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Hornbeck Offshore Services, Inc.
2006 Annual Report
SUMMARY FINANCIAL DATA
(In thousands, except per share data)
For years ended December 31
Revenues
Operating income
Net income (loss) (1)
Diluted net income (loss) per share
Weighted-average diluted shares outstanding
Total assets
Total long term debt
Total stockholders’ equity
Net cash provided by operations
EBITDA (2)
Adjusted EBITDA (2)
2006
274,551
120,405
75,715
2.76
27,461
1,098,380
549,497
454,873
131,790
152,496
173,766
$
$
$
$
$
$
$
$
$
$
SUMMARY OPERATING DATA(3)
2006
25.0
59,042
2,362
90.3%
19,380
17,500
17.6
For years ended December 31
Average number of OSVs
Average fleet capacity (deadweight)
Average vessel capacity (deadweight)
Average OSV utilization rate
Average OSV dayrate
Effective OSV dayrate
Average number of barges
Average barge fleet capacity (barrels)
Average barge size (barrels)
Average barge utilization rate
Average barge dayrate
Effective barge dayrate
REVENUES
(in millions)
R 4 7 %
G
A
8 - Y ear C
98 99 00 01 02 03 04 05
06
$300
$250
$200
$150
$100
$50
$0
$160
$120
$80
$40
$0
$
$
$
$
EBITDA(2)
(in millions)
R 6 9 %
G
A
8- Y ear C
98 99 00 01 02 03 04 05 06
Barge
OSV
Adjustment
$
$
$
$
$
$
$
$
$
$
$
$
2005
182,586
69,972
37,443
1.64
22,837
796,675
299,449
429,495
75,806
95,631
100,507
2005
24.6
57,658
2,341
96.2%
13,413
12,903
14.6
$
$
$
$
$
$
$
$
$
$
$
$
2004
132,261
35,912
(2,483)
(0.13)
19,330
460,571
225,000
182,904
21,405
36,674
59,473
2004
22.8
51,938
2,274
87.5%
10,154
8,885
16.0
VESSELS & EQUIPMENT
(in millions)
$600
$500
$400
$300
$200
$100
$0
R 3 6 %
G
A
8- Y ear C
98 99 00 01 02 03 04 05 06
1,488,177
1,072,075
1,156,330
84,267
92.7%
18,064
16,745
71,651
87.1%
13,542
11,795
$
$
72,271
82.2%
11,620
9,552
$
$
(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) EBITDA for 2001, 2004 and 2005 has been adjusted for loss on early extinguishment of debt of $3.0 million, $22.4 million and $1.7 million, respectively. See our discussion
of EBITDA and Adjusted EBITDA as non-GAAP fi nancial measures, which includes a reconciliation to the most comparable fi nancial measure calculated and presented in
accordance with GAAP, on page R-2 of this 2006 Annual Report (facing the inside back cover).
(3) See footnotes relating to Summary Operating Data on page 41 of our enclosed 2006 Annual Report on Form 10-K.
In February 1996, the reigning
In February 1996, the reigning
world chess champion, Garry
world chess champion, Garry
Kasparov, went head-to-head
Kasparov, went head-to-head
with the IBM computer system
with the IBM computer system
known as “Deep Blue.” After
known as “Deep Blue.” After
design enhancements by its
design enhancements by its
programmers, “Deeper Blue”
programmers, “Deeper Blue”
ultimately defeated Kasparov in a
ultimately defeated Kasparov in a
six-game rematch in May 1997.
six-game rematch in May 1997.
When IBM set out to develop the chess-playing computer
“Deep Blue,” they knew the challenge would be formidable.
Using experience gained from earlier matches, IBM programmers
continued to improve their algorithms and ultimately prevailed.
While the challenge of an evolving operating environment in the
“deep blue” segment of our industry is no less formidable, our
in-house engineering team at Hornbeck Offshore has designed a
technologically advanced fl eet of offshore vessels that are up to
the task. Like the programmers at IBM, we are constantly striving
to improve our proprietary vessel designs to anticipate and
address the emerging trends of the “deeper blue” frontier.
Since June 1997, Hornbeck Offshore
has built a multi-class fl eet of
proprietary new generation OSVs.
Through a series of newbuild
programs, Hornbeck has designed
increasingly larger, more versatile
vessels capable of meeting the
broadest array of customer needs
in the evolving “deep blue” market.
The HOS Stormridge currently
represents one of our largest
OSVs. This proprietary HOS 265
class DP-2 vessel, delivered in
2002, was designed to address the
unique challenges of the ultra-
deepwater. The new HOS 370 class
MPSVs, now under conversion, will
be more than twice as large and
substantially more versatile than
the HOS Stormridge.
D E A R F E L L O W S T O C K H O L D E R S
2006 was a strategic year for Hornbeck Offshore. Not only were we able to post the strongest
fi nancial performance in the history of our Company, but we were also able to strategically
position ourselves to take advantage of the favorable macro fundamental trends that we
expect to see in each of our two business segments over the next several years.
Following are a few highlights of our record-setting
financial results for 2006, as well as a more detailed
operational review by segment and a summary of our
active growth initiatives and more notable
recent achievements.
Our revenues increased 50% to $275 million on
the strength of 36% higher effective OSV dayrates
and 42% higher effective TTB dayrates. Our overall
operating income increased 72% to $120 million,
partly due to substantial TTB operating margin
expansion from 20% to 37% of revenues. Our net
income increased 102% to $76 million, driven by our
significant increase in operating income and,
to a lesser degree, higher interest income.
We were able to achieve these results in 2006
primarily because we remained “short” in our
contracting strategy based on our optimistic outlook
going into the year. This enabled us to participate in
all-time high OSV spot dayrates last summer driven
by post-Katrina and Rita related repairs of the
oilfield infrastructure in the U.S. Gulf of
Mexico (“GoM”).
Our Offshore Supply Vessel (OSV) Segment
Revenues from our OSV segment were $166 million
for 2006, an increase of 42% over 2005. This increase
was driven by a combination of higher effective
dayrates and a full year of revenue contribution
from two new foreign-flagged AHTS vessels that we
acquired in early 2005. Operating income from our
OSV segment was $80 million, or 48% of revenues,
for 2006, an increase of 41% over 2005. OSV market
conditions in the GoM reached historic record levels
during 2006. Our fleetwide average OSV dayrates for
calendar 2006 were over $19,000 and our leading-edge
spot dayrates were as high as $30,000 during the year.
While we experienced some OSV market volatility in
the spot market during the late fourth quarter of 2006,
particularly for our 200 class vessels, we believe that
market conditions for new generation vessels
in the GoM have stabilized and continue to show long-
term positive trends.
Our Tug and Tank Barge (TTB) Segment
Revenues from our TTB segment were $108 million
for 2006, an increase of 66% over 2005, a portion
of which is attributable to a full year contribution of
five newbuild double-hulled tank barges delivered
on various dates throughout 2005. Operating income
from our TTB segment was $40 million for 2006,
an increase of 209% over 2005. Our 2006 operating
margin for this segment was 37%, up from 20% of
revenues in 2005. This substantial margin expansion
was primarily related to the shift in our TTB contract
mix from COAs to time charters, a change in our
average fleet complement to larger, double-hulled
barges and deployment of our TTB vessels in non-
traditional TTB services, such as the support of
deepwater well testing and other specialty applications
for our upstream customers in the GoM.
General Corporate
We completed two financings during 2006. In
September, we refinanced our revolving credit
facility to increase its borrowing base, extend its
maturity and lower our interest rate commensurate
with our improved creditworthiness. In November, we
completed a $250 million convertible bond offering
on very attractive terms that allowed us to monetize
our high stock volatility and strong credit profile. This
opportunistic financing was immediately accretive to
earnings per share, lowered our cost of debt capital
on our total long-term debt of $550 million by 200
basis points and substantially increased our investable
liquidity. We used a portion of the net proceeds of
the convertible note offering and accompanying
convertible note hedge and warrant sale to buy-back
approximately 1.8 million of our common shares, or
6% of the Company, at a time when our stock was
trading near then-historic low multiples. As a result
of these financings, we have been able to achieve,
according to one investment bank, one of the lowest
Delivered in November 2001, the
HOS 265 class BJ Blue Ray, one
of the most sophisticated well
stimulation vessels in the world,
was designed and purpose-built
for the deepwater specialty
service market. Upon completion
of its recent fi ve-year regulatory
drydocking (shown above), our
customer exercised its renewal
option for a second fi ve-year
time charter of this vessel.
weighted-average costs of capital in the oilfield
industry. Combined with our industry leading returns
on invested capital over the past five years, we have
posted an outstanding track record of economic value
creation for our stockholders. With a $474 million
cash balance at year-end and undrawn capacity of
$100 million under our recently expanded revolver,
we are well positioned with ample “dry powder”
for continued future growth in both of our
business segments.
In addition to substantially improving our
capital structure, we had several other corporate
achievements during 2006. We implemented upgrades
of our accounting and human resource systems,
deployed the second module of our proprietary
logistics and revenue information system for our
TTB fleet, relocated the dispatch and customer
billing function for our TTB fleet from Brooklyn to
Covington and formalized and tested our business
continuity and disaster recovery plans.
Pending Growth Initiatives
We currently have two multi-purpose supply vessels
(“MPSVs”) under conversion, 13 new generation
OSVs and three double-hulled tank barges under
construction and four recently acquired ocean-going
tugs being retrofitted. Our aggregate capital budget
for these 22 vessels is currently about $525 million,
$81 million of which has already been funded prior
to 2007. Upon completion of these active growth
initiatives, our total fleet size will be approaching
80 vessels. Our OSV fleet capacity is expected
to nearly double over the next few years with an
increase of about 58,000 deadweight tons, while the
barge-carrying capacity of our TTB fleet is expected
to increase by 180,000 barrels, or 12%, by the end
of 2007. In addition to this substantial organic fleet
growth, we will continue to actively pursue strategic
acquisitions in both fleet segments that meet our
investment parameters.
In Closing
At Hornbeck Offshore, we are steadfastly committed
to meeting the evolving needs of the marketplace as
our customers continue to shift their exploration and
production efforts to deeper water depths in pursuit
of larger oil and gas deposits. Since we founded
the Company in 1997, our customers’ volumetric
requirements have grown exponentially. In response,
we have built multiple classes of new generation
vessels ranging in size from roughly 1,800 to 3,800
deadweight tons, with two multi-purpose vessels
now under conversion that will have deadweight
capacity of over 10,000 tons each. Because of
our highly dynamic and ever-changing operating
environment, we must remain on the leading-edge of
fleet innovation to achieve our mission of being the
company of choice in our industry. We will continue
to execute our business plan and, in so doing, hope
to make all the right moves as we position our
customers, employees and investors to stay one step
ahead of whatever challenges we may face next in
the “deep blue.”
Respectfully,
Todd M. Hornbeck
Chairman, President and CEO
Hornbeck Offshore Services, Inc.
B
O
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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
President
Allegro Capital
Management, Inc.
Houston, Texas
R. Clyde Parker, Jr.
Advisory Director
to the HOS Board
Shareholder, Winstead PC
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
E
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E
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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
2 Audit committee
t
3 Compensation committee
4 Nominating/Corporate Governance committee
d
5 Named executive
officers
t
1 Lead independent
d
director
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Fiscal Year Ended December 31, 2006
OR
‘ 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)
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 È 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 È
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 È No ‘
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. È
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer È Accelerated filer ‘ Non-accelerated filer ‘
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ‘ No È
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 $923,849,590.
The number of outstanding shares of Common Stock as of January 31, 2007 is 25,809,831 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive 2007 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, 2006
TABLE OF CONTENTS
PART I
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Items 1 and 2.—Business and Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Offshore Supply Vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tugs and Tank Barges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Our Competitive Strengths . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Our Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customers and Charter Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Environmental and Other Government Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating Hazards and Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Seasonality of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Availability of Reports, Certain Committee Charters and Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3—Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4—Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 5—Market for the Registrant’s Common Stock and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6—Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . .
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Critical Accounting Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commitments and Contractual Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forward-Looking Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7A—Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8—Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9—Changes in and Disagreements with Accountants on Accounting and Financial Disclosures . . . . . . . . . . . . . . . .
Item 9A—Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B—Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 10—Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11—Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12—Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . .
PART III
1
1
1
3
11
15
18
19
20
21
26
35
35
35
36
36
37
37
38
38
40
43
43
47
50
58
60
64
64
66
66
67
67
70
71
71
71
71
i
71
Item 13—Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
71
Item 14—Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
72
Item 15—Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-1
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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, references to “company,” “we,” “us,”
“our” or like terms refer 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 “MPSVs” means multi-purpose supply vessels; 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 true 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, or GoM, and in select
international markets. The primary focus of our OSV business is on complex exploration and
production activities, which include deepwater, ultra-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, or TTB, segment serving the energy
industry, primarily in the northeastern United States, the GoM and Puerto Rico. Although our
vessels operate in domestic and international waters, all but two of our vessels are qualified
under Section 27 of the Merchant Marine Act of 1920, also known as the Jones Act, to
engage in the U.S. coastwise trade, from which foreign owned, built or crewed vessels are
excluded.
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 GoM 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. We currently
have an additional 13 proprietary OSVs under construction. Our OSV fleet is among the
youngest in the industry with an average age of approximately six years.
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
1
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. While we are committed to maintaining a critical mass of new generation OSVs
operating in the GoM, we currently have vessels working offshore Trinidad and Mexico and
are actively pursuing additional contracts in these and select other U.S and international
markets.
Historically, demand for our OSV services has been primarily driven by the drilling of
deep wells, whether in the deepwater, ultra-deepwater or on the U.S. Continental Shelf, and
other complex exploration and production projects that require specialized drilling and
production equipment. 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. Our
new generation OSVs are also well suited to support logistically demanding drilling projects in
remote frontier areas, where support infrastructure is severely limited.
Our TTB operating fleet consists of 13 ocean-going tugs and 18 ocean-going tank
barges. During 2005, we took delivery of five proprietary double-hulled tank barges under our
first TTB newbuild program and completed the retrofitting of 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 TTB newbuild
program, two additional 6,100 horsepower tugs were retrofitted and placed in service during
the late first quarter of 2006. In September 2005, we announced our second TTB newbuild
program comprised of approximately 400,000 barrels of double-hulled barge capacity and
related tugs. We are currently retrofitting four recently acquired 3,000 horsepower tugs and
constructing three 60,000-barrel newbuild double-hulled tank barges, which are expected to
increase the double-hulled capacity of our TTB fleet by nearly 30% by the end of 2007. The
deliveries of these vessels are anticipated on various dates throughout 2007. The retrofit and
construction costs for these seven vessels are expected to be $70 million in the aggregate.
We continue to explore options with respect to the remaining 220,000 barrels of barge
capacity that are contemplated under this program.
We believe that our TTB 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. For example, we have been successful in
deploying our TTB equipment to non-traditional markets, such as supporting deepwater well
testing and other specialty applications for our upstream customers in the GoM. However,
demand for our TTB services has historically been 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 1.1% per year from 2007 to 2011. 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.
2
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 GoM, 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 GoM is a critical oil and natural gas supply basin for the United States. Since the late
1990’s, the primary emphasis for the exploratory efforts of offshore operators has increasingly
been in the deepwater and ultra-deepwater areas of the GoM rather than the shallow waters
of the Continental Shelf. According to the Minerals Management Service, or MMS, from the
first major deepwater leasing boom in 1995 to March 2006, oil production grew 525% to
950 thousand barrels per day and natural gas production grew 663% to 3.8 billion cubic feet
per day. Recent discoveries of large hydrocarbon reserves in deepwater fields in the GoM
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 GoM 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 report, “Deepwater Gulf of Mexico
2006: Americas Expanding Frontier,” published by the MMS, there have been over 980
exploration wells drilled in the deepwater GoM since 1995 with at least 126 announced
deepwater discoveries over the same time period. Twenty two deepwater discoveries have
been announced over the last seven years in water depths greater than 7,000 feet.
Additionally, the pending expiration of leases with substantial reserve potential is expected to
stimulate further exploration and development in the GoM.
While the shallow waters of the Continental Shelf have been actively explored for
decades, until recently, relatively few deep wells have been drilled due to the historically high
cost associated with such 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, natural gas prices and the potential for the discovery
of significant natural gas reserves. The abundance of existing platforms, production facilities
and pipelines on the Continental Shelf allow newly discovered 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 has 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.
In 2006, the MMS estimated that there may be up to 233 tcf of undiscovered,
conventionally recoverable, deep well natural gas on the Continental Shelf. This potential
reserve base compares favorably to the current total of approximately 28 tcf of proven natural
gas reserves in the entire GoM. According to the MMS, in 2005 the deepwater region
accounted for 73% of total GoM oil production and 39% of total GoM natural gas production,
up substantially from 4% and 1%, respectively, in 1990.
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. We
believe that dayrates and utilization rates for new generation OSVs that serve the deepwater
and deep well markets generally experience less volatility compared to conventional 180’
OSVs and are, therefore, generally less sensitive to short-term commodity price fluctuations.
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,
4
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 GoM 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 64%, 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 more than double the average dayrates of
conventional 180’ OSVs. We believe that demand has outpaced the supply of new generation
OSVs in the GoM, a trend we expect to continue. We base our belief on the recent and
expected drilling activity in all sectors of the GoM 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 GoM, historically such remobilization of such vessels, including those of
our competitors and our own has been limited.
According to our analysis of the industry and data compiled from various industry
sources, including the U.S. Coast Guard, we recently estimated that as of December 31,
2006, the U.S.-flagged OSV fleet in operation totaled 335 vessels, substantially all of which
are located in the GoM. Of this total, approximately 165, or 49%, are conventional 180’ OSVs
that primarily operate on the Continental Shelf. The remaining 170 vessels are U.S. flagged,
new generation OSVs, with 128 currently operating in the GoM. 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.
Our OSV Business
We currently own and operate a fleet of 25 new generation OSVs, which includes two
foreign-flagged AHTS vessels that primarily operate as supply vessels and for towing jack-up
rigs. We also have 13 additional new generation OSVs now under construction. In addition,
we own and operate one fast supply vessel and we own two coastwise sulfur tankers that are
currently undergoing conversion into MPSVs. Our logistics shore-base in Port Fourchon
5
supports logistics requirements of our fleet as well as certain of our customers. 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. Our newest design, the 250 EDF
class, is based on our highly successful 240 ED design modified to lengthen the vessel and
expand the propulsion package to achieve faster speeds. 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
compared to our competitors, whether operators of 180’ conventional OSVs or new
generation vessels.
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 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, our proprietary OSVs 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 OSVs are 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 deadweight 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 HOS Innovator, HOS Dominator, and HOS
Pioneer currently provide ROV subsea construction and maintenance support services and
the BJ Blue Ray provides, and the HOS Saylor will soon provide, deepwater well stimulation
6
support services. The BJ Blue Ray 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 also
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 tighten supply in
the GoM.
In mid-2003, we acquired six 220’ new generation OSVs from Candy Marine Investment
Corporation, or 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 and
is expected to be sold in 2007.
In January 2005, we acquired a new generation AHTS vessel from a private owner. This
r
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. While the HOS Saylor and
HOS Navegante each have anchor-handling capabilities and may be used for that purpose,
the vessels are primarily being used as supply vessels and for towing jack-up rigs. The HOS
Saylor was recently awarded a five-year contract for deepwater well stimulation support
services in Mexico and will soon be retrofitted for that purpose.
r
In November 2001, we purchased a coastwise sulfur tanker, the Energy Service 9001,
formerly known as the M/V W.K. McWilliams, Jr. 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. Based on internal estimates, the total project cost to
acquire and convert the two vessels, prior to construction period interest, with recent
modifications is now expected to be at least $150.0 million in the aggregate. We currently
anticipate delivery of the converted vessels during the first half of 2008. We believe that these
MPSVs will be the largest OSVs in the world, each with cargo carrying capacities of over
10,000 deadweight tons, including 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. Our MPSV conversion program is based, in part, on 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
liquid mud carriers. This is especially important given the ever-increasing volumes of liquid
mud necessary to spud an ultra-deep well today, with some projects requiring as many as
7
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 uniquely perform a
variety of specialty services for which customers must currently use several different types of
vessels and/or semi-submersible drilling rigs. In addition to traditional offshore supply vessel
capabilities, these MPSVs can be modified to 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 Phase 1 of our fourth OSV newbuild program under
which we initially planned to build an additional 20,000 deadweight tons of new generation
OSV vessel capacity at an estimated cost, before capitalized construction period interest, of
$170.0 million. However, Phase 1 has been deferred until more favorable shipyard conditions
materialize for the construction of the type of vessels contemplated under this phase. In
February 2006, we announced Phase 2, which would expand this newbuild program to build a
mix of 13 proprietary 240 ED and 250 EDF class vessels. The 250 EDF class adopts our
proprietary 240 ED 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 Phase 2 of our fourth OSV newbuild program is
approximately $305.0 million, in the aggregate. We are contractually committed with two
domestic shipyards for four 240 ED class OSVs and nine 250 EDF class OSVs. The 240 ED
and 250 EDF class OSVs to be constructed under Phase 2 of this newbuild program are
expected to be delivered by early 2010, with the first vessel due in early 2008.
