ITEM 1B.
UNRESOLVED STAFF COMMENTS.
None.
DRILLING FLEET
Our fleet is composed of the following types of units: semisubmersibles, dynamically positioned drillships, independent leg cantilevered jackups and submersibles. Each type is described further below. Several factors determine the type of unit most suitable for a particular job, the most significant of which include the water depth and ocean floor conditions at the proposed drilling location, whether the drilling is being done over a platform or other structure, and the intended well depth.
Semisubmersibles
Our semisubmersible fleet consists of 13 units, including:
•
three Friede & Goldman 9500 Enhanced Pacesetter semisubmersibles (including the Noble Dave Beard, which was recently completed and will begin operating under contract during the first quarter of 2010);
•
one semisubmersible capable of operating in harsh environments.
Semisubmersibles are floating platforms which, by means of a water ballasting system, can be submerged to a predetermined depth so that a substantial portion of the hull is below the water surface during drilling operations. These units maintain their position over the well through the use of either a fixed mooring system or a computer controlled dynamic positioning system and can drill in many areas where jackups can drill. However, semisubmersibles normally require water depth of at least 200 feet in order to conduct operations. Our semisubmersibles are capable of drilling in water depths of up to 12,000 feet, depending on the unit. Semisubmersibles are more expensive to construct and operate than jackups.
Dynamically Positioned Drillships
We have four dynamically positioned drillships in the fleet, including our dynamically positioned, ultra-deepwater, harsh environment Globetrotter-class drillship under construction. Drillships are ships that are equipped for drilling and are typically self-propelled. These units are positioned over the well through the use of a computer- controlled dynamic positioning system. Two drillships, the Noble Leo Segerius and the Noble Roger Eason, are capable of drilling in water depths up to 5,600 feet and 7,200 feet, respectively. The Noble Muravlenko is capable of drilling in water depths up to 4,900 feet.
In September 2008 we signed contracts for the construction of a new, dynamically positioned, ultra-deepwater, harsh environment Globetrotter-class drillship. The drillship, which is currently scheduled to be delivered in the second half of 2011, will have the capacity to drill vertically 40,000 feet and will be capable of drilling in water depths up to 10,000 feet.
Independent Leg Cantilevered Jackups
We currently have 43 jackups in the fleet. Jackups are mobile, self-elevating drilling platforms equipped with legs that can be lowered to the ocean floor until a foundation is established for support. The rig hull includes the drilling rig, jacking system, crew quarters, loading and unloading facilities, storage areas for bulk and liquid materials, helicopter landing deck and other related equipment. All of our jackups are independent leg (i.e., the legs can be raised or lowered independently of each other) and cantilevered. A cantilevered jackup has a feature that permits the drilling platform to be extended out from the hull, allowing it to perform drilling or workover operations over pre-existing platforms or structures. Moving a rig to the drill site involves jacking up its legs until the hull is floating on the surface of the water. The hull is then towed to the drill site by tugs and the legs are jacked down to the ocean floor. The jacking operation continues until the hull is raised out of the water, and drilling operations are conducted with the hull in its raised position. Our jackups are capable of drilling to a maximum depth of 30,000 feet in water depths ranging between eight and 400 feet, depending on the jackup.
Submersibles
We have two submersibles in the fleet. Submersibles are mobile drilling platforms that are towed to the drill site and submerged to drilling position by flooding the lower hull until it rests on the sea floor, with the upper deck above the water surface. Our submersibles are capable of drilling to a maximum depth of 25,000 feet in water depths ranging between 12 and 70 feet, depending on the submersible.
During March 2009, we decided to remove the Noble Fri Rodli from the fleet. In connection with this removal, we recognized a $12 million impairment charge related to the decision to evaluate disposition alternatives.
Drilling Fleet Table
The following table sets forth certain information concerning our offshore fleet at January 28, 2010. The table does not include any units owned by operators for which we had labor contracts. We operate and own all of the units included in the table.
Drilling Fleet Table
See footnotes on the following page.
Footnotes to Drilling Fleet Table
1.
Rigs designated with an “R” were modified, refurbished or otherwise upgraded in the year indicated by capital expenditures in an amount deemed material by management. Rigs designated with an “N” are newbuilds. Rigs designated with an “M” have been upgraded to the Noble NC-5SM mooring standard.
2.
Rigs listed as “active” were either operating under contract as of January 28, 2010 or were actively seeking contracts; rigs listed as “contracted” have signed contracts or have letters of intent with operators but have not begun drilling operations; rigs listed as “shipyard” are in a shipyard for construction, repair, refurbishment or upgrade; rigs listed as “stacked” are idle without a contract and are not actively marketed in present market conditions.
3.
Harsh environment capability.
4.
Although designed for a water depth rating of 390 feet of water in a non-harsh environment, the rig is currently equipped with legs adequate to drill in approximately 200 feet of water in a harsh environment. We own the additional leg sections required to extend the drilling depth capability to 390 feet of water.
5.
Although designed for a water depth rating of 300 feet of water, the rig is currently equipped with legs adequate to drill in approximately 250 feet of water. We own the additional leg sections required to extend the drilling depth capability to 300 feet of water.
6.
Although designed for a water depth rating of 400 feet of water, the rig is currently equipped with legs adequate to drill in approximately 225 feet of water. We own the additional leg sections required to extend the drilling depth capability to 400 feet of water, and we intend to install these extensions during 2010.
FACILITIES
Our corporate office is located in Baar, Switzerland. In addition, we maintain executive offices for executive officers and selected personnel in Geneva, Switzerland. We also maintain office space in Sugar Land, Texas where significant worldwide global support activity occurs. We lease administrative and marketing offices, and sites used primarily for storage, maintenance and repairs, and research and development for drilling rigs and equipment, in Sugar Land, Texas; New Orleans and Lafitte, Louisiana; Leduc, Alberta and St. John’s, Newfoundland, Canada; Lagos and Port Harcourt, Nigeria; Ivory Coast; Mexico City and Ciudad del Carmen, Mexico; Doha, Qatar; Abu Dhabi and Dubai, U.A.E.; Beverwijk and Den Helder, The Netherlands; Norfolk, England; Macae and Rio de Janiero, Brazil; Dalian, China; Jurong, Singapore; and Esjberg, Denmark. Noble Cayman also owns certain tracts of land, including office and administrative buildings and warehouse facilities, in Bayou Black, Louisiana and Aberdeen, Scotland.
Information regarding legal proceedings is set forth in Note 12 to our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.
ITEM 4.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market for Shares and Related Member Information
Noble-Swiss shares are listed and traded on the New York Stock Exchange under the symbol “NE”. The following table sets forth for the periods indicated the high and low sales prices and dividends declared and paid in U.S. dollars per share:
The declaration and payment of dividends in the future by Noble-Swiss and the making of distributions of capital, including returns of capital in the form of par value reductions, require authorization of the shareholders of Noble-Swiss. The amount of such dividends, distributions and returns of capital will depend on our results of operations, financial condition, cash requirements, future business prospects, contractual restrictions and other factors deemed relevant by our Board of Directors and our shareholders.
On February 18, 2010, there were 257,375,936 of our shares outstanding held by 1,675 shareholder accounts of record.
Swiss Tax Consequences to Shareholders of Noble
The tax consequences discussed below are not a complete analysis or listing of all the possible tax consequences that may be relevant to shareholders of Noble. Shareholders should consult their own tax advisors in respect of the tax consequences related to receipt, ownership, purchase or sale or other disposition of our shares and the procedures for claiming a refund of withholding tax.
Swiss Income Tax on Dividends and Similar Distributions
A non-Swiss holder will not be subject to Swiss income taxes on dividend income and similar distributions in respect of our shares, unless the shares are attributable to a permanent establishment or a fixed place of business maintained in Switzerland by such non-Swiss holder. However, dividends and similar distributions are subject to Swiss withholding tax. See “-Swiss Withholding Tax-Distributions to Shareholders.”
Swiss Wealth Tax
A non-Swiss holder will not be subject to Swiss wealth taxes unless the holder’s shares are attributable to a permanent establishment or a fixed place of business maintained in Switzerland by such non-Swiss holder.
Swiss Capital Gains Tax upon Disposal of Shares
A non-Swiss holder will not be subject to Swiss income taxes for capital gains unless the holder’s shares are attributable to a permanent establishment or a fixed place of business maintained in Switzerland by such non-Swiss holder. In such case, the non-Swiss holder is required to recognize capital gains or losses on the sale of such shares, which will be subject to cantonal, communal and federal income tax.
Swiss Withholding Tax-Distributions to Shareholders
A Swiss withholding tax of 35 percent is due on dividends and similar distributions to our shareholders from us, regardless of the place of residency of the shareholder (subject to the exceptions discussed under “-Exemption from Swiss Withholding Tax-Distributions to Shareholders” below). We will be required to withhold at such rate and remit on a net basis any payments made to a holder of our shares and pay such withheld amounts to the Swiss federal tax authorities. Please see “-Refund of Swiss Withholding Tax on Dividends and Other Distributions.”
Exemption from Swiss Withholding Tax-Distributions to Shareholders
Under present Swiss tax law, distributions to shareholders in relation to a reduction of par value are exempt from Swiss withholding tax. Beginning on January 1, 2011, distributions to shareholders out of qualifying additional paid-in capital for Swiss statutory purposes are as a matter of principle exempt from the Swiss withholding tax. The particulars of this general principle are, however, subject to regulations partly still to be promulgated by the competent Swiss authorities; it will further require that the current draft corporate law bill, which proposes an overhaul of certain aspects of Swiss corporate law, be modified in the upcoming legislative process to reflect the recent change in the tax law. On March 27, 2009, the aggregate amount of par value and qualifying additional paid-in capital of our outstanding shares was CHF 1.4 billion and CHF 8.7 billion, respectively. Consequently, we expect that a substantial amount of any potential future distributions may be exempt from Swiss withholding tax.
Repurchases of Shares
Under present Swiss tax law, repurchases of shares for the purposes of capital reduction are treated as a partial liquidation subject to the 35 percent Swiss withholding tax. However, for shares repurchased for capital reduction, the portion of the repurchase price attributable to the par value of the shares repurchased will not be subject to the Swiss withholding tax. Beginning on January 1, 2011, subject to the adoption of implementing regulations and amendments to Swiss corporate law, the portion of the repurchase price attributable to the qualifying additional paid-in capital for Swiss statutory reporting purposes of the shares repurchased will also not be subject to the Swiss withholding tax. We would be required to withhold at such rate the tax from the difference between the repurchase price and the related amount of par value and, beginning on January 1, 2011, subject to the adoption of implementing regulations and amendments to Swiss corporate law, the related amount of qualifying additional paid-in capital. We would be required to remit on a net basis the purchase price with the Swiss withholding tax deducted to a holder of our shares and pay the withholding tax to the Swiss federal tax authorities.
With respect to the refund of Swiss withholding tax from the repurchase of shares, see “-Refund of Swiss Withholding Tax on Dividends and Other Distributions” below.
In most instances, Swiss companies listed on the SIX Swiss Exchange (“SIX”), carry out share repurchase programs through a “second trading line” on the SIX. Swiss institutional investors typically purchase shares from shareholders on the open market and then sell the shares on the second trading line back to the company. The Swiss institutional investors are generally able to receive a full refund of the withholding tax. Due to, among other things, the time delay between the sale to the company and the institutional investors’ receipt of the refund, the price companies pay to repurchase their shares has historically been slightly higher (but less than one percent) than the price of such companies’ shares in ordinary trading on the SIX first trading line.
We do not expect to be able to use the SIX second trading line process to repurchase our shares because we do not intend to list our shares on the SIX. We do, however, intend to follow an alternative process whereby we expect to be able to repurchase our shares in a manner that should allow Swiss institutional market participants selling the shares to us to receive a refund of the Swiss withholding tax and, therefore, accomplish the same purpose as share repurchases on the second trading line at substantially the same cost to us and such market participants as share repurchases on a second trading line.
The repurchase of shares for purposes other than capital reduction, such as to retain as treasury shares for use in connection with stock incentive plans, convertible debt or other instruments within certain periods, will generally not be subject to Swiss withholding tax.
Refund of Swiss Withholding Tax on Dividends and Other Distributions
Swiss holders - A Swiss tax resident, corporate or individual, can recover the withholding tax in full if such resident is the beneficial owner of our shares at the time the dividend or other distribution becomes due and provided that such resident reports the gross distribution received on such resident’s income tax return, or in the case of an entity, includes the taxable income in such resident’s income statement.
Non-Swiss holders - If the shareholder that receives a distribution from us is not a Swiss tax resident, does not hold our shares in connection with a permanent establishment or a fixed place of business maintained in Switzerland, and resides in a country that has concluded a treaty for the avoidance of double taxation with Switzerland for which the conditions for the application and protection of and by the treaty are met, then the shareholder may be entitled to a full or partial refund of the withholding tax described above. The procedures for claiming treaty refunds (and the time frame required for obtaining a refund) may differ from country to country.
Switzerland has entered into bilateral treaties for the avoidance of double taxation with respect to income taxes with numerous countries, including the U.S., whereby under certain circumstances all or part of the withholding tax may be refunded.
U.S. residents - The Swiss-U.S. tax treaty provides that U.S. residents eligible for benefits under the treaty can seek a refund of the Swiss withholding tax on dividends for the portion exceeding 15 percent (leading to a refund of 20 percent) or a 100 percent refund in the case of qualified pension funds.
As a general rule, the refund will be granted under the treaty if the U.S. resident can show evidence of:
•
beneficial ownership,
•
meeting the U.S.-Swiss tax treaty’s limitation on benefits requirements.
The claim for refund must be filed with the Swiss federal tax authorities (Eigerstrasse 65, 3003 Berne, Switzerland), not later than December 31 of the third year following the year in which the dividend payments became due. The relevant Swiss tax form is Form 82C for companies, 82E for other entities and 82I for individuals. These forms can be obtained from any Swiss Consulate General in the U.S. or from the Swiss federal tax authorities at the address mentioned above. Each form needs to be filled out in triplicate, with each copy duly completed and signed before a notary public in the U.S. Evidence that the withholding tax was withheld at the source must also be included.
Stamp duties in relation to the transfer of shares - The purchase or sale of our shares may be subject to Swiss federal stamp taxes on the transfer of securities irrespective of the place of residency of the purchaser or seller if the transaction takes place through or with a Swiss bank or other Swiss securities dealer, as those terms are defined in the Swiss Federal Stamp Tax Act and no exemption applies in the specific case. If a purchase or sale is not entered into through or with a Swiss bank or other Swiss securities dealer, then no stamp tax will be due. The applicable stamp tax rate is 0.075 percent for each of the two parties to a transaction and is calculated based on the purchase price or sale proceeds. If the transaction does not involve cash consideration, the transfer stamp duty is computed on the basis of the market value of the consideration.
Purchases of Shares
The following table sets forth for the periods indicated certain information about shares that we purchased:
Stock Performance Graph
This graph shows the cumulative total shareholder return of our shares over the five-year period from January 1, 2005 to December 31, 2009. The graph also shows the cumulative total returns for the same five-year period of the S&P 500 Index and the Dow Jones U.S. Oil Equipment & Services Index. The graph assumes that $100 was invested in our shares and the two indices on January 1, 2005 and that all dividends were reinvested on the date of payment.
Investors are cautioned against drawing any conclusions from the data contained in the graph, as past results are not necessarily indicative of future performance.
The above graph and related information shall not be deemed “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing.
ITEM 6.
ITEM 6.
SELECTED FINANCIAL DATA.
The following table sets forth selected financial data of us and our consolidated subsidiaries over the five-year period ended December 31, 2009, which information is derived from our audited financial statements. This information should be read in connection with, and is qualified in its entirety by, the more detailed information in our financial statements included in Item 8 of this Annual Report on Form 10-K.
(1)
Consists of Long-Term Debt and Current Maturities of Long-Term Debt.
(2)
The cash dividend declared in 2008 includes a special dividend of $0.75 per share.
(3)
During the third quarter of 2009, we began paying a return on capital in the form of par value reductions, in lieu of dividends, based upon an amount in Swiss Francs. Amounts listed are in US dollars at the exchange rate that the dividend was paid.
ITEM 7.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion is intended to assist you in understanding our financial position at December 31, 2009 and 2008, and our results of operations for each of the years in the three-year period ended December 31, 2009. You should read the accompanying consolidated financial statements and related notes in conjunction with this discussion.
EXECUTIVE OVERVIEW
Our 2009 financial and operating results include:
While the global macro environment improved during the second half of 2009, the worldwide economy remains uncertain. Oil prices remained steady during the third and fourth quarter in the $70 to $80 per barrel range; however, prices continue to be volatile. Various economic indicators also continue to be mixed, leading to broad concern about the length of the economic recovery. In spite of recent increases in oil prices, we have not seen a substantial increase in demand for offshore drilling services with relatively few new contract commitments signed regardless of water depth. We believe that demand remains strong in the deepwater market segment, but there is little new contract activity across the midwater or shallow water segments. In particular, dayrates for jackup units have decreased up to fifty percent in most regions and utilization has decreased. While we believe that the risk for early contract terminations or defaults under existing contracts has decreased over the course of the year, the risk has not been eliminated. If the global economy continues to improve and oil prices continue to stabilize in the current range, we may see increased demand for contract drilling services during 2010. However, due to the introduction of newbuild jackup units into the market, it is possible that dayrates for jackup units may not improve from current levels and could decline further as more units compete for available jobs.
We cannot be certain of the future price of oil or the extent to which or when the global economy will recover. However, we believe that the current reduced demand for hydrocarbons is largely a result of the ongoing global financial uncertainty and that an economic recovery combined with the continued natural decline of worldwide hydrocarbon basins will be positive factors for the demand for future contract drilling services. We continue to believe we are well positioned within the industry. Furthermore, our liquidity and financial strength may create potential acquisition opportunities for us.
Demand for our drilling services generally depends on a variety of economic and political factors, including worldwide demand for oil and gas, the ability of the OPEC to set and maintain production levels and pricing, the level of production of non-OPEC countries and the policies of various governments regarding exploration and development of their oil and gas reserves. Our results of operations depend on activity in the oil and gas production and development markets worldwide. Historically, oil and gas prices and market expectations of potential changes in these prices have significantly affected that level of activity. Generally, higher oil and natural gas prices or our customers’ expectations of higher prices result in greater demand for our services and lower oil and gas prices result in reduced demand for our services.
Demand for our services is also a function of the worldwide supply of mobile offshore drilling units. Industry sources report that a total of 58 newbuild jackups and 76 deepwater newbuilds are planned or under construction with scheduled delivery dates in 2010 and beyond. A significant number of these units, particularly among the jackup units, reportedly do not have a contractual commitment from a customer and are referred to in the offshore drilling industry as “being built on speculation.” The introduction of non-contracted rigs into the marketplace could have an adverse affect on the level of demand for our services or the dayrates we are able to achieve.
In addition, as a result of recent exploration discoveries offshore Brazil, Petroleo Brasileiro S.A.(“Petrobras”), the Brazilian national oil company, has announced a plan to construct up to 28 deepwater rigs in Brazil. Petrobras has announced that they will finance and own the first nine of these additional rigs. Petrobras may seek long-term contracts for the remaining 19 rigs to support construction and to allow drilling contractors to bid for the opportunity to supply up to four rigs per contractor. Currently there is not a deepwater drilling rig construction industry in Brazil. As a result, if new shipyards are built, construction prices for new rigs built in such shipyards could exceed the price of an equivalent rig built in an existing yard outside of Brazil. At current market dayrates, economic returns on these units may be challenged. We cannot predict how many contractors will participate in the bidding process or how many deepwater units may ultimately be constructed in Brazil. This potential increase in supply could also adversely impact overall industry dayrates and economics.
