H O S S C I T A T I O N A N D C I T A T I O N
i g i n a l
t h e o r
t o 1 9 9 6 ,
n a m e d
F r o m 1 9 8 1
( N A S D A Q : H O S S )
t h o r o u g h b r e d s ,
i p l e C r o w n w i n n e r
c h a m p i o n
f s h o r e
O f
t e r
a f
t h e T r
i o n ,
t a t
H o r n b e c k
t s v e s s e l s
s u c h a s
i n 1 9 4 8 .
i
C i
Not all horses were born equal.
Some were born to win.
– Mark Twain
H
O
R
N
B
E
C
K
O
F
F
S
H
O
R
E
S
E
R
V
I
C
E
S
,
I
N
C
.
2
0
0
5
A
N
N
U
A
L
R
E
P
O
R
T
CLYDESDALES AT WORK AND
HOS “NEW BREED” FLEET GOING
BACK TO WORK AFTER A HURRICANE
Upon its formation in 1997, the new Hornbeck Offshore
(NYSE:HOS) continued the equine naming convention,
but switched to Clydesdales due to the much larger
size of its proprietary new generation OSVs.
103 Northpark Boulevard, Suite 300, Covington, Louisiana 70433
tel 985.727.2000 fax 985.727.2006 www.hornbeckoffshore.com
Hornbeck Offshore Services, Inc.
2005 Annual Report
14658rrdD1R1.indd 1
3/23/06 7:57:15 PM
SUMMARY FINANCIAL DATA
(In thousands, except per share data)
For years ended December 31
Revenues
Operating income
(1)
Net income (loss)
Diluted net income (loss) per share(1)
Weighted-average diluted shares outstanding
Total assets
Total long term debt
Total stockholders’ equity
Net cash provided by operations
EBITDA(2)
2005
2004
2003
$ 182,586
$ 132,261
$ 110,813
$
68,079
$
35,847
$ 37,443
$ (2,483)
$ 1.64
$ (0.13)
22,837
19,330
$
$
$
35,687
11,190
0.82
13,604
$ 796,675
$ 460,571
$ 365,242
$ 299,449
$ 225,000
$ 212,677
$ 429,495
$ 182,904
$ 112,395
$
$
75,806
97,329
$
$
21,405
59,473
$
$
25,499
54,161
SUMMARY OPERATING DATA(3)
For years ended December 31
Average number of OSVs
Average fleet capacity (deadweight tons)
Average vessel capacity (deadweight tons)
Average OSV utilization rate
Average OSV dayrate
Effective OSV dayrate
Average number of tank barges
2005
24.6
57,658
2,341
96.2%
13,413
12,903
14.6
$
$
2004
22.8
51,938
2,274
87.5%
10,154
8,885
16.0
$
$
2003
17.3
41,312
2,353
88.6%
10,940
9,693
15.9
$
$
Average barge fleet capacity (barrels)
1,072,075
1,156,330
1,145,064
Average barge size (barrels)
Average barge utilization rate
Average barge dayrate
Effective barge dayrate
71,651
87.1%
13,542
11,795
$
$
72,271
82.2%
11,620
9,552
$
$
72,082
73.6%
10,971
8,075
$
$
REVENUES
(in millions)
EBITDA(2)
(in millions)
$200
$180
$160
$140
$120
$100
$80
$60
$40
$20
$0
7-Year C A G R 4 6 %
98 99 00 01 02 03 04 05
$100
$80
$60
$40
$20
$0
7-Year C A G R 7 1 %
98 99 00 01 02 03 04 05
Barge OSV
VESSELS &
EQUIPMENT
(in millions)
$500
$400
$300
$200
$100
$0
7-Year C A G R 3 9 %
98 99 00 01 02 03 04 05
(1) Results for 2005 and 2004 include a $1.7 million ($0.05 per diluted share) and $22.4 million ($0.75 per diluted share) loss on early extinguishment of
debt related to our November 2004 bond refinancing, respectively.
(2) See our discussion of EBITDA as a non-GAAP financial measure, which includes a reconciliation to the most comparable financial measure
calculated and presented in accordance with GAAP, on page R-1 of this 2005 Annual Report (facing the inside back cover).
(3) See footnotes relating to Summar y Operating Data on page 38 of our enclosed 2005 Annual Report on Form 10-K.
CORPORATE INFORMATION
Corporate Headquarters
Hornbeck Offshore Services, Inc.
103 Northpark Boulevard, Suite 300,
Covington, Louisiana 70433
Tel 985.727.2000
Fax 985.727.2006
Internet www.hornbeckoffshore.com
Email ir@hornbeckoffshore.com
Transfer Agent and Registrar
Mellon Investor Services, LLC
480 Washington Boulevard
Jersey City, New Jersey 07310
Tel 800.635.9270
Internet www.melloninvestor.com
Email shrrelations@melloninvestors.com
Auditors
Ernst & Young LLP
New Orleans, Louisiana
Legal Counsel
Winstead Sechrest & Minick P.C.
Houston, Texas
Stock Exchange Listing
The Company’s shares of common
stock are listed on the New York
Stock Exchange (NYSE) under the
symbol “HOS.”
Financial Information
Stockholders and other interested
parties desiring information about
Hornbeck Offshore Services, Inc.
should write to the Investor Relations
Department or call 985.727.2000.
Additional information about the
Company, including its filings
with hthe Securities and Exchange
Commission, may also be obtained
without charge by visiting the
Company’s website at
www.hornbeckoffshore.com
Annual Stockholders’ Meeting
The 2006 Annual Meeting of
Stockholders will be held on Tuesday
May 2, 2006, at 9:00 a.m. (Central)
at the Company’s corporate training
room located at 103 Northpark
Boulevard, Suite 135, Covington,
Louisiana 70433
Company Overview
Headquartered in Covington, Louisiana, Hornbeck Offshore Services, Inc. (NYSE:HOS) is a leading provider of technologically
advanced, new generation offshore supply vessels primarily in the U.S. Gulf of Mexico and in select international markets,
and is a leading transporter of petroleum products through its fleet of ocean-going tugs and tank barges primarily in the
northeastern U.S. and in Puerto Rico. Hornbeck currently owns and operates a fleet of 60 vessels primarily serving the
energy industry.
Mission Statement
Our mission is to be recognized as the energy industry's marine transportation and service company of choice for our
customers, employees, and investors through innovative, high quality, value-added business solutions delivered with
enthusiasm, integrity and professionalism and with the utmost regard for the safety of individuals and the protection
of the environment.
Cautionary Statement regarding Forward-Looking Statements
This 2005 Annual Report contains forward-looking statements in which we discuss factors we believe may affect our
performance in the future. Forward-looking statements are all statements other than historical facts, such as statements
regarding assumptions, expectations, and projections about future events. Accuracy of the assumptions, expectations and
projections depend on events that change over time and thus susceptible to periodic change based on actual experience and
new developments. Although the Company believes that the assumptions, expectations and projections reflected in these
forward-looking statements are reasonable based on the information known to the Company today, the Company can give
no assurance that the assumptions, expectations and projections will prove to be correct. The Company cautions readers
that it undertakes no obligation to update or publicly release any revisions to the forward-looking statements in this 2005
Annual Report hereafter to reflect the occurrence of any events or circumstances or any changes in our assumptions,
expectations and projections, except to the extent required by applicable law. Additionally, important factors that might
cause future results to differ from these assumptions, expectations and projections include industry risks, oil and natural
gas prices, economic and political risks, weather related risks, regulatory risks, and other factors described in our most
recent Annual Report on Form 10-K filed with the Securities and Exchange Commission, a copy of which is enclosed
herewith, and in other filings.
Company Statement regarding Corporate Governance Listing Standards
As required by the New York Stock Exchange, Todd M. Hornbeck, the Company’s Chairman,
President and Chief Executive Officer certified to the Exchange on June 2, 2005, without
qualification, that he was not aware of any violation by the Company of New York Stock
Exchange corporate governance listing standards.
14658rrdD1R1.indd 2
3/24/06 5:48:27 PM
2005
Annual Report
THE BEST BLOODLINES ALWAYS PRODUCE WINNERS,
AND IN THE HANDS OF THE RIGHT PEOPLE,
CHAMPIONS EMERGE. IN THE ENERGY INDUSTRY’S
MARINE TRANSPORTATION AND SERVICE SEGMENT,
THAT CHAMPION IS HORNBECK OFFSHORE.
OUR STRATEGY, VESSELS AND PEOPLE ARE
OUR STRATEGY, VESSELS AND PEOPLE ARE
THE THINGS THAT SET US APART.
2005
Annual Report
STRATEGY
With a pedigree that dates back over 25 years,
Hornbeck Offshore has built a strategy based on an
in-depth understanding of our industry. To be sure, nobody
can control the cyclical forces that impact the oilfi eld
service market, but we can control how we position
ourselves to respond to them.
flagged new generation AHTS vessels and
a new shore based facility in Port Fourchon
to support our growing fleet of OSVs in the
Gulf of Mexico. We have also designed and
constructed, in a series of four newbuild
programs, 17 new generation OSVs and five
double-hulled tank barges substantially on
time and on budget.
As always, we will continue to evaluate and
execute strategic acquisitions where the
opportunity exists to expand our service
offerings in new or existing geographic markets
and enhance long-term customer relationships.
We will also continue to expand our fleet
through the construction of proprietary new
vessels, but only when we believe that market
THOROUGHBREDS
The Thoroughbred breed
originated in 18th century
England when English mares
were bred with Arabian
stallions to create horses
capable of covering long
distances in a short amount
of time. Having similar
characteristics, the original
Hornbeck Offshore elected
to name its OSVs for famous
champions of the breed
Meeting the needs of our customers
through existing and new technologies
We are committed to providing a
technologically advanced fleet that allows
us to offer the highest level of service while
meeting the immediate and future needs of our
customers. In our OSV segment, that means
meeting the higher capacity and performance
requirements of increasingly complex drilling
and production programs. As a result, we
have equipped our new generation OSVs,
including those planned or under construction
and conversion, with the latest technologies,
including sophisticated propulsion and cargo
handling systems, dynamic positioning
capabilities, as well as increased capacities.
In our tug and tank barge segment, we
continue to be an industry leader, delivering
quality services and meeting the requirements
of the Oil Pollution Act of 1990 (OPA 90), by
providing proprietary double-hulled tank barges
that maximize transit speed, improve cargo
throughput rates and enhance crew safety.
Expanding our fleet through newbuilds
and strategic acquisitions
Hornbeck Offshore has designed its operations
and management systems with additional
growth through new vessel construction
and acquisitions in mind. To date, we have
successfully completed and integrated multiple
acquisitions involving 17 ocean-going tugs and
13 ocean-going tank barges, two coastwise
tankers, six new generation OSVs, one new
generation fast supply vessel, two foreign-
14658rrdD2R1.indd 2
3/28/06 11:42:52 AM
2005
Annual Report
NEW SERVICE-LINE
DIVERSIFICATION
Hornbeck Offshore has recently broadened
its service offering in each segment. In
December 2005, we developed a new
market for our double-hulled tank barges
by performing well test services with the
Energy 13502 (right) for OSV customers in
the deepwater Gulf of Mexico. We also recently
secured four long-term contracts outside
of the oil service industry by successfully
demonstrating certain enhanced capabilities
of our proprietary OSVs to the U.S. military.
conditions warrant additional capacity.
Such is the case with respect to our recently
announced MPSV conversion program, second
tug and tank barge newbuild program and
fourth OSV newbuild program, all of which
are customer-driven.
Pursuing an optimal mix of long
and short-term contracts
Hornbeck Offshore will continue to seek a
balance in our portfolio of customer contracts
by entering into both long-term and spot
contracts. Long-term contracts have provided
the Company with more predictable cash flow,
which has allowed us to maintain a healthy
balance of short-term charters. This strategy
has given us the opportunity to capitalize
on increasing dayrates in favorable market
cycles, which has recently been the case in
both business segments. We typically seek to
maintain sufficient long-term contract coverage
to meet our debt service and other fixed
obligations, such as recertification related
drydocking charges.
Building on existing and developing
new customer relationships
Our success has largely been built around the
diversification of our “new breed” of vessels.
Building on our existing customer relationships
by expanding the services we offer allows us
to provide for the increasingly diverse needs
of the many oil and gas companies that require
OSVs and ocean-going tugs and tank barges
to support their operations. Recently, we were
able to develop a new market application for
our double-hulled tank barges by using them
to perform production well test services for
our OSV customers in the deepwater Gulf of
Mexico. This is an excellent example of our
ability to migrate our equipment among our
upstream and downstream customers in new
and innovative ways. Additionally, many of
our customers have expressed an interest
in chartering our vessels for international
operations. With roughly twenty percent of
our supply vessel fleet chartered for use in
foreign markets today, as well as a significant
level of in-house experience managing vessels
worldwide, we will continue to evaluate and
exploit additional international opportunities.
Optimizing tug and tank barge operations
Due to the OPA 90 phase-out requirements for
single-hulled barges, the total barrel-carrying
capacity of existing industry-wide tank vessels
is projected to decline from its current level
without a visible commensurate increase in
newbuilds or retrofittings. In response, we seek
to optimize our tug and tank barge operations
by systematically replacing our single-hulled
barge fleet and growing our market share by
introducing new, proprietary double-hulled tank
barges that typically achieve higher margins,
in accordance with customer demand. We
will also seek to maintain the supply-demand
equilibrium that has marked this segment
of the marine industry for quite some time,
thereby maximizing utilization and dayrates.
CLYDESDALES
The Clydesdale breed was
developed in Scotland
to meet the demands of
commerce for the coalfields
of Lanarkshire and for heavy
hauling on the streets of
Glasgow. Possessing much
larger vessels with greatly
increased capacities and
enhanced capabilities,
today’s Hornbeck Offshore
names its proprietary OSVs
for standouts of this durable
breed of workhorse.
14658rrdD2R1.indd 3
3/27/06 10:05:48 PM
2005
Annual Report
VESSELS
ARABIAN HORSES
Arabians were bred for
stamina, speed, loyalty
and courage. Due to their
genetic purity, they have
played a signifi cant role in
the evolution of almost every
other recognized breed.
Through the years, Hornbeck
Offshore has been a pioneer
in its industry, setting the
design standard for the next
generation of OSVs. However,
we do believe that we remain
a breed apart.
Whether through carefully selected strategic acquisitions
or the superior designs of our in-house engineering team,
the Hornbeck Offshore fl eet has been built one vessel at a time.
By listening to the needs of our customers, we are able to
provide the innovative marine solutions that allow them
to succeed in a highly complex operating environment.
Offshore Supply Vessels (OSVs)
Early on, Hornbeck Offshore recognized that the
existing fleet of conventional OSVs operating in
the Gulf of Mexico was not capable of meeting
the complex demands of deepwater, deep well
and other logistically demanding projects. So
in 1997, we began a program to construct
technologically advanced new generation OSVs
using the proprietary designs of our in-house
engineering team.
We currently own and operate a fleet of 25
new generation OSVs, for seventeen of which
we engineered and supervised construction
to meet the needs of deepwater regions and
other complex drilling projects. The quantity
of vessels, however, is only part of the story,
because we don’t claim to be the biggest,
just the best. The process always starts
with our customers.
At Hornbeck Offshore, we don’t simply build
what we think our customers want. Instead,
we involve them in the process, asking them
what they need, what they don’t need and
what they might like to have. We then engage
our in-house engineering team and utilize their
high level of industry operating experience to
design vessels for specific purposes. The team
then translates their unique skills into custom
marine engineering solutions for our customers.
The results have been impressive.
Our proprietary OSVs have up to three times
the dry bulk capacity, two to ten times the
liquid mud capacity and two to four times the
deck tonnage compared to conventional 180’
OSVs. The advanced cargo handling systems
of our proprietary OSVs are equally impressive,
as they allow dry bulk and liquid cargos to
be loaded and unloaded three times faster
than conventional 180’ OSVs. The solid-state
controls of their engines also typically result
in twenty percent greater fuel efficiency than
vessels powered by conventional engines.
The young age of our fleet has also contributed
to our success. While the industry-average age
for conventional 180’ OSVs is approximately
26 years, the average age of our OSV fleet is
about six years. This represents a considerable
advantage since newer vessels generally
experience less down time and require
significantly less maintenance compared to
older vessels. Additionally, the costs associated
with scheduled drydockings for recertification
are greatly reduced with newer vessels.
14658rrdD2R1.indd 4
3/28/06 11:43:58 AM
2005
Annual Report
TUGS & TANK BARGES:
A FLEET IN TRANSITION
At the end of 2004, we retired three single-
hulled tank barges from service as mandated
by OPA 90. During 2005, we more than
replaced that lost capacity with the delivery
of five newly constructed double-hulled barges.
Upon completion of our second tug and tank
barge newbuild program, 58% of our tank
barge fleet barrel-carrying capacity will be
double-hulled, up from 46% today and 7%
at the end of 2004.
Tugs and Tank Barges (TTBs)
Our offshore tug and tank barge business
complements our OSV segment by providing
additional revenue and geographic
diversification. At the same time, it allows us
to offer another line of services to integrated oil
and gas companies. Our fleet currently consists
of 14 ocean-going tugs and 18 ocean-going
tank barges that transport petroleum products
primarily within the northeastern United States
and Puerto Rico. During 2005, we took delivery
of five double-hulled tank barges under our first
tank barge newbuild program and completed
the retrofit of two 6,100 horsepower tugs. Like
our new generation OSVs, these barges are
based on the proprietary designs of our in-
house engineering team, with features designed
to maximize transit speed, improve cargo
throughput rates and enhance crew safety.
Our construction initiatives have more than
replaced the barrel-carrying capacity that was
lost when we retired three of our single-hulled
tank barges in 2004 as mandated by OPA 90.
As a large portion of nation-wide capacity
was removed from service by January 1, 2005
due to the OPA 90 mandate, supply was greatly
reduced without a commensurate reduction
in demand. Of our 12 remaining single-hulled
barges, 10 are not required to be retired or
double-hulled until 2015 and the remaining
two single-hulled barges are required to be
retired from service in 2009.
Our double-hulled tank barge mix is now roughly
half of our fleet’s barrel-carrying capacity, and
we will continue our strategy of rationalizing
new double-hulled capacity as single-hulled
vessels are retired industry-wide due to the
OPA 90 mandate. Based on the remaining
lives of the majority of our tank barge fleet
and our construction initiatives, we believe
that we are well positioned to expand our
tug and tank barge business through the
addition of new customers.
QUARTER HORSES
Named for their ability to
quickly cover one quarter of
a mile, Quarter horses were
bred to be fast, easy to work
with and capable of working
under a variety of conditions.
At Hornbeck Offshore, we
believe that we possess
these same attributes, and
that they make a difference
for our customers, day-in
and day-out.
14658rrdD2R1.indd 5
3/28/06 11:44:19 AM
2005
Annual Report
PEOPLE
In horseracing, you’re often betting on the jockey,
not the horse. At Hornbeck Offshore, our sound strategy
and technologically advanced vessels may be the most visible
marks of a champion, but it’s our people, and their ability
to successfully steer us through a challenging course,
that separate us from the fi eld.
Entrepreneurial Management
While our CEO co-founded Hornbeck Offshore
in June 1997, in a very real sense, nearly every
one of our key officers and managers has been
a “founder” within their own functional areas of
expertise. Just as we have built our fleet one
vessel at a time, we have built our team one
person at a time.
Over the years, they have been instrumental
in assembling the team that operates our
fleet of 60 vessels, and that is currently
overseeing nearly $500 million of vessel
newbuild programs here at Hornbeck Offshore.
Our technical team is comprised of individuals
with extensive experience designing and
constructing marine equipment all over the
world, with backgrounds in such diverse fields
as naval architecture, engineering, shipbuilding
and repair, project management, military
service and maritime academy training.
In the fall of 2000, on the heels of a major
private equity offering to fund our second OSV
newbuild program, Hornbeck Offshore began
the process of augmenting our team’s skill
As an example, shortly after founding the
Company, our CEO invited our current COO, who
has a unique background in naval architecture
and international vessel operations, to join him.
Together, they set out to design and build a
“new breed” of deepwater-capable OSVs to
exploit the then-emerging market for such
vessels. They also recognized that they would
need to develop the “next generation” of
mariners and managers capable of operating
these highly sophisticated new vessels.
WILLIE SHOEMAKER
Known for his uncanny ability
to get the most out of his
mounts, Willie Shoemaker
won 8,833 races over a
forty-one year career. Like
“Shoe,” Hornbeck Offshore
strives for the same
consistency of performance
by making sure that the
reins are always in the
right hands. This ensures
a smooth ride for our
customers and employees
everytime we leave the gate.
14658rrdD2R1.indd 6
3/27/06 10:06:41 PM
2005
Annual Report
THE NEXT GENERATION OF
MARINERS & MANAGERS
From the vessel’s bridge to the engine
room to the shore-based support team,
our proprietary new generation OSVs require
mariners and managers that are trained to
operate sophisticated equipment. As a result,
Hornbeck Offshore focuses its extensive
employee training programs on the latest
technologies, as well as on industry best
practices to ensure safety and efficiency
on the water and at the dock.
So, whether they captain or engineer one of
our vessels or manage one of our many shore-
based support functions -- such as operations,
business development, safety, engineering,
construction, maintenance, risk management,
human resources, purchasing, accounting,
finance, investor relations, legal or IT – we
believe that we have assembled a team that
is second to none in our industry. In short, we
are a team made up of like-minded individuals
who have been invited to play a major role in
building a state-of-the-art company from the
keel up.
Entrepreneurial Culture
Hornbeck Offshore is known for having one
of the youngest fleets of new generation
OSVs in the industry, as well as the youngest
management team. With an average of
21 years of experience in the marine
transportation and service industry, our
senior management team has demonstrated
a clear vision for knowing what it takes
to succeed in this business and then
setting a course for others to follow. All of
our management systems, as well as our
compensation philosophy, are designed to
foster an “ownership” mentality among our
employees. This approach has consistently
resulted in growth rates, margins and
financial returns well above our industry-
peer averages. Together, we have developed
an entrepreneurial culture that pervades
every aspect of our operations with an
unprecedented level of energy
and enthusiasm.
sets with the various support disciplines that
would be necessary to thrive as a publicly
traded company. To round out the rest
of our executive team, we looked first to
professionals that had advised us in the past
that we knew first hand met our standards
of character, chemistry, credentials and
competence. We then hand-selected our CFO,
CIO and General Counsel – each with their
own unique blend of skill sets and attributes
– to join us as “founders” of their respective
departments – accounting, finance, legal, and
information systems.
Today, we are well equipped to handle the
increased demands on public companies in
this post-Sarbanes-Oxley world. Our back-office
management team is comprised of individuals
with many years of experience in such
diverse fields as Big Four public accounting,
international tax consulting, investment
banking, the private practice of law, business
and information systems consulting and, of
course, the oilfield marine transportation
and service industry.
REJONEOS
For centuries, el rejoneo,
or the sport of fighting bulls
from horseback, has paired
horse and rider in a test of
skill and courage. With the
tremendous popularity of the
sport in Hispanic countries,
Hornbeck Offshore elected
to name its vessels in
Mexico and South America
after accomplished equine
participants, beginning
with the recently acquired
HOS Navegante.
14658rrdD2R1.indd 7
3/28/06 11:38:51 AM
2005
Annual Report
DEAR FELLOW STOCKHOLDERS
2005 was a record setting year for Hornbeck Offshore.
While I am pleased to report on the status of our Company,
I believe the results best speak for themselves. So before going
further, I would like to share with you the following summary
of the fi nancial results that we achieved during 2005.
• Our stock price increased 69% during 2005,
outperforming the OSX and our OSV peers, which
were up 47% and 28%, respectively.
to anticipate and meet the needs of our customers
were important components in achieving our record
setting results.
• Our average daily trading volume quadrupled, due
to an increase in our public float from 30% at our
IPO to 81% today.
• Our revenues increased 38% to $183 million on
the strength of 45% higher effective OSV dayrates
and 23% higher effective TTB dayrates.
Execution of Our Strategy
In the past year, Hornbeck Offshore was richly
rewarded for our diversified business strategy, as
both of our service lines enjoyed robust market
conditions. This resulted in dayrate and utilization
expansion in each segment, and new vessels were
placed into service in each of our fleets.
• Our operating income increased 90% to $68
million and our operating margin increased from
27% to 37% of revenues.
• Our EBITDA1 increased 65% to $97 million, and
exceeded the mid-point of our initial guidance for
the year of $73 million by 34%.
• Our net debt-to-capital ratio decreased from 50%
to 6% at year-end, primarily due to our $215
million follow-on public equity offering.
These are impressive results by any measure, but
they are even more gratifying when you consider
them in light of the great personal sacrifices that
were required by so many of our valued employees
in the wake of Hurricanes Katrina and Rita. This
was our team’s finest moment, and I am grateful
to each of them for the effort they put forth. Going
forward, that kind of effort will continue to set us
apart, and our commitment to day-to-day operations
will not waver. In 2005, the execution of our
strategy, recent expansion initiatives and our ability
Offshore Supply Vessels
Revenues from our OSV segment were $117 million
for 2005, an increase of 56% over 2004. This
increase was driven by a combination of higher
effective dayrates and the additional revenue
contribution from two new foreign-flagged AHTS
vessels that we acquired in early 2005. Operating
income from our OSV segment was $57 million, or
49% of revenues, for 2005, an increase of 116%
over 2004. With effective OSV dayrates having
increased by $4,000 per day and with so much of
our 25-vessel OSV fleet purposely on spot contracts
due to our optimistic outlook, we were able to
demonstrate the powerful operating leverage that
we enjoy in this segment. We believe that we are
in the midst of a multi-year up-cycle and that OSV
market conditions will continue to strengthen,
providing even greater opportunities for this
business segment in the years ahead.
Tugs and Tank Barges
Revenues from our TTB segment were $65 million
for 2005, an increase of 14% over 2004. This was
14658rrdD2R1.indd 8
3/28/06 11:38:33 AM
2005
Annual Report
a transition year for our TTB fleet mix with three
single-hulled tank barges having been retired at
the end of 2004 and five new double-hulled tank
barges being delivered during 2005. Operating
income from our TTB segment was $11 million, or
17% of revenues, for 2005, an increase of 17% over
2004. However, as anticipated, our fourth quarter
2005 operating margin for this segment was 29%
due to the gradual increase in our double-hulled
fleet complement throughout the year. This margin
improvement was also aided by the innovative new
use of one of our recently delivered double-hulled
barges in the deepwater well test market in the
Gulf of Mexico for our OSV customers.
General Corporate Initiatives
Timing was everything as we took advantage
of robust market conditions to recapitalize our
balance sheet by accessing the capital markets in
late September. Our $215 million follow-on public
equity offering and $75 million privately placed
“tack-on” to our existing 6.125% senior notes were
very well received in the immediate aftermath of
Hurricane Rita, resulting in excellent pricing of both
securities. These offerings dramatically enhanced
our balance sheet, driving our net debt-to-capital
ratio to a mere six percent, down from 50% at
the end of 2004. We were also able to place an
additional two million of secondary shares for one
of our early round private equity investors, which
further increased our public float. The combination
of these factors has resulted in a substantial
increase in the liquidity of our stock since the
offering closed in early October. With a $272 million
cash balance at year-end and undrawn capacity of
$60 million under our revolving credit facility, we
are well positioned with ample “dry powder” for
future growth in both of our business segments.
In addition to our two financings, we had quite a
few other corporate achievements during 2005.
We implemented a new accounting system on time
and under budget, deployed the first module of a
new logistics and revenue information system for
our TTB fleet, achieved compliance with Section
404 of Sarbanes-Oxley for our first year under that
new provision and effectively executed our disaster
recovery plan, thus minimizing downtime as a result
of Hurricanes Katrina and Rita.
our fleet capacity through 2009. These growth
initiatives include our MPSV program to convert two
sulfur tankers into the largest OSVs in the world,
as well as our fourth OSV newbuild program and our
second TTB newbuild program. It is important to
note that all of our expansion programs have been
designed to address a projected market need for
new tonnage two to three years from now, not just
because of the favorable market conditions that
we are currently experiencing. In addition, we were
recently able to develop a new market application
for our proprietary OSVs outside of the oil service
industry. After successfully demonstrating certain
enhanced capabilities of our vessels to the U.S.
military, we landed long-term contracts for all
four of our 240 ED class vessels. This prompted
us to expand our fourth OSV newbuild program
to include four incremental OSVs to replace the
vessels now serving the military. In December, we
were also able to acquire a shore base facility in
Port Fourchon, LA, which we renamed HOS Port, to
support our OSV operations in the GoM. In addition
to these programs, we will continue to actively
pursue strategic acquisitions in both fleet segments
that meet our investment parameters.
Commitment to our Mission
At Hornbeck Offshore, we never forget that we
operate in a service industry, which is why we are
so focused on meeting the needs of our customers.
Everything we do, from developing leading-edge
technologies for our fleets to hiring the best people
in the business, is driven by our goal of being the
company of choice in our industry. In doing so, we
apply the lessons we have learned in the past to
the challenges of the future. We will continue to
execute the strategies that propelled us to
success in 2005, thereby ensuring that our
customers, employees and investors remain in
the winner’s circle.
Respectfully,
Todd M. Hornbeck
Chairman, President and CEO
Hornbeck Offshore Services, Inc.
Recent Expansion Initiatives
In 2005, we announced several newbuild programs
that provide visible year-over-year increases in
1 See our discussion of EBITDA as a non-GAAP financial measure, which
includes a reconciliation to the most comparable financial measure calculated
and presented in accordance with GAAP, on page R-1 of this 2005 Annual
Report (facing the inside back cover).
RINGING THE
BELL IN 2005
Hornbeck Offshore “rang the
bell” in 2005 in more ways
than one. Todd Hornbeck
rang the closing bell at the
NYSE on September 29th to
celebrate the successful
pricing of a $286 million
follow-on equity offering.
Meanwhile, the Company
had a record setting year
by almost any measure.
14658rrdD2R1.indd 9
3/28/06 7:02:07 PM
(cid:35)(cid:79)(cid:77)(cid:80)(cid:85)(cid:84)(cid:69)(cid:82)(cid:13)(cid:66)(cid:65)(cid:83)(cid:69)(cid:68)(cid:0)(cid:86)(cid:69)(cid:83)(cid:83)(cid:69)(cid:76)(cid:0)
(cid:77)(cid:65)(cid:78)(cid:65)(cid:71)(cid:69)(cid:77)(cid:69)(cid:78)(cid:84)(cid:0)(cid:83)(cid:89)(cid:83)(cid:84)(cid:69)(cid:77)(cid:0)(cid:84)(cid:79)(cid:0)
(cid:66)(cid:69)(cid:84)(cid:84)(cid:69)(cid:82)(cid:0)(cid:77)(cid:79)(cid:78)(cid:73)(cid:84)(cid:79)(cid:82)(cid:0)(cid:69)(cid:78)(cid:71)(cid:73)(cid:78)(cid:69)(cid:0)
(cid:82)(cid:79)(cid:79)(cid:77)(cid:0)(cid:69)(cid:81)(cid:85)(cid:73)(cid:80)(cid:77)(cid:69)(cid:78)(cid:84)(cid:0)(cid:65)(cid:78)(cid:68)(cid:0)
(cid:67)(cid:65)(cid:82)(cid:71)(cid:79)(cid:0)(cid:79)(cid:80)(cid:69)(cid:82)(cid:65)(cid:84)(cid:73)(cid:79)(cid:78)(cid:83)
(cid:36)(cid:89)(cid:78)(cid:65)(cid:77)(cid:73)(cid:67)(cid:0)(cid:48)(cid:79)(cid:83)(cid:73)(cid:84)(cid:73)(cid:79)(cid:78)(cid:73)(cid:78)(cid:71)(cid:0)(cid:0)
(cid:35)(cid:76)(cid:65)(cid:83)(cid:83)(cid:0)(cid:18)(cid:0)(cid:70)(cid:79)(cid:82)(cid:0)(cid:66)(cid:69)(cid:84)(cid:84)(cid:69)(cid:82)(cid:0)(cid:0)
(cid:83)(cid:84)(cid:65)(cid:84)(cid:73)(cid:79)(cid:78)(cid:13)(cid:75)(cid:69)(cid:69)(cid:80)(cid:73)(cid:78)(cid:71)(cid:0)(cid:0)
(cid:82)(cid:69)(cid:68)(cid:85)(cid:78)(cid:68)(cid:65)(cid:78)(cid:67)(cid:89)
(cid:51)(cid:84)(cid:65)(cid:84)(cid:69)(cid:13)(cid:79)(cid:70)(cid:13)(cid:84)(cid:72)(cid:69)(cid:13)(cid:65)(cid:82)(cid:84)(cid:0)
(cid:78)(cid:65)(cid:86)(cid:73)(cid:71)(cid:65)(cid:84)(cid:73)(cid:79)(cid:78)(cid:0)(cid:65)(cid:78)(cid:68)(cid:0)
(cid:67)(cid:79)(cid:77)(cid:77)(cid:85)(cid:78)(cid:73)(cid:67)(cid:65)(cid:84)(cid:73)(cid:79)(cid:78)(cid:0)
(cid:83)(cid:85)(cid:73)(cid:84)(cid:69)
(cid:35)(cid:79)(cid:78)(cid:84)(cid:82)(cid:79)(cid:76)(cid:76)(cid:65)(cid:66)(cid:76)(cid:69)(cid:13)(cid:80)(cid:73)(cid:84)(cid:67)(cid:72)(cid:0)
(cid:80)(cid:82)(cid:79)(cid:80)(cid:69)(cid:76)(cid:76)(cid:69)(cid:82)(cid:83)(cid:0)(cid:70)(cid:79)(cid:82)(cid:0)(cid:66)(cid:69)(cid:84)(cid:84)(cid:69)(cid:82)(cid:0)(cid:0)
(cid:70)(cid:85)(cid:69)(cid:76)(cid:0)(cid:69)(cid:67)(cid:79)(cid:78)(cid:79)(cid:77)(cid:89)
(cid:48)(cid:82)(cid:79)(cid:80)(cid:82)(cid:73)(cid:69)(cid:84)(cid:65)(cid:82)(cid:89)(cid:0)(cid:76)(cid:79)(cid:87)(cid:0)(cid:82)(cid:69)(cid:83)(cid:73)(cid:83)(cid:84)(cid:65)(cid:78)(cid:67)(cid:69)(cid:0)
(cid:72)(cid:85)(cid:76)(cid:76)(cid:0)(cid:70)(cid:79)(cid:82)(cid:77)(cid:0)(cid:70)(cid:79)(cid:82)(cid:0)(cid:70)(cid:85)(cid:69)(cid:76)(cid:0)(cid:69)(cid:70)(cid:70)(cid:73)(cid:67)(cid:73)(cid:69)(cid:78)(cid:67)(cid:89)(cid:0)
(cid:65)(cid:78)(cid:68)(cid:0)(cid:66)(cid:69)(cid:84)(cid:84)(cid:69)(cid:82)(cid:0)(cid:36)(cid:48)(cid:0)(cid:67)(cid:65)(cid:80)(cid:65)(cid:66)(cid:73)(cid:76)(cid:73)(cid:84)(cid:73)(cid:69)(cid:83)
(cid:48)(cid:79)(cid:83)(cid:73)(cid:84)(cid:73)(cid:86)(cid:69)(cid:13)(cid:68)(cid:73)(cid:83)(cid:80)(cid:76)(cid:65)(cid:67)(cid:69)(cid:77)(cid:69)(cid:78)(cid:84)(cid:0)
(cid:67)(cid:65)(cid:82)(cid:71)(cid:79)(cid:0)(cid:80)(cid:85)(cid:77)(cid:80)(cid:83)(cid:0)(cid:70)(cid:79)(cid:82)(cid:0)(cid:80)(cid:82)(cid:69)(cid:68)(cid:73)(cid:67)(cid:84)(cid:65)(cid:66)(cid:76)(cid:69)(cid:0)
(cid:65)(cid:78)(cid:68)(cid:0)(cid:82)(cid:69)(cid:80)(cid:69)(cid:65)(cid:84)(cid:65)(cid:66)(cid:76)(cid:69)
(cid:80)(cid:82)(cid:79)(cid:68)(cid:85)(cid:67)(cid:84)(cid:0)(cid:68)(cid:69)(cid:76)(cid:73)(cid:86)(cid:69)(cid:82)(cid:89)
(cid:40)(cid:73)(cid:71)(cid:72)(cid:0)(cid:68)(cid:69)(cid:65)(cid:68)(cid:87)(cid:69)(cid:73)(cid:71)(cid:72)(cid:84)(cid:0)(cid:65)(cid:78)(cid:68)(cid:0)
(cid:76)(cid:65)(cid:82)(cid:71)(cid:69)(cid:0)(cid:67)(cid:76)(cid:69)(cid:65)(cid:82)(cid:0)(cid:68)(cid:69)(cid:67)(cid:75)(cid:0)(cid:70)(cid:79)(cid:82)(cid:0)
(cid:76)(cid:65)(cid:82)(cid:71)(cid:69)(cid:82)(cid:0)(cid:76)(cid:79)(cid:65)(cid:68)(cid:0)(cid:67)(cid:65)(cid:80)(cid:65)(cid:67)(cid:73)(cid:84)(cid:89)
(cid:36)(cid:73)(cid:69)(cid:83)(cid:69)(cid:76)(cid:13)(cid:69)(cid:76)(cid:69)(cid:67)(cid:84)(cid:82)(cid:73)(cid:67)(cid:0)(cid:0)
(cid:84)(cid:69)(cid:67)(cid:72)(cid:78)(cid:79)(cid:76)(cid:79)(cid:71)(cid:89)(cid:0)(cid:70)(cid:79)(cid:82)(cid:0)(cid:66)(cid:69)(cid:84)(cid:84)(cid:69)(cid:82)(cid:0)(cid:0)
(cid:80)(cid:79)(cid:87)(cid:69)(cid:82)(cid:0)(cid:77)(cid:65)(cid:78)(cid:65)(cid:71)(cid:69)(cid:77)(cid:69)(cid:78)(cid:84)
Of our 25 new generation OSVs, 17 were built in recent
years based on the proprietary designs of our in-house
engineers to service deepwater, deep-shelf, complex
drilling and speciality projects. They range in size
from 200 to 265 feet in length and all of them have
approximately two to three times the dry bulk capacity
and deck space, two to ten times the liquid mud
capacity and two to four times the deck tonnage
compared to conventional 180’ OSVs. Their advanced
cargo handling systems allow cargo to be loaded and
unloaded three times faster. Hornbeck’s new generation
OSVs aren’t just bigger, faster and more efficient.
