nanitem 14 exhibits financial statements reports form 10k index exhibits following documents filed part report 1 see index financial statements set forth item 8 2 financial statements schedules none 3 exhibits exhibit 21 agreement plan f merger dated november 18 1995 key welltech amended incorporated reference companys registration statement form s4 registration no333369 exhibit 22 joint plan reorganization dated october 20 1992 company eskey incand yfc international finance nv order dated december 4 1992 united states bankruptcy court district new jersey approving joint plan reorganization incorporated reference exhibits 2 28 companys report form 8k dated december 14 1992file 18038 exhibit 23 agreement plan merger dated july 20 1993 among company oei acquisition corp odessa exploration incorporated reference exhibit 2a companys report form 8k dated september 2 1993 file 18038 exhibit 24 asset purchase agreement dated december 101993 company welltech incincorporated reference exhibit 2a companys report form 8k dated august 17 1984file 18038 exhibit 31 amended restated articles incorporation company incorporated reference companys registration statement form s4registration 333369 exhibit 32 amended restated bylaws company incorporated reference companys registration statement form s4 dated march 81996 registration 333369 exhibit 41 7 convertible subordinated debenture company due july 1 2003 incorporated reference exhibit 41 companys report form 10k dated june 30 1996 file 18038 exhibit 42 indenture 7 convertible subordinated debenture company due july 1 2003incorporated reference exhibit 42 companys report form 10k dated june 30 1996 file 18038 exhibit 43 registration rights agreement among company mcmahan securities co lp rausher pierce refsnes inc dated july 3 1996 incorporated reference exhibit 43 companys report form 10k dated june 30 1996 file 18038 exhibit 44 registration rights agreement company kirk edwards dated july 20 1993incorporated reference exhibit 10 c companys report form 8ka 53 exhibit 45 registration rights agreement dated march 2 1996 among company certain stockholders incorporated reference companys registration statement form s4 registration 353369 exhibit 46 registration rights agreement dated march 30 1995 company clint hurt associates inc clint hurt incorporated reference exhibit 10 companys report 10ksb dated june 30 1995 file 18038 exhibit 47 form common stock purchase warrant purchase key common stock issued connection welltech mergerincorporated reference companys registration statement form s4 registration 353369 exhibit 101 employment agreement company kirk edwards dated july 1 1996 exhibit 102 asset purchase agreement dated march 30 1995 company clint hurt associates inc incorporated reference companys report form 10ksb dated june 30 1995 file no18038 exhibit 103 noncompetition agreement dated march 3 1995 company clint hurt associatesinc clint hurt incorporated reference exhibit 10f companys report form 10ksb dated june 30 1995 file 18038 exhibit 104 employment agreement welltech eastern inc kenneth hill dated march 29 1996incorporated reference exhibit 104 companys report form 10k dated june 30 1996 file 18038 exhibit 105 employment agreement company kenneth huseman dated august 3 1996 exhibit 106 letter agreement van greenfield company dated may 15 1996 incorporated reference exhibit 106 companys report form 10k dated june 30 1996 file 18038 exhibit 107 amendment 2 companys employment agreement francis john company dated may 15 1996 incorporated reference exhibit 107 companys report form 10k dated june 30 1996 file 18038 exhibit 108 letter agreement morton wolkowitz company dated june 3 1996 incorporated reference exhibit 108 companys report form 10k dated june 30 1996 file 18038 exhibit 109 asset purchase agreement hardy oil gas usa inc arch petroleum inc dated april 1996 incorporated reference exhibit 1012 companys annual report form 10k dated june 30 1996 file 18038 exhibit 1010 asset purchase agreement arch petroleum inc odessa exploration inc dated april 18 1996 incorporated reference exhibit 1013 companys annual report form 10k dated june 30 1996 file 18038 exhibit 1011 general conveyance arch petroleum inc odessa exploration inc dated january 1 1996incorporated reference exhibit 1014 companys annual report form 10k dated june 301996 file 18038 54 exhibit 1012 companys 1995 stock option plan incorporated reference companys registration statement form s4 registration 353369 exhibit 1013 companys outside directors stock option plan incorporated reference companys registration statement form s4 registration 353369 exhibit 1014 plan agreement merger among key energy group inc welltech eastern inc woodward well service inc dated september 30 1996 incorporated reference exhibit 10 companys quarterly report form 10q dated december 31 1996 file 18038 exhibit 1015 stock purchase agreement among key energy group inc reo brownlee elvin brownlee jr elvin brownlee iii dated october 24 1996incorporated reference exhibit 10b companys quarterly report form 10q dated december 31 1996 file 18038 exhibit 1016 asset purchase agreement among yale e key inc key energy group inc energy air drilling service coand dale rennels dated november 1 1996 incorporated reference exhibit 10 c companys quarterly report form 10q dated december 31 1996 file 18038 exhibit 1017 stock purchase agreement among key energy group inc ed hitt helen hitt michael e thompson edward monroe jr dated december 2 1996 incorporated reference exhibit 10d companys quarterly report form 10q dated december 31 1996 file 18038 exhibit 1018 plan agreement merger among key energy group inc welltech eastern inc hunt oil company brooks well servicing inc dated november 22 1996 incorporated reference exhibit 10e companys quarterly report form 10q dated december 31 1996 file 18038 exhibit 1019 asset purchase agreement among welltech eastern inc bl hotshot inc mcdowell sons inc 4 star trucking inc rbr inc royce thomas john f mcdowell john r mcdowell dated december 13 1996 incorporated reference exhibit 10f companys quarterly report form 10q dated december 31 1996 file 18038 exhibit 1020 asset purchase agreement among welltech eastern inc talon trucking company lomak petroleum incdated december 31 1996 incorporated reference exhibit 10g companys quarterly report form 10q dated december 31 1996 file 18038 exhibit 1021 first supplemental indenture dated november 20 1996 key energy group inc american stock transfer trust company trustee incorporated reference exhibit 10i companys quarterly report form 10q dated december 31 1996 file 18038 exhibit 1022 stock purchase agreement among key energy group inc michael georgia mcdermett dated january 10 1997 incorporated reference exhibit 10a companys quarterly report onform 10q dated march 31 1997 file 18038 exhibit 1023 asset purchase agreement among welltech eastern inc key energy group inc tri state wellhead valveinc john c bozeman dated march 14 1997 incorporated reference exhibit 10b companys quarterly report form 10q dated march 31 1997 file 18038 55 exhibit 1024 stock purchase agreement among yale e key inc keith leslie neill march 24 1997incorporated reference exhibit 10 c companys quarterly report form 10q dated march 31 1997 file 18038 exhibit 1025 asset purchase agreement among key energy group inc welltech eastern inc elder well service inc martha elder kenneth l ward nona faye mugraur lela gaye biehl johnny ray johnson dated march 28 1997incorporated reference exhibit 10d companys quarterly report form 10q dated march 31 1997 file 18038 exhibit 1026 asset purchase agreement 1 among welltech eastern inc key energy group inc kalkaska construction service inc dennis hogerheide lawenda hogerheide david hogerheide derek hogerheide dated march 31 1997 incorporated reference exhibit 10e companys quarterly report form 10q dated march 311997 file 18038 exhibit 1027 asset purchase agreement 2 among welltech eastern inc key energy group inc kalkaska construction service inc dennis hogerheidelawenda hogerheide david hogerheide derek hogerheide dated march 31 1997 incorporated reference exhibit 10f companys quarterly report form 10q dated march 31 1997 file 18038 exhibit 1028 stock purchase agreement among welltech eastern inc dennis hogerheide lawenda hogerheide dated march 31 1997incorporated reference exhibit 10g companys quarterly report form 10q dated march 31 1997 file 18038 exhibit 1029 asset purchase agreement among welltech eastern inc diamond well service inc john scott dwayne wardwell dated april 31997 incorporated reference exhibit 10h companys quarterly report form 10q dated march 31 1997 file 18038 exhibit 1030 asset sale agreement among welltech eastern inc drillers inc dated april 14 1997incorporated reference exhibit 10i companys quarterly report form 10q dated march 31 1997 file 18038 exhibit 1031 asset purchase agreement among welltech eastern inc shreves well service inc william shreve dated april 18 1997 incorporated reference exhibit 10j companys quarterly report form 10q dated march 31 1997 file 18038 exhibit 1032 asset purchase agreement among welltech eastern inc petro equipment inc donald e clark dated may 1 1997 incorporated reference exhibit 10k companys quarterly report form 10q dated march 31 1997 file 18038 exhibit1033 asset purchase agreement among welltech eastern inc southwest oilfield servicesinc david wright roy wofford dated may 291997 exhibit 1034 stock purchase agreement among yale e key inc raleigh k turn david butts dated june 9 1997 exhibit 1035 stock purchase agreement among key energy group inc mark duane massingill claudia lynn massingill dated june 25 1997 incorporated reference companys report form 8k dated july 9 1997 file 18038 56 exhibit 1036 stock purchase agreement among welltech eastern inc monty elmore dated july 17 1997incorporated reference companys report form 8k dated july 9 1997 file 18038 exhibit 1037 stock purchase agreement welltech eastern inc kenting energy services inc dated july 30 1997 exhibit 1038 stock purchase agreement welltech eastern inc robert e mosley jr et al dated august 22 1997 exhibit 1039 credit agreement dated june 6 1997 among key energy group inc several banks financial institutions entities time parties agreement pnc bank nanorwest bank texas na lehman commercial paper inc exhibit 1040 master guarantee collateral agreement made key energy group inc certain subsidiaries favor norwest bank texas na dated june 6 1997 exhibit 11a statement computation per share earnings filed herewith part condensed consolidated financial statements exhibit 22 subsidiaries registrant exhibit 27a statement financial data schedule filed herewith part condensed consolidated financial statements b reports form 8k company file report form 8k quarter ended june 30 1997 filed herewith 57 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized key energy group inc registrant francis john francis john president chief executive officer dated september 18 1997 director stephen e mcgregor stephen e mcgregor dated september 18 1997 chief financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated francis john francis john president chief executive chief dated september 18 1997 financial officer director morton wolkowitz morton wolkowitz dated september 18 1997 chairman board director van greenfield van greenfield dated september 18 1997 director william manly william manly dated september 18 1997 director kevin p collins kevin p collins dated september 18 1997 director w phillip marcum w phillip marcum dated september 18 1997 director danny r evatt danny r evatt dated september 18 1997 chief accounting officer 58 item 14 exhibits financial statements reports form 8k index exhibits following documents filed part report 1 see index financial statements set forth item 8 2 financial statements schedules supplemental schedules one listed omitted absence conditions required information included consolidated financial statements notes thereto 3 exhibits b reports form 8k company filed following reports form 8k quarter ended june 30 1998 current report form 8k dated april 8 1999 filed report among things company intended commence underwritten public offering common stock via effective shelf registration statement ii current report form 8k dated may 4 1999 filed report among things company entered underwriting agreement connection offering referred clause iii current report form 8k dated june 21 1999 filed file exhibits certain documents related companys exchange 14 senior subordinated notes due 2009 series b unregistered 14 senior subordinated notes due 2009 filed herewith signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated schedule ii key energy services inc consolidated valuation qualifying accounts june 30 thousands additions allowance doubtful accounts established purchase accounting s1item 14 exhibits financial statements reports form 8k index exhibits following documents filed part report 1 see index financial statements set forth item 8 2 financial statements schedules supplemental schedules one listed omitted absence conditions required information included consolidated financial statements notes thereto 3 exhibits b reports form 8k company filed following reports form 8k quarter ended june 30 2000 current report form 8k dated june 14 1999 filed report addition seventh member board directors ii current report form 8k dated june 19 1999 filed report among things undertaking certain strategic projects commencement underwritten public offering common stock via effective shelf registration statement iii current report form 8k dated june 29 1999 amended june 30 2000 filed report among things company entered underwriting agreement connection offering referred clause ii filed herewith signatures pursuant requirements section 13 15d securities exchange act 1934 registration duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated schedule ii key energy services inc consolidated valuation qualifying accounts june 30 thousands additions allowance doubtful accounts established purchase accounting s1item 14 exhibits financial statements reports form 8k index exhibits following documents filed part report 1 see index financial statements set forth item 8 2 financial statements schedules key energy services inc consolidated supplementary financial statement schedule three years ended june 30 2001 schedule iiconsolidated valuation qualifying accountss1 supplemental schedules one listed omitted absence conditions required information included consolidated financial statements notes thereto 3 exhibits b reports form 8k company file reports form 8k quarter ended june 30 2001 filed herewith signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated schedule ii key energy services inc consolidated valuation qualifying accounts june 30 additions allowance doubtful accounts established purchase accountingitem 14 principal accountant fees services effective december 1 2006 grant thornton llp engaged companys registered independent public accountant grant thornton bill us prior 2007 estimate incur approximately 80 million audit fees 2007 related audits three years ended december 31 2006 engaged grant thornton services beyond audit review financial statements internal control financial reporting prior engagement grant thornton kpmg llp served registered independent public accountant 2005 december 1 2006 audit fees paid prior date relate financial statements 2003 prior years registered independent public accountants billed company aggregate fees set forth table services provided 2006 2005 audit fees include fees paid company professional services rendered audit companys annual financial statements including audit annual financial statements fiscal year ended december 31 2003 audit services related companys restatement prior period financial statements services related audit companys internal control financial reporting auditrelated fees include fees paid company assurance related services reasonably related performance audit review companys financial statements included audit fees tax fees include fees paid company professional services rendered tax compliance tax advice tax planning fees include fees paid company services policy approval audit nonaudit fees audit committee audit nonaudit services preapproval policy requires audit committee preapprove audit nonaudit services performed independent auditor policy audit committee establishes audit auditrelated tax services approval audit committee term preapproval 12 months date preapproval unless audit committee adopts shorter period states audit committee periodically review list preapproved services add subtract list preapproved services time committee also establish annually preapproval fee levels budgeted amounts services provided independent auditor proposed services exceeding levels amounts require specific preapproval audit committee audit committee delegated chair authority preapprove services previously preapproved audit committee involve aggregate payments respect service group related services 10000 less chair report preapproval audit committee next scheduled meeting policy contains procedures determination cfo proposed services included within list services received preapproval audit committee proposed services require specific approval audit committee must submitted jointly auditor cfo must include backup statements documentation regarding proposed services whether proposed services consistent secs rules auditor independence audit committee considered whether provision certain nonaudit services grant thornton llp compatible maintaining auditor independence determined auditor independence compromised part iv item 15item 14 principal accountant fees services item 14 incorporated reference pursuant regulation 14a securities exchange act 1934 expect file definitive proxy statement sec within 120 days close year ended december 31 2007 part iv item 15item 14 principal accounting fees services item 14 incorporated reference pursuant regulation 14a exchange act expect file definitive proxy statement sec within 120 days close year ended december 31 2008 part iv item 15item 14 principal accountant fees services item 14 incorporated reference pursuant regulation 14a exchange act expect file definitive proxy statement sec within 120 days close year ended december 31 2009 part iv item 15item 14 principal accounting fees services item 14 incorporated reference pursuant regulation 14a exchange act expect file definitive proxy statement sec within 120 days close year ended december 31 2010 part iv item 15item 14 principal accounting fees services item 14 incorporated reference definitive proxy statement filed pursuant regulation 14a exchange act expect file definitive proxy statement sec within 120 days close year ended december 31 2012 part iv item 15item 14 principal accounting fees services item 14 incorporated reference definitive proxy statement filed pursuant regulation 14a exchange act expect file definitive proxy statement sec within 120 days close year ended december 31 2013 part iv item 15item 14 principal accounting fees services item 14 incorporated reference definitive proxy statement filed pursuant regulation 14a exchange act expect file definitive proxy statement sec within 120 days close year ended december 31 2014 part iv item 15item 14 principal accounting fees services fees independent registered public accounting firm audit fees effective december 1 2006 grant thornton llp engaged independent registered public accounting firm following table sets forth fees fiscal period fees relate audit committee approved fees accordance audit nonaudit services preapproval policy described 1 includes estimated fees 4950 2016 statutory audit colombian branch fees 7490 2016 statutory audit dubai subsidiary fees 21000 2016 statutory audit russian subsidiaries 2 includes fees 84610 2015 statutory audit mexican subsidiaries fees 11433 2015 statutory audit colombian branch fees 4813 2015 statutory audit united arab emirates subsidiary fees 10689 2015 statutory audit bahraini subsidiaries fees 7800 2015 statutory audit omani subsidiaries audit fees consist professional services rendered audit annual financial statements audit effectiveness internal control financial reporting reviews quarterly financial statements category also includes fees issuance comfort letters consents assistance review documents filed sec statutory audit fees work done tax professionals connection audit quarterly reviews accounting consultations research work necessary comply standards public company accounting oversight board fees generally presented period relate opposed period billed services performed include certain advisory services include fees financial information systems design implementation policy preapproval audit nonaudit fees audit committee audit nonaudit services preapproval policy requires audit committee preapprove audit nonaudit services performed independent registered public accounting firm policy audit committee establishes audit auditrelated tax services approval audit committee term preapproval twelve months date preapproval unless audit committee adopts shorter period states audit committee periodically review list preapproved services add subtract list preapproved services time audit committee also establish annually preapproval fee levels budgeted amounts services provided independent registered public accounting firm proposed services exceeding levels amounts require specific preapproval audit committee audit committee delegated chair authority preapprove services previously preapproved audit committee involve aggregate payments respect service group related services 50000 less chair report preapproval audit committee next scheduled meeting policy contains procedures determination cfo proposed services included within list services received preapproval audit committee proposed services require specific approval audit committee must submitted jointly independent registered public accounting firm cfo must include backup statements documentation regarding proposed services whether proposed services consistent sec nyse rules auditor independence report audit committee audit committee reviewed company’s audited financial statements fiscal year ended december 31 2016 discussed financial statements company’s management independent registered public accounting firm audit committee also received discussed grant thornton llp company’s independent registered public accounting firm various communications company’s independent registered public accounting firm required provide audit committee including matters required discussed statement auditing standards 61 amended aicpa professional standards vol 1 au section 380 adopted public company accounting oversight board rule 3200t company’s independent registered public accounting firm also provided audit committee written disclosures required public company accounting oversight board rule 3526 communication audit committees concerning independence audit committee discussed independent registered public accounting firm independence key set forth audit committee charter responsibility audit committee plan conduct audits determine company’s financial statements disclosures complete accurate accordance gaap applicable laws rules regulations furthermore responsibility audit committee maintain accounting financial reporting principles policies internal controls procedures provide compliance accounting standards applicable laws regulations plan carry audit company’s internal control financial reporting responsibilities management internal auditor independent registered public accounting firm furthermore members audit committee fulltime employees company performing functions auditors accountants responsibility audit committee members conduct “field work” types auditing accounting reviews procedures set auditor independence standards members audit committee necessarily rely information provided management independent registered public accounting firm accordingly audit committee’s considerations discussions referred assure audits company’s financial statements internal control financial reporting carried accordance generally accepted auditing standards financial statements presented accordance gaap company’s auditors fact “independent” based reports discussions described report subject limitations role responsibilities audit committee referred audit committee charter audit committee recommended board directors company audited financial statements included company’s annual report form 10k year ended december 31 2016 audit committee board directors hh tripp wommack iii chair steven h pruett c christopher gaut sherman k edmiston iii part iv item 15item 14 principal accounting fees services fees independent registered public accounting firm audit fees effective december 1 2006 grant thornton llp engaged independent registered public accounting firm following table sets forth fees fiscal period fees relate audit committee approved fees accordance audit nonaudit services preapproval policy described 1 includes estimated fees 4950 2016 statutory audit colombian branch fees 7490 2016 statutory audit dubai subsidiary fees 21000 2016 statutory audit russian subsidiaries audit fees consist professional services rendered audit annual financial statements audit effectiveness internal control financial reporting reviews quarterly financial statements category also includes fees issuance comfort letters consents assistance review documents filed sec statutory audit fees work done tax professionals connection audit quarterly reviews accounting consultations research work necessary comply standards public company accounting oversight board fees generally presented period relate opposed period billed services performed include certain advisory services include fees financial information systems design implementation policy preapproval audit nonaudit fees audit committee audit nonaudit services preapproval policy requires audit committee preapprove audit nonaudit services performed independent registered public accounting firm policy audit committee establishes audit auditrelated tax services approval audit committee term preapproval twelve months date preapproval unless audit committee adopts shorter period states audit committee periodically review list preapproved services add subtract list preapproved services time audit committee also establish annually preapproval fee levels budgeted amounts services provided independent registered public accounting firm proposed services exceeding levels amounts require specific preapproval audit committee audit committee delegated chair authority preapprove services previously preapproved audit committee involve aggregate payments respect service group related services 50000 less chair report preapproval audit committee next scheduled meeting policy contains procedures determination cfo proposed services included within list services received preapproval audit committee proposed services require specific approval audit committee must submitted jointly independent registered public accounting firm cfo must include backup statements documentation regarding proposed services whether proposed services consistent sec nyse rules auditor independence report audit committee audit committee reviewed company’s audited financial statements fiscal year ended december 31 2017 discussed financial statements company’s management independent registered public accounting firm audit committee also received discussed grant thornton llp company’s independent registered public accounting firm various communications company’s independent registered public accounting firm required provide audit committee including matters required discussed statement auditing standards 61 amended aicpa professional standards vol 1 au section 380 adopted public company accounting oversight board rule 3200t company’s independent registered public accounting firm also provided audit committee written disclosures required public company accounting oversight board rule 3526 communication audit committees concerning independence audit committee discussed independent registered public accounting firm independence key set forth audit committee charter responsibility audit committee plan conduct audits determine company’s financial statements disclosures complete accurate accordance gaap applicable laws rules regulations furthermore responsibility audit committee maintain accounting financial reporting principles policies internal controls procedures provide compliance accounting standards applicable laws regulations plan carry audit company’s internal control financial reporting responsibilities management internal auditor independent registered public accounting firm furthermore members audit committee fulltime employees company performing functions auditors accountants responsibility audit committee members conduct “field work” types auditing accounting reviews procedures set auditor independence standards members audit committee necessarily rely information provided management independent registered public accounting firm accordingly audit committee’s considerations discussions referred assure audits company’s financial statements internal control financial reporting carried accordance generally accepted auditing standards financial statements presented accordance gaap company’s auditors fact “independent” based reports discussions described report subject limitations role responsibilities audit committee referred audit committee charter audit committee recommended board directors company audited financial statements included company’s annual report form 10k year ended december 31 2017 audit committee board directors hh tripp wommack iii chair steven h pruett c christopher gaut sherman k edmiston iii part iv item 15item 14 principal accounting fees services fees independent registered public accounting firm audit fees following table sets forth fees fiscal period fees relate audit committee approved fees accordance audit nonaudit services preapproval policy described audit fees consist professional services rendered audit annual financial statements audit effectiveness internal control financial reporting reviews quarterly financial statements category also includes fees issuance comfort letters consents assistance review documents filed sec statutory audit fees work done tax professionals connection audit quarterly reviews accounting consultations research work necessary comply standards public company accounting oversight board fees generally presented period relate opposed period billed services performed include certain advisory services include fees financial information systems design implementation policy preapproval audit nonaudit fees audit committee audit nonaudit services preapproval policy requires audit committee preapprove audit nonaudit services performed independent registered public accounting firm policy audit committee establishes audit auditrelated tax services approval audit committee term preapproval twelve months date preapproval unless audit committee adopts shorter period states audit committee periodically review list preapproved services add subtract list preapproved services time audit committee also establish annually preapproval fee levels budgeted amounts services provided independent registered public accounting firm proposed services exceeding levels amounts require specific preapproval audit committee audit committee delegated chair authority preapprove services previously preapproved audit committee involve aggregate payments respect service group related services 50000 less chair report preapproval audit committee next scheduled meeting policy contains procedures determination cfo proposed services included within list services received preapproval audit committee proposed services require specific approval audit committee must submitted jointly independent registered public accounting firm cfo must include backup statements documentation regarding proposed services whether proposed services consistent sec nyse rules auditor independence report audit committee audit committee reviewed discussed company’s audited consolidated financial statements year ended december 31 2019 management grant thornton llp company’s independent registered public accounting firm audit committee also received discussed grant thornton llp company’s independent registered public accounting firm various communications company’s independent registered public accounting firm required provide audit committee discussed grant thornton llp matters required discussed applicable requirements public company accounting oversight board “pcaob” sec company’s independent registered public accounting firm also provided audit committee written disclosures letter required applicable requirements pcaob regarding grant thornton llp’s communication audit committee concerning independence audit committee discussed independent registered public accounting firm independence key set forth audit committee charter responsibility audit committee plan conduct audits determine company’s financial statements disclosures complete accurate accordance gaap applicable laws rules regulations furthermore responsibility audit committee maintain accounting financial reporting principles policies internal controls procedures provide compliance accounting standards applicable laws regulations plan carry audit company’s internal control financial reporting responsibilities management internal auditor independent registered public accounting firm furthermore members audit committee fulltime employees company performing functions auditors accountants responsibility audit committee members conduct “field work” types auditing accounting reviews procedures set auditor independence standards members audit committee necessarily rely information provided management independent registered public accounting firm accordingly audit committee’s considerations discussions referred assure audits company’s financial statements internal control financial reporting carried accordance generally accepted auditing standards financial statements presented accordance gaap company’s auditors fact “independent” based reports discussions described report subject limitations role responsibilities audit committee referred audit committee charter audit committee recommended board directors company audited financial statements included company’s annual report form 10k year ended december 31 2019 audit committee board directors marcus c rowland chair sherman k edmiston iii hh “tripp” wommack iii part iv item 15item 14 principal accounting fees services item 14 incorporated herein reference definitive proxy statement filed pursuant regulation 14a exchange act filed amendment either case within 120 days close year ended december 31 2015 part iv item 15item 14 principal accounting fees services item 14 incorporated herein reference definitive proxy statement filed pursuant regulation 14a exchange act filed amendment either case within 120 days close year ended december 31 2018 part iv item 15item 14 exhibits financial statements reports form 8k index exhibits following documents filed part report 1 see index financial statements set forth item 8 2 financial statements schedules none 3 exhibits 21 agreement plan f merger dated november 18 1995 key welltech amended incorporated reference companys registration statement form s4 registration 333369 22 joint plan reorganization dated october 20 1992 company eskey inc yfc international finance nv order dated december 4 1992 united states bankruptcy court district new jersey approving joint plan reorganization incorporated reference exhibits 2 28 companys current report form 8k dated december 14 1992 file 18038 23 agreement plan merger dated july 20 1993 among company oei acquisition corp odessa exploration incorporated reference exhibit 2a companys current report form 8k dated september 2 1993 file 18038 24 asset purchase agreement dated december 10 1993 company welltech inc incorporated reference exhibit 2a companys current report form 8k dated august 17 1984 file 18038 31 amended restated articles incorporation company incorporated reference companys registration statement form s4 registration 333369 32 amended restated bylaws company incorporated reference companys registration statement form s4 dated march 8 1996 registration 333369 33 amendment amended restated articles incorporation company filed exhibit 31 companys current report form 8k dated february 2 1998 file 00022665 incorporated herein reference 41 7 convertible subordinated debenture company due july 1 2003 incorporated reference exhibit 41 companys annual report form 10k dated june 30 1996 file 18038 42 indenture 7 convertible subordinated debenture company due july 1 2003 incorporated reference exhibit 42 companys annual report form 10k dated june 30 1996 file 18038 43 registration rights agreement among company mcmahan securities co lp rausher pierce refsnes inc dated july 3 1996 incorporated reference exhibit 43 companys annual report form 10k dated june 30 1996 file 18038 44 registration rights agreement company kirk edwards dated july 20 1993 incorporated reference exhibit 10 c companys current report form 8ka 45 registration rights agreement dated march 2 1996 among company certain stockholders incorporated reference companys registration statement form s4 registration 353369 46 registration rights agreement dated march 30 1995 company clint hurt associates inc clint hurt incorporated reference exhibit 10 companys annual report 10ksb dated june 30 1995 file 18038 47 form common stock purchase warrant purchase key common stock issued connection welltech merger incorporated reference companys registration statement form s4 registration 353369 48 indenture dated september 25 1997 among key energy group inc american stock transfer trust company incorporated reference exhibit 10a companys quarterly report form 10q quarter ended september 30 1997 file 18038 49 registration rights agreement among key energy group inc lehman brothers inc mcmahan securities co lp dated september 25 1997 incorporated reference exhibit 10a companys quarterly report form 10q quarter ended september 30 1997 file 18038 101 employment agreement company kirk edwards dated july 1 1996 incorporated reference exhibit 101 companys annual report form 10k year ended june 30 1997 file 18038 102 employment agreement welltech eastern inc kenneth hill dated march 29 1996 incorporated reference exhibit 104 companys annual report form 10k dated june 30 1996 file 18038 103 employment agreement company kenneth huseman dated august 3 1996 incorporated reference exhibit 105 companys annual report form 10k year ended june 30 1997 file 18038 104 letter agreement van greenfield company dated may 15 1996 incorporated reference exhibit 106 companys annual report form 10k dated june 30 1996 file 18038 105 amendment 2 companys employment agreement francis john company dated may 15 1996 incorporated reference exhibit 107 companys annual report form 10k dated june 30 1996 file 18038 106 letter agreement morton wolkowitz company dated june 3 1996 incorporated reference exhibit 108 companys annual report form 10k dated june 30 1996 file 18038 107 asset purchase agreement hardy oil gas usa inc arch petroleum inc dated april 1996 incorporated reference exhibit 1012 companys annual report form 10k dated june 30 1996 file 18038 108 asset purchase agreement arch petroleum inc odessa exploration inc dated april 18 1996 incorporated reference exhibit 1013 companys annual report form 10k dated june 30 1996 file 18038 109 general conveyance arch petroleum inc odessa exploration inc dated january 1 1996 incorporated reference exhibit 1014 companys annual report form 10k dated june 30 1996 file 18038 1010plan agreement merger among key energy group inc welltech eastern inc woodward well service inc dated september 30 1996 incorporated reference exhibit 10a companys quarterly report form 10q dated december 31 1996 file 18038 1011stock purchase agreement among key energy group inc reo brownlee elvin brownlee jr elvin brownlee iii dated october 24 1996 incorporated reference exhibit 10b companys quarterly report form 10q dated december 31 1996 file 18038 1012asset purchase agreement among yale e key inc key energy group inc energy air drilling service co dale rennels dated november 1 1996 incorporated reference exhibit 10 c companys quarterly report form 10q dated december 31 1996 file 18038 1013stock purchase agreement among key energy group inc ed hitt helen hitt michael e thompson edward monroe jr dated december 2 1996 incorporated reference exhibit 10d companys quarterly report form 10q dated december 31 1996 file 18038 1014plan agreement merger among key energy group inc welltech eastern inc hunt oil company brooks well servicing inc dated november 22 1996 incorporated reference exhibit 10e companys quarterly report form 10q dated december 31 1996 file 18038 1015asset purchase agreement among welltech eastern inc bl hotshot inc mcdowell sons inc 4 star trucking inc rbr inc royce thomas john f mcdowell john r mcdowell dated december 13 1996 incorporated reference exhibit 10f companys quarterly report form 10q dated december 31 1996 file 18038 1016asset purchase agreement among welltech eastern inc talon trucking company lomak petroleum inc dated december 31 1996 incorporated reference exhibit 10g companys quarterly report form 10q dated december 31 1996 file 18038 1017first supplemental indenture dated november 20 1996 key energy group inc american stock transfer trust company trustee incorporated reference exhibit 10i companys quarterly report form 10q dated december 31 1996 file 18038 1018stock purchase agreement among key energy group inc michael georgia mcdermett dated january 10 1997 incorporated reference exhibit 10a companys quarterly report form 10q dated march 31 1997 file 18038 1019asset purchase agreement among welltech eastern inc key energy group inc tri state wellhead valve inc john c bozeman dated march 14 1997 incorporated reference exhibit 10b companys quarterly report form 10q dated march 31 1997 file 18038 1020stock purchase agreement among yale e key inc keith leslie neill march 24 1997 incorporated reference exhibit 10 c companys quarterly report form 10q dated march 31 1997 file 18038 1021asset purchase agreement among key energy group inc welltech eastern inc elder well service inc martha elder kenneth l ward nona faye mugraur lela gaye biehl johnny ray johnson dated march 28 1997 incorporated reference exhibit 10d companys quarterly report form 10q dated march 31 1997 file 18038 1022asset purchase agreement 1 among welltech eastern inc key energy group inc kalkaska construction service inc dennis hogerheide lawenda hogerheide david hogerheide derek hogerheide dated march 31 1997 incorporated reference exhibit 10e companys quarterly report form 10q dated march 31 1997 file 18038 1023asset purchase agreement 2 among welltech eastern inc key energy group inc kalkaska construction service inc dennis hogerheide lawenda hogerheide david hogerheide derek hogerheide dated march 31 1997 incorporated reference exhibit 10f companys quarterly report form 10q dated march 31 1997 file 18038 1024stock purchase agreement among welltech eastern inc dennis hogerheide lawenda hogerheide dated march 31 1997 incorporated reference exhibit 10g companys quarterly report form 10q dated march 31 1997 file 18038 1025asset purchase agreement among welltech eastern inc diamond well service inc john scott dwayne wardwell dated april 3 1997 incorporated reference exhibit 10h companys quarterly report form 10q dated march 31 1997 file 18038 1026asset sale agreement among welltech eastern inc drillers inc dated april 14 1997 incorporated reference exhibit 10i companys quarterly report form 10q dated march 31 1997 file 18038 1027asset purchase agreement among welltech eastern inc shreves well service inc william shreve dated april 18 1997 incorporated reference exhibit 10j companys quarterly report form 10q dated march 31 1997 file 18038 1028asset purchase agreement among welltech eastern inc petro equipment inc donald e clark dated may 1 1997 incorporated reference exhibit 10k companys quarterly report form 10q dated march 31 1997 file 18038 1029asset purchase agreement among welltech eastern inc southwest oilfield services inc david wright roy wofford dated may 29 1997 incorporated reference exhibit 1033 companys annual report form 10k dated june 30 1997 file 18038 1030stock purchase agreement among yale e key inc raleigh k turn david butts dated june 9 1997 incorporated reference exhibit 1034 companys annual report form 10k dated june 30 1997 file 18038 1031stock purchase agreement among key energy group inc mark duane massingill claudia lynn massingill dated june 25 1997 incorporated reference companys current report form 8k dated july 9 1997 file 18038 1032stock purchase agreement among welltech eastern inc monty elmore dated july 17 1997 incorporated reference companys annual report form 10k dated june 30 1997 file 18038 1033stock purchase agreement welltech eastern inc kenting energy services inc dated july 30 1997 incorporated reference exhibit 1037 companys annual report form 10k year ended june 30 1997 file 18038 1034stock purchase agreement welltech eastern inc robert e mosley jr et al dated august 22 1997 incorporated reference exhibit 1038 companys annual report form 10k dated june 30 1997 file 18038 1035credit agreement dated june 6 1997 among key energy group inc several banks financial institutions entities time parties agreement pnc bank na norwest bank texas na lehman commercial paper inc incorporated reference exhibit 1039 companys annual report form 10k dated june 30 1997 file 18038 1036master guarantee collateral agreement made key energy group inc certain subsidiaries favor norwest bank texas na dated june 6 1997 incorporated reference exhibit 1033 companys annual report form 10k dated june 30 1997 file 18038 1037stock purchase agreement among nabors acquisition corp iv seller key rocky mountain inc buyer key energy group inc dated july 31 1997 gibson stock purchase agreement incorporated reference exhibit 10c companys quarterly report form 10q quarter ended september 30 1997 file 18038 1038amendment one gibson stock purchase agreement dated october 10 1997incorporated reference exhibit 10d companys quarterly report form 10q quarter ended september 30 1997 file 18038 1039stock purchase agreement ram oil well service inc among yale e key inc robert calhoon dated september 1 1997 incorporated reference exhibit 22 companys current report form 8k dated september 1 1997 file 18038 1040stock purchase agreement rowland trucking co among yale e key inc robert calhoon dated september 1 1997 incorporated reference exhibit 21 companys current report form 8k dated september 1 1997file 18038 1041asset purchase agreement among welltech eastern inc waco oil gas co inc il morris dated september 1 1997 incorporated reference exhibit 10h companys quarterly report form 10q quarter ended september 30 1997 file 18038 1042asset purchase agreement among key four corners inc key energy groupinc coleman oil gas co big well service co sunco trucking co justis supply co inc george e coleman dated september 2 1997 incorporated reference exhibit 21 companys report form 8k dated october 1 1997 file 18038 1043stock purchase agreement welltech eastern inc william gregory wines dated september 16 1997 incorporated reference exhibit 10j companys quarterly report form 10q quarter ended september 30 1997 file 18038 1044stock purchase agreement among key energy drilling inc sk rogers joe dee brooks lynn e waters donnie roberts dated september 25 1997 incorporated reference exhibit 10k companys quarterly report form 10q quarter ended september 30 1997 file 18038 1045stock purchase agreement among key rocky mountain inc joseph r dunbar janice n dunbar dated september 29 1997 incorporated reference exhibit 10m companys quarterly report form 10q quarter ended september 30 1997 file 18038 1046stock purchase agreement among key rocky mountain inc bruce l bummer jack hartnett diane hartnett bruce bummer 71482 family trust dated september 30 1997 incorporated reference exhibit 10n companys quarterly report form 10q quarter ended september 30 1997 file 18038 1047amended restated credit agreement among key energy group inc several financial institutions dated june 6 1997 amended restated november 6 1997 incorporated reference exhibit 10s companys quarterly report form 10q quarter ended december 31 1997 file 18038 1048first amendment amended restated credit agreement dated june 6 1997 amended restated november 6 1997 dated december 3 1997 incorporated reference exhibit 10t companys quarterly report form 10q quarter ended december 31 1997 file 18038 1049asset purchase agreement among welltech eastern inc mccurdy well service inc effective october 3 1997 incorporated reference exhibit 10d companys quarterly report form 10q quarter ended december 31 1997 file 18038 1050asset purchase agreement among welltech eastern inc gsi trucking company inc effective october 3 1997 incorporated reference exhibit 10e companys quarterly report form 10q quarter ended december 31 1997 file 18038 1051asset purchase agreement among welltech eastern inc kahlden production services inc effective october 3 1997 incorporated reference exhibit 10f companys quarterly report form 10q quarter ended december 31 1997 file 18038 1052stock purchase agreement welltech eastern inc donald jeter effective november 11 1997 incorporated reference exhibit 10g companys quarterly report form 10q quarter ended december 31 1997 file 18038 1053stock purchase agreement key energy drilling inc robert c jones dana lunette jones effective november 24 1997 incorporated reference exhibit 10h companys quarterly report form 10q quarter ended december 31 1997 file 18038 1054asset purchase agreement among welltech eastern inc key energy group inc white rhino drilling inc jeff critchfield effective december 2 1997 incorporated reference exhibit 10i companys quarterly report form 10q quarter ended september 30 1997 file 18038 1055asset purchase agreement among welltech eastern inc key energy group inc sr cable inc jeff critchfield royce thomas ronnie shaw donald tinker effective december 2 1997 incorporated reference exhibit 10j companys quarterly report form 10q quarter ended september 30 1997 file 18038 1056asset purchase agreement among welltech eastern inc wellcorps llc jeff critchfield terra energy ltd brian fries effective december 2 1997 incorporated reference exhibit 10k companys quarterly report form 10q quarter ended december 31 1997 file 18038 1057employment agreement dated december 5 1997 stephen e mcgregor company incorporated reference exhibit 10e companys quarterly report form 10q quarter ended march 31 1998 file 18038 1058stock purchase agreement key energy group inc key energy drilling inc ronald sitton frank r sitton effective december 12 1997 incorporated reference exhibit 10l companys quarterly report form 10q quarter ended december 31 1997 file 18038 1059asset purchase agreement brooks well servicing inc sam f mckee individually dba circle vacuum services effective january 30 1998 incorporated reference exhibit 10m companys quarterly report form 10q quarter ended december 31 1997 file 18038 1060stock purchase agreement key energy drilling inc jack b loveless jim mayfield jw miller effective january 30 1998 incorporated reference exhibit 10n companys quarterly report form 10q quarter ended december 31 1997 file 18038 1061asset purchase agreement key four corners inc four corners drilling rl andes lang effective january 30 1998 incorporated reference exhibit 10o companys quarterly report form 10q quarter ended december 31 1997 file 18038 1062asset purchase agreement among key rocky mountain inc updike brothers inc employee stock ownership retirement plan trust david w updike trust dorothy updike trust dorothy r updike trust mary e updike ralph updike daniel updike effective february 6 1998 incorporated reference exhibit 10p companys quarterly report form 10q quarter ended december 31 1997 file 18038 1063asset purchase agreement among brooks well servicing inc hot oil plus inc thomas n novosad jr patricia novosad effective january 29 1998 incorporated reference exhibit 10q companys quarterly report form 10q quarter ended december 31 1997 file 18038 1064asset purchase agreement among brooks well servicing inc lundy vacuum service inc peyton e lundy effective march 3 1998 incorporated reference exhibit 10a companys quarterly report form 10q quarter ended march 31 1998 file 18038 1065asset purchase agreement among yale e key inc edwards transport inc tom nations effective march 26 1998 incorporated reference exhibit 10b companys quarterly report form 10q quarter ended march 31 1998 file 18038 1066asset purchase agreement among brooks well servicing inc jpf well service inc effective april 20 1998 incorporated reference exhibit 10c companys quarterly report form 10q quarter ended march 31 1998 file 18038 1067asset purchase agreement among brooks well servicing inc jpf lease service inc effective april 20 1998 incorporated reference exhibit 10d companys quarterly report form 10q quarter ended march 31 1998 file 18038 1068 asset purchase agreement watson oilfield service supply inc watson truck supply inc dated may 19 1998 1069 purchase sale agreement among burnett corporation bo cornelius ann c fatheree james r corbin mary jo mitton birke b marsh h cobb birke b marsh trustee corbin trust jamie kim corbin josh alan corbin jason j corbin wilbanks exploration inc odessa exploration inc dated may 20 1998 1070 asset purchase agreement among key energy drilling inc lakota drilling company reed gilmore priscilla gilmore reed gilmore jr valerie g griess joan g lindquist james c gilmore l e grimes larry v bohannon dated may 22 1998 1071key energy group inc 1997 incentive plan incorporated reference exhibit b companys definitive proxy statement dated november 28 1997 231 consent kpmg peat marwick llp 27a statement financial data schedule filed herewith part condensed consolidated financial statements b reports form 8k company file report form 8k quarter ended june 30 1998 filed herewith signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized key energy group inc registrant francis john francis john president chief executive officer dated september 28 1998 director stephen e mcgregor stephen e mcgregor dated september 28 1998 chief financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated francis john francis john president chief executive chief dated september 28 1998 financial officer director morton wolkowitz morton wolkowitz dated september 28 1998 chairman board director david j breazzano david j breazzano dated september 28 1998 director william manly william manly dated september 28 1998 director kevin p collins kevin p collins dated september 28 1998 director w phillip marcum w phillip marcum dated september 28 1998 director danny r evatt danny r evatt dated september 28 1998 chief accounting officeritem 14 disclosure controls procedures b changes internal controls significant changes companys internal controls fiscal 2002 factors exist could significantly affect controls date report part iv item 15item 14 principal accounting fees services item 14 incorporated reference pursuant regulation 14a exchange act expect file definitive proxy statement sec within 120 days close year ended december 31 2011 index financial statements part iv item 15 item 7 managements discussion analysis results operations financial condition recent developments march 1996 company completed merger welltech inc welltech established oil well services company providing broad range workover production services oil gas wells result welltech merger companys fleet workover rigs doubled number april 1996 odessa exploration whollyowned subsidiary company acquired approximately 69 million oil gas producing properties unrelated third party subsequent event july 1996 company completed offering 52000000 7 convertible subordinated debentures due 2003 offering private offering pursuant rule 144a securities act net proceeds offering used substantially repay existing longterm debt approximately 352 million remaining proceeds together proceeds borrowings existing credit arrangements intended fund expansion companys services acquisitions businesses assets working capital general corporate purposes see note 5 financial statements detailed description including interest rate increase offering overview fluctuations well servicing activity historically strong correlation fluctuations oil gas prices company seeks minimize effects fluctuations operations financial condition diversification services entry new markets customer alliances since 1993 company made number acquisitions significantly expanded companys operations april 1996 odessa exploration consummated purchase 69 million oil gas properties result acquired additional oil gas producing properties daily average net production 240 barrels oil 15 million cubic feet natural gas march 1996 welltech well services provider merged company doubling companys fleet well service workover rigs adding two oil gas drilling rigs companys contract drilling operations welltech operates welltech eastern two operating divisions welltech midcon welltech eastern march 1995 company acquired four oil gas drilling rigs clint hurt august 1994 company acquired 58 well service workover rigs well service equipment west texas welltech july 1993 company acquired odessa exploration oil gas production company addition acquisitions company acquired several smaller oilwell service related entities expanded ancillary equipment services 13 results operations fiscal year ended june 30 1996 versus fiscal year ended june 30 1995 following discussion provides information assist understanding key energy group incs key company financial condition results operations read conjunction financial statements related notes appearing elsewhere report operating results fiscal year ended june 30 1996 include companys oilfield well service operations conducted whollyowned subsidiaries yale e key inc yale e key oil natural gas exploration production operations conducted whollyowned subsidiary odessa exploration inc odessa exploration key energy drilling inc dba clint hurt drilling clint hurt drilling engaged oil natural gas well contract drilling acquired march 1995 also included operating results welltech eastern period march 26 1996 date merger see note 2 june 30 1996 historically fluctuations oilfield well service operations oil gas well contract drilling activity closely linked fluctuations crude oil natural gas prices however company acquisitions customer alliances agreements diversification services seeks minimize effects fluctuations companys results operations financial condition operating income company revenues company year ended june 30 1996 increased 21789000 49 66478000 44689000 year ended june 30 1995 net income 3585000 increased 1407000 65 1995 fiscal year total 2178000 increase revenues primarily due addition clint hurt drilling april 1 1995 whose operations included one quarter fiscal year 1995 results increased oil gas revenues odessa exploration increased oilwell service equipment utilization acquisition welltech operations date acquisition march 26 1996 see note 2 increase fiscal year 1996 net income fiscal year 1995 net income partially attributable inclusion clint hurt drilling acquisition welltech also result increase oilwell service equipment utilization decrease total consolidated company costs expenses percent total revenues oilfield services oilfield services performed yale e key welltech eastern yale e key conducts oilfield services primarily west texas welltech eastern conducts oilfield services midcontinent region united states primarily oklahoma operating division welltech midcon northeastern united states primarily michigan pennsylvania west virginia operating division welltech eastern addition company conducts oilfield services argentina 63 ownership servicios welltech sa servicios argentinean corporation oilfield service revenues increased 15828000 39 40105000 1995 fiscal year 55933000 1996 fiscal year increase revenues primarily attributable higher equipment utilization result increase demand oilfield services acquisition welltech eastern whose operating results included period march 26 1996 date merger see note 2 june 30 1996 addition yale e key diversified oilfield services higher margin business segments oilfield frac tanks oilfield fishing tools trucking operations 14 oil natural gas exploration production oil natural gas exploration production operations performed odessa exploration revenues oil gas activities increased 1841000 79 2334000 year ended june 30 1995 4175000 current year increase revenues primarily result increased production oil natural gas several oil natural gas wells drilled began production 1996 higher oil natural gas prices current year april 1996 purchase 69 million oil gas properties unrelated third party almost doubled size odessa exploration total 4175000 revenues fiscal year 1996 approximately 3554000 sale oil gas 97130 barrels oil average price 1774 per barrel 1026577 mcf natural gas average price 179 per mcf remaining 621000 revenues represented primarily administrative fee income miscellaneous income oil natural gas well drilling oil natural gas well drilling operations performed clint hurt drilling acquired march 1995 comparable numbers full prior fiscal year therefore available addition two drilling rigs acquired march 1996 merger welltech revenues fiscal 1996 6188000 operating expenses oilfield services oilfield service expenses increased 10145000 33 30592000 fiscal 1995 40737000 fiscal year 1996 increase due primarily acquisition welltech march 26 1996 increased demand oilfield services addition company continued expand services offering ancillary services equipment oilwell fishing tools blowout preventers oilwell frac tanks oil natural gas exploration production expenses related oil gas activities increased 593000 78 757000 fiscal year 1995 1350000 fiscal year 1996 increase expenses primarily result increased production oil natural gas several oil natural gas wells drilled began production 1996 april 1996 purchase 69 million oil gas properties almost doubled size odessa exploration oil natural gas well drilling clint hurt drilling acquired march 1995 comparable numbers full prior fiscal year therefore available expenses fiscal year 1996 5031000 interest expense interest expense increased 999000 68 2477000 fiscal year 1996 1478000 fiscal 1995 increase primarily result acquisitions addition certain oil gas properties 15 general administrative expenses general administrative expenses increased 2256000 52 6608000 fiscal year 1996 4352000 fiscal year 1995 increase primarily attributable companys recent acquisitions expanded services depreciation depletion amortization expense depreciation depletion amortization expense increased 1963000 72 4701000 fiscal year 1996 2738000 fiscal year 1995 increase primarily due oilfield service depreciation expense result increased oilfield service capital expenditures current period versus prior period acquisition welltech clint hurt addition depletion expense increased period due increase production oil natural gas income taxes income tax expense 1888000 fiscal year 1996 increased 1150000 income tax expense fiscal year 1995 increase income taxes primarily due increases operating income however company expect required remit significant amount 1888000 total federal income taxes fiscal year 1996 availability net operating loss carryforwards accelerated depreciation drilling tax credits cash flow net cash provided operating activities increased 3863000 3258000 fiscal year 1995 7121000 fiscal year 1996 increase attributable primarily increases net income net cash used investing activities increased 7154000 fiscal year 1995 13551000 fiscal 1996 increase primarily result increased capital expenditures oil gas properties costs associated acquisition welltech increase partially offset decrease oilfield service capital expenditures net cash provided financing activities 9366000 fiscal year 1996 compared 3998000 net cash provided financing activities fiscal year 1995 increase primarily result increase proceeds longterm debt borrowings lineofcredit fiscal 1996 primarily result purchase oil gas properties odessa exploration acquisition welltech fiscal year ended june 30 1995 versus fiscal year ended june 30 1994 operating income fiscal 1995 revenues 44689000 increased 10068000 29 fiscal 1994 revenues 34621000 fiscal 1995 revenues increased due acquisition oil gas producing properties odessa exploration operation assets welltech west texas included twelve months fiscal 1995 seven months fiscal 1994 additional revenues clint hurt drilling acquired march 1995 addition company continued expand services offering oilwell fishing tools blowout preventers oilwell frac tanks 16 income taxes 3328000 fiscal 1995 increase 2295000 fiscal 1994 increase income taxes due increase gross revenues current fiscal year acquisition odessa exploration producing oil gas properties operations welltech west texas acquisition clint hurt drilling operating expenses fiscal 1995 costs expenses 41361000 increased 9035000 28 fiscal 1994 costs expenses 32326000 fiscal 1995 costs expenses increased primarily due operations welltech west texas acquisition clint hurt drilling well increased lease operating costs due acquisitions oil gas producing properties odessa exploration interest expense interest expense increased 830000 fiscal 1994 1478000 fiscal 1995 primarily result borrowings acquisition drilling oil gas producing properties odessa exploration acquisition clint hurt drilling general administrative expenses general administrative expenses include company yale e key odessa exploration clint hurt drilling expenses increased 812000 4352000 fiscal 1995 3540000 fiscal 1994 primarily due increased expenses odessa exploration acquisition clint hurt drilling welltech west texas however percent gross revenues general administrative expenses decreased 102 gross revenues fiscal 1994 97 gross revenues fiscal 1995 depreciation depletion expense depreciation depletion expense increased 2738000 fiscal 1995 1371000 fiscal 1994 due mainly additional depreciation expense associated acquisition welltech west texas oilfield service equipment subsequent capital expenditures equipment income taxes income tax expense 1150000 fiscal 1995 increased 950000 income tax expense fiscal 1994 increase income taxes primarily due increase operating income however company expect required remit significant amount 1150000 total federal income taxes cash fiscal 1996 cash flow net cash provided operating activities increased 1416000 1842000 1994 fiscal year 3258000 1995 fiscal period increases attributable primarily increases net income net cash used investing activities increased 5608000 fiscal 1994 7154000 fiscal 1995 increase primarily result increased capital expenditures oil gas properties costs associated acquisition clint hurt drilling increase partially offset decrease oilfield service capital expenditures capital expenditures oilfield service operations fiscal 1994 primarily result improvements necessary welltech west texas equipment 17 net cash provided financing activities 3998000 1995 fiscal year compared 4316000 net cash provided financing activities fiscal 1994 decrease primarily result increased principal payments fiscal 1995 increase principal payments somewhat offset increase proceeds longterm debt fiscal 1995 result financing improvement costs equipment west texas operations welltech purchase oil gas properties odessa exploration acquisition clint hurt drilling liquidity capital resources june 30 1996 company 3240000 cash compared 865000 cash june 30 1995 june 30 1995 company 865000 cash company also 267000 restricted marketable securities compared 717000 cash june 30 1994 company projected 62 million oilfield service capital expenditures fiscal 1997 compared 52 million fiscal 1996 capital expenditures expected primarily capitalized improvement costs existing equipment machinery company expects finance capital expenditures utilizing operating cash flows company capital expenditures 2839000 fiscal 1995 odessa exploration forecasting outlays approximately 60 million development costs fiscal 1997 compared 98 million fiscal 1996 financing expected come borrowings clint hurt drilling forecast approximately 250000 oil gas drilling capital expenditures fiscal 1997 primarily improvements existing equipment machinery compared 598000 fiscal 1996 outlays treated capital costs financing expected come existing cash flow debt july 1996 company completed offering 52000000 7 convertible subordinated debentures due 2003 debentures offering august 1996 interest rate debentures increased 7 12 offering private offering pursuant rule 144a securities act net proceeds offering used substantially repay existing longterm debt approximately 352 million remaining proceeds intended fund expansion companys services acquisitions businesses assets working capital general corporate purposes longterm debt repaid proceeds offering july 1996 included term note cit groupcredit finance inc cit approximately 211 million bank debt associated odessa exploration previously norwest bank texas na norwest approximately 141 million debentures mature july 1 2003 convertible time november 1 1996 maturity unless previously redeemed shares companys common stock conversion price 9 34 per share subject adjustment certain events addition holders debentures convert prior july 1 1999 receive addition companys common stock payment generally equal 50 interest otherwise payable converted debentures date conversion july 1 1999 payable cash common stock companys option interest debentures payable semiannually january 1 july 1 year commencing january 1 1997 august 1996 interest rate increased 7 12 due certain modifications debenture indenture involving certain subsidiarys inability guarantee obligations indenture relating debentures prospectus 7 12 effective interest rate expected remain foreseeable future 18 debentures redeemable july 15 1999 thereafter debentures redeemable option company whole part declining redemption prices set forth original prospectus together accrued unpaid interest thereon debentures also may redeemed option holder change control defined original prospectus 100 principal amount together accrued interest thereon january 1996 prior merger welltech described note 2 prior consummation offering described company yale e key clint hurt drilling welltech entered separate credit facilities cit totaling approximately 35 million combined maximum credit limit credit facilities combined one facility consummation welltech merger result separate credit facilities interest rate yale e key lowered two onehalf one onequarter percent stated prime rate 825 june 30 1996 cit term notes required principal interest payments due first day month beginning february 1 1996 plus final payment unpaid balance note due december 31 1998 expiration lines credit december 31 1998 result convertible subordinated debenture offering described subsequent repayment longterm debt cit except lines credit company currently renegotiating overall credit facilities cit including limited maximum credit availability interest rate maturity dates impact sfas 121 march 1995 financial accounting standards board issued statement financial accounting standards 121 accounting longlived assets longlived assets disposed sfas 121 regarding impairment longlived assets identifiable intangibles goodwill related assets sfas 121 effective financial statements fiscal years beginning december 15 1995 although earlier adoption encouraged application sfas 121 require periodic determination whether book value longlived assets exceeds future cash flows expected result use assets require reduction carrying amount impaired assets estimated fair values company currently estimates implementation sfas 121 material effect companys financial position company implement sfas 121 beginning july 1 1996 impact inflation operations although complex environment extremely difficult make accurate assessment impact inflation companys operations management opinion inflation significant impact business 19 item 8item 7 managements discussion analysis results operations financial condition following discussion provides information assist understanding companys financial condition results operations read conjunction financial statements related notes appearing elsewhere report overview company experienced successful year fiscal 1997 regions increased equipment use higher oil gas prices increased emphasis horizontal drilling lower production costs major independent oil gas producers renewed focus domestic production effects several new alliances company entered customers fluctuations well servicing activity strong correlation fluctuations oil gas prices oil gas prices drop significantly current levels company would expect decrease demand drilling services would negatively affect companys operating performance company seeks minimize effects fluctuations operations financial condition diversification services entry new markets customer alliances fiscal year ended june 30 1997 versus fiscal year ended june 30 1996 results operations operating income company revenues year ended june 30 1997 increased 97152000 146 66478000 fiscal 1996 163630000 fiscal 1997 net income fiscal 1997 increased 5512000 154 3586000 fiscal 1996 9098000 fiscal 1997 increase primarily due oilwell service acquisitions throughout year increased oil gas revenues odessa exploration increased oil gas drilling revenues oilfield services oilfield service revenues year ended june 30 1997 increased 88452000 158 55933000 year ended june 30 1996 144385000 year ended june 30 1997 increase primarily attributable acquisitions throughout year higher equipment use resulting increase demand oilfield services oil natural gas exploration production revenues oil gas activities increased 4005000 96 4175000 year ended june 30 1996 8180000 current year increase primarily result increased production oil natural gas several wells drilled began production fiscal 1997 higher oil natural gas prices fiscal 1997 april 1996 purchase 69 million oil gas properties unrelated third party total 8180000 revenues year ended june 30 1997 approximately 6975000 sale oil gas 1205000 represented primarily administrative fee income 12 oil natural gas well drilling revenues oil gas well drilling activities increased 3768000 61 6188000 year ended june 30 1996 9956000 year ended june 30 1997 increase primarily result increased oilwell drilling activity increase companys pricing structure operating expenses oilfield services oilfield service expenses year ended june 30 1997 increased 59629000 146 40737000 year ended june 30 1996 100366000 year ended june 30 1997 increase due primarily acquisitions made throughout fiscal year increased demand oilfield services addition company continued expand services offering fishing tools blowout preventers oilwell frac tanks oil natural gas exploration production expenses related oil gas activities increased 1680000 124 1350000 year ended june 30 1996 3030000 year ended june 30 1997 increase primarily result costs associated several oil natural gas wells drilled began producting fiscal 1997 april 1996 purchase 69 million oil gas properties oil natural gas well drilling expenses related oil gas well drilling activities increased 3125000 62 5030000 year ended june 30 1996 8155000 year ended june 30 1997 increase primarily result increased revenues depreciation depletion expense depreciation depletion amortization expense increased 6719000 143 4701000 fiscal 1996 11420000 fiscal 1997 increase primarily due oilfield service depreciation expense result increased oilfield service capital expenditures current period versus prior period acquisitions completed throughout fiscal 1997 addition depletion expense increased period due increase production oil natural gas general administrative expenses general administrative expenses increased 11914000 180 6608000 year ended june 30 1996 18522000 year ended june 30 1997 increase primarily attributable oilfield service acquisitions throughout fiscal year interest expense interest expense increased 5058000 204 2477000 fiscal 1996 7535000 fiscal 1997 increase primarily result debt incurred connection acquisitions completed throughout fiscal 1997 13 income taxes income tax expense increased 3612000 191 1888000 income tax expense fiscal 1996 5500000 fiscal 1997 increase income taxes primarily due increase operating income however company expect required remit significant amount 5500000 total federal income taxes fiscal year 1997 availability net operating loss carryforwards accelerated depreciation drilling tax credits cash flow net cash provided operating activities decreased 4965000 70 7121000 fiscal 1996 2156000 fiscal 1997 decrease attributable primarily increases accounts receivable decreases accounts payable accrued expenses partially offset increases depreciation net income net cash used investing activities increased 68511000 506 13551000 fiscal 1996 82062000 fiscal 1997 increase primarily result increased capital expenditures oilwell service operations oilwell service acquisitions net cash provided financing activities 117399000 fiscal 1997 compared 9366000 fiscal 1996 represents increase 108033000 1153 increase partially offset repayments longterm debt primarily result proceeds existing debentures commercial paper current fiscal year 14 fiscal year ended june 30 1996 versus fiscal year ended june 30 1995 operating income company revenues year ended june 30 1996 increased 21789000 49 44689000 year ended june 30 1995 66478000 year ended june 30 1996 net income increased 1408000 65 2178000 fiscal 1995 3586000 fiscal 1996 increase revenues primarily due acquisition clint hurt drilling march 1995 whose operations included one quarter 1995 yearend results increased oil gas revenues odessa exploration increased oilwell service equipment use acquisition welltech increase fiscal year 1996 net income fiscal year 1995 net income partially attributable inclusion clint hurt drilling acquisition welltech eastern also result increase oilwell service equipment use decrease total consolidated company costs expenses percentage total revenues oilfield services oilfield service revenues year ended june 30 1996 increased 15828000 40 40105000 year ended june 30 1995 55933000 year ended june 30 1996 increase revenues primarily attributable higher equipment use resulting increase demand oilfield services acquisition welltech eastern whose operating results included period march 26 1996 june 30 1996 oil natural gas exploration production revenues oil gas activities increased 1841000 79 2334000 year ended june 30 1995 4175000 year ended june 30 1996 increase revenues primarily result increased production oil natural gas several wells drilled 1996 higher oil natural gas prices 1995 april 1996 purchase 69 million oil gas properties unrelated third party total 4175000 revenues year ended june 30 1996 approximately 3554000 sale oil gas remaining 621000 attributable primarily administrative fee income miscellaneous income oil natural gas well drilling oil natural gas well drilling operations performed clint hurt drilling acquired march 1995 comparable numbers prior year therefore available revenues year ended june 30 1996 6188000 operating expenses oilfield services oilfield service expenses year ended june 30 1996 increased 10145000 33 30592000 year ended june 30 1995 40737000 year ended june 30 1996 increase due primarily acquisition welltech eastern march 26 1996 increased demand oilfield services 15 oil natural gas exploration production expenses related oil gas activities increased 593000 78 757000 year ended june 30 1995 1350000 year ended june 30 1996 increase primarily result increased production oil natural gas several wells drilled fiscal 1996 april 1996 purchase 69 million oil gas properties oil natural gas well drilling clint hurt drilling acquired march 1995 comparable numbers prior year therefore available expenses year ended june 30 1996 5030000 depreciation depletion expense depreciation depletion amortization expense increased 1963000 72 2738000 fiscal 1995 4701000 fiscal 1996 increase primarily due oilfield service depreciation expense resulted increase oilfield service capital expenditures 1996 period versus prior period acquisition welltech clint hurt addition depletion expense increased period due increase production oil natural gas general administrative expenses general administrative expenses increased 2256000 52 4352000 year ended june 30 1995 6608000 year ended june 30 1996 increase primarily attributable acquisition contract drilling assets subsequent inclusion general administrative expenses related contract drilling operations acquisition welltech eastern interest expense interest expense increased 999000 68 1478000 fiscal 1995 2477000 fiscal 1996 increase primarily result acquisitions addition certain oil gas properties financed proceeds borrowings income taxes income tax expense fiscal 1996 increased 738000 64 1150000 fiscal 1995 1888000 fiscal 1996 increase primarily due increase operating income however company required remit significant amount 1888000 total federal income taxes fiscal year 1996 availability net operating loss carryforwards accelerated depreciation drilling tax credits cash flow net cash provided operating activities increased 3863000 119 3258000 fiscal 1995 7121000 fiscal 1996 increase attributable primarily increases net income net cash used investing activities increased 6397000 89 7154000 fiscal 1995 13551000 fiscal 1996 increase primarily result increased capital expenditures oil gas properties costs associated acquisition welltech increase partially offset decrease oilfield service capital expenditures 16 net cash provided financing activities increased 5368000 134 3998000 fiscal 1995 9366000 fiscal 1996 increase primarily result increased principal payments fiscal 1996 increase principal payments somewhat offset increase proceeds longterm debt fiscal 1996 result purchase oil gas properties odessa exploration acquisition welltech liquidity capital resources companys cash equivalents increased 375 million year ended june 30 1997 42 million june 30 1996 417 million june 30 1997 increase primarily result proceeds bank credit agreement company projected 20 million oilfield service capital expenditures fiscal 1998 compared 151 million 52 million fiscal 1997 1996 respectively odessa exploration projected outlays approximately 10 million development costs fiscal 1998 compared 82 million 98 million fiscal 1997 1996 respectively clint hurt drilling forecast approximately 2 million oil gas drilling capital expenditures fiscal 1998 primarily improvements existing equipment machinery compared 15 million fiscal 1997 598000 fiscal 1996 company expects finance capital expenditures development costs using cash flows operations available credit company believes cash flows extent required borrowings bank credit agreement sufficient fund expenditures debt june 1997 company entered credit agreement bank credit agreement pnc bank na pnc administrative agent norwest bank texas na collateral agent lehman commercial paper inc advisor arranger syndication agent lenders named therein pursuant lenders agreed make available compaany fiveyear revolving credit facilty amount 135 million sevenyear term loan facility amount 120 million 10 million letters credit may issued pursuant bank credit agreement amount letters credit outstanding time reduces amount revolving credit loans may outstanding revolving credit loans incurred pursuant bank credit agreement bear interest companys option pncs base rate plus 100 libor plus 225 term loans bear interest companys option pncs base rate plus 175 libor plus 275 september 30 1997 margin applicable revolving credit loans fluctuate time 025 125 respect base rate loans 150 250 libor based loans fluctuations based companys ratio consolidated total debt net cash excess 5 million pro forma calculation consolidated earnings interest expense taxes depreciation depletion amortization company used proceeds bank credit agreement repay existing debt ii make additional acquisitions capital expenditures iii provide working capital longterm debt repaid proceeds bank credit agreement june 1997 included debt cit groupcredit finance inc approximately 543 million bank debt associated odessa exploration previously norwest bank texas na approximately 21 million 17 impact sfas 121 july 1 1996 company adopted provisions statement financial accounting standards 121 accounting impairment longlived assets longlived assets disposed sfas 121 consequently company reviews longlived assets held used including oil gas properties accounted successful efforts method accounting whenever events circumstances indicate carrying value assets may recoverable longlived assets disposed accounted lower carrying amount fair value less cost sell management committed plan dispose assets companies including successful efforts oil gas companies required adopt sfas 121 fiscal years beginning december 15 1995 order determine whether impairment occurred company estimated expected future cash flows income producing equipment oil gas properties compared future cash flows carrying amount asset determine carrying amount recoverable based process writedown carrying amount companys property necessary june 30 1997 impact recently issued accounting standards financial accounting standards board recently issued following accounting standards adopted company future statement financial accounting standards 128 sfas 128 earnings per share effective periods ending december 15 1997 fas 128 replaces presentation primary earnings per share eps presentation basic eps excludes dilution computed dividing income available common shareholders weightedaverage number common shares outstanding period sfas 128 also requires dual presentation basic eps diluted eps face income statement requires reconciliation numerators denominators basic eps diluted epsthe company adopt sfas 128 quarter ended december 31 1997 statement financial accounting standards 130 sfas 130 reporting comprehensive income effective fiscal years beginning december 15 1997 reclassification financial statements earlier periods provided comparative purposes required company adopt sfas 130 fiscal year ended june 30 1999 statement financial accounting standards 131 sfas 131 disclosures segments enterprise related information effective financial statements periods beginning december 15 1997 sfas 131 need applied interim financial statements initial year application however comparative information interim periods initial year application reported financial statements interim periods second year application company adopt sfas 131 fiscal year ended june 30 1999 management believes adoption sfas 128 sfas 130 sfas 131 material effect financial position results operations company impact inflation operations management opinion inflation significant impact companys business 18 item 8item 7 managements discussion analysis results operations financial condition special note certain statements set forth caption constitute forwardlooking statements within meaning reform act see special note regarding forwardlooking statements additional factors relating statements following discussion provides information assist understanding companys financial condition results operations read conjunction consolidated financial statements related notes appearing elsewhere report results operations fiscal year ended june 30 1999 versus fiscal year ended june 30 1998 companys results operations year ended june 30 1999 reflect impact significant unprecedented decline demand companys equipment services companys lines business experienced december 1998 march 1999 company believes decline demand equipment services fiscal 1999 due solely adverse impact customers capital spending caused decline oil prices twelveyear low 1100 per barrel december 1998 lesser extent significant decline natural gas prices see part iitem 1 major developments fiscal 1999industry downturn companys response recent recovery near beginning decline first four months fiscal 1999 company completed seven acquisitions positive impact fiscal 1999 acquisitions well impact full 12 months prior fiscal years acquisitions companys revenues compensated negative revenue impact decline business acquisitions could compensate could partially offset companys decline net income see note 3 consolidated financial statementsbusiness property acquisitions company revenues year ended june 30 1999 increased 68523000 16 420046000 fiscal 1998 488569000 fiscal 1999 net income fiscal 1999 decreased 77433000 positive 24175000 fiscal 1998 net loss 53258000 fiscal 1999 increase revenues primarily due well servicing contract drilling acquisitions completed latter portion fiscal 1998 early portion fiscal 1999 partially offset significant decline equipment utilization lesser extent pricing oilfield services throughout fiscal 1999 decrease net income due decline equipment utilization lesser extent pricing oilfield services fiscal 1999 existence high level fixed costs expenses including depreciation depletion amortization general administrative interest addition fiscal 1999 included charges bad debt expense debt issuance costs restructuring far greater charges taken fiscal 1998 operating revenues well servicing well servicing revenues year ended june 30 1999 increased 83470000 22 374845000 fiscal 1998 458315000 fiscal 1999 increase revenues primarily due acquisitions completed latter portion fiscal 1998 early portion fiscal 1999 partially offset significant decline equipment utilization lesser extent pricing oilfield services throughout fiscal 1999 contract drilling revenues contract drilling activities year ended june 30 1999 decreased 12388000 35 35095000 fiscal 1998 22707000 fiscal 1999 decrease revenues primarily due significant decline equipment utilization lesser extent pricing oilfield services throughout fiscal 1999 partially offset acquisitions completed latter portion fiscal 1998 early portion fiscal 1999 oil natural gas production revenues oil natural gas production activities year ended june 30 1999 decreased 569000 8 7030000 fiscal 1998 6461000 fiscal 1999 decrease revenues primarily due 21 decrease price oil gas received barrel oil equivalent boe basis fiscal 1999 compared fiscal 1998 partially offset 16 increase fiscal 1998 fiscal 1999 volume oil gas produced boe basis operating expenses well servicing well servicing expenses year ended june 30 1999 increased 82312000 32 259495000 fiscal 1998 341807000 fiscal 1999 increase primarily due acquisitions completed latter portion fiscal 1998 early portion fiscal 1999 partially offset significant decline equipment utilization lesser extent pricing oilfield services throughout fiscal 1999 well servicing expenses percentage well servicing revenue increased 69 fiscal 1998 75 fiscal 1999 increase due shift revenue mix higher margin higher priced well services lower margin lower priced well services reduced pricing well services lag reducing costs response declines utilization revenues contract drilling expenses related contract drilling activities year ended june 30 1999 decreased 3007000 11 26473000 fiscal 1998 23466000 fiscal 1999 decrease primarily due significant decline equipment utilization lesser extent pricing oilfield services throughout fiscal 1999 partially offset acquisitions completed latter portion fiscal 1998 early portion fiscal 1999 contract drilling expenses percentage contract drilling revenues increased 75 fiscal 1998 103 fiscal 1999 increase due reduced pricing contract drilling lag reducing costs response declines utilization revenues oil natural gas production expenses related oil natural gas production activities year ended june 30 1999 decreased 76000 3 2983000 fiscal 1998 2907000 fiscal 1999 oil natural gas production costs decreased 655 per boe fiscal 1998 550 per boe fiscal 1999 decrease per boe primarily due increase gas production compared oil production prior year resulting acquisition natural gas properties latter portion fiscal 1998 development drilling natural gas wells fiscal 1998 early portion fiscal 1999 depreciation depletion amortization expense companys depreciation depletion amortization expense year ended june 30 1999 increased 31073000 100 31001000 fiscal 1998 62074000 fiscal 1999 increase primarily due increase oilfield service depreciation resulting well servicing contract drilling acquisitions completed latter portion fiscal 1998 early portion fiscal 1999 general administrative expenses companys general administrative expenses year ended june 30 1999 increased 14121000 36 38987000 fiscal 1998 53108000 fiscal 1999 increase primarily due well servicing contract drilling acquisitions completed latter portion fiscal 1998 early portion fiscal 1999 interest expense companys interest expense year ended june 30 1999 increased 45925000 214 21476000 fiscal 1998 67401000 fiscal 1999 increase primarily due additional debt incurred connection well servicing contract drilling acquisitions completed latter portion fiscal 1998 early portion fiscal 1999 lesser extent higher interest rates amortization additional debt issuance costs see note 5 consolidated financial statements long term debt bad debt expense companys bad debt expense year ended june 30 1999 increased 5102000 618 826000 fiscal 1998 5928000 fiscal 1999 increase primarily due significant decline commodity prices corresponding deterioration market conditions fiscal 1999 causing small number companys customers become insolvent debt issuance costs fiscal 1999 company recorded expense 6307000 represented writeoff debt issuance costs debt issuance costs associated companys bridge loan subsequently repaid using proceeds companys private offering 14 senior subordinated notes restructuring charge response industry downturn caused historically low oil gas prices resulting slowdown business december 7 1998 company announced companywide restructuring plan reduce operating costs beyond achieved companys consolidation efforts plan involved reduction size management onsite work force salary reductions averaging 21 senior management combination previously separate operating divisions elimination redundant overhead facilities restructuring plan resulted pretax charges earnings approximately 67 million second quarter ending december 31 1998 15 million third quarter ending march 31 1999 however due increase oil gas prices beginning companys fourth fiscal quarter company amended restructuring plan decrease number planned employee terminations increased demand companys services made terminations unnecessary would managements opinion restricted companys ability provide services customers consequently company utilize approximately 37 million pretax charges essentially unutilized portion restructuring charge reversed fourth quarter ending june 30 1999 resulting total pretax charge fiscal year ended june 30 1999 approximately 45 million charges include severance payments termination benefits 97 employees lease commitments related closed facilities environmental studies performed closed leased yard locations income taxes companys income tax expense year ended june 30 1999 decreased 40305000 expense 14630000 fiscal 1998 benefit 25675000 fiscal 1999 decrease income taxes due decrease pretax income companys effective tax rate fiscal 1999 1998 325 377 respectively fiscal 1999 effective tax benefit rate different statutory rate 35 disallowance certain goodwill amortization nondeductible expenses state local taxes company expect required remit federal income taxes next fiscal years availability net operating loss carryforwards fiscal 1999 previous years cash flow companys net cash provided operating activities year ended june 30 1999 decreased 54352000 positive 40925000 fiscal 1998 negative 13427000 fiscal 1999 decrease primarily due decline equipment utilization lesser extent pricing oilfield services throughout fiscal 1999 existence high level fixed costs including general administrative expenses interest companys net cash used investing activities year ended june 30 1999 decreased 11685000 4 306339000 fiscal 1998 294654000 fiscal 1999 decrease primarily due decreased capital expenditures resulting reduced equipment utilization companys net cash provided financing activities year ended june 30 1999 increased 57319000 23 248975000 fiscal 1998 306294000 fiscal 1999 increase primarily result proceeds borrowings equity offering fiscal year ended june 30 1998 versus fiscal year ended june 30 1997 company revenues year ended june 30 1998 increased 257621000 159 162425000 fiscal 1997 420046000 fiscal 1998 net income fiscal 1998 increased 15077000 166 9098000 fiscal 1997 24175000 fiscal 1998 increase primarily due well servicing contract drilling acquisitions throughout fiscal 1998 greater demand companys well servicing contract drilling equipment services third quarter fiscal 1998 operating income well servicing well servicing revenues year ended june 30 1998 increased 230460000 160 144385000 fiscal 1997 374845000 fiscal 1998 increase primarily due acquisitions throughout fiscal 1998 greater demand companys well servicing drilling equipment services third quarter fiscal 1998 contract drilling revenues contract drilling activities year ended june 30 1998 increased 25139000 253 9956000 fiscal 1997 35095000 fiscal 1998 increase primarily due acquisitions throughout fiscal 1998 oil natural gas production revenues oil natural gas production activities year ended june 30 1998 increased 55000 1 6975000 fiscal 1997 7030000 fiscal 1998 increase revenues primarily due 26 increase fiscal 1997 fiscal 1998 volume oil gas produced boe basis offset 20 decrease average price per boe received fiscal 1998 compared fiscal 1997 operating expenses well servicing well servicing expenses year ended june 30 1998 increased 159129000 159 100366000 fiscal 1997 259495000 fiscal 1998 increase primarily due acquisitions made throughout fiscal 1998 greater demand companys well servicing drilling equipment services third quarter fiscal 1998 contract drilling expenses related contract drilling activities year ended june 30 1998 increased 18318000 225 8155000 fiscal 1997 26473000 fiscal 1998 increase primarily due acquisitions throughout fiscal 1998 oil natural gas production expenses related oil natural gas production activities year ended june 30 1998 increased 254000 9 2729000 fiscal 1997 2983000 fiscal 1998 increase primarily due increase total number producing oil gas wells fiscal 1997 fiscal 1998 depreciation depletion amortization expense companys depreciation depletion amortization expense year ended june 30 1998 increased 19925000 180 11076000 fiscal 1997 31001000 fiscal 1998 increase primarily due increase oilfield service depreciation resulting well servicing contract drilling acquisitions completed throughout fiscal 1998 general administrative expenses companys general administrative expenses year ended june 30 1998 increased 21540000 123 17447000 fiscal 1997 38987000 fiscal 1998 increase primarily due well servicing contract drilling acquisitions throughout fiscal 1998 interest expense companys interest expense year ended june 30 1998 increased 13597000 173 7879000 fiscal 1997 21476000 fiscal 1998 increase primarily result additional debt incurred connection well servicing contract drilling acquisitions completed throughout fiscal 1998 bad debt expense companys bad debt expense year ended june 30 1998 increased 728000 743 98000 fiscal 1997 826000 fiscal 1998 increase primarily due increase companys customer base resulting acquisitions completed fiscal 1998 latter portion fiscal 1997 income taxes companys income tax expense increased 9057000 163 5573000 income tax expense fiscal 1997 14630000 fiscal 1998 increase income taxes primarily due increase operating income however company required remit full amount 14630000 total federal income taxes fiscal year 1998 availability net operating loss carryforwards accelerated depreciation cash flow companys net cash provided operating activities year ended june 30 1998 increased 40082000 843000 fiscal 1997 40925000 fiscal 1998 increase primarily due well servicing contract drilling acquisitions made fiscal 1998 latter portion fiscal 1997 companys net cash used investing activities year ended june 30 1998 increased 225590000 279 80749000 fiscal 1997 306339000 fiscal 1998 increase primarily due increased capital expenditures well servicing operations well servicing contract drilling acquisitions companys net cash provided financing activities year ended june 30 1998 increased 131576000 112 117399000 fiscal 1997 248975000 fiscal 1998 increase primarily due proceeds longterm commercial paper borrowings companys existing lineofcredit fiscal 1998 liquidity capital resources companys cash equivalents decreased 18 million year ended june 30 1999 253 million june 30 1998 235 million june 30 1999 assuming significant improvements industry conditions company projects approximately 32 million oilfield service capital expenditures fiscal 2000 compared 313 million 514 million fiscal 1999 1998 respectively odessa exploration projected capital outlays development costs fiscal 2000 compared 03 million 78 million fiscal 1999 1998 respectively company expects finance capital expenditures using net cash provided operating activities available credit company believes cash flow extent required borrowings credit agreement sufficient fund expenditures longterm debt capital lease obligations miscellaneous notes payable companys longterm debt comprised senior credit facility ii series 14 senior subordinated notes due 2009 iii series 5 convertible subordinated notes due 2004 iv series 7 convertible subordinated debentures due 2003 v series 9 38 senior notes due 2007 senior credit facility connection acquisition dawson company entered 550000000 second amended restated credit agreement dated june 6 1997 amended restated september 14 1998 among company pnc bank national association administrative agent norwest bank texas na collateral agent pnc capital markets inc arranger lenders named time parties thereto subsequently amended credit agreement november 1998 july 1999 credit agreement amended reduce maximum amount credit available thereunder 500 million ii change interest rates payable thereunder iii ease required financial covenant levels delete certain financial covenants add others iv add requirement company achieve certain minimum levels trailing 12month ebitda adjusted v tighten restrictions acquisitions vi modify amount prepaid company issues additional capital stock company excess cash flow defined company sells certain specific assets vii provide minimum levels consolidated liquidity credit agreement provides senior credit facility consisting 150 million revolving loans 150 million tranche term loans 200 million tranche b term loans addition 20 million letters credit issued credit agreement outstanding letters credit reduces borrowing availability revolving loans tranche term loans mature sixteen consecutive quarterly installments commencing december 14 1999 quarterly installment amounts equal applicable percentage particular quarter multiplied unamortized principal amount 4 installments 1 4 6 installments 5 8 7 installments 9 12 8 installments 13 16 tranche b term loans mature nineteen consecutive quarterly installments commencing december 14 1999 quarterly installment amounts equal applicable percentage particular quarter multiplied unamortized principal amount 025 installments 1 16 24 installments 17 18 48 final installment commitment make revolving loans reduced 125 million 100 million respectively september 14 2001 september 14 2002 revolving commitment terminate september 14 2003 revolving loans must paid date revolving loans tranche term loans bear interest rates based upon companys option either prime rate plus margin ranging 075 200 eurodollar rate plus margin ranging 225 350 case depending upon ratio companys total debt less cash hand 5 million companys trailing 12month ebitda adjusted tranche b term loans bear interest rates based upon companys option either prime rate plus 250 eurodollar rate plus 400 company pays commitment fees unused portion revolving loan varying rate depending upon pricing ratio 025 050 portion net proceeds companys equity offering see note 10 consolidated financial statementsstockholders equity used repay approximately 1066 million tranche term loans 222 million tranche b term loans thereby reducing principal amount outstanding june 30 1999 tranche term loans approximately 434 million principal amount outstanding june 30 1999 tranche b term loans approximately 1778 million tranche term loan prepayments tranche b term loan prepayments applied reduce mandatory repayment installments tranche b term loans respectively pro rata thereby equally reducing amortization payments without altering amortization schedule june 30 1999 approximately 89618000 outstanding revolving loans additionally company outstanding letters credit 10832000 june 30 1999 related workmans compensation insurance see note 5 consolidated financial statementslong term debt discussion senior credit facility 14 senior subordinated notes january 22 1999 pursuant rule 144a regulation securities act 1933 amended securities act company completed private placement 150000 units consisting 150000000 14 senior subordinated notes due 2009 14 senior subordinated notes 150000 warrants purchase 2032565 shares common stock exercise price 488125 per share unit warrants cash proceeds private placement net fees expenses used repay substantially remaining 1486 million principal amount plus accrued interest owed companys bridge loan facility arranged connection acquisition dawson january 15 2004 company may redeem 14 senior subordinated notes time varying redemption prices excess par plus accrued interest addition january 15 2002 company may redeem 35 aggregate principal amount senior subordinated notes proceeds certain offerings equity 114 par plus accrued interest unit warrants separated 14 senior subordinated notes become exercisable january 25 2000 date issuance value unit warrants estimated 7434000 classified discount 14 senior subordinated notes companys consolidated balance sheet discount amortized interest expense term 14 senior subordinated notes 14 senior subordinated notes mature unit warrants expire january 15 2009 14 senior subordinated notes subordinate companys senior indebtedness defined indenture 14 senior subordinated notes issued includes borrowings credit agreement dawson 9 38 senior notes june 30 1999 150000000 principal amount 14 senior subordinated notes remained outstanding 14 senior subordinated notes pay interest semiannually january 15 july 15 year beginning july 15 1999 5 convertible subordinated notes september 25 1997 company completed initial closing private placement 200 million 5 convertible subordinated notes due 2004 5 convertible subordinated notes october 7 1997 company completed second closing private placement additional 16 million 5 convertible subordinated notes pursuant exercise remaining portion overallotment option granted initial purchasers 5 convertible subordinated notes placements made private offerings pursuant rule 144a regulation securities act 5 convertible subordinated notes subordinate companys senior indebtedness defined indenture 5 convertible subordinated notes issued includes borrowings credit agreement 14 senior subordinated notes dawson 9 38 senior notes 5 convertible subordinated notes convertible holders option shares companys common stock conversion price 3850 per share subject certain adjustments 5 convertible subordinated notes redeemable companys option september 15 2000 whole part together accrued unpaid interest initial redemption price 10286 year beginning september 15 2000 declines ratably thereafter annual basis june 30 1999 216000000 principal amount 5 convertible subordinated notes remained outstanding interest 5 convertible subordinated notes payable march 15 september 15 interest approximately 54 million paid march 15 1999 7 convertible subordinated debentures july 1996 company completed 52000000 private placement 7 convertible subordinated debentures due 2003 7 convertible subordinated debentures pursuant rule 144a securities act 7 convertible subordinated debentures subordinate companys senior indebtedness defined indenture 7 convertible subordinated debentures issued includes borrowings current credit agreement 14 senior subordinated notes dawson 9 38 senior notes debentures convertible time prior maturity holders option shares companys common stock conversion price 975 per share subject certain adjustments addition holders converted prior july 1 1999 entitled receive payment cash companys common stock companys option generally equal 50 interest otherwise payable date conversion july 1 1999 7 convertible subordinated debentures redeemable option company july 15 1999 redemption price 104 decreasing 1 per year anniversary date thereafter fiscal 1998 47400000 principal amount debentures converted 4861538 shares companys common stock additional 165423 shares common stock issued representing 50 interest otherwise payable date conversion july 1 1999 additional 35408 shares common stock issued inducement convert additional 165423 shares common stock representing 50 interest otherwise payable date conversion july 1 1999 included equity fair value additional 35408 shares common stock issued inducement convert 710186 recorded interest expense consolidated statement operations addition proportional amount unamortized debt issuance costs associated converted 7 convertible subordinated debentures charged additional paidin capital time conversion june 30 1999 4600000 principal amount 7 convertible subordinated debentures remained outstanding interest 7 convertible subordinated debentures payable january 1 july 1 year interest approximately 161000 paid july 1 1998 january 1 1999 dawson 9 38 senior notes result dawson acquisition company subsidiaries us trust company texas na trustee us trust entered supplemental indenture dated september 21 1998 supplemental indenture pursuant company assumed obligations dawson indenture dated february 20 1997 dawson indenture dawson us trust companys subsidiaries guaranteed obligations senior notes due 2007 dawson 9 38 senior notes issued pursuant dawson indenture equally ratably secured obligations credit agreement november 17 1998 company completed cash tender offer purchase full 140000000 outstanding principal amount dawson 9 38 senior notes 101 aggregate principal amount notes using borrowings credit agreement tender offer 138594000 principal amount dawson 9 38 senior notes redeemed premium 1386000 paid addition accrued interest 4078000 paid redemption june 30 1999 1406000 principal amount dawson 9 38 senior notes remained outstanding interest dawson 9 38 senior notes payable february 1 august 1 year interest approximately 65906 paid february 1 1999 impact recently issued accounting standards financial accounting standards board recently issued following accounting standards adopted company future june 1998 fasb issued sfas 133 accounting derivative instruments hedging activities amended effective fiscal years beginning june 15 2000 statement establishes accounting reporting standards derivative instruments hedging activities company currently evaluating effect statement companys financial statements company adopt statement later july 1 2000 impact inflation operations management opinion inflation significant impact companys business year 2000 issue many older computer programs written using twodigit year instead fourdigit year result computer programs may unable process datesensitive information year 2000 beyond situation frequently referred year 2000 y2k issue could cause temporary disruption ordinary course business moreover result acquisitions completed company past three years company simultaneously utilized multiple management information systems connection business operations financial reporting process result foregoing factors company made assessment year 2000 issues early calendar year 1998 time determined many management information systems might adversely impacted arrival year 2000 accordingly operational efficiency prevent adverse impacts may result arrival year 2000 july 1998 company commenced implementation new integrated management information system along updated hardware replaced systems previously utilized company implementation new integrated management information system certified vendor year 2000 compliant substantially complete new management information system cover companys argentine operations company currently implementing separate management information system argentine operations uses software virtually identical companys domestic management information system software company expects place late calendar year 1999 june 30 1999 company capitalized approximately 2534000 new management information system inventory assessment modification testing smaller less critical financial operational systems substantially completed addition assessment systems embedded companys buildings equipment infrastructures also completed date discovery significant noncompliant embedded system company communicated suppliers customers financial institutions considers material third parties evaluating risks related possible failure third parties year 2000 compliant effect companys results operations arising failure third parties year 2000 compliant reasonably estimable time risk assessment contingency plans related parties expected complete end november 1999 contingency plans mitigate companys risks year 2000related interruptions developed expected complete end november 1999 although company believes reasonably likely worst case scenario materially impacted third party noncompliance assurances failure company third parties fully implement appropriate year 2000 plans material adverse effect companys results operations adverse effects company could include among things business disruptions eg computer downtime reversion manual accounting records billings payments collections increased costs loss revenues item 7aitem 7 managements discussion analysis results operations financial condition special note certain statements set forth caption constitute forwardlooking statements within meaning reform act see special note regarding forwardlooking statements additional factors relating statements following discussion provides information assist understanding companys financial condition results operations read conjunction consolidated financial statements related notes appearing elsewhere report please note certain reclassifications made fiscal 1999 1998 financial data presented conform fiscal 2000 presentation reclassifications consist primarily reclassifying drilling revenues expenses revenues expenses limited drilling operations conducted certain companys well servicing divisions previously included well servicing revenues expenses order report results drilling operations separately results operations fiscal year ended june 30 2000 versus fiscal year ended june 30 1999 companys results operations year ended june 30 2000 reflect impact recent industry recovery resulting increased commodity prices turn caused increased demand companys equipment services fiscal 2000 see part iitem 1 major developments fiscal 2000industry recovery positive impact increased demand companys operating results partially offset increased operating expenses incurred result increase companys business activity company revenues year ended june 30 2000 increased 145915000 297 637732000 491817000 fiscal 1999 net income fiscal 2000 increased 34299000 net loss 18959000 net loss 53258000 fiscal 1999 increase revenues due improved operating conditions higher rig hours full year effect acquisitions completed early portion fiscal 1999 lesser extent higher pricing decrease net loss result improved operating conditions higher pricing cost reduction initiatives addition fiscal 1999 included nonrecurring charges debt issuance costs restructuring initiatives well higher bad debt expense operating revenues well servicing well servicing revenues year ended june 30 2000 increased 125835000 29 559492000 433657000 fiscal 1999 increase due increased demand companys well servicing equipment services full year effect acquisitions completed early portion fiscal 1999 lesser extent higher pricing contract drilling contract drilling revenues year ended june 30 2000 increased 17815000 352 68428000 50613000 fiscal 1999 increase due increased demand companys contract drilling equipment services full year effect acquisition completed early portion fiscal 1999 lesser extent higher pricing oil natural gas production oil natural gas production revenues year ended june 30 2000 increased 2930000 453 9391000 6461000 fiscal 1999 increase due 44 increase price oil gas received barrel oil equivalent boe basis fiscal 2000 compared fiscal 1999 partially offset 2 decrease volume oil gas produced boe basis operating expenses well servicing well servicing expenses year ended june 30 2000 increased 74975000 231 399940000 324965000 fiscal 1999 increase expenses due higher utilization companys well servicing equipment higher labor costs overall increase