PACIFIC DRILLING S.A., 20-F filed on 2/26/2015
Annual and Transition Report (foreign private issuer)
Document and Entity Information
12 Months Ended
Dec. 31, 2014
Document And Entity Information [Abstract]
 
Document Type
20-F 
Amendment Flag
false 
Document Period End Date
Dec. 31, 2014 
Document Fiscal Year Focus
2014 
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
No 
Entity Current Reporting Status
Yes 
Entity Filer Category
Accelerated Filer 
Entity Common Stock, Shares Outstanding
215,783,524 
Consolidated Statements of Income (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Revenues
 
 
 
Contract drilling
$ 1,085,794 
$ 745,574 
$ 638,050 
Costs and expenses
 
 
 
Contract drilling
(459,617)
(337,277)
(331,495)
General and administrative expenses
(57,662)
(48,614)
(45,386)
Depreciation expense
(199,337)
(149,465)
(127,698)
Costs and Expenses
(716,616)
(535,356)
(504,579)
Loss of hire insurance recovery
23,671 
Operating income
369,178 
210,218 
157,142 
Other income (expense)
 
 
 
Costs on interest rate swap termination
(38,184)
Interest expense
(130,130)
(94,027)
(104,685)
Total interest expense
(130,130)
(132,211)
(104,685)
Costs on extinguishment of debt
(28,428)
Other income (expense)
(5,171)
(1,554)
3,245 
Income before income taxes
233,877 
48,025 
55,702 
Income tax expense
(45,620)
(22,523)
(21,713)
Net income
$ 188,257 
$ 25,502 
$ 33,989 
Earnings per common share, basic (Note 8)
$ 0.87 
$ 0.12 
$ 0.16 
Weighted-average number of common shares, basic (Note 8)
217,223 
216,964 
216,901 
Earnings per common share, diluted (Note 8)
$ 0.87 
$ 0.12 
$ 0.16 
Weighted-average number of common shares, diluted (Note 8)
217,376 
217,421 
216,903 
Consolidated Statements of Comprehensive Income (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Statement of Comprehensive Income [Abstract]
 
 
 
Net income
$ 188,257 
$ 25,502 
$ 33,989 
Other Comprehensive Income (Loss), Net of Tax [Abstract]
 
 
 
Unrecognized gain (loss) on derivative instruments
(19,385)
2,139 
(22,551)
Reclassification adjustment for loss on derivative instruments realized in net income (Note 9)
7,737 
47,720 
24,419 
Total other comprehensive income (loss)
(11,648)
49,859 
1,868 
Total comprehensive income
$ 176,609 
$ 75,361 
$ 35,857 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2014
Dec. 31, 2013
Assets:
 
 
Cash and cash equivalents
$ 167,794 
$ 204,123 
Accounts receivable
231,027 
206,078 
Materials and supplies
95,660 
65,709 
Deferred financing costs, current
14,665 
14,857 
Deferred costs, current
25,199 
48,202 
Prepaid expenses and other current assets
17,056 
13,889 
Total current assets
551,401 
552,858 
Property and equipment, net
5,431,823 
4,512,154 
Deferred financing costs
45,978 
53,300 
Other assets
48,099 
45,728 
Total assets
6,077,301 
5,164,040 
Liabilities and shareholders’ equity:
 
 
Accounts payable
40,577 
54,235 
Accrued expenses
45,963 
66,026 
Long-term debt, current
369,000 
7,500 
Accrued interest
24,534 
21,984 
Derivative liabilities, current
8,648 
4,984 
Deferred revenue, current
84,104 
96,658 
Total current liabilities
572,826 
251,387 
Long-term debt, net of current maturities
2,781,242 
2,423,337 
Deferred revenue
108,812 
88,465 
Other long-term liabilities
35,549 
927 
Total long-term liabilities
2,925,603 
2,512,729 
Commitments and contingencies
   
   
Shareholders’ equity:
 
 
Common shares, $0.01 par value per share, 5,000,000 shares authorized, 232,770 and 224,100 shares issued and 215,784 and 217,035 shares outstanding as of December 31, 2014 and December 31, 2013, respectively
2,175 
2,170 
Additional paid-in capital
2,369,432 
2,358,858 
Treasury shares, at cost
(8,240)
Accumulated other comprehensive loss
(20,205)
(8,557)
Retained earnings
235,710 
47,453 
Total shareholders’ equity
2,578,872 
2,399,924 
Total liabilities and shareholders’ equity
$ 6,077,301 
$ 5,164,040 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Per Share data, unless otherwise specified
Dec. 31, 2014
Dec. 31, 2013
Statement of Financial Position [Abstract]
 
 
Common shares, par value
$ 0.01 
$ 0.01 
Common shares, shares authorized
5,000,000 
5,000,000 
Common shares, shares issued
232,770 
224,100 
Common shares, shares outstanding
215,784 
217,035 
Consolidated Statements of Shareholders' Equity (USD $)
In Thousands, unless otherwise specified
Total
Common Shares
Treasury Shares, At Cost
Additional Paid-In Capital
Accumulated Other Comprehensive Loss
Retained Earnings (Accumulated Deficit)
Beginning Balance at Dec. 31, 2011
$ 2,274,073 
$ 2,169 
$ 0 
$ 2,344,226 
$ (60,284)
$ (12,038)
Beginning Balance (in shares) at Dec. 31, 2011
 
216,900 
7,200 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
Shares issued under share-based compensation plan (in shares)
 
(2)
 
 
 
Shares issued under share-based compensation plan
 
 
 
Share-based compensation
5,318 
 
 
5,318 
 
 
Other comprehensive income (loss)
1,868 
 
 
 
1,868 
 
Net income
33,989 
 
 
 
 
33,989 
Ending Balance at Dec. 31, 2012
2,315,248 
2,169 
2,349,544 
(58,416)
21,951 
Ending Balance (in shares) at Dec. 31, 2012
 
216,902 
7,198 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
Shares issued under share-based compensation plan (in shares)
 
133 
(133)
 
 
 
Shares issued under share-based compensation plan
 
(1)
 
 
Share-based compensation
9,315 
 
 
9,315 
 
 
Other comprehensive income (loss)
49,859 
 
 
 
49,859 
 
Net income
25,502 
 
 
 
 
25,502 
Ending Balance at Dec. 31, 2013
2,399,924 
2,170 
2,358,858 
(8,557)
47,453 
Ending Balance (in shares) at Dec. 31, 2013
 
217,035 
7,065 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
Shares issued under share-based compensation plan (in shares)
 
418 
(418)
 
 
 
