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EXCEL - IDEA: XBRL DOCUMENT - HELIX ENERGY SOLUTIONS GROUP INCFinancial_Report.xls
EX-31.1 - RULE 13A-14(A) CERTIFICATION - CEO - OWEN KRATZ - HELIX ENERGY SOLUTIONS GROUP INCexh31-1.htm
EX-32.1 - SECTION 906 CERTIFICATIONS OF CEO AND CFO - HELIX ENERGY SOLUTIONS GROUP INCexh32-1.htm
EX-31.2 - RULE 13A-14(A) CERTIFICATION - CFO - ANTHONY TRIPODO - HELIX ENERGY SOLUTIONS GROUP INCexh31-2.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, 2014
 
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.)
  
   
3505 West Sam Houston Parkway North 
Suite 400 
Houston, Texas
(Address of principal executive offices)
 
 
77043
(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, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer“ and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ √ ]
Accelerated filer [   ]
Non-accelerated filer [   ]
Smaller reporting company [   ]
   
(Do not check if a smaller reporting company)
 
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 17, 2014, 105,537,973 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,
 
   
2014
   
2013
 
   
(Unaudited)
       
ASSETS
Current assets:
           
Cash and cash equivalents
  $ 546,529     $ 478,200  
Accounts receivable:
               
Trade, net of allowance for uncollectible accounts of $5,971 and $2,234, respectively
    125,718       156,925  
Unbilled revenue
    71,366       25,732  
Costs in excess of billing
    11,111       1,508  
Current deferred tax assets
    26,342       51,573  
Other current assets
    48,006       29,709  
Total current assets
    829,072       743,647  
Property and equipment
    2,129,058       1,963,706  
Less accumulated depreciation
    (488,871 )     (431,489 )
Property and equipment, net
    1,640,187       1,532,217  
Other assets:
               
Equity investments
    152,588       157,919  
Goodwill
    62,839       63,230  
Other assets, net
    60,270       47,267  
Total assets
  $ 2,744,956     $ 2,544,280  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
               
Accounts payable
  $ 117,280     $ 72,602  
Accrued liabilities
    85,969       96,482  
Income tax payable
    25,588       760  
Current maturities of long-term debt
    24,394       20,376  
Total current liabilities
    253,231       190,220  
Long-term debt
    529,281       545,776  
Deferred tax liabilities
    267,409       265,879  
Other non-current liabilities
    17,592       18,295  
Total liabilities
    1,067,513       1,020,170  
                 
Commitments and contingencies
               
Shareholders' equity:
               
Common stock, no par, 240,000 shares authorized, 105,531 and 105,640 shares issued, respectively
    936,922       933,507  
Retained earnings
    773,319       586,232  
Accumulated other comprehensive loss
    (32,798 )     (20,688 )
Total controlling interest shareholders' equity
    1,677,443       1,499,051  
Noncontrolling interests
          25,059  
Total equity
    1,677,443       1,524,110  
Total liabilities and shareholders' equity
  $ 2,744,956     $ 2,544,280  
 
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,
 
   
2014
   
2013
 
             
Net revenues
  $ 340,837     $ 220,117  
Cost of sales
    214,590       150,660  
                 
Gross profit
    126,247       69,457  
                 
Gain on disposition of assets
          15,812  
Selling, general and administrative expenses
    (19,916 )     (22,610 )
Income from operations
    106,331       62,659  
Equity in earnings of investments
    508       857  
Net interest expense
    (3,856 )     (6,585 )
Loss on early extinguishment of long-term debt
          (8,572 )
Other income, net
    598       2,366  
Other income – oil and gas
    1,837       1,681  
Income before income taxes
    105,418       52,406  
Income tax provision
    29,832       7,058  
Net income from continuing operations
    75,586       45,348  
Income from discontinued operations, net of tax
          44  
Net income, including noncontrolling interests
    75,586       45,392  
Less net income applicable to noncontrolling interests
          (799 )
Net income applicable to Helix
  $ 75,586     $ 44,593  
                 
                 
Basic earnings per share of common stock:
               
Continuing operations
  $ 0.72     $ 0.42  
Discontinued operations
           
Net income per common share
  $ 0.72     $ 0.42  
                 
Diluted earnings per share of common stock:
               
Continuing operations
  $ 0.71     $ 0.42  
Discontinued operations
           
Net income per common share
  $ 0.71     $ 0.42  
                 
Weighted average common shares outstanding:
               
Basic
    104,997       105,029  
Diluted
    105,338       105,136  
 
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,
 
   
2014
   
2013
 
             
Net revenues
  $ 899,996     $ 649,724  
Cost of sales
    588,765       460,203  
                 
Gross profit
    311,231       189,521  
                 
Loss on commodity derivative contracts
          (14,113 )
Gain on disposition of assets, net
    10,418       14,727  
Selling, general and administrative expenses
    (69,614 )     (65,041 )
Income from operations
    252,035       125,094  
Equity in earnings of investments
    709       2,150  
Net interest expense
    (12,856 )     (28,252 )
Loss on early extinguishment of long-term debt
          (12,100 )
Other expense, net
    (229 )     (1,884 )
Other income – oil and gas
    15,709       5,781  
Income before income taxes
    255,368       90,789  
Income tax provision
    67,778       16,078  
Net income from continuing operations
    187,590       74,711  
Income from discontinued operations, net of tax
          1,073  
Net income, including noncontrolling interests
    187,590       75,784  
Less net income applicable to noncontrolling interests
    (503 )     (2,365 )
Net income applicable to Helix
  $ 187,087     $ 73,419  
                 
                 
Basic earnings per share of common stock:
               
Continuing operations
  $ 1.77     $ 0.68  
Discontinued operations
          0.01  
Net income per common share
  $ 1.77     $ 0.69  
                 
Diluted earnings per share of common stock:
               
Continuing operations
  $ 1.77     $ 0.68  
Discontinued operations
          0.01  
Net income per common share
  $ 1.77     $ 0.69  
                 
Weighted average common shares outstanding:
               
Basic
    105,038       105,036  
Diluted
    105,374       105,152  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
HELIX ENERGY SOLUTIONS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(in thousands)
 
   
Three Months Ended
 
   
September 30,
 
   
2014
   
2013
 
             
Net income, including noncontrolling interests
  $ 75,586     $ 45,392  
Other comprehensive income (loss), net of tax:
               
Unrealized gain (loss) on hedges arising during the period
    (9,209 )     1,117  
Reclassification adjustments for loss included in net income
    812       396  
Income taxes on unrealized (gain) loss on hedges
    2,939       (529 )
Unrealized gain (loss) on hedges, net of tax
    (5,458 )     984  
Foreign currency translation gain (loss)
    (15,706 )     11,311  
Other comprehensive income (loss), net of tax
    (21,164 )     12,295  
Comprehensive income
    54,422       57,687  
Less comprehensive income applicable to noncontrolling interests
          (799 )
Comprehensive income applicable to Helix
  $ 54,422     $ 56,888  
 
 
   
Nine Months Ended
 
   
September 30,
 
   
2014
   
2013
 
             
Net income, including noncontrolling interests
  $ 187,590     $ 75,784  
Other comprehensive loss, net of tax:
               
Unrealized loss on hedges arising during the period
    (9,283 )     (16,050 )
Reclassification adjustments for loss included in net income
    2,080       900  
Income taxes on unrealized loss on hedges
    2,521       5,303  
Unrealized loss on hedges, net of tax
    (4,682 )     (9,847 )
Foreign currency translation gain (loss)
    (7,428 )     12  
Other comprehensive loss, net of tax
    (12,110 )     (9,835 )
Comprehensive income
    175,480       65,949  
Less comprehensive income applicable to noncontrolling interests
    (503 )     (2,365 )
Comprehensive income applicable to Helix
  $ 174,977     $ 63,584  
 