They have state-of-the-art systems that allow them
to operate where conventional 180’ OSVs can’t.
For instance, Hornbeck OSVs operating in deepwater
have dynamic positioning systems to enable our vessels
to offer continued operation in adverse weather and
meet the customer’s operational safety requirements.
Such safety requirements often preclude conventional
OSVs from tying up to deepwater installations. These
features are major competitive advantages. But,
increasingly, our new generation OSVs are being
utilized by customers regardless of the complexity of
their drilling program. They have learned to appreciate
the benefits of a new state-of-the-art vessel versus one
that is close to the end of its useful life. We believe that
our superior vessels will command much higher dayrates
than 180’s while commodity prices remain strong and
will continue to be preferred by our customers even if
commodity prices soften.
New Generation OSVs
DRAWN BY:
HOS 265W Class
CH’KD BY:
SCALE:
DRAWING #:
Hydrafoil skegs and
proprietary high
deadweight, low
resistance hull form for
faster transit speeds
Yokohama fenders for
ship lightering work
Powerful bow thruster
for docking
assistance and
reduced outside
tug costs
All-electrical power and
pumping plant for lower
maintenance and
operating cost, better
fuel management and
operational efficiency
(cid:50)(cid:56)(cid:55)(cid:37)(cid:50)(cid:36)(cid:53)(cid:39)(cid:3)(cid:51)(cid:53)(cid:50)(cid:41)(cid:44)(cid:47)(cid:40)
Remotely-controlled
ballast system for
increased operational
flexibility
Cargo piping installed
below deck for cleaner,
safer working areas
Positive-displacement
cargo pumps ensure
predictable product
delivery rates
(cid:48)(cid:36)(cid:44)(cid:49)(cid:3)(cid:39)(cid:40)(cid:38)(cid:46)(cid:3)(cid:36)(cid:53)(cid:53)(cid:36)(cid:49)(cid:42)(cid:40)(cid:48)(cid:40)(cid:49)(cid:55)
All electric deck machinery.
No hydraulic piping on deck.
Environmentally friendly
We operate a fleet of 14 ocean-going tugs and 18
ocean-going tank barges to transport petroleum
products within the northeastern U.S., primarily New
York Harbor, and Puerto Rico. We have three additional
barges currently under construction. These vessels
transport clean and dirty petroleum products to and
from refineries and distribution terminals and provide
ship lightering, bunkering and docking services.
Due to the Oil Pollution Act of 1990 and its mandated
vessel retirement schedule, an estimated 32% of the
U.S. single-hulled tank barge supply has recently been
removed from service, with an additional 20% to be
removed by 2010. While industry newbuild and retrofit
programs are underway, it doesn’t appear that lost
capacity will be fully replaced. We expect upward
pressure on dayrates to coincide with declining
supply and stable to modestly increasing demand.
Presently, we have three double-hulled tank barges
under construction and scheduled to be delivered
throughout 2007. The construction of these barges is
based on proprietary designs developed by our in-house
engineers. The design features outlined above maximize
transit speed, improve cargo throughput rates, enhance
crew safety and are environmentally friendly.
We believe that these superior vessels will achieve
higher dayrates and operating margins, lower insurance
and operating costs and provide exceptional customer
satisfaction and employee retention.
Tugs & Tank Barges
DRAWN BY:
HOT 135 Class
CH’KD BY:
SCALE:
DRAWING #:
14658rrdD2R1.indd 11
3/27/06 10:07:52 PM
Board of directors
Todd M. Hornbeck
Chairman, President
& Chief Executive Officer
Hornbeck Offshore
Services, Inc.
Covington, Louisiana
Larry D. Hornbeck
Retired Chairman
& Chief Executive Officer
Hornbeck Offshore
Services, Inc. (1981 – 96)
Lovelady, Texas
Bruce W. Hunt 1,2,4
President
Petro-Hunt LLC
Dallas, Texas
Steven W. Krablin 2,3
Former Senior Vice President
& Chief Financial Officer
National Oilwell Varco
Spring, Texas
Patricia B. Melcher 2,3
President
Allegro Capital
Management, Inc.
Houston, Texas
1 Lead independent
director
2 Audit committee
member
3 Compensation
committee member
4 Nominating/corporate
governance committee
5 Named executive
officers
R. Clyde Parker, Jr.
Advisory Director to the
HOS Board, Shareholder
Winstead Sechrest &
Minick, P.C.
The Woodlands, TX
Bernie W. Stewart 2,3,4
Former President
R & B Falcon Drilling U.S.
Spicewood, Texas
David A. Trice 3,4
Chairman, President
& Chief Executive Officer
Newfield Exploration Co.
Houston, Texas
Andrew L. Waite 3,4
Managing Director
SCF Partners
Houston, Texas
eXecUtiVe officers5
Todd M. Hornbeck
Chairman, President
& Chief Executive Officer
Carl G. Annessa
Executive Vice President
& Chief Operating Officer
James O. Harp, Jr.
Executive Vice President
& Chief Financial Officer
Samuel A. Giberga
Senior Vice President
& General Counsel
John S. Cook
Vice President
& Chief Information Officer
14658rrdD2R1.indd 12
3/28/06 11:44:40 AM
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2005
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number 333-69826
HORNBECK OFFSHORE SERVICES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or other jurisdiction of incorporation
or organization)
72-1375844
(I.R.S. Employer
Identification Number)
4424
(Primary Standard Industrial Classification
Code Number)
103 Northpark Boulevard, Suite 300
Covington, Louisiana 70433
(985) 727-2000
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.01 par value
Name of exchange, on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes No
x
x
x
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. Yes No
x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition
x
of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer Accelerated filer Non-accelerated filer
x
The aggregate market value of the Common Stock held by non-affiliates computed by reference to the price at which the Common Stock
was last sold as of the last day of registrant's most recently completed second fiscal quarter is $310,711,654.
The number of outstanding shares of Common Stock as of January 31, 2006 is 27,154,519 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive 2006 proxy statement, anticipated to be filed with the Securities and Exchange Commission within
120 days after the close of the Registrant’s fiscal year, are incorporated by reference into Part III of this Annual Report on Form 10-K.
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
TABLE OF CONTENTS
PART I
1
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
Items 1 and 2.—Business and Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Offshore Supply Vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
Tugs and Tank Barges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Our Competitive Strengths . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Our Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Customers and Charter Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Environmental and Other Government Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Operating Hazards and Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Seasonality of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Availability of Reports, Certain Committee Charters and Other Information . . . . . . . 34
Item 3—Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Item 4—Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . 35
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Item 5—Market for the Registrant’s Common Stock and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Item 6—Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Item 7—Management’s Discussion and Analysis of Financial Condition and Results
of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Critical Accounting Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Contractual Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Recent Accounting Pronouncements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Forward-Looking Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Item 7A—Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . 59
Item 8—Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . 60
Item 9—Changes in and Disagreements with Accountants on Accounting and
PART III
Financial Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Item 9A—Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Item 9B—Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Item 10—Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . 63
Item 11—Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Item 12—Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
i
Item 13—Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . .
63
Item 14—Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . .
63
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
64
64
Item 15—Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . .
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . F-1
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-1
ii
Items 1 and 2.—Business and Properties.
PART I
Hornbeck Offshore Services, Inc. was incorporated under the laws of the State of
Delaware in 1997. In this annual report on Form 10-K, “company,” “we,” “us” and “our” refers
to Hornbeck Offshore Services, Inc. and its subsidiaries, except as otherwise indicated.
References in this annual report on Form 10-K to “OSVs” mean offshore supply vessels; to
“MPSV” means multi-purpose supply vessel; to “AHTS” mean anchor-handling towing supply;
to “deepwater” mean offshore areas, generally 1,000’ to 5,000’ in depth, and ultra-deepwater
areas, generally more than 5,000’ in depth; to “deep well” mean a well drilled to a total vertical
depth of 15,000’ or greater; and to “new generation,” when referring to OSVs, mean modern,
deepwater-capable vessels subject to the regulations promulgated under the International
Convention on Tonnage Measurement of Ships, 1969, which was adopted by the United
States and made effective for all U.S.-flagged vessels in 1992 and foreign-flagged equivalent
vessels.
General
BUSINESS
We are a leading provider of technologically advanced, new generation OSVs serving the
offshore oil and gas industry, primarily in the U.S. Gulf of Mexico and in select international
markets. The focus of our OSV business is on complex exploration and production activities,
which include deepwater, deep well and other logistically demanding projects. Such other
projects include, among others, the construction, maintenance and repair of offshore
infrastructure. We are also a leading transporter of petroleum products through our tug and
tank barge segment serving the energy industry, primarily in the northeastern United States
and Puerto Rico.
In the mid-1990s, oil and gas producers began seeking large hydrocarbon reserves at
deeper well depths using new, specialized drilling and production equipment. We recognized
that the existing fleet of conventional 180’ OSVs operating in the U.S. Gulf of Mexico was not
designed to support these more complex projects or to operate in the challenging
environments in which they were conducted. Therefore, in 1997, we began a program to
construct new generation OSVs based upon our proprietary designs. Since that time, we have
constructed 17 new generation OSVs using proprietary designs, and have expanded our fleet
with the acquisitions of a total of six additional new generation OSVs, one fast supply vessel,
two AHTS vessels, and two coastwise sulfur tankers, currently undergoing conversion into
MPSVs. Our OSV fleet is among the youngest in the industry with an average age of
approximately six years. We are the only publicly traded company with a significant fleet of
U.S.-flagged, new generation OSVs.
In September 2005, we announced our fourth OSV newbuild program, which was initially
comprised of 20,000 deadweight tons of additional fleet capacity. This program was recently
expanded by an additional 17,000 deadweight tons of capacity comprised of up to six,
purpose built, 240EDF class OSVs.
In addition, we recently acquired a shore base facility located in Port Fourchon,
Louisiana. The facility, which has been renamed HOS Port, will support our expanding OSV
1
operations in the Gulf of Mexico and customers’ logistics requirements. We are currently
developing expansion plans for the facility. Port Fourchon is a staging point for the vast
majority of deepwater and ultra-deepwater activity in the Gulf of Mexico. HOS Port will not
only support our existing OSV fleet, but will also provide a key logistics base for our HOS 370
class MPSVs once they are delivered.
Our OSVs were purposefully designed with the flexibility to meet the diverse needs of our
clients in all stages of their exploration and production activities. As a result, all of our OSVs
have enhanced capabilities that allow them to more effectively support premium drilling
equipment required for deep drilling and related specialty services. In contrast to conventional
180’ OSVs, our vessels have dynamic positioning capability, as well as greater storage and
off-loading capacity. We are capable of providing OSV services to our customers anywhere in
the world and we are actively pursuing additional contracts in select international markets.
Historically, demand for our OSV services has been primarily driven by the drilling of
deep wells, whether in the deepwater or on the U.S. Continental Shelf, and other complex
exploration and production projects that require specialized drilling and production equipment.
In addition, our new generation OSVs are increasingly in demand by our customers for
conventional drilling projects because of the ability of our OSVs to reduce overall offshore
logistics costs for the customer through the vessel’s greater capacities and operating
efficiencies. We have also observed an increased interest in the enhanced capabilities of our
OSVs by customers in non-oilfield services such as the U.S. military.
According to the Minerals Management Service, or MMS, in 2005 the deepwater region
accounted for 69% of total U.S. Gulf of Mexico oil production and 38% of total U.S. Gulf of
Mexico natural gas production, up substantially from 4% and 1%, respectively, in 1990. In
addition, the MMS estimates that deep reservoirs on the Continental Shelf may hold up to 55
tcf of undiscovered natural gas. This potential reserve base compares favorably to the current
total of approximately 26 tcf of proven natural gas reserves in the entire U.S. Gulf of Mexico.
Our new generation OSVs are also well suited for drilling in logistically demanding projects
and remote frontier areas, where support infrastructure is severely limited.
Our tug and tank barge fleet consists of 12 active ocean-going tugs and 18 active ocean-
going tank barges. During 2005, we took delivery of five double-hulled tank barges under our
first tank barge newbuild program and completed retrofitting two 6,100 horsepower tugs.
These vessels added 600,000 barrels of new double-hulled capacity, more than replacing the
barrel-carrying capacity lost when we retired three of our single-hulled tank barges from
service at the end of 2004 as mandated by OPA 90. As part of the first newbuild program, two
remaining 6,100 horsepower tugs are being retrofitted and are currently expected to be
placed in service during the late first quarter of 2006.
In September 2005, we announced a second tug and tank barge newbuild program that
is expected to add, in the aggregate, approximately 400,000 barrels of double-hulled barge
capacity and related tugs to the tug and tank barge fleet. As part of this program, we recently
executed contracts with a domestic shipyard to build three double-hulled tank barges with an
aggregate carrying capacity of 180,000 barrels. Upon completion of our second tug and tank
barge newbuild program, 58% of our tank barge fleet barrel-carrying capacity will be double-
hulled, up from 46% today and 7% at the end of 2004.
2
We believe our tug and tank barge business complements our OSV business by
providing additional revenue and geographic diversification, while allowing us to offer another
line of services to integrated oil and gas companies. We were recently able to develop a new
market for our double-hulled tank barges performing well test services for our OSV customers
in the deepwater Gulf of Mexico. Demand for our tug and tank barge services is primarily
driven by the level of refined petroleum product consumption in the northeastern United
States and Puerto Rico, our core operating markets. The Energy Information Administration,
or EIA, projects that refined petroleum product consumption in the East Coast region of the
United States will increase by an average of 1.6% per year from 2006 to 2010. Demand for
refined petroleum products is primarily driven by population growth, the strength of the U.S.
economy, seasonal weather patterns, oil prices and competition from alternate energy
sources.
Offshore Supply Vessels
The OSV Industry
OSVs primarily serve exploratory and developmental drilling rigs and production facilities
and support offshore construction and subsea maintenance activities. OSVs differ from other
types of marine vessels in their cargo carrying flexibility and capacity. In addition to
transporting deck cargo, such as pipe or drummed material and equipment, OSVs also
transport liquid mud, potable and drilling water, diesel fuel, dry bulk cement and personnel
between shore bases and offshore rigs and facilities. In general, demand for OSVs, as
evidenced by dayrates and utilization rates, is primarily related to offshore oil and natural gas
exploration, development and production activity, which in turn is influenced by a number of
factors, including oil and natural gas prices and the drilling budgets of offshore exploration
and production companies.
OSVs operate worldwide, but are generally concentrated in relatively few offshore
regions with high levels of exploration and development activity such as the Gulf of Mexico,
the North Sea, Southeast Asia, West Africa, Latin America and the Middle East. While there
is some vessel migration between regions, key factors such as mobilization costs, vessel
suitability and government statutes prohibiting foreign-flagged vessels from operating in
certain waters generally limit such migration.
The U.S. Gulf of Mexico is a critical oil and natural gas supply basin for the United States.
In response to oilfield damage from Hurricane Andrew, the MMS offered incentives, such as
deepwater royalty relief, to energy companies to explore and develop hard-to-reach areas of
the U.S. Gulf of Mexico. According to the MMS, from the first major deepwater leasing boom
in 1995 to the end of 2004, oil production grew 510 percent to 922 thousand barrels per day
and natural gas production grew 680 percent to 3.9 billion cubic feet per day.
While the shallow waters of the Continental Shelf have been actively explored for
decades, relatively few deep wells have been drilled historically due to the high cost
associated with these wells. Based on information received from our customers, the dry hole
cost of a typical Continental Shelf well drilled from 8,000’ to 12,000’ generally ranges from $4
million to $8 million, while the dry hole cost for a deep well drilled in a similar location but to
15,000’ or more can range from $10 million to $75 million. The higher costs associated with
the drilling of deep wells can be attributed to, among other things, the need for specialized,
high-end drilling rigs and related equipment, greater volumes of downhole materials such as
liquid mud, tubular products and cement, and longer drilling times.
3
Despite the higher costs associated with deep well Continental Shelf drilling, operators,
especially those in search of natural gas, have continued to demonstrate interest. This
interest is driven by, among other things, the potential for the discovery of significant natural
gas reserves. The MMS estimates that there may be up to 55 tcf of undiscovered,
conventionally recoverable, deep well natural gas on the Continental Shelf. Moreover, the
abundance of existing platforms, production facilities and pipelines on the Continental Shelf
allow new deep gas to flow quickly to market. In addition, MMS data indicates that large new
reservoirs potentially offer higher production rates at deep depths than in more mature,
shallower well areas. Furthermore, in order to stimulate drilling deeper wells in shallow water
depths, the MMS enacted royalty relief in these areas of the Continental Shelf in 2001,
expanded the program in August 2003 and again in January 2004. As recently as January
2006, the MMS offered additional relief to lessees or operators that drill wells deeper than
25,000’ total vertical depth below the ocean surface. These factors partly compensate for the
higher drilling costs of deep wells on the Continental Shelf. While overall natural gas
production from the shelf declined, from 4.8 tcf in 1997 to 3.4 tcf in 2002, leasing activity in
water depths less than 500 feet increased from a low of 160 total block leases in 1999 to 580
total block leases in 2005.
Recent discoveries of large hydrocarbon reserves in deepwater fields in the Gulf of
Mexico and at deeper well depths on the Continental Shelf have resulted in increased
developmental and exploratory drilling activities in these areas. The deepwater region of the
U.S. Gulf of Mexico is an increasingly important source of oil and natural gas production with
many unexplored areas of potential oil and natural gas reserves. According to the Deepwater
Gulf of Mexico 2005: Interim Report of 2004 Highlights, published by the MMS, there have
been over 900 exploration wells drilled in the deepwater U.S. Gulf of Mexico since 1995 with
at least 115 announced deepwater discoveries over the same time period. Twenty deepwater
discoveries have been announced in the last six years in water depths greater than 7,000
feet. Additionally, the expiration of leases with substantial reserve potential is expected to
stimulate exploration and development in the U.S. Gulf of Mexico.
Because oil and natural gas exploration, development and production costs in the
shallow well Continental Shelf market are generally lower than those in the deepwater or
deep well environments, shallow well drilling activity on the Continental Shelf is typically more
sensitive to fluctuations in commodity prices, particularly the price of natural gas. Accordingly,
actual or anticipated decreases in oil and natural gas prices generally result in reduced
offshore drilling activity and correspondingly lower demand for the conventional 180’ OSVs
serving the shallow well Continental Shelf market. This causes a corresponding decline in
OSV dayrates and utilization rates in that market. In contrast, the relatively larger capital
commitments and longer lead times and investment horizons associated with deepwater,
particularly ultra-deepwater, and deep well developments make it less likely that an operator
will abandon such projects in response to a short-term decline in oil or natural gas prices.
Dayrates and utilization rates for new generation OSVs that serve the deepwater and deep
well markets experience less volatility compared to conventional 180’ OSVs and are,
therefore, generally less sensitive to short-term commodity price fluctuations.
According to our analysis of the industry and data compiled from various industry
sources, including the U.S. Coast Guard, we estimate that as of December 31, 2005, the
U.S.-flagged OSV fleet currently in operation totals 335 vessels, substantially all of which are
located in the Gulf of Mexico. Of this total, 179, or 53%, are conventional 180’ OSVs that
4
primarily operate on the Continental Shelf. The remaining 156 vessels are U.S. flagged, new
generation OSVs, with 115 currently operating in the U.S. Gulf of Mexico. However, during
mid-2002 to mid-2004, the most recently experienced soft market in the deepwater, we
observed that these modern vessels increasingly migrated, at premium dayrates, to
conventional drilling environments, such as the U.S. Continental Shelf, Mexico and Trinidad.
Of the conventional OSV fleet, a significant number are currently cold-stacked. Vessels that
are cold-stacked have generally been removed from active service by the operator due to lack
of demand. In contrast, we believe there are no new generation OSVs currently cold-stacked.
The Market for New Generation OSVs
Complex exploration and production projects require specialized equipment and higher
volumes of supplies to meet the more difficult operating environment associated with such
offshore developments. In order to better serve these projects and meet customer demands,
new generation OSVs, including our entire OSV fleet, are designed with larger capacities,
including greater liquid mud and dry bulk cement capacities, as well as larger areas of open
deck space than conventional 180’ OSVs. These features are essential to the effective
servicing of deepwater drilling projects, which are often distant from shore-based support
infrastructure, because they allow a vessel to make fewer trips to supply the liquid mud,
drilling water, dry bulk cement and other needs of the customer. In addition, OSVs operating
in deepwater environments generally require dynamic positioning, or anchorless station-
keeping capability, primarily because customers’ safety procedures preclude OSVs from tying
up to deepwater installations, and to enable continued operation in adverse weather
conditions. We believe that conventional 180’ OSVs, substantially all of which lack dynamic
positioning capability and sufficient on-deck or below-deck cargo capacity, are not capable of
operating effectively or economically in the deepwater market. In addition, certain ports have
draft or other logistical impediments, which limit the pool of new generation vessels capable of
servicing such ports. Our proprietary vessels were designed to work under these shallow draft
and logistically demanding conditions.
The capabilities and capacities of larger new generation OSVs have resulted in average
utilization rates for these OSVs working in the U.S. Gulf of Mexico of approximately 95%
since their introduction in 1999, which spans two significant market downturns. In contrast,
the average utilization rate for the conventional 180’ OSV fleet over the same period has been
approximately 63%, not taking into account cold-stacked conventional 180’ OSVs. Additional
utilization for new generation OSVs has come from increasing demand for these vessels in
support of conventional shelf drilling projects. Moreover, during the same period, average
dayrates for new generation OSVs were generally double the average dayrates of
conventional 180’ OSVs. We believe that demand has outpaced the supply of new generation
OSVs in the U.S. Gulf of Mexico. We base our belief on the recent and expected drilling
activity in all sectors of the U.S. Gulf of Mexico and the observed departure of certain new
generation OSVs to domestic non-oilfield and foreign oilfield markets, after taking into account
vessels currently available and vessels being constructed under announced construction
plans. Furthermore, although U.S.-flagged vessels operating in overseas locations may be
remobilized to the U.S. Gulf of Mexico, historically such re-mobilization by our competitors’
vessels has been limited.
5
Our OSV Business
We currently own and operate a fleet of 25 new generation OSVs, which includes two
AHTS vessels that are primarily operating as supply vessels and for towing jack-up rigs. We
also own and operate one fast supply vessel, we own two coastwise sulfur tankers that are
currently undergoing conversion into MPSVs, and we recently acquired a logistics shore base
in Port Fourchon to support our domestic OSV needs. In a series of three newbuild programs,
we engineered and supervised the construction of 17 of our OSVs expressly to meet the
demands of deepwater regions and other complex drilling projects, based on our proprietary
designs. Drawing from the vessel operating experience of our in-house engineers, we work
closely with potential charterers to design vessels specifically to meet their anticipated needs.
This is particularly significant when the charterer will operate a project that could have a
duration of more than 20 years and require expenditures exceeding $1 billion. Our 17
proprietary OSVs have up to three times the dry bulk capacity and deck space, two to ten
times the liquid mud capacity and two to four times the deck tonnage compared to
conventional 180’ OSVs. The advanced cargo handling systems of our proprietary OSVs
allow for dry bulk and liquid cargos to be loaded and unloaded three times faster than
conventional 180’ OSVs, while the solid state controls of their engines typically result in a
20% greater fuel efficiency than vessels powered by conventional engines. In addition, our
larger classes of proprietary OSV designs, designated by us as our 240 ED and 265 classes,
were designed, in part, to supply the substantially greater liquid mud volume and other cargo
capacity required for ultra-deepwater drilling. We believe that our customers’ recognition of
the superior capabilities of our proprietary OSVs has contributed to our ability to achieve
higher dayrates and utilization rates and increased overall operating cost efficiencies than our
competitors.
All of our new generation OSVs are equipped with dynamic positioning systems and
controllable pitch thrusters, which allow our vessels to maintain position with minimal
variance, and state-of-the-art safety, emergency power, fire alarm and fire suppression
systems and systems monitoring equipment. The unique hull design and integrated rudder
and thruster system of our 17 proprietary OSVs provide for a more maneuverable vessel.
These proprietary vessels also have double-bottomed and double-sided hulls that should
minimize environmental impact in the event of vessel collisions or groundings, solid state
controls that minimize visible soot and polluting gases and zero discharge sewage and waste
systems that minimize the impact on marine environments. In addition, these 17 vessels are
either fully SOLAS (Safety of Life at Sea) certified or SOLAS ready. SOLAS is the
international convention that regulates the technical characteristics of vessels for purposes of
ensuring international standards of safety for vessels engaged in commerce between
international ports. These features allow us to market our proprietary OSVs for service in
international markets.
Our technologically advanced, new generation OSVs are also capable of providing
specialty services in support of certain of our customers, including well stimulation, remotely
operated vehicles, or ROVs, used in oilfield subsea construction and maintenance,
underwater inspections, marine seismic operations, and certain non-energy applications such
as fiber optics cable installation, military work and containerized cargo transportation.
Compared to conventional 180’ OSVs, our OSVs have more dead weight capacity, deck
space, and berthing accommodations, improved maneuverability and greater fuel efficiency.
We believe these characteristics strengthen demand for our OSVs in specialty situations. The
6
HOS Innovator currently provides ROV subsea construction and maintenance support for a
large oilfield service company. The BJ Blue Ray provides deepwater well stimulation support
services for another large oilfield service company. This vessel was the first U.S.-flagged well
stimulation vessel to receive the American Bureau of Shipping WS and DPS2 class notations.
We believe the BJ Blue Ray is one of the most technologically sophisticated well stimulation
vessels in the world. In addition to the traditional energy-related market for our OSVs, we
have experienced increased demand for specialized non-energy-related uses, which has
recently afforded us the opportunity to diversify the market for our vessels and further
tightened supply in the U.S. Gulf of Mexico.
On June 26, 2003, we acquired five 220’ new generation OSVs from Candy Marine
Investment Corporation, an affiliate of Candy Fleet Corporation, or Candy Fleet. Following the
completion in July 2003 of a private placement of our common stock and satisfaction of
certain other conditions, on August 6, 2003 we acquired an additional 220’ new generation
OSV from Candy Fleet. These six vessels complement our existing OSV fleet and have
allowed us to expand our service offerings to clients, particularly those drilling wells on the
Continental Shelf.
In May 2004, we exercised our option to purchase the HOS Hotshot, a 165’ new
generation fast supply vessel, from a domestic shipyard, after having bareboat chartered the
vessel for one-year. This vessel is currently working under a long-term contract in Mexico.
In January 2005, we acquired a new generation AHTS vessel from a private owner. This
vessel, renamed the HOS Saylor, was our first foreign-flagged vessel. In March 2005, we
acquired the HOS Navegante, the sister vessel to the HOS Saylor, from an affiliate of the
private owner from which the HOS Saylor was acquired. The HOS Navegante, which is also
foreign-flagged, was placed in service in June 2005. These strategic vessel acquisitions
complement our growing market presence in international waters. The HOS Saylor and HOS
Navegante are currently working under long-term contracts in Mexico and Trinidad,
respectively. While these vessels have anchor-handling capabilities and may be used for that
purpose, we currently are using them primarily as supply vessels and for towing jack-up rigs.
We purchased a coastwise sulfur tanker, the Energy Service 9001, formerly known as
the M/V W.K. McWilliams, Jr., from Freeport-McMoRan Sulphur in November 2001. In the
second quarter of 2005, we acquired an identical second coastwise sulfur tanker, the M/V
Benno C. Schmidt. We are converting these two vessels into 370 class MPSVs. The total
project cost to acquire and convert the two vessels is expected to be at least $65.0 million in
the aggregate. We anticipate delivery of the converted vessels during 2007. We believe that
these MPSVs will be the largest OSVs in the world, each with cargo carrying capacities of
over 10,000 deadweight tons and a minimum of 30,000 barrels of liquid mud. Each MPSV will
have nearly three times the deadweight and liquid mud capacity of one of our 265 class new
generation OSVs and more than eight times the liquid mud capacity of one of our 200 class
new generation OSVs. The MPSVs represent the culmination of a three-year effort by our
in-house engineering team to design a multi-purpose supply vessel. The resulting plan to
convert the Energy Service 9001 and the Benno Schmidt is based on recent customer
feedback and expressed demand for a larger, more versatile, DP-2 vessel capable of meeting
the evolving needs of the exploration, development and production life-cycle of an ultra-
deepwater field. The hulls of these sister vessels, which were purpose-built for the specific
gravity of molten sulfur as a cargo, make them uniquely suited to be converted into large
7
liquid mud carriers. This is especially important given the ever-increasing volumes of liquid
mud necessary to spud a deep well today, with some projects requiring as many as 100,000
barrels of drilling fluid per spud. These MPSVs will offer our customers multiple capabilities
that we believe are well beyond those of any OSV offered or under construction today. With
these MPSVs, we will have introduced a single vessel that can perform a variety of specialty
services for which customers must currently use several different types of vessels. In addition
to traditional offshore supply vessel capabilities, these MPSVs can support offshore
construction, deepwater well testing, subsea well intervention, ROV operations, pipeline
commissioning, pipe-hauling and flotel services, among others.
In September 2005, we announced our fourth OSV newbuild program under which we
initially planned to build an additional 20,000 deadweight tons of new generation OSV vessel
capacity. We recently announced plans to expand this newbuild program to include four
240EDF class OSVs that will add approximately 11,000 deadweight tons of capacity. The
240EDF class adopts our proprietary 240ED design with modifications that allow for faster
transit speeds, a feature that customers have requested, in markets that we serve. Excluding
capitalized construction period interest, the current estimated cost of our fourth OSV newbuild
program is approximately $290.0 million, in the aggregate. We are contractually committed
with a U.S. Gulf Coast shipyard for two of the four OSVs in this program and with a West
Coast shipyard for the two remaining vessels. The latter contract contains options for two
additional vessels that would add 6,000 deadweight tons of capacity. The 240EDF class
OSVs to be constructed under this newbuild program are expected to be delivered by
mid-2008, with the first vessel due in late 2007. The remaining vessels to be constructed
under our fourth OSV newbuild program, their specifications and expected delivery dates will
be finalized as certain milestones are completed, including the negotiation of shipyard
contracts. Construction costs related to this program will be funded with a portion of the
proceeds from our recent public common stock offering and concurrent private note offering
as well as from projected cash flow from operations.
In December 2005, we acquired a shore base facility, formerly known as ASCO
Magnolia, located in Port Fourchon, Louisiana for approximately $5.0 million. The facility,
which has been renamed HOS Port, will support our expanding OSV operations in the Gulf of
Mexico and customers’ logistics requirements. The facility lease has eight years remaining on
its initial term, with four additional five-year renewal periods. We are currently developing
expansion plans for the facility. This acquisition further underscores our long-term
commitment to, and continued favorable outlook for, our primary operating market. HOS Port
will not only support our existing OSV fleet, but will also provide a key logistics base for our
HOS 370 class MPSVs once they are delivered.
8
The following table provides information, as of, March 1, 2006, regarding our fleet of
vessels that serve our OSV customers.
Offshore Supply Vessels
Current
Service
Function
Built (Acquired)
Deadweight
(long tons)
Brake
Horsepower
Name
Class
Offshore Supply Vessels:
BJ Blue Ray . . . . . . . . . . . . . . 265
HOS Brimstone . . . . . . . . . . . . 265
HOS Stormridge . . . . . . . . . . . 265
HOS Sandstorm . . . . . . . . . . . 265
HOS Newbuild #1 . . . . . . . . . . 240 EDF
HOS Newbuild #2 . . . . . . . . . . 240 EDF
HOS Newbuild #3 . . . . . . . . . . 240 EDF
HOS Newbuild #4 . . . . . . . . . . 240 EDF
HOS Bluewater . . . . . . . . . . . . 240 ED
HOS Gemstone . . . . . . . . . . . 240 ED
HOS Greystone . . . . . . . . . . . 240 ED
HOS Silverstar . . . . . . . . . . . . 240 ED
HOS Innovator . . . . . . . . . . . . 240 E
HOS Dominator
. . . . . . . . . . . 240 E
HOS Deepwater . . . . . . . . . . . 240
HOS Cornerstone . . . . . . . . . . 240
HOS Explorer . . . . . . . . . . . . . 220
HOS Express . . . . . . . . . . . . . 220
HOS Pioneer . . . . . . . . . . . . . . 220
HOS Trader . . . . . . . . . . . . . . . 220
HOS Voyager . . . . . . . . . . . . . 220
HOS Mariner . . . . . . . . . . . . . . 220
HOS Crossfire . . . . . . . . . . . . . 200
HOS Super H . . . . . . . . . . . . . 200
HOS Brigadoon . . . . . . . . . . . 200
HOS Thunderfoot . . . . . . . . . . 200
HOS Dakota . . . . . . . . . . . . . . 200
Multi-Purpose Supply Vessels:
Well Stimulation Nov 2001
Jun 2002
Supply
Aug 2002
Supply
Oct 2002
Supply
TBD(1)
TBD
TBD(1)
TBD
TBD(1)
TBD
TBD(1)
TBD
Mar 2003
Military
Jun 2003
Military
Sep 2003
Military
Jan 2004
Military
ROV Support(2) Apr 2001
Feb 2002
Supply
Nov 1999
Supply
Mar 2000
Supply
Feb 1999 (Jun 2003)
Supply
Sep 1998 (Jun 2003)
Supply
Jun 2000 (Jun 2003)
Supply
Nov 1997 (Jun 2003)
Supply
May 1998 (Jun 2003)
Supply
Sep 1999 (Aug 2003)
Supply
Nov 1998
Supply
Jan 1999
Supply
Mar 1999
Supply
May 1999
Supply
Jun 1999
Supply
3,756
3,756
3,756
3,756
2,850 est.
2,850 est.