companys well servicing business despite increased costs well servicing expenses percent well servicing revenues decreased 749 fiscal 1999 715 fiscal 2000 margin improvement due improved operating efficiencies effects higher pricing contract drilling contract drilling expenses year ended june 30 2000 increased 14743000 338 58299000 43556000 fiscal 1999 increase due higher utilization companys contract drilling equipment higher labor costs overall increase companys contract drilling business despite increased costs contract drilling expenses percentage contract drilling revenues decreased 861 fiscal 1999 852 fiscal 2000 margin improvement due improved operating efficiencies effects higher pricing oil natural gas production oil natural gas production expenses year ended june 30 2000 increased 1240000 427 4147000 2907000 fiscal 1999 increase due higher production costs partially offset lower production oil natural gas production costs increased 550 per boe fiscal 1999 660 per boe fiscal 2000 increase cost per boe primarily due increased costs incurred bringing previously dormant wells back production depreciation depletion amortization expense companys depreciation depletion amortization expense year ended june 30 2000 increased 8898000 143 70972000 62074000 fiscal 1999 increase due higher capital expenditures incurred fiscal 2000 company refurbished equipment increased utilization contract drilling equipment depreciates based utilization general administrative expenses companys general administrative expenses year ended june 30 2000 increased 5664000 107 53108000 58772000 fiscal 2000 increase due higher administrative costs necessitated growth companys operations result fiscal 1999 acquisitions improved industry conditions despite increased costs general administrative expenses percentage total revenues declined 108 fiscal 1999 92 fiscal 2000 interest expense companys interest expense year ended june 30 2000 increased 4529000 67 71930000 67401000 fiscal 1999 increase primarily due full year effect debt incurred connection acquisitions completed early portion fiscal 1999 lesser extent higher interest rates fiscal 2000 partially offset impact longterm debt reduction fiscal 2000 bad debt expense companys bad debt expense year ended june 30 2000 decreased 4280000 722 1648000 5928000 fiscal 1999 decrease primarily due improved industry conditions keys customers lesser extent centralization companys internal credit approval process extraordinary gain fourth quarter fiscal 2000 company repurchased 10190000 5 convertible subordinated notes resulted aftertax gain 1611000 income taxes companys income tax benefit year ended june 30 2000 decreased 18269000 7406000 25675000 fiscal 1999 decrease income tax benefit due decrease pretax loss companys effective tax benefit rate fiscal 2000 1999 265 325 respectively fiscal 2000 effective tax benefit rate different statutory rate 35 disallowance certain goodwill amortization nondeductible expenses decrease fiscal 2000 effective tax benefit rate due increase amount disallowed items primarily result full year effect goodwill amortization acquisitions completed early portion fiscal 1999 company expect required remit significant federal income taxes next fiscal years availability net operating loss carryforwards fiscal 2000 previous years cash flow companys net cash provided operating activities year ended june 30 2000 increased 50478000 positive 37051000 negative 13427000 fiscal 1999 increase due higher revenues resulting increased demand companys equipment services full year effect acquisitions completed early portion fiscal 1999 lesser extent higher pricing partially offset higher operating general administrative expenses resulting increased business activity companys net cash used investing activities year ended june 30 2000 decreased 256888000 872 37766000 294654000 fiscal 1999 decrease due acquisitions occurred fiscal 2000 partially offset higher capital expenditures companys net cash provided financing activities year ended june 30 2000 decreased 219184000 716 87110000 306929000 fiscal 1999 decrease primarily result significantly decreased borrowings fiscal 2000 lesser extent repayment longterm debt partially offset proceeds equity offering production payment fiscal year ended june 30 1999 versus fiscal year ended june 30 1998 companys results operations year ended june 30 1999 reflect impact significant unprecedented decline demand companys equipment services companys lines business experienced december 1998 march 1999 company believes decline demand equipment services fiscal 1999 due solely adverse impact customers capital spending caused decline oil prices twelveyear low 1100 per barrel december 1998 lesser extent significant decline natural gas prices see part iitem 1 major developments fiscal 2000industry recovery near beginning decline first four months fiscal 1999 company completed seven acquisitions positive impact fiscal 1999 acquisitions well impact full 12 months prior fiscal years acquisitions companys revenues compensated negative revenue impact decline business acquisitions could compensate could partially offset companys decline net income see note 3 consolidated financial statementsbusiness property acquisitions company revenues year ended june 30 1999 increased 67274000 158 491817000 fiscal 1999 424543000 fiscal 1998 net income fiscal 1999 decreased 77433000 net loss 53258000 fiscal 1999 positive 24175000 fiscal 1998 increase revenues primarily due well servicing contract drilling acquisitions completed latter portion fiscal 1998 early portion fiscal 1999 partially offset significant decline equipment utilization lesser extent pricing oilfield services throughout fiscal 1999 decrease net income due decline equipment utilization lesser extent pricing oilfield services fiscal 1999 existence high level fixed costs expenses including depreciation depletion amortization general administrative interest addition fiscal 1999 included charges bad debt expense debt issuance costs restructuring far greater charges taken fiscal 1998 operating revenues well servicing well servicing revenues year ended june 30 1999 increased 77419000 217 433657000 fiscal 1999 356238000 fiscal 1998 increase revenues primarily due acquisitions completed latter portion fiscal 1998 early portion fiscal 1999 partially offset significant decline equipment utilization lesser extent pricing oilfield services throughout fiscal 1999 contract drilling revenues contract drilling activities year ended june 30 1999 decreased 7586000 13 50613000 fiscal 1999 58199000 fiscal 1998 decrease revenues primarily due significant decline equipment utilization lesser extent pricing oilfield services throughout fiscal 1999 partially offset acquisitions completed latter portion fiscal 1998 early portion fiscal 1999 oil natural gas production revenues oil natural gas production activities year ended june 30 1999 decreased 569000 8 6461000 fiscal 1999 7030000 fiscal 1998 decrease revenues primarily due 21 decrease price oil gas received barrel oil equivalent boe basis fiscal 1999 compared fiscal 1998 partially offset 16 increase fiscal 1998 fiscal 1999 volume oil gas produced boe basis operating expenses well servicing well servicing expenses year ended june 30 1999 increased 77360000 312 324965000 fiscal 1999 247605000 fiscal 1998 increase primarily due acquisitions completed latter portion fiscal 1998 early portion fiscal 1999 partially offset significant decline equipment utilization lesser extent pricing oilfield services throughout fiscal 1999 well servicing expenses percentage well servicing revenue increased 75 fiscal 1999 695 fiscal 1998 increase due shift revenue mix higher margin higher priced well services lower margin lower priced well services reduced pricing well services lag reducing costs response declines utilization revenues contract drilling expenses related contract drilling activities year ended june 30 1999 increased 696000 16 42860000 fiscal 1998 43556000 fiscal 1999 increase primarily due acquisitions completed latter portion fiscal 1998 early portion fiscal 1999 offset decline equipment utilization lesser extent pricing oilfield services throughout fiscal 1999 contract drilling expenses percentage contract drilling revenues increased 861 fiscal 1999 736 fiscal 1998 increase due reduced pricing contract drilling lag reducing costs response declines utilization revenues oil natural gas production expenses related oil natural gas production activities year ended june 30 1999 decreased 76000 3 2907000 fiscal 1999 2983000 fiscal 1998 oil natural gas production costs decreased 550 per boe fiscal 1999 655 per boe fiscal 1998 decrease per boe primarily due increase gas production compared oil production prior year resulting acquisition natural gas properties latter portion fiscal 1998 development drilling natural gas wells fiscal 1998 early portion fiscal 1999 depreciation depletion amortization expense companys depreciation depletion amortization expense year ended june 30 1999 increased 31073000 100 62074000 fiscal 1999 31001000 fiscal 1998 increase primarily due increase oilfield service depreciation resulting well servicing contract drilling acquisitions completed latter portion fiscal 1998 early portion fiscal 1999 general administrative expenses companys general administrative expenses year ended june 30 1999 increased 14121000 36 53108000 fiscal 1999 38987000 fiscal 1998 increase primarily due well servicing contract drilling acquisitions completed latter portion fiscal 1998 early portion fiscal 1999 interest expense companys interest expense year ended june 30 1999 increased 45925000 214 67401000 fiscal 1999 21476000 fiscal 1998 increase primarily due additional debt incurred connection well servicing contract drilling acquisitions completed latter portion fiscal 1998 early portion fiscal 1999 lesser extent higher interest rates amortization additional debt issuance costs see note 5 consolidated financial statementslong term debt bad debt expense companys bad debt expense year ended june 30 1999 increased 5102000 618 5928000 fiscal 1999 826000 fiscal 1998 increase primarily due significant decline commodity prices corresponding deterioration market conditions fiscal 1999 causing small number companys customers become insolvent debt issuance costs fiscal 1999 company recorded expense 6307000 represented writeoff debt issuance costs debt issuance costs associated companys bridge loan subsequently repaid using proceeds companys private offering 14 senior subordinated notes restructuring charge response industry downturn caused historically low oil gas prices resulting slowdown business december 7 1998 company announced companywide restructuring plan reduce operating costs beyond achieved companys consolidation efforts plan involved reduction size management onsite work force salary reductions averaging 21 senior management combination previously separate operating divisions elimination redundant overhead facilities restructuring plan resulted pretax charges earnings approximately 67 million second quarter ending december 31 1998 15 million third quarter ending march 31 1999 however due increase oil gas prices beginning companys fourth fiscal quarter company amended restructuring plan decrease number planned employee terminations increased demand companys services made terminations unnecessary would managements opinion restricted companys ability provide services customers consequently company utilize approximately 37 million pretax charges essentially unutilized portion restructuring charge reversed fourth quarter ending june 30 1999 resulting total pretax charge fiscal year ended june 30 1999 approximately 45 million charges include severance payments termination benefits 97 employees lease commitments related closed facilities environmental studies performed closed leased yard locations income taxes companys income tax expense year ended june 30 1999 decreased 40305000 benefit 25675000 fiscal 1999 expense 14630000 fiscal 1998 decrease income taxes due decrease pretax income companys effective tax benefit rate fiscal 1999 companys effective tax rate fiscal 1998 325 377 respectively fiscal 1999 effective tax benefit rate different statutory rate 35 disallowance certain goodwill amortization nondeductible expenses state local taxes company expect required remit federal income taxes next fiscal years availability net operating loss carry forwards fiscal 1999 previous years cash flow companys net cash provided operating activities year ended june 30 1999 decreased 54352000 negative 13427000 fiscal 1999 positive 40925000 fiscal 1998 decrease primarily due decline equipment utilization lesser extent pricing oilfield services throughout fiscal 1999 existence high level fixed costs including general administrative expenses interest companys net cash used investing activities year ended june 30 1999 decreased 11685000 4 294654000 fiscal 1999 306339000 fiscal 1998 decrease primarily due decreased capital expenditures resulting reduced equipment utilization companys net cash provided financing activities year ended june 30 1999 increased 57319000 23 306294000 fiscal 1999 248975000 fiscal 1998 increase primarily result proceeds borrowings equity offering liquidity capital resources companys cash equivalents increased 864 million 368 1099 million june 30 2000 235 million june 30 1999 company projects approximately 45 million capital expenditures fiscal 2001 compared 38 million 313 million fiscal 2000 1999 respectively company expects finance capital expenditures using net cash provided operating activities available credit company believes cash flow extent required borrowings credit agreement sufficient fund expenditures longterm debt capital lease obligations miscellaneous notes payable june 30 2000 companys longterm debt comprised senior credit facility ii series 14 senior subordinated notes due 2009 iii series 5 convertible subordinated notes due 2004 iv series 7 convertible subordinated debentures due 2003 v series 9 38 senior notes due 2007 senior credit facility connection acquisition dawson production services inc dawson company entered 550000000 second amended restated credit agreement dated june 6 1997 amended restated september 14 1998 among company pnc bank national association administrative agent norwest bank texas na collateral agent pnc capital markets inc arranger lenders named time parties thereto subsequently amended credit agreement credit agreement provides senior credit facility consisting 150 million revolving loans 150 million tranche term loan 200 million tranche b term loan addition 20 million letters credit issued credit agreement outstanding letters credit reduces borrowing availability revolving loans tranche term loan matures sixteen consecutive quarterly installments commencing december 14 1999 quarterly installment amounts equal applicable percentage particular quarter multiplied unamortized principal amount 4 installments 14 6 installments 58 7 installments 912 8 installments 1316 tranche b term loan matures nineteen consecutive quarterly installments commencing december 14 1999 quarterly installment amounts equal applicable percentage particular quarter multiplied unamortized principal amount 025 installments 116 24 installments 1718 48 final installment commitment make revolving loans reduced 125 million 100 million september 14 2001 september 14 2002 respectively revolving commitment terminate september 14 2003 revolving loans must paid date revolving loans tranche term loan bear interest rates based upon companys option either prime rate plus margin ranging 075 200 eurodollar rate plus margin ranging 225 350 case depending upon ratio companys total debt less cash hand 5 million companys trailing 12month ebitda adjusted tranche b term loan bears interest rates based upon companys option either prime rate plus 250 eurodollar rate plus 400 company pays commitment fees unused portion revolving loan varying rate depending upon pricing ratio 025 050 fiscal 2000 company repaid approximately 222 million term loans increasing net borrowings revolver 3 million result june 30 2000 principal amount outstanding tranche term loan approximately 23 million ii tranche b term loan approximately 176 million iii revolver approximately 93 million additionally june 30 2000 company outstanding letters credit totaling approximately 15 million related workmans compensation insurance since june 30 2000 portion net proceeds equity offering see note 10 consolidated financial statementsstockholders equity used repay entire outstanding balance tranche term loan 23 million tranche b term loan reducing principal amount outstanding tranche b term loan approximately 174 million tranche b term loan prepayments applied reduce mandatory repayment installments tranche b term loan pro rata thereby equally reducing amortization payments without altering amortization schedule addition 65 million net proceeds equity offering used repay portion senior credit facility revolver reducing amount outstanding revolver immediately thereafter approximately 28 million remainder net proceeds equity offering used retire long term debt principal amount outstanding revolver since reduced 23 million september 28 2000 see note 5 consolidated financial statementslong term debt discussion senior credit facility 14 senior subordinated notes january 22 1999 pursuant rule 144a regulation securities act 1933 amended securities act company completed private placement 150000 units consisting 150000000 14 senior subordinated notes due 2009 14 senior subordinated notes 150000 warrants purchase 2032565 shares common stock exercise price 488125 per share unit warrants cash proceeds private placement net fees expenses used repay substantially remaining 1486 million principal amount plus accrued interest owed companys bridge loan facility arranged connection acquisition dawson january 15 2004 company may redeem 14 senior subordinated notes time varying redemption prices excess par plus accrued interest addition january 15 2002 company may redeem 35 aggregate principal amount senior subordinated notes proceeds certain offerings equity 114 par plus accrued interest unit warrants separated 14 senior subordinated notes became exercisable january 25 2000 date issuance value unit warrants estimated 7434000 classified discount 14 senior subordinated notes companys consolidated balance sheet discount amortized interest expense term 14 senior subordinated notes 14 senior subordinated notes mature unit warrants expire january 15 2009 14 senior subordinated notes subordinate companys senior indebtedness defined indenture 14 senior subordinated notes issued includes borrowings credit agreement dawson 9 38 senior notes june 30 2000 150000000 principal amount 14 senior subordinated notes remained outstanding 14 senior subordinated notes pay interest semiannually january 15 july 15 year interest approximately 10092000 10500000 paid july 15 1999 january 15 2000 respectively june 30 2000 52000 unit warrants exercised producing approximately 37 million proceeds company leaving 98000 unit warrants outstanding 5 convertible subordinated notes september 25 1997 company completed initial closing private placement 200 million 5 convertible subordinated notes due 2004 5 convertible subordinated notes october 7 1997 company completed second closing private placement additional 16 million 5 convertible subordinated notes pursuant exercise remaining portion overallotment option granted initial purchasers 5 convertible subordinated notes placements made private offerings pursuant rule 144a regulation securities act 5 convertible subordinated notes subordinate companys senior indebtedness defined indenture 5 convertible subordinated notes issued includes borrowings credit agreement 14 senior subordinated notes dawson 9 38 senior notes 5 convertible subordinated notes convertible holders option shares companys common stock conversion price 3850 per share subject certain adjustments 5 convertible subordinated notes redeemable companys option september 15 2000 whole part together accrued unpaid interest initial redemption price 10286 year beginning september 15 2000 declines ratably thereafter annual basis quarter ended june 30 2000 company repurchased canceled 10190000 principal amount 5 convertible subordinated notes leaving 205810000 principal amount 5 convertible subordinated notes outstanding june 30 2000 since june 30 2000 company repurchased canceled additional 10196000 principal amount 5 convertible subordinated notes leaving 195614000 outstanding september 28 2000 interest 5 convertible subordinated notes payable march 15 september 15 interest approximately 54 million paid september 15 1999 march 15 2000 7 convertible subordinated debentures july 1996 company completed 52000000 private placement 7 convertible subordinated debentures due 2003 7 convertible subordinated debentures pursuant rule 144a securities act 7 convertible subordinated debentures subordinate companys senior indebtedness defined indenture 7 convertible subordinated debentures issued includes borrowings credit agreement 14 senior subordinated notes dawson 9 38 senior notes debentures convertible time prior maturity holders option shares companys common stock conversion price 975 per share subject certain adjustments addition holders converted prior july 1 1999 entitled receive payment cash companys common stock companys option generally equal 50 interest otherwise payable date conversion july 1 1999 7 convertible subordinated debentures redeemable option company july 15 1999 redemption price 104 decreasing 1 per year anniversary date thereafter fiscal 2000 3600000 principal amount 7 convertible subordinated debentures converted 369229 shares companys common stock additional 11261 shares common stock issued representing 100 interest otherwise payable january 1 2000 july 1 2000 additional 11261 shares common stock representing 100 interest otherwise payable january 1 2000 july 1 2000 included equity addition proportional amount unamortized debt issuance costs associated converted 7 convertible subordinated debentures charged additional paidin capital time conversion june 30 2000 1000000 principal amount 7 convertible subordinated debentures remained outstanding august 31 2000 985000 principal amount 7 convertible subordinated debentures surrendered conversion holders thereof 101025 shares common stock issued september 1 2000 september 1 2000 remaining 15000 principal amount outstanding 7 convertible subordinated debentures redeemed 103 principal amount plus accrued interest leaving none outstanding september 28 2000 interest 7 convertible subordinated debentures payable january 1 july 1 year interest approximately 161000 paid july 1 1999 january 1 2000 dawson 9 38 senior notes result dawson acquisition company subsidiaries us trust company texas na trustee us trust entered supplemental indenture dated september 21 1998 supplemental indenture pursuant company assumed obligations dawson indenture dated february 20 1997 dawson indenture dawson us trust companys subsidiaries guaranteed obligations senior notes due 2007 dawson 9 38 senior notes issued pursuant dawson indenture equally ratably secured obligations credit agreement november 17 1998 company completed cash tender offer purchase full 140000000 outstanding principal amount dawson 9 38 senior notes 101 aggregate principal amount notes using borrowings credit agreement tender offer 138594000 principal amount dawson 9 38 senior notes redeemed premium 1386000 paid addition accrued interest 4078000 paid redemption june 30 1999 1406000 principal amount dawson 9 38 notes remained outstanding quarter ended june 30 2000 company repurchased 300000 principal amount dawson 9 38 senior notes leaving 1106000 principal amount dawson 9 38 senior notes outstanding june 30 2000 since june 30 2000 company repurchased additional 800000 principal amount dawson 9 38 senior notes leaving 306000 principal amount outstanding september 28 2000 interest dawson 9 38 senior notes payable february 1 august 1 year interest approximately 65906 paid august 1 1999 february 1 2000 impact recently issued accounting standards financial accounting standards board recently issued following accounting standard adopted key future june 1998 fasb issued sfas 133 accounting derivative instruments hedging activities amended effective fiscal years beginning june 15 2000 statement establishes accounting reporting standards derivative instruments hedging activities key adopt statement effective july 1 2000 oil gas collars currently place marked market income statement time documented hedges impact inflation operations management opinion inflation significant impact keys business item 7aitem 7 managements discussion analysis results operations financial condition special note certain statements set forth caption constitute forwardlooking statements within meaning reform act see special note regarding forwardlooking statements additional factors relating statements following discussion provides information assist understanding companys financial condition results operations read conjunction consolidated financial statements related notes appearing elsewhere report please note certain reclassifications made fiscal 2000 1999 financial data presented conform fiscal 2001 presentation reclassifications consist primarily reclassifying oil natural gas production revenues expenses oil natural gas production revenues related expenses reclassified revenues expenses company believe business segment material companys consolidated financial statements results operations fiscal year ended june 30 2001 versus fiscal year ended june 30 2000 companys results operations year ended june 30 2001 reflect impact favorable industry conditions resulting increased commodity prices turn caused increased demand companys equipment services fiscal 2001 see part iitemmajor developments fiscal 2001favorable industry conditions positive impact increased demand companys operating results partially offset increased operating expenses incurred result increase companys business activity company revenues year ended june 30 2001 increased 235530000 369 873262000 637732000 fiscal 2000 net income fiscal 2001 increased 81669000 62710000 net loss 18959000 fiscal 2000 increase revenues net income due improved operating conditions higher rig hours increased pricing lower interest expense debt reduction also contributing net income operating revenues well servicing well servicing revenues year ended june 30 2001 increased 198781000 355 758273000 559492000 fiscal 2000 increase due increased demand companys well servicing equipment services higher pricing contract drilling contract drilling revenues year ended june 30 2001 increased 39211000 573 107639000 68428000 fiscal 2000 increase due increased demand companys contract drilling equipment services higher pricing operating expenses well servicing well servicing expenses year ended june 30 2001 increased 93168000 233 493108000 399940000 fiscal 2000 increase expenses due higher utilization companys well servicing equipment higher labor costs overall increase companys well servicing business despite increased costs well servicing expenses percentage well servicing revenues decreased 715 fiscal 2000 65 fiscal 2001 margin improvement due improved operating efficiencies effects higher pricing contract drilling contract drilling expenses year ended june 30 2001 increased 19067000 327 77366000 58299000 fiscal 2000 increase due higher utilization companys contract drilling equipment higher labor costs overall increase companys contract drilling business despite increased costs contract drilling expenses percentage contract drilling revenues decreased 852 fiscal 2000 719 fiscal 2001 margin improvement due improved operating efficiencies effects higher pricing depreciation depletion amortization expense companys depreciation depletion amortization expense year ended june 30 2001 increased 4175000 59 75147000 70972000 fiscal 2000 increase due higher capital expenditures incurred fiscal 2001 company refurbished equipment increased utilization contract drilling equipment depreciates partially based utilization general administrative expenses companys general administrative expenses year ended june 30 2001 increased 7299000 124 66071000 58772000 fiscal 2000 increase due higher administrative costs resulting growth companys operations result improved industry conditions despite increased costs general administrative expenses percentage total revenues declined 92 fiscal 2000 76 fiscal 2001 interest expense companys interest expense year ended june 30 2001 decreased 15370000 214 56560000 71930000 fiscal 2000 decrease primarily due impact longterm debt reduction fiscal 2001 lesser extent lower shortterm interest rates borrowing margins floating rate debt bad debt expense companys bad debt expense year ended june 30 2001 decreased 385000 234 1263000 1648000 fiscal 2000 decrease primarily due improved industry conditions keys customers lesser extent centralization companys internal credit approval process extraordinary gain fiscal 2001 company repurchased 257115000 longterm debt various discounts premiums par value expensed related unamortized debt issuance costs resulted aftertax extraordinary gain 429000 income taxes companys income tax expense year ended june 30 2001 increased 44408000 37002000 benefit 7406000 fiscal 2000 increase income tax expense due increased pretax income companys effective tax rate fiscal 2001 2000 372 265 respectively effective tax rates vary statutory rate 35 principally certain nondeductible goodwill amortization nondeductible expenses state local taxes cash flow companys net cash provided operating activities year ended june 30 2001 increased 107857000 142717000 34860000 fiscal 2000 increase due higher revenues resulting increased demand companys equipment services higher pricing partially offset higher operating general administrative expenses resulting increased business activity companys net cash used investing activities year ended june 30 2001 increased 45584000 83350000 37766000 fiscal 2000 increase due primarily higher capital expenditures companys net cash used financing activities year ended june 30 2001 increased 256443000 use 167142000 cash provided 89301000 fiscal 2000 increase primarily result significant debt reduction fiscal 2001 partially offset proceeds debt offering exercise stock options warrants fiscal year ended june 30 2000 versus fiscal year ended june 30 1999 companys results operations year ended june 30 2000 reflect impact industry recovery period resulting increased commodity prices turn caused increased demand companys equipment services fiscal 2000 positive impact increased demand companys operating results partially offset increased operating expenses incurred result increase companys business activity company revenues year ended june 30 2000 increased 145915000 297 637732000 491817000 fiscal 1999 net income fiscal 2000 increased 34299000 net loss 18959000 net loss 53258000 fiscal 1999 increase revenues due improved operating conditions higher rig hours full year effect acquisitions completed early portion fiscal 1999 lesser extent higher pricing decrease net loss result improved operating conditions higher pricing cost reduction initiatives addition fiscal 1999 included nonrecurring charges debt issuance costs restructuring initiatives well higher bad debt expense operating revenues well servicing well servicing revenues year ended june 30 2000 increased 125835000 29 559492000 433657000 fiscal 1999 increase due increased demand companys well servicing equipment services full year effect acquisitions completed early portion fiscal 1999 lesser extent higher pricing contract drilling contract drilling revenues year ended june 30 2000 increased 17815000 352 68428000 50613000 fiscal 1999 increase due increased demand companys contract drilling equipment services full year effect acquisition completed early portion fiscal 1999 lesser extent higher pricing operating expenses well servicing well servicing expenses year ended june 30 2000 increased 74975000 231 399940000 324965000 fiscal 1999 increase expenses due higher utilization companys well servicing equipment higher labor costs overall increase companys well servicing business despite increased costs well servicing expenses percent well servicing revenues decreased 749 fiscal 1999 715 fiscal 2000 margin improvement due improved operating efficiencies effects higher pricing contract drilling contract drilling expenses year ended june 30 2000 increased 14743000 338 58299000 43556000 fiscal 1999 increase due higher utilization companys contract drilling equipment higher labor costs overall increase companys contract drilling business despite increased costs contract drilling expenses percentage contract drilling revenues decreased 861 fiscal 1999 852 fiscal 2000 margin improvement due improved operating efficiencies effects higher pricing depreciation depletion amortization expense companys depreciation depletion amortization expense year ended june 30 2000 increased 8898000 143 70972000 62074000 fiscal 1999 increase due higher capital expenditures incurred fiscal 2000 company refurbished equipment increased utilization contract drilling equipment depreciates partially based utilization general administrative expenses companys general administrative expenses year ended june 30 2000 increased 5664000 107 53108000 58772000 fiscal 2000 increase due higher administrative costs necessitated growth companys operations result fiscal 1999 acquisitions improved industry conditions despite increased costs general administrative expenses percentage total revenues declined 108 fiscal 1999 92 fiscal 2000 interest expense companys interest expense year ended june 30 2000 increased 4529000 67 71930000 67401000 fiscal 1999 increase primarily due full year effect debt incurred connection acquisitions completed early portion fiscal 1999 lesser extent higher interest rates fiscal 2000 partially offset impact longterm debt reduction fiscal 2000 bad debt expense companys bad debt expense year ended june 30 2000 decreased 4280000 722 1648000 5928000 fiscal 1999 decrease primarily due improved industry conditions keys customers lesser extent centralization companys internal credit approval process extraordinary gain fourth quarter fiscal 2000 company repurchased 10190000 5 convertible subordinated notes resulted aftertax gain 1611000 income taxes companys income tax benefit year ended june 30 2000 decreased 18269000 7406000 25675000 fiscal 1999 decrease income tax benefit due decrease pretax loss companys effective tax benefit rate fiscal 2000 1999 265 325 respectively fiscal 2000 effective tax benefit rate different statutory rate 35 principally certain nondeductible goodwill amortization nondeductible expenses state local taxes decrease fiscal 2000 effective tax benefit rate due increase amount nondeductible expenses primarily result full year effect goodwill amortization acquisitions completed early portion fiscal 1999 cash flow companys net cash provided operating activities year ended june 30 2000 increased 48287000 34860000 use 13427000 fiscal 1999 increase due higher revenues resulting increased demand companys equipment services full year effect acquisitions completed early portion fiscal 1999 lesser extent higher pricing partially offset higher operating general administrative expenses resulting increased business activity companys net cash used investing activities year ended june 30 2000 decreased 256888000 872 37766000 294654000 fiscal 1999 decrease due acquisitions occurred fiscal 2000 partially offset higher capital expenditures companys net cash provided financing activities year ended june 30 2000 decreased 216993000 708 89301000 306294000 fiscal 1999 decrease primarily result significantly decreased borrowings fiscal 2000 lesser extent repayment longterm debt partially offset proceeds equity offering volumetric production payment completed fiscal 2000 liquidity capital resources company historically funded operations acquisitions capital expenditures working capital requirements cash flow operations bank borrowings issuance equity longterm debt company believes current reserves cash equivalents availability existing credit lines access capital markets internally generated cash flow operations sufficient finance cash requirements current future operations companys cash equivalents decreased 1078 million 21 million june 30 2001 1099 million june 30 2000 included 1006 million net proceeds companys equity offering closed june 30 2000 yet applied debt reduction company projects approximately 65 million capital expenditures fiscal 2002 compared 82 million 38 million fiscal 2001 2000 respectively company expects finance capital expenditures using net cash provided operating activities available credit company believes cash flow extent required borrowings current future credit facilities sufficient fund expenditures june 30 2001 company working capital excluding current portion longterm debt approximately 98543000 includes cash equivalents approximately 2098000 compared working capital excluding current portion longterm debt approximately 175396000 includes cash equivalents approximately 109873000 june 30 2000 decrease working capital primarily due use net cash proceeds 100571000 june 30 2000 equity offering repay longterm debt fiscal year ended june 30 2001 working capital june 30 2001 excluding change cash increased june 30 2000 due continuing improvement operating results timing differences related cash receipts disbursements longterm debt capital lease obligations miscellaneous notes payable june 30 2001 companys longterm debt comprised senior credit facility ii series 8 38 senior notes due 2008 iii series 14 senior subordinated notes due 2009 iv series 5 convertible subordinated notes due 2004 v series 9 38 senior notes due 2007 senior credit facility june 30 2001 company senior credit facility pnc bank national association administrative agent norwest bank texas na collateral agent pnc capital markets inc arranger lenders named time parties thereto subsequently amended senior credit facility consisted 125 million revolving loan facility addition 20 million letters credit issued senior credit facility outstanding letters credit reduce borrowing availability revolving loan facility commitment make revolving loans reduced 100 million september 14 2001 reduce 75 million september 14 2002 revolving commitment terminate september 14 2003 revolving loans must paid date revolving loan bears interest rates based upon companys option either prime rate plus margin ranging 075 200 eurodollar rate plus margin ranging 225 350 case depending upon ratio companys total debt less cash hand 5 million companys trailing 12month ebitda adjusted fiscal 2001 company repaid full approximately 1989 million term loans originally included senior credit facility decreasing net borrowings revolver 91 million result june 30 2001 principal amounts outstanding original term loans fully repaid ii revolver approximately 20 million additionally june 30 2001 company outstanding letters credit totaling approximately 120 million related workers compensation insurance program since june 30 2001 principal amount outstanding revolver increased 380 million september 25 2001 funds used repurchase certain longterm debt company see note 5 consolidated financial statementslong term debt discussion senior credit facility 8 38 senior notes march 6 2001 company completed private placement 175000000 8 38 senior notes due 2008 8 38 senior notes net cash proceeds private placement used repay remaining balance original term loans senior credit facility portion revolving loans senior credit facility 8 38 senior notes senior unsecured obligations ranking equally companys senior unsecured indebtedness 8 38 senior notes effectively subordinated keys secured indebtedness includes borrowings senior credit facility dawson 9 38 senior notes march 1 2005 company may redeem 8 38 senior notes time varying redemption prices excess par plus accrued interest addition march 1 2004 company may redeem 35 aggregate principal amount 8 38 senior notes proceeds certain sales equity 108375 par plus accrued interest june 30 2001 175000000 principal amount 8 38 senior notes remained outstanding 8 38 senior notes pay interest semiannually march 1 september 1 year 14 senior subordinated notes january 22 1999 company completed private placement 150000 units consisting 150000000 14 senior subordinated notes due 2009 14 senior subordinated notes 150000 warrants purchase 2173433 shares common stock exercise price 488125 per share unit warrants net cash proceeds private placement used repay substantially remaining 1486 million principal amount plus accrued interest owed companys bridge loan facility arranged connection acquisition dawson production services inc dawson january 15 2004 company may redeem 14 senior subordinated notes time varying redemption prices excess par plus accrued interest addition january 15 2002 company may redeem 35 aggregate principal amount 14 senior subordinated notes proceeds certain sales equity 114 par plus accrued interest june 11 2001 company exercised right redemption 10313000 principal amount 14 senior subordinated notes price 114 principal amount plus accrued interest leaving 139687000 principal amount outstanding june 30 2001 unit warrants separated 14 senior subordinated notes became exercisable january 25 2000 date issuance value unit warrants estimated 7434000 classified discount 14 senior subordinated notes companys consolidated balance sheet discount amortized interest expense term 14 senior subordinated notes 14 senior subordinated notes mature unit warrants expire january 15 2009 14 senior subordinated notes subordinate companys senior indebtedness includes borrowings senior credit facility dawson 9 38 senior notes 8 38 senior notes june 30 2001 139687000 principal amount 14 senior subordinated notes remained outstanding 14 senior subordinated notes pay interest semiannually january 15 july 15 year interest payments approximately 10500000 made july 15 2000 january 15 2001 respectively june 30 2001 62500 unit warrants exercised producing approximately 4173000 proceeds company leaving 87500 unit warrants outstanding since june 30 2001 company repurchased canceled additional 6784000 principal amount 14 senior subordinated notes leaving 132903000 outstanding september 25 2001 5 convertible subordinated notes late september early october 1997 company completed private placement 216 million 5 convertible subordinated notes due 2004 5 convertible subordinated notes 5 convertible subordinated notes subordinate companys senior indebtedness includes borrowings senior credit facility 14 senior subordinated notes dawson 9 38 senior notes 8 38 senior notes 5 convertible subordinated notes convertible holders option shares companys common stock conversion price 3850 per share subject certain adjustments 5 convertible subordinated notes redeemable companys option september 15 2000 whole part together accrued unpaid interest initial redemption price 10286 year beginning september 15 2000 declines ratably thereafter annual basis fiscal 2001 company repurchased canceled 47384000 principal amount 5 convertible subordinated notes leaving 158426000 principal amount 5 convertible subordinated notes outstanding june 30 2001 since june 30 2001 company repurchased canceled additional 46493000 principal amount 5 convertible subordinated notes leaving 111933000 outstanding september 25 2001 interest 5 convertible subordinated notes payable march 15 september 15 interest approximately 4890000 4815000 million paid september 15 2000 march 15 2001 respectively dawson 9 38 senior notes result dawson acquisition company subsidiaries us trust company texas na trustee us trust entered supplemental indenture dated september 21 1998 supplemental indenture pursuant company assumed obligations dawson indenture dated february 20 1997 dawson indenture dawson us trust senior notes due 2007 dawson 9 38 senior notes issued pursuant dawson indenture equally ratably secured obligations senior credit facility result mandatory tender offer made connection dawson acquisition subsequent repurchases 1106000 principal amount dawson 9 38 senior notes remained outstanding june 30 2000 quarter ended september 30 2000 company repurchased canceled 800000 principal amount dawson 9 38 senior notes quarter ended june 30 2001 company repurchased additional 60000 principal amount dawson 9 38 senior notes leaving 246000 principal amount dawson 9 38 senior notes outstanding june 30 2001 interest dawson 9 38 senior notes payable february 1 august 1 year interest approximately 52000 14000 paid august 1 2000 february 1 2001 respectively 7 convertible subordinated debentures july 1996 company completed private placement 52000000 principal amount 7 convertible subordinated debentures due 2003 7 convertible subordinated debentures quarter ended september 30 2000 985000 principal amount 7 convertible subordinated debentures surrendered conversion holders thereof 101025 shares common stock issued september 1 2000 connection conversion september 1 2000 remaining 15000 principal amount outstanding 7 convertible subordinated debentures redeemed 103 principal amount plus accrued interest leaving none outstanding interest 7 convertible subordinated debentures payable january 1 july 1 year interest approximately 35000 paid july 1 2000 impact recently issued accounting standards fasb recently issued statements financial accounting standards 141 business combinations no142 goodwill intangible assets 143 accounting asset retirement obligations statement 141 requires business combinations initiated june 30 2001 accounted purchase method statement 142 requires goodwill longer amortized earnings instead reviewed impairment standard effective fiscal years beginning december 15 2001 early adoption permitted entities fiscal years beginning march 15 2001 provided first interim financial statements previously issued statement 143 establishes requirements accounting removaltype costs associated asset retirements standard effective fiscal years beginning june 15 2002 earlier application encouraged company currently assessing impact statements consolidated financial statements whether early adopt statement 142 first quarter fiscal 2002 impact inflation operations management opinion inflation significant impact keys business item 7anannanitem 7 management’s discussion analysis financial condition results operations following discussion analysis financial condition results operations read conjunction consolidated financial statements related notes thereto “item 8 consolidated financial statements supplementary data” discussion contains forwardlooking statements based upon current expectations subject uncertainty changes circumstances including identified “cautionary note regarding forwardlooking statements” actual results may differ materially expectations due inaccurate assumptions known unknown risks uncertainties forwardlooking statements read conjunction disclosures “item 1a risk factors” overview provide complete range well services major oil companies foreign national oil companies independent oil natural gas production companies including rigbased well maintenance workover well completion recompletion services fluid management services pressure pumping services fishing rental services ancillary oilfield services believe leading onshore rigbased well servicing contractor world operate major oil natural gas producing regions united states well internationally argentina mexico additionally technology development group based canada also ownership interests drilling production services company based canada drilling workover services subsurface engineering modeling company based russian federation 2008 operated three business segments well servicing segment pressure pumping services segment fishing rental services segment detail regarding business segments please see discussion “description business segments” “item 1 business” business growth strategies strategy improve results acquisitions controlling spending maintenance growth market share core segments maintenance strong balance sheet good liquidity expansion internationally investments technology new service offerings enhancement safety quality acquisition strategy contemplates time may make acquisitions strengthen one service lines enhance presence selected regional markets expand service offerings provide customer base 2008 completed acquisitions fishing rental assets trienergy services llc “trienergy” western drilling llc “western” hydrawalk inc “hydra walk” addition acquired usbased assets leader energy services ltd “leader” acquisitions purchases expanded well servicing rig fleet california market 22 rigs increased presence southeastern gulf coast gulf mexico rental tool market acquired automated pipe handling business feel complementary rigbased service offerings increased presence baaken marcellus shale formations acquisition nine coiled tubing units believe transactions help us expand geographic “footprint” diversify improve service offerings customers information acquisitions completed 2008 see discussion “acquisitions” item acquisitions 2008 made cash hand availability senior secured credit facility objective use cash future acquisitions depending future market conditions however may elect use equity financing tool acquisitions see “liquidity capital resources” item discussion financing tools available us controlling spending late third quarter 2008 saw signs market oilfield services beginning weaken weakening market services resulted overall turmoil credit markets caused many customers begin slow capital spending significant declines prices oil natural gas response pending downturn took steps later part third quarter fourth quarter 2008 decrease spending levels control costs steps included targeted reductions workforce reductions pay reductions cost structure believe actions already taken result significant cost savings near term continuing implement cost saving measures early 2009 including reductions spending levels capital expenditures order improve cost structure maintain grow core segments past three years significantly increased capital expenditures devoting capital organic growth excluding acquisitions cumulatively spent approximately 6274 million capital expenditures since beginning 2006 including capital expenditures 2190 million 2008 expenditures include purchase new pressure pumping equipment new casedhole electric wireline units new remanufactured well service rigs well numerous rental equipment fishing tools overall downturn economy late 2008 projected slowdown activity industry near term intend reduce capital expenditure program 2009 order maintain liquidity provide flexibility use capital presently estimate spend approximately 1300 million capital expenditures 2009 estimate approximately 200 million quarter devoted maintenance existing fleet 2009 capital spending could increase awarded additional international work recognize opportunity expand services particular market maintain strong balance sheet liquidity believe ability maintain strong balance sheet exercise sound capital discipline critical position company well sustain current projected downturn market also believe ability maintain ample liquidity borrowing capacity important order enable us maintain operational flexibility well take advantage attractive business opportunities develop december 31 2008 927 million cash equivalents well 1393 million availability revolving portion senior secured credit facility maturities 8375 senior notes “senior notes” 2014 required repayments borrowings senior secured credit facility 2012 also fourth quarter 2009 required make principal payments totaling 145 million related moncla notes defined discussion “moncla notes payable” “liquidity capital resources” item expect fund obligations moncla notes cash hand generated operating activities borrowing senior secured credit facility international expansion presently operate argentina mexico technology development group based canada also ownership interest drilling production services company based canada october 2008 purchased 26 interest drilling workover subsurface engineering reservoir modeling company operating russian federation obligation expand interest 2009 one objectives redeploy underutilized assets international markets addition consider strategic international acquisitions order establish presence particular market appropriate evaluated number international markets nearterm priority expansion mexico 2008 increased number working rigs positioned mexico 14 intend increase working rigs mexico 21 end second quarter 2009 see “foreign operations” “item 1 business” discussion current international operations investing technology new service offerings invested continue invest technology projects improve operating efficiencies customers improve safety performance well service rigs fluid hauling vehicles provide opportunities additional revenue 2003 began deployment proprietary well service technology called keyview® keyview® control data acquisition system measures certain wellsite operating parameters actively uses information safety intervention purposes rig allowing customers monitor analyze information well servicing promote improved efficiency quality december 31 2008 250 keyview® systems installed keyview® system increases customers’ visibility activities well site technology ability ensure proper rod tubing makeup result reduced downhole failures ii improve efficiency better logistics planning iii improve safety believe system provides us competitive advantage patented technology discussion keyview® system see “patents trade secrets trademarks copyrights” “foreign operations” “item 1 business” technology initiative expanded acquisition ami 2007 ami designs produces oilfield service data acquisition control information systems ami’s technology platform applications facilitate collection job performance related information digitally distributes information customers ami contributed development keyview® system assist advancement technology also believe important broad diverse complementary services offering reason expanded service offerings pressure pumping segment fishing rental segment took delivery five coiled tubing units fourth quarter 2008 previously ordered 2007 well four segments drill string rental tools group addition took delivery three drilling rigs continued expand casedhole wireline business entered 2006 believe customers prefer consolidate vendors feel expanded services offering may provide better opportunities serve customers safety quality devote significant resources training professional development employees special emphasis safety currently operate training centers texas california wyoming louisiana addition conjunction local community colleges two cooperative training centers new mexico oklahoma training centers used enhance employees’ understanding operating safety procedures recognize historically high turnover rate industry operate committed offering competitive compensation benefits incentive programs employees order ensure qualified safetyconscious personnel able provide quality service customers performance measures determining overall health oilfield service industry believe baker hughes us land drilling rig count best barometer capital spending activity levels since data made publicly available weekly basis historically activity levels highly correlated capital spending oil natural gas producers commodity prices strong capital spending customers tends high illustrated baker hughes us land drilling rig count following table indicates land drilling rig count increased significantly since 2002 commodity prices oil natural gas increased 1 represents average crude oil natural gas price respectively years presented source bloomberg 2 source wwwbakerhughescom 3 prices oil natural gas declined sharply fourth quarter 2008 spot prices february 23 2009 wticushing crude oil nymex henry hub natural gas 3947 per barrel 420 per mcf respectively 4 land drilling rig count affected drop commodity prices land drilling rig count january 31 2009 1412 internally measure activity levels primarily rig trucking hours generally capital spending oil natural gas producers increases demand services also rises resulting increased rig trucking services hours worked conversely activity levels decline due lower spending oil natural gas producers generally provide fewer rig trucking services results lower hours worked publicly release monthly rig trucking hours following table presents quarterly rig trucking hours 2006 2008 market conditions outlook market conditions year ended december 31 2008 overall industry demand services provide high average baker hughes land rig count united states 2008 1814 rigs increase approximately 7 2007 average approximately 16 2006 average increase average land rig count driven primarily record commodity prices 2008 west texas intermediate cushing crude oil price averaged almost 100 per barrel natural gas henry hub averaged almost 900 per mcf increases approximately 38 25 respectively 2007 levels overall activity levels asset utilization 2008 high 2008 approximately 27 million rig hours 24 million trucking hours increase approximately 109 47 respectively 2007 activity levels acquisitions made 2008 contributed approximately 65509 rig hours 2008 full year effect acquisitions completed 2007 242545 rig hours also contributing increase rig hours expansion mexico 2008 contributed additional 44736 rig hours excluding effects acquisitions expansion mexico domestic rig trucking hours per working day increased slightly 2008 first three quarters 2008 saw activity levels steadily increase due high demand services associated strong commodity prices however throughout 2008 signs financial markets united states becoming unstable turmoil credit markets increased summer fall 2008 commodity prices peaked alltime highs late third quarter 2008 began see demand services starting weaken tightening credit markets made access capital spending difficult customers uncertainty grew around future pricing oil natural gas conditions continued deteriorate fourth quarter 2008 driven rapidly declining commodity prices tight credit markets overall uncertainty market conditions responded deteriorating market conditions implementing aggressive cost control program implementing pricing changes selected markets effort maintain asset utilization cutting capital spending plans additionally steps taking towards new organizational structure efficiently manage underutilized assets allowed us identify cost savings market outlook believe 2009 challenging year business public estimates point anticipated decline land rig count magnitude seen since 2001 2002 timeframe tighter credit markets declining borrowing bases customers likely less access capital lower commodity prices customers likely inclined spend capital even access assessments supported fact land drilling rig count january 31 2009 stood 1412 decline approximately 222 2008 average oil natural gas prices 4173 per barrel 442 per mmbtu respectively approximately 581 503 respectively 2008 averages nearterm anticipate service lines whose revenues closely tied new drilling activity severely affected however believe core service lines including rigbased well servicing fluids management business resilient market downturn customers still need maintain existing wells transport dispose saltwater fluids expect prices core services decline 2009 believe fall much prices service lines closely connected new drilling light challenging conditions believe key well equipped downturn production decline rates begin drive commodity prices higher causing customers spend capital dollars increasing demand services management focused maintaining strong balance sheet acceptable leverage ratios good liquidity currently believe downturn 2009 affect company’s compliance financial covenants debt agreements also feel geographic diversity help company maintain margins market services united states recovers impact inflation operations opinion inflation significant impact key’s business acquisitions equity method investments completed trienergy services llc january 17 2008 company purchased fishing rental assets trienergy approximately 19 million cash assets integrated fishing rental segment equity interests trienergy owned employees company joined company october 2007 connection earlier acquisition 2007 moncla well service inc related entities collectively “moncla” western drilling llc april 3 2008 company purchased outstanding equity interests western privatelyowned company based california operated 22 working well service rigs three stacked well service rigs equipment used workover rig relocation process total consideration 516 million acquired western increase service footprint california market acquisition funded borrowings company’s senior secured credit facility cash hand hydrawalk inc may 30 2008 company purchased outstanding stock hydrawalk approximately 105 million cash company retained approximately 11 million hydrawalk’s net working capital assume debt hydrawalk leading provider pipe handling solutions oil gas industry operates 80 automated pipe handling units oklahoma texas wyoming acquired hydrawalk expand level integrated services able provide customers assets results operations hydrawalk integrated fishing rental segment leader energy services ltd july 22 2008 company acquired united statesbased assets leader canadian company consideration 346 million cash acquired assets include nine coiled tubing units seven nitrogen trucks twelve pumping trucks ancillary equipment additionally company paid approximately 07 million supplies inventory used pressure pumping operations leader assets integrated pressure pumping segment ooo geostream services group october 31 2008 acquired 26 interest geostream 174 million incurred direct transaction costs approximately 19 million associated transaction geostream based russian federation provides drilling workover services subsurface engineering modeling russian federation connection initial investment geostream three officers company became board members geostream representing 50 board membership contractually required purchase additional 24 geostream later march 31 2009 approximately 113 million december 31 2008 equivalent 159 million period exceed six years subsequent october 31 2008 option increase ownership percentage geostream 100 acquired 100 geostream end sixyear period required arrange initial public offering shares acquisitions completed 2007 ami september 5 2007 company acquired ami operates canada technology company focused oilfield service equipment controls data acquisition digital information flow purchase price 66 million cash 29 million assumed debt moncla october 25 2007 company acquired moncla operated well service rigs barges ancillary equipment southeastern united states total consideration 1460 million consisting cash notes payable assumed debt acquisition made expand presence southeastern united states market incorporated well servicing segment kings oil tools december 7 2007 company acquired well service assets related equipment kings oil tools inc “kings” californiabased well service company approximately 451 million cash increase presence california market assets kings incorporated well servicing segment acquisitions completed 2006 made acquisitions 2006 results operations consolidated results operations following table shows consolidated results operations years ended december 31 2008 2007 2006 year ended december 31 2008 2007 year ended december 31 2008 net income 841 million represents 503 decrease net income 1693 million year ended december 31 2007 earnings per fully diluted share year 067 per share compared 127 per share period 2007 items contributing decline net income diluted earnings per share 2008 included impairment company’s goodwill pursuant statement financial accounting standards “sfas” 142 goodwill intangible assets “sfas 142” approximately 698 million tax 054 per fully diluted share charge associated acceleration vesting certain company’s equity awards approximately 109 million tax 005 per fully diluted share impairment company’s investment iroc energy services corp “iroc” approximately 54 million tax 003 per fully diluted share severance charges associated reduction company’s domestic international workforce approximately 26 million tax 001 per fully diluted share impact hurricanes aftereffects gulf coast third quarter 2008 estimated decreased pretax earnings 84 million 004 per fully diluted share partially offsetting items price increases implemented second third quarters 2008 incremental net income acquisitions company completed 2008 integration acquisitions completed 2007 full year operations expansion company’s casedhole wireline operations mexico revenues consolidated revenue year ended december 31 2008 20 billion increase 3101 million 187 17 billion year ended december 31 2007 increase revenue primarily attributable price increases implemented second third quarters 2008 expansion company’s casedhole wireline operations international operations mexico acquisitions completed 2008 integration acquisitions company made 2007 full year operations please refer “segment operating results” discussion changes revenues 2007 changes revenues reportable segments millions weather including hurricanes ike gustav impacted landbased operations third quarter 2008 parts texas louisiana oklahoma inclement weather also significantly impacted fishing operations gulf mexico company estimates inclement weather third quarter 2008 reduced well servicing segment revenues approximately 70 million fishing rental segment revenues approximately 14 million direct operating expenses consolidated direct operating expenses increased approximately 2647 million 269 13 billion year ended december 31 2008 compared 9856 million year ended december 31 2007 excluding depreciation amortization costs 634 consolidated revenues 2008 compared 593 consolidated revenues 2007 change consolidated direct operating expenses result millions direct employee compensation includes salaries cash bonuses health insurance 401k costs payroll taxes increased approximately 1255 million 234 2008 compared period 2007 acquisitions completed company 2008 contributed approximately 186 million increase 2007 incorporation acquisitions completed 2007 full year operations 2008 contributed approximately 574 million increase company’s expansion operations mexico contributed approximately 74 million increase excluding items direct employee compensation increased approximately 79 2008 compared period last year increase primarily attributable organic direct headcount growth course 2008 support ongoing operations well pay rate increases implemented course year order retain high quality workforce response deteriorating market conditions fourth quarter 2008 company’s management implemented cost control program included freezing pay rates reductions company’s workforce certain areas equipment supplies maintenance costs increased approximately 580 million 2008 compared period 2007 acquisitions completed 2008 contributed approximately 57 million yearoveryear increase costs full year effect acquisitions company completed 2007 approximately 245 million expansion operations mexico contributed approximately 230 million increase absent items costs increased approximately 03 2008 increase costs related higher prices company’s vendors increased requirements repairs maintenance related preparation assets increased utilization expansion operations fuel costs increased approximately 334 million 449 year ended december 31 2008 compared period 2007 acquisitions completed 2008 contributed approximately 21 million increase fuel costs incorporation acquisitions company completed 2007 full year operations 2008 contributed approximately 36 million increase company estimates average pergallon cost diesel fuel increased approximately 275 2008 compared 2007 combined overall higher usage fuel higher activity levels led remaining increase fuel costs frac sand chemical costs also includes cost transporting supplies increased approximately 294 million 340 2008 compared period 2007 acquisitions company 2008 contributed approximately 12 million increase costs full year effect acquisitions completed 2007 contributed approximately 06 million increase 2008 overall demand frac sand chemicals increased 2008 overall increase pressure pumping activity result prices increased users products also direct impact cost transport frac sand costs increased approximately 361 2008 additionally 2008 company began using coated sand proppant certain high pressure frac jobs barnett shale formation coated sand expensive normal types frac sand contributed overall increase costs pressure pumping operations able charge higher rates frac jobs require coated sand company’s costs associated selfinsurance increased approximately 47 million 2008 compared 2007 company largely selfinsured loss uses actuarial information well actual claims history order calculate required reserves primary cause increase selfinsurance costs increase number employees covered added headcount acquisitions 2007 2008 depreciation amortization expense depreciation amortization expense increased 412 million 317 1708 million twelve months ended december 31 2008 compared 1296 million period 2007 acquisitions company completed 2008 contributed approximately 66 million increase integration acquisitions made 2007 full year operations 2008 contributed approximately 241 million remaining 105 million increase attributed company’s capital expenditures larger fixed asset base resulted company’s capital expenditures impairment goodwill equity method investment discussed “critical accounting policies valuation tangible intangible assets” test goodwill impairment annual basis often circumstances indicate goodwill might impaired tests 2006 2007 resulted indications impairment however upon completion test 2008 indicators goodwill pressure pumping fishing rental segments might impaired required sfas 142 calculated implied fair value goodwill pressure pumping fishing rental segments determined implied fair value less carrying value goodwill meaning goodwill impaired result fourth quarter 2008 recorded pretax charge approximately 698 million write goodwill balances pressure pumping fishing rental segments management company believes goodwill segments impaired overall economic downturn deterioration global credit markets specifically downturn oilfield services sector resulted decline company’s stock price market valuation goodwill written pressure pumping segment approximately 189 million goodwill written fishing rental segment arose acquisition q services inc 2002 2007 fair value company’s investment iroc based publicly available stock prices declined book value time management company believed steps taken iroc’s management well economic trends canadian markets indicated impairment investment temporary would recovered fourth quarter 2008 management company determined based iroc’s continued depressed stock price overall negative outlook general economy oilfield services sector impairment temporary result recorded pretax charge 54 million order write carrying value investment iroc fair value general administrative expenses general administrative expenses approximately 2577 million year ended december 31 2008 represents increase 273 million 119 approximately 2304 million period 2007 general administrative expenses 131 revenue 2008 compared 139 revenue 2007 change general administrative expense result millions nonequity employee compensation costs increased 271 million 306 year ended december 31 2008 compared period 2007 acquisitions made 2008 contributed approximately 09 million increase integration acquisitions made 2007 full year 2008 contributed approximately 52 million increase increases nonequity compensation 2008 result pay rate increases given course 2008 expansion operations mexico expansion business development group transfer existing personnel previously held positions classified direct labor fourth quarter 2008 due declining industry conditions company’s management initiated cost control program included efforts curtail nonessential spending cases reductions company’s workforce severance charges associated workforce reductions resulted pretax charge totaling approximately 18 million recorded general administrative expenses equitybased compensation increased 113 million year ended december 31 2008 compared period 2007 declines company’s stock price fourth quarter 2008 accelerated vesting period certain company’s outstanding unvested stock option awards stock appreciation rights result acceleration company recorded pretax charge approximately 109 million general administrative expenses absent item equitybased compensation approximately 125 million 2008 represents increase approximately 04 million 2007 increase primarily due new awards granted 2008 partially offset declines fair value certain awards classified liabilities whose value based company’s stock price legal fees reserves decreased 22 million year ended december 31 2008 compared period 2007 company records loss contingencies related lawsuits claims proceedings normal course business loss contingencies reviewed routinely ensure appropriate liabilities recorded adjusted appropriate professional fees declined approximately 123 million 272 2008 compared 2007 professional fees declined primarily result company emerging delayed financial reporting process becoming current sec filings relisted national stock exchange 2007 loss early extinguishment debt year ended december 31 2007 incurred loss 96 million associated termination prior senior credit agreement dated july 29 2005 “prior credit facility” 2007 issued 4250 million senior notes used proceeds retire term loans outstanding prior credit facility concurrently entered senior secured credit facility terminated prior credit facility loss represents writeoff debt issue costs incurred entered prior credit facility interest expense net amounts capitalized company’s interest expense increased approximately 50 million 139 412 million twelve months ended december 31 2008 compared 362 million period 2007 higher overall debt levels led increase interest expense gain sale assets net company recorded net gain approximately 06 million connection sale various assets 2008 compared loss approximately 18 million 2007 time normal course business company sells assets either scrap condition longer used company interest income interest income recognized company 2008 approximately 12 million represents decline approximately 54 million amounts recognized 2007 primary reason decline interest income decline company’s shortterm investment balances since 2007 fourth quarter 2007 company liquidated shortterm interestbearing investments complete acquisition moncla expense net expense net twelve months ended december 31 2008 approximately 47 million compared income net approximately 04 million year ended december 31 2007 expense net 2008 primarily relates foreign currency transaction losses associated company’s foreign operations mexico argentina canada approximately 35 million partially offsetting losses equity earnings company’s investment iroc income tax expense income tax expense 902 million year ended december 31 2008 compared 1068 million year ended december 31 2007 effective tax rate 518 2008 compared 387 2007 decrease income tax expense primarily attributable lower pretax income 2008 increase effective tax rate primarily attributable impairment 634 million goodwill nondeductible income tax purposes 64 million goodwill deductible income tax purposes 2008 effective tax rate exclusive goodwill impairment would 380 differences effective tax rate statutory rate 350 result primarily effect state certain foreign income taxes permanent items attributable booktax differences year ended december 31 2007 2006 year ended december 31 2007 company’s net income 1693 million represented decline approximately 17 million 1 company’s net income 1710 million year ended december 31 2006 fully diluted earnings per share year ended december 31 2007 127 per share decline 001 per share fully diluted earnings per share year ended december 31 2006 128 per share items contributing decline net income diluted earnings per share costs associated refinancing indebtedness fourth quarter 2007 connection refinancing company recorded pretax loss approximately 96 million 004 per fully diluted share associated writeoff existing unamortized debt issuance costs termination two interest rate swaps led pretax charge approximately 23 million 001 per fully diluted share offsetting onetime charges increased revenues net income associated acquisitions company made third fourth quarters 2007 well effect higher pricing increased activity 2007 expansion casedhole wireline business international operations mexico revenues consolidated revenue year ended december 31 2007 approximately 17 billion represented increase 1158 million 75 16 billion year ended december 31 2006 please refer “segment operating results” discussion changes revenues 2006 changes revenue reportable segments millions contributing increase revenues 2007 acquisitions company made third fourth quarters startup operations mexico second quarter expansion casedhole wireline business well price increases increased activity levels direct operating expenses consolidated direct operating expenses increased approximately 650 million 71 9856 million year ended december 31 2007 compared 9206 million year ended december 31 2006 increase direct operating expenses result millions employee compensation costs include salaries bonuses related expenses increased 254 million primarily result increased incentive compensation increased headcount exclusive impact acquisitions wage bonus increases year necessary market labor extremely competitive new competitors entered market existing competitors added equipment capacity forced increase wage rates order maintain high levels quality personnel supplies equipment pressure pumping segment increased 416 million primarily result increases size pressure pumping fleet increases costs purchase transport materials used providing services customers acquisitions well services segment added 160 million direct operating expenses 2007 selfinsurance costs comprised costs associated workers compensation vehicular liability exposure insurance premiums declined significantly 2007 compared 2006 depreciation amortization expense depreciation amortization expense increased 36 million 29 1296 million year ended december 31 2007 compared 1260 million year ended december 31 2006 contributing increase depreciation amortization expense depreciation expense associated acquisitions 2007 totaled approximately 48 million increased depreciation approximately 77 million related management’s reassessment useful lives certain assets excluding depreciation amortization expense associated acquisitions reassessment useful lives depreciation expense would declined approximately 89 million assets added various acquisitions 1994 2002 time period reaching end depreciable lives depreciation amortization expense percentage revenue year ended december 31 2007 totaled 78 compared 81 year ended december 31 2006 general administrative expenses general administrative expense increased 349 million 178 2304 million year ended december 31 2007 compared 1955 million year ended december 31 2006 349 million increase primarily result millions employee compensation exclusive impact acquisitions includes salaries bonuses equitybased compensation payroll taxes increased primarily due higher equitybased compensation lesser extent increased salaries equitybased compensation expense 2007 excluding grants made outside directors totaled 120 million compared 56 million 2006 64 million increase primarily attributable awards granted phantom share plan end 2006 well incremental stock options restricted stock appreciation rights awarded 2007 1997 incentive plan general administrative expenses added acquisitions made 2007 contributed 30 million increase costs compared 2006 general administrative expenses also increased 2007 2006 general administrative expenses included 75 million benefit legal settlement 2006 repeated 2007 professional fees increased approximately 96 million 2007 primarily due delayed financial reporting process also contributing increase additional 18 million bad debt expense 55 million general administrative costs general administrative expense percentage revenue year ended december 31 2007 totaled 139 compared 126 year ended december 31 2006 interest expense net amounts capitalized interest expense decreased 27 million 70 362 million year ended december 31 2007 compared 389 million year ended december 31 2006 decrease primarily result impact higher capitalized interest result higher capital expenditures decrease partially offset onetime 23 million cost associated settlement two interest rate swaps terminated connection termination prior credit facility 2007 interest expense percentage revenue year ended december 31 2007 totaled 22 compared 25 year ended december 31 2006 loss early extinguishment debt year ended december 31 2007 incurred loss 96 million associated termination prior credit facility 2007 issued 4250 million senior notes used proceeds retire term loans outstanding prior credit facility concurrently entered senior secured credit facility terminated prior credit facility loss represents writeoff debt issue costs incurred entered prior credit facility loss sale assets net year ended december 31 2007 incurred net loss disposal assets approximately 18 million compared net gain approximately 43 million 2006 time ordinary course business company sells assets scrap condition longer used company recognizes gains losses result sales interest income interest income approximately 66 million 2007 compared approximately 56 million 2006 increase interest income primarily associated company’s investments excess cash equivalents investments liquidated fourth quarter 2007 partially fund purchase moncla income net income net approximately 04 million 2007 compared expense net approximately 05 million 2006 increase income net primarily attributable equity earnings investment iroc foreign currency transaction gains income tax expense income tax expense 1068 million year ended december 31 2007 compared income tax expense 1034 million year ended december 31 2006 effective tax rate 2007 387 compared 377 2006 increase income tax effective tax rate primarily attributable revised texas franchise tax general differences effective tax rates statutory rate 35 result primarily effect certain foreign state income taxes permanent items attributable booktax differences segment operating results year ended december 31 2008 2007 following table shows operating results reportable segments twelve month periods ended december 31 2008 2007 well servicing segment revenues well servicing segment increased 2450 million 194 15 billion year ended december 31 2008 compared 13 billion period 2007 acquisitions company completed 2008 incorporated well servicing segment contributed 347 million increase full year impact acquisitions company completed 2007 approximately 1349 million also leading higher revenues 2008 expansion casedhole wireline business approximately 143 million continuing expansion operations pemex mexico approximately 382 million additionally company implemented price increases second third quarters 2008 across markets company operates leading higher revenues partially offsetting increases revenues well servicing segment 2008 effects hurricanes ike gustav third quarter restricted company’s well servicing operations texas louisiana oklahoma company estimates negatively impacted well servicing segment revenue approximately 70 million 2008 direct operating expenses excluding depreciation amortization expense well servicing segment 9399 million 2008 increase 2012 million 272 period 2007 costs 623 revenue 2008 584 2007 increase direct costs well servicing segment resulted millions employee compensation well servicing segment includes salaries cash bonuses health insurance 401k fees payroll taxes increased 1109 million 2008 compared period 2007 acquisitions made company 2008 incorporated well servicing segment contributed approximately 139 million increase incorporation acquisitions made 2007 full year operations 2008 contributed approximately 574 million increase also contributing increase employee compensation well servicing segment expansion casedhole wireline business approximately 36 million company’s international operations mexico approximately 74 million additionally third quarter 2008 company incurred approximately 2 million retroactive union wage increases argentina likely unable recover customers excluding items direct employee compensation increased approximately 57 2008 mainly due organic growth wage rate increases made throughout course year order maintain quality workforce supplies equipment maintenance costs well servicing segment approximately 2225 million year ended december 31 2008 increase approximately 489 million 282 compared period 2007 acquisitions company made 2008 contributed approximately 40 million increase incorporation acquisitions company made 2007 full twelve months operations 2008 contributed approximately 245 million increase absent items costs increased approximately 204 million 118 2007 increase due primarily higher prices charged vendors especially certain chemicals used well servicing process fuel costs well servicing segment increased approximately 246 million 437 807 million year ended december 31 2008 compared year ended december 31 2007 acquisitions company made 2008 contributed approximately 13 million increase fuel costs incorporation acquisitions made 2007 full twelve months 2008 contributed approximately 36 million increase absent acquisitions fuel costs increased primarily result higher usage due increased utilization per gallon price fuel company estimates average pergallon price diesel increased approximately 275 2008 compared 2007 selfinsurance costs well servicing segment increased approximately 31 million 158 2008 compared period 2007 acquisitions company made 2008 incorporation acquisitions company made 2007 full year operations 2008 contributed increase primarily due costs insuring increased headcount increases offset better safety performance resulting lower number incidents pressure pumping segment revenues company’s pressure pumping segment approximately 3450 million year ended december 31 2008 represents increase 456 million 152 revenues 2993 million period 2007 acquisition leader assets third quarter 2008 contributed approximately 96 million increase pressure pumping segment revenues excluding effects acquisitions revenues pressure pumping segment increased approximately 361 million 120 2008 increase driven primarily incremental equipment added company course year well price increases implemented second quarter 2008 however fourth quarter 2008 company’s pressure pumping segment began experience significant pricing pressure began increase discounts offered customers order preserve market share revenues 2008 also negatively impacted decline number cementing acid jobs performed declines partially offset increase number coiled tubing jobs result several coiled tubing units placed service late 2008 addition coiled tubing units acquired leader direct operating expenses excluding depreciation amortization expense pressure pumping segment approximately 2399 million 2008 represents increase 502 million 265 period 2007 excluding depreciation amortization direct operating expenses pressure pumping segment 695 revenue 2008 634 revenue 2007 increase pressure pumping segment’s direct operating expenses percentage revenue primarily attributable pricing pressures second half 2008 combined increasing supply costs 2008 fuel proppants increase direct operating expenses pressure pumping segment resulted millions frac sand chemical costs pressure pumping segment increased approximately 295 million 340 1159 million 2008 compared 864 million 2007 acquisition leader assets third quarter 2008 contributed approximately 07 million increase costs 2008 absent effect leader asset purchase costs frac sand chemicals increased 2008 primarily due higher commodity prices well higher prices charged shippers transport sand addition 2008 pressure pumping segment began using coated sand proppant certain highpressure frac jobs barnett shale formation using coated sand costly normal sand allows pressure pumping segment charge higher rate customers cover additional cost employee compensation pressure pumping segment comprised salaries cash bonuses health insurance 401k fees payroll taxes increased approximately 81 million 2008 compared period 2007 leader asset purchase third quarter 2008 contributed approximately 24 million increase direct employee compensation pressure pumping segment absent effects leader asset purchase direct employee compensation pressure pumping segment increased 56 million 141 2008 increase result addition several frac coiled tubing crews year order meet customer demand wage rate increases given throughout course year order maintain high quality workforce fuel costs pressure pumping segment increased approximately 72 million 489 2008 220 million compared 148 million period 2007 acquisition leader assets third quarter 2008 contributed approximately 05 million increase absent effects leader asset purchase primary driver increase fuel per gallon price diesel company estimates average price diesel rose approximately 275 2008 factors driving increase fuel costs higher activity levels 2008 supplies equipment maintenance costs pressure pumping segment increased 36 million 95 2008 compared 2007 increase costs attributable acquisition leader fixed assets 2008 higher prices company’s vendors increased requirements repairs maintenance associated overall increase utilization pressure pumping assets 2008 fishing rental segment revenues company’s fishing rental segment approximately 1173 million year ended december 31 2008 represented increase 194 million 198 revenues 979 million period 2007 acquisition hydrawalk second quarter 2008 contributed approximately 69 million increase revenues excluding effects acquisition fishing rental segment revenues increased 125 million 128 period 2007 increase revenues attributable price increases implemented second quarter 2008 well higher number reverse unit fishing jobs 2008 compared 2007 partially offsetting increased revenues effects hurricanes gulf coast region second third quarters 2008 significantly restricted segment’s operations gulf mexico direct operating expenses excluding depreciation amortization expense fishing rental segment 706 million 2008 increase 133 million 233 2007 acquisition hydrawalk 2008 contributed approximately 32 million increase direct operating expenses excluding depreciation amortization expense direct operating expenses fishing rental segment 602 revenue 2008 585 revenue 2007 increase direct operating expenses resulted millions employee compensation expenses include salaries bonuses insurance 401k fees payroll taxes increased approximately 65 million 2008 compared period 2007 acquisition hydrawalk 2008 contributed approximately 22 million increase employee compensation absent effects acquisition employee compensation increased segment added personnel keep pace increased demand also resulted wage rate increases given throughout course year order maintain quality workforce supplies equipment maintenance fishing rental segment approximately 240 million 2008 represents increase approximately 55 million 296 2007 acquisition hydrawalk 2008 contributed approximately 10 million increase costs increases costs attributable larger asset fleet higher activity levels fuel fishing rental segment increased approximately 16 million 479 2008 compared period 2007 acquisition hydrawalk contributed approximately 03 million increase fuel costs 2008 remainder increase attributable increased activity levels increase pergallon price diesel company estimates average pergallon price diesel increased approximately 275 2008 year ended december 31 2007 2006 following table shows results operations company’s reportable segments years ended december 31 2007 2006 well servicing segment well servicing segment revenue increased 635 million 53 126 billion year ended december 31 2007 compared revenue 120 billion year ended december 31 2006 increase revenue largely attributable impact acquisition moncla contributed 236 million 90 million contract pemex mexico 137 million higher revenue casedhole electric wireline operations remainder increase result fullyear impact pricing increases implemented second half 2006 though revenues affected declines activity levels reductions overall peak pricing second half 2007 year ended december 31 2007 rig hours decreased 79 compared year ended december 31 2006 trucking hours decreased 29 comparable period decrease rig trucking hours due primarily lost market share new market entrants well servicing direct operating expenses increased 137 million 20 7387 million year ended december 31 2007 compared 7250 million year ended december 31 2006 acquisitions made 2007 contributed approximately 160 million increase direct operating expenses excluding effect acquisitions well servicing direct operating expenses increased result higher employee compensation costs 172 million compensationrelated expenses increased due need retain workforce result new equipment capacity marketplace demand labor strong implemented programs retain personnel including higher wage rates partially offsetting increased compensation costs 228 million decrease costs associated selfinsurance programs costs include workers’ compensation vehicular liability exposure insurance premiums declined primarily result improved safety performance fewer less severe incidents 2007 compared 2006 well servicing direct expenses increased approximately 33 million pressure pumping segment pressure pumping segment revenue increased 519 million 210 2993 million year ended december 31 2007 compared revenue 2475 million year ended december 31 2006 increase revenue attributable purchase incremental pressure pumping equipment higher activity levels offset somewhat lower pricing 2007 course 2006 2007 purchased additional new pressure pumping equipment service satisfy customers’ needs increasing size fleet new equipment resulted additional services performed resulted higher revenue 2007 completed 2152 fracturing jobs 2074 cementing jobs compared 1585 1958 respectively 2006 fracturing cementing jobs accounted substantial majority segment revenue direct operating expenses increased 513 million 370 1896 million year ended december 31 2007 compared 1384 million year ended december 31 2006 increase direct operating expenses largely attributable costs associated increased demand pressure pumping services increased size pressure pumping fleet 2007 costs related employee compensation pressure pumping segment increased 88 million due primarily expansion pressure pumping fleet introduction new equipment required us hire additional personnel increased wage rates crews equipment costs increased 132 million 2006 primarily due expansion pressure pumping fleet additionally sand chemical associated freight costs increased approximately 293 million 2007 costs relate purchase sand chemicals used operations various suppliers shipment pressure pumping facilities job locations activity levels pressure pumping segment increased 2007 used greater amounts sand chemicals additionally overall activity pressure pumping sector increased 2007 costs materials transportation increased fishing rental segment fishing rental segment revenue totaled 979 million year ended december 31 2007 compared revenue 975 million year ended december 31 2006 although segment benefited additional rental equipment 2007 equipment additions offset somewhat lower overall pricing fishing rental segment direct operating expenses flat 573 million year ended december 31 2007 compared 572 million year ended december 31 2006 liquidity capital resources current financial condition liquidity following table summarizes cash flows years ended december 31 2008 2007 cash flow operating activities increased approximately 1172 million primarily result growth revenues earnings 2008 cash flows related accounts receivable increased vendor payments also managed effectively yet experienced collectibility issues receivable balances customers excess historical norms reduction commodity prices may increase credit risk associated customer payments deterioration uncertainty global economy resulting impact oil natural gas prices may also impact customer’s ability pay services 2009 actively monitor customers’ ability pay services take appropriate actions respect collectibility issues circumstances dictate cash flow used investing activities increased 262 million 2008 compared period 2007 past three years devoted significant amounts cash flow operations support organic growth beginning 2006 december 31 2008 cumulatively invested approximately 6274 million rig fleet equipment include expenditures acquisitions capital expenditures year ended december 31 2008 2190 million excluding acquisitions 2008 completed four acquisitions approximately 982 million aggregate net cash acquired cash used investing activities also increased 2007 2008 due company’s investment geostream fourth quarter 2008 sale company’s marketable securities fourth quarter 2007 company expects capital expenditure program 2009 decrease 2008 total approximately 1300 million focus 2009 maintaining maximizing utilization existing asset base cash used financing activities 2008 also increased due repurchase approximately 1394 million common stock 2007 board directors authorized share repurchase program 300 million effective march 31 2009 inception program december 31 2008 repurchased approximately 134 million shares common stock approximately 1673 million share repurchase program well amount timing future repurchases subject market conditions financial condition liquidity senior secured credit facility permits share repurchases 2000 million provides share repurchases excess 2000 million made debt capitalization ratio 50 december 31 2008 would permitted make share repurchases excess 2000 million cash outflows financing activities 2008 partially offset increased proceeds borrowings revolving portion senior secured credit facility 2008 borrowed approximately 1728 million revolving portion senior secured credit facility finance acquisitions fund initial investment geostream general corporate purposes 2008 paid approximately 350 million outstanding borrowings senior secured credit facility december 31 2008 net working capital excluding current portion longterm debt notes payable affiliates capital lease obligations 257 million 3115 million net working capital december 31 2007 excluding current portion longterm debt notes payable affiliates capital lease obligations 124 million 2654 million working capital increased december 31 2007 december 31 2008 primarily result increases cash equivalents accounts receivable balances associated incremental revenues acquisitions higher pricing 2008 higher values sand inventories due higher pricing commodities freight costs offset decline income tax refund receivable increases current accrued liabilities december 31 2008 approximately 169 million cash equivalents held bank accounts foreign subsidiaries representing approximately 203 total cash equivalents total amount held foreign subsidiaries december 31 2008 approximately 89 million held argentinean subsidiary 56 million amount held us bank accounts denominated us dollars 08 million located canada approximately 71 million held mexican subsidiary 11 million amount held us bank accounts remaining 01 million located countries believe repatriation cash balances held foreign subsidiaries would cause material withholdings maintain cash bank deposit brokerage accounts exceed federally insured limits december 31 2008 accounts guaranteed federal deposit insurance corporation “fdic” 250000 substantially company’s accounts held deposits excess fdic limits believe current financial condition strong december 31 2008 927 million cash equivalents working capital excluding current portion longterm debt notes payable affiliates capital lease obligations 3115 million december 31 2008 1878 million borrowings outstanding revolving credit facility 536 million letters credit issued letter credit subfacility outstanding also reduces total borrowing capacity senior secured credit facility 1393 million availability senior secured credit facility availability senior secured credit facility reflects reduction approximately 193 million unfunded commitments lehman commercial paper inc “lcpi” subsidiary lehman brothers holdings “lehman” one members syndicate banks participating senior secured credit facility believe reduction available capacity senior secured credit facility material impact company’s liquidity borrowing level december 31 2008 represents highest amount outstanding borrowings incurred us 2008 see “senior secured credit facility” “sources liquidity capital resources” “item 7 management’s discussion analysis financial condition results operations” discussion lcpi december 31 2008 annual debt maturities senior notes borrowings senior secured credit facility notes payable affiliates indebtedness follows millions december 31 2008 company compliance covenants required senior notes senior secured credit facility see “sources liquidity capital resources” “liquidity outlook future capital requirements” “item 7 management’s discussion analysis financial condition results operations” discussion senior notes senior secured credit facility sources liquidity capital resources company’s sources liquidity include current cash equivalents availability senior secured credit facility internally generated cash flows operations fourth quarter 2007 refinanced indebtedness issued senior notes using proceeds issuance retire thenexisting senior credit facility also entered current senior secured credit facility fourth quarter 2007 see “note 12 longterm debt” “item 8 consolidated financial statements supplementary data” detail 8375 senior notes november 29 2007 issued senior notes senior notes priced 100 face value yield 8375 net proceeds deducting initial purchasers’ fees offering expenses approximately 4161 million used approximately 3949 million net proceeds retire term loans including accrued unpaid interest thenexisting senior credit facility senior notes general unsecured senior obligations key accordingly rank effectively subordinate existing future secured indebtedness senior notes jointly severally guaranteed senior unsecured basis certain existing future domestic subsidiaries interest senior notes payable june 1 december 1 year senior notes mature december 1 2014 december 1 2011 senior notes subject redemption time option whole part upon less 30 60 days’ notice redemption prices expressed percentages principal amount redeemed set forth plus accrued unpaid interest thereon applicable redemption date redeemed twelvemonth period beginning december 1 years indicated notwithstanding foregoing time december 1 2010 may one occasions redeem 35 aggregate principal amount outstanding senior notes redemption price 108375 principal amount thereof plus accrued unpaid interest thereon redemption date net cash proceeds one equity offerings provided least 65 aggregate principal amount senior notes issued indenture remains outstanding immediately redemption provided redemption shall occur within 180 days date closing equity offering addition time prior december 1 2011 may option redeem portion senior notes redemption price equal 100 principal amount thereof plus applicable premium defined indenture respect senior notes plus accrued unpaid interest thereon redemption date experience change control subject certain exceptions must give holders senior notes opportunity sell us senior notes whole part purchase price equal 101 aggregate principal amount thereof plus accrued unpaid interest thereon date purchase subject certain negative covenants indenture governing senior notes indenture limits ability among things • sell assets • pay dividends make distributions capital stock subordinated indebtedness • make investments • incur additional indebtedness issue preferred stock • create certain liens • enter agreements restrict dividends payments subsidiaries us • consolidate merge transfer substantially assets • engage transactions affiliates • create unrestricted subsidiaries covenants subject certain exceptions qualifications contain crossdefault provisions connection covenants senior secured credit facility addition substantially covenants terminate senior notes mature one two specified ratings agencies assigns senior notes investment grade rating future events default exist indenture covenants cease apply us result achieving investment grade rating restored even credit rating assigned senior notes later falls investment grade rating connection sale senior notes company entered registration rights agreement initial purchasers pursuant agreed file exchange offer registration statement sec respect offer exchange senior notes substantially identical notes would registered securities act use reasonable best efforts cause registration statement become effective prior november 29 2008 accordance agreement company filed exchange offer registration statement sec became effective august 22 2008 offered exchange aggregate principal amount 4250 million registered 8375 senior notes due 2014 company refers exchange notes original unregistered 8375 senior notes due 2014 issued private offering november 29 2007 terms exchange notes substantially identical terms original notes except transfer restrictions registration rights additional interest provisions relating originally issued notes apply exchange notes references “senior notes” herein includes exchange notes issued exchange offer senior secured credit facility simultaneously closing offering senior notes company entered new credit agreement several lenders provides senior secured credit facility “senior secured credit facility” consisting revolving credit facility letter credit subfacility swing line facility aggregate principal amount 4000 million mature later november 29 2012 obligations senior secured credit facility guaranteed subsidiaries secured assets including accounts receivable inventory equipment senior secured credit facility obligations thereunder secured substantially assets company guaranteed certain company’s existing future domestic subsidiaries senior secured credit facility replaced company’s prior credit facility terminated connection closing offering senior notes interest rate per annum applicable amounts borrowed senior secured credit facility company’s option libor plus applicable margin ii higher x bank america’s prime rate federal funds rate plus 05 plus applicable margin applicable margin libor loans ranges 150 200 basis points applicable margin loans ranges 50 100 basis points depend upon company’s consolidated leverage ratio onemonth libor rate december 31 2008 043625 senior secured credit facility contains certain financial covenants among things require maintenance consolidated leverage ratio exceed 350 100 consolidated interest coverage ratio less 300 100 limit company’s capital expenditures 2500 million per fiscal year 50 amount may carried expenditure following fiscal year ratios referred calculated quarterly consolidated basis trailing four fiscal quarter period addition senior secured credit facility contains certain affirmative negative covenants including without limitation restrictions liens ii debt guarantees contingent obligations iii mergers consolidations iv sales transfers dispositions property assets v loans acquisitions joint ventures investments acquisitions permitted long giving pro forma effect thereto default event default exists senior secured credit facility consolidated leverage ratio exceed 275 100 company compliance consolidated interest coverage ratio company least 25 million availability senior secured credit facility vi dividends distributions redemptions repurchases equity holders vii prepaying redeeming repurchasing subordinated contractually structurally debt viii granting negative pledges lenders ix changes nature company’s business x amending organizational documents amending otherwise modifying debt related document material agreement amendment modification would material adverse effect xi changes accounting policies reporting practices foregoing cases certain exceptions senior secured credit facility also contains crossdefault provisions connection covenants senior notes senior secured credit facility permits share repurchases 2000 million provides share repurchases excess 2000 million made debt capitalization ratio 50 company may prepay senior secured credit facility whole part time without premium penalty subject certain reimbursements lenders breakage redeployment costs september 15 2008 lehman filed bankruptcy protection chapter 11 united states bankruptcy code subsidiary lehman lcpi member syndicate banks participating senior secured credit facility lcpi’s commitment approximately 11 company’s total facility moncla notes payable connection acquisition moncla entered two notes payable former owners “moncla note” collectively “moncla notes” first moncla note unsecured note amount 125 million due payable lumpsum together accrued interest october 25 2009 interest note due anniversary closing date october 25 2007 second moncla note unsecured note amount 100 million payable annual installments 20 million plus accrued interest beginning october 25 2008 2012 moncla notes bears interest federal funds rate adjusted annually anniversary closing date moncla acquisition capital lease agreements lease equipment vehicles tractors trailers frac tanks forklifts financial institutions master lease agreements december 31 2008 approximately 231 million outstanding equipment leases offbalance sheet arrangements december 31 2008 currently offbalance sheet arrangements reasonably likely material current future effect financial condition revenues expenses results operations liquidity capital expenditures capital resources liquidity outlook future capital requirements set forth summary contractual obligations december 31 2008 obligations pay future periods reflect certain assumptions including variability interest rates variablerate obligations duration obligations actual payments future periods may vary 1 interest costs floating rate debt estimated using rates effect december 31 2008 2 based december 31 2008 exchange rate 3 based company’s stock price december 31 2008 4 amounts assume certain performance targets achieved 5 amounts assume minimum required purchase price remaining two years contract believe internally generated cash flow operations current reserves cash equivalents sufficient finance majority cash requirements current future operations budgeted capital expenditures debt service 2009 historically done company may time access available funds senior secured credit facility supplement liquidity meet cash requirements day operations times peak needs throughout year planned capital expenditures well acquisitions choose pursue expected financed combination cash hand cash flow operations borrowings senior secured credit facility february 23 2009 536 million letters credit issued letter credit subfacility approximately 6583 million total debt notes payable capital leases february 23 2009 cash hand 1497 million available borrowing capacity 1393 million senior secured credit facility availability reflects reduction approximately 193 million unfunded commitments lcpi february 23 2009 approximately 135 million cash equivalents held bank accounts foreign subsidiaries 55 million amount held us bank accounts denominated us dollars believe balances could repatriated general corporate use without material withholdings senior secured credit facility senior notes contain numerous covenants govern ability make domestic international investments repurchase stock even experience severe downturn business believe covenants related capital spending investments foreign subsidiaries within control therefore believe avoid default covenants senior secured credit facility also requires us maintain certain financial performance levels financial covenants follows • consolidated interest coverage ratio calculated pursuant terms senior secured credit facility required maintain ratio trailing four quarters earnings interest tax depreciation amortization “ebitda” interest expense least 30 10 december 31 2008 calculated consolidated interest coverage ratio 118 10 management believes company remain compliance covenant least end 2009 • consolidated leverage ratio calculated pursuant terms senior secured credit facility required maintain ratio total debt trailing four quarters ebitda greater 35 10 december 31 2008 calculated consolidated leverage ratio 14 10 total qualifying debt 7129 million december 31 2008 covenant requires trailing four quarters ebitda meet minimum threshold 2037 million management believes company remain compliance covenant least end 2009 trailing four quarter ebitda fall required threshold future management may also utilize cash hand reduce debt outstanding lower ebitda minimum maintain compliance covenant breach covenants ratios tests could result default indebtedness see “item 1a risk factors” although continued deterioration market conditions could lead downgrade credit ratings companies industry downgrade key’s credit rating would effect outstanding debt either senior secured credit facility senior notes would potentially impact ability obtain additional external financing required 2009 management plans continue invest business capital expenditures albeit levels lower prior years capital expenditure program 2009 expected total approximately 1300 million approximately 500 million already committed either order fulfill customer requests december 31 2008 however amount subject market conditions including activity levels commodity prices industry capacity focus 2009 maximizing utilization current equipment however may seek increase 2009 capital expenditure budget event international expansion opportunities develop currently plan fund expenditures combination cash hand operating cash flows borrowings senior secured credit facility operating cash flows prove insufficient fund expenditures management expects adjust capital spending plans accordingly fourth quarter 2009 required make principle payments totaling 145 million related moncla notes payments represent lump sum payment one moncla note totaling 125 million 20 million annual installment payment second moncla note expect fund obligations moncla notes cash hand generated operating activities borrowings senior secured credit facility october 31 2008 acquired 26 interest geostream 174 million geostream based russian federation provides drilling workover services subsurface engineering modeling russian federation contractually required purchase additional 24 geostream later march 31 2009 approximately 113 million december 31 2008 equivalent 159 million period exceed six years subsequent october 31 2008 option increase ownership percentage geostream 100 acquired 100 geostream end sixyear period required arrange initial public offering shares expect fund obligation geostream cash hand generated operating cash flows borrowings senior secured credit facility management anticipates 2009 may period lower demand prices services believe operating cash flow cash hand available borrowings coupled ability control capital expenditures sufficient maintain adequate liquidity throughout 2009 critical accounting policies accounting department responsible development application accounting policies internal control procedures reports principal financial officer process preparation financial statements conformity generally accepted accounting principles united states “gaap” requires management make certain estimates judgments assumptions may affect reported amounts assets liabilities disclosures contingencies balance sheet date amounts revenues expenses recognized reporting period presentation statement cash flows period ended may record materially different amounts estimates judgments assumptions change actual results differ however analyze estimates assumptions judgments based historical experience various factors believe reasonable circumstances identified following critical accounting policies require significant amount estimation judgment accurately present financial position results operations cash flows • estimate reserves workers’ compensation vehicular liability selfinsured reserves • accounting contingencies • accounting income taxes • estimate fixed asset depreciable lives • valuation tangible intangible assets • valuation equitybased compensation workers’ compensation vehicular liability selfinsurance reserves well servicing workover operations expose employees hazards generally associated oilfield heavy lifting moving equipment slippery surfaces cause contribute accidents involving employees third parties may present site environmental conditions remote domestic oil natural gas basins range extreme cold extreme heat heavy rain blowing dust conditions also