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,
 
   
2014
   
2013
 
Cash flows from operating activities:
           
Net income, including noncontrolling interests
  $ 187,590     $ 75,784  
Adjustments to reconcile net income, including noncontrolling interests, to net cash provided by (used in) operating activities:
               
Income from discontinued operations, net of tax
          (1,073 )
Depreciation and amortization
    81,274       71,542  
Amortization of deferred financing costs
    3,653       4,091  
Stock-based compensation expense
    5,711       7,297  
Amortization of debt discount
    4,149       3,850  
Deferred income taxes
    24,728       (23,911 )
Excess tax from stock-based compensation
    (120 )     (168 )
Gain on disposition of assets, net
    (10,418 )     (14,727 )
Loss on early extinguishment of debt
          12,100  
Unrealized loss and ineffectiveness on derivative contracts, net
    69       140  
Changes in operating assets and liabilities:
               
Accounts receivable, net
    (16,496 )     2,046  
Other current assets
    (19,388 )     7,904  
Income tax payable
    25,440       (37,806 )
Accounts payable and accrued liabilities
    26,083       (46,313 )
Oil and gas asset retirement costs
    (956 )     (9,886 )
Other noncurrent, net
    (9,758 )     (561 )
Net cash provided by operating activities
    301,561       50,309  
Net cash used in discontinued operations
          (30,503 )
Net cash provided by operating activities
    301,561       19,806  
                 
Cash flows from investing activities:
               
Capital expenditures
    (204,528 )     (275,935 )
Distributions from equity investments, net
    5,041       6,110  
Proceeds from sale of assets
    11,074       189,054  
Acquisition of noncontrolling interests
    (20,085 )      
Net cash used in investing activities
    (208,498 )     (80,771 )
Net cash provided by discontinued operations
          582,965  
Net cash provided by (used in) investing activities
    (208,498 )     502,194  
                 
Cash flows from financing activities:
               
Early extinguishment of Senior Unsecured Notes
          (281,490 )
Borrowings under revolving credit facility
          47,617  
Repayment of revolving credit facility
          (147,617 )
Repurchase of Convertible Senior Notes due 2025
          (3,487 )
Proceeds from term loans
          300,000  
Repayment of term loans
    (11,250 )     (370,931 )
Repayment of MARAD borrowings
    (5,376 )     (5,120 )
Deferred financing costs
    (3,143 )     (10,948 )
Distributions to noncontrolling interests
    (1,018 )     (3,059 )
Repurchases of common stock
    (8,538 )     (5,562 )
Excess tax from stock-based compensation
    120       168  
Exercise of stock options, net and other
          95  
Proceeds from issuance of ESPP shares
    3,223       2,711  
Net cash used in financing activities
    (25,982 )     (477,623 )
                 
Effect of exchange rate changes on cash and cash equivalents
    1,248       (1,296 )
Net increase in cash and cash equivalents
    68,329       43,081  
Cash and cash equivalents:
               
Balance, beginning of year
    478,200       437,100  
Balance, end of period
  $ 546,529     $ 480,181  
 
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 and Recent Accounting Standards 
 
The accompanying condensed consolidated financial statements include the accounts of Helix Energy Solutions Group, Inc. and its wholly- and 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 wholly- and 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 (the “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 (“U.S. GAAP”) and are consistent in all material respects with those applied in our 2013 Annual Report on Form 10-K (“2013 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.  We have made all adjustments (which were normal recurring adjustments unless otherwise disclosed herein) that we believe are necessary for a fair presentation of the condensed consolidated balance sheets, statements of operations, statements of comprehensive income, and statements of cash flows, as applicable.  The operating results for the three- and nine-month periods ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.  Our balance sheet as of December 31, 2013 included herein has been derived from the audited balance sheet as of December 31, 2013 included in our 2013 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 2013 Form 10-K. 
 
Certain reclassifications were made to previously-reported amounts in the consolidated financial statements and notes thereto to make them consistent with the current presentation format.
 
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).”  This ASU provides a single five-step approach to account for revenue arising from contracts with customers.  The ASU requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  This guidance is effective prospectively for annual reporting periods beginning after December 15, 2016, including interim periods.  Early adoption is not permitted.  The guidance permits companies to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption through a cumulative adjustment.  We are currently evaluating which transition approach to use and the potential impact the adoption of this new standard may have on our consolidated financial statements.
 
 
Note 2 — Company Overview 
 
Our Operations
 
We are an international offshore energy company that provides specialty services to the offshore energy industry, with a focus on well intervention and robotics operations.  We seek to provide services and methodologies that we believe are critical to developing offshore reservoirs and maximizing production economics.  We provide services primarily in deepwater in the Gulf of Mexico, North Sea, Asia Pacific and West Africa regions.  Our “life of field” services are segregated into four business segments: Well Intervention, Robotics, Subsea Construction and Production Facilities (Note 11).  Our Subsea Construction segment was significantly diminished following the sale of substantially all of our assets related to this reportable segment during 2013 and early 2014 (see Note 2 to our 2013 Form 10-K and Note 2 to our Quarterly Report on Form 10-Q for the three-month period ended March 31, 2014).  Our Production Facilities segment includes the Helix Producer I (“HP I”) vessel (which we now own 100% after acquiring our minority partner’s noncontrolling interests in the entity that owns the vessel for $20.1 million in February 2014) as well as our equity investments in Deepwater Gateway, L.L.C. (“Deepwater Gateway”) and Independence Hub, LLC (“Independence Hub”) (Note 5).  The Production Facilities segment also includes the Helix Fast Response System (“HFRS”), which provides certain operators access to our Q4000 and HP I vessels in the event of a well control incident in the Gulf of Mexico.
 
Discontinued Operations
 
In February 2013, we sold Energy Resource Technology GOM, Inc. (“ERT”), a former wholly-owned U.S. subsidiary that conducted our oil and gas operations in the Gulf of Mexico, for $624 million plus additional consideration in the form of overriding royalty interests in ERT’s Wang well and certain exploration prospects.  As a result, we have presented the historical operating results of our former Oil and Gas segment as discontinued operations in the accompanying condensed consolidated financial statements.  See Note 3 to our 2013 Form 10-K for additional information regarding our discontinued operations and Note 6 regarding the use of a portion of the sale proceeds to reduce our indebtedness under our former credit agreement.
 
Note 3 — Details of Certain Accounts 
 
Other current assets and other assets, net consist of the following (in thousands): 
 
   
September 30,
   
December 31,
 
   
2014
   
2013
 
             
Note receivable (1)
  $ 10,000     $  
Other receivables
    840       785  
Prepaid insurance
    9,613       7,038  
Other prepaids
    15,969       12,999  
Spare parts inventory
    2,429       1,038  
Value added tax receivable
    9,120       7,589  
Other
    35       260  
Total other current assets
  $ 48,006     $ 29,709  
 
   
September 30,
   
December 31,
 
   
2014
   
2013
 
             
Note receivable (1)
  $ 20,000     $  
Deferred dry dock expenses, net
    14,249       20,833  
Deferred financing costs, net (Note 6)
    24,077       24,297  
Intangible assets with finite lives, net
    654       622  
Other
    1,290       1,515  
Total other assets, net
  $ 60,270     $ 47,267  
 
 
(1)
Relates to the promissory note we received in connection with the sale of our Ingleside spoolbase in January 2014.  Interest on the note is payable quarterly at a rate of 6% per annum.  A $10 million principal reduction is required to be paid on each December 31 of 2014, 2015 and 2016.
 
