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Helix Energy Solutions 10-Q 2011
form10q.htm
 
 

 

 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
Form 10-Q
 
[X]
 
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended September 30, 2011
 
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 001-32936
 
HELIX ENERGY SOLUTIONS GROUP, INC.
(Exact name of registrant as specified in its charter)
 
Minnesota
(State or other jurisdiction
of incorporation or organization)
             
95–3409686
(I.R.S. Employer
Identification No.)
  
   
400 North Sam Houston Parkway East
Suite 400
Houston, Texas
(Address of principal executive offices)
 
 
77060
(Zip Code)
 
(281) 618–0400
(Registrant's telephone number, including area code)
 
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
     Yes  
[ √ ] 
    No 
[  ] 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
     Yes  
[ √   ] 
    No 
[  ] 
 
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
 ] 
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 
[ √ ] 
 
As of October 21, 2011, 105,473,384 shares of common stock were outstanding.

 
 

 

TABLE OF CONTENTS
 
         
PART I.
 
FINANCIAL INFORMATION
 
PAGE
 
Item 1.
 
Financial Statements:
   
   
 
 
 
  
 
 
 
  
 
 
   
 
 
   
 
 
 
Item 2.
 
 
  
 
Item 3.
   
 
Item 4.
   
 
PART II.
 
OTHER INFORMATION
   
Item 1.
 
 
 
 
Item 2.
   
Item 6.
 
 
 
   
 
 
   
 
 


PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements.
 
HELIX ENERGY SOLUTIONS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 (in thousands)
 
   
September 30,
 
December 31,
   
2011
 
2010
   
(Unaudited)
   
ASSETS
Current assets:
               
  Cash and cash equivalents
 
$
375,355
   
$
391,085
 
  Accounts receivable —
     Trade, net of allowance for uncollectible accounts
         of $4,130 and $4,527, respectively
   
221,162
     
177,293
 
     Unbilled revenue
   
13,878
     
33,712
 
     Costs in excess of billing
   
14,996
     
15,699
 
  Other current assets
   
123,236
     
123,065
 
          Total current assets
   
748,627
     
740,854
 
Property and equipment
   
4,434,796
     
4,486,077
 
Less — accumulated depreciation
   
(1,961,043
)
   
(1,958,997
)
     
2,473,753
     
2,527,080
 
Other assets:
               
  Equity investments
   
186,423
     
187,031
 
  Goodwill
   
62,344
     
62,494
 
  Other assets, net
   
80,862
     
74,561
 
Total assets                                                                          
 
$
3,552,009
   
$
3,592,020
 
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
               
  Accounts payable
 
$
145,112
   
$
159,381
 
  Accrued liabilities
   
159,676
     
198,237
 
  Income taxes payable
   
3,856
     
 
  Current maturities of long-term debt
   
7,877
     
10,179
 
          Total current liabilities
   
316,521
     
367,797
 
Long-term debt
   
1,163,914
     
1,347,753
 
Deferred income taxes
   
441,520
     
413,639
 
Asset retirement obligations
   
169,429
     
170,410
 
Other long-term liabilities
   
4,844
     
5,777
 
          Total liabilities
   
2,096,228
     
2,305,376
 
                 
Convertible preferred stock
   
1,000
     
1,000
 
                 
Commitments and contingencies
               
Shareholders’ equity:
               
Common stock, no par, 240,000 shares authorized,      
     105,965 and 105,592 shares issued, respectively
   
913,976
     
906,957
 
  Retained earnings
   
505,892
     
392,705
 
  Accumulated other comprehensive income (loss)
   
7,520
     
(39,058
)
          Total controlling interest shareholders’ equity
   
1,427,388
     
1,260,604
 
  Noncontrolling interests                                                                          
   
27,393
     
25,040
 
          Total equity                                                                          
   
1,454,781
     
1,285,644
 
Total liabilities and shareholders’ equity                                                                          
 
$
3,552,009
   
$
3,592,020
 
                 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.


 
HELIX ENERGY SOLUTIONS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 (in thousands, except per share amounts)
 
     
Three Months Ended
 
     
September 30,
 
     
2011
     
2010
 
                 
Net revenues:
               
  Contracting services                                                                         
 
$
213,278
   
$
297,103
 
  Oil and gas                                                                         
   
159,218
     
95,566
 
     
372,496
     
392,669
 
                 
Cost of sales:
               
  Contracting services                                                                         
   
147,614
     
211,634
 
  Oil and gas                                                                         
   
100,230
     
93,586
 
  Oil and gas property impairments                                                                         
   
2,357
     
897
 
     
250,201
     
306,117
 
                 
     Gross profit (loss)                                                                         
   
122,295
     
86,552
 
                 
Gain on oil and gas derivative contracts                                                                         
   
     
161
 
Gain on the sale or acquisition of assets, net
   
     
13
 
Selling, general and administrative expenses
   
(22,082
)
   
(26,628
)
Income from operations                                                                         
   
100,213
     
60,098
 
  Equity in earnings of investments                                                                         
   
4,906
     
6,221
 
  Net interest expense                                                                         
   
(24,114
)
   
(25,479
)
  Other income (expense)                                                                         
   
(10,714
)
   
4,072
 
Income before income taxes                                                                         
   
70,291
     
44,912
 
  Provision for income taxes                                                                         
   
23,465
     
17,965
 
Net income, including noncontrolling interests
   
46,826
     
26,947
 
  Less net income applicable to noncontrolling interests….
   
(800
)
   
(776
)
Net income applicable to Helix                                                                         
   
46,026
     
26,171
 
  Preferred stock dividends                                                                         
   
(10
)
   
(10
)
Net income applicable to Helix common shareholders
 
$
46,016
   
$
26,161
 
                 
Earnings per share of common stock:
               
  Basic                                                                       
 
$
0.43
   
$
0.25
 
  Diluted                                                                       
 
$
0.43
   
$
0.25
 
                 
Weighted average common shares outstanding:
               
  Basic                                                                         
   
104,700
     
104,090
 
  Diluted                                                                         
   
105,154
     
105,307
 
                 
 
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.


