Company has the option to redeem the 2020 Senior Secured Notes, in whole or in part, at one time or from time to time, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interests and additional amounts, if any, on the notes redeemed, if redeemed during the twelve-month period beginning on June 1 of the years indicated below:

 

Year       

2016

     104.031

2017

     102.688

2018

     101.344

2019 and thereafter

     100

As of December 31, 2013, the aggregate maturities of our debt, including net unamortized discounts of $5.4 million, was as follows:

 

     (in thousands)  

Years ending December 31,

  

2014

   $ 7,500  

2015

     307,500  

2016

     7,500  

2017

     507,500  

2018

     716,250  

Thereafter

     890,000  
  

 

 

 

Total

   $ 2,436,250  
  

 

 

 
Income Taxes (Tables)

Income / (loss) before income taxes consisted of the following:

 

     Years ended December 31,  
     2013     2012     2011  
     (in thousands)  

Luxembourg

   $ 55,904     $ (24,451 )   $ (1,281 )

United States

     206       (444 )     (2,753 )

Other Jurisdictions

     (8,085 )     80,597       4,331  
  

 

 

   

 

 

   

 

 

 

Total

   $ 48,025     $ 55,702     $ 297  
  

 

 

   

 

 

   

 

 

 

The components of income tax (provision) / benefit consisted of the following:

 

     Years ended December 31,  
     2013     2012     2011  
     (in thousands)  

Current income tax expense:

      

Luxembourg

   $ (816 )   $ (535 )   $ —    

United States

     (1,885 )     (4,404 )     (164 )

Other Foreign

     (22,941 )     (20,540 )     (6,205 )
  

 

 

   

 

 

   

 

 

 

Total current

   $ (25,642 )   $ (25,479 )   $ (6,369 )

Deferred tax benefit:

      

Luxembourg

   $ (32 )   $ 32     $ —    

United States

     2,053       4,646       782  

Other Foreign

     1,098       (912 )     2,387  
  

 

 

   

 

 

   

 

 

 

Total deferred

   $ 3,119     $ 3,766     $ 3,169  
  

 

 

   

 

 

   

 

 

 

Income tax expense

   $ (22,523 )   $ (21,713 )   $ (3,200 )
  

 

 

   

 

 

   

 

 

 

A reconciliation between the Luxembourg statutory rate of 29.2% for the year ended December 31, 2013 (and 28.8% for the years ended 2012 and 2011) and our effective tax rate is as follows:

 

     Years ended December 31,  
         2013             2012         2011  

Statutory rate

     29.2     28.8     28.8

Effect of tax rates different than the Luxembourg statutory tax rate

     27.1     6.8     108.5

Change in valuation allowance

     (9.0 )%      3.4     934.1

Adjustments related to prior years

     (0.4 )%      —         6.0
  

 

 

   

 

 

   

 

 

 

Effective tax rate

     46.9     39.0     1,077.4
  

 

 

   

 

 

   

 

 

 

The components of deferred tax assets and liabilities consisted of the following:

 

     December 31,  
     2013     2012  
     (in thousands)  

Deferred tax assets:

    

Net operating loss carryforwards

   $ 26,402     $ 4,671  

Accrued payroll expenses

     7,048       4,644  

Deferred revenue

     6,184       5,592  

Other

     13       23  
  

 

 

   

 

 

 

Deferred tax assets

     39,647       14,930  

Less: valuation allowance

     (14,999 )     (4,476 )
  

 

 

   

 

 

 

Total deferred tax assets

   $ 24,648     $ 10,454  

Deferred tax liabilities:

    

Depreciation and amortization

   $ (958 )   $ (1,125 )

Deferred expenses

     (12,309 )     (2,024 )

Deferred expenses

     (32 )     —    
  

 

 

   

 

 

 

Total deferred tax liabilities

   $ (13,299 )   $ (3,149 )
  

 

 

   

 

 

 

Net deferred tax assets

   $ 11,349     $ 7,305  
  

 

 

   

 

 

 

A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2013 and 2012 is as follows:

 

     December 31,  
     2013      2012  
     (in thousands)  

Balance, beginning of year

   $ —        $ —    

Increases in unrecognized tax benefits as a result of tax positions taken during prior years

     736        —    
  

 

 

    

 

 

 

Balance, end of year

   $   736      $   —    
  

 

 

    

 

 

 
Share-Based Compensation (Tables)

We recorded share-based compensation expense and related tax benefit within our statement of operations as follows:

 

     Years Ended December 31,  
     2013     2012     2011  
     (in thousands)  

Contract drilling costs

   $ 2,087     $ —       $ —    

General and administrative expenses

     7,228       5,318       4,471  
  

 

 

   

 

 

   

 

 

 

Share-based compensation expense

     9,315       5,318       4,471  

Tax benefit (a)

     (2,113 )     (1,360 )     (1,050 )
  

 

 

   

 

 

   

 

 

 

Total

   $ 7,202     $ 3,958     $ 3,421  
  

 

 

   

 

 

   

 

 

 

 

  (a) The effects of tax benefits from share-based compensation expense are included within income tax expense in our consolidated statements of operations.