Accrued liabilities consist of the following (in thousands): 
 
   
September 30,
   
December 31,
 
   
2014
   
2013
 
             
Accrued payroll and related benefits
  $ 55,613     $ 50,527  
Current asset retirement obligations
    742       2,024  
Unearned revenue
    6,490       19,608  
Billing in excess of cost
          1,677  
Accrued interest
    1,362       4,187  
Derivative liability (Note 15)
    5,917       2,651  
Taxes payable excluding income tax payable
    7,918       4,811  
Pipelay assets sale deposit
          5,000  
Other
    7,927       5,997  
Total accrued liabilities
  $ 85,969     $ 96,482  
 
Note 4 — Statement of Cash Flow Information
 
We define cash and cash equivalents as cash and all highly liquid financial instruments with original maturities of three months or less.  The following table provides supplemental cash flow information (in thousands): 
 
   
Nine Months Ended
 
   
September 30,
 
   
2014
   
2013
 
             
Interest paid, net of interest capitalized
  $ 11,671     $ 39,754  
Income taxes paid
  $ 53,390     $ 78,408  
 
Our non-cash investing activities include accruals for property and equipment capital expenditures.  These non-cash investing accruals totaled $21.3 million and $9.5 million as of September 30, 2014 and December 31, 2013, respectively.  Additionally, $30 million of our non-cash investing activities relates to the promissory note we received in connection with the sale of our Ingleside spoolbase in January 2014 (Note 3).
 
Note 5 — Equity Investments
 
As of September 30, 2014, we had two investments that we account for using the equity method of accounting: Deepwater Gateway and Independence Hub, both of which are included in our Production Facilities 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 Deepwater Gulf of Mexico.  Our investment in Deepwater Gateway totaled $82.4 million and $85.8 million as of September 30, 2014 and December 31, 2013, respectively (including capitalized interest of $1.2 million and $1.3 million at September 30, 2014 and December 31, 2013, respectively). 
 
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. Our investment in Independence Hub was $70.2 million and $72.1 million as of September 30, 2014 and December 31, 2013, respectively (including capitalized interest of $4.0 million and $4.3 million at September 30, 2014 and December 31, 2013, respectively). 
 
 
We received the following distributions from these equity investments (in thousands):
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2014
   
2013
   
2014
   
2013
 
                         
Deepwater Gateway
  $ 500     $ 1,600     $ 4,250     $ 5,100  
Independence Hub
    200       800       1,500       3,160  
Total
  $ 700     $ 2,400     $ 5,750     $ 8,260  
 
Note 6 — Long-Term Debt
 
Scheduled maturities of our long-term debt outstanding as of September 30, 2014 are as follows (in thousands):
 
   
Term
Loan
   
MARAD
Debt
   
2032
Notes (1)
   
Total
 
                         
Less than one year
  $ 18,750     $ 5,644     $     $ 24,394  
One to two years
    30,000       5,926             35,926  
Two to three years
    30,000       6,222             36,222  
Three to four years
    30,000       6,532             36,532  
Four to five years
    172,500       6,858             179,358  
Over five years
          63,610       200,000       263,610  
Total debt
    281,250       94,792       200,000       576,042  
Current maturities
    (18,750 )     (5,644 )           (24,394 )
Long-term debt, less current maturities
    262,500       89,148       200,000       551,648  
Unamortized debt discount (2)
                (22,367 )     (22,367 )
Long-term debt
  $ 262,500     $ 89,148     $ 177,633     $ 529,281  
 
(1)
Beginning in March 2018, the holders of our Convertible Senior Notes due 2032 may require us to repurchase these notes or we may at our option elect to repurchase these notes.  The notes will mature in March 2032.
 
(2)
Our Convertible Senior Notes due 2032 will increase to their face amount through accretion of non-cash interest charges through March 2018.
 
Included below is a summary of certain components of our indebtedness:
 
Credit Agreement
 
In June 2013, we entered into a Credit Agreement (the “Credit Agreement”) with a group of lenders pursuant to which we borrowed $300 million under the Credit Agreement’s term loan (the “Term Loan”) component and may borrow revolving loans (the “Revolving Loans”) and/or obtain letters of credit under a revolving credit facility up to an outstanding amount of $600 million (the “Revolving Credit Facility”).  Subject to customary conditions, we may request an increase of up to $200 million in aggregate commitments with respect to the Revolving Credit Facility, additional term loans or a combination thereof.  The $300 million we borrowed under the Term Loan was in connection with our early redemption of the remaining $275 million Senior Unsecured Notes outstanding in July 2013 (see “Senior Unsecured Notes” below).
 
The Term Loan and the Revolving Loans (together, the “Loans”) will bear interest, at our election, in relation to either the base rate established by Bank of America N.A. or to a LIBOR rate, provided that all Swing Line Loans (as defined in the Credit Agreement) will be base rate loans.  The Term Loan currently bears interest at the one-month LIBOR rate plus 2.25%.  In September 2013, we entered into various interest rate swap contracts to fix the one-month LIBOR rate on $148.1 million of the Term Loan.  The fixed LIBOR rates were between 74 and 75 basis points.
 
 
The Loans or portions thereof bearing interest at the base rate will bear interest at a per annum rate equal to the base rate plus a margin ranging from 1.00% to 2.00%.  The Loans or portions thereof bearing interest at a LIBOR rate will bear interest at the LIBOR rate selected by us plus a margin ranging from 2.00% to 3.00%.  A letter of credit fee is payable by us equal to our applicable margin for LIBOR rate Loans multiplied by the daily amount available to be drawn under outstanding letters of credit.  Margins on the Loans will vary in relation to the consolidated coverage ratio, as provided by the Credit Agreement.  We currently also pay a fixed commitment fee of 0.375% on the unused portion of our Revolving Credit Facility.  At September 30, 2014, our availability under the Revolving Credit Facility totaled $583.2 million, net of $16.8 million of letters of credit issued.
 
The Term Loan is repayable in scheduled principal installments of 5% in each of the initial two loan years ($15 million per year), and 10% in each of the remaining three loan years ($30 million per year), payable quarterly, with a balloon payment of $180 million at maturity.  These installment amounts are subject to adjustment for any prepayments on the Term Loan.  We may elect to prepay amounts outstanding under the Term Loan without premium or penalty, but may not reborrow any amounts prepaid.  We may prepay amounts outstanding under the Revolving Loans without premium or penalty, and may reborrow any available amounts paid up to the amount of the Revolving Credit Facility.  The Loans mature on June 19, 2018.  In certain circumstances, we will be required to prepay the Loans.
 
The Credit Agreement and the other documents entered into in connection with the Credit Agreement (together, the “Loan Documents”) include terms and conditions, including covenants, which we consider customary for this type of transaction.  The covenants include restrictions on our and our subsidiaries’ ability to grant liens, incur indebtedness, make investments, merge or consolidate, sell or transfer assets, pay dividends and incur capital expenditures.  In addition, the Credit Agreement obligates us to meet certain financial ratios, including the Consolidated Interest Coverage Ratio and the Consolidated Leverage Ratio (as defined in the Credit Agreement).  We have designated five of our foreign subsidiaries, and may designate any newly established foreign subsidiaries, as subsidiaries that are not generally subject to the covenants in the Credit Agreement (the “Unrestricted Subsidiaries”), provided we meet certain liquidity requirements, in which case EBITDA of the Unrestricted Subsidiaries is not included in the calculations with respect to our financial covenants.  Our obligations under the Credit Agreement are guaranteed by our wholly-owned domestic subsidiaries (except Cal Dive I – Title XI, Inc.) and Canyon Offshore Limited.  Our obligations under the Credit Agreement, and of the guarantors under their guaranty, are secured by most of our assets and assets of the guarantors and Canyon Offshore Limited, plus pledges of up to two-thirds of the shares of certain foreign subsidiaries.
 