2,850 est.
2,850 est.
2,850
2,850
2,850
2,850
2,380
2,380
2,250
2,250
1,607
1,607
1,607
1,607
1,607
1,607
1,750
1,750
1,750
1,750
1,750
Energy Service 9001 . . . . . . . 370
M/V Benno C. Schmidt . . . . . . 370
Multi-Purpose
Multi-Purpose
TBD(3)
TBD(3)
10,300 est
10,300 est
Anchor-Handling Towing Supply Vessel:
HOS Saylor (4) . . . . . . . . . . . . 240
HOS Navegante (4) . . . . . . . . 240
Towing/Supply
Towing/Supply
Oct 1999 (Jan 2005)
Jan 2000 (Mar 2005)
3,322
3,322
Fast Supply Vessel:
HOS Hotshot . . . . . . . . . . . . . . 165
Fast Supply
Apr 2003 (May 2004)
260
6,200
TBD—to be determined
(1) HOS Newbuild #1 and HOS Newbuild #2 are two 240 EDF class OSVs currently under construction at a Gulf Coast shipyard and HOS
Newbuild #3 and HOS Newbuild #4 are two 240EDF class OSVs currently under construction at a West Coast shipyard, with anticipated
delivery from late 2007 through mid-2008.
(2) The term “ROV” means remotely operated vehicle.
(3) These two coastwise sulfur tankers, which will be renamed later, are currently being converted into 370 class MPSVs and are expected to be
placed in service during 2007
(4) We acquired the HOS Saylor and the HOS Navegante, each a foreign-flagged vessel, in the first quarter of 2005. We are currently using the
HOS Saylor and HOS Navegante primarily for their OSV capabilities and for towing jack-up rigs.
9
6,700
6,700
6,700
6,700
6,000 est.
6,000 est.
6,000 est.
6,000 est.
4,000
4,000
4,000
4,000
4,500
4,500
4,500
4,500
3,900
3,900
4,200
3,900
3,900
3,900
4,000
4,000
4,000
4,000
4,000
TBD
TBD
8,000
7,845
We have designed and constructed five distinct classes of proprietary OSVs and added a
sixth class, through the acquisitions of six OSVs from Candy Fleet, to meet the diverse needs
of the offshore oil and gas industry. The following table provides a comparison of certain
specifications and capabilities of our new generation OSVs to conventional 180’ OSVs.
Our Proprietary Design OSV Classes(1)
Acquired
OSVs
Conventional
180’ OSV(2)
200
240
240 E
240 ED
265
220(3)
Size
. . . . . .
Class length overall (ft.)
Breadth (ft.)
. . . . . . . . . . . . . . . .
Depth (ft.) . . . . . . . . . . . . . . . . . .
. . . . . . . . . .
Maximum draft (ft.)
Deadweight (long tons) . . . . . . .
Clear deck area (sq. ft.) . . . . . . .
Capacity
Fuel capacity (gallons)
Fuel pumping rate (gallons per
. . . . . . .
minute) . . . . . . . . . . . . . . . . . .
Drill water capacity (gallons) . . .
Dry bulk capacity (cu. ft.)
. . . . .
Liquid mud capacity
180
40
14
12
950
3,450
200
54
18
13
1,750
6,580
240
54
18
13
2,250
8,836
240
54
18
13
2,380
8,100
240
54
20
14.5
2,850
8,100
265
60
22
16
3,756
9,212
220
46
17
13.7
1,607
5,472
79,400
90,000
151,800
135,100
104,210
151,800 114,490
275
120,000
4,000
550
240,000
7,000
550
240,000
8,400
550
240,000
8,400
550
311,000
6,000
500
413,000
10,800
380
99,000
8,040
(barrels)
. . . . . . . . . . . . . . . . .
1,200
3,640
6,475
6,475
8,300
10,500
2,955
Liquid mud pumping rate
(gallons per minute) . . . . . . . .
250
500
1,000
1,000
1,000
1,000
1,200
Potable water capacity
(gallons) . . . . . . . . . . . . . . . . .
Machinery
. . .
Main engines (horsepower)
Auxiliaries (number)
. . . . . . . . .
Total rating (kw) . . . . . . . . . . . . .
Bow thruster (horsepower) . . . .
Type of Pitch . . . . . . . . . . . . . . .
Stern thruster (horsepower) . . .
Type of Pitch . . . . . . . . . . . . . . .
Fire fighting (gallons per
minute) . . . . . . . . . . . . . . . . . .
Dynamic positioning(4) . . . . . . .
Crew Requirements
11,500
52,200
52,200
52,200
30,400
20,430
26,800
2,250
2
200
325
Fixed
None
4,000
3
750
800
6,700
3
860
2,400
Controllable Controllable Controllable Controllable Controllable
1,600
— Controllable Controllable Controllable Controllable Controllable
4,000
3
750
1,600
4,000
3
750
1,600
4,000
3
750
1,600
300
300
800
800
3,900
2
250
530
Fixed
300
Fixed
None
None
1,250
DP0,1
2,700
DP1
2,700
DP2
2,700
DP2
2,700
DP2,3
2,600
DP0,1
Number of personnel(5) . . . . . .
5
6
6
7
7
8
6
(1) We now have two additional new proprietary classes of OSVs under construction or conversion.
(2) Statistics are for a typical 180’ class vessel. Actual specifications and capabilities may vary slightly from vessel to vessel.
(3) Excludes the HOS Saylor and the HOS Navegante, which are foreign-flagged AHTS vessels, and the HOS Hotshot, which is a fast supply
vessel.
(4) Dynamic positioning permits a vessel to maintain position without the use of anchors. The numbers “0,” “1,” “2” and “3” refer to increasing
levels of technical sophistication and system redundancy features.
(5) Regulatory manning requirements; depending on the services provided, operators may man vessels with more crew than required by
regulations.
Additional information with respect to our OSV segment can be found in Note 14 of our
consolidated financial statements.
Tugs and Tank Barges
The Tug and Tank Barge Industry
Introduction. The domestic tank barge industry provides marine transportation of crude
oil, petroleum products and petrochemicals by tug and tank barge, and is a critical link in the
10
U.S. petroleum distribution chain. Petroleum products are transported in the northeastern
United States through a vast network of terminals, tankers and pipelines. We believe, based
upon our analysis of the industry, that in the northeastern United States over 370 million
barrels of petroleum products are transported annually by tank barges. Additionally, the EIA
estimates that Puerto Rico, our other core area of operation, consumes 218 thousand barrels
of oil daily, approximately 80 million annually. Since Puerto Rico relies on imports to meet its
energy needs, petroleum products are delivered by tank barge for transportation and electric
power generation.
Demand for tug and tank barge services in the northeastern United States is primarily
driven by population growth, the strength of the U.S. economy, seasonal weather patterns, oil
prices and competition from alternate energy sources. According to the EIA, demand for
petroleum products in the northeastern United States is expected to increase approximately
1.6% annually through 2010, which we believe will generate steadily increasing demand for
the tank barge industry.
The largest tank barge market in the northeastern United States is New York Harbor.
Imported petroleum products are primarily delivered to New York Harbor as it has the
capacity to receive products in cargo lots of 50,000 tons or more per tanker. By contrast, draft
limitations in most New England ports and drawbridge limitations in Boston and Portland,
Maine limit the average cargo carrying capacity of direct imports into many of the largest New
England ports to about 30,000 tons per tanker. As a result, ships importing directly into New
England must frequently discharge in multiple ports or terminals or transfer cargos to tank
barges. As existing single-hulled tankers are retired due to age or as mandated under OPA
90, they are typically replaced by larger tankers. These larger-sized tankers are being built to
facilitate the importation of crude oil and petroleum products into the United States. According
to the EIA, over the last 20 years, importation of crude oil to the Northeast has grown at a
compounded annual rate of 2.6% while the volume of imported crude oil and petroleum
products is expected to grow at a compound annual rate of 2.4% through 2025.
As larger petroleum tankers are being built, we believe that direct delivery into New York
Harbor will generate increased tank barge demand for lightering services and further
shipment to New England, the Hudson River and Long Island.
11
Oil Pollution Act of 1990. OPA 90 mandates that all single-hulled tank vessels operating
in U.S. waters be removed from service according to a set time schedule. Data provided by a
U.S. Coast Guard report dated September 2001 indicates that 5.5 million barrels of single-
hulled tank barge capacity would be retired by 2005 and an additional 3.5 million barrels by
2010, as mandated by OPA 90. According to the report, this represented on a cumulative
basis as of each such retirement date, 32% and 52%, respectively, of the total 17.2 million
barrel single- hulled tank barge capacity that existed in 2001. The following chart illustrates
the capacity of tank vessels that must be removed from service from 2001 through 2015. We
believe that, absent a substantial increase in the number of double-hulled vessels constructed
in the industry or an increase in customer preference for double-hulled vessels, this reduction
in capacity, assuming steady demand, may continue to favorably impact dayrates and
utilization of the remaining single-hulled tank barges, including our own.
Based on data contained in the United States Coast Guard Report to Congress on the
Progress to Replace Single Hull Tank Vessels with Double Hull Tank Vessels, dated
September 2001.
Additionally, OPA 90 requires that owners or operators of tankers operating in U.S.
waters submit vessel spill response plans to the U.S. Coast Guard for approval and operate
according to the plans upon approval. Our vessel response plans have been approved by the
U.S. Coast Guard, and all of our crew members have been trained to comply with these
guidelines. For further discussion of OPA 90 see “—Environmental and Other Governmental
Regulation” below.
Our Tug and Tank Barge Business
We offer marine transportation, distribution and logistics services primarily in the
northeastern United States and Puerto Rico with our owned fleet of 12 active ocean-going
tugs and 18 active ocean-going tank barges. We provide our services to major oil companies,
refineries and oil traders. Generally, a tug and tank barge work together as a “tow” to
transport refined or bunker grade petroleum products. Our tank barges carry petroleum
12
products that are typically characterized as either “clean” or “dirty”. Clean products are
primarily gasoline, home heating oil, diesel fuel and jet fuel. Dirty products are mainly crude
oils, residual crudes and feedstocks, heavy fuel oils and asphalts.
Our tugs and tank barges serve the northeastern U.S. coast, primarily New York Harbor,
by transporting both clean and dirty petroleum products to and from refineries and distribution
terminals. Our tugs and tank barges also transport both clean and dirty petroleum products
from refineries and distribution terminals in Puerto Rico to the Puerto Rico Electric Power
Authority and to utilities located on other Caribbean islands. In addition, we provide ship
lightering, bunkering and docking services in these markets and are well positioned to provide
such services to the increasing number of new tankers that are too large to make direct
deliveries to distribution terminals and refineries. During the fourth quarter of 2005, we
developed a new market for our double-hulled barges by performing well test services for our
OSV customers in the deepwater Gulf of Mexico.
On May 31, 2001, we acquired nine ocean-going tugs and nine ocean-going tank barges
from the Spentonbush/Red Star Group, composed of certain affiliates of Amerada Hess, as
well as the business related to these tugs and tank barges, greatly expanding our capacity in
the northeastern United States and increasing our market share of the coastwise trade on the
U.S. upper east coast. As part of the acquisition, Amerada Hess entered into a long-term
contract of affreightment, or COA, with us pursuant to which Amerada Hess committed to use
us as its exclusive marine logistics provider and transporter of liquid petroleum products by
tank barge in the northeastern United States. Under this contract, Amerada Hess committed
to ship a minimum of 45 million barrels annually for an initial period from June 1, 2001 through
March 31, 2006. We have decided not to renew that COA; however, we have recently entered
into long-term time charters with Amerada Hess for two tank barges. The time charters will
take effect upon the expiration of the COA on March 31, 2006. Although we expect to
considerably reduce the amount of cargo we will transport for Amerada Hess, following the
expiration of our COA, we believe that we will be able to replace through other customers any
volumes that Amerada Hess does not transport due to the fact that the tank barge market in
the northeastern United States is currently operating at or near capacity.
During 2005, we completed construction of three 110,000-barrel barges, two
135,000-barrel barges and the retrofit of two 6,100 horsepower tugs. Under our first tank
barge newbuild program, the Energy 13501 and Energy 13502, 135,000-barrel double-hulled
tank barges, were placed in service on March 11, 2005 and December 1, 2005, respectively.
The Energy 11103, Energy 11104 and Energy 11105, 110,000-barrel double-hulled tank
barges, were placed in service on July 10, 2005, October 21, 2005 and December 29, 2005,
respectively. Our first tank barge newbuild program has added new barrel-carrying capacity of
600,000 barrels in the aggregate, more than replacing the 270,000 barrels of aggregate
barrel-carrying capacity lost when we retired three of our single-hulled tank barges from
service at the end of 2004, as mandated by OPA 90. Two remaining 6,100 horsepower tugs
under the first newbuild program are currently being retrofitted and are expected to be placed
in service during the late first quarter 2006.
In September 2005, we announced our second tug and tank barge newbuild program.
The estimated incremental cost of the new ocean-going tugs and ocean-going tank barges to
be constructed under this program is currently expected to be approximately $105 million in
13
the aggregate. We are contractually committed with a domestic shipyard for three double-
hulled barges with a total of 180,000 barrels of carrying capacity. We plan to build an
additional 220,000 barrels of double-hulled tank barge barrel-carrying capacity and, unlike our
first tank barge newbuild program, we may construct the related ocean-going tugs to be used
as power units for the new barges, which will total 400,000 barrels of capacity. We will
continue to seek bids from domestic shipyards for additional vessels under this program. The
precise number of additional vessels to be constructed and their specifications will be
finalized as certain milestones are completed, including the negotiation of shipyard contracts.
Construction costs related to this program will be funded, in part, with a portion of the
proceeds from our recent public common stock offering and concurrent note offering and
projected cash flow from operations. All of the new vessels to be constructed under the
second tug and tank barge newbuild program are expected to be delivered from mid-2007
through mid-2008.
Currently, six of our tank barges are double-hulled and are not subject to OPA 90
retirement dates. Upon completion of our second tug and tank barge newbuild program, 58%
of our tank barge fleet barrel-carrying capacity will be double-hulled, up from 46% today and
7% at the end of 2004. Ten of our 12 active single-hulled tank barges are not required under
OPA 90 to be retired or double-hulled until 2015. The two other single-hulled tank barges are
required to be retired from service in 2009. Based on the remaining lives of the majority of our
tank barge fleet under OPA 90 and our recent and pending construction programs, we believe
we are well positioned to obtain additional customers in the northeastern United States, as a
large portion of the then-available capacity in that market was removed from service on
January 1, 2005.
The following tables provide information, as of March 1, 2006, regarding the tugs and
tank barges that we own, as well as the three double-hulled tank barges now under
construction and the two tugs currently being retrofitted.
Ocean-Going Tugs
Name
Gross
Tonnage
Length
(feet)
Year
Built
Brake
Horsepower
Freedom Service . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liberty Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Patriot Service(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Eagle Service(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ponce Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Caribe Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Atlantic Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Brooklyn Service . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gulf Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tradewind Service . . . . . . . . . . . . . . . . . . . . . . . . . . .
Spartan Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sea Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bayridge Service . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stapleton Service . . . . . . . . . . . . . . . . . . . . . . . . . . . .
180
180
198
198
190
194
198
198
198
183
126
173
194
146
126
126
124
124
107
111
105
105
126
105
102
109
100
78
1982
1982
1996
1996
1970
1970
1978
1975
1979
1975
1978
1975
1981
1966
6,140
6,140
6,140
6,140
3,900
3,900
3,900
3,900
3,900
3,200
3,000
2,820
2,000
1,530
(1) We purchased the Patriot Service and Eagle Service from a private owner on August 12 and September 6, 2005, respectively. Following a
retrofit period in a shipyard, the vessels are expected to be placed in service during the late first quarter of 2006.
14
Ocean-Going Tank Barges
Barrel Capacity
Length
(feet)
Year Built
OPA 90
Date(1)
Name
Active:
Ocean-Going Tank Barges:
Energy 13501 . . . . . . . . . . . . . . . . . . . . . .
Energy 13502 . . . . . . . . . . . . . . . . . . . . . .
Energy 11101 . . . . . . . . . . . . . . . . . . . . . .
Energy 11102 . . . . . . . . . . . . . . . . . . . . . .
Energy 11103 . . . . . . . . . . . . . . . . . . . . . .
Energy 11104 . . . . . . . . . . . . . . . . . . . . . .
Energy 11105 . . . . . . . . . . . . . . . . . . . . . .
Energy 8001 . . . . . . . . . . . . . . . . . . . . . . .
Energy 7002 . . . . . . . . . . . . . . . . . . . . . . .
Energy 7001 . . . . . . . . . . . . . . . . . . . . . . .
Energy 6504 . . . . . . . . . . . . . . . . . . . . . . .
Energy 6505 . . . . . . . . . . . . . . . . . . . . . . .
Energy 6503 . . . . . . . . . . . . . . . . . . . . . . .
Energy 6502 . . . . . . . . . . . . . . . . . . . . . . .
Energy 6501 . . . . . . . . . . . . . . . . . . . . . . .
Energy 6506 . . . . . . . . . . . . . . . . . . . . . . .
Energy 6507 . . . . . . . . . . . . . . . . . . . . . . .
Energy 6508 . . . . . . . . . . . . . . . . . . . . . . .
Energy 5501 . . . . . . . . . . . . . . . . . . . . . . .
Energy 2201 . . . . . . . . . . . . . . . . . . . . . . .
Energy 2202 . . . . . . . . . . . . . . . . . . . . . . .
135,380
135,380
111,844
111,844
112,269
112,269
112,269
81,364
72,693
72,016
66,333
65,710
65,145
64,317
63,875
60,000 est.
60,000 est.
60,000 est.
57,848
22,556
22,457
2005
2005
1979
1979
2005
2005
2005
1996
1971
1977
1958
1978
1988
1980
1974
450
450
420
420
390
390
390
350
351
300
305
328
327
300
300
360 est. TBD(3)
360 est. TBD(3)
360 est. TBD(3)
341
242
242
1969
1973
1974
DH
DH
2009
2009
DH
DH
DH
DH
2015
2015
2015
2015
2015
2015
2015
DH
DH
DH
2015
2015
2015
Inactive:
Energy 8701 . . . . . . . . . . . . . . . . . . . . . . .
86,454
360
1976
(2)
TBD: To be determined.
DH: OPA 90 limitations are not applicable to these double-hulled vessels.
(1)
Prior to January 1 of the year indicated (except for the Energy 11101 for which the date is June 1), according to OPA 90, the vessel must be
refurbished as a double hull or be retired from service in U.S. waters. For a discussion of OPA 90 see “—Environmental and Other
Governmental Regulation” below.
The Energy 8701 was removed from service for the transportation of petroleum products in navigable waters of the United States prior to
January 1, 2005 due to OPA 90.
Energy 6506, Energy 6507 and Energy 6508 are 60,000-barrel double-hulled tank barges currently under construction with anticipated
delivery during 2007.
(2)
(3)
Additional information with respect to our tug and tank barge segment can be found in
Note 14 of our consolidated financial statements.
Our Competitive Strengths
Technologically Advanced Fleet of New Generation OSVs. Our technologically
advanced, new generation OSVs were designed with the specifications necessary for
operations in complex and challenging drilling environments, including deepwater, deep well
and other logistically demanding projects. Such other projects include, among other things,
the construction, maintenance and repair of offshore infrastructure. Our new generation OSVs
have significantly more capacity and operate more efficiently than conventional 180’ OSVs.
While operators are especially concerned with a vessel’s ability to avoid collisions with multi-
million dollar drilling rigs or production platforms during adverse weather conditions, they are
hesitant to stop operations under such conditions due to the high daily cost of halting such
complex operations. Our proprietary vessels, including the MPSVs to be converted,
incorporate sophisticated technologies and are designed specifically to operate safely in
complex exploration and production environments. These technologies include dynamic
15
positioning, roll reduction systems and controllable pitch thrusters, which allow our vessels to
maintain position with minimal variance, and our unique cargo handling systems, which permit
high volume transfer rates of liquid mud and dry bulk. We believe that we earn higher average
dayrates and maintain higher utilization rates than our competitors due to the superior
capabilities of our OSVs, our eight-year track record of safe and reliable performance and the
collaborative efforts of our in-house engineering team in providing marine engineering
solutions to our customers.
Young OSV Fleet with Lower Cost of Ownership. We believe that we operate one of the
youngest fleets of U.S.-flagged OSVs. While the average age of the conventional 180’
U.S.-flagged OSV fleet is approximately 26 years, the average age of our OSV fleet is
approximately six years. Newer vessels generally experience less downtime and require
significantly less maintenance and scheduled drydocking costs compared to older vessels.
The average intermediate drydocking for recertification for one of our OSVs generally lasts
five to ten days in the shipyard and costs approximately $0.3 million. In contrast, based upon
our industry experience, the typical drydocking for recertification of a conventional 180’ OSV
may last up to 90 days in the shipyard and could cost as much as $1.5 million. We believe
that our operation of new, technologically advanced OSVs gives us a competitive advantage
in obtaining long-term contracts for our vessels and in attracting and retaining crews. Since
we accepted delivery of our first OSV in November 1998, the average utilization rate for our
OSVs has been approximately 94% based on a 365-day denominator. According to WorkBoat
magazine, the U.S. Gulf of Mexico industry average was approximately 89% over the same
time period, based on vessel days available for service. We expect that our newer, larger,
faster and more cost-efficient vessels will remain in high demand as deepwater and other
complex and challenging exploration, development and production activities continue to
increase globally and as opportunities for military and other specialty service contracts
continue to present themselves.
Commitment to Quality, Health, Safety and the Environment. As part of our commitment
to Quality, Health, Safety and the Environment, we have voluntarily pursued and received
certifications that are not generally held by other companies in our industry. We are one of the
few OSV companies operating in the U.S. Gulf of Mexico and internationally that is approved
under the U.S. Coast Guard’s Streamlined Inspection Program in which we and the Coast
Guard cooperate to develop training, inspection and compliance processes, with our
personnel conducting periodic examinations of vessel systems to the requirements of the
vessels’ Coast Guard certifications, and taking corrective actions where necessary. Both of
our principal office locations in Covington, Louisiana and Brooklyn, New York and our field
office in Trinidad, as well as all of our vessels in the OSV fleet and a majority of our vessels in
the tug and tank barge fleet, are certified under the International Safety Management Code,
or ISM Code, developed by the International Maritime Organization to provide internationally
recognized standards for the safe management and operation of ships and for pollution
prevention. We are currently pursuing ISO 14001 certification of our office and fleetwide
operations. Quality, Health, Safety and Environmental Certifications are an increasingly
important consideration for both our OSV and tank barge customers due to the environmental
and regulatory sensitivity associated with offshore drilling and production activity and
waterborne transportation of petroleum products, respectively. We believe that customers
recognize our commitment to safety and that our strong reputation and performance history
provide us with a competitive advantage.
16
Leading Market Presence in Core Target Markets. Our 23 U.S.-flagged OSVs comprise
the second largest fleet of technologically advanced, new generation OSVs qualified for work
in the U.S. Gulf of Mexico. Currently, 20 of our 23 U.S.-flagged OSVs operate in that area.
We also operate four OSVs offshore Trinidad, which currently represents the largest market
share in that region. We believe that we are the fifth largest tank barge transporter of
petroleum products in New York Harbor, a market that is evenly distributed among the top five
operators. We also operate one of the largest fleets of tugs and tank barges for the
transportation of petroleum products in Puerto Rico. We believe that having scale in our
selected markets benefits our customers and provides us with operating efficiencies.
Successful Track Record of Vessel Construction and Acquisitions. Our management
has significant naval architecture, marine engineering and shipyard experience. We believe
we are unique in the manner in which we design our own vessels and work closely with our
contracted shipyards in their construction. We typically source and supply many of the
manufactured components (owner-furnished equipment), comprising a large portion of the
aggregate cost of a vessel, directly from vendors rather than through the shipyard. In addition
to substantial cost savings, we believe our approach enables us to better control the
construction process, resulting in a higher quality vessel and an enhanced level of service
from these vendors during the applicable warranty periods. We believe that our history of
designing and constructing 17 new generation OSVs and five double-hulled tank barges
substantially on time and on budget provides us with a competitive advantage in obtaining
contracts for our vessels prior to their actual delivery. Our company has designed its
operations and management systems in contemplation of additional growth through new
vessel construction and acquisitions. To date, we have successfully completed and integrated
multiple acquisitions involving 17 ocean-going tugs and 13 ocean-going tank barges, two
coastwise tankers, six 220’ new generation OSVs, a 165’ fast supply vessel, and two foreign-
flagged AHTS vessels. In addition, we recently announced an MPSV conversion program, our
second tug and tank barge newbuild program and our fourth OSV newbuild program.
Experienced Management Team with Proven Track Record. Our executive
management team has an average of 21 years of domestic and international marine
transportation industry-related experience. We believe that our team has successfully
demonstrated its ability to grow our fleet through new construction and strategic acquisitions
and to secure profitable contracts for our vessels in both favorable and unfavorable market
conditions. Moreover, our in-house engineering team has significant operating experience
that enables us to more effectively design and manage our new vessel construction program,
adapt our vessels for specialized purposes, oversee and manage the drydocking process and
provide custom marine engineering solutions to our customers. We believe this will continue
to result in a lower overall cost of ownership over the life of our vessels compared to our
competitors, as well as a competitive advantage in securing contracts for our OSVs as the
benefits of our proprietary designs and in-house engineering capabilities are recognized by
our customers.
Our Strategy
Apply Existing and Develop New Technologies to Meet our Customers’ Vessel
Needs. Our new generation OSVs and MPSVs, including those planned or under
construction or conversion, are designed to meet the higher capacity and performance needs
of our clients’ increasingly more complex drilling and production programs. In addition, our
17
recently delivered proprietary double-hulled tank barges, including those planned or under
construction, are designed to maximize transit speed, improve cargo through-put rates and
enhance crew safety features. Our new generation OSVs are equipped with sophisticated
propulsion and cargo handling systems, dynamic positioning capabilities and have larger
capacities than conventional 180’ OSVs. We are committed to applying existing and
developing new technologies to maintain a technologically advanced fleet that will enable us
to continue to provide a high level of customer service and meet the developing needs of our
customers for OSVs and ocean-going tugs and tank barges, as well as other types of vessels
that complement our two business segments. Improvements in exploration and production
technologies have enabled operators to pursue larger scale, more complex drilling programs
in remote locations and under more challenging operating conditions. We believe that the
trend toward increasingly more complex projects will increase the demand for our
technologically advanced fleet of new generation OSVs. Oil and natural gas exploration and
development activity in these regions has increased recently as a result of several factors,
including world-class exploration potential, improvements in exploration and production
technologies for deepwater projects, and slowing or declining production from onshore and
shallow water fields. We believe that deepwater regions worldwide and deep well drilling on
the Continental Shelf will continue to be active areas for exploration and development in the
foreseeable future, and that demand for our OSVs, which are uniquely equipped to serve the
current and planned drilling programs in these markets, will continue to be strong. We also
believe that some non-energy related uses for our OSVs, including military applications and
other specialty services, may allow us to further diversify in additional markets.
Expand Fleet Through Newbuilds and Strategic Acquisitions. We plan to expand our
fleet through construction of new vessels, including construction of new generation OSVs and
double-hulled tank barges as market conditions warrant, through conversion and retrofitting of
existing vessels and through strategic acquisitions. During the past two years, we have
announced the conversion of two coastwise sulfur tankers into MPSVs, the purchase and
upgrade of four ocean-going tugs, our second tug and tank barge newbuild program, and our
fourth OSV newbuild program. Market demand for vessels, including demand for new
generation OSVs in domestic and international markets, third party vessel building programs,
and the need to replace single-hulled tank barges will be the main determinant of the level
and timing of our construction of vessels in addition to those constructed under these pending
growth initiatives. We believe that acquisition opportunities are likely to arise as consolidation
continues in our two industry segments. We intend to use our expertise and experience to
evaluate and execute strategic acquisitions where the opportunity exists to expand our
service offerings in our core markets and create or enhance long-term customer relationships.
As of December 31, 2005, we have completed multiple acquisitions involving 40 vessels, and
constructed 17 proprietary OSVs and five proprietary double-hulled tank barges.
Pursue Optimal Mix of Long-Term and Short-Term Contracts. We seek to balance our
portfolio of customer contracts by entering into both long-term and short-term charters. Long-
term charters, which contribute to higher utilization rates, provide us with more predictable
cash flow. Some of our long-term charters contain annual dayrate escalation provisions.
Short-term charters provide the opportunity to benefit from increasing dayrates in favorable
market cycles. We plan our mix of long-term and spot market contracts with respect to our
OSVs based on anticipated market conditions. Our COA with Amerada Hess for the services
of tugs and tank barges in the northeastern United States will expire on March 31, 2006.
18
Although we have considerably reduced the amount of cargo we will transport for Amerada
Hess beyond the initial contract term, we believe that we will be able to replace through other
customers any volumes that Amerada Hess does not transport due to the fact that the tank
barge market in the northeastern United States is currently operating at or near full practical
capacity. This has allowed us to diversify our customer base by exposing a greater portion of
our fleet to currently favorable market conditions. Our other tug and tank barge contracts
typically have been renewed annually over the last several years.
Build Upon Existing Customer Relationships. We intend to build upon existing customer
relationships by expanding the services we offer to those customers with diversified marine
transportation needs. Many integrated oil and gas companies require OSVs to support their
exploration and production activities and ocean-going tugs and tank barges to support their
refining, trading and retail distribution activities. Recently, we were successful in developing a
new market application for our double-hulled tank barges by using them to support an existing
OSV customer for deepwater well testing in the Gulf of Mexico. Moreover, many of our
customers that conduct operations internationally have expressed interest in chartering our
OSVs in such markets. We now have roughly 20% of our supply vessel fleet chartered for use
in international markets, with four OSVs operating offshore Trinidad and one OSV and one
fast supply vessel offshore Mexico. Our management team has significant international
experience and will continue to evaluate such opportunities.
Optimize Tug and Tank Barge Operations. Due to OPA 90 phase-out requirements of
single-hulled barges, the total barrel-carrying capacity of existing tank vessels transporting
petroleum products domestically is projected to decline from its current level without a
commensurate increase in newbuildings and retrofittings. In addition, the energy industry is
increasingly outsourcing its marine transportation requirements and focusing on safety and
reliability as a key determinant in awarding new business. We believe that these trends are
improving the balance of supply and demand, resulting in improved tank barge utilization and
dayrates. This has recently allowed us to double our operating margin for this segment over
levels a year-ago to a new level that we believe is sustainable for the foreseeable future.
Customers and Charter Terms
Major oil companies, large independent oil and gas exploration, development and
production companies and large oil service companies constitute the majority of our
customers for our OSV services, while refining, marketing and trading companies constitute
the majority of our customers for our tug and tank barge services. The percentage of
revenues attributable to a customer in any particular year depends on the level of oil and
natural gas exploration, development and production activities undertaken or refined
petroleum products or crude oil transported by a particular customer, the availability and
suitability of our vessels for the customer’s projects or products and other factors, many of
which are beyond our control. For the year ended December 31, 2005, Amerada Hess
Corporation accounted for more than 10% of our total revenues. Although the level of
volumes that we transport for Amerada Hess will be reduced after our initial contract term with
them expires on March 31, 2006, we believe that we will be able to replace their business
through other customers. For a discussion of significant customers in prior periods, see Note
13 of the notes to our consolidated financial statements.
We enter into a variety of contract arrangements with our customers, including spot and
time charters, contracts of affreightment, consecutive voyage contracts and, occasionally,
19
bareboat charters. Our contracts are obtained through competitive bidding or, with established
customers, through negotiation.
Most of the contracts for our OSVs contain early termination options in favor of the
customer; however, some have early termination penalties designed to discourage the
customers from exercising such options. Our tank barges primarily operate under time charters
or contracts of affreightment commensurate with market conditions. Since we commenced
operations, our OSVs have performed services for more than 90 different customers, and our
tugs and tank barges have performed services for more than 250 different customers. Because
of the variety and number of customers historically using the services of our fleet, and the
approximate balance between supply and demand in both the OSV and tug and tank barge
markets, we believe that the loss of any one customer would not have a material adverse effect
on our business.
Because we have established a reputation for on-time delivery and reliability, charterers
have contacted us in certain circumstances to construct vessels to meet their needs. In such
circumstances, we have generally contracted these specially designed vessels for three to
five years, with renewal options, before construction is completed. Although we will design
vessels to meet the specific needs of a charterer, we ensure in our design that customization
does not preclude efficient operation of these vessels for other customers, for other purposes
or in other situations.
Competition
We operate in a highly competitive industry. Competition in the OSV and ocean-going tug
and tank barge segments of the marine transportation industry primarily involves factors such
as:
(cid:127) quality and capability of the vessels;
(cid:127) ability to meet the customer’s schedule;
(cid:127)
(cid:127)
safety record;
reputation;
(cid:127) price; and
(cid:127) experience.
The terms of the Jones Act restrict the ability of vessels that are not built in the United
States, documented under the laws of the United States and controlled by U.S. citizens to
engage in the coastwise trade in the United States and Puerto Rico. See “—Environmental
and Other Governmental Regulation” for a more detailed discussion of the Jones Act.
We do not anticipate significant competition in the near term from pipelines as an
alternative method of petroleum product delivery in the northeastern United States or Puerto
Rico. No pipelines are currently under construction that could provide significant competition
to tank barges in the northeastern United States or Puerto Rico, nor are any new pipelines
likely to be built in the near future due to cost constraints and logistical and environmental
requirements.
We believe that only about 31% of the new generation OSVs currently operating in the
U.S. Gulf of Mexico are owned by publicly-traded companies. We believe we operate the
20
second largest fleet of new generation OSVs in the U.S. Gulf of Mexico, and are the only
publicly traded company with a significant fleet of U.S.-flagged, new generation OSVs. In
contrast, approximately 54% of the conventional 180’ OSVs operating on the Continental
Shelf of the U.S. Gulf of Mexico are owned by publicly-traded companies. We operate one of
the largest tank barge fleets in Puerto Rico and believe that we are the fifth largest transporter
by tank barge of petroleum products in New York Harbor, a market that is evenly distributed
among the top five competitors. All but one of our direct competitors in our segment of the tug
and tank barge industry are privately held.
Although some of our principal competitors are larger and have greater financial
resources and, with respect to OSVs, extensive international operations, we believe that our
operating capabilities and reputation enable us to compete effectively with other fleets in the
market areas in which we operate. In particular, we believe that the relatively young age and
advanced features of our OSVs provide us with a competitive advantage. The ages of our
OSVs range from two years to eight years, while the average age of the industry’s
conventional 180’ U.S.-flagged OSV fleet is approximately 26 years. Retirement of older
vessels has already commenced and we believe that many more of these older vessels will
be retired in the next few years. The young age of our fleet, together with the advanced
capabilities of our vessels, position us to take advantage of the expanding deepwater, deep
well and other logistically demanding exploration and production projects in the U.S. Gulf of
Mexico and around the world. In addition, our new generation OSVs are also increasingly in
demand by our customers for conventional shallow-water drilling projects because of the
ability of our OSVs to reduce overall offshore logistics costs for the customer through the
vessels’ greater capacities and operating efficiencies.
Environmental and Other Governmental Regulation
Our operations are significantly affected by a variety of federal, state, local and
international laws and regulations governing worker health and safety and the manning,
construction and operation of vessels. Certain U.S. governmental agencies, including the
Department of Homeland Security and agencies under its auspices (such as the U.S. Coast
Guard and the U.S. Customs and Border Protection), the National Transportation Safety
Board, and the Maritime Administration of the U.S. Department of Transportation, have
jurisdiction over our operations. In addition, private industry organizations such as the
American Bureau of Shipping oversee aspects of our business. The U.S. Coast Guard and
the National Transportation Safety Board establish safety criteria and are authorized to
investigate vessel accidents and recommend improved safety standards, requirements,
tonnage requirements and restrictions, hull and shafting requirements and vessel
documentation. Coast Guard regulations require that each of our vessels be drydocked for
inspection at least twice within a five-year period.