The fair value of the 2011, 2010 and 2009 stock option grants as of March 31, 2011, the date of modification and grant, was calculated using the following assumptions:

 

     2011     2010     2009  
     Stock Options     Stock Options     Stock Options  

Expected volatility

     52.3     52.7     53.2

Expected term (in years)

     6.25       6.00       5.75  

Expected dividends

     —         —         —    

Risk-free interest rate

     2.7     2.6     2.5

During the years ended December 31, 2013 and 2012, the fair value of the options granted was calculated using the following weighted-average assumptions:

 

     2013     2012  
     Stock Options     Stock Options  

Expected volatility

     47.3     48.5

Expected term (in years)

     6.25       6.25  

Expected dividends

     —         —    

Risk-free interest rate

     1.2     1.4

A summary of option activity under the 2011 Stock Plan as of and for the year ended December 31, 2013 is as follows:

 

    Number of Shares
Under Option
    Weighted-Average
Exercise Price
    Weighted-Average
Remaining
Contractual Term
    Aggregate
Intrinsic
Value
 
    (in thousands)     (per share)     (in years)     (in thousands)  

Outstanding — January 1, 2013

    3,976     $ 10.04      

Granted

    1,359       9.58      

Exercised

    —         —        

Cancelled or forfeited

    (86 )     9.97      
 

 

 

       

Outstanding — December 31, 2013

    5,249     $ 9.91       7.7     $ 8,121  

Exercisable — December 31, 2013

    2,107     $ 10.01       6.7     $ 3,054  

A summary of restricted stock units activity under the 2011 Stock Plan as of and for the year ended December 31, 2013 was as follows:

 

     Number of
Restricted Stock
Units
    Weighted-Average
Grant-Date Fair
Value
 
     (in thousands)     (per share)  

Nonvested—January 1, 2013

     290     $ 10.07  

Granted

     1,013       9.93  

Vested

     (170 )     10.19  

Cancelled or forfeited

     (108 )     9.94  
  

 

 

   

Nonvested—December 31, 2013

     1,025     $ 9.93  
  

 

 

   
Earnings per Share (Tables)

The following reflects the income and the share data used in the basic and diluted EPS computations:

 

     Years Ended December 31,  
     2013      2012      2011  
     (in thousands, except per share amounts)  

Numerator:

        

Net income (loss), basic and diluted

   $ 25,502       $ 33,989       $ (2,903

Denominator:

        

Weighted-average number of common shares outstanding, basic

     216,964         216,901         195,448   

Effect of share-based compensation awards

     457         2         —     
  

 

 

    

 

 

    

 

 

 

Weighted-average number of common shares outstanding, diluted

     217,421         216,903         195,448   

Earnings (loss) per share:

        

Basic

   $ 0.12       $ 0.16       $ (0.01

Diluted

   $ 0.12       $ 0.16       $ (0.01

The following table presents the share effects of share-based compensation awards excluded from our computations of diluted EPS as their effect would have been anti-dilutive for the periods presented:

 

     Years Ended December 31,  
     2013      2012      2011  
     (in thousands)  

Share-based compensation awards

     5,817         4,263         2,789   
Derivatives (Tables)

The following table summarizes the cash flow hedge gains and losses:

 

Derivatives in Cash Flow
Hedging Relationships
  Amount of Gain (Loss) Recognized
in Equity for the Years Ended
December 31,
    Amount of Loss Reclassified
from Equity into
Income for the Years Ended
December 31,
    Amount Recognized in Income
(Ineffective Portion and Amount
Excluded from Effectiveness
Testing) for the Years ended
December 31,
 
        2013             2012             2011             2013             2012             2011             2013             2012             2011      
    (in thousands)  

Interest rate swaps

  $ 49,859      $ 1,868      $ (60,284   $ 47,720      $ 24,419      $ 1,802      $ —        $ —        $ —     