 
 
HELIX ENERGY SOLUTIONS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 (in thousands, except per share amounts)
 
     
Nine Months Ended
 
     
September 30,
 
     
2011
     
2010
 
                 
Net revenues:
               
  Contracting services                                                                         
 
$
501,887
   
$
604,634
 
  Oil and gas                                                                         
   
500,535
     
288,867
 
     
1,002,422
     
893,501
 
                 
Cost of sales:
               
  Contracting services                                                                         
   
371,042
     
438,008
 
  Oil and gas                                                                         
   
306,733
     
266,032
 
  Oil and gas property impairments                                                                         
   
25,078
     
171,871
 
     
702,853
     
875,911
 
                 
     Gross profit                                                                         
   
299,569
     
17,590
 
                 
Gain on oil and gas derivative contracts                                                                         
   
     
2,643
 
Gain (loss) on sale or acquisition of assets, net
   
(6
)
   
6,246
 
Selling, general and administrative expenses
   
(70,821
)
   
(91,675
)
Income (loss) from operations                                                                         
   
228,742
     
(65,196
)
  Equity in earnings of investments                                                                         
   
16,443
     
12,932
 
  Gain on sale of Cal Dive common stock                                                                         
   
753
     
 
  Net interest expense                                                                         
   
(73,628
)
   
(61,637
)
  Other income (expense)                                                                         
   
(7,554
)
   
(3,189
)
Income (loss) before income taxes                                                                         
   
164,756
     
(117,090
)
  Provision (benefit) for income taxes                                                                         
   
49,186
     
(41,962
)
Net income (loss), including noncontrolling interests
   
115,570
     
(75,128
)
  Less net income applicable to noncontrolling interests…
   
(2,354
)
   
(2,049
)
Net income (loss) applicable to Helix                                                                         
   
113,216
     
(77,177
)
  Preferred stock dividends                                                                         
   
(30
)
   
(104
)
Net income (loss) applicable to Helix common shareholders
 
$
113,186
   
$
(77,281
)
                 
Earnings (loss) per share of common stock:
               
  Basic                                                                       
 
$
1.07
   
$
(0.74
)
  Diluted                                                                       
 
$
1.06
   
$
(0.74
)
                 
Weighted average common shares outstanding:
               
  Basic                                                                         
   
104,616
     
103,772
 
  Diluted                                                                         
   
105,061
     
103,772
 
                 
 
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
 
 
 
 
 
 
HELIX ENERGY SOLUTIONS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 (in thousands)
     
Nine Months Ended
 
     
September 30,
 
     
2011
     
2010
 
Cash flows from operating activities:
               
  Net income (loss), including noncontrolling interests
 
$
115,570
   
$
(75,128
)
  Adjustments to reconcile net income (loss), including noncontrolling interests to net cash provided by operating activities
               
         Depreciation and amortization                                                                                 
   
239,540
     
222,730
 
         Asset impairment charge and dry hole expense
   
32,736
     
171,626
 
         Amortization of deferred financing costs                                                                                 
   
7,197
     
5,731
 
         Stock compensation expense                                                                                 
   
6,835
     
6,889
 
         Amortization of debt discount                                                                                 
   
6,693
     
6,272
 
         Deferred income taxes                                                                                 
   
31,707
     
(53,335
)
         Excess tax benefit from stock-based compensation
   
805
     
2,376
 
         Gain on investment in Cal Dive common stock
   
(753
)
   
 
         Loss on early extinguishment of Senior Unsecured Notes
   
2,354
     
 
         (Gain) loss on sale or acquisition of assets
   
6
     
(6,246
)
         Unrealized (gain) loss on derivative contracts
   
433
     
2,304
 
         Changes in operating assets and liabilities:
               
            Accounts receivable, net                                                                                 
   
(24,205
)
   
(29,256
)
            Other current assets                                                                                 
   
(11,100
)
   
3,947
 
            Income tax payable                                                                                 
   
9,129
     
4,896
 
            Accounts payable and accrued liabilities
   
(28,668
)
   
38,662
 
            Oil and gas asset retirement costs                                                                                 
   
(34,836
)
   
(52,244
)
            Other noncurrent, net                                                                                 
   
(2,312
)
   
(7,458
)
              Net cash provided by operating activities
   
351,131
     
241,766
 
                 
Cash flows from investing activities:
               
  Capital expenditures                                                                                 
   
(167,849
)
   
(179,018
)
  Investments in equity investments                                                                                 
   
(2,699
)
   
(7,768
)
  Distributions from equity investments, net                                                                                 
   
3,437
     
9,876
 
  Proceeds from sale of Cal Dive common stock
   
3,588
     
 
  Insurance recovery for capital items                                                                               
   
     
16,106
 
  Proceeds from sales of property                                                                               
   
     
852
 
  Decrease (increase) in restricted cash                                                                               
   
703
     
(133
)
              Net cash used in investing activities
   
(162,820
)
   
(160,085
)
                 
Cash flows from financing activities:
               
  Borrowing under revolving credit facility                                                                                 
   
109,400
     
 
  Repayment of revolving credit facility                                                                                 
   
(109,400
)
   
 
  Repayment of Helix Term Loan                                                                                 
   
(111,941
)
   
(3,245
)
  Early extinguishment of Senior Unsecured Notes
   
(77,394
)
   
 
  Repayment of MARAD borrowings                                                                                 
   
(4,645
)
   
(4,866
)
  Loan notes repayment                                                                                 
   
(1,215
)
   
(1,842
)
  Deferred financing costs                                                                                 
   
(9,224
)
   
(2,864
)
  Repurchases of common stock and preferred dividends paid
   
(1,102
)
   
(11,763
)
  Excess tax benefit from stock-based compensation
   
(805
)
   
(2,376
)
  Exercise of stock options, net                                                                                 
   
2,018
     
335
 
              Net cash used in financing activities                                                                                 
   
(204,308
)
   
(26,621
)
Effect of exchange rate changes on cash and cash equivalents
   
267
     
(253
)
Net (decrease) increase in cash and cash equivalents
   
(15,730
)
   
54,807
 
Cash and cash equivalents:
               
  Balance, beginning of year                                                                                 
   
391,085
     
270,673
 
  Balance, end of period                                                                                 
 
$
375,355
   
$
325,480
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.


HELIX ENERGY SOLUTIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
Note 1 – Basis of Presentation
 
The accompanying condensed consolidated financial statements include the accounts of Helix Energy Solutions Group, Inc. and its majority-owned subsidiaries (collectively, "Helix" or the "Company"). Unless the context indicates otherwise, the terms "we," "us" and "our" in this report refer collectively to Helix and its majority-owned subsidiaries.  All material intercompany accounts and transactions have been eliminated. These unaudited condensed consolidated financial statements have been prepared pursuant to instructions for the Quarterly Report on Form 10-Q required to be filed with the Securities and Exchange Commission (“SEC”), and do not include all information and footnotes normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles.
 
The accompanying condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles and are consistent in all material respects with those applied in our 2010 Annual Report on Form 10-K (“2010 Form 10-K”).  The preparation of these financial statements requires us to make estimates and judgments that affect the amounts reported in the financial statements and the related disclosures.  Actual results may differ from our estimates.  Management has reflected all adjustments (which were normal recurring adjustments unless otherwise disclosed herein) that it believes are necessary for a fair presentation of the condensed consolidated balance sheets, results of operations, and cash flows, as applicable. The operating results for the periods ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. Our balance sheet as of December 31, 2010 included herein has been derived from the audited balance sheet as of December 31, 2010 included in our 2010 Form 10-K. These unaudited condensed consolidated financial statements should be read in conjunction with the annual audited consolidated financial statements and notes thereto included in our 2010 Form 10-K.
 