lead contribute accidents business activities incorporate significant numbers fluid transport trucks oilfield vehicles supporting rolling stock move public private roads vehicle accidents significant risk us also conduct contract drilling operations present additional hazards inherent drilling wells blowouts explosions fires could result loss hole damaged equipment personal injury contractor also enter master service agreements customers agreements subject us potential contractual liabilities common oilfield hazards accidents could result damage property third party’s property injury death employees third parties although purchase insurance protect large losses much risk retained form large deductibles selfinsured retentions occurrence event fully insured indemnified failure customer insurer meet indemnification insurance obligations could result substantial losses addition assurance insurance available cover risks available could obtained without substantial increase premiums possible addition higher premiums future insurance coverage may subject higher deductibles coverage restrictions based risks discussed estimate liability arising potentially insured events including workers’ compensation employer’s liability vehicular liability general liability record accruals consolidated financial statements reserves related claims covered insurance based specific facts circumstances insured event past experience similar claims loss estimates individual claims adjusted based upon actual claim judgments settlements reported claims actual outcome claims could differ significantly estimated amounts largely selfinsured physical damage equipment automobiles rigs accruals maintain consolidated balance sheet relate deductibles selfinsured retentions estimate use historical claims data trend analysis actual outcome claim could differ significantly estimated amounts adjust loss estimates calculation accruals based upon actual claim settlements reported claims accounting contingencies addition workers’ compensation vehicular liability selfinsurance reserves record loss contingencies relate numerous lawsuits claims proceedings taxrelated audits normal course operations consolidated balance sheet accordance sfas 5 accounting contingencies “sfas 5” record loss contingency matters probable liability incurred amount loss reasonably estimated review loss contingencies routinely ensure appropriate liabilities recorded balance sheet adjust liabilities based estimates judgments made management respect likely outcome matters including effect applicable insurance coverage litigation matters estimates judgments could change based new information changes laws regulations changes management’s plans intentions outcome legal proceedings settlements factors actual results could vary materially reserves record liabilities environmental assessment indicates site remediation efforts probable costs reasonably estimated measure liabilities based part relevant past experience currently enacted laws regulations existing technology sitespecific costs costsharing arrangements recognition joint several liability based upon best estimate final prorata share liability low amount range estimates assumptions involve judgments estimates management changes assumptions new information could lead increases decreases ultimate liability changes recognized immediately earnings provisions sfas 143 accounting asset retirement obligations “sfas 143” record legal obligations retire tangible longlived assets balance sheet liabilities recorded discount incur liability significant judgment involved estimating future cash flows associated obligations well ultimate timing cash flows estimates amount timing cash flows change may material impact results operations accounting income taxes follow sfas 109 accounting income taxes “sfas 109” requires account deferred income taxes using asset liability method provide income taxes significant temporary differences management determines current tax liability well taxes incurred result current operations yet deferred future periods current taxes payable represent liability related income tax return current year net deferred tax expense benefit represents change balance deferred tax assets liabilities reported consolidated balance sheets management estimates changes deferred tax assets liabilities using basis assets liabilities financial reporting purposes enacted rates management estimates effect differences reverse management makes certain assumptions timing temporary tax differences differing treatment certain items tax accounting purposes whether differences permanent final determination tax liability involves interpretation local tax laws tax treaties related authorities jurisdiction well significant use estimates assumptions regarding scope future operations results achieved timing nature income earned expenditures incurred establish valuation allowances reduce deferred tax assets determine likely eg likelihood 50 portion deferred tax assets realized future periods assess likelihood use estimates judgment regarding future taxable income well jurisdiction taxable income generated determine whether valuation allowance required evidence include current financial position results operations actual forecasted results reversal deferred tax liabilities tax planning strategies well current forecasted business economics industry additionally record reserves uncertain tax positions subject management judgment related resolution tax positions completion audits tax authorities domestic international tax jurisdictions operate please see “note 11 income taxes” “item 8 consolidated financial statements supplementary data” discussion accounting income taxes changes valuation allowance components tax rate reconciliation realization loss carryforwards estimates depreciable lives use estimated depreciable lives longlived assets rigs heavyduty trucks trailers compute depreciation expense estimate future asset retirement obligations conduct impairment tests base estimates depreciable lives number factors environment assets operate industry factors including forecasted prices competition assumption provide appropriate amount capital expenditures asset operation maintain economical operation asset prevent untimely demise scrap useful lives intangible assets determined years expect assets generate benefit based legal contractual expectations depreciate operational assets depreciable lives salvage value 10 acquisition cost recognize gain loss upon ultimate disposal asset periodically analyze estimates depreciable lives fixed assets determine depreciable periods salvage value continue appropriate also analyze useful lives salvage value events conditions occur could shorten remaining depreciable life asset review depreciable periods salvage values reasonableness given current conditions result depreciation expense based upon estimates depreciable lives fixed assets salvage value economic factors require management make significant judgments estimates determine depreciable lives different originally estimated depreciation expense may increase decrease impairments carrying values fixed assets may result valuation intangible tangible assets company periodically reviews intangible assets subject amortization including goodwill determine whether impairment assets may exist sfas 142 requires tests made least annual basis often circumstances indicate assets may impaired circumstances include limited significant adverse changes business climate test impairment indefinitelived intangibles two step test first step test fair value calculated company’s reporting units fair value compared carrying value reporting unit including reporting unit’s goodwill fair value reporting unit exceeds carrying value impairment second step test performed carrying value exceeds fair value reporting unit second step test required second step test compares implied fair value reporting unit’s goodwill carrying value implied fair value reporting unit’s goodwill determined manner amount goodwill recognized business combination purchase price equal fair value reporting unit implied fair value reporting unit’s goodwill excess carrying value impairment recorded carrying value excess implied fair value impairment equal excess recorded company conducts annual impairment test goodwill december 31 year determining fair value company’s reporting units management uses weightedaverage approach three commonly used valuation techniques discounted cash flow method guideline companies method similar transaction method company’s management assigns weight results methods based facts circumstances existence testing period 2008 acquisitions international investments made company prior two years overall economic downturn decline company’s stock price market valuation 2008 management assigned weighting discounted cash flow method methods prior years company assigned higher weightings guideline companies method addition estimates made management regarding weighting various valuation techniques creation techniques requires significant estimates assumptions made management discounted cash flow method assigned highest weight management requires assumptions future cash flows future growth rates discount rates assumptions future cash flows growth rates based company’s budgets strategic plans well beliefs management future activity levels discount rate assumptions include assessment specific risk associated reporting unit tested assist management preparation analysis valuation company’s reporting units management utilized services thirdparty valuation consultant reviewed management’s estimates assumptions calculations ultimate conclusions valuation techniques remain sole responsibility company’s management test required annual basis also required frequently based changes external factors currently expect additional tests would result additional charge fair value used test heavily impacted market prices equity debt securities could result impairment charges future unlike goodwill indefinitelived intangible assets fixed assets finitelived intangibles tested impairment recurring basis circumstances events indicate possible impairment may exist circumstances events referred “trigger events” examples trigger events include limited adverse change market conditions significant decrease benefits derived acquired business significant disposal particular asset class trigger event occurs impairment test pursuant guidelines established sfas 144 accounting impairment disposal longlived assets “sfas 144” performed based undiscounted cash flow analysis perform impairment test make judgments estimates assumptions regarding longterm forecasts revenues expenses relating assets subject review market conditions energy prices estimated depreciable lives assets discount rate assumptions legal factors impact operations significant effect estimates management using different judgments estimates could differ significantly actual financial results could differ materially estimates longterm forecasts used impairment tests determine asset’s carrying value recoverable writedown fair value required analysis determines assets reporting unit asset grouping impaired impairment charge recorded valuation equitybased compensation account share based compensation provisions sfas 123 revised 2004 sharebased payment “sfas 123r” adopted january 1 2006 adopted provisions sfas 123r using modified prospective transition method company granted stock options stocksettled stock appreciation rights “sars” restricted stock “rsas” phantom shares “phantom shares” employees nonemployee directors option sar awards granted company fair valued using blackscholes option model amortized compensation expense vesting period option award net estimated actual forfeitures compensation related rsas based fair value award grant date recognized based vesting requirements satisfied period phantom shares accounted fair value changes fair value awards recorded compensation expense period please see “note 17 sharebased compensation” “item 8 consolidated financial statements supplementary data” discussion various award types accounting equitybased compensation utilizing blackscholes option pricing model determine fair values awards certain assumptions made based subjective expectations subject change one assumptions would impact expense associated future grants key assumptions include volatility common stock riskfree interest rate expected life awards used following weighted average assumptions blackscholes option pricing model determining fair value stock option grants years ended december 31 2008 2007 2006 calculate expected volatility stock option grants measuring volatility historical stock price period equal expected life option ending time option granted determine riskfree interest rate based upon interest rate us treasury bill term equal expected life option time option granted estimating expected lives stock options relied primarily actual experience previous stock option grants expected life less term option holders experience exercise forfeit options term option required recalculate fair value stock option grants estimated using blackscholes option pricing model initial calculation unless original option grant terms modified however 100 basis point increase expected volatility riskfree interest rate grant date would increased compensation expense year ended december 31 2008 approximately 10 million new accounting standards adopted report fin 48 fsp fin 481 june 2006 financial accounting standards board “fasb” issued fasb interpretation “fin” 48 accounting uncertainty income taxes interpretation fasb statement 109 “fin 48” provides clarification sfas 109 respect recognition income tax benefits uncertain tax positions financial statements fin 48 requires uncertain tax positions reviewed assessed recognition measurement tax benefit based “more likely not” standard may 2007 fasb issued fasb staff position “fsp” fin 481 “fsp fin 481” fsp fin 481 provides guidance enterprise determine whether tax position effectively settled purpose recognizing previously unrecognized tax benefits determining whether tax position effectively settled entities must evaluate whether taxing authorities completed examination procedures ii whether entity intends appeal litigate aspect tax position included completed evaluation iii whether remote taxing authority would examine reexamine aspect taxing position fsp fin 481 applied upon initial adoption fin 48 adopted provisions fin 48 fsp fin 481 january 1 2007 recorded 13 million decrease balance retained earnings january 1 2007 reflect cumulative effect adopting standards fsp eitf 00192 december 2006 fasb issued fsp eitf 00192 accounting registration payment arrangements “fsp eitf 00192” fsp eitf 00192 addresses accounting registration payment arrangements “rpas” provisions within financial instruments equity shares warrants debt instruments issuer agrees file registration statement registration statement declared effective sec within specified grace period registration statement declared effective within grace period effectiveness maintained period time specified rpa issuer must compensate counterparty fasb staff concluded contingent obligation make future payments otherwise transfer consideration rpa recognized liability measured accordance sfas 5 fin 14 reasonable estimation amount loss rpa recognized measured separately instrument rpa attached january 1999 company completed private placement 150000 units consisting 1500 million 14 senior subordinated notes due january 25 2009 “14 senior subordinated notes” 150000 warrants purchase aggregate approximately 22 million shares company’s common stock exercise price 488125 per share “warrants” terms warrants required maintain effective registration statement covering shares common stock issuable upon exercise warrants due past failure file sec reports timely manner effective registration statement covering warrants required make liquidated damages payments requirement make liquidated damages payments constituted rpa provisions fsp eitf 00192 prescribed transition provisions standard january 1 2007 company recorded pretax current liability approximately 10 million equivalent payments warrant rpa one year offsetting adjustment opening balance retained earnings sfas 157 september 2006 fasb issued sfas 157 fair value measurements “sfas 157” effective periods beginning january 1 2008 sfas 157 establishes framework measuring fair value requires expanded disclosure information used measure fair value statement applies whenever statements require permit assets liabilities measured fair value expand use fair value accounting new circumstances adoption standard material impact consolidated financial statements sfas 159 company adopted statement financial accounting standards 159 fair value option financial assets liabilities including amendment fasb statement 115 “sfas 159” january 1 2008 sfas 159 permits companies choose specified election dates measure eligible items fair value “fair value option” companies choosing election report unrealized gains losses items fair value option elected earnings subsequent reporting period elect measure financial assets liabilities using fair value option assess measurement date whether use fair value option future financial assets liabilities permitted pursuant provisions sfas 159 fsp sfas 1573 october 2008 fasb issued fsp sfas 1573 determining fair value financial asset market asset active “fsp 1573” fsp sfas 1573 clarified application sfas 157 fsp sfas 1573 demonstrated fair value financial asset determined market financial asset inactive fsp sfas 1573 effective upon issuance including prior periods financial statements issued implementation standard material impact consolidated financial statements accounting standards yet adopted report fsp sfas 1423 april 2008 fasb issued fsp sfas 1423 determination useful life intangible assets “fsp 1423” fsp sfas 1423 amends factors considered developing renewal extension assumptions used determine useful life recognized intangible asset sfas 142 fsp sfas 1423 also requires expanded disclosure regarding determination intangible asset useful lives fsp sfas 1423 effective fiscal years beginning december 15 2008 currently evaluating potential impact adoption fsp sfas 1423 consolidated financial statements sfas 161 march 2008 fasb issued sfas 161 disclosures derivative instruments hedging activities “sfas 161” sfas 161 amends expands disclosure requirements sfas 133 accounting derivative instruments hedging activities requires qualitative disclosures objectives strategies using derivatives quantitative disclosures fair value amounts gains losses derivative instruments disclosures creditriskrelated contingent features derivative agreements statement effective financial statements issued fiscal periods beginning november 15 2008 company currently financial instruments qualify derivatives expect adoption standard material impact company’s financial position results operations cash flows fsp sfas 1572 february 2008 fasb issued fsp sfas 1572 effective date fasb statement 157 “fsp 1572” partially defer sfas 157 fsp 1572 defers effective date sfas 157 nonfinancial assets nonfinancial liabilities except recognized disclosed fair value financial statements recurring basis least annually fiscal years interim periods within fiscal years beginning november 15 2008 currently evaluating impact adopting provisions sfas 157 relates nonfinancial assets liabilities sfas 141r december 2007 fasb issued sfas 141 revised 2007 business combinations “sfas 141r” sfas 141r establishes principles requirements acquirer business combination recognizes measures financial statements identifiable assets acquired liabilities assumed noncontrolling interests acquiree well goodwill acquired significant changes current practice resulting sfas 141r include expansion definitions “business” “business combination” business combinations whether partial full step acquisitions acquirer record 100 assets liabilities acquired business including goodwill fair values contingent consideration recognized fair value acquisition date certain arrangements changes fair value recognized earnings settlement acquisitionrelated transaction restructuring costs expensed rather treated part cost acquisition sfas 141r also establishes disclosure requirements enable users evaluate nature financial effects business combination sfas 141r applies prospectively business combinations acquisition date beginning first annual reporting period beginning december 15 2008 sfas 141r may impact consolidated financial statements nature magnitude specific impact depend upon nature terms size acquisitions consummated effective date sfas 160 december 2007 fasb issued sfas 160 noncontrolling interests consolidated financial statements amendment arb 51 “sfas 160” sfas 160 amends accounting research bulletin 51 consolidated financial statements establish accounting reporting standards noncontrolling interest subsidiary deconsolidation subsidiary clarifies noncontrolling interest subsidiary sometimes referred minority interest thirdparty ownership interest consolidated entity reported component equity consolidated financial statements among requirements sfas 160 requires consolidated statement income reported amounts include amounts attributable parent noncontrolling interest sfas 160 also requires disclosure face consolidated statement income amounts consolidated net income attributable parent noncontrolling interest sfas 160 effective fiscal years interim periods within fiscal years beginning december 15 2008 earlier adoption permitted currently evaluating potential impact statement item 7aitem 7 management’s discussion analysis financial condition results operations following discussion analysis financial condition results operations read conjunction consolidated financial statements related notes thereto “item 8 financial statements supplementary data” discussion contains forwardlooking statements based upon current expectations subject uncertainty changes circumstances including identified “cautionary note regarding forwardlooking statements” actual results may differ materially expectations due inaccurate assumptions known unknown risks uncertainties forwardlooking statements read conjunction disclosures “item 1a risk factors” overview provide complete range services major oil companies foreign national oil companies independent oil natural gas production companies including rigbased services fluid management services pressure pumping services fishing rental services wireline services operate major oil natural gas producing regions united states well internationally mexico argentina russian federation also technology development company based canada equity interests oilfield service companies canada 2009 operated two business segments well servicing production services also functional support segment associated managing reportable operating segments full description operating segments see “service offerings” “item 1 business” business growth strategies strategy improve results acquisitions controlling spending maintenance growth market share core segments expansion internationally investments technology new service offerings enhancement safety quality maintenance strong balance sheet good liquidity acquisition strategy contemplates time may acquire businesses assets consistent longterm growth strategy 2009 acquired additional 24 interest geostream gained 50 ownership controlling interest geostream oilfield services company russian federation providing drilling services workover services subsurface engineering modeling result investment expect expand international presence specifically russia wells shallow suited services perform investment geostream made using cash generated operations objective use cash future acquisitions may time access availability revolving credit facility fund future acquisitions depending future market conditions however may elect use equity financing tool acquisitions controlling spending 2009 market conditions oilfield services continued downward trend began latter part 2008 downturn market services resulted disruption credit markets caused many customers begin slow capital spending well declines prices oil natural gas response downturn began taking steps latter part 2008 continued 2009 decrease spending levels control costs steps included targeted reductions workforce reductions pay benefits reductions cost structure believe actions took resulted significant cost savings year continue focus rationalization infrastructure including facility consolidations continued cost reductions efforts maintain grow core segments 2006 2008 significantly increased capital expenditures compared prior years devoting capital organic growth excluding acquisitions cumulatively spent approximately 5600 million capital expenditures since beginning 2007 including capital expenditures 1284 million 2009 expenditures include purchases expand operations mexico russia drill strings nitrogen units rental operations capitalized costs new information system projects overall downturn economy began late 2008 persisted 2009 reduced capital expenditure program 2009 order maintain liquidity provide flexibility use capital however continue evaluate capital spending current environment could increase spending growth opportunities awarded additional international work recognize opportunity expand services particular market international expansion evaluating expansion number international markets one objectives redeploy underutilized assets international markets continue grow presence service capabilities mexico russia 2009 increased number working rigs positioned mexico also deployed oilfield service equipment region expand service offerings russia sold drilling workover rigs equipment geostream enhance presence consider strategic international acquisitions joint ventures order establish presence particular market investing technology invested continue invest technologies improve operational safety performance believe investments continue differentiate key premium energy service provider provide opportunities higher pricing keyview® technology keyview® system proprietary rig data acquisition control information system began deployment 2003 keyview® system measures selected rig sensor data rig activity data provides visibility performance safety well site operations 2009 continued upgrade keyview® system enhanced data mining reporting safety capabilities enhance operational safety benefits systems believe measuring performance critical providing premium service customer base differentiates us competitors december 31 2009 299 keyview® systems deployed advanced measurements inc “ami” technology initiative expanded acquisition ami 2007 ami designs produces oilfield service data acquisition control information systems ami’s technology platform application facilitate collection job performance related information digitally distributes information customers ami contributed development keyview® system assists advancement technology smarttongsm services 2009 introduced “smarttongsm rod connection services” market development technology driven high sucker rod connection failure rates additional associated repair costs incurred clients smarttongsm systems computercontrolled fully automated hydraulic sucker rod tong systems make sucker rod connection manufacturer’s american petroleum institute “api” specifications believe technology kind provides level precision december 31 2009 two smarttongsm systems deployed anticipate deploying additional smarttongsm systems course 2010 safety quality devote significant resources training professional development employees special emphasis safety currently operate training centers texas california oklahoma new mexico louisiana addition conjunction local community colleges cooperative training centers wyoming new mexico texas training centers used enhance employees’ understanding operating safety procedures recognize historically high turnover rate industry operate committed offering competitive compensation benefits incentive programs employees order ensure qualified safetyconscious personnel able provide quality service customers maintain strong balance sheet liquidity believe ability maintain strong balance sheet exercise sound capital discipline critical position key sustain current market conditions also believe ability maintain liquidity borrowing capacity important order enable us maintain operational flexibility well take advantage business opportunities arise december 31 2009 374 million cash equivalents 1569 million availability revolving portion senior secured credit agreement “senior secured credit facility” material indebtedness repayment obligations 2010 maturities 8375 senior notes “senior notes” 2014 required repayments borrowings senior secured credit facility 2012 also fourth quarter 2009 made principal payments totaling 145 million related party notes defined “related party notes payable” “liquidity capital resources” funded obligations related party notes cash hand performance measures determining overall health oilfield service industry believe baker hughes us land drilling rig count best barometer capital spending activity levels since data made publicly available weekly basis historically activity levels highly correlated capital spending oil natural gas producers oil natural gas prices strong capital spending customers tends high indicated correlation baker hughes us land drilling rig count similarly oil natural gas prices fall notably 2009 bakerhughes us land drilling rig count declines 1 represents average monthly average prices years presented source eia bloomberg 2 source wwwbakerhughescom internally measure activity levels well servicing operations primarily rig trucking hours generally capital spending oil natural gas producers increases demand services also rises resulting increased rig trucking services hours worked conversely activity levels decline due lower spending oil natural gas producers generally provide fewer rig trucking services results lower hours worked publicly release monthly rig trucking hours following table presents quarterly rig trucking hours 2007 2009 market conditions outlook market conditions year ended december 31 2009 overall demand pricing services provide declined compared 2008 average baker hughes us land drilling rig count 2009 1046 rigs decrease 424 2008 average 383 2007 average decrease average land drilling rig count driven primarily sharp declines oil natural gas prices 2009 west texas intermediate cushing crude oil price averaged 6195 per barrel natural gas henry hub averaged 428 per mcf decreases 378 519 respectively 2008 prices 144 399 respectively 2007 prices due decline commodity prices overall activity levels asset utilization 2009 decreased customers reduced capital spending 2009 18 million rig hours 17 million trucking hours decrease 352 282 respectively 2008 activity levels 281 248 respectively 2007 activity levels partially offsetting decline rig hours expansion mexico russia 2009 full year effect acquisitions completed 2008 also impacting activity levels disruption credit markets general uncertainty us global economy reduced credit availability significantly curtailed capital spending customers conditions deteriorated 2009 driven rapidly declining commodity prices first half 2009 tight credit markets overall uncertainty market conditions responded implementing aggressive cost control program implementing pricing changes selected markets effort maintain asset utilization cutting capital spending plans cost control program included targeted reductions headcount employee wage rates benefits reductions controlled spending overhead costs based assessment conditions rigbased oilfield services market chose retire portion us rig fleet associated equipment third quarter 2009 resulted pretax charge 659 million included retirement approximately 250 older less efficient rigs leaving remaining us well service rig fleet 743 rigs third quarter 2009 also determined market overcapacity prolonged depression natural gas prices lower activity levels major customer base related stimulation work consecutive quarterly operating losses production services segment indicated carrying amounts asset groups segment potentially recoverable performed assessment fair value asset groups segment results assessment indicated carrying value pressure pumping equipment exceeded fair value result recorded pretax impairment charge 934 million third quarter 2009 also recorded pretax impairment charge 05 million related goodwill third quarter 2009 production services segment market outlook 2010 remain largely dependent us global economies however oil prices gradually recovered 70 per barrel second half 2009 believe outlook 2010 generally favorable relative lows experienced 2009 activity levels latter half fourth quarter improved earlier periods even considering effects thanksgiving christmas holidays historically negatively impacted fourth quarter activity levels coupled signs demand oil natural gas increasing provides encouragement near term well long term outlook believe oil prices sustained levels seen end fourth quarter 2009 customers increase capital spending 2010 compared 2009 dependent continued increases economic growth 2010 believe see higher levels workover completion activity us well servicing business 2010 industry activity levels increase expect pemex maintain level workover activity rigs currently operating mexico utilized 2010 argentina although experienced significant laborrelated issues 2009 operating conditions activity levels pricing country began stabilize improve late 2009 2010 also expect activity levels russia increase significantly equipment sold joint venture deployed begins working production services business encouraged increased number size frac jobs saw latter half fourth quarter production services business highly correlated drilling activity drilling activity increased lows 2009 seen signs pressure pumping business beginning stabilize relative sharp decline experienced 2009 currently believe market fishing rental operations wireline business also improve 2010 activity levels businesses historically directly correlated drilling completion workover activity enter 2010 also continue monitor cost structure focus rationalization infrastructure base latter half 2009 closed several facilities consolidated others order efficiently serve customers reduce costs throughout 2010 continue assess size compensation levels workforce ensure take advantage recovery may occur near term believe rationalization process serve better position us take advantage opportunities however portion temporary cost cutting measures put place 2009 may discontinued activity levels market increase need bring costs back operations required additionally exploring several opportunities expand services internationally feel liquidity sufficient take advantage attractive acquisition opportunities develop impact inflation operations opinion inflation significant impact business results operations consolidated results operations following table shows consolidated results operations years ended december 31 2009 2008 2007 year ended december 31 2009 2008 year ended december 31 2009 net loss 1561 million compared net income 841 million year ended december 31 2008 loss per diluted share 2009 129 per share compared earnings per diluted share 067 per share 2008 items contributing net loss diluted loss per share 2009 included retirement portion us rig fleet associated equipment 659 million pretax 034 per diluted share impairment carrying value pressure pumping equipment 934 million pretax 049 per diluted share also contributing net loss dramatic rapid decline activity levels inability reduce costs pace decline revenues year ended december 31 2009 decreased 8934 million 453 11 billion 20 billion year ended december 31 2008 see “segment operating results year ended december 31 2009 2008” detailed discussion change revenues direct operating expenses direct operating expenses decreased 4709 million 377 7795 million 723 revenues year ended december 31 2009 compared 13 billion 634 revenues year ended december 31 2008 see “segment operating results year ended december 31 2009 2008” detailed discussion change direct operating expenses depreciation amortization expense depreciation amortization expense decreased 12 million 07 1696 million 157 revenue year ended december 31 2009 compared 1708 million 87 revenue year ended december 31 2008 decrease depreciation amortization expense primarily attributable decreases carrying value fixed assets due rig retirement asset impairment charges recorded third quarter 2009 partially offsetting decline depreciation increases due accelerated depreciation assets removed service first half 2009 response downturn market conditions well larger fixed asset base 2009 due capital spending 2008 general administrative expenses general administrative expenses decreased 790 million 307 1787 million 166 revenues year ended december 31 2009 compared 2577 million 131 revenues year ended december 31 2008 general administrative expenses declined result cost cutting measures put place beginning late 2008 continued 2009 related reductions headcount employee wage rate benefits reductions controlled spending overhead costs equitybased compensation also lower year ended december 31 2009 result accelerated vesting period majority stock option stock appreciation right “sar” awards fourth quarter 2008 result acceleration expense recognized awards year ended december 31 2009 asset retirements impairments year ended december 31 2009 recognized 1598 million pretax charges associated asset retirements impairments compared 751 million year ended december 31 2008 2009 pretax charges included 659 million related retirement certain rigs associated equipment additionally identified events changes circumstance indicating carrying amounts certain asset groups may recoverable accordingly performed recoverability assessment comparing estimated future cash flows asset groups asset groups’ estimated carrying value completion test indicated carrying value pressure pumping equipment recoverable resulted recording 934 million pretax impairment charge production services segment also determined goodwill recorded 2009 contingent consideration paid related prior year acquisition fishing rental services line business within production services segment impaired recorded pretax impairment charge 05 million 2009 upon completion annual goodwill impairment test 2008 indicators goodwill pressure pumping services fishing rental services lines business within production services segment might impaired calculated implied fair value lines business determined implied fair value less carrying value goodwill meaning goodwill impaired result fourth quarter 2008 recorded pretax charge 698 million write goodwill balances pressure pumping services fishing rental services lines business within production services segment 2008 fair value investment iroc energy services corp “iroc” based publicly available stock prices remained book value fourth quarter 2008 management determined based iroc’s continued depressed stock price overall negative outlook general economy oilfield services sector impairment temporary result recorded pretax charge 54 million order write carrying value investment iroc fair value interest expense net amounts capitalized interest expense decreased 22 million year ended december 31 2009 compared period 2008 decline primarily attributable lower average interest rates variablerate debt instruments repayment 1000 million revolving credit facility second quarter 2009 net following table summarizes components net periods indicated connection amendment senior secured credit facility fourth quarter 2009 recorded loss early extinguishment debt 05 million income tax benefit expense income tax benefit 911 million 368 effective rate pretax loss 2478 million year ended december 31 2009 compared income tax expense 902 million 518 effective rate pretax income 1741 million 2008 effective tax rates differ statutory rate 35 primarily state local foreign income taxes tax effects permanent items attributable booktax differences year ended december 31 2008 2007 year ended december 31 2008 net income 841 million 503 decrease net income 1693 million year ended december 31 2007 earnings per diluted share year 067 per share compared 127 per share period 2007 items contributing decline net income diluted earnings per share 2008 included impairment goodwill 698 million pre tax 054 per diluted share charge associated acceleration vesting certain equity awards 109 million pretax 005 per diluted share impairment investment iroc 54 million pretax 003 per diluted share severance charges associated reduction domestic international workforce 26 million pretax 001 per diluted share impact hurricanes aftereffects along us gulf coast third quarter 2008 estimated decreased pretax earnings 84 million 004 per diluted share partially offsetting items price increases implemented second third quarters 2008 incremental net income acquisitions completed 2008 fullyear effect acquisitions completed 2007 expansion wireline operations mexico revenues year ended december 31 2008 20 billion increase 3101 million 187 17 billion year ended december 31 2007 see “segment operating results year ended december 31 2008 2007” detailed discussion change revenues direct operating expenses direct operating expenses increased 2647 million 269 13 billion 634 revenues year ended december 31 2008 compared 9856 million 593 revenues year ended december 31 2007 see “segment operating results year ended december 31 2008 2007” detailed discussion change direct operating expenses depreciation amortization expense depreciation amortization expense increased 412 million 317 1708 million 87 revenues twelve months ended december 31 2008 compared 1296 million 78 revenues period 2007 acquisitions completed 2008 contributed 66 million increase fullyear effect acquisitions completed 2007 2008 contributed 241 million remaining 105 million increase attributed larger fixed asset base general administrative expenses general administrative expenses 2577 million 131 revenues year ended december 31 2008 represented increase 273 million 119 2304 million 139 revenues period 2007 general administrative expenses increased result increases nonequity employee compensations costs due pay rate increases throughout 2008 incremental costs acquisitions completed 2008 fullyear effect acquisitions completed 2007 addition fourth quarter 2008 accelerated vesting period certain outstanding unvested stock option sar awards resulting charge general administrative expenses partially offsetting increase declines professional fees result emerging delayed financial reporting process becoming current sec filings relisted national stock exchange 2007 asset retirements impairments upon completion annual goodwill impairment test 2008 indicators goodwill production services segment might impaired calculated implied fair value goodwill production services segment determined implied fair value less carrying value goodwill meaning goodwill impaired result fourth quarter 2008 recorded pretax charge 698 million goodwill production services segment management believed goodwill segments impaired economic downturn second half 2008 deterioration global credit markets specifically downturn oilfield services sector resulted decline stock price market valuation period 2008 fair value investment iroc based publicly available stock prices remained book value fourth quarter 2008 management determined based iroc’s continued depressed stock price overall negative outlook general economy oilfield services sector impairment temporary result recorded pretax charge 54 million order write carrying value investment iroc fair value interest expense net amounts capitalized interest expense increased 50 million 139 412 million twelve months ended december 31 2008 compared 362 million period 2007 higher overall debt levels led increase interest expense net following table summarizes components net periods indicated fourth quarter 2007 issued senior notes defined used proceeds senior notes repay outstanding amounts previous credit facility replaced facility current senior secured credit facility connection transactions wrote unamortized debt issuance costs associated previous credit facility resulting loss early extinguishment debt 96 million income tax expense income tax expense 902 million 518 effective rate year ended december 31 2008 compared 1068 million 387 effective rate year ended december 31 2007 decrease income tax expense primarily attributable lower pretax income 2008 increase effective tax rate primarily attributable portion impairment goodwill nondeductible income tax purposes 2008 effective tax rate excluding goodwill impairment would 380 differences effective tax rate statutory rate 350 result primarily effect state certain foreign income taxes permanent items attributable booktax differences segment operating results revised reportable business segments effective first quarter 2009 new operating segments well servicing production services financial results years ended december 31 2008 2007 recast reflect change reportable segments revised segments reflect changes management’s resource allocation performance assessment making decisions regarding operations rig services fluid management services operations aggregated within well servicing segment pressure pumping services fishing rental services wireline services operations well technology development group canada aggregated within production services segment also reportable segment titled functional support includes expenses associated managing operating segments full description segments see “service offerings” “item 1 business” year ended december 31 2009 2008 following table shows operating results reportable segments twelve month periods ended december 31 2009 2008 thousands except percentages well servicing revenues well servicing segment decreased 6106 million 415 8597 million year ended december 31 2009 compared 15 billion year ended december 31 2008 decline revenues attributable lower activity levels negative pricing pressure result general downturn markets services demand services declined 2009 result falling prices oil natural gas downturn us global economies tight credit markets combined curtail capital spending customers partially offsetting decline activity expansion operations mexico incremental rig hours russian joint venture 2009 much year ended december 31 2009 primary focus activity us rig services business shifted towards lower margin repair maintenance work much work performed small midsized independent operators traditional customer base major large independent producers decreased activity levels period led lower activity pricing us rig services business excluding charges asset retirements operating expenses well servicing segment 7815 million 909 revenues year ended december 31 2009 represented decrease 3329 million 299 compared 11 billion 758 revenues 2008 decline operating expenses year ended december 31 2009 attributable lower employee compensation lower repairs maintenance expenses lower fuel costs declined due lower activity levels associated lower demand services 2009 compared 2008 also implemented cost control measures beginning fourth quarter 2008 response downturn demand services dramatic rapid decline revenues 2009 outpaced ability cut costs production services revenues production services segment decreased 2828 million 564 2189 million year ended december 31 2009 compared 5018 million 2008 overall decline revenue segment primarily attributable lower asset utilization resulting decline gasdirected land drilling activity continental united states continued depression natural gas prices overall uncertainty economy tight credit markets pressure pricing service providers attempted maintain market share also impacted revenues 2009 excluding charges asset impairments operating expenses production services segment decreased 1669 million 410 2406 million 1099 revenues year ended december 31 2009 compared 4076 million 812 revenues 2008 operating expenses declined due reductions activity lower fuel prices decreased expenses frac sand cost control measures put place beginning fourth quarter 2008 response downturn demand services despite decline operating expenses dramatic rapid decline revenues outpaced ability cut operating expenses segment 2009 resulting operating costs excess revenues functional support excluding impairment charge investment iroc fourth quarter 2008 operating expenses functional support declined 512 million 1056 million 98 revenues year ended december 31 2009 compared 1568 million 80 revenues 2008 operating expenses declined result cost cutting measures put place beginning late 2008 continued 2009 related reductions headcount employee wage rates benefits reductions controlled spending overhead costs equitybased compensation also lower year ended december 31 2009 result accelerated vesting period majority stock option sar awards fourth quarter 2008 result expense recognized awards 2009 year ended december 31 2008 2007 following table shows operating results reportable segments twelve month periods ended december 31 2008 2007 thousands except percentages well servicing revenues well servicing segment increased 2302 million 186 15 billion year ended december 31 2008 compared 12 billion year ended december 31 2007 increase revenues primarily attributable well serving segment acquisitions completed 2008 full year impact acquisitions completed 2007 expansion operations pemex mexico price increases implemented second third quarters 2008 across markets operate partially offsetting increases revenues well servicing segment 2008 effects hurricanes ike gustav third quarter restricted well servicing operations texas louisiana oklahoma operating expenses well servicing segment 11 billion 758 revenues year ended december 31 2008 represented increase 2352 million 267 compared 09 million 709 revenues 2007 operating expenses well servicing segment increased 2008 compared 2007 due acquisitions made 2008 full year effect acquisitions completed 2007 higher pergallon prices fuel higher costs selfinsurance due increased headcount higher repair maintenance expenses due higher activity levels 2008 expansion operations mexico production services revenues production services segment increased 799 million 189 5018 million year ended december 31 2008 compared 4219 million 2007 increase revenues driven primarily incremental revenue acquisitions made 2008 organic growth pressure pumping equipment fleet expansion wireline operations price increases implemented second third quarters 2008 partially offsetting increase revenues effects hurricanes along us gulf coast third quarter 2008 excluding charges asset impairments operating expenses production services segment increased 916 million 290 4076 million 812 revenues year ended december 31 2008 compared 3159 million 749 revenues 2007 increase operating expenses production services segment driven primarily incremental operating expenses associated acquisitions made 2008 increased costs frac sand chemicals used pressure pumping operations additional employee compensation associated increase number frac crews expansion wireline operations functional support excluding charges asset impairments operating expenses functional support increased 64 million 1568 million 80 revenues year ended december 31 2008 compared 1504 million 91 revenues 2007 functional support operating expenses increased 2008 due headcount pay rate increases made first three quarters 2008 effects acquisitions made 2008 increased equitybased compensation associated charge took fourth quarter 2008 connection acceleration vesting period majority stock option sar awards liquidity capital resources require capital fund ongoing operations including maintenance expenditures existing fleet equipment organic growth initiatives investments acquisitions primary sources liquidity cash flows generated operations available cash equivalents availability senior secured credit facility addition expect receive income tax refund approximately 500 million 2010 intend use sources liquidity fund working capital requirements capital expenditures strategic investments acquisitions part business strategy regularly evaluate acquisition opportunities including equipment businesses believe internally generated cash flows operations current reserves cash equivalents sufficient finance majority cash requirements operations budgeted capital expenditures debt service next twelve months historically done may time access available funds senior secured credit facility meet cash requirements daytoday operations times peak needs throughout year planned capital expenditures well acquisitions choose pursue could financed combination cash hand cash flow operations borrowings senior secured credit facility case acquisitions equity december 31 2009 working capital 2045 million excluding current portion longterm debt notes payable related parties capital lease obligations totaling 102 million working capital december 31 2008 3115 million excluding current portion longterm debt notes payable related parties capital lease obligations totaling 257 million working capital december 31 2009 decreased 2008 result decreased cash equivalents due primarily repayment 1000 million revolving credit facility decreased accounts receivable due lower revenues period partially offsetting declines higher income tax receivables due current taxable losses lower accounts payable lower accrued expenses due decline activity levels december 31 2009 374 million cash equivalents amount 09 million accounts guaranteed federal deposit insurance corporation “fdic” including fdic’s temporary liquidity guarantee program january 1 2010 lending institution amount held discontinued participation fdic temporary liquidity guarantee program december 31 2009 approximately 186 million cash equivalents held bank accounts foreign subsidiaries amount approximately 109 million held russian subsidiary subject noncontrolling interest approximately 10 million cash held foreign subsidiaries held us bank accounts denominated us dollars believe cash held whollyowned foreign subsidiaries could repatriated general corporate use without material withholdings december 31 2009 878 million borrowings 552 million letters credit outstanding senior secured credit facility december 31 2009 1569 million availability facility terms senior secured credit facility committed letters credit count borrowing capacity obligations senior secured credit facility guaranteed subsidiaries secured assets including accounts receivable inventory equipment weighted average interest rate outstanding borrowings senior secured credit facility 373 december 31 2009 see discussion “debt service senior secured credit facility” february 17 2010 552 million letters credit issued letter credit subfacility approximately 5334 million total debt notes payable capital leases february 17 2010 cash equivalents 272 million available borrowing capacity 1569 million senior secured credit facility february 17 2010 approximately 130 million cash equivalents held bank accounts foreign subsidiaries 06 million amount held us bank accounts denominated us dollars except amounts held russian subsidiary believe balances could repatriated general corporate use without material withholdings cash flows year ended december 31 2009 generated cash flows operating activities 1848 million compared 3672 million year ended december 31 2008 operating cash inflows 2009 primarily relate collection accounts receivable partially offset overall net loss period well cash paid accounts payable liabilities operating cash flow declined primarily result lower net income period attributable decrease activity levels pricing 2009 cash used investing activities 1106 million 3291 million year ended december 31 2009 2008 respectively investing cash flows year ended december 31 2009 consisted primarily capital expenditures second investment geostream financed cash hand cash generated operations investing cash flows declined 2008 due lower capital expenditures lower net cash paid acquisitions current period cash used financing activities 1275 million year ended december 31 2009 80 million 2008 financing cash flows 2009 consisted primarily repayment 1000 million outstanding principal balance senior secured credit facility second quarter paid use existing cash hand cash generated operations lump sum repayment related party note totaling 125 million fourth quarter financing cash outflows increased year ended december 31 2009 borrow senior secured credit facility partially offset lower cash paid repurchase common stock share repurchase program expired march 31 2009 following table summarizes cash flows year ended december 31 2009 2008 debt service third quarter 2009 amended senior secured credit facility reduce total credit commitments facility 4000 million 3000 million see “senior secured credit facility” detail december 31 2009 annual debt maturities senior notes defined borrowings senior secured credit facility notes payable related parties indebtedness follows revolving senior secured credit facility matures november 2012 may 2009 repaid 1000 million outstanding balance revolving credit facility october 2009 made principal payments totaling 145 million plus accrued interest related party notes payments represent lump sum repayment one related party note totaling 125 million 20 million annual installment payment second related party note interest senior notes due june 1 december 1 year senior notes mature december 2014 interest paid senior notes 2009 356 million interest senior notes due 2010 356 million expect fund interest payments cash hand cash generated operations 8375 senior notes november 29 2007 issued 4250 million senior notes indenture “indenture” senior notes priced 100 face value yield 8375 net proceeds deducting initial purchasers’ fees offering expenses approximately 4161 million senior notes registered public debt effective august 22 2008 senior notes general unsecured senior obligations company rank effectively subordinate existing future secured indebtedness senior notes jointly severally guaranteed senior unsecured basis certain existing future domestic subsidiaries senior notes mature december 1 2014 december 1 2011 senior notes subject redemption time option whole part redemption prices expressed percentages principal amount redeemed plus accrued unpaid interest applicable redemption date redeemed twelvemonth period beginning december 1 years indicated addition time december 1 2010 option redeem 35 aggregate principal amount outstanding senior notes redemption price 108375 plus accrued unpaid interest redemption date net cash proceeds one equity offerings provided least 65 aggregate principal amount senior notes issued indenture remains outstanding immediately redemption redemptions must occur within 180 days date closing equity offering addition time prior december 1 2011 may option redeem portion senior notes redemption price equal 100 principal amount plus applicable premium defined indenture respect senior notes plus accrued unpaid interest redemption date experience change control subject certain exceptions must give holders senior notes opportunity sell us senior notes whole part purchase price equal 101 aggregate principal amount plus accrued unpaid interest date purchase subject certain negative covenants indenture governing senior notes indenture limits ability among things • sell assets • pay dividends make distributions capital stock subordinated indebtedness • make investments • incur additional indebtedness issue preferred stock • create certain liens • enter agreements restrict dividends payments subsidiaries us • consolidate merge transfer substantially assets • engage transactions affiliates • create unrestricted subsidiaries covenants subject certain exceptions qualifications contain crossdefault provisions connection covenants senior secured credit facility substantially covenants terminate senior notes mature one two specified ratings agencies assigns senior notes investment grade rating future events default exist indenture december 31 2009 senior notes investment grade never assigned investment grade covenants cease apply us result achieving investment grade rating restored even credit rating assigned senior notes later falls investment grade rating senior secured credit facility maintain senior secured credit facility pursuant revolving credit agreement syndicate banks bank america securities llc wells fargo bank na administrative agents entered senior secured credit facility november 29 2007 simultaneously offering senior notes entered amendment “amendment” senior secured credit facility october 27 2009 amended senior secured credit facility consists revolving credit facility letter credit subfacility swing line facility aggregate principal amount 3000 million mature later november 29 2012 amendment entered fourth quarter 2009 reduced total credit commitments facility 4000 million 3000 million effected pro rata reduction commitment lender facility ability request increases total commitments facility 1000 million aggregate increases subject certain requirements well lenders’ approval pursuant amendment also modified applicable interest rates financial covenants among changes interest rate per annum applicable senior secured credit facility amended option libor plus margin 350 450 basis points depending consolidated leverage ratio ii base rate defined higher x bank america’s prime rate federal funds rate plus 05 plus margin 250 350 basis points depending consolidated leverage ratio unused commitment fees facility range 050 075 depending upon consolidated leverage ratio senior secured credit facility contains certain financial covenants among things require us maintain certain financial ratios limit annual capital expenditures addition covenants impose restrictions ability repurchase shares assets owned domestic subsidiaries located outside united states limitations amended senior secured credit facility also requires • consolidated funded indebtedness greater 45 adjusted total capitalization • senior secured leverage ratio senior secured funded debt trailing four quarters earnings interest taxes depreciation amortization calculated pursuant terms senior secured credit facility “ebitda” greater 250 100 fiscal quarter ended december 31 2009 including fiscal quarter ending december 31 2010 ii thereafter 200 100 • maintain consolidated interest coverage ratio trailing four quarters ebitda interest expense least following amounts corresponding period • limit capital expenditures including made foreign subsidiaries whollyowned 1350 million fiscal year 2009 1200 million subsequent fiscal year consolidated leverage ratio total funded debt trailing four quarters ebitda greater 350 100 ii 2500 million consolidated leverage ratio total funded debt trailing four quarters ebitda equal less 350 100 subject certain adjustments • make acquisitions either completed equity consideration without regard leverage ii completed cash consideration consolidated leverage ratio total funded debt trailing four quarters ebitda 275 100 less x aggregate amount 250 million unused credit commitments facility pro forma compliance financial covenants contained credit agreement b consolidated leverage ratio total funded debt trailing four quarters ebitda greater 275 100 addition requirements subclauses x clause cash amount paid respect acquisitions limited 250 million per fiscal year subject potential increase using amounts available capital expenditures net cash proceeds receive october 27 2009 connection issuance sale equity interests incurrence issuance certain unsecured debt securities identified used purpose • limit investment foreign subsidiaries including way loans made us domestic subsidiaries foreign subsidiaries guarantees made us domestic subsidiaries debt foreign subsidiaries 750 million fiscal year aggregate amount october 27 2009 equal greater 2000 million 25 consolidated net worth plus ii net cash proceeds receive october 27 2009 connection issuance sale equity interests incurrence certain unsecured debt securities identified used purpose addition amended senior secured credit facility contains certain affirmative covenants including without limitation restrictions related liens ii debt guarantees contingent obligations iii mergers consolidations iv sales transfers dispositions property assets v loans acquisitions joint ventures investments vi dividends distributions redemptions repurchases equity holders vii prepaying redeeming repurchasing senior notes unsecured debt incurred pursuant sixth bullet point listed viii granting negative pledges lenders ix changes nature business x amending organizational documents amending otherwise modifying debt amendment modification would material adverse effect amending senior notes unsecured debt incurred pursuant sixth bullet point listed effect amendment shorten maturity senior notes unsecured debt xi changes accounting policies reporting practices foregoing cases certain exceptions may prepay senior secured credit facility whole part time without premium penalty subject obligation reimburse lenders breakage redeployment costs connection amendment wrote proportionate amount unamortized deferred financing costs associated capacity reduction credit facility year ended december 31 2009 recognized 05 million pretax charges losses extinguishment debt associated writeoff unamortized deferred financing costs capitalized 25 million costs associated amendment senior secured credit facility related party notes payable october 25 2007 entered two notes payable related parties “related party note” collectively “related party notes” first related party note unsecured note amount 125 million due paid lumpsum together accrued interest october 25 2009 second related party note unsecured note amount 100 million payable annual installments 20 million plus accrued interest beginning october 25 2008 2012 related party notes bore bears interest federal funds rate adjusted annually anniversary date october 25 interest rate remaining outstanding related party note december 31 2009 011 outstanding principal amount 60 million capital lease agreements lease equipment vehicles tractors trailers frac tanks forklifts financial institutions master lease agreements december 31 2009 approximately 143 million outstanding equipment leases offbalance sheet arrangements december 31 2009 currently offbalance sheet arrangements reasonably likely material current future effect financial condition revenues expenses results operations liquidity capital expenditures capital resources contractual obligations set forth summary contractual obligations december 31 2009 obligations pay future periods reflect certain assumptions including variability interest rates variablerate obligations duration obligations actual payments future periods may vary 1 based interest rates effect december 31 2009 2 based stock price december 31 2009 3 assumes performance targets achieved believe internally generated cash flows operations current reserves cash equivalents sufficient finance majority cash requirements current future operations budgeted capital expenditures debt service 2010 historically done may time access available funds senior secured credit facility supplement liquidity meet cash requirements day operations times peak needs throughout year planned capital expenditures well acquisitions choose pursue expected financed combination cash hand cash flow operations borrowings senior secured credit facility debt compliance senior secured credit facility senior notes contain numerous covenants govern ability make domestic international investments repurchase stock even experience severe downturn business believe covenants related capital spending investments foreign subsidiaries within control therefore believe avoid default covenants december 31 2009 compliance financial covenants senior secured credit facility amended senior notes based management’s current projections expect compliance covenants senior secured credit facility senior notes next twelve months breach covenants ratios tests debt could result default indebtedness see “item 1a risk factors” capital expenditures year ended december 31 2009 capital expenditures totaled 1284 million mostly related expansion operations mexico russia drill strings nitrogen units rental operations capitalized costs new information systems asset acquisitions fluids management operations maintenance existing fleet capital expenditures program expected total approximately 1400 million 2010 focusing mainly maintenance fleet capital expenditure program 2010 subject market conditions including activity levels commodity prices industry capacity focus 2010 maximization current equipment fleet may choose increase capital expenditures 2010 increase market share expand presence new market currently anticipate funding 2010 capital expenditures combination cash hand operating cash flow borrowings senior secured credit facility operating cash flows activity levels prove insufficient warrant currently planned capital spending levels management expects adjust capital spending plans accordingly may also incur capital expenditures strategic investments acquisitions geostream investment september 1 2009 acquired additional 24 interest geostream approximately 164 million geostream oilfield services company russian federation providing drilling workover services subsurface engineering modeling russia second investment geostream pursuant agreement dated august 26 2008 amended second investment brings total investment geostream 50 upon acquiring 50 interest also obtained majority representation geostream’s board directors therefore controlling interest results geostream included consolidated financial statements since acquisition date result acquisition expect expand international presence russia wells shallow suited services perform fair value consideration transferred 50 interest geostream totaled approximately 350 million consisted cash consideration second investment september 1 2009 fair value previous equity interest conjunction second investment geostream agreed purchase us customized suite equipment including two workover rigs two drilling rigs associated complementary support equipment cementing equipment fishing tools approximately 230 million portion financed us concurrent second investment geostream paid us approximately 160 million cash representing payment equipment deliver began delivery equipment purchase agreement fourth quarter 2009 geostream agreement amended period exceed six years subsequent october 31 2008 option increase ownership percentage geostream 100 however acquired 100 geostream end sixyear period required arrange initial public offering shares critical accounting policies accounting department responsible development application accounting policies internal control procedures reports chief financial officer process preparation financial statements conformity generally accepted accounting principles united states “gaap” requires us make certain estimates judgments assumptions may affect reported amounts assets liabilities disclosures contingencies balance sheet date amounts revenues expenses recognized reporting period presentation statement cash flows may record materially different amounts estimates judgments assumptions change actual results differ however analyze estimates assumptions judgments based historical experience various factors believe reasonable circumstances identified following critical accounting policies require significant amount estimation judgment accurately present financial position results operations cash flows • estimate reserves workers’ compensation vehicular liability selfinsurance • contingencies • income taxes • estimates depreciable lives • valuation indefinitelived intangible assets • valuation tangible finitelived intangible assets • valuation equitybased compensation workers’ compensation vehicular liability selfinsurance operations expose employees hazards generally associated oilfield heavy lifting moving equipment slippery surfaces cause contribute accidents involving employees third parties may present site environmental conditions remote domestic oil natural gas basins range extreme cold extreme heat heavy rain blowing dust conditions also lead contribute accidents business activities involve use significant number fluid transport trucks oilfield vehicles supporting rolling stock move public private roads vehicle accidents significant risk us also conduct limited contract drilling operations present additional hazards inherent drilling wells blowouts explosions fires could result loss hole damaged equipment personal injury hazards accidents could result damage property third party’s property injury death employees third parties although purchase insurance protect large losses much risk retained form large deductibles selfinsured retentions contractor also enter master service agreements customers agreements subject us potential contractual liabilities common oilfield occurrence event fully insured indemnified failure customer insurer meet indemnification insurance obligations could result substantial losses addition assurance insurance available cover risks available could obtained without substantial increase premiums possible addition higher premiums future insurance coverage may subject higher deductibles coverage restrictions based risks discussed estimate liability arising potentially insured events including workers’ compensation employer’s liability vehicular liability general liability record accruals consolidated financial statements reserves related claims covered insurance based specific facts circumstances insured event past experience similar claims loss estimates individual claims adjusted based upon actual claim judgments settlements reported claims actual outcome claims could differ significantly estimated amounts largely selfinsured physical damage equipment automobiles accruals maintain consolidated balance sheet relate deductibles selfinsured retentions estimate use historical claims data trend analysis actual outcome claim could differ significantly estimated amounts adjust loss estimates calculation accruals based upon actual claim settlements reported claims changes assumptions estimates could potentially negative impact earnings contingencies periodically required record loss contingencies relate lawsuits claims proceedings taxrelated audits normal course operations consolidated balance sheet record loss contingency matters probable liability incurred amount loss reasonably estimated periodically review loss contingencies ensure appropriate liabilities recorded balance sheet adjust liabilities based estimates judgments made management respect likely outcome matters including effect applicable insurance coverage litigation matters estimates judgments could change based new information changes laws regulations changes management’s plans intentions outcome legal proceedings settlements factors actual results could vary materially reserves record liabilities environmental assessment indicates site remediation efforts probable costs reasonably estimated measure environmental liabilities based part relevant past experience currently enacted laws regulations existing technology sitespecific costs costsharing arrangements recognition joint several liability based upon best estimate final prorata share liability low amount range estimates assumptions involve judgments estimates management changes assumptions new information could lead increases decreases ultimate liability changes recognized immediately earnings record legal obligations retire tangible longlived assets balance sheet liabilities recorded discount incur liability significant judgment involved estimating future cash flows associated obligations well ultimate timing cash flows estimates amount timing cash flows change may material impact results operations income taxes account deferred income taxes using asset liability method provide income taxes significant temporary differences management determines current tax liability well taxes incurred result current operations yet deferred future periods current taxes payable represent liability related income tax return current year net deferred tax expense benefit represents change balance deferred tax assets liabilities reported consolidated balance sheets management estimates changes deferred tax assets liabilities using basis assets liabilities financial reporting purposes enacted rates management estimates effect differences reverse management makes certain assumptions timing temporary tax differences differing treatment certain items tax accounting purposes whether differences permanent final determination tax liability involves interpretation local tax laws tax treaties related authorities jurisdiction well significant use estimates assumptions regarding scope future operations results achieved timing nature income earned expenditures incurred establish valuation allowances reduce deferred tax assets determine likely eg likelihood 50 deferred tax assets realized future periods assess likelihood use estimates judgment regarding future taxable income well jurisdiction taxable income generated determine whether valuation allowance required evidence include current financial position results operations actual forecasted results reversal deferred tax liabilities tax planning strategies well current forecasted business economics industry additionally record uncertain tax positions net recognizable amount based amount management deems likely sustained upon ultimate settlement tax authorities domestic international tax jurisdictions operate estimates assumptions regarding current deferred tax items inaccurate modified changes could potentially material negative impacts earnings see “note 12 income taxes” “item 8 financial statements supplementary data” discussion accounting income taxes changes valuation allowance components tax rate reconciliation realization loss carryforwards estimates depreciable lives use estimated depreciable lives longlived assets rigs heavyduty trucks trailers compute depreciation expense estimate future asset retirement obligations conduct impairment tests base estimates depreciable lives number factors environment assets operate industry factors including forecasted prices competition assumption provide appropriate amount capital expenditures asset operation maintain economical operation asset prevent untimely demise scrap useful lives intangible assets determined years expect assets generate benefit based legal contractual expectations depreciate operational assets depreciable lives salvage value 10 acquisition cost recognize gain loss upon ultimate disposal asset based difference carrying value asset disposal date proceeds receive connection disposal periodically analyze estimates depreciable lives fixed assets determine depreciable periods salvage value continue appropriate also analyze useful lives salvage value events conditions occur could shorten remaining depreciable life asset review depreciable periods salvage values reasonableness given current conditions result depreciation expense based upon estimates depreciable lives fixed assets salvage value economic factors require management make significant judgments estimates determine depreciable lives different originally estimated depreciation expense may increase decrease impairments carrying values fixed assets may result could negatively impact earnings valuation indefinitelived intangible assets periodically review intangible assets subject amortization including goodwill determine whether impairment assets may exist tests must made least annual basis often circumstances indicate assets may impaired circumstances include limited significant adverse changes business climate test impairment indefinitelived intangible assets two step test first step fair value calculated reporting units fair value compared current carrying value reporting unit including reporting unit’s goodwill fair value reporting unit exceeds carrying value potential impairment second step performed carrying value exceeds fair value reporting unit second step required second step test impairment compares implied fair value reporting unit’s goodwill current carrying value implied fair value reporting unit’s goodwill determined manner amount goodwill would recognized business combination purchase price equal fair value reporting unit implied fair value reporting unit’s goodwill excess carrying value impairment charge recorded carrying value reporting unit’s goodwill excess implied fair value impairment charge equal excess recorded conduct annual impairment test goodwill intangible assets subject amortization december 31 year determining fair value reporting units use weightedaverage approach three commonly used valuation techniques discounted cash flow method guideline companies method similar transactions method assign weight results methods based facts circumstances existence testing period 2009 international expansion russia acquisitions made prior years overall economic downturn affected companies’ stock prices market valuation assigned weight discounted cash flow method also weighted discounted cash flow method heavily 2008 similar reasons prior years assigned weight guideline companies method addition estimates made management regarding weighting various valuation techniques creation techniques requires make significant estimates assumptions discounted cash flow method assigned highest weight management current year requires us make assumptions future cash flows future growth rates tax rates future periods booktax differences carrying value assets future periods discount rates assumptions future cash flows growth rates based current budgets future periods well strategic plans beliefs management future activity levels analysts’ expectations revenues profitability cash flows future periods assumptions future tax rates booktax differences carrying value assets future periods based assumptions future cash flows growth rates management’s knowledge beliefs tax law practice current future periods assumptions discount rates include assessment specific risk associated reporting unit tested developed assistance thirdparty valuation consultant reviewed estimates assumptions calculations ultimate conclusions valuation techniques remain responsibility test required annual basis also required frequently based changes external factors triggering events impairment test longlived assets conducted recent annual test impairment goodwill indefinitelived intangible assets december 31 2009 date rig services reporting unit 2986 million goodwill fluid management services reporting unit 186 million goodwill ami 41 million goodwill pressure pumping services fishing rental services wireline services reporting units goodwill either goodwill reporting units impaired prior periods reporting unit created entirely organic growth 248 million goodwill associated acquisition geostream included annual assessment due specific nature transaction giving rise goodwill recent nature fair value assessment connection acquisition based results annual test fair value reporting units goodwill substantially exceeded carrying values fair value reporting units substantially exceeded carrying values determined potential impairment goodwill associated reporting units existed december 31 2009 step two impairment test required noted determination fair value reporting units heavily dependent upon certain estimates assumptions make reporting units estimates assumptions made regarding reporting units 2009 annual test indicated fair values reporting units exceeded carrying values believe estimates assumptions reasonable possible changes estimates assumptions could impact determination fair value reporting units discount rates use future periods could change substantially cost debt equity significantly increase decrease chose different comparable companies determining appropriate discount rate reporting units additionally future projected cash flows reporting units could significantly impact fair value reporting units current projections future activity levels pricing cost structure inaccurate fair value reporting units could change materially current recovery overall economy temporary nature significant rapid adverse change business near midterm reporting units current estimates fair value reporting units could decrease significantly leading possible impairment charges future periods based current knowledge beliefs feel material adverse changes current estimates assumptions reporting units would fail step one impairment test reasonably possible discussed “note 7 goodwill intangible assets” “item 8 financial statements supplementary data” third quarter 2009 identified triggering event required us test goodwill impairment interim basis result test determined goodwill associated fishing rental services reporting unit impaired recorded pretax charge 05 million write goodwill associated reporting unit valuation tangible finitelived intangible assets fixed assets finitelived intangibles tested potential impairment circumstances events indicate possible impairment may exist circumstances events referred “trigger events” examples trigger events include limited adverse change market conditions significant decrease benefits derived acquired business significant disposal particular asset class trigger event occurs impairment test performed based undiscounted cash flow analysis perform impairment test make judgments estimates assumptions regarding longterm forecasts revenues expenses relating assets subject review market conditions energy prices estimated depreciable lives assets discount rate assumptions legal factors impact operations significant effect estimates use determine whether assets impaired results analysis indicate carrying value assets tested impairment recoverable record impairment charge write carrying value assets fair value using different judgments assumptions estimates could potentially arrive materially different fair value assets tested impairment may result impairment charge discussed “note 6 property plant equipment” “item 8 financial statements supplementary data” third quarter 2009 retired portion us rig fleet associated support equipment identified trigger event required us test well servicing fixed assets impairment based analysis expected undiscounted cash flows assets exceeded carrying value indication impairment existed feel material adverse changes estimates assumptions well servicing assets’ carrying value exceeded fair value reasonably possible however third quarter 2009 due continuing market overcapacity continued prolonged depression natural gas prices decreased activity levels major customer base related stimulation work consecutive quarterly operating losses determined events changes circumstances occurred indicating carrying value assets production services segment may recoverable performed assessment fair value asset groups using expected present value technique based undiscounted cash flows used discounted cash flow models involving assumptions based utilization equipment revenues expenses capital expenditures working capital requirements discounted cash flow projections based financial forecasts discounted using discount rate 14 based assessment fair value pressure pumping assets less carrying value resulted recording pretax impairment charge 934 million third quarter 2009 impairment tests well servicing pressure pumping assets also triggered interim test goodwill indefinitelived intangible assets potential impairment third quarter 2009 identify trigger events causing us test tangible finitelived intangible assets impairment first second fourth quarters 2009 valuation equitybased compensation granted stock options stocksettled stock appreciation rights “sars” restricted stock “rsas” phantom shares “phantom shares” employees nonemployee directors option sar awards grant fair valued using blackscholes option model grant date amortized compensation expense vesting period option award net estimated actual forfeitures compensation related rsas based fair value award grant date recognized based vesting requirements satisfied period phantom shares accounted fair value changes fair value awards recorded compensation expense period see “note 18 sharebased compensation” “item 8 financial statements supplementary data” discussion various award types accounting equitybased compensation utilizing blackscholes option pricing model determine fair values awards certain assumptions made based subjective expectations subject change one assumptions would impact expense associated future grants key assumptions include volatility price common stock riskfree interest rate expected life awards used following weighted average assumptions blackscholes option pricing model determining fair value stock option grants years ended december 31 2009 2008 2007 calculate expected volatility stock option grants measuring volatility historical stock price period equal expected life option ending time option granted determine riskfree interest rate based upon interest rate us treasury bill term equal expected life option time option granted estimating expected lives stock options sars elected use simplified method time current financial statements filed sec options legally restricted exercised therefore believe access sufficient historical exercise data appropriately provide reasonable basis upon estimate expected term stock option awards expected life less term option holders experience exercise forfeit options term option required recalculate fair value stock option grants estimated using blackscholes option pricing model initial calculation unless original option grant terms modified however 10 percent increase expected volatility riskfree rate grant date would increased compensation expense year ended december 31 2009 less 01 million new accounting standards adopted report sfas 141r december 2007 financial accounting standards board “fasb” issued sfas 141 revised 2007 business combinations “sfas 141r” sfas 141r establishes principles requirements acquirer business combination recognizes measures financial statements identifiable assets acquired liabilities assumed noncontrolling interests acquiree well goodwill acquired significant changes previous practice resulting sfas 141r include expansion definitions “business” “business combination” business combinations whether partial full step acquisitions acquirer record 100 assets liabilities acquired business including goodwill generally fair values contingent consideration recognized fair value acquisition date certain arrangements changes fair value recognized earnings settlement acquisitionrelated transaction restructuring costs expensed rather treated part cost acquisition sfas 141r also establishes disclosure requirements enable users evaluate nature financial effects business combination sfas 141r applies prospectively business combinations acquisition date beginning first annual reporting period beginning december 15 2008 company adopted provisions sfas 141r january 1 2009 consummate business combinations three months ended march 31 2009 sfas 141r may impact consolidated financial statements future nature magnitude specific impact depend upon nature terms size acquisitions consummated effective date sfas 160 december 2007 fasb issued sfas 160 noncontrolling interests consolidated financial statements amendment arb 51 “sfas 160” sfas 160 amends accounting research bulletin 51 consolidated financial statements establish accounting reporting standards noncontrolling interest subsidiary deconsolidation subsidiary clarifies noncontrolling interest subsidiary sometimes referred minority interest thirdparty ownership interest consolidated entity reported component equity consolidated financial statements among requirements sfas 160 requires consolidated statement income reported amounts include amounts attributable parent noncontrolling interest sfas 160 also requires disclosure face consolidated statement income amounts consolidated net income attributable parent noncontrolling interest adopted provisions sfas 160 january 1 2009 adoption standard material impact financial position results operations cash flows sfas 165 may 2009 fasb issued sfas 165 subsequent events “sfas 165” sfas 165 establishes general standards accounting disclosing events occur balance sheet date financial statements issued available issued sfas 165 significantly change types subsequent events entity reports requires disclosure date entity evaluated subsequent events basis date sfas 165 effective interim annual reporting requirements ending june 15 2009 adoption standard material impact financial position results operations cash flows asu 200901 june 2009 fasb issued accounting standards update “asu” 200901 fasb accounting standards codification hierarchy generally accepted accounting principles replacement fasb statement 162 “asu 200901” asu 200901 established accounting standards codification “codification” source authoritative gaap recognized fasb applied nongovernmental entities codification supersedes prior nonsec accounting reporting standards following asu 200901 fasb issue new accounting standards form fasb statements fasb staff positions emerging issues task force abstracts asu 200901 also modifies existing hierarchy gaap include two levels authoritative nonauthoritative asu 200901 effective financial statements issued interim annual periods ending september 15 2009 early adoption permitted adoption standard impact financial position results operations cash flows asu 200905 august 2009 fasb issued asu 200905 fair value measurements disclosures topic 820 measuring liabilities fair value “asu 200905” asu 200905 addresses concerns situations may lack observable market information measure fair value liability provides clarification circumstances quoted market price active market identical liability available cases reporting entities measure fair value using valuation technique uses quoted price identical liability traded asset quoted prices similar liabilities another valuation technique income market approach asu 200905 also clarifies estimating fair value liability reporting entity required include separate input adjustment inputs relating existence restriction prevents transfer liability asu 200905 effective first reporting period subsequent august 2009 adoption update material impact financial position results operations cash flows accounting standards yet adopted report sfas 166 june 2009 fasb issued sfas 166 accounting transfers financial assets amendment fasb statement 140 “sfas 166” sfas 166 amends application disclosure requirements sfas 140 accounting transfers servicing financial assets extinguishment liabilities replacement fasb statement 125 “sfas 140” removes concept “qualifying special purpose entity” sfas 140 removes exception applying fasb interpretation “fin” 46r consolidation variable interest entities interpretation arb 51 “fin 46r” qualifying special purpose entities sfas 166 effective first annual reporting period begins november 15 2009 early adoption permitted adoption standard anticipated material impact financial position results operations cash flows sfas 167 june 2009 fasb issued sfas 167 amendments fasb interpretation 46r “sfas 167” sfas 167 amends scope fin 46r include entities previously considered qualifying specialpurpose entities fin 46r concept qualifying specialpurpose entity eliminated sfas 166 standard shifts guidance determining enterprise variable interest entity consolidates entity quantitative consideration primary beneficiary qualitative focus entity power direct activities obligation absorb losses standard effective first annual reporting period begins november 15 2009 early adoption permitted adoption standard anticipated material impact financial position results operations cash flows asu 200913 october 2009 fasb issued asu 200913 revenue recognition topic 605 multipledeliverable revenue arrangements consensus fasb emerging issues task force “asu 200913” asu 200913 addresses accounting multipledeliverable arrangements products services accounted separately rather combined unit addresses separate deliverables measure allocate arrangement consideration one units accounting existing gaap requires entity use vendorspecific objective evidence “vsoe” thirdparty evidence selling price separate deliverables multipledeliverable selling arrangement result asu 200913 multipledeliverable arrangements separated circumstances current guidance asu 200913 establishes selling price hierarchy determining selling price deliverable selling price based vsoe available thirdparty evidence vsoe available estimated selling price neither vsoe thirdparty evidence available asu 200913 also requires entity determine best estimate selling price manner consistent used determine selling price deliverable standalone basis increases disclosure requirements related entity’s multipledeliverable revenue arrangements asu 200913 must prospectively applied revenue arrangements entered materially modified fiscal years beginning june 15 2010 early adoption permitted entities may elect required adopt amendments retrospectively periods presented expect adopt provisions asu 200913 january 1 2011 believe adoption standard material impact financial position results operations cash flows asu 200914 october 2009 fasb issued asu 200914 software topic 985 certain revenue arrangements include software elements consensus fasb emerging issues task force “asu 200914” asu 200914 issued address concerns relating accounting revenue arrangements contain tangible products software “more incidental” product whole existing guidance circumstances requires entities use vsoe selling price separate deliverables multipledeliverable arrangement reporting entities raised concerns current accounting model appropriately reflect economics underlying transactions softwareenabled products fall within scope current guidance originally intended asu 200914 changes current accounting model revenue arrangements include tangible products software elements exclude software components essential tangible products’ core functionality addition asu 200914 also requires hardware components tangible product containing software components always excluded software revenue recognition guidance provides guidance determine software relating tangible products considered essential tangible products’ functionality excluded scope software revenue recognition guidance asu 200914 also provides guidance allocate arrangement consideration deliverables arrangement contains tangible products software essential product’s functionality asu 200914 issued concurrently asu 200913 also requires entities provide disclosures required asu 200913 included within scope asu 200914 asu 200914 effective prospectively revenue arrangements entered materially modified fiscal years beginning june 15 2010 early adoption permitted entities may also elect required adopt asu 200914 retrospectively prior periods must adopt asu 200914 period using transition methods uses adopt asu 200913 expect adopt provisions asu 200914 january 1 2011 believe adoption standard material impact financial position results operations cash flows asu 200917 december 2009 fasb issued asu 200917 consolidations topic 810 improvements financial reporting enterprises involved variable interest entities asu 200917 replaces quantitativebased risk rewards calculation determining reporting entity controlling financial interest variable interest entity approach focused identifying reporting entity power direct activities variable interest entity significantly impact entity’s economic performance 1 obligation absorb losses entity 2 right receive benefits entity approach expected primarily qualitative effective identifying reporting entity controlling financial interest variable interest entity asu 200917 also requires additional disclosures reporting entity’s involvement variable interest entities provisions asu 200917 applied beginning first fiscal period beginning november 15 2009 adopt asu 200917 january 1 2010 anticipate adoption standard material effect financial position results operations cash flows asu 201002 january 2010 fasb issued asu 201002 consolidation topic 810 accounting reporting decreases ownership subsidiary scope clarification asu 201002 clarifies scope previous guidance accounting disclosure requirements related decreases ownership subsidiary apply subsidiary group assets business nonprofit entity ii subsidiary business nonprofit entity transferred equity method investee joint venture iii exchange group assets constitutes business nonprofit activity noncontrolling interest entity asu 201002 also expands disclosure requirements deconsolidation subsidiary derecognition group assets include valuation techniques used measure fair value retained investment ii nature continuing involvement subsidiary entity acquiring group assets iii whether transaction resulted deconsolidation derecognition related party whether former subsidiary entity acquiring assets become related party transaction provisions asu 201002 effective us first reporting period beginning december 13 2009 adopt provisions asu 201002 january 1 2010 anticipate adoption standard material impact financial position results operations cash flows asu 201006 january 2010 fasb issued asu 201006 fair value measurements disclosures topic 820 improving disclosures fair value measurements asu 201006 clarifies requirements certain disclosures around fair value measurements also requires registrants provide certain additional disclosures measurements new disclosure requirements include significant amounts transfers level 1 level 2 fair value measurements period along reason transfers ii separate presentation information purchases sales issuances settlements fair value measurements significant unobservable inputs asu 201006 effective interim annual reporting periods beginning december 15 2009 adopt provisions asu 201006 january 1 2010 expect adoption standard material impact financial position results operations cash flows item 7aitem 7 management’s discussion analysis financial condition results operations following discussion analysis financial condition results operations read conjunction consolidated financial statements related notes thereto “item 8 financial statements supplementary data” discussion contains forwardlooking statements based upon current expectations subject uncertainty changes circumstances including identified “cautionary note regarding forwardlooking statements” actual results may differ materially expectations due inaccurate assumptions known unknown risks uncertainties forwardlooking statements read conjunction disclosures “item 1a risk factors” overview provide full range well services major oil companies foreign national oil companies independent oil natural gas production companies complete maintain enhance flow oil natural gas throughout life well services include rigbased coiled tubingbased well maintenance workover services well completion recompletion services fluid management services fishing rental services ancillary oilfield services additionally certain rigs capable specialty drilling applications operate major oil natural gas producing regions continental united states operations based mexico colombia middle east russia argentina addition technology development group based canada ownership interests two oilfield service companies based canada 2010 operated two business segments well servicing production services october 1 2010 sold majority lines business within production services segment also functional support segment associated managing reportable operating segments full description operating segments see “service offerings” “item 1 business” effective first quarter 2011 begin reporting two new business segments us international financial results periods presented future filings restated reflect change operating segments revised segments reflect change operating focus assessment operations resource allocation making decisions regarding key business growth strategies focus horizontal well services recent years number horizontal wells drilled increased significantly capitalize growing market segment acquired new equipment upgraded existing equipment capable providing services integral completion maintenance horizontal wellbores recently added larger higher horsepower well service rigs fleet capable servicing horizontal wellbores 2010 expanded number coiled tubing units 72 60 currently consist extendedreach longlateral coiled tubing units addition established fluids management business bakken shale 2010 intend continue focus expansion horizontal well service offerings new markets united states continue expansion international markets presently operate internationally mexico colombia middle east russia argentina areas large oilfields declining production believe domestic experience mature oilfields proprietary technology keyview® system provides us opportunity compete new business foreign markets mature oilfields similar united states continue evaluate international expansion opportunities seek redeploy underutilized assets international markets pursue prudent acquisitions complementary businesses intend continue disciplined approach acquisitions seeking opportunities strengthen presence selected regional markets provide opportunities expand core services example recent acquisition coiled tubing businesses expands range services offer customers engaged rapidly growing horizontal well drilling trend performance measures determining overall health oilfield service industry believe baker hughes us land drilling rig count best barometer capital spending activity levels since data made publicly available weekly basis historically activity levels highly correlated capital spending oil natural gas producers 1 represents average monthly average prices years presented source eia bloomberg 2 source wwwbakerhughescom internally measure activity levels well servicing operations primarily rig trucking hours generally capital spending oil natural gas producers increases demand services also rises resulting increased rig trucking services hours worked conversely activity levels decline due lower spending oil natural gas producers generally provide fewer rig trucking services results lower hours worked publicly release monthly rig trucking hours following table presents quarterly rig trucking hours 2008 2010 market conditions outlook market conditions year ended december 31 2010 overall demand services provide improved considerably compared 2009 baker hughes us land rig count average 2010 1514 rigs 448 compared 2009 average 1046 rigs increase oilfield activity 2010 driven primarily increases oil prices associated increase capital spending oilfield services year 2010 west texas intermediate crude oil price averaged 7948 per barrel 283 compared 2009 average price 6195 per barrel natural gas henry hub averaged 438 per mcf 2010 increase 23 2009 average price 428 per mcf result increase oil prices customers’ associated increase capital spending key’s overall activity levels asset utilization prices increased 2010 rigs worked almost 20 million hours increase 119 18 million hours worked 2009 fluid transportation trucks worked total 22 million hours 2010 increase 293 compared 17 million trucking hours worked 2009 additionally customers’ capital spending therefore overall activity levels benefitted improved credit markets 2010 compared 2009 overall market conditions recovered lows experienced 2009 responded making several strategic changes better position key certain geographic areas businesses perceived would yield higher longterm growth better overall investment returns particular sold pressure pumping wireline businesses sold marine rig assets significantly increased investment coiled tubing business also 2010 upgraded reactivated several well servicing workover rigs made significant investment fluid transportation business bakken shale williston basin north dakota deployed several rigs fluid transportation trucks coiled tubing units assets high growth regions including bakken shale eagle ford shale internationally initiated new operations colombia bahrain second half 2010 colombia first project 25 million involves two rigs two years operations award started early fourth quarter 2010 bahrain awarded first project joint venture middle east two rigs two years one rig began operations early december second rig began operating early january mexico one two contracts pemex expired end march 2010 second two contracts remained place 2010 received limited funding year leading activity levels country significantly reduced much 2010 many temporary cost reduction measures put place 2009 including reductions wages benefits remained place 2010 reinstated early 2011 continue aggressively monitor control costs inflation wages fuel costs equipment costs remained significant challenge throughout 2010 market outlook believe macro fundamental backdrop drove oilfield expansion 2010 remain present 2011 specifically ongoing global economic expansion continues drive increased global demand crude oil natural gas despite weak domestic natural gas fundamental outlook believe strong fundamental oil outlook sets stage continued growth production companies’ capital spending 2011 domestically internationally material change domestic global economies 2011 outlook key’s business 2011 2012 could change believe us lines business experience continued higher demand resulting higher overall activity levels 2011 compared 2010 rigbased services business intend address higher customer demand continuing upgrade enhance several higher capability rigs improve operational efficiency existing fleet grow fleet organic additions particularly larger rig classes fluids management business tends driven overall number producing oil gas wells relates hauling produced water wells us onshore rig count especially horizontal onshore us rig count relates transportation drilling fluid completion fluid water make frac fluids well sites continue expand fluid transportation fleet invest additional strategically located swd wells coiled tubing business activity driven number producing oil gas wells us new horizontal well drilling anticipate demand services remain strong 2011 longer particularly horizontal well completion fracture stimulation related activities 2010 due strong customer demand limited availability extendedreach longlateral coiled tubing fleets industrywide realized higher levels pricing anticipate continued strong pricing environment horizontal well driven coiled tubing services 2011 fishing rental services business tends correlated onshore rig count anticipate moderate strong customer demand growth 2011 continue invest business meet growth demand greater inventory fishing rental tools seeking investments new existing technologies enhance fishing rental services since initial project award colombia 2010 five additional rigs awarded projects work country bringing total active rig fleet colombia seven rigs previously deployed mexico inactive 2010 anticipate strong demand rigs colombia 2011 beyond since initial project award bahrain third rig added scope work begin operating first quarter 2011 anticipate three rigs remain active 2012 operation middle east performed joint venture middle east mexico pemex begun operating 2011 capital budget activity levels begun increase depressed levels 2010 anticipate strong demand 2011 rigs currently deployed mexico primarily chicontepec region continue seek additional opportunities work regions mexico particularly south awarded additional work may deploy additional rig assets country argentina overall activity levels continue increase driven higher oil prices continue seek better pricing services customers generate appropriate returns investment country aggressively manage costs russia anticipate better activity financial performance 2011 compared 2010 expect two new purposebuilt 1000hp drilling rigs two new purposebuilt 500hp heavy workover rigs joint venture russia contribute nearly full year operations 2011 impact inflation operations 2011 anticipate cost inflation remain one biggest challenges expect competition experienced crews throughout oilfield services industry continue put upward pressure wages access experienced capable crews remains one biggest challenges growth also anticipate need mitigate equipment fuel costs 2011 addition effective active cost management endeavor secure prices services anticipate cost inflation still generate appropriate return services results operations consolidated results operations following table shows consolidated results operations years ended december 31 2010 2009 2008 year ended december 31 2010 2009 year ended december 31 2010 income 735 million compared loss 1561 million year ended december 31 2009 income 2010 057 per share compared loss 129 per share 2009 included income per share 2010 gain sale pressure pumping wireline businesses october 1 2010 also 2009 results included asset retirement impairment charges 970 million reoccur 2010 revenues year ended december 31 2010 increased 1980 million 207 12 billion 10 billion year ended december 31 2009 result increased activity improved pricing compared 2009 well revenue contribution acquisitions completed 2010 see “segment operating results year ended december 31 2010 2009” detailed discussion change revenues direct operating expenses direct operating expenses increased 1591 million 235 8350 million 724 revenues year ended december 31 2010 compared 6759 million 707 revenues year ended december 31 2009 direct result activity increases business well inflation operating costs see “segment operating results year ended december 31 2010 2009” detailed discussion change direct operating expenses depreciation amortization expense depreciation amortization expense decreased 122 million 82 1370 million 119 revenue year ended december 31 2010 compared 1492 million 156 revenue year ended december 31 2009 decrease depreciation amortization expense primarily attributable decreases carrying value fixed assets due rig retirement asset impairment charges recorded third quarter 2009 partially offsetting decline increases fixed asset base 2010 due capital spending acquisitions year general administrative expenses general administrative expenses increased 261 million 152 1983 million 172 revenues year ended december 31 2010 compared 1721 million 180 revenues year ended december 31 2009 general administrative expenses increased due additional stock based compensation expense related new equity awards 2010 bonuses paid 2010 present 2009 offset less professional fees 2010 related cost reduction efforts transaction costs incurred 2010 related acquisition ofs also contributed increase asset retirements impairments year ended december 31 2010 asset retirements impairments compared year ended december 31 2009 recognized 970 million pretax charge associated asset retirements impairments 2009 pretax charges included 659 million related retirement certain rigs associated equipment 311 million pretax impairment charge production services segment interest expense net amounts capitalized interest expense increased 26 million 420 million 36 revenues year ended december 31 2010 compared 394 million 41 revenues period 2009 due higher interest rates borrowings senior secured credit facility combined lower capitalized interest due lower capital expenditures related construction equipment net year ended december 31 2010 recognized income net 27 million compared income net 08 million year ended december 31 2009 net consists income tax benefit expense income tax benefit continuing operations 205 million 367 effective rate pretax loss 559 million year ended december 31 2010 compared income tax benefit 660 million 372 effective rate pretax loss 1772 million 2009 effective tax rates differ statutory rate 35 primarily state local foreign income taxes tax effects permanent items attributable booktax differences discontinued operations recorded net income discontinued operations 1057 million year ended december 31 2010 compared net loss discontinued operations 454 million year ended december 31 2009 loss 2009 mostly related asset impairment recorded pressure pumping equipment third quarter 2009 discontinued operations improved 2010 fracturing cementing services within pressure pumping operations due higher activity expansion new markets better pricing also recorded gain sale discontinued operations october 2010 see “note 3 discontinued operations” item 8 discussion noncontrolling interest year ended december 31 2010 allocated 31 million compared 06 million year ended december 31 2009 associated net loss incurred joint ventures year ended december 31 2009 2008 year ended december 31 2009 loss 1561 million decrease income 841 million year ended december 31 2008 loss 2009 129 per share compared income 067 per share 2008 items contributing net loss diluted loss per share 2009 included retirement portion us rig fleet associated equipment 659 million pretax impairment production services segment 311 million pretax also contributing loss dramatic rapid decline activity levels inability remove costs pace decline revenue 2009 revenues year ended december 31 2009 10 billion decrease 