Under Section 27 of the Merchant Marine Act of 1920, also known as the Jones Act, the
privilege of transporting merchandise or passengers for hire in the coastwise trade in U.S.
domestic waters is restricted to only those vessels that are controlled by U.S. citizens and are
built in and documented under the laws of the United States. To engage in coastwise trade, a
corporation is not considered a U.S. citizen unless, among other things:
(cid:127)
the corporation is organized under the laws of the United States or of a state, territory
or possession of the United States;
21
(cid:127) at least 75% of the ownership of voting interests with respect to its capital stock is held
by U.S. citizens;
(cid:127)
the corporation’s chief executive officer, president and chairman of the board are U.S.
citizens; and
(cid:127) no more than a minority of the number of directors necessary to constitute a quorum
for the transaction of business are non-U.S. citizens.
We meet all of the foregoing requirements. If we should fail to comply with these
requirements, our vessels would lose their eligibility to engage in coastwise trade within U.S.
domestic waters. To facilitate compliance, our certificate of incorporation:
(cid:127)
limits ownership by non-U.S. citizens of any class of our capital stock (including our
common stock) to 20%, so that foreign ownership will not exceed the 25% permitted;
(cid:127) permits withholding of dividends and suspension of voting rights with respect to any
shares held by non-U.S. citizens that exceed 20%;
(cid:127) permits a stock certification system with two types of certificates to aid tracking of
ownership;
(cid:127) permits our board of directors to redeem any shares held by non-U.S. citizens that
exceed 20%; and
(cid:127) permits our board of directors to make such determinations to ascertain ownership
and implement such measures as reasonably may be necessary.
Jones Act restrictions have been challenged by interests seeking to facilitate foreign
competition for coastwise trade. Historically, their efforts have been defeated by large margins
when considered by the U.S. Congress. Industry associations and participants actively
responded to and successfully defeated certain recent challenges involving the nature, extent
and availability of lease-finance alternatives permitted by a 1996 amendment of the Jones
Act. Under the provisions of that amendment, certain foreign interests operated and proposed
to operate in the U.S. coastwise trade. In addition, in the interest of national defense, the
Secretary of Homeland Security may suspend the citizen requirements of the Jones Act.
On August 9, 2004, following an initiative by the U.S. marine industry interested in
protecting the Jones Act, Congress enacted and the President signed into law Public Law
No. 108-293. Section 608 of that law amends the lease financing criteria of such Act, adding
new requirements that effectively eliminate the ability of foreign interests engaged in the
marine business to control vessels engaged in U.S. coastwise trade by structuring lease-
finance transactions. In addition, the legislation requires the United States Coast Guard to, by
August 9, 2007, revoke the authorization of any offshore service vessel that received an
endorsement to engage in coastwise trade utilizing the challenged lease-finance structure,
unless the vessel otherwise complies with the Jones Act’s U.S.-control requirements.
Following enactment of the foregoing legislation, we are aware of one foreign marine interest
that is subject to the three-year sunset provision and another foreign marine interest that had
announced its intention to avail itself of the lease-finance structure, but aborted its plan.
Instead, the latter utilized a foreign mortgage-finance structure covering 100% of the
construction costs of its vessels. Following a challenge by the U.S. marine industry, the debt
in question was restructured with more conventional financing. Should foreign competition be
permitted to enter the U.S. coastwise market to any significant extent, it could have an
adverse effect on the U.S. marine industry and on us.
22
Our operations are also subject to a variety of federal, state, local and international laws
and regulations regarding the discharge of materials into the environment or otherwise
relating to environmental protection. The requirements of these laws and regulations have
become more complex and stringent in recent years and may, in certain circumstances,
impose strict liability, rendering a company liable for environmental damages and remediation
costs without regard to negligence or fault on the part of such party. Aside from possible
liability for damages and costs including natural resource damages associated with releases
of oil or hazardous materials into the environment, such laws and regulations may expose us
to liability for the conditions caused by others or even acts of ours that were in compliance
with all applicable laws and regulations at the time such acts were performed. Failure to
comply with applicable laws and regulations may result in the imposition of administrative,
civil and criminal penalties, revocation of permits, issuance of corrective action orders and
suspension or termination of our operations. Moreover, it is possible that changes in the
environmental laws, regulations or enforcement policies that impose additional or more
restrictive requirements or claims for damages to persons, property, natural resources or the
environment could result in substantial costs and liabilities to us. We believe that we are in
substantial compliance with currently applicable environmental laws and regulations.
OPA 90 and regulations promulgated pursuant thereto impose a variety of regulations on
“responsible parties” related to the prevention of oil spills and liability for damages resulting
from such spills. A “responsible party” includes the owner or operator of an onshore facility,
pipeline or vessel or the lessee or permittee of the area in which an offshore facility is located.
OPA 90 assigns liability to each responsible party for oil removal costs and a variety of public
and private damages. Under OPA 90, “tank vessels” of over 3,000 gross tons that carry oil or
other hazardous materials in bulk as cargo, a term, which includes our tank barges, are
subject to liability limits of the greater of $1,200 per gross ton or $10 million. For any vessels,
other than “tank vessels,” that are subject to OPA 90, the liability limits are the greater of
$500,000 or $600 per gross ton. A party cannot take advantage of liability limits if the spill was
caused by gross negligence or willful misconduct or resulted from violation of a federal safety,
construction or operating regulation. In addition, there are no liability limits for vessels carrying
crude oil from a well situated on the Continental Shelf. If the party fails to report a spill or to
cooperate fully in the cleanup, the liability limits likewise do not apply. Moreover, OPA 90
imposes on responsible parties the need for proof of financial responsibility to cover at least
some costs in a potential spill. We have provided satisfactory evidence of financial
responsibility to the U.S. Coast Guard for all of our vessels over 300 tons.
OPA 90 also imposes ongoing requirements on a responsible party, including
preparedness and prevention of oil spills, preparation of an oil spill response plan and proof of
financial responsibility (to cover at least some costs in a potential spill) for vessels in excess
of 300 gross tons. We have engaged the National Response Corporation to serve as our
independent contractor for purposes of providing stand-by oil spill response services in all
geographical areas of our fleet operations. In addition, our Oil Spill Response Plan has been
approved by the U.S. Coast Guard.
OPA 90 requires that all newly-built tank vessels used in the transportation of petroleum
products be built with double hulls and provides for a phase-out period for existing single hull
vessels. We previously retired from service three single-hulled tank barges at the end of 2004
pursuant to OPA 90. Modifying or replacing existing vessels to provide for double hulls will be
required of all tank barges and tankers in the industry by the year 2015. We are in a favorable
23
position concerning this provision because a significant number of vessels in our fleet of tank
barges measure less than 5,000 gross tons. Vessels of such tonnage may continue to
operate without double hulls through the year 2015. Under existing legal requirements,
therefore, we will be required to modify or replace only two of our existing single-hulled tank
barges before 2015. However, if there are changes in the law that accelerate the time frame
for retirement of such vessels, or if customer policies or preferences that mandate the use of
double-hulled vessels become significantly more prevalent, absent our implementation of a
more aggressive replacement or newbuild program, such changes in law or in customer
mandates could adversely affect our results of operations and financial condition.
The Clean Water Act imposes strict controls on the discharge of pollutants into the
navigable waters of the United States. The Clean Water Act also provides for civil, criminal
and administrative penalties for any unauthorized discharge of oil or other hazardous
substances in reportable quantities and imposes substantial liability for the costs of removal
and remediation of an unauthorized discharge. Many states have laws that are analogous to
the Clean Water Act and also require remediation of accidental releases of petroleum in
reportable quantities. Our OSVs routinely transport diesel fuel to offshore rigs and platforms
and also carry diesel fuel for their own use. Our OSVs also transport bulk chemical materials
used in drilling activities and liquid mud, which contain oil and oil by-products. In addition, our
tank barges are specifically engaged to transport a variety of petroleum products. We
maintain vessel response plans as required by the Clean Water Act to address potential oil
and fuel spills.
The Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
also known as “CERCLA” or “Superfund,” and similar laws impose liability for releases of
hazardous substances into the environment. CERCLA currently exempts crude oil from the
definition of hazardous substances for purposes of the statute, but our operations may involve
the use or handling of other materials that may be classified as hazardous substances.
CERCLA assigns strict liability to each responsible party for all response and remediation
costs, as well as natural resource damages and thus we could be held liable for releases of
hazardous substances that resulted from operations by third parties not under our control or
for releases associated with practices performed by us or others that were standard in the
industry at the time.
The Resource Conservation and Recovery Act regulates the generation, transportation,
storage, treatment and disposal of onshore hazardous and non-hazardous wastes and
requires states to develop programs to ensure the safe disposal of wastes. We generate
non-hazardous wastes and small quantities of hazardous wastes in connection with routine
operations. We believe that all of the wastes that we generate are handled in all material
respects in compliance with the Resource Conservation and Recovery Act and analogous
state statutes.
In addition to laws and regulations affecting us directly, our operations are also
influenced by laws, regulations and policies which affect our customers’ drilling programs and
the oil and natural gas industry as a whole.
The Outer Continental Shelf Lands Act gives the federal government broad discretion to
regulate the release of offshore resources of oil and natural gas. Because our operations rely
primarily on offshore oil and natural gas exploration, development and production, if the
24
government were to exercise its authority under the Outer Continental Shelf Lands Act to
restrict the availability of offshore oil and natural gas leases, such an action would have a
material adverse effect on our financial condition and results of operations.
We currently have in place protection and indemnity insurance that includes coverage for
pollution incidents. Our OSVs have $5 million in primary insurance coverage for such offshore
pollution incidents, with an additional $100 million in excess umbrella coverage. In addition,
our tugs and tank barges have insurance coverage for oil spills with a coverage limit of $1
billion.
Both of our principal office locations in Covington, Louisiana and Brooklyn, New York, our
field office in Trinidad, as well as all of the vessels in our OSV fleet and a majority of our
vessels in our tug and tank barge fleet, are certified to the standards of the ISM Code for the
safe management and operation of ships and for pollution prevention. In addition, our OSVs,
domestically and internationally, participate in the U.S. Coast Guard’s Streamlined Inspection
Program (SIP), which ensures the overall readiness level of our vessel lifesaving and other
critical safety and emergency systems. We believe that our voluntary attainment and
maintenance of these certifications and participation in these programs provides evidence of
our commitment to operate in a manner that minimizes any impact on the environment from
our fleet operations.
25
RISK FACTORS
Our results of operations and financial condition can be adversely affected by numerous
risks. You should carefully consider the risks described below as well as the other information
we have provided in this Annual Report on Form 10-K. The risks described below are not the
only ones we face. Additional risks not presently known to us or that we currently deem
immaterial may also impair our business operations.
Demand for our OSV services substantially depends on the level of activity in
offshore oil and gas exploration, development and production.
The level of offshore oil and gas exploration, development and production activity has
historically been volatile and is likely to continue to be so in the future. The level of activity is
subject to large fluctuations in response to relatively minor changes in a variety of factors that
are beyond our control, including:
(cid:127) prevailing oil and natural gas prices and expectations about future prices and price
volatility;
(cid:127)
the cost of offshore exploration for, and production and transportation of, oil and
natural gas;
(cid:127) worldwide demand for oil and natural gas;
(cid:127)
consolidation of oil and gas and oil service companies operating offshore;
(cid:127) availability and rate of discovery of new oil and natural gas reserves in offshore areas;
(cid:127)
(cid:127)
local and international political and economic conditions and policies;
technological advances affecting energy production and consumption;
(cid:127) weather conditions;
(cid:127) environmental regulation; and
(cid:127)
the ability of oil and gas companies to generate or otherwise obtain funds for
exploration and production.
We expect levels of oil and gas exploration, development and production activity
to continue to be volatile and affect the demand for our OSVs.
A prolonged, material downturn in oil and natural gas prices is likely to cause a
substantial decline in expenditures for exploration, development and production activity, which
would likely result in a corresponding decline in the demand for OSVs and thus decrease the
utilization and dayrates of our OSVs. Such decreases could have a material adverse effect on
our financial condition and results of operations. Moreover, increases in oil and natural gas
prices and higher levels of expenditure by oil and gas companies for exploration,
development and production may not necessarily result in increased demand for our OSVs.
Increases in the supply of vessels could decrease dayrates.
Certain of our competitors have announced plans to construct new OSVs to be deployed
in domestic and foreign locations. A remobilization to the U.S. Gulf of Mexico oilfield of
U.S.-flagged OSVs currently operating in other regions or non-oilfield applications would
26
result in an increase in OSV capacity in our primary market. Additionally, construction of
double-hulled, ocean-going tank barges in sufficient size and number to exceed the
replacement of the single-hulled tank barges that have been or still need to be retired under
OPA 90 would create an increase in ocean-going tank barge capacity. Further, a repeal,
suspension or significant modification of the Jones Act, or the administrative erosion of its
benefits, permitting OSVs or tank barges that are either foreign-flagged, foreign-built, foreign-
owned, foreign-controlled or foreign-operated to engage in the U.S. coastwise trade, would
also result in an increase in capacity. Any increase in the supply of OSVs, whether through
new construction, refurbishment or conversion of vessels from other uses, remobilization or
changes in law or its application, could not only increase competition for charters and lower
utilization and dayrates, which would adversely affect our revenues and profitability, but could
also worsen the impact of any downturn in oil and natural gas prices on our results of
operations and financial condition. Similarly, any increase in the supply of ocean-going tank
barges, could not only increase competition for charters and lower utilization and dayrates,
which could negatively affect our revenues and profitability, but could also worsen the impact
of any reduction in domestic consumption of refined petroleum products or crude oil on our
results of operations and financial condition.
Intense competition in our industry could reduce our profitability and market
share.
Contracts for our OSVs and tank barges are generally awarded on an intensely
competitive basis. The most important factors determining whether a contract will be awarded
include:
(cid:127) quality and capability of the vessels;
(cid:127) ability to meet the customer’s schedule;
(cid:127)
(cid:127)
safety record;
reputation;
(cid:127) price; and
(cid:127) experience.
Some of our competitors, including diversified multinational companies in the OSV
segment, have substantially greater financial resources and larger operating staffs than we
do. They may be better able to compete in making vessels available more quickly and
efficiently, meeting the customer’s schedule and withstanding the effect of declines in
dayrates and utilization rates. They may also be better able to weather a downturn in the oil
and gas industry. As a result, we could lose customers and market share to these
competitors. Some of our competitors may also be willing to accept lower dayrates in order to
maintain utilization, which can have a negative impact upon dayrates and utilization in both of
our market segments.
The failure to successfully complete construction or conversion of our vessels on
schedule and on budget and to utilize those and the other vessels in our fleet at
profitable levels could adversely affect our financial condition and results of
operations.
We have four new generation OSVs and three double-hulled, ocean-going tank barges
currently under construction and two coastwise sulfur tankers currently undergoing
27
conversion into MPSVs. We have also recently announced plans to construct additional new
generation OSVs and double-hulled tank barges and may plan to construct other such
vessels as market conditions warrant. Our construction projects are subject to the risks of
delay and cost overruns inherent in any large construction project, including shortages of
equipment, lack of shipyard availability, unforeseen engineering problems, work stoppages,
weather interference, unanticipated cost increases, inability to obtain necessary certifications
and approvals and shortages of materials or skilled labor. Significant delays could have a
material adverse effect on anticipated contract commitments with respect to vessels under
construction or conversion, while significant cost overruns or delays not adequately protected
by liquidated damages provisions, in general could adversely affect our financial condition
and results of operations. Moreover, customer demand for vessels currently under
construction or conversion may not be as strong as we presently anticipate, and our inability
to obtain contracts on anticipated terms or at all may have a material adverse effect on our
revenues and profitability. In addition, our OSVs are typically chartered or hired to provide
services to a specified drilling rig. A delay in the availability of the drilling rig to our customer
may have an adverse impact on our utilization of the contracted vessel and thus on our
financial condition and results of operations.
If we are unable to acquire additional vessels or businesses and successfully
integrate them into our operations, our ability to grow may be limited.
We regularly consider possible acquisitions of single vessels, vessel fleets and
businesses that complement our existing operations to enable us to grow our business. We
can give no assurance that we will be able to identify desirable acquisition candidates or that
we will be successful in entering into definitive agreements or closing such acquisitions on
satisfactory terms. An inability to acquire additional vessels or businesses may limit our
growth potential. Even if we consummate an acquisition, we may be unable to integrate it into
our existing operations successfully or realize the anticipated benefits of the acquisition. The
process of integrating acquired operations into our own may result in unforeseen operating
difficulties, may require significant management attention and financial resources.
Revenues from our tug and tank barge business could be adversely affected by a
decline in demand for domestic refined petroleum products and crude oil or a change
in existing methods of delivery in response to insufficient availability of tug and tank
barge services and other conditions.
A reduction in domestic consumption of refined petroleum products or crude oil may
adversely affect the revenues of our tug and tank barge business and, therefore, our financial
condition and results of operation. Weather conditions also affect demand for our tug and tank
barge services. For example, a mild winter may reduce demand for heating oil in the
northeastern United States.
Moreover, alternative methods of delivery of refined petroleum products or crude oil may
develop as a result of insufficient availability of tug and tank barge services, the cost of
compliance with homeland security, environmental regulations or increased liabilities
connected with the transportation of refined petroleum products and crude oil. For example,
long-haul transportation of refined petroleum products and crude oil is generally less costly by
pipeline than by tank barge. While there are significant impediments to building new pipelines,
such as high capital costs and environmental concerns, entities may propose new pipeline
28
construction to meet demand for petroleum products. To the extent new pipeline segments
are built or existing pipelines converted to carry petroleum products, such activity could have
an adverse effect on our ability to compete in particular markets.
The early termination of contracts on our vessels could have an adverse effect on
our operations.
Most of the long-term contracts for our vessels contain early termination options in favor
of the customer; however, some have early termination penalties or other provisions designed
to discourage the customers from exercising such options. We cannot assure that our
customers would not choose to exercise their termination rights in spite of such penalties.
Until replacement of such business with other customers, any termination could temporarily
disrupt our business or otherwise adversely affect our financial condition and results of
operations.
We are subject to complex laws and regulations, including environmental
regulations, that can adversely affect the cost, manner or feasibility of doing business.
Increasingly stringent federal, state, local and foreign laws and regulations governing
worker health and safety and the manning, construction and operation of vessels significantly
affect our operations. Many aspects of the marine industry are subject to extensive
governmental regulation by the United States Coast Guard, the National Transportation
Safety Board and the United States Customs Service, and their foreign equivalents, and to
regulation by private industry organizations such as the American Bureau of Shipping. The
Coast Guard and the National Transportation Safety Board set safety standards and are
authorized to investigate vessel accidents and recommend improved safety standards, while
the Customs Service is authorized to inspect vessels at will. Our operations are also subject
to federal, state, local and international laws and regulations that control the discharge of
pollutants into the environment or otherwise relate to environmental protection. Compliance
with such laws, regulations and standards may require installation of costly equipment,
increased manning, or operational changes. Failure to comply with applicable laws and
regulations may result in administrative and civil penalties, criminal sanctions, imposition of
remedial obligations or the suspension or termination of our operations. Some environmental
laws impose strict liability for remediation of spills and releases of oil and hazardous
substances, which could subject us to liability without regard to whether we were negligent or
at fault. These laws and regulations may expose us to liability for the conduct of, or conditions
caused by, others, including charterers. Moreover, these laws and regulations could change
in ways that substantially increase costs that we may not be able to pass along to our
customers. Any changes in laws, regulations or standards that would impose additional
requirements or restrictions could adversely affect our financial condition and results of
operations.
We are also subject to the Merchant Marine Act of 1936, which provides that, upon
proclamation by the President of a national emergency or a threat to the security of the
national defense, the Secretary of Transportation may requisition or purchase any vessel or
other watercraft owned by United States citizens (which includes United States corporations),
including vessels under construction in the United States. If one of our OSVs, tugs or tank
barges were purchased or requisitioned by the federal government under this law, we would
be entitled to be paid the fair market value of the vessel in the case of a purchase or, in the
29
case of a requisition, the fair market value of charter hire. However, if one of our tugs is
requisitioned or purchased and its associated tank barge is left idle, we would not be entitled
to receive any compensation for the lost revenues resulting from the idled barge. We would
also not be entitled to be compensated for any consequential damages we suffer as a result
of the requisition or purchase of any of our OSVs, tugs or tank barges. The purchase or the
requisition for an extended period of time of one or more of our OSVs, tugs or tank barges
could adversely affect our results of operations and financial condition.
Finally, we are subject to the Merchant Marine Act of 1920, commonly referred to as the
Jones Act, which requires that vessels engaged in coastwise trade to carry cargo between
U.S. ports be documented under the laws of the United States and be controlled by U.S.
citizens. To ensure that we are determined to be a U.S. citizen as defined under these laws,
our certificate of incorporation contains certain restrictions on the ownership of our capital
stock by non-U.S. citizens and establishes certain mechanisms to maintain compliance with
these laws. If we are determined at any time not to be in compliance with these citizenship
requirements, our vessels would become ineligible to engage in the coastwise trade in U.S.
domestic waters, and our business and operating results would be adversely affected. The
Jones Act’s provisions restricting coastwise trade to vessels controlled by U.S. citizens have
recently been circumvented by foreign interests that seek to engage in trade reserved for
vessels controlled by U.S. citizens and otherwise qualifying for coastwise trade. Legal
challenges against such actions are difficult, costly to pursue and are of uncertain outcome.
To the extent such efforts are successful and foreign competition is permitted, such
competition could have a material adverse effect on domestic companies in the offshore
service vessel industry and on our financial condition and results of operations. In addition, in
the interest of national defense, the Secretary of Homeland Security is authorized to suspend
the coastwise trading restrictions imposed by the Jones Act on vessels not controlled by U.S.
citizens. Such a waiver was issued following Hurricane Katrina and was in effect on a
temporary basis for tank vessels that carried petroleum products. A more limited waiver
continues in existence for vessels that carry petroleum cargoes from the Strategic Petroleum
Reserve.
Our business involves many operating risks that may disrupt our business or
otherwise result in substantial losses, and insurance may be unavailable or inadequate
to protect us against these risks.
Our vessels are subject to operating risks such as:
(cid:127)
catastrophic marine disaster;
(cid:127) adverse weather and sea conditions;
(cid:127) mechanical failure;
(cid:127)
collisions;
(cid:127) oil and hazardous substance spills;
(cid:127) navigation errors;
(cid:127) acts of God; and
(cid:127) war and terrorism.
30
The occurrence of any of these events may result in damage to or loss of our vessels
and their tow or cargo or other property and injury to passengers and personnel. If any of
these events were to occur, we could be exposed to liability for resulting damages and
possible penalties, that pursuant to typical marine indemnity policies, we must pay and then
seek reimbursement from our insurer. Affected vessels may also be removed from service
and thus be unavailable for income-generating activity. While we believe our insurance
coverage is at adequate levels and insures us against risks that are customary in the industry,
we may be unable to renew such coverage in the future at commercially reasonable rates.
Moreover, existing or future coverage may not be sufficient to cover claims that may arise.
Our expansion into international markets subjects us to risks inherent in
conducting business internationally.
Over the past three years we have derived an increasing portion of our revenues from
foreign sources. We therefore face risks inherent in conducting business internationally, such
as legal and governmental regulatory requirements, potential vessel seizure or nationalization
of assets, import-export quotas or other trade barriers, difficulties in collecting accounts
receivable and longer collection periods, political and economic instability, kidnapping of or
assault on personnel, adverse tax consequences, difficulties and costs of staffing international
operations, currency exchange rate fluctuations and language and cultural differences. All of
these risks are beyond our control and difficult to insure against. We cannot predict the nature
and the likelihood of any such events. If such an event should occur, however, it could have a
material adverse effect on our financial condition and results of operations.
Future results of operations depend on the long-term financial stability of our
customers.
Many of the contracts we enter into for our vessels are full utilization contracts with initial
terms ranging from one to five years. We enter into these long-term contracts with our
customers based on a credit assessment at the time of execution. Our financial condition in
any period may therefore depend on the long-term stability and creditworthiness of our
customers. We can provide no assurance that our customers will fulfill their obligations under
our long-term contracts and the insolvency or other failure of a customer to fulfill its
obligations under such contract could adversely affect our financial condition and results of
operations.
We may be unable to attract and retain qualified, skilled employees necessary to
operate our business.
Our success depends in large part on our ability to attract and retain highly skilled and
qualified personnel. Our inability to hire, train and retain a sufficient number of qualified
employees could impair our ability to manage, maintain and grow our business.
In crewing our vessels, we require skilled employees who can perform physically
demanding work. As a result of the volatility of the oil and gas industry and the demanding
nature of the work, potential vessel employees may choose to pursue employment in fields
that offer a more desirable work environment at wage rates that are competitive with ours.
With a reduced pool of workers, it is possible that we will have to raise wage rates to attract
31
workers from other fields and to retain our current employees. If we are not able to increase
our service rates to our customers to compensate for wage-rate increases, our financial
condition and results of operations may be adversely affected.
Our employees are covered by federal laws that may subject us to job-related
claims in addition to those provided by state laws.
Some of our employees are covered by provisions of the Jones Act, the Death on the
High Seas Act and general maritime law. These laws preempt state workers’ compensation
laws and permit these employees and their representatives to pursue actions against
employers for job-related incidents in federal courts. Because we are not generally protected
by the limits imposed by state workers’ compensation statutes, we may have greater
exposure for any claims made by these employees.
Our success depends on key members of our management, the loss of whom
could disrupt our business operations.
We depend to a large extent on the efforts and continued employment of our executive
officers and key management personnel. We do not maintain key-man insurance. The loss of
services of one or more of our executive officers or key management personnel could have a
negative impact on our financial condition and results of operations.
Restrictions contained in the indenture governing our senior notes and in the
agreement governing our revolving credit facility may limit our ability to obtain
additional financing and to pursue other business opportunities.
Covenants contained in the indenture governing our senior notes and in the agreement
governing our revolving credit facility require us to meet certain financial tests, which may limit
or otherwise restrict:
(cid:127) our flexibility in operating, planning for, and reacting to changes, in our business;
(cid:127) our ability to dispose of assets, withstand current or future economic or industry
downturns and compete with others in our industry for strategic opportunities; and
(cid:127) our ability to obtain additional financing for working capital, capital expenditures,
including our newbuild programs, acquisitions, general corporate and other purposes.
We have high levels of fixed costs that will be incurred regardless of our level of
business activity.
Our business has high fixed costs, and downtime or low productivity due to reduced
demand, weather interruptions or other causes can have a significant negative effect on our
operating results and financial condition.
If we are required to retire our existing single-hulled tank barges earlier than
anticipated due to either regulatory or other requirements, it could adversely affect our
business.
OPA 90 requires that all newly-built tank vessels used in the transportation of petroleum
products be built with double hulls and provides for a phase-out period for existing single hull
32
vessels. Modifying or replacing existing vessels to provide for double hulls will be required for
all tank barges and tankers in the industry by the year 2015. A significant number of vessels
in our tank barge fleet measure less than 5,000 gross tons. Under current law, certain of our
vessels may continue to operate without double hulls through 2014. However, if there are
changes in the law that accelerate the time frame for retirement of such vessels, or if
customer policies or preferences that mandate the use of double-hulled vessels become
significantly more prevalent, absent our implementation of a more aggressive replacement or
newbuild program, such changes in law or in customer mandates could adversely affect our
results of operations and financial condition.
Operating Hazards and Insurance
The operation of our vessels is subject to various risks, such as catastrophic marine
disaster, adverse weather conditions, mechanical failure, collision and navigation errors, all of
which represent a threat to personnel safety and to our vessels and cargo. We maintain
insurance coverage that we consider customary in the industry against certain of these risks,
including, as discussed above, $1 billion in pollution insurance for the tug and tank barge fleet
and $105 million of pollution coverage for the OSVs. We believe that our current level of
insurance is adequate for our business and consistent with industry practice, and we have not
experienced a loss in excess of our policy limits. We may not be able to obtain insurance
coverage in the future to cover all risks inherent in our business, or insurance, if available,
may be at rates that we do not consider to be commercially reasonable. In addition, as single-
hulled tank barges increase in age, insurers may be less willing to insure and customers less
willing to hire single-hulled vessels. The terms of our entry into a mutual protection and
indemnity association covering marine risks relating to our tug and tank barge business
allows additional premiums to be called for from time to time, and paid by association
members in respect of unanticipated reserve requirements of the association.
Employees
On December 31, 2005, we had 657 employees, including 518 operating personnel and
139 corporate, administrative and management personnel. None of our employees are
represented by a union or employed pursuant to a collective bargaining agreement or similar
arrangement. We have not experienced any strikes or work stoppages, and our management
believes that we continue to enjoy good relations with our employees.
Properties
Our corporate headquarters are located in Covington, Louisiana. Our office lease covers
23,756 sq. ft. and has an initial term of five years, which commenced in September 2003, with
two additional five-year renewal periods. In August 2005 and December 2005, we entered
into agreements that increased our total office space by an additional 5,500 sq. ft. and 4,700
sq. ft., respectively. We also hold a one-year lease on a 4,500-sq. ft. warehouse near our
corporate headquarters to maintain spare parts inventory. To support our OSV operations in
the Gulf of Mexico, we lease a shore base facility in Port Fourchon, Louisiana. Our facility
lease, which commenced in December 2005, has an initial term of eight years with four
additional five-year renewal periods. The base facility covers approximately 24 acres of land
and includes approximately 1,850 linear feet of dock space and 13,125 sq. ft. of warehouse
and office space. For local support in Puerto Rico, we lease an office consisting of
33
approximately 1,900 sq. ft. To support our operations in the northeastern United States, we
lease office space and warehouse space in Brooklyn, New York, consisting of approximately
66,760 sq. ft. We also lease dock space, consisting of approximately 36,000 sq. ft., in
Brooklyn, New York. We operate our tug and tank barge fleet from these New York facilities.
The lease on our Brooklyn facilities is currently scheduled to expire in March 2007. We
believe that our facilities, including waterfront locations used for vessel dockage and certain
vessel repair work, provide an adequate base of operations for the foreseeable future.
Information regarding our fleet is set forth above in “—Offshore Supply Vessels—Our OSV
Business” and “—Tugs and Tank Barges—Our Tug and Tank Barge Business”.
Seasonality of Business
Demand for our OSV services is directly affected by the levels of offshore drilling activity.
Budgets of many of our customers are based upon a calendar year, and demand for our
services has historically been stronger in the third and fourth calendar quarters when
allocated budgets are expended by our customers and weather conditions are more favorable
for offshore activities. Many other factors, such as the expiration of drilling leases and the
supply of and demand for oil and natural gas, may affect this general trend in any particular
year. In addition, we typically have an increase in demand for our OSVs to survey and repair
offshore infrastructure immediately following major hurricanes in the U.S. Gulf of Mexico.
Tank barge services are significantly affected by the strength of the U.S. economy,
changes in weather patterns and population growth that affect the consumption of and the
demand for refined petroleum products and crude oil. The tug and tank barge market, in
general, is marked by steady demand over time, although such demand is seasonal and often
dependent on weather conditions. Unseasonably mild winters result in significantly lower
demand for heating oil in the northeastern United States, which is a significant market for our
tank barge services. Conversely, the summer driving season can increase demand for
automobile fuel and, accordingly, the demand for our services.
Availability of Reports, Certain Committee Charters and Other Information
Our website address is http://www.hornbeckoffshore.com/. We make available on this
website, free of charge, access to our Annual Reports on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K and amendments to those reports, as well as other
documents that we file with, or furnish to, the Securities and Exchange Commission, or the
Commission, pursuant to Sections 13(a) or 15(d) of the Exchange Act, as soon as reasonably
practicable after such documents are filed with, or furnished to, the Commission. You may
read and copy any materials we file with the Commission at the Commission’s Public
Reference Room at 450 Fifth Street, NW, Washington, DC 20549. You can obtain information
on the operation of the Public Reference Room by calling the Commission at 1-800-732-0330.
The SEC maintains an Internet site that contains reports, proxy and information statements,
and other information regarding issuers that file electronically with the Commission at http://
www.sec.gov.
Our Corporate Governance Guidelines, Employee Code of Business Conduct and Ethics
(which applies to all employees, including our Chief Executive Officer and certain Financial and
Accounting Officers), Board of Directors Code of Business Conduct and Ethics, and the
charters for our Audit, Nominating/Corporate Governance and Compensation Committees, can
34
all be found on the Investor Relations page of our website (http://www.hornbeckoffshore.com/)
under "Corporate Governance". We intend to disclose any changes to or waivers from the
Employee Code of Business Conduct and Ethics that would otherwise be required to be
disclosed under Item 5.05 of Form 8-K on our website. We will also provide printed copies of
these materials to any stockholder upon request to Hornbeck Offshore Services Inc., Attn: Chief
Compliance Officer, 103 Northpark Boulevard, Suite 300, Covington, Louisiana 70433. The
information on our website is not, and shall not be deemed to be, a part of this report or
incorporated into any other filings we make with the Commission.
Item 3—Legal Proceedings
We are not currently a party to any material legal proceedings, although we may from
time to time be subject to various legal proceedings and claims that arise in the ordinary
course of business.
Item 4—Submission of Matters to a Vote of Security Holders
None.
35
PART II
Item 5—Market for the Registrant’s Common Stock and Related Stockholder Matters
Our common stock, $0.01 par value, trades on the New York Stock Exchange, or NYSE,
under the trading symbol “HOS”. The table sets forth, for the quarterly period indicated, the
high and low sale prices for our common stock as reported by the NYSE during 2005 and
2004.
2005
2004
High
Low
High
Low
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter
Third Quarter
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$26.14
$27.73
$37.49
$36.89
$18.10
$20.10
$26.81
$27.81
$13.55
$13.75
$17.00
$21.50
$13.00
$10.15
$11.12
$14.44
On January 31, 2006, we had 58 holders of record of our common stock.
We have not previously declared or paid, and we do not plan to declare or pay in the
foreseeable future, any cash dividends on our common stock. We presently intend to retain all
of the cash our business generates to meet our working capital requirements and fund future
growth. Any future payment of cash dividends will depend upon the financial condition, capital
requirements and earnings of our Company, as well as other factors that our Board of
Directors may deem relevant. In addition, our indenture and revolving credit facility include
restrictions on our ability to pay cash dividends on our common stock.
See Item 12 “Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters” for information regarding shares of common stock authorized
for issuance under our equity compensation plans.
36
Item 6—Selected Financial Data
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
(In thousands, except operating and per share data)
Our selected historical consolidated financial information as of and for the periods ended
December 31, 2005, 2004, 2003, 2002 and 2001 was derived from our audited historical
consolidated financial statements prepared in accordance with generally accepted accounting
principles, or GAAP. The data should be read in conjunction with and is qualified in its entirety
by reference to “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” and our historical consolidated financial statements and the notes to those
statements included elsewhere in this Annual Report on Form 10-K.
Year Ended December 31,
2005
2004
2003
2002
2001
Statements of Operations Data:
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative expenses . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on early extinguishment of debt
. . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before income taxes . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Per Share Data:
Basic net income (loss)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average basic shares outstanding . . . . . . . . . . . . .
Weighted average diluted shares outstanding(3) . . . . . . . . . .
Balance Sheet Data (at period end):
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Working capital
Property, plant, and equipment, net
. . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total short-term debt(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total long-term debt(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Statement of Cash Flows Data:
Net cash provided by (used in):
Operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Financial Data (unaudited):
EBITDA (6)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Operating Data (unaudited):
Offshore Supply Vessels:
Average number(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average fleet capacity (deadweight) . . . . . . . . . . . . . . . .
Average vessel capacity (deadweight) . . . . . . . . . . . . . .
Average utilization rate(8) . . . . . . . . . . . . . . . . . . . . . . . . .
Average dayrate(9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective dayrate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tugs and Tank Barges:
Average number of tank barges(10)
. . . . . . . . . . . . . . . .
Average fleet capacity (barrels)(10) . . . . . . . . . . . . . . . . .
Average barge size (barrels)
. . . . . . . . . . . . . . . . . . . . . .
Average utilization rate(8) . . . . . . . . . . . . . . . . . . . . . . . . .