In December 2005, we acquired for approximately $5.0 million the lease rights for a
shore-base facility, formerly known as ASCO Magnolia and renamed HOS Port, located in
Port Fourchon, Louisiana. The facility lease has eight years remaining on its initial term, with
four additional five-year renewal periods. This acquisition further underscores our long-term
commitment to, and continued favorable outlook for the GoM as our primary operating
market. HOS Port will not only support our existing OSV fleet and customers’ logistics
requirements, but will also provide a key logistics base for our 370 class MPSVs once they
are delivered.
8
The following table provides information, as of February 15, 2007, regarding our fleet of
vessels that serve our OSV customers.
Name
OSVs:
BJ Blue Ray . . . . . . . . . . . . . . . . . . . . . . . .
HOS Brimstone . . . . . . . . . . . . . . . . . . . . .
HOS Stormridge . . . . . . . . . . . . . . . . . . . .
HOS Sandstorm . . . . . . . . . . . . . . . . . . . .
HOS Newbuild #1 . . . . . . . . . . . . . . . . . . .
HOS Newbuild #2 . . . . . . . . . . . . . . . . . . .
HOS Newbuild #3 . . . . . . . . . . . . . . . . . . .
HOS Newbuild #4 . . . . . . . . . . . . . . . . . . .
HOS Newbuild #5 . . . . . . . . . . . . . . . . . . .
HOS Newbuild #6 . . . . . . . . . . . . . . . . . . .
HOS Newbuild #7 . . . . . . . . . . . . . . . . . . .
HOS Newbuild #8 . . . . . . . . . . . . . . . . . . .
HOS Newbuild #9 . . . . . . . . . . . . . . . . . . .
HOS Newbuild #10 . . . . . . . . . . . . . . . . . .
HOS Newbuild #11 . . . . . . . . . . . . . . . . . .
HOS Newbuild #12 . . . . . . . . . . . . . . . . . .
HOS Newbuild #13 . . . . . . . . . . . . . . . . . .
HOS Bluewater . . . . . . . . . . . . . . . . . . . . .
HOS Gemstone . . . . . . . . . . . . . . . . . . . . .
HOS Greystone . . . . . . . . . . . . . . . . . . . . .
HOS Silverstar . . . . . . . . . . . . . . . . . . . . . .
HOS Innovator . . . . . . . . . . . . . . . . . . . . . .
HOS Dominator . . . . . . . . . . . . . . . . . . . . .
HOS Deepwater . . . . . . . . . . . . . . . . . . . .
HOS Cornerstone . . . . . . . . . . . . . . . . . . .
HOS Explorer
. . . . . . . . . . . . . . . . . . . . . .
HOS Express . . . . . . . . . . . . . . . . . . . . . . .
HOS Pioneer . . . . . . . . . . . . . . . . . . . . . . .
HOS Trader . . . . . . . . . . . . . . . . . . . . . . . .
HOS Voyager
. . . . . . . . . . . . . . . . . . . . . .
HOS Mariner . . . . . . . . . . . . . . . . . . . . . . .
HOS Crossfire . . . . . . . . . . . . . . . . . . . . . .
HOS Super H . . . . . . . . . . . . . . . . . . . . . . .
HOS Brigadoon . . . . . . . . . . . . . . . . . . . . .
HOS Thunderfoot
. . . . . . . . . . . . . . . . . . .
HOS Dakota . . . . . . . . . . . . . . . . . . . . . . .
MPSVs
Energy Service 9001 . . . . . . . . . . . . . . . .
M/V Benno C. Schmidt . . . . . . . . . . . . . . .
AHTS
HOS Saylor (4) . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . .
HOS Navegante (4)
Fast Supply Vessel:
HOS Hotshot . . . . . . . . . . . . . . . . . . . . . . .
Offshore Supply Vessels
Current
Service
Function
Built (Acquired)
Deadweight
(long tons)
Brake
Horsepower
Nov 2001
Well Stimulation
Jun 2002
Supply
Aug 2002
Supply
Oct 2002
Supply
TBD (1)
TBD
TBD (1)
TBD
TBD (1)
TBD
TBD (1)
TBD
TBD (1)
TBD
TBD (1)
TBD
TBD (1)
TBD
TBD (1)
TBD
TBD (1)
TBD
TBD (1)
TBD
TBD (1)
TBD
TBD (1)
TBD
TBD (1)
TBD
Mar 2003
Military
Jun 2003
Military
Sep 2003
Military
Military
Jan 2004
ROV Support (2) Apr 2001
Feb 2002
ROV Support (2)
Nov 1999
Supply
Mar 2000
Supply
Feb 1999 (Jun 2003)
Supply
Sep 1998 (Jun 2003)
Supply
Jun 2000 (Jun 2003)
ROV Support (2)
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
2,950 est.
2,950 est.
2,950 est.
2,950 est.
2,950 est.
2,950 est.
2,950 est.
2,950 est.
2,950 est.
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
6,700
6,700
6,700
6,700
6,000 est.
6,000 est.
6,000 est.
6,000 est.
6,000 est.
6,000 est.
6,000 est.
6,000 est.
6,000 est.
4,000 est.
4,000 est.
4,000 est.
4,000 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
Multi-Purpose
Multi-Purpose
TBD (3)
TBD (3)
10,300 (est)
10,300 (est)
TBD
TBD
Towing/Supply
Towing/Supply
Oct 1999 (Jan 2005)
Jan 2000 (Mar 2005)
3,322
3,322
8,000
7,845
Class
265
265
265
265
250 EDF
250 EDF
250 EDF
250 EDF
250 EDF
250 EDF
250 EDF
250 EDF
250 EDF
240 ED
240 ED
240 ED
240 ED
240 ED
240 ED
240 ED
240 ED
240 E
240 E
240
240
220
220
220
220
220
220
200
200
200
200
200
370
370
240
240
165
Fast Supply
Apr 2003 (May 2004)
260
6,200
TBD—to be determined
(1) These vessels are currently being constructed under OSV newbuild program #4 with anticipated deliveries ranging from early 2008 through
early 2010.
(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 the first half of 2008.
(4) We acquired the HOS Saylor and the HOS Navegante, each a foreign-flagged AHTS vessel, in the first quarter of 2005. The HOS Navegante
and HOS Saylor are being used primarily for their OSV capabilities and for towing jack-up rigs. The HOS Saylor was recently awarded a five-
year well stimulation contract. After a retrofit period In a shipyard, the HOS Saylor will commence service in Mexico as a well stimulation
vessel.
9
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. Upon delivery of our 250 EDF class vessels and our
MPSVs, we will have expanded our OSV fleet offering to eight classes of OSVs. The following
table provides a comparison of certain specifications and capabilities of our existing new
generation OSVs to conventional 180’ OSVs
Our Proprietary Design OSV Classes (1)
Acquired
OSVs (3)
Conventional
180’ OSV (2)
200
240
240 E
240 ED
265
220
Size
. . . . . .
Class length overall (ft.)
Breadth (ft.)
. . . . . . . . . . . . . . . .
Depth (ft.) . . . . . . . . . . . . . . . . . .
Maximum draft (ft.)
. . . . . . . . . .
Deadweight (long tons) . . . . . . .
Clear deck area (sq. ft.) . . . . . . .
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
Capacity
Fuel capacity (gallons)
Fuel pumping rate (gallons per
. . . . . . .
minute) . . . . . . . . . . . . . . . . . .
Drill water capacity (gallons) . . .
Dry bulk capacity (cu. ft.)
. . . . .
Liquid mud capacity
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) . . . . . . . . . . . . . . . . .
11,500
52,200
52,200
52,200
30,400
20,430
26,800
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
2,250
2
200
325
Fixed
None
—
None
None
4,000
3
750
800
4,000
3
750
1,600
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
300
300
800
800
3,900
2
250
530
Fixed
300
Fixed
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 new generation vessels, the HOS 250 EDF class OSVs and the HOS 370 class
MPSVs, 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, and often do, 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.
10
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 ocean-going tugs and tank barges and is a
critical link in the U.S. petroleum distribution chain. Petroleum products are transported in the
northeastern United States through a vast network of terminals, tankers and pipelines.
According to the EIA, approximately 240 million barrels of petroleum products were
transported in 2006 by tankers and tank barges along the East Coast. Additionally, the EIA
estimates that Puerto Rico, historically our other core area of TTB operation, consumes
234 thousand barrels of oil daily, or approximately 85 million barrels 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 TTB 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 1.1%
annually through 2011, 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 1.7% while the volume of imported crude oil and petroleum
products is expected to grow at a compound annual rate of 1.5% 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.
Oil Pollution Act of 1990. OPA 90 mandates that all single-hulled tank vessels operating
in U.S. waters be removed from petroleum transportation service according to a set time
schedule. Data provided by a U.S. Coast Guard report dated September 2001 indicated 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 has been or must be
removed from service from 2001 through 2015. We believe that, absent a substantial increase
11
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.
Cumulative OPA 90 Phase-Out of Single-Hulled Tank Barge Capacity
Capacity
20,000
)
s
d
n
a
s
u
o
h
t
n
i
(
s
l
e
r
r
a
B
g
n
i
r
i
t
e
R
15,000
10,000
5,000
0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
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 are 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, the GoM and Puerto Rico with our operating fleet of 13 ocean-
going tugs and 18 ocean-going tank barges. In addition, we currently have three more ocean-
going tank barges under construction and four recently acquired tugs under retrofit. 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 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
12
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. In addition, during 2005 and 2006, we
accessed a new market for our double-hulled barges by performing upstream services for our
OSV customers in the deepwater GoM.
In mid-2001, we acquired nine ocean-going tugs and nine ocean-going tank barges from
the Spentonbush/Red Star Group, affiliated with Amerada Hess. As part of the acquisition,
Amerada Hess entered into a contract of affreightment, or COA, with us for the period from
June 1, 2001 through March 31, 2006. We elected not to renew that COA, however, we
entered into long-term time charters with Amerada Hess for two tank barges. The time
charters were effective upon the expiration of the COA on March 31, 2006. Although we
considerably reduced the amount of cargo that we transported on behalf of Amerada Hess,
following the expiration of our COA, we were able to successfully redeploy our TTB
equipment that was previously dedicated to the Hess COA on time charter agreements with
other customers at attractive dayrates. We believe that the tank barge market 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 TTB 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 TTB 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. Notably, the Energy 8701, one of the previously retired tank barges,
was reactivated in October 2006 based on Coast Guard approval of an extended OPA 90
retirement date, which added back approximately 86,000 barrels to our capacity. During 2006,
we completed the retrofit of two additional 6,100 horsepower tugs under the first TTB
newbuild program.
In September 2005, we announced the commencement of our second TTB newbuild
program. We have three double-hulled barges with a total of 180,000 barrels of carrying
capacity currently under construction at a domestic shipyard and four recently acquired 3,000
horsepower tugs currently being retrofitted at another domestic shipyard. The cost for the
construction, acquisition and retrofit of these seven vessels is currently estimated to be
approximately $70 million in the aggregate. All of the new vessels currently being constructed
or retrofitted under the second TTB newbuild program are expected to be delivered on
various dates throughout 2007. We continue to investigate our alternatives with regard to the
remaining 220,000 barrels of double-hulled tank barge newbuild capacity originally
contemplated to be constructed under this program.
13
Currently, six of our tank barges are double-hulled and are not subject to OPA 90
retirement dates. Upon completion of the three tank barges presently under construction
under our second TTB newbuild program, 50% of our tank barge fleet barrel-carrying capacity
will be double-hulled, up from 44% today and 7% at the end of 2004. Ten of our 12 single-
hulled tank barges are not required under OPA 90 to be retired or double-hulled prior to
January 1, 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 grow our customer base in the northeastern United States, as we believe a large
portion of the industry’s capacity that was removed from service on January 1, 2005 has not
been replaced one-for-one, leaving the market net under-supplied.
The following tables provide information, as of February 15, 2007, regarding the tugs and
tank barges that we own, as well as the three double-hulled tank barges now under
construction and the four tugs currently being retrofitted.
Ocean-Going Tugs
Name
Freedom Service . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liberty Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Patriot Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Eagle Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Caribe Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Atlantic Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Brooklyn Service . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gulf Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Erie Service(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Superior Service(1)
. . . . . . . . . . . . . . . . . . . . . . . . .
Tradewind Service . . . . . . . . . . . . . . . . . . . . . . . . . .
Spartan Service . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Huron Service(1)
Michigan Service(1) . . . . . . . . . . . . . . . . . . . . . . . . .
Sea Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bayridge Service . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stapleton Service . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross
Tonnage
Length
(feet)
180
180
198
198
194
198
198
198
98
98
183
126
98
98
173
194
146
126
126
124
124
111
105
105
126
105
105
105
102
105
105
109
100
78
Year
Built
1982
1982
1996
1996
1970
1978
1975
1979
1981
1981
1975
1978
1981
1981
1975
1981
1966
Brake
Horsepower
6,140
6,140
6,140
6,140
3,900
3,900
3,900
3,900
3,620
3,620
3,200
3,000
3,000
3,000
2,820
2,000
1,530
(1)
In July 2006, we purchased four tugs from a private owner and renamed them the Erie Service, Superior Service, Huron Service and Michigan
Service. Following a retrofit period in a domestic shipyard, these vessels are expected to be placed in service on various dates throughout
2007.
14
Ocean-Going Tank Barges
Name
Ocean-Going Tank Barges:
Energy 13501 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Energy 13502 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Energy 11101 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Energy 11102 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Energy 11103 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Energy 11104 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Energy 11105 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Energy 8701 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Barrel Capacity
Length
(feet)
Year
Built
OPA 90
Date(1)
135,380
135,380
111,844
111,844
112,269
112,269
112,269
86,454
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
DH
2005
450
DH
2005
450
2009
1979
420
2009
1979
420
DH
2005
390
DH
2005
390
DH
2005
390
2015
1976
360
DH
1996
350
2015
1971
351
2015
1977
300
2015
1958
305
2015
1978
328
2015
1988
327
2015
1980
300
2015
1974
300
360 est. TBD(2) DH
360 est. TBD(2) DH
360 est. TBD(2) DH
2015
1969
341
2015
1973
242
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, 2009 and the Energy 11102 for which the
date is December 31, 2009), according to OPA 90, the vessel must be refurbished as a double hull or be retired from petroleum transportation
service in U.S. waters. For a discussion of OPA 90 see “—Environmental and Other Governmental Regulation” below.
(2) The Energy 6506, Energy 6507 and Energy 6508 are 60,000-barrel double-hulled tank barges currently under construction with anticipated
delivery on various dates throughout 2007.
Additional information with respect to our TTB 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
positioning, roll reduction systems and controllable pitch thrusters, which allow our vessels to
15
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.
Jones Act Qualified Fleet. All but two of our vessels are Jones Act qualified. The Jones
Act prohibits vessels that are foreign built, foreign owned, foreign crewed or foreign flagged
from participating in the U.S. coastwise trade. Nearly all of the services provided by our
vessels, in both of our fleets, constitute coastwise trade as defined by the Jones Act.
Consequently, competition for our services is largely restricted to other U.S. vessel owners
and operators.
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 27 years, the average age of our existing OSV fleet is
approximately six years. Based on our current fleet complement, once our 15 new vessels
now under construction or conversion are delivered, our average fleet age will be even lower.
Newer vessels generally experience less downtime and require significantly less maintenance
and scheduled drydocking costs compared to older vessels. In addition, 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 93% based on a 365-day denominator. According to WorkBoat
magazine, the GoM industry average for conventional 180’ OSVs was approximately 85%
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, ultra-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 GoM 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 TTB 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 received ISO
14001:2004 certification for our environmental management system in 2006. Quality, Health,
Safety and Environmental Certifications are an increasingly important consideration for both
our OSV and TTB customers due to the environmental and regulatory sensitivity associated
16
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.
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 GoM. Currently, 16 of our 23 U.S.-flagged OSVs operate in that area. We also operate
three U.S.-flagged OSVs and one foreign-flagged AHTS offshore Trinidad, which currently
represents the largest market share in that region. We believe that we are the fourth largest
tank barge transporter of petroleum products in New York Harbor, a market that has a fairly
even distribution among the top five operators and we 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 role we play in the design of our vessels and the manner in which we
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. 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
three proprietary OSV newbuild programs involving 17 new generation OSVs and one
proprietary TTB newbuild program involving five ocean-going double-hulled tank barges. In
addition, our MPSV conversion program, our fourth OSV newbuild program, and our second
TTB newbuild program are currently underway. To date, we have also 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, one 165’ fast supply vessel,
and two foreign-flagged AHTS vessels.
Experienced Management Team with Proven Track Record. Our executive
management team has an average of 22 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
programs, 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
vessels as the benefits of our proprietary designs and in-house engineering capabilities are
recognized by our customers.
17
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 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. Our current fleet expansion initiatives
include our MPSV conversion program, our second TTB newbuild program, and our fourth
OSV newbuild program. The main determinants of the level and timing of incremental
newbuild programs initiated by us in the future will be our assessment of the visible supply
and visible demand for our vessels and our receiving acceptable shipyard terms and
conditions. We intend to use our expertise and experience to evaluate the economics of, and
where appropriate, 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, 2006, we have completed multiple acquisitions involving 45 vessels, and
constructed 17 proprietary OSVs and five proprietary double-hulled tank barges with 13
OSVs, three tank barges, two MPSVs and four ocean-going tugs currently under construction,
conversion or retrofit.
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
18
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, but are also subject to the negative effect of declining market cycles. We plan
our mix of long-term and short-term, or 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 expired on March 31, 2006. Although we
considerably reduced the amount of cargo transported for Amerada Hess since the expiration
of the COA, we have successfully redeployed the barrel-carrying capacity previously required
to serve the COA through other customers. We believe 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 TTB customer base and geographic markets by exposing a greater
portion of our fleet to currently favorable market conditions. Other than the Amerada Hess
COA, our other TTB 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. During 2005 and 2006, we were able to
access a new market application for our double-hulled tank barges by using them to support
existing OSV customers for upstream services such as deepwater well testing in the GoM.
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. Notwithstanding the recent deployment of our TTB equipment to upstream
customers, these trends have recently allowed us to roughly double our operating margin for
downstream work in this segment over year-ago levels to a higher 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 TTB services. The percentage of revenues attributable
to a customer in any particular year depends on the level of oil and natural gas exploration,
19
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. We
enter into a variety of contract arrangements with our customers, including spot and time
charters, COAs, consecutive voyage contracts and, occasionally, bareboat charters. Our
contracts are obtained through competitive bidding or, with established customers, through
negotiation. For the year ended December 31, 2006, Amerada Hess Corporation and Military
Sealift Command each accounted for more than 10% of our total revenues. For a discussion
of significant customers in prior periods, see Note 13 of the notes to our consolidated financial
statements.
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 have historically operated under
time charters or COAs commensurate with market conditions. However, since the
non-renewal of our five-year COA with Amerada Hess, which expired March 31, 2006, we
have been successful in shifting our entire TTB fleet to time charters. 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 TTB markets,
we believe that the loss of any one customer would not have a material adverse effect on our
business.
Because of our successful proprietary newbuild designs, 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 including competitors with conventional 180’
OSVs, competitors with new generation OSVs and competitors in the TTB business with both
single-hullled and double-hulled tank barges. Competition in the OSV and domestic ocean-
going TTB segments of the marine transportation industry primarily involves factors such as:
• quality and capability of the vessels and crew members;
• ability to meet the customer’s schedule;
•
•
safety record;
reputation;
• price; and
• experience.
20
All but two of our 60 vessels are U.S.-flagged and are qualified under the Jones Act to
engage in domestic coastwise trade. 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 believe that only about 30% of the new generation OSVs currently operating in the
GoM are owned by publicly-traded companies. We believe we operate the second largest
fleet of new generation OSVs in the GoM, 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 GoM are owned by publicly-
traded companies. We operate one of the largest tank barge fleets in Puerto Rico and believe
that we are the fourth largest transporter by tank barge of petroleum products in New York
Harbor, a market that has a fairly even distribution among the top five competitors. All but one
of our direct competitors in our segment of the TTB industry are privately held.
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.
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 three years to nine 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 GoM 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. We also compete with other operators of new
generation OSVs
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
21
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 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:
•
the corporation is organized under the laws of the United States or of a state, territory
or possession of the United States;
• at least 75% of the ownership of voting interests with respect to its capital stock is held
by U.S. citizens;
•
the corporation’s chief executive officer, president and chairman of the board are U.S.
citizens; and
• 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:
•
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;
• permits withholding of dividends and suspension of voting rights with respect to any
shares held by non-U.S.citizens that exceed 20%;
• permits a stock certification system with two types of certificates to aid tracking of
ownership;
• permits our board of directors to redeem any shares held by non-U.S. citizens that
exceed 20%; and
• 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.
22
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.
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 and/or reporting 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 $600 per gross ton or $500,000. 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 and
certain defenses may not be available. Moreover, OPA 90 imposes on responsible parties the
need for proof of financial responsibility to cover at least some costs in a potential spill. As
required, 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.