Shares issued under share-based compensation plan
95 
 
90 
 
 
Issuance of common shares to treasury (in shares)
 
 
8,670 
 
 
 
Stock repurchase under share repurchase program (in shares)
 
(1,669)
1,669 
 
 
 
Stock repurchase under share repurchase program, value
(8,240)
 
(8,240)
 
 
 
Share-based compensation
10,484 
 
 
10,484 
 
 
Other comprehensive income (loss)
(11,648)
 
 
 
(11,648)
 
Net income
188,257 
 
 
 
 
188,257 
Ending Balance at Dec. 31, 2014
$ 2,578,872 
$ 2,175 
$ (8,240)
$ 2,369,432 
$ (20,205)
$ 235,710 
Ending Balance (in shares) at Dec. 31, 2014
 
215,784 
16,986 
 
 
 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Cash flow from operating activities:
 
 
 
Net income
$ 188,257 
$ 25,502 
$ 33,989 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation expense
199,337 
149,465 
127,698 
Amortization of deferred revenue
(109,208)
(72,515)
(95,750)
Amortization of deferred costs
51,173 
39,479 
70,660 
Amortization of deferred financing costs
10,416 
10,106 
13,926 
Amortization of debt discount
817 
445 
Write-off of unamortized deferred financing costs
27,644 
Costs on interest rate swap termination
38,184 
Deferred income taxes
18,661 
(3,119)
(3,766)
Share-based compensation expense
10,484 
9,315 
5,318 
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(24,949)
(53,779)
(89,721)
Materials and supplies
(29,951)
(16,083)
(6,640)
Prepaid expenses and other assets
(56,493)
(30,840)
(61,548)
Accounts payable and accrued expenses
20,865 
12,301 
33,865 
Deferred revenue
117,001 
94,482 
156,967 
Net cash provided by operating activities
396,410 
230,587 
184,998 
Cash flow from investing activities:
 
 
 
Capital expenditures
(1,136,205)
(876,142)
(449,951)
Decrease in restricted cash
172,184 
204,784 
Net cash used in investing activities
(1,136,205)
(703,958)
(245,167)
Cash flow from financing activities:
 
 
 
Proceeds from shares issued under share-based compensation plan
95 
Proceeds from long-term debt
760,000 
1,656,250 
797,415 
Payments on long-term debt
(41,833)
(1,480,000)
(218,750)
Payments for costs on interest rate swap termination
(41,993)
Payments for financing costs
(7,569)
(62,684)
(19,853)
Purchases of treasury shares
(7,227)
Net cash provided by financing activities
703,466 
71,573 
558,812 
Increase (decrease) in cash and cash equivalents
(36,329)
(401,798)
498,643 
Cash and cash equivalents, beginning of period
204,123 
605,921 
107,278 
Cash and cash equivalents, end of period
$ 167,794 
$ 204,123 
$ 605,921 
Nature of Business
Nature of Business
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 offshore drilling services to the oil and natural gas industry through the use of high-specification floating rigs. Our primary business is to contract our high-specification rigs, related equipment and work crews, primarily on a dayrate basis, to drill wells for our clients. As of December 31, 2014, we had a fleet of eight drillships, including one under construction at Samsung Heavy Industries (“SHI”).
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
Significant Accounting Policies
Principles of Consolidation—The consolidated financial statements include the accounts of Pacific Drilling S.A., entities that we control by ownership of a majority voting interest and entities that meet the criteria for variable interest entities for which we are deemed to be the primary beneficiary for accounting purposes. 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.
We currently are party to a Nigerian joint venture, Pacific International Drilling West Africa Limited (“PIDWAL”), with Derotech, a privately-held Nigerian registered limited liability company. In December 2014, we increased PIDWAL’s interest in rig holding subsidiaries, Pacific Bora Ltd. and Pacific Scirocco Ltd. to 50% and Derotech’s interest in PIDWAL to 51%.  A holding company, Pacific Drillship Nigeria Limited (“PDNL”), was formed under PIDWAL and our wholly owned subsidiary to hold PIDWAL’s interest in rig holding subsidiaries. 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. Likewise PIDWAL will not accrue the economic benefits of its interest in PDNL unless and until it satisfies certain outstanding obligations to us and a certain pledge is cancelled by us. We also determined that as of December 31, 2014, PIDWAL and PDNL were variable interest entities for which we were the primary beneficiary. Accordingly, we consolidated all interest of PIDWAL and PDNL and no portion of their operating results is allocated to the noncontrolling interest. See Note 14—Variable Interest Entities.
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, 2014, 2013 and 2012, we incurred fees of $16.6 million, $9.4 million and $7.0 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 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, 2014 and 2013, 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 $4.0 million and $1.1 million as of December 31, 2014 and 2013, respectively.
Property and Equipment—High-specification 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. 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

 
We review 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 steep 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 property and equipment 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 2014, 2013 and 2012, 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 2014, 2013 and 2012, total foreign exchange gains and (losses) were $(5.3) million, $(2.1) million and $2.4 million, respectively, and recorded in other income (expense) within our consolidated statements of income.
Earnings per Share—Basic earnings per common share (“EPS”) is computed by dividing the net income 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.
 
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.
Recently Issued Accounting Standards
Revenue Recognition—On May 28, 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective for the Company on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that this new standard will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method, nor have we determined the effect of the standard on our ongoing financial reporting.
Property and Equipment
Property and Equipment
Property and Equipment
Property and equipment consisted of the following:
 
 
December 31,
 
2014
 
2013
 
(in thousands)
Drillships and related equipment
$
4,892,746

 
$
4,020,792

Assets under construction
1,014,480

 
769,131

Other property and equipment
10,353

 
10,260

Property and equipment, cost
5,917,579

 
4,800,183

Accumulated depreciation
(485,756
)
 
(288,029
)
Property and equipment, net
$
5,431,823

 
$
4,512,154


On January 25, 2013, we entered into a contract for the construction of the Pacific Zonda. The SHI contract for the Pacific Zonda provides for a purchase price of approximately $517.5 million for the acquisition of the vessel, payable in installments during the construction process, of which we have made payments of approximately $181.1 million through December 31, 2014 and we anticipate making payments of approximately $336.4 million in 2015.
 