Certain reclassifications were made to previously reported amounts in the condensed consolidated financial statements and notes thereto to make them consistent with the current presentation format, including reclassifying the previously recorded results associated with our discontinued operations.  The discontinued operations results are now reflected as a component of other income (expense) in the accompanying condensed consolidated statement of operations as such amounts are immaterial for all the periods presented in this Quarterly Report on Form 10-Q.
 
Note 2 – Company Overview
 
We are an international offshore energy company that provides reservoir development solutions and other contracting services to the energy market as well as to our own oil and gas properties. Our Contracting Services segment utilizes our vessels, offshore equipment and methodologies to deliver services that may reduce finding and development costs and encompass the complete lifecycle of an offshore oil and gas field. Our Contracting Services are located primarily in the Gulf of Mexico, North Sea, Asia Pacific and West Africa regions.  Our Oil and Gas segment engages in exploration, development and production activities. Our oil and gas operations are exclusively located in the Gulf of Mexico.
 
Contracting Services Operations
 
We seek to provide services and methodologies which we believe are critical to finding and developing offshore reservoirs and maximizing production economics.  Our “life of field” services are segregated into four disciplines: subsea construction, well operations, robotics and production facilities. We have disaggregated our contracting services operations into two reportable segments: Contracting Services and Production Facilities. Our Contracting Services business primarily includes subsea construction, deepwater pipelay, well operations and robotics activities.  Our Production Facilities business includes our equity investment in Deepwater Gateway, L.L.C. (“Deepwater Gateway”) and Independence Hub, LLC (“Independence Hub”) as well as our majority ownership of the Helix Producer I   (“HP I”) vessel.   We have developed a response system that has been referenced as a designated spill response resource in Gulf of Mexico permit applications (see “Events in Gulf of Mexico” below), which is also a component of our Production Facilities segment.


 
Oil and Gas Operations
 
We began our oil and gas operations to provide a more efficient solution to offshore abandonment, to expand off-season utilization of our contracting services assets and to achieve incremental returns. We have evolved this business model to include not only mature oil and gas properties but also proved and unproved reserves yet to be explored and developed.  This has led to the assembly of services that allows us to create value at key points in the life of a reservoir from exploration through development, life of field management and operating through abandonment.
 
Events in Gulf of Mexico
 
In April 2010, an explosion occurred on the Deepwater Horizon drilling rig located on the site of the Macondo well at Mississippi Canyon Block 252.  The resulting events included loss of life, the complete destruction of the drilling rig and an oil spill, the magnitude of which was unprecedented in U.S. territorial waters.  In May 2010, the U.S. Department of Interior (“DOI”) announced a total moratorium on new drilling in the Gulf of Mexico.   In October 2010, the DOI lifted the drilling moratorium and instructed the Bureau of Ocean Energy Management, Regulation and Enforcement (“BOEMRE”) that it could resume issuing drilling permits conditioned on the requesting company’s compliance with all revised drilling, safety and environmental requirements.   No post moratorium deepwater drilling permits were issued by BOEMRE until late February 2011.
 
We developed the Helix Fast Response System (“HFRS”) as a culmination of our experience as a responder in the Gulf oil spill response and containment efforts.  The HFRS centers on two vessels, the HP I and the Q4000, both of which played a key role in the Gulf oil spill response and containment efforts and are presently operating in the Gulf of Mexico.  In 2011, we signed an agreement with Clean Gulf Associates ("CGA"), a non-profit industry group, allowing, in exchange for a retainer fee, the HFRS to be named as a response resource in permit applications to federal and state agencies and making the HFRS available for a two-year term to certain CGA participants who have executed utilization agreements with us. In addition to the agreement with CGA, we currently have signed separate utilization agreements with 24 CGA participant member companies specifying the day rates to be charged should the HFRS be deployed in connection with a well control incident.  The retainer fee for the HFRS became effective April 1, 2011 and is a component of our Production Facilities business segment.   A total of 38 permits have been granted to CGA participants for deepwater drilling operations identifying the HFRS to fulfill the BOERME requirement to have a spill response and containment resource included in the submitted permit applications.
 
New Accounting Pronouncement
 
In June 2011, the Financial Accounting Standards Board (“FASB”) issued an update to existing guidance on the presentation of comprehensive income. This update will require the presentation of the components of net income and other comprehensive income either in a single continuous statement or in two separate but consecutive statements. In addition, companies are also required to present reclassification adjustments for items that are reclassified from other comprehensive income to net income on the face of the financial statements. The update is effective for fiscal years and interim periods beginning after December 15, 2011. We will adopt the new disclosure requirements for comprehensive income beginning January 1, 2012 and are currently evaluating the provisions of this updat.


 
 
Note 3 – Details of Certain Accounts
 
Other current assets consisted of the following as of September 30, 2011 and December 31, 2010:
 
 
September 30,
   
December 31,
 
 
2011
   
2010
 
 
(in thousands)
 
Other receivables
$ 2,767     $ 1,247  
Prepaid insurance
  20,539       12,375  
Other prepaids
  14,032       11,623  
Spare parts inventory
  21,602       25,333  
Current deferred tax assets
  21,758       49,200  
Hedging assets
  33,203       5,472  
Gas imbalance
  4,817       6,001  
Income tax receivable
        6,099  
Investment held for sale (a) 
        2,835  
Other
  4,518       2,880  
  $ 123,236
 
  $ 123,065  
 
a.  
In March 2011, we sold our remaining 500,000 shares of common stock in our former subsidiary Cal Dive International, Inc. (“Cal Dive”).  These sales transactions resulted in net proceeds of approximately $3.6 million and a pre-tax gain of $0.8 million.   In the fourth quarter of 2010, we recognized a $2.2 million other than temporary loss on our investment in Cal Dive common shares (see Notes 2 and 3 of our 2010 Form 10-K for additional information regarding our former Investment in Cal Dive common stock).
 
Other assets, net, consisted of the following as of September 30, 2011 and December 31, 2010:
 
 
September 30,
   
December 31,
 
 
2011
   
2010
 
 
(in thousands)
 
Restricted cash
$ 34,636     $ 35,339  
Deferred drydock expenses, net
  6,576       11,086  
Deferred financing costs, net
  28,013       25,697  
Intangible assets with finite lives, net
  559       636  
Hedging assets
  9,428        
Other
  1,650       1,803  
  $ 80,862     $ 74,561  
 
Accrued liabilities consisted of the following as of September 30, 2011 and December 31, 2010:
 
 
September 30,
   
December 31,
 
 
2011
   
2010
 
 
(in thousands)
 
Accrued payroll and related benefits
$ 41,261     $ 38,026  
Royalties payable
  15,140       15,008  
Current asset retirement obligations
  63,816       64,526  
Unearned revenue
  7,900       4,094  
Billing in excess of cost
  5,297       3,869  
Accrued interest
  13,795       27,308  
Hedge liability
  956       30,606  
Other
  11,511       14,800  
  $ 159,676     $ 198,237  
 


 
Note 4 – Oil and Gas Properties
 
We follow the successful efforts method of accounting for our interests in oil and gas properties. Under the successful efforts method, the costs of drilling and equipping successful wells and leases containing productive reserves are capitalized. Costs incurred to drill and equip development wells, including unsuccessful development wells, are capitalized. Costs incurred relating to unsuccessful exploratory wells are charged to expense in the period in which the drilling is determined to be unsuccessful.
 