23
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. One of the three single-hulled barges, the Energy 8701, returned to
service during 2006 after a re-measurement conducted by the U.S. Coast Guard and
recertification extending its retirement date to 2015. 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 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 retire from service 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.
24
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
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 TTB 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.
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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:
• prevailing oil and natural gas prices and expectations about future prices and price
volatility;
•
the cost of offshore exploration for, and production and transportation of, oil and
natural gas;
• worldwide demand for oil and natural gas;
•
consolidation of oil and gas and oil service companies operating offshore;
• availability and rate of discovery of new oil and natural gas reserves in offshore areas;
•
•
local and international political and economic conditions and policies;
technological advances affecting energy production and consumption;
• weather conditions;
• environmental regulation; and
•
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 GoM oilfield of U.S.-flagged OSVs
26
currently operating in other regions or in non-oilfield applications would 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:
• quality and capability of the vessels and crew members;
• ability to meet the customer’s schedule;
•
•
safety record;
reputation;
• price; and
• 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 or
repairs, maintenance and routine drydockings on schedule and on budget and to
27
utilize such vessels and the other vessels in our fleet at profitable levels could
adversely affect our financial condition and results of operations.
We have 13 new generation OSVs and three double-hulled, ocean-going tank barges
currently under construction, four ocean-going tugs being retrofitted and two coastwise sulfur
tankers currently undergoing conversion into MPSVs. We have also announced plans to
construct additional double-hulled tank barges and may plan to construct other such vessels
as market conditions warrant. We also routinely engage shipyards to drydock our vessels for
regulatory compliance and to provide repair and maintenance. Our construction projects and
drydockings 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 or anticipated revenues with respect to vessels under
construction, conversion or for other drydockings. Further, significant cost overruns or delays
for vessels under construction, conversion or retrofit 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. Likewise, there are several deepwater-capable drilling rigs under
construction that, if delayed or cancelled, could adversely impact us.
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 TTB 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 TTB services and other
conditions.
A reduction in domestic consumption of refined petroleum products or crude oil may
adversely affect the revenues of our TTB business and, therefore, our financial condition and
results of operation. Weather conditions also affect demand for our TTB services. For
example, a mild winter may reduce demand for heating oil in the northeastern United States.
28
Moreover, alternative methods of delivery of refined petroleum products or crude oil may
develop as a result of insufficient availability of TTB 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
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 or
the threat of litigation with us. 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 might not be able to replace such business on
economically equivalent terms.
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. While we endeavor to comply with all applicable
laws, we might not and our 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.
29
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
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:
•
catastrophic marine disaster;
• adverse weather and sea conditions;
• mechanical failure;
•
collisions or allisions;
30
• oil and hazardous substance spills;
• navigation errors;
• acts of God; and
• war and terrorism.
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.
Finally, we do not maintain insurance for loss of income resulting from a marine casualty
Our expansion into international markets subjects us to risks inherent in
conducting business internationally.
Over the past several 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.
31
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
workers and to retain our current employees such as occurred in 2006. 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. If we are unable to
recruit qualified personnel we may not be able to operate our vessels at full utilization, which
would adversely affect our results of operations.
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 based on tort theories. Because we are
not generally protected by the damage 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 6.125% Senior Notes due
2014 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 6.125% Senior Notes due 2014 and
in the agreement governing our revolving credit facility require us to meet certain financial
tests, which may limit or otherwise restrict:
• our flexibility in operating, planning for, and reacting to changes, in our business;
• 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
• 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.
32
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-
hulled 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.
We may not have the ability to raise the funds necessary to settle conversion of
the 1.625% convertible senior notes or to purchase such notes upon a fundamental
change or on other purchase dates as defined in the agreement, and our future debt
may contain limitations on our ability to pay cash upon conversion or repurchase of
shares.
Upon conversion of the 1.625% convertible senior notes, we may pay a settlement
amount in cash and shares of our common stock, if any, based upon a 25 trading-day
observation period. In addition, on November 15, 2013, November 15, 2016 and
November 15, 2021, holders of the 1.625% convertible senior notes may require us to
purchase their notes for cash. We cannot assure you that we will have sufficient financial
resources, or would be able to arrange financing, to pay the settlement amount in cash, or the
purchase price or fundamental change purchase price for the 1.625% convertible senior notes
tendered by the holders in cash. Further, our ability to pay the settlement amount in cash, or
the purchase price or fundamental change purchase price for the 1.625% convertible senior
notes in cash may be subject to limitations in our revolving credit facility or any other
indebtedness we may have in the future. If the holders of the 1.625% convertible senior notes
convert such notes or require us to repurchase them, we may seek the consent of our lenders
or attempt to refinance the debt, but there can be no assurance that we will be able to do so.
Failure by us to pay the settlement amount upon conversion or purchase the notes when
required will result in an event of default with respect to the notes, which may also result in
the acceleration of our other indebtedness.
Our revenues and operating results may vary significantly from quarter to quarter
due to a number of factors such as volatility in our vessel dayrates, changes in
utilization, vessel incidents and other unforeseen matters. Many of these factors that
may cause our actual financial results to vary from our publicly disclosed earnings
guidance and forecasts are outside of our control.
Our actual financial results might vary from those anticipated by us or by securities
analysts and investors, and these variations could be material. From time to time we publicly
provide earnings or other forms of guidance, which reflect our predictions about future
dayrates, utilization, operating costs and capital structure, among other factors. These
33
numerous assumptions may be impacted by factors that are beyond our control and might not
turn out to be correct.
We are susceptible to unexpected increases in operating expenses such as
materials and supplies, crew wages, maintenance and repairs, and insurance costs.
Many of our operating costs are unpredictable and vary based on events beyond our
control. Our gross margins will vary based on fluctuations in our operating costs. If our costs
increase or we encounter unforeseen costs, we may not be able to recover such costs from
our customers, which could adversely affect our financial position, results of operations and
cash flows.
The convertible note hedge and warrant transactions may affect the value of our
common stock.
In connection with the original issuance of the 1.625% convertible senior notes, we
entered into convertible note hedge and warrant transactions with counterparties that include
affiliates of the initial purchasers of the convertible senior notes. The convertible note hedge
transactions are expected to reduce the potential dilution upon conversion of such notes.
However, if the warrants are exercised, such exercise would mitigate some of that reduction.
In connection with these hedging and warrant transactions, such counterparties or their
affiliates may enter into, or may unwind, various derivatives and/or purchase or sell our
common stock in secondary market transactions (and are likely to do so during any
observation period related to a conversion of notes).
The effect, if any, of these convertible note hedge and warrant transactions or any of
these hedging activities on the market price of our common stock or the convertible senior
notes will depend in part on market conditions and cannot be ascertained at this time, but any
of these activities could materially and adversely affect the value of our common stock.
The fundamental change purchase feature of the 1.625% convertible senior notes
and provisions of our certificate of incorporation, bylaws, stockholder rights plan and
Delaware law may delay or prevent an otherwise beneficial takeover attempt of our
company.
The terms of the notes require us to purchase the notes for cash in the event of a
fundamental change. A takeover of our company would trigger the requirement that we
purchase the notes. Furthermore, our certificate of incorporation and bylaws, Delaware
corporations law, and our stockholder rights plan contain provisions that could have the effect
of making it more difficult for a third party to acquire, or discourage a third party from
attempting to acquire, control of us. These provisions could limit the price that investors might
be willing to pay in the future for shares of our common stock and may have the effect of
delaying or preventing a takeover of our company that would otherwise be beneficial to
investors.
34
Conversion of the 1.625% convertible senior notes or exercise of the warrants
issued in the warrant transactions may dilute the ownership interest of existing
stockholders.
The conversion of the 1.625% convertible senior notes or exercise of some or all of the
warrants we issued in the warrant transactions may dilute the ownership interests of existing
stockholders. Although the convertible note hedge transactions are expected to reduce
potential dilution upon conversion of the 1.625% convertible senior notes, the warrant
transactions could have a dilutive effect on our earnings per share to the extent that the price
of our common stock exceeds the strike price of the warrants. Any sales in the public market
of our common stock issuable upon such conversion of the 1.625% convertible senior notes
could adversely affect prevailing market prices of our common stock. In addition, the
anticipated exercise of the warrants for shares of our common stock could depress the price
of our common stock.
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 TTB 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 TTB 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, 2006, we had 742 employees, including 583 operating personnel and
159 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 primary office lease
covers 23,756 square feet 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 square feet and 4,700 square feet, respectively. We also hold a one-year
lease on 4,500-square-feet in a warehouse near our corporate headquarters to maintain
35
spare parts inventory. To support our OSV operations in the GoM, we lease a shore base
facility in Port Fourchon, Louisiana operated under the name HOS Port. Our facility lease for
HOS Port, 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 square feet of
warehouse and office space. For local support in Puerto Rico, we lease an office consisting of
approximately 1,900 square feet. 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 square feet. We also lease dock space, consisting of approximately
36,000 square feet, in Brooklyn, New York. We operate our TTB fleet from these New York
facilities. The lease on our Brooklyn facilities is currently scheduled to expire in March 2007
and we intend to renew our lease for that facility prior to expiration. 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 GoM.
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 TTB 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 TTB
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 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 100 F Street, N.E., 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
36
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 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
On January 18, 2007, Anthony Caiafa filed an action in the United States District Court
for the Eastern District of Louisiana against Hornbeck Offshore Services, Inc. and Todd M.
Hornbeck, our Chairman of the Board, President, and Chief Executive Officer. On January 24,
2007, Thomas Schedler filed a similar action in the United States District Court for the
Eastern District of Louisiana against Hornbeck Offshore Services, Inc., Todd M. Hornbeck
and James O. Harp, Jr., our Executive Vice President and Chief Financial Officer. On
January 26, 2007, Michael D. Fontenelle filed another similar action in the United States
District Court for the Eastern District of Louisiana against Hornbeck Offshore Services, Inc.
and Todd M. Hornbeck. On February 8, 2007, Oakmont Capital Management, LLC filed a
similar action in the United States District Court for the Eastern District of Louisiana against
Hornbeck Offshore Services, Inc., Todd M. Hornbeck, James O. Harp, Jr. and Carl G.
Annessa, our Executive Vice President and Chief Operating Officer. These lawsuits purport to
be filed as a class action on behalf of the plaintiffs and other similarly situated purchasers of
our securities from November 1, 2006 to January 10, 2007. In their complaints, the plaintiffs
allege that Hornbeck Offshore Services, Inc. and the other defendants violated Section 10(b)
of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 thereunder, by
allegedly making false and misleading statements, and/or by omitting to state material facts
necessary to make the statements not misleading, in connection with its forward earnings
guidance and its January 10, 2007 announcement of preliminary financial results for the
fourth quarter of 2006 and the full year of 2006 that fell short of such guidance and indicated
an anticipated reduction in 2007 guidance. The Company and such officers deny these
allegations and believe that these actions are without merit. We intend to defend these
actions vigorously. However, we cannot predict whether we will prevail in the actions or
estimate the amount of damages that we might incur. We are also unable to estimate any
reimbursement that we may receive from insurance policies in the event that we incur any
damages or costs in connection with these actions.
Item 4—Submission of Matters to a Vote of Security Holders
None.
37
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 following table sets forth, for the quarterly period
indicated, the high and low sale prices for our common stock as reported by the NYSE during
2006 and 2005.
2006
2005
High
Low
High
Low
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter
Third Quarter
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$40.73
$40.96
$36.74
$38.72
$29.66
$29.44
$29.62
$30.47
$26.14
$27.73
$37.49
$36.89
$18.10
$20.10
$26.81
$27.81
On January 31, 2007, we had 174 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, the indenture governing our 6.125% senior notes
and our revolving credit facility include restrictions on our ability to pay cash dividends on our
common stock. See Item 7 “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and Note 6 of the notes to our consolidated financial statements
for further discussion.
On November 13, 2006, we completed a private offering of $250.0 million of our 1.625%
convertible senior unsecured notes due 2026, or the convertible notes, to “qualified
institutional buyers” pursuant to Rule 144A under the Securities Act. In connection with the
sale of the convertible notes, we entered into convertible note hedge transactions with respect
to our common stock with Jefferies International Limited, Bear, Stearns International Limited
and AIG-FP Structured Finance (Cayman) Limited, or the dealers. Each of the convertible
note hedge transactions involves the purchase of call options, or the call options, with
exercise prices equal to the conversion price of the convertible notes, and is intended to limit
exposure to dilution to the Company’s stockholders upon the potential future conversion of
the convertible notes. The convertible note hedge transactions cover approximately the same
number of shares of the Company’s common stock underlying the convertible notes, subject
to customary anti-dilution adjustments, at a strike price of approximately $48.48 per share of
common stock.
We also entered into separate warrant transactions, or warrants, whereby we sold to the
counterparties warrants to acquire approximately the same number of shares of our common
stock underlying the convertible notes, subject to customary anti-dilution adjustments, at a
strike price of $62.59 per share of common stock. On exercise of the warrants, we have the
option to deliver cash or shares of our common stock equal to the difference between the
then market price and strike price. The issuance of the warrants and the underlying shares of
38
our common stock issuable upon exercise of the warrants was not registered under the
Securities Act, and the warrants and common stock issuable upon exercise of the warrants
cannot be offered or sold in the United States absent registration under the Securities Act or
an applicable exemption from such registration requirements. For more information regarding
this convertible note offering and convertible note hedge and warrant transactions, please
refer to the Liquidity and Capital Resources section of Management’s Discussion and
Analysis of Financial Condition and Results of Operations or Note 6 within the consolidated
financial statements contained within this Annual Report on Form 10-K.
In connection with the issuance of the convertible senior notes, in November 2006 our
Board of Directors authorized us to use up to 30% of the net proceeds from the convertible
senior note offering to repurchase shares of the Company’s common stock.
Period
October 1-31, 2006 . . . . . . . . . . . . . . . . . . .
November 1-30, 2006 . . . . . . . . . . . . . . . . .
December 1-31, 2006 . . . . . . . . . . . . . . . . .
Total Shares Repurchased . . . . . . . . . . . . .
Total
Number of
Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs
—
1,795,100
—
1,795,100
Maximum
number of
Shares
that May
Yet be
Purchased
Under the
Plans or
Programs
—
—
—
—
Total
Number of
Shares
Repurchased
—
1,795,100
—
1,795,100
Average
Price
Paid per
Share
$ —
$35.26
$ —
$35.26
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.
39
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, 2006, 2005, 2004, 2003 and 2002 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,
2006
2005
2004
2003
2002
Statements of Operations Data:
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . .
General and administrative expenses . . . . . . . . . . . . . . . . .
Gain on sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on early extinguishment of debt . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (loss) (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before income taxes . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Per Share Data:
Basic net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average basic shares outstanding . . . . . . . . . . . .
Weighted average diluted shares outstanding(2) . . . . . . . .
Balance Sheet Data (at period end):
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . .
Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant, and equipment, net . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total short-term debt (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total long-term debt (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . .
Statement of Cash Flows Data:
Net cash provided by (used in):
Other Financial Data (unaudited):
EBITDA (5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Operating Data (unaudited):
Offshore Supply Vessels:
Average number (6) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average fleet capacity (deadweight)
. . . . . . . . . . . . . .
Average vessel capacity (deadweight) . . . . . . . . . . . . .
Average utilization rate (7) . . . . . . . . . . . . . . . . . . . . . . .
Average dayrate (8) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective dayrate(9) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tugs and Tank Barges:
Average number of tank barges (10) . . . . . . . . . . . . . .
Average fleet capacity (barrels)(10) . . . . . . . . . . . . . . .
Average barge size (barrels) . . . . . . . . . . . . . . . . . . . . .
Average utilization rate (7) . . . . . . . . . . . . . . . . . . . . . . .
Average dayrate (11) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective dayrate (9) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 274,551
95,591
32,021
28,388
1,854
120,405
—
16,074
17,675
70
118,874
43,159
75,715
$ 182,586
66,910
27,270
20,327
1,893
69,972
1,698
3,178
12,558
87
58,981
21,538
37,443
$ 132,261
58,520
23,135
14,759
65
35,912
22,443
356
17,698
70
(3,803)
(1,320)
(2,483)
$
$
$
$
2.81
2.76
26,966
27,461
1.67
1.64
22,369
22,837
$ 474,261
489,261
531,951
1,098,380
—
549,497
454,873
$ 271,739
290,471
462,041
796,675
—
299,449
429,495
$
$
75,806
(120,617)
262,202
95,631
124,964
$ 152,496
91,212
$
$
$
$
$
(0.13) $
(0.13) $
19,330
19,330
54,301
52,556
361,219
460,571
15,449
225,000
182,904
21,405
(61,378)
81,358
36,674
61,378
$
$
$
$ 110,813
46,805
17,590
10,731
713
36,400
—
178
18,523
(7)
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
53,983
105,816
$
$
$
$
$
$
92,585
36,337
12,296
9,681
32
34,303
—
667
16,207
23
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
24,955
(55,771)
(159)
46,622
55,771
25.0
59,042
2,362
24.6
57,658
2,341
22.8
51,938
2,274
17.3
41,312
2,353
90.3%
19,380
17,500
$
$
96.2%
13,413
12,903
$
$
87.5%
10,154
8,885
$
$
88.6%
10,940
9,693
$
$
11.0
25,006
2,208
94.9%
12,176
11,555
17.6
1,488,177
84,267
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
92.7%
18,064
16,745
$
$
87.1%
13,542
11,795
$
$
82.2%
11,620
9,552
$
$
73.6%
10,971
8,075
$
$
78.1%
9,499
7,419
$
$
$
$
40
Operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 131,790
(87,138)
157,797
(1) Represents other operating income and expenses, including equity in income from investments and foreign currency transaction gains or
losses.
(2) For the years ended December 31, 2006, 2005 and 2004, stock options representing rights to acquire 323, 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.
(3) Represents the remaining balance of approximately $15,500 in aggregate principal amount of our 10.625% senior notes due 2008 that were
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.
(4) Excludes original issue discount associated with our 6.125% senior notes in the amount of $503 and $551 as of December 31, 2006 and
2005, respectively. Excludes original issue discount associated with our 10.625% senior notes in the amount of $2,323 and $2,694 as of
December 31, 2003 and 2002, respectively. The amount as of December 31, 2003 includes $40,000 outstanding under our long-term,
revolving credit facility.
(5) See our discussion of EBITDA as a non-GAAP financial measure immediately following these footnotes.
(6) We owned 25 OSVs at December 31, 2006. The HOS Saylor and HOS Navegante were acquired in January 2005 and March 2005,
respectively.
(7) Utilization rates are average rates based on a 365-day year. Vessels are considered utilized when they are generating revenues.
(8) 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.
(9) Effective dayrate represents the average dayrate multiplied by the average utilization rate.
(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 TTB fleet consisted of 16 vessels, of which three tank barges were retired
from service by the end of 2004. 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. We owned 18 tank barges at
December 31, 2006, which includes the Energy 8701, a previously retired tank barge that was reactivated in October 2006 following a U.S.
Coast Guard approved extension of its retirement date to 2015.
(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 and amortization. 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 their usefulness as comparative measures.
We view EBITDA primarily as a liquidity measure and, as such, we believe that the
GAAP financial measure most directly comparable to this measure 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.
41
EBITDA is also a financial metric 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 years ended December 31, 2006, 2005, 2004, 2003 and 2002, respectively (in
thousands) Information for years prior to 2006 has been reclassified to conform to the 2006
presentation.
Year Ended December 31,
2006
2005
2004
2003
2002
Components of EBITDA:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . $ 75,715 $37,443 $ (2,483) $11,190 $11,647
Interest, net:
Debt obligations . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . .
17,675
(16,074)
12,558
(3,178)
17,698
(356)
18,523
(178)
16,207
(667)
Total interest, net . . . . . . . . . . . . . . . . . . . . . . .
1,601
9,380
17,342
18,345
15,540
Income tax expense (benefit) . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . .
43,159
24,070
7,951
21,538
19,954
7,316
(1,320)
17,408
5,727
6,858
14,393
3,197
7,139
10,351
1,945
EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $152,496 $95,631 $36,674 $53,983 $46,622
The following table reconciles EBITDA to cash flows provided by operating activities for
the years ended December 31, 2006, 2005, 2004, 2003 and 2002, respectively (in
thousands).
Year Ended December 31,
2006
2005
2004
2003
2002
EBITDA Reconciliation to GAAP:
EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $152,496 $ 95,631 $ 36,674 $ 53,983 $ 46,622
(2,409)
Cash paid for deferred drydocking charges . . .
(19,075)
Cash paid for interest . . . . . . . . . . . . . . . . . . . . .
Cash paid for taxes . . . . . . . . . . . . . . . . . . . . . .
Changes in working capital . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . .
Loss on early extinguishment of debt . . . . . . . .
. . . . . . . . . . . . . . . . . . . .