During the years ended December 31, 2014, 2013 and 2012, we capitalized interest costs of $62.1 million, $78.5 million and $33.2 million, respectively, on assets under construction.
Debt
Debt
Debt
Debt consisted of the following:
 
December 31,
 
2014
 
2013
 
(in thousands)
Due within one year:
 
 
 
2015 Senior Unsecured Bonds
$
286,500

 
$

Senior Secured Credit Facility
75,000

 

2018 Senior Secured Term Loan B
7,500

 
7,500

Total current debt
369,000

 
7,500

Long-term debt:
 
 
 
2015 Senior Unsecured Bonds
$

 
$
300,000

2017 Senior Secured Bonds
498,369

 
497,892

2018 Senior Secured Term Loan B
728,706

 
735,445

Senior Secured Credit Facility
804,167

 
140,000

2020 Senior Secured Notes
750,000

 
750,000

Total long-term debt
2,781,242

 
2,423,337

Total debt
$
3,150,242

 
$
2,430,837


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 bore interest at 8.25% and were repaid on February 23, 2015.
During the year ended December 31, 2014, we repurchased and canceled an aggregate principal amount of $13.5 million of our 2015 Senior Unsecured Bonds at an aggregate cost of $13.9 million, including accrued interest. See Note 17—Subsequent Event.
2017 Senior Secured Notes
In November 2012, Pacific Drilling V Limited (“PDV”), an indirect, wholly-owned subsidiary of the Company, and the Company, as guarantor, completed a private placement of $500.0 million in aggregate principal amount of 7.25% senior secured notes due 2017 (the “2017 Senior Secured Notes”). 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.
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, 2014, 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, 2014, 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, as amended and restated (the “SSCF”), to finance the construction, operation and other costs associated with the Pacific Sharav and the Pacific Meltem (the “SSCF Vessels”). The SSCF consists of two principal 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 of $500.0 million guaranteed by GIEK, comprised of two sub-tranches: (x) an Eksportkreditt Norge AS (“EKN”) sub-tranche of $250.0 million and (y) a bank sub-tranche of $250.0 million. The SSCF is primarily secured on a first priority basis by liens on the SSCF Vessels, and by an assignment of earnings and insurance proceeds relating thereto.
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). Undrawn commitments will terminate if not drawn before May 10, 2015.
Borrowings under the Commercial Tranche bear interest at LIBOR plus a margin of 3.5%. Borrowings under the EKN sub-tranche bear interest, at the Company’s 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 will mature on 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.
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 terms of the SSCF allow the payment of dividends or distributions to our shareholders under certain conditions more fully set forth therein, whereby we may distribute up to 50% of our net income per year, to be paid no later than the end of the following year.
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 4.50 to 1.00 on the last day of any fiscal quarter during the period from March 31, 2015 through December 31, 2015 and 4.00 to 1.00 on the last day of any fiscal quarter thereafter, (iii) a projected debt service coverage ratio for the next twelve months of at least 1.5x on March 31, 2015 and on the last day of any fiscal quarter thereafter, (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 September 30, 2015, 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, 2014, we were in compliance with all SSCF covenants.
Project Facilities Agreement Refinancing Transactions
On September 9, 2010, certain of our subsidiaries entered into a project facilities agreement to finance the costs associated with the Pacific Bora, the Pacific Mistral, the Pacific Scirocco and the Pacific Santa Ana (the “PFA”).
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, as amended (the “2013 Revolving Credit Facility”). 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 was terminated and all related collateral released (the “PFA Refinancing”).
2020 Senior Secured Notes
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, and mature on June 1, 2020.
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 2013 Revolving Credit Facility and certain future obligations (together with the 2020 Senior Secured Notes, the “Pari Passu Obligations”), subject to payment priorities in favor of lenders under the 2013 Revolving Credit Facility pursuant 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”).
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 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, 2014, 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 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.
The Senior Secured Term Loan B 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.
The Senior Secured Term Loan B is secured by the Shared Collateral and subject to the terms and provisions of the Intercreditor Agreement. 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, 2014, we were in compliance with all Senior Secured Term Loan B covenants.
2013 Revolving Credit Facility
Borrowings under the 2013 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 2013 Revolving Credit Facility, as amended, permits loans to be extended up to a maximum sublimit of $300.0 million and permits letters of credit to be issued up to a maximum sublimit of $300.0 million, subject to a $500.0 million overall facility limit. Outstanding but undrawn letters of credit accrue a fee at a rate equal to the margin on LIBOR loans minus 1%. The 2013 Revolving Credit Facility has a maturity date of June 3, 2018.
The 2013 Revolving Credit Facility is secured by the Shared Collateral and subject to the provisions of the Intercreditor Agreement.
As of December 31, 2014, no amounts were outstanding under the 2013 Revolving Credit Facility and approximately $100.7 million of letters of credit were issued under the 2013 Revolving Credit Facility as credit support for temporary import bonds issued in favor of the Government of Nigeria Customs Service.
Borrowings under the 2013 Revolving Credit Facility may be prepaid, and commitments under the 2013 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 2013 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 2013 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 2013 Revolving Credit Facility also requires the Company to maintain (i) a leverage ratio (adjusted net debt (excluding SSCF indebtedness prior to September 30, 2015) to adjusted EBITDA) not greater than 4.75 to 1.00, on the last day of any fiscal quarter during the period from March 31, 2015 through December 31, 2015, and 4.25 to 1.00, on the last day of any fiscal quarter thereafter; and (ii) minimum liquidity of $100.0 million (including undrawn capacity for loans under the 2013 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 2013 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 2013 Revolving Credit Facility will be subject to termination, (ii) borrowings under the 2013 Revolving Credit Facility will be subject to acceleration, and (iii) outstanding letters of credit will be subject to cash collateralization.
As of December 31, 2014, we were in compliance with all 2013 Revolving Credit Facility covenants.
2014 Revolving Credit Facility
On October 29, 2014, we entered into a new revolving credit facility with an aggregate principal amount of up to $500.0 million (the “2014 Revolving Credit Facility”), for pre-delivery, delivery and post-delivery financing of the Pacific Zonda and other general corporate purposes.
The 2014 Revolving Credit Facility provides for loans up to a maximum of $500.0 million; however, loans in excess of $350.0 million are subject to the delivery of the Pacific Zonda and the Company's entry into a satisfactory drilling contract with respect to the Pacific Zonda. A satisfactory drilling contract must provide for an initial duration of at least one year and a minimum dayrate of $425,000 or must be otherwise acceptable to the lenders.
As of December 31, 2014, no amounts were drawn under the 2014 Revolving Credit Facility. See Note 17—Subsequent Event.
Prior to delivery of the Pacific Zonda, the 2014 Revolving Credit Facility is primarily secured on a first priority basis by liens on the construction contract and refund guarantee for the Pacific Zonda and a pledge of the equity of one of the subsidiary guarantors. Upon delivery of the Pacific Zonda, the 2014 Revolving Credit Facility will be primarily secured on a first priority basis by liens on the Pacific Zonda and by assignments of earnings and insurances related thereto.
The 2014 Revolving Credit Facility has a maturity date of five years after the delivery date of the Pacific Zonda. Borrowings under the 2014 Revolving Credit Facility bear interest, at the Company’s option, at either (1) LIBOR plus a margin ranging from 1.75% to 2.5% 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 1-month LIBOR, in each case plus a margin ranging from 0.75% to 1.5% based on the Company’s leverage ratio. Undrawn commitments accrue a fee ranging from 0.5% to 0.8% per annum based on the Company’s leverage ratio. Interest is payable quarterly.
Mandatory commitment reductions under the 2014 Revolving Credit Facility are calculated on a 12 year profile and begin six months after the delivery date of the Pacific Zonda.
The 2014 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 to its shareholders (except for certain specified exceptions, including that the Company may pay dividends (as more fully described in the 2014 Revolving Credit Facility) so long as there is no default under the 2014 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) 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 2014 Revolving Credit Facility requires the Company to maintain (i) a leverage ratio (adjusted net debt (excluding SSCF indebtedness prior to September 30, 2015) to adjusted EBITDA) not greater than 4.75 to 1.00, on the last day of any fiscal quarter during the period from March 31, 2015 through December 31, 2015, and 4.25 to 1.00, on the last day of any fiscal quarter thereafter; and (ii) minimum liquidity of $100.0 million (including undrawn capacity for loans under the 2013 Revolving Credit Facility); provided that such amount shall be reduced to U.S. $50.0 million following the repayment in full of the senior secured credit facility agreement entered into by subsidiaries of the Company to finance the construction, operation and other costs associated with the drillships the Pacific Sharav and the Pacific Meltem.
The 2014 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 under the revolving credit facility agreement will be subject to termination and (ii) borrowings under the revolving credit facility will be subject to acceleration.
As of December 31, 2014, we were in compliance with all 2014 Revolving Credit Facility covenants.
Maturities of Long-Term Debt
As of December 31, 2014, the aggregate maturities of our debt, including net unamortized discounts of $4.2 million, was as follows:
 
