Adjusted EBITDA Reconciliation
Adjusted EBITDA represents net income before interest, taxes, depreciation and amortization, gains or losses on interest rate swaps and class survey costs. Adjusted EBITDA does not represent and should not be considered as an alternative to net income or cash flow from operations, as determined by United States generally accepted accounting principles, or U.S. GAAP, and our calculation of adjusted EBITDA may not be comparable to that reported by other companies. Adjusted EBITDA is included herein because it is a basis upon which the Company measures its operations and efficiency. Adjusted EBITDA is also used by our lenders as a measure of our compliance with certain covenants contained in our loan agreements and because the Company believes that it presents useful information to investors regarding a company's ability to service and/or incur indebtedness.
The following table reconciles net income to Adjusted EBITDA:
Three Months Ended Year Ended(Dollars in thousands) December 31, December 31, ------------------- ------------------ 2011 2012 2011 2012 --------- -------- -------- ---------Net income/(loss) $ 36,502 (71,013) 95,298 $(132,336)Add: Net interest expense 28,571 29,826 53,942 115,874Add: Depreciation and amortization 54,529 56,454 162,532 224,479Add: Income taxes 9,872 11,354 27,428 43,957Add: (Gain)/loss on interest rate swaps (703) 4,860 33,455 36,974Add: Class survey costs - 43,912 15,258 65,491 --------- -------- -------- ---------Adjusted EBITDA $ 128,771 75,393 387,913 $ 354,439 ========= ======== ======== =========
Drill Rigs Holdings Inc - Supplemental Information
The Leiv Eiriksson is currently on drydock at Westcon, a Norwegian shipyard to complete scheduled equipment and winterization upgrades related to the Rig Management. It will then undergo acceptance testing at the drilling location in Norway and is expected to commence drilling operations under the contract that will last for three years on or before April 15, 2013. The Company expects to receive in total approximately $83 million for mobilization and equipment upgrades. We currently estimate total equipment upgrade and drydock costs to be approximately $80 million. All such revenues received and the majority of operating expenses, incurred during this period, will be capitalized and amortized through the duration of the Rig Management contract, while upgrade costs will be capitalized and depreciated over the life of the equipment.
The Eirik Raude completed its scheduled 10-year class survey at the end of December 2012. During the class survey works and drydock, the unit was earning zero revenue and operating expenses were accounted for on an "as incurred" basis. The drydock- and class survey-related expenses were approximately $65 million and were accounted for on an "as incurred" basis. Following the completion of the scheduled 10-year class survey, the Eirik Raude mobilized to Liberia and commenced drilling operations under the drilling contract with European Hydrocarbons. During the initial phase of the drilling contract in January 2013, testing revealed that the blow out preventer, or BOP bonnets were defective and not performing up to specifications. The equipment replacement took 21 days during which time the unit was earning zero revenue and operating expenses were accounted for on an "as incurred" basis. The unit then drilled for 27 days completing the first well of the two well contract. On March 3, 2013, European Hydrocarbons unilaterally cancelled the contract. Under the terms of the contract, European Hydrocarbons will have to reimburse the Company with an early termination payment of approximately $13 million plus accrued work performed to date. The Eirik Raude commenced a drilling contract with ExxonMobil following the termination of the European Hydrocarbons contract in March 2013. Following the completion of the ExxonMobil contract, the Eirik Raude is scheduled to commence its mobilization from Ireland to offshore West Africa to commence a one-year contract with Lukoil in the third quarter of 2013.