Convertible Senior Notes Due 2032 
 
In March 2012, we completed a public offering and sale of $200.0 million in aggregate principal amount of 3.25% Convertible Senior Notes due 2032 (the “2032 Notes”).  The net proceeds from the issuance of the 2032 Notes were $195.0 million after deducting the underwriter’s discounts and commissions and offering expenses.  We used the net proceeds to repurchase and retire $142.2 million of aggregate principal amount of our 3.25% Convertible Senior Notes due 2025 in separate, privately negotiated transactions (see Note 7 to our 2013 Form 10-K for additional information).  The remaining net proceeds were used for general corporate purposes, including the repayment of other indebtedness. 
 
The 2032 Notes bear interest at a rate of 3.25% per annum, and are payable semi-annually in arrears on March 15 and September 15 of each year, beginning on September 15, 2012.  The 2032 Notes will mature on March 15, 2032 unless earlier converted, redeemed or repurchased.  The 2032 Notes are convertible in certain circumstances and during certain periods at an initial conversion rate of 39.9752 shares of common stock per $1,000 principal amount (which represents an initial conversion price of approximately $25.02 per share of common stock), subject to adjustment in certain circumstances as set forth in the Indenture governing the 2032 Notes.
 
 
Prior to March 20, 2018, the 2032 Notes are not redeemable.  On or after March 20, 2018, we, at our option, may redeem some or all of the 2032 Notes in cash, at any time upon at least 30 days’ notice, at a price equal to 100% of the principal amount plus accrued and unpaid interest (including contingent interest, if any) up to but excluding the redemption date.  In addition, the holders of the 2032 Notes may require us to purchase in cash some or all of their 2032 Notes at a repurchase price equal to 100% of the principal amount of the 2032 Notes, plus accrued and unpaid interest (including contingent interest, if any) up to but excluding the applicable repurchase date, on March 15, 2018, March 15, 2022 and March 15, 2027, or, subject to specified exceptions, at any time prior to the 2032 Notes’ maturity following a fundamental change (as defined in the Indenture governing the 2032 Notes). 
 
In connection with the issuance of the 2032 Notes, we recorded a discount of $35.4 million as required under existing accounting rules.  To arrive at this discount amount, we estimated the fair value of the liability component of the 2032 Notes as of the date of their issuance (March 12, 2012) using an income approach.  To determine this estimated fair value, we used borrowing rates of similar market transactions involving comparable liabilities at the time of issuance and an expected life of 6.0 years.  In selecting the expected life, we selected the earliest date upon which the holders could require us to repurchase all or a portion of the 2032 Notes (March 15, 2018).  The effective interest rate for the 2032 Notes is 6.9% after considering the effect of the accretion of the related debt discount that represented the equity component of the 2032 Notes at their inception. 
 
MARAD Debt
 
This U.S. government guaranteed financing (the “MARAD Debt”) is pursuant to Title XI of the Merchant Marine Act of 1936 administered by the Maritime Administration, and 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, is guaranteed 50% by us, and initially bore interest at a floating rate that 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 maturity date. 
 
Nordea Credit Agreement
 
In September 2014, our wholly-owned subsidiary, Helix Q5000 Holdings S.à r.l. (“Q5000 Holdings”), entered into a Credit Agreement (the “Nordea Credit Agreement”) with a syndicated bank lending group for a term loan (the “Nordea Term Loan”) in an amount of up to $250 million.  The Nordea Term Loan will be funded at or near the time of the delivery of the Q5000, which is currently estimated in early 2015.  The parent company of Q5000 Holdings, Helix Vessel Finance S.à r.l., has guaranteed the Nordea Term Loan.  The loan will be secured by the Q5000 and its charter earnings as well as by a pledge of the shares of Q5000 Holdings.  This indebtedness is nonrecourse to Helix.
 
The Nordea Term Loan will bear interest at a LIBOR rate plus a margin of 2.5%, with an undrawn fee of 0.875%.  The Nordea Term Loan matures five years after funding and is repayable in scheduled principal installments of $8.9 million, payable quarterly, with a balloon payment of $80.4 million at maturity.  Installment amounts are subject to adjustment for any prepayments on this debt.  Q5000 Holdings may elect to prepay amounts outstanding under the Nordea Term Loan without premium or penalty, but may not reborrow any amounts prepaid.  In certain circumstances, Q5000 Holdings will be required to prepay the loan.
 
The Nordea Credit Agreement and the other related loan documents include terms and conditions, including covenants, that are considered customary for this type of transaction.  The covenants include restrictions on Q5000 Holdings’s ability to grant liens, incur indebtedness, make investments, merge or consolidate, sell or transfer assets, and pay dividends.  In addition, the Nordea Credit Agreement obligates Q5000 Holdings to meet minimum financial requirements, including liquidity, consolidated debt service coverage and collateral maintenance.
 
 
Former Credit Facility
 
Similar to our current Credit Agreement, our former credit facility contained both term loan and revolving loan components.  This indebtedness was scheduled to mature on July 1, 2015.  In February 2013, we repaid $318.4 million of borrowings outstanding under this former credit facility with the proceeds from the sale of ERT.  We fully repaid the remaining indebtedness outstanding under this credit facility in June 2013.  In connection with the repayments of this debt, we recorded charges totaling $3.5 million to accelerate a pro rata portion of the deferred financing costs associated with our former term loan debt.  This charge is reflected as a component of “Loss on early extinguishment of long-term debt” in the accompanying condensed consolidated statement of operations for the nine-month period ended September 30, 2013.
 
Senior Unsecured Notes 
 
In December 2007, we issued $550 million of 9.5% Senior Unsecured Notes due 2016 (the “Senior Unsecured Notes”).  We had $275 million of the Senior Unsecured Notes outstanding at the beginning of 2013.  We fully redeemed these notes in July 2013 (see Note 7 to our 2013 Form 10-K).  Our results of operations for the three- and nine-month periods ended September 30, 2013 included a loss on early extinguishment of debt totaling $8.6 million in connection with the redemption of these notes.
 
Other 
 
In accordance with our Credit Agreement, the 2032 Notes, the MARAD Debt agreements, and the Nordea Credit Agreement, we are required to comply with certain covenants, including certain financial ratios such as a consolidated interest coverage ratio and consolidated leverage ratio, as well as the maintenance of minimum net worth, working capital and debt-to-equity requirements.  As of September 30, 2014, we were in compliance with these covenants. 
 
Unamortized deferred financing costs are included in “Other assets, net” in the accompanying condensed consolidated balance sheets and are amortized over the life of the respective debt agreements.  The following table reflects the components of our deferred financing costs (in thousands):
 
   
September 30, 2014
   
December 31, 2013
 
   
Gross Carrying Amount
   
Accumulated Amortization
   
Net
   
Gross Carrying Amount
   
Accumulated Amortization
   
Net
 
                                     
Term Loan (matures June 2018) (1)
  $ 3,638     $ (909 )   $ 2,729     $ 3,638     $ (364 )   $ 3,274  
Revolving Credit Facility (matures June 2018) (1)
    13,275       (3,319 )     9,956       13,275       (1,327 )     11,948  
2032 Notes (mature March 2032)
    3,759       (1,609 )     2,150       3,759       (1,148 )     2,611  
MARAD Debt (matures February 2027)
    12,200       (6,101 )     6,099       12,200       (5,736 )     6,464  
Nordea Term Loan
    3,143             3,143                    
Total deferred financing costs
  $ 36,015     $ (11,938 )   $ 24,077     $ 32,872     $ (8,575 )   $ 24,297  
 
(1)
Relates to amounts allocated to the existing Term Loan and Revolving Credit Facility, which became effective in June 2013.
 