Changes in other, net
(12,881)
(18,537)
(1,398)
8,591
5,196
—
(1,677)
—
(1,993)
—
—
(673)
—
5,139
—
1,698
(1,947)
—
(460)
—
—
277
—
(4,960)
—
(6,100)
(19,718)
(6,827)
(17,888)
(8,530)
(24,023)
22,443
(199)
Cash flows provided by operating activities . . . $131,790 $ 75,806 $ 21,405 $ 25,499 $ 24,955
In addition, we also make certain adjustments to EBITDA for loss on early
extinguishment of debt, stock-based compensation expense and interest income to compute
ratios used in certain financial covenants of our revolving credit facility with various lenders.
We believe that these ratios are a material component of certain financial covenants in such
credit agreements and failure to comply with the financial covenants could result in the
acceleration of indebtedness or the imposition of restrictions on our financial flexibility.
42
The following table provides the detailed adjustments to EBITDA, as defined in our
revolving credit facility for the years ended December 31, 2006, 2005, 2004, 2003 and 2002,
respectively (in thousands).
Adjustments to EBITDA for Computation of Financial Ratios Used in Debt Covenants
Year Ended December 31,
2006
2005
2004
2003
2002
Loss on early extinguishment of debt … . . . . . . . . . . . . . . . $ — $1,698 $22,443 $ — $ —
—
Stock-based compensation expense… . . . . . . . . . . . . . . . .
667
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,196
16,074
—
3,178
—
178
—
356
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.
• 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,
• 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,
• 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
• 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, 16 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 our fast supply vessel are working offshore Mexico. Our OSV fleet has been
assembled through the completion of three OSV newbuild programs and a series of
acquisitions. We are currently expanding our OSV fleet through Phase 2 of our fourth OSV
43
newbuild program, which includes the construction of a mix of 13 proprietary 240 ED and 250
EDF class vessels, and the MPSV conversion program that includes the conversion of two
sulfur tankers into 370 class MPSVs. We also own 13 active ocean-going tugs and 18 active
ocean-going tank barges, six of which are double-hulled. Currently, eight of our tank barges
are operating in the northeastern United States, primarily New York Harbor, seven are
operating in the GoM and three are operating in Puerto Rico. In October 2006, one of our
previously retired single-hulled tank barges was, with U.S. Coast Guard approval, returned to
service with a new OPA 90 date of 2015. Our tug and tank barge, or TTB, fleet has been
assembled through a series of acquisitions and the completion of our first TTB newbuild
program. We are currently expanding our TTB fleet through our second TTB newbuild
program, which includes the construction of new double-hulled tank barges and the retrofit of
related tugs. We are now constructing three 60,000 barrel double-hulled tank barges and
retrofitting four recently acquired ocean-going tugs for use as power units for new and existing
barges as part of this program. Once these three barges are placed in service, 50% of our
tank barge fleet barrel-carrying capacity will be double-hulled, up from 44% today and 7% at
the end of 2004. Except for our two AHTS vessels, all of our vessels are qualified under the
Jones Act to engage in U.S. coastwise trade.
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
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 sixteen
that are chartered under long-term contracts with expiration dates ranging from March 2007
through September 2011. 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
44
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, the ongoing conversion of two
coastwise sulfur tankers for use as 370 class MPSVs, and the ongoing construction of four
240 ED class OSVs and nine 250 EDF class OSVs.
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 GoM, as we have also observed this preference in foreign areas
such as Mexico, Trinidad, Brazil and West Africa.
OSV market conditions in the GoM reached historic record levels during 2006. Our
fleetwide average OSV dayrates for calendar 2006 were approximately $19,000 and our
leading-edge spot dayrates were as high as $30,000 during the year. While we experienced
some OSV market volatility in the spot market during the late fourth quarter of 2006,
particularly for our 200 class vessels, we believe that market conditions for new generation
vessels in the GoM continue to show long-term positive trends. We have observed an
increased level of interest in the deepwater and ultra-deepwater regions with recent record
setting well tests, total bid values for lease sales in the deepwater Western GoM reaching
eight-year highs, and 12 deepwater discoveries in the GoM in 2006. 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. Certain contracts for rigs working
in deepwater and ultra-deepwater regions extend into 2013. In addition, certain operators’
have construction commitments for incremental new deepwater floating rigs, deep shelf
jack-up rigs, floating production units, subsea tie-backs and other deepwater production
infrastructure. The supply fundamentals for new generation OSVs could further impact market
conditions. The average age of conventional 180 class OSVs is approximately 27 years;
therefore, we expect that there will be a continued and accelerated attrition rate for such
vessels working in the GoM 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 GoM for foreign and non-oilfield markets,
which is a long-term trend that we expect to continue.
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,
or COAs, 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 TTB
industry are generally single-voyage COAs, 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
45
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 TTB services are population growth, the strength of
the U.S. economy, changes in weather, oil prices and competition from alternate energy
sources. The TTB market, in general, is marked by steady demand over time. Our 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 during the second and third
quarters. Because we have recently shifted nearly all of our TTB fleet from COAs to time
charters and continue to diversify our services, some of our historic seasonality for this
segment should be diminished. We generally take advantage of seasonal weather patterns to
prepare our TTB 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.
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 increased 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 emerging market opportunities as
they develop. To expand our geographic market area and current service offering, we are
now operating vessels from our TTB fleet in the GoM. These vessels are being used for the
transportation of petroleum products and, more recently, ethanol. In addition, we have
recently been successful in deploying our vessels in non-traditional TTB services, such as
support of deepwater well testing and other specialty applications for our upstream
customers. We now have 17 of our tank barges operating under time charters, including 10
that are chartered under long-term contracts with expiration dates ranging from June 2007
through April 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 amortization of 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,
46
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
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,
47
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
maintenance as they are incurred. Recertification costs can be accounted for in one of two
ways: (1) defer and amortize or (2) expense as incurred. 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 and TTBs 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. We also contract our TTBs to customers
under COAs, 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 COAs are
less than 10 days in length.
Allowance for Doubtful Accounts. Our customers are primarily major and independent,
domestic and international, oil and gas 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 customer’s 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 net
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.
48
Stock-Based Compensation Expense. Effective January 1, 2006, we adopted FAS
No. 123 (revised 2004), “Share-Based Payment,” or FAS 123R, utilizing the modified
prospective method. Prior to the adoption of FAS 123R, we accounted for stock option grants
in accordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees,” utilizing
the intrinsic value method, and accordingly, recognized no compensation expense for stock
option grants for periods prior to 2006. However, FAS 123R requires all share-based
payments to employees and directors, including grants of stock options and restricted stock,
to be recognized in the income statement based on their fair values. Compensation expense
for the portion of awards for which the requisite service has not been rendered that were
outstanding as of January 1, 2006 was recognized as the service was rendered on or after
January 1, 2006. The compensation expense for that portion of awards was based on the
grant-date fair value estimated in accordance with the original provisions of FAS 123,
“Accounting for Stock-Based Compensation.” At December 31, 2006, approximately $8.8
million of unrecognized compensation expense related to nonvested awards is expected to be
recognized over a weighted-average period of 1.9 years.
Under our employee restricted stock agreements, effective February 14, 2006, we issued
restricted stock that may not be released or transferred until the end of the performance
period, which is generally three years from the grant, or measurement, date. The number of
shares that will ultimately be received by the award recipients at the end of the performance
period will be dependent upon our performance relative to a peer group, as defined by the
employee restricted stock agreements. Performance is measured by the change in our stock
price measured against the peer group during the measurement period. The actual number of
shares that could be received by the award recipients can range from 0% to 200% of our
base share awards depending on our performance ranking relative to the peer group.
Compensation expense related to restricted stock is recognized over the period the
restrictions lapse, from one to three years. The compensation expense related to restricted
stock awards, which is amortized over the vesting period, is determined based on the market
price of our stock on the date of grant applied to the total shares that are expected to fully
vest.
49
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 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.
Years Ended December 31,
2006
2005
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 (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
25.0
59,042
2,362
24.6
57,658
2,341
90.3%
19,380 $
17,500 $
96.2%
13,413 $
12,903 $
22.8
51,938
2,274
87.5%
10,154
8,885
Tugs and Tank Barges:
Average number of tank barges . . . . . . . . . . . . . . . . . . . . .
Average fleet capacity (barrels) . . . . . . . . . . . . . . . . . . . . . .
Average barge size (barrels) . . . . . . . . . . . . . . . . . . . . . . . .
Average utilization rate (1) . . . . . . . . . . . . . . . . . . . . . . . . . .
Average dayrate (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Effective dayrate (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
17.6
1,488,177
84,267
14.6
1,072,075
71,651
16.0
1,156,330
72,271
92.7%
18,064 $
16,745 $
87.1%
13,542 $
11,795 $
82.2%
11,620
9,552
(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) Effective dayrate represents the average dayrate multiplied by the average utilization rate.
(4) 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.
50
Summarized financial information concerning our reportable segments for the years ended
December 31, 2006 and 2005, respectively, is shown below in the following table (in
thousands, except percentage changes):
YEAR ENDED DECEMBER 31, 2006 COMPARED TO YEAR ENDED DECEMBER 31, 2005
Year Ended
December 31,
2006
2005
Increase (Decrease)
$ Change % Change
Revenues by segment:
Offshore supply vessels
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $141,341 $ 88,772
28,663
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25,040
$ 52,569
(3,623)
Tugs and tank barges
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
166,381
117,435
48,946
100,260
7,910
108,170
57,379
7,772
65,151
42,881
138
43,019
59.2%
(12.6)
41.7
74.7
1.8
66.0
$274,551 $182,586
$ 91,965
50.4%
Operating expenses by segment:
Offshore supply vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 55,175 $ 35,936
30,974
Tugs and tank barges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
40,416
$ 19,239
9,442
$ 95,591 $ 66,910
$ 28,681
Depreciation and amortization by segment:
Offshore supply vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,344 $ 15,197
12,073
Tugs and tank barges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,677
$ 2,147
2,604
$ 32,021 $ 27,270
$ 4,751
General and administrative expenses:
Offshore supply vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,505 $
Tugs and tank barges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,883
9,299
11,028
$ 4,206
3,855
$ 28,388 $ 20,327
$ 8,061
53.5%
30.5
42.9%
14.1%
21.6
17.4%
45.2%
35.0
39.7%
Gain (loss) on sale of assets:
Offshore supply vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Tugs and tank barges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
— $
(5) $
1,854
1,898
$
1,854 $
1,893
$
5
(44)
(39)
(100.0)%
(2.3)
(2.1)%
Operating income:
Offshore supply vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 80,357 $ 56,998
12,974
Tugs and tank barges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
40,048
$ 23,359
27,074
$120,405 $ 69,972
$ 50,433
41.0%
208.7
72.1%
Loss on early extinguishment of debt
. . . . . . . . . . . . . . . $ — $ 1,698
$ (1,698)
(100.0)%
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,675 $ 12,558
$ 5,117
40.7%
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,074 $ 3,178
$12,896
405.8%
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 43,159 $ 21,538
$21,621
100.4%
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 75,715 $ 37,443
$38,272
102.2%
(1)
Included are the amounts applicable to our Puerto Rico TTB 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.
51
Revenues. Revenues for 2006 increased 50.4%, or $92.0 million, to $274.6 million from
2005 due to continued favorable market conditions in each of our two business segments and
the increase in our average fleet size due to acquisitions and new vessel construction. Our
average operating fleet was approximately 57 vessels at the end of 2006 compared to 53
vessels at the end of 2005.
Revenues from our OSV segment were 41.7% higher for 2006 compared to 2005, due
primarily to dayrate improvement attributed to continued strength in the GoM, the operation of
a shore-based port facility leased in December 2005 and, to a lesser extent, a full year
contribution of one AHTS vessel acquired in early 2005 and placed in service in June 2005.
Our utilization rate was 90.3% in 2006 compared to 96.2% in 2005. Our OSV average dayrate
was $19,380 in 2006 compared to $13,413 in 2005, an increase of $5,967 or 44.5%.
Domestic revenues for our OSV segment were $141.3 million in 2006, an increase of $52.6
million or 59.2%, compared to $88.8 million in 2005. Foreign revenues for our OSV segment
decreased to $25.0 million for 2006, compared to $28.7 million in 2005, a decrease of $3.6
million or 12.6%, because we had an average of three fewer vessels operating internationally
during 2006.
Revenues from our TTB segment increased 66.0% in 2006 compared to 2005, due to
market-driven higher utilization and dayrates and the full year contribution of five newbuild
double-hulled tank barges delivered on various dates throughout 2005. Our tank barge
utilization increased to 92.7% for 2006 compared to 87.1% for 2005, due primarily to our
continued shift in contract mix from COAs to time charters. Our tank barge average dayrate of
$18,064 for 2006 increased $4,522, or 33.4%, from $13,542 for 2005. The increase in
average dayrates was primarily attributed to our ability to capitalize on higher demand in the
northeastern United States and diversified non-traditional TTB services, such as the support
of deepwater well testing and other specialty applications for our upstream customers
Operating expenses. Operating expenses for 2006 grew 42.9%, or $28.7 million, to
$95.6 million. The increase in operating expense during 2006 is primarily due to higher
personnel costs, increases in our average fleet size, expansion of our shore-based operations
and higher costs for in-chartering third party equipment. We currently expect daily operating
costs for existing vessels to increase approximately 20% to 25% in 2007 over 2006 levels.
Operating expenses for our OSV segment increased 53.5% for 2006 compared to 2005,
primarily due to market-driven wage increases for OSV mariners, FAS 123R stock-based
compensation related to restricted stock awards granted to mariners during 2006, the
operation of an OSV shore-based port facility that was leased in December 2005, and an
increase in customer-requested contract labor, the cost of the latter of which is offset by
higher dayrates charged to such customers.
Operating expenses for our TTB segment increased 30.5% for 2006 compared to 2005,
primarily as a result of market-driven wage increases for TTB mariners, FAS123R stock-
based compensation related to restricted stock awards granted to mariners in 2006, the
increased cost of three in-chartered third party tugs to fulfill time charter requirements, the full
year contribution of five new double-hulled tank barges delivered on various dates throughout
2005, partial year contribution of two higher horsepower, ocean-going tugs placed in service
during the first half of 2006, and higher insurance costs. These increases were offset, in part,
52
by lower fuel costs in 2006 due to a shift in contract mix from COAs to time charters. Under
time charter arrangements, the charterer is typically responsible for fuel costs. Average daily
operating expense in 2007 for the TTB segment is expected to increase as a result of the
delivery of three 60,000-barrel double-hulled tank barges and four retrofitted ocean-going tugs
that are expected to be placed in service on various dates throughout 2007.
Depreciation and Amortization. Depreciation and amortization was $4.8 million higher for
2006 compared to 2005, due to a full year of depreciation for five new double-hulled tank
barges that were placed in service throughout 2005, a shore-based port facility leased in
December 2005, an AHTS vessel that was acquired in early 2005 and placed in service in
June 2005 and, to a lesser extent, non-vessel capital expenditures that were completed
during the second half of 2005. In addition, there were six OSVs that underwent their initial
regulatory drydocking event during 2006, which resulted in amortization expense being
recorded for these vessels for the first time. Depreciation and amortization expense is
expected to increase further when the vessels under our current newbuild and conversion
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.
General and Administrative Expense. General and administrative expenses increased
$8.1 million during 2006 compared to 2005. During 2006, we recorded $5.2 million of stock-
based compensation expense as a result of adopting FAS 123R. No such expense was
booked for periods prior to 2006. The remainder of the increase is the result of increased
headcount to implement our growth strategy and increased amounts related to our cash
incentive compensation plan, awards under which vary commensurate with our financial
results. Our general and administrative expenses, inclusive of FAS123R expenses, are
expected to increase approximately 20% to 25% in 2007 over 2006 levels, but are still
expected to remain approximately 10% to 12% of revenues.
Gain or Loss on Sale of Assets. During 2006, we recorded a $1.9 million gain in our TTB
segment due to the sale of the Energy 2202, a single-hulled tank barge, and the Ponce
Service, a 3,900 horsepower tug, in May 2006 and October 2006, respectively. During 2005,
we recorded a $1.9 million gain in our TTB segment due to the sales of the Energy 9801 and
the Energy 9501, two retired single-hulled tank barges, and the Yabucoa Service and the
North Service, two older, lower horsepower tugs.
Operating Income. The variances with respect to our operating income are described
above. Operating income as a percentage of revenues for our OSV segment was 48.3% for
2006, compared to 48.5% for 2005. Operating income as a percentage of revenues for our
TTB segment was 37.0% for 2006, compared to 19.9% for 2005. The 2006 increase was
primarily related to the shift in our TTB contract mix from COAs to time charters and the ability
to deploy our TTB vessels in non-traditional TTB services, such as the support of deepwater
well testing and other specialty applications for our upstream customers.
Interest Expense. Interest expense increased $5.1 million during 2006 compared to
2005, primarily as a result of the October 2005 issuance of an additional $75.0 million in
principal amount outstanding under our 6.125% senior notes, lower capitalized interest and to
a lesser extent the November 2006 issuance of $250.0 million of 1.625% convertible senior
notes. Capitalized interest decreased $1.4 million during 2006, compared to 2005 due to a
53
lower average construction work-in-progress balance and, to a lesser degree, a lower
blended average interest rate. See “Liquidity and Capital Resources” for further discussion.
Interest Income. Interest income increased $12.9 million in 2006 resulting from increased
interest rates on higher invested cash balances primarily due to the October 2005 debt and
equity offerings along with approximately $156.6 million net proceeds from the November
2006 convertible senior notes offering. Our average cash balance for 2006 was $373.0 million
compared to $163.0 million in 2005. Our cash balance as of December 31, 2006 was $474.3
million. Our average interest rate earned on invested cash during 2006 was approximately
5.0% compared to approximately 3.9% in 2005, primarily due to six sequential 25-basis point
changes in the Federal Funds rate in 2006.
Income Tax Expense. Our effective tax rate was 36.3% and 36.5% for 2006 and 2005,
respectively. Our income tax expense primarily consists of deferred taxes due to our federal
tax 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. We recorded deferred taxes due to our federal tax net operating
loss carryforwards primarily generated by accelerated depreciation for tax purposes of
approximately $37.3 million as of December 31, 2006. These loss carryforwards are available
through 2025 to offset future taxable income. We expect our effective tax rate to be 36.5% in
2007.
Net Income. Net income increased by 102.2%, or $38.3 million, to $75.7 million primarily
due to the growth in operating income and net interest income for the reasons discussed
above, which was offset in part, by higher income tax expense in 2006.
54
Summarized financial information concerning our reportable segments for the years ended
December 31, 2005 and 2004, respectively, is shown below in the following table (in
thousands, except percentage changes):
YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004
Year Ended
December 31,
2005
2004
Increase (Decrease)
$ Change % Change
Revenues by segment:
Offshore supply vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 88,772 $ 59,886 $ 28,886
13,256
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28,663
15,407
Tugs and tank barges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
117,435
75,293
42,142
57,379
7,772
65,151
50,465
6,503
56,968
6,914
1,269
8,183
48.2%
86.0
56.0
13.7
19.5
14.4
Operating expenses by segment:
$182,586 $132,261 $ 50,325
38.0%
Offshore supply vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 35,936 $ 29,724 $ 6,212
2,178
Tugs and tank barges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28,796
30,974
Depreciation and amortization by segment:
$ 66,910 $ 58,520 $ 8,390
Offshore supply vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,197 $ 12,876 $ 2,321
1,814
Tugs and tank barges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12,073
10,259
General and administrative expenses:
Offshore supply vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Tugs and tank barges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,299 $
11,028
6,342 $ 2,957
2,611
8,417
$ 20,327 $ 14,759 $ 5,568
$ 27,270 $ 23,135 $ 4,135
20.9%
7.6
14.3%
18.0%
17.7
17.9%
46.6%
31.0
37.7%
Gain (loss) on sale of assets:
Offshore supply vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Tugs and tank barges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(5) $
1,898
32 $
33
(37)
1,865
—
5,651.5
$
1,893 $
65 $ 1,828
2,812.3%
Operating income:
Offshore supply vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 56,998 $ 26,383
9,529
Tugs and tank barges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12,974
30,615
3,445
$ 69,972 $ 35,912 $ 34,060
116.0%
36.2
94.8%
Loss on early extinguishment of debt . . . . . . . . . . . . . . . . . . . $
1,698 $ 22,443 $(20,745)
(92.4)%
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,558 $ 17,698 $ (5,140)
(29.0)%
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
3,178 $
356 $ 2,822
792.7%
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,538 $ (1,320) $ 22,858
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 37,443 $ (2,483) $ 39,926
—
—
(1)
Included are the amounts applicable to our Puerto Rico TTB 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.
55
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
strengthening market conditions in our OSV and TTB 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 56.0% during 2005. Our revenue growth is
primarily attributable to market-driven 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 primarily related to the significant improvement in the
GoM 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 GoM. 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 86.0%,
due to having an average of three more vessels operating internationally during 2005.