Depletion expense is determined on a field-by-field basis using the units-of-production method, with depletion rates for leasehold acquisition costs based on estimated total remaining proved reserves.  Depletion rates for well and related facility costs are based on estimated total remaining proved developed reserves associated with each individual field.  The depletion rates are changed whenever there is an indication of the need for a revision, but at a minimum, are evaluated annually.  Any such revisions are accounted for prospectively as a change in accounting estimate.
 
Impairments
 
During the third quarter of 2011, we recorded a total of $2.4 million of impairment charges primarily related to revisions in cost estimates for reclamation activities ongoing at two of our Gulf of Mexico oil and gas properties.   For the three-month period ended June 30, 2011, we recorded impairment charges totaling $22.7 million, including $4.1 million for our only non-domestic oil and gas property (see “United Kingdom Property” below), and for six of our Gulf of Mexico oil and gas properties.   These impairment charges primarily reflect a premature end of these fields’ production life either through actual depletion or as a result of capital allocation decisions affecting our third party operated fields.  We did not have any impairment of our oil and gas properties during the three-month period ended March 31, 2011.
 
Following the determination of a significant reduction in our estimates of proved reserves at June 30, 2010, we recorded oil and gas property impairment charges totaling $159.9 million which affected the carrying value of 15 of our Gulf of Mexico oil and gas properties.   In the first quarter of 2010, we recorded $7.0 million of impairment charges primarily resulting from natural gas price declines since year end 2009.   The three properties subject to these impairment charges produce natural gas almost entirely.   Separately, we also recorded a $4.1 million impairment charge for our United Kingdom oil and gas property.  
 
Exploration and Other
 
As of September 30, 2011, we capitalized approximately $4.6 million of costs associated with ongoing exploration and/or appraisal activities.  Such capitalized costs may be charged against earnings in future periods if management determines that commercial quantities of hydrocarbons have not been discovered or that future appraisal drilling or development activities are not likely to occur.
 
The following table details the components of exploration expense for the three- and nine-month periods ended September 30, 2011 and 2010 (in thousands):
 
     
Three Months Ended
     
Nine Months Ended
 
     
September 30,
     
September 30,
 
     
2011
     
2010
     
2011
     
2010
 
Delay rental and geological and geophysical costs
 
$
522
   
$
497
   
$
2,176
   
$
2,025
 
Impairment of unproved properties
   
1,028
     
     
7,668
a
   
 
Dry hole expense and other
   
(2
)
   
(55
)
   
(11
)
   
(245
)
     Total exploration expense
 
$
1,548
   
$
442
   
$
9,833
   
$
1,780
 
 
a.  
Includes the costs ($6.6 million) associated with a deepwater lease the term of which expired during the second quarter of 2011.


 
United Kingdom Property
 
Since 2006, we have maintained an ownership interest in the Camelot field, located offshore in the North Sea.   In 2007, we sold half of our 100% working interest in Camelot to a third party with whom we agreed to jointly pursue future development and production of the field.   In February 2010, we acquired this third party and thereby assumed the obligations, most notably the asset retirement obligation, related to its 50% working interest in the field.   We recorded an approximate $6.0 million gain on the acquisition of the remaining working interest in Camelot, including the acquired entity’s $10.2 million of cash (see Note 5 of 2010 Form 10-K).
 
In connection with this acquisition, we reassessed the fair value associated with our original 50% interest in the field. Based on these evaluations, we concluded that the Camelot field was impaired based on the unlikely probability of our expending the additional capital necessary to further develop the field.  As a result, we recorded a $4.1 million impairment charge to fully impair the property in the first quarter of 2010.  We are currently abandoning the field in accordance with applicable United Kingdom regulations. In connection with these activities, we continue to evaluate our estimated future field abandonment costs for the field.   These evaluations resulted in our recording an incremental $4.1 million impairment charge in the second quarter of 2011 to increase the field’s estimated reclamation liability.  Our current estimated asset retirement obligation for the Camelot field totals $11.6 million at September 30, 2011.  We have incurred approximately $4.8 million of costs related to our reclamation activities at the Camelot field through September 30, 2011.
 
Asset retirement obligations
 
The following table describes the changes in our asset retirement obligations (both long term and current) since December 31, 2010 (in thousands):
 
Asset retirement obligations at December 31, 2010
 
$
234,936
 
Liability incurred during the period                                                                               
   
1,372
 
Liability settled during the period                                                                               
   
(36,591
)
Revision in estimated cash flows                                                                               
   
22,276
 
Accretion expense (included in depreciation and amortization)
   
11,252
 
Asset retirement obligations at September 30, 2011
 
$
233,245
 
 
Insurance
 
We carry comprehensive insurance for our operated and non-operated producing and non-producing properties.  We record our hurricane-related costs as incurred. Insurance reimbursements are recorded when the realization of the claim for recovery of a loss is deemed probable.  In 2011, our hurricane-related costs have been immaterial.  Hurricane-related costs, net of reimbursements totaled $0.9 million and $4.6 million for the three-month and nine-month periods ended September 30, 2010.   Our insurance reimbursements totaled $5.0 million for the nine-month period ended September 30, 2011.  On June 30, 2011, we renewed our hurricane catastrophic bond for the period from July 1, 2011 to June 30, 2012 and made a payment of $10.6 million.   We recorded a charge of approximately $8.4 million to insurance expense in the third quarter of 2011 to reduce the value of our hurricane catastrophic bond to its intrinsic value at September 30, 2011.  We will record a $2.0 million charge to insurance expense in the fourth quarter of 2011.
 
Note 5 – Statement of Cash Flow Information
 
We define cash and cash equivalents as cash and all highly liquid financial instruments with original maturities of less than three months.  We had restricted cash totaling $34.6 million at September 30, 2011 and $35.3 million at December 31, 2010, all of which was related to funds required to be escrowed to cover the future asset retirement obligations associated with our South Marsh Island Block 130 field.  We have fully satisfied the escrow requirements under the escrow agreement. We have used a small portion of these escrowed funds to pay for the initial reclamation activities at the South Marsh Island Block 130 field.  Reclamation activities at the field will occur over many years and will be funded with these escrowed amounts.  These amounts are reflected in other assets, net in the accompanying condensed consolidated balance sheets.
 