(in thousands)
Years ending December 31,
2015
$
369,000

2016
82,500

2017
582,500

2018
791,250

2019
579,167

Thereafter
750,000

Total
$
3,154,417

Income Taxes
Income Taxes
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% that commenced January 1, 2013. For the year ended December 31, 2012, 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,
 
2014
 
2013
 
2012
 
(in thousands)
Luxembourg
$
36,783

 
$
55,904

 
$
(24,451
)
United States
3,631

 
206

 
(444
)
Other Jurisdictions
193,463

 
(8,085
)
 
80,597

Total
$
233,877

 
$
48,025

 
$
55,702


 
The components of income tax (provision) / benefit consisted of the following:
 
 
Years ended December 31,
 
2014
 
2013
 
2012
 
(in thousands)
Current income tax expense:
 
 
 
 
 
Luxembourg
$
(979
)
 
$
(816
)
 
$
(535
)
United States
(6,030
)
 
(1,885
)
 
(4,404
)
Other Foreign
(19,950
)
 
(22,941
)
 
(20,540
)
Total current
$
(26,959
)
 
$
(25,642
)
 
$
(25,479
)
Deferred tax benefit (expense):
 
 
 
 
 
Luxembourg
$
(1
)
 
$
(32
)
 
$
32

United States
4,281

 
2,053

 
4,646

Other Foreign
(22,941
)
 
1,098

 
(912
)
Total deferred
$
(18,661
)
 
$
3,119

 
$
3,766

Income tax expense
$
(45,620
)
 
$
(22,523
)
 
$
(21,713
)

A reconciliation between the Luxembourg statutory rate of 29.2% for the years ended December 31, 2014 and 2013 (and 28.8% for the year ended 2012) and our effective tax rate is as follows:
 
 
Years ended December 31,
 
2014
 
2013
 
2012
Statutory rate
29.2
 %
 
29.2
 %
 
28.8
%
Effect of tax rates different than the Luxembourg statutory tax rate
(17.5
)%
 
27.1
 %
 
6.8
%
Change in valuation allowance
10.2
 %
 
(9.0
)%
 
3.4
%
Adjustments related to prior years
(2.4
)%
 
(0.4
)%
 
%
Effective tax rate
19.5
 %
 
46.9
 %
 
39.0
%

The components of deferred tax assets and liabilities consisted of the following:
 
 
December 31,
 
2014
 
2013
 
(in thousands)
Deferred tax assets:
 
 
 
Net operating loss carryforwards
$
33,537

 
$
26,402

Depreciation and amortization
54,815

 

Accrued payroll expenses
9,086

 
7,048

Deferred revenue
19,107

 
6,184

Other
1,187

 
13

Deferred tax assets
117,732

 
39,647

Less: valuation allowance
(78,328
)
 
(14,999
)
Total deferred tax assets
$
39,404

 
$
24,648

Deferred tax liabilities:
 
 
 
Depreciation and amortization
$

 
$
(958
)
Deferred expenses
(21,937
)
 
(12,309
)
Other
(1,220
)
 
(32
)
Total deferred tax liabilities
$
(23,157
)
 
$
(13,299
)
Net deferred tax assets
$
16,247

 
$
11,349


 
As of December 31, 2014 and 2013, the Company had gross deferred tax assets of $33.5 million and $26.4 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, 2014 and 2013, the valuation allowance for deferred tax assets was $78.3 million and $15.0 million, respectively. The increase in our valuation allowance partially 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. Additionally, we believe it is more likely than not that a tax benefit will not be realized from the excess of tax basis over book basis for certain of our drillships.
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 distributions from the unremitted earnings of these subsidiaries, we would be subject to taxes payable to various jurisdictions. At December 31, 2014, the amount of indefinitely reinvested earnings was approximately $32.9 million. If all of these indefinitely reinvested earnings were distributed, we would be subject to estimated taxes of approximately $1.6 million as of December 31, 2014.
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, 2014, we had $23.2 million of unrecognized tax benefits which was included in other long-term liabilities on our consolidated balance sheet, of which $23.2 million would impact our consolidated effective tax rate if realized. For the year ended December 31, 2014, we recognized interest and penalties of $1.0 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, 2014 and 2013 is as follows:

 
December 31,
 
2014
 
2013
 
(in thousands)
Balance, beginning of year
$
736

 
$

Increases in unrecognized tax benefits as a result of tax positions taken during prior years
3,473

 
736

Increases in unrecognized tax benefits as a result of tax positions taken during current year
19,039

