| General Information | 1. General Information
The unaudited consolidated financial statements of Diamond Offshore
Drilling, Inc. and subsidiaries, which we refer to as
“Diamond Offshore,” “we,” “us”
or “our,” should be read in conjunction with our Annual
Report on Form 10-K for the year ended December 31, 2015 (File No.
1-13926).
As of October 26, 2016, Loews Corporation owned approximately 53%
of the outstanding shares of our common stock.
Interim Financial Information
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting
principles in the U.S., or GAAP, for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation
S-X of the Securities and Exchange Commission. Accordingly,
pursuant to such rules and regulations, they do not include all
disclosures required by GAAP for complete financial
statements. The consolidated financial information has not
been audited but, in the opinion of management, includes all
adjustments (consisting of normal recurring accruals) necessary for
a fair presentation of Diamond Offshore’s consolidated
balance sheets, statements of operations, statements of
comprehensive income and statements of cash flows at the dates and
for the periods indicated. Results of operations for interim
periods are not necessarily indicative of results of operations for
the respective full years.
Use of Estimates in the Preparation of Financial
Statements
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during
the reporting period. Actual results could differ from those
estimated.
Assets Held For Sale
At December 31, 2015, we reported the $14.2 million carrying value
of five marketed-for-sale jack-up rigs as “Assets held for
sale” in our Consolidated Balance Sheets. One of these
rigs was sold for $8.0 million in February 2016. At September
30, 2016, we reported “Assets held for sale” of $7.6
million in our Consolidated Balance Sheets, consisting of $6.2
million for our four marketed-for-sale jack-up rigs and $1.4
million for two of our semisubmersible rigs, which we expect to
sell as scrap in the fourth quarter of 2016.
Drilling and Other Property and Equipment
We carry our drilling and other property and equipment at cost,
less accumulated depreciation. Maintenance and routine repairs
are charged to income currently while replacements and betterments
that upgrade or increase the functionality of our existing
equipment and that significantly extend the useful life of an
existing asset are capitalized. During the nine-month period
ended September 30, 2016 and the year ended December 31, 2015, we
capitalized $154.8 million and $262.4 million, respectively, in
replacements and betterments of our drilling fleet. See Notes
2 and 8.
Capitalized Interest
We capitalize interest cost for qualifying construction and upgrade
projects. See Note 8. A reconciliation of our total
interest cost to “Interest expense, net of amounts
capitalized” as reported in our Consolidated Statements of
Operations is as follows:
Three Months Ended September 30, Nine Months Ended September 30,
2016 2015 2016 2015
(In
thousands)
Total interest cost, including amortization of debt issuance
costs $ 27,016 $ 23,830 $ 83,888 $ 84,254
Capitalized interest (7,984 ) (2,480 ) (15,184 ) (13,454 )
Total interest expense as reported $ 19,032 $ 21,350 $ 68,704 $ 70,800
Impairment of Long-Lived Assets
We evaluate our property and equipment for impairment whenever
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable (such as, but not limited to, cold
stacking a rig, the expectation of cold stacking a rig in the near
term, contracted backlog of less than one year for a rig, a
decision to retire or scrap a rig, or excess spending over budget
on a newbuild, construction project or major rig upgrade). We
utilize an undiscounted probability-weighted cash flow analysis in
testing an asset for potential impairment. Our assumptions and
estimates underlying this analysis include the following:
• dayrate by rig;
• utilization rate by rig if active,
warm stacked or cold stacked (expressed as the actual percentage of
time per year that the rig would be used at certain dayrates);
• the per day operating cost for each
rig if active, warm stacked or cold stacked;
• the estimated annual cost for rig
replacements and/or enhancement programs;
• the estimated maintenance, inspection
or other reactivation costs associated with a rig returning to
work;
• salvage value for each rig; and
• estimated proceeds that may be
received on disposition of each rig.
Based on these assumptions, we develop a matrix for each rig under
evaluation using multiple utilization/dayrate scenarios, to each of
which we have assigned a probability of occurrence. We arrive
at a projected probability- weighted cash flow for each rig based
on the respective matrix and compare such amount to the carrying
value of the asset to assess recoverability.
The underlying assumptions and assigned probabilities of occurrence
for utilization and dayrate scenarios are developed using a
methodology that examines historical data for each rig, which
considers the rig’s age, rated water depth and other
attributes, and then assesses the rig’s future marketability
in light of the current and projected market environment at the
time of assessment. Other assumptions, such as operating,
maintenance, inspection and reactivation costs, are estimated using
historical data adjusted for known developments, cost projections
for re-entry of rigs into the market and future events that are
anticipated by management at the time of the assessment.
Management’s assumptions are necessarily subjective and are
an inherent part of our asset impairment evaluation, and the use of
different assumptions could produce results that differ from those
reported. Our methodology generally involves the use of significant
unobservable inputs, representative of a Level 3 fair value
measurement, which may include assumptions related to future
dayrate revenue, costs and rig utilization, quotes from rig
brokers, the long-term future performance of our rigs and future
market conditions. Management’s assumptions involve
uncertainties about future demand for our services, dayrates,
expenses and other future events, and management’s
expectations may not be indicative of future outcomes. Significant
unanticipated changes to these assumptions could materially alter
our analysis in testing an asset for potential impairment. For
example, changes in market conditions that exist at the measurement
date or that are projected by management could affect our key
assumptions. Other events or circumstances that could affect our
assumptions may include, but are not limited to, a further
sustained decline in oil and gas prices, cancelations of our
drilling contracts or contracts of our competitors, contract
modifications, costs to comply with new governmental regulations,
growth in the global oversupply of oil and geopolitical events,
such as lifting sanctions on oil-producing nations. Should actual
market conditions in the future vary significantly from market
conditions used in our projections, our assessment of impairment
would likely be different. See Note 2.
Debt Issuance Costs
Historically, we have presented deferred costs associated with the
issuance of long-term debt as “Other Assets” in our
unaudited consolidated balance sheets and have amortized such costs
over the respective terms of the related debt. In April 2015,
the Financial Accounting Standards Board, or FASB, issued
Accounting Standards Update, or ASU, No. 2015-03, Interest - Imputation of
Interest (Subtopic 835-30); Simplifying the Presentation of Debt
Issuance Costs
Other Assets Long-term
(In
thousands)
Amount as previously presented, before adoption of ASU 2015-03 $ 116,480 $ 1,994,773
Deferred debt issuance costs (14,995 ) (14,995 )
Amount as restated, after adoption of ASU 2015-03 $ 101,485 $ 1,979,778
Recent Accounting Pronouncements
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows
(Topic 230): Classification of Certain Cash
Receipts and Cash Payments ASU 2016-15
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock
Compensation (Topic 718)
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ASU 2016-02, ASU 2014-09.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with
Customers (Topic 606) |