 
 
    The following table provides supplemental cash flow information for the nine-month period ended September 30, 2011 and 2010 (in thousands):
 
     
Nine Months Ended
 
     
September 30,
 
     
2011
     
2010
 
                 
Interest paid, net of capitalized interest
 
$
73,096
   
$
60,137
 
Income taxes paid
 
$
9,575
   
$
8,020
 
 
Non-cash investing activities for the nine-month periods ended September 30, 2011 and 2010 included $34.8 million and $17.5 million, respectively, of accruals for capital expenditures.  The accruals have been reflected in the condensed consolidated balance sheet as an increase in property and equipment and accounts payable.
 
 
Note 6 – Equity Investments
    
As of September 30, 2011, we have three investments that we account for using the equity method of accounting: Deepwater Gateway, Independence Hub, and Clough Helix Joint Venture Pty Ltd. (“Clough Helix JV”).  Deepwater Gateway and Independence Hub are included in our Production Facilities segment while the Clough Helix JV is a component of our Contracting Services segment.
 
·  
Deepwater Gateway, L.L.C.  In June 2002, we, along with Enterprise Products Partners L.P. (”Enterprise”), formed Deepwater Gateway, each with a 50% interest, to design, construct, install, own and operate a tension leg platform production hub primarily for Anadarko Petroleum Corporation's Marco Polo field in the Gulf of Mexico. Our investment in Deepwater Gateway totaled $96.8 million at September 30, 2011 and $99.8 million at December 31, 2010 (including capitalized interest of $1.4 million at September 30, 2011 and $1.5 million December 31, 2010).  Our equity in earnings of Deepwater Gateway totaled $0.6 million and $2.7 million for the respective three-month and nine-month periods ended September 30, 2011 as compared to $1.3 million and $3.6 million for the three-month and nine-month periods ended September 30, 2010, respectively.   Distributions from Deepwater Gateway, net to our interest, totaled $2.2 million and $5.7 million for the respective three-month and nine-month periods ended September 30, 2011.
 
·  
Independence Hub, LLC.  In December 2004, we acquired a 20% interest in Independence Hub, an affiliate of Enterprise.  Independence Hub owns the "Independence Hub" platform located in Mississippi Canyon Block 920 in a water depth of 8,000 feet.  First production through the facility commenced in July 2007.  Our investment in Independence Hub was $80.2 million at September 30, 2011 and $82.4 million at December 31, 2010 (including capitalized interest of $5.0 million at September 30, 2011 and $5.2 million at December 31, 2010).  Our equity in earnings of Independence Hub totaled $4.0 million and $12.3 million for the respective three-month and nine-month periods ended September 30, 2011 as compared to $4.2 million and $14.1 million for the three-month and nine-month periods ended September 30, 2010, respectively.   Distributions from Independence Hub, net to our interest, totaled $4.6 million and $14.2 million for the three-month and nine-month periods ended September 30, 2011, respectively.
 
·  
Clough Helix JV. In February 2010, we announced the formation of the Clough Helix JV with Australian-based engineering and construction company, Clough Projects Australia Pty Ltd (“Clough”), to provide a range of subsea services to offshore operators in the Asia Pacific region. The Clough Helix JV combines our well intervention equipment with Clough’s 12-man saturation diving system, which are deployed from the 118 meter long DP2 multiservice vessel, Normand Clough.   In the first quarter of 2011, the Clough Helix JV commenced an approximate six- to nine-month day rate project located offshore China.  Our 50% share of the earnings from the Clough Helix JV totaled $0.3 million and $1.4 million for the three- and nine-month periods ended September 30, 2011, respectively as compared to $0.7 million of earnings and $5.0 million of losses in the three- and nine-month periods ended September 30, 2010, respectively.   The loss in the nine-month 2010 period primarily represented the mobilization costs of transporting the Normand Clough from the Gulf of Mexico to Singapore and other start up costs.   Our investment in the Clough Helix JV was $9.4 million at September 30, 2011 and $4.9 million at December 31, 2010.


Note 7 – Long-Term Debt
 
Scheduled maturities of long-term debt outstanding as of September 30, 2011 were as follows (in thousands):
 
   
Term Loan
   
Revolving Loans
   
Senior Unsecured Notes
   
Convertible Senior Notes (1)
   
MARAD Debt
   
Total
 
                                     
Less than one year
  $ 3,000     $     $     $     $ 4,877     $ 7,877  
One to two years
    3,000                         5,120       8,120  
Two to three years
    3,000                         5,376       8,376  
Three to four years
    289,500                         5,644       295,144  
Four to five years
                474,960             5,925       480,885  
Over five years
                      300,000       83,224       383,224  
Total debt
    298,500             474,960       300,000       110,166       1,183,626  
Current maturities
    (3,000 )                       (4,877 )     (7,877 )
Long-term debt, less
   current maturities
    295,500             474,960       300,000       105,289       1,175,749  
Unamortized debt discount (2)
                      (11,835 )           (11,835 )
Long-term debt
  $ 295,500     $     $ 474,960     $ 288,165     $ 105,289     $ 1,163,914  
                                                 
(1)  
Beginning in December 2012, the holders may require us to repurchase the notes or we may at our own option elect to repurchase the notes. The notes will mature in March 2025.
(2)  
The notes will increase to the $300 million face amount through accretion of non-cash interest charges through 2012.
 
At September 30, 2011, unsecured letters of credit issued totaled approximately $42.6 million (see “Credit Agreement” below).  These letters of credit primarily guarantee various contract bidding, contractual performance, including asset retirement obligations, and insurance activities.  The following table details our interest expense and capitalized interest for the three- and nine-month periods ended September 30, 2011 and 2010:
 
     
Three Months Ended
     
Nine Months Ended
 
     
September 30,
     
September 30,
 
     
2011
     
2010
     
2011
     
2010
 
     
(in thousands)
 
Interest expense
 
$
25,175
   
$
25,784
   
$
75,971
   
$
74,730
 
Interest income
   
(600
)
   
(263
)
   
(1,575
)
   
(660
)
Capitalized interest
   
(461
)
   
(42
)
   
(768
)
   
(12,433
)
     Interest expense, net
 
$
24,114
   
$
25,479
   
$
73,628
   
$
61,637
 
 
Included below is a summary of certain components of our indebtedness. For additional information regarding our debt see Note 9 of our 2010 Form 10-K.
 
Senior Unsecured Notes
 
In December 2007, we issued $550 million of 9.5% Senior Unsecured Notes due 2016 (“Senior Unsecured Notes”).  Interest on the Senior Unsecured Notes is payable semiannually in arrears on each January 15 and July 15, commencing July 15, 2008.  The Senior Unsecured Notes are fully and unconditionally guaranteed by substantially all of our existing restricted domestic subsidiaries, except for Cal Dive I-Title XI, Inc.  In addition, any future restricted domestic subsidiaries that guarantee any of our indebtedness and/or our restricted subsidiaries’ indebtedness are required to guarantee the Senior Unsecured Notes.  Our foreign subsidiaries are not guarantors.
 