Average dayrate(11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective dayrate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 182,586
66,910
27,270
20,327
68,079
1,698
3,178
12,558
1,980
58,981
21,538
37,443
$
$
1.67
1.64
22,369
22,837
$ 271,739
290,471
462,041
796,675
—
299,449
429,495
75,806
(120,617)
262,202
97,329
124,964
(0.13) $
(0.13) $
$ 132,261
58,520
23,135
14,759
35,847
22,443
356
17,698
135
(3,803)
(1,320)
(2,483)
$
$
$
$
$
19,330
19,330
54,301
52,556
361,219
460,571
15,449
225,000
182,904
21,405
(61,378)
81,358
59,473
61,378
$ 110,813
46,805
17,590
10,731
35,687
—
178
18,523
706
18,048
6,858
11,190
0.84
0.82
13,397
13,604
$
$
$
12,899
17,698
316,715
365,242
—
212,677
112,395
25,499
(98,166)
63,322
54,161
105,816
$
$
$
$
$
$
92,585
36,337
12,296
9,681
34,271
—
667
16,207
55
18,786
7,139
11,647
0.96
0.94
12,098
12,428
22,228
22,265
226,232
278,290
—
172,306
71,876
$ 68,791
25,135
7,670
8,039
27,947
3,029
1,455
13,617
—
12,756
5,737
7,019
$
$
0.68
0.67
10,265
10,514
$ 53,203
48,516
180,781
258,817
—
171,976
59,866
24,955
(55,771)
(159)
$ 33,345
(88,328)
75,198
47,289
55,771
$ 37,072
88,328
24.6
57,658
2,341
22.8
51,938
2,274
17.3
41,312
2,353
11.0
25,006
2,208
7.8
15,473
1,947
96.2%
13,413
12,903
$
$
87.5%
10,154
8,885
$
$
88.6%
10,940
9,693
$
$
94.9%
99.1%
12,176
11,555
$ 11,872
$ 11,765
14.6
1,072,075
71,651
16.0
1,156,330
72,271
15.9
1,145,064
72,082
16.0
1,130,727
70,670
12.3
847,780
68,109
87.1%
13,542
11,795
$
$
82.2%
11,620
9,552
$
$
73.6%
10,971
8,075
$
$
78.1%
84.4%
9,499
7,419
$
$
8,944
7,549
$
$
$
$
$
$
37
(1) Represents other operating income and expenses, including gains (or losses) on disposition of assets and equity in income from investments.
Includes goodwill amortization of $126 for the year ended December 31, 2001. Effective January 1, 2002, SFAS No. 142, “Goodwill and Other
(2)
Intangible Assets” required that goodwill and other indefinite-lived assets no longer be amortized, but instead be reviewed for impairment
annually or more frequently if circumstances indicate potential impairment. Net income (loss) would have been $7,145 for the year ended
December 31, 2001 if SFAS 142 had been in effect on January 1, 2001.
(3) For the years ended December 31, 2005 and 2004, stock options representing rights to acquire 42 and 273 shares, respectively, of common
stock were excluded from the calculation of diluted earnings per share because the effect was antidilutive. Stock options are antidilutive when
the results from operations are a net loss or when the exercise price of the options is greater than the average market price of the common
stock for the period.
(4) Represents the remaining balance of approximately $15,500 in aggregate principal amount of the Company’s 10.625% senior notes due 2008
that was redeemed on January 14, 2005 and excludes original issue discount associated with our 10.625% senior notes in the amount of $97
as of December 31, 2004.
(5) Excludes original issue discount associated with our 6.125% senior notes in the amount of $551 as of December 31, 2005. Excludes original
issue discount associated with our 10.625% senior notes in the amount of $2,323, $2,694 and $3,024 as of December 31, 2003, 2002 and
2001, respectively. The amount as of December 31, 2003 includes $40,000 outstanding under our long-term, revolving credit facility.
(6) See our discussion of EBITDA as a non-GAAP financial measure immediately following these footnotes.
(7) We owned 25 OSVs at December 31, 2005. The HOS Saylor and HOS Navegante were acquired in January 2005 and March 2005,
respectively.
(8) Utilization rates are average rates based on a 365-day year. Vessels are considered utilized when they are generating revenues.
(9) Average dayrates represent average revenue per day, which includes charter hire and brokerage revenue, based on the number of days
during the period that the OSVs generated revenue.
(10) The averages for the year ended December 31, 2003 give effect to our sale of the Energy 5502 on January 28, 2003 and our acquisition of the
Energy 8001 on February 28, 2003. As of December 31, 2004, our tank barge fleet consisted of 16 vessels, of which three tank barges were
retired from service by the end of 2004. We owned 18 active tank barges at December 31, 2005. The averages for the year ended
December 31, 2005 reflect the delivery of five double-hulled tank barges under our first newbuild program, including two 135,000-barrel
double-hulled tank barges in March 2005 and December 2005 and three 110,000-barrel double-hulled tank barges in July 2005, October 2005
and December 2005, respectively.
(11) Average dayrates represent average revenue per day, including time charters, brokerage revenue, revenues generated on a per-barrel-
transported basis, demurrage, shipdocking and fuel surcharge revenue, based on the number of days during the period that the tank barges
generated revenue. For purposes of brokerage arrangements, this calculation excludes that portion of revenue that is equal to the cost of
in-chartering third-party equipment paid by customers.
Non-GAAP Financial Measures
We disclose and discuss EBITDA as a non-GAAP financial measure in our public
releases, including quarterly earnings releases, investor conference calls and other filings
with the Commission. We define EBITDA as earnings (net income) before interest, income
taxes, depreciation, amortization and losses on early extinguishment of debt. Our measure of
EBITDA may not be comparable to similarly titled measures presented by other companies.
Other companies may calculate EBITDA differently than we do, which may limit its usefulness
as a comparative measure.
We view EBITDA primarily as a liquidity measure and, as such, we believe that the
GAAP financial measure most directly comparable to it is cash flows provided by operating
activities. Because EBITDA is not a measure of financial performance calculated in
accordance with GAAP, it should not be considered in isolation or as a substitute for
operating income, net income or loss, cash flows provided by operating, investing and
financing activities, or other income or cash flow statement data prepared in accordance with
GAAP.
EBITDA is widely used by investors and other users of our financial statements as a
supplemental financial measure that, when viewed with our GAAP results and the
accompanying reconciliation, we believe provides additional information that is useful to gain
an understanding of the factors and trends affecting our ability to service debt, pay deferred
taxes and fund drydocking charges and other maintenance capital expenditures. We also
believe the disclosure of EBITDA helps investors meaningfully evaluate and compare our
cash flow generating capacity from quarter to quarter and year to year.
38
EBITDA is also one of the financial metrics used by management (i) as a supplemental
internal measure for planning and forecasting overall expectations and for evaluating actual
results against such expectations; (ii) as a significant criteria for annual incentive cash
bonuses paid to our executive officers and other shore-based employees; (iii) to compare to
the EBITDA of other companies when evaluating potential acquisitions; and (iv) to assess our
ability to service existing fixed charges and incur additional indebtedness.
The following table provides the detailed components of EBITDA, as we define that term,
for the following periods (in thousands).
Year Ended December 31,
2005
2004
2003
2002
2001
Components of EBITDA:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . $37,443 $ (2,483) $11,190 $11,647 $ 7,019
Interest, net:
Debt obligations . . . . . . . . . . . . . . . . . . . . .
Put warrants (1) . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . .
12,558
—
(3,178)
17,698
18,523
16,207
—
(356)
—
(178)
—
(667)
10,665
2,952
(1,455)
Total interest, net . . . . . . . . . . . . . . . . . . . . . . . .
9,380
17,342
18,345
15,540
12,162
Income tax expense (benefit) . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on early extinguishment of debt (2) . . . . .
21,538
19,954
7,316
1,698
(1,320)
17,408
5,727
22,443
6,858
14,393
3,197
—
7,139
10,351
1,945
—
5,737
6,501
1,169
3,029
EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $97,329 $59,117 $53,983 $46,622 $35,617
(1)
Interest expense from put warrants represents an adjustment to the estimated fair value of the put warrants. According to the Emerging Issues
Task Force, or EITF, Issue 88-9, as supplemented by EITF Issue 00-19, which we have adopted, we are required to account for warrants that
contain put options at their estimated fair value with the changes reported as interest. We repurchased and terminated all of the warrants for
$14,500 in October 2001.
(2) A loss on early extinguishment of debt was recorded during 2001 resulting from the write-off of deferred financing costs upon the refinancing
of all our debt through the issuance of our 10.625% senior notes in July 2001. For the year ended December 31, 2004, amount includes the
repurchase premium, related fees and expenses and the write-off of unamortized original issue discount and deferred financing costs related
to the repurchase of 91% the 10.625% senior notes in November 2004. For the year ended December 31, 2005, amount includes the
repurchase premium, related fees and expenses and the write-off of unamortized original issue discount and deferred financing costs related
to the redemption of the remaining 9% of the 10.625% senior notes in January 2005.
The following table reconciles EBITDA to cash flows provided by operating activities for
the following periods (in thousands).
Year Ended December 31,
2005
2004
2003
2002
2001
EBITDA Reconciliation to GAAP:
EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 97,329 $ 59,117 $ 53,983 $ 46,622 $35,617
(1,745)
Cash paid for deferred drydocking charges . . .
(5,577)
Cash paid for interest . . . . . . . . . . . . . . . . . . . . .
4,972
Changes in working capital . . . . . . . . . . . . . . . .
78
Changes in other, net . . . . . . . . . . . . . . . . . . . . .
(2,409)
(19,075)
(460)
277
(6,100)
(19,718)
(1,993)
(673)
(8,530)
(24,023)
(4,960)
(199)
(6,827)
(17,888)
5,139
(1,947)
Cash flows provided by operating activities . . . $ 75,806 $ 21,405 $ 25,499 $ 24,955 $33,345
39
Set forth below are the material limitations associated with using EBITDA as a
non-GAAP financial measure compared to cash flows provided by operating activities.
(cid:127) EBITDA does not reflect the future capital expenditure requirements that may be
necessary to replace our existing vessels as a result of normal wear and tear,
(cid:127) EBITDA does not reflect the interest, future principal payments and other financing-
related charges necessary to service the debt that we have incurred in acquiring and
constructing our vessels,
(cid:127) EBITDA does not reflect the deferred income taxes that we will eventually have to pay
once we are no longer in an overall tax net operating loss carryforward position, and
(cid:127) EBITDA does not reflect changes in our net working capital position.
Management compensates for the above-described limitations in using EBITDA as a
non-GAAP financial measure by only using EBITDA to supplement our GAAP results.
Item 7—Management’s Discussion and Analysis of Financial Condition and Results of
Operations
The following management’s discussion and analysis of financial condition and results of
operations should be read in conjunction with our historical consolidated financial statements
and their notes included elsewhere in this Annual Report on Form 10-K. This discussion
contains forward-looking statements that reflect our current views with respect to future
events and financial performance. Our actual results may differ materially from those
anticipated in these forward-looking statements or as a result of certain factors such as those
set forth below under “Forward Looking Statements.”
General
We own a fleet of 25 technologically advanced, new generation OSVs, which includes
two foreign-flagged AHTS vessels that primarily operate as supply vessels and for towing
jack-up rigs. We also own and operate one fast supply vessel and own two former coastwise
sulfur tankers that are being converted into MPSVs. Currently, 20 of our OSVs are operating
in the U.S. Gulf of Mexico, or GoM, four of our OSVs are operating offshore Trinidad, and one
OSV and a fast supply vessel are working offshore Mexico. We also own 12 active ocean-
going tugs and 18 active ocean-going tank barges, six of which are double-hulled. Currently,
16 of our tank barges are operating in the northeastern United States, primarily New York
Harbor, and two are operating in Puerto Rico. The current fleet count reflects five double-
hulled barges delivered in 2005 under our first tug and tank barge newbuild program, and is
net of the retirement of three single-hulled tank barges at the end of 2004. We also plan to
build several new double-hulled tank barges with an aggregate 400,000 barrels of additional
barrel-carrying capacity and, unlike our first tank barge newbuild program, we may construct
the related ocean-going tugs to be used as power units for the new barges. All of the new
vessels to be constructed under the second tug and tank barge newbuild program are
expected to be delivered from early mid-2007 through mid-2008. Upon completion of our
second tug and tank barge newbuild program, 58% of our tank barge fleet barrel-carrying
capacity will be double-hulled, up from 46% today and 7% at the end of 2004.
We charter our OSVs on a dayrate basis, under which the customer pays us a specified
dollar amount for each day during the term of the contract, pursuant to either fixed term or
40
spot time charters. A fixed term time charter is a contract for a fixed period with a specified
dayrate, generally paid monthly. Spot time charters in the OSV industry are generally charter
contracts with either relatively short fixed or indefinite terms. In all time charters, spot or fixed,
the vessel owner absorbs crew, insurance and repair and maintenance costs in connection
with the operation of the vessel, while customers absorb all other direct operating costs. In
addition, in a typical time charter, the charterer obtains the right to direct the movements and
utilization of the vessel while the vessel owner retains operational control over the vessel.
All of our OSVs and our fast supply vessel operate under time charters, including eleven
that are chartered under long-term contracts with expiration dates ranging from March 2006
through June 2007. The long-term contracts for our supply vessels are consistent with those
used in the industry and are typically either fixed for a term of one or more years or are tied to
the duration of a long-term contract for a drilling rig for which the vessel provides services.
These contracts generally contain, among others, provisions governing insurance, reciprocal
indemnifications, performance requirements and, in certain instances, dayrate escalation
terms and renewal options.
While OSVs service existing oil and gas production platforms as well as exploration and
development activities, incremental OSV demand depends primarily upon the level of drilling
activity, which can be influenced by a number of factors, including oil and natural gas prices
and drilling budgets of exploration and production companies. As a result, utilization rates
have historically been tied to oil and natural gas prices and drilling activity. However, the
relatively large capital commitments, longer lead times and investment horizons associated
with deepwater and deep well projects have diminished the significance of these factors
compared to conventional shelf projects.
We have developed, through a series of three newbuild programs, a proprietary fleet of
200, 240, and 265 class new generation OSVs to meet the diverse needs of our customers.
Through acquisitions, we have broadened the mix of our fleet to include additional 200 class
vessels that are well suited for deep shelf gas exploration and other complex shelf drilling
applications and to fill the increasing demand for modern equipment for conventional drilling
on the Continental Shelf. We have continued our efforts to expand the services that we offer
our customers with the acquisition of two AHTS vessels, which primarily serve as 240 class
supply vessels and for towing jack-up rigs, the ongoing conversion of two coastwise sulfur
tankers for use as 370 class MPSVs, and the commencement of our fourth OSV newbuild
program that will add, in the aggregate, up to 37,000 deadweight tons of capacity to our OSV
fleet, including up to six 240 EDF class vessels that were announced in February 2006.
Although the demand for new generation equipment has historically been driven by
deepwater, deep shelf and highly complex projects, we are experiencing increased demand
for our vessels for all types of projects, including transition zone and shelf activity, irrespective
of water depth, drilling depth or project type, and non-oil and gas production activities,
including military applications. Notably, this prevailing shift in customer preference does not
appear to be limited to the U.S. Gulf of Mexico, as we have also observed this preference in
foreign areas such as Mexico, Trinidad, Brazil and West Africa.
Soft market conditions for OSVs in the U.S. Gulf of Mexico persisted from the second half
of 2002 through the first half of 2004. Since the second half of 2004, OSV market conditions
in the U.S. Gulf of Mexico have improved substantially. Our average dayrates have risen
41
approximately $6,300 since April 2004 to an average of approximately $15,900 per day for
the fourth quarter 2005, while our fleetwide OSV utilization has risen from roughly 70% to
95% over the same time span. This combination of increased dayrates and utilization has
resulted in our effective, or utilization-adjusted, OSV dayrate more than doubling since April
2004.
Market conditions in the U.S. Gulf of Mexico continue to show positive trends such as the
increased level of approved applications to drill deepwater wells and certain operators’
construction commitments for new deepwater floating rigs, deep shelf jack-up rigs, floating
production units, subsea tie-backs and other deepwater production infrastructure, as well as
the additional demand for vessels in connection with rehabilitating infrastructure damaged by
Hurricanes Katrina and Rita. Another indication of the encouraging visible demand is rising
dayrates and utilization for all classes of offshore rigs, which in the past has been a barometer
for OSV dayrates. The supply fundamentals for new generation OSVs could further impact
market conditions. The average age of conventional 180 class OSVs is approximately 26
years; therefore, we expect that there will be a continued and accelerated attrition rate for
such vessels working in the U.S. Gulf of Mexico and abroad. Although OSVs have been
recently constructed to replace the worldwide conventional 180 class tonnage being removed
from service, several U.S.-flagged new generation OSVs have left the U.S. Gulf of Mexico for
foreign markets, which is a long-term trend that we expect to continue. Additionally, there are
signs that the improved market conditions in the U.S. Gulf of Mexico could be a long-term
trend. For example, in the offshore oil and natural gas lease sale during 2005 by the Minerals
Management Service, interest in acquiring leases was the highest it had been since 2001, a
6% increase from 2004, with 53% of the leases bid on being located in ultra-deep water.
Generally, we operate an ocean-going tug and tank barge together as a “tow” to transport
petroleum products between U.S. ports and along the coast of Puerto Rico. We operate our
tugs and tank barges under fixed time charters, spot time charters, contracts of affreightment
and consecutive voyage contracts. A fixed term time charter is a contract for a fixed period of
time with a specified day rate, generally paid monthly. Spot time charters in the tug and tank
barge industry are generally single-voyage contracts of affreightment, consecutive voyage
contracts, or time charter contracts with either relatively short fixed or indefinite terms. A
consecutive voyage contract is a contract for the transportation of cargo for a specified
number of voyages between designated ports over a fixed period of time under which we are
paid based on the volume of products we deliver per voyage. Under consecutive voyage
contracts, in addition to earning revenues for volumes delivered, we earn a standby hourly
rate between voyages. We may also charter vessels to a third party under a bareboat charter.
A bareboat charter is a “net lease” in which the charterer takes full operational control over
the vessel for a specified period of time for a specified daily rate that is generally paid monthly
to the vessel owner. The bareboat charterer is solely responsible for the operation and
management of the vessel and must provide its own crew and pay all operating and voyage
expenses. We also provide tug services to third party vessels on a periodic basis. Typically,
these services include vessel docking and towage assistance.
The primary demand drivers for our tug and tank barge services are population growth,
the strength of the U.S. economy, changes in weather, oil prices and competition from
alternate energy sources. The tug and tank barge market, in general, is marked by steady
demand over time. Results for the first and fourth quarters of a given year are typically higher
due to normal seasonal winter-weather patterns that typically result in a drop-off of activity
42
during the second and third quarters. We generally take advantage of this seasonality to
prepare our tug and tank barge fleet for peak demand periods by performing our regulatory
drydocking and maintenance programs during the second and third quarters. In addition, we
regularly evaluate our customers’ needs and often elect to accelerate scheduled drydockings
to take advantage of certain market opportunities. However, as we shift more of our fleet from
COAs to time charters, some of our historic seasonality will be diminished.
As the most recent major OPA 90 milestone approached on January 1, 2005 and since
that date, customer demand for double-hulled equipment has led to increases in dayrates for
this equipment, particularly for tank barges in black oil service. We are actively working to
ensure that our fleet is well positioned to take advantage of these opportunities as they
develop. In November 2003, we commenced our first double-hulled tank barge newbuild
program to replace some of our existing single-hulled tank barges that we anticipated retiring
from service in accordance with OPA 90. Under our first newbuild program, two 135,000-
barrel double-hulled tank barges were placed in service in March 2005 and December 2005,
respectively, and three 110,000-barrel double-hulled tank barges were placed in service in
July 2005, October 2005 and December 2005, respectively. This newbuild program more than
replaced the barrel-carrying capacity that we lost when we retired three of our single-hulled
tank barges from service at the end of 2004, as mandated by OPA 90. On September 26,
2005, the Company announced a second newbuild program that will add double-hulled tank
barges with 400,000 barrels of aggregate carrying capacity plus related offshore tugs to our
existing fleet. The tugs and double-hulled tank barges under the second newbuild program
are currently expected to be delivered from mid-2007 through mid-2008.
Our operating costs are primarily a function of fleet size and utilization levels. The most
significant direct operating costs are wages paid to vessel crews, maintenance and repairs
and marine insurance. Because most of these expenses are incurred regardless of vessel
utilization, our direct operating costs as a percentage of revenues may fluctuate considerably
with changes in dayrates and utilization.
In addition to the operating costs described above, we incur fixed charges related to the
depreciation of our fleet and costs for routine drydock inspections and maintenance and
repairs necessary to ensure compliance with applicable regulations and to maintain
certifications for our vessels with the U.S. Coast Guard and various classification societies.
The aggregate number of drydockings and other repairs undertaken in a given period
determines the level of maintenance and repair expenses and marine inspection amortization
charges. We generally capitalize costs incurred for drydock inspection and regulatory
compliance and amortize such costs over the period between such drydockings, typically 30
or 60 months. Applicable maritime regulations require us to drydock our vessels twice in a
five-year period for inspection and routine maintenance and repair. If we undertake a large
number of drydockings in a particular fiscal period, comparative results may be affected.
Critical Accounting Policies
Our consolidated financial statements included in this Annual Report on Form 10-K have
been prepared in accordance with accounting principles generally accepted in the United
States. In many cases, the accounting treatment of a particular transaction is specifically
dictated by generally accepted accounting principles. In other circumstances, we are required
to make estimates, judgments and assumptions that we believe are reasonable based upon
43
available information. We base our estimates and judgments on historical experience and
various other factors that we believe are reasonable based upon the information available.
Actual results may differ from these estimates under different assumptions and conditions.
We believe that of our significant accounting policies discussed in Note 2 to our consolidated
financial statements, the following may involve estimates that are inherently more subjective.
Purchase Accounting. Purchase accounting requires extensive use of estimates and
judgments to allocate the cost of an acquired enterprise to the assets acquired and liabilities
assumed. The cost of each acquired operation is allocated to the assets acquired and
liabilities assumed based on their estimated fair values. These estimates are revised during
an allocation period as necessary when, and if, information becomes available to further
define and quantify the value of the assets acquired and liabilities assumed. For example,
costs related to the recertification of acquired vessels that are drydocked within the allocation
period immediately following the acquisition of such vessels are reflected as an adjustment to
the value of the vessels acquired and the liabilities assumed related to the drydocking. The
adjusted basis of the vessel is depreciated over the estimated useful lives of the vessel. The
allocation period does not exceed one year from the date of the acquisition. To the extent
additional information to refine the original allocation becomes available during the allocation
period, the allocation of the purchase price is adjusted. For example, if an acquired vessel
was subsequently disposed of within the allocation period, the sales price of the vessel would
be used to adjust the original assigned value to the vessel at the date of acquisition such that
no gain or loss would be recognized upon disposition during the allocation period. If
information becomes available after the allocation period, those items are reflected in
operating results.
Carrying Value of Vessels. We depreciate our tugs, tank barges, and OSVs over
estimated useful lives of 14 to 25 years, three to 25 years and 20 to 25 years, respectively.
The useful lives used for single-hulled tank barges are based on their classification under
OPA 90, and for double-hulled tank barges it is 25 years. In assigning depreciable lives to
these assets, we have considered the effects of both physical deterioration largely caused by
wear and tear due to operating use and other economic and regulatory factors that could
impact commercial viability. To date, our experience confirms that these policies are
reasonable, although there may be events or changes in circumstances in the future that
indicate the recoverability of the carrying amount of a vessel might not be possible. Examples
of events or changes in circumstances that could indicate that the recoverability of a vessel’s
carrying amount should be assessed might include a change in regulations such as OPA 90,
a significant decrease in the market value of a vessel and current period operating or cash
flow losses combined with a history of operating or cash flow losses or a projection or forecast
that demonstrates continuing losses associated with a vessel. If events or changes in
circumstances as set forth above indicate that a vessel’s carrying amount may not be
recoverable, we would then be required to estimate the undiscounted future cash flows
expected to result from the use of the vessel and its eventual disposition. If the sum of the
expected future cash flows is less than the carrying amount of the vessel, we would be
required to recognize an impairment loss.
Recertification Costs. Our tugs, tank barges and OSVs are required by regulation to be
recertified after certain periods of time. These recertification costs are incurred while the
vessel is in drydock where other routine repairs and maintenance are performed and, at
times, major replacements and improvements are performed. We expense routine repairs and
44
maintenance as they are incurred. Recertification costs can be accounted for in one of three
ways: (1) defer and amortize, (2) accrue in advance, or (3) expense as incurred. Companies
in our industry typically use either the defer and amortize or the expense as incurred
accounting method. We defer and amortize recertification costs over the length of time that
the recertification is expected to last, which is generally 30 or 60 months. Major replacements
and improvements, which extend the vessel’s economic useful life or functional operating
capability, are capitalized and depreciated over the vessel’s remaining economic useful life.
Inherent in this process are estimates we make regarding the specific cost incurred and the
period that the incurred cost will benefit.
Revenue Recognition. We charter our OSVs to customers under time charters based
on a daily rate of hire and recognize revenue as earned on a daily basis during the contract
period of the specific vessel. Tugs and tank barges are often contracted to customers under
contracts of affreightment, under which revenue is recognized based on the number of days
incurred for the voyage as a percentage of total estimated days applied to total estimated
revenues. Voyage related costs are expensed as incurred. Substantially all voyages under
these contracts are less than 10 days in length. We also contract our tugs and tank barges
under time charters based on a daily rate of hire. Revenue is recognized on such contracts as
earned on a daily basis during the contract period of the specific vessel.
Allowance for Doubtful Accounts. Our customers are primarily major and independent,
domestic and international, oil and oil service companies. Our customers are granted credit
on a short-term basis and related credit risks are considered minimal. We usually do not
require collateral. We provide an estimate for uncollectible accounts based primarily on
management’s judgment. Management uses historical losses, current economic conditions
and individual evaluations of each customer to make adjustments to the allowance for
doubtful accounts. Our historical losses have not been significant. However, because
amounts due from individual customers can be significant, future adjustments to the
allowance can be material if one or more individual customers balances are deemed
uncollectible.
Income Taxes. We follow SFAS No. 109, “Accounting for Income Taxes.” SFAS 109
requires the use of the liability method of computing deferred income taxes. Under this
method, deferred income taxes are provided for the temporary differences between the
financial reporting basis and the tax basis of our assets and liabilities. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or settled. The
assessment of the realization of deferred tax assets, particularly those related to tax operating
loss carryforwards, involves the use of management’s judgment to determine whether it is
more likely than not that we will realize such tax benefits in the future.
45
Results of Operations
The tables below set forth, by segment, the average dayrates and utilization rates and
effective dayrates for our vessels and the average number of vessels owned during the
periods indicated. These OSVs and tug and tank barges generate substantially all of our
revenues and operating profit.
The table does not include the results of operations of the HOS Hotshot, a 165-ft. new
generation fast supply vessel that we acquired in May 2004.
Offshore Supply Vessels:
Average number of vessels . . . . . . . . . . . . . . . . . . . . . . . .
Average fleet capacity (deadweight) . . . . . . . . . . . . . . . . .
Average vessel capacity (deadweight) . . . . . . . . . . . . . . .
Average utilization rate(1) . . . . . . . . . . . . . . . . . . . . . . . . .
Average dayrate(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective dayrate(4)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tugs and Tank Barges:
Years Ended December 31,
2005
2004
2003
24.6
57,658
2,341
22.8
51,938
2,274
96.2%
13,413
12,903
$
$
87.5%
10,154
8,885
$
$
$
$
17.3
41,312
2,353
88.6%
10,940
9,693
Average number of tank barges . . . . . . . . . . . . . . . . . . . .
Average fleet capacity (barrels) . . . . . . . . . . . . . . . . . . . . .
Average barge size (barrels) . . . . . . . . . . . . . . . . . . . . . . .
Average utilization rate(1) . . . . . . . . . . . . . . . . . . . . . . . . .
Average dayrate(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective dayrate(4)
14.6
1,072,075
71,651
16.0
1,156,330
72,271
15.9
1,145,064
72,082
87.1%
13,542
11,795
$
$
82.2%
11,620
9,552
$
$
73.6%
10,971
8,075
$
$
(1) Utilization rates are average rates based on a 365-day year. Vessels are considered utilized when they are generating revenues.
(2) Average dayrates represent average revenue per day, which includes charter hire and brokerage revenue, based on the number of days
during the period that the OSVs generated revenue.
(3) Average dayrates represent average revenue per day, including time charters, brokerage revenue, revenues generated on a per-barrel-
transported basis, demurrage, shipdocking and fuel surcharge revenue, based on the number of days during the period that the tank barges
generated revenue. For purposes of brokerage arrangements, this calculation excludes that portion of revenue that is equal to the cost paid by
customers of in-chartering third-party equipment.
(4) Effective dayrate represents the average dayrate multiplied by the average utilization rate.
46
Summarized financial information concerning our reportable segments is shown below in
the following table (in thousands):
Year Ended December 31,
2005
2004
2003
Revenues by segment:
Offshore supply vessels
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 88,772 $ 59,886 $ 50,044
12,358
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15,407
28,663
Tugs and tank barges
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses by segment:
117,435
75,293
62,402
57,379
7,772
65,151
50,465
6,503
56,968
43,206
5,205
48,411
$182,586 $132,261 $110,813
Offshore supply vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 35,936 $ 29,724 $ 22,786
24,019
Tugs and tank barges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28,796
30,974
Depreciation and amortization by segment:
$ 66,910 $ 58,520 $ 46,805
Offshore supply vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,197 $ 12,876 $ 9,381
8,209
Tugs and tank barges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12,073
10,259
Loss on early extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . $ 1,698 $ 22,443 $
—
General and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . $ 20,327 $ 14,759 $ 10,731
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,558 $ 17,698 $ 18,523
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,178 $
Income tax expense (benefit)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,538 $ (1,320) $ 6,858
356 $
178
$ 27,270 $ 23,135 $ 17,590
(1)
Included are the amounts applicable to our Puerto Rico tug and tank barge operations, even though Puerto Rico is considered a possession of
the United States and the Jones Act applies to vessels operating in Puerto Rican waters.
Year Ended December 31, 2005 Compared To Year Ended December 31, 2004
Revenues. Revenues were $182.6 million in 2005, compared to $132.3 million in 2004,
an increase of $50.3 million or 38.0%. Revenues increased primarily as a result of the
strengthening market conditions in our OSV and tug and tank barge business segments, and
to a lesser extent, our average operating fleet increasing to 53 vessels at the end of 2005
from 51 vessels at the end of 2004.
Revenues from our OSV segment increased $42.1 million, or 55.9%, to $117.4 million in
2005, compared to $75.3 million in 2004. Our revenue growth is primarily attributable to the
increases in OSV utilization and dayrates compared to the prior year and the addition of two
AHTS vessels during the first quarter of 2005. Our utilization rate was 96.2% in 2005
compared to 87.5% in 2004. Our OSV average dayrate was $13,413 in 2005 compared to
$10,154 in 2004, an increase of $3,259, or 32.1%. The increase in dayrates and utilization is
47
primarily related to the significant improvement in the U.S. Gulf of Mexico market. Domestic
revenues for our OSV segment were $88.8 million in 2005, an increase of $28.9 million or
48.2%, compared to $59.9 million in 2004 due to the recovery of the OSV market in the U.S.
Gulf of Mexico. Foreign revenues for our OSV segment increased to $28.7 million for 2005,
compared to $15.4 million in 2004, an increase of $13.3 million or 86.4%, due to having an
average of three more vessels operating internationally during 2005. Based on current market
trends, we anticipate that our fleetwide OSV effective dayrates will remain above 2005 levels
through calendar 2006.
Revenues from our tug and tank barge segment increased $8.2 million, or 14.4%, to
$65.2 million in 2005, compared to $57.0 million in 2004. Our utilization rate increased to
87.1% for 2005 compared to 82.2% for 2004. Our average dayrate of $13,542 for 2005
increased $1,922, or 16.5%, from the average dayrate of $11,620 in 2004. The increase in
dayrates is attributed to higher demand for our equipment in the northeastern United States
and the ability of the five double-hulled barges delivered under our first newbuild program to
command higher rates as newbuild double-hulled tank barges with higher barrel-carrying
capacity compared to our remaining single-hulled fleetwide average barrel-carrying capacity.
Operating Expense. Our operating expense increased to $66.9 million in 2005,
compared to $58.5 million in 2004, an increase of $8.4 million or 14.4%. The increase in
operating expense during 2005 is primarily due to prevailing cost inflation trends in the oilfield
and the effect of recent vessel acquisitions and newbuild deliveries, offset in part by
mandatory vessel retirements at the end of 2004.
Operating expense for our OSV segment increased $6.2 million, or 20.9%, to $35.9
million in 2005, compared to $29.7 million in 2004. Operating expenses were higher in 2005
due to increased crewing requirements on vessels to meet customer demand, higher
insurance costs, and the addition of two AHTS vessels to our fleet in January 2005 and March
2005.
Operating expense for our tug and tank barge segment was $31.0 million in 2005,
compared to $28.8 million in 2004, an increase of $2.2 million or 7.6%. Operating expenses
increased due to higher fuel prices and personnel costs and the addition of two higher
horsepower, ocean-going tugs and five double-hulled newbuild tank barges, offset in part by
the effect of the mandatory removal of three single-hulled tank barges from service at the end
of 2004. Average daily operating expense in 2006 for the tug and tank barge segment is
expected to increase as a result of a full year contribution of five double-hulled tank barges
and two higher horsepower tugs.
Depreciation and Amortization. Our depreciation and amortization expense of $27.3
million in 2005 increased $4.2 million or 18.2% compared to $23.1 million in 2004. This
increase is primarily related to increased drydocking activity compared to 2004 and the impact
of adding two AHTS vessels, five double-hulled tank barges and two 6,100 horsepower
ocean-going tugs to our fleet, offset in part by the effect of the mandatory removal of three
single-hulled tank barges from service since 2004. These expenses are expected to increase
further when the vessels under our recently announced expansion programs are placed in
service and when these and any other recently acquired and newly constructed vessels
undergo their initial 30 and 60 month recertifications.
48
Loss on Early Extinguishment of Debt. On November 3, 2004, we commenced a cash
tender offer for all of the $175 million in aggregate principal amount of our 10.625% senior
notes. Senior notes totaling approximately $159.5 million, or 91% of such notes outstanding,
were validly tendered during the designated tender period. The remaining $15.5 million of our
10.625% senior notes were redeemed on January 14, 2005. Losses on early extinguishment
of debt of approximately $1.7 million and $22.4 million were recorded during 2005 and 2004,
respectively and includes the redemption costs and an allocable portion of the write-off of
unamortized financing costs and original issue discount, and a bond redemption premium.
General and Administrative Expense. Our general and administrative expense was
$20.3 million for 2005, compared to $14.8 million in 2004, an increase of $5.5 million or
37.2%. This increase resulted from higher personnel and health insurance costs, including
variable incentive compensation commensurate with our record financial results, and costs
associated with corporate governance initiatives such as compliance with the Sarbanes-Oxley
Act. General and administrative expenses were expected to increase due to our continued
growth via vessel acquisitions, our newbuild and conversion programs and our increased
reporting obligations under federal securities and corporate governance laws and stock
exchange requirements. However, we expect the ratio of general and administrative
expenses to revenues to remain at our historical levels of approximately 11% of revenues.
Interest Expense.
Interest expense was $12.6 million in 2005, compared to $17.7
million in 2004, a decrease of $5.1 million or 28.8%. The decrease in interest expense
primarily relates to the refinancing of our 10.625% senior notes with 6.125% senior notes at
the end of 2004. Other factors causing a decrease in interest expense was higher capitalized
interest recorded during 2005 due to our fleet expansion programs. Capitalized interest was
$3.9 million and $3.0 million for 2005 and 2004, respectively. See “Liquidity and Capital
Resources” for further discussion.
Interest Income.