6687 million 412 16 billion year ended december 31 2008 see “segment operating results year ended december 31 2009 2008” detailed discussion change revenues direct operating expenses direct operating expenses decreased 3299 million 328 6759 million 707 revenues year ended december 31 2009 compared 10 billion 619 revenues year ended december 31 2008 see “segment operating results year ended december 31 2009 2008” detailed discussion change direct operating expenses depreciation amortization expense depreciation amortization expense decreased 04 million less 10 1492 million 156 revenues year ended december 31 2009 compared 1496 million 92 revenues period 2008 depreciation amortization expense flat year primarily due decrease depreciable asset base result rig retirement asset impairment charges recorded third quarter 2009 offset increases due accelerated depreciation assets removed service first half 2009 response downturn market conditions asset retirements impairments 2009 pretax charges included 659 million related retirement certain rigs associated equipment also recorded 306 million pretax fixed asset impairment charge production services segment additionally determined goodwill recorded 2009 contingent consideration paid related prior year acquisition fishing rental services line business within production services segment impaired recorded pretax impairment charge 05 million 2009 2008 recorded goodwill impairment charge 207 million related pressure pumping services fishing rental services lines business within production services segment implied fair value goodwill less carrying value 2008 fair value investment iroc energy services corp “iroc” based publicly available stock prices remained book value fourth quarter 2008 management determined based iroc’s continued depressed stock price overall negative outlook general economy oilfield services sector impairment temporary result recorded pretax charge 54 million order write carrying value investment iroc fair value general administrative expenses general administrative expenses 1721 million 180 revenues year ended december 31 2009 represented decrease 742 million 301 2463 million 152 revenues period 2008 general administrative expenses declined result cost cutting measures put place beginning late 2008 continued 2009 related reductions headcount employee wage rate benefits reductions controlled spending overhead costs equitybased compensation also lower year ended december 31 2009 result accelerated vesting period majority stock option stock appreciation right “sar” awards fourth quarter 2008 result acceleration expense recognized awards year ended december 31 2009 interest expense net amounts capitalized interest expense decreased 32 million 394 million 41 revenues year ended december 31 2009 compared 426 million 26 revenues period 2008 decline primarily attributable lower average interest rates variablerate debt instruments repayment 1000 million revolving credit facility second quarter 2009 net year ended december 31 2009 recognized income net 08 million compared expense net 26 million year ended december 31 2008 net consists income tax expense income tax benefit 660 million 372 effective rate year ended december 31 2009 compared income tax expense 819 million 541 effective rate year ended december 31 2008 effective tax rates differed statutory rate 35 primarily state local foreign income taxes tax effects permanent items attributable booktax differences 2008 impairment goodwill discontinued operations recorded net loss discontinued operations 454 million year ended december 31 2009 compared net income discontinued operations 143 million year ended december 31 2008 loss 2009 mostly related asset impairment recorded pressure pumping equipment third quarter 2009 see “note 3 discontinued operations” item 8 discussion noncontrolling interest year ended december 31 2009 allocated 06 million compared 02 million year ended december 31 2008 associated net loss incurred joint venture russian federation segment operating results year ended december 31 2010 2009 following table shows operating results reportable segments twelve month periods ended december 31 2010 2009 thousands except percentages well servicing revenues well servicing segment increased 1205 million 140 9803 million year ended december 31 2010 compared 8597 million year ended december 31 2009 increase revenues resulted sequential improvements us activity since 2009 international expansion improved pricing additional revenues 2010 acquisitions offset lower revenues attributable operations mexico due decrease work pemex fourth quarter 2010 commenced operations colombia middle east revenue fluid management business improved significantly 2010 due increased activity bakken shale market however contract pemex expired march 2010 resulting unutilized assets mexico budget cuts mexico suppressed work remaining pemex contract second third quarter fourth quarter pemex extended contract additional year began operate 2011 budget excluding charges asset retirements 2009 operating expenses well servicing segment 9033 million 921 revenues year ended december 31 2010 represented increase 1218 million 156 compared 7815 million 909 revenues 2009 increase operating expenses attributable higher activity levels related expansion costs us well start costs associated foreign expansion severance costs incurred mexico due decrease work pemex overall inflation incurred additional costs 2010 integrate newly acquired businesses expand presence bakken shale also commenced operations colombia middle east second half 2010 production services revenues production services segment increased 775 million 807 1734 million year ended december 31 2010 compared 960 million period 2009 increase revenue attributable expansion coiled tubing services organic growth acquisition well increased activity fishing rental operations due improved economic conditions excluding charges asset retirements impairments 2009 operating expenses production services segment increased 311 million 282 1413 million 815 revenues year ended december 31 2010 compared 1102 million 1149 revenues 2009 operating expenses increased due costs associated expansion coiled tubing operations however expenses percentage revenue lower due improved pricing services additional activity functional support operating expenses functional support increased 201 million 1257 million 109 consolidated revenues year ended december 31 2010 compared 1056 million 110 consolidated revenues 2009 increase costs relates primarily bonuses paid december 2010 present 2009 higher equity compensation expense due new equity awards implementation costs new erp system conversion second quarter 2010 transaction costs incurred 2010 related acquisition ofs also contributed increase year ended december 31 2009 2008 following table shows operating results reportable segments twelve month periods ended december 31 2009 2008 thousands except percentages well servicing revenues well servicing segment decreased 6106 million 415 8597 million year ended december 31 2009 compared 15 billion year ended december 31 2008 decline revenues attributable lower activity levels negative pricing pressure result general downturn markets services demand services declined 2009 result falling prices oil natural gas downturn us global economies tight credit markets combined curtail capital spending customers partially offsetting decline activity expansion operations mexico incremental rig hours russian joint venture 2009 much year ended december 31 2009 primary focus activity us rig services business shifted towards lower margin repair maintenance work much work performed small midsized independent operators traditional customer base major large independent producers decreased activity levels period led lower activity pricing us rig services business excluding charges asset retirements operating expenses well servicing segment 7815 million 909 revenues year ended december 31 2009 represented decrease 3329 million 299 compared 11 billion 758 revenues 2008 decline operating expenses year ended december 31 2009 attributable lower employee compensation lower repairs maintenance expenses lower fuel costs declined due lower activity levels associated lower demand services 2009 compared 2008 also implemented cost control measures beginning fourth quarter 2008 response downturn demand services dramatic rapid decline revenues 2009 outpaced ability cut costs production services revenues production services segment decreased 582 million 377 960 million year ended december 31 2009 compared 1541 million period 2008 overall decline revenue segment primarily attributable lower asset utilization resulting decline gasdirected land drilling activity continental united states continued depression natural gas prices overall uncertainty economy tight credit markets resulting pressure pricing service providers attempted maintain market share also impacted revenues 2009 excluding charges asset impairments operating expenses production services segment decreased 203 million 156 1102 million 1149 revenues year ended december 31 2009 compared 1306 million 847 revenues 2008 operating expenses declined due reductions activity lower fuel prices decreased expenses frac sand cost control measures put place beginning fourth quarter 2008 response downturn demand services despite decline operating expenses dramatic rapid decline revenues outpaced ability cut operating expenses segment 2009 resulting operating costs excess revenues functional support excluding impairment charge investment iroc fourth quarter 2008 operating expenses functional support decreased 512 million 1056 million 110 consolidated revenues year ended december 31 2009 compared 1568 million 97 consolidated revenues 2008 operating expenses declined result cost cutting measures put place beginning late 2008 continued 2009 related reductions headcount employee wage rates benefits reductions controlled spending overhead costs equitybased compensation also lower year ended december 31 2009 result accelerated vesting period majority stock option sar awards fourth quarter 2008 result expense recognized awards 2009 liquidity capital resources require capital fund ongoing operations including maintenance expenditures existing fleet equipment organic growth initiatives investments acquisitions primary sources liquidity cash flows generated operations available cash availability senior secured credit facility intend use sources liquidity fund working capital requirements capital expenditures strategic investments acquisitions additionally march 2011 required make tax payment approximately 67 million related us federal state income taxes december 31 2010 outstanding amounts borrowed senior secured credit facility 2011 expect access available funds senior secured credit facility meet cash requirements daytoday operations times peak needs throughout year planned capital expenditures well acquisitions choose pursue could financed combination cash hand cash flow operations borrowings senior secured credit facility case acquisitions equity believe internally generated cash flows operations current reserves cash availability senior secured credit facility sufficient finance cash requirements current future operations budgeted capital expenditures debt service next twelve months terms senior secured credit facility committed letters credit count borrowing capacity obligations senior secured credit facility guaranteed subsidiaries secured assets including accounts receivable inventory equipment see discussion “debt service” december 31 2010 working capital 1364 million excluding current portion capital lease obligations 40 million working capital december 31 2009 2045 million excluding current portion longterm debt notes payable related parties capital lease obligations totaling 102 million working capital december 31 2010 decreased 2009 result increased current liabilities due activity increases associated improving market conditions 2010 use cash capital spending plans including acquisitions december 31 2010 566 million cash approximately 137 million held bank accounts foreign subsidiaries amount approximately 26 million held joint ventures subject noncontrolling interest cannot repatriated approximately 06 million cash held foreign subsidiaries held us bank accounts denominated us dollars believe cash held whollyowned foreign subsidiaries could repatriated general corporate use without material withholdings december 31 2010 594 million letters credit outstanding revolving credit facility 2406 million availability october 1 2010 borrowed 800 million credit facility fund portion purchase price ofs entities using portion proceeds pattersonuti transaction subsequently repaid entire balance 1678 million october 4 2010 bringing total revolving facility borrowings outstanding zero cash flows year ended december 31 2010 generated cash flows operating activities 1298 million compared 1848 million year ended december 31 2009 operating cash inflows primarily relate net income 703 million collection accounts receivable receipt 532 million federal income tax refund partially offset cash paid accounts payable liabilities due increase activity cash used investing activities 86 million 1106 million years ended december 31 2010 2009 respectively investing cash outflows decreased 2009 due proceeds sale pressure pumping wireline businesses sale six barge rigs offsetting proceeds increased capital expenditures cash paid acquisitions cash used financing activities 1002 million year ended december 31 2010 1275 million 2009 financing cash outflows 2010 consisted primarily net repayment revolving credit facility 1978 million repayment capital lease obligations repayment 60 million outstanding principal balance related party note cash flows discontinued operations separately identified consolidated statements cash flows years ended december 31 2010 2009 2008 believe reduction cash flows expected discontinued operations material adverse impact liquidity ability fund current future operations capital expenditures expect anticipated cash flows ofs businesses offset reduction cash flows discontinued operations additionally used portion net proceeds sale discontinued operations pay outstanding balance senior secured credit facility improved liquidity reducing leverage required interest payments believe sale pressure pumping wireline businesses significant adverse impact nearterm liquidity cash flows following table summarizes cash flows year ended december 31 2010 2009 debt service december 31 2010 annual maturities indebtedness consisting senior notes defined yearend follows maturities debt 2011 interest senior notes due june 1 december 1 year senior notes mature december 2014 interest paid senior notes 2010 356 million interest senior notes 2011 356 million expect fund interest payments cash hand cash generated operations october 2010 repaid outstanding principal balance 1678 million revolving credit facility portion proceeds sale pressure pumping wireline businesses 8375 senior notes 4250 million senior notes outstanding “senior notes” issued november 2007 indenture “indenture” 8375 coupon rate senior notes registered public debt effective august 22 2008 senior notes general unsecured senior obligations company rank effectively subordinate existing future secured indebtedness senior notes jointly severally guaranteed senior unsecured basis certain existing future domestic subsidiaries senior notes mature december 1 2014 december 1 2011 senior notes subject redemption time option whole part redemption prices expressed percentages principal amount redeemed plus accrued unpaid interest applicable redemption date redeemed twelvemonth period beginning december 1 years indicated addition time prior december 1 2011 may option redeem portion senior notes redemption price equal 100 principal amount plus applicable premium defined indenture respect senior notes plus accrued unpaid interest redemption date experience change control subject certain exceptions must give holders senior notes opportunity sell us senior notes whole part purchase price equal 101 aggregate principal amount plus accrued unpaid interest date purchase subject certain negative covenants indenture governing senior notes indenture limits ability among things • sell assets • pay dividends make distributions capital stock subordinated indebtedness • make investments • incur additional indebtedness issue preferred stock • create certain liens • enter agreements restrict dividends payments subsidiaries us • consolidate merge transfer substantially assets • engage transactions affiliates • create unrestricted subsidiaries covenants subject certain exceptions qualifications contain crossdefault provisions connection covenants senior secured credit facility substantially covenants terminate senior notes mature one two specified ratings agencies assigns senior notes investment grade rating future events default exist indenture december 31 2010 senior notes investment grade never assigned investment grade covenants cease apply us result achieving investment grade rating restored even credit rating assigned senior notes later falls investment grade rating february 14 2011 commenced cash tender offer consent solicitation respect senior notes tender offer scheduled expire 1200 midnight new york city time march 14 2011 unless extended earlier terminated obligation accept purchase pay senior notes tender offer conditioned among things tender senior notes representing least majority aggregate principal amount senior notes outstanding prior march 14 2011 received replacement financing terms acceptable us intend fund repurchase senior notes plus related fees expenses proceeds one capital markets debt offerings borrowings senior secured credit facility senior secured credit facility maintain senior secured credit facility pursuant revolving credit agreement syndicate banks bank america securities llc wells fargo bank na administrative agents senior secured credit facility consists revolving credit facility letter credit subfacility swing line facility aggregate principal amount 3000 million mature later november 29 2012 ability request increases total commitments facility 1000 million aggregate increases subject certain requirements well lenders’ approval interest rate per annum applicable senior secured credit facility option libor plus margin 350 450 basis points depending consolidated leverage ratio ii base rate defined higher x bank america’s prime rate federal funds rate plus 05 plus margin 250 350 basis points depending consolidated leverage ratio unused commitment fees facility range 050 075 depending upon consolidated leverage ratio senior secured credit facility contains certain financial covenants among things require us maintain certain financial ratios limit annual capital expenditures addition covenants impose restrictions ability repurchase shares assets owned domestic subsidiaries located outside united states limitations amended senior secured credit facility also requires • consolidated funded indebtedness greater 45 adjusted total capitalization • senior secured leverage ratio senior secured funded debt trailing four quarters earnings interest taxes depreciation amortization calculated pursuant terms senior secured credit facility “ebitda” greater 250 100 fiscal quarter ending december 31 2010 ii thereafter 200 100 • maintain consolidated interest coverage ratio trailing four quarters ebitda interest expense least following amounts corresponding period • limit capital expenditures including made foreign subsidiaries whollyowned 1200 million year consolidated leverage ratio total funded debt trailing four quarters ebitda greater 350 100 ii 2500 million consolidated leverage ratio total funded debt trailing four quarters ebitda equal less 350 100 subject certain adjustments • make acquisitions either completed equity consideration without regard leverage ii completed cash consideration consolidated leverage ratio total funded debt trailing four quarters ebitda 275 100 less x aggregate amount 250 million unused credit commitments facility pro forma compliance financial covenants contained credit agreement b consolidated leverage ratio total funded debt trailing four quarters ebitda greater 275 100 addition requirements subclauses x clause cash amount paid respect acquisitions limited 250 million per fiscal year subject potential increase using amounts available capital expenditures net cash proceeds receive october 27 2009 connection issuance sale equity interests incurrence issuance certain unsecured debt securities identified used purpose • limit investment foreign subsidiaries including way loans made us domestic subsidiaries foreign subsidiaries guarantees made us domestic subsidiaries debt foreign subsidiaries 750 million fiscal year aggregate amount october 27 2009 equal greater 2000 million 25 consolidated net worth plus ii net cash proceeds receive october 27 2009 connection issuance sale equity interests incurrence certain unsecured debt securities identified used purpose addition senior secured credit facility contains certain affirmative covenants including without limitation restrictions related liens ii debt guarantees contingent obligations iii mergers consolidations iv sales transfers dispositions property assets v loans acquisitions joint ventures investments vi dividends distributions redemptions repurchases equity holders vii prepaying redeeming repurchasing senior notes unsecured debt incurred pursuant sixth bullet point listed viii granting negative pledges lenders ix changes nature business x amending organizational documents amending otherwise modifying debt amendment modification would material adverse effect amending senior notes unsecured debt incurred pursuant sixth bullet point listed effect amendment shorten maturity senior notes unsecured debt xi changes accounting policies reporting practices foregoing cases certain exceptions may prepay senior secured credit facility whole part time without premium penalty subject obligation reimburse lenders breakage redeployment costs february 11 2011 received commitment subject customary conditions including syndication best efforts basis new 4000 million senior secured revolving credit facility 250 million may used letters credit pursuant commitment new credit facility would contain accordion feature expand new facility aggregate amount 1000 million expect enter new credit facility march 31 2011 expect interest rate provisions applicable loans new facility favorable contained existing senior secured credit facility covenants new credit facility substantially similar existing facility except expect permitted greater flexibility domestic foreign investments closing new credit facility borrowings thereunder subject satisfaction number customary conditions cannot assure able enter new credit facility terms acceptable us timely manner related party notes payable concurrently sale six barge rigs related equipment may 2010 repaid remaining 60 million outstanding note payable related party second two notes payable related parties “related party note” entered october 25 2007 first related party note unsecured note amount 125 million repaid october 25 2009 second related party note unsecured note amount 100 million payable annual installments 20 million capital lease agreements lease equipment vehicles tractors trailers frac tanks forklifts financial institutions master lease agreements third quarter 2010 repaid 13 million capital leases incurred acquire vehicles pursuant terms pattersonuti sale agreement december 31 2010 approximately 61 million outstanding equipment leases offbalance sheet arrangements december 31 2010 currently offbalance sheet arrangements reasonably likely material current future effect financial condition revenues expenses results operations liquidity capital expenditures capital resources contractual obligations set forth summary contractual obligations december 31 2010 obligations pay future periods reflect certain assumptions including variability interest rates variablerate obligations duration obligations actual payments future periods may vary 1 based interest rates effect december 31 2010 2 based closing stock price december 31 2010 debt compliance senior secured credit facility senior notes contain numerous covenants govern ability make domestic international investments repurchase stock even experience severe downturn business believe covenants related capital spending investments foreign subsidiaries within control therefore believe avoid default covenants december 31 2010 compliance financial covenants senior secured credit facility senior notes based management’s current projections expect compliance covenants senior secured credit facility senior notes next twelve months breach covenants ratios tests could result default indebtedness see “item 1a risk factors” capital expenditures year ended december 31 2010 capital expenditures totaled 1803 million primarily related purchase coiled tubing units addition larger well service rigs major maintenance existing fleet equipment capitalized costs associated new erp system capital expenditures program expected total approximately 2400 million 2011 focusing growth markets united states abroad capital expenditure program 2011 subject market conditions including activity levels commodity prices industry capacity focus 2011 maximization current equipment fleet may choose increase capital expenditures 2011 increase market share expand presence new market currently anticipate funding 2011 capital expenditures combination cash hand operating cash flow borrowings senior secured credit facility operating cash flows activity levels prove insufficient warrant currently planned capital spending levels management expects adjust capital spending plans accordingly may also incur capital expenditures strategic investments acquisitions ofs 2010 acquired certain subsidiaries together associated assets ofs privatelyheld oilfield services company owned arclight capital partners llc subsidiaries oilfield services companies provide well workover stimulation services well nitrogen pumping coiled tubing fluid handling wellsite construction preparation services total consideration acquisition 158 million shares common stock cash payment 758 million subject certain working capital adjustments closing registered shares common stock issued transaction securities act 1933 amended subject certain conditions january 2011 acquired 10 swd wells equity energy company approximately 143 million swd wells located north dakota anticipate acquisitions complementary companies assets lines businesses continue play important role business strategy currently unannounced agreements ongoing negotiations acquisition material businesses assets transactions effected quickly may occur time critical accounting policies accounting department responsible development application accounting policies internal control procedures reports chief financial officer process preparation financial statements conformity generally accepted accounting principles united states “gaap” requires us make certain estimates judgments assumptions may affect reported amounts assets liabilities disclosures contingencies balance sheet date amounts revenues expenses recognized reporting period presentation statement cash flows may record materially different amounts estimates judgments assumptions change actual results differ however analyze estimates assumptions judgments based historical experience various factors believe reasonable circumstances identified following critical accounting policies require significant amount estimation judgment accurately present financial position results operations cash flows • revenue recognition • estimate reserves workers’ compensation vehicular liability selfinsurance • contingencies • income taxes • estimates depreciable lives • valuation indefinitelived intangible assets • valuation tangible finitelived intangible assets • valuation equitybased compensation revenue recognition recognize revenue following criteria met evidence arrangement exists ii delivery occurred services rendered iii price customer fixed determinable iv collectibility reasonably assured • evidence arrangement exists final understanding us customer occurred evidenced completed customer purchase order field ticket supplier contract master service agreement • delivery occurred services rendered completed requirements pursuant terms arrangement evidenced field ticket service log • price customer fixed determinable amount required paid agreed upon evidence price fixed determinable evidenced contractual terms price book completed customer purchase order completed customer field ticket • collectibility reasonably assured screen customers provide goods services customers according determined credit terms granted accordance credit policy present revenues net sales taxes collected us customers required remitted local state governmental taxing authorities review contracts multiple element revenue arrangements deliverables separated units accounting assigned fair value standalone value customer objective reliable evidence fair value delivery undelivered items substantially controlled us believe negotiated prices deliverables services contracts representative fair value since acceptance nonacceptance element contract affect elements workers’ compensation vehicular liability selfinsurance operations expose employees hazards generally associated oilfield heavy lifting moving equipment slippery surfaces cause contribute accidents involving employees third parties may present site environmental conditions remote domestic oil natural gas basins range extreme cold extreme heat heavy rain blowing dust conditions also lead contribute accidents business activities involve use significant number fluid transport trucks oilfield vehicles supporting rolling stock move public private roads vehicle accidents significant risk us also conduct limited contract drilling operations present additional hazards inherent drilling wells blowouts explosions fires could result loss hole damaged equipment personal injury hazards accidents could result damage property third party’s property injury death employees third parties although purchase insurance protect large losses much risk retained form large deductibles selfinsured retentions contractor also enter master service agreements customers agreements subject us potential contractual liabilities common oilfield occurrence event fully insured indemnified failure customer insurer meet indemnification insurance obligations could result substantial losses addition assurance insurance available cover risks available could obtained without substantial increase premiums possible addition higher premiums future insurance coverage may subject higher deductibles coverage restrictions based risks discussed estimate liability arising potentially insured events including workers’ compensation employer’s liability vehicular liability general liability record accruals consolidated financial statements reserves related claims covered insurance based specific facts circumstances insured event past experience similar claims loss estimates individual claims adjusted based upon actual claim judgments settlements reported claims actual outcome claims could differ significantly estimated amounts largely selfinsured physical damage equipment automobiles well workers’ compensation claims accruals maintain consolidated balance sheet relate deductibles selfinsured retentions estimate use historical claims data trend analysis actual outcome claim could differ significantly estimated amounts adjust loss estimates calculation accruals based upon actual claim settlements reported claims changes assumptions estimates could potentially negative impact earnings contingencies periodically required record loss contingencies relate lawsuits claims proceedings taxrelated audits normal course operations consolidated balance sheet record loss contingency matters probable liability incurred amount loss reasonably estimated periodically review loss contingencies ensure recorded appropriate liabilities balance sheet adjust liabilities based estimates judgments made management respect likely outcome matters including effect applicable insurance coverage litigation matters estimates judgments could change based new information changes laws regulations changes management’s plans intentions outcome legal proceedings settlements factors actual results could vary materially reserves record liabilities environmental assessment indicates site remediation efforts probable costs reasonably estimated measure environmental liabilities based part relevant past experience currently enacted laws regulations existing technology sitespecific costs costsharing arrangements recognition joint several liability based upon best estimate final prorata share liability low amount range estimates assumptions involve judgments estimates management changes assumptions new information could lead increases decreases ultimate liability changes recognized immediately earnings record legal obligations retire tangible longlived assets balance sheet liabilities recorded discount incur liability significant judgment involved estimating future cash flows associated obligations well ultimate timing cash flows estimates amount timing cash flows change may material impact results operations income taxes account deferred income taxes using asset liability method provide income taxes significant temporary differences management determines current tax liability well taxes incurred result current operations yet deferred future periods current taxes payable represent liability related income tax return current year net deferred tax expense benefit represents change balance deferred tax assets liabilities reported consolidated balance sheets management estimates changes deferred tax assets liabilities using basis assets liabilities financial reporting purposes enacted rates management estimates effect differences reverse management makes certain assumptions timing temporary tax differences differing treatment certain items tax accounting purposes whether differences permanent final determination tax liability involves interpretation local tax laws tax treaties related authorities jurisdiction well significant use estimates assumptions regarding scope future operations results achieved timing nature income earned expenditures incurred establish valuation allowances reduce deferred tax assets determine likely eg likelihood 50 deferred tax assets realized future periods assess likelihood use estimates judgment regarding future taxable income well jurisdiction taxable income generated determine whether valuation allowance required evidence include current financial position results operations actual forecasted results reversal deferred tax liabilities tax planning strategies well current forecasted business economics industry additionally record uncertain tax positions net recognizable amount based amount management deems likely sustained upon ultimate settlement tax authorities domestic international tax jurisdictions operate estimates assumptions regarding current deferred tax items inaccurate modified changes could potentially material negative impacts earnings see “note 14 income taxes” “item 8 financial statements supplementary data” discussion accounting income taxes changes valuation allowance components tax rate reconciliation realization loss carryforwards estimates depreciable lives use estimated depreciable lives longlived assets rigs heavyduty trucks trailers compute depreciation expense estimate future asset retirement obligations conduct impairment tests base estimates depreciable lives number factors environment assets operate industry factors including forecasted prices competition assumption provide appropriate amount capital expenditures asset operation maintain economical operation asset prevent untimely demise scrap useful lives intangible assets determined years expect assets generate benefit based legal contractual expectations depreciate operational assets depreciable lives salvage value 10 acquisition cost recognize gain loss upon ultimate disposal asset based difference carrying value asset disposal date proceeds receive connection disposal periodically analyze estimates depreciable lives fixed assets determine depreciable periods salvage value continue appropriate also analyze useful lives salvage value events conditions occur could shorten remaining depreciable life asset review depreciable periods salvage values reasonableness given current conditions result depreciation expense based upon estimates depreciable lives fixed assets salvage value economic factors require management make significant judgments estimates determine depreciable lives different originally estimated depreciation expense may increase decrease impairments carrying values fixed assets may result could negatively impact earnings valuation indefinitelived intangible assets periodically review intangible assets subject amortization including goodwill determine whether impairment assets may exist tests must made least annual basis often circumstances indicate assets may impaired circumstances include limited significant adverse changes business climate test impairment indefinitelived intangible assets two step test first step fair value calculated reporting units fair value compared current carrying value reporting unit including reporting unit’s goodwill fair value reporting unit exceeds carrying value potential impairment second step performed carrying value exceeds fair value reporting unit second step required second step test impairment compares implied fair value reporting unit’s goodwill current carrying value implied fair value reporting unit’s goodwill determined manner amount goodwill would recognized business combination purchase price equal fair value reporting unit implied fair value reporting unit’s goodwill excess carrying value impairment charge recorded carrying value reporting unit’s goodwill excess implied fair value impairment charge equal excess recorded conduct annual impairment test goodwill intangible assets subject amortization december 31 year determining fair value reporting units use weightedaverage approach three commonly used valuation techniques discounted cash flow method guideline companies method similar transactions method assign weight results methods based facts circumstances existence testing period assigned weight discounted cash flow method addition estimates made management regarding weighting various valuation techniques creation techniques requires make significant estimates assumptions discounted cash flow method assigned highest weight management current year requires us make assumptions future cash flows future growth rates tax rates future periods booktax differences carrying value assets future periods discount rates assumptions future cash flows growth rates based current budgets future periods well strategic plans beliefs management future activity levels analysts’ expectations revenues profitability cash flows future periods assumptions future tax rates booktax differences carrying value assets future periods based assumptions future cash flows growth rates management’s knowledge beliefs tax law practice current future periods assumptions discount rates include assessment specific risk associated reporting unit tested developed assistance thirdparty valuation consultant reviewed estimates assumptions calculations ultimate conclusions valuation techniques remain responsibility test required annual basis also required frequently based changes external factors triggering events impairment test longlived assets conducted recent annual test impairment goodwill indefinitelived intangible assets december 31 2010 date reporting units purposes impairment testing rig services fluid management services coiled tubing services fishing rental services russian canadian reporting units 3017 million goodwill rig services reporting unit 211 million goodwill fluid management services reporting unit 913 million coiled tubing services reporting unit 246 million goodwill russian reporting unit 42 million goodwill related canadian reporting unit 47 million goodwill fishing rental services reporting unit also intangible assets amortized 87 million related russian reporting unit based results annual test fair value reporting units substantially exceeded carrying values fair value reporting units substantially exceeded carrying values determined potential impairment goodwill associated reporting units existed december 31 2010 step two impairment test required fourth quarter 2010 changed date annual goodwill impairment assessment russian reporting unit september 30 december 31 constitutes change method applying accounting principle believe preferable change made align testing russian reporting unit testing date remaining reporting units change preferable also aligns timing annual russian goodwill impairment test planning budgeting process allow us utilize updated forecasts discounted cash flow models used determination fair value reporting units performed annual goodwill impairment test russian reporting unit september 30 2010 indicators impairment noted retested russian reporting unit december 31 2010 concluded fair value russian reporting unit substantially exceeded carrying value key assumption model revenue related reporting unit increase future years based growth pricing increases potential events could affect assumption level development exploration production activity corresponding capital spending oil natural gas companies russian federation oil natural gas production costs government regulations conditions worldwide oil natural gas industry possible events could affect assumption ability acquire additional assets deployment assets region test concluded fair value russian reporting unit exceeded carrying value second step goodwill impairment test required noted determination fair value reporting units heavily dependent upon certain estimates assumptions make reporting units estimates assumptions made regarding reporting units 2010 annual test indicated fair values reporting units exceeded carrying values believe estimates assumptions reasonable possible changes estimates assumptions could impact determination fair value reporting units discount rates use future periods could change substantially cost debt equity significantly increase decrease chose different comparable companies determining appropriate discount rate reporting units additionally future projected cash flows reporting units could significantly impact fair value reporting units current projections future activity levels pricing cost structure inaccurate fair value reporting units could change materially current recovery overall economy temporary nature significant rapid adverse change business near midterm reporting units current estimates fair value reporting units could decrease significantly leading possible impairment charges future periods based current knowledge beliefs feel material adverse changes current estimates assumptions reporting units would fail step one impairment test reasonably possible valuation tangible finitelived intangible assets fixed assets finitelived intangibles tested potential impairment circumstances events indicate possible impairment may exist circumstances events referred “trigger events” examples trigger events include limited adverse change market conditions significant decrease benefits derived acquired business significant disposal particular asset class trigger event occurs impairment test performed based undiscounted cash flow analysis perform impairment test make judgments estimates assumptions regarding longterm forecasts revenues expenses relating assets subject review market conditions energy prices estimated depreciable lives assets discount rate assumptions legal factors impact operations significant effect estimates use determine whether assets impaired results analysis indicate carrying value assets tested impairment recoverable record impairment charge write carrying value assets fair value using different judgments assumptions estimates could potentially arrive materially different fair value assets tested impairment may result impairment charge identify trigger events causing us test tangible finitelived intangible assets impairment 2010 valuation equitybased compensation granted stock options stocksettled stock appreciation rights “sars” restricted stock “rsas” phantom shares performance units employees nonemployee directors option sar awards grant fair valued using blackscholes option model grant date amortized compensation expense vesting period option award net estimated actual forfeitures compensation related rsas based fair value award grant date recognized based vesting requirements satisfied period phantom shares accounted fair value changes fair value awards recorded compensation expense period performance units provide cash incentive award unit value determined reference common stock performance units measured based two performance periods end performance period 100 50 0 individual’s performance units period vest based relative placement total shareholder return within peer group consisting key five companies see “note 20 sharebased compensation” “item 8 financial statements supplementary data” discussion various award types accounting equitybased compensation utilizing blackscholes option pricing model determine fair values awards certain assumptions made based subjective expectations subject change one assumptions would impact expense associated future grants key assumptions include volatility price common stock riskfree interest rate expected life awards grant stock options year ended december 31 2010 used following weighted average assumptions blackscholes option pricing model determining fair value stock option grants years ended december 31 2009 2008 calculate expected volatility stock option grants measuring volatility historical stock price period equal expected life option ending time option granted determine riskfree interest rate based upon interest rate us treasury bill term equal expected life option time option granted estimating expected lives stock options sars elected use simplified method time current financial statements filed sec options legally restricted exercised therefore believe access sufficient historical exercise data appropriately provide reasonable basis upon estimate expected term stock option awards expected life less term option holders experience exercise forfeit options term option required recalculate fair value stock option grants estimated using blackscholes option pricing model initial calculation unless original option grant terms modified new accounting standards adopted report asu 200916 december 2009 financial accounting standards board “fasb” issued accounting standards update “asu” 200916 transfers servicing topic 860 accounting transfers financial assets asu 200916 revises provisions former fasb statement 140 accounting transfers servicing financial assets extinguishment liabilities requires disclosure regarding transfers financial assets asu 200916 also eliminates concept “qualifying special purpose entity” changes requirements derecognizing financial assets increases disclosure requirements transfers financial assets reporting entity’s continuing involvement transferred financial assets adopted provisions asu 200916 january 1 2010 adoption standard material effect financial condition results operations cash flows asu 200917 december 2009 fasb issued asu 200917 consolidations topic 810 improvements financial reporting enterprises involved variable interest entities asu 200917 replaces quantitativebased risk rewards calculation determining reporting entity controlling financial interest variable interest entity approach focused identifying reporting entity power direct activities variable interest entity significantly impact entity’s economic performance obligation absorb losses entity ii right receive benefits entity approach expected primarily qualitative effective identifying reporting entity controlling financial interest variable interest entity asu 200917 also requires additional disclosures reporting entity’s involvement variable interest entities provisions asu 200917 applied beginning first fiscal period beginning november 15 2009 adopted asu 200917 january 1 2010 adoption standard material effect financial position results operations cash flows asu 201002 january 2010 fasb issued asu 201002 consolidation topic 810 accounting reporting decreases ownership subsidiary scope clarification asu 201002 clarifies scope previous guidance accounting disclosure requirements related decreases ownership subsidiary apply subsidiary group assets business nonprofit entity ii subsidiary business nonprofit entity transferred equity method investee joint venture iii exchange group assets constitutes business nonprofit activity noncontrolling interest entity asu 201002 also expands disclosure requirements deconsolidation subsidiary derecognition group assets include valuation techniques used measure fair value retained investment ii nature continuing involvement subsidiary entity acquiring group assets iii whether transaction resulted deconsolidation derecognition related party whether former subsidiary entity acquiring assets become related party transaction provisions asu 201002 effective first reporting period beginning december 13 2009 adopted provisions asu 201002 january 1 2010 adoption standard material impact financial position results operations cash flows asu 201006 january 2010 fasb issued asu 201006 fair value measurements disclosures topic 820 improving disclosures fair value measurements asu 201006 clarifies requirements certain disclosures around fair value measurements also requires registrants provide certain additional disclosures measurements new disclosure requirements include significant amounts transfers level 1 level 2 fair value measurements period along reason transfers ii separate presentation information purchases sales issuances settlements fair value measurements significant unobservable inputs asu 201006 effective interim annual reporting periods beginning december 15 2009 adopted provisions asu 201006 january 1 2010 adoption standard material impact financial position results operations cash flows asu 201009 february 2010 fasb issued asu 201009 subsequent events topic 855 amendments certain recognition disclosure requirements update provides amendments subtopic 85510 follows entity either sec filer b conduit bond obligor conduit debt securities traded public market domestic foreign stock exchange overthecountermarket including local regional markets required evaluate subsequent events date financial statements issued ii glossary topic 855 amended include definition sec filer sec filer entity required file furnish financial statements either sec respect entity subject section 12i securities exchange act 1934 amended appropriate agency section iii entity sec filer required disclose date subsequent events evaluated iv glossary topic 855 amended remove definition public entity definition public entity topic 855 used determine date subsequent events evaluated v scope reissuance disclosure requirements refined include revised financial statements term revised financial statements added glossary topic 855 revised financial statements include financial statements revised either result correction error retrospective application us generally accepted accounting principles adopted provisions asu 201009 march 1 2010 adoption standard material impact financial position results operations cash flows accounting standards yet adopted report asu 200913 october 2009 fasb issued asu 200913 revenue recognition topic 605 multipledeliverable revenue arrangements consensus fasb emerging issues task force “asu 200913” asu 200913 addresses accounting multipledeliverable arrangements products services accounted separately rather combined unit addresses separate deliverables measure allocate arrangement consideration one units accounting existing gaap requires entity use vendorspecific objective evidence “vsoe” thirdparty evidence selling price separate deliverables multipledeliverable selling arrangement result asu 200913 multipledeliverable arrangements separated circumstances current guidance asu 200913 establishes selling price hierarchy determining selling price deliverable selling price based vsoe available thirdparty evidence vsoe available estimated selling price neither vsoe thirdparty evidence available asu 200913 also requires entity determine best estimate selling price manner consistent used determine selling price deliverable standalone basis increases disclosure requirements related entity’s multipledeliverable revenue arrangements asu 200913 must prospectively applied revenue arrangements entered materially modified fiscal years beginning june 15 2010 early adoption permitted entities may elect required adopt amendments retrospectively periods presented adopted provisions asu 200913 january 1 2011 believe adoption standard material impact financial position results operations cash flows asu 200914 october 2009 fasb issued asu 200914 software topic 985 certain revenue arrangements include software elements consensus fasb emerging issues task force “asu 200914” asu 200914 issued address concerns relating accounting revenue arrangements contain tangible products software “more incidental” product whole existing guidance circumstances requires entities use vsoe selling price separate deliverables multipledeliverable arrangement reporting entities raised concerns current accounting model appropriately reflect economics underlying transactions softwareenabled products fall within scope current guidance originally intended asu 200914 changes current accounting model revenue arrangements include tangible products software elements exclude software components essential tangible products’ core functionality addition asu 200914 also requires hardware components tangible product containing software components always excluded software revenue recognition guidance provides guidance determine software relating tangible products considered essential tangible products’ functionality excluded scope software revenue recognition guidance asu 200914 also provides guidance allocate arrangement consideration deliverables arrangement contains tangible products software essential product’s functionality asu 200914 issued concurrently asu 200913 also requires entities provide disclosures required asu 200913 included within scope asu 200914 asu 200914 effective prospectively revenue arrangements entered materially modified fiscal years beginning june 15 2010 early adoption permitted entities may also elect required adopt asu 200914 retrospectively prior periods must adopt asu 200914 period using transition methods uses adopt asu 200913 adopted provisions asu 200914 january 1 2011 believe adoption standard material impact financial position results operations cash flows asu 201013 april 2010 fasb issued asu 201013 compensation stock compensation topic 718 effect denominating exercise price sharebased payment award currency market underlying equity security trades asu codifies consensus reached eitf issue 09j “effect denominating exercise price sharebased payment award currency market underlying equity security trades” amendments codification clarify employee sharebased payment award exercise price denominated currency market substantial portion entity’s equity shares trades considered contain condition market performance service condition therefore entity would classify award liability otherwise qualifies equity asu 201013 effective fiscal years beginning december 15 2010 early adoption permitted amendments update applied recording cumulativeeffect adjustment opening balance retained earnings cumulativeeffect adjustment calculated awards outstanding beginning fiscal year amendments initially applied amendments applied consistently since inception award cumulativeeffect adjustment presented separately adopted provisions asu 201013 january 1 2011 believe adoption standard material impact financial position results operations cash flows asu 201028 december 2010 fasb issued asu 201028 intangibles goodwill topic 350 perform step 2 goodwill impairment test reporting units zero negative carrying amounts asu reflects decision reached eitf issue 10a amendments asu modify step 1 goodwill impairment test reporting units zero negative carrying amounts reporting units entity required perform step 2 goodwill impairment test likely goodwill impairment exists determining whether likely goodwill impairment exists entity consider whether adverse qualitative factors indicating impairment may exist qualitative factors consistent existing guidance examples require goodwill reporting unit tested impairment annual tests event occurs circumstances change would likely reduce fair value reporting unit carrying amount public entities amendments asu effective fiscal years interim periods within years beginning december 15 2010 early adoption permitted adopted provisions asu 201028 january 1 2011 believe adoption standard material impact financial position results operations cash flows asu 201029 december 2010 fasb issued asu 201029 business combinations topic 805 disclosure supplementary pro forma information business combinations asu reflects decision reached eitf issue 10g amendments asu affect public entity defined topic 805 business combinations enters business combinations material individual aggregate basis amendments asu specify public entity presents comparative financial statements entity disclose revenue earnings combined entity though business combinations occurred current year occurred beginning comparable prior annual reporting period amendments also expand supplemental pro forma disclosures include description nature amount material nonrecurring pro forma adjustments directly attributable business combination included reported pro forma revenue earnings asu 201029 effective prospectively business combinations acquisition date beginning first annual reporting period beginning december 15 2010 early adoption permitted adopted provisions asu 201029 january 1 2011 adoption standard may result additional disclosures material impact financial position results operations cash flows item 7aitem 7 management’s discussion analysis financial condition results operations following discussion analysis financial condition results operations read conjunction consolidated financial statements related notes thereto “item 8 financial statements supplementary data” discussion contains forwardlooking statements based upon current expectations subject uncertainty changes circumstances including identified “cautionary note regarding forwardlooking statements” actual results may differ materially expectations due potentially inaccurate assumptions known unknown risks uncertainties forwardlooking statements read conjunction disclosures “item 1a risk factors” overview provide full range well services major oil companies foreign national oil companies independent oil natural gas production companies produce maintain enhance flow oil natural gas throughout life well services include rigbased coiled tubingbased well maintenance workover services well completion recompletion services fluid management services fishing rental services ancillary oilfield services additionally certain rigs capable specialty drilling applications operate major oil natural gas producing regions continental united states operations mexico colombia middle east russia addition technology development control systems business based canada demand services fluctuates primarily relation price anticipated price oil natural gas turn driven primarily supply demand oil natural gas generally supply commodities decreases demand increases service maintenance requirements increase oil natural gas producers attempt maximize productivity wells higher priced environment however lower oil natural gas price environment demand service maintenance generally decreases oil natural gas producers decrease activity particular demand new existing field drilling completion work driven available investment capital work types services easily “started” “stopped” oil natural gas producers generally tend less risk tolerant commodity prices low volatile may experience rapid decline demand well maintenance services compared demand types oilfield services lowerpriced environment fewer well service rigs needed completions activities generally associated drilling activity business growth strategies focus horizontal well services recent years number horizontal wells drilled us increased significantly horizontal wells tend involve higher degree service intensity associated drilling completion believe ultimately maintenance required lifetime capitalize growing market segment built acquired new equipment including capable rigs coiled tubing units upgraded existing equipment capable providing services integral completion maintenance horizontal wellbores additionally 2011 acquired edge primarily rents frac stack equipment used support hydraulic fracturing operations associated flowback frac fluids proppants oil natural gas edge acquisition increased higherend equipment service offerings associated horizontal well completion activity also expanded service offerings unconventional shale regions horizontal activity prevalent including bakken shale eagle ford shale others intend continue focus expansion horizontal well service offerings existing markets new markets united states continue expansion international markets presently operate internationally mexico colombia middle east russia particularly regions countries large mature oilfields facing production declines believe experience domestic mature oilfields proprietary technologies including keyview® system provides us opportunity compete new business foreign markets continue evaluate international expansion opportunities regions already presence well regions pursue prudent acquisitions complementary businesses intend continue disciplined approach acquisitions seeking opportunities domestic internationally strengthen presence selected regional markets provide opportunities expand core services also seek acquire technologies assets businesses represent good operational strategic andor synergistic fit existing service offerings example recent acquisition edge complemented horizontal well service offerings likewise october 2010 acquired certain subsidiaries together associated assets owned ofs energy services llc coiled tubing asset acquisitions enabled us expand unconventional shale market positioning performance measures baker hughes us rig count data publicly available weekly basis often used coincident indicator overall exploration production ep company spending broader oilfield activity assessing overall activity us onshore oilfield service industry operate believe baker hughes us land drilling rig count best barometer ep companies capital spending resulting activity levels historically activity levels highly correlated us onshore capital spending ep company customers group 1 represents average monthly average prices years presented source us energy information administration bloomberg 2 source wwwbakerhughescom internally measure activity levels well servicing operations primarily rig trucking hours generally capital spending ep companies increases demand services also rises resulting increased rig trucking services hours worked conversely activity levels decline due lower spending ep companies generally provide fewer rig trucking services results lower hours worked following table presents quarterly rig trucking hours 2010 2012 1 international continuing operations rig hours exclude rig hours generated argentina operations sold third quarter 2012 reported discontinued operations argentina hours 54625 55972 first second quarters 2012 respectively argentina rig hours 56804 59255 59532 50876 first second third fourth quarters 2011 respectively argentina rig hours 51745 52101 56099 56946 first second third fourth quarters 2010 respectively 2 total continuing operations rig hours included us rig hours international continuing operations rig hours described footnote 1 3 keys us working days number weekdays quarter minus national holidays market conditions outlook market conditions year ended december 31 2012 industry conditions influenced number factors domestic international supply demand oil natural gas domestic international economic conditions political instability oil producing countries merger acquisition divestiture activity among ep companies first half 2012 customer spending drove increased demand services accordingly invested equipment personnel resources necessary accommodate market growth meanwhile oil prices peaked near 110 per barrel early year subsequently declined 80 per barrel midyear lower realized oil prices combined natural gas prices 350 per mcf persisting year negatively impacted customer cash flow result customers reduced operating cash flow overall activity levels pricing services decreased 2012 progressed experienced reduced equipment utilization underabsorbed operating costs particularly fluids management services coiled tubing services fishing rental services due higher exposure natural gas markets customer demand weakened price competition increased services provide earlier year expanded capacity large diameter extended reach capable coiled tubing units increased frac stack well testing business eagle ford developed presence oil shale markets notably mississippian lime bakken shale markets continued recapitalize us rig services fleet deploying modern heavy workover rigs retiring scrapping older less capable well servicing rigs internationally doubled presence mexico expanded colombia middle east additionally year sold argentina operations market outlook continued growth global domestic oil demand combined limited global production capacity recently improved oil price outlook believe supports continued oildirected activity 2013 particularly productive horizontal wells anticipate keys us activity 2013 approximate 2012 levels implying generally increasing activity lower first quarter level additionally believe favorable global oil fundamentals also lead higher activity international segment one keys large customers reduced us oilfield service activity negatively impacted rig services business late fourth quarter 2012 anticipate full quarters impact activity reduction first quarter 2013 expect generally improving activity rig services beginning second quarter 2013 continuing year idled rig assets return service fishing rental services business tends correlated mostly onshore drilling rig count even backdrop overall flat yearoveryear us oilfield service activity levels believe business could grow result investments rental equipment made 2012 internationally expect build growth experienced 2012 capital investments made year mexico colombia middle east assets deployed late 2012 help fuel incremental growth full years contribution results 2013 impact inflation operations 2013 anticipate cost inflation remain one biggest challenges 2012 expect competition experienced crews throughout oilfield services industry continue put upward pressure wages access experienced capable crews remains one biggest challenges growth also anticipate need mitigate equipment fuel costs 2013 addition effective active cost management endeavor secure prices services anticipate cost inflation still generate appropriate return services results operations consolidated results operations following table shows consolidated results operations years ended december 31 2012 2011 2010 year ended december 31 2012 2011 year ended december 31 2012 operating income 2070 million compared 2538 million year ended december 31 2011 income 2012 005 per diluted share compared 069 per diluted share 2011 income per share 2011 impacted loss extinguishment debt revenues year ended december 31 2012 increased 2309 million 134 196 billion 173 billion year ended december 31 2011 mostly due strong demand rigbased services oil markets improved pricing overall economic conditions first half 2012 well domestic international expansion business see “segment operating results year ended december 31 2012 2011” detailed discussion change revenues direct operating expenses direct operating expenses increased 2237 million 206 13 billion 668 revenues year ended december 31 2012 compared 11 billion 628 revenues year ended december 31 2011 incurred additional costs period relocate assets personnel declining natural gas markets oil markets result experienced increased competition oil markets serve giving rise higher labor costs see “segment operating results year ended december 31 2012 2011” detailed discussion change direct operating expenses depreciation amortization expense depreciation amortization expense increased 468 million 281 2138 million 109 revenue year ended december 31 2012 compared 1669 million 97 revenue year ended december 31 2011 increase primarily attributable increase fixed asset base acquisitions 2011 well increased capital expenditures 2011 full year 2012 general administrative expenses general administrative expenses increased 72 million 32 2305 million 118 revenues year ended december 31 2012 compared 2233 million 129 revenues year ended december 31 2011 increase primarily due higher employee compensation benefit costs professional fees addition prior year expenses offset favorable legal settlement 55 million key energy services inc plantiff loss early extinguishment debt loss early extinguishment debt zero year ended december 31 2012 compared 465 million period 2011 due tender offer 8375 senior notes due 2014 “2014 notes” termination prior credit facility first quarter 2011 loss consisted tender premium 2014 notes well transaction fees writeoff unamortized portion deferred financing costs interest expense net amounts capitalized interest expense increased 127 million 536 million 27 revenues year ended december 31 2012 compared 408 million 24 revenues period 2011 overall interest rates debt declined compared 2011 due repurchase 2014 notes issuance 675 senior notes due 2021 first quarter 2011 however interest expense year ended december 31 2012 increased due issuance additional 2000 million aggregate principal amount 675 senior notes due 2021 higher outstanding balance 2011 credit facility defined income expense net year ended december 31 2012 recognized income net 66 million compared income net 90 million year ended december 31 2011 second quarter 2011 sold equity interest iroc energy services corp “iroc” recorded gain sale 48 million foreign exchange gain relates increase us dollardenominated transactions foreign locations fluctuations strength us dollar table presents comparative detailed information income net december 31 2012 2011 income tax expense benefit income tax expense continuing operations 574 million 358 effective rate pretax income 1600 million year ended december 31 2012 compared income tax expense 641 million 365 effective rate pretax income 1755 million 2011 effective tax rates differ statutory rate 35 primarily state local foreign income taxes tax effects permanent items attributable booktax differences discontinued operations years ended december 31 2012 2011 net loss discontinued operations 936 million 107 million respectively activity related argentina business included loss discontinued operations year ended december 31 2012 pretax loss 858 million includes noncash impairment charge 415 million recorded first quarter 2012 writeoff 519 million cumulative translation adjustment previously recorded accumulated comprehensive loss discussion see “note 3 discontinued operations” “item 8 financial statements supplementary data” noncontrolling interest year ended december 31 2012 allocated 15 million associated income incurred joint ventures noncontrolling interest holders ventures compared net loss 08 million year ended december 31 2011 year ended december 31 2011 2010 year ended december 31 2011 operating income 2538 million compared 40 million operating loss year ended december 31 2010 income 2011 069 per diluted share compared 057 per diluted share 2010 income per share 2011 impacted loss extinguishment debt also 2010 results included gain sale pressure pumping wireline businesses october 1 2010 revenues year ended december 31 2011 increased 6666 million 627 173 billion 106 billion year ended december 31 2010 result increased activity improved pricing compared 2010 domestic international growth well revenue contribution acquisitions completed 2011 fourth quarter 2010 see “segment operating results year ended december 31 2011 2010” detailed discussion change revenues direct operating expenses direct operating expenses increased 3387 million 454 11 billion 628 revenues year ended december 31 2011 compared 7464 million 702 revenues year ended december 31 2010 direct result increased business activity well inflation operating costs see “segment operating results year ended december 31 2011 2010” detailed discussion change direct operating expenses depreciation amortization expense depreciation amortization expense increased 330 million 247 1669 million 97 revenue year ended december 31 2011 compared 1339 million 126 revenue year ended december 31 2010 increase primarily attributable increase fixed asset base acquisitions 2011 fourth quarter 2010 well increased capital expenditures 2011 general administrative expenses general administrative expenses increased 371 million 199 2233 million 129 revenues year ended december 31 2011 compared 1862 million 175 revenues year ended december 31 2010 general administrative expenses increased due increase employee compensation resulting rescission temporary employee compensation benefit reductions late 2010 well increased headcount due growth loss early extinguishment debt loss early extinguishment debt 465 million year ended december 31 2011 compared zero period 2010 due tender offer 2014 notes termination prior credit facility first quarter 2011 loss consisted tender premium 2014 notes well transaction fees writeoff unamortized portion deferred financing costs interest expense net amounts capitalized interest expense decreased 04 million 408 million 24 revenues year ended december 31 2011 compared 412 million 39 revenues period 2010 overall interest rates debt declined 2011 due replacement 2014 notes 675 senior notes due 2021 first quarter 2011 however rate decline offset additional interest expense due greater aggregate principal amount outstanding 2021 notes additional borrowings 2011 credit facility fund acquisition edge income expense net year ended december 31 2011 recognized income net 90 million compared income net 28 million year ended december 31 2010 second quarter 2011 sold equity interest iroc recorded gain sale 48 million foreign exchange gain relates increase us dollardenominated transactions foreign locations fluctuations strength us dollar table presents comparative detailed information income net december 31 2011 2010 income tax expense benefit income tax expense continuing operations 641 million 365 effective rate pretax income 1755 million year ended december 31 2011 compared income tax benefit 180 million 424 effective rate pretax loss 424 million 2010 effective tax rates differ statutory rate 35 primarily state local foreign income taxes tax effects permanent items attributable booktax differences discontinued operations net loss discontinued operations 107 million year ended december 31 2011 compared income 948 million year ended december 31 2010 net loss 2011 related argentina business net income 2010 related argentina business pressure pumping wireline businesses discussion see “note 3 discontinued operations” “item 8 financial statements supplementary data” noncontrolling interest year ended december 31 2011 allocated 08 million associated net loss incurred joint ventures noncontrolling interest holders ventures compared 31 million year ended december 31 2010 segment operating results year ended december 31 2012 2011 following table shows operating results reportable segments years ended december 31 2012 2011 thousands year ended december 31 2012 year ended december 31 2011 us revenues us segment increased 967 million 63 163 billion year ended december 31 2012 compared 153 billion year ended december 31 2011 increase due increase activity rigbased services fishing rental services along improved pricing operating expenses us segment 134 billion year ended december 31 2012 represented increase 1689 million 144 compared 117 billion period 2011 incurred additional costs 2012 relocate assets personnel declining natural gas markets oil markets result experienced increased activity oil markets 2012 combined impact inflationary pressure fuel wages benefitrelated expenses international revenues international segment increased 1342 million 674 3333 million year ended december 31 2012 compared 1991 million year ended december 31 2011 increase primarily attributable increased activity mexico operating expenses international segment increased 1101 million 687 2703 million year ended december 31 2012 compared 1602 million year ended december 31 2011 expenses increased direct result additional activity period also incurred additional costs mobilize assets oman mexico functional support operating expenses functional support decreased 14 million 10 1414 million 72 consolidated revenues year ended december 31 2012 compared 1428 million 83 consolidated revenues year ended december 31 2011 decrease costs primarily related lower bonus stock based compensation expenses addition prior year expenses offset favorable legal settlement 55 million key energy services inc plantiff year ended december 31 2011 2010 following table shows operating results reportable segments twelvemonth periods ended december 31 2011 2010 thousands year ended december 31 2011 year ended december 31 2010 us revenues us segment increased 5688 million 592 153 billion year ended december 31 2011 compared 9612 million year ended december 31 2010 increase segment due increase activity customer spending improved pricing first quarter 2011 implemented price increases lines business also added new equipment capacity several growing shale plays including bakken eagle ford additionally acquisitions fourth quarter 2010 2011 contributed increase revenue year operating expenses us segment 117 billion year ended december 31 2011 represented increase 3435 million 414 compared 8290 million period 2010 increase directly attributable activity growth increases period combined impact inflationary pressure operating costs including fuel wages impact rescission late 2010 temporary cost reduction measures international revenues international segment increased 978 million 965 1991 million year ended december 31 2011 compared 1014 million year ended december 31 2010 increase segment primarily attributable international expansion second half 2010 colombia middle east addition significant activity increase mexico operating expenses international segment increased 484 million 432 1602 million year ended december 31 2011 compared 1118 million year ended december 31 2010 increased direct result additional activity growth full year operations colombia middle east period functional support operating expenses functional support increased 170 million 135 1428 million 83 consolidated revenues year ended december 31 2011 compared 1257 million 118 consolidated revenues year ended december 31 2010 increase costs relates reinstatement late 2010 certain employee compensation benefits suspended 2009 part cost savings effort liquidity capital resources require capital fund ongoing operations including maintenance expenditures existing fleet equipment organic growth initiatives investments acquisitions primary sources liquidity cash flows generated operations available cash borrowings senior secured revolving credit facility maintain senior secured credit facility pursuant revolving credit agreement several lenders jpmorgan chase bank na administrative agent bank america na syndication agent capital one na wells fargo bank na credit agricole corporate investment bank dnb bank asa codocumentation agents amended july 27 2011 “2011 credit facility” 2011 credit facility consists revolving credit facility letter credit subfacility swing line facility aggregate principal amount 5500 million mature later march 31 2016 intend use sources liquidity fund working capital requirements capital expenditures strategic investments acquisitions 2013 expect access available funds 2011 credit facility meet cash requirements daytoday operations times peak needs throughout year planned capital expenditures well acquisitions choose pursue could financed combination cash hand cash flow operations borrowings 2011 credit facility case acquisitions equity believe internally generated cash flows operations current reserves cash availability 2011 credit facility sufficient finance cash requirements current future operations budgeted capital expenditures debt service next twelve months terms 2011 credit facility committed letters credit count borrowing capacity december 31 2012 1650 million borrowings 541 million letters credit outstanding 2011 credit facility leaving 3309 million unused borrowing capacity obligations 2011 credit facility guaranteed subsidiaries secured assets including accounts receivable inventory equipment see discussion “debt service” december 31 2012 adjusted working capital working capital excluding current portion capital lease obligations 04 million 2851 million adjusted working capital december 31 2011 3128 million excluding current portion capital lease obligations 17 million adjusted working capital december 31 2011 decreased 2012 result sale argentina business working capital increase current liabilities slightly offset increase accounts receivable december 31 2012 460 million cash approximately 34 million held bank accounts foreign subsidiaries amount approximately 20 million held joint ventures subject noncontrolling interest therefore cash cannot repatriated less 01 million cash held foreign subsidiaries held us bank accounts denominated us dollars believe cash held wholly owned foreign subsidiaries could repatriated general corporate use without material withholdings cash flows year ended december 31 2012 generated cash flows operating activities 3697 million compared 1883 million year ended december 31 2011 operating cash inflows primarily relate increase collection accounts receivable higher accounts payables accrued liabilities cash used investing activities 4287 million 5201 million years ended december 31 2012 2011 respectively investing cash outflows periods consisted primarily capital expenditures acquisition 2011 capital expenditures 2012 relate increased demand services compared 2011 associated growth initiatives cash provided financing activities 739 million 3061 million years ended december 31 2012 2011 respectively overall financing cash inflows 2012 relate proceeds issuance additional 2000 million 675 senior notes due 2021on march 8 2012 partially offset net payments revolving credit facility following table summarizes cash flows year ended december 31 2012 2011 debt service december 31 2012 annual maturities indebtedness consisting 2014 notes 675 senior notes due 2021 borrowings 2011 credit facility yearend follows maturities debt 2013 interest 6750 million 675 senior notes due 2021 due march 1 september 1 year 675 senior notes due 2021 mature september 1 2021 interest remaining 36 million aggregate principal amount 2014 notes outstanding due june 1 december 1 year 2014 notes mature december 1 2014 interest paid 2014 notes 675 senior notes due 2021 2012 389 million interest 2014 notes 675 senior notes due 2021 2013 expected 459 million expect fund interest payments cash hand cash generated operations 8375 senior notes due 2014 november 29 2007 issued 4250 million aggregate principal amount 2014 notes march 4 2011 repurchased 4213 million aggregate principal amount 2014 notes purchase price 1090 per 1000 principal amount march 15 2011 repurchased additional 01 million aggregate principal amount purchase price 1060 per 1000 principal amount connection repurchase 2014 notes incurred loss 443 million early extinguishment debt related premium paid tender payment related fees writeoff unamortized loan fees 675 senior notes due 2021 issued 4750 million aggregate principal amount 675 senior notes due 2021 march 4 2011 issued additional 2000 million notes march 8 2012 collectively “2021 notes” indenture dated march 4 2011 base indenture supplemented first supplemental indenture dated march 4 2011 amended first supplemental indenture dated march 8 2012 amended supplemental indenture together base indenture used net proceeds repay senior secured indebtedness revolving bank credit facility capitalized 46 million financing costs associated issuance 2021 notes amortized term notes january 29 2013 commenced offer exchange 2000 million aggregate principal amount notes issued private placement march 8 2012 equal principal amount notes registered securities act 1933 exchange offer expire february 25 2013 scheduled close march 5 2013 2021 notes treated single class indenture assuming completion exchange offer exchange notes subject thereto 2021 notes bear cusip isin numbers 2021 notes general unsecured senior obligations effectively subordinated existing future secured indebtedness 2021 notes jointly severally guaranteed senior unsecured basis certain existing future domestic subsidiaries march 1 2016 2021 notes subject redemption time option whole part redemption prices expressed percentages principal amount redeemed plus accrued unpaid interest applicable redemption date redeemed twelvemonth period beginning march 1 years indicated time march 1 2014 may one occasions redeem 35 aggregate principal amount outstanding 2021 notes redemption price 106750 principal amount plus accrued unpaid interest redemption date net cash proceeds one equity offerings provided least 65 aggregate principal amount 2021 notes remains outstanding immediately redemption ii redemption shall occur within 180 days date closing equity offering addition time prior march 1 2016 may option redeem portion 2021 notes redemption price equal 100 principal amount plus premium respect 2021 notes plus accrued unpaid interest redemption date experience change control subject certain exceptions must give holders 2021 notes opportunity sell us 2021 notes whole part purchase price equal 101 aggregate principal amount plus accrued unpaid interest date purchase subject certain negative covenants indenture limits ability among things • incur additional indebtedness issue preferred equity interests • pay dividends make distributions repurchase redeem equity interests • make loans investments • enter sale leaseback transactions • sell transfer otherwise convey assets • create liens • enter transactions affiliates • enter agreements restricting subsidiaries’ ability pay dividends • designate future subsidiaries unrestricted subsidiaries • consolidate merge sell substantially applicable entities’ assets covenants subject certain exceptions qualifications contain crossdefault provisions relating covenants 2011 credit facility discussed substantially covenants terminate 2021 notes mature one two specified ratings agencies assigns 2021 notes investment grade rating future events default exist indenture december 31 2012 2021 notes investment grade covenants cease apply us result achieving investment grade rating restored even credit rating assigned 2021 notes later falls investment grade compliance covenants december 31 2012 senior secured credit facility 2011 credit facility important source liquidity us 2011 credit facility consists revolving credit facility letter credit subfacility swing line facility totaling 550 million mature later march 31 2016 maximum amount may borrow facility may subject limitation due operation covenants contained facility 2011 credit facility allows us request increases total commitments facility 1000 million aggregate part full anytime term 2011 credit facility increases subject compliance restrictive covenants 2011 credit facility indenture governing 2021 senior notes well lender approval capitalized 49 million financing costs connection execution 2011 credit facility additional 14 million related subsequent amendment amortized term debt interest rate per annum applicable 2011 credit facility option adjusted libor plus applicable margin ii higher x jpmorgan’s prime rate federal funds rate plus 05 z onemonth adjusted libor plus 10 plus case applicable margin loans applicable margin libor loans ranges 225 300 basis points applicable margin loans ranges 125 200 basis points depending upon consolidated total leverage ratio defined 2011 credit facility unused commitment fees facility equal 050 2011 credit facility contains certain financial covenants among things limit annual capital expenditures restrict ability repurchase shares require us maintain certain financial ratios financial ratios require • ratio consolidated funded indebtedness total capitalization greater 45 • senior secured leverage ratio senior secured funded debt trailing four quarters earnings interest taxes depreciation amortization calculated pursuant terms 2011 credit facility “ebitda” greater 200 100 • maintain collateral coverage ratio aggregate book value collateral amount total commitments last day fiscal quarter least 200 100 • maintain consolidated interest coverage ratio trailing four quarters ebitda interest expense least 300 100 • limit capital expenditures investments foreign subsidiaries 2500 million per fiscal year consolidated total leverage ratio exceeds 300 100 addition 2011 credit facility contains certain affirmative negative covenants including without limitation restrictions liens ii debt guarantees contingent obligations iii mergers consolidations iv sales transfers dispositions property assets v loans acquisitions joint ventures investments acquisitions permitted long giving pro forma effect thereto default event default exists 2011 credit facility pro forma consolidated total leverage ratio exceed 400 100 compliance financial covenants least 250 million availability 2011 credit facility vi dividends distributions redemptions repurchases equityholders vii making investments loans advances viii selling properties ix prepaying redeeming repurchasing subordinated contractually structurally debt x engaging transactions affiliates xi entering hedging arrangements xii entering sale leaseback transactions xiii granting negative pledges lenders xiv changes nature business xv amending organizational documents xvi changes accounting policies reporting practices foregoing cases certain exceptions compliance covenants december 31 2012 may prepay 2011 credit facility whole part time without premium penalty subject certain reimbursements lenders breakage redeployment costs december 31 2012 borrowings 1650 million revolving credit facility 541 million letters credit outstanding leaving 3309 million available borrowing capacity 2011 credit facility years ended december 31 2012 2011 weighted average interest rate outstanding borrowings 2011 credit facility 271 278 respectively capital lease agreements time lease equipment vehicles tractors trailers frac tanks forklifts financial institutions master lease agreements december 31 2012 approximately 04 million outstanding equipment leases offbalance sheet arrangements december 31 2012 currently offbalance sheet arrangements reasonably likely material current future effect financial condition revenues expenses results operations liquidity capital expenditures capital resources contractual obligations set forth summary contractual obligations december 31 2012 obligations pay future periods reflect certain assumptions including variability interest rates variablerate obligations duration obligations actual payments future periods may vary 1 based interest rates effect december 31 2012 2 based closing stock price december 31 2012 debt compliance december 31 2012 compliance financial covenants 2011 credit facility 2014 notes 2021 notes based management’s current projections expect compliance covenants 2011 credit facility 2014 notes 2021 notes next twelve months breach covenants ratios tests could result default indebtedness see “item 1a risk factors” capital expenditures year ended december 31 2012 capital expenditures totaled 4472 million primarily related addition larger well service rigs coiled tubing units fluid transportation equipment rental equipment including drill pipe major maintenance existing fleet equipment capital expenditure plan 2013 210 million equipment maintenance needs including ongoing upgrades rig services fleet capital expenditure program 2013 subject market conditions including activity levels commodity prices industry capacity specific customer needs focus 2013 maximization current equipment fleet may choose increase capital expenditures 2013 increase market share expand presence new market currently anticipate funding 2013 capital expenditures combination cash hand operating cash flow borrowings 2011 credit facility operating cash flows activity levels prove insufficient warrant currently planned capital spending levels management expects adjust capital spending plans accordingly may also incur capital expenditures strategic investments acquisitions edge completed acquisition edge august 2011 edge primarily rents frac stack equipment used support hydraulic fracturing operations associated flowback frac fluids proppants oil natural gas also provides well testing services rental equipment pumps power swivels oilfield fishing services total consideration acquisition approximately 3059 million consisting approximately 75 million shares common stock approximately 1879 million cash included 263 million reimburse edge growth capital expenditures incurred march 1 2011 date closing net working capital adjustments 18 million january 2011 acquired 10 swd wells equity energy company approximately 143 million swd wells located north dakota anticipate acquisitions complementary companies assets lines businesses continue play important role business strategy currently unannounced agreements ongoing negotiations acquisition material businesses assets transactions effected quickly may occur time critical accounting policies accounting department responsible development application accounting policies internal control procedures reports chief financial officer process preparation financial statements conformity generally accepted accounting principles united states “gaap” requires us make certain estimates judgments assumptions may affect reported amounts assets liabilities disclosures contingencies balance sheet date amounts revenues expenses recognized reporting period presentation statement cash flows may record materially different amounts estimates judgments assumptions change actual results differ however analyze estimates assumptions judgments based historical experience various factors believe reasonable circumstances identified following critical accounting policies require significant amount estimation judgment accurately present financial position results operations cash flows • revenue recognition • estimate reserves workers’ compensation vehicular liability selfinsurance • contingencies • income taxes • estimates depreciable lives • valuation indefinitelived intangible assets • valuation tangible finitelived intangible assets • valuation equitybased compensation revenue recognition recognize revenue following criteria met evidence arrangement exists ii delivery occurred services rendered iii price customer fixed determinable iv collectability reasonably assured • evidence arrangement exists final understanding us customer occurred evidenced completed customer purchase order field ticket supplier contract master service agreement • delivery occurred services rendered completed requirements pursuant terms arrangement evidenced field ticket service log • price customer fixed determinable amount required paid agreed upon evidence price fixed determinable evidenced contractual terms price book completed customer purchase order field ticket • collectability reasonably assured screen customers provide goods services customers according determined credit terms granted accordance credit policy present revenues net sales taxes collected us customers required remitted local state governmental taxing authorities review contracts multiple element revenue arrangements deliverables separated units accounting assigned fair value standalone value customer objective reliable evidence fair value delivery undelivered items substantially controlled us believe negotiated prices deliverables services contracts representative fair value since acceptance nonacceptance element contract affect elements workers’ compensation vehicular liability selfinsurance occurrence event fully insured indemnified failure customer insurer meet indemnification insurance obligations could result substantial losses addition insurance may available cover risks available might able obtain insurance without substantial increase premiums possible addition higher premiums future insurance coverage may subject higher deductibles coverage restrictions estimate liability arising uninsured potentially insured events including workers’ compensation employer’s liability vehicular liability general liability record accruals consolidated financial statements reserves related claims based specific facts circumstances insured event past experience similar claims trend analysis adjust loss estimates calculation accruals based upon actual claim settlements reported claims loss estimates individual claims adjusted based upon actual claim judgments settlements reported claims actual outcome claims could differ significantly estimated amounts changes assumptions estimates could potentially negative impact earnings largely selfinsured physical damage property rigs equipment automobiles due large deductibles selfinsurance contingencies periodically required record loss contingencies relate lawsuits claims proceedings taxrelated audits normal course operations consolidated balance sheet record loss contingency matters probable liability incurred amount loss reasonably estimated periodically review loss contingencies ensure recorded appropriate liabilities balance sheet adjust liabilities based estimates judgments made management respect likely outcome matters including effect applicable insurance coverage litigation matters estimates judgments could change based new information changes laws regulations changes management’s plans intentions outcome legal proceedings settlements factors actual results could vary materially reserves record liabilities environmental assessment indicates site remediation efforts probable costs reasonably estimated measure environmental liabilities based part relevant past experience currently enacted laws regulations existing technology sitespecific costs costsharing arrangements recognition joint several liability based upon best estimate final prorata share liability low amount range estimates assumptions involve judgments estimates management changes assumptions new information could lead increases decreases ultimate liability changes recognized immediately earnings record legal obligations retire tangible longlived assets balance sheet liabilities recorded discount incur liability significant judgment involved estimating future cash flows associated obligations well ultimate timing cash flows estimates amount timing cash flows change may material impact results operations income taxes account deferred income taxes using asset liability method provide income taxes significant temporary differences management determines current tax liability well taxes incurred result current operations yet deferred future periods current taxes payable represent liability related income tax return current year net deferred tax expense benefit represents change balance deferred tax assets liabilities reported consolidated balance sheets management estimates changes deferred tax assets liabilities using basis assets liabilities financial reporting purposes enacted rates management estimates effect differences reverse management makes certain assumptions timing temporary tax differences differing treatment certain items tax accounting purposes whether differences permanent final determination tax liability involves interpretation local tax laws tax treaties related authorities jurisdiction well significant use estimates assumptions regarding scope future operations results achieved timing nature income earned expenditures incurred establish valuation allowances reduce deferred tax assets determine likely eg likelihood 50 deferred tax assets realized future periods assess likelihood use estimates judgment regarding future taxable income well jurisdiction taxable income generated determine whether valuation allowance required evidence include current financial position results operations actual forecasted results reversal deferred tax liabilities tax planning strategies well current forecasted business economics industry additionally record uncertain tax positions net recognizable amount based amount management deems likely sustained upon ultimate settlement tax authorities domestic international tax jurisdictions operate estimates assumptions regarding current deferred tax items inaccurate modified changes could potentially material negative impacts earnings estimates depreciable lives use estimated depreciable lives longlived assets rigs heavyduty trucks trailers compute depreciation expense estimate future asset retirement obligations conduct impairment tests base estimates depreciable lives number factors environment assets operate industry factors including forecasted prices competition assumption provide appropriate amount capital expenditures asset operation maintain economical operation asset prevent untimely demise scrap useful lives intangible assets determined years expect assets generate benefit based legal contractual expectations depreciate operational assets depreciable lives salvage value generally 10 acquisition cost recognize gain loss upon ultimate disposal asset based difference carrying value asset disposal date proceeds receive connection disposal periodically analyze estimates depreciable lives fixed assets determine depreciable periods salvage value continue appropriate also analyze useful lives salvage value events conditions occur could shorten remaining depreciable life asset review depreciable periods salvage values reasonableness given current conditions result depreciation expense based upon estimates depreciable lives fixed assets salvage value economic factors require management make significant judgments estimates determine depreciable lives different originally estimated depreciation expense may increase decrease impairments carrying values fixed assets may result could negatively impact earnings valuation indefinitelived intangible assets periodically review intangible assets subject amortization including goodwill determine whether impairment assets may exist tests must made least annual basis often circumstances indicate assets may impaired circumstances include limited significant adverse changes business climate test impairment indefinitelived intangible assets allows us first assess qualitative factors determine whether “more likely not” fair value reporting unit less carrying amount basis determining whether necessary perform twostep goodwill impairment test qualitative analysis shows “more likely not” fair value reporting unit less carrying amount perform twostep goodwill impairment test first step fair value calculated reporting units fair value compared current carrying value reporting unit including reporting unit’s goodwill fair value reporting unit exceeds carrying value potential impairment second step performed carrying value exceeds fair value reporting unit second step required second step test impairment compares implied fair value reporting unit’s goodwill current carrying value implied fair value reporting unit’s goodwill determined manner amount goodwill would recognized business combination purchase price equal fair value reporting unit implied fair value reporting unit’s goodwill excess carrying value impairment charge recorded carrying value reporting unit’s goodwill excess implied fair value impairment charge equal excess recorded conducted annual impairment test goodwill intangible assets subject amortization december 31 2012 determining fair value reporting units use weightedaverage approach three commonly used valuation techniques discounted cash flow method guideline companies method similar transactions method assigned weight results methods based facts circumstances existence testing period assigned weight discounted cash flow method addition estimates made management regarding weighting various valuation techniques creation techniques requires make significant estimates assumptions discounted cash flow method assigned highest weight management current year requires us make assumptions future cash flows future growth rates tax rates future periods booktax differences carrying value assets future periods discount rates assumptions future cash flows growth rates based current budgets future periods well strategic plans beliefs management future activity levels analysts’ expectations revenues profitability cash flows future periods assumptions future tax rates booktax differences carrying value assets future periods based assumptions future cash flows growth rates management’s knowledge beliefs tax law practice current future periods assumptions discount rates include assessment specific risk associated reporting unit tested developed assistance thirdparty valuation consultant ultimate conclusions valuation techniques remain responsibility test required annual basis also required frequently based changes external factors triggering events conducted recent annual test impairment goodwill indefinitelived intangible assets december 31 2012 date reporting units purposes impairment testing rig services fluid management servicescoiled tubing services fishing rental services russian canadian reporting units goodwill reporting unit december 31 2012 follows thousands except percentages also intangible assets amortized 51 million 83 million related fishing rental services reporting unit russian reporting unit respectively tradenames tested impairment annually using relief royalty method performed qualitative analysis goodwill impairment december 31 2012 based analysis canadian reporting unit triggering event would indicate “more likely not” carrying value reporting unit higher fair value however determined necessary perform first step goodwill impairment test rig services fluid management services coiled tubing services fishing rental services russian reporting units first step goodwill impairment test compared fair value reporting unit carrying amount including goodwill based results step 1 fair value rig services fluid management services coiled tubing services fishing rental services russian reporting units exceeded carrying value 165 132 150 155 178 respectively key assumption model forecast increased revenue 2013 2014 rig services fishing rental services followed nominal revenue increases 2017 fluid management services anticipate decrease revenue 2013 2014 steady revenue increases 2014 2017 anticipate coiled tubing services russian reporting units increased revenue future years potential events could affect assumption include level development exploration production activity corresponding capital spending oil natural gas companies russia oil natural gas production costs government regulations conditions worldwide oil natural gas industry possible factors could affect assumption ability acquire deploy additional assets deployment assets region fair value reporting units exceeded carrying values determined impairment goodwill associated reporting units existed december 31 2012 step two impairment test required noted determination fair value reporting units heavily dependent upon certain estimates assumptions make reporting units estimates assumptions made regarding reporting units 2012 annual test indicated fair values reporting units exceeded carrying values although believe estimates assumptions reasonable possible changes estimates assumptions could impact determination fair value reporting units discount rates use future periods could change substantially cost debt equity significantly increase decrease choose different comparable companies determining appropriate discount rate reporting units additionally future projected cash flows reporting units could significantly impact fair value reporting units current projections future activity levels pricing cost structure inaccurate fair value reporting units could change materially current overall economy declines significant rapid adverse change business near midterm reporting units current estimates fair value reporting units could decrease significantly leading possible impairment charges future periods based current knowledge beliefs feel material adverse changes current estimates assumptions reporting units would fail step one impairment test reasonably possible valuation tangible finitelived intangible assets fixed assets finitelived intangibles tested potential impairment circumstances events indicate possible impairment may exist circumstances events referred “trigger events” examples trigger events include limited adverse change market conditions significant decrease benefits derived acquired business change use asset significant disposal particular asset class trigger event occurs impairment test performed based undiscounted cash flow analysis perform impairment test make judgments estimates assumptions regarding longterm forecasts revenues expenses relating assets subject review market conditions energy prices estimated depreciable lives assets discount rate assumptions legal factors impact operations significant effect estimates use determine whether assets impaired results analysis indicate carrying value assets tested impairment recoverable record impairment charge write carrying value assets fair value using different judgments assumptions estimates could potentially arrive materially different fair value assets tested impairment may result impairment charge identify trigger events causing us test tangible finitelived intangible assets impairment years ended december 31 2012 2011 2010 valuation equitybased compensation granted stock options stocksettled stock appreciation rights “sars” restricted stock “rsas” “rsus” phantom shares performance units employees nonemployee directors option sar awards grant fair valued using blackscholes option model grant date amortized compensation expense vesting period option award net estimated actual forfeitures compensation related rsas rsus based fair value award grant date recognized based vesting requirements satisfied period phantom shares accounted fair value changes fair value awards recorded compensation expense period performance units provide cash incentive award unit value determined reference common stock see note 20 share based compensation “item 8 financial statements supplementary data detailed discussion performance units measurement utilizing blackscholes option pricing model determine fair values awards certain assumptions made based subjective expectations subject change one assumptions would impact expense associated future grants key assumptions include volatility price common stock riskfree interest rate expected life awards grant stock options years ended december 31 2012 2011 2010 new accounting standards adopted report asu 201104 may 2011 fasb issued asu 201104 fair value measurement topic 820 amendments achieve common fair value measurement disclosure requirements us gaap ifrs asu represents converged guidance fasb iasb measuring fair value disclosing information fair value measurements amendments asu clarify board’s intent application existing fair value measurement disclosure requirements changes particular principles requirements measuring fair value disclosing information fair value measurements asu 201104 effective prospectively interim annual reporting periods beginning december 15 2011 adopted provisions asu 201104 january 1 2012 adoption standard material impact financial position results operations cash flows item 7aitem 7 management’s discussion analysis financial condition results operations following discussion analysis financial condition results operations read conjunction consolidated financial statements related notes thereto “item 8 financial statements supplementary data” discussion contains forwardlooking statements based upon current expectations subject uncertainty changes circumstances including identified “cautionary note regarding forwardlooking statements” actual results may differ materially expectations due potentially inaccurate assumptions known unknown risks uncertainties forwardlooking statements read conjunction disclosures “item 1a risk factors” overview provide full range well services major oil companies foreign national oil companies independent oil natural gas production companies produce maintain enhance flow oil natural gas throughout life well services include rigbased coiled tubingbased well maintenance workover services well completion recompletion services fluid management services fishing rental services ancillary oilfield services additionally certain rigs capable specialty drilling applications operate major oil natural gas producing regions continental united states operations mexico colombia ecuador middle east russia addition technology development control systems business based canada demand services fluctuates primarily relation price anticipated price oil natural gas turn driven primarily supply demand oil natural gas generally supply commodities decreases demand increases service maintenance requirements increase oil natural gas producers attempt maximize productivity wells higher priced environment however lower oil natural gas price environment demand service maintenance generally decreases oil natural gas producers decrease activity particular demand new existing field drilling completion work driven available investment capital work types services easily “started” “stopped” oil natural gas producers generally tend less risk tolerant commodity prices low volatile may experience rapid decline demand well maintenance services compared demand types oilfield services lowerpriced environment fewer well service rigs needed completions activities generally associated drilling activity business growth strategies focus horizontal well services recent years number horizontal wells drilled us increased significantly horizontal wells tend involve higher degree service intensity associated drilling completion believe ultimately maintenance required lifetime capitalize growing market segment built acquired new equipment including capable rigs coiled tubing units upgraded existing equipment capable providing services integral completion maintenance horizontal wellbores acquired frac stack equipment used support hydraulic fracturing operations associated flowback frac fluids proppants oil natural gas also expanded service offerings unconventional shale regions horizontal activity prevalent including bakken shale eagle ford shale others horizontal wells become prevalent permian basin expanded operations service offerings market intend continue focus expansion horizontal well service offerings existing markets new markets united states continue expansion international markets presently operate internationally mexico colombia ecuador middle east russia particularly regions countries large mature oilfields facing production declines believe experience domestic mature oilfields proprietary technologies including keyview® system provides us opportunity compete new business foreign markets continue evaluate international expansion opportunities regions already presence well regions pursue prudent acquisitions complementary businesses focused maximizing cash flows acquisitions investments made added internal financial metric key value added “kva” evaluate investments intend continue disciplined approach acquisitions seeking opportunities domestic internationally strengthen presence selected regional markets provide opportunities expand core services also seek acquire technologies assets businesses represent good operational strategic andor synergistic fit existing service offerings performance measures baker hughes us rig count data publicly available weekly basis often used coincident indicator overall exploration production “ep” company spending broader oilfield activity assessing overall activity us onshore oilfield service industry operate believe baker hughes us land drilling rig count best barometer ep companies capital spending resulting activity levels historically activity levels highly correlated us onshore capital spending ep company customers group 1 represents average monthly average prices years presented source us energy information administration bloomberg 2 source wwwbakerhughescom internally measure