The following table details the components of our net interest expense (in thousands): 
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2014
   
2013
   
2014
   
2013 (1)
 
                         
Interest expense
  $ 8,952     $ 9,416     $ 24,474     $ 35,971  
Interest income
    (2,741 )     (271 )     (4,113 )     (903 )
Capitalized interest
    (2,355 )     (2,560 )     (7,505 )     (6,816 )
Net interest expense
  $ 3,856     $ 6,585     $ 12,856     $ 28,252  
 
 
(1)
Interest expense amount includes $2.8 million for the three-month period ended March 31, 2013 that was allocated to ERT and is included in discontinued operations.  Following the sale of ERT in February 2013, we ceased allocating interest expense to ERT, which then constituted a discontinued operation.
 
Note 7 — Income Taxes 
 
The effective tax rates for the three- and nine-month periods ended September 30, 2014 were 28.3% and 26.5%, respectively.  The effective tax rates for the three- and nine-month periods ended September 30, 2013 were 13.5% and 17.7%, respectively.  The variance is primarily attributable to projected year-over-year increases in profitability in the United States and the 2013 tax benefit of a reduction in the U.K. statutory tax rate. 
 
Income taxes have been provided based on the U.S. statutory rate of 35% and at the local statutory rate for each foreign jurisdiction adjusted for items that are allowed as deductions for federal and foreign income tax reporting purposes, but not for book purposes.  The primary differences between the statutory rate and our effective rate from continuing operations are as follows: 
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2014
   
2013
   
2014
   
2013
 
                         
Statutory rate
    35.0 %     35.0 %     35.0 %     35.0 %
Foreign provision
    (7.2 )     (12.3 )     (7.8 )     (11.8 )
Tax return to accrual adjustment
          (4.0 )           (2.3 )
Change in U.K. tax rate
          (5.6 )           (3.3 )
Other
    0.5       0.4       (0.7 )     0.1  
Effective rate
    28.3 %     13.5 %     26.5 %     17.7 %
 
In June 2014, the U.S. Internal Revenue Service (“IRS”) and the Joint Committee on Taxation completed the examination procedures including all appeals and administrative reviews that the taxing authorities are required and expected to perform for the 2006 through 2010 audit period.  In September 2014, we received an income tax refund in the amount of $35.2 million that was pending the conclusion of the examination.  The refund was primarily attributable to the utilization of a net operating loss carryback from 2010.
 
Note 8 — Accumulated Other Comprehensive Income (Loss) (“OCI”)
 
The components of Accumulated OCI are as follows (in thousands): 
 
   
September 30,
   
December 31,
 
   
2014
   
2013
 
             
Cumulative foreign currency translation adjustment
  $ (18,125 )   $ (10,697 )
Unrealized loss on hedges, net (1)
    (14,673 )     (9,991 )
Accumulated other comprehensive loss
  $ (32,798 )   $ (20,688 )
 
(1)
Amounts relate to foreign currency hedges for the Grand Canyon, the Grand Canyon II and the Grand Canyon III charters as well as interest rate swap contracts for the Term Loan, and are net of deferred income taxes totaling $7.9 million and $5.4 million as of September 30, 2014 and December 31, 2013, respectively (Note 15).
 
 
Note 9 — Earnings Per Share 
 
We have shares of restricted stock issued and outstanding, which currently are unvested.  Holders of such shares of unvested restricted stock are entitled to the same liquidation and dividend rights as the holders of our outstanding unrestricted common stock and the shares 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 applicable to Helix 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, 2014
   
September 30, 2013
 
   
Income
     
Shares
   
Income
     
Shares
 
Basic:
                           
Continuing operations:
                           
Net income applicable to Helix
  $ 75,586             $ 44,593          
Less: Income from discontinued operations, net of tax
                  (44 )        
Net income from continuing operations
    75,586               44,549          
Less: Undistributed income allocable to participating securities – continuing operations
    (392 )             (337 )        
Net income applicable to common shareholders – continuing operations
  $ 75,194      
 104,997 
    $ 44,212      
 105,029 
 
 
Discontinued operations:
                       
Income from discontinued operations, net of tax
  $       104,997     $ 44       105,029  
 
Diluted:
                       
Continuing operations:
                       
Net income applicable to common shareholders – continuing operations
  $ 75,194       104,997     $ 44,212       105,029  
Effect of dilutive securities:
                               
Share-based awards other than participating securities
          341             107  
Undistributed income reallocated to participating securities
    1                    
Net income applicable to common shareholders – continuing operations
  $ 75,195       105,338     $ 44,212       105,136  
                                 
Discontinued operations:
                               
Income from discontinued operations, net of tax
  $       105,338     $ 44       105,136  
 
 
   
Nine Months Ended
   
Nine Months Ended
 
   
September 30, 2014
   
September 30, 2013
 
   
Income
     
Shares
   
Income
     
Shares
 
Basic:
                           
Continuing operations:
                           
Net income applicable to Helix
  $ 187,087             $ 73,419          
Less: Income from discontinued operations, net of tax
                  (1,073 )        
Net income from continuing operations
    187,087               72,346          
Less: Undistributed income allocable to participating securities – continuing operations
    (980 )             (525 )        
Net income applicable to common shareholders – continuing operations
  $ 186,107      
 105,038 
    $ 71,821      
 105,036 
 
 
Discontinued operations:
                       
Income from discontinued operations, net of tax
  $           $ 1,073        
Less: Undistributed income allocable to participating securities – discontinued operations
                (8 )      
Net income applicable to common shareholders – discontinued operations
  $       105,038     $ 1,065       105,036  
 
Diluted:
                       
Continuing operations:
                       
Net income applicable to common shareholders – continuing operations
  $ 186,107       105,038     $ 71,821       105,036  
Effect of dilutive securities:
                               
Share-based awards other than participating securities
          336             116  
Undistributed income reallocated to participating securities
    3                    
Net income applicable to common shareholders – continuing operations
  $ 186,110       105,374     $ 71,821       105,152  
                                 
Discontinued operations:
                               
Income from discontinued operations, net of tax
  $       105,374     $ 1,073       105,152  
 
No diluted shares were included for the 2032 Notes for the three- and nine-month periods ended September 30, 2014 and 2013 as the conversion trigger of $32.53 per share were not met in either period, and because we have the right to settle any such future conversions in cash at our sole discretion (Note 6).
 
Note 10 — Employee Benefit Plans 
 
Long-Term Incentive Stock-Based Plans 
 
As of September 30, 2014, there were 6.4 million shares available for issuance under our long-term incentive stock-based plans (the “LTI Stock Plans”).  During the nine-month period ended September 30, 2014, the following grants of other share-based awards were made to executive officers and non-employee members of our Board of Directors under our LTI Stock Plans: 
 
         
Grant Date
   
         
Fair Value
   
Date of Grant
 
Shares
   
Per Share
 
Vesting Period
               
January 2, 2014 (1)
    73,609     $ 23.18  
33% per year over three years
January 2, 2014 (2)
    73,609     $ 26.79  
100% on January 1, 2017
January 2, 2014 (3)
    2,724     $ 23.18  
100% on January 1, 2016
April 1, 2014 (3)
    4,051     $ 22.98  
100% on January 1, 2016
July 1, 2014 (3)
    3,397     $ 26.31  
100% on January 1, 2016
 
(1)
Reflects the grant of restricted shares to our executive officers.
 
 
(2)
Reflects the grant of performance share units (“PSUs”) to our executive officers.  The estimated fair value of the PSUs on grant date was determined using a Monte Carlo simulation model.  The PSUs provide for an award based on the performance of our common stock over a three-year period with the maximum award being 200% of the original awarded PSUs and the minimum amount being zero.  The vested PSUs will be settled in an equivalent number of shares of our common stock unless the Compensation Committee of our Board of Directors elects to pay in cash.
 
