XNYS:HLX Helix Energy Solutions Group Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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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 March 31, 2012
 
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 April 20, 2012, 105,641,054 shares of common stock were outstanding.

 
 

 

 
         
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.
 
 
 
   
 
 
   
 
 
 
 

 
2

 

 
 
 
 
PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements.
 
 
HELIX ENERGY SOLUTIONS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 (in thousands)
 
 
                 
   
March 31,
   
December 31,
 
   
2012
   
2011
 
   
(Unaudited)
         
ASSETS
Current assets:
               
Cash and cash equivalents
 
$
620,449
   
$
546,465
 
Accounts receivable-
               
Trade, net of allowance for uncollectible accounts of $4,067
   
237,417
     
238,781
 
Unbilled revenue
   
15,458
     
24,338
 
Costs in excess of billing
   
9,118
     
13,037
 
Other current assets
   
109,669
     
121,621
 
Total current assets
   
992,111
     
944,242
 
Property and equipment
   
4,403,092
     
4,391,064
 
Less - accumulated depreciation
   
(2,041,405)
     
(2,059,737)
 
Property and equipment, net
   
2,361,687
     
2,331,327
 
Other assets:
               
Equity investments
   
173,440
     
175,656
 
Goodwill
   
62,667
     
62,215
 
Other assets, net
   
75,038
     
68,907
 
Total assets
 
$
3,664,943
   
$
3,582,347
 
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
               
Accounts payable
 
$
145,631
   
$
147,043
 
Accrued liabilities
   
196,814
     
239,963
 
Income tax payable
   
24,977
     
1,293
 
Current maturities of long-term debt
   
12,997
     
7,877
 
Total current liabilities
   
380,419
     
396,176
 
Long-term debt
   
1,167,486
     
1,147,444
 
Deferred income taxes
   
423,098
     
417,610
 
Asset retirement obligations
   
146,696
     
161,208
 
Other long-term liabilities
   
16,516
     
9,368
 
Total liabilities
   
2,134,215
     
2,131,806
 
                 
Convertible preferred stock
   
1,000
     
1,000
 
Commitments and contingencies
               
Shareholders' equity:
               
Common stock, no par, 240,000 shares authorized, 105,636 and 105,530 shares issued, respectively
   
932,097
     
908,776
 
Retained Earnings
   
588,371
     
522,644
 
Accumulated other comprehensive loss
   
(19,667)
     
(10,017)
 
Total controlling interest shareholders' equity
   
1,500,801
     
1,421,403
 
Noncontrolling interest
   
28,927
     
28,138
 
Total equity
   
1,529,728
     
1,449,541
 
Total liabilities and shareholders' equity
 
$
3,664,943
   
$
3,582,347
 
 
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 AND
COMPREHENSIVE INCOME
(UNAUDITED)
 (in thousands, except per share amounts)
 
 
   
Three Months Ended
 
   
March 31,
 
   
2012
   
2011
 
             
Net revenues:
           
Contracting services
  $ 229,842     $ 122,748  
Oil and gas
    178,085       168,859  
Total net revenues
    407,927       291,607  
                 
Cost of sales:
               
Contracting services
    156,968       106,907  
Oil and gas
    89,249       107,624  
Total cost of sales
    246,217       214,531  
                 
Gross profit
    161,710       77,076  
                 
Gain (loss) on sale of assets, net
    (1,478 )     16  
Loss on oil and gas derivative commodity contracts
    (2,339 )     -  
Selling, general and administrative expenses
    (25,696 )     (24,981 )
Income from operations
    132,197       52,111  
Equity in earnings of investments
    407       5,650  
Net interest expense
    (21,760 )     (24,236 )
  Loss on early extinguishment of long term debt
    (17,127 )     -  
  Other income (expense), net
    86       2,660  
Income before income taxes
    93,803       36,185  
Provision for income taxes
    27,277       9,550  
Net income, including noncontrolling interests
    66,526       26,635  
Less net income applicable to noncontrolling interests
    (789 )     (768 )
Net income applicable to Helix
    65,737       25,867  
Preferred stock dividends
    (10 )     (10 )
Net income applicable to Helix common shareholders
  $ 65,727     $ 25,857  
                 
                 
Earnings per share of common stock:
               
Basic
  $ 0.62     $ 0.24  
  Diluted
  $ 0.62     $ 0.24  
                 
Weighted average common shares outstanding:
               
Basic
    104,530       104,471  
Diluted
    104,989       104,903  
                 
Comprehensive income (Note 9)
  $ 56,876     $ 18,183  
 
 
 
 
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)
 
   
Three Months Ended
 
   
March 31,
 
   
2012
   
2011
 
Cash flows from operating activities:
           
Net income, including noncontrolling interests
  $ 66,526     $ 26,635  
Adjustments to reconcile net income, including noncontrolling interests
 to net cash provided by operating activities
               
Depreciation and amortization
    72,492       92,143  
Asset impairment charge and dry hole expense
    143       -  
Amortization of deferred financing costs
    2,355       1,981  
Stock compensation expense
    1,838       2,953  
Amortization of debt discount
    1,611       2,207  
Deferred income taxes
    (2,673 )     9,329  
Excess tax benefit from stock-based compensation
    340       969  
Gain on investment in Cal Dive common stock
    -       (753 )
(Gain) loss on sale of assets, net
    1,478       (16 )
Loss on early extinguishment of debt
    17,127       -  
Unrealized loss (gain) and ineffectiveness on derivative contracts, net
    2,453       (318 )
Changes in operating assets and liabilities:
               
Accounts receivable, net
    11,526       (381 )
Other current assets
    15,360       18,869  
Income tax payable
    23,233       (2,338 )
Accounts payable and accrued liabilities
    (59,079 )     (58,747 )
Oil and gas asset retirement costs
    (18,357 )     (8,160 )
Other noncurrent, net
    (2,568 )     692  
Net cash provided by operating activities
    133,805       85,065  
                 
Cash flows from investing activities:
               
Capital expenditures
    (101,744 )     (34,488 )
Distributions from equity investments, net
    5,943       480  
Proceeds from sale of Cal Dive common stock
    -       3,588  
Decrease in restricted cash
    922       613  
Net cash used in investing activities
    (94,879 )     (29,807 )
                 
Cash flows from financing activities:
               
Early extinguishment of Senior Unsecured Notes
    (209,500 )     -  
Borrowings under revolving credit facility
    100,000       -  
Issuance of Convertible Senior Notes due 2032
    200,000       -  
Repurchase of Convertible Senior Notes due 2025
    (143,945 )     -  
Proceeds from Term Loan A
    100,000       -  
Repayment of Term Loan
    (750 )     (1,082 )
Repayment of MARAD borrowings
    (2,409 )     (2,294 )
Deferred financing costs
    (6,337 )     -  
Repurchases of common stock
    (991 )     (927 )
Excess tax benefit from stock-based compensation
    (340 )     (969 )
Exercise of stock options, net and other
    381       (70 )
Net cash provided by (used in) financing activities
    36,109       (5,342 )
                 
Effect of exchange rate changes on cash and cash equivalents
    (1,051 )     (470 )
Net increase in cash and cash equivalents
    73,984       49,446  
Cash and cash equivalents:
               
Balance, beginning of year
    546,465       391,085  
Balance, end of period
  $ 620,449     $ 440,531  
 
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 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 2011 Annual Report on Form 10-K (“2011 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 three-month period ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. Our balance sheet as of December 31, 2011 included herein has been derived from the audited balance sheet as of December 31, 2011 included in our 2011 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 2011 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.
 