activity levels well servicing operations primarily rig trucking hours generally capital spending ep companies increases demand services also rises resulting increased rig trucking services hours worked conversely activity levels decline due lower spending ep companies generally provide fewer rig trucking services results lower hours worked following table presents quarterly rig trucking hours 2011 2013 1 international rig hours exclude rig hours generated argentina operations sold third quarter 2012 reported discontinued operations argentina hours 54625 55972 first second quarters 2012 respectively argentina rig hours 56804 59255 59532 50876 first second third fourth quarters 2011 respectively 2 total rig hours included us rig hours international rig hours described footnote 1 3 keys us working days number weekdays quarter minus national holidays market conditions outlook market conditions year ended december 31 2013 core businesses depend customers willingness make expenditures produce develop explore oil natural gas industry conditions influenced numerous factors supply demand oil natural gas domestic worldwide economic conditions political instability oil producing countries fourth quarter 2013 us revenues 61 compared third quarter 2013 fourth quarter 2013 results impacted seasonal effects multiple severe weather events despite factors able maintain revenue consistent expectations heading fourth quarter growing customer base certain customers returning work last weeks quarter offset severe weather helped mitigate revenue declines fourth quarter 2013 international revenues 145 compared third quarter 2013 international results impacted continued activity slowdown north region mexico principal operating region prior expectation based indications senior pemex officials activity would return operating regions fourth quarter pemex prepared return normal activity levels 2014 fourth quarter 2013 mexican government ratified energy reform amongst many facets required pemex submit proposals assets wishes operate future process known round zero operations north region effectively ceased energy reform emerged round zero commenced market outlook continue position key thrive flat market balanced service offerings across wells life giving key exposure unconventional horizontal well legacy vertical well activities believe high value service provide across well life cycle yields many incremental opportunities key look 2014 us customer capital spending market activity seeing positive demand signals many customers seen pace inquiries services increase 2014 expect horizontal oil well count continue increase especially permian basin believe well positioned benefit trend production completiondriven businesses also expect continue benefit efforts broaden customer base deliver keys value proposition new band customers allow us expand base business believe improvements cost structure course 2013 effort increase utilization existing assets allow key improve returns us segment internationally taking necessary actions insulate losses allow us operate profitably await benefits mexican energy reform plan redeploy approximately two dozen 41 rigs mexico back us 2014 reduce fixed cost structure internationally believe activity improve north region mexico national hydrocarbons commission approves assets pemex continue manage time expect achieve cashflow breakeven international segment 2014 help mitigate losses consolidated business maintaining option value activity mexico returns results operations consolidated results operations following table shows consolidated results operations years ended december 31 2013 2012 2011 years ended december 31 2013 2012 year ended december 31 2013 operating income 302 million compared 2069 million year ended december 31 2012 loss per diluted share 014 year ended december 31 2013 compared 005 income per diluted share year ended december 31 2012 revenues year ended december 31 2013 decreased 3684 million 188 159 billion 196 billion year ended december 31 2012 primarily due lower demand rigbased services oil markets overall weaker economic conditions affecting domestic international operations see “segment operating results years ended december 31 2013 2012” detailed discussion change revenues direct operating expenses direct operating expenses decreased 1944 million 149 11 billion 700 revenues year ended december 31 2013 compared 13 billion 668 revenues year ended december 31 2012 decrease direct result activity decreases business improved operating efficiencies rigbased services coiled tubing services operating efficiencies partially offset charges 63 million primarily associated severance costs 23 million costs primarily associated rig mobilizations north region mexico south region mexico countries including us 19 million lease cancellation fees caused direct operating expenses percentage revenue higher 2013 2012 see “segment operating results years ended december 31 2013 2012” detailed discussion change direct operating expenses depreciation amortization expense depreciation amortization expense increased 115 million 54 2253 million 142 revenues year ended december 31 2013 compared 2138 million 109 revenues year ended december 31 2012 increase primarily attributable 2013 impact increased capital expenditures 2012 general administrative expenses general administrative expenses decreased 87 million 38 2218 million 139 revenues year ended december 31 2013 compared 2305 million 118 revenues year ended december 31 2012 decrease primarily related lower third party consulting fees partially offset 22 million charge associated retirement executive recorded first quarter 2013 22 million expenses primarily associated severance costs recorded second quarter 2013 interest expense net amounts capitalized interest expense increased 16 million 552 million 35 revenues year ended december 31 2013 compared 536 million 27 revenues year ended december 31 2012 interest expense year ended december 31 2013 increased due issuance additional 200 million aggregate principal amount 2021 notes defined march 2012 income net year ended december 31 2013 recognized income net 08 million compared 66 million year ended december 31 2012 foreign exchange gain loss relates us dollardenominated transactions foreign locations fluctuations exchange rates local currencies us dollar table presents comparative detailed information income net december 31 2013 2012 income tax expense benefit income tax benefit continuing operations 31 million 126 effective rate pretax loss 242 million year ended december 31 2013 compared income tax expense 574 million 358 effective rate pretax income 1600 million year ended december 31 2012 effective tax rates differ statutory rate 35 primarily state local foreign income taxes tax effects permanent items attributable booktax differences discontinued operations net loss discontinued operations year ended december 31 2013 zero compared 936 million year ended december 31 2012 loss related argentina business sold september 2012 included loss discontinued operations pretax loss 858 million includes noncash impairment charge 415 million recorded first quarter 2012 writeoff 519 million cumulative translation adjustment previously recorded accumulated comprehensive loss discussion see “note 3 discontinued operations” “item 8 financial statements supplementary data” noncontrolling interest year ended december 31 2013 allocated 06 million associated income incurred joint ventures noncontrolling interest holders ventures compared income 15 million year ended december 31 2012 decrease income allocated noncontrolling interest holders due acquisition remaining noncontrolling interests 2013 resulting less income allocated noncontrolling interests holders years ended december 31 2012 2011 year ended december 31 2012 operating income 2070 million compared 2538 million year ended december 31 2011 income per diluted share 005 year ended december 31 2012 compared 069 per diluted share year ended december 31 2011 income per share 2011 impacted loss early extinguishment debt revenues year ended december 31 2012 increased 2309 million 134 196 billion 173 billion year ended december 31 2011 primarily due strong demand rigbased services oil markets improved pricing overall economic conditions first half 2012 well domestic international expansion business see “segment operating results years ended december 31 2012 2011” detailed discussion change revenues direct operating expenses direct operating expenses increased 2237 million 206 13 billion 668 revenues year ended december 31 2012 compared 11 billion 628 revenues year ended december 31 2011 incurred additional costs period relocate assets personnel declining natural gas markets oil markets addition experienced increased competition oil markets serve giving rise higher labor costs see “segment operating results years ended december 31 2012 2011” detailed discussion change direct operating expenses depreciation amortization expense depreciation amortization expense increased 468 million 281 2138 million 109 revenues year ended december 31 2012 compared 1669 million 97 revenues year ended december 31 2011 increase primarily attributable increase fixed asset base acquisitions 2011 well increased capital expenditures portion 2011 full year 2012 general administrative expenses general administrative expenses increased 72 million 32 2305 million 118 revenues year ended december 31 2012 compared 2233 million 129 revenues year ended december 31 2011 increase primarily due higher employee compensation benefit costs professional fees addition prior year expenses offset favorable legal settlement 55 million key energy services inc plantiff loss early extinguishment debt loss early extinguishment debt zero year ended december 31 2012 compared 465 million year ended december 31 2011 due tender offer purchase 8375 senior notes due 2014 “2014 notes” termination prior credit facility first quarter 2011 loss consisted tender premium 2014 notes well transaction fees writeoff unamortized portion deferred financing costs interest expense net amounts capitalized interest expense increased 127 million 536 million 27 revenues year ended december 31 2012 compared 408 million 24 revenues year ended december 31 2011 overall interest rates debt 2012 declined compared 2011 due repurchase 2014 notes issuance 675 senior notes due 2021 first quarter 2011 however interest expense year ended december 31 2012 increased due issuance additional 2000 million aggregate principal amount 2021 notes higher outstanding balance 2011 credit facility income net year ended december 31 2012 recognized income net 66 million compared 90 million year ended december 31 2011 second quarter 2011 sold equity interest iroc energy services corp “iroc” recorded gain sale 48 million foreign exchange gain relates increase us dollardenominated transactions foreign locations fluctuations strength us dollar table presents comparative detailed information income net december 31 2012 2011 income tax expense income tax expense continuing operations 574 million 358 effective rate pretax income 1600 million year ended december 31 2012 compared 641 million 365 effective rate pretax income 1755 million 2011 effective tax rates differ statutory rate 35 primarily state local foreign income taxes tax effects permanent items attributable booktax differences discontinued operations net loss discontinued operations 936 million year ended december 31 2012 compared 107 million year ended december 31 2011 losses related argentina business sold september 2012 included loss discontinued operations year ended december 31 2012 pretax loss 858 million includes noncash impairment charge 415 million recorded first quarter 2012 writeoff 519 million cumulative translation adjustment previously recorded accumulated comprehensive loss discussion see “note 3 discontinued operations” “item 8 financial statements supplementary data” noncontrolling interest year ended december 31 2012 allocated 15 million associated income incurred joint ventures noncontrolling interest holders ventures compared net loss 08 million year ended december 31 2011 segment operating results years ended december 31 2013 2012 following table shows operating results reportable segments years ended december 31 2013 2012 thousands year ended december 31 2013 year ended december 31 2012 us revenues us segment decreased 2498 million 154 138 billion year ended december 31 2013 compared 163 billion year ended december 31 2012 decrease segment due reduced customer spending lower activity natural gas markets increased competition operating expenses us segment 118 billion year ended december 31 2013 represented decrease 1568 million 117 compared 134 billion year ended december 31 2012 decrease directly attributable lower activity oil markets period improved operating efficiencies keys rigbased services coiled tubing services partially offset labor cost inefficiencies due weather related work delays charge 16 million related lease cancellation fees international revenues international segment decreased 1186 million 356 2147 million year ended december 31 2013 compared 3333 million year ended december 31 2012 decrease primarily attributable lower customer activity mexico operating expenses international segment decreased 289 million 107 2414 million year ended december 31 2013 compared 2703 million year ended december 31 2012 expenses decreased direct result lower customer activity mexico partially offset charges 48 million primarily associated severance costs 21 million costs associated rig mobilizations north region mexico south region mexico countries including us functional support operating expenses functional support segment decreased 59 million 42 1355 million 85 consolidated revenues year ended december 31 2013 compared 1414 million 72 consolidated revenues year ended december 31 2012 decrease reflects lower consulting fees partially offset higher severance costs incentive bonus equity based compensation accruals years ended december 31 2012 2011 following table shows operating results reportable segments years ended december 31 2012 2011 thousands year ended december 31 2012 year ended december 31 2011 us revenues us segment increased 967 million 63 163 billion year ended december 31 2012 compared 153 billion year ended december 31 2011 increase due increase activity rigbased services fishing rental services along improved pricing operating expenses us segment 134 billion year ended december 31 2012 represented increase 1689 million 144 compared 117 billion period 2011 incurred additional costs 2012 relocate assets personnel declining natural gas markets oil markets result experienced increased activity oil markets 2012 combined impact inflationary pressure fuel wages benefitrelated expenses international revenues international segment increased 1342 million 674 3333 million year ended december 31 2012 compared 1991 million year ended december 31 2011 increase primarily attributable increased activity mexico operating expenses international segment increased 1101 million 687 2703 million year ended december 31 2012 compared 1602 million year ended december 31 2011 expenses increased direct result additional activity period also incurred additional costs mobilize assets oman mexico functional support operating expenses functional support segment decreased 14 million 10 1414 million 72 consolidated revenues year ended december 31 2012 compared 1428 million 83 consolidated revenues year ended december 31 2011 decrease costs primarily related lower bonus equity based compensation expenses addition prior year expenses offset favorable legal settlement 55 million key energy services inc plaintiff liquidity capital resources require capital fund ongoing operations including maintenance expenditures existing fleet equipment organic growth initiatives investments acquisitions primary sources liquidity cash flows generated operations available cash borrowings senior secured revolving credit facility maintain senior secured credit facility pursuant revolving credit agreement several lenders jpmorgan chase bank na administrative agent bank america na syndication agent capital one na wells fargo bank na credit agricole corporate investment bank dnb bank asa codocumentation agents amended july 27 2011 “2011 credit facility” 2011 credit facility consists revolving credit facility letter credit subfacility swing line facility aggregate principal amount 5500 million mature later march 31 2016 intend use sources liquidity fund working capital requirements capital expenditures strategic investments acquisitions 2014 expect access available funds 2011 credit facility meet cash requirements daytoday operations times peak needs throughout year planned capital expenditures well acquisitions choose pursue could financed combination cash hand cash flow operations borrowings 2011 credit facility case acquisitions equity believe internally generated cash flows operations current reserves cash availability 2011 credit facility sufficient finance cash requirements current future operations budgeted capital expenditures debt service next twelve months terms 2011 credit facility committed letters credit count borrowing capacity december 31 2013 850 million borrowings 541 million letters credit outstanding 2011 credit facility leaving 4109 million unused borrowing capacity subject covenant compliance facility obligations 2011 credit facility guaranteed subsidiaries secured assets including accounts receivable inventory equipment see discussion “debt service” december 31 2013 adjusted working capital working capital excluding current portion longterm debt 36 million 2774 million adjusted working capital working capital excluding current portion capital lease obligations 04 million december 31 2012 2851 million adjusted working capital decreased 2013 result decrease cash equivalents net receivables inventory partially offset decrease accrued taxes december 31 2013 283 million cash approximately 25 million held bank accounts foreign subsidiaries december 31 2013 01 million cash held foreign subsidiaries held us bank accounts denominated us dollars believe cash held wholly owned foreign subsidiaries could repatriated general corporate use without material withholdings cash flows year ended december 31 2013 generated cash flows operating activities 2286 million compared 3697 million year ended december 31 2012 operating cash inflows primarily relate net income continuing operations adjusted non cash items cash used investing activities 1609 million 4287 million years ended december 31 2013 2012 respectively investing cash outflows periods consisted primarily capital expenditures capital expenditures 2013 primarily relate replacement assets existing fleet equipment additionally 2013 completed acquisition remaining 50 noncontrolling interest geostream 146 million capital expenditures 2012 primarily relate increased demand services compared 2011 associated growth initiatives cash used financing activities 855 million year ended december 31 2013 compared cash provided financing activities 739 million year ended december 31 2012 overall financing cash outflows 2013 primarily relate net payments 2011 credit facility overall financing cash inflows 2012 primarily relate proceeds issuance additional 2000 million 2021 notes partially offset net payments 2011credit facility following table summarizes cash flows years ended december 31 2013 2012 debt service december 31 2013 annual maturities indebtedness consisting 2014 notes 2021 notes borrowings 2011 credit facility yearend follows interest 6750 million 2021 notes due march 1 september 1 year 2021 notes mature september 1 2021 interest remaining 36 million aggregate principal amount 2014 notes due june 1 december 1 year 2014 notes mature december 1 2014 interest paid 2014 notes 2021 notes 2013 2012 459 million 389 million respectively expect fund interest payments cash hand cash generated operations 2014 notes november 29 2007 issued 4250 million aggregate principal amount 2014 notes march 4 2011 repurchased 4213 million aggregate principal amount 2014 notes purchase price 1090 per 1000 principal amount march 15 2011 repurchased additional 01 million aggregate principal amount purchase price 1060 per 1000 principal amount connection repurchases 2014 notes incurred loss 443 million early extinguishment debt related premium paid tender payment related fees writeoff unamortized loan fees 2021 notes issued 4750 million aggregate principal amount 675 senior notes due 2021 “initial 2021 notes” march 4 2011 issued additional 2000 million aggregate principal amount 2021 notes “additional 2021 notes” together initial 2021 notes “2021 notes” private placement march 8 2012 indenture dated march 4 2011 “base indenture” supplemented first supplemental indenture dated march 4 2011 amended supplemental indenture dated march 8 2012 “supplemental indenture” together base indenture “indenture” used net proceeds repay senior secured indebtedness revolving bank credit facility capitalized 46 million financing costs associated issuance 2021 notes amortized term notes march 5 2013 completed offer exchange 2000 million aggregate principal amount unregistered additional 2021 notes equal principal amount notes registered securities act 1933 2021 notes treated single class indenture closing exchange offer bear cusip isin numbers 2021 notes general unsecured senior obligations effectively subordinated existing future secured indebtedness 2021 notes jointly severally guaranteed senior unsecured basis certain existing future domestic subsidiaries march 1 2016 2021 notes subject redemption time option whole part redemption prices expressed percentages principal amount redeemed plus accrued unpaid interest applicable redemption date redeemed twelvemonth period beginning march 1 years indicated time march 1 2014 may one occasions redeem 35 aggregate principal amount outstanding 2021 notes redemption price 106750 principal amount plus accrued unpaid interest redemption date net cash proceeds one equity offerings provided least 65 aggregate principal amount 2021 notes remains outstanding immediately redemption ii redemption shall occur within 180 days date closing equity offering addition time prior march 1 2016 may option redeem portion 2021 notes redemption price equal 100 principal amount plus premium respect 2021 notes plus accrued unpaid interest redemption date premium excess present value redemption price 103375 principal amount plus remaining scheduled interest payments due march 1 2016 discounted treasury rate plus 050 ii principal amount note experience change control subject certain exceptions must give holders 2021 notes opportunity sell us 2021 notes whole part purchase price equal 101 aggregate principal amount plus accrued unpaid interest date purchase subject certain negative covenants indenture limits ability among things • incur additional indebtedness issue preferred equity interests • pay dividends make distributions repurchase redeem equity interests • make loans investments • enter sale leaseback transactions • sell transfer otherwise convey assets • create liens • enter transactions affiliates • enter agreements restricting subsidiaries’ ability pay dividends • designate future subsidiaries unrestricted subsidiaries • consolidate merge sell substantially applicable entities’ assets covenants subject certain exceptions qualifications contain crossdefault provisions relating covenants 2011 credit facility discussed substantially covenants terminate 2021 notes mature one two specified ratings agencies assigns 2021 notes investment grade rating future events default exist indenture december 31 2013 2021 notes investment grade covenants cease apply us result achieving investment grade rating restored even credit rating assigned 2021 notes later falls investment grade compliance covenants december 31 2013 2011 credit facility 2011 credit facility important source liquidity us 2011 credit facility consists revolving credit facility letter credit subfacility swing line facility totaling 550 million mature later march 31 2016 maximum amount may borrow facility may subject limitation due operation covenants contained facility 2011 credit facility allows us request increases total commitments facility 1000 million aggregate part full anytime term 2011 credit facility increases subject compliance restrictive covenants 2011 credit facility indenture well lender approval capitalized 49 million financing costs connection execution 2011 credit facility additional 14 million related subsequent amendment amortized term debt interest rate per annum applicable 2011 credit facility option adjusted libor plus applicable margin ii higher x jpmorgan’s prime rate federal funds rate plus 05 z onemonth adjusted libor plus 10 plus case applicable margin loans applicable margin libor loans ranges 225 300 basis points applicable margin loans ranges 125 200 basis points depending upon consolidated total leverage ratio defined 2011 credit facility unused commitment fees facility equal 050 2011 credit facility contains certain financial covenants among things limit annual capital expenditures restrict ability repurchase shares require us maintain certain financial ratios financial ratios require • ratio consolidated funded indebtedness total capitalization greater 45 • senior secured leverage ratio senior secured funded debt trailing four quarters earnings interest taxes depreciation amortization calculated pursuant terms 2011 credit facility “ebitda” greater 200 100 • maintain collateral coverage ratio aggregate book value collateral amount total commitments last day fiscal quarter least 200 100 • maintain consolidated interest coverage ratio trailing four quarters ebitda interest expense least 300 100 • limit capital expenditures investments foreign subsidiaries 2500 million per fiscal year consolidated total leverage ratio exceeds 300 100 addition 2011 credit facility contains certain affirmative negative covenants including without limitation restrictions liens ii debt guarantees contingent obligations iii mergers consolidations iv sales transfers dispositions property assets v loans acquisitions joint ventures investments acquisitions permitted long giving pro forma effect thereto default event default exists 2011 credit facility pro forma consolidated total leverage ratio exceed 400 100 compliance financial covenants least 250 million availability 2011 credit facility vi dividends distributions redemptions repurchases equityholders vii making investments loans advances viii selling properties ix prepaying redeeming repurchasing subordinated contractually structurally debt x engaging transactions affiliates xi entering hedging arrangements xii entering sale leaseback transactions xiii granting negative pledges lenders xiv changes nature business xv amending organizational documents xvi changes accounting policies reporting practices foregoing cases certain exceptions compliance covenants december 31 2013 may prepay 2011 credit facility whole part time without premium penalty subject certain reimbursements lenders breakage redeployment costs december 31 2013 borrowings 850 million revolving credit facility 541 million letters credit outstanding leaving 4109 million undrawn borrowing capacity subject covenant compliance facility 2011 credit facility years ended december 31 2013 2012 weighted average interest rates outstanding borrowings 2011 credit facility 276 271 respectively letter credit facility november 7 2013 entered uncommitted unsecured 150 million letter credit facility used solely issuances performance letters credit december 31 2013 48 million letters credit outstanding leaving 102 million unused borrowing capacity facility capital lease agreements time lease equipment vehicles tractors trailers frac tanks forklifts financial institutions master lease agreements december 31 2013 capital leases outstanding offbalance sheet arrangements december 31 2013 currently offbalance sheet arrangements reasonably likely material current future effect financial condition revenues expenses results operations liquidity capital expenditures capital resources contractual obligations set forth summary contractual obligations december 31 2013 obligations pay future periods reflect certain assumptions including variability interest rates variablerate obligations duration obligations actual payments future periods may vary 1 based interest rates effect december 31 2013 2 based closing stock price december 31 2013 debt compliance december 31 2013 compliance financial covenants 2011 credit facility 2014 notes 2021 notes based management’s current projections expect compliance covenants 2011 credit facility 2014 notes 2021 notes next twelve months breach covenants ratios tests could result default indebtedness see “item 1a risk factors” capital expenditures year ended december 31 2013 capital expenditures totaled 1641 million primarily related ongoing replacement rig service fleet including addition fortyseven rigs coiled tubing units fluid transportation equipment rental equipment including drill pipe capital expenditure plan 2014 198 million primarily related equipment replacement needs including ongoing replacement rig services fleet capital expenditure program 2014 subject market conditions including activity levels commodity prices industry capacity specific customer needs focus 2014 maximization current equipment fleet may choose increase capital expenditures 2014 increase market share expand presence new market currently anticipate funding 2014 capital expenditures combination cash hand operating cash flow borrowings 2011 credit facility operating cash flows activity levels prove insufficient warrant currently planned capital spending levels management expects adjust capital spending plans accordingly may also incur capital expenditures strategic investments acquisitions geostream april 9 2013 completed acquisition remaining 50 noncontrolling interest geostream 146 million 100 geostream almansoori key energy services lcc august 5 2013 agreed dissolution almansoori key energy services llc joint venture formed laws abu dhabi uae acquisition underlying business 51 million edge completed acquisition edge august 2011 edge primarily rents frac stack equipment used support hydraulic fracturing operations associated flowback frac fluids proppants oil natural gas also provides well testing services rental equipment pumps power swivels oilfield fishing services total consideration acquisition approximately 3059 million consisting approximately 75 million shares common stock approximately 1879 million cash included 263 million reimburse edge growth capital expenditures incurred march 1 2011 date closing net working capital adjustments 18 million january 2011 acquired purchase lease 10 swd wells equity energy company approximately 143 million swd wells located north dakota anticipate acquisitions complementary companies assets lines businesses continue play important role business strategy currently unannounced agreements ongoing negotiations acquisition material businesses assets transactions effected quickly may occur time critical accounting policies accounting department responsible development application accounting policies internal control procedures reports chief financial officer process preparation financial statements conformity generally accepted accounting principles united states “gaap” requires us make certain estimates judgments assumptions may affect reported amounts assets liabilities disclosures contingencies balance sheet date amounts revenues expenses recognized reporting period presentation statement cash flows may record materially different amounts estimates judgments assumptions change actual results differ however analyze estimates assumptions judgments based historical experience various factors believe reasonable circumstances identified following critical accounting policies require significant amount estimation judgment accurately present financial position results operations cash flows • revenue recognition • estimate reserves workers’ compensation vehicular liability selfinsurance • contingencies • income taxes • estimates depreciable lives • valuation indefinitelived intangible assets • valuation tangible finitelived intangible assets • valuation equitybased compensation revenue recognition recognize revenue following criteria met evidence arrangement exists ii delivery occurred services rendered iii price customer fixed determinable iv collectability reasonably assured • evidence arrangement exists final understanding us customer occurred evidenced completed customer purchase order field ticket supplier contract master service agreement • delivery occurred services rendered completed requirements pursuant terms arrangement evidenced field ticket service log • price customer fixed determinable amount required paid agreed upon evidence price fixed determinable evidenced contractual terms price book completed customer purchase order field ticket • collectability reasonably assured screen customers provide goods services customers according determined credit terms granted accordance credit policy present revenues net sales taxes collected us customers required remitted local state governmental taxing authorities review contracts multiple element revenue arrangements deliverables separated units accounting assigned fair value standalone value customer objective reliable evidence fair value delivery undelivered items substantially controlled us believe negotiated prices deliverables services contracts representative fair value since acceptance nonacceptance element contract affect elements workers’ compensation vehicular liability selfinsurance occurrence event fully insured indemnified failure customer insurer meet indemnification insurance obligations could result substantial losses addition insurance may available cover risks available might able obtain insurance without substantial increase premiums possible addition higher premiums future insurance coverage may subject higher deductibles coverage restrictions estimate liability arising uninsured potentially insured events including workers’ compensation employer’s liability vehicular liability general liability record accruals consolidated financial statements reserves related claims based specific facts circumstances insured event past experience similar claims trend analysis adjust loss estimates calculation accruals based upon actual claim settlements reported claims loss estimates individual claims adjusted based upon actual claim judgments settlements reported claims actual outcome claims could differ significantly estimated amounts changes assumptions estimates could potentially negative impact earnings largely selfinsured physical damage property rigs equipment automobiles due large deductibles selfinsurance contingencies periodically required record loss contingencies relate lawsuits claims proceedings taxrelated audits normal course operations consolidated balance sheet record loss contingency matters probable liability incurred amount loss reasonably estimated periodically review loss contingencies ensure recorded appropriate liabilities balance sheet adjust liabilities based estimates judgments made management respect likely outcome matters including effect applicable insurance coverage litigation matters estimates judgments could change based new information changes laws regulations changes management’s plans intentions outcome legal proceedings settlements factors actual results could vary materially reserves record liabilities environmental assessment indicates site remediation efforts probable costs reasonably estimated measure environmental liabilities based part relevant past experience currently enacted laws regulations existing technology sitespecific costs costsharing arrangements recognition joint several liability based upon best estimate final prorata share liability low amount range estimates assumptions involve judgments estimates management changes assumptions new information could lead increases decreases ultimate liability changes recognized immediately earnings record legal obligations retire tangible longlived assets balance sheet liabilities recorded discount incur liability significant judgment involved estimating future cash flows associated obligations well ultimate timing cash flows estimates amount timing cash flows change may material impact results operations income taxes account deferred income taxes using asset liability method provide income taxes significant temporary differences management determines current tax liability well taxes incurred result current operations yet deferred future periods current taxes payable represent liability related income tax return current year net deferred tax expense benefit represents change balance deferred tax assets liabilities reported consolidated balance sheets management estimates changes deferred tax assets liabilities using basis assets liabilities financial reporting purposes enacted rates management estimates effect differences reverse management makes certain assumptions timing temporary tax differences differing treatment certain items tax accounting purposes whether differences permanent final determination tax liability involves interpretation local tax laws tax treaties related authorities jurisdiction well significant use estimates assumptions regarding scope future operations results achieved timing nature income earned expenditures incurred establish valuation allowances reduce deferred tax assets determine likely eg likelihood 50 deferred tax assets realized future periods assess likelihood use estimates judgment regarding future taxable income well jurisdiction taxable income generated determine whether valuation allowance required evidence include current financial position results operations actual forecasted results reversal deferred tax liabilities tax planning strategies well current forecasted business economics industry additionally record uncertain tax positions net recognizable amount based amount management deems likely sustained upon ultimate settlement tax authorities domestic international tax jurisdictions operate estimates assumptions regarding current deferred tax items inaccurate modified changes could potentially material negative impacts earnings estimates depreciable lives use estimated depreciable lives longlived assets rigs heavyduty trucks trailers compute depreciation expense estimate future asset retirement obligations conduct impairment tests base estimates depreciable lives number factors environment assets operate industry factors including forecasted prices competition assumption provide appropriate amount capital expenditures asset operation maintain economical operation asset prevent untimely demise scrap useful lives intangible assets determined years expect assets generate benefit based legal contractual expectations depreciate operational assets depreciable lives salvage value generally 10 acquisition cost recognize gain loss upon ultimate disposal asset based difference carrying value asset disposal date proceeds receive connection disposal periodically analyze estimates depreciable lives fixed assets determine depreciable periods salvage value continue appropriate also analyze useful lives salvage value events conditions occur could shorten remaining depreciable life asset review depreciable periods salvage values reasonableness given current conditions result depreciation expense based upon estimates depreciable lives fixed assets salvage value economic factors require management make significant judgments estimates determine depreciable lives different originally estimated depreciation expense may increase decrease impairments carrying values fixed assets may result could negatively impact earnings valuation indefinitelived intangible assets periodically review intangible assets subject amortization including goodwill determine whether impairment assets may exist tests must made least annual basis often circumstances indicate assets may impaired circumstances include limited significant adverse changes business climate test impairment indefinitelived intangible assets allows us first assess qualitative factors determine whether “more likely not” fair value reporting unit less carrying amount basis determining whether necessary perform twostep goodwill impairment test qualitative analysis shows “more likely not” fair value reporting unit less carrying amount perform twostep goodwill impairment test first step fair value calculated reporting units fair value compared current carrying value reporting unit including reporting unit’s goodwill fair value reporting unit exceeds carrying value potential impairment second step performed carrying value exceeds fair value reporting unit second step required second step test impairment compares implied fair value reporting unit’s goodwill current carrying value implied fair value reporting unit’s goodwill determined manner amount goodwill would recognized business combination purchase price equal fair value reporting unit implied fair value reporting unit’s goodwill excess carrying value impairment charge recorded carrying value reporting unit’s goodwill excess implied fair value impairment charge equal excess recorded historically evaluated goodwill impairment one level reporting segment level reporting unit level annually december 31 frequently impairment indicators arose accordance accounting standards codification asc topic 350 third quarter 2013 changed date annual assessment goodwill impairment october 1 year change assessment date delay accelerate avoid cause impairment charge change result adjustments previously issued financial statements believe change date aligns planning cycle create synergy allow goodwill impairment analysis embedded projection future results business planning purposes believe enhance quality goodwill impairment analysis also change date allows us time identify respond issues noted analysis finalization sec filings improve quality financial reporting company prospectively applied change annual goodwill impairment testing date beginning fourth quarter 2013 conducted annual impairment test goodwill intangible assets subject amortization october 1 2013 determining fair value reporting units use weightedaverage approach three commonly used valuation techniques discounted cash flow method guideline companies method similar transactions method assigned weight results methods based facts circumstances existence testing period assigned weight discounted cash flow method believe representative future business addition estimates made management regarding weighting various valuation techniques creation techniques requires make significant estimates assumptions discounted cash flow method assigned highest weight management current year requires us make assumptions future cash flows future growth rates tax rates future periods booktax differences carrying value assets future periods discount rates assumptions future cash flows growth rates based current budgets future periods well strategic plans beliefs management future activity levels analysts’ expectations revenues profitability cash flows future periods assumptions future tax rates booktax differences carrying value assets future periods based assumptions future cash flows growth rates management’s knowledge beliefs tax law practice current future periods assumptions discount rates include assessment specific risk associated reporting unit tested developed assistance thirdparty valuation consultant ultimate conclusions valuation techniques remain responsibility test required annual basis also required frequently based changes external factors triggering events conducted recent annual test impairment goodwill indefinitelived intangible assets october 1 2013 date reporting units purposes impairment testing rigbased services fluid management services coiled tubing services fishing rental services russian canadian reporting units goodwill reporting unit december 31 2013 follows thousands except percentages also intangible assets amortized 51 million 85 million related fishing rental services reporting unit russian reporting unit respectively tradenames tested impairment annually using relief royalty method performed qualitative analysis goodwill impairment october 1 2013 based analysis canadian reporting unit triggering event would indicate “more likely not” carrying value reporting unit higher fair value however determined necessary perform first step goodwill impairment test rig services fluid management services coiled tubing services fishing rental services russian reporting units first step goodwill impairment test compared fair value reporting unit carrying amount including goodwill based results step 1 fair value rigbased services fluid management services coiled tubing services fishing rental services russian reporting units exceeded carrying value 11 4 19 21 86 respectively key assumption model forecast increased revenue 2014 rigbased services fluid management services fishing rental services followed nominal revenue increases 2018 anticipate coiled tubing services russian reporting units increased revenue future years potential events could affect assumption include level development exploration production activity corresponding capital spending oil natural gas companies russia oil natural gas production costs government regulations conditions worldwide oil natural gas industry possible factors could affect assumption ability acquire deploy additional assets deployment assets region fair value reporting units exceeded carrying values determined impairment goodwill associated reporting units existed october 1 2013 step two impairment test required noted determination fair value reporting units heavily dependent upon certain estimates assumptions make reporting units estimates assumptions made regarding reporting units 2013 annual test indicated fair values reporting units exceeded carrying values although believe estimates assumptions reasonable possible changes estimates assumptions could impact determination fair value reporting units discount rates use future periods could change substantially cost debt equity significantly increase decrease choose different comparable companies determining appropriate discount rate reporting units additionally future projected cash flows reporting units could significantly impact fair value reporting units current projections future activity levels pricing cost structure inaccurate fair value reporting units could change materially current overall economy declines significant rapid adverse change business near midterm reporting units current estimates fair value reporting units could decrease significantly leading possible impairment charges future periods based current knowledge beliefs think material adverse changes current estimates assumptions rigbased services coiled tubing services fishing rental services russian reporting units would fail step one impairment test reasonably possible based forecast fluid management services cushion four percent expect business show rebound growth 2014 future years thus anticipate impairment valuation tangible finitelived intangible assets fixed assets finitelived intangibles tested potential impairment circumstances events indicate possible impairment may exist circumstances events referred “trigger events” examples trigger events include limited adverse change market conditions significant decrease benefits derived acquired business change use asset significant disposal particular asset class trigger event occurs impairment test performed based undiscounted cash flow analysis perform impairment test make judgments estimates assumptions regarding longterm forecasts revenues expenses relating assets subject review market conditions energy prices estimated depreciable lives assets discount rate assumptions legal factors impact operations significant effect estimates use determine whether assets impaired results analysis indicate carrying value assets tested impairment recoverable record impairment charge write carrying value assets fair value using different judgments assumptions estimates could potentially arrive materially different fair value assets tested impairment may result impairment charge identify trigger events causing us test tangible finitelived intangible assets impairment years ended december 31 2013 2012 2011 valuation equitybased compensation granted stock options stocksettled stock appreciation rights “sars” restricted stock “rsas” “rsus” phantom shares performance units employees nonemployee directors option sar awards grant fair valued using blackscholes option model grant date amortized compensation expense vesting period option sar award net estimated actual forfeitures compensation related rsas rsus based fair value award grant date recognized based vesting requirements satisfied period phantom shares accounted fair value changes fair value awards recorded compensation expense period performance units provide cash incentive award unit value determined reference common stock see “note 20 share based compensation” “item 8 financial statements supplementary data” detailed discussion performance units measurement utilizing blackscholes option pricing model determine fair values awards certain assumptions made based subjective expectations subject change one assumptions would impact expense associated future grants key assumptions include volatility price common stock riskfree interest rate expected life awards grant stock options years ended december 31 2013 2012 2011 new accounting standards adopted report new accounting standards adopted yet adopted report item 7aitem 7 management’s discussion analysis financial condition results operations following discussion analysis financial condition results operations read conjunction consolidated financial statements related notes thereto “item 8 financial statements supplementary data” discussion contains forwardlooking statements based upon current expectations subject uncertainty changes circumstances including identified “cautionary note regarding forwardlooking statements” actual results may differ materially expectations due potentially inaccurate assumptions known unknown risks uncertainties forwardlooking statements read conjunction disclosures “item 1a risk factors” overview provide full range well services major oil companies foreign national oil companies independent oil natural gas production companies produce maintain enhance flow oil natural gas throughout life well services include rigbased coiled tubingbased well maintenance workover services well completion recompletion services fluid management services fishing rental services ancillary oilfield services additionally certain rigs capable specialty drilling applications operate major oil natural gas producing regions continental united states operations mexico colombia ecuador middle east russia addition technology development control systems business based canada demand services fluctuates primarily relation price anticipated price oil natural gas turn driven primarily supply demand oil natural gas generally supply commodities decreases demand increases service maintenance requirements increase oil natural gas producers attempt maximize productivity wells higher priced environment however lower oil natural gas price environment demand service maintenance generally decreases oil natural gas producers decrease activity particular demand new existing field drilling completion work driven available investment capital work types services easily “started” “stopped” oil natural gas producers generally tend less risk tolerant commodity prices low volatile may experience rapid decline demand well maintenance services compared demand types oilfield services lowerpriced environment fewer well service rigs needed completions activities generally associated drilling activity business growth strategies focus horizontal well services past several years number horizontal wells particularly horizontal oil wells drilled us increased significantly horizontal wells tend involve higher degree service intensity associated drilling completion believe ultimately maintenance required lifetime well believe many wells entering phase life maintenance services required stem declines maintain production believe future periods market maintenance installed base horizontal oil wells grow capitalize growing market segment built acquired new equipment including capable rigs coiled tubing units upgraded existing equipment capable providing services integral completion maintenance horizontal wellbores acquired frac stack equipment used support completion horizontal wellbore also expanded service offerings unconventional shale regions horizontal activity prevalent including bakken shale eagle ford shale others horizontal wells become prevalent permian basin expanded operations assets best suited horizontal well maintenance service offerings market additionally invested assets used service customer’s well site needs also strengthened sales service efforts better identify meet needs customers intend continue focus expansion horizontal well service offerings particularly production maintenance related services existing markets new markets united states navigate market uncertainties operate cyclical business customer’s spending largely driven prices received sale oil natural gas production periods declining oil natural gas prices demand services price receive services may fall competition remaining market activity increase periods low demand services stack older costly operate equipment reduce amount capital invested business growth replacement equipment also take steps lower cost operate reducing headcount costs labor additionally taken steps reduce fixed costs business continue believe actions able maintain sufficient liquidity capitalize return activity well see longer term trend towards higher maintenance needs recently installed base horizontal oil wells pursue prudent acquisitions complementary businesses focused maximizing cash flows acquisitions investments made added internal financial metric key value added “kva” evaluate investments intend continue disciplined approach acquisitions seeking opportunities strengthen presence selected regional markets provide opportunities expand core services also seek acquire technologies assets businesses represent good operational strategic andor synergistic fit existing service offerings performance measures baker hughes us rig count data publicly available weekly basis often used coincident indicator overall exploration production “ep” company spending broader oilfield activity assessing overall activity us onshore oilfield service industry operate believe baker hughes us land drilling rig count best barometer ep companies capital spending resulting activity levels historically activity levels highly correlated us onshore capital spending ep company customers group 1 represents average monthly average prices years presented source us energy information administration bloomberg 2 source wwwbakerhughescom internally measure activity levels well servicing operations primarily rig trucking hours generally capital spending ep companies increases demand services also rises resulting increased rig trucking services hours worked conversely activity levels decline due lower spending ep companies generally provide fewer rig trucking services results lower hours worked following table presents quarterly rig trucking hours 2012 2014 1 international rig hours exclude rig hours generated argentina operations sold third quarter 2012 reported discontinued operations argentina hours 54625 55972 first second quarters 2012 respectively 2 total rig hours included us rig hours international rig hours described footnote 1 3 keys us working days number weekdays quarter minus national holidays market conditions outlook market conditions year ended december 31 2014 core businesses depend customers willingness make expenditures produce develop explore oil natural gas industry conditions influenced numerous factors supply demand oil natural gas domestic worldwide economic conditions political instability oil producing countries course 2014 businesses us faced strong competitive forces market environment demand completion related services horizontal oil wells continued grow response competitive environment made organizational changes improve responsiveness customer demands service requirements addition given strong demand oilfield service labor faced rising labor costs order ensure could appropriately services customers’ needs market due competitive pressures challenged pass costs along customers demand production maintenance services see growth 2014 although believe began see increase demand maintenance horizontal oil wellbores expect trend continue outside us awarded two year 48 million contract mexico first pemex since 2011 began provide services contract fourth quarter 2014 believe contract begin stabilize mexican operation additionally moved nineteen well service rigs mexico us market outlook continue position key take advantage shift horizontal oil well maintenance steady investment productiondriven services built address demands complex horizontal wellbores continue see population horizontal well bores expand growing number well bores entering maintenance intensive cycle phase life associated older producing wells believe well positioned take advantage trend look 2015 recent unraveling global oil prices cast shadow uncertainty us oil industry us customer capital budgets slashed order respond lower oil price environment preserve liquidity although us customers reacting draconian fashion believe impetus optimize existing horizontal oil production moderated oil price environment continue grow well maintenance provide attractive return customers fraction outlay new well also important keep sharp focus continuing broaden customer base provide new opportunities help offset spending declines implemented significant cost control efforts including executive salary reductions headcount reductions furlough programs field wage reductions order help mitigate margin degradation believe although 2015 present many challenges weather storm emerge stronger company results operations consolidated results operations following table shows consolidated results operations years ended december 31 2014 2013 2012 years ended december 31 2014 2013 year ended december 31 2014 operating loss 2039 million compared operating income 302 million year ended december 31 2013 loss per share 116 year ended december 31 2014 compared 014 loss per share year ended december 31 2013 revenues year ended december 31 2014 decreased 1643 million 103 14 billion 16 billion year ended december 31 2013 primarily due overall lower activity us result competitive pressure reduced customer activity reduced customer activity mexico resulted reduced revenue international segment see “segment operating results years ended december 31 2014 2013” detailed discussion change revenues direct operating expenses direct operating expenses decreased 548 million 49 106 billion 742 revenues year ended december 31 2014 compared 111 billion 700 revenues year ended december 31 2013 result lower variable costs cost attributable direct labor equipment due reduced activity levels see “segment operating results years ended december 31 2014 2013” detailed discussion change direct operating expenses depreciation amortization expense depreciation amortization expense decreased 246 million 109 2007 million 141 revenues year ended december 31 2014 compared 2253 million 142 revenues year ended december 31 2013 decrease primarily attributable decreases capital expenditures lower amortization related intangible assets general administrative expenses general administrative expenses increased 279 million 126 2496 million 175 revenues year ended december 31 2014 compared 2218 million 139 revenues year ended december 31 2013 increase primarily due legal expenses related fcpa investigation 411 million partially offset lower compensation costs due reduced staffing levels impairment expense year ended december 31 2014 recorded 287 million impairment goodwill intangibles assets russian business unit included international reporting segment 734 million impairment fixed assets intangibles assets fishing rental services segment 191 million impairment goodwill impairment goodwill coiled tubing segment impairments recorded 2013 interest expense net amounts capitalized interest expense decreased 10 million 542 million 38 revenues year ended december 31 2014 compared 552 million 35 revenues year ended december 31 2013 decrease primarily related reduced borrowings revolving credit facility year ended december 31 2014 compared 2013 income expense net year ended december 31 2014 recognized expense net 10 million compared income net 08 million year ended december 31 2013 foreign exchange loss relates us dollardenominated transactions foreign locations fluctuations exchange rates local currencies us dollar table presents comparative detailed information income expense net december 31 2014 2013 income tax benefit income tax benefit continuing operations 805 million 311 effective rate pretax loss 2591 million year ended december 31 2014 compared income tax benefit 31 million 126 effective rate pretax loss 242 million year ended december 31 2013 effective tax rates periods differ us statutory rate 35 due number factors including mix profit loss domestic international taxing jurisdictions impact permanent items goodwill impairment expense affect book income affect taxable income noncontrolling interest noncontrolling interest holders 2014 due acquisition remaining noncontrolling interest joint ventures 2013 year ended december 31 2013 allocated 06 million associated income incurred joint ventures noncontrolling interest holders ventures years ended december 31 2013 2012 year ended december 31 2013 operating income 302 million compared 2069 million year ended december 31 2012 loss per share 014 year ended december 31 2013 compared 005 income per share year ended december 31 2012 revenues year ended december 31 2013 decreased 3684 million 188 159 billion 196 billion year ended december 31 2012 primarily due lower demand rigbased services oil markets overall weaker economic conditions affecting domestic international operations see “segment operating results years ended december 31 2013 2012” detailed discussion change revenues direct operating expenses direct operating expenses decreased 1944 million 149 11 billion 700 revenues year ended december 31 2013 compared 13 billion 668 revenues year ended december 31 2012 decrease direct result activity decreases business improved operating efficiencies rigbased services coiled tubing services operating efficiencies partially offset charges 63 million primarily associated severance costs 23 million costs primarily associated rig mobilizations north region mexico south region mexico countries including us 19 million lease cancellation fees caused direct operating expenses percentage revenue higher 2013 2012 see “segment operating results years ended december 31 2013 2012” detailed discussion change direct operating expenses depreciation amortization expense depreciation amortization expense increased 115 million 54 2253 million 142 revenues year ended december 31 2013 compared 2138 million 109 revenues year ended december 31 2012 increase primarily attributable 2013 impact increased capital expenditures 2012 general administrative expenses general administrative expenses decreased 87 million 38 2218 million 139 revenues year ended december 31 2013 compared 2305 million 118 revenues year ended december 31 2012 decrease primarily related lower third party consulting fees partially offset 22 million charge associated retirement executive recorded first quarter 2013 22 million expenses primarily associated severance costs recorded second quarter 2013 interest expense net amounts capitalized interest expense increased 16 million 552 million 35 revenues year ended december 31 2013 compared 536 million 27 revenues year ended december 31 2012 interest expense year ended december 31 2013 increased due issuance additional 200 million aggregate principal amount 2021 notes defined march 2012 income net year ended december 31 2013 recognized income net 08 million compared 66 million year ended december 31 2012 foreign exchange gain loss relates us dollardenominated transactions foreign locations fluctuations exchange rates local currencies us dollar table presents comparative detailed information income net december 31 2013 2012 income tax expense benefit income tax benefit continuing operations 31 million 126 effective rate pretax loss 242 million year ended december 31 2013 compared income tax expense 574 million 358 effective rate pretax income 1600 million year ended december 31 2012 effective tax rates differ statutory rate 35 primarily state local foreign income taxes tax effects permanent items attributable booktax differences discontinued operations net loss discontinued operations year ended december 31 2013 zero compared 936 million year ended december 31 2012 loss related argentina business sold september 2012 included loss discontinued operations pretax loss 858 million includes noncash impairment charge 415 million recorded first quarter 2012 writeoff 519 million cumulative translation adjustment previously recorded accumulated comprehensive loss discussion see “note 3 discontinued operations” “item 8 financial statements supplementary data” noncontrolling interest year ended december 31 2013 allocated 06 million associated income incurred joint ventures noncontrolling interest holders ventures compared income 15 million year ended december 31 2012 decrease income allocated noncontrolling interest holders due acquisition remaining noncontrolling interests 2013 resulting less income allocated noncontrolling interests holders segment operating results years ended december 31 2014 2013 following table shows operating results reportable segments years ended december 31 2014 2013 thousands year ended december 31 2014 year ended december 31 2013 us rig services revenues us rig services segment increased 56 million 08 6790 million year ended december 31 2014 compared 6735 million year ended december 31 2013 increase revenue primarily due increase market activity partially offset decrease customer activity california rigbased services decrease customer spending operating expenses us rig services segment 5827 million year ended december 31 2014 represented increase 428 million 79 compared 5399 million year ended december 31 2013 expenses increased primarily result increase direct labor repair maintenance expenses related increase activity fluid management services revenues fluid management services segment decreased 221 million 81 2496 million year ended december 31 2014 compared 2717 million year ended december 31 2013 decrease revenue primarily due lower activity decrease pricing due competitive pressure operating expenses fluid management services segment 2463 million year ended december 31 2014 represented decrease 214 million 80 compared 2677 million year ended december 31 2013 decrease expenses primarily related lower direct labor expenses fuel costs due decrease activity coiled tubing services revenues coiled tubing services segment decreased 198 million 103 1734 million year ended december 31 2014 compared 1932 million year ended december 31 2013 decrease revenue primarily due lower activity due competitive pressure unscheduled time events operating expenses coiled tubing services segment 1842 million year ended december 31 2014 represented increase 144 million 85 compared 1698 million year ended december 31 2013 increase expenses primarily result impairment goodwill partially offset lower direct labor expenses due decrease activity fishing rental services revenues fishing rental services segment decreased 260 million 109 2126 million year ended december 31 2014 compared 2386 million year ended december 31 2013 decrease revenue primarily due lower activity due competitive pressure operating expenses fishing rental services segment 2715 million year ended december 31 2014 represented increase 642 million 310 compared 2073 million year ended december 31 2013 increase expenses primarily result impairment fixed assets intangible assets partially offset decrease depreciation expense international revenues international segment decreased 1020 million 475 1127 million year ended december 31 2014 compared 2147 million year ended december 31 2013 decrease primarily attributable lower customer activity mexico operating expenses international segment decreased 632 million 262 1782 million year ended december 31 2014 compared 2414 million year ended december 31 2013 expenses decreased direct result lower customer activity severance costs mexico partially offset impairment goodwill tradenames russian business reporting unit functional support operating expenses functional support segment increased 329 million 243 1684 million 118 consolidated revenues year ended december 31 2014 compared 1355 million 85 consolidated revenues year ended december 31 2013 increase primarily due increased legal expense related fcpa investigations partially offset lower employee compensation benefit costs years ended december 31 2013 2012 following table shows operating results reportable segments years ended december 31 2013 2012 thousands year ended december 31 2013 year ended december 31 2012 us rig services revenues us rig services segment decreased 1150 million 146 6735 million year ended december 31 2013 compared 7885 million year ended december 31 2012 decrease revenue primarily related reduced customer spending lower activity natural gas markets increased competition operating expenses us rig services segment 5399 million year ended december 31 2013 represented decrease 543 million 91 compared 5942 million year ended december 31 2012 decrease expenses primarily result decrease direct labor expenses repair maintenance expenses directly attributable lower activity natural gas markets period improved operating efficiencies fluid management services revenues fluid management services segment decreased 819 million 232 2717 million year ended december 31 2013 compared 3536 million year ended december 31 2012 decrease revenue primarily related reduced customer spending lower activity natural gas markets increased competition operating expenses fluid management services segment 2677 million year ended december 31 2013 represented decrease 604 million 184 compared 3280 million year ended december 31 2012 decrease expenses primarily result decrease direct labor repair maintenance fuel expenses directly attributable lower activity natural gas markets period coiled tubing services revenues coiled tubing services decreased 227 million 105 1932 million year ended december 31 2013 compared 2159 million year ended december 31 2012 decrease revenue primarily related reduced customer spending lower activity natural gas markets increased competition operating expenses coiled tubing services segment 1698 million year ended december 31 2013 represented decrease 310 million 154 compared 2007 million year ended december 31 2012 decrease expenses primarily result decrease direct labor fuel expenses directly attributable lower activity natural gas markets period improved operating efficiencies fishing rental services revenues fishing rental services segment decreased 302 million 112 2386 million year ended december 31 2013 compared 2688 million year ended december 31 2012 decrease revenue primarily related reduced customer spending lower activity natural gas markets increased competition operating expenses fishing rental services segment 2073 million year ended december 31 2013 represented decrease 111 million 51 compared 2184 million year ended december 31 2012 decrease expenses primarily result decrease direct labor expenses directly attributable lower activity natural gas markets period international revenues international segment decreased 1186 million 356 2147 million year ended december 31 2013 compared 3333 million year ended december 31 2012 decrease primarily attributable lower customer activity mexico operating expenses international segment decreased 289 million 107 2414 million year ended december 31 2013 compared 2703 million year ended december 31 2012 expenses decreased direct result lower customer activity mexico partially offset charges 48 million primarily associated severance costs 21 million costs associated rig mobilizations north region mexico south region mexico countries including us functional support operating expenses functional support segment decreased 59 million 42 1355 million 85 consolidated revenues year ended december 31 2013 compared 1414 million 72 consolidated revenues year ended december 31 2012 decrease reflects lower consulting fees partially offset higher severance costs incentive bonus equity based compensation accruals liquidity capital resources require capital fund ongoing operations including maintenance expenditures existing fleet equipment organic growth initiatives investments acquisitions primary sources liquidity cash flows generated operations available cash borrowings senior secured revolving credit facility maintain senior secured credit facility pursuant revolving credit agreement several lenders jpmorgan chase bank na administrative agent bank america na syndication agent capital one na wells fargo bank na credit agricole corporate investment bank dnb bank asa codocumentation agents amended july 27 2011 december 5 2014 “2011 credit facility” 2011 credit facility consists revolving credit facility letter credit subfacility swing line facility aggregate principal amount 4000 million mature later march 31 2016 intend use sources liquidity fund working capital requirements capital expenditures strategic investments acquisitions 2015 expect access available funds 2011 credit facility meet cash requirements daytoday operations times peak needs throughout year planned capital expenditures well acquisitions choose pursue could financed combination cash hand cash flow operations borrowings 2011 credit facility case acquisitions equity believe internally generated cash flows operations current reserves cash availability 2011 credit facility sufficient finance cash requirements current future operations budgeted capital expenditures debt service next twelve months terms 2011 credit facility committed letters credit count borrowing capacity december 31 2014 700 million borrowings 504 million letters credit outstanding borrowing capacity 2796 million available considering covenant constraints 2011 credit facility obligations 2011 credit facility guaranteed subsidiaries secured assets including accounts receivable inventory equipment see discussion “debt service” december 31 2014 adjusted working capital working capital excluding current portion longterm debt 1919 million compared 2774 million december 31 2013 adjusted working capital decreased 2014 primarily result decrease accounts receivable predominantly mexico december 31 2014 273 million cash approximately 69 million held bank accounts foreign subsidiaries december 31 2014 02 million cash held foreign subsidiaries held us bank accounts denominated us dollars believe cash held wholly owned foreign subsidiaries could repatriated general corporate use without material withholdings cash flows year ended december 31 2014 generated cash flows operating activities 1642 million compared 2286 million year ended december 31 2013 operating cash inflows primarily relate net loss adjusted non cash items cash used investing activities 1468 million 1609 million years ended december 31 2014 2013 respectively investing cash outflows periods consisted primarily capital expenditures capital expenditures primarily relate replacement assets existing fleet equipment additionally 2013 completed acquisition remaining 50 noncontrolling interest geostream 146 million cash used financing activities 221 million 855 million years ended december 31 2014 2013 respectively financing cash outflows primarily relate net payments 2011 credit facility following table summarizes cash flows years ended december 31 2014 2013 debt service december 31 2014 annual maturities indebtedness consisting 2021 notes borrowings 2011 credit facility yearend follows interest 6750 million 2021 notes due march 1 september 1 year 2021 notes mature september 1 2021 interest paid 2014 notes 2021 notes 2014 2013 456 million 459 million respectively expect fund interest payments cash hand cash generated operations 8375 senior notes due 2014 november 29 2007 issued 4250 million aggregate principal amount 2014 notes march 2011 repurchased 4214 million aggregate principal amount 2014 notes february 25 2014 redeemed remaining 36 million aggregate principal amount paid 01 million accrued interest 2014 notes pursuant indenture dated november 29 2007 supplemented “indenture” 2014 notes general unsecured senior obligations subordinate existing future secured indebtedness 2014 notes jointly severally guaranteed senior unsecured basis certain existing future domestic subsidiaries interest 2014 notes payable june 1 december 1 year 675 senior notes due 2021 issued 4750 million aggregate principal amount 675 senior notes due 2021 “initial 2021 notes” march 4 2011 issued additional 2000 million aggregate principal amount 2021 notes “additional 2021 notes” together initial 2021 notes “2021 notes” private placement march 8 2012 indenture dated march 4 2011 “base indenture” supplemented first supplemental indenture dated march 4 2011 amended supplemental indenture dated march 8 2012 “supplemental indenture” together base indenture “indenture” used net proceeds repay senior secured indebtedness revolving bank credit facility capitalized 46 million financing costs associated issuance 2021 notes amortized term notes march 5 2013 completed offer exchange 2000 million aggregate principal amount unregistered additional 2021 notes equal principal amount notes registered securities act 1933 2021 notes treated single class indenture closing exchange offer bear cusip isin numbers 2021 notes general unsecured senior obligations effectively subordinated existing future secured indebtedness 2021 notes jointly severally guaranteed senior unsecured basis certain existing future domestic subsidiaries march 1 2016 2021 notes subject redemption time option whole part redemption prices expressed percentages principal amount redeemed plus accrued unpaid interest applicable redemption date redeemed twelvemonth period beginning march 1 years indicated time prior march 1 2016 may option redeem portion 2021 notes redemption price equal 100 principal amount plus premium respect 2021 notes plus accrued unpaid interest redemption date premium excess present value redemption price 103375 principal amount plus remaining scheduled interest payments due march 1 2016 discounted treasury rate plus 050 ii principal amount note experience change control subject certain exceptions must give holders 2021 notes opportunity sell us 2021 notes whole part purchase price equal 101 aggregate principal amount plus accrued unpaid interest date purchase subject certain negative covenants indenture limits ability among things • incur additional indebtedness issue preferred equity interests • pay dividends make distributions repurchase redeem equity interests • make loans investments • enter sale leaseback transactions • sell transfer otherwise convey assets • create liens • enter transactions affiliates • enter agreements restricting subsidiaries’ ability pay dividends • designate future subsidiaries unrestricted subsidiaries • consolidate merge sell substantially applicable entities’ assets covenants subject certain exceptions qualifications contain crossdefault provisions relating covenants 2011 credit facility discussed substantially covenants terminate 2021 notes mature one two specified ratings agencies assigns 2021 notes investment grade rating future events default exist indenture december 31 2014 2021 notes rated investment grade covenants cease apply us result achieving investment grade rating restored even credit rating assigned 2021 notes later falls investment grade compliance covenants december 31 2014 senior secured credit facility december 5 2014 entered second amendment credit agreement “amendment” 4000 million senior secured revolving bank credit facility jpmorgan chase bank na administrative agent bank america na syndication agent capital one na wells fargo bank na credit agricole corporate investment bank dnb bank asa codocumentation agent amended “2011 credit facility” important source liquidity us amendment decreased total commitments lenders credit facility 5500 million 4000 million automatically reduced 4000 million 3500 million july 1 2015 among changes amendment modified definition earnings interest taxes depreciation amortization calculated pursuant terms 2011 credit facility “ebitda” allow add back expenses incurred second third quarters 2014 related company’s compliance fcpa ii 500 million additional expenses incurred relation company’s fcpa compliance commencing fourth quarter 2014 2011 credit facility consists revolving credit facility letter credit subfacility swing line facility mature later march 31 2016 maximum amount may borrow facility may subject limitation due operation covenants contained facility 2011 credit facility allows us request increases total commitments facility 1000 million aggregate part full anytime term 2011 credit facility increases subject compliance restrictive covenants 2011 credit facility indenture well lender approval capitalized 49 million financing costs connection execution 2011 credit facility additional 14 million related first amendment amortized term debt 04 million remaining unamortized financing costs related first amendment written time second amendment interest rate per annum applicable 2011 credit facility option adjusted libor plus applicable margin ii higher x jpmorgan’s prime rate federal funds rate plus 05 z onemonth adjusted libor plus 10 plus case applicable margin loans applicable margin libor loans ranges 225 300 basis points applicable margin loans ranges 125 200 basis points depending upon consolidated total leverage ratio defined 2011 credit facility unused commitment fees facility equal 05 2011 credit facility contains certain financial covenants among things limit annual capital expenditures restrict ability repurchase shares require us maintain certain financial ratios financial ratios require • ratio consolidated funded indebtedness total capitalization greater 55 • senior secured leverage ratio senior secured funded debt trailing four quarters ebitda greater 200 100 • maintain consolidated interest coverage ratio trailing four quarters ebitda interest expense less ratio specified fiscal quarter indicated table • maintain collateral coverage ratio aggregate book value collateral amount total commitments last day fiscal quarter least 200 100 • limit capital expenditures investments foreign subsidiaries 2500 million per fiscal year consolidated total leverage ratio exceeds 300 100 addition 2011 credit facility contains certain affirmative negative covenants including without limitation restrictions liens ii debt guarantees contingent obligations iii mergers consolidations iv sales transfers dispositions property assets v loans acquisitions joint ventures investments acquisitions permitted long giving pro forma effect thereto default event default exists 2011 credit facility pro forma consolidated total leverage ratio exceed 400 100 compliance financial covenants least 250 million availability 2011 credit facility vi dividends distributions redemptions repurchases equityholders vii making investments loans advances viii selling properties ix prepaying redeeming repurchasing subordinated contractually structurally debt x engaging transactions affiliates xi entering hedging arrangements xii entering sale leaseback transactions xiii granting negative pledges lenders xiv changes nature business xv amending organizational documents xvi changes accounting policies reporting practices foregoing cases certain exceptions compliance covenants december 31 2014 may prepay 2011 credit facility whole part time without premium penalty subject certain reimbursements lenders breakage redeployment costs december 31 2014 borrowings 700 million revolving credit facility 504 million letters credit outstanding borrowing capacity 2796 million available considering covenant constraints 2011 credit facility years ended december 31 2014 2013 weighted average interest rates outstanding borrowings 2011 credit facility 297 276 respectively letter credit facility november 7 2013 entered uncommitted unsecured 150 million letter credit facility used solely issuances performance letters credit december 31 2014 30 million letters credit outstanding facility offbalance sheet arrangements december 31 2014 currently offbalance sheet arrangements reasonably likely material current future effect financial condition revenues expenses results operations liquidity capital expenditures capital resources contractual obligations set forth summary contractual obligations december 31 2014 obligations pay future periods reflect certain assumptions including variability interest rates variablerate obligations duration obligations actual payments future periods may vary 1 based interest rates effect december 31 2014 2 based closing stock price december 31 2014 debt compliance december 31 2014 compliance financial covenants 2011 credit facility 2021 notes based management’s current projections expect compliance covenants 2011 credit facility 2021 notes next twelve months breach covenants ratios tests could result default indebtedness see “item 1a risk factors” capital expenditures year ended december 31 2014 capital expenditures totaled 1616 million primarily related ongoing replacement rig service fleet coiled tubing units fluid transportation equipment rental equipment capital expenditure plan 2015 contemplates spending 500 million 800 million subject market conditions primarily related equipment replacement needs including ongoing replacement rig services fleet capital expenditure program 2015 subject market conditions including activity levels commodity prices industry capacity specific customer needs focus 2015 maximization current equipment fleet may choose increase capital expenditures 2015 increase market share expand presence new market currently anticipate funding 2015 capital expenditures combination cash hand operating cash flow borrowings 2011 credit facility operating cash flows activity levels prove insufficient warrant currently planned capital spending levels management expects adjust capital spending plans accordingly may also incur capital expenditures strategic investments acquisitions geostream april 9 2013 completed acquisition remaining 50 noncontrolling interest geostream 146 million 100 geostream almansoori key energy services lcc august 5 2013 agreed dissolution almansoori key energy services llc joint venture formed laws abu dhabi uae acquisition underlying business 51 million fourth quarter 2014 joint venture duly liquidated 51 million transferred almansoori anticipate acquisitions complementary companies assets lines businesses continue play important role business strategy currently unannounced agreements ongoing negotiations acquisition material businesses assets transactions effected quickly may occur time critical accounting policies accounting department responsible development application accounting policies internal control procedures reports chief financial officer process preparation financial statements conformity generally accepted accounting principles united states “gaap” requires us make certain estimates judgments assumptions may affect reported amounts assets liabilities disclosures contingencies balance sheet date amounts revenues expenses recognized reporting period presentation statement cash flows may record materially different amounts estimates judgments assumptions change actual results differ however analyze estimates assumptions judgments based historical experience various factors believe reasonable circumstances identified following critical accounting policies require significant amount estimation judgment accurately present financial position results operations cash flows • revenue recognition • estimate reserves workers’ compensation vehicular liability selfinsurance • contingencies • income taxes • estimates depreciable lives • valuation indefinitelived intangible assets • valuation tangible finitelived intangible assets • valuation equitybased compensation revenue recognition recognize revenue following criteria met evidence arrangement exists ii delivery occurred services rendered iii price customer fixed determinable iv collectability reasonably assured • evidence arrangement exists final understanding us customer occurred evidenced completed customer purchase order field ticket supplier contract master service agreement • delivery occurred services rendered completed requirements pursuant terms arrangement evidenced field ticket service log • price customer fixed determinable amount required paid agreed upon evidence price fixed determinable evidenced contractual terms price book completed customer purchase order field ticket • collectability reasonably assured screen customers provide goods services customers according determined credit terms granted accordance credit policy present revenues net sales taxes collected us customers required remitted local state governmental taxing authorities review contracts multiple element revenue arrangements deliverables separated units accounting assigned fair value standalone value customer objective reliable evidence fair value delivery undelivered items substantially controlled us believe negotiated prices deliverables services contracts representative fair value since acceptance nonacceptance element contract affect elements workers’ compensation vehicular liability selfinsurance occurrence event fully insured indemnified failure customer insurer meet indemnification insurance obligations could result substantial losses addition insurance may available cover risks available might able obtain insurance without substantial increase premiums possible addition higher premiums future insurance coverage may subject higher deductibles coverage restrictions estimate liability arising uninsured potentially insured events including workers’ compensation employer’s liability vehicular liability general liability record accruals consolidated financial statements reserves related claims based specific facts circumstances insured event past experience similar claims trend analysis adjust loss estimates calculation accruals based upon actual claim settlements reported claims loss estimates individual claims adjusted based upon actual claim judgments settlements reported claims actual outcome claims could differ significantly estimated amounts changes assumptions estimates could potentially negative impact earnings largely selfinsured physical damage property rigs equipment automobiles due large deductibles selfinsurance contingencies periodically required record loss contingencies relate lawsuits claims proceedings taxrelated audits normal course operations consolidated balance sheet record loss contingency matters probable liability incurred amount loss reasonably estimated periodically review loss contingencies ensure recorded appropriate liabilities balance sheet adjust liabilities based estimates judgments made management respect likely outcome matters including effect applicable insurance coverage litigation matters estimates judgments could change based new information changes laws regulations changes management’s plans intentions outcome legal proceedings settlements factors actual results could vary materially reserves record liabilities environmental assessment indicates site remediation efforts probable costs reasonably estimated measure environmental liabilities based part relevant past experience currently enacted laws regulations existing technology sitespecific costs costsharing arrangements recognition joint several liability based upon best estimate final prorata share liability low amount range estimates assumptions involve judgments estimates management changes assumptions new information could lead increases decreases ultimate liability changes recognized immediately earnings record legal obligations retire tangible longlived assets balance sheet liabilities recorded discount incur liability significant judgment involved estimating future cash flows associated obligations well ultimate timing cash flows estimates amount timing cash flows change may material impact results operations income taxes account deferred income taxes using asset liability method provide income taxes significant temporary differences management determines current tax liability well taxes incurred result current operations yet deferred future periods current taxes payable represent liability related income tax return current year net deferred tax expense benefit represents change balance deferred tax assets liabilities reported consolidated balance sheets management estimates changes deferred tax assets liabilities using basis assets liabilities financial reporting purposes enacted rates management estimates effect differences reverse management makes certain assumptions timing temporary tax differences differing treatment certain items tax accounting purposes whether differences permanent final determination tax liability involves interpretation local tax laws tax treaties related authorities jurisdiction well significant use estimates assumptions regarding scope future operations results achieved timing nature income earned expenditures incurred establish valuation allowances reduce deferred tax assets determine likely eg likelihood 50 deferred tax assets realized future periods assess likelihood use estimates judgment regarding future taxable income well jurisdiction taxable income generated determine whether valuation allowance required evidence include current financial position results operations actual forecasted results reversal deferred tax liabilities tax planning strategies well current forecasted business economics industry additionally record uncertain tax positions net recognizable amount based amount management deems likely sustained upon ultimate settlement tax authorities domestic international tax jurisdictions operate estimates assumptions regarding current deferred tax items inaccurate modified changes could potentially material negative impacts earnings estimates depreciable lives use estimated depreciable lives longlived assets rigs heavyduty trucks trailers compute depreciation expense estimate future asset retirement obligations conduct impairment tests base estimates depreciable lives number factors environment assets operate industry factors including forecasted prices competition assumption provide appropriate amount capital expenditures asset operation maintain economical operation asset prevent untimely demise scrap useful lives intangible assets determined years expect assets generate benefit based legal contractual expectations depreciate operational assets depreciable lives salvage value generally 10 acquisition cost recognize gain loss upon ultimate disposal asset based difference carrying value asset disposal date proceeds receive connection disposal periodically analyze estimates depreciable lives fixed assets determine depreciable periods salvage value continue appropriate also analyze useful lives salvage value events conditions occur could shorten remaining depreciable life asset review depreciable periods salvage values reasonableness given current conditions result depreciation expense based upon estimates depreciable lives fixed assets salvage value economic factors require management make significant judgments estimates determine depreciable lives different originally estimated depreciation expense may increase decrease impairments carrying values fixed assets may result could negatively impact earnings valuation indefinitelived intangible assets periodically review intangible assets subject amortization including goodwill determine whether impairment assets may exist tests must made least annual basis often circumstances indicate assets may impaired circumstances include limited significant adverse changes business climate test impairment indefinitelived intangible assets allows us first assess qualitative factors determine whether “more likely not” fair value reporting unit less carrying amount basis determining whether necessary perform twostep goodwill impairment test qualitative analysis shows “more likely not” fair value reporting unit less carrying amount perform twostep goodwill impairment test first step fair value calculated reporting units fair value compared current carrying value reporting unit including reporting unit’s goodwill fair value reporting unit exceeds carrying value potential impairment second step performed carrying value exceeds fair value reporting unit second step required second step test impairment compares implied fair value reporting unit’s goodwill current carrying value implied fair value reporting unit’s goodwill determined manner amount goodwill would recognized business combination purchase price equal fair value reporting unit implied fair value reporting unit’s goodwill excess carrying value impairment charge recorded carrying value reporting unit’s goodwill excess implied fair value impairment charge equal excess recorded conducted annual impairment test goodwill intangible assets subject amortization october 1 2014 determining fair value reporting units use weightedaverage approach three commonly used valuation techniques discounted cash flow method guideline companies method similar transactions method assigned weight results methods based facts circumstances existence testing period assigned weight discounted cash flow method believe representative future business addition estimates made management regarding weighting various valuation techniques creation techniques requires make significant estimates assumptions discounted cash flow method assigned highest weight management current year requires us make assumptions future cash flows future growth rates tax rates future periods booktax differences carrying value assets future periods discount rates assumptions future cash flows growth rates based current budgets future periods well strategic plans beliefs management future activity levels analysts’ expectations revenues profitability cash flows future periods assumptions future tax rates booktax differences carrying value assets future periods based assumptions future cash flows growth rates management’s knowledge beliefs tax law practice current future periods assumptions discount rates include assessment specific risk associated reporting unit tested developed assistance thirdparty valuation consultant ultimate conclusions valuation techniques remain responsibility conducted recent annual test impairment goodwill indefinitelived intangible assets october 1 2014 date reporting units purposes impairment testing us rig services fluid management services coiled tubing services fishing rental services canadian reporting units test required annual basis also required frequently based changes external factors triggering events 2014 experienced several triggering events required us perform additional interim testing possible impairment goodwill resulted recording reduction value goodwill 415 million indefinitelived intangible 99 million goodwill reporting unit december 31 2014 follows thousands except percentages also intangible assets amortized 15 million 12 million related fishing rental services segment russian reporting unit respectively tradenames tested impairment annually using relief royalty method noted determination fair value reporting units heavily dependent upon certain estimates assumptions make reporting units changes estimates assumptions could possibly impact determination fair value reporting units discount rates use future periods could change substantially cost debt equity significantly increase decrease choose different comparable companies determining appropriate discount rate reporting units additionally future projected cash flows reporting units could significantly impact fair value reporting units current projections future activity levels pricing cost structure inaccurate fair value reporting units could change materially current overall economy declines significant rapid adverse change business near midterm reporting units current estimates fair value reporting units could decrease significantly leading possible impairment charges future periods based current knowledge beliefs think material adverse changes current estimates assumptions reporting units would fail step one impairment test reasonably possible valuation tangible finitelived intangible assets fixed assets finitelived intangibles tested potential impairment circumstances events indicate possible impairment may exist circumstances events referred “trigger events” examples trigger events include limited adverse change market conditions significant decrease benefits derived acquired business change use asset significant disposal particular asset class trigger event occurs impairment test performed based undiscounted cash flow analysis perform impairment test make judgments estimates assumptions regarding longterm forecasts revenues expenses relating assets subject review market conditions energy prices estimated depreciable lives assets discount rate assumptions legal factors impact operations significant effect estimates use determine whether assets impaired results analysis indicate carrying value assets tested impairment recoverable record impairment charge write carrying value assets fair value using different judgments assumptions estimates could potentially arrive materially different fair value assets tested impairment may result impairment charge identified triggering events 2014 resulted recording reduction value fixed assets 621 million finitelived intangibles 77 million fishing rental services segment identify trigger events causing us test tangible finitelived intangible assets impairment years ended december 31 2013 2012 valuation equitybased compensation granted stock options stocksettled stock appreciation rights “sars” restricted stock “rsas” “rsus” phantom shares performance units employees nonemployee directors option sar awards grant fair valued using blackscholes option model grant date amortized compensation expense vesting period option sar award net estimated actual forfeitures compensation related rsas rsus based fair value award grant date recognized based vesting requirements satisfied period phantom shares accounted fair value changes fair value awards recorded compensation expense period performance units provide cash incentive award unit value determined reference common stock see “note 19 share based compensation” “item 8 financial statements supplementary data” detailed discussion performance units measurement utilizing blackscholes option pricing model determine fair values awards certain assumptions made based subjective expectations subject change one assumptions would impact expense associated future grants key assumptions include volatility price common stock riskfree interest rate expected life awards grant stock options years ended december 31 2014 2013 2012 accounting standards adopted yet adopted report new accounting standards adopted report asu 201409 may 2014 fasb issued asu 201409 revenue contracts customers topic 606 objective asu establish principles report useful information users financial statements nature amount timing uncertainty revenue contracts customers core principle recognize revenue depict transfer promised goods services customers amount reflects consideration entity expects entitled exchange goods services asu 201409 effective interim annual reporting periods beginning december 15 2016 must adopted using either full retrospective method modified retrospective method currently evaluating standard determine impact adoption consolidated financial statements item 7aitem 7 management’s discussion analysis financial condition results operations following discussion analysis financial condition results operations read conjunction consolidated financial statements related notes thereto “item 8 financial statements supplementary data” discussion contains forwardlooking statements based upon current expectations subject uncertainty changes circumstances including identified “cautionary note regarding forwardlooking statements” actual results may differ materially expectations due potentially inaccurate assumptions known unknown risks uncertainties forwardlooking statements read conjunction disclosures “item 1a risk factors” overview provide full range well services major oil companies foreign national oil companies independent oil natural gas production companies produce maintain enhance flow oil natural gas throughout life well services include rigbased coiled tubingbased well maintenance workover services well completion recompletion services fluid management services fishing rental services ancillary oilfield services additionally certain rigs capable specialty drilling applications operate major oil natural gas producing regions continental united states operations russia attempting sell addition technology development control systems business based canada demand services fluctuates primarily relation price anticipated price oil natural gas turn driven primarily supply demand oil natural gas generally supply commodities decreases demand increases service maintenance requirements increase oil natural gas producers attempt maximize productivity wells higher priced environment however lower oil natural gas price environment persisted since late 2014 demand service maintenance decreased oil natural gas producers decrease activity particular demand new existing field drilling completion work driven available investment capital work customers significantly curtailed capital spending 2015 2016 types services easily “started” “stopped” oil natural gas producers generally tend less risk tolerant commodity prices low volatile may experience rapid decline demand well maintenance services compared demand types oilfield services lowerpriced environment fewer well service rigs needed completions activities generally associated drilling activity emergence voluntary reorganization fresh start accounting upon emergence bankruptcy effective date company adopted fresh start accounting resulted creation new entity financial reporting purposes result application fresh start accounting well effects implementation plan consolidated financial statements december 16 2016 comparable consolidated financial statements prior date refer “note 3 fresh start accounting” “item 8 financial statements supplementary data” additional information references “successor” “successor company” relate financial position results operations reorganized company subsequent december 15 2016 references “predecessor” “predecessor company” refer financial position results operations company prior december 15 2016 business growth strategies focus production related services life oil gas well regular maintenance well bore artificial lift systems required maintain production offset natural production declines interventions well service rig required remove replace items needing repair perform activities would increase oil gas production current levels many instances interventions require additional assets services perform decline oil prices beginning 2014 believe number oil gas producers united states significantly curtailed recurring well maintenance activities believe recovery oil prices result oil gas producers making decision resume regular well maintenance activities additionally believe many instances since oil price decline began 2014 oil gas producers foregone regular maintenance activities additional demand services provided oil gas producers seeking improve production repairing wells key well positioned capitalize trends fleet active warm stacked well service rigs additional fishing rental service offerings provides continue invest either equipment acquisition grow take advantage dynamic growth population horizontal oil gas wells since revolution horizontal well drilling hydraulic fracturing began united states thousands new horizontal oil wells added many period 2012 2014 initial production wells decline first several years production wells placed artificial lift systems maintain production believe wells require periodic maintenance similar conventional oil well many instances due depth long lateral sections wells larger well service rig higher rated derrick capacity needed maintenance intend invest portion well service rig fleet needed rental equipment services either organic capital deployment acquisition capitalize trend growing population horizontal wells entered enter phase life regular maintenance required performance measures baker hughes us rig count data publicly available weekly basis often used coincident indicator overall exploration production “ep” company spending broader oilfield activity assessing overall activity us onshore oilfield service industry operate believe baker hughes us land drilling rig count best barometer ep companies capital spending resulting activity levels historically activity levels highly correlated us onshore capital spending ep company customers group 1 represents average monthly average prices years presented source us energy information administration bloomberg 2 source wwwbakerhughescom internally measure activity levels well servicing operations primarily rig trucking hours generally capital spending ep companies increases demand services also rises resulting increased rig trucking services hours worked conversely activity levels decline due lower spending ep companies generally provide fewer rig trucking services results lower hours worked following table presents quarterly rig trucking hours 2014 2016 1 keys us working days number weekdays quarter minus national holidays market business conditions outlook core businesses depend customers’ willingness make expenditures produce develop explore oil natural gas industry conditions influenced numerous factors oil natural gas prices supply demand oil natural gas domestic worldwide economic conditions political instability oil producing countries oil natural gas prices began rapid substantial decline fourth quarter 2014 depressed commodity price conditions persisted worsened 2015 trend continued 2016 result rig count demand products services declined substantially prices able charge customers products services also declined substantially sought anticipate activity declines reshaped organizational cost structure mitigate negative impact declines continued experience negative operating results cash flows operations although oil prices improved low point 2016 revenues improved fourth quarter 2016 third quarter 2016 experienced uptick activity levels commensurate increases oil prices november 2016 decision opec curtail cartel’s oil production provided continued improvement oil prices future outlook oil prices thus improvement spending outlook customers believe improved outlook increased spending customers demand services continue improve allowing increases activity price services 2017 increased demand oilfield services broadly however demand qualified employees also increase may impact ability meet needs customers offset inflation labor costs price increases customers results operations consolidated results operations following tables set forth consolidated results operations financial information operating segment selected information periods indicated period december 16 december 31 2016 successor company period january 1 december 15 2016 predecessor company distinct reporting periods result emergence bankruptcy december 15 2016 references results operations change percentage change combine successor company predecessor company results year ended december 31 2016 order provide comparability information year ended december 31 2015 combined presentation presented according generally accepted accounting principles united states “gaap” comparable gaap measure presented management believes providing financial information relevant useful method making comparisons year ended december 31 2015 years ended december 31 2016 2015 revenues combined year ended december 31 2016 decreased 3751 million 473 4173 million 7923 million year ended december 31 2015 due lower spending customers result lower oil prices market conditions resulted reduced customer activity reduction price received services internationally lower revenue result reduced customer activity russia colombia exit operations middle east south america see “segment operating results years ended december 31 2016 2015” detailed discussion change revenues direct operating expenses direct operating expenses decreased 3352 million 469 3794 million 909 revenues combined year ended december 31 2016 compared 7146 million 902 revenues year ended december 31 2015 decrease primarily related decrease employee compensation costs fuel expense repair maintenance expense sought reduce cost structure result lower activity levels see “segment operating results years ended december 31 2016 2015” detailed discussion change direct operating expenses depreciation amortization expense depreciation amortization expense decreased 454 million 252 1349 million 323 revenues combined year ended december 31 2016 compared 1803 million 228 revenues year ended december 31 2015 decrease primarily attributable impairment certain fixed assets 2015 decreases capital expenditures lower amortization expense due impairment certain intangible assets general administrative expenses general administrative expenses decreased 329 million 162 1698 million 407 revenues combined year ended december 31 2016 compared 2026 million 256 revenues year ended december 31 2015 decrease primarily due lower employee compensation costs due reduced staffing levels reduction wages 308 million lower expenses related fcpa investigations doj sec concluded april august 2016 respectively partially offset 258 million restructuring fees 2016 impairment expense combined year ended december 31 2016 recorded 446 million impairment reduce carrying value assets held sale fair market value related business unit mexico year ended december 31 2015 recorded 5827 million impairment goodwill 511 million impairment fixed assets held used 15 million impairment intangible assets longer used 868 million impairment fixed assets reduce carrying value assets held sale fair market value reorganization items net reorganization items primarily consist 5787 million gain debt discharge partially offset 2996 million loss fresh start accounting revaluations 192 million writeoff deferred financing costs debt premiums discounts 152 million professional fees incurred connection emergence voluntary reorganization interest expense net amounts capitalized interest expense increased 18 million 757 million 181 revenues combined year ended december 31 2016 compared 738 million 93 revenues year ended december 31 2015 increase primarily related increased borrowings interest rate new term loan facility combined year ended december 31 2016 writeoff remaining 08 million unamortized deferred financing costs related previously terminated credit facility second quarter 2015 income loss net combined year ended december 31 2016 recognized income net 24 million compared loss net 94 million year ended december 31 2015 78 million allowance collectibility notes receivable related sale operations argentina recorded year ended december 31 2015 foreign exchange loss relates us dollardenominated transactions foreign locations fluctuations exchange rates local currencies us dollar table presents comparative detailed information combined loss net december 31 2016 2015 income tax expense benefit income tax benefit zero 00 effective rate pretax loss 102 million 28 million 22 effective rate pretax loss 1289 million period december 16 2016 december 31 2016 period january 1 2016 december 15 2016 respectively compared income tax benefit 1928 million 174 effective rate pretax loss 11 billion year ended december 31 2015 effective tax rates periods differ us statutory rate 35 due number factors including mix profit loss domestic international taxing jurisdictions impact permanent items including goodwill impairment expense expenses subject statutorily imposed limitations meals entertainment expenses affect book income affect taxable income discrete tax adjustments valuation allowances deferred tax assets tax expense benefit recognized uncertain tax positions years ended december 31 2015 2014 year ended december 31 2015 operating loss 10 billion compared operating loss 2039 million year ended december 31 2014 loss per share 586 year ended december 31 2015 compared 116 loss per share year ended december 31 2014 revenues year ended december 31 2015 decreased 6350 million 445 7923 million 14 billion year ended december 31 2014 due lower spending customers