We cannot predict the future level of demand for our drilling services or future conditions in the offshore contract drilling industry. Decreases in commodity prices or the level of demand for our drilling services or increases in the supply of drilling rigs in the market could have an adverse effect on our results of operations.
Our long-standing business strategy is the active expansion of our worldwide offshore drilling and deepwater capabilities through acquisitions, upgrades and modifications, and the deployment of drilling assets in important geological areas. We have also actively expanded our offshore drilling and deepwater capabilities in recent years through the construction of new rigs. In 2009, we continued our expansion strategy as indicated by the following developments and activities:
•
we completed construction on the Noble Danny Adkins, an ultra-deepwater semisubmersible, which left the shipyard during the fourth quarter of 2009 and commenced operating under a long-term contract in the Gulf of Mexico;
•
we continued construction on two additional newbuild ultra-deepwater semisubmersibles, the Noble Dave Beard, which was completed and left the shipyard in the fourth quarter and is scheduled to commence drilling operations in the first quarter of 2010, and the Noble Jim Day, which is scheduled for delivery in the second quarter of 2010; and
•
we commenced construction on one dynamically positioned, ultra-deepwater, harsh environment Globetrotter-class drillship, which is scheduled to be delivered in the second half of 2011.
Newbuild capital expenditures totaled $717 million during 2009.
CONSUMMATION OF MIGRATION AND INTERNAL RESTRUCTURING
On March 26, 2009, we completed a series of transactions that effectively changed the place of incorporation of our parent holding company from the Cayman Islands to Switzerland. As a result of these transactions, Noble-Cayman, the previous publicly traded Cayman Islands parent holding company, became a direct, wholly-owned subsidiary of Noble-Swiss, the current parent Company. Noble-Swiss’ principal asset is 100% of the shares of common stock of Noble-Cayman. The consolidated financial statements of Noble-Swiss include the accounts of Noble-Cayman, and Noble-Swiss conducts substantially all of its business through Noble-Cayman and its subsidiaries. In connection with this transaction, we relocated our principal executive offices, executive officers and selected personnel to Geneva, Switzerland.
On October 1, 2009, we completed a worldwide internal restructuring of the ownership of substantially all of our drilling rigs under a single non-U.S. entity. The advantages of this restructuring include better alignment of fleet ownership and operation with our predominately non-U.S. drilling business, facilitation of more efficient fleet deployment on a worldwide basis, and greater efficiency in managing cash and enhancing borrowing opportunities. Additionally, our effective tax rate has been beneficially impacted as a result of this restructuring.
CONTRACT DRILLING SERVICES BACKLOG
We maintain a backlog (as defined below) of commitments for contract drilling services. The following table sets forth as of December 31, 2009 the amount of our contract drilling services backlog and the percent of available operating days committed for the periods indicated:
(1)
Our drilling contracts with Petrobras provide an opportunity for us to earn performance bonuses based on downtime experienced for our rigs operating offshore Brazil. With respect to our semisubmersibles operating offshore Brazil, we have included in our backlog an amount equal to 75 percent of potential performance bonuses for such semisubmersibles, which amount is based on and generally consistent with our historical earnings of performance bonuses for these rigs. With respect to our drillships operating offshore Brazil, we (a) have not included in our backlog any performance bonuses for periods prior to the commencement of certain upgrade projects planned for 2010 and 2011, which projects are designed to enhance the reliability and operational performance of our drillships, and (b) have included in our backlog an amount equal to 75 percent of potential performance bonuses for periods after the estimated completion of such upgrade projects. Our backlog for semisubmersibles/drillships includes approximately $299 million attributable to these performance bonuses.
(2)
Our drilling contracts with Pemex for certain jackups operating offshore in Mexico are subject to price review and adjustment of the rig dayrate. Presently, contracts for five jackups have dayrates indexed to the world average of the highest dayrates published by ODS-Petrodata. After an initial firm dayrate period, the dayrates are generally adjusted quarterly based on formulas calculated from the index. Our contract drilling services backlog has been calculated using the December 31, 2009 index-based dayrates for periods subsequent to the initial firm dayrate period.
(3)
Pemex has the ability to cancel its drilling contracts on 30 days or less notice without any early termination payment. We currently have 13 rigs contracted to Pemex in Mexico, and our backlog includes approximately $550 million related to such contracts at December 31, 2009. Also our drilling contracts generally give the customer an early termination right in the event we fail to meet certain performance standards, including downtime thresholds. While we do not currently anticipate any cancellations as a result of events that have occurred to date, clients may from time to time have the contractual right to do so, which is the case with the drilling contract for the Noble Roger Eason. However, based on communications to date with the customer we do not believe that the customer will terminate this contract.
(4)
The drilling contract for the Noble Jim Day contains a termination right in the event the rig is not ready to commence operations by December 31, 2010. The drilling contract for the Noble Dave Beard currently gives the customer the right to terminate the contract and also gives the customer the right to apply a penalty for delay beyond the August 2009 delivery date.
(5)
Percentages take into account additional capacity from the estimated dates of deployment of our newbuild rigs that are scheduled to commence operations during 2010 through 2011.
Our contract drilling services backlog consists of commitments we believe to be firm. Our contract drilling services backlog reported above reflects estimated future revenues attributable to both signed drilling contracts and letters of intent. A letter of intent is generally subject to customary conditions, including the execution of a definitive drilling contract. If worldwide economic conditions continue to deteriorate, it is possible that some customers that have entered into letters of intent will not enter into signed drilling contracts. We calculate backlog for any given unit and period by multiplying the full contractual operating dayrate for such unit by the number of days remaining in the period. The reported contract drilling services backlog does not include amounts representing revenues for mobilization, demobilization and contract preparation, which are not expected to be significant to our contract drilling services revenues, reimbursable amounts from customers or amounts attributable to uncommitted option periods under drilling contracts or letters of intent.
The amount of actual revenues earned and the actual periods during which revenues are earned may differ from the backlog amounts and backlog periods set forth in the table above due to various factors, including, but not limited to, shipyard and maintenance projects, unplanned downtime, weather conditions and other factors that result in applicable dayrates lower than the full contractual operating dayrate. In addition, amounts included in the backlog may change because drilling contracts may be varied or modified by mutual consent or customers may exercise early termination rights or decline to enter into a drilling contract after executing a letter of intent. As a result, our backlog as of any particular date may not be indicative of our actual operating results for the future periods for which the backlog is calculated.
INTERNAL INVESTIGATION
Since June 2007, we have been conducting, with the assistance of independent outside counsel engaged by our audit committee, an internal investigation relating to our Nigerian operations. The investigation has focused on the legality under the FCPA, and local laws of our Nigerian affiliate’s reimbursement of certain expenses incurred by our customs agents in connection with obtaining and renewing permits for the temporary importation of drilling units and related equipment into Nigerian waters, including permits that are necessary for our drilling units to operate in Nigerian waters. The scope of the investigation has also included our dealings with customs agents and customs authorities in certain parts of the world other than Nigeria in which we conduct our operations, as well as dealings with other types of local agents in Nigeria and such other parts of the world. There can be no assurance that evidence of additional potential FCPA violations or violations of other laws or regulations may not be uncovered through the investigation.
We voluntarily contacted the SEC and the U.S. Department of Justice (“DOJ”) to advise them of the independent investigation. We have been cooperating, and intend to continue to cooperate fully with both agencies. If the SEC or the DOJ determines that violations of the FCPA have occurred, they could seek civil and criminal sanctions, including monetary penalties, against us and/or certain of our employees, as well as additional changes to our business practices and compliance programs, any of which could have a material adverse effect on our business or financial condition. In addition, such actions, whether actual or alleged, could damage our reputation and ability to do business, to attract and retain employees, and to access capital markets. Further, detecting, investigating, and resolving such actions is expensive and consumes significant time and attention of our senior management.
The independent outside counsel appointed by the audit committee to perform the internal investigation made a presentation of the results of its investigation to the DOJ and the SEC in June 2008. Since June 2008, the SEC and the DOJ have reviewed these results and information gathered by the independent outside counsel in the course of the investigation. We consider the matter to be ongoing and cannot predict (a) when it will conclude, (b) whether either the SEC or the DOJ will open its own proceeding to investigate this matter, or (c) if a proceeding is opened, what potential sanctions, penalties or other remedies these agencies may seek. We could also face fines or sanctions in relevant foreign jurisdictions. Based on information obtained to date, we believe it is probable that we will have to pay an amount to settle this matter with the DOJ and SEC, however, we are not in a position to estimate any potential liability that may result and, as a result, we have not made any accrual in our consolidated financial statements at December 31, 2009.
Notwithstanding that the investigation is ongoing, we concluded that certain changes to our FCPA compliance program would provide us greater assurance that our assets are not used, directly or indirectly, to make improper payments, including customs payments, and that we are in compliance with the FCPA’s record-keeping requirements. Although we have had a long-standing published policy requiring compliance with the FCPA and broadly prohibiting any improper payments by us to foreign or U.S. officials, we adopted additional measures intended to enhance FCPA compliance procedures. Further measures may be required once the investigation matter is concluded.
We are currently operating three jackup rigs offshore Nigeria. The temporary import permits covering two of these rigs expired in November 2008 and we have pending applications to renew these permits. However, as of February 15, 2010, the Nigerian customs office had not acted on our applications. We have obtained a temporary import permit for the third rig, which was recently imported into the country. We continue to seek to avoid material disruption to our Nigerian operations; however, there can be no assurance that we will be able to obtain new permits or further extensions of permits necessary to continue the operation of our rigs in Nigeria. If we cannot obtain a new permit or an extension necessary to continue operations of any rig, we may need to cease operations under the drilling contract for such rig and relocate such rig from Nigerian waters. In any case, we also could be subject to actions by Nigerian customs for import duties and fines for these two rigs, as well as other drilling rigs that operated in Nigeria in the past. We cannot predict what impact these events may have on any such contract or our business in Nigeria. Furthermore, we cannot predict what changes, if any, relating to temporary import permit policies and procedures may be established or implemented in Nigeria in the future, or how any such changes may impact our business there.
RESULTS OF OPERATIONS
2009 Compared to 2008
General
Net income for 2009 was $1.7 billion, or $6.42 per diluted share, on operating revenues of $3.6 billion, compared to net income for 2008 of $1.6 billion, or $5.81 per diluted share, on operating revenues of $3.4 billion.
Rig Utilization, Operating Days and Average Dayrates
Operating revenues and operating costs and expenses for our contract drilling services segment are dependent on three primary metrics - rig utilization, operating days and dayrates. The following table sets forth the average rig utilization, operating days and average dayrates for our rig fleet for 2009 and 2008:
Contract Drilling Services
The following table sets forth the operating revenues and the operating costs and expenses for our contract drilling services segment for 2009 and 2008:
(1)
We record reimbursements from customers for out-of-pocket expenses as revenues and the related direct costs as operating expenses. Changes in the amount of these reimbursables do not have a material effect on our financial position, results of operations or cash flows.
**
Not a meaningful percentage.
Operating Revenues. Contract drilling services revenue increases for 2009 as compared to 2008 were primarily driven by increases in average dayrates. Average dayrates increased revenues approximately $428 million for 2009, while fewer operating days reduced revenues approximately $217 million.
Average dayrates increased 13 percent in 2009 as compared to 2008. Except for our jackup rigs, which were impacted by the weakening demand in the shallow waters worldwide, higher average dayrates were received across all other rig categories as scheduled contractual increases for deepwater rigs, coupled with the completion of additional deepwater rigs, drove average dayrates higher in those classes.
The decrease in operating days in 2009 as compared 2008 was primarily due to downtime of certain rigs in 2009. Unpaid shipyard days increased 498 days in 2009 as compared to 2008, as we had 21 rigs spend time in the shipyard during 2009. We had only 12 rigs with unpaid shipyard days in 2008. Additionally, stacked days increased 850 days as the Noble Al White, Noble Byron Welliver, Noble Cees van Diemen, Noble Dick Favor, Noble Don Walker, Noble Fri Rodli, Noble Joe Alford, Noble Lester Pettus, Noble Lloyd Noble and Noble Tommy Craighead each were stacked for certain periods during 2009. In 2008, five rigs, the Noble Carl Norberg, Noble Don Walker, Noble Fri Rodli, Noble Joe Alford, and the Noble Roy Butler, spent a significant number of days stacked. The decrease in operating days in 2009 was partially offset by a 576 day increase in available days for the enhanced premium jackups Noble Hans Deul and Noble Scott Marks, which were placed into service in November 2008 and June 2009, respectively, and the addition of the semisubmersible Noble Danny Adkins, which began operating under contract in October 2009. We also had 275 less available days in 2009 as compared to 2008 due to the Noble Fri Rodli being removed from our rig fleet effective March 31, 2009. Additionally, 2009 had one less available operating day than 2008 due to the leap year, which reduced available days in 2009 by 54 days.
Operating Costs and Expenses. Contract drilling services operating costs and expenses decreased $5 million in 2009 as compared to 2008. Our newbuild rigs, the Noble Hans Deul, Noble Scott Marks, and the Noble Danny Adkins, which were placed into service in November 2008, June 2009, and October 2009, respectively, added approximately $34 million of operating costs in 2009. Excluding the additional expenses related to our newbuild rigs, our contract drilling costs decreased $39 million in 2009 versus 2008. This change was primarily driven by a $42 million decrease in local labor costs due to the increased number of rigs stacked during 2009 and an $18 million decrease in insurance costs from our insurance program under which we are predominately self-insured. These decreases were partially offset by a $9 million increase in miscellaneous transportation and fuel costs, a $9 million increase in mobilization costs and a $3 million increase in other operating cost and expenses.
Depreciation and amortization increased $49 million in 2009 over 2008 due to depreciation on newbuilds placed into service, and additional depreciation related to other capital expenditures on our fleet since the beginning of 2008. Since the beginning of 2008, we have spent $2.6 billion on contract drilling capital expenditures.
Loss on asset disposal/involuntary conversion in 2009 primarily consists of a charge of $17 million for our jackup, the Noble David Tinsley, which experienced a “punch-through” while being positioned on location offshore Qatar. The $17 million charge includes approximately $9 million for the write-off of the damaged legs and $8 million for non-reimbursable expenses. Also during 2009, we recorded an impairment charge of $12 million for the Noble Fri Rodli as a result of a decision to evaluate disposition alternatives for this submersible drilling unit.
Other
The following table sets forth the operating revenues and the operating costs and expenses for our other services for 2009 and 2008 (in thousands):
(1)
We record reimbursements from customers for out-of-pocket expenses as revenues and the related direct cost as operating expenses. Changes in the amount of these reimbursables do not have a material effect on our financial position, results of operations or cash flows. The reduction in reimbursables for 2009 as compared to 2008 is due to the sale of our North Sea labor contract drilling services business in 2008.
**
Not a meaningful percentage.
Operating Revenues. Our labor contract drilling services revenues decreased primarily due to the sale of our North Sea labor contract drilling services business in April 2008. Additionally, during the second quarter of 2008, we returned the jackup Noble Kolskaya, which we had operated under a bareboat charter, to its owner. Revenues during 2008 related to our North Sea labor contract drilling services business and the Noble Kolskaya were $22 million in 2008. The remaining variance is due to currency exchange fluctuations and decreases related to revenue from the platform that we operate in Canada.
Operating Costs and Expenses. Labor contract drilling services costs and expenses decreased $24 million due to the sale of our North Sea labor contract drilling services business and the return of the Noble Kolskaya to its owner in 2008. Expenses during 2008 related to our North Sea labor contract drilling services business and Noble Kolskaya were $19 million. Operating costs associated with our Canadian labor contracts in 2009 decreased $5 million from 2008 primarily as a result of decreases in operations under the Hibernia contract and fluctuations in foreign currency exchange rates.
Other Income and Expenses
Selling, general and administrative expenses. Overall selling, general and administrative expenses increased $6 million in 2009 from 2008 primarily due to $7 million in costs related to our re-domestication from the Cayman Islands to Switzerland, a $6 million increase in salaries and employment related costs, $4 million in charges related to our worldwide internal restructuring, and a $3 million increase due to our Restoration Plan mark-to-market adjustment, partially offset by a $12 million decrease in costs incurred in the internal investigation of our Nigerian operations, and a $2 million decrease in other selling general and administrative expenses.
Interest Expense, net of amount capitalized. Interest expense, net of amount capitalized decreased $3 million primarily due to repayments of debt not subject to interest capitalization coupled with higher capital expenditures, and capitalized interest, in 2009 as compared to 2008. Capitalized interest was $55 million for 2009 versus $48 million for 2008.
Income Tax Provision. The income tax provision decreased $14 million primarily due to a lower effective tax rate in 2009 compared to 2008. The lower effective tax rate of 16.7 percent in 2009 compared to 18.4 percent in 2008 decreased income tax expense by approximately $34 million. The lower effective tax rate in 2009 resulted primarily from the worldwide internal restructuring that took place in October 2009 and from higher pre-tax earnings of non-U.S. owned assets, which generally have a lower statutory tax rate. This decrease was partially offset by increased pre-tax earnings of approximately $103 million
2008 Compared to 2007
General
Net income for 2008 was $1.6 billion, or $5.81 per diluted share, on operating revenues of $3.4 billion, compared to net income for 2007 of $1.2 billion, or $4.45 per diluted share, on operating revenues of $3.0 billion.
Rig Utilization, Operating Days and Average Dayrates
The following table sets forth the average rig utilization, operating days and average dayrates for our rig fleet for 2008 and 2007:
(1)
Information reflects our policy of reporting on the basis of the number of rigs in our fleet, excluding newbuild rigs under construction.
(2)
Information reflects the number of days that our rigs were operating under contract.
(3)
These units have water depth ratings of 6,000 feet or greater.
(4)
These units have water depth ratings of less than 6,000 feet.
Contract Drilling Services
The following table sets forth the operating revenues and the operating costs and expenses for our contract drilling services segment for 2008 and 2007 (in thousands):
(1)
We record reimbursements from customers for out-of-pocket expenses as revenues and the related direct cost as operating expenses. Changes in the amount of these reimbursables do not have a material effect on our financial position, results of operations or cash flows.
**
Not a meaningful percentage
Operating Revenues. Contract drilling services revenue increases for 2008 as compared to 2007 were primarily driven by increases in average dayrates. Average dayrates increased revenues approximately $670 million for 2008, while fewer operating days reduced revenues approximately $86 million.
Average dayrates increased 25 percent in 2008 as compared to 2007. Except for our submersible rigs, which were impacted by weakening demand in the shallow waters of the U.S. Gulf of Mexico, higher average dayrates were received across all rig categories as strong demand for drilling rigs drove market dayrates higher. Demand in the U.S. Gulf of Mexico has been weakened due to decreases in natural gas prices and increases in operating costs compared to on-shore drilling.