 

Balance, end of year
$
23,248

 
$
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 2010 remain subject to examination. As of December 31, 2014, the Company has ongoing tax audits in Nigeria, the United States, and Brazil.
Shareholder's Equity
Shareholder's Equity
Shareholders’ Equity
On November 24, 2014, the Company’s shareholders approved a share repurchase program for the repurchase of up to 8.0 million shares through May 20, 2016. Based on this authorization, the Board of Directors authorized the commencement of the program on December 1, 2014 and repurchases of up to $30.0 million under the program.
Shares under our share repurchase program are repurchased at market price on the trade date. Repurchased shares of our common stock are held as treasury shares until they are reissued or retired. Amounts paid to reacquire these shares are shown separately as a deduction from equity on the balance sheet.
During the year ended December 31, 2014, we repurchased 1.7 million shares under our share repurchase program at an aggregate cost of $8.2 million.
As of December 31, 2014, the Company’s share capital consisted of 5.0 billion common shares authorized, $0.01 par value per share, 232.8 million common shares issued and 215.8 million common shares outstanding of which approximately 69.5% is held by Quantum Pacific (Gibraltar) Limited.
Share-Based Compensation
Share-Based Compensation
Share-Based Compensation
We recorded share-based compensation expense and related tax benefit within our consolidated statements of income as follows:
 
 
Years Ended December 31,
 
2014
 
2013
 
2012
 
(in thousands)
Contract drilling costs
$
3,131

 
$
2,087

 
$

General and administrative expenses
7,353

 
7,228

 
5,318

Share-based compensation expense
10,484

 
9,315

 
5,318

Tax benefit (a)
(2,154
)
 
(2,113
)
 
(1,360
)
Total
$
8,330

 
$
7,202

 
$
3,958

 
(a)
The effects of tax benefits from share-based compensation expense are included within income tax expense in our consolidated statements of income.
Stock Options
On March 31, 2011, 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. On March 4, 2014, the Board approved an amendment to the 2011 Stock Plan increasing the number of common shares reserved and available for issuance from 7.2 million to 15.9 million.
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.
During the years ended December 31, 2014, 2013 and 2012, the fair value of the options granted was calculated using the following weighted-average assumptions:
 
 
2014
Stock Options
 
2013
Stock Options
 
2012
Stock Options
Expected volatility
46.3
%
 
47.3
%
 
48.5
%
Expected term (in years)
6.25

 
6.25

 
6.25

Expected dividends

 

 

Risk-free interest rate
1.9
%
 
1.2
%
 
1.4
%

A summary of option activity under the 2011 Stock Plan as of and for the year ended December 31, 2014 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, 2014
5,249

 
$
9.91

 
 
 
 
Granted
493

 
10.81

 
 
 
 
Exercised
(84
)
 
10.01

 
 
 
 
Cancelled or forfeited
(629
)
 
9.89

 
 
 
 
Outstanding — December 31, 2014
5,029

 
$
10.00

 
7.4
 
$

Exercisable — December 31, 2014
2,904

 
$
9.97

 
6.0
 
$


 The weighted-average grant date fair value of options granted during the years ended December 31, 2014, 2013 and 2012 was $5.10, $4.46 and $4.85, respectively.
There were 0.1 million options exercised during the year ended December 31, 2014, and no options exercised during the years ended December 31, 2013 and 2012. The total intrinsic value of options exercised during the year ended December 31, 2014 was $0.1 million. As of December 31, 2014, total compensation costs related to nonvested option awards not yet recognized was $6.2 million and was expected to be recognized over 2.1 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, 2014 was as follows:
 
 
Number of
Restricted Stock
Units
 
Weighted-Average
Grant-Date Fair
Value
 
(in thousands)
 
(per share)
Nonvested—January 1, 2014
1,025

 
$
9.93

Granted
1,252

 
10.06

Vested
(412
)
 
10.02

Cancelled or forfeited
(98
)
 
10.14

Nonvested—December 31, 2014
1,767

 
$
9.99


The weighted-average grant-date fair value of restricted stock units granted was $9.93 and $10.12 per share for the years
ended December 31, 2013 and 2012, respectively. The total grant-date fair value of the restricted stock units vested was $4.1 million, $1.7 million and $0 for the years ended December 31, 2014, 2013 and 2012, respectively.
As of December 31, 2014, total compensation costs related to nonvested restricted stock units not yet recognized was $11.0 million and is expected to be recognized over a weighted-average period of 2.4 years.
Earnings per Share
Earnings per Share
Earnings per Share
The following reflects the income and the share data used in the basic and diluted EPS computations:
 
 
Years Ended December 31,
 
2014
 
2013
 
2012
 
(in thousands, except per share amounts)
Numerator:
 
 
 
 
 
Net income, basic and diluted
$
188,257

 
$
25,502

 
$
33,989

Denominator:
 
 
 
 
 
Weighted-average number of common shares outstanding, basic
217,223

 
216,964

 
216,901

Effect of share-based compensation awards
153

 
457

 
2

Weighted-average number of common shares outstanding, diluted
217,376

 
217,421

 
216,903

Earnings per share:
 
 
 
 
 
Basic
$
0.87

 
$
0.12

 
$
0.16

Diluted
$
0.87

 
$
0.12

 
$
0.16


 
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,
 
2014
 
2013
 
2012
 
(in thousands)
Share-based compensation awards
6,196

 
5,817

 
4,263

Derivatives
Derivatives
Derivatives
We are currently exposed to market risk from changes in interest rates and foreign exchange 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 and foreign exchange 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.
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.
On December 17, 2014, we entered into a series of foreign currency forward contracts with a bank as a cash flow hedge against future exchange rate fluctuations in Euro. We used the forward contracts to hedge Euro payments for forecasted capital expenditures. The forward contracts have an aggregate notional value of €18.5 million with settlement dates of December 15, 2015, January 15, 2016 and December 15, 2016. Upon each settlement, we pay US Dollars and receive Euros at forward rates ranging from $1.25 to $1.27.
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
 
2014
 
2013
 
 
 
 
(in thousands)
Long-term—Interest rate swaps
 
Other assets
 
$
5,601

 
$
9,726

Short-term—Interest rate swaps
 
Derivative liabilities, current
 
(8,381
)
 
(4,984
)
Short-term—Foreign currency forward contracts
 
Derivative liabilities, current
 
(267
)
 

Long-term—Foreign currency forward contracts
 
Other long-term liabilities
 
(296
)
 

Total
 
 
 
$
(3,343
)
 