In June 2011, the Financial Accounting Standards Board (“FASB”) issued amendments to disclosure requirements for presentation of comprehensive income. This guidance, effective retrospectively for the interim and annual periods beginning on or after December 15, 2011, requires presentation of total comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  In December 2011, the FASB issued an amendment that deferred the presentation of reclassification adjustments for each component of accumulated other comprehensive income in both net income and other comprehensive income on the face of the financial statements.  The implementation of the amended accounting guidance did not have a material impact on our consolidated financial position or results of operations.
 
Note 2 – Company Overview
 
We are an international offshore energy company that provides 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 proprietary technologies to deliver services that may reduce finding and development costs and cover 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 prospect generation, exploration, development and production activities. Our oil and gas operations are located in the Gulf of Mexico.


 
Contracting Services Operations
We seek to provide services and methodologies which we believe are critical to developing offshore reservoirs and maximizing production economics.  Our “life of field” services are segregated into four disciplines: well operations, robotics, subsea construction 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 well operations, robotics and subsea construction activities.  Our Production Facilities business includes our equity investments 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.  It also includes the Helix Fast Response System (“HFRS”), which includes our Q4000 and HP I vessels.  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.
 
Oil and Gas Operations
We began our oil and gas operations to achieve incremental returns, to expand our off-season utilization of our contracting services assets, and to provide a more efficient solution to offshore abandonment. We have evolved this business model to include not only mature oil and gas properties but also unproved and proved reserves yet to be explored and developed. This has led to the assembly of services that allows us to create value throughout the complete cycle of a reservoir, including exploration through development and managing and operating a field’s production up to and through the field’s eventual abandonment.
 
Note 3 – Details of Certain Accounts
 
Other current assets consisted of the following as of March 31, 2012 and December 31, 2011:
 
 
               
 
March 31,
   
December 31,
 
 
2012
   
2011
 
 
(in thousands)
 
Other receivables
$
 4,771
   
$
 5,096
 
Prepaid insurance
 
 6,637
     
 12,701
 
Other prepaids
 
 10,200
     
 13,271
 
Spare parts inventory
 
 16,614
     
 18,066
 
Current deferred tax assets
 
 44,442
     
 41,449
 
Hedging assets
 
 17,785
     
 21,579
 
Gas and oil imbalance
 
 4,175
     
 5,134
 
Other
 
 5,045
     
 4,325
 
Total other current assets
$
 109,669
   
$
 121,621
 
 
Other assets, net, consisted of the following as of March 31, 2012 and December 31, 2011:
 
 
               
 
March 31,
   
December 31,
 
 
2012
   
2011
 
 
(in thousands)
 
Restricted cash
$
 32,819
   
$
 33,741
 
Deferred drydock expenses, net
 
 9,445
     
 5,381
 
Deferred financing costs, net
 
 28,081
     
 26,483
 
Intangible assets with finite lives, net
 
 520
     
 531
 
Other
 
 4,173
     
 2,771
 
Total other assets, net
$
 75,038
   
$
 68,907
 
 


 
 
Accrued liabilities consisted of the following as of March 31, 2012 and December 31, 2011:
 
 
               
 
March 31,
   
December 31,
 
 
2012
   
2011
 
 
(in thousands)
 
Accrued payroll and related benefits
$
 37,489
   
$
 49,599
 
Royalties payable
 
 16,011
     
 19,391
 
Current asset retirement obligations
 
 82,339
     
 93,183
 
Unearned revenue
 
 7,724
     
 7,654
 
Billing in excess of cost
 
 8,361
     
 28,839
 
Accrued interest
 
 9,619
     
 24,028
 
Hedging liability
 
 15,167
     
 1,247
 
Gas and oil imbalance
 
 3,601
     
 4,177
 
Other
 
 16,503
     
 11,845
 
Total accrued liabilities
$
 196,814
   
$
 239,963
 
 
 
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 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.
 
Exploration and Other
 
As of March 31, 2012, we capitalized approximately $7.8 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-month periods ended March 31, 2012 and 2011:
 
                 
     
Three Months Ended
 
     
March 31,
 
     
2012
     
2011
 
     
(in thousands)
 
Delay rental and geological and geophysical costs
 
$
611
   
$
355
 
Impairment of unproved properties
   
144
     
 
Dry hole expense
   
(1
)
   
(9
)
     Total exploration expense
 
$
754
   
$
346
 
 
Impairments
 
No proved property impairments were recorded in the first quarter of 2012 or 2011.
 
Asset retirement obligations
 
The following table describes the changes in our asset retirement obligations (both long term and current) since December 31, 2011 (in thousands):
 
Asset retirement obligations at December 31, 2011
 
$
254,391
 
Liability incurred during the period                                                                               
   
115
 
Liability settled during the period                                                                               
   
(34,665
)
Other revisions in estimated cash flows                                                                               
   
5,755
 
Accretion expense (included in depreciation and amortization)
   
3,439
 
Asset retirement obligations at March 31, 2012
 
$
229,035
 
 
 
 
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 $32.8 million at March 31, 2012 and $33.7 million at December 31, 2011, all of which consisted of 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 and may use the restricted cash for the future asset retirement costs of the field.  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 three-month periods ended March 31, 2012 and 2011 (in thousands):
 
     
Three Months Ended
 
     
March 31,
 
     
2012
     
2011
 
                 
Interest paid, net of capitalized interest(1)
 
$
32,554
   
$
32,093
 
Income taxes paid
 
$
6,725
   
$
3,785
 
 
Non-cash investing activities for the three-month periods ended March 31, 2012 and 2011 included $21.0 million and $36.0 million, respectively, of accruals for capital expenditures.  The accruals have been reflected in the accompanying condensed consolidated balance sheets as an increase in property and equipment and accounts payable.
 