The decrease in operating days in 2008 as compared to 2007 was primarily due to an increase in downtime of certain rigs in 2008. Unpaid shipyard days increased 417 days in 2008 as compared to 2007, as the Noble Roy Butler and the Noble George McLeod each spent significant time in the shipyard during 2008 for rig modifications and regulatory inspections, and the Noble Roger Eason was completing repairs for fire damage suffered in November 2007. Additionally, the Noble Fri Rodli, the Noble Don Walker, the Noble Roy Butler and the Noble Carl Norberg spent an aggregate total of 852 days stacked during 2008. The Noble Fri Rodli has been cold-stacked since October 2007 due to weakening demand in the shallow waters of the U.S. Gulf of Mexico. The Noble Don Walker, the Noble Roy Butler and the Noble Carl Norberg spent time stacked in 2008 due to weakness in the Nigerian market. The Noble Carl Norberg and the Noble Roy Butler are currently under contract in Mexico, and the Noble Don Walker was operating under a contract off the West African coast of Benin. The aggregate number of stacked days in 2007 was 255 days. These decreases in operating days were partially offset by increased operating days of 471 days for three recently completed newbuilds, the ultra-deepwater semisubmersible the Noble Clyde Boudreaux and the enhanced premium jackups the Noble Roger Lewis and the Noble Hans Deul, which were added to the fleet in June 2007, September 2007 and November 2008, respectively. Additionally, 2008 had one more available operating day than 2007 due to leap year, which added 54 more operating days in 2008.
Operating Costs and Expenses. Contract drilling services expenses increased 15 percent in 2008 as compared to 2007. Our newbuild rigs, including the Noble Clyde Boudreaux, the Noble Roger Lewis and the Noble Hans Deul, added $45 million of operating costs in 2008 as compared to 2007. Excluding the effect of these rigs, our labor costs increased $42 million in 2008 over 2007 due to higher compensation, including retention programs designed to retain key rig and operations personnel. The remaining $45 million of the operating cost increase in 2008 over 2007 was primarily due to increases in costs of daily rig operations, including a $19 million increase in maintenance expenses, an $11 million increase in crew rotation and transportation costs and to a lesser extent, increases in catering, fuel, rig communications and safety and training costs.
Depreciation and amortization increased $66 million in 2008 over 2007 due to depreciation on newbuilds added to the fleet, and additional depreciation related to other capital expenditures on our fleet since the beginning of 2007.
Selling, general and administrative expenses decreased $11 million in 2008 from 2007 primarily due to a $6 million decrease in severance costs related to executive departures, a $3 million reduction in compensation expense on our Restoration Plan mark-to-market adjustment and a $2 million decrease in costs incurred in the internal investigation of our Nigerian operations.
Hurricane losses and recoveries, net for 2008 relate to a charge of $10 million, which represents our deductible under our insurance program, for certain of our rigs operating in the U.S. Gulf of Mexico that sustained damage as a result of Hurricane Ike. All damaged rigs have subsequently returned to work. During 2007, we recognized a net recovery of $4 million on the final settlement of all remaining physical damage and loss of hire insurance claims for damage caused by Hurricanes Katrina and Rita in 2005.
Other
The following table sets forth the operating revenues and the operating costs and expenses for our other services for 2008 and 2007:
(1)
We record reimbursements from customers for out-of-pocket expenses as revenues and the related direct cost as operating expenses. Changes in the amount of these reimbursables do not have a material effect on our financial position, results of operations or cash flows.
**
Not a meaningful percentage
Operating Revenues. Our labor contract drilling services revenues decreased primarily due to the sale of our North Sea labor contract drilling services business in April 2008. Additionally, during the second quarter of 2008, we returned the jackup Noble Kolskaya, which we had operated under a bareboat charter, to its owner. Revenues during 2008 related to our North Sea labor contract drilling services business and the Noble Kolskaya were $22 million as compared to $124 million in 2007.
Engineering, consulting and other operating revenues decreased $2 million in 2008 from 2007 due to closure of the operations of our Triton Engineering Services, Inc. (“Triton”) subsidiary in March 2007 and the sale of the rotary steerable assets and intellectual property of our Noble Downhole Technology Ltd. (“Downhole Technology”) subsidiary in November 2007. We no longer conduct engineering and consulting operations.
Operating Costs and Expenses. Labor contract drilling services costs and expenses decreased in 2008 due to the sale of our North Sea labor contract drilling services business and the return of the Noble Kolskaya to its owner.
Engineering, consulting and other expenses decreased $17 million in 2008 due to the sale of the Downhole Technology assets and the closure of the operations of Triton.
The decrease in depreciation and amortization was primarily due to the return of the Noble Kolskaya to its owner during 2008.
Other Income and Expenses
Interest Expense. Interest expense, net of amount capitalized, decreased $9 million due to lower average debt levels in 2008 than 2007 primarily as a result of short-term borrowings during 2007 that contributed $8 million in interest expense. The short-term borrowings were used to repay an inter-company loan in connection with the dissolution of a wholly-owned subsidiary. Capitalized interest for 2008 was $48 million as compared to $50 million for 2007.
Interest income and other, net. Interest income decreased $3 million in 2008 from 2007 primarily as a result of the investment of the proceeds from the short-term borrowings described above during 2007 that contributed $6 million in interest income during 2007. This decrease was partially offset by interest on increased average cash and cash equivalent balances during 2008.
Income Tax Provision. The income tax provision increased $69 million primarily due to higher pre-tax earnings in 2008 over 2007. The higher pre-tax earnings increased income tax expense by approximately $81 million, offset by a lower effective tax rate of 18.4 percent in 2008 compared to 19.0 percent in 2007, that decreased income tax expense by approximately $12 million. The lower effective tax rate in 2008 resulted primarily from higher pre-tax earnings of non-U.S. owned assets, which generally have a lower statutory tax rate.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Our principal capital resource in 2009 was net cash from operating activities of $2.1 billion, which compared to $1.9 billion and $1.4 billion in 2008 and 2007, respectively. The increase in net cash from operating activities in 2009 was primarily attributable to higher net income. At December 31, 2009, we had cash and cash equivalents of $735 million and $600 million available under our bank credit facility. We had working capital of $1.0 billion and $561 million at December 31, 2009 and 2008, respectively. Total debt as a percentage of total debt plus shareholders’ equity was 10.0 percent and 14.9 percent at December 31, 2009 and 2008, respectively.
As a result of the cash generated by our operations, our cash on hand and the availability under our bank credit facility, we believe our liquidity and financial condition are sufficient to meet all of our reasonably anticipated cash flow needs for 2010 including:
•
normal recurring operating expenses;
•
capital expenditures, including expenditures for newbuilds;
•
repurchase of registered shares, and payments of return on capital in the form of a reduction of par value of our registered shares (in-lieu of dividends); and
•
contributions to our pension plans.
Capital Expenditures
Our primary liquidity requirement in 2010 will be for capital expenditures. We had total capital expenditures of $1.4 billion in 2009, and $1.2 billion and $1.3 billion for 2008 and 2007, respectively.
At December 31, 2009, we had two rigs under construction, and capital expenditures for new construction, including capitalized interest totaled $717 million in 2009. Capital expenditures for newbuild rigs in 2009 included $172 million for the Noble Jim Day, $167 million for the Noble Dave Beard, $163 million for the Noble Danny Adkins and $162 million for our Globetrotter-class drillship. Additionally, new construction capital expenditures for 2009 included $53 million for our remaining newbuilds, which include the recently completed Noble Scott Marks and the Noble Hans Deul. Other capital expenditures totaled $595 million in 2009, which included approximately $406 million for major upgrade projects, including $167 million to upgrade of our three drillships in Brazil. Capitalized major maintenance expenditures, which typically occur every 3 to 5 years, totaled $119 million in 2009.
Our total capital expenditures budget for 2010 is approximately $1.0 billion. In connection with our 2010 and future capital expenditure programs, we have entered into certain commitments, including shipyard and purchase commitments, for approximately $1.1 billion, of which we expect to spend approximately $700 million in 2010. Our remaining 2010 capital expenditure budget will generally be spent at our discretion. We may accelerate or delay capital projects, as needed.
From time to time we consider possible projects that would require capital expenditures or other cash expenditures that are not included in our capital budget, and such unbudgeted capital or cash expenditures could be significant. In addition, we will continue to evaluate acquisitions of drilling units from time to time. Other factors that could cause actual capital expenditures to materially exceed planned capital expenditures include delays and cost overruns in shipyards (including costs attributable to labor shortages), shortages of equipment, latent damage or deterioration to hull, equipment and machinery in excess of engineering estimates and assumptions, and changes in design criteria or specifications during repair or construction.
Share Repurchase, Distributions of Capital and Dividends
Our Board of Directors has authorized and adopted a share repurchase program. At December 31, 2009, 12.9 million shares remained available under this authorization. Future repurchases will be subject to the requirements of Swiss law, including the requirement that we and our subsidiaries may only repurchase shares if and to the extent that sufficient freely distributable reserves are available. Also, the aggregate par value of all registered shares held by us and our subsidiaries, including treasury shares, may not exceed 10 percent of our registered share capital without shareholder approval. Our existing share repurchase program received the required shareholder approval prior to completion of our 2009 Swiss migration transaction. Share repurchases for each of the three years ended December 31, 2009 were as follows:
Our most recent quarterly payment to shareholders, in the form of a capital reduction, which was declared on February 8, 2010 and is to be paid on February 26, 2010 to holders of record on February 18, 2010, was 0.05 CHF per share, or an aggregate of approximately $12 million. The declaration and payment of dividends in the future by Noble-Swiss and the making of distributions of capital, including returns of capital in the form of par value reductions, require authorization of the shareholders of Noble-Swiss. The amount of such dividends, distributions and returns of capital will depend on our results of operations, financial condition, cash requirements, future business prospects, contractual restrictions and other factors deemed relevant by our Board of Directors and shareholders.
Recently, our Board of Directors approved, subject to shareholder authorization at our upcoming annual general meeting scheduled for April 30, 2010, the payment of a regular return of capital through a reduction of the par value of our shares in a total amount equal to Swiss francs 0.52 CHF per share to be paid in four equal installments scheduled for August 2010, November 2010, February 2011 and May 2011. In addition, our Board of Directors approved, subject to shareholder authorization at our upcoming annual general meeting, a single payment of a special return of capital through a par value reduction of 0.56 CHF per share. This payment will be paid together with the regular return of capital in August 2010. The payments will be made in U.S. dollars based on the CHF/USD exchange rate available approximately two business days prior to the payment date. Although the amount of the return of capital, expressed in Swiss francs, is fixed, the amount of the payment in U.S. dollars will fluctuate based on the exchange rate. The exchange rate as published by the Swiss National Bank on February 5, 2010 was 1.0742 CHF/1.0 USD. If approved by our shareholders, these returns of capital will require us to make total cash payments of approximately $200 million in 2010 (based on the exchange rate on February 5, 2010).
Contributions to Pension Plans
In August 2006, the Pension Protection Act of 2006 (“PPA”) was signed into law in the U.S. The PPA requires that pension plans fund towards a target of at least 100 percent with a transition through 2011 and increases the amount we are allowed to contribute to our U.S. pension plans in the near term. During 2009, 2008 and 2007 we made contributions to our non-U.S. and U.S. pension plans totaling $18 million, $21 million and $54 million, respectively. We expect the minimum aggregate contributions to our non-U.S. and U.S. plans in 2010, subject to applicable law, to be $14 million. We continue to monitor and evaluate funding options based upon market conditions and may increase contributions at our discretion.
Credit Facility and Long-Term Debt
We have a $600 million unsecured bank credit facility (the “Credit Facility”), which was originally scheduled to mature on March 15, 2012. During the first quarter of 2008, the term of the Credit Facility was extended for an additional one-year period to March 15, 2013. During this one-year extension period, the total amount available under the Credit Facility will be $575 million, but we have the right to seek an increase of the total amount available during that period to $600 million. We may, subject to certain conditions, request that the term of the Credit Facility be further extended for an additional one-year period. Our subsidiary, Noble Drilling Corporation (“Noble Drilling”), has guaranteed the obligations under the Credit Facility. In connection with the worldwide restructuring completed during 2009 (see Part II- Item 8 - Note 1), our subsidiary, Noble Holding International Limited, issued a subsidiary guarantee under the Credit Facility effective October 1, 2009. Pursuant to the terms of the Credit Facility, we may, subject to certain conditions, elect to increase the amount available up to $800 million. Borrowings under the facility will bear interest (i) at the sum of Adjusted LIBOR (as defined in the Credit Facility) plus the Applicable Margin (as defined in the Credit Facility; 0.235 percent based on our current credit ratings), or (ii) at the base rate, determined as the greater of the prime rate for U.S. Dollar loans announced by Citibank, N.A. in New York or the sum of the weighted average overnight federal funds rate published by the Federal Reserve Bank of New York plus 0.50 percent. The Credit Facility contains various covenants, including a debt to total tangible capitalization covenant that limits this ratio to 0.60. As of December 31, 2009, our debt to total tangible capitalization was 0.10. In addition, the Credit Facility includes restrictions on certain fundamental changes such as mergers, unless we are the surviving entity or the other party assumes the obligations under the Credit Facility, and the ability to sell or transfer all or substantially all of our assets unless to a subsidiary. The Credit Facility also limits our subsidiaries’ additional indebtedness, excluding intercompany advances and loans, to 10 percent of our consolidated net assets, as defined in the Credit Facility, unless a subsidiary guarantee is issued to the parent company borrower. There are also restrictions on our incurring or assuming additional liens in certain circumstances. We were in compliance with all covenants under the Credit Facility at December 31, 2009. We continually monitor compliance under our Credit Facility covenants and, based on our expectations for 2010, expect to remain in compliance during the year.
The Credit Facility provides us with the ability to issue up to $150 million in letters of credit. While the issuance of letters of credit does not increase our borrowings outstanding, it does reduce the amount available. At December 31, 2009, we had no borrowing or letters of credit outstanding under the Credit Facility. We believe that we maintain good relationships with our lenders under the Credit Facility, and we believe that our lenders have the liquidity and capability to perform should the need arise for us to draw on the Credit Facility.
In November 2008, we issued through our indirect wholly-owned subsidiary, Noble Holding International Limited, $250 million principal amount of 7.375% Senior Notes due 2014. Proceeds, net of discount and issuance costs, totaled $247 million. Interest on the 7.375% Senior Notes is payable semi-annually, in arrears, on March 15 and September 15 of each year.
The indentures governing our outstanding senior unsecured notes contain covenants that place restrictions on certain merger and consolidation transactions, unless we are the surviving entity or the other party assumes the obligations under the indenture, and on the ability to sell or transfer all or substantially all of our assets. In addition, there are restrictions on incurring or assuming certain liens and sale and lease-back transactions. At December 31, 2009, we were in compliance with all our debt covenants. We continually monitor compliance with the covenants under our notes and, based on our expectations for 2010, expect to remain in compliance during the year.
At December 31, 2009, we had letters of credit of $96 million and performance and tax assessment bonds totaling $299 million supported by surety bonds outstanding. Of the letters of credit outstanding, $54 million were issued to support bank bonds in connection with our drilling units in Nigeria. Additionally, certain of our subsidiaries issue, from time to time, guarantees of the temporary import status of rigs or equipment imported into certain countries in which we operate. These guarantees are issued in lieu of payment of custom, value added or similar taxes in those countries.
During the first quarter of 2009, we repaid $150 million principal amount of 6.95% Senior Notes due 2009 and $23 million principal amount of project financing Thompson Notes using cash on hand at maturity.
Our debt decreased to $751 million at December 31, 2009 from $923 million (including current maturities of $173 million) at December 31, 2008, primarily due to the retirement of $150 million in 6.95% Senior Notes and the repayment of the remaining $23 million of project financing of the Noble Jim Thomson, mentioned above. Other than our outstanding letters of credit and surety bonds discussed above, at December 31, 2009 and 2008, we had no other off-balance sheet debt or other off-balance sheet arrangements. For additional information on our long-term debt, see Note 6 to our accompanying consolidated financial statements.
Summary of Contractual Cash Obligations and Commitments
The following table summarizes our contractual cash obligations and commitments at December 31, 2009 (in thousands):
(1)
Pension plan contributions are estimated by third-party actuaries for defined benefit plan funding in 2009 and estimated future benefit payments beginning in 2010 for the unfunded nonqualified excess benefit plan. Estimates of minimum funding for our qualified benefit plan beyond the 2009 plan year are not available.
(2)
Purchase commitments consist of obligations outstanding to external vendors primarily related to future capital purchases.
(3)
Tax reserves are included in “Other” due to the difficulty in making reasonably reliable estimates of the timing of cash settlements to taxing authorities. See Note 9 to our accompanying consolidated financial statements.
At December 31, 2009, we had other commitments that we are contractually obligated to fulfill with cash if the obligations are called. These obligations include letters of credit and surety bonds that guarantee our performance as it relates to our drilling contracts, insurance, tax and other obligations in various jurisdictions. These letters of credit and surety bond obligations are not normally called as we typically comply with the underlying performance requirement. The following table summarizes our other commercial commitments at December 31, 2009 (in thousands):
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements are impacted by the accounting policies used and the estimates and assumptions made by management during their preparation. Critical accounting policies and estimates that most significantly impact our consolidated financial statements are described below.
Property and Equipment
Property and equipment is stated at cost, reduced by provisions to recognize economic impairment in value whenever events or changes in circumstances indicate an asset’s carrying value may not be recoverable. Major replacements and improvements are capitalized. When assets are sold, retired or otherwise disposed of, the cost and related accumulated depreciation are eliminated from the accounts and the gain or loss is recognized. Drilling equipment and facilities are depreciated using the straight-line method over their estimated useful lives as of the date placed in service or date of major refurbishment. Estimated useful lives of our drilling equipment range from three to thirty years. Other property and equipment is depreciated using the straight-line method over useful lives ranging from two to twenty-five years.
Interest is capitalized on construction-in-progress at the interest rate on debt incurred for construction or at the weighted average cost of debt outstanding during the period of construction.
Overhauls and scheduled maintenance of equipment are performed based on the number of hours operated in accordance with our preventative maintenance program. Routine repair and maintenance costs are charged to expense as incurred; however, the costs of the overhauls and scheduled major maintenance projects that benefit future periods and which typically occur every three to five years are deferred when incurred and amortized over an equivalent period. The deferred portion of these major maintenance projects is included in “Other Assets” in the Consolidated Balance Sheets included in the accompanying consolidated financial statements.
Impairment of Assets
We evaluate the realization of our long-lived assets, including property and equipment and goodwill, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We evaluated goodwill on at least an annual basis. An impairment loss on our property and equipment exists when estimated undiscounted cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. Any impairment loss recognized represents the excess of the asset’s carrying value as compared to its estimated fair value. An impairment loss on our goodwill exists when the carrying amount of the goodwill exceeds its implied fair value, as determined pursuant to Financial Accounting Standards Board (“FASB”) standards.
During 2009, we recorded a $12 million impairment charge on long-lived assets in conjunction with our decision to explore disposal options for the submersible rig Noble Fri Rodli. No impairment losses were recorded on our property and equipment balances during the year ended December 31, 2008. During 2007, we recorded impairments to goodwill of $10 million in conjunction with our planned rationalization of our technology services division. All of our goodwill was attributable to our engineering and consulting services, and we had no goodwill recorded as of December 31, 2009 or 2008.
Insurance Reserves
We maintain various levels of self-insured retention for certain losses including property damage, loss of hire, employment practices liability, employers’ liability, and general liability, among others. We accrue for property damage and loss of hire charges on a per event basis.
Employment practices liability claims are accrued based on actual claims during the year. Maritime employer’s liability claims are generally estimated using actuarial determinations. General liability claims are estimated by our internal claims department by evaluating the facts and circumstances of each claim (including incurred but not reported claims) and making estimates based upon historical experience with similar claims. At December 31, 2009, loss reserves for personal injury and protection claims totaled $23 million and are included in “Other current liabilities” in our Consolidated Balance Sheets.