The following table summarizes the fair values of derivatives that are designated as hedge instruments:

 

Derivatives Designated as
Hedging Instruments

        December 31,  
  

Balance Sheet Location

   2013     2012  
          (in thousands)  
Long-term—Interest rate swaps    Other assets    $ 9,726      $ —     
Short-term—Interest rate swaps    Derivative liabilities, current      (4,984     (17,017
Long-term—Interest rate swaps    Other long-term liabilities      —          (27,437
     

 

 

   

 

 

 

Total

      $ 4,742      $ (44,454
     

 

 

   

 

 

 

The following table summarizes the fair values of derivatives that are not designated as hedge instruments:

 

Derivatives Not Designated as
Hedging Instruments

        December 31,  
  

Balance Sheet Location

       2013              2012      
          (in thousands)  

Short-term—Interest rate swaps

   Derivative liabilities, current    $ —         $ (978

Long-term—Interest rate swaps

   Other long-term liabilities      —           (1,574
     

 

 

    

 

 

 

Total

      $ —         $ (2,552
     

 

 

    

 

 

 
Fair Value Measurements (Tables)

The following table presents the carrying value and estimated fair value of our other long-term debt instruments:

 

     December 31,  
     2013      2012  
     Carrying
Value
     Estimated
Fair Value
     Carrying
Value
     Estimated
Fair Value
 
     (in thousands)  

2015 Senior Unsecured Bonds

   $ 300,000      $ 313,500      $ 300,000      $ 308,850  

2017 Senior Secured Bonds

     497,892        540,000        497,458        512,500  

2020 Senior Secured Notes

     750,000        756,563        —          —    

2018 Senior Secured Term Loan B

     742,945        758,910        —          —    

The following table presents the carrying value and estimated fair value of our financial instruments recognized at fair value on a recurring basis:

 

     December 31, 2013  
           Fair Value Measurements Using  
     Carrying Value     Level 1      Level 2     Level 3  
     (in thousands)  

Assets:

         

Interest rate swaps

   $ 9,726       —        $ 9,726       —    

Liabilities:

         

Interest rate swaps

   $ (4,984     —        $ (4,984     —    
     December 31, 2012  
           Fair Value Measurements Using  
     Carrying Value     Level 1      Level 2     Level 3  
     (in thousands)  

Liabilities:

         

Interest rate swaps

   $ (47,006     —        $ (47,006     —    
Commitments and Contingencies (Tables)
Future Minimum Lease Payments Under Noncancelable Operating Leases

As of December 31, 2013, the future minimum lease payments under the non-cancelable operating leases with lease terms in excess of one year was as follows:

 

     (In thousands)  

Years Ending December 31,

  

2014

   $ 1,163  

2015

     1,097  

2016

     1,069  

2017

     966  

2018

     858  

Thereafter

     1,600  
  

 

 

 

Total future minimum lease payments

   $ 6,753  
  

 

 

 
Concentrations of Credit and Market Risk (Tables)
Percentage of Revenues Earned from Customers

During the years ended December 31, 2013, 2012 and 2011, the percentage of revenues earned from our clients was as follows:

 

     Years Ended December 31,  
         2013             2012             2011      

Chevron

     55.6     45.0     100

Total

     22.6     32.9     —    

Petrobras

     21.8     22.1     —    
Segments and Geographic Areas (Tables)
Percentage of Revenue Earned by Geographical Area

During the years ended December 31, 2013, 2012 and 2011, the percentage of revenues earned by geographic area, based on drilling location, is as follows:

 

     Years Ended December 31,  
         2013             2012             2011      

Nigeria

     52.1     63.6     100

Gulf of Mexico

     26.1     14.3     —    

Brazil

     21.8     22.1     —    
Investment In and Notes Receivable from Joint Venture (Tables)
Summarized Consolidated Results of Operations

Summarized TPDI consolidated results of operations are as follows:

 

     For the Three
Months Ended
March 31, 2011
 
     (in thousands)  

Operating revenues

   $ 90,414  

Operating expenses

     35,492  
  

 

 

 

Operating income

     54,922  

Interest expense, net

     (13,958 )

Other expense

     (99 )
  

 

 

 

Income before income taxes

     40,865  

Income tax expense

     4,166  
  

 

 

 

Net income

   $ 36,699  
  

 

 

 
Nature of Business - Additional Information (Detail)
12 Months Ended
Dec. 31, 2013
Vessel
Organization, Consolidation and Presentation of Financial Statements Disclosure [Line Items]
 