Note 6 – Equity Investments
    
As of March 31, 2012, 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 $95.1 million and $96.0 million as of March 31, 2012 and December 31, 2011, respectively (including capitalized interest of $1.4 million at March 31, 2012 and December 31, 2011).  Our net distributions from Deepwater Gateway totaled $2.2 million in the first quarter of 2012.
 
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 $78.3 million and $79.7 million as of March 31, 2012 and December 31, 2011, respectively (including capitalized interest of $4.8 million and $4.9 million at March 31, 2012 and December 31, 2011, respectively).  Our net distributions from Independence Hub totaled $4.2 million in the first quarter of 2012.
 
As disclosed in our 2011 Form 10-K, we invested in an Australian joint venture that engages in well intervention operations in the Southeast Asia region.   At December 31, 2011, we fully impaired our investment in that joint venture (Note 7 of 2011 Form 10-K).   In the first quarter of 2012, we recorded additional losses totaling $3.8 million related to our continued participation in this joint venture, including a $3.0 million negotiated exit fee from the joint venture.  In April 2012, we paid this exit fee and we are no longer a participant in this Australian joint venture.


 
Note 7 – Long-Term Debt
 
Scheduled maturities of long-term debt outstanding as of March 31, 2012 were as follows (in thousands):
 
     
Term Loan (1)
   
Revolving Credit Facility
   
Senior Unsecured Notes
   
2025  
Notes (2)
   
MARAD Debt
   
2032
 Notes (3)
   
Total
 
                                             
Less than one year
 
$
8,000
 
$
 
$
 
$
 
$
4,997
 
$
 
$
12,997
 
One to two years
   
8,000
   
   
   
   
5,247
   
   
13,247
 
Two to three years
   
8,000
   
   
   
   
5,508
   
   
13,508
 
Three to four years
   
355,000
   
100,000
   
274,960
   
   
5,783
   
   
735,743
 
Four to five years
   
   
   
   
   
6,072
   
   
6,072
 
Over five years
   
   
   
   
157,830
   
80,149
   
200,000
   
437,979
 
Total debt
   
379,000
   
100,000
   
274,960
   
157,830
   
107,756
   
200,000
   
1,219,546
 
Current maturities
   
(8,000
)
 
   
   
   
(4,997
)
 
   
(12,997
)
Long-term debt, less
   current maturities
 
$
371,000
 
$
100,000
 
$
274,960
 
$
157,830
 
$
102,759
 
 
$
 
200,000
 
$
1,206,549
 
Unamortized debt discount (4)
   
   
   
   
(3,688
)
 
   
(35,375
)
 
(39,063
)
Long-term debt
 
$
371,000
 
$
100,000
 
$
274,960
 
$
154,142
 
$
102,759
 
 
$
 
164,625
 
$
1,167,486
 
 
(1)  
Amounts reflect both our Term Loan and new Term Loan A.
(2)  
Beginning in December 2012, the holders of these Convertible Senior Notes may require us to repurchase these notes or we may at our own option elect to repurchase notes. These notes will mature in March 2025.
(3)  
Beginning in March 2018, the holders of these Convertible Senior Notes may require us to repurchase these notes or we may at our election elect to repurchase the notes. These notes will mature in March 2032.
(4)  
The notes will increase to their principal amount through accretion of non-cash interest charges through December 2012 for the Convertible Senior Notes due 2025 and March 2018 for the Convertible Senior Notes due 2032.
 
At March 31, 2012, unsecured letters of credit issued totaled approximately $46.2 million (see “Credit Agreement” below).  These letters of credit primarily guarantee asset retirement obligations as well as various contract bidding, contractual performance, insurance activities and shipyard commitments.  The following table details our interest expense and capitalized interest for the three-month periods ended March 31, 2012 and 2011:
 
                 
     
Three Months Ended
 
     
March 31,
 
     
2012
     
2011
 
     
(in thousands)
 
Interest expense
 
$
22,809
   
$
24,767
 
Interest income
   
(570
)
   
(476
)
Capitalized interest
   
(479
)
   
(55
)
     Interest expense, net
 
$
21,760
   
$
24,236
 
 
 
Included below is a summary of certain components of our indebtedness. For additional information regarding our debt see Note 9 of our 2011 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.    At December 31, 2011, we had $475.0 million of Senior Unsecured Notes outstanding.   Prior to stated maturity, after January 15, 2012, we may redeem all or a portion of the Senior Unsecured Notes, on not less than 30 days’ nor more than 60 days’ prior notice at the redemption prices (expressed as percentages of the principal amount) set forth below, plus accrued and unpaid interest, in any, thereon to the applicable redemption date.
 
 
 
 
Year
 
Redemption Price
2012
 
104.750%
2013
 
102.375%
2014 and thereafter
 
100.000%
 
In March 2012, we purchased a portion of these Senior Unsecured Notes that resulted in an early extinguishment of $200.0 million of our balance outstanding. In these transactions we paid an aggregate amount of $213.5 million, including $200.0 million in principal,  $9.5 million in premium for the repurchased Senior Unsecured Notes and $4.0 million of accrued interest.  We also recorded a $2.0 million charge to accelerate a pro rata portion of the deferred financing costs associated with the original issuance of the Senior Unsecured Notes.  The loss on the early extinguishment of these related Senior Unsecured Notes totaled $11.5 million and is reflected as a component of “Loss on early extinguishment of long term debt” in the accompanying condensed consolidated statements of operations and comprehensive income.
 
Credit Agreement
 
In July 2006, we entered into a credit agreement (the “Credit Agreement”) under which we borrowed $835 million in a term loan (the “Term Loan”) and were able to borrow up to $300 million (the “Revolving Loans”) under a revolving credit facility (the “Revolving Credit Facility”). The Credit Agreement has been amended six times, most recently in March 2012 , to address certain issues with regard to covenants, maturity and the borrowing limits under the Term Loans and Revolving Credit Facility.  For additional information regarding the current terms of our credit facility see Note 9 of our 2011 Form 10-K.
 
On February 21, 2012, we entered into an amendment to our Credit Agreement.   Under the terms of the amendment the participating lenders agree to loan us $100.0 million pursuant to a new term loan (“Term Loan A”).  The terms of the new Term Loan A are the same as those governing the Revolving Credit Facility, with the Term Loan A requiring a $5 million annual payment of its principal balance. The Term Loan A was funded in late March 2012 and we used the borrowings under Term Loan A to repurchase a portion of our Senior Unsecured Notes. 
 
The Term Loan currently bears interest either at the one-, two-, three- or six-month LIBOR at our election plus an applicable margin of between 2.25% and 3.5% depending on our consolidated leverage ratio.  Our average interest rate on the Term Loan for the three-month periods ended March 31, 2012 and 2011 was approximately 4.0% and 3.0%, respectively, including the effects of our interest rate swaps (Note 16).  Our Term Loan is currently scheduled to mature on July 1, 2015 but could be extended to July 1, 2016 if our Senior Unsecured Notes are fully repaid or refinanced by July 1, 2015.
 