Interest income was $3.2 million in 2005, an increase of $2.8 million or
700%, compared to $0.4 million in 2004. The increase in interest income resulted from
increased interest rates and a higher average cash balance of $163.0 million, primarily due to
the early fourth quarter 2005 debt and equity offerings, compared to $33.6 million in 2004.
Our cash balance as of December 31, 2005 was $271.7 million.
Income Tax Expense. Our effective tax rate was 36.5% in 2005 and we recorded an
income tax benefit in 2004 due to a pre-tax loss attributable to an early extinguishment of
debt. See “Liquidity and Capital Resources” for further discussion. We also recorded deferred
taxes due to our federal tax net operating loss carryforwards primarily generated by
accelerated depreciation for tax purposes of approximately $92 million as of December 31,
2005. These loss carryforwards are available through 2020 to offset future taxable income.
Our income tax expense primarily consists of deferred taxes due to our federal net operating
loss carryforwards. Our income tax rate is higher than the federal statutory rate due primarily
to expected state and foreign tax liabilities and items not deductible for federal income tax
purposes.
Year Ended December 31, 2004 Compared To Year Ended December 31, 2003
Revenues. Revenues were $132.3 million in 2004, compared to $110.8 million in 2003,
an increase of $21.5 million or 19.4%. The increase in revenues was primarily the result of the
49
year-over-year increase in the size of our fleet. Our operating fleet grew from an average of
45 vessels during 2003 to an average of 51 vessels during 2004. The additional revenues
generated by newly constructed or acquired vessels that were not in operation during all of
2003 and 2004 accounted for $15.8 million of the increase in our revenues. We also
experienced a $5.7 million increase in revenues from our 45 vessels that were in service
during each of the years ended December 31, 2004 and 2003 due to improving market
conditions in both of our business segments.
Revenues from our OSV segment increased to $75.3 million in 2004, compared to $62.4
million for 2003, an increase of $12.9 million or 20.7%. Our average OSV fleet size grew by
5.5 vessels during 2004 compared to 2003. The average utilization rate was 87.5% for 2004,
compared to 88.6% for 2003. Although there was a 1.1% decrease in utilization for 2004, the
early stages of 2004 were marked with utilization in the mid to low-80’s while the latter part of
2004 had utilization in the low to mid-90’s. Our OSV average dayrate was $10,154 for 2004,
compared to $10,940 for 2003, a decrease of $786 or 7.2%. The decrease in average
dayrates primarily reflected the change in our average vessel size as 2004 was the first full
year of operating results for the six 220’ class vessels that were acquired in mid-2003. While
our annual average dayrates were lower in 2004 compared to 2003, average dayrates for the
fourth quarter of 2004 have returned to annual 2003 levels. Domestic revenues were also
higher in 2004 than the prior year due mainly to the recovery of the OSV market in the U.S.
Gulf of Mexico. Foreign revenues were positively impacted by having two additional vessels
working internationally during 2004.
Revenues from our tug and tank barge segment totaled $57.0 million in 2004, compared
to $48.4 million in 2003, an increase of $8.6 million or 17.8%. Our utilization rate increased to
82.2% for 2004, compared to 73.6% for 2003, primarily due to extended cold weather in the
spring of 2004, fewer days out of service for drydockings and repairs in 2004 compared to
2003, and increased movements of diesel and unleaded gasoline barrels as gasoline
inventories during the summer of 2004 were at 30-year seasonal record lows. Our average
dayrates were $649 higher in 2004 than the prior year as a tightening tank barge market in
the northeastern United States contributed to higher freight rates and fuel shortages during
the summer of 2004 that caused higher barrel movements for gasoline and diesel fuel.
Operating Expenses. Our operating expenses increased to $58.5 million for 2004,
compared to $46.8 million in 2003, an increase of $11.7 million or 25.0%. The increase in
operating expenses was the result of having more vessels in service during 2004 compared
to 2003 and increasing costs related to newly instituted Homeland Security measures,
training, repair and maintenance, and insurance.
Operating expenses for our OSV segment increased $6.9 million, or 30.3%, in 2004 to
$29.7 million, compared to $22.8 million in 2003. This increase was primarily the result of
having an average of six more new OSVs in service during 2004 compared to 2003. Daily
operating costs per vessel in the OSV segment decreased over the same period in 2003,
commensurate with the change in our fleet complement with the addition of six 220’ vessels in
mid-2003.
Operating expenses for our tug and tank barge segment was $28.8 million for 2004,
compared to $24.0 million in 2003, an increase of $4.8 million or 20.0%. The increase in
operating expenses was primarily the result of higher fuel, insurance and personnel costs
50
along with the increased cost of compliance of newly instituted Homeland Security measures.
Average daily operating costs per vessel for 2004 increased over 2003 commensurately with
the overall increase in operating expenses discussed above.
Depreciation and Amortization. Our depreciation and amortization expense of $23.1
million for 2004 increased $5.5 million or 31.3% compared to $17.6 million for 2003.
Depreciation and amortization were higher in 2004 as a result of having an average of six
additional vessels in our fleet and increased drydocking activity compared to 2003. These
expenses are expected to increase further with the recent acquisition of two ocean-going
tugs, two AHTS vessels and the construction of five double-hulled tank barges, and when
these and any other recently acquired and newly constructed vessels undergo their initial 30
and 60 month recertifications.
Loss on Early Extinguishment of Debt. On November 3, 2004, we commenced a cash
tender offer for all of the $175 million in aggregate principal amount of our 10.625% senior
notes. Senior notes totaling approximately $159.5 million, or 91% of such notes outstanding,
were validly tendered during the designated tender period. The remaining $15.5 million of our
10.625% senior notes were redeemed on January 14, 2005. A loss on early extinguishment of
debt of approximately $22.4 million was recorded during the fourth quarter of 2004 and
includes the tender offer costs and an allocable portion of the write off of unamortized
financing costs and original issue discount, and a bond redemption premium. A loss on early
extinguishment of debt of approximately $1.7 million will be recorded for the first quarter of
2005 for those costs allocable to the $15.5 million of our 10.625% senior notes redeemed on
January 14, 2005.
General and Administrative Expenses. Our general and administrative expenses were
$14.8 million for 2004, compared to $10.7 million in 2003, an increase of $4.1 million or
38.3%. This increase primarily resulted from increased overhead relating to the additional
vessels purchased, the increased costs of operating as a public company and, during the
fourth quarter 2004, several discrete charges related to increased employee bonuses,
insurance and legal fees. General and administrative expenses are expected to trend higher
in 2005 to accommodate our continued growth via vessel acquisitions, the current
construction of five double-hulled tank barges, and our increased reporting obligations under
federal securities and corporate governance laws and stock exchange requirements.
Interest Expense.
Interest expense from debt obligations was $17.7 million in 2004,
compared to $18.5 million in 2003, a decrease of $0.8 million or 4.3%. The decrease in
interest expense primarily relates to having an average balance outstanding under our
revolving credit facility of $12.0 million during 2004 compared to $20.0 million during 2003
and having outstanding balances on such facility during only three months of 2004 compared
to 11 months of 2003. Other factors causing a decrease in interest expense are continued
increases in our capitalized interest due to the construction of double-hulled tank barges and
the November 2004 issuance of 6.125% senior notes to repurchase a portion of our
outstanding 10.625% senior notes. See “Liquidity and Capital Resources” for further
discussion. Capitalization of interest costs relating to new construction of vessels was
approximately $3.0 million for 2004 compared to $2.7 million for 2003.
Interest Income.
Interest income was $0.4 million in 2004, compared to $0.2 million in
2003, an increase of $0.2 million or 100%. The increase in interest income resulted from
51
increased interest rates along with higher average cash balances invested during 2004
compared to 2003. Average cash balances were $33.6 million and $17.6 million for the years
ended December 31, 2004 and 2003, respectively.
Income Tax Expense. We recorded an income tax benefit for 2004, compared to an
income tax provision for 2003, due to a pre-tax loss attributable to an early extinguishment of
debt. See “Liquidity and Capital Resources” for further discussion. We also recorded deferred
taxes due to our federal tax net operating loss carryforwards primarily generated by
accelerated depreciation for tax purposes of approximately $95 million as of December 31,
2004. These loss carryforwards are available through 2018 to offset future taxable income.
Our income tax rate is higher than the federal statutory rate due primarily to expected state
and foreign tax liabilities and items not deductible for federal income tax purposes.
Liquidity and Capital Resources
Our capital requirements have historically been financed with cash flow from operations,
proceeds from issuances of our debt and common equity securities, and borrowings under
our credit facilities. We require capital to fund ongoing operations, construction of new
vessels, acquisitions, vessel recertifications, discretionary capital expenditures and debt
service. The nature of our capital requirements and the types of our financing sources are not
expected to change significantly during 2006.
We have a five-year $100 million senior secured revolving credit facility with a current
borrowing base of $60 million. As of December 31, 2005, we had $60 million of credit
immediately available under such facility. On October 5, 2005, we used a portion of the net
proceeds from a public offering of common stock and a concurrent private placement of
additional 6.125% senior notes to pay down our revolving credit facility to a zero balance. We
have made, and may make additional, short-term draws on our revolving credit facility from
time to time to satisfy scheduled capital expenditure requirements or for other corporate
purposes. Any liquidity in excess of our planned capital expenditures will be utilized to repay
debt or finance the implementation of our growth strategy, which includes expanding our fleet
through the construction of new vessels, conversion or retrofit of existing vessels or
acquisition of additional vessels, including OSVs, MPSVs, AHTS vessels, fast supply vessels,
ocean-going tugs, tank barges and tankers, as needed to take advantage of the demand for
such vessels.
On August 31 and September 1, 2005, respectively, we filed with the Commission
registration statements on Form S-3 and Form S-4 in connection with a $350.0 million
universal shelf and a $150.0 million acquisition shelf. On September 15, 2005, each of these
registration statements was declared effective by the Commission. On October 4, 2005, we
closed the private placement of $75.0 million of additional 6.125% senior notes that were
priced at 99.25% of principal. On October 5, 2005, we closed an underwritten public offering
of 6.1 million shares of our common stock at a price to the public of $35.35 per share, for total
gross proceeds to us of $215.6 million before underwriting discounts, commissions and
offering expenses. This public offering also included an additional 2.0 million shares sold by a
selling stockholder, but we did not receive any proceeds from such sale.
We believe that our current working capital, projected cash flow from operations and
available capacity under our revolving credit facility, will be sufficient to meet our cash
52
requirements for the foreseeable future and, together with the proceeds from the October
2005 senior notes and common stock offerings, will fund the recently announced vessel
newbuild and conversion programs. Although we expect to continue generating positive
working capital through our operations, events beyond our control, such as mild winter
conditions, a reduction in domestic consumption of refined petroleum products, or declines in
expenditures for exploration, development and production activity may affect our financial
condition or results of operations. Depending on the market demand for OSVs, tugs and tank
barges and other growth opportunities that may arise, we may require additional debt or
equity financing.
Operating Activities. We rely primarily on cash flows from operations to provide working
capital for current and future operations. Cash flows from operating activities totaled $75.8
million in 2005, $21.4 million in 2004, and $25.5 million in 2003. The increase in operating
cash flows from 2004 to 2005 was primarily related to substantially improved market
conditions in both of our business segments, reduced drydock expenditures, the growth of our
fleet and the net effect of the bond refinancing that we commenced in November 2004, which
resulted in a lower interest rate and a change in the timing of our interest payments. Our cash
flow from operations for the year ended December 31, 2005 reflects a full period of revenue
contribution from one OSV and one fast supply vessel that were added to our fleet during
2004 and partial period contributions from two AHTS vessels and five new double-hulled tank
barges that were placed in service during 2005. The decrease in operating cash flows from
2003 to 2004 was due to increased cash outlays associated with OSV drydocking activity and
the timing of interest payments resulting from the early extinguishment of debt in November
2004. Our cash flows from operations are expected to trend higher in 2006, as we will have a
full year of revenue contribution from the five new double-hulled tank barges and two AHTS
vessels that were delivered and acquired, respectively, during 2005. In 2006, we expect to
drydock a total of eleven OSVs, five tugs, and six tank barges for recertification and/or
discretionary vessel enhancements, which together with non-vessel capital expenditures
related primarily to information technology initiatives, is estimated to cost approximately $24.0
million.
As of December 31, 2005, we had federal tax net operating loss carryforwards of
approximately $92 million available through 2020 to offset future federal taxable income.
These federal tax net operating losses were generated primarily through accelerated tax
depreciation applied to our vessels. Our use of these tax net operating losses and additional
tax benefits may be limited due to U.S. tax laws. Based on the age and composition of our
current and projected fleet, we expect to continue generating federal tax net operating losses
over the near term.
Investing Activities. Cash invested for 2005 was approximately $120.6 million, which
primarily consisted of construction costs incurred for our first tank barge newbuild program
and the acquisitions of two foreign-flagged AHTS vessels and one coastwise tanker, the latter
of which will be retrofitted under the MPSV conversion program described below. The HOS
Saylor and HOS Navegante were purchased in January and March 2005, respectively. The
aggregate purchase price and retrofit costs, excluding capitalized interest, incurred during
2005 for the AHTS vessels was $29.2 million. We also took delivery of five double-hulled
newbuild tank barges, the Energy 13501, Energy 13502, Energy 11103, Energy 11104 and
Energy 11105, throughout 2005. These five new double-hulled tank barges have more than
53
replaced the barrel-carrying capacity of the three single-hulled vessels that were retired from
service by January 1, 2005, pursuant to OPA 90. The net increase in our fleet barrel-carrying
capacity since 2004 is approximately 330,000 barrels, or 29%.
In August and September 2005, we acquired two 6,100 horsepower tugs, which were
renamed the Eagle Service and Patriot Service, respectively. The aggregate cost, before
capitalized interest, to purchase and retrofit these vessels is expected to be approximately
$16.0 million, of which $12.5 million was incurred in 2005. The two new tugs are expected to
be placed in service during the late first quarter of 2006 to service newbuild tank barges
delivered in 2005. The cash utilized for investing activities during 2005 was partially offset by
approximately $4.3 million of net cash inflows from the sales of the Energy 9801 and the
Energy 9501, two retired single-hulled tank barges, and the Yabucoa Service and the North
Service, 3,000 and 2,200 horsepower tugs, respectively.
In May 2005, we announced a conversion program to retrofit two coastwise sulfur tankers
into U.S.-flagged, new generation 370 class MPSVs. The total project cost to acquire and
convert the two vessels is currently expected to be at least $65.0 million in the aggregate.
While we are not yet contractually committed to a shipyard for the costs associated with this
conversion program, approximately $11.9 million has been incurred to-date for the purchase
of owner-furnished equipment, prior to construction period interest. The remaining conversion
costs are expected to be incurred during 2006 and 2007. We plan to fund the project from
current cash on-hand and projected cash flow from operations. We anticipate delivery of the
converted vessels during 2007. The M/V W.K. McWilliams, Jr., which we acquired in
November 2001 and renamed the Energy Service 9001, and the M/V Benno C. Schmidt, the
sister vessel to the Energy Service 9001 that we acquired in May 2005, are the two coastwise
tankers that will be converted under the MPSV conversion program.
In September 2005, we announced new vessel construction programs for each of our two
business segments. These will be our fourth OSV newbuild program and second tug and tank
barge newbuild program. In February 2006, we announced an expansion of our fourth OSV
newbuild program. Based on internal estimates, the incremental cost of these two programs is
expected to be approximately $395.0 million in the aggregate, prior to the allocation of
construction period interest. Our fourth OSV newbuild program includes the recently
announced four purpose-built 240EDF class OSVs at an estimated cost of approximately $80
million, in the aggregate. We are now contractually committed to a Gulf Coast shipyard for
two of the four 240EDF class OSVs and a West Coast shipyard for the two remaining vessels.
The latter contract includes options for two additional vessels. This OSV newbuild program is
expected to create up to an additional 37,000 deadweight tons of vessel capacity at an
estimated cost of approximately $290.0 million. The 240EDF class OSVs are expected to be
delivered by mid-2008, with the first vessel due in late 2007. The precise number of remaining
vessels to be constructed under our fourth OSV newbuild program, their specifications and
expected delivery dates will be finalized as certain milestones are completed, including the
negotiation of shipyard contracts. We also plan to build several new double-hulled tank
barges with an aggregate 400,000 barrels of additional barrel-carrying capacity and, unlike
our first tank barge newbuild program, we may construct the related ocean-going tugs to be
used as power units for the new barges. The estimated incremental cost of the new ocean-
going tugs and ocean-going tank barges is expected to be approximately $105.0 million, in
the aggregate. We are now contractually committed with one domestic shipyard to build three
60,000-barrel barges under the second tug and tank barge newbuild program, of which
54
approximately $3.7 million, prior to construction period interest, was incurred during 2005. All
of the new vessels to be constructed under the second tug and tank barge newbuild program
are expected to be delivered from mid-2007 through mid-2008. Construction costs related to
the fourth OSV newbuild program and the second tug and tank barge newbuild program will
be funded, in part, with a portion of the proceeds from our recent common stock offering and
concurrent senior note offering and projected cash flow from operations.
For those vessels for which we are not contractually committed to a shipyard, projected
timing and pricing are subject to change due to delays and cost overruns inherent in any large
construction project, including shortages of equipment, lack of shipyard availability,
unforeseen engineering problems, work stoppages, weather interference, unanticipated cost
increases, inability to obtain necessary certifications and approvals and shortages of
materials or skilled labor.
Cash flows from investing activities in 2004 were approximately $61.4 million, primarily
for the construction of new double-hulled tank barges, the acquisition of two tugs that were
retrofitted and renamed the Freedom Service and Liberty Service and one fast supply vessel,
the HOS Hotshot, along with discretionary vessel and non-vessel capital expenditures. During
2003, cash invested was approximately $99.8 million, for the construction of new vessels,
acquisitions of six OSVs and a double-hulled tank barge, and miscellaneous capital
expenditures. These 2003 expenditures were offset by $1.7 million in cash proceeds from the
sale of one tank barge.
In 2006, investing activities are anticipated to include costs to complete the retrofit costs
of the second two higher horsepower tugs, the conversion of the two MPSVs, the acquisition,
retrofit or conversion of additional vessels, in addition to construction costs related to our
recently announced OSV and tug and tank barge newbuild programs and other capital
expenditures, including discretionary vessel modifications and corporate projects. See
“Contractual Obligations” for a brief overview of anticipated vessel construction commitments
in 2006.
Financing Activities. Net cash provided by financing activities was $262.2 million for
2005, which is primarily the result of an underwritten public offering of 6.1 million shares of
our common stock at a price to the public of $35.35 per share resulting in net proceeds of
approximately $205.4 million during October 2005. We also received approximately $73.1
million in net proceeds in connection with the concurrent private placement of an additional
$75.0 million in aggregate principal amount of our 6.125% senior notes due 2014, or
additional notes, under our indenture dated as of November 23, 2004. The additional notes
were priced at 99.25% of principal amount to yield 6.41% and have substantially the same
terms as the existing senior notes issued in November 2004, except that the issuance of the
additional notes was not registered under the Securities Act. An exchange offer is currently in
process to exchange the unregistered additional notes for registered notes. Net cash provided
by financing activities during 2005 was also offset by the redemption of the $15.5 million
non-tendered 10.625% senior notes in January 2005.
Financing activities during 2004 generated $81.4 million and consisted of cash inflows
generated by the November 2004 issuance of 6.125% senior notes and the initial public
offering of our common stock, which was completed in March 2004. These cash inflows were
offset by the repurchase of 91% of our outstanding 10.625% senior notes and the repayment
55
of amounts then outstanding on our revolving credit facility in March 2004. Cash provided by
financing activities in 2003 consisted of the private placement of approximately 1.9 million
shares of our common stock, raising net cash proceeds of approximately $23.3 million that
were used in part, together with borrowings under our revolving credit facility of $40 million, to
fund certain vessel purchases.
Contractual Obligations
The following table sets forth our aggregate contractual obligations as of December 31,
2005 (in thousands).
Contractual Obligations
Total
Less than
1 Year
1-3 Years
3-5 Years
Thereafter
Senior notes(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . $300,000 $ — $ — $ — $300,000
36,750
Interest payments(2)
. . . . . . . . . . . . . . . . . . . . . .
Operating leases(3) . . . . . . . . . . . . . . . . . . . . . . .
26,860
. . . . . . . . .
Vessel construction commitments(4)
165,375
41,450
43,701
18,375
3,701
39,781
55,125
7,868
3,920
55,125
3,021
—
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $550,526 $61,857 $66,913 $58,146 $363,610
(1) Our 6.125% senior notes mature on December 1, 2014 and include $551 of original issue discount.
(2)
Interest payments relate to our 6.125% senior notes due December 1, 2014 with semi-annual interest payments of $9.2 million payable June 1
and December 1.
Included in operating leases are commitments for vessel rentals, a port facility, office space, office equipment and vehicles. See “—Properties”
for additional information regarding our leased office space and other facilities.
(3)
(4) The timing of the incurrence of these costs is subject to change among periods based on the achievement of shipyard milestones, however,
the amounts are not expected to change materially in the aggregate.
We have a $100.0 million revolving credit facility due February 2009 with a borrowing
base of $60.0 million. As of December 31, 2005, we had no outstanding balance and $60.0
million of borrowing capacity immediately available under the facility. We plan to negotiate a
new revolving credit facility with our current bank group, and possibly add new lenders, in
early 2006. Our goal will be to provide for, among other things, a longer maturity, increased
borrowing capacity, lower interest rates and an updated covenant package commensurate
with our improved credit standing.
As of December 31, 2005, we had outstanding debt of $299.4 million, net of original issue
discount, under our 6.125% senior unsecured notes, or senior notes. The effective interest
rate on the senior notes is 6.39%. Semi-annual cash interest payments of $9.2 million are
payable each June 1 and December 1. The senior notes do not require any payments of
principal prior to their stated maturity on December 1, 2014, but pursuant to the indenture
under which the senior notes are issued, we would be required to make offers to purchase the
senior notes upon the occurrence of specified events, such as certain asset sales or a change
in control. For additional information with respect to our revolving credit facility and our senior
notes, please refer to note 6 of our audited consolidated financial statements included herein.
As of December 31, 2005, we were committed under vessel construction contracts with
one domestic shipyard for a total of three 60,000-barrel double-hulled tank barges under our
second tug and tank barge newbuild program. Approximately $3.7 million has been incurred
under such newbuild program during 2005 before construction period interest. For the year
ended December 31, 2005, we incurred $65.8 million, excluding capitalized interest, for our
first tank barge newbuild program, which was comprised of the construction of five new
double-hulled tank barges and the purchase and retrofit of four higher horsepower, ocean-
56
going tugs. This program is expected to cost, prior to construction period interest,
approximately $121.0 million in the aggregate, of which approximately $116.4 million was
incurred and paid from October 2003 through December 2005. We expect to incur the
remaining balance of $4.6 million in the first quarter of 2006. All five double-hulled tank
barges under our first tug and tank barge newbuild program were delivered in 2005. The two
remaining 6,100 horsepower tugs under that program are being retrofitted and are expected
to be placed in service during the late first quarter of 2006.
In 2006, we expect to drydock a total of eleven OSVs, five tugs, and six tank barges for
recertification and/or discretionary vessel enhancements, which together with non-vessel
capital expenditures related primarily to information technology initiatives, is estimated to cost
approximately $24.0 million, which includes approximately $13.5 million for deferred
drydocking charges. For the year ended December 31, 2005, we expended approximately
$10.8 million for our vessel capital maintenance program, of which $6.8 million was
accounted for as deferred drydocking charges and $4.0 million for other vessel capital
improvements. During 2005, we also expended approximately $2.6 million for miscellaneous
non-vessel related additions to property, plant and equipment and information technology
initiatives.
Inflation
To date, general inflationary trends have not had a material effect on our operating
revenues or expenses.
Recent Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards Board, or FASB, issued
FASB Statement No. 123 (revised 2004), “Share-Based Payment,” or SFAS 123R, which is a
revision of FASB Statement No. 123, “Accounting for Stock-Based Compensation,” or SFAS
123. SFAS 123R supersedes Accounting Principles Board Opinion No. 25, or APB 25,
“Accounting for Stock Issued to Employees,” and amends FASB Statement No. 95,
“Statement of Cash Flows.” Generally, the approach in SFAS 123R is similar to the approach
described in SFAS 123. However, SFAS 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the income
statement based on their fair values. Accordingly, the adoption of SFAS 123R’s fair value
method will have a significant impact on our results of operations, although it will have no
impact on our overall financial condition. The impact of adoption of SFAS 123R is expected to
result in additional compensation expense of approximately $2.9 million, net of tax, for the
2006 fiscal year. In addition, had we adopted SFAS 123R in prior periods, the impact of that
standard would have approximated the impact of SFAS 123 as described in the disclosure of
pro forma net income and earnings per share in Note 8 to our audited consolidated financial
statements. SFAS 123R also requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow, rather than as an operating cash
flow as required under current GAAP literature. This requirement will reduce net operating
cash flows and increase net financing cash flows in periods after adoption. While we cannot
estimate what those amounts will be in the future because they depend on, among other
things, when employees exercise stock options, the amount of operating cash flows
recognized for such excess tax deductions was approximately $1.7 million for the year ended
December 31, 2005. On April 14, 2005, the Commission, announced amended compliance
57
dates for SFAS 123R. The Commission previously required companies to adopt this standard
no later than July 1, 2005, but the new rule allows companies to implement SFAS 123R at the
beginning of their next fiscal year, that begins after June 15, 2005. We will not be required to
report under SFAS 123R until the quarter ending March 31, 2006 and do not currently intend
to adopt this standard for reporting prior to such time. See Note 8 of these audited
consolidated financial statements for further discussion of our Incentive Compensation Plan.
Forward-Looking Statements
We make forward-looking statements in this Annual Report on Form 10-K, including
certain information set forth in the sections entitled “Business and Properties” and
“Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
We have based these forward-looking statements on our current views and assumptions
about future events and our future financial performance. You can generally identify forward-
looking statements by the appearance in such a statement of words like “anticipate,”
“believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,”
“project,” “should” or “will” or other comparable words or the negative of these words. When
you consider our forward-looking statements, you should keep in mind the cautionary
statements we make in this Annual Report on Form 10-K.
Among the risks, uncertainties and assumptions to which these forward-looking
statements may be subject are:
(cid:127) activity levels in the energy markets;
(cid:127)
(cid:127)
(cid:127)
changes in oil and natural gas prices;
increases in supply of vessels in our markets;
the effects of competition;
(cid:127) our ability to complete vessels under construction or refurbishment without significant
delays or cost overruns;
(cid:127) our ability to integrate acquisitions successfully;
(cid:127) our ability to obtain or maintain adequate levels of insurance;
(cid:127) demand for refined petroleum products or in methods of delivery;
(cid:127)
(cid:127)
(cid:127)
(cid:127)
loss of existing customers and our ability to attract new customers;
changes in laws;
changes in international economic and political conditions;
changes in foreign currency exchange rates;
(cid:127) adverse domestic or foreign tax consequences;
(cid:127) uncollectible foreign accounts receivable or longer collection periods on such
accounts;
financial stability of our customers;
retention of skilled employees and our management;
(cid:127)
(cid:127)
58
(cid:127)
(cid:127)
laws governing the health and safety of our employees working offshore;
catastrophic marine disasters;
(cid:127) adverse weather and sea conditions;
(cid:127) oil and hazardous substance spills;
(cid:127) war and terrorism;
(cid:127) acts of God;
(cid:127) our ability to finance our operations on acceptable terms and access the debt and
equity markets to fund our capital requirements, which may depend on general market
conditions and our financial condition at the time;
(cid:127) our ability to charter our vessels on acceptable terms; and
(cid:127) our success at managing these risks.
Our forward-looking statements are only predictions based on expectations that we
believe are reasonable. Actual events or results may differ materially from those described in
any forward-looking statement. We undertake no obligation to update or revise any forward-
looking statements, whether as a result of new information, future events or otherwise. To the
extent these risks, uncertainties and assumptions give rise to events that vary from our
expectations, the forward-looking events discussed in this Annual Report on Form 10-K may
not occur.
Item 7A—Quantitative and Qualitative Disclosures About Market Risk
We have not entered into any derivative financial instrument transactions to manage or
reduce market risk or for speculative purposes.
Changes in interest rates may result in changes in the fair market value of our financial
instruments, interest income and interest expense. Our financial instruments that are exposed
to interest rate risk are cash equivalents and long-term borrowings. Due to the short duration
and conservative nature of our cash equivalent investment portfolio, we do not expect any
material loss with respect to our investments. The book value for cash equivalents is
considered to be representative of its fair value.
We are subject to interest rate risk on our long-term fixed interest rate senior notes. In
general, the fair market value of debt with a fixed interest rate will increase as interest rates
fall. Conversely, the fair market value of debt will decrease as interest rates rise. The currently
outstanding senior notes accrue interest at the rate of 6.125% per annum and mature on
December 1, 2014 and the effective interest rate on such notes is 6.39%. Our revolving credit
facility has a variable interest rate and, therefore, is not subject to interest rate risk.
Our operations are primarily conducted between U.S. ports, including along the coast of
Puerto Rico, and historically we have not been exposed to foreign currency fluctuation.
However, as we expand our operations to international markets, we may become exposed to
certain risks typically associated with foreign currency fluctuation. We currently have time
charters for four of our OSVs for service offshore Trinidad. Although such contracts are
denominated and will be paid in U.S. Dollars, value added tax, or VAT, payments are paid in
Trinidad & Tobago dollars which creates an exchange risk related to currency fluctuations. In
59
addition, we are currently operating under fixed time charters with one of our other OSVs and
our fast supply vessel for service offshore Mexico. Although we are paid in U.S. Dollars, there
is an exchange risk to foreign currency fluctuations related to the payment terms of such time
charters. To date, we have not hedged against any foreign currency rate fluctuations
associated with foreign currency VAT payments or other foreign currency denominated
transactions arising in the normal course of business. We continually monitor the currency
exchange risks associated with conducting international operations. To date, gains or losses
associated with such fluctuations have not been material.
Item 8—Financial Statements and Supplementary Data
The financial statements and information required by this Item appear on pages F-1
through F-21 of this Annual Report on Form 10-K.
Item 9—Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures
None
Item 9A—Controls and Procedures
Disclosure Controls And Procedures
Management’s Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange Act
Rule 13(a)-15(e). Internal control over financial reporting is a process to provide reasonable
assurance regarding the reliability of our financial reporting for external purposes in
accordance with U.S. generally accepted accounting principles. Internal control over financial
reporting includes maintaining records that, in reasonable detail, accurately and fairly reflect
our transactions; providing reasonable assurance that transactions are recorded as
necessary for preparation of our financial statements in accordance with U.S. generally
accepted accounting principles; providing reasonable assurance that receipts and
expenditures of company assets are made in accordance with authorizations of the
Company’s management and board of directors; and providing reasonable assurance that
unauthorized acquisition, use or disposition of company assets that could have a material
effect on our financial statements would be prevented or detected on a timely basis. Because
of its inherent limitations, internal control over financial reporting is not intended to provide
absolute assurance that a misstatement of our financial statements would be prevented or
detected. In addition, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies of procedures may deteriorate.
Under the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness
of our internal control over financial reporting as of December 31, 2005, utilizing the criteria
set forth in the report entitled Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based upon
such assessment, our management concluded that our internal control over financial
reporting was effective as of December 31, 2005.
60
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Hornbeck Offshore Services, Inc.
We have audited management’s assessment, included in the accompanying
Management’s Report on Internal Control Over Financial Reporting, that Hornbeck Offshore
Services, Inc. maintained effective internal control over financial reporting as of December 31,
2005, based on criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria).
Hornbeck Offshore Service Inc.’s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an opinion on management’s
assessment and an opinion on the effectiveness of the company’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, evaluating management’s
assessment, testing and evaluating the design and operating effectiveness of internal control,
and performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Hornbeck Offshore Services, Inc.
maintained effective internal control over financial reporting as of December 31, 2005, is fairly
stated, in all material respects, based on the COSO criteria. Also, in our opinion, Hornbeck
Offshore Services, Inc. maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2005, based on the COSO criteria.
61
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of Hornbeck
Offshore Services, Inc. as of December 31, 2005 and 2004, and the related consolidated
statements of income, stockholders’ equity, and cash flows for each of the three years in the
period ended December 31, 2005 of Hornbeck Offshore Services, Inc. and our report dated
January 27, 2006 expressed an unqualified opinion thereon.
Ernst & Young LLP
New Orleans, LA
January 27, 2006
Item 9B—Other Information
None.
62
PART III
Item 10—Directors and Executive Officers of the Registrant
The information required under this item is incorporated by reference herein from the
Company’s definitive 2006 proxy statement anticipated to be filed with the Securities and
Exchange Commission within 120 days after December 31, 2005.
Item 11—Executive Compensation
The information required under this item is incorporated by reference herein from the
Company’s definitive 2006 proxy statement anticipated to be filed with the Securities and
Exchange Commission within 120 days after December 31, 2005.
Item 12—Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information required under this item is incorporated by reference herein from the
Company’s definitive 2006 proxy statement anticipated to be filed with the Securities and
Exchange Commission within 120 days after December 31, 2005.
Item 13—Certain Relationships and Related Transactions
The information required under this item is incorporated by reference herein from the
Company’s definitive 2006 proxy statement anticipated to be filed with the Securities and
Exchange Commission within 120 days after December 31, 2005.
Item 14—Principal Accounting Fees and Services
The information required under this item is incorporated by reference herein from the
Company’s definitive 2006 proxy statement anticipated to be filed with the Securities and
Exchange Commission within 120 days after December 31, 2005.
63
PART IV
Item 15—Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following items are filed as part of this report:
1. Financial Statements. The financial statements and information required by Item 8
appear on pages F-1 through F-21 of this report. The Index to Consolidated
Financial Statements appears on page F-1.
2. Financial Statement Schedules. All schedules are omitted because they are not
applicable or the required information is shown in the financial statements or the
notes thereto.
3. Exhibits.
Exhibit
Number
Description of Exhibit
3.1
—Second Restated Certificate of Incorporation of the Company, as amended
through May 5, 2005 (incorporated by reference to Exhibit 3.1 to the Company’s
Form 10-Q for the period ended March 31, 2005).
3.2
—Certificate of Designation of Series A Junior Participating Preferred Stock filed
with the Secretary of State of the State of Delaware on June 20, 2003
(incorporated by reference to Exhibit 3.6 to the Company’s Registration
Statement on Form S-1 dated September 19, 2003, Registration No.
333-108943).
3.3
—Fourth Restated Bylaws of the Company adopted June 30, 2004 (incorporated
by reference to Exhibit 3.3 to the Company’s Form 10-Q for the quarter ended
June 30, 2004).
4.1
—Exchange and Registration Rights Agreement, dated as of October 4, 2005,
among Goldman, Sachs & Co., Bear, Stearns & Co., Inc., Jefferies & Company,
Inc., Hornbeck Offshore Services, Inc. and the guarantors party thereto
(incorporated by reference to Exhibit 4.1 to the Company’s Current Report on
Form 8-K dated October 4, 2005).
4.1
—Indenture dated as of November 23, 2004 between the Company, the guarantors
named therein and Wells Fargo Bank, National Association (as Trustee),
including table of contents and cross-reference sheet (incorporated by reference
to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated November 18,
2004).
4.2
4.3
—Exchange and Registration Rights Agreement, dated as of November 23, 2004,
among Goldman, Sachs & Co., Bear, Stearns & Co., Inc., Jefferies & Company,
Inc., Hornbeck Offshore Services, Inc. and the guarantors party thereto
(incorporated by reference to Exhibit 4.2 to the Company’s Current Report on
Form 8-K dated November 18, 2004).
—Specimen 6.125% Series B Senior Note due 2014 (incorporated by reference to
Exhibit 4.5 to the Company’s Amendment No. 1 to Registration Statement on
Form S-4 dated February 7, 2005, Registration No. 333-121557).