(3)
Reflects the grant of restricted shares to certain members of our Board of Directors who have made an election to take their quarterly fees in stock in lieu of cash.
 
Compensation cost is recognized over the respective vesting periods on a straight-line basis.  For the three- and nine-month periods ended September 30, 2014, $1.7 million and $5.2 million, respectively, were recognized as stock-based compensation expense related to share-based awards as compared with $1.6 million and $6.7 million for the three- and nine-month periods ended September 30, 2013.  A total of $1.3 million of the stock-based compensation expense for the nine-month period ended September 30, 2013 was included within our discontinued operations.
 
Long-Term Incentive Cash Plans 
 
We have certain long-term incentive cash plans (the “LTI Cash Plans”) that provide long-term cash-based compensation to eligible employees.  Cash awards historically have been both fixed sum amounts payable (for non-executive management only) as well as cash awards indexed to our common stock with the payment amount at each vesting date fluctuating based on the performance of our common stock (for both executive and non-executive management).  These are measured based on the performance of our stock price over the applicable award period compared to a base price determined by the Compensation Committee of our Board of Directors at the time of the award.  Cash payments under the LTI Cash Plans are made each year on the anniversary date of the award.  Cash awards granted since 2012 have a vesting period of three years while those granted prior to 2012 have a vesting period of five years.  The LTI Cash Plans are considered liability plans and as such are re-measured to fair value each reporting period with corresponding changes in the liability amount being reflected in our results of operations. 
 
The cash awards granted under the LTI Cash Plans to our executive officers and selected management employees totaled $8.9 million in 2014 and $8.4 million in 2013.  Total compensation expense associated with the cash awards issued pursuant to the LTI Cash Plans was $5.4 million ($2.4 million related to our executive officers) for the nine-month period ended September 30, 2014.  Overall, compensation expense recorded for the three-month period ended September 30, 2014 was immaterial reflecting the effect the decrease in our stock price at the end of September 2014 had on the value of our liability plan.  For the three- and nine-month periods ended September 30, 2013, total compensation expense associated with the cash awards issued pursuant to the LTI Cash Plans was $3.3 million ($2.1 million related to our executive officers) and $7.5 million ($4.4 million related to our executive officers), respectively.  The liability balance for the cash awards issued under the LTI Cash Plans was $10.5 million at September 30, 2014 and $14.8 million at December 31, 2013, including $6.7 million at September 30, 2014 and $11.1 million at December 31, 2013 associated with the cash awards issued to our executive officers under the LTI Cash Plans.
 
Employee Stock Purchase Plan 
 
We also have an employee stock purchase plan (the “ESPP”).  The ESPP has 1.5 million shares authorized for issuance, of which 1.2 million shares were available for issuance as of September 30, 2014.  The total value of the ESPP awards is calculated using the component approach where each award is computed as the sum of 15% of a share of non-vested stock, a call option on 85% of a share of non-vested stock, and a put option on 15% of a share of non-vested stock.  Share-based compensation expense with respect to the ESPP was $0.3 million and $0.7 million for the three- and nine-month periods ended September 30, 2014, respectively.  For the three- and nine-month periods ended September 30, 2013, share-based compensation with respect to the ESPP was $0.2 million and $0.6 million, respectively.
 
 
For more information regarding our employee benefit plans, including our stock-based compensation plans, our long-term incentive cash plans and our employee stock purchase plan, see Note 9 to our 2013 Form 10-K.
 
Note 11 — Business Segment Information 
 
We have four business segments: Well Intervention, Robotics, Subsea Construction and Production Facilities.  Our Well Intervention segment includes our vessels and related equipment that are used to perform well intervention services primarily in the Gulf of Mexico and North Sea regions.  Our well intervention vessels include the Q4000, the Helix 534, the Seawell, the Well Enhancer and the Skandi Constructor, which is a chartered vessel.  We are currently constructing two additional well intervention vessels, the Q5000 and the Q7000.  We have also contracted to charter two newbuild vessels, which are expected to be delivered in 2016 and used in connection with our contracts to provide well intervention services offshore Brazil.  Our Robotics segment currently operates four chartered vessels, and also includes remotely operated vehicles (“ROVs”), trenchers and ROVDrills designed to complement offshore construction and well intervention services.  We have sold substantially all of the assets associated with our former Subsea Construction operations, including the sale in January 2014 of our Ingleside spoolbase.  The Production Facilities segment includes the HP I as well as our equity investments in Deepwater Gateway and Independence Hub that are accounted for under the equity method.  All material intercompany transactions between the segments have been eliminated.  In February 2013, we sold ERT and as a result, the assets and liabilities included in the sale of ERT and the historical operating results of our former Oil and Gas segment are presented as discontinued operations in the accompanying consolidated financial statements.  See Note 3 to our 2013 Form 10-K for additional information regarding our discontinued operations. 
 
We evaluate our performance based on operating income and income before income taxes of each segment.  Segment assets are comprised of all assets attributable to each reportable segment.  Corporate and other includes all assets not directly identifiable with our business segments, most notably the majority of our cash and cash equivalents.  Certain financial data by reportable segment is summarized as follows (in thousands): 
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2014
   
2013
   
2014
   
2013
 
Net revenues —
                       
Well Intervention
  $ 205,139     $ 114,238     $ 546,057     $ 319,893  
Robotics
    131,707       90,370       339,301       242,940  
Subsea Construction
          4,120       358       69,305  
Production Facilities
    24,184       24,366       71,373       68,933  
Intercompany elimination
    (20,193 )     (12,977 )     (57,093 )     (51,347 )
Total
  $ 340,837     $ 220,117     $ 899,996     $ 649,724  
                                 
Income (loss) from operations —
                               
Well Intervention
  $ 80,789     $ 33,544     $ 194,297     $ 93,906  
Robotics
    28,397       16,392       60,415       28,991  
Subsea Construction (1)
    41       15,088       10,871       29,031  
Production Facilities
    11,284       14,136       33,127       39,964  
Corporate and other
    (14,283 )     (16,522 )     (45,625 )     (64,260 )
Intercompany elimination
    103       21       (1,050 )     (2,538 )
Total
  $ 106,331     $ 62,659     $ 252,035     $ 125,094  
                                 
Equity in earnings of equity investments
  $ 508     $ 857     $ 709     $ 2,150  
 
(1)
Amount in 2014 includes the $10.5 million gain on the sale of our Ingleside spoolbase in January 2014.  Amounts in 2013 include the $1.1 million loss on the sale of the Caesar in June 2013 and the $15.6 million gain on the sale of the Express in July 2013.
 