result lower oil prices market conditions resulted reduced customer activity reduction price received services internationally lower revenue result reduced customer activity russia colombia exit operations middle east south america see “segment operating results years ended december 31 2015 2014” detailed discussion change revenues direct operating expenses direct operating expenses decreased 3450 million 326 7146 million 902 revenues year ended december 31 2015 compared 106 billion 742 revenues year ended december 31 2014 decrease primarily related decrease employee compensation costs fuel expense repair maintenance expense sought reduce cost structure result lower activity levels see “segment operating results years ended december 31 2015 2014” detailed discussion change direct operating expenses depreciation amortization expense depreciation amortization expense decreased 205 million 102 1803 million 228 revenues year ended december 31 2015 compared 2007 million 141 revenues year ended december 31 2014 decrease primarily attributable impairment certain fixed assets decreases capital expenditures lower amortization expense due impairment certain intangible assets general administrative expenses general administrative expenses decreased 470 million 188 2026 million 256 revenues year ended december 31 2015 compared 2496 million 175 revenues year ended december 31 2014 decrease primarily due lower employee compensation costs due reduced staffing levels reduction wages 316 million related fcpa investigations 2015 compared 411 million 2014 impairment expense year ended december 31 2015 recorded 5827 million impairment goodwill 511 million impairment fixed assets held used 15 million impairment intangible assets longer used 868 million impairment fixed assets reduce carrying value assets held sale fair market value year ended december 31 2014 recorded 287 million impairment goodwill tradenames russian business unit included international reporting segment 734 million impairment goodwill fixed assets fishing rental services segment 191 million impairment goodwill coiled tubing segment interest expense net amounts capitalized interest expense increased 196 million 738 million 93 revenues year ended december 31 2015 compared 542 million 38 revenues year ended december 31 2014 increase primarily related increased borrowings interest rate new term loan facility year ended december 31 2015 writeoff remaining 08 million unamortized deferred financing costs related 2011 credit facility second quarter 2015 loss net year ended december 31 2015 recognized loss net 94 million compared loss net 10 million year ended december 31 2014 78 million allowance collectibility notes receivable related sale operations argentina recorded year ended december 31 2015 foreign exchange loss relates us dollardenominated transactions foreign locations fluctuations exchange rates local currencies us dollar table presents comparative detailed information loss net december 31 2015 2014 income tax benefit income tax benefit continuing operations 1928 million 174 effective rate pretax loss 11 billion year ended december 31 2015 compared income tax benefit 805 million 311 effective rate pretax loss 2591 million year ended december 31 2014 effective tax rates periods differ us statutory rate 35 due number factors including mix profit loss domestic international taxing jurisdictions impact permanent items including goodwill impairment expense expenses subject statutorily imposed limitations meals entertainment expenses affect book income affect taxable income discrete tax adjustments valuation allowances deferred tax assets tax expense benefit recognized uncertain tax positions segment operating results years ended december 31 2016 2015 following table shows operating results reportable segments years ended december 31 2016 2015 thousands successor period december 16 2016 december 31 2016 predecessor period january 1 2016 december 15 2016 year ended december 31 2015 us rig services revenues us rig services segment decreased 1457 million 386 2314 million combined year ended december 31 2016 compared 3771 million year ended december 31 2015 decrease segment primarily due lower spending customers result lower oil prices market conditions resulted reduced customer activity reduction price received services operating expenses us rig services segment 2728 million combined year ended december 31 2016 represented decrease 4123 million 602 compared 6851 million year ended december 31 2015 expenses decreased primarily due impairment expense 2016 compared 2977 million impairment expense 2015 result decrease employee compensation costs equipment expense sought reduce cost structure result lower activity levels fluid management services revenues fluid management services segment decreased 739 million 483 792 million combined year ended december 31 2016 compared 1532 million year ended december 31 2015 decrease segment primarily due lower spending customers result lower oil prices market conditions resulted reduced customer activity reduction price received services operating expenses fluid management services segment 1183 million combined year ended december 31 2016 represented decrease 783 million 398 compared 1966 million year ended december 31 2015 expenses decreased primarily due impairment expense 2016 compared 245 million impairment expense 2015 result decrease employee compensation costs equipment expense sought reduce cost structure result lower activity levels coiled tubing services revenues coiled tubing services segment decreased 579 million 644 320 million combined year ended december 31 2016 compared 898 million year ended december 31 2015 decrease segment primarily due lower spending customers result lower oil prices market conditions resulted reduced customer activity reduction price received services operating expenses coiled tubing services segment 515 million combined year ended december 31 2016 represented decrease 1935 million 790 compared 2450 million year ended december 31 2015 expenses decreased primarily due impairment expense 2016 compared 827 million impairment goodwill 511 million impairment fixed assets 2015 result decrease employee compensation costs repair maintenance expense fuel costs sought reduce cost structure result lower activity levels fishing rental services revenues fishing rental services segment decreased 627 million 514 592 million combined year ended december 31 2016 compared 1219 million year ended december 31 2015 decrease segment primarily due lower spending customers result lower oil prices market conditions resulted reduced customer activity reduction price received services operating expenses fishing rental services segment 859 million combined year ended december 31 2016 represented decrease 2334 million 731 compared 3193 million year ended december 31 2015 expenses decreased primarily due impairment expense 2016 compared 1735 million impairment goodwill 60 million impairment intangible assets 2015 result decrease employee compensation costs repair maintenance expense fuel costs sought reduce cost structure result lower activity levels international revenues international segment decreased 349 million 693 155 million combined year ended december 31 2016 compared 503 million year ended december 31 2015 decrease primarily attributable lower customer activity mexico exit operations middle east south america operating expenses international segment decreased 1582 million 680 746 million combined year ended december 31 2016 compared 2329 million year ended december 31 2015 expenses decreased primarily due impairment expense 446 million 2016 compared 808 million impairment assets held sale 44 million impairment goodwill 2015 result decrease employee compensation costs equipment expense lower activity exit certain international markets functional support operating expenses functional support segment decreased 152 million 108 1256 million 301 consolidated revenues combined year ended december 31 2016 compared 1408 million 178 consolidated revenues year ended december 31 2015 decrease primarily due lower employee compensation costs due reduced staffing levels 308 million lower expenses related fcpa investigations doj sec concluded april august 2016 respectively partially offset 258 million professional fees related corporate restructuring 2016 years ended december 31 2015 2014 following table shows operating results reportable segments years ended december 31 2015 2014 thousands year ended december 31 2015 year ended december 31 2014 us rig services revenues us rig services segment decreased 3019 million 445 3771 million year ended december 31 2015 compared 6790 million year ended december 31 2014 decrease segment primarily due lower spending customers result lower oil prices market conditions resulted reduced customer activity reduction price received services operating expenses us rig services segment 6851 million year ended december 31 2015 represented increase 1024 million 176 compared 5827 million year ended december 31 2014 expenses increased primarily result 2977 million impairment goodwill 2015 partially offset decrease employee compensation costs equipment expense sought reduce cost structure result lower activity levels fluid management services revenues fluid management services segment decreased 964 million 386 1532 million year ended december 31 2015 compared 2496 million year ended december 31 2014 decrease segment primarily due lower spending customers result lower oil prices market conditions resulted reduced customer activity reduction price received services operating expenses fluid management services segment 1966 million year ended december 31 2015 represented decrease 496 million 202 compared 2463 million year ended december 31 2014 expenses decreased primarily result decrease equipment expense employee compensation costs sought reduce cost structure result lower activity levels decrease partially offset 245 million impairment goodwill recorded 2015 coiled tubing services revenues coiled tubing services segment decreased 835 million 482 898 million year ended december 31 2015 compared 1734 million year ended december 31 2014 decrease segment primarily due lower spending customers result lower oil prices market conditions resulted reduced customer activity reduction price received services operating expenses coiled tubing services segment 2450 million year ended december 31 2015 represented increase 608 million 330 compared 1842 million year ended december 31 2014 expenses increased primarily result 827 million impairment goodwill 511 million impairment fixed assets 2015 compared 191 million impairment goodwill 2014 partially offset decrease employee compensation costs repair maintenance expense fuel costs sought reduce cost structure result lower activity levels fishing rental services revenues fishing rental services segment decreased 907 million 427 1219 million year ended december 31 2015 compared 2126 million year ended december 31 2014 decrease segment primarily due lower spending customers result lower oil prices market conditions resulted reduced customer activity reduction price received services operating expenses fishing rental services segment 3193 million year ended december 31 2015 represented increase 478 million 176 compared 2715 million year ended december 31 2014 expenses increased primarily result 1735 million impairment goodwill 60 million impairment intangible assets 2015 compared 621 impairment fixed assets 2014 partially offset decrease employee compensation costs repair maintenance expense fuel costs sought reduce cost structure result lower activity levels international revenues international segment decreased 624 million 554 503 million year ended december 31 2015 compared 1127 million year ended december 31 2014 decrease primarily attributable lower customer activity russia colombia exit operations middle east south america operating expenses international segment increased 547 million 307 2329 million year ended december 31 2015 compared 1782 million year ended december 31 2014 expenses increased primarily result increase impairment assets held sale 808 million 44 million impairment goodwill 2015 compared 224 million impairment goodwill 63 million impairment intangible assets 2014 partially offset decrease employee compensation costs equipment expense primarily due lower activity functional support operating expenses functional support segment decreased 276 million 164 1408 million 178 consolidated revenues year ended december 31 2015 compared 1684 million 118 consolidated revenues year ended december 31 2014 decrease primarily due lower employee compensation costs due reduced staffing levels reduction wages 316 million related fcpa investigations 2015 compared 411 million 2014 liquidity capital resources require capital fund ongoing operations including maintenance expenditures existing fleet equipment organic growth initiatives investments acquisitions debt service payments obligations believe internally generated cash flows operations current reserves cash availability abl facility sufficient finance cash requirements current future operations budgeted capital expenditures debt service obligations next twelve months oil natural gas prices began rapid substantial decline fourth quarter 2014 depressed commodity price conditions persisted worsened 2015 remained depressed 2016 result demand products services declined substantially prices able charge customers products services also declined substantially trends materially adversely affected results operations cash flows financial condition 2016 unless conditions industry improve trend continue 2017 potentially beyond response conditions undertaken several actions detailed effort preserve improve liquidity financial position • december 15 2016 company emerged preplanned voluntary chapter 11 reorganization resulting approximately 697 million company’s longterm debt eliminated along 456 million annual interest expense going forward • december 15 2016 entered new 80 million abl facility increased 100 million february 3 2017 due june 15 2021 new 250 million term loan facility due december 15 2021 december 31 2016 borrowings outstanding abl facility 385 million letters credit outstanding borrowing capacity 277 million available subject covenant constraints abl facility • april 2015 announced decision exit markets participate outside north america strategy sell relocate assets businesses operating markets december 31 2015 sold subsidiary bahrain certain assets oman ecuador colombia longer operating markets fourth quarter 2016 completed sale business mexico currently discussions sell business russia • beginning first quarter 2015 began series structural cost cutting changes corporate field levels include fixed costs supplychain efficiencies headcount wage reductions however still substantial indebtedness obligations may incur additional expenses unable predict time ability fund operations pay principal interest longterm debt satisfy obligations depend upon available liquidity amount cash flows able generate operations 2016 net cash used operating activities 1384 million industry conditions improve may negative cash flows operations 2017 december 31 2016 working capital 1178 million compared 2691 million december 31 2015 working capital decreased 2016 primarily result repayment longterm debt decrease accounts receivable current assets partially offset receipt cash proceeds rights offering part restructuring also decrease accounts payable accrued expenses december 31 2016 905 million cash approximately 41 million held bank accounts foreign subsidiaries december 31 2016 03 million cash held foreign subsidiaries held us bank accounts denominated us dollars believe cash held wholly owned foreign subsidiaries could repatriated general corporate use without material withholdings cash flows cash used operating activities 04 million 1384 million 224 million periods december 16 2016 december 31 2016 january 1 2016 december 15 2016 year ended december 31 2015 respectively cash used operating activities periods primarily related net loss adjusted noncash items payments accounts payable accrued liabilities partially offset cash inflows related collection accounts receivable cash used investing activities 03 million period december 16 2016 december 31 2016 cash provided investing activities 65 million january 1 2016 december 15 2016 compared cash 194 million used investing activities year ended december 31 2015 investing cash inflows primarily relate sales assets periods investing cash outflows primarily relate capital expenditures capital expenditures primarily relate replacement assets existing fleet equipment cash provided financing activities 188 million 2187 million period january 1 2016 december 15 2016 year ended december 31 2015 cash provided financing activities period january 1 2016 december 15 2016 primarily related proceeds stock offering partially offset repayment longterm debt increase restricted cash provided financing activities year ended december 31 2015 related proceeds longterm debt partially offset net payments previous credit facility following table summarizes cash flows period december 16 2016 december 31 2016 period january 1 2016 december 15 2016 year ended december 31 2015 thousands debt service december 31 2016 annual maturities indebtedness consisting term loan facility yearend follows abl facility december 15 2016 company key energy services llc borrowers “abl borrowers” entered abl facility financial institutions party thereto time lenders “abl lenders” bank america na administrative agent lenders bank america na wells fargo bank national association cocollateral agents lenders abl facility provides aggregate initial commitments abl lenders 80 million february 3 2017 increased 100 million matures june 15 2021 abl facility provides abl borrowers ability borrow aggregate principal amount equal lesser aggregate revolving commitments effect ii sum 85 value eligible accounts receivable plus b 80 value eligible unbilled accounts receivable subject limit equal greater x 35 million 25 commitments amount may borrowed abl facility subject increase reduction based certain segregated cash reserves provided abl facility addition percentages accounts receivable unbilled accounts receivable included calculation described subject reduction extent certain bad debt writedowns dilutive items provided abl facility borrowings abl facility bear interest abl borrowers’ option per annum rate equal libor 30 60 90 180 consent abl lenders 360 days plus applicable margin varies 250 450 depending borrowers’ fixed charge coverage ratio time ii base rate equal sum greatest x prime rate federal funds rate plus 050 z 30day libor plus 10 plus b applicable margin varies 150 350 depending borrowers’ fixed charge coverage ratio time addition abl facility provides unused line fees 10 125 per year depending utilization letter credit fees certain factors abl facility may future guaranteed certain company’s existing future subsidiaries “abl guarantors” together abl borrowers “abl loan parties” secure obligations abl facility abl loan parties granted grant applicable administrative agent firstpriority security interest benefit abl lenders present future accounts receivable inventory related assets proceeds foregoing “abl priority collateral” addition obligations abl loan parties abl facility secured secondpriority liens term priority collateral described “term loan facility” revolving loans abl facility may voluntarily prepaid whole part without premium penalty subject breakage similar costs abl facility contains certain affirmative negative covenants including covenants restrict ability abl loan parties take certain actions including among things subject certain significant exceptions incurrence debt granting liens making investments entering transactions affiliates payment dividends sale assets abl facility also contains requirement abl borrowers comply certain periods fixed charge coverage ratio 100 december 31 2016 borrowings outstanding abl facility 385 million letters credit outstanding borrowing capacity 277 million available subject covenant constraints abl facility term loan facility december 15 2016 company entered term loan facility among company borrower certain subsidiaries company named guarantors therein financial institutions party thereto time lenders collectively “term loan lenders” cortland capital market services llc cortland products corp agent term loan lenders term loan facility outstanding principal amount 250 million effective date term loan facility mature december 15 2021 although maturity date may company’s request extended one term loan lenders pursuant terms term loan facility borrowings term loan facility bear interest company’s option per annum rate equal libor one two three six consent term loan lenders 12 months plus 1025 ii base rate equal sum greatest x prime rate federal funds rate plus 050 z 30day libor plus 10 plus b 925 term loan facility guaranteed certain company’s existing future subsidiaries “term loan guarantors” together company “term loan parties” secure obligations term loan facility term loan parties granted grant applicable agent firstpriority security interest benefit term loan lenders substantially term loan party’s assets certain excluded assets abl priority collateral “term priority collateral” addition obligations term loan parties term loan facility secured secondpriority liens abl priority collateral described “abl facility” loans term loan facility may prepaid company’s option subject payment prepayment premium certain circumstances provided term loan facility prepayment made prior first anniversary loan prepayment must made makewhole amount calculation makewhole amount specified term loan facility prepayment made first anniversary loan prior second anniversary prepayment must made 106 principle amount prepayment made second anniversary prior third anniversary prepayment must made 103 principle amount third anniversary prepayment made prepayment premium due company required make principal payments amount 625000 per quarter commencing quarter ending march 31 2017 addition pursuant term loan facility company must prepay offer prepay applicable term loans net cash proceeds certain debt incurrences asset sales excess cash flow upon certain change control transactions subject case certain exceptions term loan facility contains certain affirmative negative covenants including covenants restrict ability term loan parties take certain actions including among things subject certain significant exceptions incurrence debt granting liens making investments entering transactions affiliates payment dividends sale assets term loan facility also contains financial covenants requiring company maintain asset coverage ratio least 135 10 liquidity defined term loan facility must less 375 million least 200 million must cash equivalents held deposit accounts last day fiscal quarter subject certain exceptions cure rights letter credit facility november 7 2013 entered uncommitted unsecured 150 million letter credit facility used solely issuances performance letters credit december 31 2016 20 million letters credit outstanding facility offbalance sheet arrangements december 31 2016 currently offbalance sheet arrangements reasonably likely material current future effect financial condition revenues expenses results operations liquidity capital expenditures capital resources contractual obligations set forth summary contractual obligations december 31 2016 obligations pay future periods reflect certain assumptions including variability interest rates variablerate obligations duration obligations actual payments future periods may vary 1 based interest rates effect december 31 2016 debt compliance december 31 2016 compliance financial covenants abl facility term loan facility based management’s current projections expect compliance covenants abl facility term loan facility next twelve months breach covenants ratios tests could result default indebtedness see “ debt service” “item 1a risk factors” capital expenditures year ended december 31 2016 capital expenditures totaled 85 million primarily related ongoing replacement rig service fleet coiled tubing units fluid transportation equipment rental equipment capital expenditure plan 2017 contemplates spending 10 million 20 million subject market conditions primarily related equipment replacement needs including ongoing replacement rig services fleet capital expenditure program 2017 subject market conditions including activity levels commodity prices industry capacity specific customer needs well cash flows focus 2017 maximization current equipment fleet may choose increase capital expenditures 2017 expand presence market currently anticipate funding 2017 capital expenditures combination cash hand operating cash flow proceeds sales assets borrowings abl facility operating cash flows activity levels prove insufficient fund currently planned capital spending levels management expects adjust capital spending plans accordingly may also incur capital expenditures strategic investments acquisitions critical accounting policies accounting department responsible development application accounting policies internal control procedures reports chief financial officer process preparing financial statements conformity gaap requires us make certain estimates judgments assumptions may affect reported amounts assets liabilities disclosures contingencies balance sheet date amounts revenues expenses recognized reporting period presentation statement cash flows may record materially different amounts estimates judgments assumptions change actual results differ however analyze estimates assumptions judgments based historical experience various factors believe reasonable circumstances identified following critical accounting policies require significant amount estimation judgment accurately present financial position results operations cash flows • revenue recognition • estimate reserves workers’ compensation vehicular liability selfinsurance • contingencies • income taxes • estimates depreciable lives • valuation indefinitelived intangible assets • valuation tangible finitelived intangible assets • valuation equitybased compensation revenue recognition recognize revenue following criteria met evidence arrangement exists ii delivery occurred services rendered iii price customer fixed determinable iv collectability reasonably assured • evidence arrangement exists final understanding us customer occurred evidenced completed customer purchase order field ticket supplier contract master service agreement • delivery occurred services rendered completed requirements pursuant terms arrangement evidenced field ticket service log • price customer fixed determinable amount required paid agreed upon evidence price fixed determinable evidenced contractual terms price book completed customer purchase order field ticket • collectability reasonably assured screen customers provide goods services customers according determined credit terms granted accordance credit policy present revenues net sales taxes collected us customers required remitted local state governmental taxing authorities review contracts multiple element revenue arrangements deliverables separated units accounting assigned fair value standalone value customer objective reliable evidence fair value delivery undelivered items substantially controlled us believe negotiated prices deliverables services contracts representative fair value since acceptance nonacceptance element contract affect elements workers’ compensation vehicular liability selfinsurance occurrence event fully insured indemnified failure customer insurer meet indemnification insurance obligations could result substantial losses addition insurance may available cover risks available might able obtain insurance without substantial increase premiums possible addition higher premiums future insurance coverage may subject higher deductibles coverage restrictions estimate liability arising uninsured potentially insured events including workers’ compensation employer’s liability vehicular liability general liability record accruals consolidated financial statements reserves related claims based specific facts circumstances insured event past experience similar claims trend analysis adjust loss estimates calculation accruals based upon actual claim settlements reported claims loss estimates individual claims adjusted based upon actual claim judgments settlements reported claims actual outcome claims could differ significantly estimated amounts changes assumptions estimates could potentially negative impact earnings primarily selfinsured physical damage property rigs equipment automobiles due large deductibles selfinsurance contingencies periodically required record loss contingencies relate lawsuits claims proceedings taxrelated audits normal course operations consolidated balance sheet record loss contingency matters probable liability incurred amount loss reasonably estimated periodically review loss contingencies ensure recorded appropriate liabilities balance sheet adjust liabilities based estimates judgments made management respect likely outcome matters including effect applicable insurance coverage litigation matters estimates judgments could change based new information changes laws regulations changes management’s plans intentions outcome legal proceedings settlements factors actual results could vary materially reserves record liabilities environmental assessment indicates site remediation efforts probable costs reasonably estimated measure environmental liabilities based part relevant past experience currently enacted laws regulations existing technology sitespecific costs costsharing arrangements recognition joint several liability based upon best estimate final prorata share liability low amount range estimates assumptions involve judgments estimates management changes assumptions new information could lead increases decreases ultimate liability changes recognized immediately earnings record legal obligations retire tangible longlived assets balance sheet liabilities recorded discount incur liability significant judgment involved estimating future cash flows associated obligations well ultimate timing cash flows estimates amount timing cash flows change may material impact results operations income taxes account deferred income taxes using asset liability method provide income taxes significant temporary differences management determines current tax liability well taxes incurred result current operations yet deferred future periods current taxes payable represent liability related income tax returns current year net deferred tax expense benefit represents change balance deferred tax assets liabilities reported consolidated balance sheets deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled management makes certain assumptions timing temporary tax differences differing treatment certain items tax accounting purposes whether differences permanent final determination tax liability involves interpretation local tax laws tax treaties related authorities jurisdiction well significant use estimates assumptions regarding scope future operations results achieved timing nature income earned expenditures incurred record valuation allowances reduce deferred tax assets determine likely eg likelihood 50 deferred tax assets realized future periods assess likelihood use estimates judgment regarding future taxable income well jurisdiction taxable income generated determine whether valuation allowance required ultimate realization deferred tax assets depends ability generate sufficient taxable income appropriate character related jurisdiction future evidence supporting ability include current financial position results operations actual forecasted results reversal deferred tax liabilities tax planning strategies well current forecasted business economics industry additionally record uncertain tax positions financial statements net recognizable amount based amount management deems likely sustained upon ultimate settlement tax authorities domestic international tax jurisdictions operate estimates assumptions regarding current deferred tax items inaccurate modified changes could potentially material negative impacts earnings estimates depreciable lives use estimated depreciable lives longlived assets rigs heavyduty trucks trailers compute depreciation expense estimate future asset retirement obligations conduct impairment tests base estimates depreciable lives number factors environment assets operate industry factors including forecasted prices competition assumption provide appropriate amount capital expenditures asset operation maintain economical operation asset prevent untimely demise scrap useful lives intangible assets determined years expect assets generate benefit based legal contractual expectations depreciate operational assets depreciable lives salvage value generally 10 acquisition cost recognize gain loss upon ultimate disposal asset based difference carrying value asset disposal date proceeds receive connection disposal periodically analyze estimates depreciable lives fixed assets determine depreciable periods salvage value continue appropriate also analyze useful lives salvage value events conditions occur could shorten remaining depreciable life asset review depreciable periods salvage values reasonableness given current conditions result depreciation expense based upon estimates depreciable lives fixed assets salvage value economic factors require management make significant judgments estimates determine depreciable lives different originally estimated depreciation expense may increase decrease impairments carrying values fixed assets may result could negatively impact earnings valuation indefinitelived intangible assets periodically review intangible assets subject amortization including goodwill determine whether impairment assets may exist tests must made least annual basis often circumstances indicate assets may impaired circumstances include limited significant adverse changes business climate test impairment indefinitelived intangible assets allows us first assess qualitative factors determine whether “more likely not” fair value reporting unit less carrying amount basis determining whether necessary perform twostep goodwill impairment test qualitative analysis shows “more likely not” fair value reporting unit less carrying amount perform twostep goodwill impairment test first step fair value calculated reporting units fair value compared current carrying value reporting unit including reporting unit’s goodwill fair value reporting unit exceeds carrying value potential impairment second step performed carrying value exceeds fair value reporting unit second step required second step test impairment compares implied fair value reporting unit’s goodwill current carrying value implied fair value reporting unit’s goodwill determined manner amount goodwill would recognized business combination purchase price equal fair value reporting unit implied fair value reporting unit’s goodwill excess carrying value impairment charge recorded carrying value reporting unit’s goodwill excess implied fair value impairment charge equal excess recorded determining fair value reporting units use weightedaverage approach three commonly used valuation techniques discounted cash flow method guideline companies method similar transactions method assigned weight results methods based facts circumstances existence testing period assigned weight discounted cash flow method believe representative future business addition estimates made management regarding weighting various valuation techniques creation techniques requires make significant estimates assumptions discounted cash flow method assigned highest weight management current year requires us make assumptions future cash flows future growth rates tax rates future periods booktax differences carrying value assets future periods discount rates assumptions future cash flows growth rates based current budgets future periods well strategic plans beliefs management future activity levels analysts’ expectations revenues profitability cash flows future periods assumptions future tax rates booktax differences carrying value assets future periods based assumptions future cash flows growth rates management’s knowledge beliefs tax law practice current future periods assumptions discount rates include assessment specific risk associated reporting unit tested developed assistance thirdparty valuation consultant ultimate conclusions valuation techniques remain responsibility valuation tangible finitelived intangible assets fixed assets finitelived intangibles tested potential impairment circumstances events indicate possible impairment may exist circumstances events referred “trigger events” examples trigger events include limited adverse change market conditions significant decrease benefits derived acquired business change use asset significant disposal particular asset class trigger event occurs impairment test performed based undiscounted cash flow analysis perform impairment test make judgments estimates assumptions regarding longterm forecasts revenues expenses relating assets subject review market conditions energy prices estimated depreciable lives assets discount rate assumptions legal factors impact operations significant effect estimates use determine whether assets impaired results undiscounted cash flow analysis indicate carrying value assets tested impairment recoverable record impairment charge write carrying value assets fair value using different judgments assumptions estimates could potentially arrive materially different fair value assets tested impairment may result impairment charge valuation equitybased compensation issue time based vesting performance based vesting stock options time based vesting performance based vesting restricted stock units restricted stock awards employees nonemployee directors options grant fair valued using blackscholes option model grant date amortized compensation expense vesting period option net estimated actual forfeitures compensation related restricted stock units restricted stock awards based fair value award grant date recognized based vesting requirements satisfied period grantdate fair value restricted stock units restricted stock awards determined using stock price grant date utilizing blackscholes option pricing model determine fair values stock options certain assumptions made based subjective expectations subject change one assumptions would impact expense associated future grants key assumptions include historical stock price volatility riskfree interest rate expected life awards view limited amount time elapsed since reorganization volatility calculated based historical stock price volatility peer group lookback period equivalent expected term award valuation warrants pursuant plan effective date company issued two series warrants former holders predecessor companys common stock one series warrants expire december 15 2020 series warrants expire december 15 2021 warrant exercisable one share company’s common stock par value 001 issuance warrants recorded fair value determined using blackscholes option pricing model warrants equity classified issuance recorded increase additional paidin capital amount 38 million recent accounting developments asu 201618 november 2016 fasb issued asu 201618 statement cash flows topic 230 restricted cash standard provides guidance presentation restricted cash restricted cash equivalents statement cash flows restricted cash restricted cash equivalents included cash equivalents reconciling beginningofperiod endofperiod amounts shown statements cash flows amendments asu applied using retrospective transition method effective reporting periods beginning december 15 2017 early adoption permitted revised statement cash flows presentation restricted cash adoption asu 201618 expected impact consolidated financial statements asu 201615 august 2016 fasb issued asu 201615 “statement cash flows topic 230 classification certain cash receipts cash payments consensus fasb emerging issues task force asu 201615” clarifies entities classify certain cash receipts cash payments statement cash flows guidance also clarifies predominance principle applied cash receipts cash payments aspects one class cash flows guidance effective annual periods beginning december 15 2017 interim periods within annual periods early adoption permitted company evaluating effect asu 201615 consolidated financial statements asu 201613 june 2016 fasb issued asu 201613 measurement credit losses financial instruments” change companies measure credit losses financial assets certain instruments aren’t measured fair value net income standard replace today’s “incurred loss” approach “expected loss” model instruments measured amortized cost availableforsale debt securities entities required record allowances rather reduce carrying amount amendments update effective annual periods beginning december 15 2019 interim periods within annual periods early adoption permitted annual periods beginning december 15 2018 company evaluating effect asu 201613 consolidated financial statements asu 201609 march 2016 fasb issued asu 201609 compensationstock compensation topic 718 improvements employee sharebased payment accounting updated guidance changes companies account certain aspects sharebased payment awards employees including accounting income taxes forfeitures statutory tax withholding requirements well classification statement cash flows company adopt accounting guidance january 1 2017 adoption asu material impact company’s consolidated financial statements asu 201602 february 2016 fasb issued asu 201602 leases topic 842 replace existing lease guidance standard intended provide enhanced transparency comparability requiring lessees record rightofuse assets corresponding lease liabilities balance sheet additional disclosure requirements include qualitative disclosures along specific quantitative disclosures objective enabling users financial statements assess amount timing uncertainty cash flows arising leases asu 201602 effective company annual reporting periods beginning december 15 2018 including interim periods within fiscal years early adoption permitted new standard required applied modified retrospective approach prior reporting period presented currently evaluating standard determine impact adoption consolidated financial statements asu 201517 november 2015 fasb issued asu 201517 balance sheet classification deferred taxes topic 740 objective asu simplify current guidance requires entities separately present deferred tax assets liabilities current noncurrent classified balance sheet new guidance require entities present deferred tax assets liabilities noncurrent classified balance sheet adopted asu 201517 fourth quarter 2016 reclassified net current deferred tax assets 101 million noncurrent deferred tax asset liabilities adopted asu 201517 prospectively prior periods restated conform new presentation adoption effect net income cash flows asu 201409 may 2014 fasb issued asu 201409 revenue contracts customers topic 606 objective asu establish principles report useful information users financial statements nature amount timing uncertainty revenue contracts customers core principle recognize revenue depict transfer promised goods services customers amount reflects consideration entity expects entitled exchange goods services asu 201409 must adopted using either full retrospective method modified retrospective method july 2015 meeting fasb affirmed proposal defer effective date new revenue standard entities one year result asu 201409 effective company interim annual reporting periods beginning december 15 2017 early adoption permitted interim annual reporting periods beginning december 15 2016 currently evaluating standard determine impact adoption consolidated financial statements however management believes impact financial statements material item 7aitem 7 management’s discussion analysis financial condition results operations following discussion analysis financial condition results operations read conjunction consolidated financial statements related notes thereto “item 8 financial statements supplementary data” discussion contains forwardlooking statements based upon current expectations subject uncertainty changes circumstances including identified “cautionary note regarding forwardlooking statements” actual results may differ materially expectations due potentially inaccurate assumptions known unknown risks uncertainties forwardlooking statements read conjunction disclosures “item 1a risk factors” overview provide full range well services major oil companies independent oil natural gas production companies produce maintain enhance flow oil natural gas throughout life well services include rigbased coiled tubingbased well maintenance workover services well completion recompletion services fluid management services fishing rental services ancillary oilfield services additionally certain rigs capable specialty drilling applications operate major oil natural gas producing regions continental united states previously operations canada russia sold second third quarters 2017 respectively demand services fluctuates primarily relation price anticipated price oil natural gas turn driven primarily supply demand oil natural gas generally supply commodities decreases demand increases service maintenance requirements increase oil natural gas producers attempt maximize productivity wells higher priced environment however lower oil natural gas price environment persisted since late 2014 demand service maintenance decreased oil natural gas producers decrease activity particular demand new existing field drilling completion work driven available investment capital work customers significantly curtailed capital spending beginning 2015 continuing 2017 types services easily “started” “stopped” oil natural gas producers generally tend less risk tolerant commodity prices low volatile may experience rapid decline demand well maintenance services compared demand types oilfield services lowerpriced environment fewer well service rigs needed completions activities generally associated drilling activity emergence voluntary reorganization fresh start accounting upon emergence bankruptcy effective date company adopted fresh start accounting resulted creation new entity financial reporting purposes result application fresh start accounting well effects implementation plan consolidated financial statements december 16 2016 comparable consolidated financial statements prior date refer “note 3 fresh start accounting” “item 8 financial statements supplementary data” additional information references “successor” “successor company” relate financial position results operations reorganized company subsequent december 15 2016 references “predecessor” “predecessor company” refer financial position results operations company prior december 15 2016 business growth strategies focus production related services life oil gas well regular maintenance well bore artificial lift systems required maintain production offset natural production declines interventions well service rig required remove replace items needing repair perform activities would increase oil gas production current levels many instances interventions require additional assets services perform decline oil prices beginning 2014 believe number oil gas producers united states significantly curtailed recurring well maintenance activities believe recovery oil prices result oil gas producers making decision resume regular well maintenance activities additionally believe many instances since oil price decline began 2014 oil gas producers foregone regular maintenance activities additional demand services provided oil gas producers seeking improve production repairing wells key well positioned capitalize trends fleet active warm stacked well service rigs additional fishing rental service offerings provides continue invest either equipment acquisition grow take advantage dynamic growth population horizontal oil gas wells since revolution horizontal well drilling hydraulic fracturing began united states thousands new horizontal oil wells added many period 2012 2014 initial production wells decline first several years production wells placed artificial lift systems maintain production believe wells require periodic maintenance similar conventional oil well many instances due depth long lateral sections wells larger well service rig higher rated derrick capacity needed maintenance intend invest portion well service rig fleet needed rental equipment services either organic capital deployment acquisition capitalize trend growing population horizontal wells entered enter phase life regular maintenance required performance measures baker hughes us rig count data publicly available weekly basis often used coincident indicator overall exploration production “ep” company spending broader oilfield activity assessing overall activity us onshore oilfield service industry operate believe baker hughes us land drilling rig count best barometer ep companies capital spending resulting activity levels historically activity levels highly correlated us onshore capital spending ep company customers group 1 represents average monthly average prices years presented source us energy information administration bloomberg 2 source wwwbakerhughescom 3 source wwwaescnet internally measure activity levels well servicing operations primarily rig trucking hours generally capital ep companies increases demand services also rises resulting increased rig trucking services hours worked conversely activity levels decline due lower spending ep companies generally provide fewer rig trucking services results lower hours worked following table presents quarterly rig trucking hours 2015 2017 1 keys us working days number weekdays quarter minus national holidays market business conditions outlook core businesses depend customers’ willingness make expenditures produce develop explore oil natural gas industry conditions influenced numerous factors oil natural gas prices supply demand oil natural gas domestic worldwide economic conditions political instability oil producing countries available supply demand services provide oil natural gas prices began rapid substantial decline fourth quarter 2014 depressed commodity price conditions persisted worsened 2015 2016 result baker hughes us rig count aesc well service rig count along demand products services declined substantially prices able charge customers products services also declined substantially sought anticipate activity declines reshaped organizational cost structure mitigate negative impact declines continued experience negative operating results cash flows operations 2017 oil prices recovered lows 2016 spurred increase baker hughes us rig count related well completion activity however magnitude activity increase occur principal rig services business measured aesc well service rig count oil gas producers’ production maintenance spending recovered extent new well drilling completion spending 2017 saw continued improvement demand pricing services particularly driven completion oil natural gas wells continued uncertainty around stability oil prices dampened pace improvement well services activity particularly relates customer spending maintenance existing oil gas wells believe stabilization oil prices price attractive customers necessary demand associated pricing services related conventional well maintenance work improve significantly additionally believe continued aging horizontal wells customers choosing increase production accretive regular well maintenance horizontal wells strengthen demand increase price services next several years increased demand oilfield services broadly however demand qualified employees also increase may impact ability meet needs customers offset price increases realized due inflation labor costs results operations consolidated results operations following tables set forth consolidated results operations financial information operating segment selected information periods indicated period december 16 december 31 2016 successor company period january 1 december 15 2016 predecessor company distinct reporting periods result emergence bankruptcy december 15 2016 references results operations change percentage change combine successor company predecessor company results year ended december 31 2016 order provide comparability information years ended december 31 2017 december 31 2015 combined presentation presented according generally accepted accounting principles united states “gaap” comparable gaap measure presented management believes providing financial information relevant useful method making comparisons years ended december 31 2017 december 31 2015 years ended december 31 2017 2016 revenues year ended december 31 2017 increased 189 million 45 4362 million 4173 million combined year ended december 31 2016 due increase spending customers reacted improving commodity prices internationally lower revenue result sale operations mexico decrease activity russia sale third quarter 2017 russian operations see “segment operating results years ended december 31 2017 2016” detailed discussion change revenues direct operating expenses direct operating expenses decreased 471 million 124 3323 million 762 revenues year ended december 31 2017 compared 3794 million 909 revenues combined year ended december 31 2016 decrease partially related 210 million gain sale certain assets decrease employee compensation costs fuel expense repair maintenance expense took steps reduce cost structure see “segment operating results years ended december 31 2017 2016” detailed discussion change direct operating expenses depreciation amortization expense depreciation amortization expense decreased 503 million 373 845 million 194 revenues year ended december 31 2017 compared 1349 million 323 revenues combined year ended december 31 2016 decrease primarily attributable reduction property plant equipment due implementation fresh start accounting fourth quarter 2016 general administrative expenses general administrative expenses decreased 545 million 321 1153 million 264 revenues year ended december 31 2017 compared 1698 million 407 revenues combined year ended december 31 2016 decrease primarily due 240 million decrease professional fees related 2016 corporate restructuring lower employee compensation costs due reduced staffing levels reduction wages partially offset 52 million increase legal settlement accruals impairment expense year ended december 31 2017 recorded 02 million impairment reduce carrying value assets related liabilities russian business unit sold third quarter 2017 fair market value combined year ended december 31 2016 recorded 446 million impairment reduce carrying value assets held sale fair market value related business unit mexico reorganization items net reorganization items primarily consist 15 million professional fees incurred connection emergence voluntary reorganization year ended december 31 2017 compared 5787 million gain debt discharge partially offset 2996 million loss fresh start accounting revaluations 192 million writeoff deferred financing costs debt premiums discounts 152 million professional fees incurred connection emergence voluntary reorganization combined year ended december 31 2016 interest expense net amounts capitalized interest expense decreased 439 million 318 million 73 revenues year ended december 31 2017 compared 757 million 181 revenues combined year ended december 31 2016 decrease primarily related elimination predecessor company’s senior secured notes connection emergence voluntary reorganization income loss net year ended december 31 2017 recognized income net 72 million compared 24 million combined year ended december 31 2016 foreign exchange gain loss relates us dollardenominated transactions foreign locations fluctuations exchange rates local currencies us dollar table presents comparative detailed information combined loss net december 31 2017 2016 income tax expense benefit income tax benefit 17 million 14 effective rate pretax loss 1223 million year ended december 31 2017 compared income tax benefit zero 000 effective rate pretax loss 102 million 28 million tax expense 22 effective rate pretax loss 1289 million period december 16 2016 december 31 2016 period january 1 2016 december 15 2016 respectively effective tax rates periods differ thenapplicable us statutory rate 35 due number factors including mix profit loss domestic international taxing jurisdictions impact permanent items including goodwill impairment expense expenses subject statutorily imposed limitations meals entertainment expenses affect book income affect taxable income discrete tax adjustments valuation allowances deferred tax assets tax expense benefit recognized uncertain tax positions us enacted law tax cuts jobs act “2017 tax act” december 22 2017 tax act comprehensive tax reform legislation among things contains significant changes corporate taxation including permanent reduction corporate income tax rate 35 21 imposing mandatory onetime tax accumulated earnings foreign subsidiaries partial limitation deductibility business interest expense limitation net operating losses 80 taxable income year shift us taxation multinational corporations tax worldwide income partial territorial system along rules create new us minimum tax earnings foreign subsidiaries ultimate impact 2017 tax act may differ estimated tax impacts recognized fourth quarter due technical corrections made law future treasury regulations interpretive guidance may impact company’s actions continue examine impact tax reform legislation overall impact uncertain years ended december 31 2016 2015 revenues combined year ended december 31 2016 decreased 3751 million 473 4173 million 7923 million year ended december 31 2015 due lower spending customers result lower oil prices market conditions resulted reduced customer activity reduction price received services internationally lower revenue result reduced customer activity russia colombia exit operations middle east south america see “segment operating results years ended december 31 2016 2015” detailed discussion change revenues direct operating expenses direct operating expenses decreased 3352 million 469 3794 million 909 revenues combined year ended december 31 2016 compared 7146 million 902 revenues year ended december 31 2015 decrease primarily related decrease employee compensation costs fuel expense repair maintenance expense sought reduce cost structure result lower activity levels see “segment operating results years ended december 31 2016 2015” detailed discussion change direct operating expenses depreciation amortization expense depreciation amortization expense decreased 454 million 252 1349 million 323 revenues combined year ended december 31 2016 compared 1803 million 228 revenues year ended december 31 2015 decrease primarily attributable impairment certain fixed assets 2015 decreases capital expenditures lower amortization expense due impairment certain intangible assets general administrative expenses general administrative expenses decreased 329 million 162 1698 million 407 revenues combined year ended december 31 2016 compared 2026 million 256 revenues year ended december 31 2015 decrease primarily due lower employee compensation costs due reduced staffing levels reduction wages 308 million lower expenses related investigations pursuant foreign corrupt practices act “fcpa” doj sec concluded april august 2016 respectively partially offset 258 million restructuring fees 2016 impairment expense combined year ended december 31 2016 recorded 446 million impairment reduce carrying value assets held sale fair market value related business unit mexico year ended december 31 2015 recorded 5827 million impairment goodwill 511 million impairment fixed assets held used 15 million impairment intangible assets longer used 868 million impairment fixed assets reduce carrying value assets held sale fair market value reorganization items net reorganization items primarily consist 5787 million gain debt discharge partially offset 2996 million loss fresh start accounting revaluations 192 million writeoff deferred financing costs debt premiums discounts 152 million professional fees incurred connection emergence voluntary reorganization interest expense net amounts capitalized interest expense increased 18 million 757 million 181 revenues combined year ended december 31 2016 compared 738 million 93 revenues year ended december 31 2015 increase primarily related increased borrowings interest rate new term loan facility combined year ended december 31 2016 writeoff remaining 08 million unamortized deferred financing costs related previously terminated credit facility second quarter 2015 income loss net combined year ended december 31 2016 recognized income net 24 million compared loss net 94 million year ended december 31 2015 78 million allowance collectability notes receivable related sale operations argentina recorded year ended december 31 2015 foreign exchange loss relates us dollardenominated transactions foreign locations fluctuations exchange rates local currencies us dollar table presents comparative detailed information loss net december 31 2016 2015 income tax expense benefit income tax benefit zero 00 effective rate pretax loss 102 million income tax expense 28 million 22 effective rate pretax loss 1289 million period december 16 2016 december 31 2016 period january 1 2016 december 15 2016 respectively compared income tax benefit 1928 million 174 effective rate pretax loss 11 billion year ended december 31 2015 effective tax rates periods differ thenapplicable us statutory rate 35 due number factors including mix profit loss domestic international taxing jurisdictions impact permanent items including goodwill impairment expense expenses subject statutorily imposed limitations meals entertainment expenses affect book income affect taxable income discrete tax adjustments valuation allowances deferred tax assets tax expense benefit recognized uncertain tax positions segment operating results years ended december 31 2017 2016 following table shows operating results reportable segments years ended december 31 2017 2016 thousands year ended december 31 2017 successor period december 16 2016 december 31 2016 predecessor period january 1 2016 december 15 2016 us rig services revenues us rig services segment increased 174 million 75 2488 million year ended december 31 2017 compared 2314 million combined year ended december 31 2016 increase segment primarily due increase completion production spending customers reacted improving commodity prices operating expenses us rig services segment 2525 million year ended december 31 2017 represented decrease 204 million 75 compared 2728 million combined year ended december 31 2016 expenses decreased primarily result reduced depreciation expense decrease employee compensation per hour basis took steps reduce cost structure fluid management services revenues fluid management services segment increased 15 million 19 807 million year ended december 31 2017 compared 792 million combined year ended december 31 2016 increase segment primarily due increase spending customers reacted improving commodity prices operating expenses fluid management services segment 1003 million year ended december 31 2017 represented decrease 180 million 152 compared 1183 million combined year ended december 31 2016 expenses decreased primarily result decrease employee compensation costs equipment expense took steps reduce cost structure coiled tubing services revenues coiled tubing services segment increased 99 million 310 419 million year ended december 31 2017 compared 320 million combined year ended december 31 2016 increase segment primarily due increase drilling completion spending customers reacted improving commodity prices operating expenses coiled tubing services segment 402 million year ended december 31 2017 represented decrease 113 million 219 compared 515 million combined year ended december 31 2016 expenses decreased primarily result reduced depreciation expense decrease employee compensation costs equipment expense took steps reduce cost structure fishing rental services revenues fishing rental services segment 592 million year ended december 31 2017 combined year ended december 31 2016 decrease revenue segment primarily due sale frac stack well testing business offset increase completion production spending customers react improving commodity prices operating expenses fishing rental services segment 517 million year ended december 31 2017 represented decrease 342 million 398 compared 859 million combined year ended december 31 2016 expenses decreased primarily due 210 million gain sale certain assets result reduced depreciation expense decrease employee compensation per hour basis took steps reduce cost structure international revenues international segment decreased 99 million 640 56 million year ended december 31 2017 compared 155 million combined year ended december 31 2016 decrease primarily attributable lower customer activity russia sale third quarter 2017 russian operations exit operations mexico sold 2016 operating expenses international segment decreased 641 million 858 106 million year ended december 31 2017 compared 746 million combined year ended december 31 2016 expenses decreased primarily result decrease employee compensation costs equipment expense related exit operations mexico russia 446 million impairment reduce carrying value assets related liabilities mexican business unit sold 2016 fair market value functional support operating expenses functional support segment decreased 484 million 385 772 million 177 consolidated revenues year ended december 31 2017 compared 1256 million 301 consolidated revenues combined year ended december 31 2016 decrease primarily due lower employee compensation costs due reduced staffing levels reduction wages 50 million fcpa settlement accrual 2016 decrease 240 million professional fees related 2016 corporate restructuring years ended december 31 2016 2015 following table shows operating results reportable segments years ended december 31 2016 2015 thousands successor period december 16 2016 december 31 2016 predecessor period january 1 2016 december 15 2016 year ended december 31 2015 us rig services revenues us rig services segment decreased 1457 million 386 2314 million combined year ended december 31 2016 compared 3771 million year ended december 31 2015 decrease segment primarily due lower spending customers result lower oil prices market conditions resulted reduced customer activity reduction price received services operating expenses us rig services segment 2728 million combined year ended december 31 2016 represented decrease 4123 million 602 compared 6851 million year ended december 31 2015 expenses decreased primarily due impairment expense 2016 compared 2977 million impairment expense 2015 result decrease employee compensation costs equipment expense sought reduce cost structure result lower activity levels fluid management services revenues fluid management services segment decreased 739 million 483 792 million combined year ended december 31 2016 compared 1532 million year ended december 31 2015 decrease segment primarily due lower spending customers result lower oil prices market conditions resulted reduced customer activity reduction price received services operating expenses fluid management services segment 1183 million combined year ended december 31 2016 represented decrease 783 million 398 compared 1966 million year ended december 31 2015 expenses decreased primarily due impairment expense 2016 compared 245 million impairment expense 2015 result decrease employee compensation costs equipment expense sought reduce cost structure result lower activity levels coiled tubing services revenues coiled tubing services segment decreased 579 million 644 320 million combined year ended december 31 2016 compared 898 million year ended december 31 2015 decrease segment primarily due lower spending customers result lower oil prices market conditions resulted reduced customer activity reduction price received services operating expenses coiled tubing services segment 515 million combined year ended december 31 2016 represented decrease 1935 million 790 compared 2450 million year ended december 31 2015 expenses decreased primarily due impairment expense 2016 compared 827 million impairment goodwill 511 million impairment fixed assets 2015 result decrease employee compensation costs repair maintenance expense fuel costs sought reduce cost structure result lower activity levels fishing rental services revenues fishing rental services segment decreased 627 million 514 592 million combined year ended december 31 2016 compared 1219 million year ended december 31 2015 decrease segment primarily due lower spending customers result lower oil prices market conditions resulted reduced customer activity reduction price received services operating expenses fishing rental services segment 859 million combined year ended december 31 2016 represented decrease 2334 million 731 compared 3193 million year ended december 31 2015 expenses decreased primarily due impairment expense 2016 compared 1735 million impairment goodwill 60 million impairment intangible assets 2015 result decrease employee compensation costs repair maintenance expense fuel costs sought reduce cost structure result lower activity levels international revenues international segment decreased 349 million 693 155 million combined year ended december 31 2016 compared 503 million year ended december 31 2015 decrease primarily attributable lower customer activity mexico exit operations middle east south america operating expenses international segment decreased 1582 million 680 746 million combined year ended december 31 2016 compared 2329 million year ended december 31 2015 expenses decreased primarily due impairment expense 446 million 2016 compared 808 million impairment assets held sale 44 million impairment goodwill 2015 result decrease employee compensation costs equipment expense lower activity exit certain international markets functional support operating expenses functional support segment decreased 152 million 108 1256 million 301 consolidated revenues combined year ended december 31 2016 compared 1408 million 178 consolidated revenues year ended december 31 2015 decrease primarily due lower employee compensation costs due reduced staffing levels 308 million lower expenses related fcpa investigations doj sec concluded april august 2016 respectively partially offset 258 million professional fees related corporate restructuring 2016 liquidity capital resources require capital fund ongoing operations including maintenance expenditures existing fleet equipment organic growth initiatives investments acquisitions debt service payments obligations believe internally generated cash flows operations current reserves cash availability abl facility sufficient finance cash requirements current future operations budgeted capital expenditures debt service obligations next twelve months oil natural gas prices began rapid substantial decline fourth quarter 2014 depressed commodity price conditions persisted worsened 2015 remained depressed 2016 2017 result demand products services declined substantially prices able charge customers products services also declined substantially trends materially adversely affected results operations cash flows financial condition 2017 unless conditions industry improve trend potentially continue beyond 2017 response conditions undertaken several actions detailed effort preserve improve liquidity financial position • april 2015 announced decision exit markets participate outside north america strategy sell relocate assets businesses operating markets end second half 2015 ceased operations colombia ecuador middle east fourth quarter 2016 completed sale business mexico completed sale canadian subsidiary russian subsidiary second third quarters 2017 respectively additionally 2017 sold frac stack testing business • december 15 2016 company emerged preplanned voluntary chapter 11 reorganization resulting approximately 697 million company’s longterm debt eliminated along 456 million annual interest expense going forward • december 15 2016 entered new 80 million abl facility increased 100 million february 3 2017 due june 15 2021 new 250 million term loan facility due december 15 2021 december 31 2017 borrowings outstanding abl facility 356 million letters credit outstanding borrowing capacity 247 million available subject covenant constraints abl facility • beginning first quarter 2015 began series structural cost cutting changes corporate field levels include fixed costs supplychain efficiencies headcount wage reductions continued 2017 however still substantial indebtedness obligations may incur additional expenses unable predict time ability fund operations pay principal interest longterm debt satisfy obligations depend upon available liquidity amount cash flows able generate operations 2017 net cash used operating activities 514 million industry conditions improve may negative cash flows operations 2018 december 31 2017 working capital 830 million compared 1178 million december 31 2016 working capital decreased 2017 primarily result decrease cash equivalents restricted cash partially offset decrease accrued expenses december 31 2017 731 million cash approximately 07 million held bank accounts foreign subsidiaries december 31 2017 02 million cash held foreign subsidiaries held us bank accounts denominated us dollars believe cash held wholly owned foreign subsidiaries could repatriated general corporate use without material withholdings cash flows cash used operating activities 514 million 04 million 1384 million year ended december 31 2017 periods december 16 2016 december 31 2016 january 1 2016 december 15 2016 respectively cash used operating activities periods primarily related net loss adjusted noncash items payments accounts payable accrued liabilities partially offset cash inflows related collection accounts receivable cash provided investing activities 169 million 65 million year ended december 31 2017 period january 1 2016 december 15 2016 respectively cash used investing activities 03 million period december 16 2016 december 31 2016 investing cash inflows primarily relate sales assets periods investing cash outflows primarily relate capital expenditures capital expenditures primarily relate replacement assets existing fleet equipment cash provided financing activities 172 million 188 million year ended december 31 2017 period january 1 2016 december 15 2016 respectively cash used financing activities less 01 million period january 1 2016 december 15 2016 cash provided financing activities year ended december 31 2017 primarily relate reduction restricted cash provided financing activities period january 1 2016 december 15 2016 primarily related proceeds stock offering connection emerging bankruptcy partially offset repayment longterm debt increase restricted cash following table summarizes cash flows year ended december 31 2017 period december 16 2016 december 31 2016 period january 1 2016 december 15 2016 thousands debt service december 31 2017 annual maturities indebtedness consisting term loan facility yearend follows thousands abl facility december 15 2016 company key energy services llc borrowers “abl borrowers” entered abl facility financial institutions party thereto time lenders “abl lenders” bank america na administrative agent lenders bank america na wells fargo bank national association cocollateral agents lenders abl facility provides aggregate initial commitments abl lenders 80 million february 3 2017 increased 100 million matures june 15 2021 abl facility provides abl borrowers ability borrow aggregate principal amount equal lesser aggregate revolving commitments effect ii sum 85 value eligible accounts receivable plus b 80 value eligible unbilled accounts receivable subject limit equal greater x 35 million 25 commitments amount may borrowed abl facility subject increase reduction based certain segregated cash reserves provided abl facility addition percentages accounts receivable unbilled accounts receivable included calculation described subject reduction extent certain bad debt writedowns dilutive items provided abl facility borrowings abl facility bear interest abl borrowers’ option per annum rate equal libor 30 60 90 180 consent abl lenders 360 days plus applicable margin varies 250 450 depending borrowers’ fixed charge coverage ratio time ii base rate equal sum greatest x prime rate federal funds rate plus 050 z 30day libor plus 10 plus b applicable margin varies 150 350 depending borrowers’ fixed charge coverage ratio time addition abl facility provides unused line fees 10 125 per year depending utilization letter credit fees certain factors abl facility may future guaranteed certain company’s existing future subsidiaries “abl guarantors” together abl borrowers “abl loan parties” secure obligations abl facility abl loan parties granted grant applicable administrative agent firstpriority security interest benefit abl lenders present future accounts receivable inventory related assets proceeds foregoing “abl priority collateral” addition obligations abl loan parties abl facility secured secondpriority liens term priority collateral described “term loan facility” revolving loans abl facility may voluntarily prepaid whole part without premium penalty subject breakage similar costs abl facility contains certain affirmative negative covenants including covenants restrict ability abl loan parties take certain actions including among things subject certain significant exceptions incurrence debt granting liens making investments entering transactions affiliates payment dividends sale assets abl facility also contains requirement abl borrowers comply certain periods fixed charge coverage ratio 100 december 31 2017 borrowings outstanding abl facility 356 million letters credit outstanding borrowing capacity 247 million available subject covenant constraints abl facility term loan facility december 15 2016 company entered term loan facility among company borrower certain subsidiaries company named guarantors therein financial institutions party thereto time lenders collectively “term loan lenders” cortland capital market services llc cortland products corp agent term loan lenders term loan facility outstanding principal amount 250 million effective date term loan facility mature december 15 2021 although maturity date may company’s request extended one term loan lenders pursuant terms term loan facility borrowings term loan facility bear interest company’s option per annum rate equal libor one two three six consent term loan lenders 12 months plus 1025 ii base rate equal sum greatest x prime rate federal funds rate plus 050 z 30day libor plus 10 plus b 925 term loan facility guaranteed certain company’s existing future subsidiaries “term loan guarantors” together company “term loan parties” secure obligations term loan facility term loan parties granted grant applicable agent firstpriority security interest benefit term loan lenders substantially term loan party’s assets certain excluded assets abl priority collateral “term priority collateral” addition obligations term loan parties term loan facility secured secondpriority liens abl priority collateral described “abl facility” loans term loan facility may prepaid company’s option subject payment prepayment premium certain circumstances provided term loan facility prepayment made first anniversary loan prior second anniversary prepayment must made 106 principle amount prepayment made second anniversary prior third anniversary prepayment must made 103 principle amount third anniversary prepayment made prepayment premium due company required make principal payments amount 625000 per quarter commencing quarter ending march 31 2017 addition pursuant term loan facility company must prepay offer prepay applicable term loans net cash proceeds certain debt incurrences asset sales excess cash flow upon certain change control transactions subject case certain exceptions term loan facility contains certain affirmative negative covenants including covenants restrict ability term loan parties take certain actions including among things subject certain significant exceptions incurrence debt granting liens making investments entering transactions affiliates payment dividends sale assets term loan facility also contains financial covenants requiring company maintain asset coverage ratio least 135 10 liquidity defined term loan facility must less 375 million least 200 million must cash equivalents held deposit accounts last day fiscal quarter subject certain exceptions cure rights offbalance sheet arrangements december 31 2017 currently offbalance sheet arrangements reasonably likely material current future effect financial condition revenues expenses results operations liquidity capital expenditures capital resources contractual obligations set forth summary contractual obligations december 31 2017 obligations pay future periods reflect certain assumptions including variability interest rates variablerate obligations duration obligations actual payments future periods may vary 1 based interest rates effect december 31 2017 debt compliance december 31 2017 compliance financial covenants abl facility term loan facility based management’s current projections expect compliance covenants abl facility term loan facility next twelve months breach covenants ratios tests could result default indebtedness see “ debt service” “item 1a risk factors” capital expenditures year ended december 31 2017 capital expenditures totaled 161 million primarily related ongoing replacement rig service fleet coiled tubing units fluid transportation equipment rental equipment capital expenditure plan 2018 contemplates spending 30 million 35 million subject market conditions primarily related equipment replacement needs including ongoing replacement rig services fleet capital expenditure program 2018 subject market conditions including activity levels commodity prices industry capacity specific customer needs well cash flows including cash generated asset sales focus 2018 maximization current equipment fleet may choose increase capital expenditures 2018 expand presence market currently anticipate funding 2018 capital expenditures combination cash hand operating cash flow proceeds sales assets borrowings abl facility operating cash flows activity levels prove insufficient fund currently planned capital spending levels management expects adjust capital spending plans accordingly may also incur capital expenditures strategic investments acquisitions critical accounting policies accounting department responsible development application accounting policies internal control procedures reports chief financial officer process preparing financial statements conformity gaap requires us make certain estimates judgments assumptions may affect reported amounts assets liabilities disclosures contingencies balance sheet date amounts revenues expenses recognized reporting period presentation statement cash flows may record materially different amounts estimates judgments assumptions change actual results differ however analyze estimates assumptions judgments based historical experience various factors believe reasonable circumstances identified following critical accounting policies require significant amount estimation judgment accurately present financial position results operations cash flows • revenue recognition • estimate reserves workers’ compensation vehicular liability selfinsurance • contingencies • income taxes • estimates depreciable lives • valuation indefinitelived intangible assets • valuation tangible finitelived intangible assets • valuation equitybased compensation revenue recognition recognize revenue following criteria met evidence arrangement exists ii delivery occurred services rendered iii price customer fixed determinable iv collectability reasonably assured • evidence arrangement exists final understanding us customer occurred evidenced completed customer purchase order field ticket supplier contract master service agreement • delivery occurred services rendered completed requirements pursuant terms arrangement evidenced field ticket service log • price customer fixed determinable amount required paid agreed upon evidence price fixed determinable evidenced contractual terms price book completed customer purchase order field ticket • collectability reasonably assured screen customers provide goods services customers according determined credit terms granted accordance credit policy present revenues net sales taxes collected us customers required remitted local state governmental taxing authorities review contracts multiple element revenue arrangements deliverables separated units accounting assigned fair value standalone value customer objective reliable evidence fair value delivery undelivered items substantially controlled us believe negotiated prices deliverables services contracts representative fair value since acceptance nonacceptance element contract affect elements workers’ compensation vehicular liability selfinsurance occurrence event fully insured indemnified failure customer insurer meet indemnification insurance obligations could result substantial losses addition insurance may available cover risks available might able obtain insurance without substantial increase premiums possible addition higher premiums future insurance coverage may subject higher deductibles coverage restrictions estimate liability arising uninsured potentially insured events including workers’ compensation employer’s liability vehicular liability general liability record accruals consolidated financial statements reserves related claims based specific facts circumstances insured event past experience similar claims trend analysis adjust loss estimates calculation accruals based upon actual claim settlements reported claims loss estimates individual claims adjusted based upon actual claim judgments settlements reported claims actual outcome claims could differ significantly estimated amounts changes assumptions estimates could potentially negative impact earnings primarily selfinsured physical damage property rigs equipment automobiles due large deductibles selfinsurance contingencies periodically required record loss contingencies relate lawsuits claims proceedings taxrelated audits normal course operations consolidated balance sheet record loss contingency matters probable liability incurred amount loss reasonably estimated periodically review loss contingencies ensure recorded appropriate liabilities balance sheet adjust liabilities based estimates judgments made management respect likely outcome matters including effect applicable insurance coverage litigation matters estimates judgments could change based new information changes laws regulations changes management’s plans intentions outcome legal proceedings settlements factors actual results could vary materially reserves record liabilities environmental assessment indicates site remediation efforts probable costs reasonably estimated measure environmental liabilities based part relevant past experience currently enacted laws regulations existing technology sitespecific costs costsharing arrangements recognition joint several liability based upon best estimate final prorata share liability low amount range estimates assumptions involve judgments estimates management changes assumptions new information could lead increases decreases ultimate liability changes recognized immediately earnings record legal obligations retire tangible longlived assets balance sheet liabilities recorded discount incur liability significant judgment involved estimating future cash flows associated obligations well ultimate timing cash flows estimates amount timing cash flows change may material impact results operations income taxes account deferred income taxes using asset liability method provide income taxes significant temporary differences management determines current tax liability well taxes incurred result current operations yet deferred future periods current taxes payable represent liability related income tax returns current year net deferred tax expense benefit represents change balance deferred tax assets liabilities reported consolidated balance sheets deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled management makes certain assumptions timing temporary tax differences differing treatment certain items tax accounting purposes whether differences permanent final determination tax liability involves interpretation local tax laws tax treaties related authorities jurisdiction well significant use estimates assumptions regarding scope future operations results achieved timing nature income earned expenditures incurred record valuation allowances reduce deferred tax assets determine likely eg likelihood 50 deferred tax assets realized future periods assess likelihood use estimates judgment regarding future taxable income well jurisdiction taxable income generated determine whether valuation allowance required ultimate realization deferred tax assets depends ability generate sufficient taxable income appropriate character related jurisdiction future evidence supporting ability include current financial position results operations actual forecasted results reversal deferred tax liabilities tax planning strategies well current forecasted business economics industry additionally record uncertain tax positions financial statements net recognizable amount based amount management deems likely sustained upon ultimate settlement tax authorities domestic international tax jurisdictions operate estimates assumptions regarding current deferred tax items inaccurate modified changes could potentially material negative impacts earnings estimates depreciable lives use estimated depreciable lives longlived assets rigs heavyduty trucks trailers compute depreciation expense estimate future asset retirement obligations conduct impairment tests base estimates depreciable lives number factors environment assets operate industry factors including forecasted prices competition assumption provide appropriate amount capital expenditures asset operation maintain economical operation asset prevent untimely demise scrap useful lives intangible assets determined years expect assets generate benefit based legal contractual expectations depreciate operational assets depreciable lives salvage value generally 10 acquisition cost recognize gain loss upon ultimate disposal asset based difference carrying value asset disposal date proceeds receive connection disposal periodically analyze estimates depreciable lives fixed assets determine depreciable periods salvage value continue appropriate also analyze useful lives salvage value events conditions occur could shorten remaining depreciable life asset review depreciable periods salvage values reasonableness given current conditions result depreciation expense based upon estimates depreciable lives fixed assets salvage value economic factors require management make significant judgments estimates determine depreciable lives different originally estimated depreciation expense may increase decrease impairments carrying values fixed assets may result could negatively impact earnings valuation indefinitelived intangible assets periodically review intangible assets subject amortization including goodwill determine whether impairment assets may exist tests must made least annual basis often circumstances indicate assets may impaired circumstances include limited significant adverse changes business climate test impairment indefinitelived intangible assets allows us first assess qualitative factors determine whether “more likely not” fair value reporting unit less carrying amount basis determining whether necessary perform twostep goodwill impairment test qualitative analysis shows “more likely not” fair value reporting unit less carrying amount perform twostep goodwill impairment test first step fair value calculated reporting units fair value compared current carrying value reporting unit including reporting unit’s goodwill fair value reporting unit exceeds carrying value potential impairment second step performed carrying value exceeds fair value reporting unit second step required second step test impairment compares implied fair value reporting unit’s goodwill current carrying value implied fair value reporting unit’s goodwill determined manner amount goodwill would recognized business combination purchase price equal fair value reporting unit implied fair value reporting unit’s goodwill excess carrying value impairment charge recorded carrying value reporting unit’s goodwill excess implied fair value impairment charge equal excess recorded determining fair value reporting units use weightedaverage approach three commonly used valuation techniques discounted cash flow method guideline companies method similar transactions method assigned weight results methods based facts circumstances existence testing period assigned weight discounted cash flow method believe representative future business addition estimates made management regarding weighting various valuation techniques creation techniques requires make significant estimates assumptions discounted cash flow method assigned highest weight management current year requires us make assumptions future cash flows future growth rates tax rates future periods booktax differences carrying value assets future periods discount rates assumptions future cash flows growth rates based current budgets future periods well strategic plans beliefs management future activity levels analysts’ expectations revenues profitability cash flows future periods assumptions future tax rates booktax differences carrying value assets future periods based assumptions future cash flows growth rates management’s knowledge beliefs tax law practice current future periods assumptions discount rates include assessment specific risk associated reporting unit tested developed assistance thirdparty valuation consultant ultimate conclusions valuation techniques remain responsibility valuation tangible finitelived intangible assets fixed assets finitelived intangibles tested potential impairment circumstances events indicate possible impairment may exist circumstances events referred “trigger events” examples trigger events include limited adverse change market conditions significant decrease benefits derived acquired business change use asset significant disposal particular asset class trigger event occurs impairment test performed based undiscounted cash flow analysis perform impairment test make judgments estimates assumptions regarding longterm forecasts revenues expenses relating assets subject review market conditions energy prices estimated depreciable lives assets discount rate assumptions legal factors impact operations significant effect estimates use determine whether assets impaired results undiscounted cash flow analysis indicate carrying value assets tested impairment recoverable record impairment charge write carrying value assets fair value using different judgments assumptions estimates could potentially arrive materially different fair value assets tested impairment may result impairment charge valuation equitybased compensation issue issued timebased vesting performancebased vesting stock options timebased vesting performancebased vesting restricted stock units restricted stock awards employees nonemployee directors options grant fair valued using blackscholes option model grant date amortized compensation expense vesting period option net forfeitures compensation related restricted stock units restricted stock awards based fair value award grant date amortized compensation expense vesting period award net forfeitures grantdate fair value timebased restricted stock units restricted stock awards determined using stock price grant date grantdate fair value performancebased restricted stock units determined using stock price grant date assuming 10x payout target however maximum 20x payout could achieved certain ebitdabased performance measures met utilizing blackscholes option pricing model determine fair values stock options certain assumptions made based subjective expectations subject change one assumptions would impact expense associated future grants key assumptions include historical stock price volatility riskfree interest rate expected life awards view limited amount time elapsed since reorganization volatility calculated based historical stock price volatility peer group lookback period equivalent expected term award valuation warrants pursuant plan effective date company issued two series warrants former holders predecessor companys common stock one series warrants expire december 15 2020 series warrants expire december 15 2021 warrant exercisable one share company’s common stock par value 001 issuance warrants recorded fair value determined using blackscholes option pricing model warrants equity classified issuance recorded increase additional paidin capital amount 38 million recent accounting developments asu 201618 november 2016 fasb issued asu 201618 statement cash flows topic 230 restricted cash standard provides guidance presentation restricted cash restricted cash equivalents statement cash flows restricted cash restricted cash equivalents included cash equivalents reconciling beginningofperiod endofperiod amounts shown statements cash flows amendments asu applied using retrospective transition method effective reporting periods beginning december 15 2017 early adoption permitted revised statement cash flows presentation restricted cash adoption asu 201618 expected impact consolidated financial statements asu 201615 august 2016 fasb issued asu 201615 “statement cash flows topic 230 classification certain cash receipts cash payments consensus fasb emerging issues task force asu 201615” clarifies entities classify certain cash receipts cash payments statement cash flows guidance also clarifies predominance principle applied cash receipts cash payments aspects one class cash flows guidance effective annual periods beginning december 15 2017 interim periods within annual periods early adoption permitted adoption asu 201615 expected impact consolidated financial statements asu 201613 june 2016 fasb issued asu 201613 measurement credit losses financial instruments” change companies measure credit losses financial assets certain instruments aren’t measured fair value net income standard replace today’s “incurred loss” approach “expected loss” model instruments measured amortized cost availableforsale debt securities entities required record allowances rather reduce carrying amount amendments update effective annual periods beginning december 15 2019 interim periods within annual periods early adoption permitted annual periods beginning december 15 2018 company evaluating effect asu 201613 consolidated financial statements asu 201609 march 2016 fasb issued asu 201609 compensationstock compensation topic 718 improvements employee sharebased payment accounting standard changes companies account certain aspects sharebased payment awards employees including accounting income taxes forfeitures statutory tax withholding requirements well classification statement cash flows company adopted accounting guidance january 1 2017 prospective basis elected account forfeitures equity awards occur adoption guidance material impact consolidated financial statements exception excess tax benefits tax deficiencies recognized income tax expense benefit income statement rather additional paid capital balance sheet classification statement cash flow operating activity rather financing activity asu 201602 february 2016 fasb issued asu 201602 leases topic 842 replace existing lease guidance standard intended provide enhanced transparency comparability requiring lessees record rightofuse assets corresponding lease liabilities balance sheet additional disclosure requirements include qualitative disclosures along specific quantitative disclosures objective enabling users financial statements assess amount timing uncertainty cash flows arising leases asu 201602 effective company annual reporting periods beginning december 15 2018 including interim periods within fiscal years early adoption permitted new standard required applied modified retrospective approach prior reporting period presented currently evaluating standard determine impact adoption consolidated financial statements asu 201409 may 2014 fasb issued asu 201409 revenue contracts customers topic 606 objective asu establish principles report useful information users financial statements nature amount timing uncertainty revenue contracts customers core principle recognize revenue depict transfer promised goods services customers amount reflects consideration entity expects entitled exchange goods services asu 201409 must adopted using either full retrospective method modified retrospective method formed project team implement standard team scoped identified relevant revenue streams documented procedures control changes required address impacts asu 201409 may business process training staff procedures controls went effect january 1 2018 implementation efforts included identification revenue streams similar contract structures performing detailed review key contracts revenue stream comparing historical policies practices new standard company’s services rental contracts principally charge day rate basis primarily shortterm nature therefore based assessment company concluded adoption asu material impact consolidated financial statements adopted new standard effective january 1 2018 using full retrospective method item 7aitem 7 management’s discussion analysis financial condition results operations following discussion analysis financial condition results operations read conjunction consolidated financial statements related notes thereto “item 8 financial statements supplementary data” discussion contains forwardlooking statements based upon current expectations subject uncertainty changes circumstances including identified “cautionary note regarding forwardlooking statements” actual results may differ materially expectations due potentially inaccurate assumptions known unknown risks uncertainties forwardlooking statements read conjunction disclosures “item 1a risk factors” overview provide full range well services major oil companies independent oil natural gas production companies produce maintain enhance flow oil natural gas throughout life well services include rigbased coiled tubingbased well maintenance workover services well completion recompletion services fluid management services fishing rental services ancillary oilfield services additionally certain rigs capable specialty drilling applications operate major oil natural gas producing regions continental united states previously operations canada russia sold second third quarters 2017 respectively demand services fluctuates primarily relation price anticipated price oil natural gas turn driven primarily supply demand oil natural gas generally supply commodities decreases demand increases service maintenance requirements increase oil natural gas producers attempt maximize productivity wells higher priced environment however lower oil natural gas price environment persisted since late 2014 demand service maintenance decreased oil natural gas producers decrease activity particular demand new existing field drilling completion work driven available investment capital work customers significantly curtailed capital spending beginning 2015 continuing 2019 types services easily “started” “stopped” oil natural gas producers generally tend less risk tolerant commodity prices low volatile may experience rapid decline demand well maintenance services compared demand types oilfield services lowerpriced environment fewer well service rigs needed completions activities generally associated drilling activity fourth quarter 2019 took steps reduce labor costs exit certain operations areas focus certain markets additionally took steps reduce overhead given reduced operating footprint believe improve operating cash flows reduce operating losses restructuring reverse stock split march 6 2020 closed previously announced restructuring capital structure indebtedness “restructuring” pursuant restructuring support agreement dated january 24 2020 “rsa” lenders prior term loan facility defined collectively holding 995 “supporting term lenders” principal amount company’s outstanding term loans pursuant connection rsa restructuring contemplated thereby among things effected following transactions changes capital structure governance • immediately prior closing restructuring completed 1for50 reverse stock split outstanding common stock result issued outstanding common stock decreased 20659654 413258 shares accordingly share per share information contained report restated retroactively show effect stock split • pursuant exchange agreements entered closing restructuring exchanged approximately 2419 million aggregate outstanding principal term loans together accrued interest thereon held supporting term lenders prior term loan facility 13362009 newly issued shares common stock representing 97 company’s outstanding shares giving effect issuance without giving effect dilution new warrants mip defined ii 20 million term loans new 512 million term loan facility “new term loan facility” pro rata basis based holdings term loans prior term loan facility • distributed common stockholders record february 18 2020 two series warrants “new warrants” • entered 512 million new term loan facility 30 million funded closing restructuring new cash proceeds supporting term lenders 20 million issued exchange term loans held supporting term lenders prior term loan facility described ii approximate 12 million senior secured term loan tranche respect term loans held lenders prior term loan facility supporting term lenders • entered new abl facility defined • adopted new management incentive plan “mip” representing 9 company’s outstanding shares giving effect issuance shares described • made certain changes company’s governance including changes board directors “board” amendments governing documents entry stockholders agreement defined supporting term lenders accordance rsa closing restructuring company amended restated certificate incorporation entered stockholders agreement “stockholders agreement” supporting term lenders order among things provide board seven members pursuant stockholders agreement board consists chief executive officer six members appointed various supporting term lenders specifically pursuant stockholders agreement supporting term lenders hold 25 company’s outstanding shares closing restructuring entitled nominate two directors supporting term lenders hold 10 25 company’s outstanding shares closing restructuring entitled nominate one director appointees nominees supporting term lenders directed appointed nominated soter capital llc “soter” must meet “independent director” requirements set forth section 303a nyse listed company manual addition pursuant stockholders agreement supporting term lenders entitled appoint nonvoting board observer subject specified ownership thresholds accordance rsa following closing restructuring company distributed stockholders record february 18 2020 new warrants new warrants issued two series fouryear exercise period first series entitles holders purchase aggregate 1669730 newly issued shares common stock representing 10 company’s common shares closing restructuring asexercised basis giving effect exercise new warrants subject dilution issuances mip aggregate exercise price first series new warrants 1923 determined based aggregate outstanding principal amount term loans prior term loan facility plus accrued interest thereon default rate closing restructuring second series new warrants entitles holders purchase aggregate 1252297 newly issued shares common stock representing 75 company’s common shares closing restructuring asexercised basis giving effect exercise new warrants subject dilution issuances mip aggregate strike price second series new warrants 2885 determined based product aggregate outstanding principal amount term loans prior term loan facility plus accrued interest thereon default rate closing restructuring multiplied ii 150 information new term loan facility new abl facility entered connection restructuring see “liquidity capital resources” business growth strategies focus production related services life oil gas well regular maintenance well bore artificial lift systems required maintain production offset natural production declines interventions well service rig required remove replace items needing repair perform activities would increase oil gas production current levels many instances interventions require additional assets services perform decline oil prices beginning 2014 believe number oil gas producers united states significantly curtailed recurring well maintenance activities believe recovery oil prices result oil gas producers making decision resume regular well maintenance activities additionally believe many instances since oil price decline began 2014 oil gas producers foregone regular maintenance activities additional demand services provided oil gas producers seeking improve production repairing wells key well positioned capitalize trends fleet active warm stacked well service rigs additional fishing rental service offerings provides continue invest either equipment acquisition grow take advantage dynamic growth population horizontal oil gas wells since revolution horizontal well drilling hydraulic fracturing began united states thousands new horizontal oil wells added many period 2012 2014 initial production wells declines first several years production wells placed artificial lift systems maintain production believe wells require periodic maintenance similar conventional oil well many instances due depth long lateral sections wells larger well service rig higher rated derrick capacity needed maintenance intend invest portion well service rig fleet needed rental equipment services either organic capital deployment acquisition capitalize trend growing population horizontal wells entered enter phase life regular maintenance required performance measures baker hughes us rig count data publicly available weekly basis often used coincident indicator overall exploration production “ep” company spending broader oilfield activity assessing overall activity us onshore oilfield service industry operate believe baker hughes us land drilling rig count best barometer ep companies’ capital spending resulting activity levels historically activity levels highly correlated us onshore capital spending ep company customers group 1 represents average monthly average prices years presented source us energy information administration bloomberg 2 source wwwbakerhughescom 3 source wwwaescnet internally measure activity levels well servicing operations primarily rig trucking hours generally capital ep companies increases demand services also rises resulting increased rig trucking services hours worked conversely activity levels decline due lower spending ep companies generally provide fewer rig trucking services results lower hours worked following table presents quarterly rig trucking hours 2017 2019 1 key’s us working days number weekdays quarter minus national holidays market business conditions outlook core businesses depend customers’ willingness ability make expenditures produce develop explore oil natural gas onshore us basins industry conditions influenced numerous factors oil natural gas prices supply demand oil natural gas domestic worldwide economic conditions political instability oil producing countries available supply demand services provide higher oil prices historically spurred additional demand services oil gas producers increase spending production maintenance drilling completion new wells 2019 oil prices began recover lows experienced late 2018 however many clients react favorably expected improved oil prices higher spending increases planned expenditures would increased demand services believe result customers’ managing activity achieve cash flow targets prioritization maintenance activities highest return opportunities due continued uncertainty around future commodity prices access capital lower spending customers increased competition primarily completion activities also resulted lower activity corresponding period 2018 fourth quarter 2019 took steps internally realign operations exited operations areas focus certain markets best competitive positions also took steps reduce overhead costs given reduced operating footprint received benefit changes fourth quarter 2019 expect see full benefit lower cost structure 2020 first quarter 2020 completed restructuring thereby reducing longterm debt future interest expense addition received cash proceeds restructuring improved cash position early march 2020 market experienced precipitous decline oil prices response oil demand concerns due economic impacts covid19 virus anticipated increases supply russia opec particularly saudi arabia impact oil price decline yet felt demand services expect response customers reduce activity period commodity price weakness also seek price reductions services current uncertainty gives us limited visibility near term demand services longer term however believe commodity prices stabilize continued aging horizontal wells increase demand well maintenance services customers seek maintain increase production accretive regular well maintenance economically supportive oil prices results operations consolidated results operations following tables set forth consolidated results operations financial information operating segment selected information years ended december 31 2019 2018 2017 years ended december 31 2019 2018 revenues year ended december 31 2019 decreased 1078 million 207 4139 million 5217 million year ended december 31 2018 due lower spending customers result lower oil prices market conditions resulted reduced customer activity additionally fourth quarter 2019 company strategically exited number noncore underperforming locations see “segment operating results years ended december 31 2019 2018” detailed discussion change revenues direct operating expenses direct operating expenses decreased 729 million 179 3335 million 806 revenues year ended december 31 2019 compared 4064 million 779 revenues year ended december 31 2018 decrease primarily result decrease employee compensation costs fuel expense repair maintenance expense due decrease activity levels see “segment operating results years ended december 31 2019 2018” detailed discussion change direct operating expenses depreciation amortization expense depreciation amortization expense decreased 257 million 311 570 million 138 revenues year ended december 31 2019 compared 826 million 158 revenues year ended december 31 2018 decrease primarily due certain assets becoming fully depreciated fourth quarter 2018 general administrative expenses general administrative expenses decreased 03 million 03 913 million 221 revenues year ended december 31 2019 compared 916 million 176 revenues year ended december 31 2018 decrease primarily due lower employee compensation costs due reduced staffing levels partially offset 46 million severance costs 40 million expenses related restructuring debt interest expense net amounts capitalized interest expense increased 14 million 355 million 86 revenues year ended december 31 2019 compared 342 million 65 revenues year ended december 31 2018 increase primarily related increase variable interest rate longterm debt income net year ended december 31 2019 recognized income net 20 million compared 24 million year ended december 31 2018 table presents comparative detailed information combined loss net december 31 2019 2018 income tax benefit income tax benefit 40 million 39 effective rate pretax loss 1014 million year ended december 31 2019 compared income tax benefit 20 million 22 effective rate pretax loss 908 million year ended december 31 2018 effective tax rates differ applicable us statutory rate 21 including expenses subject statutorily imposed limitations meals entertainment expenses affect book income affect taxable income discrete tax adjustments valuation allowances deferred tax assets years ended december 31 2018 2017 revenues year ended december 31 2018 increased 855 million 196 5217 million 4362 million year ended december 31 2017 due increase spending customers reacted improving commodity prices ability increase prices services internationally revenue 2018 result sale operations canada russia see “segment operating results years ended december 31 2018 2017” detailed discussion change revenues direct operating expenses direct operating expenses increased 741 million 223 4064 million 779 revenues year ended december 31 2018 compared 3323 million 762 revenues year ended december 31 2017 increase primarily result increase employee compensation costs fuel expense repair maintenance expense due increase activity levels respect increase