64
Exhibit
Number
Description of Exhibit
4.4
—Rights Agreement dated as of June 18, 2003 between the Company and Mellon
Investor Services LLC as Rights Agent, which includes as Exhibit A the
Certificate of Designations of Series A Junior Participating Preferred Stock, as
Exhibit B the form of Right Certificate and as Exhibit C the form of Summary of
Rights to Purchase Stock (incorporated by reference to Exhibit 4.1 to the
Company’s Current Report on Form 8-K filed July 2, 2003).
4.5
—Amendment to Rights Agreement dated as of March 5, 2004 between the
Company and Mellon Investor Services LLC as Rights Agent (incorporated by
reference to Exhibit 4.13 to the Company’s Form 10-K for the period ended
December 31, 2003).
4.6
—Second Amendment to Rights Agreement dated as of September 3, 2004 by and
between the Company and Mellon Investor Services, LLC as Rights Agent
(incorporated by reference to Exhibit 4.3 to the Company’s Form 8-A/A file
September 3, 2004, Registration No. 333-108943).
4.7
—Stockholders’ Agreement dated as of October 27, 2000 between the Company,
Todd M. Hornbeck, Troy A. Hornbeck, Cari Investment Company and SCF-IV,
L.P. (incorporated by reference to Exhibit 4.6 to the Company’s Registration
Statement on Form S-1 dated September 19, 2003, Registration No.
333-108943).
10.1† —Amended and Restated Incentive Compensation Plan (incorporated by reference
to Exhibit 10.1 to the Company’s Form 10-Q for the period ended September 30,
2003).
10.2
10.3
10.4
10.5
10.6
—Senior Employment Agreement dated effective January 1, 2001 by and between
Todd M. Hornbeck and the Company (incorporated by reference to Exhibit 10.2
to the Company’s Registration Statement on Form S-4 dated September 21,
2001, Registration No. 333-69826).
—Employment Agreement dated effective January 1, 2001 by and between Carl
Annessa and the Company (incorporated by reference to Exhibit 10.3 to the
Company’s Registration Statement on Form S-4 dated September 21, 2001,
Registration No. 333-69826).
—Employment Agreement dated effective January 1, 2001 by and between James
O. Harp, Jr. and the Company (incorporated by reference to Exhibit 10.5 to the
Company’s Registration Statement on Form S-4 dated September 21, 2001,
Registration No. 333-69826).
—Amendment to Senior Employment Agreement dated effective February 17, 2003
by and between Todd M. Hornbeck and the Company (incorporated by reference
to Exhibit 10.15 to the Company’s Registration Statement on Form S-1 dated
September 19, 2003, Registration No. 333-108943).
—Amendment to Employment Agreement dated effective February 17, 2003 by
and between Carl G. Annessa and the Company (incorporated by reference to
Exhibit 10.16 to the Company’s Registration Statement on Form S-1 dated
September 19, 2003, Registration No. 333-108943).
65
Exhibit
Number
10.7
10.8
10.9
Description of Exhibit
—Amendment to Employment Agreement dated effective February 17, 2003 by
and between James O. Harp, Jr. and the Company (incorporated by reference
to Exhibit 10.17 to the Company’s Registration Statement on Form S-1 dated
September 19, 2003, Registration No. 333-108943).
—Second Amendment to Senior Employment Agreement dated effective March
10, 2005 by and between Todd M. Hornbeck and the Company (incorporated
by reference to Exhibit 10.8, 10.9 and 10.10 to the Company’s Form 10-K for
the period ended December 31, 2004).
—Second Amendment to Employment Agreement dated effective March 10, 2005
by and between Carl G. Annessa and the Company (incorporated by reference
to Exhibit 10.8, 10.9 and 10.10 to the Company’s Form 10-K for the period
ended December 31, 2004).
10.10
—Second Amendment to Employment Agreement dated effective March 10, 2005
by and between James O. Harp, Jr. and the Company (incorporated by
reference to Exhibit 10.8, 10.9 and 10.10 to the Company’s Form 10-K for the
period ended December 31, 2004).
10.11
—Amended and Restated Credit Agreement dated as of February 13, 2004
among Hornbeck Offshore Services, Inc. and Hibernia National Bank, as agent,
and Hibernia National Bank, Fortis Capital Corp., Southwest Bank of Texas,
N.A., DVB Bank Aktiengesellscheft and Wells Fargo Bank, N.A., as lenders
(incorporated by reference to Exhibit 10.5 to the Company’s Form 10-K for the
period ended December 31, 2003).
10.12
—Form of Indemnification Agreement for directors, officers and key employees
(incorporated by reference to Exhibit 10.9 to the Company's Registration
Statement of Form S-1 filed July 22, 2002, Registration No. 333-96833).
10.13
—Form of First Amendment to Indemnification Agreement for Directors, Officers
and Key Employees (incorporated by reference to Exhibit 10.6 to the
Company’s Form 10-Q for the period ended September 30, 2003).
10.14
—Asset Purchase Agreement dated as of June 20, 2003 by and among HOS-IV,
LLC, Candy Marine Investment Corporation, Candy Fleet Corporation and
Kenneth I. Nelkin, and joined for limited purposes by Hornbeck Offshore
Services, Inc. (incorporated by reference to Exhibit 2.1 of the Company’s
Current Report on Form 8-K filed July 7, 2003).
*10.15† —Director & Advisory Director Compensation Policy, effective February 14, 2006.
10.16
—Form of Executive Non-Qualified Stock Option Agreement (incorporated by
reference to Exhibit 10.16 to the Company’s Form 10-K for the period ended
December 31, 2004).
10.17
—Form of Director Non-Qualified Stock Option Agreement (incorporated by
reference to Exhibit 10.17 to the Company’s Form 10-K for the period ended
December 31, 2004).
10.18
—Form of Employee Non-Qualified Stock Option Agreement (incorporated by
reference to Exhibit 10.18 to the Company’s Form 10-K for the period ended
December 31, 2004).
66
Exhibit
Number
Description of Exhibit
10.19 —Stockholders’ Agreement dated as of June 5, 1997 between the Company, Todd
M. Hornbeck, Troy A. Hornbeck and Cari Investment Company (incorporated by
reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-1
filed July 22, 2002, Registration No. 333-96833).
10.20 —Registration Rights Agreement dated as of October 27, 2000 between the
Company and SCF-IV, L.P. (incorporated by reference to Exhibit 4.4 to the
Company’s Registration Statement on Form S-1 filed July 22, 2002, Registration
No. 333-96833).
10.21 —Registration Rights Agreement dated as of June 24, 2003 between the Company
and certain purchasers of securities (incorporated by reference to Exhibit 4.11 to
the Company’s Registration Statement on Form S-1 filed September 19, 2003,
Registration No. 333-108943).
10.22 —Agreement Concerning Registration Rights dated as of October 27, 2000
between the Company, SCF IV, LP, Joint Energy Development Investments II,
LP and Sundance Assets, LP (incorporated by reference to Exhibit 4.5 to the
Company’s Registration Statement on Form S-1 filed July 22, 2002, Registration
No. 333-96833).
10.23 —Letter Agreement dated September 24, 2001 between the Company, Todd M.
Hornbeck, Troy A. Hornbeck, Cari Investment Company and SCF-IV, L.P.
(incorporated by reference to Exhibit 4.7 to the Company’s Registration
Statement on Form S-1 filed September 19, 2003, Registration No. 333-108943).
*10.24 —Form of Executive Restricted Stock Agreement.
*10.25 —Form of Director Restricted Stock Agreement.
*10.26 —Form of Employee Restricted Stock Agreement.
*23.1
*31.1
—Consent of Ernst & Young, LLP.
—Certification of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
*31.2
—Certification of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
*32.1
—Certification of the Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
*32.2
—Certification of the Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.1
—Amended and Restated Credit Agreement Confirmation dated December 29,
2004 (incorporated by reference to Exhibit 99.4 to the Company’s Amendment
No. 1 to Registration Statement on Form S-4 dated February 7, 2005,
Registration No. 333-121557).
* Filed herewith.
† Compensatory plan or arrangement under which executive officers or directors of the Company may participate.
67
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS OF HORNBECK OFFSHORE SERVICES, INC.:
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2005 and 2004
Consolidated Statements of Operations for Each of the Three Years in the Period
Ended December 31, 2005
Consolidated Statements of Changes in Stockholders’ Equity for Each of the
Three Years in the Period Ended December 31, 2005
Consolidated Statements of Cash Flows for Each of the Three Years in the
Period Ended December 31, 2005
Notes to Consolidated Financial Statements
Page
F-2
F-5
F-6
F-7
F-8
F-9
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Hornbeck Offshore Services, Inc.
We have audited management’s assessment, included in the accompanying
Management’s Report on Internal Control Over Financial Reporting, that Hornbeck Offshore
Services, Inc. maintained effective internal control over financial reporting as of December 31,
2005, based on criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria).
Hornbeck Offshore Service Inc.’s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an opinion on management’s
assessment and an opinion on the effectiveness of the company’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, evaluating management’s
assessment, testing and evaluating the design and operating effectiveness of internal control,
and performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Hornbeck Offshore Services, Inc.
maintained effective internal control over financial reporting as of December 31, 2005, is fairly
stated, in all material respects, based on the COSO criteria. Also, in our opinion, Hornbeck
Offshore Services, Inc. maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2005, based on the COSO criteria.
F-2
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of Hornbeck
Offshore Services, Inc. as of December 31, 2005 and 2004, and the related consolidated
statements of income, stockholders’ equity, and cash flows for each of the three years in the
period ended December 31, 2005 of Hornbeck Offshore Services, Inc. and our report dated
January 27, 2006 expressed an unqualified opinion thereon.
ERNST & YOUNG LLP
New Orleans, LA
January 27, 2006
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Hornbeck Offshore Services, Inc.
We have audited the accompanying consolidated balance sheets of Hornbeck Offshore
Services, Inc. and subsidiaries as of December 31, 2005 and 2004, and the related
consolidated statements of operations, changes in stockholders’ equity and cash flows for
each of the three years in the period ended December 31, 2005. These financial statements
are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion. An audit
also includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Hornbeck Offshore Services, Inc. and
subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2005 in conformity
with U.S. generally accepted accounting principles.
ERNST & YOUNG LLP
New Orleans, Louisiana
January 27, 2006
F-4
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
December 31,
2005
2004
Current assets:
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $271,739 $ 54,301
Accounts receivable, net of allowance for doubtful accounts of $495 and
$407, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
35,990
1,355
3,788
2,934
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
315,806
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment, net
Goodwill, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred charges, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
462,041
2,628
15,904
296
22,028
530
2,936
1,934
81,729
361,219
2,628
14,863
132
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $796,675 $460,571
Current liabilities:
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,709 $ 4,845
2,391
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,991
Accrued payroll and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,723
Current portion of long-term debt, net of original issue discount of $0 and
1,653
6,893
24
$97 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
1,056
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25,335
Revolving credit facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt, net of original issue discount of $551 and $0
—
15,449
774
29,173
—
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
299,449
41,558
838
225,000
22,247
1,247
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
367,180
277,667
Stockholders’ equity:
Preferred stock: $0.01 par value; 5,000 shares authorized; no shares
issued and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
Common stock: $0.01 par value; 100,000 shares authorized; 27,151 and
20,822 shares issued and outstanding, respectively . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . .
271
372,303
56,843
78
208
163,264
19,400
32
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
429,495
182,904
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . $796,675 $460,571
The accompanying notes are an integral part of these consolidated statements.
F-5
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year Ended December 31,
2005
2004
2003
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $182,586 $132,261 $110,813
Costs and expenses:
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative expenses . . . . . . . . . . . . . . . . . . . . .
66,910
19,954
7,316
20,327
114,507
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
68,079
Other income (expense):
58,520
17,408
5,727
14,759
96,414
35,847
46,805
14,393
3,197
10,731
75,126
35,687
Loss on early extinguishment of debt . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,698)
1,893
3,178
(12,558)
87
(22,443)
65
356
(17,698)
70
—
712
178
(18,523)
(6)
Other income (expense)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(9,098)
(39,650)
(17,639)
Income (loss) before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
58,981
21,538
(3,803)
(1,320)
18,048
6,858
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 37,443 $ (2,483) $ 11,190
Basic earnings (loss) per common share . . . . . . . . . . . . . . . . . . . . . . . $
1.67 $
(0.13) $
Diluted earnings (loss) per common share . . . . . . . . . . . . . . . . . . . . . $
1.64 $
(0.13) $
0.84
0.82
Weighted average basic shares outstanding . . . . . . . . . . . . . . . . . . . .
22,369
19,330
13,397
Weighted average diluted shares outstanding . . . . . . . . . . . . . . . . . .
22,837
19,330
13,604
The accompanying notes are an integral part of these consolidated statements.
F-6
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands)
Common Stock
Shares Amount
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Total
Stockholders’
Equity
Balance at January 1, 2003 . . . . . . . . . . . . .
Private placement of common stock . . . . . .
Other shares issued . . . . . . . . . . . . . . . . . . .
Comprehensive income:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . . . . . . .
Total comprehensive income . . . . . . . . . . . .
Balance at December 31, 2003 . . . . . . . . . .
Initial public offering of common stock . . . .
Other shares issued . . . . . . . . . . . . . . . . . . .
Comprehensive income:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . . . . . . .
Total comprehensive income . . . . . . . . . . . .
Balance at December 31, 2004 . . . . . . . . . .
Public offering of common stock . . . . . . . . .
Other shares issued . . . . . . . . . . . . . . . . . . .
Comprehensive income:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . . . . . . .
Total comprehensive income . . . . . . . . . . . .
12,122
2,400
6
—
—
14,528
6,126
168
—
—
20,822
6,100
229
—
—
$121
24
—
—
—
$145
61
2
—
—
$208
61
2
—
—
$ 61,062
29,243
46
—
—
$10,693
—
—
11,190
—
$ 90,351
71,743
1,170
$21,883
—
—
—
—
(2,483)
—
$163,264
205,058
3,981
—
—
$19,400
—
—
37,443
—
$—
—
—
—
16
$ 16
—
—
—
16
$ 32
—
—
—
46
$ 71,876
29,267
46
11,190
16
11,206
$112,395
71,804
1,172
(2,483)
16
(2,467)
$182,904
205,119
3,983
37,443
46
37,489
Balance at December 31, 2005 . . . . . . . . . .
27,151
$271
$372,303
$56,843
$ 78
$429,495
The accompanying notes are an integral part of these consolidated statements.
F-7
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for bad debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in income from investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on early extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid insurance and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred drydocking charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued liabilities and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2005
2004
2003
$ 37,443
$
(2,483) $ 11,190
19,954
7,316
88
21,538
(1,893)
(143)
1,698
758
(13,999)
(2,771)
(6,827)
12,216
2,865
(1,699)
(738)
17,408
5,727
(47)
(1,320)
(65)
(87)
22,443
1,532
(5,437)
(5,740)
(8,530)
1,130
503
1,723
(5,352)
14,393
3,197
56
6,858
(712)
(17)
—
1,531
(2,297)
(1,635)
(6,100)
(1,627)
610
—
52
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CASH FLOWS FROM INVESTING ACTIVITIES:
75,806
21,405
25,499
Acquisitions and retrofit of tugs and tank barges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions and retrofit of OSVs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction of tugs and tank barges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction of OSVs and conversion of MPSVs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net proceeds from the sale of vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vessel capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-vessel capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(15,795)
(30,555)
(58,573)
(13,484)
4,347
(3,979)
(2,578)
(6,500)
(3,500)
(39,191)
(2,433)
—
(8,786)
(968)
(7,400)
(48,000)
(34,438)
(3,609)
1,650
(5,060)
(1,309)
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CASH FLOWS FROM FINANCING ACTIVITIES:
(120,617)
(61,378)
(98,166)
Proceeds from issuance of senior notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of senior notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redemption premium on retirement of debt
Payments for bond refinancing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net proceeds from (payments on) borrowings under revolving credit facility . . . . . . . . . .
Proceeds from borrowings under other debt agreements . . . . . . . . . . . . . . . . . . . . . . . . .
Payments on borrowings under other debt agreements . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross proceeds from public offerings of common stock . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments for public offering costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash proceeds from other shares issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
74,438
(15,546)
(1,436)
—
—
—
—
(2,286)
215,635
(10,516)
1,913
225,000
(159,454)
—
(21,006)
(40,000)
—
—
3,842
79,643
(7,839)
1,172
—
—
—
—
40,000
1,656
(1,488)
(159)
—
—
23,313
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
262,202
81,358
63,322
Effects of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
47
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
217,438
54,301
16
41,402
12,899
16
(9,329)
22,228
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 271,739
$ 54,301
$ 12,899
SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 17,888
$ 24,023
$ 19,718
NONCASH FINANCING ACTIVITIES:
Issuance of common stock to partially fund the purchase of offshore supply vessels . . .
$
— $
— $ 6,000
The accompanying notes are an integral part of these consolidated statements.
F-8
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
Nature of Operations
Hornbeck Offshore Services, Inc. (or the Company) was incorporated in the state of
Delaware in 1997. The Company, through its subsidiaries, operates offshore supply vessels
(OSVs) to provide support and specialty services to the offshore oil and gas exploration and
production industry, primarily in the U.S. Gulf of Mexico and select international markets. The
Company, through its subsidiaries, also operates ocean-going tugs and tank barges that
provide transportation of petroleum products, primarily in the northeastern United States and
Puerto Rico. All significant intercompany accounts and transactions have been eliminated.
The Company owns a 49% interest in Hornbeck Offshore Trinidad & Tobago Limited
(HOTT-Ltd). HOTT-Ltd is a vessel crewing and management services company established
to support the Company’s Trinidad & Tobago-based operations. The 49% interest owned by
the Company is being recorded using the equity method. The Company’s equity in income
from investments is not material.
2. Summary of Significant Accounting Policies
Revenue Recognition
The Company charters its OSVs and certain of its tank barges to clients under time
charters based on a daily rate of hire and recognizes revenue as earned on a daily basis
during the contract period of the specific vessel.
The Company also contracts its tank barges to clients under contracts of affreightment,
under which revenue is recognized based on the number of days incurred for the voyage as a
percentage of total estimated days applied to total estimated revenues. Voyage related costs
are expensed as incurred. Substantially all voyages under these contracts are less than 10
days in length.
Deferred revenue represents payments received from customers in advance of vessels
commencing time charters.
Accounts Receivable
Accounts receivable consists of trade receivables net of reserves, amounts to be rebilled
to customers and interest receivables.
Cash and Cash Equivalents
Cash and cash equivalents consist of all highly liquid investments in money market
funds, deposits and investments available for current use with an initial maturity of three
months or less.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation and amortization of
equipment and leasehold improvements are computed using the straight-line method based
F-9
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
on the estimated useful lives of the related assets. Major modifications and improvements,
which extend the useful life of the vessel, are capitalized and amortized over the remaining
useful life of the vessel. Gains and losses from retirements or other dispositions are
recognized as incurred.
The estimated useful lives by classification are as follows:
Tugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tank barges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Offshore supply vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . .
Non-vessel related property, plant and equipment
14-25 years
3-25 years
25 years
3-10 years
All of the Company’s single-hulled tank barges have estimated useful lives based on their
classification under the Oil Pollution Act of 1990 and three of such barges were retired from
service at December 31, 2004. The Company’s double-hulled tank barges have an estimated
useful life of 25 years.
Deferred Charges
The Company’s vessels are required by regulation to be recertified after certain periods
of time. The Company defers the drydocking expenditures incurred due to regulatory marine
inspections and amortizes the costs on a straight-line basis over the period to be benefited
from such improvements (generally 30 or 60 months). Financing charges are amortized over
the term of the related debt.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using currently enacted tax rates. The
effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date. The provision for income taxes includes
provisions for federal, state and foreign income taxes.
Use of Estimates
The preparation of financial statements in conformity with United States generally
accepted accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
Concentration of Credit Risk
Customers are primarily major and independent, domestic and international, oil and oil
service companies. The Company’s customers are granted credit on a short-term basis and
F-10
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
related credit risks are considered minimal. The Company usually does not require collateral.
The Company provides an estimate for uncollectible accounts based primarily on
management’s judgment. Management uses historical losses, current economic conditions
and individual evaluations of each customer to make adjustments to the allowance for
doubtful accounts. The Company’s historical losses have not been significant. However,
because amounts due from individual customers can be significant, future adjustments to the
allowance can be material if one or more individual customer’s balances are deemed
uncollectible.
The following table represents the allowance for doubtful accounts (in thousands):
Balance, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes to provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write off of uncollectible accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2005
2004
2003
$407
88
—
$495
$454
(47)
—
$469
56
(71)
$407
$454
Property taxes receivable represents assessed property taxes on the Company’s vessels
by local municipalities that are refunded upon the filing of state tax returns.
Goodwill
Goodwill reflects the excess of cost over the estimated fair value of the net assets
acquired. Fair value is determined based on discounted cash flow or appraised values, as
appropriate. The Company has performed goodwill impairment reviews by reporting unit
based on a fair value concept as required by Statement of Financial Accounting Standards
(SFAS) No. 142, “Goodwill and Other Intangible Assets”, using a multiple of earnings before
interest, depreciation, taxes and amortization (EBITDA) and earnings. Such fair value
calculations have not resulted in the impairment of goodwill.
Stock-Based Compensation
SFAS No. 123, “Accounting for Stock-Based Compensation” established accounting and
disclosure requirements using a fair-value-based method of accounting for stock-based
employee compensation plans. As provided for under SFAS 123, the Company accounts for
stock-based compensation using the intrinsic value method prescribed in Accounting
Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees.” For all
periods presented, the Company has used the intrinsic value method, in which compensation
cost for stock options, if any, is measured as the excess of the estimated fair value market
price of the Company’s stock at the date of grant over the amount an employee must pay to
acquire the stock. Refer to Recent Accounting Pronouncements below.
Impairment of Long-Lived Assets
When events or circumstances indicate that the carrying amount of long-lived assets to
be held and used or intangible assets might not be recoverable, the expected future
F-11
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
undiscounted cash flows from the assets are estimated and compared with the carrying
amount of the assets. If the sum of the estimated undiscounted cash flows is less than the
carrying amount of the assets, an impairment loss is recorded. The impairment loss is
measured by comparing the fair value of the assets with their carrying amounts. Fair value is
determined based on discounted cash flow or appraised values, as appropriate. The
Company did not record any impairment losses related to its long-lived assets during 2005,
2004 or 2003.
Recent Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards Board, or FASB, issued
FASB Statement No. 123 (revised 2004), “Share-Based Payment,” or SFAS 123R, which is a
revision of FASB Statement No. 123, “Accounting for Stock-Based Compensation,” or SFAS
123. SFAS 123R supersedes Accounting Principles Board Opinion No. 25, or APB 25,
“Accounting for Stock Issued to Employees,” and amends FASB Statement No. 95,
“Statement of Cash Flows.” Generally, the approach in SFAS 123R is similar to the approach
described in SFAS 123. However, SFAS 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the income
statement based on their fair values. Accordingly, the adoption of SFAS 123R’s fair value
method will have a significant impact on the Company’s results of operations, although it will
have no impact on its overall financial condition. The impact of adoption of SFAS 123R is
expected to be approximately $2.9 million, net of tax, for the 2006 fiscal year. However, had
the Company adopted SFAS 123R in prior periods, the impact of that standard would have
approximated the impact of SFAS 123 as described in the disclosure of pro forma net income
and earnings per share in Note 8 to the Company’s audited consolidated financial statements.
SFAS 123R also requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow, rather than as an operating cash
flow as required under current GAAP literature. This requirement will reduce net operating
cash flows and increase net financing cash flows in periods after adoption. While the
Company cannot estimate what those amounts will be in the future because they depend on,
among other things, when employees exercise stock options and purchase rights, the amount
of operating cash flows recognized for such excess tax deductions was approximately $1.7
million in 2005. On April 14, 2005, the Securities and Exchange Commission, or Commission,
announced amended compliance dates for SFAS 123R. The Commission previously required
companies to adopt this standard no later than July 1, 2005, but the new rule allows
companies to implement SFAS 123R at the beginning of their next fiscal year, that begins
after June 15, 2005. The Company will not be required to report under SFAS 123R until the
quarter ending March 31, 2006 and does not currently intend to adopt this standard for
reporting prior to such time. See Note 8 of these audited consolidated financial statements for
further discussion of the Company’s Incentive Compensation Plan.
3. Earnings Per Share and Reverse Stock Split
Basic earnings (loss) per common share was calculated by dividing net income (loss) by
the weighted average number of common shares outstanding during the period. Diluted
F-12
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
earnings (loss) per common share was calculated by dividing net income (loss) by the
weighted average number of common shares outstanding during the year plus the effect of
dilutive stock options. Weighted average number of common shares outstanding was
calculated by using the sum of the shares determined on a daily basis divided by the number
of days in the period. The table below reconciles the company’s earnings (loss) per share (in
thousands, except for per share data):
Year Ended December 31,
2005
2004
2003
Net income (loss)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$37,443
$ (2,483)
$11,190
Weighted average number of shares of common stock
outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add: Net effect of dilutive stock options (1) . . . . . . . . . . . . . .
22,369
468
19,330
—
13,397
207
Adjusted weighted average number of shares of common
stock outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22,837
19,330
13,604
Earnings (loss) per common share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1.67
$ (0.13)
$ 0.84
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1.64
$ (0.13)
$ 0.82
(1) At December 31, 2005 and 2004, stock options representing rights to acquire 42 and 273 shares, respectively, of common stock were
excluded from the calculation of diluted earnings per share because the effect was antidilutive. Stock options are antidilutive when the exercise
price of the options is greater than the average market price of the common stock for the period or when the results from operations are a net
loss.
On March 5, 2004, the Company effected a 1-for-2.5 reverse stock split of its common
stock that caused the number of outstanding shares to decrease from approximately
36.3 million to 14.5 million. For all periods, the share amounts and per share data reflected
throughout these financial statements have been adjusted to give effect to the reverse stock
split. Basic and diluted earnings per common share are each calculated based on the
weighted average number of shares outstanding during the periods adjusted for the effect of
the reverse stock split.
4. Defined Contribution Plan
The Company offers a 401(k) plan to all full time employees. Employees must be at least
twenty-one years of age and have completed three months of service to be eligible for
participation. Participants may elect to defer up to 60% of their compensation, subject to
certain statutorily established limits. The Company may elect to make annual matching and/or
profit sharing contributions to the plan. During the years ended December 31, 2005, 2004 and
2003, the Company made contributions of approximately $0.6 million, $0.5 million and $0.1
million, respectively.
F-13
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
5. Property, Plant and Equipment
Property, plant and equipment consisted of the following (in thousands):
Tugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tank barges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Offshore supply vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-vessel related property, plant and equipment . . . . . . . .
Less: Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . .
December 31,
2005
2004
$ 37,911
133,402
317,860
29,921
14,752
(71,805)
$ 30,036
40,663
287,222
53,232
6,170
(56,104)
$462,041
$361,219
6. Long-Term Debt
Senior Notes
On July 24, 2001, the Company issued $175.0 million in aggregate principal amount of
10.625% senior notes, or old senior notes. The old senior notes were due to mature on
August 1, 2008 and required semi-annual interest payments at an annual rate of 10.625% on
February 1 and August 1 of each year until maturity. The effective interest rate on the old
senior notes was 11.18%. No principal payments were due until maturity. On November 3,
2004, the Company commenced a cash tender offer for all of the old senior notes. Old senior
notes totaling approximately $159.5 million, or 91% of the notes outstanding, were validly
tendered during the designated tender period and repurchased during 2004. The remaining
$15.5 million of old senior notes were redeemed on January 14, 2005. A loss on early
extinguishment of debt for the old senior notes of approximately $22.4 million and $1.7 million
was recorded during the fourth quarter 2004 and the first quarter of 2005, respectively. These
losses include the tender offer costs, the write-off of unamortized financing costs and original
issue discount, and a bond redemption premium.
On November 23, 2004, the Company issued in a private placement $225.0 million in
aggregate principal amount of 6.125% senior notes, or new senior notes, governed by an
indenture, or the 2004 indenture. The new senior notes were subsequently exchanged on
March 7, 2005 for senior notes with substantially similar terms, except that the issuance of the
senior notes issued in the exchange offer was registered under the Securities Act of 1933, or
Securities Act. The net proceeds to the Company from the private placement were
approximately $219.0 million, net of transaction costs. The Company used $198.0 million of
the proceeds to repurchase or redeem all of the old senior notes. The $198.0 million
comprised the total consideration paid for the old senior notes, including related tender offer
costs, consent fees, and bond redemption premium required to be paid to holders of the old
senior notes. The residual proceeds were used for the acquisition, construction and retrofit of
vessels. The effective interest rate on the new senior notes is 6.38%.
On October 4, 2005, the Company issued in a private placement an additional $75.0
million in aggregate principal amount of 6.125% senior notes, or additional notes, governed
F-14
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
by the 2004 indenture. The additional notes were priced at 99.25% of principal amount to
yield 6.41%. The net proceeds to the Company from this private placement were
approximately $73.1 million, net of estimated transaction costs. The Company intends to use
the proceeds from the sale of the additional notes, as well as the proceeds from its concurrent
public offering of common stock, to partially fund the construction of new OSVs, ocean-going
tugs and ocean-going, double-hulled tank barges and the retrofit or conversion of certain
existing vessels, including MPSVs. In addition, the combined proceeds may be used in
connection with possible future acquisitions and additional new vessel construction programs,
as well as for general corporate purposes. Pending these uses, the Company repaid debt
under its revolving credit facility, which may be reborrowed.
In December 2005, the Company filed a registration statement to facilitate an offer to
exchange the additional notes that were initially sold pursuant to the October 2005 private
placement, for 6.125% senior notes with substantially the same terms, except that the
issuance of the senior notes issued in the exchange offer will be registered under the
Securities Act. Both series of senior notes were issued under and are entitled to the benefits
of the same 2004 indenture. The exchange offer is expected to be completed in late March
2006.
The new senior notes and additional notes (or, collectively, the senior notes) mature on
December 1, 2014 and require semi-annual interest payments on June 1 and December 1 of
each year until maturity. No principal payments are due until maturity. The senior notes are
senior unsecured obligations and rank equally in right of payment with other existing and
future senior indebtedness and senior in right of payment to any subordinated indebtedness
that may be incurred by the Company in the future. The senior notes are guaranteed by
certain of the Company’s subsidiaries. The guarantees are full and unconditional, joint and
several, and all of the Company’s non-guarantor subsidiaries are minor as defined in
Commission regulations. Hornbeck Offshore Services, Inc., as the parent company issuer of
the senior notes, has no independent assets or operations other than its ownership interest in
its subsidiaries and affiliates. There are no significant restrictions on the Company’s ability or
the ability of any guarantor to obtain funds from its subsidiaries by such means as a dividend
or loan, except for certain restrictions contained in the Company’s revolving credit facility
restricting the payment of dividends by the Company’s two principal subsidiaries. The
Company may, at its option, redeem all or part of the senior notes from time to time at
specified redemption prices and subject to certain conditions required by the indenture. The
Company is permitted under the terms of the indenture to incur additional indebtedness in the
future, provided that certain financial conditions set forth in the indenture are satisfied by the
Company.
Revolving Credit Facility
Effective February 13, 2004, the Company amended and restated its senior secured
revolving credit facility to increase its size to $100.0 million and extend its maturity to
February 13, 2009. The borrowing base under the facility is currently $60.0 million. Pursuant
to the indenture governing the senior notes, unless the Company meets a specified
F-15
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
consolidated interest coverage ratio test, the level of permitted borrowings under this facility is
limited to the greater of $75 million or 20% of the Company’s consolidated net tangible assets
determined as of the end of the Company’s most recently completed fiscal quarter for which
internal financial statements are available. Borrowings under the revolving credit facility
accrue interest, at the Company’s option, at either (1) the prime rate announced by Citibank,
N.A. in New York, plus a margin of up to 1.0%, or (2) the London Interbank Offered Rate, plus
a margin of 1.5% to 3.5%. Unused commitment fees are payable quarterly at the annual rate
of one-quarter to one-half of one percent on the revolving credit facility, based on the leverage
ratio defined by the agreement. As of December 31, 2005, the Company had no balance
outstanding under the revolving credit facility and had $60.0 million of additional credit
immediately available under such facility. As of such date, seven OSVs and four ocean-going
tugs and associated personalty, collateralized the revolving credit facility.
The revolving credit facility and 2004 indenture impose certain operating and financial
restrictions on the Company. Such restrictions affect, and in many cases limit or prohibit,
among other things, the Company’s ability to incur additional indebtedness, make capital
expenditures, redeem equity, create liens, sell assets and make dividend or other restricted
payments.
Interest expense excludes capitalized interest related to the construction or conversion of
vessels in the approximate amount of $3.9 million, $3.0 million and $2.7 million for the years
ended December 31, 2005, 2004 and 2003, respectively.
As of the dates indicated, the Company had the following outstanding long-term debt (in
thousands):
December 31,
2005
2004
10.625% senior notes due 2008, net of original issue discount of
$97 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
—
$ 15,449
6.125% senior notes due 2014, net of original issue discount of
$551 and $0 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
299,449
225,000
Less current maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
299,449
—
240,449
15,449
$299,449
$225,000
Annual maturities of debt during each year ending December 31, are as follows (in
thousands):
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
—
—
—
—
—
299,449
$299,449
F-16
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
7. Stockholders’ Equity
Preferred Stock
The Company’s certificate of incorporation authorizes 5.0 million shares of preferred
stock. The Board of Directors has the authority to issue preferred stock in one or more series
and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights,
conversion rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series or the designation of such
series, without further vote or action by the Company’s stockholders.
Stockholder Rights Plan
On June 18, 2003, the Company’s Board of Directors implemented a stockholder rights
plan, as amended on March 5, 2004 and September 3, 2004, declaring a dividend of one right
for each outstanding share of common stock to stockholders of record on June 18, 2003. One
right will also attach to each share of common stock issued after June 28, 2003. The rights
become exercisable, and transferable apart from the Company’s common stock, 10 business
days following a public announcement that a person or group has acquired beneficial
ownership of, or has commenced a tender or exchange offer for, 10% or more of the
Company’s common stock.
The rights have anti-takeover effects, causing substantial dilution to a person or group
who attempts to acquire the Company without the approval of the Board of Directors. As a
result, the overall effect of the rights may be to render more difficult or discourage any attempt
to acquire the Company even if such acquisition may be favorable to the interests of the
Company’s stockholders. Because the Board of Directors can redeem the rights or approve
certain offers, the rights should not interfere with any merger or other business combination
approved by the Company’s Board of Directors.
Private Placement of Common Stock
In May 2003, the Company commenced a private placement of its common stock to
accredited investors to raise gross proceeds of approximately $30 million, including $6 million
of common stock, or 0.5 million shares, issued to the seller as partial consideration for the
June 26, 2003 acquisition of five deepwater OSVs. The private placement was completed in
July 2003 with 1.9 million shares distributed for gross cash proceeds of approximately $24
million. Costs incurred for the private placement were approximately $0.7 million and were
recorded as a reduction of additional paid-in capital.
Public Offerings of Common Stock
On March 31, 2004, the Company completed an initial public offering of 6 million shares
of its common stock at $13.00 per share, for total gross proceeds of approximately $78
million. On April 28, 2004, the Company issued an additional 0.1 million shares of its common
stock pursuant to the exercise by the underwriters of the initial public offering of an option to
purchase additional shares, which resulted in incremental gross proceeds to the Company of
F-17
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
approximately $1.6 million. The Company used the net proceeds of the offerings of
approximately $73 million to repay the $40 million balance then-outstanding under its
revolving credit facility on March 31, 2004 and, from March 31, 2004 to December 31, 2004,
used approximately $33 million of the net proceeds to fund expenditures related to its tank
barge new build program, the acquisition and retrofit of two ocean-going tugs, the acquisition
of one fast supply vessel, and for general corporate purposes. The Company’s shares of
common stock trade on the New York Stock Exchange under the symbol “HOS”.
On October 6, 2005, the Company completed an underwritten public offering (the
Offering) of 6.1 million shares of its common stock at $35.35 per share, for total gross
proceeds of $215.6 million. Underwriting discounts, commissions and offering expenses of
approximately $0.6 million incurred to date were recorded as a reduction of additional paid-in
capital. The Offering was pursuant to the effective shelf registration statement previously filed
with the Commission and included an additional 2 million shares sold by a selling stockholder.