 
Intercompany segment revenues are as follows (in thousands): 
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2014
   
2013
   
2014
   
2013
 
                         
Well Intervention
  $ 8,635     $ 4,784     $ 22,052     $ 15,052  
Robotics
    11,558       8,193       35,041       31,305  
Subsea Construction
                      317  
Production Facilities
                      4,673  
Total
  $ 20,193     $ 12,977     $ 57,093     $ 51,347  
 
Intercompany segment profits (losses), which only relate to intercompany capital projects, are as follows (in thousands): 
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2014
   
2013
   
2014
   
2013
 
                         
Well Intervention
  $ (87 )   $ (45 )   $ (236 )   $ (91 )
Robotics
    28       67       1,417       2,602  
Subsea Construction
                      158  
Production Facilities
    (44 )     (43 )     (131 )     (131 )
Total
  $ (103 )   $ (21 )   $ 1,050     $ 2,538  
 
Segment assets are comprised of all assets attributable to each reportable segment.  Corporate and other includes all assets not directly identifiable with our business segments, most notably the majority of our cash and cash equivalents.  The following table reflects total assets by reportable segment (in thousands): 
 
   
September 30,
   
December 31,
 
   
2014
   
2013
 
             
Well Intervention
  $ 1,503,592     $ 1,245,229  
Robotics
    324,101       282,373  
Subsea Construction
    32,959       38,054  
Production Facilities
    469,374       495,829  
Corporate and other
    414,930       482,795  
Total
  $ 2,744,956     $ 2,544,280  
 
Note 12 — Commitments and Contingencies and Other Matters 
 
Commitments 
 
In March 2012, we executed a contract with a shipyard in Singapore for the construction of a newbuild semi-submersible well intervention vessel, the Q5000.  This $386.5 million shipyard contract represents the majority of the expected costs associated with the construction of the Q5000.  Pursuant to the terms of this contract, payments are made in a fixed percentage of the contract price, together with any variations, on contractually scheduled dates.  The vessel is expected to be completed and placed in service in early 2015.  In September 2014, we entered into the Nordea Credit Agreement to partially finance the construction of the Q5000 and other future capital projects.  The Nordea Term Loan will be funded at or near the time of the delivery of the Q5000 (Note 6).  At September 30, 2014, our total investment in the Q5000 was $282.0 million, including $231.9 million of scheduled payments made to the shipyard.
 
In February 2013, we contracted to charter the Grand Canyon II and Grand Canyon III for use in our robotics operations.  The terms of the charters will be five years from the respective delivery dates, both of which are expected to be in 2015.
 
 
In September 2013, we executed a second contract with the same shipyard in Singapore that is currently constructing the Q5000.  This contract provides for the construction of a newbuild semi-submersible well intervention vessel, the Q7000, which will be built to North Sea standards.  This $346.0 million shipyard contract represents the majority of the expected costs associated with the construction of the Q7000.  Pursuant to the terms of this contract, 20% of the contract price was paid upon the signing of the contract and the remaining 80% will be paid upon the delivery of the vessel, which is expected to occur in 2016.  At September 30, 2014, our total investment in the Q7000 was $95.7 million, including the $69.2 million paid to the shipyard upon signing the contract.
 
In February 2014, we entered into agreements with Petróleo Brasileiro S.A. (“Petrobras”) to provide well intervention services offshore Brazil.  The initial term of the agreements with Petrobras is for four years with options to extend.  In connection with the Petrobras agreements, we entered into charter agreements with Siem Offshore AS for two newbuild monohull vessels, both of which are expected to be in service for Petrobras in 2016.  At September 30, 2014, our total investment in the topside equipment for the two vessels was $31.0 million.
 
Contingencies and Claims 
 
Under the terms of the equity purchase agreement for the sale of ERT, we required the buyer to provide bonding in a sufficient amount as determined by the Bureau of Ocean Energy Management (the “BOEM”) to cover the decommissioning costs of ERT’s lease properties and thus to replace and allow for a discharge of our existing guaranty to the BOEM for ERT’s lease obligations.  The buyer posted the bonding required by the equity purchase agreement, and we submitted a formal request to the BOEM to terminate and release our guaranty.  On July 24, 2014, we received a letter from the BOEM terminating the period of liability under our guaranty effective July 14, 2014.
 
Litigation 
 
On July 8, 2011, a shareholder derivative lawsuit styled City of Sterling Heights Police & Fire Retirement System v. Owen Kratz, et al. was filed in the United States District Court for the Southern District of Texas, Houston Division.  In the suit, the plaintiff made claims against our Board of Directors, certain of our former directors, certain of our current and former executive officers, and the independent compensation consultant to the Compensation Committee of our Board of Directors, for breaches of the fiduciary duty of loyalty, unjust enrichment and aiding and abetting the alleged breaches of fiduciary duty relating to the long-term equity awards granted in 2010 to certain of the Company’s then executive officers who are defendants.  The defendants filed a motion to dismiss the claim asserting that the plaintiff has not (i) pled specific facts excusing its failure to make pre-suit demand on our Board of Directors as required by Minnesota law, (ii) filed proper verification, or (iii) stated a claim.  In August 2014, the judge in this case granted the defendants’ motion to dismiss and dismissed the case with prejudice.
 
We are involved in various legal proceedings, primarily involving claims for personal injury under the General Maritime Laws of the United States and the Jones Act based on alleged negligence.  In addition, from time to time we incur other claims, such as contract disputes, in the normal course of business.
 
Note 13 — Allowance for Uncollectible Accounts
 
The following table sets forth the activity in our allowance for uncollectible accounts since December 31, 2013 (in thousands):
 
Balance at December 31, 2013
  $ 2,234  
Provision (1)
    5,196  
Write-offs
    (1,459 )
Balance at September 30, 2014
  $ 5,971  
 
(1)
Reflects charges associated with the provision for uncertain collection of a portion of our existing trade receivables related to our Robotics segment.
 
 
Note 14 — Fair Value Measurements
 
Certain of our financial assets and liabilities are measured and reported at fair value on a recurring basis as required under applicable accounting requirements.  These requirements establish a hierarchy for inputs used in measuring fair value.  The fair value is to be calculated based on assumptions that market participants would use in pricing assets and liabilities and not on assumptions specific to the entity.  The statement requires that each asset and liability carried at fair value be classified into one of the following categories: 
 
 
 
Level 1.  Observable inputs such as quoted prices in active markets;
 
 
Level 2.  Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
 
 
Level 3.  Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions.
 
Assets and liabilities measured at fair value are based on one or more of three valuation techniques as follows: 
 
(a)   
Market Approach.  Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. 
(b)   
Cost Approach.  Amount that would be required to replace the service capacity of an asset (replacement cost). 
(c)   
Income Approach.  Techniques to convert expected future cash flows to a single present amount based on market expectations (including present value techniques, option-pricing and excess earnings models). 
 
Our financial instruments include cash and cash equivalents, accounts receivable, accounts payable, long-term debt and various derivative instruments.  The carrying amount of cash and cash equivalents, accounts receivable and accounts payable approximates fair value due to the highly liquid nature of these instruments.  The following table provides additional information related to other financial instruments measured at fair value on a recurring basis at September 30, 2014 (in thousands): 
 
                         
Valuation
   
Level 1
   
Level 2 (1)
   
Level 3
   
Total
 
Technique
Assets:
                         
Interest rate swaps
  $     $ 578     $     $ 578  
(c)
                                   
Liabilities:
                                 
Fair value of long-term debt (2)
    513,278       104,300             617,578  
(a)
Foreign exchange contracts
          22,490             22,490  
(c)
Interest rate swaps
          662             662  
(c)
Total net liability
  $ 513,278     $ 126,874     $     $ 640,152    
 
(1)
Unless otherwise indicated, the fair value of our Level 2 derivative instruments reflects our best estimate and is based upon exchange or over-the-counter quotations whenever they are available.  Quoted valuations may not be available due to location differences or terms that extend beyond the period for which quotations are available.  Where quotes are not available, we utilize other valuation techniques or models to estimate market values.  These modeling techniques require us to make estimations of future prices, price correlation and market volatility and liquidity based on market data.  Our actual results may differ from our estimates, and these differences could be positive or negative.  See Note 15 for further discussion on fair value of our derivative instruments. 
 
 
(2)
See Note 6 for additional information regarding our long-term debt.  The value of our long-term debt is as follows (in thousands): 
 
   
September 30, 2014
 
   
Carrying Value
   
Fair Value (b)
 
             
Term Loan (matures June 2018)
  $ 281,250     $ 278,438  
2032 Notes (mature March 2032) (a)
    200,000       234,840  
MARAD Debt (matures February 2027)
    94,792       104,300  
Total debt
  $ 576,042     $ 617,578  
 
  (a)
Carrying value excludes the related unamortized debt discount of $22.4 million at September 30, 2014.
 