$
4,742


We have elected to not offset the fair value of derivatives subject to master netting agreements, but report them gross on our consolidated balance sheets.
The following table summarizes the cash flow hedge gains and losses: 
Derivatives in Cash Flow
Hedging Relationships
 
Gain (Loss) Recognized
in Other Comprehensive Income ("OCI") for the Years Ended
December 31,
 
Loss Reclassified
from Accumulated OCI into
Income for the Years Ended
December 31,
 
Gain (Loss) Recognized in Income
(Ineffective Portion and Amount
Excluded from Effectiveness
Testing) for the Years ended
December 31,
 
2014
 
2013
 
2012
 
2014
 
2013
 
2012
 
2014
 
2013
 
2012
 
 
(in thousands)
Interest rate swaps
 
$
(11,085
)
 
$
49,859

 
$
1,868

 
$
7,737

 
$
47,720

 
$
24,419

 
$

 
$

 
$

Foreign currency forward contracts
 
$
(563
)
 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$


During the years ended December 31, 2014, 2013 and 2012, we reclassified $7.0 million, $47.1 million and $23.9 million to interest expense and $0.8 million, $0.6 million and $0.5 million to depreciation from accumulated other comprehensive income, respectively.
As of December 31, 2014, 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 $9.2 million.
Fair Value Measurements
Fair Value Measurements
Fair Value Measurements
We estimated fair value by using appropriate valuation methodologies and information available to management as of December 31, 2014 and 2013. 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,
 
2014
 
2013
 
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
 
(in thousands)
2015 Senior Unsecured Bonds
$
286,500

 
$
284,351

 
$
300,000

 
$
313,500

2017 Senior Secured Bonds
498,369

 
447,500

 
497,892

 
540,000

2020 Senior Secured Notes
750,000

 
600,000

 
750,000

 
756,563

2018 Senior Secured Term Loan B
736,206

 
614,551

 
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, 2014
 
 
 
Fair Value Measurements Using
 
Carrying Value
 
Level 1
 
Level 2
 
Level 3
 
(in thousands)
Assets:
 
 
 
 
 
 
 
Interest rate swaps
$
5,601

 

 
$
5,601

 

Liabilities:
 
 
 
 
 
 
 
Interest rate swaps
$
(8,381
)
 

 
$
(8,381
)
 

Foreign currency forward contracts
$
(563
)
 

 
$
(563
)
 

 
 
 
 
 
 
 
 
 
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
)
 


We used an income approach to value assets and liabilities for outstanding interest rate swaps and foreign currency forward contracts. 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 and forward 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
Commitments and Contingencies
Operating Leases—The Company leases office space in countries in which it operates. As of December 31, 2014, 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,
 
2015
$
2,389

2016
2,294

2017
2,212

2018
2,127

2019
2,083

Thereafter
10,223

Total future minimum lease payments
$
21,328


During the years ended December 31, 2014, 2013 and 2012, rent expense was $4.5 million, $2.0 million and $1.7 million, respectively. 
Commitments—As of December 31, 2014, and 2013, Pacific Drilling had no material commitments other than the high-specification drillship construction purchase commitments discussed in Note 3.
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 activities and existing credit facilities will provide sufficient liquidity over the next twelve months to fund our working capital needs, scheduled payments on our long-term debt and capital expenditures.
Letters of Credit—As of December 31, 2014, we were contingently liable under certain performance, bid and custom bonds and letters of credit totaling approximately $258.1 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 subsequently filed an Amended Complaint against us on May 13, 2013. In its Amended Complaint, Transocean seeks relief in the form of a permanent injunction, compensatory damages, enhanced damages, court costs and fees. On May 31, 2013, we filed our Answer to the Amended Complaint and our Counterclaims seeking Declaratory Judgments that we do not infringe the asserted Transocean patents and that such patents are invalid and unenforceable. On April 15, 2014, the Court held a claim construction hearing, and the parties are awaiting the Court’s claim construction order. The remaining case deadlines are calculated as a number of weeks after the Court’s issuance of the claim construction order. 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 position, results of operations or cash flows.
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. 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 of loss of hire insurance recovery recognized during the year ended December 31, 2012. During the years ended December 31, 2014 and December 31, 2013, there was no loss of hire insurance recovery.
Concentrations of Credit and Market Risk
Concentrations of Credit and Market Risk
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, 2014, 2013 and 2012, the percentage of revenues earned from our clients was as follows:
 
 
Years Ended December 31,
 
2014
 
2013
 
2012
Chevron
67.4
%
 
55.6
%
 
45.0
%
Total
17.3
%
 
22.6
%
 
32.9
%
Petrobras
15.3
%
 
21.8
%
 
22.1
%
Segments and Geographic Areas
Segments and Geographic Areas
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, 2014, 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 and the Pacific Sharav were located offshore the United States. As of December 31, 2014, the Pacific Meltem was mobilizing and the Pacific Zonda was located in South Korea, where it is under construction by SHI.
During the years ended December 31, 2014, 2013 and 2012, the percentage of revenues earned by geographic area, based on drilling location, is as follows:
 
 
Years Ended December 31,
 
2014
 
2013
 
2012
Nigeria
60.2
%
 
52.1
%
 
63.6
%
Gulf of Mexico
24.5
%
 
26.1
%
 
14.3
%
Brazil
15.3
%
 
21.8
%
 
22.1
%
Variable Interest Entities
Variable Interest Entities
Variable Interest Entities

The carrying amounts associated with our consolidated variable interest entities, after eliminating the effect of intercompany transactions, were as follows:

 
December 31,
 
2014
 
(in thousands)
Assets
$
18,349

Liabilities
(10,559
)
Net carrying amount
$
7,790



PIDWAL is a joint venture formed to provide ultra-deepwater drilling services in Nigeria and to hold equity investment in PDNL. PDNL is a company owned by us and PIDWAL, formed to hold equity investment in certain of our rig-owning entities operating in Nigeria. We determined that each of these companies met the criteria of a variable interest entity for accounting purposes because its equity at risk was insufficient to permit it to carry on its activities without additional subordinated financial support from us. We also determined that we were the primary beneficiary for accounting purposes since (a) for PIDWAL, we had the power to direct the day-to-day management and operations of the entity, and for PDNL we had the power to secure and direct all its equity investment, which are the activities that most significantly impact each entity’s economic performance, and (b) we had the obligation to absorb losses or the right to receive a majority of the benefits that could be potentially significant to the variable interest entities. As a result, we consolidated PIDWAL and PDNL in our consolidated financial statements.