As amended, our Revolving Credit Facility provides for $600 million in borrowing capacity. The full amount of the Revolving Credit Facility may be used for issuances of letters of credit.  In late March 2012, we borrowed $100.0 million under our Revolving Credit Facility to repurchase a portion of our Senior Unsecured Notes.  Accordingly, at March 31, 2012, we had $100.0 million drawn on the Revolving Credit Facility and our availability under the Revolving Credit Facility totaled $453.8 million, net of $46.2 million of letters of credit issued.  There were no borrowings outstanding at December 31, 2011.
 
The Revolving Loans bear interest based on one-, two-, three- or six-month LIBOR rates or on Base Rates, at our election, plus an applicable margin. The margin ranges from 1.5% to 3.5%, depending on our consolidated leverage ratio. The average interest rate under the Revolving Credit Facility totaled 3.0% for the period in which we had borrowings outstanding during the three-month period ended March 31, 2012.
 
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.
 
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 cash flow hedging interest rate swaps to stabilize cash flows relating to a portion of our interest payments for our Term Loan.  In January 2010, we entered into $200 million, two-year interest rate swaps to stabilize cash flows relating to a portion of our interest payments on our Term Loan, which extended to January 2012.  In August 2011, we entered into additional two-year
 
 
11

 
interest rate swap contracts to assist in stabilizing cash flows related to our interest payments from January 2012 through January 2014 (Note 16).
 
Convertible Senior Notes
 
In March 2005, we issued $300 million of our 3.25% Convertible Senior Notes at 100% of the principal amount to certain qualified institutional buyers (the “2025 Notes”).  The 2025 Notes are convertible into cash and, if applicable, shares of our common stock based on the specified conversion rate, subject to adjustment.
 
The 2025 Notes can be converted prior to the stated maturity (March 2025) under certain triggering events specified in the indenture governing the 2025 Notes.  No conversion triggers were met during the three-month period ended March 31, 2012. The first dates for early redemption of the 2025 Notes are in December 2012, with the holders of the 2025 Notes being able to put them to us on December 15, 2012 and our being able to call the 2025 Notes at any time after December 20, 2012 (see Note 9 of our 2011 Form 10-K).   To the extent we do not have long-term financing secured to cover such conversion and/or redemption, the 2025 Notes would be classified as a current liability in the accompanying consolidated balance sheet.  As the holders have the option to require us to redeem the 2025 Notes on December 15, 2012, we assessed whether or not this indebtedness was required to be classified as a current liability at March 31, 2012 and concluded that it still qualified as a long term debt because  a) we possess enough borrowing capacity under our Revolving Credit Facility (see “Credit Agreement” above) to settle the notes in full and b) it is our intent to utilize our Revolving Credit Facility borrowings or other alternative financing proceeds to settle our 2025 Notes, if and when the holders exercise their redemption option.
 
The remaining balance of our 2025 Notes was $157.8 million at March 31, 2012.   In association with the issuance of additional Convertible Senior Notes (see “2032 Notes” below), we repurchased $142.2 million in aggregate principal of our 2025 Notes.  In these repurchase transactions we paid an aggregate amount of $145.1 million, representing principal plus $1.8 million of premium and $1.1 million of accrued interest on these repurchased 2025 Notes.  The loss on the early extinguishment of these related 2025 Notes totaled $5.6 million and is reflected as a component of “Loss on early extinguishment of long term debt” in the accompanying condensed consolidated statements of operations and comprehensive income.  The loss on early extinguishment includes the acceleration of $3.5 million of related unamortized discounts associated with the 2025 Notes, the $1.8 million premium paid in connection with the repurchase of a portion of the 2025 Notes and a $0.3 million charge to accelerate a pro rata portion of the deferred financing costs associated with the original issuance of these 2025 Notes.
 
The effective interest rate for the 2025 Notes is 6.6% after considering the effect of the accretion of the related debt discount that represented the equity component of the Convertible Notes at their inception.
 
Our average share price for the both the first quarter of 2012 and 2011 was below the $32.14 per share conversion price.  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 2025 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 paid in cash, and such shares would be issued on conversion.
 
2032 Notes
 
In March 2012, we completed the 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 estimated offering expenses.  We used the net proceeds to repurchase and retire $142.2 million of aggregate principal amount of our 2025 Notes (see above), in separate, privately negotiated transactions, and intend to use the remaining net proceeds for other general corporate purposes, including the repayment of other indebtedness.
 
The registered 2032 Notes bear interest at a rate of 3.25% per annum, 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 by us.  The 2032 Notes are convertible in certain circumstances and during certain periods at an initial conversion rate of 39.9752
 
 
12

 
shares of common stock per $1,000 principal amount of the 2032 Notes (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.  The initial conversion price represents a conversion premium of 35.0% over the closing price of our common stock on March 6, 2012 of $18.53 per share.
 
 
Prior to March 20, 2018, the 2032 Notes will not be redeemable.  On or after March 20, 2018, we may, at our option, 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 of the 2032 Notes to be redeemed plus accrued and unpaid interest (including contingent interest, if any) up to but excluding the redemption date.  Holders 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.
 
In connection with the issuance of our 2032 Notes, we recorded a discount of $35.4 million as required under existing accounting requirements.  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 that the holder 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 ("MARAD Debt") is pursuant to Title XI of the Merchant Marine Act of 1936 which is 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 25 years from such date. The MARAD Debt is collateralized by the Q4000, with us guaranteeing 50% of the debt, and 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 maturity date (February 2027).
 
Other
 
In accordance with our Credit Agreement, Senior Unsecured Notes, 2025 Notes, 2032 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 March 31, 2012, we were in compliance with these covenants and restrictions.
 
Deferred financing costs of $28.1 million and $26.5 million are included in other assets, net as of March 31, 2012 and December 31, 2011, respectively, and are being amortized over the life of the respective financing agreements.
 
Note 8 – Income Taxes
 
      The effective tax rate for the three-month period ended March 31, 2012 was 29.1% as compared to 26.4% for the three-month period ended March 31, 2011. The variance is primarily attributable to increased profitability in certain foreign jurisdictions with higher income tax rates.
 
     We believe our recorded assets and liabilities are reasonable; however, tax laws and regulations are subject to interpretation and tax litigation is inherently uncertain, and therefore our assessments can involve a series of complex judgments about future events and rely heavily on estimates and assumptions.