  (b)
The estimated fair value of all debt, other than the MARAD Debt, was determined using Level 1 inputs using the market approach.  The fair value of the MARAD Debt was determined using a third party evaluation of the remaining average life and outstanding principal balance of the MARAD indebtedness as compared to other governmental obligations in the marketplace with similar terms.  The fair value of the MARAD Debt was estimated using Level 2 fair value inputs using the market approach.
 
Note 15 — Derivative Instruments and Hedging Activities
 
Our operations are exposed to market risk associated with interest rates and foreign currency exchange rates.  Our risk management activities involve the use of derivative financial instruments to hedge the impact of market risk exposure related to variable interest rates and foreign currency exchange rates.  All derivatives are reflected in the accompanying condensed consolidated balance sheets at fair value.
 
We engage solely in cash flow hedges.  Hedges of cash flow exposure are entered into to hedge a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability.  Changes in the derivative fair values that are designated as cash flow hedges are deferred to the extent that the hedges are effective.  These fair value changes are recorded as a component of Accumulated OCI (a component of shareholders’ equity) until the hedged transactions occur and are recognized in earnings.  The ineffective portion of changes in the fair value of cash flow hedges is recognized immediately in earnings.  In addition, any change in the fair value of a derivative that does not qualify for hedge accounting is recorded in earnings in the period in which the change occurs.
 
For additional information regarding our accounting for derivatives, see Notes 2 and 16 to our 2013 Form 10-K. 
 
Interest Rate Risk
 
From time to time, we enter into interest rate swaps to stabilize cash flows related to our long-term debt subject to variable interest rates.  Changes in the fair value of an interest rate swap are deferred to the extent the swap is effective.  These changes are recorded as a component of Accumulated OCI until the anticipated interest payments occur and are recognized in interest expense.  The ineffective portion of the interest rate swap, if any, is recognized immediately in earnings within the line titled “Net interest expense.”  The amount of ineffectiveness associated with our interest rate swap contracts was immaterial for all periods presented.  In September 2013, we entered into interest rate swap contracts to fix the interest rate on $148.1 million of our Term Loan (Note 6).  These monthly contracts began in October 2013 and extend through October 2016. 
 
 
Foreign Currency Exchange Rate Risk
 
Because we operate in various regions in the world, we conduct a portion of our business in currencies other than the U.S. dollar.  We entered into various foreign currency exchange contracts to stabilize expected cash outflows relating to certain vessel charters that are denominated in British pounds and Norwegian kroner.
 
In January 2013, we entered into foreign currency exchange contracts to hedge through September 2017 the foreign currency exposure associated with the Grand Canyon charter payments ($104.6 million) denominated in Norwegian kroner (NOK591.3 million).  In February 2013, we entered into similar foreign currency exchange contracts to hedge our foreign currency exposure with respect to the Grand Canyon II and Grand Canyon III charter payments ($100.4 million and $98.8 million, respectively) denominated in Norwegian kroner (NOK594.7 million and NOK595.0 million, respectively), through July 2019 and February 2020, respectively.  These contracts currently qualify for hedge accounting treatment.  All of our remaining foreign exchange contracts that were not accounted for as hedge contracts have been settled.  We had no foreign currency exchange contracts for vessel charters denominated in British pounds as of September 30, 2014.
 
Quantitative Disclosures Related to Derivative Instruments 
 
As a result of the announcement in December 2012 of the sale of ERT, we de-designated all of our then remaining oil and natural gas derivative contracts as hedging instruments.  In addition, under the terms of our former credit agreement (Note 6), we were required to use a portion of the proceeds from the sale of ERT, as well as the sale of the Caesar and Express vessels, to make payments to reduce our indebtedness.  Because of the probability that the former term loan debt would be totally repaid before the expiration of our then existing interest rate swaps, we also concluded that those swaps no longer qualified as cash flow hedges.  The mark-to-market adjustments related to our commodity derivative contracts and interest rate swaps are reflected in “Loss on commodity derivative contracts” and “Other expense, net,” respectively, in the accompanying condensed consolidated statements of operations.
 
The following table presents the fair value and balance sheet classification of our derivative instruments that were not designated as hedging instruments (in thousands): 
 
 
September 30, 2014
 
December 31, 2013
 
 
Balance Sheet
 
Fair
 
Balance Sheet
 
Fair
 
 
Location
 
Value
 
Location
 
Value
 
Asset Derivatives:
               
Foreign exchange contracts
Other current assets
  $  
Other current assets
  $ 69  
      $       $ 69  
 
The following table presents the fair value and balance sheet classification of our derivative instruments that were designated as hedging instruments (in thousands): 
 
 
September 30, 2014
 
December 31, 2013
 
 
Balance Sheet
 
Fair
 
Balance Sheet
 
Fair
 
 
Location
 
Value
 
Location
 
Value
 
Asset Derivatives:
               
Interest rate swaps
Other assets, net
  $ 578  
Other assets, net
  $ 446  
      $ 578       $ 446  
                     
Liability Derivatives:
                   
Foreign exchange contracts
Accrued liabilities
  $ 5,255  
Accrued liabilities
  $ 1,905  
Interest rate swaps
Accrued liabilities
    662  
Accrued liabilities
    746  
Foreign exchange contracts
Other non-current liabilities
    17,235  
Other non-current liabilities
    13,166  
      $ 23,152       $ 15,817  
 
 
Ineffectiveness associated with our derivatives was immaterial for all periods presented.  The following tables present the impact that derivative instruments designated as cash flow hedges had on our Accumulated OCI (net of tax) and our condensed consolidated statements of operations (in thousands).  We estimate that as of September 30, 2014 $3.8 million of unrealized losses in Accumulated OCI associated with our derivatives is expected to be reclassified into earnings within the next 12 months. 
 
     
Gain (Loss) Recognized in OCI
 
     
on Derivatives, Net of Tax
 
     
(Effective Portion)
 
     
Three Months Ended
   
Nine Months Ended
 
     
September 30,
   
September 30,
 
     
2014
   
2013
   
2014
   
2013
 
                           
Foreign exchange contracts
    $ (5,713 )   $ 1,186     $ (4,823 )   $ (9,645 )
Interest rate swaps
      255       (202 )     141       (202 )
      $ (5,458 )   $ 984     $ (4,682 )   $ (9,847 )
 
     
Gain (Loss) Reclassified from
 
     
Accumulated OCI into Earnings
 
 
Location of Gain (Loss)
 
(Effective Portion)
 
 
Reclassified from
 
Three Months Ended
   
Nine Months Ended
 
 
Accumulated OCI into Earnings
 
September 30,
   
September 30,
 
 
(Effective Portion)
 
2014
   
2013
   
2014
   
2013
 
                           
Interest rate swaps
Net interest expense
  $ (215 )   $     $ (646 )   $  
Foreign exchange contracts
Cost of sales
    (597 )     (396 )     (1,434 )     (900 )
      $ (812 )   $ (396 )   $ (2,080 )   $ (900 )
 
The following table presents the impact that derivative instruments not designated as hedges had on our condensed consolidated statements of operations (in thousands): 
 
     
Gain (Loss) Recognized
 
     
in Earnings on Derivatives
 
 
Location of Gain (Loss)
 
Three Months Ended
   
Nine Months Ended
 
 
Recognized in Earnings
 
September 30,
   
September 30,
 
 
on Derivatives
 
2014
   
2013
   
2014
   
2013
 
                           
Oil and natural gas commodity contracts
Loss on commodity derivative contracts
  $     $     $     $ (14,113 )
Interest rate swaps
Other expense, net
                      (86 )
Foreign exchange contracts
Other expense, net