Revenues from our TTB segment increased 14.4% due to our utilization rate increasing
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 Expenses. Our operating expense increased to $66.9 million in 2005,
compared to $58.5 million in 2004, an increase of $8.4 million or 14.3%. 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 expenses for our OSV segment increased 20.9% 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 expenses for our TTB segment increased 7.6% 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.
Depreciation and Amortization. Our depreciation and amortization expense was
$4.1 million higher for 2005 compared to 2004 due primarily to increased drydocking activity
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.
General and Administrative Expense. Our general and administrative expense increased
$5.6 million during 2005 compared to 2004 due to higher personnel and health insurance
56
costs, including cash 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.
Gain or Loss on Sale of Assets. We recorded a $1.9 million gain in our TTB segment
during 2005 resulting from the sale 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 ocean-going tugs, respectively.
Operating Income. The variances with respect to our operating income are described
above. Operating income as a percentage of revenues for our OSV segment was 48.5% for
2005, compared to 35.0% for 2004. Operating income as a percentage of revenues for our
TTB segment was 19.9% for 2005, compared to 16.7% for 2004. These increases primarily
resulted from market-driven year-over-year increases in dayrates and utilization in each
business segment.
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 include the redemption costs and an allocable portion of the write-off of
unamortized financing costs, original issue discount, and a bond redemption premium.
Interest Expense. Interest expense decreased $5.1 million during 2005 compared to
2004 as a result of 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 increased $2.8 million in 2005 compared to 2004 as a
result of 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
57
to expected state and foreign tax liabilities and items not deductible for federal income tax
purposes.
Net Income. Net income increased $39.9 million during 2005 compared to 2004 due
primarily to the loss on early extinguishment of debt that was recorded during 2004 and the
increases in operating income previously noted.
Liquidity and Capital Resources
Our capital requirements have historically been financed with cash flows from operations,
proceeds from issuances of our debt and common equity securities, and borrowings under
our credit facilities. We require capital to fund on-going operations, vessel construction, retrofit
or conversion, 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 2007.
On September 27, 2006, we entered into a new senior secured revolving credit facility
with an increased current borrowing base of $100.0 million and an accordion feature that
allows for an increase in the size of the facility to an aggregate of $250.0 million in certain
circumstances. The new senior secured revolving credit facility replaced our prior revolving
credit facility. The new facility has a maturity date of September 27, 2011. As of
December 31, 2006, we had $100.0 million of credit immediately available under such new
revolving credit facility.
We have historically 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 market demand for such vessels.
We believe that our current working capital, projected cash flows from operations and
available capacity under our revolving credit facility, will be sufficient to meet our cash
requirements for the foreseeable future and will fund our previously announced vessel
newbuild and conversion programs, including the expansion of such programs announced
since their commencement. Although we expect to continue generating positive working
capital through our operations, events beyond our control, such as declines in expenditures
for exploration, development and production activity, mild winter conditions or a reduction in
domestic consumption of refined petroleum products, 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.
Construction costs related to our MPSV conversion program, Phase 2 of our fourth OSV
newbuild program and our second TTB newbuild program will be funded, in part, with cash on
hand, including a portion of the proceeds from our October 2005 common stock offering and
concurrent senior note offering, our November 2006 convertible senior note offering and
projected cash flows from operations.
58
Cash Flows
Operating Activities. We rely primarily on cash flows from operations to provide working
capital for current and future operations. Cash flows from operating activities were $131.8
million in 2006, $75.8 million in 2005 and $21.4 million in 2004. The increase in operating
cash flows from 2005 to 2006 was the result of substantially improved market conditions in
both of our business segments and the growth of our fleet as a result of acquisitions and new
construction. In addition, our cash flows from operations for 2006 reflect a full period of
revenue contribution from two additional AHTS vessels and five new double-hulled tank
barges that were placed in service during 2005 offset, in part, by higher deferred drydocking
costs. 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 flows from operations should be positively impacted
in 2007 by the partial year of revenue contribution from the three new double-hulled tank
barges that are expected to be delivered on various dates throughout 2007.
As of December 31, 2006, we had federal tax net operating loss carryforwards of
approximately $37.3 million available through 2025 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
future tax benefits may be limited due to U.S. tax laws.
Investing Activities. Net cash used in investing activities was $87.1 million in 2006,
$120.6 million in 2005 and $61.4 million in 2004. Cash utilized in 2006 consisted of
construction costs incurred for our first and second TTB newbuild programs, our MPSV
conversion program, our fourth OSV newbuild program and improvements made to our shore-
based port facility. The cash utilized for investing activities during 2006 was partially offset by
approximately $4.1 million of cash inflows from the sale of a single-hulled tank barge and an
ocean-going tug. Cash invested for 2005 primarily consisted of construction costs incurred for
our first TTB newbuild program and the acquisitions of two foreign-flagged AHTS vessels and
one coastwise tanker, the latter of which is being retrofitted under our MPSV conversion
program. The cash utilized for investing activities during 2005 was partially offset by
approximately $4.3 million of net cash inflows from the sales of two retired single-hulled tank
barges and two ocean-going tugs. Cash invested for 2004 primarily consisted of construction
costs incurred for our first TTB newbuild program and other vessel capital expenditures.
Investing activities for 2007 are anticipated to include costs related to our MPSV conversion
program, our second TTB newbuild program, Phase 2 of our fourth OSV newbuild program,
retrofit and construction of additional vessels, and other capital expenditures, including
discretionary vessel modifications and corporate projects.
Financing Activities. Net cash provided by financing activities was $157.8 million in
2006, $262.2 million in 2005 and $81.4 million in 2004. Net cash provided by financing
activities for 2006 primarily resulted from net cash proceeds generated from our November
2006 convertible senior note offering and the accompanying convertible note hedge, warrant
sale, and stock repurchase transactions Net cash provided by financing activities for 2005
primarily resulted from our October 2005 public offering of 6.1 million shares of our common
stock resulting in net proceeds of approximately $205.4 million. We also received
59
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 6.125% senior notes issued in November 2004.
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 consisted of cash inflows generated by the March 2004 initial public offering of our
common stock and the November 2004 issuance of 6.125% senior notes. These cash inflows
were offset by the repayment of amounts then outstanding on our revolving credit facility in
March 2004 and the November 2004 repurchase of 91% of our outstanding 10.625% senior
notes.
Commitments and Contractual Obligations
The following table sets forth our aggregate contractual obligations as of December 31,
2006 (in thousands).
Contractual Obligations
Total
Less than
1 Year
1-3 Years
3-5 Years
Thereafter
6.125% senior notes (1) . . . . . . . . . . . . . . . . $ 300,000 $
1.625% convertible senior notes (2) . . . . . . .
Interest payments (3)
. . . . . . . . . . . . . . . . . .
Operating leases (4) . . . . . . . . . . . . . . . . . . .
. . . . .
Vessel construction commitments (5)
250,000
220,127
22,628
444,208
22,438
5,318
239,985
— $
—
— $ — $300,000
250,000
—
63,063
12,358
—
67,313
1,380
—
—
67,313
3,572
204,223
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,236,963 $292,264 $299,908 $68,693 $625,421
(3)
(1) Our 6.125% senior notes mature on December 1, 2014 and include $503 of original issue discount.
(2) Our 1.625% convertible senior notes, with an initial interest rate of 1.625% per year, declining to 1.375% beginning on November 15, 2013,
mature on November 15, 2026. Holders of the convertible senior notes may convert their notes at their option pursuant to the factors noted in
the “Debt” section below.
Interest payments relate to our 6.125% senior notes due December 1, 2014 and our 1.625% convertible senior notes due November 15, 2026
with semi-annual
interest payments of $9.2 million payable June 1 and December 1 and $2.0 million payable May 1 and November 1,
respectively. Our semi-annual Interest payments for our convertible senior notes will decline to $1.7 million for interest payments made after
November 15, 2013.
Included in operating leases are commitments for vessel rentals, a shore-based port facility, office space, office equipment and vehicles. See
“—Properties” for additional information regarding our leased office space and other facilities.
(4)
(5) 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.
Debt
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 5, 2005, we
closed an underwritten public offering of 6.1 million shares of our common stock under the
Form S-3 universal shelf for total gross proceeds to us of $215.6 million before underwriting
discounts, commissions and offering expenses.
On October 5, 2005, we used a portion of the net proceeds from the public offering of
common stock and concurrent private placement of additional 6.125% senior notes to pay
down our then-outstanding $21.0 million balance under our prior revolving credit facility due
60
February 2009 to a zero balance. On September 27, 2006, we entered into a new senior
secured revolving credit facility due September 2011 with an increased current borrowing
base of $100.0 million and an accordion feature that allows for an increase in the size of the
facility to an aggregate of $250.0 million in certain circumstances. The new senior secured
revolving credit facility replaced our prior revolving credit facility. As of December 31, 2006,
we had zero drawn and $100.0 million of credit immediately available under such new
revolving credit facility.
As of December 31, 2006, we had outstanding debt of $299.5 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 6.38%. Semi-annual cash interest payments of $9.2 million are due
and payable each June 1 and December 1. The senior notes do not require any payments of
principal prior to their stated maturity of December 1, 2014, but pursuant to the 2004
indenture under which the senior notes were issued, we would be required to make offers to
purchase such senior notes upon the occurrence of specified events, such as certain asset
sales or a change in control.
On November 13, 2006, we completed a private offering of $250.0 million of our 1.625%
convertible senior unsecured notes due 2026, or the convertible notes, to “qualified
institutional buyers” pursuant to Rule 144A under the Securities Act. During the first quarter of
2007, we registered the resale of the convertible notes by the holders thereof. The convertible
notes will initially bear interest at a fixed rate of 1.625% per year, declining to 1.375%
beginning on November 15, 2013, payable semi-annually on May 15 and November 15 of
each year, with the first interest payment payable on May 15, 2007. The convertible notes are
convertible into shares of our common stock at an initial conversion price of approximately
$48.48 per share, upon the occurrence of certain events, including the closing price of our
common stock exceeding 137.5% of the conversion price per share for 20 of the last 30
trading days of any calendar quarter. If, upon the occurrence of certain events, the holders of
the convertible notes exercise the conversion provisions of the convertible notes, we may
need to remit the principal balance of the convertible notes to them in cash as discussed
below. As such, we would classify the entire amount of the convertible notes outstanding as a
current liability in the respective quarter. This evaluation of the classification of amounts
outstanding associated with the convertible notes will occur every calendar quarter. Upon
conversion, a holder will receive, in lieu of shares of common stock, an amount of cash equal
to the lesser of (i) the principal amount of the convertible note, or (ii) the conversion value,
determined in the manner set forth in the indenture governing the convertible notes, of a
number of shares equal to the conversion rate. If the conversion value exceeds the principal
amount of the convertible note on the conversion date, we will also deliver, at our election,
cash or shares of our common stock or a combination of cash and shares of our common
stock with respect to the conversion value upon conversion. If conversion occurs in
connection with a change of control, we may be required to deliver additional shares of our
common stock by increasing the conversion rate with respect to such convertible notes.
We used a portion of the $243.8 million in net proceeds of the convertible notes offering,
along with the $51.9 million in proceeds from the sale of warrants, to fund the $75.8 million
cost of convertible note hedge transactions and the $63.3 million cost to repurchase
approximately 1.8 million shares of our common stock contemporaneously with the closing of
the convertible notes offering. The remaining net proceeds of the convertible notes offering
61
and the warrant transactions of approximately $156.6 million will be used for general
corporate purposes, including possible future acquisitions and additional new vessel
construction.
Holders of the convertible notes may convert their notes prior to the close of business on
the business day before the stated maturity date based on the applicable conversion rate only
under the following circumstances:
• during any calendar quarter beginning after March 31, 2007 (and only during such
calendar quarter), if the closing price of our shares of common stock for at least 20
trading days in the 30 consecutive trading days ending on the last trading day of the
immediately preceding calendar quarter is more than 135% of the conversion price per
share, which is $1,000 divided by the then applicable conversion rate;
• prior to November 15, 2013, during the five business day period after a 10 consecutive
trading day period in which the trading price per $1,000 principal amount of convertible
notes for each day of that period was less than 95% of the product of the closing price
for our shares of common stock for each day of that period and the number of shares
of common stock issuable upon conversion of $1,000 principal amount of the
convertible notes;
•
if the convertible notes have been called for redemption, or
• upon the occurrence of specified corporate transactions, as defined by the convertible
note agreement.
The initial conversion rate is 20.6260 shares of common stock per $1,000 principal
amount of the convertible notes. This is equivalent to an initial conversion price of
approximately $48.48 per share of common stock.
In addition, holders of the convertible notes have the right to require us to purchase all or
a portion of their notes on each of November 15, 2013, November 15, 2016 and
November 15, 2021. Among other conditions, the holders of the convertible notes will be
required to deliver a written purchase notice to a paying agent with such notice being
delivered beginning any time from the opening of business on the date that is 20 business
days prior to the relevant purchase date. The purchase price payable will be equal to 100% of
the principal amount of the notes to be purchased plus any accrued and unpaid interest,
including any additional amounts, to such purchase date.
Prior to November 15, 2011, the convertible notes will not be redeemable. However, on
or after November 15, 2011, but prior to November 15, 2013, we may redeem for cash all or
part of the convertible notes provided that the last reported sale price of shares of our
common stock is greater than or equal to 135% of the conversion price then in effect for at
least 20 trading days within a period of 30 consecutive trading days and proper notice, as
described in the convertible note agreement, has been given to the trustee, holder of the
convertible notes and the paying agent. On or after November 15, 2013, we may redeem for
cash all or part of the convertible notes at any time provided notice is given to the trustee,
holder of the convertible notes and the paying agent.
We are obligated to use reasonable best efforts to cause a shelf registration statement
covering the resale of the convertible notes and the common stock issuable upon the
conversion of the convertible notes to become effective under the Securities Act no later than
62
180 days after the original date of issuance of the notes. We have agreed to keep such shelf
registration statement effective until the earlier of (i) the sale pursuant to the shelf registration
statement of all of the convertible notes and/or shares of common stock issuable upon
conversion of the convertible notes, and (ii) the date when the holders, other than the holders
that are our affiliates, of the convertible notes and the common stock issuable upon
conversion or the convertible notes are able to sell all such securities immediately without
restriction pursuant to the volume limit provisions of Rule 144(k) under the Securities Act or
any successor rule thereto or otherwise. We will be required to pay additional interest, subject
to some limitations, to the holders of the convertible notes if we fail to comply with our
obligations to keep such shelf registration statement effective for the specified time period.
For additional information with respect to our new revolving credit facility, our 6.125%
senior notes and our 1.625% convertible senior notes, please refer to Note 6 of our
consolidated financial statements included herein.
Capital Expenditures and Related Commitments
The following table sets forth the amounts incurred, before construction period interest,
during the year ended December 31, 2006 and since each program’s inception, respectively,
as well as the estimated total project costs for each of our current expansion programs (in
millions):
Growth Capital Expenditures:
Active:
MPSV conversion program (2) . . . . . . . . . . .
TTB newbuild program #2 (3) . . . . . . . . . . . .
OSV newbuild program #4 (Phase 2) (4) . . .
Pending:
OSV newbuild program #4 (Phase 1) (4) . . .
Total: . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TBD – to be determined
For the Year
Ended
December 31, 2006
Incurred
Since
Inception
Estimated
Program
Totals (1)
Projected
Delivery
Dates (1)
$27.3
15.7
22.1
—
$65.1
$39.2
19.4
22.1
$150.0
70.0
305.0
1Q2008-2Q2008
1Q2007-4Q2007
1Q2008-1Q2010
—
170.0
TBD
$80.7
$695.0
(1) Estimated Program Totals and Projected Delivery Dates are based on internal estimates and are subject to change due to delays and possible
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, component equipment or skilled labor. All of the above historical and budgeted capital expenditure project amounts for
our active and pending newbuild and conversion programs represent estimated cash outlays and do not include any allocation of capitalized
construction period interest. Projected delivery dates correspond to existing vessels that are currently contracted with shipyards for
construction, retrofit or conversion.
(2)
(3)
In May 2005, we announced a conversion program to retrofit two coastwise sulfur tankers into U.S.-flagged, new generation 370 class MPSVs.
We have contracted for the retrofit and conversion of these two vessels at a domestic shipyard. 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 are being converted and will be renamed upon delivery under the
MPSV conversion program.
In September 2005, we announced our second TTB newbuild program, which is expected to be comprised of multiple new double-hulled tank
barges with an aggregate 400,000 barrels of additional carrying capacity and related ocean-going tugs to be used as power units for new and
existing barges. On August 3, 2006, we announced an expansion to the scope and specifications of the vessels to be constructed under the
second TTB newbuild program, including the potential construction of additional tugs. With nearly all of our barges currently operating under
time charters rather than COAs, we now plan to transition our TTB fleet toward a 1:1 tug-to-barge ratio. We are currently committed under
vessel construction contracts with one domestic shipyard to build three 60,000-barrel double-hulled barges under this program and another
63
domestic shipyard for the retrofit of four 3,000 horsepower ocean-going tugs that were purchased in July 2006. The aggregate cost to acquire
and retrofit these four tugs is included in the total project budget noted above. The precise number, specifications and delivery dates of the
remaining vessels to be constructed or acquired and retrofitted under this program will be finalized as decisions are reached to commence
implementation of the remainder of the program based on certain internal milestones, including the negotiation of acceptable shipyard
contracts.
(4)
In September 2005, we announced our fourth OSV newbuild program. Phase 1 of our fourth OSV newbuild program was initially comprised of
an innovative high-end proprietary class of vessel that would add approximately 20,000 deadweight tons of capacity at an aggregate cost of
$170.0 million. However, Phase 1 has been deferred until more favorable shipyard conditions materialize for the construction of the type of
vessels contemplated under this phase. In February 2006, we announced Phase 2 of our fourth OSV newbuild program, which is now
expected to add, in the aggregate, approximately 38,000 deadweight tons of capacity to our OSV fleet. We are now committed under vessel
construction contracts with two domestic shipyards to build four 240 ED class OSVs and nine 250 EDF class OSVs, respectively, under Phase
2 of this program.
During calendar 2007, we expect to drydock a total of eleven OSVs, four tugs, and three
tank barges for recertification and/or discretionary vessel enhancements, and to incur
non-vessel capital expenditures related primarily to information technology initiatives,
transportation assets and corporate projects. The following table summarizes the costs
incurred for those purposes for the years ended December 31, 2006, 2005 and 2004 and a
forecast for 2007 (in millions and prior to construction period interest, as applicable):
Maintenance Capital Expenditures:
Deferred drydocking charges . . . . . . . . . . . . . . . . . . . . . .
Other vessel capital improvements . . . . . . . . . . . . . . . . . .
Miscellaneous non-vessel additions . . . . . . . . . . . . . . . . .
Year Ended December 31,
2007
Forecast
$14.7
7.0
7.2
2006
Actual
$12.9
8.4
5.1
2005
Actual
$ 6.8
4.0
2.6
2004
Actual
$ 8.5
8.8
1.0
Total:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$28.9
$26.4
$13.4
$18.3
Inflation
To date, general inflationary trends have not had a material effect on our operating
revenues or expenses.
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,” “might,” “plan,” “potential,”
“predict,” “forecast”, “project,” “should” or “will” or other comparable words or the negative of
such words. When you consider our forward-looking statements, you should keep in mind the
risk factors and other cautionary statements we include in this Annual Report on Form 10-K.
In addition to the risk factors specified elsewhere in this Annual Report on Form 10-K, the
risks, uncertainties and assumptions to which these forward-looking statements may be
subject are:
• activity levels in the energy markets;
•
changes in oil and natural gas prices;
64
•
•
increases in supply of vessels in our markets;
the effects of competition;
• our ability to complete vessels under construction or conversion programs without
significant delays or cost overruns;
• our ability to integrate acquisitions successfully;
• our ability to maintain adequate levels of insurance;
•
•
•
•
•
changes in demand for refined petroleum products or in methods of delivery;
loss of existing customers and our ability to attract new customers;
changes in laws;
changes in domestic and international economic and political conditions;
changes in foreign currency exchange rates;
• adverse domestic or foreign tax consequences;
• uncollectible accounts receivable or longer collection periods on such accounts;
•
•
•
•
•
•
financial stability of our customers;
retention and new hiring of skilled employees and our management;
laws governing the health and safety of our employees working offshore;
catastrophic marine disasters;
collisions or allisions;
shipyard delays in drydockings;
• adverse weather and sea conditions;
• oil and hazardous substance spills;
• war and terrorism;
• acts of God;
• our ability to finance our operations and capital requirements on acceptable terms and
access the debt and equity markets;
• our ability to recruit and retain qualified crew members;
• our ability to charter our vessels on acceptable terms; and
• our success at managing these risks.
Our forward-looking statements are only predictions based on our expectations at the
time of such statements. 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.
65
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, other than the convertible note hedge and
warrant transactions entered into concurrently with our convertible note offering in November
2006. Such transactions were entered into to mitigate the potential dilutive effect of the
conversion feature of the convertible notes on our common stock.