 
Note 9 – Comprehensive Income and Accumulated Other Comprehensive Loss
 
The components of total comprehensive income for the three-month periods ended March 31, 2012 and 2011 were as follows (in thousands):
 
                 
     
Three Months Ended
 
     
March 31,
 
     
2012
     
2011
 
                 
Net income, including noncontrolling interests
 
$
66,526
   
$
26,635
 
Other accumulated comprehensive income, net of tax
               
     Foreign currency translation gain                                                                           
   
4,152
     
2,115
 
     Unrealized loss on hedges, net                                                                           
   
(13,802
)
   
(10,567
)
Total  comprehensive income                                                                           
 
$
56,876
   
$
18,183
 
 
The components of accumulated other comprehensive loss were as follows (in thousands):
 
                 
   
March 31,
 
December 31,
   
2012
 
2011
                 
Cumulative foreign currency translation adjustment
 
$
(18,806
)
 
$
(22,958
)
Unrealized gain (loss) on hedges, net
   
(861
)
   
12,941
 
     Accumulated other comprehensive loss
 
$
(19,667
)
 
$
(10,017
)
 
 
Note 10 – Earnings Per Share
 
We have shares of restricted stock issued and outstanding, some of which remain subject to 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
 
     
March 31, 2012
     
March 31, 2011
 
     
Income
     
Shares
     
Income
     
Shares
 
Basic:
                               
Net income applicable to common shareholders
 
$
65,727
           
$
25,857
         
Less: Undistributed net income allocable to participating securities
   
(677
)
           
(338
)
       
Net income applicable to common shareholders
 
$
65,050
     
104,530
   
$
25,519
     
104,471
 
 


 
 
     
Three Months Ended
March 31, 2012
     
Three Months Ended
March 31, 2011
 
     
Income
     
Shares
     
Income
     
Shares
 
Diluted:
                               
Net  income per common share - Basic
 
$
65,050
     
104,530
   
$
25,519
     
104,471
 
Effect of dilutive securities:
                               
Stock options                                                                
   
     
98
     
     
71
 
Undistributed earnings reallocated to participating securities
   
3
     
     
1
     
 
2025 Notes and 2032 Notes                                                                
   
     
     
     
 
Convertible preferred stock                                                                
   
10
     
361
     
10
     
361
 
Net income per common share - Diluted
 
$
65,063
     
104,989
   
$
25,530
     
104,903
 
                                 
 
There were no diluted shares associated with our 2025 Convertible Senior Notes as the conversion price of $32.14 (and conversion trigger of $38.57 per share) was not met in either of the three-month periods ended March 31, 2012 and 2011.    Also, no diluted shares were included for our 2032 Notes for the three-month period ended March 31, 2012 as the conversion price of $25.02 (and conversion trigger of $32.53 per share) was not met and we have the right to settle any such future conversions in cash at our sole discretion.
 
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 March 31, 2012, there were 401,642 shares available for grant under our 2005 Incentive Plan. There were no stock option grants in the three-month periods ended March 31, 2012 and 2011. During the three-month period ended March 31, 2012, the following grants of share-based awards (restricted shares, restricted stock units and performance share units) were made 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 3, 2012
   
537,973
   
$
15.80
     
33% per year over three years
January 3, 2012
   
1,958
     
15.80
     
100% on January 1, 2014
 
Compensation cost is recognized over the respective vesting periods on a straight-line basis.  For the three-month period ended March 31, 2012, $1.8 million was recognized as compensation expense related to shared based awards as compared with $3.0 million during the three-month period ended March 31, 2011.
 
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 (the vesting period is five years for awards granted before January 1, 2012 and three years thereafter).  However, some of the cash awards are indexed to our Company common stock and the payment amount at each vesting date will fluctuate based on the common stock’s performance. This share-based component is considered a liability plan and as such is re-measured to fair value each reporting period with corresponding changes being recorded as a charge to earnings as appropriate.
 
The total awards made under the 2009 LTI Plan totaled $4.2 million in 2012 and $5.2 million in 2011.   Total compensation expense under the 2009 LTI plan totaled $2.4 million and $3.0 million for the three-month periods ended March 31, 2012 and 2011, respectively.   The liability balance under the 2009 LTI Plan was $6.9 million at March 31, 2012 and $9.9 million at December 31, 2011, including $6.5 million at March 31, 2012 and $8.5 million at December 31, 2011 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 2011 Form 10-K.
 
 
Note 12 – Business Segment Information
 
Our operations are conducted through the following 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 well operations, robotics and subsea construction.  The Production Facilities segment includes our consolidated investment in the HP I and Kommandor LLC as well as 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
 
     
March 31,
 
     
2012
     
2011
 
     
(in thousands)
 
Revenues ─
               
      Contracting Services
 
$
244,544
   
$
131,537
 
      Production Facilities
   
20,022
     
15,570
 
      Oil and Gas
   
178,085
     
168,859
 
      Intercompany elimination
   
(34,724
)
   
(24,359
)
            Total
 
$
407,927
   
$
291,607
 
 
                 
Income (loss) from operations ─
               
      Contracting Services
 
$
59,124
   
$
3,266
 
      Production Facilities
   
10,049
     
5,956
 
      Oil and Gas
   
76,942
     
53,240
 
      Corporate
   
(10,898
)
   
(10,441
)
      Intercompany elimination
   
(3,020
)
   
90
 
            Total
 
$
132,197
   
$
52,111
 
                 
Equity in earnings of equity investments
 
$
407
   
$
5,650
 
 
 
                 
   
March 31,
2012
 
December 31,
2011
     
(in thousands)
 
Identifiable Assets ─
               
      Contracting Services                                                                           
 
$
2,128,639
   
$
2,006,065
 
      Production Facilities                                                                           
   
534,155
     
534,776
 
      Oil and Gas                                                                           
   
1,002,149
     
1,041,506
 
            Total                                                                           
 
$
3,664,943
   
$
3,582,347
 
 
Intercompany segment revenues during the three-month periods ended March 31, 2012 and 2011 were as follows:
 
     
Three Months Ended
 
      March 31,  
     
2012
     
2011
 
     
(in thousands)
 
Contracting Services
 
$
23,201
   
$
12,869
 
Production Facilities
   
11,523
     
11,490
 
            Total
 
$
34,724
   
$
24,359
 
 
 
 
    Intercompany segment profits during the three-month periods ended March 31, 2012 and 2011 were as follows:
 
                 
     
Three Months Ended
 
     
March 31,
 
     
2012
     
2011
 
     
(in thousands)
 
Contracting Services
 
$
3,064
   
$
(24
)
Production Facilities
   
(44
)
   
(66
)
            Total
 
$
3,020
   
$
(90
)
 
 
Note 13 – Related Party Transactions
 
In April 2000, we acquired a 20% working interest in Gunnison, a deepwater Gulf of Mexico prospect, from a third party.  Financing for the exploratory costs of approximately $20 million was provided by an investment partnership (OKCD Investments, Ltd. or “OKCD”), the investors of which include current and former Helix senior management, in exchange for a revenue interest that is an overriding royalty interest of 25% of Helix’s 20% working interest. Production began in December 2003. Our payments to OKCD totaled $1.7 million and $2.3 million for the three-month periods ended March 31, 2012 and 2011, respectively.  Our Chief Executive Officer, Owen Kratz, through Class A limited partnership interests in OKCD, personally owns approximately 81% of the partnership. In 2000, OKCD also awarded Class B income participations to key Helix employees, who are required to maintain their employment status with Helix in order to retain such income participations.
 