During the year ended December 31, 2014, we provided financial support to PIDWAL to enable it to operate as a going concern by funding its working capital via intercompany loans and payables. We also issued corporate guarantees in the amount of $157.3 million in letters of credits issued as credit support for temporary import bonds issued in favor of PIDWAL as of December 31, 2014.

During the year ended December 31, 2014, we provided financial support to PDNL to fund its equity investment in our rig-owning entities operating in Nigeria via intercompany loans. Both the equity investment and intercompany loans of PDNL are eliminated upon consolidation.
Retirement Plans
Retirement Plans
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, 2014, 2013 and 2012, our total employer contributions to both plans amounted to $6.9 million, $4.5 million and $3.7 million, respectively.
Supplemental Cash Flow Information
Supplemental Cash Flow Information
Supplemental Cash Flow Information
During the years ended December 31, 2014, 2013 and 2012, we paid $135.4 million, $87.7 million and $70.9 million of interest, net of amounts capitalized, respectively. During the years ended December 31, 2014, 2013 and 2012, we paid income taxes of $31.7 million, $22.0 million, and $19.3 million, respectively.
Within our consolidated statements of cash flows, capital expenditures represent expenditures for which cash payments were made during the period. These amounts exclude accrued capital expenditures, which are capital expenditures that were accrued but unpaid. During the years ended December 31, 2014, 2013 and 2012, changes in accrued capital expenditures were $(23.9) million, $17.3 million and $(4.0) million, respectively.
During the years ended December 31, 2014, 2013 and 2012, non-cash amortization of deferred financing costs and accretion of debt discount totaling $5.1 million, $7.1 million and $3.6 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, 2014, 2013 and 2012.
During the year ended December 31, 2014, shares bought but not yet settled under our share repurchase program totaling $1.0 million was included in the treasury shares. Accordingly, this amount is excluded from the purchases of treasury shares in our consolidated statements of cash flows for the year ended December 31, 2014.
Subsequent Event
Subsequent Event
Subsequent Event
On February 23, 2015, we repaid the remaining outstanding aggregate principal in the amount of $286.5 million and accrued interest of the 2015 Senior Unsecured Bonds as of the stated maturity date. We funded this transaction by existing cash balances and drawing on $180.0 million of the 2014 Revolving Credit Facility.
Significant Accounting Policies (Policies)
Principles of Consolidation—The consolidated financial statements include the accounts of Pacific Drilling S.A., entities that we control by ownership of a majority voting interest and entities that meet the criteria for variable interest entities for which we are deemed to be the primary beneficiary for accounting purposes. 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.
We currently are party to a Nigerian joint venture, Pacific International Drilling West Africa Limited (“PIDWAL”), with Derotech, a privately-held Nigerian registered limited liability company. In December 2014, we increased PIDWAL’s interest in rig holding subsidiaries, Pacific Bora Ltd. and Pacific Scirocco Ltd. to 50% and Derotech’s interest in PIDWAL to 51%.  A holding company, Pacific Drillship Nigeria Limited (“PDNL”), was formed under PIDWAL and our wholly owned subsidiary to hold PIDWAL’s interest in rig holding subsidiaries. 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. Likewise PIDWAL will not accrue the economic benefits of its interest in PDNL unless and until it satisfies certain outstanding obligations to us and a certain pledge is cancelled by us. We also determined that as of December 31, 2014, PIDWAL and PDNL were variable interest entities for which we were the primary beneficiary. Accordingly, we consolidated all interest of PIDWAL and PDNL and no portion of their operating results is allocated to the noncontrolling interest. See Note 14—Variable Interest Entities.
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, 2014, 2013 and 2012, we incurred fees of $16.6 million, $9.4 million and $7.0 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 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, 2014 and 2013, 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 $4.0 million and $1.1 million as of December 31, 2014 and 2013, respectively.
Property and Equipment—High-specification 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. 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

 
We review 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 steep 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 property and equipment 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 2014, 2013 and 2012, 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 2014, 2013 and 2012, total foreign exchange gains and (losses) were $(5.3) million, $(2.1) million and $2.4 million, respectively, and recorded in other income (expense) within our consolidated statements of income.
Earnings per Share—Basic earnings per common share (“EPS”) is computed by dividing the net income 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.
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.
Recently Issued Accounting Standards
Revenue Recognition—On May 28, 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective for the Company on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that this new standard will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method, nor have we determined the effect of the standard on our ongoing financial reporting.
Significant Accounting Policies (Tables)
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 consisted of the following:
 
 
December 31,
 
2014
 
2013
 
(in thousands)
Drillships and related equipment
$
4,892,746

 
$
4,020,792

Assets under construction
1,014,480

 
769,131

Other property and equipment
10,353

 
10,260

Property and equipment, cost
5,917,579

 
4,800,183

Accumulated depreciation
(485,756
)
 
(288,029
)
Property and equipment, net
$
5,431,823

 
$
4,512,154

Property and Equipment (Tables)
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 consisted of the following:
 
 
December 31,
 
2014
 
2013
 
(in thousands)
Drillships and related equipment
$
4,892,746

 
$
4,020,792

Assets under construction
1,014,480

 
769,131

Other property and equipment
10,353

 
10,260

Property and equipment, cost
5,917,579

 
4,800,183

Accumulated depreciation
(485,756
)
 
(288,029
)
Property and equipment, net
$
5,431,823

 
$
4,512,154

Debt (Tables)
Debt consisted of the following:
 
December 31,
 
2014
 
2013
 
(in thousands)
Due within one year:
 
 
 
2015 Senior Unsecured Bonds
$
286,500

 
$

Senior Secured Credit Facility
75,000

 

2018 Senior Secured Term Loan B
7,500

 
7,500

Total current debt
369,000

 
7,500

Long-term debt:
 
 
 
2015 Senior Unsecured Bonds
$

 
$
300,000

2017 Senior Secured Bonds
498,369

 
497,892

2018 Senior Secured Term Loan B
728,706

 
735,445

Senior Secured Credit Facility
804,167

 
140,000

2020 Senior Secured Notes
750,000

 
750,000

Total long-term debt
2,781,242

 
2,423,337

Total debt
$
3,150,242

 
$
2,430,837

As of December 31, 2014, the aggregate maturities of our debt, including net unamortized discounts of $4.2 million, was as follows:
 
(in thousands)
Years ending December 31,
2015
$
369,000

2016
82,500

2017
582,500

2018
791,250

2019
579,167

Thereafter
750,000

Total
$
3,154,417

Income Taxes (Tables)
Income / (loss) before income taxes consisted of the following:
 