repair maintenance expense due costs associated making idle equipment ready work decrease gain sale assets related sale frac stack equipment well testing services business sold second quarter 2017 see “segment operating results years ended december 31 2018 2017” detailed discussion change direct operating expenses depreciation amortization expense depreciation amortization expense decreased 19 million 22 826 million 158 revenues year ended december 31 2018 compared 845 million 194 revenues year ended december 31 2017 decrease primarily due sale businesses former international segment frac stack equipment welltesting services business 2017 general administrative expenses general administrative expenses decreased 237 million 206 916 million 176 revenues year ended december 31 2018 compared 1153 million 264 revenues year ended december 31 2017 decrease primarily due lower employee compensation costs due reduced staffing levels decrease legal settlement expenses impairment expense year ended december 31 2018 record impairment year ended december 31 2017 recorded 02 million impairment reduce carrying value assets related liabilities russian business unit sold third quarter 2017 fair market value reorganization items net year ended december 31 2018 recorded zero reorganization items compared 15 million year ended december 31 2017 primarily consisting professional fees incurred connection emergence voluntary reorganization 2016 interest expense net amounts capitalized interest expense increased 24 million 342 million 65 revenues year ended december 31 2018 compared 318 million 73 revenues year ended december 31 2017 increase primarily related increase variable interest rate longterm debt income loss net year ended december 31 2018 recognized income net 24 million compared 72 million year ended december 31 2017 income net year ended december 31 2017 includes 47 million gain sale related russian subsidiary disposed third quarter 2017 table presents comparative detailed information combined loss net december 31 2018 2017 income tax expense benefit income tax benefit 20 million 22 effective rate pretax loss 908 million year ended december 31 2018 compared income tax benefit 17 million 14 effective rate pretax loss 1223 million year ended december 31 2017 effective tax rates 2018 2017 periods differ us statutory rate 21 35 respectively due number factors including mix profit loss domestic international taxing jurisdictions impact permanent items including expenses subject statutorily imposed limitations meals entertainment expenses affect book income affect taxable income discrete tax adjustments valuation allowances deferred tax assets tax expense benefit recognized uncertain tax positions us enacted law tax cuts jobs act “2017 tax act” december 22 2017 tax act comprehensive tax reform legislation among things contains significant changes corporate taxation including permanent reduction corporate income tax rate 35 21 imposing mandatory onetime tax accumulated earnings foreign subsidiaries partial limitation deductibility business interest expense limitation net operating losses 80 taxable income year shift us taxation multinational corporations tax worldwide income partial territorial system along rules create new us minimum tax earnings foreign subsidiaries segment operating results years ended december 31 2019 2018 following table shows operating results reportable segments years ended december 31 2019 2018 thousands year ended december 31 2019 year ended december 31 2018 rig services revenues rig services segment decreased 464 million 156 2505 million year ended december 31 2019 compared 2970 million year ended december 31 2018 decrease segment primarily due lower spending customers result lower oil prices market conditions resulted reduced customer activity operating expenses rig services segment 2347 million year ended december 31 2019 represented decrease 427 million 154 compared 2774 million year ended december 31 2018 decrease primarily result decrease employee compensation costs fuel expense repair maintenance expense due decrease activity levels decrease depreciation expense fishing rental services revenues fishing rental services segment decreased 102 million 157 545 million year ended december 31 2019 compared 647 million year ended december 31 2018 decrease segment primarily due lower spending customers oil gas well drilling completion result lower oil prices market conditions resulted reduced customer activity operating expenses fishing rental services segment 620 million year ended december 31 2019 represented decrease 114 million 155 compared 733 million year ended december 31 2018 decrease primarily result decrease employee compensation costs repair maintenance expense due decrease activity levels decrease depreciation expense coiled tubing services revenues coiled tubing services segment decreased 330 million 465 380 million year ended december 31 2019 compared 710 million year ended december 31 2018 decrease segment primarily due lower spending customers oil gas well drilling completion result lower oil prices increase competition market conditions resulted reduced customer activity reduction price received services operating expenses coiled tubing services segment 418 million year ended december 31 2019 represented decrease 240 million 365 compared 658 million year ended december 31 2018 decrease primarily result decrease employee compensation costs fuel expense repair maintenance expense due decrease activity levels fluid management services revenues fluid management services segment decreased 182 million 204 708 million year ended december 31 2019 compared 890 million year ended december 31 2018 decrease segment primarily due lower spending customers oil gas well drilling completion result lower oil prices market conditions resulted reduced customer activity additionally fourth quarter 2019 company strategically exited number noncore underperforming locations operating expenses fluid management services segment 704 million year ended december 31 2019 represented decrease 274 million 280 compared 979 million year ended december 31 2018 decrease primarily result decrease employee compensation costs fuel expense repair maintenance expense due decrease activity levels decrease depreciation expense functional support operating expenses functional support segment increased 66 million 100 728 million 176 consolidated revenues year ended december 31 2019 compared 662 million 127 consolidated revenues year ended december 31 2018 increase primarily due increase legal settlements professional fee partially offset lower employee compensation costs due reduced staffing levels decrease facilities costs legal settlements years ended december 31 2018 2017 following table shows operating results reportable segments years ended december 31 2018 2017 thousands year ended december 31 2018 year ended december 31 2017 rig services revenues rig services segment increased 481 million 193 2970 million year ended december 31 2018 compared 2488 million year ended december 31 2017 increase segment primarily due increase completion production spending customers reacted improving commodity prices ability increase prices services operating expenses rig services segment 2774 million year ended december 31 2018 represented increase 250 million 99 compared 2525 million year ended december 31 2017 increase primarily result increase employee compensation costs fuel expense repair maintenance expense due increase activity levels increase wages employees fishing rental services revenues fishing rental services segment increased 55 million 93 647 million year ended december 31 2018 compared 592 million year ended december 31 2017 increase revenue segment primarily due increase completion production spending customers react improving commodity prices ability increase prices services increase partially offset sale frac stack welltesting services business sold 2017 operating expenses fishing rental services segment 733 million year ended december 31 2018 represented increase 217 million 420 compared 517 million year ended december 31 2017 increase primarily result increase employee compensation costs fuel expense repair maintenance expense due increase activity levels increase wages employees coiled tubing services revenues coiled tubing services segment increased 291 million 695 710 million year ended december 31 2018 compared 419 million year ended december 31 2017 increase segment primarily due increase completion spending customers reacted improving commodity prices ability increase prices services operating expenses coiled tubing services segment 658 million year ended december 31 2018 represented increase 256 million 636 compared 402 million year ended december 31 2017 increase primarily result increase employee compensation costs fuel expense repair maintenance expense due increase activity levels increase wages employees fluid management services revenues fluid management services segment increased 83 million 103 890 million year ended december 31 2018 compared 807 million year ended december 31 2017 increase segment primarily due increase spending customers reacted improving commodity prices ability increase prices services operating expenses fluid management services segment 979 million year ended december 31 2018 represented decrease 24 million 24 compared 1003 million year ended december 31 2017 decrease primarily result decrease legal settlement expenses partially offset increase employee compensation costs due increase activity levels increase wages employees international sold remaining businesses former international segment canadian subsidiary russian subsidiary second third quarters 2017 respectively accordingly 2018 longer international segment revenues international segment year ended december 31 2017 56 million operating expenses international segment 106 million expenses related employee compensation costs equipment expense 02 million impairment reduce carrying value assets related liabilities russian business unit fair market value functional support operating expenses functional support segment decreased 110 million 143 662 million 127 consolidated revenues year ended december 31 2018 compared 772 million 177 consolidated revenues year ended december 31 2017 decrease primarily due lower employee compensation costs due reduced staffing levels decrease legal settlement expenses liquidity capital resources effective march 6 2020 completed restructuring capital structure indebtedness among things reduced outstanding debt 2429 million december 31 2019 512 million closing restructuring information restructuring see “restructuring reverse stock split” require capital fund ongoing operations including maintenance expenditures existing fleet equipment organic growth initiatives investments acquisitions debt service payments obligations following restructuring believe internally generated cash flows operations current reserves cash availability new abl facility sufficient finance cash requirements current future operations budgeted capital expenditures debt service obligations next twelve months current financial condition liquidity december 31 2019 working capital 07 million compared 550 million december 31 2018 working capital decreased 2019 primarily result decrease cash equivalents accounts receivable immediately following closing restructuring working capital 75 million cash flows cash used operating activities 290 million 18 million years ended december 31 2019 2018 respectively cash used operating activities years ended december 31 2019 primarily related net loss adjusted noncash items cash used investing activities 37 million year ended december 31 2019 compared cash provided investing activities 221 million ended december 31 2018 cash outflows periods consisted capital expenditures capital expenditures primarily related addition new equipment ongoing maintenance equipment cash inflows periods consisted proceeds sales fixed assets cash used financing activities 29 million 28 million years ended december 31 2019 2018 respectively financing cash outflows periods primarily relate repayment longterm debt following table summarizes cash flows years ended december 31 2019 2018 2017 thousands debt service december 31 2019 annual maturities indebtedness consisting prior term loan facility yearend follows thousands subsequent december 31 2019 debt table substantially exchanged shares common stock pursuant restructuring new abl facility march 6 2020 company key energy services llc borrowers “abl borrowers” entered amendment 3 company’s existing abl facility dated december 15 2016 amended “new abl facility” financial institutions party thereto time lenders “abl lenders” bank america na administrative agent collateral agent “abl agent” abl lenders new abl facility provides aggregate commitments abl lenders 70 million mature earlier x april 5 2024 181 days prior scheduled maturity date company’s term loan facility scheduled maturity date company’s material debt aggregate principal amount exceeding 15 million new abl facility provides abl borrowers ability borrow aggregate principal amount equal lesser aggregate revolving commitments effect ii sum 85 value eligible accounts receivable plus b 80 value eligible unbilled accounts receivable subject limit equal greater x 30 million 25 commitments amount may borrowed new abl facility subject increase reduction based certain segregated cash reserves provided new abl facility addition percentages accounts receivable unbilled accounts receivable included calculation described subject reduction extent certain bad debt writedowns dilutive items provided new abl facility borrowings new abl facility bear interest abl borrowers’ option per annum rate equal libor 30 60 90 180 consent abl lenders 360 days plus applicable margin varies 275 325 depending abl borrowers’ fixed charge coverage ratio time ii base rate equal sum greatest x prime rate federal funds rate plus 050 z 30day libor plus 10 plus b applicable margin varies 175 225 depending abl borrowers’ fixed charge coverage ratio time new abl facility provides event libor becomes unascertainable requested interest period otherwise becomes unavailable replaced benchmark interest rates company abl agent may amend new abl facility purpose replacing libor one sofrbased rates another alternate benchmark rate giving consideration general practice similar us dollar denominated syndicated credit facilities addition new abl facility provides unused line fees 05 0375 per year depending utilization letter credit fees certain factors new abl facility may future guaranteed certain company’s existing future subsidiaries “abl guarantors” together abl borrowers “abl loan parties” secure obligations new abl facility abl loan parties granted grant applicable abl agent firstpriority security interest benefit abl lenders present future accounts receivable inventory related assets proceeds foregoing “abl priority collateral” addition obligations abl loan parties abl facility secured secondpriority liens term priority collateral described “new term loan facility” revolving loans new abl facility may voluntarily prepaid whole part without premium penalty subject breakage similar costs new abl facility contains certain affirmative negative covenants including covenants restrict ability abl loan parties take certain actions including among things subject certain significant exceptions incurrence debt granting liens making investments entering transactions affiliates payment dividends sale assets new abl facility also contains requirement abl borrowers comply certain periods fixed charge coverage ratio 100 march 6 2020 borrowings outstanding new abl facility 363 million letters credit outstanding borrowing capacity 136 million available subject covenant constraints new abl facility new term loan facility march 6 2020 company entered amendment restatement agreement supporting term lenders cortland capital market services llc cortland products corp agent “term agent” amended restated prior term loan facility among company borrower certain subsidiaries company named guarantors therein financial institutions party thereto time lenders term agent amended restated amendment restatement agreement “new term loan facility” prior closing restructuring approximately 2431 million aggregate principal amount term loans outstanding prior term loan facility following closing restructuring new term loan facility comprised 30 million new money term loans funded supporting term lenders 20 million amended term loans issued exchange existing term loans held supporting term lenders collectively “new term loans” ii approximate 12 million senior secured term loan tranche respect existing term loans held lenders supporting term lenders “continuing term loans” new term loan facility mature august 28 2025 respect new term loans december 15 2021 respect continuing term loans maturity date may company’s request extended one term loan lenders pursuant terms new term loan facility new term loans bear interest per annum rate equal libor six months plus 1025 company option pay interest kind annual rate libor plus 1225 outstanding principal amount new term loans first two years following closing restructuring continuing term loans bear interest per annum rate equal libor one two three six consent term loan lenders 12 months company option pay interest kind 100 basis points per annum interest due continuing term loans new term loan facility guaranteed certain company’s existing future subsidiaries “term loan guarantors” together company “term loan parties” ensure obligations new term loan facility term loan parties granted grant applicable term agent firstpriority security interest benefit term loan lenders substantially term loan party’s assets certain excluded assets abl priority collateral “term priority collateral” addition obligations term loan parties new term loan facility secured secondpriority liens abl priority collateral described “abl facility” new term loans may prepaid company’s option subject payment prepayment premium may waived lenders holding new term loans new term loan facility representing least twothirds aggregate outstanding principal amount new term loans certain circumstances provided new term loan facility prepayment made prior first anniversary closing restructuring prepayment premium equal 3 principal amount new term loans prepaid prepayment made first anniversary second anniversary closing restructuring prepayment premium equal 2 principal amount new term loans prepaid prepayment made second anniversary third anniversary closing restructuring prepayment premium equal 1 principal amount new term loans prepaid prepayment premium thereafter company required make principal payments respect continuing term loans amount 3125 per quarter commencing quarter ending march 31 2020 required pay 1190625 maturity date continuing term loans addition pursuant new term loan facility company must prepay offer prepay applicable term loans net cash proceeds certain debt incurrences asset sales excess cash flow receipt extraordinary cash proceeds eg tax insurance upon certain change control transactions subject case certain exceptions new term loan facility contains certain affirmative negative covenants including covenants restrict ability term loan parties take certain actions including among things subject certain significant exceptions incurrence debt granting liens making investments entering transactions affiliates payment dividends sale assets new term loan facility also contains financial covenant requiring company maintain liquidity defined new term loan facility less 10 million last day fiscal quarter subject certain exceptions cure rights offbalance sheet arrangements december 31 2019 currently offbalance sheet arrangements reasonably likely material current future effect financial condition revenues expenses results operations liquidity capital expenditures capital resources capital expenditures year ended december 31 2019 capital expenditures totaled 183 million primarily related ongoing replacement rig service fleet coiled tubing units fluid transportation equipment rental equipment capital expenditure plan 2020 contemplates spending 15 million 20 million subject market conditions primarily related addition new equipment needed ongoing maintenance equipment capital expenditure program 2020 subject market conditions including activity levels commodity prices industry capacity specific customer needs well cash flows including cash generated asset sales focus 2020 maximization current equipment fleet may choose increase capital expenditures 2020 expand presence market currently anticipate funding 2020 capital expenditures combination cash hand operating cash flow proceeds sales assets operating cash flows activity levels prove insufficient fund currently planned capital spending levels management expects adjust capital spending plans accordingly may also incur capital expenditures strategic investments acquisitions critical accounting policies accounting department responsible development application accounting policies internal control procedures reports chief financial officer process preparing financial statements conformity gaap requires us make certain estimates judgments assumptions may affect reported amounts assets liabilities disclosures contingencies balance sheet date amounts revenues expenses recognized reporting period presentation statement cash flows may record materially different amounts estimates judgments assumptions change actual results differ however analyze estimates assumptions judgments based historical experience various factors believe reasonable circumstances identified following critical accounting policies require significant amount estimation judgment accurately present financial position results operations cash flows • revenue recognition • estimate reserves workers’ compensation vehicular liability selfinsurance • contingencies • income taxes • estimates depreciable lives • valuation tangible finitelived intangible assets • valuation equitybased compensation revenue recognition recognize revenue following criteria met contract customer identified ii performance obligations contract identified iii transaction price determined iv transaction price allocated performance obligations v revenue recognized performance obligations satisfied • identifying contract customer ensures understanding company customer specific nature terms transaction finalized • inception contract company assesses goods services promised contract customer identifies performance obligation promise transfer customer either good service bundle goods services distinct ii series distinct goods services substantially pattern transfer customer • transaction price amount consideration company expects entitled exchange transferring promised goods services customer excluding amounts collected behalf third parties transaction price may include fixed amounts variable amounts nature variable amounts transaction price inherent uncertainty amount ultimately expected realized determinable outset contract however company shall estimate amount variable consideration contract inception subject certain limitations • separate performance obligations identified transaction price determined company allocates transaction price performance obligations generally done proportion standalone selling prices result discount within contract generally allocated proportionally separate performance obligations contract • revenue recognized satisfies identified performance obligation transferring promised good service customer good service considered transferred customer obtains control typical business contracts customers may include multiple performance obligations arrangements allocate revenues performance obligation based relative standalone selling price generally determine standalone selling prices based prices charged customers using expected costplus margin combined products services within contract account individual products services separately distinct ie product service separately identifiable items contract customer benefit resources readily available customer consideration including discounts allocated separate products services within contract based prices separately sell services items sold separately estimate standalone selling prices using expected costplus margin approach workers’ compensation vehicular liability selfinsurance occurrence event fully insured indemnified failure customer insurer meet indemnification insurance obligations could result substantial losses addition insurance may available cover risks available might able obtain insurance without substantial increase premiums possible addition higher premiums future insurance coverage may subject higher deductibles coverage restrictions estimate liability arising uninsured potentially insured events including workers’ compensation employer’s liability vehicular liability general liability record accruals consolidated financial statements reserves related claims based specific facts circumstances insured event past experience similar claims trend analysis adjust loss estimates calculation accruals based upon actual claim settlements reported claims loss estimates individual claims adjusted based upon actual claim judgments settlements reported claims actual outcome claims could differ significantly estimated amounts changes assumptions estimates could potentially negative impact earnings primarily selfinsured physical damage property rigs equipment automobiles due large deductibles selfinsurance contingencies periodically required record loss contingencies relate lawsuits claims proceedings taxrelated audits normal course operations consolidated balance sheet record loss contingency matters probable liability incurred amount loss reasonably estimated periodically review loss contingencies ensure recorded appropriate liabilities balance sheet adjust liabilities based estimates judgments made management respect likely outcome matters including effect applicable insurance coverage litigation matters estimates judgments could change based new information changes laws regulations changes management’s plans intentions outcome legal proceedings settlements factors actual results could vary materially reserves record liabilities environmental assessment indicates site remediation efforts probable costs reasonably estimated measure environmental liabilities based part relevant past experience currently enacted laws regulations existing technology sitespecific costs costsharing arrangements recognition joint several liability based upon best estimate final prorata share liability low amount range estimates assumptions involve judgments estimates management changes assumptions new information could lead increases decreases ultimate liability changes recognized immediately earnings record legal obligations retire tangible longlived assets balance sheet liabilities recorded discount incur liability significant judgment involved estimating future cash flows associated obligations well ultimate timing cash flows estimates amount timing cash flows change may material impact results operations income taxes account deferred income taxes using asset liability method provide income taxes significant temporary differences management determines current tax liability well taxes incurred result current operations yet deferred future periods current taxes payable represent liability related income tax returns current year net deferred tax expense benefit represents change balance deferred tax assets liabilities reported consolidated balance sheets deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled management makes certain assumptions timing temporary tax differences differing treatment certain items tax accounting purposes whether differences permanent final determination tax liability involves interpretation local tax laws tax treaties related authorities jurisdiction well significant use estimates assumptions regarding scope future operations results achieved timing nature income earned expenditures incurred record valuation allowances reduce deferred tax assets determine likely eg likelihood 50 deferred tax assets realized future periods assess likelihood use estimates judgment regarding future taxable income well jurisdiction taxable income generated determine whether valuation allowance required ultimate realization deferred tax assets depends ability generate sufficient taxable income appropriate character related jurisdiction future evidence supporting ability include current financial position results operations actual forecasted results reversal deferred tax liabilities tax planning strategies well current forecasted business economics industry additionally record uncertain tax positions financial statements net recognizable amount based amount management deems likely sustained upon ultimate settlement tax authorities domestic international tax jurisdictions operate estimates assumptions regarding current deferred tax items inaccurate modified changes could potentially material negative impacts earnings estimates depreciable lives use estimated depreciable lives longlived assets rigs heavyduty trucks trailers compute depreciation expense estimate future asset retirement obligations conduct impairment tests base estimates depreciable lives number factors environment assets operate industry factors including forecasted prices competition assumption provide appropriate amount capital expenditures asset operation maintain economical operation asset prevent untimely demise scrap useful lives intangible assets determined years expect assets generate benefit based legal contractual expectations depreciate operational assets depreciable lives salvage value generally 10 acquisition cost recognize gain loss upon ultimate disposal asset based difference carrying value asset disposal date proceeds receive connection disposal periodically analyze estimates depreciable lives fixed assets determine depreciable periods salvage value continue appropriate also analyze useful lives salvage value events conditions occur could shorten remaining depreciable life asset review depreciable periods salvage values reasonableness given current conditions result depreciation expense based upon estimates depreciable lives fixed assets salvage value economic factors require management make significant judgments estimates determine depreciable lives different originally estimated depreciation expense may increase decrease impairments carrying values fixed assets may result could negatively impact earnings valuation tangible finitelived intangible assets fixed assets finitelived intangibles tested potential impairment circumstances events indicate possible impairment may exist circumstances events referred “trigger events” examples trigger events include limited adverse change market conditions significant decrease benefits derived acquired business change use asset significant disposal particular asset class trigger event occurs impairment test performed based undiscounted cash flow analysis perform impairment test make judgments estimates assumptions regarding longterm forecasts revenues expenses relating assets subject review market conditions energy prices estimated depreciable lives assets discount rate assumptions legal factors impact operations significant effect estimates use determine whether assets impaired results undiscounted cash flow analysis indicate carrying value assets tested impairment recoverable record impairment charge write carrying value assets fair value using different judgments assumptions estimates could potentially arrive materially different fair value assets tested impairment may result impairment charge valuation equitybased compensation issue issued timebased vesting performancebased vesting stock options timebased vesting performancebased vesting restricted stock units restricted stock awards employees nonemployee directors options grant fair valued using blackscholes option model grant date amortized compensation expense vesting period option net forfeitures compensation related restricted stock units restricted stock awards based fair value award grant date amortized compensation expense vesting period award net forfeitures grantdate fair value timebased restricted stock units restricted stock awards determined using stock price grant date grantdate fair value performancebased restricted stock units determined using stock price grant date assuming 10x payout target however maximum 20x payout could achieved certain ebitdabased performance measures met utilizing blackscholes option pricing model determine fair values stock options certain assumptions made based subjective expectations subject change one assumptions would impact expense associated future grants key assumptions include historical stock price volatility riskfree interest rate expected life awards view limited amount time elapsed since reorganization volatility calculated based historical stock price volatility peer group lookback period equivalent expected term award valuation warrants upon emergence bankruptcy december 15 2016 company issued two series warrants former holders predecessor company’s common stock one series warrants expire december 15 2020 series warrants expire december 15 2021 warrant exercisable one share company’s common stock par value 001 issuance warrants recorded fair value determined using blackscholes option pricing model warrants equity classified issuance recorded increase additional paidin capital amount 38 million recent accounting developments asu 201613 june 2016 fasb issued asu 201613 financial instrumentscredit losses topic 326 measurement credit losses financial instruments change companies measure credit losses financial assets certain instruments aren’t measured fair value net income standard replace today’s “incurred loss” approach “expected loss” model instruments measured amortized cost availableforsale debt securities entities required record allowances rather reduce carrying amount amendments update effective annual periods beginning december 15 2019 interim periods within annual periods adoption asu 201613 expected material impact consolidated financial statements asu 201602 february 2016 fasb issued asu 201602 leases topic 842 replaced existing lease guidance new standard intended provide enhanced transparency comparability requiring lessees record rightofuse assets corresponding lease liabilities balance sheet additional disclosure requirements include qualitative disclosures along specific quantitative disclosures objective enabling users financial statements assess amount timing uncertainty cash flows arising leases asu 201602 effective company annual reporting periods beginning december 15 2018 including interim periods within fiscal years early adoption permitted part assessment created additional internal controls financial reporting made changes business practices processes related asu key elected new prospective “comparatives 840” transition method defined asu 201811 adopted new standard january 1 2019 part adoption company elected several practical expedients contracts existed time adoption allowed company reassess whether existing contracts contained leases classification lease ie operating leases remain operating leases initial direct costs land easement arrangements part adoption company also made several accounting policy elections allow company apply standard short term leases well choose separate nonlease components lease components instead account components single lease component adoption standard impact consolidated statement operations consolidated statement cash flows immaterial impact consolidated balance sheet right use assets obtained exchange operating leases liabilities 41 million time adoption standard item 7aitem 7 management’s discussion analysis financial condition results operations following discussion analysis financial condition results operations read conjunction consolidated financial statements related notes thereto “item 8 financial statements supplementary data” discussion contains forwardlooking statements based upon current expectations subject uncertainty changes circumstances including identified “cautionary note regarding forwardlooking statements” actual results may differ materially expectations due potentially inaccurate assumptions known unknown risks uncertainties forwardlooking statements read conjunction disclosures “item 1a risk factors” overview provide full range well services major oil companies foreign national oil companies independent oil natural gas production companies produce maintain enhance flow oil natural gas throughout life well services include rigbased coiled tubingbased well maintenance workover services well completion recompletion services fluid management services fishing rental services ancillary oilfield services additionally certain rigs capable specialty drilling applications operate major oil natural gas producing regions continental united states operations mexico russia addition technology development control systems business based canada second half 2015 ceased operations colombia ecuador middle east demand services fluctuates primarily relation price anticipated price oil natural gas turn driven primarily supply demand oil natural gas generally supply commodities decreases demand increases service maintenance requirements increase oil natural gas producers attempt maximize productivity wells higher priced environment however lower oil natural gas price environment persisted since late 2014 demand service maintenance decreased oil natural gas producers decrease activity particular demand new existing field drilling completion work driven available investment capital work customers significantly curtailed capital spending 2015 2016 types services easily “started” “stopped” oil natural gas producers generally tend less risk tolerant commodity prices low volatile may experience rapid decline demand well maintenance services compared demand types oilfield services lowerpriced environment fewer well service rigs needed completions activities generally associated drilling activity business growth strategies focus horizontal well services past several years number horizontal wells particularly horizontal oil wells drilled us increased significantly horizontal wells tend involve higher degree service intensity associated drilling completion believe ultimately maintenance required lifetime well believe many wells entering phase life maintenance services required stem declines maintain production believe future periods market maintenance installed base horizontal oil wells grow capitalize growing market segment built acquired new equipment including capable rigs coiled tubing units upgraded existing equipment capable providing services integral completion maintenance horizontal wellbores acquired frac stack equipment used support completion horizontal wellbore also expanded service offerings unconventional shale regions horizontal activity prevalent including bakken shale eagle ford shale others horizontal wells become prevalent permian basin expanded operations assets best suited horizontal well maintenance service offerings market additionally invested assets used service customer’s well site needs also strengthened sales service efforts better identify meet needs customers intend continue focus expansion horizontal well service offerings particularly production maintenance related services existing markets new markets united states navigate market uncertainties operate cyclical business customers’ spending largely driven prices received sale oil natural gas production current depressed commodity price environment demand services price receive services fallen significantly competition remaining market activity increased response stacked older costly operate equipment reduced amount capital invested business growth replacement equipment also taken steps lower cost operate reducing headcount costs labor additionally taken steps reduce fixed costs business continue actions taken effort preserve liquidity pending increase activity levels exit operations outside north america evaluating market opportunities presented secular trend aging horizontal wellbores options allocation company’s capital board directors management refined company’s strategy focus north american production enhancement second quarter 2015 began evaluation alternatives took steps exit markets participate outside north america either sale relocation assets sold subsidiary bahrain oman colombia ecuador sold property plant equipment net inventories ceased operations currently discussion sell russian subsidiary expect sale occur first half 2016 performance measures baker hughes us rig count data publicly available weekly basis often used coincident indicator overall exploration production “ep” company spending broader oilfield activity assessing overall activity us onshore oilfield service industry operate believe baker hughes us land drilling rig count best barometer ep companies capital spending resulting activity levels historically activity levels highly correlated us onshore capital spending ep company customers group 1 represents average monthly average prices years presented source us energy information administration bloomberg 2 source wwwbakerhughescom internally measure activity levels well servicing operations primarily rig trucking hours generally capital spending ep companies increases demand services also rises resulting increased rig trucking services hours worked conversely activity levels decline due lower spending ep companies generally provide fewer rig trucking services results lower hours worked following table presents quarterly rig trucking hours 2013 2015 1 keys us working days number weekdays quarter minus national holidays market conditions outlook market conditions year ended december 31 2015 core businesses depend customers’ willingness make expenditures produce develop explore oil natural gas industry conditions influenced numerous factors supply demand oil natural gas domestic worldwide economic conditions political instability oil producing countries fourth quarter continued deterioration oil gas industry persistently low commodity prices caused oilfield service activity continue decline additionally pronounced seasonal reduction activity due holidays fewer daylight hours adverse weather conditions contributed activity declines quarter ep companies continued scale back capital spending order preserve liquidity operating expenditures key’s core production services business relies also scaled economics supporting spend eroded current commodity prices key aggressively reshaped organizational structure reduced cost structure reflect realities today’s market company moved closer exiting markets participates outside north america physical assets colombia ecuador bahrain oman sold relocated us pertains company’s business russia continue work potential buyers finalize due diligence negotiate final transaction finalized sale russia business remaining operations outside us limited mexico subsidiary canada market outlook domestic oil gas complex facing challenge achieve returnaccretive cash flow face low commodity prices believe due deferred maintenance backlog well maintenance building though remains unclear set factors drive customers resume normal production maintenance activity levels however believe customers must work wells maintain production base believe economics associated work make sense oil price lower enjoyed customers peak recent drilling cycle believe commitment production enhancement activities eventually provide meaningful opportunity us look first quarter outlook us oilfield services landscape remains challenged company continue identify ways streamline cost structure continue explore ways enhance liquidity position company internally externally results operations consolidated results operations following table shows consolidated results operations years ended december 31 2015 2014 2013 years ended december 31 2015 2014 year ended december 31 2015 operating loss 10 billion compared operating loss 2039 million year ended december 31 2014 loss per share 586 year ended december 31 2015 compared 116 loss per share year ended december 31 2014 revenues year ended december 31 2015 decreased 6350 million 445 7923 million 14 billion year ended december 31 2014 due lower spending customers result lower oil prices market conditions resulted reduced customer activity reduction price received services internationally lower revenue result reduced customer activity russia colombia exit operations middle east south america see “segment operating results years ended december 31 2015 2014” detailed discussion change revenues direct operating expenses direct operating expenses decreased 3450 million 326 7146 million 902 revenues year ended december 31 2015 compared 106 billion 742 revenues year ended december 31 2014 decrease primarily related decrease employee compensation costs fuel expense repair maintenance expense sought reduce cost structure result lower activity levels see “segment operating results years ended december 31 2015 2014” detailed discussion change direct operating expenses depreciation amortization expense depreciation amortization expense decreased 205 million 102 1803 million 228 revenues year ended december 31 2015 compared 2007 million 141 revenues year ended december 31 2014 decrease primarily attributable impairment certain fixed assets decreases capital expenditures lower amortization expense due impairment certain intangible assets general administrative expenses general administrative expenses decreased 470 million 188 2026 million 256 revenues year ended december 31 2015 compared 2496 million 175 revenues year ended december 31 2014 decrease primarily due lower employee compensation costs due reduced staffing levels reduction wages lower expenses related fcpa investigations impairment expense year ended december 31 2015 recorded 5827 million impairment goodwill 511 million impairment fixed assets held used 15 million impairment intangible assets longer used 868 million impairment fixed assets reduce carrying value assets held sale fair market value year ended december 31 2014 recorded 287 million impairment goodwill tradenames russian business unit included international reporting segment 734 million impairment goodwill fixed assets fishing rental services segment 191 million impairment goodwill coiled tubing segment interest expense net amounts capitalized interest expense increased 196 million 738 million 93 revenues year ended december 31 2015 compared 542 million 38 revenues year ended december 31 2014 increase primarily related increased borrowings interest rate new term loan facility year ended december 31 2015 writeoff remaining 08 million unamortized deferred financing costs related 2011 credit facility second quarter 2015 loss net year ended december 31 2015 recognized loss net 94 million compared loss net 10 million year ended december 31 2014 78 million allowance collectibility notes receivable related sale operations argentina recorded year ended december 31 2015 foreign exchange loss relates us dollardenominated transactions foreign locations fluctuations exchange rates local currencies us dollar table presents comparative detailed information loss net december 31 2015 2014 income tax benefit income tax benefit continuing operations 1928 million 174 effective rate pretax loss 11 billion year ended december 31 2015 compared income tax benefit 805 million 311 effective rate pretax loss 2591 million year ended december 31 2014 effective tax rates periods differ us statutory rate 35 due number factors including mix profit loss domestic international taxing jurisdictions impact permanent items including goodwill impairment expense expenses subject statutorily imposed limitations meals entertainment expenses affect book income affect taxable income discrete tax adjustments valuation allowances deferred tax assets tax expense benefit recognized uncertain tax positions years ended december 31 2014 2013 year ended december 31 2014 operating loss 2039 million compared operating income 302 million year ended december 31 2013 loss per share 116 year ended december 31 2014 compared 014 loss per share year ended december 31 2013 revenues year ended december 31 2014 decreased 1643 million 103 14 billion 16 billion year ended december 31 2013 primarily due overall lower activity us result competitive pressure reduced customer activity reduced customer activity mexico resulted reduced revenue international segment see “segment operating results years ended december 31 2014 2013” detailed discussion change revenues direct operating expenses direct operating expenses decreased 548 million 49 106 billion 742 revenues year ended december 31 2014 compared 111 billion 700 revenues year ended december 31 2013 result lower variable costs cost attributable direct labor equipment due reduced activity levels see “segment operating results years ended december 31 2014 2013” detailed discussion change direct operating expenses depreciation amortization expense depreciation amortization expense decreased 246 million 109 2007 million 141 revenues year ended december 31 2014 compared 2253 million 142 revenues year ended december 31 2013 decrease primarily attributable decreases capital expenditures lower amortization related intangible assets general administrative expenses general administrative expenses increased 279 million 126 2496 million 175 revenues year ended december 31 2014 compared 2218 million 139 revenues year ended december 31 2013 increase primarily due legal expenses related fcpa investigation 411 million partially offset lower compensation costs due reduced staffing levels impairment expense year ended december 31 2014 recorded 287 million impairment goodwill intangibles assets russian business unit included international reporting segment 734 million impairment fixed assets intangibles assets fishing rental services segment 191 million impairment goodwill coiled tubing segment impairments recorded 2013 interest expense net amounts capitalized interest expense decreased 10 million 542 million 38 revenues year ended december 31 2014 compared 552 million 35 revenues year ended december 31 2013 decrease primarily related reduced borrowings revolving credit facility year ended december 31 2014 compared 2013 income loss net year ended december 31 2014 recognized loss net 10 million compared income net 08 million year ended december 31 2013 foreign exchange loss relates us dollardenominated transactions foreign locations fluctuations exchange rates local currencies us dollar table presents comparative detailed information income loss net december 31 2014 2013 income tax benefit income tax benefit continuing operations 805 million 311 effective rate pretax loss 2591 million year ended december 31 2014 compared income tax benefit 31 million 126 effective rate pretax loss 242 million year ended december 31 2013 effective tax rates periods differ us statutory rate 35 due number factors including mix profit loss domestic international taxing jurisdictions impact permanent items goodwill impairment expense affect book income affect taxable income noncontrolling interest noncontrolling interest holders 2014 due acquisition remaining noncontrolling interest joint ventures 2013 year ended december 31 2013 allocated 06 million associated income incurred joint ventures noncontrolling interest holders ventures segment operating results years ended december 31 2015 2014 following table shows operating results reportable segments years ended december 31 2015 2014 thousands year ended december 31 2015 year ended december 31 2014 us rig services revenues us rig services segment decreased 3019 million 445 3771 million year ended december 31 2015 compared 6790 million year ended december 31 2014 decrease segment primarily due lower spending customers result lower oil prices market conditions resulted reduced customer activity reduction price received services operating expenses us rig services segment 6851 million year ended december 31 2015 represented increase 1024 million 176 compared 5827 million year ended december 31 2014 expenses increased primarily result 2977 million impairment goodwill 2015 partially offset decrease employee compensation costs equipment expense sought reduce cost structure result lower activity levels fluid management services revenues fluid management services segment decreased 964 million 386 1532 million year ended december 31 2015 compared 2496 million year ended december 31 2014 decrease segment primarily due lower spending customers result lower oil prices market conditions resulted reduced customer activity reduction price received services operating expenses fluid management services segment 1966 million year ended december 31 2015 represented decrease 496 million 202 compared 2463 million year ended december 31 2014 expenses decreased primarily result decrease equipment expense employee compensation costs sought reduce cost structure result lower activity levels decrease partially offset 245 million impairment goodwill recorded 2015 coiled tubing services revenues coiled tubing services segment decreased 835 million 482 898 million year ended december 31 2015 compared 1734 million year ended december 31 2014 decrease segment primarily due lower spending customers result lower oil prices market conditions resulted reduced customer activity reduction price received services operating expenses coiled tubing services segment 2450 million year ended december 31 2015 represented increase 608 million 330 compared 1842 million year ended december 31 2014 expenses increased primarily result 827 million impairment goodwill 511 million impairment fixed assets 2015 compared 191 million impairment goodwill 2014 partially offset decrease employee compensation costs repair maintenance expense fuel costs sought reduce cost structure result lower activity levels fishing rental services revenues fishing rental services segment decreased 907 million 427 1219 million year ended december 31 2015 compared 2126 million year ended december 31 2014 decrease segment primarily due lower spending customers result lower oil prices market conditions resulted reduced customer activity reduction price received services operating expenses fishing rental services segment 3193 million year ended december 31 2015 represented increase 478 million 176 compared 2715 million year ended december 31 2014 expenses increased primarily result 1735 million impairment goodwill 60 million impairment intangible assets 2015 compared 621 impairment fixed assets 2014 partially offset decrease employee compensation costs repair maintenance expense fuel costs sought reduce cost structure result lower activity levels international revenues international segment decreased 624 million 554 503 million year ended december 31 2015 compared 1127 million year ended december 31 2014 decrease primarily attributable lower customer activity russia colombia exit operations middle east south america operating expenses international segment increased 547 million 307 2329 million year ended december 31 2015 compared 1782 million year ended december 31 2014 expenses increased primarily result increase impairment assets held sale 808 million 44 million impairment goodwill 2015 compared 224 million impairment goodwill 63 million impairment intangible assets 2014 partially offset decrease employee compensation costs equipment expense primarily due lower activity functional support operating expenses functional support segment decreased 276 million 164 1408 million 178 consolidated revenues year ended december 31 2015 compared 1684 million 118 consolidated revenues year ended december 31 2014 decrease expense primarily due lower employee compensation costs due reduced staffing levels decrease 95 million legal expense related fcpa investigations years ended december 31 2014 2013 following table shows operating results reportable segments years ended december 31 2014 2013 thousands year ended december 31 2014 year ended december 31 2013 us rig services revenues us rig services segment increased 56 million 08 6790 million year ended december 31 2014 compared 6735 million year ended december 31 2013 increase revenue primarily due increase market activity partially offset decrease customer activity california rigbased services decrease customer spending operating expenses us rig services segment 5827 million year ended december 31 2014 represented increase 428 million 79 compared 5399 million year ended december 31 2013 expenses increased primarily result increase direct labor repair maintenance expenses related increase activity fluid management services revenues fluid management services segment decreased 221 million 81 2496 million year ended december 31 2014 compared 2717 million year ended december 31 2013 decrease revenue primarily due lower activity decrease pricing due competitive pressure operating expenses fluid management services segment 2463 million year ended december 31 2014 represented decrease 214 million 80 compared 2677 million year ended december 31 2013 decrease expenses primarily related lower direct labor expenses fuel costs due decrease activity coiled tubing services revenues coiled tubing services segment decreased 198 million 103 1734 million year ended december 31 2014 compared 1932 million year ended december 31 2013 decrease revenue primarily due lower activity due competitive pressure unscheduled time events operating expenses coiled tubing services segment 1842 million year ended december 31 2014 represented increase 144 million 85 compared 1698 million year ended december 31 2013 increase expenses primarily result impairment goodwill partially offset lower direct labor expenses due decrease activity fishing rental services revenues fishing rental services segment decreased 260 million 109 2126 million year ended december 31 2014 compared 2386 million year ended december 31 2013 decrease revenue primarily due lower activity due competitive pressure operating expenses fishing rental services segment 2715 million year ended december 31 2014 represented increase 642 million 310 compared 2073 million year ended december 31 2013 increase expenses primarily result impairment fixed assets intangible assets partially offset decrease depreciation expense international revenues international segment decreased 1020 million 475 1127 million year ended december 31 2014 compared 2147 million year ended december 31 2013 decrease primarily attributable lower customer activity mexico operating expenses international segment decreased 632 million 262 1782 million year ended december 31 2014 compared 2414 million year ended december 31 2013 expenses decreased direct result lower customer activity severance costs mexico partially offset impairment goodwill tradenames russian business reporting unit functional support operating expenses functional support segment increased 329 million 243 1684 million 118 consolidated revenues year ended december 31 2014 compared 1355 million 85 consolidated revenues year ended december 31 2013 increase primarily due increased legal expense related fcpa investigations partially offset lower employee compensation benefit costs liquidity capital resources require capital fund ongoing operations including maintenance expenditures existing fleet equipment organic growth initiatives investments acquisitions debt service payments obligations primary sources liquidity cash flows generated operations available cash borrowings abl facility oil natural gas prices began rapid substantial decline fourth quarter 2014 depressed commodity price conditions persisted worsened 2015 trend continued 2016 result demand products services declined substantially prices able charge customers products services also declined substantially trends materially adversely affected results operations cash flows financial condition 2015 unless conditions industry improve trend continue 2016 potentially beyond response conditions undertaken several actions detailed effort preserve improve liquidity financial position • june 1 2015 entered 100 million abl facility due february 28 2020 315 million term loan facility due june 1 2020 closing borrowed full amount available term loan facility used portion proceeds repay terminate prior revolving credit facility remaining proceeds retained cash provide liquidity december 31 2015 borrowings outstanding abl facility 479 million letters credit outstanding available borrowing capacity 272 million available restricted covenant constraints abl facility • april 2015 announced decision exit markets participate outside north america strategy sell relocate assets businesses operating markets december 31 2015 sold subsidiary bahrain certain assets oman ecuador colombia longer operating markets currently discussions sell subsidiary russia • beginning first quarter 2015 began series cost cutting initiatives corporate field levels include fixed costs supplychain efficiencies headcount wage reductions however still substantial indebtedness obligations may incur additional expenses obligated pay fines penalties connection seeking resolve ongoing fcpa investigation although time unable predict ultimate resolution matter ability fund operations pay principal interest longterm debt satisfy obligations depend upon available liquidity amount cash flows able generate operations 2015 net cash used operating activities 224 million industry conditions improve may negative cash flows operations 2016 december 31 2015 adjusted working capital working capital excluding current portion longterm debt 2691 million compared 1919 million december 31 2014 adjusted working capital increased 2015 primarily result receipt cash proceeds term loan facility decrease accounts payable accrued expenses partially offset decrease accounts receivable repayment 2011 credit facility december 31 2015 2044 million cash approximately 137 million held bank accounts foreign subsidiaries december 31 2015 106 million cash held foreign subsidiaries held us bank accounts denominated us dollars believe cash held wholly owned foreign subsidiaries could repatriated general corporate use without material withholdings believe internally generated cash flows operations current reserves cash availability abl facility sufficient finance cash requirements current future operations budgeted capital expenditures debt service obligations next twelve months however light current conditions industry continue explore alternatives improve liquidity may however able implement transaction alternative necessary commercially reasonable terms even successful implementing strategic transaction alternative transaction alternative may successful allowing us meet debt obligations addition even able implement strategic transaction alternative transaction alternative may impose onerous terms us andor certain security holders could materially adversely impact interests certain security holders see item 1a risk factors“the amount debt covenants agreements governing debt could negatively impact financial condition results operations business prospects” “we may able generate sufficient cash flow meet debt service obligations” future operating performance ability refinance affected results operations economic capital market conditions oil natural gas prices factors many beyond control cash flows cash used operating activities 224 million year ended december 31 2015 compared cash provided operating activities 1642 million year ended december 31 2014 cash used operating activities year ended december 31 2015 primarily related net loss adjusted noncash items payments accounts payable accrued liabilities partially offset cash inflows related collection accounts receivable cash provided operating activities year ended december 31 2014 primarily related net income adjusted noncash items collection accounts receivable increase accounts payable cash used investing activities 194 million 1468 million years ended december 31 2015 2014 respectively investing cash outflows periods consisted primarily capital expenditures partially offset sales assets capital expenditures primarily relate replacement assets existing fleet equipment cash provided financing activities 2187 million year ended december 31 2015 compared cash used financing activities 221 million year ended december 31 2014 cash provided financing activities year ended december 31 2015 primarily relates proceeds longterm debt partially offset net payments 2011 credit facility cash used financing activities year ended december 31 2014 primarily relates net payments 2011 credit facility following table summarizes cash flows years ended december 31 2015 2014 debt service december 31 2015 annual maturities indebtedness consisting 2021 notes term loan facility yearend follows interest 6750 million 2021 notes due march 1 september 1 year 2021 notes mature september 1 2021 interest paid 2021 notes 2015 2014 456 million expect fund interest payments cash hand cash generated operations 675 senior notes due 2021 outstanding 6750 million 675 senior notes due 2021 “2021 notes” 2021 notes general unsecured senior obligations effectively subordinated existing future secured indebtedness 2021 notes jointly severally guaranteed senior unsecured basis certain existing future domestic subsidiaries interest 2021 notes payable march 1 september 1 year 2021 notes mature march 1 2021 capitalized 46 million financing costs associated issuance 2021 notes amortized term notes march 1 2016 2021 notes subject redemption time option whole part redemption prices expressed percentages principal amount redeemed plus accrued unpaid interest applicable redemption date redeemed twelvemonth period beginning march 1 years indicated time prior march 1 2016 may option redeem portion 2021 notes redemption price equal 100 principal amount plus premium respect 2021 notes plus accrued unpaid interest redemption date premium excess present value redemption price 103375 principal amount plus remaining scheduled interest payments due march 1 2016 discounted treasury rate plus 050 ii principal amount note experience change control subject certain exceptions must give holders 2021 notes opportunity sell us 2021 notes whole part purchase price equal 101 aggregate principal amount plus accrued unpaid interest date purchase subject certain negative covenants indenture limits ability among things • incur additional indebtedness issue preferred equity interests • pay dividends make distributions repurchase redeem equity interests • make loans investments • enter sale leaseback transactions • sell transfer otherwise convey assets • create liens • enter transactions affiliates • enter agreements restricting subsidiaries’ ability pay dividends • designate future subsidiaries unrestricted subsidiaries • consolidate merge sell substantially applicable entities’ assets substantially covenants terminate 2021 notes mature one two specified ratings agencies assigns 2021 notes investment grade rating future events default exist indenture december 31 2015 2021 notes rated investment grade covenants cease apply us result achieving investment grade rating restored even credit rating assigned 2021 notes later falls investment grade compliance covenants indenture december 31 2015 abl facility june 1 2015 company entered loan security agreement “abl facility” among company key energy services llc borrowers collectively “abl borrowers” certain subsidiaries abl borrowers named guarantors therein financial institutions party thereto time lenders collectively “abl lenders” bank america na administrative agent lenders bank america na wells fargo bank national association cocollateral agents lenders abl facility provides aggregate initial commitments abl lenders 100 million “commitments” matures february 28 2020 abl facility provides abl borrowers ability borrow aggregate principal amount equal lesser commitments ii sum 85 value eligible accounts receivable plus b 80 value eligible unbilled accounts receivable subject limit equal greater x 35 million 25 commitments plus c certain cash equivalents deposited benefit abl lenders subject limit 15 million amount may borrowed abl facility subject reduction certain reserves provided abl facility addition percentages accounts receivable unbilled accounts receivable included calculation described subject reduction extent certain bad debt writedowns similar amounts provided abl facility borrowings abl facility bear interest abl borrowers’ option per annum rate equal libor 30 60 90 180 consent abl lenders 360 days plus 45 ii base rate equal sum greatest x prime rate federal funds rate plus 050 z 30day libor plus 10 plus b 35 addition abl facility provides unused line fees 100 125 per year depending utilization letter credit fees certain fees abl facility guaranteed certain company’s existing future subsidiaries “abl guarantors” together abl borrowers “abl loan parties” secure obligations abl facility abl loan parties granted administrative agent firstpriority security interest benefit abl lenders present future accounts receivable inventory related assets proceeds foregoing “abl priority collateral” addition obligations abl loan parties abl facility secured secondpriority liens term priority collateral described “term loan facility” revolving loans abl facility may voluntarily prepaid whole part without premium penalty subject breakage similar costs abl facility contains certain affirmative negative covenants including covenants restrict ability abl loan parties take certain actions without permission abl lenders permitted abl facility including incurrence debt granting liens making investments payment dividends sale assets abl facility also contains requirement abl borrowers comply minimum liquidity covenant asset coverage ratio certain periods fixed charge coverage ratio asset coverage ratio covenant abl borrowers must maintain asset coverage ratio least 15 10 asset coverage ratio generally defined ratio sum value term priority collateral plus b certain cash equivalents excess 100 million held benefit term loan lenders ii sum amount outstanding term loan facility following repayment term loan facility amount outstanding abl facility plus b amount fine settlement respect fcpa matter defined abl facility secured lien abl priority collateral term priority collateral “asset coverage ratio” fixed charge coverage ratio covenant abl borrowers must maintain fixed charge coverage ratio least 10 period commencing day availability abl facility less greater 20 million 20 commitments continuing 90th day following day availability abl facility greater 20 million 20 commitments fixed charge coverage ratio generally defined ratio ebitda minus certain capital expenditures cash taxes paid ii sum cash interest expenses scheduled principal payments borrowed money certain distributions abl facility permits abl borrowers calculating ebitda add back certain amounts respect investigatory expenses associated fcpa matter amounts paid settlement fcpa matter extent amounts exceed net liquidity defined certain cash equivalents minus principal amount loans outstanding abl facility minimum liquidity covenant “minimum liquidity covenant” abl borrowers must permit liquidity defined sum availability abl facility plus ii certain unrestricted cash equivalents less 1000 million last day fiscal quarter immediately cash payment settlement fine connection fcpa matter abl facility contains customary representations warranties conditions borrowing including absence default event default accuracy material respects representations warranties abl loan parties contained abl facility absence event circumstance could reasonably expected material adverse effect abl facility contains customary events default occurrence entitle abl lenders accelerate maturity amounts outstanding abl facility exercise customary remedies event triggered immediately cash payment settlement fcpa matter cash borrowings abl facility used fund payment company shall fail compliance minimum liquidity covenant ii loans abl facility outstanding date cash payment availability abl facility less 33 borrowing base effect date term loan facility june 1 2015 company entered term loan security agreement “term loan facility” among company borrower certain subsidiaries company named guarantors therein financial institutions party thereto time lenders collectively “term loan lenders” cortland capital market services llc agent lenders merrill lynch pierce fenner smith incorporated sole lead arranger sole bookrunner june 1 2015 company parties thereto closed term loan facility company borrowed 315 million prior giving effect upfront discount 3 resulted net proceeds company prior expenses approximately 3055 million company used portion proceeds repay prior credit facility term loan facility provides incremental facility subject agreement one term loan lenders institutional lenders agreeing provide additional loans satisfaction certain terms conditions would enable company borrow additional amounts term loan facility long aggregate outstanding amount borrowings thereunder exceed 400 million term loan facility mature june 1 2020 although maturity date may company’s request extended one term loan lenders pursuant terms term loan facility borrowings term loan facility bear interest company’s option per annum rate equal libor one two three six consent term loan lenders 12 months plus 925 ii base rate equal sum greatest x prime rate federal funds rate plus 050 z 30day libor plus 10 plus b 825 term loan facility guaranteed certain company’s existing future subsidiaries “term loan guarantors” together company “term loan parties” secure obligations term loan facility term loan parties granted agent firstpriority security interest benefit term loan lenders substantially term loan party’s assets certain excluded assets abl priority collateral “term priority collateral” addition obligations term loan parties term loan facility secured secondpriority liens abl priority collateral described “abl facility” loans term loan facility may prepaid company’s option subject payment prepayment premium certain circumstances provided term loan facility company required make principal payments amount 787500 per quarter commencing quarter ended september 30 2015 addition pursuant term loan facility company must offer prepay term loans net cash proceeds defined term loan facility certain asset sales fiscal year beginning company’s fiscal year ending december 31 2015 company must offer prepay term loans aggregate principal amount equal 50 company’s excess cash flow defined term loan facility fiscal year within 30 days following change control defined term loan facility company must offer prepay term loans price 101 amount thereof giving effect change control asset coverage ratio least 15 10 ii price equal greater 101 amount thereof applicable prepayment premium provided term loan facility giving effect change control asset coverage ratio less 15 10 term loan facility contains customary representations warranties certain affirmative negative covenants including covenants restrict ability term loan parties take certain actions without permission term loan lenders permitted term loan facility including incurrence debt granting liens making investments payment dividends sale assets term loan facility also contains financial covenants requiring company maintain asset coverage ratio least 15 10 liquidity defined term loan facility must less 100 million last day fiscal quarter immediately cash payment settlement fine connection fcpa matter term loan facility contains events default occurrence entitle term loan lenders accelerate maturity amounts outstanding term loan facility exercise customary remedies compliance covenants abl facility term loan facility december 31 2015 december 31 2015 borrowings outstanding abl facility 479 million letters credit outstanding borrowing capacity 272 million available subject covenant constraints abl facility ability fund operations pay principal interest longterm debt satisfy obligations depend upon available liquidity amount cash flows able generate operations 2015 cash used operations 224 million industry conditions improve may negative cash flows operations 2016 believe internally generated cash flows operations current reserves cash availability abl facility sufficient finance cash requirements current future operations budgeted capital expenditures debt service obligations next twelve months however light current conditions industry continue analyze variety transactions mechanisms designed reduce debt improve liquidity future operating performance ability refinance affected results operations economic capital market conditions oil natural gas prices factors many beyond control may required repay portion debt accelerated basis certain circumstances fail comply covenants restrictions agreements governing debt unable cure obtain waiver amendment could lead event default consequent acceleration obligation repay outstanding debt ability comply debt covenants restrictions may affected events beyond control including general economic financial conditions particular terms indebtedness must comply certain financial ratios satisfy certain financial condition tests could require us take action reduce debt take action order comply ability satisfy required financial ratios tests affected events beyond control including prevailing economic financial industry conditions may able continue meet ratios tests future breach covenants ratios tests could result default indebtedness default lenders abl facility longer obligated extend credit us well trustee outstanding notes administrative agent term loan facility could elect declare amounts outstanding debt together accrued interest immediately due payable results actions would significant negative impact results operations financial position cash flows addition access liquidity provided abl facility predicated upon ability satisfy conditions borrowing conditions require representations warranties facility including representations warranties related solvency absence material adverse effect remain true correct weighted average interest rates outstanding borrowings abl facility term loan facility year ended december 31 2015 follows senior secured credit facility june 1 2015 connection entering abl facility term loan facility terminated senior secured revolving bank credit facility dated march 31 2011 amended december 5 2014 “2011 credit facility” scheduled mature later march 31 2016 2011 credit facility provided senior secured credit facility consisting revolving credit facility letter credit subfacility swing line facility aggregate principal amount 4000 million 2011 credit facility terminated without prepayment penalties remaining unamortized deferred financing costs 08 million written time termination interest rate per annum applicable 2011 credit facility option adjusted libor plus applicable margin ii higher x jpmorgan’s prime rate federal funds rate plus 05 z onemonth adjusted libor plus 10 plus case applicable margin loans applicable margin libor loans ranged 225 300 basis points applicable margin loans ranges 125 200 basis points depending upon consolidated total leverage ratio defined 2011 credit facility unused commitment fees facility equal 05 five months ended june 1 2015 year ended december 31 2014 weighted average interest rates outstanding borrowings 2011 credit facility 314 297 respectively letter credit facility november 7 2013 entered uncommitted unsecured 150 million letter credit facility used solely issuances performance letters credit december 31 2015 20 million letters credit outstanding facility offbalance sheet arrangements december 31 2015 currently offbalance sheet arrangements reasonably likely material current future effect financial condition revenues expenses results operations liquidity capital expenditures capital resources contractual obligations set forth summary contractual obligations december 31 2015 obligations pay future periods reflect certain assumptions including variability interest rates variablerate obligations duration obligations actual payments future periods may vary 1 based interest rates effect december 31 2015 2 based closing stock price december 31 2015 debt compliance december 31 2015 compliance financial covenants abl facility term loan facility 2021 notes based management’s current projections expect compliance covenants 2011 credit facility 2021 notes next twelve months breach covenants ratios tests could result default indebtedness see “ debt service” “item 1a risk factors” capital expenditures year ended december 31 2015 capital expenditures totaled 408 million primarily related ongoing replacement rig service fleet coiled tubing units fluid transportation equipment rental equipment capital expenditure plan 2016 contemplates spending 200 million 300 million subject market conditions primarily related equipment replacement needs including ongoing replacement rig services fleet capital expenditure program 2016 subject market conditions including activity levels commodity prices industry capacity specific customer needs focus 2016 maximization current equipment fleet may choose increase capital expenditures 2016 increase market share expand presence new market currently anticipate funding 2016 capital expenditures combination cash hand operating cash flow borrowings abl facility operating cash flows activity levels prove insufficient fund currently planned capital spending levels management expects adjust capital spending plans accordingly may also incur capital expenditures strategic investments acquisitions geostream april 9 2013 completed acquisition remaining 50 noncontrolling interest geostream 146 million 100 geostream almansoori key energy services lcc august 5 2013 agreed dissolution almansoori key energy services llc joint venture formed laws abu dhabi uae acquisition underlying business 51 million fourth quarter 2014 joint venture duly liquidated 51 million transferred almansoori anticipate acquisitions complementary companies assets lines businesses continue play important role business strategy currently unannounced agreements ongoing negotiations acquisition material businesses assets transactions effected quickly may occur time critical accounting policies accounting department responsible development application accounting policies internal control procedures reports chief financial officer process preparation financial statements conformity generally accepted accounting principles united states “gaap” requires us make certain estimates judgments assumptions may affect reported amounts assets liabilities disclosures contingencies balance sheet date amounts revenues expenses recognized reporting period presentation statement cash flows may record materially different amounts estimates judgments assumptions change actual results differ however analyze estimates assumptions judgments based historical experience various factors believe reasonable circumstances identified following critical accounting policies require significant amount estimation judgment accurately present financial position results operations cash flows • revenue recognition • estimate reserves workers’ compensation vehicular liability selfinsurance • contingencies • income taxes • estimates depreciable lives • valuation indefinitelived intangible assets • valuation tangible finitelived intangible assets • valuation equitybased compensation revenue recognition recognize revenue following criteria met evidence arrangement exists ii delivery occurred services rendered iii price customer fixed determinable iv collectability reasonably assured • evidence arrangement exists final understanding us customer occurred evidenced completed customer purchase order field ticket supplier contract master service agreement • delivery occurred services rendered completed requirements pursuant terms arrangement evidenced field ticket service log • price customer fixed determinable amount required paid agreed upon evidence price fixed determinable evidenced contractual terms price book completed customer purchase order field ticket • collectability reasonably assured screen customers provide goods services customers according determined credit terms granted accordance credit policy present revenues net sales taxes collected us customers required remitted local state governmental taxing authorities review contracts multiple element revenue arrangements deliverables separated units accounting assigned fair value standalone value customer objective reliable evidence fair value delivery undelivered items substantially controlled us believe negotiated prices deliverables services contracts representative fair value since acceptance nonacceptance element contract affect elements workers’ compensation vehicular liability selfinsurance occurrence event fully insured indemnified failure customer insurer meet indemnification insurance obligations could result substantial losses addition insurance may available cover risks available might able obtain insurance without substantial increase premiums possible addition higher premiums future insurance coverage may subject higher deductibles coverage restrictions estimate liability arising uninsured potentially insured events including workers’ compensation employer’s liability vehicular liability general liability record accruals consolidated financial statements reserves related claims based specific facts circumstances insured event past experience similar claims trend analysis adjust loss estimates calculation accruals based upon actual claim settlements reported claims loss estimates individual claims adjusted based upon actual claim judgments settlements reported claims actual outcome claims could differ significantly estimated amounts changes assumptions estimates could potentially negative impact earnings primarily selfinsured physical damage property rigs equipment automobiles due large deductibles selfinsurance contingencies periodically required record loss contingencies relate lawsuits claims proceedings taxrelated audits normal course operations consolidated balance sheet record loss contingency matters probable liability incurred amount loss reasonably estimated periodically review loss contingencies ensure recorded appropriate liabilities balance sheet adjust liabilities based estimates judgments made management respect likely outcome matters including effect applicable insurance coverage litigation matters estimates judgments could change based new information changes laws regulations changes management’s plans intentions outcome legal proceedings settlements factors actual results could vary materially reserves record liabilities environmental assessment indicates site remediation efforts probable costs reasonably estimated measure environmental liabilities based part relevant past experience currently enacted laws regulations existing technology sitespecific costs costsharing arrangements recognition joint several liability based upon best estimate final prorata share liability low amount range estimates assumptions involve judgments estimates management changes assumptions new information could lead increases decreases ultimate liability changes recognized immediately earnings record legal obligations retire tangible longlived assets balance sheet liabilities recorded discount incur liability significant judgment involved estimating future cash flows associated obligations well ultimate timing cash flows estimates amount timing cash flows change may material impact results operations income taxes account deferred income taxes using asset liability method provide income taxes significant temporary differences management determines current tax liability well taxes incurred result current operations yet deferred future periods current taxes payable represent liability related income tax return current year net deferred tax expense benefit represents change balance deferred tax assets liabilities reported consolidated balance sheets management estimates changes deferred tax assets liabilities using basis assets liabilities financial reporting purposes enacted rates management estimates effect differences reverse management makes certain assumptions timing temporary tax differences differing treatment certain items tax accounting purposes whether differences permanent final determination tax liability involves interpretation local tax laws tax treaties related authorities jurisdiction well significant use estimates assumptions regarding scope future operations results achieved timing nature income earned expenditures incurred establish valuation allowances reduce deferred tax assets determine likely eg likelihood 50 deferred tax assets realized future periods assess likelihood use estimates judgment regarding future taxable income well jurisdiction taxable income generated determine whether valuation allowance required evidence include current financial position results operations actual forecasted results reversal deferred tax liabilities tax planning strategies well current forecasted business economics industry additionally record uncertain tax positions net recognizable amount based amount management deems likely sustained upon ultimate settlement tax authorities domestic international tax jurisdictions operate estimates assumptions regarding current deferred tax items inaccurate modified changes could potentially material negative impacts earnings estimates depreciable lives use estimated depreciable lives longlived assets rigs heavyduty trucks trailers compute depreciation expense estimate future asset retirement obligations conduct impairment tests base estimates depreciable lives number factors environment assets operate industry factors including forecasted prices competition assumption provide appropriate amount capital expenditures asset operation maintain economical operation asset prevent untimely demise scrap useful lives intangible assets determined years expect assets generate benefit based legal contractual expectations depreciate operational assets depreciable lives salvage value generally 10 acquisition cost recognize gain loss upon ultimate disposal asset based difference carrying value asset disposal date proceeds receive connection disposal periodically analyze estimates depreciable lives fixed assets determine depreciable periods salvage value continue appropriate also analyze useful lives salvage value events conditions occur could shorten remaining depreciable life asset review depreciable periods salvage values reasonableness given current conditions result depreciation expense based upon estimates depreciable lives fixed assets salvage value economic factors require management make significant judgments estimates determine depreciable lives different originally estimated depreciation expense may increase decrease impairments carrying values fixed assets may result could negatively impact earnings valuation indefinitelived intangible assets periodically review intangible assets subject amortization including goodwill determine whether impairment assets may exist tests must made least annual basis often circumstances indicate assets may impaired circumstances include limited significant adverse changes business climate test impairment indefinitelived intangible assets allows us first assess qualitative factors determine whether “more likely not” fair value reporting unit less carrying amount basis determining whether necessary perform twostep goodwill impairment test qualitative analysis shows “more likely not” fair value reporting unit less carrying amount perform twostep goodwill impairment test first step fair value calculated reporting units fair value compared current carrying value reporting unit including reporting unit’s goodwill fair value reporting unit exceeds carrying value potential impairment second step performed carrying value exceeds fair value reporting unit second step required second step test impairment compares implied fair value reporting unit’s goodwill current carrying value implied fair value reporting unit’s goodwill determined manner amount goodwill would recognized business combination purchase price equal fair value reporting unit implied fair value reporting unit’s goodwill excess carrying value impairment charge recorded carrying value reporting unit’s goodwill excess implied fair value impairment charge equal excess recorded determining fair value reporting units use weightedaverage approach three commonly used valuation techniques discounted cash flow method guideline companies method similar transactions method assigned weight results methods based facts circumstances existence testing period assigned weight discounted cash flow method believe representative future business addition estimates made management regarding weighting various valuation techniques creation techniques requires make significant estimates assumptions discounted cash flow method assigned highest weight management current year requires us make assumptions future cash flows future growth rates tax rates future periods booktax differences carrying value assets future periods discount rates assumptions future cash flows growth rates based current budgets future periods well strategic plans beliefs management future activity levels analysts’ expectations revenues profitability cash flows future periods assumptions future tax rates booktax differences carrying value assets future periods based assumptions future cash flows growth rates management’s knowledge beliefs tax law practice current future periods assumptions discount rates include assessment specific risk associated reporting unit tested developed assistance thirdparty valuation consultant ultimate conclusions valuation techniques remain responsibility decline market value stock third quarter 2015 well persistent low oil prices affect low oil prices industry determined triggering events making necessary perform testing possible goodwill impairment us rig services coiled tubing services fishing rental services fluid management services international segments analysis concluded remaining 5610 million goodwill segments fully impaired also intangible assets amortized 09 million related russian reporting unit international segment tradenames tested impairment annually using relief royalty method valuation tangible finitelived intangible assets fixed assets finitelived intangibles tested potential impairment circumstances events indicate possible impairment may exist circumstances events referred “trigger events” examples trigger events include limited adverse change market conditions significant decrease benefits derived acquired business change use asset significant disposal particular asset class trigger event occurs impairment test performed based undiscounted cash flow analysis perform impairment test make judgments estimates assumptions regarding longterm forecasts revenues expenses relating assets subject review market conditions energy prices estimated depreciable lives assets discount rate assumptions legal factors impact operations significant effect estimates use determine whether assets impaired results analysis indicate carrying value assets tested impairment recoverable record impairment charge write carrying value assets fair value using different judgments assumptions estimates could potentially arrive materially different fair value assets tested impairment may result impairment charge valuation equitybased compensation granted stock options stocksettled stock appreciation rights “sars” restricted stock “rsas” “rsus” performance units employees nonemployee directors option sar awards grant fair valued using blackscholes option model grant date amortized compensation expense vesting period option sar award net estimated actual forfeitures compensation related rsas rsus based fair value award grant date recognized based vesting requirements satisfied period grantdate fair value restricted stock awards determined using stock price grant date performance units provide cash incentive award unit value determined reference common stock see “note 19 share based compensation” “item 8 financial statements supplementary data” detailed discussion performance units measurement utilizing blackscholes option pricing model determine fair values stock options sars awards certain assumptions made based subjective expectations subject change one assumptions would impact expense associated future grants key assumptions include volatility price common stock riskfree interest rate expected life awards grant stock options years ended december 31 2015 2014 2013 recent accounting developments asu 201517 november 2015 fasb issued asu 201517 balance sheet classification deferred taxes topic 740 objective asu simplify current guidance requires entities separately present deferred tax assets liabilities current noncurrent classified balance sheet new guidance require entities present deferred tax assets liabilities noncurrent classified balance sheet asu 201517 effective fiscal years beginning december 15 2016 interim periods within years may applied either prospectively deferred tax assets liabilities retrospectively periods presented currently evaluating standard determine impact adoption consolidated financial statements asu 201503 april 2015 fasb issued asu 201503 interestimputation interest subtopic 83530 simplifying presentation debt issuance costs objective asu simplify presentation debt issuance costs requiring debt issuance costs related recognized debt liability presented balance sheet direct deduction carrying amount debt liability consistent debt discounts recognition measurement guidance debt issuance costs affected amendments update asu effective annual periods beginning december 15 2015 interim periods within annual periods early adoption permitted adopted asu 201503 second quarter 2015 using retrospective transition method result 107 million unamortized deferred financing costs december 31 2014 balance sheet reclassified noncurrent assets direct deduction longterm debt adoption standard affect results operations cash flows asu 201409 may 2014 fasb issued asu 201409 revenue contracts customers topic 606 objective asu establish principles report useful information users financial statements nature amount timing uncertainty revenue contracts customers core principle recognize revenue depict transfer promised goods services customers amount reflects consideration entity expects entitled exchange goods services asu 201409 must adopted using either full retrospective method modified retrospective method july 2015 meeting fasb affirmed proposal defer effective date new revenue standard entities one year result asu 201409 effective company interim annual reporting periods beginning december 15 2017 early adoption permitted interim annual reporting periods beginning december 15 2016 currently evaluating standard determine impact adoption consolidated financial statements item 7aitem 7 management’s discussion analysis financial condition results operations following discussion analysis financial condition results operations read conjunction consolidated financial statements related notes thereto “item 8 financial statements supplementary data” discussion contains forwardlooking statements based upon current expectations subject uncertainty changes circumstances including identified “cautionary note regarding forwardlooking statements” actual results may differ materially expectations due potentially inaccurate assumptions known unknown risks uncertainties forwardlooking statements read conjunction disclosures “item 1a risk factors” overview provide full range well services major oil companies independent oil natural gas production companies produce maintain enhance flow oil natural gas throughout life well services include rigbased coiled tubingbased well maintenance workover services well completion recompletion services fluid management services fishing rental services ancillary oilfield services additionally certain rigs capable specialty drilling applications operate major oil natural gas producing regions continental united states previously operations mexico sold fourth quarter 2016 canada russia sold second third quarters 2017 respectively demand services fluctuates primarily relation price anticipated price oil natural gas turn driven primarily supply demand oil natural gas generally supply commodities decreases demand increases service maintenance requirements increase oil natural gas producers attempt maximize productivity wells higher priced environment however lower oil natural gas price environment persisted since late 2014 demand service maintenance decreased oil natural gas producers decrease activity particular demand new existing field drilling completion work driven available investment capital work customers significantly curtailed capital spending beginning 2015 continuing 2018 types services easily “started” “stopped” oil natural gas producers generally tend less risk tolerant commodity prices low volatile may experience rapid decline demand well maintenance services compared demand types oilfield services lowerpriced environment fewer well service rigs needed completions activities generally associated drilling activity emergence voluntary reorganization fresh start accounting upon emergence bankruptcy effective date company adopted fresh start accounting resulted creation new entity financial reporting purposes result application fresh start accounting well effects implementation plan consolidated financial statements december 16 2016 comparable consolidated financial statements prior date refer “note 3 fresh start accounting” “item 8 financial statements supplementary data” additional information references “successor” “successor company” relate financial position results operations reorganized company subsequent december 15 2016 references “predecessor” “predecessor company” refer financial position results operations company prior december 15 2016 business growth strategies focus production related services life oil gas well regular maintenance well bore artificial lift systems required maintain production offset natural production declines interventions well service rig required remove replace items needing repair perform activities would increase oil gas production current levels many instances interventions require additional assets services perform decline oil prices beginning 2014 believe number oil gas producers united states significantly curtailed recurring well maintenance activities believe recovery oil prices result oil gas producers making decision resume regular well maintenance activities additionally believe many instances since oil price decline began 2014 oil gas producers foregone regular maintenance activities additional demand services provided oil gas producers seeking improve production repairing wells key well positioned capitalize trends fleet active warm stacked well service rigs additional fishing rental service offerings provides continue invest either equipment acquisition grow take advantage dynamic growth population horizontal oil gas wells since revolution horizontal well drilling hydraulic fracturing began united states thousands new horizontal oil wells added many period 2012 2014 initial production wells declines first several years production wells placed artificial lift systems maintain production believe wells require periodic maintenance similar conventional oil well many instances due depth long lateral sections wells larger well service rig higher rated derrick capacity needed maintenance intend invest portion well service rig fleet needed rental equipment services either organic capital deployment acquisition capitalize trend growing population horizontal wells entered enter phase life regular maintenance required performance measures baker hughes us rig count data publicly available weekly basis often used coincident indicator overall exploration production “ep” company spending broader oilfield activity assessing overall activity us onshore oilfield service industry operate believe baker hughes us land drilling rig count best barometer ep companies’ capital spending resulting activity levels historically activity levels highly correlated us onshore capital spending ep company customers group 1 represents average monthly average prices years presented source us energy information administration bloomberg 2 source wwwbakerhughescom 3 source wwwaescnet internally measure activity levels well servicing operations primarily rig trucking hours generally capital ep companies increases demand services also rises resulting increased rig trucking services hours worked conversely activity levels decline due lower spending ep companies generally provide fewer rig trucking services results lower hours worked following table presents quarterly rig trucking hours 2016 2018 1 key’s us working days number weekdays quarter minus national holidays market business conditions outlook core businesses depend customers’ willingness make expenditures produce develop explore oil natural gas onshore us basins industry conditions influenced numerous factors oil natural gas prices supply demand oil natural gas domestic worldwide economic conditions political instability oil producing countries available supply demand services provide higher oil prices historically spurred additional demand services oil gas producers increase spending production maintenance drilling completion new wells course 2018 strengthening oil prices led improvement demand services particularly driven completion oil natural gas wells able increase prices service offerings oil price rose levels experienced since end 2014 experienced improvement demand across service offerings yet seen substantial change activity relates customer’s spending maintenance existing oil gas wells particularly conventional wells fourth quarter 2018 experienced decline revenues due seasonal effects decline completion driven revenues primarily coiled tubing services due reduction completion activities believe occurred result lack take away pipeline capacity operators permian basin clients completion 2018 budgets decline oil prices experienced fourth quarter 2018 expect commodity prices improved 2019 take away capacity added permian basin 2019 demand completion driven services increase additionally believe continued aging horizontal wells 2019 future periods customers choosing increase production accretive regular well maintenance horizontal wells strengthen demand pricing well maintenance services next several years increased demand oilfield services broadly specifically services offer expect demand qualified employees also increase inability attract retain qualified employees meet needs customers may constrain growth 2019 future periods offset price increases realized due inflation labor costs necessary attract retain employees results operations consolidated results operations following tables set forth consolidated results operations financial information operating segment selected information periods indicated period december 16 december 31 2016 successor company period january 1 december 15 2016 predecessor company distinct reporting periods result emergence bankruptcy december 15 2016 references results operations change percentage change combine successor company predecessor company results year ended december 31 2016 order provide comparability information years ended december 31 2018 december 31 2017 combined presentation presented according generally accepted accounting principles united states “gaap” comparable gaap measure presented management believes providing financial information relevant useful method making comparisons years ended december 31 2018 december 31 2017 years ended december 31 2018 2017 revenues year ended december 31 2018 increased 855 million 196 5217 million 4362 million year ended december 31 2017 due increase spending customers react improving commodity prices ability increase prices services internationally revenue 2018 result sale operations canada russia see “segment operating results years ended december 31 2018 2017” detailed discussion change revenues direct operating expenses direct operating expenses increased 741 million 223 4064 million 779 revenues year ended december 31 2018 compared 3323 million 762 revenues year ended december 31 2017 increase primarily result increase employee compensation costs fuel expense repair maintenance expense due increase activity levels respect increase repair maintenance expense due costs associated making idle equipment ready work decrease gain sale assets related sale frac stack equipment well testing services business sold second quarter 2017 see “segment operating results years ended december 31 2018 2017” detailed discussion change direct operating expenses depreciation amortization expense depreciation amortization expense decreased 19 million 22 826 million 158 revenues year ended december 31 2018 compared 845 million 194 revenues year ended december 31 2017 decrease primarily due sale businesses former international segment frac stack equipment welltesting services business 2017 general administrative expenses general administrative expenses decreased 237 million 206 916 million 176 revenues year ended december 31 2018 compared 1153 million 264 revenues year ended december 31 2017 decrease primarily due lower employee compensation costs due reduced staffing levels decrease legal settlement expenses impairment expense year ended december 31 2018 record impairment year ended december 31 2017 recorded 02 million impairment reduce carrying value assets related liabilities russian business unit sold third quarter 2017 fair market value reorganization items net year ended december 31 2018 recorded zero reorganization items compared 15 million year ended december 31 2017 primarily consisting professional fees incurred connection emergence voluntary reorganization interest expense net amounts capitalized interest expense increased 24 million 342 million 65 revenues year ended december 31 2018 compared 318 million 73 revenues year ended december 31 2017 increase primarily related increase variable interest rate longterm debt income net year ended december 31 2018 recognized income net 24 million compared 72 million year ended december 31 2017 income net year ended december 31 2017 includes 47 million gain sale related russian subsidiary disposed third quarter 2017 table presents comparative detailed information combined loss net december 31 2018 2017 income tax benefit income tax benefit 20 million 22 effective rate pretax loss 908 million year ended december 31 2018 compared income tax benefit 17 million 14 effective rate pretax loss 1223 million year ended december 31 2017 effective tax rates 2018 2017 periods differ us statutory rate 21 35 respectively due number factors including mix profit loss domestic international taxing jurisdictions impact permanent items including expenses subject statutorily imposed limitations meals entertainment expenses affect book income affect taxable income discrete tax adjustments valuation allowances deferred tax assets tax expense benefit recognized uncertain tax positions us enacted law tax cuts jobs act “2017 tax act” december 22 2017 tax act comprehensive tax reform legislation among things contains significant changes corporate taxation including permanent reduction corporate income tax rate 35 21 imposing mandatory onetime tax accumulated earnings foreign subsidiaries partial limitation deductibility business interest expense limitation net operating losses 80 taxable income year shift us taxation multinational corporations tax worldwide income partial territorial system along rules create new us minimum tax earnings foreign subsidiaries years ended december 31 2017 2016 revenues year ended december 31 2017 increased 189 million 45 4362 million 4173 million combined year ended december 31 2016 due increase spending customers reacted improving commodity prices internationally lower revenue result sale operations mexico decrease activity russia sale third quarter 2017 russian operations see “segment operating results years ended december 31 2017 2016” detailed discussion change revenues direct operating expenses direct operating expenses decreased 471 million 124 3323 million 762 revenues year ended december 31 2017 compared 3794 million 909 revenues combined year ended december 31 2016 decrease partially related 210 million gain sale certain assets decrease employee compensation costs fuel expense repair maintenance expense took steps reduce cost structure see “segment operating results years ended december 31 2017 2016” detailed discussion change direct operating expenses depreciation amortization expense depreciation amortization expense decreased 503 million 373 845 million 194 revenues year ended december 31 2017 compared 1349 million 323 revenues combined year ended december 31 2016 decrease primarily attributable reduction property plant equipment due implementation fresh start accounting fourth quarter 2016 general administrative expenses general administrative expenses decreased 545 million 321 1153 million 264 revenues year ended december 31 2017 compared 1698 million 407 revenues combined year ended december 31 2016 decrease primarily due 240 million decrease professional fees related 2016 corporate restructuring lower employee compensation costs due reduced staffing levels reduction wages partially offset 52 million increase legal settlement accruals impairment expense year ended december 31 2017 recorded 02 million impairment reduce carrying value assets related liabilities russian business unit sold third quarter 2017 fair market value combined year ended december 31 2016 recorded 446 million impairment reduce carrying value assets held sale fair market value related business unit mexico reorganization items net reorganization items primarily consist 15 million professional fees incurred connection emergence voluntary reorganization year ended december 31 2017 compared 5787 million gain debt discharge partially offset 2996 million loss fresh start accounting revaluations 192 million writeoff deferred financing costs debt premiums discounts 152 million professional fees incurred connection emergence voluntary reorganization combined year ended december 31 2016 interest expense net amounts capitalized interest expense decreased 439 million 318 million 73 revenues year ended december 31 2017 compared 757 million 181 revenues combined year ended december 31 2016 decrease primarily related elimination predecessor company’s senior secured notes connection emergence voluntary reorganization income loss net year ended december 31 2017 recognized income net 72 million compared 24 million combined year ended december 31 2016 foreign exchange gain loss relates us dollardenominated transactions foreign locations fluctuations exchange rates local currencies us dollar table presents comparative detailed information combined loss net december 31 2017 2016 income tax expense benefit income tax benefit 17 million 14 effective rate pretax loss 1223 million year ended december 31 2017 compared income tax benefit zero 000 effective rate pretax loss 102 million 28 million tax expense 22 effective rate pretax loss 1289 million period december 16 2016 december 31 2016 period january 1 2016 december 15 2016 respectively effective tax rates periods differ thenapplicable us statutory rate 35 due number factors including mix profit loss domestic international taxing jurisdictions impact permanent items including goodwill impairment expense expenses subject statutorily imposed limitations meals entertainment expenses affect book income affect taxable income discrete tax adjustments valuation allowances deferred tax assets tax expense benefit recognized uncertain tax positions segment operating results years ended december 31 2018 2017 following table shows operating results reportable segments years ended december 31 2018 2017 thousands year ended december 31 2018 year ended december 31 2017 rig services revenues rig services segment increased 481 million 193 2970 million year ended december 31 2018 compared 2488 million year ended december 31 2017 increase segment primarily due increase completion production spending customers reacted improving commodity prices ability increase prices services operating expenses rig services segment 2774 million year ended december 31 2018 represented increase 250 million 99 compared 2525 million year ended december 31 2017 increase primarily result increase employee compensation costs fuel expense repair maintenance expense due increase activity levels increase wages employees fishing rental services revenues fishing rental services segment increased 55 million 93 647 million year ended december 31 2018 compared 592 million year ended december 31 2017 increase revenue segment primarily due increase completion production spending customers react improving commodity prices ability increase prices services increase partially offset sale frac stack welltesting services business sold 2017 operating expenses fishing rental services segment 733 million year ended december 31 2018 represented increase 217 million 420 compared 517 million year ended december 31 2017 increase primarily result increase employee compensation