Note 14 – Commitments and Contingencies
 
Commitments
 
In March 2012, we executed a shipyard contract for the construction of a newbuild semisubmersible well intervention vessel.  This $385.5 million shipyard contract represents the majority of the expected costs associated with this new semisubmersible well intervention vessel.   We made the first scheduled payment under the contract in the amount of $57.8 million on March 12, 2012.  Under terms of this contract, payments will be made in fixed amounts on contractually scheduled dates.
 
Contingencies and Claims
 
We were subcontracted to perform development work for a large gas field offshore India.  Work commenced in the fourth quarter of 2007 and we completed our scope of work in the third quarter of 2009.  To date we have collected approximately $303 million related to this project with an amount of trade receivables yet to be collected.  We have requested arbitration in India pursuant to the terms of the subcontract to pursue our claims and the prime contractor has also requested arbitration and has asserted certain counterclaims against us.  If we are not successful in resolving these matters through ongoing discussions with the prime contractor, then arbitration in India remains a potential remedy.  Based on a number of factors associated with the ongoing negotiations with the prime contractor, in 2010 we established an allowance against our trade receivable balance that reduces its balance to an amount we believe is ultimately realizable (see Notes 16 and 18 of our 2011 Form 10-K).  However, at the time of this filing no final commercial resolution of this matter has been reached.
 
We have received value added tax (VAT) assessments from the State of Andhra Pradesh, India (the “State”) in the amount of approximately $28 million for the tax years 2007, 2008, 2009 and  2010 related to a subsea construction and diving contract we entered into in December 2006 in India.  The State claims we owe unpaid taxes related to products consumed by us during the period of the contract.  We are of the opinion that the State has arbitrarily assessed this VAT tax and has no foundation for the assessment and believe that we have complied with all rules and regulations as relate to VAT in the State. We also believe that our position is supported by law and intend to vigorously defend our position. However, the ultimate outcome of this assessment and our potential liability from it, if any, cannot be determined at this time. If the current assessment is upheld, it may have a material negative effect on our consolidated results of operations while also impacting our financial position.
 
 
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 15 – 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).
 
The following table provides additional information related to assets and liabilities measured at fair value on a recurring basis at March 31, 2012 (in thousands):
 
                           
   
Level 1
   
Level 2 (1)
   
Level 3
   
Total
 
Valuation Technique
                           
Assets:
                         
   Natural gas contracts                                           
  $     $ 20,239     $     $ 20,239  
(c)
   Interest rate swaps                                           
          83             83  
(c)
   Foreign currency forwards
          110             110  
(c)
                                   
Liabilities:
                                 
   Oil contracts                                           
          23,647             23,647  
(c)
   Fair value of long term debt(2) 
    1,143,077       119,609             1,262,686  
(a), (b)
   Interest rate swaps                                           
          338             338  
(c)
   Foreign currency forwards
          13             13  
(c)
     Total net liability                                           
  $ 1,143,077     $ 123,175     $     $ 1,266,252    
 
(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. Our actual results may differ from our estimates, and these differences could be positive or negative.
 
(2)  
See Note 7 for additional information regarding our long term debt.   The fair value of our long term debt at March 31, 2012 is as follows:
 
 
   
Fair Value
   
Carrying Value
   
Term Loans (mature July 2015)
  $ 380,395     $ 379,000    
Revolving Credit Facility (matures July 2015)
    100,000       100,000    
2025 Notes (mature March 2025)
    160,099       157,830  
(a)
2032 Notes (mature March 2032)
    212,500       200,000  
(b)
Senior Unsecured Notes (mature January 2016)
    290,083       274,960    
MARAD Debt (matures February 2027) (c) 
    119,609       107,756    
  Total
  $ 1,262,686     $ 1,219,546    
                   
(a)  
Amount excludes the related unamortized debt discount of $3.7 million.
 
(b)  
Amount excludes the related unamortized debt discount of $35.4 million.
 
(c)  
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 16 – Derivative Instruments and Hedging Activities
 
We are currently exposed to market risk in three major areas: commodity prices, interest rates and foreign currency exchange rates. Our risk management activities involve the use of derivative financial instruments to hedge the impact of market price risk exposures primarily related to our oil and gas production, variable interest rate exposure and foreign exchange currency fluctuations. All derivatives are reflected in the accompanying condensed consolidated balance sheets at fair value, unless otherwise noted.
 
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 they are effective and are recorded as a component of accumulated other comprehensive income (loss), a component of shareholders’ equity, until the hedged transactions occur and are recognized in earnings. The ineffective portion of a cash flow hedge’s change in fair value 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 20 of our 2011 Form 10-K.
 
Commodity Price Risks
 
We currently manage commodity price risk through various financial costless collars and swap instruments covering a portion of our anticipated oil and natural gas production for 2012 and 2013.  All of our current commodity derivative contracts qualify for hedge accounting.
 
As of March 31, 2012, we had the following volumes under derivative contracts related to our oil and gas producing activities, totaling approximately 2.9 million barrels of oil and 14.4 Bcf of natural gas:


 
 
Production Period
 
 
Instrument Type
 
 
Average
Monthly Volumes
 
Weighted Average
Price a
Crude Oil:
         
(per barrel)
April 2012 — December 2012
 
Collar
 
     75.0 MBbl
 
$  96.67 — $118.57b
April 2012 — December 2012
 
Collar
 
   118.6 MBbl
 
$  99.52 — $118.06
April 2012 — December 2012
 
Swap
 
     11.4 MBbl
 
$103.20
January 2013 — December 2013
 
Swap
 
     41.7 MBbl
 
$99.15
January 2013 — December 2013
 
Collar
 
     50.0 MBbl
 
$  95.83 — $105.50
             
Natural Gas:
         
(per Mcf)
April 2012 — December 2012
 
Swap
 
    771.1 Mmcf
 
$4.32
April 2012 — December 2012
 
Collar
 
    162.2 Mmcf
 
$4.75 —  $5.09
January 2013 — December 2013
 
Swap
 
    500.0 Mmcf
 
$4.09
 
a.  
The prices quoted in the table above are NYMEX Henry Hub for natural gas.  Most of our current contracts are indexed to the Brent crude oil price.
b.  
This contract is priced using NYMEX West Texas Intermediate for crude oil.
 