Pension and other employee benefit plans
Our defined benefit pension and other employee benefit plans are accounted for in accordance with updated FASB standards. Pension obligations are actuarially determined and are affected by assumptions including, but not limited to, expected return on plan assets, discount rates, compensation increases and employee turnover rates. We evaluate our assumptions periodically and make adjustments to these assumptions and the recorded liabilities as necessary. Significant changes to the broader economic market can materially impact the assumptions, and contributions for any given period.
Revenue Recognition
Revenues generated from our dayrate-basis drilling contracts and labor contracts are recognized as services are performed.
We may receive lump-sum fees for the mobilization of equipment and personnel. Mobilization fees received and costs incurred to mobilize a drilling unit from one market to another are recognized over the term of the related drilling contract. Costs incurred to relocate drilling units to more promising geographic areas in which a contract has not been secured are expensed as incurred. Lump-sum payments received from customers relating to specific contracts, including equipment modifications, are deferred and amortized to income over the term of the drilling contract. Deferred revenues under drilling contracts totaled $32 million and $8 million at December 31, 2009 and 2008, respectively, and such amounts are included in either “Other current liabilities” or “Other liabilities” in our Consolidated Balance Sheets, based upon our expected time of recognition.
We record reimbursements from customers for “out-of-pocket” expenses as revenues and the related direct cost as operating expenses. Reimbursements for loss of hire under our insurance coverages are included in “(Gain)/loss on assets disposal/involuntary conversion, net” in our Consolidated Statements of Income.
Income Taxes
Income taxes have been provided based on the laws and rates in effect in the countries in which operations are conducted or in which we or our subsidiaries are considered resident for income tax purposes. Applicable income and withholding taxes have not been provided on undistributed earnings of our subsidiaries. We do not intend to repatriate such undistributed earnings for the foreseeable future except for distributions upon which incremental income and withholding taxes would not be material. In certain circumstances, we expect that, due to changing demands of the offshore drilling markets and the ability to redeploy our offshore drilling units, certain of such units will not reside in a location long enough to give rise to future tax consequences. As a result, no deferred tax liability or asset has been recognized in these circumstances. Should our expectations change regarding the length of time an offshore drilling unit will be used in a given location, we will adjust deferred taxes accordingly. Our recognition of a deferred tax asset or liability in these circumstances would not have had a material effect on our financial position or results of operations.
Share-Based Compensation
We account for share-based compensation pursuant to current accounting standards. Accordingly, we record the grant date fair value of share-based compensation arrangements as compensation cost using a straight-line method over the service period. Share-based compensation is expensed or capitalized based on the nature of the employee’s activities.
Inherent in expensing stock options and other share-based compensation under accounting standards are several judgments and estimates that must be made. These include determining the underlying valuation methodology for share compensation awards and the related inputs utilized in each valuation, such as our expected stock price volatility, expected term of the employee option, expected dividend yield, the expected risk-free interest rate, the underlying stock price and the exercise price of the option. Changes to these assumptions could result in different valuations for individual share awards. For option valuations, we utilize the Black-Scholes option pricing model, however, we also use lattice models to verify that the assumptions used are reasonable. We utilize the Monte Carlo Simulation Model for valuing the performance-vested restricted stock awards. Additionally, for such awards, similar assumptions were made for each of the companies included in the defined index and the peer group of companies in order to simulate the future outcome using the Monte Carlo Simulation Model.
New Accounting Pronouncements
In April 2009, the FASB issued the following guidance:
•
expanded disclosures about fair value of financial instruments for interim reporting periods. This guidance is effective for interim reporting periods ending after June 15, 2009 and has applied to our disclosures beginning with our second fiscal quarter of 2009.
•
additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. This guidance is effective for interim reporting periods ending after June 15, 2009 and has applied to our disclosures beginning with our second fiscal quarter of 2009.
•
amendment to the guidance in other-than-temporary impairment for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This guidance is effective for interim reporting periods ending after June 15, 2009 and has applied to our disclosures beginning with our second fiscal quarter of 2009.
The adoption of the above guidance did not have a material impact on our financial condition or results of operations.
In May 2009, the FASB issued guidance which expands disclosures of subsequent events and requires management to disclose the date through which subsequent events have been evaluated. This guidance is effective for interim reporting periods ending after June 15, 2009 and has applied to our disclosures beginning with our second fiscal quarter of 2009. Our adoption of this guidance had no impact on our financial condition or results of operations.
In June 2009, the FASB issued guidance which expanded disclosures that a reporting entity provides about transfers of financial assets and its effect on the financial statements. This guidance is effective for annual and interim reporting periods beginning after November 15, 2009. The adoption of this guidance will not have a material impact on our financial condition or results of operation.
Also in June 2009, the FASB issued guidance which revises how an entity evaluates variable interest entities. This guidance is effective for annual and interim reporting periods beginning after November 15, 2009. The adoption of this guidance will not have a material impact on our financial condition or results of operation.
In addition, in June 2009, the FASB modified the GAAP hierarchy and how authoritative guidance is referenced in financial statements. This guidance is effective for annual and interim reporting periods ending after September 15, 2009. The adoption of guidance did not have a material impact on the disclosures of our financial statements.
In October 2009, the FASB issued guidance which impacts the recognition of revenue in multi-deliverable arrangements. The guidance establishes a selling-price hierarchy for determining the selling price of a deliverable. The goal of this guidance is to clarify disclosures related to multi-deliverable arrangements and to align the accounting with the underlying economics of the multi-deliverable transaction. This guidance is effective for fiscal years beginning on or after June 15, 2010. We are in the process of evaluating this guidance but do not believe this guidance will have a material impact on our financial condition or results of operations.
ITEM 7A.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risk is the potential for loss due to a change in the value of a financial instrument as a result of fluctuations in interest rates, currency exchange rates or equity prices, as further described below.
Interest Rate Risk
We are subject to market risk exposure related to changes in interest rates on borrowings under the Credit Facility. Interest on borrowings under the Credit Facility is at an agreed upon percentage point spread over LIBOR, or a base rate stated in the agreement. At December 31, 2009, we had no amounts outstanding under the Credit Facility.
Foreign Currency Risk
As a multinational company, we conduct business in approximately 15 countries. Our functional currency is primarily the U.S. dollar, which is consistent with the oil and gas industry. However, outside the United States, a significant portion of our expenses are incurred in local currencies.
Therefore, when the U.S. dollar weakens (strengthens) in relation to the currencies of the countries in which we operate, the U.S. dollar - reported expenses will increase (decrease).
We are exposed to risks on future cash flows to the extent that local currency expenses exceed revenues denominated in local currency that are other than the functional currency. To help combat this potential risk we periodically enter into derivative instruments to manage our exposure to fluctuations in currency exchange rates, and we may conduct hedging activities in future periods to mitigate such exposure. These contracts are accounted for as cash flow hedges, with the effective portion of changes in the fair value of the hedge recorded on the Consolidated Balance Sheet and in Other Comprehensive Income (Loss). Amounts recorded in Other Comprehensive Income (Loss) are reclassified into earnings in the same period or periods that the hedged item is recognized in earnings. The ineffective portion of changes in the fair value of the hedged item is recorded directly to earnings. We have documented policies and procedures to monitor and control the use of derivative instruments. We do not engage in derivative transactions for speculative or trading purposes, nor are we a party to leveraged derivatives.
Our North Sea operations have a significant amount of their cash operating expenses payable in either the Euro or British Pound, and we typically maintain forward contracts settling monthly in Euros and British Pounds. In addition, our Brazilian operations have a significant amount of their operating expenses payable in the Brazilian Real and during the fourth quarter of 2009, we began hedging those positions with forward contracts. At December 31, 2008, we had no outstanding cash flow hedge forward contracts. The aggregate notional amount of these forward contracts, expressed in U.S. Dollars, was $48 million at December 31, 2009. A ten percent change in exchange rates in the Euro, Pound, and Real would change the fair value of these forward contracts by approximately $5 million.
We have entered into a firm commitment for the construction of a newbuild drillship. The drillship will be constructed in two phases, with the second phase being installation and commissioning of the topside equipment. Our payment obligation for this second phase of construction is denominated in Euros, and in order to mitigate the risk of fluctuations in foreign currency exchange rates, we entered into forward contracts to purchase Euros. As of December 31, 2009, the aggregate notional amount of the remaining forward contracts was 50 million Euros. Each forward contract settles in connection with required payments under the contract. We are accounting for these forward contracts as fair value hedges. The fair market value of those derivative instruments is included in “Other current assets/liabilities” or “Other assets/liabilities,” depending on when the forward contract is expected to be settled. Gains and losses from these fair value hedges are recognized in earnings currently along with the change in fair value of the hedged item attributable to the risk being hedged. The fair market value of these outstanding forward contracts, which are included in “Other current liabilities” and “Other liabilities,” totaled approximately $0.8 million at December 31, 2009. A ten percent change in the exchange rate for the Euro would change the fair value of these forward contracts by approximately $7 million.
Market Risk
We sponsor the Noble Drilling Corporation 401(k) Savings Restoration Plan (“Restoration Plan”). The Restoration Plan is a nonqualified, unfunded employee benefit plan under which certain highly compensated employees may elect to defer compensation in excess of amounts deferrable under our 401(k) savings plan. The Restoration Plan has no assets, and amounts withheld for the Restoration Plan are kept by us for general corporate purposes. The investments selected by employees and the associated returns are tracked on a phantom basis. Accordingly, we have a liability to employees for amounts originally withheld plus phantom investment income or less phantom investment losses. We are at risk for phantom investment income and, conversely, benefit should phantom investment losses occur. At December 31, 2009, our liability under the Restoration Plan totaled $8 million. During 2008, we purchased investments that closely correlate to the investment elections made by participants in the Restoration Plan in order to mitigate the impact of the phantom investment income and losses on our consolidated financial statements. The value of these investments held for our benefit totaled $8 million at December 31, 2009. A ten percent change in the fair value of the phantom investments would change our liability by approximately $0.8 million. Any change in the fair value of the phantom investments would be mitigated by a change in the investments held for our benefit.
We also have a U.S. noncontributory defined benefit pension plan that covers certain salaried employees and a U.S. noncontributory defined benefit pension plan that covers certain hourly employees, whose initial date of employment is prior to August 1, 2004 (collectively referred to as our “qualified U.S. plans”). These plans are governed by the Noble Drilling Corporation Retirement Trust (the “Trust”). The benefits from these plans are based primarily on years of service and, for the salaried plan, employees’ compensation near retirement. These plans are designed to qualify under the Employee Retirement Income Security Act of 1974 (“ERISA”), and our funding policy is consistent with funding requirements of ERISA and other applicable laws and regulations. We make cash contributions, or utilize credits available to us, for the qualified U.S. plans when required. The benefit amount that can be covered by the qualified U.S. plans is limited under ERISA and the Internal Revenue Code (“IRC”) of 1986. Therefore, we maintain an unfunded, nonqualified excess benefit plan designed to maintain benefits for all employees at the formula level in the qualified U.S. plans. We refer to the qualified U.S. plans and the excess benefit plan collectively as the “U.S. plans”.
In addition to the U.S. plans, each of Noble Drilling (Land Support) Limited, Noble Enterprises Limited and Noble Drilling (Nederland) B.V., all indirect, wholly-owned subsidiaries of Noble-Swiss, maintains a pension plan that covers all of its salaried, non-union employees (collectively referred to as our “non-U.S. plans”). Benefits are based on credited service and employees’ compensation near retirement, as defined by the plans.
Changes in market asset value related to the pension plans noted above could have a material impact upon our “Consolidated Statement of Comprehensive Income” and could result in material cash expenditures in future periods.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following financial statements are filed in this Item 8:
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Noble Corporation, a Swiss Corporation (“Noble-Swiss”):
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of cash flows, of shareholders’ equity and of comprehensive income present fairly, in all material respects, the financial position of Noble-Swiss and its subsidiaries at December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
February 26, 2010
NOBLE CORPORATION (NOBLE-SWISS) AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands)
See accompanying notes to the consolidated financial statements.
NOBLE CORPORATION (NOBLE-SWISS) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
See accompanying notes to the consolidated financial statements.
NOBLE CORPORATION (NOBLE-SWISS) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
See accompanying notes to the consolidated financial statements.
NOBLE CORPORATION (NOBLE-SWISS) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands)
See accompanying notes to the consolidated financial statements.
NOBLE CORPORATION (NOBLE-SWISS) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
See accompanying notes to the consolidated financial statements.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Noble Corporation, a Cayman Islands Company (Noble-Cayman):
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of cash flows, of shareholders’ equity and of comprehensive income present fairly, in all material respects, the financial position of Noble-Cayman and its subsidiaries at December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
February 26, 2010
NOBLE CORPORATION (NOBLE-CAYMAN) AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands)
See accompanying notes to the consolidated financial statements.
NOBLE CORPORATION (NOBLE-CAYMAN) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
See accompanying notes to the consolidated financial statements.
NOBLE CORPORATION (NOBLE-CAYMAN) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
See accompanying notes to the consolidated financial statements.
NOBLE CORPORATION (NOBLE-CAYMAN) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands)
See accompanying notes to the consolidated financial statements.
NOBLE CORPORATION (NOBLE-CAYMAN) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
See accompanying notes to the consolidated financial statements.
NOBLE CORPORATION (NOBLE-SWISS) AND SUBSIDIARIES
NOBLE CORPORATION (NOBLE-CAYMAN) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share data)
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Noble Corporation, a Swiss corporation (“Noble” or, together with its consolidated subsidiaries, unless the context requires otherwise, the “Company”, “we”, “our” and words of similar import), is a leading offshore drilling contractor for the oil and gas industry. We perform contract drilling services with our fleet of 62 mobile offshore drilling units located worldwide. This fleet consists of 13 semisubmersibles, four dynamically positioned drillships, 43 jackups and two submersibles. The fleet count includes two units under construction: one dynamically positioned, ultra-deepwater, harsh environment Globetrotter-class drillship, and one deepwater dynamically positioned semisubmersible. As of January 28, 2010, approximately 87 percent of our fleet was deployed in areas outside the United States, principally in the Middle East, India, Mexico, the North Sea, Brazil and West Africa.
Consummation of Migration and Worldwide Internal Restructuring
On March 26, 2009, pursuant to the previously announced Agreement and Plan of Merger, Reorganization and Consolidation, dated as of December 19, 2008 (as amended, the “Merger Agreement”), among Noble-Swiss, Noble-Cayman, and Noble Cayman Acquisition Ltd., a Cayman Islands company and a wholly-owned subsidiary of Noble-Swiss (“Noble-Acquisition”), Noble-Cayman merged by way of schemes of arrangement under Cayman Islands law (the “Schemes of Arrangement”) with Noble-Acquisition, with Noble-Cayman as the surviving company (the “Transaction”). Under the terms of the Schemes of Arrangement, each holder of Noble-Cayman ordinary shares outstanding immediately prior to the Transaction received, through an exchange agent, one Noble-Swiss registered share in exchange for each outstanding Noble-Cayman ordinary share, and Noble-Swiss received, through an exchange agent, a number of newly issued Noble-Cayman ordinary shares equal to the number of Noble-Cayman ordinary shares outstanding immediately prior to the Transaction. Noble-Swiss also issued 15 million Noble-Swiss registered shares to Noble-Cayman in connection with the Transaction that are being held in treasury by a wholly owned subsidiary of Noble-Swiss.
The Transaction effectively changed the place of incorporation of our parent holding company from the Cayman Islands to Switzerland. As a result of the Transaction, Noble-Cayman became a direct, wholly-owned subsidiary of Noble-Swiss. Currently, Noble-Swiss’ principal asset is 100% of the shares of common stock of Noble-Cayman. The consolidated financial statements of Noble-Swiss include the accounts of its wholly-owned subsidiary, Noble-Cayman. Noble-Swiss conducts substantially all of its business through Noble-Cayman and its subsidiaries.
In connection with the Transaction, we relocated our principal executive offices, executive officers and selected personnel, to Geneva, Switzerland.
On October 1, 2009, we completed a worldwide internal restructuring of the ownership of substantially all of our drilling rigs under a single non-U.S. entity.
Stock Split
On July 27, 2007, our Board of Directors approved what is commonly referred to in the United States as a “two-for-one stock split” of our ordinary shares in the form of a 100 percent stock dividend to members (shareholders) of record on August 7, 2007. The stock dividend was distributed on August 28, 2007 when shareholders of record were issued one additional ordinary share for each ordinary share held.
All share and per share data included in the consolidated financial statements and accompanying notes have been adjusted to reflect the stock split for all periods presented.
As a result of the stock split, the number of restricted shares and stock options outstanding and available for grant, and the exercise prices for the outstanding stock options under share-based compensation plans, have been adjusted in accordance with the terms of the plans. Such modifications have no impact on the amount of share-based compensation costs.
NOBLE CORPORATION (NOBLE-SWISS) AND SUBSIDIARIES
NOBLE CORPORATION (NOBLE-CAYMAN) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share data)
Principles of Consolidation
The consolidated financial statements include our accounts and those of our wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Foreign Currency Translation
Although we are a Swiss corporation, we define foreign currency as any non-U.S. denominated currency. In non-U.S. locations where the U.S. Dollar has been designated as the functional currency (based on an evaluation of such factors as the markets in which the subsidiary operates, inflation, generation of cash flow, financing activities and intercompany arrangements), local currency transaction gains and losses are included in net income. In non-U.S. locations where the local currency is the functional currency, assets and liabilities are translated at the rates of exchange on the balance sheet date, while income and expense items are translated at average rates of exchange during the year. The resulting gains or losses arising from the translation of accounts from the functional currency to the U.S. Dollar are included in “Accumulated Other Comprehensive Loss” in the Consolidated Balance Sheets. We did not recognize any material gains or losses on foreign currency transactions or translations during the years ended December 31, 2009, 2008 and 2007. We use the Canadian Dollar as the functional currency for our labor contract drilling services in Canada.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, demand deposits with banks and all highly liquid investments with original maturities of three months or less. Our cash, cash equivalents and short-term investments are subject to potential credit risk, and certain of our cash accounts carry balances greater than the federally insured limits. Cash and cash equivalents are held by major banks or investment firms. Our cash management and investment policies restrict investments to lower risk, highly liquid securities and we perform periodic evaluations of the relative credit standing of the financial institutions with which we conduct business.
In accordance with FASB standards, cash flows from our labor contract drilling services in Canada are calculated based on the Canadian Dollar. As a result, amounts related to assets and liabilities reported on the Consolidated Statements of Cash Flows will not necessarily agree with changes in the corresponding balances on the Consolidated Balance Sheets. The effect of exchange rate changes on cash balances held in foreign currencies was not material in 2009, 2008 or 2007.
Investments in Marketable Securities
Investments in marketable securities held at December 31, 2009 and 2008 were classified as trading securities and carried at fair value in “Other Current Assets” with the unrealized gain or loss included in “Other Income” in the accompanying Consolidated Statements of Income.