 
Years ended December 31,
 
2014
 
2013
 
2012
 
(in thousands)
Luxembourg
$
36,783

 
$
55,904

 
$
(24,451
)
United States
3,631

 
206

 
(444
)
Other Jurisdictions
193,463

 
(8,085
)
 
80,597

Total
$
233,877

 
$
48,025

 
$
55,702

 
The components of income tax (provision) / benefit consisted of the following:
 
 
Years ended December 31,
 
2014
 
2013
 
2012
 
(in thousands)
Current income tax expense:
 
 
 
 
 
Luxembourg
$
(979
)
 
$
(816
)
 
$
(535
)
United States
(6,030
)
 
(1,885
)
 
(4,404
)
Other Foreign
(19,950
)
 
(22,941
)
 
(20,540
)
Total current
$
(26,959
)
 
$
(25,642
)
 
$
(25,479
)
Deferred tax benefit (expense):
 
 
 
 
 
Luxembourg
$
(1
)
 
$
(32
)
 
$
32

United States
4,281

 
2,053

 
4,646

Other Foreign
(22,941
)
 
1,098

 
(912
)
Total deferred
$
(18,661
)
 
$
3,119

 
$
3,766

Income tax expense
$
(45,620
)
 
$
(22,523
)
 
$
(21,713
)
A reconciliation between the Luxembourg statutory rate of 29.2% for the years ended December 31, 2014 and 2013 (and 28.8% for the year ended 2012) and our effective tax rate is as follows:
 
 
Years ended December 31,
 
2014
 
2013
 
2012
Statutory rate
29.2
 %
 
29.2
 %
 
28.8
%
Effect of tax rates different than the Luxembourg statutory tax rate
(17.5
)%
 
27.1
 %
 
6.8
%
Change in valuation allowance
10.2
 %
 
(9.0
)%
 
3.4
%
Adjustments related to prior years
(2.4
)%
 
(0.4
)%
 
%
Effective tax rate
19.5
 %
 
46.9
 %
 
39.0
%
The components of deferred tax assets and liabilities consisted of the following:
 
 
December 31,
 
2014
 
2013
 
(in thousands)
Deferred tax assets:
 
 
 
Net operating loss carryforwards
$
33,537

 
$
26,402

Depreciation and amortization
54,815

 

Accrued payroll expenses
9,086

 
7,048

Deferred revenue
19,107

 
6,184

Other
1,187

 
13

Deferred tax assets
117,732

 
39,647

Less: valuation allowance
(78,328
)
 
(14,999
)
Total deferred tax assets
$
39,404

 
$
24,648

Deferred tax liabilities:
 
 
 
Depreciation and amortization
$

 
$
(958
)
Deferred expenses
(21,937
)
 
(12,309
)
Other
(1,220
)
 
(32
)
Total deferred tax liabilities
$
(23,157
)
 
$
(13,299
)
Net deferred tax assets
$
16,247

 
$
11,349

A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2014 and 2013 is as follows:

 
December 31,
 
2014
 
2013
 
(in thousands)
Balance, beginning of year
$
736

 
$

Increases in unrecognized tax benefits as a result of tax positions taken during prior years
3,473

 
736

Increases in unrecognized tax benefits as a result of tax positions taken during current year
19,039

 

Balance, end of year
$
23,248

 
$
736

Share-Based Compensation (Tables)
We recorded share-based compensation expense and related tax benefit within our consolidated statements of income as follows:
 
 
Years Ended December 31,
 
2014
 
2013
 
2012
 
(in thousands)
Contract drilling costs
$
3,131

 
$
2,087

 
$

General and administrative expenses
7,353

 
7,228

 
5,318

Share-based compensation expense
10,484

 
9,315

 
5,318

Tax benefit (a)
(2,154
)
 
(2,113
)
 
(1,360
)
Total
$
8,330

 
$
7,202

 
$
3,958

 
(a)
The effects of tax benefits from share-based compensation expense are included within income tax expense in our consolidated statements of income.
During the years ended December 31, 2014, 2013 and 2012, the fair value of the options granted was calculated using the following weighted-average assumptions:
 
 
2014
Stock Options
 
2013
Stock Options
 
2012
Stock Options
Expected volatility
46.3
%
 
47.3
%
 
48.5
%
Expected term (in years)
6.25

 
6.25

 
6.25

Expected dividends

 

 

Risk-free interest rate
1.9
%
 
1.2
%
 
1.4
%
A summary of option activity under the 2011 Stock Plan as of and for the year ended December 31, 2014 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, 2014
5,249

 
$
9.91

 
 
 
 
Granted
493

 
10.81

 
 
 
 
Exercised
(84
)
 
10.01

 
 
 
 
Cancelled or forfeited
(629
)
 
9.89

 
 
 
 
Outstanding — December 31, 2014
5,029

 
$
10.00

 
7.4
 
$

Exercisable — December 31, 2014
2,904

 
$
9.97

 
6.0
 
$

A summary of restricted stock units activity under the 2011 Stock Plan as of and for the year ended December 31, 2014 was as follows:
 
 
Number of
Restricted Stock
Units
 
Weighted-Average
Grant-Date Fair
Value
 
(in thousands)
 
(per share)
Nonvested—January 1, 2014
1,025

 
$
9.93

Granted
1,252

 
10.06

Vested
(412
)
 
10.02

Cancelled or forfeited
(98
)
 
10.14

Nonvested—December 31, 2014
1,767

 
$
9.99

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,
 
2014
 
2013
 
2012
 
(in thousands, except per share amounts)
Numerator:
 
 
 
 
 
Net income, basic and diluted
$
188,257

 
$
25,502

 
$
33,989

Denominator:
 
 
 
 
 
Weighted-average number of common shares outstanding, basic
217,223

 
216,964

 
216,901

Effect of share-based compensation awards
153

 
457

 
2

Weighted-average number of common shares outstanding, diluted
217,376

 
217,421

 
216,903

Earnings per share:
 
 
 
 
 
Basic
$
0.87

 
$
0.12

 
$
0.16

Diluted
$
0.87

 
$
0.12

 
$
0.16

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,
 
2014
 
2013
 
2012
 
(in thousands)
Share-based compensation awards
6,196

 
5,817

 
4,263

Derivatives (Tables)
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
 
2014
 
2013
 
 
 
 
(in thousands)
Long-term—Interest rate swaps
 
Other assets
 
$
5,601

 
$
9,726

Short-term—Interest rate swaps
 
Derivative liabilities, current
 
(8,381
)
 
(4,984
)
Short-term—Foreign currency forward contracts
 
Derivative liabilities, current
 
(267
)
 

Long-term—Foreign currency forward contracts