During the three-month period ended September 30, 2011, we purchased a portion of our Senior Unsecured Notes that resulted in the early extinguishment of an aggregate $75.0 million of those notes.   In these transactions we paid an aggregate amount of $77.4 million, including the $75.0 million in principal and $2.4 million in premium for the repurchased Senior Unsecured Notes.  The premium is reflected as a component of “other income (expense)” in the accompanying condensed consolidated statements of operations.   We also paid the accrued interest on these Senior Unsecured Notes totaling
 
 
11

 
$0.8 million and we recorded a $0.9 million charge to interest expense to accelerate a pro rata portion of the deferred financing costs associated with the issuance of the Senior Unsecured Notes in 2007.
 
Credit Agreement
 
In July 2006, we entered into a credit agreement (the “Credit Agreement”) containing both a term loan (the “Term Loan”) and a revolving credit facility (the “Revolving Credit Facility”). The $835 million term loan was used to fund the cash portion of the acquisition of Remington Oil and Gas Corporation in July 2006.   The original borrowing capacity under the Revolving Credit Facility was $300 million.  In June 2011, we amended our Credit Agreement as further discussed below.  For additional information regarding the previous terms of our Credit Agreement see Note 9 of our 2010 Form 10-K.
 
The fourth amendment to our Credit Agreement, among other things:
 
·  
increases the Revolving Credit Facility to $600.0 million (capacity was $435 million prior to the closing of the fourth amendment);
 
·  
provided for the repayment of $109.4 million of the outstanding principal portion of the Term Loan together with accrued interest thereon and related costs;
 
·  
extends the maturity date of the Term Loan from July 1, 2013 to a maturity date that is the earlier of (A) July 1, 2016, or (B), if our currently outstanding Senior Unsecured Notes due in 2016 are not fully re-financed or repaid by July 1, 2015, July 1, 2015;
 
·  
extends the maturity date of the Revolving Credit Facility from November 30, 2012 to a maturity date that is the earlier of (A) January 1, 2016, or (B), if our currently outstanding Senior Unsecured Notes due in 2016 are not fully re-financed or repaid by July 1, 2015, July 1, 2015;
 
·  
relaxes limitations on our right to dispose of certain Contracting Services assets comprising collateral to the Credit Agreement;
 
 
 
·  
increases the amount of restricted payments in the form of stock repurchases or redemptions that we are permitted to repurchase or redeem up to $50 million;
 
 
 
·  
permits us to repurchase or redeem all or part of our Convertible Senior Notes or Senior Unsecured Notes assuming certain conditions are met pro forma for any such  transaction, including maintaining minimum levels of liquidity (defined as cash on hand and availability under our Revolving Credit Facility) of (A) $400 million with respect to the Convertible Senior Notes, and (B) $500 million with respect to the Senior Unsecured Notes; and
 
 
 
·  
increases the maximum amount of all investments permitted in subsidiaries that are neither loan parties nor whose equity interests are pledged from $150 million to $200 million.
 
With the closing of the fourth amendment, the Term Loan currently bears interest either at the one-, two-, three- or six-month LIBOR or Base Rates at our election plus a margin of between 3.25% and 3.5%  (LIBOR margin) or 2.25% to 2.5% (Base Rate margin) depending on current leverage ratios.  Our average interest rate on the Term Loan for the nine-month periods ended September 30, 2011 and 2010 was approximately 3.6% and 2.9%, respectively, including the effects of our interest rate swaps (Note 16).
 
As the rates for our Term Loan are subject to market influences and will vary over the term of the Credit Agreement, we may enter into various interest rate swaps to stabilize cash flows relating to a portion of our interest payments for our Term Loan (Note 16).
 
The full amount of the Revolving Credit Facility may be used for issuances of letters of credit.  At September 30, 2011, we had no amounts drawn on the Revolving Credit Facility and our availability under the Revolving Credit Facility totaled $557.4 million, net of $42.6 million of letters of credit issued.
 
 
Pursuant to the fourth amendment, the borrowings outstanding under the Revolving Credit Facility will bear interest based on one-, two-, three- or six-month LIBOR rates or on Base Rates at our election plus an applicable margin. The LIBOR margin ranges from 2.5% to 3.5% and the Base Rate margin rates from 1.5% to 2.5%, depending on our consolidated leverage ratio. In connection with the closing of the fourth amendment to our Credit Agreement (as noted above), we borrowed $109.4 million under the Revolving Credit Facility and prepaid a portion of the Term Loan.   We subsequently repaid all borrowings under our Revolving Credit Facility with our available cash on hand.  There were no borrowings outstanding on the Revolving Credit Facility at any time during the third quarter of 2011.
 
The Credit Agreement contains various covenants regarding, among other things, collateral, capital expenditures, investments, dispositions, indebtedness and financial performance that are customary for this type of financing and for companies in our industry.
 
Convertible Senior Notes
 
In March 2005, we issued $300 million of Convertible Senior Notes at 100% of the principal amount to certain qualified institutional buyers.  The Convertible Senior Notes are convertible into cash and, if applicable, shares of our common stock based on the specified conversion rate, subject to adjustment.
 
The Convertible Senior Notes can be converted prior to the stated maturity (March 2025) under certain triggering events specified in the indenture governing the Convertible Senior Notes.  To the extent we do not have long-term financing secured to cover the conversion, the Convertible Senior Notes would be classified as a current liability in the accompanying condensed consolidated balance sheet.  No conversion triggers were met during either the three- or nine-month periods ended September 30, 2011 and September 30, 2010. The first dates for early redemption of the Convertible Senior Notes are in December 2012, with the holders of the Convertible Senior Notes being able to put them to us on December 15, 2012 and our being able to call the Convertible Senior Notes at any time after December 20, 2012 (see Note 9 of our 2010 Form 10-K).   Effective January 1, 2009, we adopted certain accounting standards that required us to discount the principal amount of our Convertible Senior Notes. Following adoption of these accounting standards, the effective interest rate for the Convertible Senior Notes is 6.6%.
 
Our average share price was below the $32.14 per share conversion price for all the periods presented in this Quarterly Report on Form 10-Q.  As a result of our share price being lower than the $32.14 per share conversion price for these periods there are no shares included in our diluted earnings per share calculation associated with the assumed conversion of our Convertible Senior Notes.  In the event our average share price exceeds the conversion price, there would be a premium, payable in shares of common stock, in addition to the principal amount, which is payable in cash, and such shares would be issued on conversion.  The Convertible Senior Notes are convertible into a maximum of 13,303,770 shares of our common stock.

MARAD Debt
 
This U.S. government guaranteed financing ("MARAD Debt")  pursuant to Title XI of the Merchant Marine Act of 1936, which is administered by the Maritime Administration, was used to finance the construction of the Q4000. The MARAD Debt is payable in equal semi-annual installments beginning in August 2002 and matures in February 2027. The MARAD Debt is collateralized by the Q4000 and 50% of the debt is guaranteed by us.  The MARAD Debt initially bore interest at a floating rate which approximated AAA Commercial Paper yields plus 20 basis points.  As provided for in the MARAD Debt agreements, in September 2005, we fixed the interest rate on the debt through the issuance of a 4.93% fixed-rate note with the same February 2027 maturity date.