Property and Equipment
Property and equipment is stated at cost, reduced by provisions to recognize economic impairment in value whenever events or changes in circumstances indicate an asset’s carrying value may not be recoverable. At both December 31, 2009 and 2008, there was $2.3 billion of construction-in-progress. Such amounts are included in “Drilling equipment and facilities” in the accompanying Consolidated Balance Sheets. Major replacements and improvements are capitalized. When assets are sold, retired or otherwise disposed of, the cost and related accumulated depreciation are eliminated from the accounts and the gain or loss is recognized. Drilling equipment and facilities are depreciated using the straight-line method over their estimated useful lives as of the date placed in service or date of major refurbishment. Estimated useful lives of our drilling equipment range from three to thirty years. Other property and equipment is depreciated using the straight-line method over useful lives ranging from two to twenty-five years.
NOBLE CORPORATION (NOBLE-SWISS) AND SUBSIDIARIES
NOBLE CORPORATION (NOBLE-CAYMAN) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share data)
Interest is capitalized on construction-in-progress at the interest rate on debt incurred for construction or at the weighted average cost of debt outstanding during the period of construction. Capitalized interest for the years ended December 31, 2009, 2008 and 2007 was $55 million, $48 million and $50 million, respectively.
Overhauls and scheduled maintenance of equipment are performed based on the number of hours operated in accordance with our preventative maintenance program. Routine repair and maintenance costs are charged to expense as incurred; however, the costs of the overhauls and scheduled major maintenance projects that benefit future periods and which typically occur every three to five years are deferred when incurred and amortized over an equivalent period. The deferred portion of these major maintenance projects is included in “Other Assets” in the Consolidated Balance Sheets. Such amounts totaled $181 million and $171 million at December 31, 2009 and 2008, respectively.
Amortization of deferred costs for major maintenance projects is reflected in “Depreciation and amortization” in the accompanying Consolidated Statements of Income. The amount of such amortization was $102 million, $91 million and $76 million for the years ended December 31, 2009, 2008 and 2007, respectively. Total repair and maintenance expense for the years ended December 31, 2009, 2008 and 2007, exclusive of amortization of deferred costs for major maintenance projects, was $175 million, $169 million and $134 million, respectively.
We evaluate the realization of property and equipment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss on our property and equipment exists when estimated undiscounted cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. Any impairment loss recognized represents the excess of the asset’s carrying value over the estimated fair value.
In May 2009, our jackup, the Noble David Tinsley, experienced a “punch-through” while the rig was being positioned on location offshore Qatar. The incident involved the sudden penetration of all three legs through the sea bottom, which resulted in severe damage to the legs and the rig. The rig is currently in the shipyard to replace the legs and repair the damage to the rig. We recorded a charge of $17 million during the quarter ended June 30, 2009 related to this involuntary conversion, which includes approximately $9 million for the write-off of the damaged legs.
During the first quarter of 2009, we recognized a charge of $12 million related to the Noble Fri Rodli, a submersible that has been cold stacked since October 2007. We recorded the charge as a result of a decision to evaluate disposition alternatives for this rig.
In 2007, we closed the operations of our Triton Engineering Services Inc. (“Triton”) subsidiary resulting in closure costs of $2 million, including a $0.4 million impairment of property and equipment. No impairment losses were recorded on our property and equipment balances during the year ended December 31, 2008.
Deferred Costs
Deferred debt issuance costs are being amortized over the life of the debt securities. The amortization of debt issuance costs is included in interest expense.
Insurance Reserves
We maintain various levels of self-insured retention for certain losses including property damage, loss of hire, employment practices liability, employers’ liability, and general liability, among others. We accrue for property damage and loss of hire charges on a per event basis.
Employment practices liability claims are accrued based on actual claims during the year. Maritime employer’s liability claims are generally estimated using actuarial determinations. General liability claims are estimated by our internal claims department by evaluating the facts and circumstances of each claim (including incurred but not reported claims) and making estimates based upon historical experience with similar claims. At December 31, 2009 and 2008, loss reserves for personal injury and protection claims totaled $23 million and $26 million, respectively, and such amounts are included in “Other current liabilities” in the accompanying Consolidated Balance Sheets.
NOBLE CORPORATION (NOBLE-SWISS) AND SUBSIDIARIES
NOBLE CORPORATION (NOBLE-CAYMAN) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share data)
Revenue Recognition
Revenues generated from our dayrate-basis drilling contracts and labor contracts are recognized as services are performed.
We may receive lump-sum fees for the mobilization of equipment and personnel. Mobilization fees received and costs incurred to mobilize a drilling unit from one market to another are recognized over the term of the related drilling contract. Costs incurred to relocate drilling units to more promising geographic areas in which a contract has not been secured are expensed as incurred. Lump-sum payments received from customers relating to specific contracts, including equipment modifications, are deferred and amortized to income over the term of the drilling contract. Deferred revenues under drilling contracts totaled $32 million and $8 million at December 31, 2009 and 2008, respectively, and such amounts are included in either “Other Current Liabilities” or “Current Liabilities” in our Consolidated Balance Sheets, based upon our expected time of recognition.
We record reimbursements from customers for “out-of-pocket” expenses as revenues and the related direct cost as operating expenses. Reimbursements for loss of hire under our insurance coverages are included in “(Gain)/loss on assets disposal/involuntary conversion, net” in the Consolidated Statements of Income.
Income Taxes
Income taxes have been provided based on the laws and rates in effect in the countries in which operations are conducted or in which we or our subsidiaries are considered resident for income tax purposes. Applicable income and withholding taxes have not been provided on undistributed earnings of our subsidiaries. We do not intend to repatriate such undistributed earnings for the foreseeable future except for distributions upon which incremental income and withholding taxes would not be material. In certain circumstances, we expect that, due to changing demands of the offshore drilling markets and the ability to redeploy our offshore drilling units, certain of such units will not reside in a location long enough to give rise to future tax consequences. As a result, no deferred tax asset or liability has been recognized in these circumstances. Should our expectations change regarding the length of time an offshore drilling unit will be used in a given location, we will adjust deferred taxes accordingly.
We operate through various subsidiaries in numerous countries throughout the world including the United States. Consequently, we are subject to changes in tax laws, treaties or regulations or the interpretation or enforcement thereof in the U.S., Switzerland or jurisdictions in which we or any of our subsidiaries operate or is resident. Our income tax expense is based upon our interpretation of the tax laws in effect in various countries at the time that the expense was incurred. If the U.S. Internal Revenue Service or other taxing authorities do not agree with our assessment of the effects of such laws, treaties and regulations, this could have a material adverse effect on us including the imposition of a higher effective tax rate on our worldwide earnings or a reclassification of the tax impact of our significant corporate restructuring transactions.
Net Income per Share
According to FASB standards, we have determined that our unvested share-based payment awards, which contain non-forfeitable rights to dividends, are participating securities and should be included in the computation of earnings per share pursuant to the “two-class” method. The “two-class” method allocates undistributed earnings between common shares and participating securities. The diluted earnings per share calculation under the “two-class” method also includes the dilutive effect of potential registered shares issued in connection with stock options. The dilutive effect of stock options is determined using the treasury stock method. Our adoption of the “two-class” method for calculating earnings per share did not have a material impact on prior year earnings per share amounts.
NOBLE CORPORATION (NOBLE-SWISS) AND SUBSIDIARIES
NOBLE CORPORATION (NOBLE-CAYMAN) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share data)
Share-Based Compensation Plans
We account for share-based compensation pursuant to FASB standards. Accordingly, we record the grant date fair value of share-based compensation arrangements as compensation cost using a straight-line method over the service period. Share-based compensation is expensed or capitalized based on the nature of the employee’s activities.
Certain Significant Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. Certain accounting policies involve judgments and uncertainties to such an extent that there is reasonable likelihood that materially different amounts could have been reported under different conditions, or if different assumptions had been used. We evaluate our estimates and assumptions on a regular basis. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and assumptions used in preparation of our consolidated financial statements.
Accounting Pronouncements
In April 2009, the FASB issued the following guidance:
•
expanded disclosures about fair value of financial instruments for interim reporting periods. This guidance is effective for interim reporting periods ending after June 15, 2009 and has applied to our disclosures beginning with our second fiscal quarter of 2009.
•
additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. This guidance is effective for interim reporting periods ending after June 15, 2009 and has applied to our disclosures beginning with our second fiscal quarter of 2009.
•
amendment to the guidance in other-than-temporary impairment for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This guidance is effective for interim reporting periods ending after June 15, 2009 and has applied to our disclosures beginning with our second fiscal quarter of 2009.
The adoption of these pronouncements did not have a material impact on our financial condition or results of operations.
In May 2009, the FASB issued guidance which expands disclosures of subsequent events and requires management to disclose the date through which subsequent events have been evaluated. This guidance is effective for interim reporting periods ending after June 15, 2009 and has applied to our disclosures beginning with our second fiscal quarter of 2009. Our adoption of this guidance did not have a material impact on our financial condition or results of operations.
In June 2009, the FASB issued guidance which expanded disclosures that a reporting entity provides about transfers of financial assets and its effect on the financial statements. This guidance is effective for annual and interim reporting periods beginning after November 15, 2009. The adoption of this guidance will not have a material impact on our financial condition or results of operation.
NOBLE CORPORATION (NOBLE-SWISS) AND SUBSIDIARIES
NOBLE CORPORATION (NOBLE-CAYMAN) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share data)
Also in June 2009, the FASB issued guidance which revises how an entity evaluates variable interest entities. This guidance is effective for annual and interim reporting periods beginning after November 15, 2009. The adoption of this guidance will not have a material impact on our financial condition or results of operation.
In addition, in June 2009, the FASB modified the GAAP hierarchy and how authoritative guidance is referenced in financial statements. This guidance is effective for annual and interim reporting periods ending after September 15, 2009. The adoption of guidance did not have a material impact on the disclosures of our financial statements.
The adoption of these new accounting pronouncements did not have a material impact on our financial condition or results of operations.
In October 2009, the FASB issued guidance which impacts the recognition of revenue in multi-deliverable arrangements. The guidance establishes a selling-price hierarchy for determining the selling price of a deliverable. The goal of this guidance is to clarify disclosures related to multi-deliverable arrangements and to align the accounting with the underlying economics of the multi-deliverable transaction. This guidance is effective for fiscal years beginning on or after June 15, 2010. We are in the process of evaluating this guidance but do not believe this guidance will have a material impact on our financial condition or results of operations.
Reclassifications
Certain reclassifications have been made to amounts in prior period financial statements to conform to current period presentations. We believe these reclassifications are immaterial as they do not have a material impact on our financial position, results of operations or cash flows.
NOTE 2 - NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income per share for Noble-Swiss:
Only those items having a dilutive impact on our basic net income per share are included in diluted net income per share. For the years ended December 31, 2009 and 2008, stock options totaling 0.1 million and 0.7 million, respectively, were excluded from the diluted net income per share calculation as they were not dilutive. There were no anti-dilutive stock options and awards for the year ended December 31, 2007.
NOBLE CORPORATION (NOBLE-SWISS) AND SUBSIDIARIES
NOBLE CORPORATION (NOBLE-CAYMAN) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share data)
NOTE 3 - MARKETABLE SECURITIES
Marketable Equity Securities
During 2008, we purchased investments that closely correlate to the investment elections made by participants in the Noble Drilling Corporation 401(k) Savings Restoration Plan (“Restoration Plan”) in order to mitigate the impact of the investment income and losses from the Restoration Plan on our consolidated financial statements. The value of these investments held for our benefit totaled $8 million and $7 million at December 31, 2009 and 2008, respectively. These assets were classified as trading securities and carried at fair value in “Other Current Assets” with the realized and unrealized gain or loss included in “Other Income” in the accompanying Consolidated Statements of Income. We recognized a gain of $2 million and a loss of $2 million on these investments during 2009 and 2008, respectively.
NOTE 4 - ACCOUNTS RECEIVABLE
During the second quarter of 2009, we reached an agreement with one of our customers in the U.S. Gulf of Mexico regarding outstanding receivables owed to us, which totaled approximately $59 million at December 31, 2009. The customer has conveyed to us an overriding royalty interest (“ORRI”) as security for the outstanding receivables and has agreed to a payment plan to repay all past due amounts. Amounts received by us pursuant to the ORRI will be applied to the customer’s payment obligations under the payment plan. We have agreed that we will not sell, assign or otherwise dispose of the ORRI as long as the customer meets its payment obligations and complies with the terms of the agreement, which runs through June 2011. Through the date of this report, the customer has met its payment obligations under the agreement. The customer has a right to reacquire the ORRI at the end of the term of the agreement, or earlier, subject to certain conditions, which include the customer being current on all payment obligations. In connection with this agreement, during the second quarter of 2009, we reclassified certain amounts from “Accounts receivable” to “Other assets”.
NOTE 5 - SUPPLEMENTAL CASH FLOW INFORMATION
NOTE 6 - DEBT
Long-term debt consists of the following at December 31, 2009 and 2008:
NOBLE CORPORATION (NOBLE-SWISS) AND SUBSIDIARIES
NOBLE CORPORATION (NOBLE-CAYMAN) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share data)
We have a $600 million unsecured bank credit facility (the “Credit Facility”), which was originally scheduled to mature on March 15, 2012. During the first quarter of 2008, the term of the Credit Facility was extended for an additional one-year period to March 15, 2013. During this one-year extension period, the total amount available under the Credit Facility will be $575 million, but we have the right to seek an increase of the total amount available during that period to $600 million. We may, subject to certain conditions, request that the term of the Credit Facility be further extended for an additional one-year period. Our subsidiary, Noble Drilling Corporation (“Noble Drilling”), has guaranteed the obligations under the Credit Facility. In connection with the worldwide restructuring completed during 2009 (see Note 1), our subsidiary, Noble Holding International Limited, issued a subsidiary guarantee under the Credit Facility effective October 1, 2009. Pursuant to the terms of the Credit Facility, we may, subject to certain conditions, elect to increase the amount available up to $800 million. Borrowings may be made under the facility (i) at the sum of Adjusted LIBOR (as defined in the Credit Facility) plus the Applicable Margin (as defined in the Credit Facility; 0.235 percent based on our current credit ratings), or (ii) at the base rate, determined as the greater of the prime rate for U.S. Dollar loans announced by Citibank, N.A. in New York or the sum of the weighted average overnight federal funds rate published by the Federal Reserve Bank of New York plus 0.50 percent. The Credit Facility contains various covenants, including a debt to total tangible capitalization covenant that limits this ratio to 0.60. As of December 31, 2009, our debt to total tangible capitalization was 0.10. In addition, the Credit Facility includes restrictions on certain fundamental changes such as mergers, unless we are the surviving entity or the other party assumes the obligations under the Credit Facility, and the ability to sell or transfer all or substantially all of our assets unless to a subsidiary. The Credit Facility also limits our subsidiaries’ additional indebtedness, excluding intercompany advances and loans, to 10 percent of our consolidated net assets, as defined in the Credit Facility, unless a subsidiary guarantee is issued to the parent company borrower. There are also restrictions on our incurring or assuming additional liens in certain circumstances. We were in compliance with all covenants under the Credit Facility at December 31, 2009.
In November 2008, we issued through our indirect wholly-owned subsidiary, Noble Holding International Limited, $250 million principal amount of 7.375% Senior Notes due 2014. Proceeds, net of discount and issuance costs, totaled $247 million. Interest on the 7.375% Senior Notes is payable semi-annually, in arrears, on March 15 and September 15 of each year.
Our senior unsecured notes are redeemable, as a whole or from time to time in part, at our option on any date prior to maturity at prices equal to 100 percent of the outstanding principal amount of the notes redeemed plus accrued interest to the redemption date plus a make-whole premium, if any is required to be paid. The indentures governing our three series of outstanding senior unsecured notes contain covenants that place restrictions on certain merger and consolidation transactions, unless we are the surviving entity or the other party assumes the obligations under the indenture, and on the ability to sell or transfer all or substantially all of our assets. In addition, there are restrictions on incurring or assuming certain liens and sale and lease-back transactions. At December 31, 2009, we were in compliance with all our debt covenants.
During the first quarter of 2009, we repaid $150 million principal amount of 6.95% Senior Notes due 2009 and $23 million principal amount of project financing Thompson Notes using cash on hand at maturity.
At December 31, 2009, we had letters of credit of $96 million and performance and tax assessment bonds totaling $299 million supported by surety bonds outstanding. Of the letters of credit outstanding, $54 million were issued to support bank bonds in connection with our drilling units in Nigeria. Additionally, certain of our subsidiaries issue, from time to time, guarantees of the temporary import status of rigs or equipment imported into certain countries in which we operate. These guarantees are issued in lieu of payment of custom, value added or similar taxes in those countries.
Aggregate principal repayments of total debt for the next five years and thereafter are as follows:
NOBLE CORPORATION (NOBLE-SWISS) AND SUBSIDIARIES
NOBLE CORPORATION (NOBLE-CAYMAN) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share data)
Fair Value of Financial Instruments
Fair value, as used in FASB standards, represents the amount at which an instrument could be exchanged in a current transaction between willing parties. The fair value of our senior notes was based on the quoted market prices for similar issues or on the current rates offered to us for debt of similar remaining maturities. The following table presents the estimated fair value of our long-term debt as of December 31, 2009 and 2008.
NOTE 7 - SHAREHOLDERS’ EQUITY
As of December 31, 2009, we had shares issued of 276,265,693 shares, including 14,291,149 shares held in treasury by a wholly-owned subsidiary of Noble-Swiss. Outstanding shares as of December 31, 2009 include 3,750,000 shares held as treasury shares by Noble-Swiss which were repurchased pursuant to our approved share repurchase program. Total shares repurchased during the year under our share repurchase program were 5,470,000, including 1,720,000 shares which were repurchased prior to March 26, 2009 and were canceled.
Share Repurchases
Share repurchases were made pursuant to the share repurchase program which our Board of Directors authorized and adopted. At December 31, 2009, 12.9 million shares remained available under this authorization. Future repurchases will be subject to the requirements of Swiss law, including the requirement that we and our subsidiaries may only repurchase shares if and to the extent that sufficient freely distributable reserves are available. Also, the aggregate par value of all registered shares held by us and our subsidiaries, including treasury shares, may not exceed 10 percent of our registered share capital without shareholder approval. Our existing share repurchase program received the required shareholder approval prior to completion of our 2009 Swiss migration transaction. Share repurchases for each of the three years ended December 31, 2009 are as follows:
Share-Based Compensation Plans
Stock Plans
The Noble Corporation 1991 Stock Option and Restricted Stock Plan, as amended (the “1991 Plan”), provides for the granting of options to purchase our shares, with or without stock appreciation rights, and the awarding of restricted shares or units to selected employees. In general, all options granted under the 1991 Plan have a term of 10 years, an exercise price equal to the fair market value of a share on the date of grant and generally vest over a three year period. The 1991 Plan limits the total number of shares issuable under the plan to 41.4 million. As of December 31, 2009, we had 5.2 million shares remaining available for grants to employees under the 1991 Plan.
Prior to October 25, 2007, the Noble Corporation 1992 Nonqualified Stock Option and Share Plan for Non-Employee Directors (the “1992 Plan”) provided for the granting of nonqualified stock options to our non-employee directors. We granted options at fair market value on the grant date. The options are exercisable from time to time over a period commencing one year from the grant date and ending on the expiration of 10 years from the grant date, unless terminated sooner as described in the 1992 Plan. On October 25, 2007, the 1992 Plan was amended and restated to, among other things, eliminate grants of stock options to non-employee directors and modify the annual award of restricted shares from a fixed number of restricted shares to an annually-determined variable number of restricted or unrestricted shares. The 1992 Plan limits the total number of shares issuable under the plan to 1.6 million. As of December 31, 2009, we had 0.8 million shares remaining available for award to non-employee directors under the 1992 Plan.