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 6.125% senior
notes and 1.625% convertible 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 6.125% 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 outstanding 1.625% convertible senior notes accrue
interest at the rate of 1.625%, which will decline to 1.375% beginning on November 15, 2013,
and mature on November 15, 2026 and the effective interest rate on such notes is 2.04%. 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
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-24 of this Annual Report on Form 10-K.
66
Item 9—Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures
None
Item 9A—Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures
(as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report.
Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of such period, our disclosure controls and procedures were
effective to ensure that information required to be disclosed by us in reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission’s rules and forms, and
that such information is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosures.
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 Rule13(a)-15(f) or Rule15d-
15(f) under the Exchange Act. 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, 2006, 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, 2006.
67
Ernst & Young LLP, an independent registered public accounting firm, issued an
attestation report on our management’s assessment of the effectiveness of our internal
control over financial reporting as of December 31, 2006.
There were no changes in our internal controls over financial reporting that occurred
during the quarter ended December 31, 2006 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
68
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, 2006, 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 Services 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, 2006, 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, 2006, based on the COSO criteria.
69
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, 2006 and 2005, 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, 2006, of Hornbeck Offshore Services, Inc. and our report dated
March 1, 2007, expressed an unqualified opinion thereon.
Ernst & Young LLP
New Orleans, Louisiana
March 1, 2007
Item 9B—Other Information
Effective Income Tax Rate
In connection with our 2006 year-end financial statement closing process, we completed
our evaluation of the accounting treatment of the tax benefits related to our November 2006
convertible note offering and concurrent convertible note hedge and warrant transactions. We
are accounting for the tax benefits of our recent financing through the balance sheet, rather
than the income statement. As a result, our effective tax rate for 2006 is 36.3% and our
effective tax rate for 2007 is expected to be 36.5%. For a further discussion of our accounting
treatment of these tax benefits, see Notes 6 and 9 of the notes to our consolidated financial
statements.
70
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 2007 proxy statement anticipated to be filed with the Securities and
Exchange Commission within 120 days after December 31, 2006.
Item 11—Executive Compensation
The information required under this item is incorporated by reference herein from the
Company’s definitive 2007 proxy statement anticipated to be filed with the Securities and
Exchange Commission within 120 days after December 31, 2006.
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 2007 proxy statement anticipated to be filed with the Securities and
Exchange Commission within 120 days after December 31, 2006.
Item 13—Certain Relationships and Related Transactions
The information required under this item is incorporated by reference herein from the
Company’s definitive 2007 proxy statement anticipated to be filed with the Securities and
Exchange Commission within 120 days after December 31, 2006.
Item 14—Principal Accounting Fees and Services
The information required under this item is incorporated by reference herein from the
Company’s definitive 2007 proxy statement anticipated to be filed with the Securities and
Exchange Commission within 120 days after December 31, 2006.
71
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-31 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
(incorporated by reference to Exhibit 3.1 to the Company’s Form 10-Q for the
quarter 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 —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 filed November 24,
2004).
4.2 —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).
4.3 —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 filed October 7, 2005).
4.4 —Specimen stock certificate for the Company’s common stock, $0.01 par value
(incorporated by reference to the Company’s amended Registration Statement on
Form 8-A/A dated September 3, 2004).
4.5 —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
72
Exhibit
Number
Description of Exhibit
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).
4.6 —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).
4.7 —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).
4.8 —Indenture dated as of November 13, 2006 by and among Hornbeck Offshore
Services, Inc., the guarantors named therein, and Wells Fargo Bank, National
Association, as Trustee (including form of 1.625% Convertible Senior Notes due
2026) (incorporated by reference to Exhibit 4.1 to the Company’s Current Report
on Form 8-K filed November 13, 2006).
4.9 —Registration Rights Agreement dated November 13, 2006 by and among Hornbeck
Offshore Services, Inc., the guarantors named therein, and Jefferies & Company,
Inc. and Bear, Stearns & Co. Inc. (incorporated by reference to Exhibit 4.2 to the
Company’s Current Report on Form 8-K filed November 13, 2006).
4.10 —Confirmation of OTC Warrant Confirmation dated as of November 7, 2006 by and
between Hornbeck Offshore Services, Inc. and Jefferies International Limited
(incorporated by reference to Exhibit 4.6 to the Company’s Current Report on
Form 8-K filed November 13, 2006).
4.11 —Confirmation of OTC Warrant Confirmation dated as of November 7, 2006 by and
between Hornbeck Offshore Services, Inc and Bear, Stearns International Limited,
as supplemented on November 9, 2006 (incorporated by reference to Exhibit 4.7 to
the Company’s Current Report on Form 8-K filed November 13, 2006).
4.12 —Confirmation of OTC Warrant Confirmation dated as of November 7, 2006 by and
between Hornbeck Offshore Services, Inc. and AIG-FP Structured Finance
(Cayman) Limited, as supplemented on November 9, 2006 (incorporated by
reference to Exhibit 4.8 to the Company’s Current Report on Form 8-K filed
November 13, 2006).
10.1 —Facilities Use Agreement effective January 1, 2006, and incorporated
Indemnification Agreement and amendments thereto (incorporated by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed February 21,
2006).
10.2† —Director & Advisory Director Compensation Policy, effective February 14, 2006
(incorporated by reference to Exhibit 10.15 to the Company’s Form 10-K for the
period ended December 31, 2005).
73
Exhibit
Number
Description of Exhibit
10.3† —Second Amended and Restated Hornbeck Offshore Services, Inc. Incentive
Compensation Plan, effective May 2, 2006 (incorporated by reference to Exhibit
10.1 to the Company’s Current Report on Form 8-K filed May 4, 2006).
10.4† —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).
10.5† —Employment Agreement dated effective January 1, 2001 by and between Carl G.
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).
10.6† —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).
10.7† —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).
10.8† —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).
10.9† —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).
10.10† —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 to the Company’s Form 10-K for the period ended
December 31, 2004).
10.11† —Second Amendment to Employment Agreement dated effective March 10, 2005 by
and between Carl G. Annessa and the Company (incorporated by reference to
Exhibit 10.9 to the Company’s Form 10-K for the period ended December 31,
2004).
10.12† —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 10.10 to the Company’s Form 10-K for the period ended December 31,
2004).
10.13† —Third Amendment to Senior Employment Agreement dated effective March 31,
2006 by and between Todd M. Hornbeck and the Company (incorporated by
74
Exhibit
Number
Description of Exhibit
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed
April 4, 2006).
10.14† —Third Amendment to Employment Agreement dated effective March 31, 2006 by
and between Carl G. Annessa and the Company (incorporated by reference to
Exhibit 10.2 to the Company’s Current Report on Form 8-K filed April 4, 2006).
10.15† —Third Amendment to Employment Agreement dated effective March 31, 2006 by
and between James O. Harp, Jr. and the Company (incorporated by reference to
Exhibit 10.3 to the Company’s Current Report on Form 8-K filed April 4, 2006).
10.16 —Senior Secured Revolving Credit Facility dated effective September 27, 2006 by
and among the Company and two of its subsidiaries, Hornbeck Offshore Services,
LLC and Hornbeck Offshore Transportation, LLC, and Wells Fargo Bank, N.A., as
administrative agent, Comerica Bank, as syndication agent, and the lenders party
thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report
on Form 8-K filed October 3, 2006).
10.17 —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).
10.18 —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 quarter ended September 30, 2003).
10.19† —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).
10.20† —Form of Director 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).
10.21† —Form of Employee 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).
10.22 —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).
10.23† —Form of Executive Restricted Stock Agreement (incorporated by reference to
Exhibit 10.24 to the Company’s Form 10-K for the period ended December 31,
2005).
10.24† —Form of Director Restricted Stock Agreement (incorporated by reference to Exhibit
10.25 to the Company’s Form 10-K for the period ended December 31, 2005).
10.25† —Form of Employee Restricted Stock Agreement (incorporated by reference to
Exhibit 10.26 to the Company’s Form 10-K for the period ended December 31,
2005).
75
Exhibit
Number
Description of Exhibit
10.26† —Form of Restricted Stock Unit Agreement for Executive Officers (Time Vesting)
(incorporated by reference to Exhibit 10.9 to the Company’s Form 10-Q for the
quarter ended September 30, 2006).
10.27† —Form of Restricted Stock Unit Agreement for Non-Employee Directors (Time
Vesting) (incorporated by reference to Exhibit 10.10 to the Company’s Form 10-Q
for the quarter ended September 30, 2006).
10.28† —Form of Restricted Stock Unit Agreement for Executive Officers (Performance
Based) (incorporated by reference to Exhibit 10.12 to the Company’s Form 10-Q
for the quarter ended September 30, 2006).
10.29 —Purchase Agreement dated November 7, 2006 by and among Hornbeck Offshore
Services, Inc., the guarantors named therein, and Jefferies & Company, Inc. and
Bear, Stearns & Co. Inc. as representatives of the Initial Purchasers named in
Schedule I thereto (incorporated by reference to Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed November 13, 2006).
10.30 —Confirmation of OTC Convertible Note Hedge dated as of November 7, 2006 by
and between Hornbeck Offshore Services, Inc. and Jefferies International Limited
(incorporated by reference to Exhibit 4.3 to the Company’s Current Report on
Form 8-K filed November 13, 2006).
10.31 —Confirmation of OTC Convertible Note Hedge dated as of November 7, 2006 by
and between Hornbeck Offshore Services, Inc. and Bear, Stearns International
Limited, as supplemented on November 9, 2006 (incorporated by reference to
Exhibit 4.4 to the Company’s Current Report on Form 8-K filed November 13,
2006).
10.32 —Confirmation of OTC Convertible Note Hedge dated as of November 7, 2006 by
and between Hornbeck Offshore Services, Inc. and AIG-FP Structured Finance
(Cayman) Limited, as supplemented on November 9, 2006 (incorporated by
reference to Exhibit 4.5 to the Company’s Current Report on Form 8-K filed
November 13, 2006).
*21
—Subsidiaries of the Company
*23.1 —Consent of Ernst & Young, LLP
*31.1 —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.
* Filed herewith.
† Compensatory plan or arrangement under which executive officers or directors of the Company may participate.
76
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS OF HORNBECK OFFSHORE SERVICES, INC.:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2006 and 2005
Consolidated Statements of Operations for Each of the Three Years in the Period Ended December 31, 2006
Consolidated Statements of Changes in Stockholders’ Equity for Each of the Three Years in the Period Ended
December 31, 2006
Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended December 31, 2006
Notes to Consolidated Financial Statements
Page
F-2
F-3
F-4
F-5
F-6
F-7
F-1
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, 2006 and 2005, 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, 2006. 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 examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Hornbeck Offshore Services, Inc. and
subsidiaries at December 31, 2006 and 2005, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended December 31, 2006, in
conformity with U.S. generally accepted accounting principles.
As discussed in Note 8 to the consolidated financial statements, in 2006 the Company
adopted the provisions of FASB No. 123 (revised 2004) regarding share-based payments.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Hornbeck Offshore
Services, Inc.’s internal control over financial reporting as of December 31, 2006, based on
criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2007,
expressed an unqualified opinion thereon.
Ernst & Young LLP
New Orleans, Louisiana
March 1, 2007
F-2
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
December 31,
2006
2005
Current assets:
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 474,261 $271,739
Accounts receivable, net of allowance for doubtful accounts of $745 and
$495, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
46,133
6,593
35,990
8,077
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
526,987
315,806
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred charges, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
531,951
2,628
31,554
5,260
462,041
2,628
15,904
296
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,098,380 $796,675
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued payroll and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18,472 $ 15,709
1,653
6,590
24
1,359
2,314
7,859
7,693
1,388
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
37,726
25,335
Long-term debt, net of original issue discount of $503 and $551,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
549,497
54,480
1,804
299,449
41,558
838
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
643,507
367,180
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; 25,561 and
27,151 shares issued and outstanding, respectively . . . . . . . . . . . . . . . .
Additional paid-in capital
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
255
321,909
132,558
151
271
372,303
56,843
78
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
454,873
429,495
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . $1,098,380 $796,675
The accompanying notes are an integral part of these consolidated statements.
F-3
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year Ended December 31,
2006
2005
2004
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $274,551 $182,586 $132,261
Costs and expenses:
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative expenses . . . . . . . . . . . . . . . . . . . . .
95,591
24,070
7,951
28,388
66,910
19,954
7,316
20,327
156,000
114,507
Gain on sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,854
1,893
58,520
17,408
5,727
14,759
96,414
65
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
120,405
69,972
35,912
Other income (expense):
Loss on early extinguishment of debt . . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
16,074
(17,675)
70
(1,698)
3,178
(12,558)
87
(22,443)
356
(17,698)
70
(1,531)
(10,991)
(39,715)
Income (loss) before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
118,874
43,159
58,981
21,538
(3,803)
(1,320)
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 75,715 $ 37,443 $ (2,483)
Basic earnings (loss) per common share . . . . . . . . . . . . . . . . . . . . . . . $
2.81 $
1.67 $
(0.13)
Diluted earnings (loss) per common share . . . . . . . . . . . . . . . . . . . . . $
2.76 $
1.64 $
(0.13)
Weighted average basic shares outstanding . . . . . . . . . . . . . . . . . . . .
26,966
22,369
19,330
Weighted average diluted shares outstanding . . . . . . . . . . . . . . . . . .
27,461
22,837
19,330
The accompanying notes are an integral part of these consolidated statements.
F-4
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands)
Accumulated
Other
Comprehensive
Income
Total
Stockholders’
Equity
Common Stock
Shares Amount
Balance at January 1, 2004 . . . . . . . . . . . . . .
Initial public offering of common stock . . . . .
Other shares issued . . . . . . . . . . . . . . . . . . . .
Comprehensive income:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . . . . . . . .
14,528
6,126
168
—
—
$145
61
2
—
—
Total comprehensive income . . . . . . . . . . . .
Additional
Paid-In
Capital
$ 90,351
71,743
1,170
Retained
Earnings
$ 21,883
—
—
—
—
(2,483)
—
$ 16
—
—
—
16
Balance at December 31, 2004 . . . . . . . . . . .
20,822
$208
$163,264
$ 19,400
$ 32
Public offering of common stock . . . . . . . . . .
Other shares issued . . . . . . . . . . . . . . . . . . . .
Comprehensive income:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . . . . . . . .
6,100
229
—
—
61
2
—
—
205,058
3,981
—
—
—
—
37,443
—
—
—
—
46
Total comprehensive income . . . . . . . . . . . .
$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
Other shares issued . . . . . . . . . . . . . . . . . . . .
Repurchase of common stock . . . . . . . . . . . .
. . .
Purchase of convertible note hedge, net
Sale of common stock warrants . . . . . . . . . .
Stock-based compensation expense . . . . . .
Comprehensive income:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . . . . . . . .
205
(1,795)
—
—
—
—
—
2
(18)
—
—
—
—
—
4,135
(63,278)
(48,567)
51,916
5,400
—
—
—
—
—
—
75,715
—
—
—
—
—
—
73
Total comprehensive income . . . . . . . . . . . .
4,137
(63,296)
(48,567)
51,916
5,400
75,715
73
75,788
Balance at December 31, 2006 . . . . . . . . . . .
25,561
$255
$321,909
$132,558
$151
$454,873
The accompanying notes are an integral part of these consolidated statements.
F-5
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
2006
2005
2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 75,715 $ 37,443 $
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for bad debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity income from investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on early extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred drydocking charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued liabilities and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest
24,070
7,951
5,196
250
41,760
1,031
(1,854)
(67)
—
(10,512)
(2,634)
(12,881)
(6,727)
9,831
661
19,954
7,316
—
88
21,538
758
(1,893)
(143)
1,698
(13,999)
(2,771)
(6,827)
12,216
1,166
(738)
(2,483)
17,408
5,727
—
(47)
(1,320)
1,532
(65)
(87)
22,443
(5,437)
(5,740)
(8,530)
1,130
2,226
(5,352)
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
131,790
75,806
21,405
CASH FLOWS FROM INVESTING ACTIVITIES:
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 sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vessel capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-vessel capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(13,793)
(2,385)
(9,179)
(52,368)
4,074
(8,420)
(5,067)
(15,795)
(30,555)
(58,573)
(13,484)
4,347
(3,979)
(2,578)
(6,500)
(3,500)
(39,191)
(2,433)
—
(8,786)
(967)
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(87,138)
(120,617)
(61,377)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible senior notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment for purchase of convertible note hedge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of common stock warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments for repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of senior notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of senior notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redemption premium on retirement of debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments for bond refinancing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments on borrowings under credit facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross proceeds from public offerings of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments for public offering costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash proceeds from other shares issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
250,000
(75,792)
51,916
(63,296)
—
—
—
—
—
(7,608)
—
—
2,577
—
—
—
—
—
—
—
—
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
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
157,797
262,202
81,358
Effects of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
73
47
16
Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
202,522
271,739
217,438
54,301
41,402
12,899
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $474,261 $ 271,739 $ 54,301
SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES:
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,537 $ 17,888 $ 24,023
Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,398 $
— $
—
The accompanying notes are an integral part of these consolidated statements.
F-6
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 logistics support and specialty services to the offshore oil and gas
exploration and production industry, primarily in the U.S. Gulf of Mexico, or GoM, 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, GoM 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 certain of its tank barges to clients under contracts of
affreightment, or COAs, 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.
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.
Accounts Receivable
Accounts receivable consists of trade receivables net of reserves, amounts to be rebilled
to customers and interest receivables.
F-7
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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
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
3-28 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. 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.
Deferred charges also include prepaid lease expenses related to the Company’s shore-
based port facility. Such prepaid lease expenses are being amortized on a straight-line basis
over the effective remaining term of the lease.
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.
F-8
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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
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 using historical losses, current economic conditions and individual
evaluations of each customer to make adjustments to the allowance for doubtful accounts.
The following table represents the allowance for doubtful accounts (in thousands):
Balance, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes to provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2006
2005
2004
$495
250
$745
$407
88
$495
$454
(47)
$407
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, taxes, depreciation and amortization (EBITDA) and earnings per share. Such fair
value calculations have not resulted in the impairment of goodwill.
Stock-Based Compensation
Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-
Based Payment,” or FAS 123R, using the modified prospective method. Prior to the adoption
of FAS 123R, the Company accounted for stock option grants in accordance with APB 25,
using the intrinsic value method, and accordingly, no compensation expense was recorded for
stock option grants for periods prior to 2006. Under the modified prospective method, FAS
123R applies to new awards and to awards that were outstanding on January 1, 2006 or were
repurchased or cancelled after the FAS 123R-required effective date. Additionally,
compensation expense for the portion of awards for which the required service has not been
rendered that are outstanding as of January 1, 2006 shall be recognized as the service is
F-9
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
rendered on or after January 1, 2006. The compensation expense for that portion of awards
shall be based on the grant-date fair value estimated in accordance with the original
provisions of FAS 123, and compensation expense for all share-based payments granted
subsequent to January 1, 2006, shall be based on the grant-date fair value estimated in
accordance with the provisions of FAS 123R. Prior periods were not restated to reflect the
impact of adopting the new standard.
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
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 2006,
2005 or 2004.
Recent Accounting Pronouncements
In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes—an Interpretation of FASB Statement No. 109”, or FIN 48, which clarifies the
accounting and disclosure for uncertain tax positions in accordance with SFAS No. 109,
“Accounting for Income Taxes.” FIN 48 addresses the recognition, measurement,
classification and disclosure issues related to the recording of financial statement benefits for
income tax positions that have some degree of uncertainty. This interpretation is effective as
of the beginning of an entity’s first fiscal year that begins after December 15, 2006. The
Company is currently evaluating the impact of FIN 48 on the Company’s future operating
results.
F-10
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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
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,
2006
2005
2004
Net income (loss)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$75,715
$37,443
$ (2,483)
Weighted average number of shares of common stock
outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add: Net effect of dilutive stock options (1) (2) . . . . . . . . . . .
26,966
495
22,369
468
19,330
—
Adjusted weighted average number of shares of common
stock outstanding (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27,461
22,837
19,330
Earnings (loss) per common share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2.81
$ 1.67
$ (0.13)
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2.76
$ 1.64
$ (0.13)
(1) As of December 31, 2006, 2005 and 2004, stock options representing rights to acquire 323, 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.
(2) For the year ended December 31, 2006, the 1.625% convertible senior notes were not dilutive, as the average price of the
Company’s stock was less than the effective conversion price of the Notes (see note 6).
(3) Dilutive restricted stock is expected to fluctuate from quarter to quarter depending on the relative stock price performance
ranking among the Company’s peers. See Note 4 for further information regarding certain of the Company’s restricted stock
awards.
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 401(k) plan. During the years ended December 31, 2006,
F-11
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
2005 and 2004, the Company made contributions to the 401(k) plan of approximately $3.2
million, $0.6 million and $0.5 million, respectively.
5. Property, Plant and Equipment
Property, plant and equipment consisted of the following (in thousands):
Tugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tank barges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Offshore supply vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-vessel related property, plant and equipment . . . . . . . .
Less: Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . .
December 31,
2006
2005
$ 54,505
135,895
322,831
16,091
(94,042)
$ 37,911
133,402
317,860
9,728
(71,805)
435,280
427,096
Construction in progress (vessel and non-vessel) . . . . . . . .
96,671
34,945
$531,951
$462,041
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 of 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
F-12
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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
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 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.
Pursuant to registered exchange offers, the new senior notes and additional notes issued
in November 2004 and October 2005 that were initially sold pursuant to private placements
were exchanged for 6.125% senior notes with substantially the same terms, except that the
issuance of the senior notes issued in the exchange offers was 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 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.
F-13
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Convertible Senior Notes
On November 13, 2006, the Company issued in a private placement $250.0 million of
convertible senior notes due 2026, or the convertible notes, to qualified institutional buyers
pursuant to Rule 144A under the Securities Act. During the first quarter of 2007, the Company
registered the resale of the convertible notes by the holders thereof. The convertible notes
bear interest at an annual rate of 1.625%, declining to 1.375% beginning on November 15,
2013, payable semi-annually on May 15 and November 15 of each year, with the first interest
payment payable on May 15, 2007. The convertible notes are convertible into shares of the
Company’s common stock based on the applicable conversion rate only under the following
circumstances:
• during any calendar quarter beginning after March 31, 2007 (and only during such
calendar quarter), if the closing price of the Company’s shares of common stock for at
least 20 trading days in the 30 consecutive trading days ending on the last trading day
of the immediately preceding calendar quarter is more than 135% of the conversion
price per share, which is $1,000 divided by the then applicable conversion rate;
• prior to November 15, 2013, during the five business day period after a 10 consecutive
trading day period in which the trading price per $1,000 principal amount of senior
subordinated convertible notes for each day of that period was less than 95% of the
product of the closing price for the Company’s shares of common stock for each day
of that period and the number of shares of common stock issuable upon conversion of
$1,000 principal amount of the convertible notes;
•
if the convertible notes have been called for redemption, or
• upon the occurrence of specified corporate transactions, as defined by the convertible
note agreement.
The initial conversion rate of 20.6260 shares per $1,000 principal amount of notes, which
corresponds to a conversion price of approximately $48.48 per share, is based on the last
reported sale price of the Company’s common shares on The New York Stock Exchange of
$35.26 on November 7, 2006. As of December 31, 2006, the Company’s closing share price
was $35.70.
The convertible 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 convertible 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.
If, upon the occurrence of certain events, the holders of the convertible notes exercise
the conversion provisions of the convertible notes, the Company may need to remit the
F-14
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
principal balance of the convertible notes to them in cash as discussed below. In such case,
the Company would classify the entire amount of the outstanding convertible notes as a
current liability in the respective quarter. This evaluation of the classification of amounts
outstanding associated with the convertible notes will occur every calendar quarter. Upon
conversion, a holder will receive, in lieu of common stock, an amount of cash equal to the
lesser of (i) the principal amount of the convertible note, or (ii) the conversion value,
determined in the manner set forth in the indenture governing the convertible notes, of a
number of shares equal to the conversion rate. If the conversion value exceeds the principal
amount of the convertible note on the conversion date, the Company will also deliver, at the
Company’s election, cash or common stock or a combination of cash and common stock with
respect to the conversion value upon conversion. If conversion occurs in connection with a
change of control, the Company may be required to deliver additional shares of its common
stock by increasing the conversion rate with respect to such convertible notes.
In connection with the sale of the convertible notes, the Company entered into
convertible note hedge transactions with respect to its common stock with Jefferies
International Limited, Bear, Stearns International Limited and AIG-FP Structured Finance
(Cayman) Limited, or the counterparties. Each of the convertible note hedge transactions
involves the purchase of call options with exercise prices equal to the conversion price of the
convertible notes, and are intended to mitigate dilution to the Company’s stockholders upon
the potential future conversion of the convertible notes. Under the convertible note hedge
transactions, the counterparties are required to deliver to the Company the number of shares
of the Company’s common stock that the Company is obligated to deliver to the holders of the
convertible notes with respect to the conversion. The convertible note hedge transactions
cover approximately the same number of shares of the Company’s common stock underlying
the convertible notes, subject to customary anti-dilution adjustments, at a strike price of
approximately $48.48 per share of common stock. The convertible note hedge transactions
expire at the close of trading on November 15, 2013, which is the date that the convertible
notes are first putable by the convertible noteholders, although the counterparties will have
ongoing obligations with respect to convertible notes properly converted on or prior to that
date of which the counterparty has been timely notified.
The Company also entered into separate warrant transactions, whereby the Company
sold to the counterparties warrants to acquire approximately the same number of shares of its
common stock underlying the convertible notes, subject to customary anti-dilution
adjustments, at a strike price of $62.59 per share of common stock, which represented a
77.5% premium over the closing price of the Company’s shares of common stock on
November 7, 2006. If the counterparties exercise the warrants, the Company will have the
option to settle in cash or shares of its common stock equal to the difference between the
then market price and strike price. The convertible note hedge and warrant transactions are
separate and legally distinct instruments that bind the Company and the counterparties and
have no binding effect on the holders of the convertible notes.
Pursuant to Emerging Issues Task Force (EITF) Issue No. 90-19, “Convertible Bonds
with Issuer Option to Settle for Cash upon Conversion,” (EITF 90-19), EITF Issue No. 00-19
F-15
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
“Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock,” (EITF 00-19), and EITF Issue No. 01-06, “The Meaning of Indexed to
a Company’s Own Stock” (EITF 01-06), the convertible notes are accounted for as convertible
debt in the accompanying consolidated balance sheet and the embedded conversion option
in the convertible notes has not been accounted for as a separate derivative. In addition,
pursuant to EITF 00-19 and EITF 01-6, the convertible note hedge and warrant transactions
are accounted for as equity transactions and, therefore, the payment associated with the
issuance of the convertible note hedge and the proceeds received from the issuance of the
warrants were recorded as a charge and an increase, respectively, in additional paid-in
capital in stockholders’ equity as separate equity transactions.
For income tax reporting purposes, the Company has elected to integrate the convertible
notes and the convertible note hedge transactions. Integration of the convertible note hedge
with the convertible notes creates an in-substance original issue debt discount for income tax
reporting purposes and, therefore, the cost of the convertible note hedge will be accounted for
as interest expense over the term of the convertible notes for income tax reporting purposes.
The associated income tax benefits will be recognized in the period that the deduction is
taken for income tax reporting purposes as an increase in additional paid-in capital in
stockholders’ equity. The Company has also treated the proceeds from the sale of warrants
as a non-taxable increase in additional paid-in capital in stockholders’ equity.
The Company is obligated to use reasonable best efforts to cause a shelf registration
statement covering the resale of the convertible notes and the common stock issuable upon
the conversion of the convertible notes to become effective under the Securities Act no later
than 180 days after the original date of issuance of the notes. The Company has agreed to
keep such shelf registration statement effective until the earlier of (i) the sale pursuant to the
shelf registration statement of all of the convertible notes and/or shares of common stock
issuable upon conversion of the convertible notes, and (ii) the date when the holders, other
than the holders that are the Company’s affiliates, of the convertible notes and the common
stock issuable upon conversion or the convertible notes are able to sell all such securities
immediately without restriction pursuant to the provisions of Rule 144(k) under the Securities
Act or any successor rule thereto or otherwise. The Company will be required to pay
additional interest, subject to certain limitations, to the holders of the convertible notes if the
Company fails to comply with its obligations to keep such shelf registration statement effective
for the specified time period. The additional interest will accrue from the date on which any
registration statement default occurs to the date such default has been cured. As of
December 31, 2006, the Company was not in default of its shelf registration requirements set
forth in the convertible note agreement and has not accrued for such additional interest.
The Company used a portion of the $243.8 million in net proceeds of the offering, along
with the $51.9 million in proceeds from the sale of warrants, to fund the $75.8 million cost of
convertible note hedge transactions and the $63.3 million cost to repurchase approximately
1.8 million shares of its common stock contemporaneously with the closing of the convertible
notes offering. The remaining net proceeds of the convertible notes offering and the warrant
F-16
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
transactions of approximately $156.6 million will be used for general corporate purposes,
including possible future acquisitions and additional new vessel construction.
Revolving Credit Facility
In September 2006, the Company closed on a new five-year senior secured revolving
credit facility that increased the borrowing base, extended the maturity, lowered the interest
rate and improved the financial flexibility of the covenant package of the Company’s prior
revolving credit facility. The new revolving credit facility has increased the Company’s
borrowing base from $60.0 million to $100.0 million, with an accordion feature that allows for
the potential expansion of the facility up to an aggregate of $250.0 million. The new facility
has also extended the maturity of the prior facility from February 2009 to September 2011.
With the new facility, the Company has the option of borrowing at a variable rate of
interest equal to either (i) the greater of the Prime Rate or the Federal Funds Effective Rate
plus 1⁄1 2⁄⁄ of 1% or (ii) the London Interbank Offered Rate, or LIBOR; plus in each case an
applicable margin. The applicable margin for each base rate is determined by a pricing grid,
which is based on the Company’s leverage ratio, as defined in the credit agreement
governing the new revolving credit facility. The applicable LIBOR margin for the new facility
ranges from 50 to 150 basis points, which is substantially less than the comparable range of
the prior facility of 150 to 350 basis points. Unused commitment fees are payable quarterly at
the annual rate of 17.5 to 30.0 basis points of the unused portion of the borrowing base of the
new revolving credit facility, based on the defined leverage ratio.
As of December 31, 2006, the Company had no balance outstanding under the new
revolving credit facility and had $100.0 million of credit immediately available under such
facility. As of that date, eight offshore supply vessels and four ocean-going tugs and
associated personalty collateralized the new facility. The new revolving credit facility is
available for working capital and general corporate purposes, including acquisitions,
additional newbuild and conversion programs and other capital expenditures.
The credit agreement governing the new revolving credit facility and the 2004 indenture
governing the Company’s senior notes 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 $2.5 million, $3.9 million and $3.0 million for the years
ended December 31, 2006, 2005 and 2004, respectively.
F-17
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As of the dates indicated, the Company had the following outstanding long-term debt (in
thousands):
December 31,
2006
2005
6.125% senior notes due 2014, net of original issue discount of
$503 and $551 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.625% convertible senior notes due 2026 (1) . . . . . . . . . . . . . . . . . . .
$299,497
250,000
$299,449
—
Less current maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
549,497
299,449
$549,497
$299,449
(1) The notes initially bear interest at a fixed rate of 1.625% per year, declining to 1.375% beginning on November 15, 2013.
Annual maturities of debt, excluding the potential effects of conditions discussed in
Convertible Senior Notes, during each year ending December 31, are as follows (in
thousands):
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
—
—
—
—
—
549,497
$549,497
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.
F-18
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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.
Public Offerings of Common Stock
On March 31, 2004, the Company completed an initial public offering of 6.0 million
shares of its common stock at $13.00 per share, for total gross proceeds of approximately
$78 million. The Company’s shares of common stock trade on the New York Stock Exchange
under the symbol “HOS”. 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 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 newbuild program, the acquisition and retrofit of two ocean-going
tugs, the acquisition of one fast supply vessel, and for general corporate purposes.
On October 6, 2005, the Company completed an underwritten public offering, or 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 2.0 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 has used a
portion of the offering proceeds and 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.
Repurchase of Common Stock
On November 13, 2006, the Company repurchased approximately 1.8 million shares of
its common stock at a cost of $63.3 million. The stock repurchase was executed
contemporaneously with the private offering of $250.0 million of 1.625% convertible senior
unsecured notes due 2026 as discussed in Note 6.
F-19
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
8. Stock-Based Compensation
Incentive Compensation Plan
The Company has an incentive compensation plan covering a maximum of 3.5 million
shares of common stock that allows the Company to grant stock options, restricted stock
awards and restricted stock unit awards, or collectively restricted stock, and stock
appreciation rights to employees and directors. Effective January 1, 2006, the Company
adopted FAS No. 123 (revised 2004), “Share-Based Payment,” or FAS 123R, using the
modified prospective method. Prior to the adoption of FAS 123R, the Company accounted for
stock option grants in accordance with APB 25, using the intrinsic value method, and
accordingly, no compensation expense was recorded for stock option grants for periods prior
to 2006.
Under the modified prospective method, FAS 123R applies to new awards and to awards
that were outstanding on January 1, 2006 or were repurchased or cancelled after the FAS
123R-required effective date. Additionally, compensation expense for the portion of awards
for which the required service had not been rendered that were outstanding as of January 1,
2006 will be recognized as the service is rendered on or after January 1, 2006. The
compensation expense for that portion of awards was based on the grant-date fair value
estimated in accordance with the original provisions of FAS 123, and compensation expense
for all share-based payments granted subsequent to January 1, 2006, was based on the
grant-date fair value estimated in accordance with the provisions of FAS 123R. Prior periods
were not restated to reflect the impact of adopting the new standard. The issuance of shares
of common stock under the incentive compensation plan has been registered on Form S-8
with the Securities and Exchange Commission.
F-20
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
If compensation cost for the Company’s stock-based compensation plan had been
determined based on the fair value at the grant dates for awards under that plan consistent
with the method under SFAS 123, the Company’s net income (loss) for the years ended
December 31, 2005 and 2004 would have been as indicated below (in thousands, except per
share data):
Year Ended
December 31,
2005
2004
Net income (loss):
As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $37,443 $(2,483)
Deduct: Stock-based employee compensation expense determined under fair
value based method for all awards, net of related tax effect . . . . . . . . . . . . . .
(1,373)
(671)
Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $36,070 $(3,154)
Basic earnings (loss) per common share:
As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.67 $ (0.13)
Deduct: Stock-based employee compensation expense determined under fair
value based method for all awards, net of related tax effect . . . . . . . . . . . . . .
(0.06)
(0.03)
Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.61 $ (0.16)
Diluted earnings (loss) per common share:
As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.64 $ (0.13)
Deduct: Stock-based employee compensation expense determined under fair
value based method for all awards, net of related tax effect . . . . . . . . . . . . . .
(0.06)
(0.03)
Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.58 $ (0.16)
As a result of adopting FAS 123R on January 1, 2006, the Company’s income before
taxes, net income and basic and diluted earnings per share for the year ended December 31,
2006, included $5.2 million, $3.3 million, $0.12 per share as reported and $0.12 per share of
stock-based compensation expense charges, respectively. For the year ended December 31,
2006, approximately $0.2 million of stock-based compensation expense was capitalized as
part of the Company’s newbuild construction programs and general corporate projects. FAS
123R also requires the benefits of tax deductions in excess of recognized compensation
expense to be reported as financing cash flows, rather than as operating cash flows as
required under previous accounting literature. The Company recorded financing cash flows
for such excess tax deductions of approximately $1.4 million for the year ended
December 31, 2006. Net cash proceeds from the exercise of stock options were $2.1 million
for the year ended December 31, 2006, and the income tax benefit from such exercises was
$1.5 million for the year ended December 31, 2006. As of December 31, 2006, the Company
has approximately 1.3 million shares available for future grants of stock options, restricted
stock, stock appreciation rights or other awards to employees and directors under the
incentive compensation plan.
F-21
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Stock Options
The Company is authorized to grant stock options under its incentive compensation plan
in which the purchase price of the stock subject to each option is established as the closing
price on the New York Stock Exchange of the Company’s common stock on the date of grant
and accordingly is not less than the fair market value of the stock on the date of grant. All
options granted during each of the three years ended December 31, 2006, 2005, and 2004
expire ten years after the date of grant, have an exercise price equal to or greater than the
actual or estimated market price of the Company’s stock on the date of grant and vest over a
one to four-year period.
The fair value of the options granted under the Company’s incentive compensation plan
during each of the three years ended December 31, 2006, 2005 and 2004 was estimated
using the Black-Scholes pricing model using the minimum value method with the following
weighted-average assumptions for the respective periods.
For the Year Ended
December 31, 2006
2006
2005
2004
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected term (years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.54
Weighted-average grant-date fair value per share . . . . . . . . . . . . . . . . . . . . . . $12.47 $12.73 $4.60
4.5% 4.3% 4.1%
7.51
4.0
40.4% 39.1% n/a
0%
0%
0%
(1) Volatility was not considered for the year ended December 31, 2004, as the Company’s initial public offering occurred in
March 2004 and historical price fluctuation was not available.
The following table represents the Company’s stock option activity for the year ended
December 31, 2006 (in thousands, except per share data and years):
Number of
Shares
Weighted
Average
Exercise Price
Weighted-Average
Remaining Contractual
Term (years)
Aggregate
Intrinsic
Value
Options outstanding at January 1, 2006 . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,248
239
(194)
(67)
(10)
Options outstanding at December 31, 2006 . .
1,216
$14.45
33.15
10.76
27.33
13.69
$18.01
Exercisable options outstanding at
December 31, 2006 . . . . . . . . . . . . . . . . . . . .
688
$12.20
7.51
9.88
n/a
n/a
n/a
7.00
5.95
$22,806
n/a
5,026
n/a
n/a
$21,509
$16,171
In addition, the total intrinsic value of stock options exercised and the total fair value of
stock options vested for the year ended December 31, 2006 were $5.0 million and $2.3
million, respectively.
F-22
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table represents the Company’s nonvested stock option activity for the year
ended December 31, 2006 (in thousands, except per share data):
Nonvested stock options at January 1, 2006 . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonvested stock options at December 31, 2006 . . . . . . . . . . . . . . . . . . . . .
674
239
(318)
(67)
528
$10.80
12.47
7.38
12.23
$10.86
Number of
Shares
Weighted-Average
Grant-Date
Fair Value
Restricted Stock
The Company’s incentive compensation plan allows the Company to issue restricted
stock with either time-based or performance-based vesting provisions. For performance-
based restricted stock, the number of shares that will ultimately be received by the award
recipients at the end of the performance period is dependent upon the Company’s
performance relative to a peer group, as defined by the Employee Restricted Stock
Agreements or Restricted Stock Unit Agreements. Performance is measured by the change in
the Company’s stock price measured against the peer group during the measurement period,
generally three years. The actual number of shares that could be received by the award
recipients can range from 0% to 200% of the Company’s base share awards depending on
the Company’s performance ranking relative to the peer group. Compensation expense
related to restricted stock is recognized over the period the restrictions lapse, from one to
three years. The compensation expense related to time-based restricted stock awards, which
is amortized over the vesting period, is determined based on the market price of the
Company’s stock on the date of grant applied to the total shares that are expected to fully
vest. The fair value of the Company’s performance-based restricted stock, which is
determined using a binomial lattice model, is applied to the base shares and is amortized over
the vesting period based on relative performance compared to peers. As of December 31,
2006, the Company had unamortized stock-based compensation expense of $5.3 million and
has recorded approximately $2.4 million of compensation expense during the year ended
December 31, 2006, respectively, associated with restricted stock.
F-23
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table summarizes the restricted stock activity during the year ended
December 31, 2006 (in thousands):
Number of
Restricted
Shares
Weighted Avg.
Fair Value
Per Share (1)
Restricted stock:
Granted during the period (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cancellations during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding, as of December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
352
(27)
(5)
320
$23.51
18.50
26.05
23.76
(1) The weighted average fair value per share is determined using a binomial lattice model, and for performance-based shares,
(2)
the fair value is applied to both the base and bonus share awards .
Includes the full amount of both base and bonus share awards granted during the period, which represents 200% of the
aggregate total of the base share awards.
Employee Stock Purchase Plan
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
authorized to issue up to 700,000 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 with the Commission to register the issuance of
shares of common stock under the ESPP. As of December 31, 2006, there were
approximately 676,000 shares available for future issuance to employees under the ESPP.
The fair value of the employees’ stock purchase rights granted under the ESPP was
estimated using the Black-Scholes model with the following assumptions for years ended
December 31, 2006 and 2005:
2006
2005
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected term (months) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average grant-date fair value per share . . . . . . . . . . . . . . . . . . . . . .
F-24
0%
0%
41.2% 41.9%
5.2% 3.4%
6.0
$9.97
6.0
$7.51
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
9.
Income Taxes
The net long-term deferred tax liabilities in the accompanying consolidated balance
sheets include the following components (in thousands):
Deferred tax liabilities:
December 31,
2006
2005
2004
Fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 93,058 $ 71,690 $ 53,606
3,451
Deferred charges and other liabilities . . . . . . . . . . . . . . . . . . . . . . .
3,465
5,343
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax assets:
Net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deductible original issue discount (1) . . . . . . . . . . . . . . . . . . . . . . .
FAS 123R stock-based compensation expense . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
98,401
75,155
57,057
(13,621)
(270)
(26,806)
(1,850)
(1,469)
(44,016)
95
(33,466)
(180)
—
—
(46)
(33,692)
95
(34,708)
(148)
—
—
(49)
(34,905)
95
Total deferred tax liabilities, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 54,480 $ 41,558 $ 22,247
(1) Refer to Note 6 of these consolidated financial statements for more information regarding the income tax accounting related to the November
2006 convertible notes offering
The components of the income tax expense (benefit) follow (in thousands):
Year Ended December 31,
2005
2006
2004
Current tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ — $ —
Deferred tax expense (benefit)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21,538
43,159
(1,320)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $43,159 $21,538 $(1,320)
At December 31, 2006, the Company had federal tax net operating loss carryforwards of
approximately $37.3 million. The carryforward benefit from the federal tax net operating loss
carryforwards begins to expire in 2025. The Company has a state tax net operating loss
carryforward of approximately $1.5 million related to one state tax jurisdiction. This
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.