In April 2012, we entered into costless collar financial derivative contracts associated with a total of 1.0 MMBbls of our anticipated crude oil production in 2013, with a floor price of $100.00 per barrel and a ceiling price of $122.06 per barrel as indexed to Brent crude oil prices.
 
Changes in NYMEX oil and gas and Brent crude oil strip prices would, assuming all other things being equal, cause the fair value of these instruments to increase or decrease inversely to the change in NYMEX or Brent prices, respectively.
 
Variable Interest Rate Risks
 
As some of our long-term debt has variable interest rates and is subject to market influences, in January 2010 we entered into various interest rate swaps to stabilize cash flows relating to interest payments for $200 million of our Term Loan debt under our Credit Agreement (Note 7).  The last of these monthly contracts matured in January 2012.  In August 2011, we entered into additional interest rate swap contracts to fix the interest rate on $200 million of our Term Loan debt.   These monthly contracts began in January 2012 and extend through January 2014.  Changes in the interest rate swap fair value are deferred to the extent the swap is effective and are recorded as a component of accumulated other comprehensive income (loss) until the anticipated interest payments occur and are recognized in interest expense.  The ineffective portion of the interest rate swap, if any, will be recognized immediately in earnings within the line titled net interest expense.  The amount of ineffectiveness associated with our interest swap contracts was immaterial for all periods presented in this Quarterly Report on Form 10-Q.
 
Foreign Currency Exchange Risks
 
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 forwards to stabilize expected cash outflows relating to certain vessel charters denominated in British pounds.  We did not designate any of our existing foreign exchange contracts as hedge contracts at their inception. The last of our existing monthly foreign currency swap contracts will settle in June 2012.
 
Quantitative Disclosures Related to Derivative Instruments
 
The following tables present the fair value and balance sheet classification of our derivative instruments as of March 31, 2012 and December 31, 2011.


 
 
Derivatives designated as hedging instruments are as follows:
 
 
As of March 31, 2012
 
As of December 31, 2011
 
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
 
                 
Asset Derivatives:
               
   Natural gas contracts
Other current assets
  $ 16,744  
Other current assets
  $ 12,957  
   Oil contracts
Other current assets
    931  
Other current assets
    8,567  
   Natural gas contracts
Other assets
    2,564  
Other assets
    857  
   Interest rate swaps
Other assets
    83  
Other assets
    327  
      $ 20,322       $ 22,708  
 
 
As of March 31, 2012
 
As of December 31, 2011
 
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
 
                 
Liability Derivatives:
               
   Oil contracts
Accrued liabilities
  $ 14,816  
Accrued liabilities
  $ 886  
   Interest rate swaps
Accrued liabilities
    338  
Accrued liabilities
    202  
   Oil contracts
Other long-term liabilities
    8,831  
Other long-term liabilities
    1,711  
      $ 23,985       $ 2,799  
 
Derivatives that were not designated as hedging instruments (in thousands):
 
 
As of March 31, 2012
 
As of December 31, 2011
 
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
 
                 
Asset Derivatives:
               
   Foreign exchange forwards
Other current assets
  $ 110  
Other current assets
  $ 55  
      $ 110       $ 55  
                     
 
 
As of March 31, 2012
 
As of December 31, 2011
 
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
 
                 
Liability Derivatives:
               
   Foreign exchange forwards
Accrued liabilities
    13  
Accrued liabilities
    159  
      $ 13       $ 159  
                     
 
The following tables present the impact that derivative instruments designated as cash flow hedges had on our accumulated comprehensive income (loss) and our consolidated condensed statements of operations and comprehensive income for the three-month periods ended March 31, 2012 and 2011.  The ineffectiveness related to some of our crude oil contracts totaled $2.3 million for the three-month period ended March 31, 2012 and is reflected as a separate line item titled “Loss on oil and gas derivative commodity contracts” in the accompanying condensed consolidated statements of operations and comprehensive income.  Ineffectiveness associated with our interest swaps was immaterial for all periods presented in this report.  All unrealized gains (losses) related to our derivative contracts are expected to be reclassified to earnings by no later than December 31, 2013.   The last of our interest rate swaps will be settled in January 2014.  At March 31, 2012, most of our remaining unrealized gains (losses) related to our derivative contracts are expected to be reclassified into earnings in 2012, including $2.8 million for our oil and natural gas contracts and $(0.2) million related to our interest swap contracts.


 
 
     
Gain (Loss) Recognized in Accumulated OCI
on Derivatives
 
     
2012
     
2011
 
     
(in thousands)
 
Oil and natural gas commodity contracts
 
$
(13,555
)
 
$
(10,778
)
Interest rate swaps
   
(247
)
   
211
 
   
$
(13,802
)
 
$
(10,567
)
 
 
 
Location of Gain (Loss) Reclassified from Accumulated OCI into Income
   
Gain (Loss) Recognized from Accumulated OCI into Income
 
     
2012
     
2011
 
       
(in thousands)
 
Oil and natural gas commodity contracts
 
Oil and gas revenue
 
 
$
109
   
 
$
 
(6,325
)
Interest rate swaps
Net interest expense
   
(193
)
   
(480
)
     
$
(84
)
 
$
(6,805
)
                   
The following tables present the impact that derivative instruments not designated as hedges had on our condensed consolidated statement of operations for the three months ended March 31, 2012 and 2011:
 
 
Location of Gain (Loss) Recognized in Income on Derivatives
 
Gain (Loss) Recognized in Income on Derivatives
 
   
2012
   
2011
 
     
(in thousands)
 
Foreign exchange forwards
Other expense
 
233
   
608
 
   
$
233
 
$
608
 
               

Note 17 – Condensed Consolidated Guarantor and Non-Guarantor Financial Information
 
The payment of our obligations under the Senior Unsecured Notes is guaranteed by all of our restricted domestic subsidiaries (“Subsidiary Guarantors”) except for Cal Dive I-Title XI, Inc.  Each of these Subsidiary Guarantors is included in our consolidated financial statements and has fully and unconditionally guaranteed the Senior Unsecured Notes on a joint and several basis.  As a result of these guaranty arrangements, we are required to present the following condensed consolidating financial information.  The accompanying guarantor financial information is presented on the equity method of accounting for all periods presented.  Under this method, investments in subsidiaries are recorded at cost and adjusted for our share in the subsidiaries’ cumulative results of operations, capital contributions and distributions and other changes in equity.  Elimination entries related primarily to the elimination of investments in subsidiaries and associated intercompany balances and transactions.
 