NOBLE CORPORATION (NOBLE-SWISS) AND SUBSIDIARIES
NOBLE CORPORATION (NOBLE-CAYMAN) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share data)
Stock Options
A summary of the status of stock options granted under both the 1991 Plan and 1992 Plan as of December 31, 2009, 2008 and 2007 and the changes during the year ended on those dates is presented below:
The following table summarizes additional information about stock options outstanding at December 31, 2009:
Fair value information and related valuation assumptions for stock options granted are as follows:
NOBLE CORPORATION (NOBLE-SWISS) AND SUBSIDIARIES
NOBLE CORPORATION (NOBLE-CAYMAN) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share data)
The fair value of each option grant is estimated on the date of grant using a Black-Scholes option pricing model. Assumptions used in the valuation are shown in the table above. The expected term of options granted represents the period of time that the options are expected to be outstanding and is derived from historical exercise behavior, current trends and values derived from lattice-based models. Expected volatilities are based on implied volatilities of traded options on our shares, historical volatility of our shares, and other factors. The expected dividend yield is based on historical yields on the date of grant. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant.
A summary of the status of our non-vested stock options at December 31, 2009, and changes during the year ended December 31, 2008, is presented below:
At December 31, 2009, there was $3 million of total unrecognized compensation cost remaining for option grants awarded under the 1991 Plan. We attribute the service period to the vesting period and the unrecognized compensation is expected to be recognized over a weighted-average period of 1.8 years. Compensation cost recognized during the year ended December 31, 2009 related to stock options totaled $2 million. Compensation cost recognized during the year ended December 31, 2008 related to stock options totaled $3 million.
We issue new shares to meet the share requirements upon exercise of stock options. We have historically repurchased shares in the open market from time to time which minimizes the dilutive effect of share-based compensation.
Restricted Stock
We have awarded both time-vested restricted stock and performance-vested restricted stock under the 1991 Plan. The time-vested restricted stock awards generally vest over a three year period. The number of performance-vested restricted shares which vest will depend on the degree of achievement of specified corporate performance criteria over a three-year performance period. These criteria are strictly market based criteria as defined by FASB standards.
The time-vested restricted stock is valued on the date of award at our underlying share price. The total compensation for shares that ultimately vest is recognized over the service period. The shares and related par value are recorded when the restricted stock is issued and retained earnings is adjusted as the share-based compensation cost is recognized for financial reporting purposes.
The performance-vested restricted stock is valued on the date of grant based on the estimated fair value. Estimated fair value is determined based on numerous assumptions, including an estimate of the likelihood that our stock price performance will achieve the targeted thresholds and the expected forfeiture rate. The fair value is calculated using a Monte Carlo Simulation Model. The assumptions used to value the performance-vested restricted stock awards include historical volatility, risk-free interest rates, and expected dividends over a time period commensurate with the remaining term prior to vesting, as follows:
NOBLE CORPORATION (NOBLE-SWISS) AND SUBSIDIARIES
NOBLE CORPORATION (NOBLE-CAYMAN) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share data)
Additionally, similar assumptions were made for each of the companies included in the defined index and the peer group of companies in order to simulate the future outcome using the Monte Carlo Simulation Model.
A summary of the restricted share awards for each of the years in the period ended December 31 is as follows:
We award both time-vested restricted stock and unrestricted shares under the 1991 Plan. The time-vested restricted stock awards generally vest over a three-year period. During the year ended December 31, 2009, we awarded 67,280 unrestricted shares to non-employee directors, resulting in related compensation cost of $2 million. We did not award any time-vested restricted stock under the 1992 Plan during the year ended December 31, 2009.
A summary of the status of non-vested restricted shares at December 31, 2009, and changes during the year ended December 31, 2009, is presented below:
(1)
The number of performance-vested restricted shares shown equals the shares that would vest if the “maximum” level of performance is achieved. The minimum number of shares is zero and the “target” level of performance is 67 percent of the amounts shown.
At December 31, 2009, there was $27 million of total unrecognized compensation cost related to the time-vested restricted shares which is expected to be recognized over a remaining weighted-average period of 1.5 years. The total award-date fair value of time-vested restricted shares vested during the year ended December 31, 2009 was $28 million.
NOBLE CORPORATION (NOBLE-SWISS) AND SUBSIDIARIES
NOBLE CORPORATION (NOBLE-CAYMAN) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share data)
At December 31, 2009, there was $8 million of total unrecognized compensation cost related to the performance-vested restricted shares which is expected to be recognized over a remaining weighted-average period of 1.3 years. The total potential compensation for performance-vested restricted stock is recognized over the service period regardless of whether the performance thresholds are ultimately achieved. During the year ended December 31, 2009, 57,610 performance-vested shares for the 2006-2008 performance period were forfeited. On January 1, 2010, 361,130 shares of the performance-vested shares for the 2007-2009 performance period vested and, in February 2010, 202,199 shares for the same performance period were forfeited.
Compensation expense recognized during the years ended December 31, 2009, 2008 and 2007 related to all restricted stock totaled $32 million ($27 million net of income tax), $29 million ($24 million net of income tax) and $25 million ($20 million net of income tax), respectively. Capitalized compensation costs totaled approximately $1 million in 2009, 2008, and 2007, respectively.
NOTE 8 - ACCUMULATED COMPREHENSIVE INCOME
The following table sets forth the components of “Accumulated other comprehensive loss,” net of deferred taxes:
NOTE 9 - INCOME TAXES
Noble Corporation, a Swiss resident holding company, is exempt from Swiss cantonal and communal income tax on its worldwide income. Noble Corporation is also granted participation relief from Swiss federal tax for qualifying dividend income and capital gains related to the sale of qualifying participations. It is expected that the participation relief will result in a full exemption of participation income from Swiss federal income tax.
We operate through various subsidiaries in numerous countries throughout the world, including the United States. Consequently, income taxes have been provided based on the laws and rates in effect in the countries in which operations are conducted, or in which we or our subsidiaries are considered resident for income tax purposes.
In certain circumstances, management expects that, due to changing demands of the offshore drilling markets and the ability to re-deploy our offshore drilling units, certain of such units will not reside in a location long enough to give rise to future tax consequences. As a result, no deferred tax asset or liability has been recognized in these circumstances. If management’s expectations change regarding the length of time an offshore drilling unit will be used in a given location, we will adjust deferred taxes accordingly.
NOBLE CORPORATION (NOBLE-SWISS) AND SUBSIDIARIES
NOBLE CORPORATION (NOBLE-CAYMAN) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share data)
The components of the net deferred taxes were as follows:
Income before income taxes consisted of the following:
The income tax provision consisted of the following:
NOBLE CORPORATION (NOBLE-SWISS) AND SUBSIDIARIES
NOBLE CORPORATION (NOBLE-CAYMAN) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share data)
A reconciliation of reserve for uncertain tax position amounts is as follows:
The increase in uncertain tax positions at December 31, 2009 was primarily due to tax positions taken on returns filed. If these reserves of $98 million are not realized, the provision for income taxes will be reduced by $77 million and equity would be directly increased by $21 million.
We include as a component of our income tax provision potential interest and penalties related to recognized tax contingencies within our global operations. Interest and penalties included in income tax expense totaled $5 million, $3 million, and $3 million in 2009, 2008 and 2007, respectively. Total interest and penalties accrued in “Other liabilities” totaled $18 million and $13 million as of December 31, 2009 and 2008, respectively.
We do not anticipate that any tax contingencies resolved in the next 12 months will have a material impact on our consolidated financial position or results of operations.
We conduct business globally and, as a result, we file numerous income tax returns in the U.S. and non-U.S. jurisdictions. In the normal course of business we are subject to examination by taxing authorities throughout the world, including such jurisdictions as Benin, Brazil, Canada, Cyprus, Denmark, Equatorial Guinea, India, Ivory Coast, Libya, Luxembourg, Mexico, the Netherlands, Nigeria, Norway, Qatar, Singapore, Switzerland, the United Kingdom and the United States. We are no longer subject to U.S. Federal income tax examinations for years before 2006 and non-U.S. income tax examinations for years before 2000.
A reconciliation of statutory and effective income tax rates is shown below:
In 2009, we generated and utilized $69 million of U.S. foreign tax credits. In 2008, we fully utilized our foreign tax credits of $71 million.
Deferred income taxes and the related dividend withholding taxes have not been provided on approximately $1.5 billion of undistributed earnings of our U.S. subsidiaries. We consider such earnings to be permanently reinvested in the U.S. It is not practicable to estimate the amount of deferred income taxes associated with these unremitted earnings. If such earnings were to be distributed, we would be subject to U.S. taxes, which would have a material impact on our profit and loss.
NOBLE CORPORATION (NOBLE-SWISS) AND SUBSIDIARIES
NOBLE CORPORATION (NOBLE-CAYMAN) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share data)
NOTE 10 - EMPLOYEE BENEFIT PLANS
Defined Benefit Plans
We have a U.S. noncontributory defined benefit pension plan which covers certain salaried employees and a U.S. noncontributory defined benefit pension plan which covers certain hourly employees, whose initial date of employment is prior to August 1, 2004 (collectively referred to as our “qualified U.S. plans”). These plans are governed by the Noble Drilling Corporation Retirement Trust (the “Trust”). The benefits from these plans are based primarily on years of service and, for the salaried plan, employees’ compensation near retirement. These plans qualify under the Employee Retirement Income Security Act of 1974 (“ERISA”), and our funding policy is consistent with funding requirements of ERISA and other applicable laws and regulations. We make cash contributions, or utilize credit balances available to us under the plan, for the qualified U.S. plans when required. The benefit amount that can be covered by the qualified U.S. plans is limited under ERISA and the Internal Revenue Code (“IRC”) of 1986. Therefore, we maintain an unfunded, nonqualified excess benefit plan designed to maintain benefits for all employees at the formula level in the qualified U.S. plans. We refer to the qualified U.S. plans and the excess benefit plan collectively as the “U.S. plans”.
Each of Noble Drilling (Land Support) Limited, Noble Enterprises Limited and Noble Drilling (Nederland) B.V., all indirect, wholly-owned subsidiaries of Noble, maintains a pension plan which covers all of its salaried, non-union employees (collectively referred to as our “non-U.S. plans”). Benefits are based on credited service and employees’ compensation near retirement, as defined by the plans.
A reconciliation of the changes in projected benefit obligations (“PBO”) for our non-U.S. and U.S. plans is as follows:
For the U.S. plans, the actuarial loss in 2009 is primarily the result of updated actuarial assumptions related to the deterioration of market conditions. We recognized a curtailment gain in 2008 in conjunction with the sale of our North Sea labor contract drilling service.
NOBLE CORPORATION (NOBLE-SWISS) AND SUBSIDIARIES
NOBLE CORPORATION (NOBLE-CAYMAN) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share data)
A reconciliation of the changes in fair value of plan assets is as follows:
The funded status of the plans is as follows:
Amounts recognized in the Consolidated Balance Sheets consist of:
Amounts recognized in the “Accumulated other comprehensive loss” consist of:
NOBLE CORPORATION (NOBLE-SWISS) AND SUBSIDIARIES
NOBLE CORPORATION (NOBLE-CAYMAN) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share data)
Pension cost includes the following components:
The estimated prior service cost, transition obligation and net actuarial loss that will be amortized from “Accumulated other comprehensive loss” into net periodic pension cost in 2010 are $0 million $0.1 million and $0.7 million, respectively, for non-U.S. plans and $0.4 million, $0 and $2.7 million, respectively, for U.S. plans.
In 2007, a pension obligation was paid from the U.S. noncontributory defined benefit pension plan in a lump-sum cash payment as full settlement of benefits due to a former employee under the plan.
Defined Benefit Plans - Disaggregated Plan Information
Disaggregated information regarding our non-U.S. and U.S. plans is summarized below:
The following table provides information related to those plans in which the PBO exceeded the fair value of the plan assets at December 31, 2009 and 2008. The PBO is the actuarially computed present value of earned benefits based on service to date and includes the estimated effect of any future salary increases.
The PBO for the unfunded excess benefit plan was $10 million and $6 million at December 31, 2009 and 2008, respectively, and is included under “U.S.” in the above tables.
NOBLE CORPORATION (NOBLE-SWISS) AND SUBSIDIARIES
NOBLE CORPORATION (NOBLE-CAYMAN) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share data)
The following table provides information related to those plans in which the accumulated benefit obligation (“ABO”) exceeded the fair value of plan assets at December 31, 2009 and 2008. The ABO is the actuarially computed present value of earned benefits based on service to date, but differs from the PBO in that it is based on current salary levels.
The ABO for the unfunded excess benefit plan was $6 million at December 31, 2009 as compared to $3 million in 2008, and is included under “U.S.” in the above tables.
Defined Benefit Plans - Key Assumptions
The key assumptions for the plans are summarized below:
The discount rates used to calculate the net present value of future benefit obligations for both our U.S. and non-U.S. plans are based on the average of current rates earned on long-term bonds that receive a Moody’s rating of “Aa” or better. The third-party consultants we employ for our U.S. and non-U.S. plans have determined that the timing and amount of expected cash outflows on our plans reasonably matches this index.
We employ third-party consultants for our U.S. and non-U.S. plans that use a portfolio return model to assess the initial reasonableness of the expected long-term rate of return on plan assets. To develop the expected long-term rate of return on assets, we considered the current level of expected returns on risk free investments (primarily government bonds), the historical level of risk premium associated with the other asset classes in which the portfolio is invested and the expectations for future returns of each asset class. The expected return for each asset class was then weighted based on the target asset allocation to develop the expected long-term rate of return on assets for the portfolio.
NOBLE CORPORATION (NOBLE-SWISS) AND SUBSIDIARIES
NOBLE CORPORATION (NOBLE-CAYMAN) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share data)
Defined Benefit Plans - Plan Assets
Non-U.S. Plans
Both the Noble Enterprises Limited and Noble Drilling (Nederland) B.V. pension plans have a targeted asset allocation of 100 percent debt securities. The investment objective for the Noble Enterprises Limited plan assets is to earn a favorable return against the Salomon Brothers U.S. Government Bond Index for all maturities greater than one year. The investment objective for the Noble Drilling (Nederland) B.V. plan assets is to earn a favorable return against the Salomon Brothers EMU Government Bond Index for all maturities greater than one year. We evaluate the performance of these plans on an annual basis.
There is no target asset allocation for the Noble Drilling (Land Support) Limited pension plan. However, the investment objective of the plan, as adopted by the plan’s trustees, is to achieve a favorable return against a benchmark of blended United Kingdom market indices. By achieving this objective, the trustees believe the plan will be able to avoid significant volatility in the contribution rate and provide sufficient plan assets to cover the plan’s benefit obligations were the plan to be liquidated. To achieve these objectives, the trustees have given the plan’s investment managers full discretion in the day-to-day management of the plan’s assets. The plan’s assets are divided between two investment managers. The performance objective communicated to one of these investment managers is to exceed a blend of FTSE UK Gilts index and Deutsche Börse’s iBoxx Non Gilts index by 1.25 percent per annum. The performance objective communicated to the other investment manager is to exceed a blend of FTSE’s All Share index, North America index, Europe index and Pacific Basin index by 1.00 to 2.00 percent per annum. This investment manager is prohibited by the trustees from investing in real estate. The trustees meet with the investment managers periodically to review and discuss their investment performance.
The actual fair values of Non-U.S. pension plans at December 31, 2009 were as follows:
NOBLE CORPORATION (NOBLE-SWISS) AND SUBSIDIARIES
NOBLE CORPORATION (NOBLE-CAYMAN) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share data)
The assets of Noble Drilling (Nederland) B.V. are invested in instruments which are similar in form to annuity contracts. There is no observable market value in these assets. However, the amounts listed as plan assets materially resemble the obligations which are anticipated under the plan. Amounts are therefore calculated using actuarial assumptions and are calculated by third-party consultants employed by the Company. The following details a roll-forward of the fair value of these assets during 2009.
U.S. Plans
The qualified U.S. plans’ Trust invests in equity securities, fixed income debt securities, and cash equivalents and other short-term investments. The Trust may invest in these investments directly or through pooled vehicles, including mutual funds.
The Company’s overall investment strategy, or target range, is to achieve a mix of approximately 65 percent in equity securities, 32 percent in debt securities and 3 percent in cash holdings. Actual results may deviate from the target range, however any deviation from the target range of asset allocations must be approved by the Trust’s governing committee.
The performance objective of the Trust is to outperform the return of the Total Index Composite as constructed to reflect the target allocation weightings for each asset class. This objective should be met over a market cycle, which is defined as a period not less than three years or more than five years. U.S. equity securities (common stock, convertible preferred stock and convertible bonds) should achieve a total return (after fees) that exceeds the total return of an appropriate market index over a full market cycle of three to five years. Non-U.S. equity securities (common stock, convertible preferred stock and convertible bonds), either from developed or emerging markets, should achieve a total return (after fees) that exceeds the total return of an appropriate market index over a full market cycle of three to five years. Fixed income debt securities should achieve a total return (after fees) that exceeds the total return of an appropriate market index over a full market cycle of three to five years. Cash equivalent and short-term investments should achieve relative performance better than the 90-day Treasury bills. When mutual funds are used by the Trust, those mutual funds should achieve a total return that equals or exceeds the total return of each fund’s appropriate Lipper or Morningstar peer category over a full market cycle of three to five years. Lipper and Morningstar are independent mutual fund rating and information services.
For investments in equity securities, no individual options or financial futures contracts are purchased unless approved in writing by the Trust’s governing committee. In addition, no private placements or purchases of venture capital are allowed. The maximum commitment to a particular industry, as defined by Standard & Poor’s, may not exceed 20 percent. The Trust’s equity managers vote all proxies in the best interest of the Trust without regards to social issues. The Trust’s governing committee reserves the right to comment on and exercise control over the response to any individual proxy solicitation.
For fixed income debt securities, corporate bonds purchased are primarily limited to investment grade securities as established by Moody’s or Standard & Poor’s. At no time shall the lowest investment grade make up more than 20 percent of the total market value of the Trust’s fixed income holdings. The total fixed income exposure from any single non-government or government agency issuer shall not exceed 10 percent of the Trust’s fixed income holdings. The average duration of the total portfolio shall not exceed seven years. All interest and principal receipts are swept, as received, into an alternative cash management vehicle until reallocated in accordance with the Trust’s core allocation.
NOBLE CORPORATION (NOBLE-SWISS) AND SUBSIDIARIES
NOBLE CORPORATION (NOBLE-CAYMAN) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share data)
For investments in mutual funds, the assets of the Trust are subject to the guidelines and limits imposed by such mutual fund’s prospectus and the other governing documentation at the fund level.
For investments in cash equivalent and short-term investments, the Trust utilizes a money market mutual fund which invests in U.S. government and agency obligations, repurchase agreements collateralized by U.S. government or agency securities, commercial paper, bankers’ acceptances, certificate of deposits, delayed delivery transactions, reverse repurchase agreements, time deposits and Euro obligations. Bankers’ acceptances shall be made in larger banks (ranked by assets) rated “Aa” or better by Moody’s and in conformance with all FDIC regulations concerning capital requirements.
Equity securities include our shares in the amounts of $4 million (3.6 percent of total U.S. plan assets) and $2 million (2.6 percent of total U.S. plan assets) at December 31, 2009 and 2008, respectively.
The actual fair values of U.S. plan assets were as follows:
As of December 31, 2009 no single security made up more than 10% of total assets of either the U.S. or the Non-U.S. plans.