F-25
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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,
2006
2005
2004
Statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $41,606 $20,644 $(1,331)
(49)
State taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
57
Non-deductible expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
Foreign taxes and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,545
49
(41)
767
50
77
$43,159 $21,538 $(1,320)
10. Commitments and Contingencies
Vessel Construction
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. Based on internal estimates, the total project cost to acquire and convert the two
vessels, prior to construction period interest, with recent modifications is now expected to be
at least $150.0 million in the aggregate, of which approximately $27.3 million was incurred
during 2006. The Company has contracted for the retrofit and conversion of these two vessels
at a domestic shipyard. The Company anticipates delivery of the converted vessels during the
first half of 2008.
In September 2005, the Company announced its fourth OSV newbuild program. In
February 2006, the Company announced the deferral of Phase 1 of this program and the
commencement of Phase 2 which is expected to add approximately 38,000 deadweight tons
of capacity to the Company’s OSV fleet at an aggregate cost of $305.0 million. The Company
is currently committed under vessel construction contracts with two domestic shipyards to
build four 240 ED class OSVs and nine 250 EDF class OSVs, respectively, under Phase 2 of
this program. These 13 vessels are expected to be delivered from early 2008 through early
2010,
In September 2005, the Company announced its second TTB newbuild program and
announced an expansion to such program in August 2006. The Company is now committed
under vessel construction contracts with one domestic shipyard to build three 60,000-barrel
double-hulled barges under this program and another domestic shipyard for the retrofit of four
3,000 horsepower ocean-going tugs that were purchased in July 2006. The acquisition,
retrofit and construction costs for these seven vessels are expected to be $70.0 million, in the
aggregate. These seven vessels are expected to be delivered on various dates throughout
2007.
F-26
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 leases for
two tugs with terms of one and three years, respectively. 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 expires on March 31, 2007, but is expected to be
extended under a one-year renewal option. A shore-based facility lease in Port Fourchon
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 2006
follow (in thousands):
Year Ended December 31,
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,318
2,718
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
425
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
429
13,738
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 and thereafter
$22,628
In addition, the Company leases marine vessels used in its operations under long-term
and month-to-month operating lease agreements. Total rent expense related to such leases
was approximately $7.8 million, $1.2 million and $1.7 million during the years ended
December 31, 2006, 2005 and 2004, 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.
On January 18, 2007, Anthony Caiafa filed an action in the United States District Court
for the Eastern District of Louisiana against Hornbeck Offshore Services, Inc. and Todd M.
Hornbeck, Chairman of the Board, President, and Chief Executive Officer. On January 24,
2007, Thomas Schedler filed a similar action in the United States District Court for the
Eastern District of Louisiana against Hornbeck Offshore Services, Inc., Todd M. Hornbeck
and James O. Harp, Jr., Executive Vice President and Chief Financial Officer. On January 26,
2007, Michael D. Fontenelle filed another similar action in the United States District Court for
the Eastern District of Louisiana against Hornbeck Offshore Services, Inc. and Todd M.
Hornbeck. On February 8, 2007, Oakmont Capital Management, LLC filed a similar action in
the United States District Court for the Eastern District of Louisiana against Hornbeck
Offshore Services, Inc., Todd M. Hornbeck, James O. Harp, Jr. and Carl G. Annessa,
F-27
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Executive Vice President and Chief Operating Officer. These lawsuits purport to be filed as a
class action on behalf of the plaintiffs and other similarly situated purchasers of the
Company’s securities from November 1, 2006 to January 10, 2007. In their complaints, the
plaintiffs allege that Hornbeck Offshore Services, Inc. and the other defendants violated
Section 10(b) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5
thereunder, by allegedly making false and misleading statements, and/or by omitting to state
material facts necessary to make the statements not misleading, in connection with its
forward earnings guidance and its January 10, 2007 announcement of preliminary financial
results for the fourth quarter of 2006 and the full year of 2006 that fell short of such guidance
and indicated an anticipated reduction in 2007 guidance. The Company and such officers
deny these allegations and believe that these actions are without merit. The Company intends
to defend these actions vigorously. However, the Company cannot predict whether it will
prevail in the actions or estimate the amount of damages that the Company might incur. The
Company is also unable to estimate any reimbursement that it may receive from insurance
policies in the event that the Company incurs any damages or costs in connection with these
actions.
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. In March 2006, the terms of entry for both of the Company’s
segments 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
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 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, 2006, the Company’s claims reserves related to one of its segments incurred
under its P&I Club policies have exceeded the AAD for the current policy year.
F-28
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
11. Deferred Charges
Deferred charges include the following (in thousands):
Year Ended December 31,
2006
2005
2004
Deferred financing costs, net of accumulated amortization of
$2,060, $1,075 and $7,487, respectively . . . . . . . . . . . . . . . . $13,542 $ 6,928 $ 5,616
Deferred drydocking costs, net of accumulated amortization of
$18,499, $10,654 and $6,557, respectively . . . . . . . . . . . . . .
Prepaid lease expense, net of amortization of $119 . . . . . . . . .
Deferred other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,686
4,269
57
8,651
—
325
8,978
—
269
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $31,554 $15,904 $14,863
12. Related Party Transactions
During 2006, the Company received aggregate payments of approximately $1.4 million
for charters of its OSVs and rental of its shore-based port facility from a customer whose
Chairman, President and Chief Executive Officer is currently a member of the Company’s
Board of Directors.
13. Major Customers
For the year ended December 31, 2006, revenues from one of the Company’s customers
served by both operating segments was approximately 12% of the Company’s total revenues.
For the year ended December 31, 2006, revenues from one of the Company’s customers
served by the offshore supply vessel segment was approximately 11% of the Company’s total
revenues. For the years ended December 31, 2005 and 2004, revenues from one of the
Company’s customers served by the TTB segment was approximately 17% and 22%,
respectively, of the Company’s total revenues.
14. Segment Information
The Company provides marine transportation services through two business segments.
The Company primarily operates new generation offshore supply vessels in the GoM,
Trinidad and Mexico and its shore-based facility in Port Fourchon, Louisiana through its
offshore supply vessel segment. The offshore supply vessels and the shore-based facility
principally support complex exploration and production projects by transporting cargo to
offshore drilling rigs and production facilities and provide support for specialty services. The
TTB segment operates ocean-going tugs and tank barges in the northeastern United States,
the GoM and in Puerto Rico. The ocean-going tugs and tank barges provide coastwise
transportation of refined and bunker grade petroleum products and more recently, ethanol, as
well as non-traditional TTB services, such as support of deepwater well testing and other
specialty applications for the Company’s upstream customers.
F-29
HORNBECK OFFSHORE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table shows reportable segment information for the years ended
December 31, 2006, 2005 and 2004, reconciled to consolidated totals and prepared on the
same basis as the Company’s consolidated financial statements (in thousands).
Revenues:
Offshore supply vessels
y
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tugs and tank barges
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating Expenses:
Offshore supply vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tugs and tank barges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and Amortization:
Offshore supply vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tugs and tank barges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and Administrative Expenses:
p
Offshore supply vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tugs and tank barges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain (loss) on sale of assets:
Offshore supply vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tugs and tank barges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2006
2005
2004
$
141,341
25,040
166,381
$ 88,772
28,663
117,435
$ 59,886
15,407
75,293
100,260
7,910
108,170
$ 274,551
57,379
7,772
65,151
$182,586
50,465
6,503
56,968
$132,261
$
$
$
$
$
$
$
$
55,175
40,416
95,591
$ 35,936
30,974
$ 66,910
$ 29,724
28,796
$ 58,520
17,344
14,677
32,021
$ 15,197
12,073
$ 27,270
$ 12,876
10,259
$ 23,135
13,505
14,883
28,388
$
9,299
11,028
$ 20,327
$
6,342
8,417
$ 14,759
— $
(5) $
1,854
1,854
1,898
1,893
$
$
32
33
65
Operating Income:
Offshore supply vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tugs and tank barges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital Expenditures:
Offshore supply vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tugs and tank barges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-vessel
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Identifiable Assets:
Offshore supply vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tugs and tank barges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
80,357
40,048
$ 120,405
$ 56,998
12,974
$ 69,972
$ 26,383
9,529
$ 35,912
$
$
58,218
27,959
5,035
91,212
$ 46,232
76,154
2,578
$124,964
$ 10,568
49,842
967
$ 61,377
$ 861,498
215,935
20,947
$1,098,380
$599,514
182,766
14,395
$796,675
$328,857
119,980
11,734
$460,571
Long-Lived Assets:
y
Offshore supply vessels
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tugs and tank barges
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign (1) (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-30
$
281,244
55,271
336,515
$231,445
62,141
293,586
$202,382
54,978
257,360
186,491
4,242
190,733
4,703
$ 531,951
158,404
5,841
164,245
4,210
$462,041
95,301
5,875
101,176
2,683
$361,219
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 operating areas. As these assets are highly mobile, the long-lived assets reflected above represent the assets that
were present in international areas as of December 31, 2006, 2005 and 2004, respectively.
Included are amounts applicable to the Puerto Rico TTB 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.
(2)
15. 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 cash incentive compensation program 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 cash incentive compensation program 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 for the full remaining term of the agreement.
16. 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 years 2006 and 2005. 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 2006
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $61,056 $70,695 $77,502 $65,298
25,468
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16,627
Earnings per common share:
37,664
23,946
32,725
20,292
24,548
14,851
Basic (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.55 $ 0.75 $ 0.88 $ 0.63
0.62
Diluted (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.73
0.54
0.86
Fiscal Year 2005
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $37,904 $41,083 $46,462 $57,137
24,939
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15,083
Earnings per common share:
14,927
7,723
17,620
9,398
12,486
5,238
Basic (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.25 $ 0.37 $ 0.45 $ 0.56
0.55
Diluted (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.36
0.44
0.25
(1) The sum of the four quarters may not equal annual results due to rounding.
(2)
Included in net income for Fiscal Year 2005 is a loss early extinguishment of debt recorded in the first quarter of 2005.
Please refer to Note 6 for more information.
F-31
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 1, 2007.
HORNBECK OFFSHORE SERVICES, INC.
By:
/S/ TODD M. HORNBECK
Todd M. Hornbeck
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.)
Chairman of the Board, President,
March 1, 2007
and Chief Executive Officer
(Principal Executive Officer)
Executive Vice President and
March 1, 2007
Chief Financial Officer (Principal
Financial and Accounting
Officer)
/S/ LARRY D. HORNBECK
Director
March 1, 2007
(Larry D. Hornbeck)
/S/ BRUCE W. HUNT
Director
March 1, 2007
(Bruce W. Hunt)
/S/ STEVEN W. KRABLIN
Director
March 1, 2007
(Steven W. Krablin)
/S/ PATRICIA B. MELCHER
Director
March 1, 2007
(Patricia B. Melcher)
/S/ BERNIE W. STEWART
Director
March 1, 2007
(Bernie W. Stewart)
/S/ DAVID A. TRICE
(David A. Trice)
Director
March 1, 2007
S-1
Exhibit 31.1
CERTIFICATION
I have reviewed this Annual 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)) 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;
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 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;
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 1, 2007
/s/ Todd M. Hornbeck
Todd M. Hornbeck
Chief Executive Officer
(Principal Executive Officer)
1
Exhibit 31.2
CERTIFICATION
I have reviewed this Annual Report on Form 10-K of Hornbeck Offshore Services, Inc.;
I, James O. Harp, Jr., 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)) 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;
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 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;
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 1, 2007
/s/ James O. Harp, Jr.
James O. Harp, Jr.
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
1
Performance Graph
The graph below compares the cumulative total stockholder return on our common stock to the cumulative
total stockholder return of the Standard & Poor’s 500 Stock Index and the cumulative total stockholder return
of the PHLX Oil Service Sector Index. The total stockholder return assumes $100 invested on March 26,
2004 in Hornbeck Offshore Services, Inc., the Standard & Poor’s 500 Stock Index and the PHLX Oil Service
Sector Index. It also assumes reinvestment of all dividends of companies in such indices. The PHLX Oil
Service Sector Index consists of 15 companies that provide oil drilling and production services, oil field
equipment, support services and geophysical/reservoir services. The results shown in the graph below are
not necessarily indicative of future performance.
Hornbeck Offshore Services, Inc.
S&P 500
PHLX OSX
$300
$250
$200
$150
$100
$50
3/26/2004
12/31/2004
12/31/2005
12/31/2006
3/26/2004
12/31/2004
12/31/2005
12/31/2006
Hornbeck Offshore Services, Inc. 100.00
005P&S
XSOXLHP
00.001
00.001
145.66
73.901
39.221
246.79
66.211
66.081
269.43
00.821
72.891
Regulation G Reconciliation of Non-GAAP Financial Measures
This 2006 Annual Report contains references to the non-GAAP
financial measures of EBITDA and Adjusted EBITDA. We define
EBITDA as earnings (net income) before interest, income taxes,
depreciation and amortization. We define Adjusted EBITDA as
EBITDA adjusted for loss on early extinguishment of debt, stock-
based compensation expense and interest income. Our measures
of EBITDA and Adjusted EBITDA may not be comparable to
similarly titled measures presented by other companies. Other
companies may calculate EBITDA and Adjusted EBITDA differently
than we do, which may limit
their usefulness as comparative
measures.
We view EBITDA and Adjusted EBTIDA primarily as liquidity
the GAAP financial
measures and, as such, we believe that
measure most directly comparable to such measures is cash flows
provided by operating activities. Because EBITDA and Adjusted
EBTIDA are not measures of financial performance calculated in
accordance with GAAP, these measures 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 and Adjusted EBITDA are widely used by investors
financial statements as supplemental
and other users of our
financial measures 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 and
Adjusted EBITDA helps investors meaningfully evaluate and
compare our cash flow generating capacity from quarter to quarter
and year to year.
(i) as a supplemental
results against such expectations;
EBITDA and Adjusted EBITDA are also financial metrics used
by management
internal measure for
planning and forecasting overall expectations and for evaluating
(ii) as a significant
actual
criteria for annual
incentive cash bonuses paid to our executive
officers and other shore-based employees; (iii) to compare to the
EBITDA and Adjusted EBTIDA of other companies when
evaluating potential acquisitions; and (iv) to assess our ability to
indebtedness
service existing fixed charges and incur additional
and execute our growth strategy.
The following table provides the detailed components of
EBITDA and Adusted EBTIDA, as we define those terms, and
reconciles EBITDA and Adjusted EBITDA with our cash flows
provided by operating activities for the following periods:
Reconciliation of Non-GAAP Financial Measures ($mm)
Components of EBITDA:
Net income (loss)
Interest expense, net:
Debt obligations
Put warrants
Interest income
Total interest expense, net
Income tax expense (benefit)
Depreciation
Amortization
EBITDA
Loss on early extinguishment of debt 1
Stock-based compensation expense
Interest income
1998
1999
2000
2001
2002
2003
2004
2005
2006
Year Ended December 31,
$(1.4)
$(1.8)
$ (4.5)
$ 7.0
$ 11.6
$ 11.2
$ (2.5)
$ 37.4
$ 75.7
1.2
1.5
(0.1)
2.6
(0.2)
0.9
0.4
$ 2.3
-
-
0.1
5.3
2.3
(0.1)
7.5
0.3
2.4
0.7
$ 9.1
-
-
0.1
8.2
7.3
(0.3)
15.2
1.6
4.2
1.0
$17.5
-
-
0.3
10.7
3.0
(1.5)
12.2
5.7
6.5
1.2
$32.6
3.0
-
1.5
16.2
-
(0.7)
15.5
7.1
10.4
1.9
18.5
-
(0.2)
18.3
6.9
14.4
3.2
17.7
-
(0.4)
17.3
(1.3)
17.4
5.7
12.6
-
(3.2)
9.4
21.5
20.0
7.3
17.7
-
(16.1)
1.6
43.1
24.1
8.0
$ 46.5
-
-
0.7
$ 54.0
-
-
0.2
$ 36.6
22.4
-
0.4
$ 95.6
1.7
-
3.2
$152.5
-
5.2
16.1
Adjusted EBITDA
$ 2.4
$ 9.2
$17.8
$37.1
$ 47.2
$ 54.2
$ 59.4
$100.5
$173.8
EBITDA Reconciliation to GAAP:
EBITDA
Cash paid for deferred drydocking charges
Cash paid for interest
Cash paid for taxes
Changes in working capital
Stock-based compensation expense
Loss on early extinguishment of debt
Changes in other, net
$ 2.3
(1.7)
(0.4)
-
4.7
-
-
(1.3)
$ 9.1
(2.4)
(4.5)
-
(0.6)
-
-
0.3
$17.5
(1.5)
(7.1)
-
(2.9)
-
-
(0.1)
$32.6
(1.7)
(5.6)
-
1.9
-
3.0
0.1
$ 46.5
(2.4)
(19.1)
-
(0.5)
-
-
0.3
$ 54.0
(6.1)
(19.7)
-
(2.0)
-
-
(0.7)
$ 36.6
(8.5)
(24.0)
-
(5.0)
-
22.4
(0.2)
$ 95.6
(6.8)
(17.9)
-
5.1
-
1.7
(1.9)
$152.5
(12.9)
(18.5)
(1.4)
8.6
5.2
-
(1.7)
Cash flows provided by operating activities
$ 3.6
$ 1.9
$ 5.9
$30.3
$ 24.8
$ 25.5
$ 21.3
$ 75.8
$131.8
1) Results for 2001 were impacted by a $2.0 after-tax charge on early extinguishment of debt relating to a July 2001 debt refinancing. Results for 2004 were
impacted by a $14.7 after-tax charge on early extinguishment of debt relating to 91% of the November 2004 refinancing of our 10.625% Senior Notes due 2008.
Results for 2005 were impacted by a $1.1 after-tax charge on early extinguishment of debt relating to the January 2005 redemption of the final 9% of our 10.625%
Senior Notes due 2008.
R-2
CORPORATE INFORMATION
Auditors
Ernst & Young LLP
New Orleans, Louisiana
Legal Counsel
Winstead PC
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.”
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
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 the
Securities and Exchange Commission,
may also be obtained without charge by
visiting the Company’s website at
www.hornbeckoffshore.com
Annual Stockholders’ Meeting
The 2007 Annual Meeting of Stockholders
will be held on Tuesday May 1, 2007,
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 2006 Annual Report contains “forward-looking statements,” as contemplated by the Private Securities Litigation Reform Act of 1995, in
which the Company discusses factors it believes may affect its performance in the future. Forward-looking statements are all statements other
than historical facts, such as statements regarding assumptions, expectations, beliefs and projections about future events or conditions. 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,” “might,” “plan,” “potential,” “predict,” “forecast,” “project,” “should” or “will” or other comparable
words or the negative of such words. The accuracy of the Company’s assumptions, expectations, beliefs and projections depend on events or
conditions that change over time and are thus susceptible to change based on actual experience, new developments and known and unknown
risks. Although the Company believes that the assumptions, expectations, beliefs and projections refl ected 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,
beliefs and projections will prove to be correct. Important factors that might cause future results to differ from these assumptions, expecta-
tions, beliefs and projections include, but are not limited to, industry risks, changes in capital spending budgets by customers, oil and natural
gas prices, variations in demand for vessel services including the inability to secure additional upstream contracts for TTB vessels, increases
in operating costs, the inability to accurately predict vessel utilization levels and dayrates, the level of fl eet additions by competitors and over-
capacity, economic and political risks, weather related risks, the ability to attract and retain qualifi ed marine personnel, regulatory risks, the
repeal or administrative weakening of the Jones Act, shipyard construction and drydocking delays and cost overruns and related risks, vessel
accidents, unplanned customer suspensions, cancellations or non-renewal of contracts, unexpected litigation and insurance expenses and other
factors described in the Company’s most recent Annual Report on Form 10-K and other fi lings fi led with the Securities and Exchange Commis-
sion. The Company cautions readers that the information contained in this Annual Report is only current as of April 6, 2007, and the Company
undertakes no obligation to update or publicly release any revisions to the forward-looking statements in this Annual Report hereafter to refl ect
the occurrence of any events or circumstances or any changes in its assumptions, expectations, beliefs and projections, except to the extent
required by applicable law.
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 May 31, 2006, without qualification, that he was not aware of any violation by the Company of New York
Stock Exchange corporate governance listing standards.
103 Northpark Boulevard, Suite 300, Covington, Louisiana 70433
103 Northpark Boulevard, Suite 300, Covington, Louisiana 70433
tel 985.727.2000 fax 985.727.2006 www.hornbeckoffshore.com
tel 985.727.2000 fax 985.727.2006 www.hornbeckoffshore.com