 
 
 
 HELIX ENERGY SOLUTIONS GROUP, INC.
CONDENSED CONSOLIDATING BALANCE SHEETS
(in thousands)
(Unaudited)
 
 
 
As of March 31, 2012
   
Helix
   
Guarantors
   
Non-Guarantors
   
Consolidating Entries
   
Consolidated
 
ASSETS
                             
Current assets:
                             
     Cash and cash equivalents
$
566,287
 
$
2,498
 
$
51,664
 
$
 
$
620,449
 
     Accounts receivable, net
 
50,886
   
118,038
   
68,493
   
   
237,417
 
     Unbilled revenue
 
5,777
   
228
   
18,571
   
   
24,576
 
     Income taxes receivable
 
86,005
   
   
1,586
   
(87,591
)
 
 
     Other current assets
 
54,484
   
45,654
   
9,864
   
(333
)
 
109,669
 
          Total current assets
 
763,439
   
166,418
   
150,178
   
(87,924
)
 
992,111
 
Intercompany
 
(157,195
)
 
340,018
   
(107,547
)
 
(75,276
)
 
 
Property and equipment, net
 
227,620
   
1,456,602
   
682,200
   
(4,735
)
 
2,361,687
 
Other assets:
                             
     Equity investments in unconsolidated affiliates
 
   
   
173,440
   
   
173,440
 
     Equity investments
 
2,019,076
   
39,864
   
   
(2,058,940
)
 
 
     Goodwill
 
   
45,107
   
17,560
   
   
62,667
 
     Other assets, net
 
54,828
   
36,566
   
21,475
   
(37,831
)
 
75,038
 
     Due from subsidiaries/parent
 
56,189
   
509,701
   
   
(565,890
)
 
 
 
$
2,963,957
 
$
2,594,276
 
$
937,306
 
$
(2,830,596
)
$
3,664,943
 
                               
LIABILITIES AND SHAREHOLDERS’ EQUITY
                             
Current liabilities:
                             
     Accounts payable
$
42,316
 
$
67,950
 
$
35,365
 
$
 
$
145,631
 
     Accrued liabilities
 
68,627
   
107,284
   
20,903
   
   
196,814
 
     Income taxes payable
 
   
128,808
   
   
(103,831
)
 
24,977
 
     Current maturities of long-term debt
 
8,000
   
   
4,997
   
   
12,997
 
          Total current liabilities
 
118,943
   
304,042
   
61,265
   
(103,831
)
 
380,419
 
Long-term debt
 
1,064,726
   
   
102,760
   
   
1,167,486
 
Deferred income taxes
 
234,567
   
90,526
   
103,861
   
(5,856
)
 
423,098
 
Asset retirement obligations
 
   
146,696
   
   
   
146,696
 
Other long-term liabilities
 
4,163
   
11,803
   
550
   
   
16,516
 
Due to parent
 
   
   
89,821
   
(89,821
)
 
 
         Total liabilities
 
1,422,399
   
553,067
   
358,257
   
(199,508
)
 
2,134,215
 
Convertible preferred stock
 
1,000
   
   
   
   
1,000
 
Total equity
 
1,540,558
   
2,041,209
   
579,049
   
(2,631,088
)
 
1,529,728
 
 
$
2,963,957
 
$
2,594,276
 
$
937,306
 
$
(2,830,596
)
$
3,664,943
 
                               


 
 
 
 
HELIX ENERGY SOLUTIONS GROUP, INC.
CONDENSED CONSOLIDATING BALANCE SHEETS
(in thousands)
 
 
As of December 31, 2011
   
Helix
   
Guarantors
   
Non-Guarantors
   
Consolidating Entries
   
Consolidated
 
ASSETS
                             
Current assets:
                             
     Cash and cash equivalents
$
495,484
 
$
2,434
 
$
48,547
 
$
 
$
546,465
 
     Accounts receivable, net
 
79,290
   
117,767
   
41,724
   
   
238,781
 
     Unbilled revenue
 
10,530
   
155
   
26,690
   
   
37,375
 
     Income taxes receivable
 
80,388
   
   
   
(80,388
)
 
 
     Other current assets
 
68,627
   
48,661
   
10,159
   
(5,826
)
 
121,621
 
          Total current assets
 
734,319
   
169,017
   
127,120
   
(86,214
)
 
944,242
 
Intercompany
 
(147,187
)
 
315,821
   
(102,826
)
 
(65,808
)
 
 
Property and equipment, net
 
230,946
   
1,422,326
   
682,899
   
(4,844
)
 
2,331,327
 
Other assets:
                             
     Equity investments in unconsolidated affiliates
 
   
   
175,656
   
   
175,656
 
     Equity investments in affiliates
 
1,952,392
   
37,239
   
   
(1,989,631
)
 
 
     Goodwill, net
 
   
45,107
   
17,108
   
   
62,215
 
     Other assets, net
 
53,425
   
36,453
   
16,809
   
(37,780
)
 
68,907
 
     Due from subsidiaries/parent
 
64,655
   
430,496
   
   
(495,151
)
 
 
 
$
2,888,550
 
$
2,456,459
 
$
916,766
 
$
(2,679,428
)
$
3,582,347
 
                               
LIABILITIES AND SHAREHOLDERS’ EQUITY
                             
Current liabilities:
                             
     Accounts payable
$
39,280
 
$
82,750
 
$
25,013
 
$
 
$
147,043
 
     Accrued liabilities
 
115,921
   
97,692
   
26,350
   
   
239,963
 
     Income taxes payable
 
   
97,692
   
217
   
(96,616
)
 
1,293
 
     Current maturities of long-term debt
 
3,000
   
   
10,377
   
(5,500
)
 
7,877
 
          Total current liabilities
 
158,201
   
278,134
   
61,957
   
(102,116
)
 
396,176
 
Long-term debt
 
1,042,155
   
   
105,289
   
   
1,147,444
 
Deferred income taxes
 
231,255
   
88,625
   
103,552
   
(5,822
)
 
417,610
 
Decommissioning liabilities
 
   
161,208
   
   
   
161,208
 
Other long-term liabilities
 
4,150
   
4,647
   
571
   
   
9,368
 
Due to parent
 
   
   
98,285
   
(98,285
)
 
 
         Total liabilities
 
1,435,761
   
532,614
   
369,654
   
(206,223
)
 
2,131,806
 
Convertible preferred stock
 
1,000
   
   
   
   
1,000
 
Total equity
 
1,451,789
   
1,923,845
   
547,112
   
(2,473,205
)
 
1,449,541
 
 
$
2,888,550
 
$
2,456,459
 
$
916,766
 
$
(2,679,428