NOBLE CORPORATION (NOBLE-SWISS) AND SUBSIDIARIES
NOBLE CORPORATION (NOBLE-CAYMAN) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share data)
Defined Benefit Plans - Cash Flows
In 2009, we made total contributions of $6 million and $12 million to our non-U.S. and U.S. pension plans, respectively. In 2008, we made total contributions of $7 million and $15 million to our non-U.S. and U.S. pension plans, respectively. In 2007, we made total contributions of $23 million to each of our non-U.S. and $32 million to our U.S. pension plans. We expect our aggregate minimum contributions to our non-U.S. and U.S. plans in 2010, subject to applicable law, to be $1 million and $3 million, respectively. We continue to monitor and evaluate funding options based upon market conditions and may increase contributions at our discretion.
In August 2006, the Pension Protection Act of 2006 (“PPA”) was signed into law in the U.S. The PPA requires that pension plans become fully funded over a seven-year period beginning in 2008 and increases the amount we are allowed to contribute to our U.S. pension plans in the near term.
Estimated benefit payments from our non-U.S. plans are $6 million for 2010, $1 million for 2011, $1 million for 2012, $2 million for 2013, $2 million for 2014 and $11 million in the aggregate for the five years thereafter.
Estimated benefit payments from our U.S. plans are $8 million for 2010, $4 million for 2011, $4 million for 2012, $5 million for 2013, $5 million for 2014 and $41 million in the aggregate for the five years thereafter.
Other Benefit Plans
We sponsor the Restoration Plan, which is a nonqualified, unfunded employee benefit plan under which certain highly compensated employees may elect to defer compensation in excess of amounts deferrable under our 401(k) savings plan. The Restoration Plan has no assets, and amounts withheld for the Restoration Plan are kept by us for general corporate purposes. The investments selected by employees and associated returns are tracked on a phantom basis. Accordingly, we have a liability to the employee for amounts originally withheld plus phantom investment income or less phantom investment losses. We are at risk for phantom investment income and, conversely, benefit should phantom investment losses occur. At December 31, 2009 and 2008, our liability for the Restoration Plan was $8 million and $8 million, respectively, and is included in “Accrued payroll and related costs.”
In 2005 we enacted a profit sharing plan, the Noble Drilling Corporation Profit Sharing Plan, which covers eligible employees, as defined. Participants in the plan become fully vested in the plan after five years of service, or three years beginning in 2007. Profit sharing contributions are discretionary, require Board of Directors approval and are made in the form of cash. Contributions recorded related to this plan totaled $1 million, $2 million and $2 million in 2009, 2008 and 2007, respectively.
We sponsor a 401(k) savings plan, a medical plan and other plans for the benefit of our employees. The cost of maintaining these plans aggregated $36 million, $37 million and $37 million in 2009, 2008 and 2007, respectively. We do not provide post-retirement benefits (other than pensions) or any post-employment benefits to our employees.
NOTE 11 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
We periodically enter into derivative instruments to manage our exposure to fluctuations in interest rates and foreign currency exchange rates, and we may conduct hedging activities in future periods to mitigate such exposure. We have documented policies and procedures to monitor and control the use of derivative instruments. We do not engage in derivative transactions for speculative or trading purposes, nor are we a party to leveraged derivatives.
Hedge effectiveness is measured quarterly based on the relative cumulative changes in fair value between derivative contracts and the hedged item over time. Any change in fair value resulting from ineffectiveness is recognized immediately in earnings. We did not recognize any gain or loss due to hedge ineffectiveness in our Consolidated Statements of Income during the years ended December 31, 2009, 2008 or 2007 related to derivative instruments.
NOBLE CORPORATION (NOBLE-SWISS) AND SUBSIDIARIES
NOBLE CORPORATION (NOBLE-CAYMAN) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share data)
Cash Flow Hedges
Our North Sea operations have a significant amount of their cash operating expenses payable in either the Euro or British Pound, and we typically maintain forward contracts settling monthly in Euros and British Pounds. In addition, our Brazilian operations have a significant amount of their operating expenses payable in the Brazilian Real. During the fourth quarter of 2009, we began hedging those positions with forward contracts. At December 31, 2008, we had no outstanding cash flow hedge forward contracts.
The balance of the net unrealized gain or loss related to our foreign currency forward contracts included in “Accumulated other comprehensive loss” and related activity for 2009, 2008 and 2007 is as follows:
Fair Value Hedges
During the third quarter of 2008, we entered into a firm commitment for the construction of a newbuild drillship. The drillship will be constructed in two phases, with the second phase being installation and commissioning of the topside equipment. The contract for this second phase of construction is denominated in Euros, and in order to mitigate the risk of fluctuations in foreign currency exchange rates, we entered into forward contracts to purchase Euros. As of December 31, 2009, the aggregate notional amount of the forward contracts was 50 million Euros. Each forward contract settles in connection with required payments under the construction contract. We are accounting for these forward contracts as fair value hedges under FASB standards. The fair market value of those derivative instruments is included in “Other current assets/liabilities” or “Other assets/liabilities,” depending on when the forward contract is expected to be settled. Gains and losses from these fair value hedges would be recognized in earnings currently along with the change in fair value of the hedged item attributable to the risk being hedged, if any portion was found to be ineffective. The fair market value of these outstanding forward contracts, which are included in “Other current liabilities” and “Other liabilities,” totaled approximately $0.8 million at December 31, 2009. No amounts related to fair value hedges was recognized in the income statement as of December 31, 2009.
NOBLE CORPORATION (NOBLE-SWISS) AND SUBSIDIARIES
NOBLE CORPORATION (NOBLE-CAYMAN) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share data)
NOTE 12 - FINANCIAL INSTRUMENTS AND CREDIT RISK
The following table presents the carrying amount and estimated fair value of our financial instruments recognized at fair value on a recurring basis:
The derivative instruments have been valued using actively quoted prices and quotes obtained from the counterparties to the derivative agreements. Our cash and cash equivalents, accounts receivable and accounts payable are by their nature short-term. As a result, the carrying values included in the accompanying Consolidated Balance Sheets approximate fair value.
Concentration of Credit Risk
The market for our services is the offshore oil and gas industry, and our customers consist primarily of government-owned oil companies, major integrated oil companies and independent oil and gas producers. We perform ongoing credit evaluations of our customers and generally do not require material collateral. We maintain reserves for potential credit losses when necessary. Our results of operations and financial condition should be considered in light of the fluctuations in demand experienced by drilling contractors as changes in oil and gas producers’ expenditures and budgets occur. These fluctuations can impact our results of operations and financial condition as supply and demand factors directly affect utilization and dayrates, which are the primary determinants of our net cash provided by operating activities.
In 2009, two customers combined for approximately 35 percent of consolidated operating revenues. No other customer accounted for more than 10 percent of consolidated operating revenues in 2009. In both 2008 and 2007, one customer accounted for approximately 20 percent and 15 percent of consolidated operating revenues, respectively. No other customer accounted for more than 10 percent of consolidated operating revenues in 2008 or 2007.
NOBLE CORPORATION (NOBLE-SWISS) AND SUBSIDIARIES
NOBLE CORPORATION (NOBLE-CAYMAN) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share data)
NOTE 13 - COMMITMENTS AND CONTINGENCIES
Noble Asset Company Limited (“NACL”), our wholly-owned, indirect subsidiary, was named one of 21 parties served a Show Cause Notice (“SCN”) issued by the Commissioner of Customs (Prev.), Mumbai, India (the “Commissioner”) in August 2003. The SCN concerned alleged violations of Indian customs laws and regulations regarding one of our jackups. The Commissioner alleged certain violations to have occurred before, at the time of, and after NACL acquired the rig from the rig’s previous owner. In the purchase agreement for the rig, NACL received contractual indemnification against liability for Indian customs duty from the rig’s previous owner. In connection with the export of the rig from India in 2001, NACL posted a bank guarantee in the amount of 150 million Indian Rupees (or $3 million at December 31, 2009) and a customs bond in the amount of 970 million Indian Rupees (or $21 million at December 31, 2009), both of which remain in place. In March 2005, the Commissioner passed an order against NACL and the other parties cited in the SCN seeking (i) to invoke the bank guarantee posted on behalf of NACL as a fine, (ii) to demand duty of (a) $19 million plus interest related to a 1997 alleged import and (b) $22 million plus interest related to a 1999 alleged import, provided that the duty and interest demanded in (b) would not be payable if the duty and interest demanded in (a) were paid by NACL, and (iii) to assess a penalty of $500,000 against NACL. NACL appealed the order of the Commissioner to the Customs, Excise & Service Tax Appellate Tribunal (“CESTAT”). At a hearing on April 5, 2006, CESTAT upheld NACL’s appeal and overturned the Commissioner’s March 2005 order against NACL in its entirety. CESTAT thereafter issued its written judgment dated August 8, 2006 upholding NACL’s appeal on all grounds and setting aside the duty demand, interest, fine and penalty. The Commissioner filed an appeal in the Bombay High Court challenging the order passed by CESTAT. In August 2008, the Division Bench of the Bombay High Court dismissed the Commissioner’s appeal of CESTAT’s order. In November 2008, the Commissioner filed a Special Leave Petition, an Appeal in the Supreme Court of India, appealing the order of the Bombay High Court. NACL has filed an Affidavit-in-reply opposing admission of the Appeal in the Supreme Court of India, and is seeking the return or cancellation of its previously posted custom bond and bank guarantee. NACL continues to pursue contractual indemnification against liability for Indian customs duty and related costs and expenses against the rig’s previous owner in arbitration proceedings in London, which proceedings the parties have temporarily stayed pending further developments in the Indian proceeding. We do not believe the ultimate resolution of this matter will have a material adverse effect on our financial position, results of operations or cash flows.
We operate in a number of countries throughout the world and our income tax returns filed in those jurisdictions are subject to review and examination by tax authorities within those jurisdictions. We are currently contesting several tax assessments and may contest future assessments when we believe the assessments are in error. We cannot predict or provide assurance as to the ultimate outcome of the existing or future assessments. We believe the ultimate resolution of the outstanding assessments, for which we have not made any accrual, will not have a material adverse effect on our consolidated financial statements. We recognize uncertain tax positions that we believe have a greater than 50 percent likelihood of being sustained. See Note 9 for additional information.
Certain of our non-U.S. income tax returns have been examined for the 2002 through 2004 periods and audit claims have been assessed for approximately $179 million (including interest and penalties), primarily in Mexico. We do not believe we owe these amounts and are defending our position. However, we expect increased audit activity in Mexico and anticipate the tax authorities will issue additional assessments and continue to pursue legal actions for all audit claims. We believe audit claims in the range of an additional $13 to $16 million attributable to other business tax returns may be assessed against us. We have contested, or intend to contest, the audit findings, including through litigation if necessary, and we do not believe that there is greater than 50 percent likelihood that additional taxes will be incurred. Accordingly, no accrual has been made for such amounts.
We are from time to time a party to various lawsuits that are incidental to our operations in which the claimants seek an unspecified amount of monetary damages for personal injury, including injuries purportedly resulting from exposure to asbestos on drilling rigs and associated facilities. At December 31, 2009, there were approximately 39 of these lawsuits in which we are one of many defendants. These lawsuits have been filed in the states of Louisiana, Mississippi and Texas. Exposure related to these lawsuits is not currently determinable. We intend to defend vigorously against the litigation.
We are a defendant in certain claims and litigation arising out of operations in the ordinary course of business, the resolution of which, in the opinion of management, will not be material to our financial position, results of operations or cash flows.
NOBLE CORPORATION (NOBLE-SWISS) AND SUBSIDIARIES
NOBLE CORPORATION (NOBLE-CAYMAN) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share data)
During the fourth quarter of 2007, our Nigerian subsidiary received letters from the Nigerian Maritime Administration and Safety Agency (“NIMASA”) seeking to collect a two percent surcharge on contract amounts under contracts performed by “vessels,” within the meaning of Nigeria’s cabotage laws, engaged in the Nigerian coastal shipping trade. Although we do not believe that these laws apply to our ownership of drilling units, NIMASA is seeking to apply a provision of the Nigerian cabotage laws (which became effective on May 1, 2004) to our offshore drilling units by considering these units to be “vessels” within the meaning of those laws and therefore subject to the surcharge, which is imposed only upon “vessels.” Our offshore drilling units are not engaged in the Nigerian coastal shipping trade and are not in our view “vessels” within the meaning of Nigeria’s cabotage laws. In January 2008, we filed an originating summons against NIMASA and the Minister of Transportation in the Federal High Court of Lagos, Nigeria seeking, among other things, a declaration that our drilling operations do not constitute “coastal trade” or “cabotage” within the meaning of Nigeria’s cabotage laws and that our offshore drilling units are not “vessels” within the meaning of those laws. In February 2009, NIMASA filed suit against us in the Federal High Court of Nigeria seeking collection of the cabotage surcharge. In August 2009, the court issued a favorable ruling in response to our originating summons stating that drilling operations do not fall within the cabotage laws and that drilling rigs are not vessels for purposes of those laws, and the court also issued an injunction against the defendants prohibiting their interference with our drilling rigs or drilling operations. NIMASA has appealed the court’s ruling, although the NIMASA lawsuit filed against us in February 2009 has been dismissed as a result of the court’s ruling in our favor. We intend to take all further appropriate legal action to resist the application of Nigeria’s cabotage laws to our drilling units. The outcome of any such legal action and the extent to which we may ultimately be responsible for the surcharge is uncertain. If it is ultimately determined that offshore drilling units constitute vessels within the meaning of the Nigerian cabotage laws, we may be required to pay the surcharge and comply with other aspects of the Nigerian cabotage laws, which could adversely affect our operations in Nigerian waters and require us to incur additional costs of compliance.
NIMASA had also informed the Nigerian Content Division of its position that we are not in compliance with the cabotage laws. The Nigerian Content Division makes determinations of companies’ compliance with applicable local content regulations for purposes of government contracting, including contracting for services in connection with oil and gas concessions where the Nigerian national oil company is a partner. The Nigerian Content Division had barred us from participating in new tenders as a result of NIMASA’a allegations, although the Division has reversed its actions based on the favorable Federal High Court ruling. However, no assurance can be given with respect to our ability to bid for future work in Nigeria until our dispute with NIMASA is resolved.
We maintain certain insurance coverage against specified marine liabilities, including liability for physical damage to our drilling rigs, and loss of hire on certain of our rigs. The damage caused in 2005 and 2008 by Hurricanes Katrina, Rita and Ike to oil and gas assets situated in the U.S. Gulf of Mexico has negatively impacted the energy insurance market, resulting in more restricted and more expensive coverage. Beginning March 1, 2009, we elected to self insure U.S. named windstorm physical damage and loss of hire exposures due to the high cost of coverage for these perils. This self insurance applies only to our units in the U.S. portion of the Gulf of Mexico. We presently have six semisubmersibles and two submersibles in the U.S. Gulf of Mexico. Our rigs located in the Mexican portion of the Gulf of Mexico remain covered by commercial insurance for windstorm damage up to the declared value of each unit. We maintain physical damage deductibles of $25 million per occurrence for jackups and submersibles and $50 million per occurrence for semi-submersibles and drillships. The loss of hire coverage applies only to our rigs operating under contract with a dayrate equal to or greater than $200,000 a day and is subject to a 45-day waiting period for each unit and each occurrence.
Although we maintain insurance in the geographic areas in which we operate, pollution, reservoir damage and environmental risks generally are not fully insurable. Our insurance policies and contractual rights to indemnity may not adequately cover our losses or may have exclusions of coverage for some losses. We do not have insurance coverage or rights to indemnity for all risks, including loss of hire insurance on most of the rigs in our fleet. Uninsured exposures may include war risk, activities prohibited by U.S. laws and regulations, radiation hazards, certain loss or damage to property on board our rigs and losses relating to terrorist acts or strikes. If a significant accident or other event occurs and is not fully covered by insurance or contractual indemnity, it could adversely affect our financial position, results of operations or cash flows. There can be no assurance that those parties with contractual obligations to indemnify us will necessarily be financially able to indemnify us against all these risks.
We carry protection and indemnity insurance covering marine third party liability exposures, which also includes coverage for employer’s liability resulting from personal injury to our offshore drilling crews. Our protection and indemnity policy currently has a standard deductible of $10 million per occurrence.
In connection with our capital expenditure program, we had outstanding commitments, including shipyard and purchase commitments of approximately $1.1 billion at December 31, 2009.
NOBLE CORPORATION (NOBLE-SWISS) AND SUBSIDIARIES
NOBLE CORPORATION (NOBLE-CAYMAN) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share data)
We have entered into employment agreements with certain of our executive officers, as well as certain other employees. These agreements become effective upon a change of control of Noble-Swiss (within the meaning set forth in the agreements) or a termination of employment in connection with or in anticipation of a change of control, and remain effective for three years thereafter. These agreements provide for compensation and certain other benefits under such circumstances.
Internal Investigation
Since June 2007, we have been conducting, with the assistance of independent outside counsel engaged by our audit committee, an internal investigation relating to our Nigerian operations. The investigation has focused on the legality under the FCPA, and local laws of our Nigerian affiliate’s reimbursement of certain expenses incurred by our customs agents in connection with obtaining and renewing permits for the temporary importation of drilling units and related equipment into Nigerian waters, including permits that are necessary for our drilling units to operate in Nigerian waters. The scope of the investigation has also included our dealings with customs agents and customs authorities in certain parts of the world other than Nigeria in which we conduct our operations, as well as dealings with other types of local agents in Nigeria and such other parts of the world. There can be no assurance that evidence of additional potential FCPA violations or violations of other laws or regulations may not be uncovered through the investigation.
We voluntarily contacted the SEC and the U.S. Department of Justice (“DOJ”) to advise them of the independent investigation. We have been cooperating, and intend to continue to cooperate fully with both agencies. If the SEC or the DOJ determines that violations of the FCPA have occurred, they could seek civil and criminal sanctions, including monetary penalties, against us and/or certain of our employees, as well as additional changes to our business practices and compliance programs, any of which could have a material adverse effect on our business or financial condition. In addition, such actions, whether actual or alleged, could damage our reputation and ability to do business, to attract and retain employees, and to access capital markets. Further, detecting, investigating, and resolving such actions is expensive and consumes significant time and attention of our senior management.
The independent outside counsel appointed by the audit committee to perform the internal investigation made a presentation of the results of its investigation to the DOJ and the SEC in June 2008. Since June 2008, the SEC and the DOJ have reviewed these results and information gathered by the independent outside counsel in the course of the investigation. We consider the matter to be ongoing and cannot predict (a) when it will conclude, (b) whether either the SEC or the DOJ will open its own proceeding to investigate this matter, or (c) if a proceeding is opened, what potential sanctions, penalties or other remedies these agencies may seek. We could also face fines or sanctions in relevant foreign jurisdictions. Based on information obtained to date, we believe it is probable that we will have to pay an amount to settle this matter with the DOJ and SEC, however, we are not in a position to estimate any potential liability that may result and, as a result, we have not made any accrual in our consolidated financial statements at December 31, 2009.
Notwithstanding that the investigation is ongoing, we concluded that certain changes to our FCPA compliance program would provide us greater assurance that our assets are not used, directly or indirectly, to make improper payments, including customs payments, and that we are in compliance with the FCPA’s record-keeping requirements. Although we have had a long-standing published policy requiring compliance with the FCPA and broadly prohibiting any improper payments by us to foreign or U.S. officials, we adopted additional measures intended to enhance FCPA compliance procedures. Further measures may be required once the investigation matter is concluded.