The Company used a portion of the net proceeds of the Offering to repay the $21 million
balance then-outstanding under its revolving credit facility. The Company intends to use the
remaining proceeds from the Offering to partially fund the construction of new OSVs, ocean-
going tugs and ocean-going, double-hulled tank barges and the retrofit or conversion of
certain existing vessels, including MPSVs. In addition, the proceeds may be used in
connection with possible future acquisitions and additional new vessel construction programs,
as well as for general corporate purposes.
8. Stock-Based Compensation
Incentive Compensation Plan
SFAS No. 123 “Accounting for Stock-Based Compensation” established financial
accounting and reporting standards for stock-based compensation plans. The Company’s
incentive compensation plan includes all arrangements by which employees and directors
receive shares of stock or other equity instruments of the Company, or the Company incurs
liabilities to employees or directors in amounts based on the price of the stock. SFAS 123
defines a fair-value-based method of accounting for stock-based compensation. However,
SFAS 123 also allows an entity to continue to measure stock-based compensation cost using
the intrinsic value method of APB Opinion No. 25, “Accounting for Stock Issued to
Employees.” Entities electing to retain the accounting prescribed in APB 25 must make pro
forma disclosures of net income assuming dilution as if the fair-value-based method of
accounting defined in SFAS 123 had been applied. The Company retained the provisions of
APB 25 for expense recognition purposes. Under APB 25, where the exercise price of the
Company’s stock options equals the market price of the underlying stock on the date of grant,
no compensation expense is recognized. The Company will be required to report under SFAS
123R effective the quarter ending March 31, 2006, which requires all share-based payments
to employees, including grants of employee stock options, to be recognized in the income
statement based on their fair values.
The Company established an incentive compensation plan, which provides the Company
with the ability to grant options, restricted stock and other awards for a maximum of 3.5 million
F-18
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
shares of common stock. The purchase price of the stock subject to each option is
determined by the Board of Directors of the Company and cannot be less than the fair market
value of the stock at the date of grant. During 2005, 2004 and 2003, options for approximately
221,000, 168,000 and 6,000 shares, respectively, were exercised. All options granted expire
five to ten years after the date of grant, have an exercise price equal to or greater than the
estimated market price of the Company’s stock at the date of grant and vest over a two- to
four-year period.
The following summarizes the option activity in the plan during 2005, 2004 and 2003 (in
thousands, except for per share data):
2005
2004
2003
Number of
Options
Outstanding
Outstanding, beginning of year . . . .
Granted . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . .
Cancelled . . . . . . . . . . . . . . . . . .
Outstanding, end of year . . . . . . . . .
1,118
374
(221)
(22)
1,249
Exercisable, end of year
. . . . . . . . .
573
Weighted-average fair value of
options granted during the
year . . . . . . . . . . . . . . . . . . . . . . . .
Average
Price
Per
Share
$ 9.73
24.92
9.40
15.88
$16.75
Average
Price
Per
Share
$ 7.45
13.88
6.55
9.96
$ 9.73
Number of
Options
Outstanding
925
380
(168)
(19)
1,118
572
Number of
Options
Outstanding
773
209
(6)
(51)
925
455
Average
Price
Per
Share
$ 6.40
11.30
6.63
7.15
$ 7.45
$12.73
$ 4.60
$ 3.55
The following is a summary of outstanding stock options at December 31, 2005 (in
thousands, except for years and per share data):
Options Outstanding
Options
Exercisable
Range of exercise prices:
$ 4.63 to $ 6.63 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$11.20 to $13.83 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$15.80 to $23.10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$27.09 to $36.63 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares
354
516
322
56
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,248
Employee Stock Purchase Plan
Weighted
Average
Remaining
Contractual
Life (Years)
Weighted
Average
Exercise
Price
Weighted
Average
Exercise
Price
Shares
5.26
7.79
9.14
9.74
7.51
$ 6.37
12.91
22.89
30.93
14.45
342
222
3
8
575
$ 6.36
12.46
16.87
28.32
9.09
On May 3, 2005, the Company established the Hornbeck Offshore Services, Inc. 2005
Employee Stock Purchase Plan, or ESPP, which was adopted by the Company’s Board of
Directors and approved by the Company’s stockholders. Under the ESPP, the Company is
F-19
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
authorized to issue up to 0.7 million shares of common stock to eligible employees of the
Company and its designated subsidiaries. Employees have the opportunity to purchase
shares of the Company’s common stock at periodic intervals through accumulated payroll
deductions that will be applied at semi-annual intervals to purchase shares of common stock
at a discount from the market price as defined by the ESPP. The ESPP is designed to satisfy
the requirements of Section 423 of the Internal Revenue Code of 1986, as amended, and
thereby allows participating employees to defer recognition of taxes when purchasing the
shares of common stock at a 15% discount under the ESPP. On May 6, 2005, the Company
filed a Registration Statement on Form S-8 to register the issuance of shares of common
stock under the ESPP. Approximately 12% of eligible employees have participated in the
ESPP during the first purchase period, July 1, 2005 through December 31, 2005. Under the
Plan, the Company sold approximately 7,000 shares for the year ended December 31, 2005.
If compensation cost for the Company’s two stock-based compensation plans had been
determined based on the fair value at the grant dates for awards under those plans consistent
with the method under SFAS 123, the Company’s net income (loss) for the years ended
December 31, 2005, 2004 and 2003 would have been as indicated below (in thousands,
except per share data):
Year Ended December 31,
2005
2004
2003
Net income (loss):
As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $37,443 $(2,483) $11,190
Deduct: Stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax
effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,373)
(671)
(281)
Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $36,070 $(3,154) $10,909
Basic earnings (loss) per common share:
As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.67 $ (0.13) $ 0.84
Deduct: Stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax
effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.03)
(0.06)
(0.02)
Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.61 $ (0.16) $ 0.82
Diluted earnings (loss) per common share:
As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.64 $ (0.13) $ 0.82
Deduct: Stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax
effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.03)
(0.06)
(0.02)
Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.58 $ (0.16) $ 0.80
The fair value of the options granted under the Company’s stock option plan during each
of the three years ended December 31, 2005, 2004 and 2003, was estimated using the Black-
Scholes pricing model using the minimum value method whereby an average expected
volatility of 39.1% was used for the year ended December 31, 2005. Volatility was not
considered for the years ended December 31, 2004 and 2003, respectively. The Company
F-20
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
used an average interest rate of 4.27%, 4.05% and 3.84% for the years ended December 31,
2005, 2004 and 2003, respectively. The Company valued its grants at a seven to ten year
expected life through the periods ended September 30, 2005, December 31, 2004 and
December 31, 2003. Analysis of the Company’s two years of exercise history indicates an
expected term of approximately four years, which was applied to the Black-Scholes pricing
model for all grants during fourth quarter 2005. The Black-Scholes pricing model also
assumes no expected dividends for each year.
The fair value of the employees’ purchase rights granted under the Employee Stock
Purchase Plan was estimated using the Black-Scholes model with the following assumptions
for the year ended December 31, 2005: an expected life of 6 months; no expected dividends;
expected volatility of 41.9%; and a risk-free interest rate of 3.4%. The weighted-average fair
value of those purchase rights granted in 2005 was $7.51.
9.
Income Taxes
The net long-term deferred tax liabilities in the accompanying consolidated balance
sheets include the following components (in thousands):
December 31,
2005
2004
Deferred tax liabilities:
Fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 71,690 $ 53,606
3,451
Deferred charges and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,465
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax assets:
75,155
57,057
Net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(33,466)
(180)
(46)
(33,692)
95
(34,708)
(148)
(49)
(34,905)
95
Total deferred tax liabilities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 41,558 $ 22,247
The components of the income tax expense (benefit) follow (in thousands):
Year Ended December 31,
2005
2004
2003
Current tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ — $ —
Deferred tax expense (benefit)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,320)
21,538
6,858
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $21,538 $(1,320) $6,858
At December 31, 2005, the Company had federal tax net operating loss carryforwards of
approximately $92 million. The carryforward benefit from the federal tax net operating loss
carryforwards begins to expire in 2020. The Company has a state tax net operating loss
carryforward of approximately $1.5 million related to one state tax jurisdiction. This
F-21
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
carryforward can only be utilized if the Company generates taxable income in the appropriate
tax jurisdiction. A valuation allowance of approximately $0.1 million has been established to
fully offset the deferred tax asset related to the state tax jurisdiction.
The following table reconciles the difference between the Company’s income tax
provision calculated at the federal statutory rate and the actual income tax provision (in
thousands):
Year Ended December 31,
2005
2004
2003
Statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20,644 $(1,331) $6,317
235
State taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
47
Non-deductible expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
259
Foreign taxes and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(49)
57
3
767
50
77
$21,538 $(1,320) $6,858
10. Commitments and Contingencies
Vessel Construction
As of December 31, 2005, the Company was committed under vessel construction
contracts with a domestic shipyard for the retrofit of two 6,100 horsepower tugs under its first
tug and tank barge newbuild program. The Company expects the total project costs of the first
tug and tank barge newbuild program to be approximately $121.0 million in the aggregate.
The remaining tug retrofit costs of approximately $4.6 million are expected to be incurred in
the first quarter of 2006.
On May 5, 2005, the Company announced a conversion program to retrofit two coastwise
sulfur tankers into U.S.-flagged, new generation 370-foot multi-purpose supply vessels, or
MPSVs. The total project cost to acquire and convert the two vessels, prior to construction
period interest, is estimated to be at least $65.0 million in the aggregate, of which
approximately $13.1 million was incurred during 2005. The Company is currently evaluating
prospective domestic shipyards and has not yet contractually committed to a shipyard for the
additional costs associated with this conversion program. The Company anticipates delivery
of the converted vessels during 2007.
On September 26, 2005 and February 23, 2006, the Company announced new vessel
construction programs for its two business segments. Based on internal estimates, the project
costs, prior to construction period interest, for the second tug and tank barge newbuild
program and the fourth OSV newbuild program are expected to be $105.0 million and $290.0
million, respectively. The Company is contractually committed to a domestic shipyard for the
construction of three 60,000-barrel double-hulled tank barges. The Company is also
contractually committed to one domestic shipyard for the construction of two 240 EDF class
OSVs and with another domestic shipyard for the construction of two additional 240 EDF
class OSVs. All three 60,000-barrel tank barges and four of the 240EDF class OSVs under
the fourth OSV newbuild program are expected to be delivered by mid-2008, with the first
vessel due in late 2007.
F-22
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Operating Leases
The Company is obligated under certain operating leases for marine vessels, office
space, shore-based facilities and vehicles. The Company is currently committed to lease a
tug for a term of three years, originating November 20, 2005. The Covington facility lease,
which commenced on September 1, 2003, provides for an initial term of five years with two
five-year renewal options. The Brooklyn facility lease is currently scheduled to expire on
March 31, 2007. A shore based facility lease commenced on December 20, 2005 and
provides for an initial term of eight years with four additional five-year periods upon the terms
and conditions contained in the lease agreement.
Future minimum payments under noncancelable leases for years subsequent to 2005
follow (in thousands):
Year Ended December 31,
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 and thereafter
$ 3,701
3,637
3,253
978
29,881
$41,450
In addition, the Company leases marine vessels used in its operations under
month-to-month operating lease agreements. Total rent expense related to leases was
approximately $1.2 million; $1.7 million and $1.0 million during the years ended December 31,
2005, 2004 and 2003, respectively.
Contingencies
In the normal course of its business, the Company becomes involved in various claims
and legal proceedings in which monetary damages are sought. It is management’s opinion
that the Company’s liability, if any, under such claims or proceedings would not materially
affect its financial position or results of operations.
The Company insures against losses relating to its vessels, pollution and third party
liabilities, including claims by employees under Section 27 of the Merchant Marine Act of
1920, or the Jones Act. Third party liabilities and pollution claims that relate to vessel
operations are covered by the Company’s entry in a mutual protection and indemnity
association, or P&I Club. Commencing in March 2005, the terms of entry for the Company’s
offshore supply vessel, or OSV, segment contained an annual aggregate deductible (AAD) for
which the Company remains responsible, while the P&I Club is responsible for all applicable
amounts that exceed the AAD, after payment by the Company of an additional individual
claim deductible. The terms of entry for the Company’s tug and tank barge segment does not
contain an AAD. The Company provides reserves for those portions of the AAD and any
individual claim deductibles for which the Company remains responsible by using an
estimation process that considers Company-specific and industry data, as well as
F-23
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
management’s experience, assumptions and consultation with outside counsel. As additional
information becomes available, the Company will assess the potential liability related to its
pending litigation and revise its estimates. Such revisions in estimates of the potential liability
could materially impact the Company’s results of operations, financial position or cash flows.
As of December 31, 2005, the Company’s claims costs incurred under its OSV P&I Club
policy had not exceeded the AAD.
11. Deferred Charges
Deferred charges include the following (in thousands):
Year Ended December 31,
2005
2004
2003
Deferred financing costs, net of accumulated amortization
of $1,075, $7,487 and $2,702, respectively . . . . . . . . . . . .
$ 6,928
$ 5,616
$ 5,019
Deferred drydocking costs, net of accumulated
amortization of $10,654, $6,557 and $5,330,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,651
325
8,978
269
6,175
1,122
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$15,904
$14,863
$12,316
12. Related Party Transactions
During 2004 and 2003, the Company was committed under vessel construction contracts
to construct OSVs and double-hulled tank barges with a shipyard affiliated with an individual
who was, at the time of the execution of the shipyard contracts, a member of the Company’s
Board of Directors. The Company incurred approximately $16.3 million and $25.2 million,
respectively, of construction costs related to such vessels.
13. Major Customers
In the years ended December 31, 2005, 2004 and 2003, revenues from one of the
Company’s customers served by its tug and tank barge segment was approximately 17%,
22% and 23%, respectively.
14. Segment Information
The Company provides marine transportation services through two business segments.
The Company operates new generation offshore supply vessels in the U.S. Gulf of Mexico,
Trinidad and Mexico through its offshore supply vessel segment. The offshore supply vessels
principally support complex exploration and production projects by transporting cargo to
offshore drilling rigs and production facilities and provide support for specialty services. The
tug and tank barge segment primarily operates ocean-going tugs and tank barges in the
northeastern United States and in Puerto Rico. The ocean-going tugs and tank barges
provide coastwise transportation of refined and bunker grade petroleum products from one
port to another. The following shows reportable segment information for the years ended
F-24
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2005, 2004 and 2003, reconciled to consolidated totals and prepared on the
same basis as the Company’s consolidated financial statements (in thousands).
Year Ended December 31,
2005
2004
2003
Operating Revenues:
Offshore supply vessels
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 88,772
28,663
$ 59,886
15,407
$ 50,044
12,358
Tugs and tank barges
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
117,435
75,293
62,402
57,379
7,772
65,151
50,465
6,503
56,968
43,206
5,205
48,411
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$182,586
$132,261
$110,813
Operating Expenses:
Offshore supply vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tugs and tank barges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 35,936
30,974
$ 29,724
28,796
$ 22,786
24,019
Total
Depreciation and Amortization:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 66,910
$ 58,520
$ 46,805
Offshore supply vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tugs and tank barges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 15,197
12,073
$ 12,876
10,259
$
9,381
8,209
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 27,270
$ 23,135
$ 17,590
General and Administrative Expenses:
Offshore supply vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tugs and tank barges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
9,299
11,028
$
6,342
8,417
$
4,952
5,779
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 20,327
$ 14,759
$ 10,731
Operating Income:
Offshore supply vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tugs and tank barges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 57,003
11,076
$ 26,351
9,496
$ 25,283
10,404
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 68,079
$ 35,847
$ 35,687
Capital Expenditures:
Offshore supply vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tugs and tank barges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 46,232
76,154
2,578
$ 10,568
49,842
968
$ 92,054
12,453
1,309
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$124,964
$ 61,378
$105,816
Identifiable Assets:
Offshore supply vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tugs and tank barges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$599,514
182,766
14,395
$328,857
119,980
11,734
$276,567
68,589
20,086
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$796,675
$460,571
$365,242
Long-Lived Assets:
Offshore supply vessels
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$231,445
62,141
$202,382
54,978
$221,332
36,744
Tugs and tank barges
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign (1) (2)
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
293,586
257,360
258,076
158,404
5,841
164,245
4,210
95,301
5,875
101,176
2,683
46,444
10,470
56,914
1,725
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$462,041
$361,219
$316,715
F-25
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(1) The Company’s vessels conduct operations in international areas. Vessels will routinely move to and from international and domestic
in
operating areas. As these assets are highly mobile,
international areas as of December 31, 2005, 2004 and 2003, respectively.
Included are amounts applicable to the Puerto Rico tug and tank barge operations, even though Puerto Rico is considered a possession of the
United States and the Jones Act applies to vessels operating in Puerto Rican waters.
the long-lived assets reflected above represent
the assets that were present
(2)
15. Candy Fleet Offshore Supply Vessel Acquisitions
On June 26, 2003, the Company acquired five 220-foot new generation offshore supply
vessels and their related business from Candy Marine Investment Corporation, an affiliate of
Candy Fleet Corporation (collectively, Candy Fleet), for approximately $45 million, comprised
of $39 million in cash and $6 million of common stock, for the purpose of diversifying its
offshore supply vessel fleet and expanding its service offering. Candy Fleet is a privately held
marine vessel operator in the Gulf of Mexico. The Company funded the cash portion of the
purchase price with a combination of borrowings under the Company’s revolving credit facility
discussed in Note 6, and with part of the cash proceeds generated by the private placement
of its common stock discussed in Note 7. The new vessel names are HOS Explorer, HOS
Express, HOS Pioneer, HOS Trader, and HOS Voyager.
On August 6, 2003, the Company completed the acquisition of an additional 220-foot new
generation offshore supply vessel from Candy Fleet. The closing of the transaction was effected
after satisfying certain conditions precedent to closing, including, among other things, receipt
during July 2003 of approximately $13.5 million in proceeds relating to a $30 million private
placement of common stock and the satisfactory completion of a drydocking and survey of the
vessel in early August. The purchase price of approximately $9 million was negotiated by the
parties on an arms-length basis. The vessel was renamed the HOS Mariner. In connection with
the acquisition, the Company was also granted options to purchase three conventional 180-foot
offshore supply vessels from Candy Fleet for an aggregate exercise price of approximately $4.5
million. These options expired on August 6, 2004.
The purchase method was used to account for the acquisitions of the six new generation
offshore supply vessels from Candy Fleet. There were no intangible assets or goodwill
recorded as a result of the acquisitions. Included in the purchase price allocation was
approximately $0.3 million of acquisition costs comprised of legal, consulting and accounting
fees. As of December 31, 2003, the final purchase price was allocated to the acquired assets
based on the estimated fair values as follows (in thousands):
Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$54,437
183
(275)
Purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$54,345
The unaudited pro forma income statement data from the Candy Fleet acquisition would
not have had a material impact on the Company’s consolidated results of operations for the
year ended December 31, 2003, if the acquisition had taken place at the beginning of such
fiscal years.
F-26
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
16. Employment Agreements
The Company has employment agreements with certain members of its executive
management team. These agreements include, among other things, contractually stated base
level salaries and a structured bonus plan dependent upon the Company achieving certain
targeted financial results. Prior to 2005, the agreements contained EBITDA and earnings per
share targets. In March 2005, the Company and such members of its executive management
team amended these agreements to include a discretionary component of the bonus plan in
lieu of the earnings per share target. In the event such a member of the executive
management team is terminated due to events as defined in such officer’s agreement, the
employee will continue to receive salary, bonus and other payments equal to the full amount
payable under the agreement.
17. Supplemental Selected Quarterly Financial Data (Unaudited) (in thousands, except
per share data):
The following table contains selected unaudited quarterly financial data from the
consolidated statements of operations for each quarter of fiscal 2005 and 2004. The operating
results for any quarter are not necessarily indicative of results for any future period.
Quarter Ended
Mar 31
Jun 30
Sep 30
Dec 31
Fiscal Year 2005
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $37,904 $41,083 $46,462 $ 57,137
24,947
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income(1)
15,083
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per common share:
13,845
7,723
12,497
5,238
16,790
9,398
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.25 $ 0.37 $ 0.45 $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.44
0.36
0.25
Fiscal Year 2004
0.56
0.55
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $31,347 $30,288 $32,892 $ 37,784
10,186
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(10,058)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss)(1)
Earnings (loss) per common share:
8,829
2,338
9,239
3,303
7,640
1,930
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.16 $ 0.09 $ 0.16 $ (0.48)
(0.48)
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.15
0.15
0.09
The sum of the four quarters may not equal annual results due to rounding.
(1) Refer to Note 6 for information about the loss on early extinguishment of debt recorded in the first quarter ended March 31, 2005 and the
fourth quarter ended December 31, 2004.
F-27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Covington, the State of
Louisiana, on March 16, 2006.
HORNBECK OFFSHORE SERVICES, INC.
By:
/S/ TODD M. HORNBECK
Todd M. Hornbeck
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signature
Title
Date
/S/ TODD M. HORNBECK
(Todd M. Hornbeck)
/S/
JAMES O. HARP, JR.
(James O. Harp, Jr.)
/S/ LARRY D. HORNBECK
(Larry D. Hornbeck)
/S/ BRUCE W. HUNT
(Bruce W. Hunt)
/S/ STEVEN W. KRABLIN
(Steven W. Krablin)
/S/ PATRICIA B. MELCHER
(Patricia B. Melcher)
/S/ BERNIE W. STEWART
(Bernie W. Stewart)
/S/ DAVID A. TRICE
(David A. Trice)
/S/ ANDREW L. WAITE
(Andrew L. Waite)
Chairman of the Board,
March 16, 2006
President, Chief Executive
Officer and Secretary
(Principal Executive Officer)
Executive Vice President and
March 16, 2006
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
S-1
March 16, 2006
March 16, 2006
March 16, 2006
March 16, 2006
March 16, 2006
March 16, 2006
March 16, 2006
CERTIFICATION
Exhibit 31.1
I have reviewed this report on Form 10-K of Hornbeck Offshore Services, Inc.;
I, Todd M. Hornbeck, certify that:
1.
2. Based on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect
to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b) Designed such internal controls over financial reporting, or caused such internal
controls over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles; and
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter
in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the
audit committee of registrant’s board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely
affect the registrant’s ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrant’s internal control over financial reporting.
Date: March 16, 2006
/S/ TODD M. HORNBECK
Todd M. Hornbeck
Chief Executive Officer
(Principal Executive Officer)
1
CERTIFICATION
Exhibit 31.2
I, James O. Harp, Jr., certify that:
1. I have reviewed this report on Form 10-K of Hornbeck Offshore Services, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b) Designed such internal controls over financial reporting, or caused such internal
controls over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles; and
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter
in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the
audit committee of registrant’s board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely
affect the registrant’s ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrant’s internal control over financial reporting.
Date: March 16, 2006
/S/ JAMES O. HARP, JR.
James O. Harp, Jr.
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
1
Regulation G EBITDA Reconciliation
This 2005 Annual Report contains references to the non-GAAP
financial measure of EBITDA. We define EBITDA as earnings (net
income) before interest, income taxes, depreciation, amortization
and losses on early extinguishment of debt. Our measure of
EBITDA may not be comparable to similarly titled measures
presented by other companies. Other companies may calculate
EBITDA differently than we do, which may limit its usefulness as a
comparative measure.
We view EBITDA primarily as a liquidity measure and, as such, we
believe that the GAAP financial measure most directly comparable
to it is cash flows provided by operating activities. Because
EBITDA is not a measure of financial performance calculated in
accordance with GAAP, it should not be considered in isolation or
as a substitute for operating income, net income or loss, cash
flows provided by operating, investing and financing activities, or
other income or cash flow statement data prepared in accordance
with GAAP.
reconciliation, we believe provides additional information that is
useful to gain an understanding of the factors and trends affecting
our ability to service debt, pay deferred taxes and fund drydocking
charges and other maintenance capital expenditures. We also
believe the disclosure of EBITDA helps investors meaningfully
evaluate and compare our cash flow generating capacity from
quarter to quarter and year to year.
EBITDA is also one of the financial metrics used by management
(i) as a supplemental internal measure for planning and forecasting
overall expectations and for evaluating actual results against such
expectations; (ii) as a significant criteria for annual incentive cash
bonuses paid to our executive officers and other shore-based
employees; (iii) to compare to the EBITDA of other companies
when evaluating potential acquisitions; and (iv) to assess our
ability to ser vice existing fixed charges, incur additional
indebtedness and execute our growth strategy.
EBITDA is widely used by investors and other users of our financial
statements as a supplemental financial measure that, when
results and the accompanying
viewed with our GAAP
The following tables provide the detailed components of EBITDA,
as we define that term, and reconciles EBITDA with our cash
flows provided by operating activities for the following periods:
Reconciliation of EBITDA to Cash Flows Provided by Operating Activities ($mm)
Components of EBITDA:
Net income (loss), as adjusted
Adjustment for loss on early extinguishment of
debt, net of taxes1
Net income (loss), as adjusted
Interest expense, net:
Debt obligations
Put warrants2
Interest income
Total interest expense, net
Income tax expense (benefit)
Depreciation
Amortization
EBITDA
EBITDA Reconciliation to GAAP:
EBITDA, as reported
Cash paid for deferred drydocking charges
Cash paid for interest
Changes in working capital
Changes in other, net
1998
1999
2000
2001
2002
2003
2004
2005
Year Ended December 31,
$ ( 1.4)
$
(1.8)
$
(4.5)
$
7.0
$
11.6
$
11.2
$
(2.5)
$
37.4
–
(1.4)
1.2
1.5
–
(1.8)
5.3
2.3
(0.1)
(0.1)
2.6
(0.2)
0.9
0.4
2.3
$
7.5
0.3
2.4
0.7
–
(4.5)
8.2
7.3
(0.3)
15.2
1.6
4.2
1.0
2.0
9.0
13.7
3.0
(1.5)
15.2
6.8
6.5
1.2
–
11.6
16.2
–
(0.7)
15.5
7.1
10.4
1.9
–
11.2
18.5
–
(0.2)
18.3
6.9
14.4
3.2
14.7
12.2
17.7
–
(0.4)
17.3
6.4
17.4
5.7
1.1
38.5
12.6
–
(3.2)
9.4
22.1
20.0
7.3
$
9.1
$
17.4
$
38.7
$
46.6
$
54.0
$
59.1
$
97.3
1998
1999
2000
2001
2002
2003
2004
2005
Year Ended December 31,
$
2.3
$
9.1
$
17.4
$
38.7
$
46.6
$
54.0
$
59.1
$
97.3
(1.7)
(0.4)
4.7
(1.3)
(2.4)
(4.5)
(0.6)
0.3
1.9
(1.5)
(7.1)
(2.9)
(0.1)
(1.7)
(5.6)
1.9
0.1
(2.4)
(19.1)
(0.5)
0.3
(6.1)
(19.7)
(2.0)
(0.7)
(8.5)
(24.0)
(5.0)
(0.2)
(6.8)
(17.9)
5.1
(1.9)
$
5.7
$
33.3
$
25.0
$
25.5
$
21.4
$
75.8
Cash flows provided by operating activities
$
3.6
$
(1)
(2)
A loss on early extinguishment of debt was recorded during 2001 resulting from the write-off of deferred financing costs upon the refinancing of all our debt
through the issuance of our 10.625% senior notes in July 2001. For the year ended December 31, 2004, amount includes the repurchase premium, related fees
and expenses and the write-off of unamortized original issue discount and deferred financing costs related to the repurchase of 91% the 10.625% senior notes
in November 2004. For the year ended December 31, 2005, amount includes the repurchase premium, related fees and expenses and the write-off of
unamortized original issue discount and deferred financing costs related to the redemption of the remaining 9% of the 10.625% senior notes in January 2005.
Interest expense from put warrants represents an adjustment to the estimated fair value of the put warrants. According to the Emerging Issues Task Force, or
EITF, Issue 88-9, as supplemented by EITF Issue 00-19, which we have adopted, we are required to account for warrants that contain put options at their
estimated fair value with the changes reported as interest. We repurchased and terminated all of the warrants for $14.5 in October 2001.
R-1
SUMMARY FINANCIAL DATA
(In thousands, except per share data)
For years ended December 31
Revenues
Operating income
(1)
Net income (loss)
Diluted net income (loss) per share(1)
Weighted-average diluted shares outstanding
Total assets
Total long term debt
Total stockholders’ equity
Net cash provided by operations
EBITDA(2)
2005
2004
2003
$ 182,586
$ 132,261
$ 110,813
$
68,079
$
35,847
$ 37,443
$ (2,483)
$ 1.64
$ (0.13)
22,837
19,330
$
$
$
35,687
11,190
0.82
13,604
$ 796,675
$ 460,571
$ 365,242
$ 299,449
$ 225,000
$ 212,677
$ 429,495
$ 182,904
$ 112,395
$
$
75,806
97,329
$
$
21,405
59,473
$
$
25,499
54,161
SUMMARY OPERATING DATA(3)
For years ended December 31
Average number of OSVs
Average fleet capacity (deadweight tons)
Average vessel capacity (deadweight tons)
Average OSV utilization rate
Average OSV dayrate
Effective OSV dayrate
Average number of tank barges
2005
24.6
57,658
2,341
96.2%
13,413
12,903
14.6
$
$
2004
22.8
51,938
2,274
87.5%
10,154
8,885
16.0
$
$
2003
17.3
41,312
2,353
88.6%
10,940
9,693
15.9
$
$
Average barge fleet capacity (barrels)
1,072,075
1,156,330
1,145,064
Average barge size (barrels)
Average barge utilization rate
Average barge dayrate
Effective barge dayrate
71,651
87.1%
13,542
11,795
$
$
72,271
82.2%
11,620
9,552
$
$
72,082
73.6%
10,971
8,075
$
$
REVENUES
(in millions)
EBITDA(2)
(in millions)
$200
$180
$160
$140
$120
$100
$80
$60
$40
$20
$0
7-Year C A G R 4 6 %
98 99 00 01 02 03 04 05
$100
$80
$60
$40
$20
$0
7-Year C A G R 7 1 %
98 99 00 01 02 03 04 05
Barge OSV
VESSELS &
EQUIPMENT
(in millions)
$500
$400
$300
$200
$100
$0
7-Year C A G R 3 9 %
98 99 00 01 02 03 04 05
(1) Results for 2005 and 2004 include a $1.7 million ($0.05 per diluted share) and $22.4 million ($0.75 per diluted share) loss on early extinguishment of
debt related to our November 2004 bond refinancing, respectively.
(2) See our discussion of EBITDA as a non-GAAP financial measure, which includes a reconciliation to the most comparable financial measure
calculated and presented in accordance with GAAP, on page R-1 of this 2005 Annual Report (facing the inside back cover).
(3) See footnotes relating to Summar y Operating Data on page 38 of our enclosed 2005 Annual Report on Form 10-K.
CORPORATE INFORMATION
Corporate Headquarters
Hornbeck Offshore Services, Inc.
103 Northpark Boulevard, Suite 300,
Covington, Louisiana 70433
Tel 985.727.2000
Fax 985.727.2006
Internet www.hornbeckoffshore.com
Email ir@hornbeckoffshore.com
Transfer Agent and Registrar
Mellon Investor Services, LLC
480 Washington Boulevard
Jersey City, New Jersey 07310
Tel 800.635.9270
Internet www.melloninvestor.com
Email shrrelations@melloninvestors.com
Auditors
Ernst & Young LLP
New Orleans, Louisiana
Legal Counsel
Winstead Sechrest & Minick P.C.
Houston, Texas
Stock Exchange Listing
The Company’s shares of common
stock are listed on the New York
Stock Exchange (NYSE) under the
symbol “HOS.”
Financial Information
Stockholders and other interested
parties desiring information about
Hornbeck Offshore Services, Inc.
should write to the Investor Relations
Department or call 985.727.2000.
Additional information about the
Company, including its filings
with hthe Securities and Exchange
Commission, may also be obtained
without charge by visiting the
Company’s website at
www.hornbeckoffshore.com
Annual Stockholders’ Meeting
The 2006 Annual Meeting of
Stockholders will be held on Tuesday
May 2, 2006, at 9:00 a.m. (Central)
at the Company’s corporate training
room located at 103 Northpark
Boulevard, Suite 135, Covington,
Louisiana 70433
Company Overview
Headquartered in Covington, Louisiana, Hornbeck Offshore Services, Inc. (NYSE:HOS) is a leading provider of technologically
advanced, new generation offshore supply vessels primarily in the U.S. Gulf of Mexico and in select international markets,
and is a leading transporter of petroleum products through its fleet of ocean-going tugs and tank barges primarily in the
northeastern U.S. and in Puerto Rico. Hornbeck currently owns and operates a fleet of 60 vessels primarily serving the
energy industry.
Mission Statement
Our mission is to be recognized as the energy industry's marine transportation and service company of choice for our
customers, employees, and investors through innovative, high quality, value-added business solutions delivered with
enthusiasm, integrity and professionalism and with the utmost regard for the safety of individuals and the protection
of the environment.
Cautionary Statement regarding Forward-Looking Statements
This 2005 Annual Report contains forward-looking statements in which we discuss factors we believe may affect our
performance in the future. Forward-looking statements are all statements other than historical facts, such as statements
regarding assumptions, expectations, and projections about future events. Accuracy of the assumptions, expectations and
projections depend on events that change over time and thus susceptible to periodic change based on actual experience and
new developments. Although the Company believes that the assumptions, expectations and projections reflected in these
forward-looking statements are reasonable based on the information known to the Company today, the Company can give
no assurance that the assumptions, expectations and projections will prove to be correct. The Company cautions readers
that it undertakes no obligation to update or publicly release any revisions to the forward-looking statements in this 2005
Annual Report hereafter to reflect the occurrence of any events or circumstances or any changes in our assumptions,
expectations and projections, except to the extent required by applicable law. Additionally, important factors that might
cause future results to differ from these assumptions, expectations and projections include industry risks, oil and natural
gas prices, economic and political risks, weather related risks, regulatory risks, and other factors described in our most
recent Annual Report on Form 10-K filed with the Securities and Exchange Commission, a copy of which is enclosed
herewith, and in other filings.
Company Statement regarding Corporate Governance Listing Standards
As required by the New York Stock Exchange, Todd M. Hornbeck, the Company’s Chairman,
President and Chief Executive Officer certified to the Exchange on June 2, 2005, without
qualification, that he was not aware of any violation by the Company of New York Stock
Exchange corporate governance listing standards.
14658rrdD1R1.indd 2
3/24/06 5:48:27 PM
H O S S C I T A T I O N A N D C I T A T I O N
i g i n a l
t h e o r
t o 1 9 9 6 ,
n a m e d
F r o m 1 9 8 1
( N A S D A Q : H O S S )
t h o r o u g h b r e d s ,
i p l e C r o w n w i n n e r
c h a m p i o n
f s h o r e
O f
t e r
a f
t h e T r
i o n ,
t a t
H o r n b e c k
t s v e s s e l s
s u c h a s
i n 1 9 4 8 .
i
C i
Not all horses were born equal.
Some were born to win.
– Mark Twain
H
O
R
N
B
E
C
K
O
F
F
S
H
O
R
E
S
E
R
V
I
C
E
S
,
I
N
C
.
2
0
0
5
A
N
N
U
A
L
R
E
P
O
R
T
CLYDESDALES AT WORK AND
HOS “NEW BREED” FLEET GOING
BACK TO WORK AFTER A HURRICANE
Upon its formation in 1997, the new Hornbeck Offshore
(NYSE:HOS) continued the equine naming convention,
but switched to Clydesdales due to the much larger
size of its proprietary new generation OSVs.
103 Northpark Boulevard, Suite 300, Covington, Louisiana 70433
tel 985.727.2000 fax 985.727.2006 www.hornbeckoffshore.com
Hornbeck Offshore Services, Inc.
2005 Annual Report
14658rrdD1R1.indd 1
3/23/06 7:57:15 PM