 
 
Other
 
In accordance with our Credit Agreement and our Senior Unsecured Notes, Convertible Senior Notes and MARAD Debt agreements, we are required to comply with certain covenants, including the maintenance of minimum net worth, working capital and debt-to-equity requirements, and restrictions that limit our ability to incur certain types of additional indebtedness.  As of September 30, 2011, we were in compliance with these covenants and restrictions.
 
Deferred financing costs of $28.0 million and $25.7 million are included in other assets, net as of September 30, 2011 and December 31, 2010, respectively, and are being amortized over the life of the applicable loan agreements.  We incurred $9.2 million of deferred financing costs related to the fourth amendment to our Credit Agreement and charged $0.8 million of deferred financing costs to interest expense associated with the repayment of $109.4 million of our Term Loan balance in June 2011 (see “Credit Agreement” above).  In the third quarter of 2011, we charged $0.9 million of deferred financing costs to interest expense associated with purchases and early extinguishment of a portion of our Senior Unsecured Notes (see “Senior Unsecured Notes” above).
 
 
Note 8 – Income Taxes
 
          The effective tax rates for the three-month and nine-month periods ended September 30, 2011 were 33.4% and 29.9%, respectively.  The effective tax rates for the three-month and nine-month periods ended September 30, 2010 reflected a provision of 40.0% and a benefit of 35.8%, respectively.  The variance of the comparable year-over-year periods primarily reflect the increased benefit derived from the effect of lower tax rates in certain foreign jurisdictions.   Our effective tax rate increased in the third quarter of 2011, primarily reflecting increased profitability in our U.S. operations and certain losses associated with our Australian operations that are nondeductible for income tax purposes.   
 
     We believe our recorded assets and liabilities are reasonable. However, because tax laws and regulations are subject to interpretation and tax litigation is inherently uncertain, our assessments can involve a series of complex judgments about future events and rely heavily on estimates and assumptions.
 
 
Note 9 – Comprehensive Income (Loss)
 
The components of total comprehensive income (loss) for the three and nine-month periods ended September 30, 2011 and 2010 were as follows (in thousands):
 
     
Three Months Ended
     
Nine Months Ended
 
     
September 30,
     
September 30,
 
     
2011
     
2010
     
2011
     
2010
 
                                 
Net income (loss), including noncontrolling interests
 
$
46,826
   
$
26,947
   
$
115,570
   
$
(75,128
)
Other comprehensive income (loss), net of tax
                               
     Foreign currency translation gain (loss)
   
1,588
     
5,436
     
2,287
     
(8,372
)
     Unrealized gain (loss) on hedges, net
   
33,888
     
(3,795
)
   
44,291
     
12,308
 
     Unrealized loss on investment available for sale
   
     
(123
)
   
     
(679
)
Total other comprehensive income (loss)
 
 $
82,302
   
$
28,465
   
$
162,148
   
$
(71,871
)
 
The components of accumulated other comprehensive income (loss) were as follows (in thousands):
 
   
September 30,
 
December 31,
   
2011
 
2010
                 
Cumulative foreign currency translation adjustment
 
$
(19,975
)
 
$
(22,262
)
Unrealized gain (loss) on hedges, net
   
27,495
     
(16,796
)
     Accumulated other comprehensive income (loss)
 
$
7,520
   
$
(39,058
)
 
 
 
Note 10 – Earnings Per Share
 
We have shares of restricted stock issued and outstanding, some of which remain subject to certain vesting requirements. Holders of such shares of unvested restricted stock are entitled to the same liquidation and dividend rights as the holders of our outstanding common stock and are thus considered participating securities. Under applicable accounting guidance, the undistributed earnings for each period are allocated based on the participation rights of both the common shareholders and holders of any participating securities as if earnings for the respective periods had been distributed.   Because both the liquidation and dividend rights are identical, the undistributed earnings are allocated on a proportionate basis.  Further, we are required to compute earnings per share (“EPS”) amounts under the two class method in periods in which we have earnings from continuing operations.  For periods in which we have a net loss we do not use the two class method as holders of our restricted shares are not contractually obligated to share in such losses.
 
The presentation of basic EPS amounts on the face of the accompanying condensed consolidated statements of operations is computed by dividing the net income available to common shareholders by the weighted average shares of outstanding common stock. The calculation of diluted EPS is similar to basic EPS, except that the denominator includes dilutive common stock equivalents and the income included in the numerator excludes the effects of the impact of dilutive common stock equivalents, if any. The computations of the numerator (income) and denominator (shares) to derive the basic and diluted EPS amounts presented on the face of the accompanying condensed consolidated statements of operations are as follows (in thousands):
 
   
Three Months Ended
 
Three Months Ended
   
September 30, 2011
 
September 30, 2010
   
Income
 
Shares
 
Income
 
Shares
Basic:
               
Net income applicable to common shareholders
  $ 46,016       $ 26,161    
Less: Undistributed net income allocable to participating securities
    (549 )       (356 )  
Net income applicable to common stock
  $ 45,467  
104,700
  $ 25,805  
104,090
 
     Three Months Ended   Three Months Ended
     September 30, 2011    September 30, 2010
   
Income
 
Shares
 
Income
 
Shares
Diluted:
               
Net  income per common share – Basic
  $ 45,467   104,700   $ 25,805   104,090
Effect of dilutive securities:
                   
Stock options                                                                
      93       22
Undistributed earnings reallocated to participating securities
    2       5  
Convertible Senior Notes                                                                
           
Convertible preferred stock                                                                
    10   361       1,195
Net income per common share – Diluted
  $ 45,479   105,154   $ 25,810   105,307
                     
 
   
Nine Months Ended
 
Nine Months Ended
   
September 30, 2011
 
September 30, 2010
   
Income
 
Shares
 
Income
 
Shares
Basic:
               
Net income (loss) applicable to common shareholders
  $ 113,186       $ (77,281 )  
Less: Undistributed net income allocable to participating securities
    (1,403 )          
Net income (loss) applicable to common stock
  $ 111, 783  
104,616
  $ (77,281 )
103,772
 


 
 
     Nine Months Ended    Nine Months Ended
     September 30, 2011    September 30, 2010
   
Income
 
Shares
 
Income
 
Shares
Diluted:
               
Net  income (loss) per common share –  Basic
  $ 111,783   104,616   $ (77,281 ) 103,772
Effect of dilutive securities:
                   
Stock options                                                                
      84      
Undistributed earnings reallocated to participating securities
    6        
Convertible Senior Notes                                                                
           
Convertible preferred stock                                                                
    30   361      
Net income (loss) per common share –  Diluted
  $ 111,819   105,061   $ (77,281 ) 103,772
                     
 
We had a net loss from continuing operations for the nine-month period ended September 30, 2010.  Accordingly, we had no dilutive securities during this reporting period as their inclusion would have had an anti-dilutive effect on our EPS calculation, meaning it would have increased our reported EPS amount. The following table provides the effect the excluded securities would have had on our diluted shares calculation for the nine-month period ended September 30, 2010 assuming we had earnings from continuing operations (in thousands):
 
 
Diluted shares (as reported)
103,772
Stock options
51
Convertible preferred stock
1,689
Total
105,512
 
 
Note 11 – Stock-Based Compensation Plans
 
We have two stock-based compensation plans: the 1995 Long-Term Incentive Plan, as amended (the “1995 Incentive Plan”) and the 2005 Long-Term Incentive Plan, as amended (the “2005 Incentive Plan”).  As of September 30, 2011, there were 985,070 shares available for grant under our 2005 Incentive Plan.
 