We are currently operating three jackup rigs offshore Nigeria. The temporary import permits covering two of these rigs expired in November 2008 and we have pending applications to renew these permits. However, as of February 15, 2010, the Nigerian customs office had not acted on our applications. We have obtained a temporary import permit for the third rig, which was recently imported into the country. We continue to seek to avoid material disruption to our Nigerian operations; however, there can be no assurance that we will be able to obtain new permits or further extensions of permits necessary to continue the operation of our rigs in Nigeria. If we cannot obtain a new permit or an extension necessary to continue operations of any rig, we may need to cease operations under the drilling contract for such rig and relocate such rig from Nigerian waters. In any case, we also could be subject to actions by Nigerian customs for import duties and fines for these two rigs, as well as other drilling rigs that operated in Nigeria in the past. We cannot predict what impact these events may have on any such contract or our business in Nigeria. Furthermore, we cannot predict what changes, if any, relating to temporary import permit policies and procedures may be established or implemented in Nigeria in the future, or how any such changes may impact our business there.
NOBLE CORPORATION (NOBLE-SWISS) AND SUBSIDIARIES
NOBLE CORPORATION (NOBLE-CAYMAN) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share data)
We incurred legal fees and related costs of $1 million, $13 million and $15 million for the years ended December 31, 2009, 2008 and 2007, respectively, related to the internal investigation. It is anticipated that additional costs will be incurred in future periods, but the amount of these costs cannot be presently determined.
NOTE 14 - (GAIN)/LOSS ON ASSET DISPOSAL/INVOLUNTARY CONVERSION, NET
In May 2009, our jackup, the Noble David Tinsley, experienced a “punch-through” while the rig was being positioned on location offshore Qatar. The incident involved the sudden penetration of all three legs through the sea bottom, which resulted in severe damage to the legs and the rig. The rig is currently in the shipyard to replace the legs and repair the damage to the rig. We recorded a charge of $17 million during the quarter ended June 30, 2009 related to this involuntary conversion, which includes approximately $9 million for the write-off of the damaged legs.
In March 2009, we recognized a charge of $12 million related to the Noble Fri Rodli, a submersible that has been cold stacked since October 2007. We recorded the charge as a result of a decision to evaluate disposition alternatives for this rig.
During the third quarter of 2008, Hurricane Ike caused damage to certain of our rigs. The $200 million aggregate insurance limit available to our rigs operating in the U.S. Gulf of Mexico was sufficient to cover the loss, with the exception of the physical damage deductible and the loss of hire waiting period. During 2008, we recorded a charge of $10 million, which represents our deductible under our then existing insurance program.
During the second quarter of 2008, we sold our North Sea labor contract drilling services business to Seawell Holding UK Limited (“Seawell”) for $35 million plus working capital. This sale included labor contracts covering 11 platform operations in the United Kingdom sector of the North Sea. In connection with this sale, we recognized a gain of $36 million, net of closing costs. This gain included approximately $5 million in cumulative currency translation adjustments.
During the fourth quarter of 2007, we recognized a net recovery of $5 million for physical damage and loss of hire insurance claims for damage caused by the Hurricanes Katrina and Rita in 2005. This recovery was partially offset by an additional claim loss of $2 million earlier in 2007.
NOBLE CORPORATION (NOBLE-SWISS) AND SUBSIDIARIES
NOBLE CORPORATION (NOBLE-CAYMAN) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share data)
NOTE 15 - SEGMENT AND RELATED INFORMATION
We report our contract drilling operations as a single reportable segment: Contract Drilling Services. The consolidation of our contract drilling operations into one reportable segment is attributable to how we manage our business, and the fact that all of our drilling fleet is dependent upon the worldwide oil industry. The mobile offshore drilling units comprising our offshore rig fleet operate in a single, global market for contract drilling services and are often redeployed globally due to changing demands of our customers, which consist largely of major non-U.S. and government owned/controlled oil and gas companies throughout the world. Our contract drilling services segment conducts contract drilling operations in the Middle East, India, U.S. Gulf of Mexico, Mexico, the North Sea, Brazil and West Africa.
The accounting policies of our reportable segment are the same as those described in the summary of significant accounting policies (see Note 1). We evaluate the performance of our operating segment based on revenues from external customers and segment profit. Summarized financial information of our reportable segment for the years ended December 31, 2009, 2008 and 2007 is shown in the following table. The “Other” column includes results of labor contract drilling services, engineering and consulting services, other insignificant operations and corporate related items.
NOBLE CORPORATION (NOBLE-SWISS) AND SUBSIDIARIES
NOBLE CORPORATION (NOBLE-CAYMAN) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share data)
The following table presents revenues and identifiable assets by country based on the location of the service provided:
(1)
Assets in Cameroon are generally made up of jackup rigs that are currently available and are being marketed however, no revenue was earned by these rigs during the period while in this jurisdiction.
(2)
China and Singapore consist of asset values for newbuild rigs under construction in shipyards.
(3)
Switzerland assets consist of general corporate assets which generate no external revenue for the Company.
NOTE 16 - OTHER FINANCIAL INFORMATION
The following are Swiss statutory disclosure requirements:
(i) Expenses
Total personnel expenses amounted to $564 million, $581 million and $565 million for the years ended December 31, 2009, 2008 and 2007, respectively.
(ii) Fire Insurance
Total fire insurance values of property and equipment amounted to $8.2 billion and $7.6 billion at December 31, 2009 and 2008, respectively.
(iii) Risk assessment and Management
The Board of Directors, together with the management of Noble, is responsible for assessing risks related to the financial reporting process and for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of the Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of Noble’s consolidated financial statements for external purposes in accordance with GAAP.
NOBLE CORPORATION (NOBLE-SWISS) AND SUBSIDIARIES
NOBLE CORPORATION (NOBLE-CAYMAN) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share data)
The Board, operating through its Audit Committee composed entirely of directors who are not officers or employees of the Company, is responsible for oversight of the financial reporting process and safeguarding of assets against unauthorized acquisition, use, or disposition. The Audit Committee meets with management, the independent registered public accountants and the internal auditor; approves the overall scope of audit work and related fee arrangements; and reviews audit reports and findings. In addition, the independent registered public accountants and the internal auditor meet separately with the Audit Committee, without management representatives present, to discuss the results of their audits; the adequacy of the Company’s internal control; the quality of its financial reporting; and the safeguarding of assets against unauthorized acquisition, use, or disposition.
NOTE 17 - SUBSEQUENT EVENTS
Management has evaluated subsequent events through February 26, 2010, which is the date the consolidated financial statements were filed with the SEC, and has determined that no other material reportable events have occurred between January 1, 2010 and February 26, 2010.
NOTE 18 - GUARANTEES OF REGISTERED SECURITIES
Noble-Cayman and Noble Holding (U.S.) Corporation (“NHC”), each a wholly-owned subsidiary of Noble-Swiss, are guarantors of Noble Drilling Corporation’s (“NDC”) 7.50% Senior Notes due 2019. The outstanding principal balance of the 7.50% Senior Notes at December 31, 2009 was $202 million. NDC is an indirect, wholly-owned subsidiary of Noble-Swiss and a direct, wholly-owned subsidiary of NHC. Noble-Cayman’s and NHC’s guarantees of the 7.50% Senior Notes are full and unconditional. In December 2005, Noble Drilling Holding LLC (“NDH”), an indirect wholly-owned subsidiary of Noble-Swiss, became a co-obligor on (and effectively a guarantor of) the 7.50% Senior Notes.
In connection with our worldwide internal restructuring completed during 2009 (see Note 1), prior to September 30, 2009, Noble Drilling Services 1 LLC (“NDS1”), an indirect wholly-owned subsidiary of Noble-Swiss, became a co-issuer of the 7.50% Senior Notes. Subsequent to September 30, 2009, NDS1 merged with Noble Drilling Services 6 LLC (“NDS6”), also an indirect wholly-owned subsidiary of Noble-Swiss, as part of the internal restructuring. NDS6 was the surviving company in this merger and assumed NDS1’s obligations under, and became a co-issuer of, the 7.50% Senior Notes.
In connection with the issuance of Noble-Cayman’s 5.875% Senior Notes due 2013, NDC guaranteed the payment of the 5.875% Senior Notes. In connection with the worldwide internal restructuring, Noble Holding International Limited (“NHIL”), an indirect wholly-owned subsidiary of Noble-Cayman and Noble-Swiss, also guaranteed the payment of the 5.875% Senior Notes. NDC’s and NHIL’s guarantees of the 5.875% Senior Notes are full and unconditional. The outstanding principal balance of the 5.875% Senior Notes at December 31, 2009 was $300 million.
In November 2008, NHIL issued $250 million principal amount of 7.375% Senior Notes due 2014, which are fully and unconditionally guaranteed by Noble-Cayman. The outstanding principal balance of the 7.375% Senior Notes at December 31, 2009 was $249 million.
The following consolidating financial statements of Noble-Cayman, NHC and NDH combined, NDC, NDS1, NHIL and all other subsidiaries present investments in both consolidated and unconsolidated affiliates using the equity method of accounting.
NOBLE CORPORATION (NOBLE-CAYMAN) AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2009
(in thousands)
NOBLE CORPORATION (NOBLE-CAYMAN) AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2008
(in thousands)
NOBLE CORPORATION (NOBLE-CAYMAN) AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF INCOME
Year Ended December 31, 2009
(in thousands)
NOBLE CORPORATION (NOBLE-CAYMAN) AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF INCOME
Year Ended December 31, 2008
(in thousands)
NOBLE CORPORATION (NOBLE-CAYMAN) AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF INCOME
Year Ended December 31, 2007
(in thousands)
NOBLE CORPORATION (NOBLE-CAYMAN) AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Year Ended December 31, 2009
(in thousands)
NOBLE CORPORATION (NOBLE-CAYMAN) AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Year Ended December 31, 2008
(in thousands)
NOBLE CORPORATION (NOBLE-CAYMAN) AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Year Ended December 31, 2007
(in thousands)
NOBLE CORPORATION (NOBLE-SWISS) AND SUBSIDIARIES
NOBLE CORPORATION (NOBLE-CAYMAN) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise indicated, dollar amounts in tables are in thousands, except per share data)
NOTE 19 - UNAUDITED INTERIM FINANCIAL DATA
Unaudited interim consolidated financial information for the years ended December 31, 2009 and 2008 is as follows:
(1)
Net income per share is computed independently for each of the quarters presented. Therefore, the sum of the quarters’ net income per share may not equal the total computed for the year.
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
David W. Williams, Chairman, President and Chief Executive Officer of Noble Corporation, a Swiss corporation (“Noble-Swiss”), and Thomas L. Mitchell, Senior Vice President, Chief Financial Officer, Treasurer and Controller of Noble-Swiss have evaluated the disclosure controls and procedures of Noble-Swiss as of the end of the period covered by this report. On the basis of this evaluation, Mr. Williams and Mr. Mitchell have concluded that Noble-Swiss’s disclosure controls and procedures were effective as of December 31, 2009. Noble-Swiss’s disclosure controls and procedures are designed to ensure that information required to be disclosed by Noble-Swiss in the reports that it files with or submits to the SEC are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.
David W. Williams, President and Chief Executive Officer of Noble Corporation, a Cayman Islands company (“Noble-Cayman”) and Dennis J. Lubojacky, Vice President and Chief Financial Officer of Noble-Cayman have evaluated the disclosure controls and procedures of Noble-Cayman as of the end of the period covered by this report. On the basis of this evaluation, Mr. Williams and Mr. Lubojacky have concluded that Noble-Cayman’s disclosure controls and procedures were effective as of December 31, 2009. Noble-Cayman’s disclosure controls and procedures are designed to ensure that information required to be disclosed by Noble-Cayman in the reports that it files with or submits to the SEC are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) promulgated under the U.S. Securities Exchange Act of 1934, as amended.
Internal control over financial reporting includes the controls themselves, monitoring (including internal auditing practices), and actions taken to correct deficiencies as identified. There are inherent limitations to the effectiveness of internal control over financial reporting, however well designed, including the possibility of human error and the possible circumvention or overriding of controls. The design of an internal control system is also based in part upon assumptions and judgments made by management about the likelihood of future events, and there can be no assurance that an internal control will be effective under all potential future conditions. As a result, even an effective system of internal controls can provide no more than reasonable assurance with respect to the fair presentation of financial statements and the processes under which they were prepared.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on management’s assessment, we maintained effective internal control over financial reporting as of December 31, 2009.
PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited our financial statements included in this Annual Report on Form 10-K, has audited the effectiveness of internal control over financial reporting as of December 31, 2009 as stated in their report, which is provided in this Annual Report on Form 10-K.
None.
PART III
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The sections entitled “Election of Directors”, “Additional Information Regarding the Board of Directors”, “Section 16(a) Beneficial Ownership Reporting Compliance”, and “Other Matters” appearing in the proxy statement for the annual general meeting of shareholders (the “2010 Proxy Statement”), will set forth certain information with respect to directors, certain corporate governance matters and reporting under Section 16(a) of the Securities Exchange Act of 1934, and are incorporated in this report by reference.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information as of February 15, 2010 with respect to our executive officers:
David W. Williams was named Chairman, President and Chief Executive Officer effective January 2, 2008. Mr. Williams served as Senior Vice President - Business Development of Noble Drilling Services Inc. from September 2006 to January 2007, as Senior Vice President - Operations of Noble Drilling Services Inc. from January to April 2007, and as Senior Vice President and Chief Operating Officer of Noble from April 2007 to January 2, 2008. Prior to September 2006, Mr. Williams served for more than five years as Executive Vice President of Diamond Offshore Drilling, Inc., an offshore oil and gas drilling contractor.
Julie J. Robertson was named Executive Vice President effective February 10, 2006. Ms. Robertson served as Senior Vice President - Administration from July 2001 to February 10, 2006. Ms. Robertson has served continuously as Corporate Secretary since December 1993. Ms. Robertson served as Vice President - Administration of Noble Drilling from 1996 to July 2001. In 1994, Ms. Robertson became Vice President - Administration of Noble Drilling Services Inc. From 1989 to 1994, Ms. Robertson served consecutively as Manager of Benefits and Director of Human Resources for Noble Drilling Services Inc. Prior to 1989, Ms. Robertson served consecutively in the positions of Risk and Benefits Manager and Marketing Services Coordinator for a predecessor subsidiary of Noble, beginning in 1979.
Thomas L. Mitchell was named Senior Vice President, Chief Financial Officer, Treasurer and Controller effective November 6, 2006. Prior to joining Noble, Mr. Mitchell served as Vice President and Controller of Apache Corporation, an oil and gas exploration and production company, since 1997. From 1996 to 1997, he served as Controller of Apache, and from 1989 to 1996 he served Apache in various positions including Assistant to Vice President Production and Director Natural Gas Marketing. Prior to joining Apache, Mr. Mitchell spent seven years with Arthur Andersen & Co. where he practiced as a Certified Public Accountant, managing clients in the oil and gas, banking, manufacturing and government contracting industries.
Donald E. Jacobsen was named Senior Vice President - Operations effective July 30, 2009. Prior to joining Noble, Mr. Jacobsen served as Vice President - Drilling and Completions of Hess Corporation, a global integrated energy company engaged in exploration and production activities worldwide, from July 2008 to July 2009. He served as Vice President - Health, Safety, Security, Environment and Sustainable Development of Shell International Exploration & Production from September 2006 to July 2008 and as Vice President - Global Wells of Shell International Exploration & Production from April 2003 to September 2006. Shell International Exploration & Production is the upstream division of Royal Dutch Shell plc, a global group of energy and petrochemicals companies involved in oil and gas exploration and production activities worldwide.
Roger B. Hunt was named Senior Vice President - Marketing and Contracts effective July 20, 2009. Prior to joining Noble, Mr. Hunt served as Senior Vice President - Marketing at GlobalSantaFe Corporation, an offshore oil and gas drilling contractor, from 1997 to 2007. In that capacity, Mr. Hunt was responsible for marketing and pricing strategy, sales and contract activities for the company’s fleet of 57 offshore drilling units. Mr. Hunt did not hold a principal employment from December 2007 to July 2009.
Scott W. Marks was named Senior Vice President - Engineering effective January 2007. Mr. Marks served as Vice President - Project Management and Construction from August 2006 to January 2007, as Vice President - Support Engineering from September 2005 to August 2006 and as Director of Engineering from January 2003 to September 2005. Mr. Marks has been with Noble since 1991, serving as a Project Manager and as a Drilling Superintendent prior to 2003.
William E. Turcotte was named Senior Vice President and General Counsel effective December 16, 2008. Prior to joining Noble, Mr. Turcotte served as Senior Vice President, General Counsel and Corporate Secretary of Cornell Companies, Inc., a private corrections company, since March 2007. He served as Vice President, Associate General Counsel and Assistant Secretary of Transocean, Inc., an offshore oil and gas drilling contractor, from October 2005 to March 2007 and as Associate General Counsel and Assistant Secretary from January 2000 to October 2005. From 1992 to 2000, Mr. Turcotte served in various legal positions with Schlumberger Limited in Houston, Caracas and Paris. Mr. Turcotte was in private practice prior to joining Schlumberger.
We have adopted a Code of Business Conduct and Ethics that applies to directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer. Our Code of Business Conduct and Ethics is posted on our website at http://www.noblecorp.com in the “Governance” area. Changes to and waivers granted with respect to our Code of Business Conduct and Ethics related to the officers identified above, and our other executive officers and directors, that we are required to disclose pursuant to applicable rules and regulations of the SEC will also be posted on our website.
The sections entitled “Executive Compensation” and “Compensation Committee Report” appearing in the 2010 Proxy Statement set forth certain information with respect to the compensation of our management and our compensation committee report, and are incorporated in this report by reference.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The sections entitled “Equity Compensation Plan Information”, “Security Ownership of Certain Beneficial Owners” and “Security Ownership of Management” appearing in the 2010 Proxy Statement set forth certain information with respect to securities authorized for issuance under equity compensation plans and the ownership of our voting securities and equity securities, and are incorporated in this report by reference.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The sections entitled “Additional Information Regarding the Board of Directors - Board Independence” and “Policies and Procedures Relating to Transactions with Related Persons” appearing in the 2010 Proxy Statement set forth certain information with respect to director independence and transactions with related persons, and are incorporated in this report by reference.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES.
The section entitled “Auditors” appearing in the 2010 Proxy Statement sets forth certain information with respect to accounting fees and services, and is incorporated in this report by reference.
PART IV
ITEM 15.
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a)
The following documents are filed as part of this report:
(1)
A list of the financial statements filed as a part of this report is set forth in Item 8 on page 46 and is incorporated herein by reference.
(2)
Financial Statement Schedules:
All schedules are omitted because they are either not applicable or required information is shown in the financial statements or notes thereto.
The information required by this Item 15(a)(3) is set forth in the Index to Exhibits accompanying this Annual Report on Form 10-K and is incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NOBLE CORPORATION, a Swiss Corporation
Date: February 26, 2010 By: /s/ DAVID W. WILLIAMS
David W. Williams, Chairman of the Board,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NOBLE CORPORATION, a Cayman Islands company
Date: February 26, 2010 By: /s/ DAVID W. WILLIAMS
David W. Williams,
President and Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
INDEX TO EXHIBITS
*
Management contract or compensatory plan or arrangement.
+
Furnished in accordance with Item 601(b)(32)(ii) of Regulation S-K.