Number of drillships operated under customer contracts
Asset under Construction
 
Organization, Consolidation and Presentation of Financial Statements Disclosure [Line Items]
 
Number of drillships
Customer Contracts
 
Organization, Consolidation and Presentation of Financial Statements Disclosure [Line Items]
 
Number of drillships
Significant Accounting Policies - Additional Information (Detail) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2013
Pacific International Drilling West Africa Limited
Dec. 31, 2013
Pacific International Drilling West Africa Limited
Derotech Offshore Services Limited
Mar. 30, 2011
Transocean Pacific Drilling Inc
Predecessor
Dec. 31, 2007
Transocean Pacific Drilling Inc
Predecessor
Accounting Policies [Line Items]
 
 
 
 
 
 
 
Percentage of ownership in joint venture
 
 
 
90.00% 
10.00% 
 
 
Fees incurred under marketing and logistics agreement
$ 9.4 
$ 7.0 
$ 3.1 
 
 
 
 
Allowances for excess or obsolete materials and supplies
1.1 
 
 
 
 
 
Long-lived asset impairments
 
 
 
 
Foreign exchange gains and (losses)
$ (2.1)
$ 2.4 
$ 1.4 
 
 
 
 
Percentage of ownership interest
 
 
 
 
 
50.00% 
50.00% 
Estimated Useful Lives of Property And Equipment (Detail)
12 Months Ended
Dec. 31, 2013
Drillships and Related Equipment |
Minimum
 
Property, Plant and Equipment [Line Items]
 
Property Plant and Equipment, Useful Life
15 years 
Drillships and Related Equipment |
Maximum
 
Property, Plant and Equipment [Line Items]
 
Property Plant and Equipment, Useful Life
35 years 
Other Property And Equipment |
Minimum
 
Property, Plant and Equipment [Line Items]
 
Property Plant and Equipment, Useful Life
2 years 
Other Property And Equipment |
Maximum
 
Property, Plant and Equipment [Line Items]
 
Property Plant and Equipment, Useful Life
7 years 
Property And Equipment (Detail) (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2013
Dec. 31, 2012
Property, Plant and Equipment [Line Items]
 
 
Property Plant and Equipment, Gross
$ 4,800,183 
$ 3,899,648 
Accumulated depreciation
(288,029)
(139,227)
Property and equipment, net
4,512,154 
3,760,421 
Drillships and Related Equipment
 
 
Property, Plant and Equipment [Line Items]
 
 
Property Plant and Equipment, Gross
4,020,792 
3,278,861 
Asset under Construction
 
 
Property, Plant and Equipment [Line Items]
 
 
Property Plant and Equipment, Gross
769,131 
613,762 
Other Property And Equipment
 
 
Property, Plant and Equipment [Line Items]
 
 
Property Plant and Equipment, Gross
$ 10,260 
$ 7,025 
Property and Equipment - Additional Information (Detail) (USD $)
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2011
Property, Plant and Equipment [Line Items]
 
 
 
Aggregate SHI contract purchase price of vessels under construction
$ 1,500,000,000 
 
 
Capital expenditures
876,142,000 
449,951,000 
1,539,630,000 
Anticipated installment payments for vessels under construction, 2014
756,300,000 
 
 
Anticipated installment payments for vessels under construction, 2015
336,400,000 
 
 
Capitalized interest costs
78,500,000 
33,200,000 
71,000,000 
Asset under Construction
 
 
 
Property, Plant and Equipment [Line Items]
 
 
 
Number of Vessels
 
 
First Installment
 
 
 
Property, Plant and Equipment [Line Items]
 
 
 
Capital expenditures
$ 429,200,000 
 
 
Summary of Debt (Detail) (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2012
Project Facilities Agreement
Dec. 31, 2013
2018 Senior Secured Term Loan B
Jun. 3, 2013
2018 Senior Secured Term Loan B
Dec. 31, 2013
2015 Senior Unsecured Bonds
Dec. 31, 2012
2015 Senior Unsecured Bonds
Feb. 29, 2012
2015 Senior Unsecured Bonds
Dec. 31, 2013
2017 Senior Secured Bonds
Dec. 31, 2012
2017 Senior Secured Bonds
Nov. 30, 2012
2017 Senior Secured Bonds
Dec. 31, 2013
Senior Secured Credit Facility
Dec. 31, 2013
2020 Senior Secured Notes
Jun. 3, 2013
2020 Senior Secured Notes
Debt Instrument [Line Items]