There were no stock option grants in the three- and nine-month periods ended September 30, 2011 and 2010. During the nine-month period ended September 30, 2011, we made the following restricted share grants to executive officers, selected management employees and non-employee members of the board of directors under the 2005 Incentive Plan:
 
Date of Grant
 
Shares
   
Market Value Per Share
 
Vesting Period
               
January 4, 2011
    475,804     $ 12.14  
20% per year over five years
January 4, 2011
    4,427       12.14  
100% on January 1, 2013
April 1, 2011
    2,907       17.20  
100% on January 1, 2013
May 11, 2011
    21,608       16.14  
20% per year over five years
July 1, 2011
    2,095       16.56  
100% on January 1, 2013
 
Compensation cost is recognized over the applicable vesting periods on a straight-line basis.  For the three- and nine-month periods ended September 30, 2011, $1.9 million and $6.8 million, respectively, was recognized as compensation expense related to restricted shares as compared with $2.1 million and $6.7 million during the three- and nine-month periods ended September 30, 2010, respectively.


 
In January 2009, we adopted the 2009 Long-Term Incentive Cash Plan (the “2009 LTI Plan”) to provide long term cash-based compensation to eligible employees.  Under the terms of the 2009 LTI Plan, the majority of the cash awards are fixed sum amounts payable annually over a five-year vesting period.  Some of the cash awards, however, are indexed to the Company’s common stock price and the payment amount at each vesting date will fluctuate based on the common stock’s performance.  As a result, the compensation expense associated with those awards is re-measured to fair value each reporting period with corresponding changes being recorded as a charge to earnings as appropriate.
 
Total compensation expense under the 2009 LTI plan totaled $0.4 million and $5.0 million for the three- and nine-month periods ended September 30, 2011, respectively.  For the three- and nine-month periods ended September 30, 2010, total compensation under the 2009 LTI plan totaled $0.8 million and $3.4 million, respectively.  The liability balance under the 2009 LTI Plan was $7.0 million at September 30, 2011 and $7.9 million at December 31, 2010, including $5.8 million at September 30, 2011 and $6.2 million at December 31, 2010 associated with the variable portion of the 2009 LTI plan.
 
For more information regarding our stock-based compensation plans, including our 2009 LTI Plan see Note 12 of our 2010 Form 10-K.
 
Note 12 – Business Segment Information
 
Our operations are conducted through two lines of business: contracting services and oil and gas.  We have disaggregated our contracting services operations into two reportable segments.  As a result, our reportable segments consist of the following: Contracting Services, Production Facilities and Oil and Gas. Contracting Services operations include subsea construction, deepwater pipelay, well operations and robotics.  The Production Facilities segment includes our consolidated investment in the HP I and Kommandor LLC, as well as the retainer fee related to the HFRS and our equity investments in Deepwater Gateway and Independence Hub that are accounted for under the equity method of accounting.
 
We evaluate our performance based on income before income taxes of each segment. Segment assets are comprised of all assets attributable to the reportable segment.  All material intercompany transactions between the segments have been eliminated.
 
     
Three Months Ended
     
Nine Months Ended
 
     
September 30,
     
September 30,
 
     
2011
     
2010
     
2011
     
2010
 
     
(in thousands)
 
Revenues ─
                               
      Contracting Services
 
$
229,967
   
$
238,531
   
$
532,857
   
$
595,048
 
      Production Facilities
   
19,986
     
74,458
     
56,101
     
97,169
 
      Oil and Gas
   
159,218
     
95,566
     
500,535
     
288,867
 
      Intercompany elimination
   
(36,675
)
   
(15,886
)
   
(87,071
)
   
(87,583
)
            Total
 
$
372,496
   
$
392,669
   
$
1,002,422
   
$
893,501
 
                                 
Income (loss) from operations ─
                               
      Contracting Services
 
$
47,363
   
$
31,015
   
$
81,194
   
$
102,282
 
      Production Facilities (1) 
   
10,983
     
44,520
     
28,859
     
57,460
 
      Oil and Gas
   
48,622
     
(4,384
)
   
144,926
     
(159,991
)
      Corporate (2) 
   
(6,227
)
   
(10,767
)
   
(25,780
)
   
(46,242
)
      Intercompany elimination
   
(528
)
   
(286
)
   
(457
)
   
(18,705
)
            Total
 
$
100,213
   
$
60,098
   
$
228,742
   
$
(65,196
)
                                 
Equity in earnings of equity investments (Note 6)
 
$
4,906
   
$
6,221
   
$
16,443
   
$
12,932
 
 
(1)  
In April 2009, Kommandor LLC commenced leasing the HP I to us under terms of a charter arrangement following the completion of the initial conversion of the vessel (Note 8 of our 2010 Form
10-K).  The HP I was certified as a floating oil and gas production unit in June 2010 following the completion of installation of oil and gas processing facilities on the vessel.
(2)  
The nine-month period ended September 30, 2010, included $13.8 million of $17.5 million settlement of a third party claim against us in March 2010 (Note 14).
 
      
    Intercompany segment revenues during the three- and nine-month periods ended September 30, 2011 and 2010 were as follows:
 
     
Three Months Ended
     
Nine Months Ended
 
     
September 30,
     
September 30,
 
     
2011
     
2010
     
2011
     
2010
 
     
(in thousands)
 
Contracting Services
 
$
25,410
   
$
15,886
   
$
52,574
   
$
84,053
 
Production Facilities
   
11,265
     
     
34,497
     
3,530
 
            Total
 
$
36,675
   
$
15,886
   
$
87,071
   
$
87,583
 
 
Intercompany segment gross profit (losses) during the three- and nine-month periods ended September 30, 2011 and 2010 were as follows:
 
     
Three Months Ended
     
Nine Months Ended
 
     
September 30,
     
September 30,
 
     
2011
     
2010
     
2011
     
2010
 
     
(in thousands)
 
Contracting Services
 
$
606
   
$
330
   
$
645
   
$