costs fuel expense repair maintenance expense due increase activity levels increase wages employees coiled tubing services revenues coiled tubing services segment increased 291 million 695 710 million year ended december 31 2018 compared 419 million year ended december 31 2017 increase segment primarily due increase completion spending customers reacted improving commodity prices ability increase prices services operating expenses coiled tubing services segment 658 million year ended december 31 2018 represented increase 256 million 636 compared 402 million year ended december 31 2017 increase primarily result increase employee compensation costs fuel expense repair maintenance expense due increase activity levels increase wages employees fluid management services revenues fluid management services segment increased 83 million 103 890 million year ended december 31 2018 compared 807 million year ended december 31 2017 increase segment primarily due increase spending customers reacted improving commodity prices ability increase prices services operating expenses fluid management services segment 979 million year ended december 31 2018 represented decrease 24 million 24 compared 1003 million year ended december 31 2017 decrease primarily result decrease legal settlement expenses partially offset increase employee compensation costs due increase activity levels increase wages employees international sold remaining businesses former international segment canadian subsidiary russian subsidiary second third quarters 2017 respectively accordingly 2018 longer international segment revenues international segment year ended december 31 2017 56 million operating expenses international segment 106 million expenses related employee compensation costs equipment expense 02 million impairment reduce carrying value assets related liabilities russian business unit fair market value functional support operating expenses functional support segment decreased 110 million 143 662 million 127 consolidated revenues year ended december 31 2018 compared 772 million 177 consolidated revenues year ended december 31 2017 decrease primarily due lower employee compensation costs due reduced staffing levels decrease legal settlement expenses years ended december 31 2017 2016 following table shows operating results reportable segments years ended december 31 2017 2016 thousands year ended december 31 2017 successor period december 16 2016 december 31 2016 predecessor period january 1 2016 december 15 2016 rig services revenues rig services segment increased 174 million 75 2488 million year ended december 31 2017 compared 2314 million combined year ended december 31 2016 increase segment primarily due increase completion production spending customers reacted improving commodity prices operating expenses rig services segment 2525 million year ended december 31 2017 represented decrease 204 million 75 compared 2728 million combined year ended december 31 2016 expenses decreased primarily result reduced depreciation expense decrease employee compensation per hour basis took steps reduce cost structure fishing rental services revenues fishing rental services segment 592 million year ended december 31 2017 combined year ended december 31 2016 decrease revenue segment primarily due sale frac stack welltesting services business offset increase completion production spending customers react improving commodity prices operating expenses fishing rental services segment 517 million year ended december 31 2017 represented decrease 342 million 398 compared 859 million combined year ended december 31 2016 expenses decreased primarily due 210 million gain sale certain assets result reduced depreciation expense decrease employee compensation per hour basis took steps reduce cost structure coiled tubing services revenues coiled tubing services segment increased 99 million 310 419 million year ended december 31 2017 compared 320 million combined year ended december 31 2016 increase segment primarily due increase drilling completion spending customers reacted improving commodity prices operating expenses coiled tubing services segment 402 million year ended december 31 2017 represented decrease 113 million 219 compared 515 million combined year ended december 31 2016 expenses decreased primarily result reduced depreciation expense decrease employee compensation costs equipment expense took steps reduce cost structure fluid management services revenues fluid management services segment increased 15 million 19 807 million year ended december 31 2017 compared 792 million combined year ended december 31 2016 increase segment primarily due increase spending customers reacted improving commodity prices operating expenses fluid management services segment 1003 million year ended december 31 2017 represented decrease 180 million 152 compared 1183 million combined year ended december 31 2016 expenses decreased primarily result decrease employee compensation costs equipment expense took steps reduce cost structure international revenues international segment decreased 99 million 640 56 million year ended december 31 2017 compared 155 million combined year ended december 31 2016 decrease primarily attributable lower customer activity russia sale third quarter 2017 russian operations exit operations mexico sold 2016 operating expenses international segment decreased 641 million 858 106 million year ended december 31 2017 compared 746 million combined year ended december 31 2016 expenses decreased primarily result decrease employee compensation costs equipment expense related exit operations mexico russia 446 million impairment reduce carrying value assets related liabilities mexican business unit sold 2016 fair market value functional support operating expenses functional support segment decreased 484 million 385 772 million 177 consolidated revenues year ended december 31 2017 compared 1256 million 301 consolidated revenues combined year ended december 31 2016 decrease primarily due lower employee compensation costs due reduced staffing levels reduction wages 50 million fcpa settlement accrual 2016 decrease 240 million professional fees related 2016 corporate restructuring liquidity capital resources require capital fund ongoing operations including maintenance expenditures existing fleet equipment organic growth initiatives investments acquisitions debt service payments obligations believe internally generated cash flows operations current reserves cash availability abl facility sufficient finance cash requirements current future operations budgeted capital expenditures debt service obligations next twelve months oil natural gas prices began rapid substantial decline fourth quarter 2014 depressed commodity price conditions persisted worsened 2015 remained depressed 2016 2017 2018 commodity prices increased remain well 2014 average result demand products services declined substantially prices able charge customers products services also declined substantially trends materially adversely affected results operations cash flows financial condition 2018 unless conditions industry improve trend potentially continue beyond 2018 response conditions undertaken several actions detailed effort preserve improve liquidity financial position • april 2015 announced decision exit markets participate outside north america strategy sell relocate assets businesses operating markets end second half 2015 ceased operations colombia ecuador middle east fourth quarter 2016 completed sale business mexico completed sale canadian subsidiary russian subsidiary second third quarters 2017 respectively additionally 2017 sold frac stack welltesting services business • december 15 2016 company emerged preplanned voluntary chapter 11 reorganization resulting approximately 697 million company’s longterm debt eliminated along 456 million annual interest expense going forward • december 15 2016 entered new 80 million abl facility increased 100 million february 3 2017 due june 15 2021 new 250 million term loan facility due december 15 2021 december 31 2018 borrowings outstanding abl facility 348 million letters credit outstanding borrowing capacity 240 million available subject covenant constraints abl facility • beginning first quarter 2015 began series structural cost cutting changes corporate field levels include fixed costs supplychain efficiencies reduction capital expenditures headcount wage reductions continued 2018 however still substantial indebtedness obligations may incur additional expenses unable predict time ability fund operations pay principal interest longterm debt satisfy obligations depend upon available liquidity amount cash flows able generate operations 2018 net cash used operating activities 18 million industry conditions improve may negative cash flows operations 2019 current financial condition liquidity december 31 2018 working capital 550 million compared 830 million december 31 2017 working capital decreased 2018 primarily result decrease cash equivalents restricted cash inventories partially offset increase accounts receivable december 31 2018 503 million cash approximately 04 million held bank accounts foreign subsidiaries december 31 2018 01 million cash held foreign subsidiaries held us bank accounts denominated us dollars believe cash held wholly owned foreign subsidiaries could repatriated general corporate use without material withholdings cash flows cash used operating activities 18 million 514 million years ended december 31 2018 2017 respectively cash used operating activities year ended december 31 2018 primarily related net loss adjusted noncash items increase accounts receivable partially offset decrease inventory cash used operating activities year ended december 31 2017 primarily related net loss adjusted noncash items cash used investing activities 221 million year ended december 31 2018 compared cash provided investing activities 169 million ended december 31 2017 cash outflows periods consisted capital expenditures capital expenditures primarily related addition new equipment ongoing maintenance equipment cash inflows periods consisted proceeds sales fixed assets cash provided financing activities 28 million 35 million years ended december 31 2018 2017 respectively financing cash outflows periods primarily relate repayment longterm debt following table summarizes cash flows years ended december 31 2018 2017 period december 16 2016 december 31 2016 period january 1 2016 december 15 2016 thousands debt service december 31 2018 annual maturities indebtedness consisting term loan facility yearend follows thousands abl facility december 15 2016 company key energy services llc borrowers “abl borrowers” entered abl facility financial institutions party thereto time lenders “abl lenders” bank america na administrative agent lenders bank america na wells fargo bank national association cocollateral agents lenders abl facility provides aggregate initial commitments abl lenders 80 million february 3 2017 increased 100 million matures june 15 2021 abl facility provides abl borrowers ability borrow aggregate principal amount equal lesser aggregate revolving commitments effect ii sum 85 value eligible accounts receivable plus b 80 value eligible unbilled accounts receivable subject limit equal greater x 35 million 25 commitments amount may borrowed abl facility subject increase reduction based certain segregated cash reserves provided abl facility addition percentages accounts receivable unbilled accounts receivable included calculation described subject reduction extent certain bad debt writedowns dilutive items provided abl facility borrowings abl facility bear interest abl borrowers’ option per annum rate equal libor 30 60 90 180 consent abl lenders 360 days plus applicable margin varies 250 450 depending borrowers’ fixed charge coverage ratio time ii base rate equal sum greatest x prime rate federal funds rate plus 050 z 30day libor plus 10 plus b applicable margin varies 150 350 depending borrowers’ fixed charge coverage ratio time addition abl facility provides unused line fees 10 125 per year depending utilization letter credit fees certain factors abl facility may future guaranteed certain company’s existing future subsidiaries “abl guarantors” together abl borrowers “abl loan parties” secure obligations abl facility abl loan parties granted grant applicable administrative agent firstpriority security interest benefit abl lenders present future accounts receivable inventory related assets proceeds foregoing “abl priority collateral” addition obligations abl loan parties abl facility secured secondpriority liens term priority collateral described “term loan facility” revolving loans abl facility may voluntarily prepaid whole part without premium penalty subject breakage similar costs abl facility contains certain affirmative negative covenants including covenants restrict ability abl loan parties take certain actions including among things subject certain significant exceptions incurrence debt granting liens making investments entering transactions affiliates payment dividends sale assets abl facility also contains requirement abl borrowers comply certain periods fixed charge coverage ratio 100 december 31 2018 borrowings outstanding abl facility 348 million letters credit outstanding borrowing capacity 240 million available subject covenant constraints abl facility term loan facility december 15 2016 company entered term loan facility among company borrower certain subsidiaries company named guarantors therein financial institutions party thereto time lenders collectively “term loan lenders” cortland capital market services llc cortland products corp agent term loan lenders term loan facility outstanding principal amount 250 million effective date term loan facility mature december 15 2021 although maturity date may company’s request extended one term loan lenders pursuant terms term loan facility borrowings term loan facility bear interest company’s option per annum rate equal libor one two three six consent term loan lenders 12 months plus 1025 ii base rate equal sum greatest x prime rate federal funds rate plus 050 z 30day libor plus 10 plus b 925 term loan facility guaranteed certain company’s existing future subsidiaries “term loan guarantors” together company “term loan parties” secure obligations term loan facility term loan parties granted grant applicable agent firstpriority security interest benefit term loan lenders substantially term loan party’s assets certain excluded assets abl priority collateral “term priority collateral” addition obligations term loan parties term loan facility secured secondpriority liens abl priority collateral described “abl facility” loans term loan facility may prepaid company’s option subject payment prepayment premium certain circumstances provided term loan facility prepayment made first anniversary loan prior second anniversary prepayment must made 106 principle amount prepayment made second anniversary prior third anniversary prepayment must made 103 principle amount third anniversary prepayment made prepayment premium due company required make principal payments amount 625000 per quarter commencing quarter ending march 31 2017 addition pursuant term loan facility company must prepay offer prepay applicable term loans net cash proceeds certain debt incurrences asset sales excess cash flow upon certain change control transactions subject case certain exceptions term loan facility contains certain affirmative negative covenants including covenants restrict ability term loan parties take certain actions including among things subject certain significant exceptions incurrence debt granting liens making investments entering transactions affiliates payment dividends sale assets term loan facility also contains financial covenants requiring company maintain asset coverage ratio least 135 10 liquidity defined term loan facility must less 375 million least 200 million must cash equivalents held deposit accounts last day fiscal quarter subject certain exceptions cure rights offbalance sheet arrangements december 31 2018 currently offbalance sheet arrangements reasonably likely material current future effect financial condition revenues expenses results operations liquidity capital expenditures capital resources contractual obligations set forth summary contractual obligations december 31 2018 obligations pay future periods reflect certain assumptions including variability interest rates variablerate obligations duration obligations actual payments future periods may vary 1 based interest rates effect december 31 2018 debt compliance december 31 2018 compliance financial covenants abl facility term loan facility based management’s current projections expect compliance covenants abl facility term loan facility next twelve months breach covenants ratios tests could result default indebtedness see “ debt service” “item 1a risk factors” capital expenditures year ended december 31 2018 capital expenditures totaled 375 million primarily related ongoing replacement rig service fleet coiled tubing units fluid transportation equipment rental equipment capital expenditure plan 2019 contemplates spending 15 million 20 million subject market conditions primarily related addition new equipment needed take advantage increases activity ongoing maintenance equipment capital expenditure program 2019 subject market conditions including activity levels commodity prices industry capacity specific customer needs well cash flows including cash generated asset sales focus 2019 maximization current equipment fleet may choose increase capital expenditures 2019 expand presence market currently anticipate funding 2019 capital expenditures combination cash hand operating cash flow proceeds sales assets borrowings abl facility operating cash flows activity levels prove insufficient fund currently planned capital spending levels management expects adjust capital spending plans accordingly may also incur capital expenditures strategic investments acquisitions critical accounting policies accounting department responsible development application accounting policies internal control procedures reports chief financial officer process preparing financial statements conformity gaap requires us make certain estimates judgments assumptions may affect reported amounts assets liabilities disclosures contingencies balance sheet date amounts revenues expenses recognized reporting period presentation statement cash flows may record materially different amounts estimates judgments assumptions change actual results differ however analyze estimates assumptions judgments based historical experience various factors believe reasonable circumstances identified following critical accounting policies require significant amount estimation judgment accurately present financial position results operations cash flows • revenue recognition • estimate reserves workers’ compensation vehicular liability selfinsurance • contingencies • income taxes • estimates depreciable lives • valuation tangible finitelived intangible assets • valuation equitybased compensation revenue recognition recognize revenue following criteria met contract customer identified ii performance obligations contract identified iii transaction price determined iv transaction price allocated performance obligations v revenue recognized performance obligations satisfied • identifying contract customer ensures understanding company customer specific nature terms transaction finalized • inception contract company assesses goods services promised contract customer identifies performance obligation promise transfer customer either good service bundle goods services distinct ii series distinct goods services substantially pattern transfer customer • transaction price amount consideration company expects entitled exchange transferring promised goods services customer excluding amounts collected behalf third parties transaction price may include fixed amounts variable amounts nature variable amounts transaction price inherent uncertainty amount ultimately expected realized determinable outset contract however company shall estimate amount variable consideration contract inception subject certain limitations • separate performance obligations identified transaction price determined company allocates transaction price performance obligations generally done proportion standalone selling prices result discount within contract generally allocated proportionally separate performance obligations contract • revenue recognized satisfies identified performance obligation transferring promised good service customer good service considered transferred customer obtains control typical business contracts customers may include multiple performance obligations arrangements allocate revenues performance obligation based relative standalone selling price generally determine standalone selling prices based prices charged customers using expected costplus margin combined products services within contract account individual products services separately distinct ie product service separately identifiable items contract customer benefit resources readily available customer consideration including discounts allocated separate products services within contract based prices separately sell services items sold separately estimate standalone selling prices using expected costplus margin approach workers’ compensation vehicular liability selfinsurance occurrence event fully insured indemnified failure customer insurer meet indemnification insurance obligations could result substantial losses addition insurance may available cover risks available might able obtain insurance without substantial increase premiums possible addition higher premiums future insurance coverage may subject higher deductibles coverage restrictions estimate liability arising uninsured potentially insured events including workers’ compensation employer’s liability vehicular liability general liability record accruals consolidated financial statements reserves related claims based specific facts circumstances insured event past experience similar claims trend analysis adjust loss estimates calculation accruals based upon actual claim settlements reported claims loss estimates individual claims adjusted based upon actual claim judgments settlements reported claims actual outcome claims could differ significantly estimated amounts changes assumptions estimates could potentially negative impact earnings primarily selfinsured physical damage property rigs equipment automobiles due large deductibles selfinsurance contingencies periodically required record loss contingencies relate lawsuits claims proceedings taxrelated audits normal course operations consolidated balance sheet record loss contingency matters probable liability incurred amount loss reasonably estimated periodically review loss contingencies ensure recorded appropriate liabilities balance sheet adjust liabilities based estimates judgments made management respect likely outcome matters including effect applicable insurance coverage litigation matters estimates judgments could change based new information changes laws regulations changes management’s plans intentions outcome legal proceedings settlements factors actual results could vary materially reserves record liabilities environmental assessment indicates site remediation efforts probable costs reasonably estimated measure environmental liabilities based part relevant past experience currently enacted laws regulations existing technology sitespecific costs costsharing arrangements recognition joint several liability based upon best estimate final prorata share liability low amount range estimates assumptions involve judgments estimates management changes assumptions new information could lead increases decreases ultimate liability changes recognized immediately earnings record legal obligations retire tangible longlived assets balance sheet liabilities recorded discount incur liability significant judgment involved estimating future cash flows associated obligations well ultimate timing cash flows estimates amount timing cash flows change may material impact results operations income taxes account deferred income taxes using asset liability method provide income taxes significant temporary differences management determines current tax liability well taxes incurred result current operations yet deferred future periods current taxes payable represent liability related income tax returns current year net deferred tax expense benefit represents change balance deferred tax assets liabilities reported consolidated balance sheets deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled management makes certain assumptions timing temporary tax differences differing treatment certain items tax accounting purposes whether differences permanent final determination tax liability involves interpretation local tax laws tax treaties related authorities jurisdiction well significant use estimates assumptions regarding scope future operations results achieved timing nature income earned expenditures incurred record valuation allowances reduce deferred tax assets determine likely eg likelihood 50 deferred tax assets realized future periods assess likelihood use estimates judgment regarding future taxable income well jurisdiction taxable income generated determine whether valuation allowance required ultimate realization deferred tax assets depends ability generate sufficient taxable income appropriate character related jurisdiction future evidence supporting ability include current financial position results operations actual forecasted results reversal deferred tax liabilities tax planning strategies well current forecasted business economics industry additionally record uncertain tax positions financial statements net recognizable amount based amount management deems likely sustained upon ultimate settlement tax authorities domestic international tax jurisdictions operate estimates assumptions regarding current deferred tax items inaccurate modified changes could potentially material negative impacts earnings estimates depreciable lives use estimated depreciable lives longlived assets rigs heavyduty trucks trailers compute depreciation expense estimate future asset retirement obligations conduct impairment tests base estimates depreciable lives number factors environment assets operate industry factors including forecasted prices competition assumption provide appropriate amount capital expenditures asset operation maintain economical operation asset prevent untimely demise scrap useful lives intangible assets determined years expect assets generate benefit based legal contractual expectations depreciate operational assets depreciable lives salvage value generally 10 acquisition cost recognize gain loss upon ultimate disposal asset based difference carrying value asset disposal date proceeds receive connection disposal periodically analyze estimates depreciable lives fixed assets determine depreciable periods salvage value continue appropriate also analyze useful lives salvage value events conditions occur could shorten remaining depreciable life asset review depreciable periods salvage values reasonableness given current conditions result depreciation expense based upon estimates depreciable lives fixed assets salvage value economic factors require management make significant judgments estimates determine depreciable lives different originally estimated depreciation expense may increase decrease impairments carrying values fixed assets may result could negatively impact earnings valuation tangible finitelived intangible assets fixed assets finitelived intangibles tested potential impairment circumstances events indicate possible impairment may exist circumstances events referred “trigger events” examples trigger events include limited adverse change market conditions significant decrease benefits derived acquired business change use asset significant disposal particular asset class trigger event occurs impairment test performed based undiscounted cash flow analysis perform impairment test make judgments estimates assumptions regarding longterm forecasts revenues expenses relating assets subject review market conditions energy prices estimated depreciable lives assets discount rate assumptions legal factors impact operations significant effect estimates use determine whether assets impaired results undiscounted cash flow analysis indicate carrying value assets tested impairment recoverable record impairment charge write carrying value assets fair value using different judgments assumptions estimates could potentially arrive materially different fair value assets tested impairment may result impairment charge valuation equitybased compensation issue issued timebased vesting performancebased vesting stock options timebased vesting performancebased vesting restricted stock units restricted stock awards employees nonemployee directors options grant fair valued using blackscholes option model grant date amortized compensation expense vesting period option net forfeitures compensation related restricted stock units restricted stock awards based fair value award grant date amortized compensation expense vesting period award net forfeitures grantdate fair value timebased restricted stock units restricted stock awards determined using stock price grant date grantdate fair value performancebased restricted stock units determined using stock price grant date assuming 10x payout target however maximum 20x payout could achieved certain ebitdabased performance measures met utilizing blackscholes option pricing model determine fair values stock options certain assumptions made based subjective expectations subject change one assumptions would impact expense associated future grants key assumptions include historical stock price volatility riskfree interest rate expected life awards view limited amount time elapsed since reorganization volatility calculated based historical stock price volatility peer group lookback period equivalent expected term award valuation warrants pursuant plan effective date company issued two series warrants former holders predecessor company’s common stock one series warrants expire december 15 2020 series warrants expire december 15 2021 warrant exercisable one share company’s common stock par value 001 issuance warrants recorded fair value determined using blackscholes option pricing model warrants equity classified issuance recorded increase additional paidin capital amount 38 million recent accounting developments asu 201802 february 2018 financial accounting standards board “fasb” issued asu 201802 income statementreporting comprehensive income topic 220 reclassification certain tax effects accumulated comprehensive income standard allows reclassification accumulated comprehensive income loss retained earnings stranded tax effects resulting us tax cuts jobs act “2017 tax act” enacted december 22 2017 adopted guidance january 1 2018 adoption standard impact consolidated financial statements asu 201618 november 2016 fasb issued asu 201618 statement cash flows topic 230 restricted cash standard provides guidance presentation restricted cash restricted cash equivalents statement cash flows restricted cash restricted cash equivalents included cash equivalents reconciling beginningofperiod endofperiod amounts shown statements cash flows amendments asu applied using retrospective transition method effective reporting periods beginning december 15 2017 early adoption permitted adopted new standard effective january 1 2018 revised statement cash flows presentation restricted cash adoption standard impact consolidated financial statements asu 201615 august 2016 fasb issued asu 201615 statement cash flows topic 230 classification certain cash receipts cash payments clarifies entities classify certain cash receipts cash payments statement cash flows guidance also clarifies predominance principle applied cash receipts cash payments aspects one class cash flows guidance effective annual periods beginning december 15 2017 interim periods within annual periods early adoption permitted adopted new standard effective january 1 2018 adoption standard material impact consolidated financial statements asu 201613 june 2016 fasb issued asu 201613 financial instrumentscredit losses topic 326 measurement credit losses financial instruments change companies measure credit losses financial assets certain instruments aren’t measured fair value net income standard replace today’s “incurred loss” approach “expected loss” model instruments measured amortized cost availableforsale debt securities entities required record allowances rather reduce carrying amount amendments update effective annual periods beginning december 15 2019 interim periods within annual periods early adoption permitted annual periods beginning december 15 2018 company evaluating effect standard consolidated financial statements asu 201602 february 2016 fasb issued asu 201602 leases topic 842 replace existing lease guidance new standard intended provide enhanced transparency comparability requiring lessees record rightofuse assets corresponding lease liabilities balance sheet additional disclosure requirements include qualitative disclosures along specific quantitative disclosures objective enabling users financial statements assess amount timing uncertainty cash flows arising leases asu 201602 effective company annual reporting periods beginning december 15 2018 including interim periods within fiscal years early adoption permitted part assessment work todate formed implementation work team conducted training relevant staff regarding potential impacts new asu continuing contract analysis policy review engaged external resources assist us efforts complete analysis potential changes current accounting practices additionally created additional internal controls financial reporting made changes business practices processes related asu key elected new prospective “comparatives 840” transition method defined asu 201811 adopted new standard january 1 2019 applying comparatives 840 transition method adoption new standard require cumulative effect adjustment retained earnings believe immaterial asu 201409 may 2014 fasb issued asu 201409 revenue contracts customers topic 606 objective asu establish principles report useful information users financial statements nature amount timing uncertainty revenue contracts customers core principle recognize revenue depict transfer promised goods services customers amount reflects consideration entity expects entitled exchange goods services asu 201409 must adopted using either full retrospective method modified retrospective method adopted new standard effective january 1 2018 using full retrospective method adoption standard material impact consolidated financial statements item 7aitem 7 managements discussion analysis results operations financial condition special note certain statements set forth caption consitute forwardlooking statements within meaning reform act see special note regarding forwardlooking statements additional factors relating statements following discussion provides information assist understanding companys financial condition results operations read conjunction consolidated financial statements related notes appearing elsewhere report overview historically fluctuations well servicing activity strong correlation fluctuations oil gas prices fiscal 1998 oil prices decreased average approximately 21 per barrel west texas intermediate crude oil july 1997 average approximately 12 per barrel june 1998 result company experienced decrease demand drilling services even though company experienced successful fiscal year ended june 30 1998 terms earnings per share compared previous years continued low oil prices may continue negatively affect companys operating performance company seeks minimize effects low oil prices fluctuations pricing operations financial condition reduction operating capital costs diversification services entry new markets customer alliances fiscal year ended june 30 1998 versus fiscal year ended june 30 1997 results operations operating income company revenues year ended june 30 1998 increased 257621000 159 162425000 fiscal 1997 420046000 fiscal 1998 net income fiscal 1998 increased 15077000 166 9098000 fiscal 1997 24175000 fiscal 1998 increase primarily due well service oil gas well drilling acquisitions throughout year increased well service oil gas drilling revenues existing equipment third quarter fiscal 1998 oilfield services oilfield service revenues year ended june 30 1998 increased 230460000 160 144385000 year ended june 30 1997 374845000 year ended june 30 1998 increase primarily attributable acquisitions throughout year higher equipment use third quarter fiscal 1998 resulting increase demand oilfield services oil natural gas well drilling revenues oil gas well drilling activities increased 25139000 253 9956000 year ended june 30 1997 35095000 year ended june 30 1998 increase primarily result acquisitions oil natural gas exploration production revenues oil gas activities increased 55000 1 6975000 year ended june 30 1997 7030000 current year increase primarily result increased production current year partially offset decrease average price oil natural gas fiscal 1998 compared fiscal 1997 operating expenses oilfield services oilfield service expenses year ended june 30 1998 increased 159129000 159 100366000 year ended june 30 1997 259495000 year ended june 30 1998 increase due primarily acquisitions made throughout fiscal year increased demand oilfield services third quarter fiscal 1998 oil natural gas well drilling expenses related oil gas well drilling activities increased 18318000 225 8155000 year ended june 30 1997 26473000 year ended june 30 1998 increase primarily result acquisitions throughout fiscal 1998 oil natural gas exploration production expenses related oil gas activities increased 253000 9 2729000 year ended june 30 1997 2983000 year ended june 30 1998 increase primarily result increase total number producing oil gas wells fiscal 1997 1998 depreciation depletion expense depreciation depletion amortization expense increased 19925000 180 11076000 fiscal 1997 31001000 fiscal 1998 increase primarily due oilfield service depreciation expense result acquisitions completed throughout fiscal 1998 1997 general administrative expenses general administrative expenses increased 22268000 127 17545000 year ended june 30 1997 39813000 year ended june 30 1998 increase primarily attributable oilfield service oil gas well drilling acquisitions throughout fiscal year interest expense interest expense increased 13597000 173 7879000 fiscal 1997 21476000 fiscal 1998 increase primarily result debt incurred connection acquisitions completed throughout fiscal 1998 1997 income taxes income tax expense increased 9057000 163 5573000 income tax expense fiscal 1997 14630000 fiscal 1998 increase income taxes primarily due increase operating income however company expect required remit total amount 14630000 total federal income taxes fiscal year 1998 availability net operating loss carryforwards accelerated depreciation cash flow net cash provided operating activities increased 32193000 1493 2156000 fiscal 1997 34349000 fiscal 1998 increase attributable primarily increase net income fiscal 1998 compared fiscal 1997 decreases accounts payable accrued expenses increases depreciation net cash used investing activities increased 217701000 265 82062000 fiscal 1997 299763000 fiscal 1998 increase primarily result increased capital expenditures well service operations well service oil gas well drilling acquisitions net cash provided financing activities increased 131576000 112 117399000 fiscal 1997 248975000 fiscal 1998 increase primarily result proceeds longterm commercial paper borrowings companys existing lineofcredit current fiscal year fiscal year ended june 30 1997 versus fiscal year ended june 30 1996 operating income company revenues year ended june 30 1997 increased 96568000 147 65857000 fiscal 1996 162425000 fiscal 1997 net income fiscal 1997 increased 5512000 154 3586000 fiscal 1996 9098000 fiscal 1997 increase primarily due well service acquisitions throughout year increased oil gas revenues odessa exploration increased oil gas drilling revenues oilfield services oilfield service revenues year ended june 30 1997 increased 88452000 158 55933000 year ended june 30 1996 144385000 year ended june 30 1997 increase primarily attributable acquisitions throughout year higher equipment use resulting increase demand oilfield services oil natural gas exploration production revenues oil gas activities increased 3421000 96 3554000 year ended june 30 1996 6975000 current year increase primarily result increased production oil natural gas several wells drilled began production fiscal 1997 higher oil natural gas prices fiscal 1997 april 1996 purchase 69 million oil gas properties unrelated third party oil natural gas well drilling revenues oil gas well drilling activities increased 3768000 61 6188000 year ended june 30 1996 9956000 year ended june 30 1997 increase primarily result increased well drilling activity increase companys pricing structure operating expenses oilfield services oilfield service expenses year ended june 30 1997 increased 59629000 146 40737000 year ended june 30 1996 100366000 year ended june 30 1997 increase due primarily acquisitions made throughout fiscal year increased demand oilfield services addition company continued expand services offering fishing tools blowout preventers oilwell frac tanks oil natural gas exploration production expenses related oil gas activities increased 1534000 128 1195000 year ended june 30 1996 2729000 year ended june 30 1997 increase primarily result costs associated several oil natural gas wells drilled began producing fiscal 1997 april 1996 purchase 69 million oil gas properties oil natural gas well drilling expenses related oil gas well drilling activities increased 3125000 62 5030000 year ended june 30 1996 8155000 year ended june 30 1997 increase primarily result increased revenues depreciation depletion expense depreciation depletion amortization expense increased 6375000 136 4701000 fiscal 1996 11076000 fiscal 1997 increase primarily due oilfield service depreciation expense result increased oilfield service capital expenditures current period versus prior period acquisitions completed throughout fiscal 1997 addition depletion expense increased period due increase production oil natural gas general administrative expenses general administrative expenses increased 11403000 186 6142000 year ended june 30 1996 17545000 year ended june 30 1997 increase primarily attributable oilfield service acquisitions throughout fiscal year interest expense interest expense increased 5402000 218 2477000 fiscal 1996 7879000 fiscal 1997 increase primarily result debt incurred connection acquisitions completed throughout fiscal 1997 income taxes income tax expense increased 3685000 195 1888000 income tax expense fiscal 1996 5573000 fiscal 1997 increase income taxes primarily due increase operating income however company expect required remit significant amount 5573000 total federal income taxes fiscal year 1997 availability net operating loss carryforwards accelerated depreciation drilling tax credits cash flow net cash provided operating activities decreased 4965000 70 7121000 fiscal 1996 2156000 fiscal 1997 decrease attributable primarily increases accounts receivable decreases accounts payable accrued expenses partially set increases depreciation net income net cash used investing activities increased 68511000 506 13551000 fiscal 1996 82062000 fiscal 1997 increase primarily result increased capital expenditures well service operations well service acquisitions net cash provided financing activities 117399000 fiscal 1997 compared 9366000 fiscal 1996 represents increase 108033000 1153 increase partially offset repayments longterm debt primarily result proceeds existing debentures commercial paper current fiscal year liquidity capital resources companys cash equivalents decreased 164 million year ended june 30 1998 417 million june 30 1997 253 million june 30 1998 company projected without consideration acquisitions subsequent june 30 1998 51 million oilfield service capital expenditures fiscal 1999 compared 443 million 15 million fiscal 1998 1997 respectively odessa exploration projected outlays approximately 6 million development costs fiscal 1999 compared 78 million 82 million fiscal 1998 1997 respectively companys oil gas well drilling operations forecast approximately 5 million capital expenditures fiscal 1999 primarily improvements existing equipment machinery compared 54 million fiscal 1998 15 million fiscal 1997 company expects finance capital expenditures development costs using cash flows operations available credit company believes cash flows extent required borrowings second amended restated credit agreement sufficient fund expenditures debt june 6 1997 company entered agreement initial credit agreement pnc bank na pnc administrative agent syndication lenders pursuant lenders provided 255 million credit facility consisting 120 million sevenyear term loan 135 million fiveyear revolver interest rate term loan libor plus 275 percent interest rate revolver varied based libor level companys indebtedness initial credit agreement contained certain restrictive covenants required company maintain certain financial ratios september 25 1997 company repaid term loan portion outstanding amounts revolver applying proceeds initial second closings companys private placement 216 million 5 convertible subordinated notes discussed effective november 6 1997 company entered amended restated credit agreement pnc amended pnc credit agreement administrative agent lender pursuant pnc agreed make revolving credit loans maximum loan commitment 200 million maximum commitment decreases 175 million november 6 2000 125 million november 6 2001 loan commitment terminates november 6 2002 borrowings credit facility may either eurodollar loans interest currently payable quarterly libor plus 125 subject adjustment based certain financial ratios ii base rate loans interest payable quarterly greater pnc prime rate federal funds effective rate plus 12 iii combination thereof companys option amended pnc credit agreement contains certain restrictive covenants requires company maintain certain financial ratios change control company defined amended pnc credit agreement event default borrowings amended pnc credit agreement secured substantially assets company domestic subsidiaries effective december 3 1997 pnc completed syndication amended pnc credit agreement connection therewith pnc administrative agent syndication lenders company entered first amendment amended restated credit agreement amendment amended pnc credit agreement providing among things increase maximum commitment 250 million 200 million september 25 1997 company completed initial closing private placement 200 million 5 convertible subordinated notes due 2004 notes october 7 1997 company completed second closing private placement additional 16 million notes pursuant exercise remaining portion overallotment option granted initial purchasers notes placements made private offerings pursuant rule 144a securities act 1933 notes subordinate companys senior indebtedness defined indenture notes issued includes borrowings amended pnc credit agreement amended notes convertible holders option shares common stock conversion price 3850 per share subject certain adjustments notes redeemable companys option september 15 2000 whole part together accrued unpaid interest initial redemption price 10286 year beginning september 15 2000 declines ratably thereafter annual basis july 1996 company completed 52000000 private offering 7 convertible subordinated debentures due 2003 debentures pursuant rule 144a securities act 1933 amended securities act debentures subordinate companys senior indebtedness defined indenture pursuant debentures issued includes borrowings amended pnc credit agreement amended debentures convertible time prior maturity holders option shares common stock conversion price 975 per share subject certain adjustments addition debenture holders convert prior july 1 1999 entitled receive payment cash common stock companys option generally equal 50 interest otherwise payable date conversion july 1 1999 debentures redeemable option company july 15 1999 redemption price 104 decreasing 1 per year anniversary date thereafter event change control company defined indenture debentures issued holder debentures right holders option require company repurchase part holders debentures within 60 days event price equal 100 principal amount thereof together accrued unpaid interest thereon june 30 1998 47400000 principal amount debentures converted 4861538 shares common stock option holders additional 165423 shares common stock issued representing 50 interest otherwise payable date conversion july 1 1999 additional 35408 shares common stock issued inducement convert additional 165423 shares common stock representing 50 interest otherwise payable date conversion july 1 1999 included equity fair value additional 35408 shares common stock issued inducement convert 710186 recorded interest expense consolidated statement operations addition proportional amount unamortized debt issuance costs associated converted debentures charged additional paidin capital time conversion impact sfas 121 july 1 1996 company adopted provisions statement financial accounting standards 121 accounting impairment longlived assets longlived assets disposed fas 121 consequently company reviews longlived assets held used including oil gas properties accounted successful efforts method accounting whenever events circumstances indicate carrying value assets may recoverable longlived assets disposed accounted lower carrying amount fair value less cost sell management committed plan dispose assets companies including successful efforts oil gas companies required adopt fas 121 fiscal years beginning december 15 1995 order determine whether impairment occurred company estimated expected future cash flows income producing equipment oil gas properties compared future cash flows carrying amount asset determine carrying amount recoverable based process writedown carrying amount companys property necessary june 30 1998 impact recently issued accounting standards financial accounting standards board recently issued following accounting standards adopted company future statement financial accounting standards 130 sfas 130 reporting comprehensive income effective fiscal years beginning december 15 1997 sfas 130 establishes standards reporting display comprehensive income components full set generalpurpose financial statements specifially sfas 130 requires enterprise classify items comprehensive income nature financial statement ii display accumulated balance comprehensive income separately retained earnings additional paidin capital equity section statement financial position reclassification financial statements earlier periods provided comparative purposes required company adopt sfas 130 first quarter fiscal year ended june 30 1999 statement financial accounting standards 131 sfas 131 disclosures segments enterprise related information effective financial statements periods beginning december 15 1997 sfas 131 establishes standards way companys report information operating segments annual financial statements requires companys report selected information operating segments interim financial reports issued shareholders statement also establishes standards related disclosures products services geographic areas major customers sfas 131 need applied interim financial statements initial year application however comparative information interim periods initial year application reported financial statements interim periods second year application company adopt sfas 131 fiscal year ended june 30 1999 impact inflation operations management opinion inflation significant impact companys business year 2000 issue result acquisitions completed company past twentyfour months company utilizes several management information systems connection business operations financial reporting process company made assessment year 2000 issues determined many management information systems would adversely impacted arrival year 2000 accordingly operational efficiency prevent adverse impacts may result arrival year 2000 company currently implementing new integrated management information system along updated hardware replace systems currently utilized implementation new management information system year 2000 compliant began july 1998 scheduled completed june 1999 assuming unforeseen circumstances beyond companys control year 2000 issues relate suppliers customers remain evaluated company however based current available information company anticipate costs associated necessary modifications material companys operations financial condition cost new management information system large part management expects capitalized expected material impact companys business operations results thereof financial condition liquidity capital resources item 8item 7 managements discussion analysis results operations financial condition special note certain statements set forth caption constitute forwardlooking statements within meaning private securities litigation reform act 1995 see special note regarding forwardlooking statements additional factors relating statements following discussion provides information assist understanding companys financial condition results operations read conjunction consolidated financial statements related notes appearing elsewhere report certain reclassifications made consolidated financial statements years ended june 30 2001 2000 conform year end june 30 2002 presentation reclassifications consist primarily reclassifying certain items general administrative expense direct expense results operations fiscal year ended june 30 2002 versus fiscal year ended june 30 2001 companys results operations year ended june 30 2002 reflect impact decline industry conditions resulting decreased commodity prices customers perception commodity prices may decrease turn caused decline demand companys equipment services partially offset minimizing rate concessions lower interest charges fiscal 2002 see part item 1 major developments fiscal 2002 unfavorable industry conditions company revenues year ended june 30 2002 decreased 70698000 81 802564000 873262000 fiscal 2001 net income fiscal 2002 decreased 24564000 392 38146000 net income 62710000 fiscal 2001 decrease revenues net income due lower levels activity partially offset higher pricing lower interest expense debt reduction also contributing net income operating revenues well servicing well servicing revenues year ended june 30 2002 decreased 51644000 68 706629000 758273000 fiscal 2001 decrease due lower demand companys well servicing equipment services partially offset higher pricing contract drilling contract drilling revenues year ended june 30 2002 decreased 20562000 191 87077000 107639000 fiscal 2001 decrease due lower demand companys contract drilling equipment services partially offset higher pricing operating expenses well servicing well servicing expenses year ended june 30 2002 decreased 10643000 21 489681000 500324000 fiscal 2001 decrease expenses due lower activity levels partially offset higher insurance costs primarily workers compensation health care despite decreased costs well servicing expenses percentage well servicing revenues increased 660 fiscal 2001 693 fiscal 2002 primarily due increase insurance costs contract drilling contract drilling expenses year ended june 30 2002 decreased 16805000 217 60561000 77366000 fiscal 2001 decrease due lower activity levels partially offset higher insurance costs primarily workers compensation health care contract drilling expenses percentage contract drilling revenues decreased 719 fiscal 2001 695 fiscal 2002 margin improvement due improved operating efficiencies effects higher pricing partially offset increase insurance costs depreciation depletion amortization expense companys depreciation depletion amortization expense year ended june 30 2002 increased 3118000 41 78265000 75147000 fiscal 2001 increase due recent acquisitions increased capital expenditures past year company continued major refurbishments well servicing contract drilling equipment partially offset discontinued amortization goodwill amounted 9322000 fiscal 2001 companys adoption sfas 142 general administrative expenses companys general administrative expenses year ended june 30 2002 decreased 624000 10 59494000 60118000 fiscal 2001 decrease due reductions incentive payroll costs partially offset additional expenses incurred result moving corporate headquarters midland texas east brunswick new jersey increases personnel supporting information technology functions despite decreased costs general administrative expenses percentage total revenues increased 69 fiscal 2001 74 fiscal 2002 interest expense companys interest expense year ended june 30 2002 decreased 13228000 234 43332000 56560000 fiscal 2001 decrease primarily due significant reduction companys longterm debt using proceeds equity offering debt offering operating cash flow lesser extent lower interest rates included interest expense amortization debt issuance costs 2581000 3578000 years ended june 30 2002 2001 respectively foreign currency transaction loss fiscal 2002 company recorded argentine foreign currency transaction loss approximately 1443000 related dollardenominated receivables resulting recent devaluation argentinas currency extraordinary gain loss fiscal 2002 company repurchased 150908000 longterm debt various discounts premiums par value expensed related unamortized debt issuance costs resulted aftertax extraordinary loss 3037000 income taxes companys income tax expense year ended june 30 2002 decreased 12928000 24074000 37002000 fiscal 2001 decrease income tax expense due decreased pretax income companys effective tax rate fiscal 2002 2001 369 373 respectively effective tax rates vary statutory federal rate 35 principally disallowance certain goodwill amortization year ended june 30 2001 nondeductible expenses effects state local taxes cash flow companys net cash provided operating activities year ended june 30 2002 increased 35369000 178716000 143347000 fiscal 2001 increase despite lower net income fiscal 2002 primarily due decrease accounts receivable fiscal 2002 compared increase accounts receivable fiscal 2001 companys net cash used investing activities year ended june 30 2002 increased 24769000 108749000 83980000 fiscal 2001 increase due primarily higher capital expenditures increase acquisitions companys net cash used financing activities year ended june 30 2002 decreased 149827000 17315000 167142000 fiscal 2001 decrease primarily result higher proceeds debt equity offerings fiscal 2002 compared fiscal 2001 company continued strategy significantly reduced debt fiscal 2002 total debt reductions fiscal 2002 decreased compared fiscal 2001 effect exchange rates cash year ended june 30 2002 use 603000 result devaluation argentine peso fiscal 2002 fiscal year ended june 30 2001 versus fiscal year ended june 30 2000 companys results operations year ended june 30 2001 reflect impact favorable industry conditions resulting increased commodity prices turn caused increased demand companys equipment services fiscal 2001 positive impact increased demand companys operating results partially offset increased operating expenses incurred result increase companys business activity company revenues year ended june 30 2001 increased 235530000 369 873262000 637732000 fiscal 2000 net income fiscal 2001 increased 81669000 62710000 net loss 18959000 fiscal 2000 increase revenues net income due improved operating conditions higher rig hours increased pricing lower interest expense debt reduction also contributing net income operating revenues well servicing well servicing revenues year ended june 30 2001 increased 198781000 355 758273000 559492000 fiscal 2000 increase due increased demand companys well servicing equipment services higher pricing contract drilling contract drilling revenues year ended june 30 2001 increased 39211000 573 107639000 68428000 fiscal 2000 increase due increased demand companys contract drilling equipment services higher pricing operating expenses well servicing well servicing expenses year ended june 30 2001 increased 91601000 224 500324000 408723000 fiscal 2000 increase expenses due higher utilization companys well servicing equipment higher labor costs overall increase companys well servicing business despite increased costs well servicing expenses percent well servicing revenues decreased 731 fiscal 2000 660 fiscal 2001 margin improvement due improved operating efficiencies effects higher pricing contract drilling contract drilling expenses year ended june 30 2001 increased 19067000 327 77366000 58299000 fiscal 2000 increase due higher utilization companys contract drilling equipment higher labor costs overall increase companys contract drilling business despite increased costs contract drilling expenses percentage contract drilling revenues decreased 852 fiscal 2000 719 fiscal 2001 margin improvement due improved operating efficiencies effects higher pricing depreciation depletion amortization expense companys depreciation depletion amortization expense year ended june 30 2001 increased 4175000 59 75147000 70972000 fiscal 2000 increase due higher capital expenditures incurred fiscal 2001 company refurbished equipment increased utilization contract drilling equipment depreciates partially based utilization general administrative expenses companys general administrative expenses year ended june 30 2001 increased 8481000 164 60118000 51637000 fiscal 2000 increase due higher administrative costs resulting growth companys operations result improved industry conditions despite increased costs general administrative expenses percentage total revenues declined 81 fiscal 2000 69 fiscal 2001 interest expense companys interest expense year ended june 30 2001 decreased 15370000 214 56560000 71930000 fiscal 2000 decrease primarily due impact longterm debt reduction fiscal 2001 lesser extent lower shortterm interest rates borrowing margins floating rate debt extraordinary gain fiscal 2001 company repurchased 257115000 longterm debt various discounts premiums par value expensed related unamortized debt issue costs resulted aftertax extraordinary gain 429000 income taxes companys income tax expense year ended june 30 2001 increased 44408000 37002000 benefit 7406000 fiscal 2000 increase income tax expense due increased pretax income companys effective tax rate fiscal 2001 2000 373 265 respectively effective tax rates vary statutory federal rate 35 principally certain nondeductible goodwill amortization nondeductible expenses state local taxes cash flow companys net cash provided operating activities year ended june 30 2001 increased 108487000 143347000 34860000 fiscal 2000 increase due higher revenues resulting increased demand companys equipment services higher pricing partially offset higher operating general administrative expenses resulting increased business activity companys net cash used investing activities year ended june 30 2001 increased 46214000 83980000 37766000 fiscal 2000 increase due primarily higher capital expenditures companys net cash used financing activities year ended june 30 2001 increased 256443000 use 167142000 cash provided 89301000 fiscal 2000 increase primarily result significant debt reduction fiscal 2001 partially offset proceeds companys fiscal 2001 debt offering exercise stock options warrants liquidity capital resources company historically funded operations acquisitions capital expenditures working capital requirements cash flow operations bank borrowings issuance equity longterm debt company believes current reserves cash equivalents availability existing credit lines access capital markets internally generated cash flow operations sufficient finance cash requirements current future operations companys cash equivalents increased 52049000 54147000 june 30 2002 2098000 june 30 2001 company expects finance capital expenditures using net cash provided operating activities available credit company believes cash flow extent required borrowings current future credit facilities sufficient fund expenditures june 30 2002 company working capital excluding current portion longterm debt 7674000 approximately 103119000 includes cash equivalents approximately 54147000 compared working capital excluding current portion longterm debt 7946000 approximately 98543000 includes cash equivalents approximately 2098000 june 30 2001 increase working capital primarily due increase cash equivalents decrease accounts payable partially offset decrease accounts receivable inventories longterm debt capital lease obligations miscellaneous notes payable june 30 2002 companys longterm debt comprised senior credit facility ii series 8 38 senior notes due 2008 iii series 14 senior subordinated notes due 2009 iv series 5 convertible subordinated notes due 2004 senior credit facility fiscal 2002 company senior credit facility prior senior credit facility syndicate banks led pnc bank na consisted 100000000 revolving loan facility addition 30000000 letters credit could issued prior senior credit facility outstanding letters credit reduced borrowing availability revolving loan facility june 30 2002 funds outstanding revolving loan facility approximately 27963000 letters credit related workmans compensation insurance outstanding company drew approximately 43 million january 14 2002 order redeem 14 senior subordinated notes funds repaid issuance additional 8 38 notes march 2002 revolving loan bore interest based upon companys option prime rate plus variable margin 075 200 eurodollar rate plus variable margin 225 350 july 15 2002 company entered third amended restated credit agreement new senior credit facility new senior credit facility consists 150000000 revolving loan facility 40000000 sublimit letters credit loans secured tangible intangible assets company revolving loan commitment terminate july 15 2005 revolving loans must paid date revolving loans bear interest based upon companys option prime rate plus variable margin 000 075 eurodollar rate plus variable margin 125 275 new senior credit facility customary affirmative negative covenants including maximum leverage ratio minimum fixed charge coverage ratio minimum net worth well limitations liens indebtedness restrictions dividends acquisitions dispositions 8 38 senior notes march 6 2001 company completed private placement 175000000 8 38 senior notes due 2008 8 38 senior notes net cash proceeds private placement used repay remaining balance original term loans senior credit facility portion revolving loan facility senior credit facility outstanding march 1 2002 company completed public offering additional 100000000 8 38 senior notes due 2008 net cash proceeds public offering used repay remaining balance revolving loan facility senior credit facility 8 38 senior notes senior unsecured obligations 8 38 senior notes effectively subordinated keys secured indebtedness includes borrowings senior credit facility march 1 2005 company may redeem 8 38 senior notes time varying redemption prices excess par plus accrued interest addition march 1 2004 company may redeem 35 aggregate principal amount 8 38 senior notes proceeds certain sales equity 108375 par plus accrued interest june 30 2002 275000000 principal amount 8 38 senior notes remained outstanding 8 38 senior notes require semiannual interest payments march 1 september 1 year interest payments approximately 7125000 7328000 paid september 1 2001 march 1 2002 respectively 14 senior subordinated notes january 22 1999 company completed private placement 150000 units consisting 150000000 14 senior subordinated notes due 2009 14 senior subordinated notes 150000 warrants purchase 2173433 shares companys common stock exercise price 488125 per share unit warrants net cash proceeds private placement used repay substantially remaining 148600000 principal amount plus accrued interest owed companys bridge loan facility arranged connection acquisition dawson production services inc dawson january 15 2004 company may redeem 14 senior subordinated notes time varying redemption prices excess par plus accrued interest addition january 15 2002 company allowed redeem 35 aggregate principal amount 14 senior subordinated notes 114 par plus accrued interest proceeds certain sales equity fiscal 2001 company exercised right redemption 10313000 principal amount 14 senior subordinated notes price 114 principal amount plus accrued interest transaction resulted extraordinary loss taxes approximately 2561000 january 14 2002 company exercised right redemption 35403000 principal amount 14 senior subordinated notes price 114 principal amount plus accrued interest transaction resulted extraordinary loss taxes approximately 8468000 also fiscal 2002 company purchased canceled 6784000 principal amount 14 senior subordinated notes price 116 principal amount plus accrued interest transactions resulted extraordinary losses taxes approximately 1821000 unit warrants separated 14 senior subordinated notes became exercisable january 25 2000 date issuance value unit warrants estimated 7434000 classified discount 14 senior subordinated notes companys consolidated balance sheet discount amortized interest expense term 14 senior subordinated notes 14 senior subordinated notes mature unit warrants expire january 15 2009 14 senior subordinated notes subordinate companys senior indebtedness includes borrowings senior credit facility 8 38 senior notes june 30 2002 97500000 principal amount 14 senior subordinated notes remained outstanding 14 senior subordinated notes pay interest semiannually january 15 july 15 year interest payments approximately 9778000 6825000 made july 15 2001 january 15 2002 respectively june 30 2002 63500 unit warrants exercised producing approximately 4173000 proceeds company leaving 86500 unit warrants outstanding 5 convertible subordinated notes late september early october 1997 company completed private placement 216000000 5 convertible subordinated notes due 2004 5 convertible subordinated notes 5 convertible subordinated notes subordinate companys senior indebtedness includes borrowings senior credit facility 14 senior subordinated notes 8 38 senior notes 5 convertible subordinated notes convertible holders option shares companys common stock conversion price 3850 per share subject certain adjustments 5 convertible subordinated notes redeemable companys option september 15 2000 whole part together accrued unpaid interest initial redemption price 10286 year beginning september 15 2000 declines ratably thereafter annual basis fiscal 2001 company repurchased canceled 47384000 principal amount 5 convertible subordinated notes repurchases resulted extraordinary gains taxes approximately 4564000 fiscal 2002 company repurchased canceled 108475000 principal amount 5 convertible subordinated notes leaving 49951000 principal amount 5 convertible subordinated notes outstanding june 30 2002 repurchases resulted extraordinary gains taxes approximately 5633000 since june 30 2002 company repurchased canceled additional 204000 principal amount 5 convertible subordinated notes leaving 49747000 outstanding september 30 2002 interest 5 convertible subordinated notes payable march 15 september 15 year interest approximately 3027000 1259000 paid september 15 2001 march 15 2002 respectively critical accounting policies company follows certain significant accounting policies preparing consolidated financial statements complete summary policies included note 1 consolidated financial statements included herein certain policies require management make significant subjective estimates sensitive deviations actual results managements assumptions particular management makes estimates regarding fair value companys reporting units assessing potential impairment goodwill addition company makes estimates regarding future undiscounted cash flows future use longlived assets whenever events changes circumstances indicate carrying amount longlived asset may recoverable assessing impairment goodwill company used estimates assumptions estimating fair value reporting units actual future results could different estimates assumptions used events circumstances might lead indication impairment goodwill would include might limited prolonged decreases expectations longterm well servicing andor drilling activity rates brought prolonged decreases oil natural gas prices changes government regulation oil natural gas industry events could affect level activity exploration production companies assessing impairment longlived assets goodwill change circumstances indicating carrying amount longlived asset may recoverable company estimated future undiscounted net cash flows use asset based actual historical results expectations future economic circumstances including oil natural gas prices operating costs estimate future net cash flows use asset could change actual prices costs differ due industry conditions factors affecting companys performance recently issued financial accounting standards recently financial accounting standards board fasb issued statement financial accounting standards 143 accounting asset retirement obligations sfas 143 statement financial accounting standards 144 accounting impairment disposal longlived assets sfas 144 statement financial accounting standards 145 rescission fasb statements 4 44 64 amendment fasb statement 13 technical corrections sfas 145 statement financial accounting standards 146 accounting costs associated exit disposal activities sfas 146 sfas 143 requires company recognize liability legal obligations associated retirement tangible long lived assets capitalize equal amount cost asset depreciate estimated remaining useful life asset adoption sfas 143 could material impact company depending lives oil gas properties salt water disposal wells sfas 144 addresses financial accounting reporting impairment disposal longlived assets sfas 145 rescinds statement 4 required gains losses extinguishment debt aggregated classified extraordinary item amends statement 13 require certain lease modifications economic effects similar saleleaseback transactions accounted manner saleleaseback transactions upon adoption sfas 145 company longer record gains losses extinguishment debt extraordinary items impact adoption sfas 145 company depend companys early retirements debt sfas 146 establishes requirements financial accounting reporting costs associated exit disposal activities sfas 143 effective fiscal years beginning june 15 2002 earlier adoption encouraged sfas 144 effective fiscal years beginning december 15 2001 interim periods within fiscal years sfas 145 effective fiscal years beginning may 15 2002 earlier adoption encouraged sfas 146 effective exit disposal activities initiated december 31 2002 company currently assessing impact standards consolidated financial statements impact inflation operations management opinion inflation significant impact keys business item 7aitem 7 management’s discussion analysis financial condition results operations following discussion analysis financial condition results operations read conjunction consolidated financial statements related notes thereto “item 8 financial statements supplementary data” discussion contains forwardlooking statements based upon current expectations subject uncertainty changes circumstances including identified “cautionary note regarding forwardlooking statements” actual results may differ materially expectations due potentially inaccurate assumptions known unknown risks uncertainties forwardlooking statements read conjunction disclosures “item 1a risk factors” index financial statements overview provide full range well services major oil companies foreign national oil companies independent oil natural gas production companies produce maintain enhance flow oil natural gas throughout life well services include rigbased coiled tubingbased well maintenance workover services well completion recompletion services fluid management services fishing rental services ancillary oilfield services additionally certain rigs capable specialty drilling applications operate major oil natural gas producing regions continental united states operations mexico colombia middle east russia argentina addition technology development control systems business based canada demand services fluctuates primarily relation price anticipated price oil natural gas turn driven supply demand oil natural gas generally supply commodities decreases demand increases service maintenance requirements increase oil natural gas producers attempt maximize productivity wells higher priced environment however lower oil natural gas price environment demand service maintenance generally decreases oil natural gas producers decrease activity particular demand new existing field drilling completion work driven available investment capital work types services easily “started” “stopped” oil natural gas producers generally tend less risk tolerant commodity prices low volatile may experience rapid decline demand well maintenance services compared demand types oilfield services lowerpriced environment fewer well service rigs needed completions activities generally associated drilling activity revised reportable business segments first quarter 2011 revised operating segments us international also functional support segment associated managing reportable operating segments full description operating segments see “service offerings” “item 1 business” financial results years ended december 31 2010 2009 restated reflect change operating segments business growth strategies focus horizontal well services recent years number horizontal wells drilled us increased significantly horizontal wells tend involve higher degree service intensity associated drilling completion believe ultimately maintenance required lifetime capitalize growing market segment built acquired new equipment including capable rigs coiled tubing units upgraded existing equipment capable providing services integral completion maintenance horizontal wellbores additionally 2011 acquired edge oilfield services llc summit oilfield services llc collectively “edge” primarily rents frac stack equipment used support hydraulic fracturing operations associated flowback frac fluids proppants oil natural gas edge increases higherend equipment service offerings associated horizontal well completion activity also expanded service offerings unconventional shale regions horizontal activity prevalent including bakken shale eagle ford shale others intend continue focus expansion horizontal well service offerings existing markets new markets united states continue expansion international markets presently operate internationally mexico colombia middle east russia argentina particularly regions countries large legacy oilfields facing production declines believe experience domestic mature oilfields proprietary technologies including keyview® system provides us opportunity compete new business foreign markets continue evaluate international expansion opportunities regions already presence well regions index financial statements pursue prudent acquisitions complementary businesses intend continue disciplined approach acquisitions seeking opportunities strengthen presence selected regional markets provide opportunities expand core services also seek acquire technologies assets businesses represent good operational strategic andor synergistic fit existing service offerings example recent acquisition edge complemented horizontal well service offerings likewise acquisition ofs energy services llc “ofs” 2010 coiled tubing asset acquisitions enabled us expand unconventional shale market positioning performance measures determining overall health oilfield service industry believe baker hughes us land drilling rig count best barometer capital spending activity levels since data made publicly available weekly basis historically activity levels highly correlated capital spending oil natural gas producers 1 represents average monthly average prices years presented source eia bloomberg 2 source wwwbakerhughescom index financial statements internally measure activity levels well servicing operations primarily rig trucking hours generally capital spending oil natural gas producers increases demand services also rises resulting increased rig trucking services hours worked conversely activity levels decline due lower spending oil natural gas producers generally provide fewer rig trucking services results lower hours worked following table presents quarterly rig trucking hours 2009 2011 market conditions outlook market conditions year ended december 31 2011 overall demand services provide continued improve building industry expansion began earnest 2010 baker hughes us rig count data published weekly often used coincident indicator broader oilfield activity baker hughes us land rig count average 2011 1846 rigs 219 compared 2010 average 1514 rigs additionally baker hughes us oil rig count average 2011 984 rigs 666 compared 2010 average 591 horizontal rig count average 2011 1074 rigs 307 compared 2010 average 822 result increase oil prices related increase customers’ capital spending overall activity levels asset utilization prices increased 2011 overall market conditions continued improve 2011 compared 2010 continued build strategic initiatives underway 2010 efforts generate higher longterm growth better investment returns particular continued increase investments higher capability heavy workover completion rigs large diameter extendedreach capable coiled tubing units fluid transportation vehicles disposal wells premium rental drill pipe service tubing high pressure certified blowout preventers keyview® systems continued focus investments growing market positioning legacy oil markets newer unconventional shale oil markets including bakken north dakota eagle ford texas index financial statements furtherance investment strategy acquired edge august 2011 edge acquisition added premium rental equipment offerings particularly frac stacks used high pressure hydraulic fracturing operations also expanded edge’s frac stack business eagle ford shale additionally edge represents initial foray production testing services good operational fit well completion service offerings also expanded position mexico colombia middle east 2011 mexico awarded two 90 million contracts work aceite terciario del golfo “atg” field contracts led us increase rig count country 2011 additional rigs planned country 2012 doubling rig count country colombia bahrain increased rig count first full year operations markets opportunities increases 2012 argentina focus remains improving overall asset utilization profitability however begun process selling argentina operations expect close transaction 2012 russia continue grow customer base stable backlog projects improve asset utilization market outlook continued growth global domestic oil demand combined limited global production capacity continues drive oil prices favorable continued investment oildirected activity 2012 especially productive horizontal wells despite weak domestic natural gas prices believe strong fundamental oil outlook sets stage continued growth production companies’ capital spending 2012 domestically internationally material change domestic global economies 2012 outlook business 2012 2013 could change believe us lines business experience continued higher demand resulting higher overall activity levels 2012 compared 2011 rig services business intend address higher customer demand continuing upgrade enhance several higher capability rigs improve operational efficiency existing fleet grow fleet organic additions particularly larger rig classes fluids management services business tends driven overall number producing oil gas wells relates hauling produced water wells us onshore rig count especially horizontal onshore us rig count relates transportation drilling fluid completion fluid water make frac fluids well sites activity intervention services coiled tubing business driven new horizontal well completions number producing oil gas wells us anticipate demand services remain strong 2012 beyond particularly additional drilling rig hydraulic fracturing capacity debottlenecks growth well completion activity conversely new coiled tubing equipment deliveries availability experienced crews remain challenge growth fishing rental services business tends correlated onshore rig count anticipate continued moderatetostrong customer demand growth 2012 continue invest business meet growth demand greater inventory fishing rental tools seeking investments new existing technologies enhance fishing rental services internationally expect build growth experienced 2011 mexico colombia middle east additional investments areas supported expected strong customer demand plan leverage international operations reservoir field development engineering expertise russian business impact inflation operations 2012 anticipate cost inflation remain one biggest challenges 2011 expect competition experienced crews throughout oilfield services industry continue put upward pressure wages access experienced capable crews remains one biggest challenges growth also anticipate need mitigate equipment fuel costs 2012 addition effective active cost management endeavor secure prices services anticipate cost inflation still generate appropriate return services index financial statements results operations consolidated results operations following table shows consolidated results operations years ended december 31 2011 2010 2009 year ended december 31 2011 2010 year ended december 31 2011 income 1015 million compared 735 million year ended december 31 2010 income 2011 069 per diluted share compared 057 per diluted share 2010 income per share 2011 impacted loss extinguishment debt also 2010 results included gain sale pressure pumping wireline businesses october 1 2010 revenues year ended december 31 2011 increased 6932 million 601 185 billion 115 billion year ended december 31 2010 result increased activity improved pricing compared 2010 domestic international growth well revenue contribution acquisitions completed 2011 fourth quarter 2010 see “segment operating results year ended december 31 2011 2010” detailed discussion change revenues direct operating expenses direct operating expenses increased 3621 million 434 12 billion 648 revenues year ended december 31 2011 compared 8350 million 724 revenues year ended december 31 2010 direct result increased business activity well inflation operating costs see “segment operating results year ended december 31 2011 2010” detailed discussion change direct operating expenses index financial statements depreciation amortization expense depreciation amortization expense increased 326 million 238 1696 million 92 revenue year ended december 31 2011 compared 1370 million 119 revenue year ended december 31 2010 increase primarily attributable increase fixed asset base acquisitions 2011 fourth quarter 2010 well increased capital expenditures 2011 general administrative expenses general administrative expenses increased 398 million 201 2381 million 129 revenues year ended december 31 2011 compared 1983 million 172 revenues year ended december 31 2010 general administrative expenses increased due increase employee compensation resulting rescission temporary employee compensation benefit reductions late 2010 well increased headcount due growth loss early extinguishment debt loss early extinguishment debt 465 million year ended december 31 2011 compared zero period 2010 due tender offer 8375 senior notes due 2014 “2014 notes” termination prior credit facility first quarter 2011 loss consisted tender premium 2014 notes well transaction fees writeoff unamortized portion deferred financing costs interest expense net amounts capitalized interest expense increased 06 million 425 million 23 revenues year ended december 31 2011 compared 420 million 36 revenues period 2010 overall interest rates debt declined 2011 due replacement 2014 notes 675 senior notes due 2021 “2021 notes” first quarter 2011 however rate decline offset additional interest expense due greater aggregate principal amount outstanding 2021 notes additional borrowings amended 2011 credit facility defined fund acquisition edge income expense net year ended december 31 2011 recognized income net 58 million compared income net 27 million year ended december 31 2010 april 2011 sold equity interest iroc energy services corp “iroc” recorded gain sale 48 million second quarter 2011 foreign exchange gain relates increase us dollardenominated transactions foreign locations fluctuations strength us dollar table presents comparative detailed information income net december 31 2011 2010 income tax expense benefit income tax expense continuing operations 583 million 367 effective rate pretax income 1590 million year ended december 31 2011 compared income tax benefit 205 index financial statements million 367 effective rate pretax loss 559 million 2010 effective tax rates differ statutory rate 35 primarily state local foreign income taxes tax effects permanent items attributable booktax differences discontinued operations net income discontinued operations zero year ended december 31 2011 compared 1057 million year ended december 31 2010 discontinued operations 2010 relate sale pressure pumping wireline businesses discussion see “note 3 discontinued operations” “item 8 financial statements supplementary data” noncontrolling interest year ended december 31 2011 allocated 08 million associated net loss incurred joint ventures noncontrolling interest holders ventures compared 31 million year ended december 31 2010 year ended december 31 2010 2009 year ended december 31 2010 income 735 million compared loss 1561 million year ended december 31 2009 income 2010 057 per share compared loss 129 per share 2009 included income per share 2010 gain sale pressure pumping wireline businesses october 1 2010 also 2009 results included asset retirement impairment charges 970 million recur 2010 revenues year ended december 31 2010 increased 1980 million 207 12 billion 9557 million year ended december 31 2009 result increased activity improved pricing compared 2009 well revenue contribution acquisitions completed 2010 see “segment operating results year ended december 31 2010 2009” detailed discussion change revenues direct operating expenses direct operating expenses increased 1591 million 235 8350 million 724 revenues year ended december 31 2010 compared 6759 million 707 revenues year ended december 31 2009 direct result activity increases business well inflation operating costs see “segment operating results year ended december 31 2010 2009” detailed discussion change direct operating expenses depreciation amortization expense depreciation amortization expense decreased 122 million 82 1370 million 119 revenue year ended december 31 2010 compared 1492 million 156 revenue year ended december 31 2009 decrease depreciation amortization expense primarily attributable decreases carrying value fixed assets due rig retirement asset impairment charges recorded third quarter 2009 partially offsetting decline increases fixed asset base 2010 due capital spending acquisitions year general administrative expenses general administrative expenses increased 261 million 152 1983 million 172 revenues year ended december 31 2010 compared 1721 million 180 revenues year ended december 31 2009 general administrative expenses increased due additional stock based compensation expense related new equity awards 2010 bonuses paid 2010 present 2009 offset lower professional fees 2010 related cost reduction efforts transaction costs incurred 2010 related acquisition ofs also contributed increase index financial statements asset retirements impairments year ended december 31 2010 asset retirements impairments compared year ended december 31 2009 recognized 970 million pretax charge associated asset retirements impairments 2009 pretax charges included 659 million related retirement certain rigs associated equipment 311 million pretax impairment charge related assets us segment loss early extinguishment debt loss early extinguishment debt zero year ended december 31 2010 compared 05 million period 2009 loss consisted writeoff unamortized portion deferred financing costs associated capacity reduction credit facility fourth quarter 2009 interest expense net amounts capitalized interest expense increased 26 million 420 million 36 revenues year ended december 31 2010 compared 394 million 41 revenues period 2009 due higher interest rates borrowings credit facility combined lower capitalized interest due lower capital expenditures related construction equipment income net year ended december 31 2010 recognized income net 27 million compared income net 13 million year ended december 31 2009 table presents comparative detailed information income net december 31 2010 2009 income tax expense benefit income tax benefit continuing operations 205 million 367 effective rate pretax loss 559 million year ended december 31 2010 compared income tax benefit 660 million 372 effective rate pretax loss 1772 million year ended december 31 2009 effective tax rates differ statutory rate 35 primarily state local foreign income taxes tax effects permanent items attributable booktax differences discontinued operations recorded net income discontinued operations 1057 million year ended december 31 2010 compared net loss discontinued operations 454 million year ended december 31 2009 loss 2009 mostly related asset impairment recorded pressure pumping equipment third quarter 2009 discontinued operations improved 2010 fracturing cementing services within pressure pumping operations due higher activity expansion new markets better pricing also recorded gain sale discontinued operations october 2010 discussion see “note 3 discontinued operations” “item 8 financial statements supplementary data” noncontrolling interest year ended december 31 2010 allocated 31 million compared 06 million year ended december 31 2009 associated net loss incurred joint ventures index financial statements segment operating results year ended december 31 2011 2010 following table shows operating results reportable segments twelvemonth periods ended december 31 2011 2010 thousands year ended december 31 2011 year ended december 31 2010 us revenues us segment increased 5688 million 592 153 billion year ended december 31 2011 compared 9612 million year ended december 31 2010 increase segment due increase activity customer spending improved pricing first quarter 2011 implemented price increases lines business also added new equipment capacity several growing shale plays including bakken eagle ford additionally acquisitions fourth quarter 2010 2011 contributed increase revenue year operating expenses us segment 117 billion year ended december 31 2011 represented increase 3435 million 414 compared 8290 million period 2010 increase directly attributable activity growth increases period combined impact inflationary pressure operating costs including fuel wages impact rescission late 2010 temporary cost reduction measures international revenues international segment increased 1244 million 646 3168 million year ended december 31 2011 compared 1924 million year ended december 31 2010 increase segment primarily attributable international expansion second half 2010 colombia middle east addition significant activity increase mexico operating expenses international segment increased 739 million 343 2895 million year ended december 31 2011 compared 2156 million year ended december 31 2010 increased direct result additional activity growth full year operations colombia middle east period functional support operating expenses functional support increased 170 million 135 1428 million 77 consolidated revenues year ended december 31 2011 compared 1257 million 109 consolidated revenues year ended december 31 2010 increase costs relates reinstatement late 2010 certain employee compensation benefits suspended 2009 part cost savings effort index financial statements year ended december 31 2010 2009 following table shows operating results reportable segments twelvemonth periods ended december 31 2010 2009 thousands except percentages year ended december 31 2010 year ended december 31 2009 us revenues us segment increased 2029 million 268 9612 million year ended december 31 2010 compared 7584 million year ended december 31 2009 increase segment due expansion coiled tubing services organic growth acquisitions well increase activity fishing rental operations due improved economic conditions revenue fluid management business improved significantly 2010 due increased activity bakken shale market excluding asset retirements impairments operating expenses us segment 8290 million year ended december 31 2010 represented increase 1039 million 143 compared 7250 million period 2009 although incurred additional costs attributable higher activity levels expansion costs us costs offset impact temporary cost reduction measures implemented 2009 incur asset retirement impairment charges 2010 third quarter 2009 removed service retired portion us rig fleet associated support equipment resulting pretax asset retirement charge 659 million also third quarter 2009 performed assessment fair value assets us segment assessment resulted pretax asset impairment charge 311 million international revenues international segment decreased 49 million 25 1924 million year ended december 31 2010 compared 1973 million year ended december 31 2009 decrease segment primarily attributable lower revenues mexico due decrease work pemex contract pemex expired march 2010 resulting unutilized assets mexico budget cuts mexico suppressed work remaining pemex contract second third quarter 2010 partially offsetting decrease increase revenue colombia middle east due international expansion second half 2010 operating expenses international segment increased 490 million 294 2156 million year ended december 31 2010 compared 1667 million year ended december 31 2009 increase direct result start costs associated foreign expansion severance costs incurred mexico due decrease work pemex overall inflation index financial statements functional support operating expenses functional support increased 201 million 1257 million 109 consolidated revenues year ended december 31 2010 compared 1056 million 110 consolidated revenues year ended december 31 2009 increase costs relates primarily bonuses paid december 2010 present 2009 higher equity compensation expense due new equity awards costs associated new erp system second quarter 2010 transaction costs incurred 2010 related acquisition ofs also contributed increase liquidity capital resources require capital fund ongoing operations including maintenance expenditures existing fleet equipment organic growth initiatives investments acquisitions primary sources liquidity cash flows generated operations available cash availability senior secured revolving credit facility intend use sources liquidity fund working capital requirements capital expenditures strategic investments acquisitions 2012 expect access available funds amended 2011 credit facility meet cash requirements daytoday operations times peak needs throughout year planned capital expenditures well acquisitions choose pursue could financed combination cash hand cash flow operations borrowings amended 2011 credit facility case acquisitions equity believe internally generated cash flows operations current reserves cash availability amended 2011 credit facility sufficient finance cash requirements current future operations budgeted capital expenditures debt service next twelve months terms amended 2011 credit facility committed letters credit count borrowing capacity december 31 2011 2950 million borrowings 643 million letters credit outstanding amended 2011 credit facility leaving 1907 million available borrowing capacity subsequent december 31 2011 borrowed additional 85 million amended 2011 credit facility fund capital expenditures obligations amended 2011 credit facility guaranteed subsidiaries secured assets including accounts receivable inventory equipment see discussion “debt service” december 31 2011 adjusted working capital working capital excluding current portion capital lease obligations 17 million 3128 million adjusted working capital december 31 2010 1364 million excluding current portion capital lease obligations 40 million adjusted working capital december 31 2011 increased 2010 result increased receivables due activity increases growth associated improving market conditions 2011 december 31 2011 354 million cash approximately 106 million held bank accounts foreign subsidiaries amount approximately 10 million held joint ventures subject noncontrolling interest cannot repatriated less 01 million cash held foreign subsidiaries held us bank accounts denominated us dollars believe cash held wholly owned foreign subsidiaries could repatriated general corporate use without material withholdings cash flows year ended december 31 2011 generated cash flows operating activities 1883 million compared 1298 million year ended december 31 2010 operating cash inflows primarily relate income generated year partially offset net payment income tax obligations 2010 increase accounts receivable deposits associated increased activity cash used investing activities 5201 million 86 million years ended december 31 2011 2010 respectively investing cash outflows relate increased capital expenditure program 2011 cash paid acquisitions index financial statements cash provided financing activities 3061 million year ended december 31 2011 compared cash used financing activities 1002 million year ended december 31 2010 financing cash inflows 2011 consisted primarily net borrowings 2950 million revolving credit facility fund acquisition edge august 2011 well fund portion capital expenditures following table summarizes cash flows year ended december 31 2011 2010 debt service december 31 2011 annual maturities indebtedness consisting 2014 notes 2021 notes borrowings amended 2011 credit facility yearend follows maturities debt 2012 interest 4750 million 2021 notes due march 1 september 1 year 2021 notes mature september 1 2021 interest remaining 36 million aggregate principal amount 2014 notes outstanding due june 1 december 1 year 2014 notes mature december 1 2014 interest paid 2014 notes 2021 notes 2011 226 million interest 2014 notes 2021 notes 2012 expected 324 million expect fund interest payments cash hand cash generated operations 8375 senior notes due 2014 november 29 2007 issued 4250 million aggregate principal amount 2014 notes march 4 2011 repurchased 4213 million aggregate principal amount 2014 notes purchase price index financial statements 1090 per 1000 principal amount march 15 2011 repurchased additional 01 million aggregate principal amount purchase price 1060 per 1000 principal amount connection repurchase 2014 notes incurred loss 443 million early extinguishment debt related premium paid tender payment related fees writeoff unamortized loan fees 675 senior notes due 2021 march 4 2011 issued 4750 million aggregate principal amount 2021 notes net proceeds deducting underwriters’ fees offering expenses 4660 million used net proceeds repurchase 2014 notes described including accrued unpaid interest fees expenses capitalized 102 million financing costs associated issuance 2021 notes amortized term notes 2021 notes general unsecured senior obligations subordinated existing future secured indebtedness 2021 notes jointly severally guaranteed senior unsecured basis certain existing future domestic subsidiaries march 1 2016 2021 notes subject redemption time option whole part redemption prices expressed percentages principal amount redeemed plus accrued unpaid interest applicable redemption date redeemed twelvemonth period beginning march 1 years indicated time march 1 2014 may one occasions redeem 35 aggregate principal amount outstanding 2021 notes redemption price 106750 principal amount plus accrued unpaid interest redemption date net cash proceeds one equity offerings provided least 65 aggregate principal amount 2021 notes remains outstanding immediately redemption ii redemption shall occur within 180 days date closing equity offering addition time prior march 1 2016 may option redeem portion 2021 notes redemption price equal 100 principal amount plus premium respect 2021 notes plus accrued unpaid interest redemption date experience change control subject certain exceptions must give holders 2021 notes opportunity sell us 2021 notes whole part purchase price equal 101 aggregate principal amount plus accrued unpaid interest date purchase subject certain negative covenants indenture governing 2021 notes “indenture” indenture limits ability among things • incur additional indebtedness issue preferred equity interests • pay dividends make distributions repurchase redeem equity interests • make loans investments • enter sale leaseback transactions • sell transfer otherwise convey assets • create liens • enter transactions affiliates • enter agreements restricting subsidiaries’ ability pay dividends index financial statements • designate future subsidiaries unrestricted subsidiaries • consolidate merge sell substantially applicable entities’ assets covenants subject certain exceptions qualifications contain crossdefault provisions relating covenants 2011 credit facility discussed substantially covenants terminate 2021 notes mature one two specified ratings agencies assigns 2021 notes investment grade rating future events default exist indenture december 31 2011 2021 notes investment grade covenants cease apply us result achieving investment grade rating restored even credit rating assigned 2021 notes later falls investment grade compliance covenants december 31 2011 senior secured credit facility march 31 2011 simultaneously terminated without prepayment penalty 300 million credit agreement dated november 29 2007 amended mature later november 29 2012 entered new credit agreement “2011 credit facility” several lenders jpmorgan chase bank na administrative agent swing line lender bank america na syndication agent capital one na wells fargo bank na codocumentation agents 2011 credit facility consists revolving credit facility letter credit subfacility swing line facility mature later march 31 2016 connection termination previous credit agreement incurred loss 22 million early extinguishment debt related writeoff unamortized portion deferred financing costs july 27 2011 entered first amendment 2011 credit facility “amendment” several lenders jpmorgan chase bank na administrative agent bank america na syndication agent capital one na wells fargo bank na credit agricole corporate investment bank dnb bank asa codocumentation agents amendment effective july 27 2011 amends certain provisions 2011 credit facility among changes amendment increased total commitments lenders 2011 credit facility 4000 million 5500 million effected increase commitments certain existing lenders facility addition certain new lenders amendment also modifies 2011 credit facility increasing 5000 million 6500 million maximum aggregate amount commitments permitted 2011 credit facility pursuant option increase commitments lenders amended 2011 credit facility obligations thereunder secured substantially assets subsidiary guarantors guaranteed certain existing future domestic subsidiaries capitalized 49 million financing costs connection execution 2011 credit facility additional 14 million related amendment amortized term debt interest rate per annum applicable amended 2011 credit facility option adjusted libor plus applicable margin ii higher x jpmorgan’s prime rate federal funds rate plus 05 z onemonth adjusted libor plus 10 plus case applicable margin loans applicable margin libor loans ranges 225 300 basis points applicable margin loans ranges 125 200 basis points depending upon consolidated total leverage ratio defined 2011 credit facility unused commitment fees facility equal 050 amended 2011 credit facility contains certain financial covenants among things limit annual capital expenditures restrict ability repurchase shares require us maintain certain financial ratios financial ratios require • ratio consolidated funded indebtedness total capitalization greater percentages specified index financial statements • senior secured leverage ratio senior secured funded debt trailing four quarters earnings interest taxes depreciation amortization calculated pursuant terms 2011 credit facility “ebitda” greater 200 100 • maintain collateral coverage ratio aggregate book value collateral amount total commitments last day fiscal quarter least • maintain consolidated interest coverage ratio trailing four quarters ebitda interest expense least 300 100 • limit capital expenditures investments foreign subsidiaries 2500 million per fiscal year consolidated total leverage ratio exceeds 300 100 addition amended 2011 credit facility contains certain affirmative negative covenants including without limitation restrictions liens ii debt guarantees contingent obligations iii mergers consolidations iv sales transfers dispositions property assets v loans acquisitions joint ventures investments acquisitions permitted long giving pro forma effect thereto default event default exists 2011 credit facility pro forma consolidated total leverage ratio exceed 400 100 compliance financial covenants least 250 million availability 2011 credit facility vi dividends distributions redemptions repurchases equityholders vii making investments loans advances viii selling properties ix prepaying redeeming repurchasing subordinated contractually structurally debt x engaging transactions affiliates xi entering hedging arrangements xii entering sale leaseback transactions xiii granting negative pledges lenders xiv changes nature business xv amending organizational documents xvi changes accounting policies reporting practices foregoing cases certain exceptions compliance covenants december 31 2011 may prepay amended 2011 credit facility whole part time without premium penalty subject certain reimbursements lenders breakage redeployment costs december 31 2011 borrowings 2950 million revolving credit facility 643 million letters credit outstanding leaving 1907 million available borrowing capacity amended 2011 credit facility weighted average interest rate outstanding borrowings amended 2011 credit facility 278 year ended december 31 2011 capital lease agreements lease equipment vehicles tractors trailers frac tanks forklifts financial institutions master lease agreements december 31 2011 approximately 21 million outstanding equipment leases offbalance sheet arrangements december 31 2011 currently offbalance sheet arrangements reasonably likely material current future effect financial condition revenues expenses results operations liquidity capital expenditures capital resources index financial statements contractual obligations set forth summary contractual obligations december 31 2011 obligations pay future periods reflect certain assumptions including variability interest rates variablerate obligations duration obligations actual payments future periods may vary 1 based interest rates effect december 31 2011 2 based closing stock price december 31 2011 debt compliance 2011 credit facility senior notes contain numerous covenants govern ability make domestic international investments repurchase stock even experience severe downturn business believe covenants related capital spending investments foreign subsidiaries within control therefore believe avoid default covenants december 31 2011 compliance financial covenants amended 2011 credit facility 2014 notes 2021 notes based management’s current projections expect compliance covenants amended 2011 credit facility 2014 notes 2021 notes next twelve months breach covenants ratios tests could result default indebtedness see “item 1a risk factors” capital expenditures year ended december 31 2011 capital expenditures totaled 3591 million primarily related addition larger well service rigs coiled tubing units fluid transportation equipment rental equipment including drill pipe major maintenance existing fleet equipment 2012 capital expenditures program expected total approximately 4500 million focusing growth markets united states index financial statements select international regions capital expenditure program 2012 subject market conditions including activity levels commodity prices industry capacity specific customer needs focus 2012 maximization current equipment fleet may choose increase capital expenditures 2012 increase market share expand presence new market currently anticipate funding 2012 capital expenditures combination cash hand operating cash flow borrowings amended 2011 credit facility operating cash flows activity levels prove insufficient warrant currently planned capital spending levels management expects adjust capital spending plans accordingly may also incur capital expenditures strategic investments acquisitions edge completed acquisition edge august 2011 edge primarily rents frac stack equipment used support hydraulic fracturing operations associated flowback frac fluids proppants oil natural gas also provides well testing services rental equipment pumps power swivels oilfield fishing services total consideration acquisition approximately 3059 million consisting approximately 75 million shares common stock approximately 1879 million cash included 263 million reimburse edge growth capital expenditures incurred march 1 2011 date closing net working capital adjustments 18 million january 2011 acquired 10 swd wells equity energy company approximately 143 million swd wells located north dakota anticipate acquisitions complementary companies assets lines businesses continue play important role business strategy currently unannounced agreements ongoing negotiations acquisition material businesses assets transactions effected quickly may occur time critical accounting policies accounting department responsible development application accounting policies internal control procedures reports chief financial officer process preparation financial statements conformity generally accepted accounting principles united states “gaap” requires us make certain estimates judgments assumptions may affect reported amounts assets liabilities disclosures contingencies balance sheet date amounts revenues expenses recognized reporting period presentation statement cash flows may record materially different amounts estimates judgments assumptions change actual results differ however analyze estimates assumptions judgments based historical experience various factors believe reasonable circumstances identified following critical accounting policies require significant amount estimation judgment accurately present financial position results operations cash flows • revenue recognition • estimate reserves workers’ compensation vehicular liability selfinsurance • contingencies • income taxes • estimates depreciable lives • valuation indefinitelived intangible assets index financial statements • valuation tangible finitelived intangible assets • valuation equitybased compensation revenue recognition recognize revenue following criteria met evidence arrangement exists ii delivery occurred services rendered iii price customer fixed determinable iv collectability reasonably assured • evidence arrangement exists final understanding us customer occurred evidenced completed customer purchase order field ticket supplier contract master service agreement • delivery occurred services rendered completed requirements pursuant terms arrangement evidenced field ticket service log • price customer fixed determinable amount required paid agreed upon evidence price fixed determinable evidenced contractual terms price book completed customer purchase order field ticket • collectability reasonably assured screen customers provide goods services customers according determined credit terms granted accordance credit policy present revenues net sales taxes collected us customers required remitted local state governmental taxing authorities review contracts multiple element revenue arrangements deliverables separated units accounting assigned fair value standalone value customer objective reliable evidence fair value delivery undelivered items substantially controlled us believe negotiated prices deliverables services contracts representative fair value since acceptance nonacceptance element contract affect elements workers’ compensation vehicular liability selfinsurance occurrence event fully insured indemnified failure customer insurer meet indemnification insurance obligations could result substantial losses addition insurance may available cover risks available might able obtain insurance without substantial increase premiums possible addition higher premiums future insurance coverage may subject higher deductibles coverage restrictions estimate liability arising uninsured potentially insured events including workers’ compensation employer’s liability vehicular liability general liability record accruals consolidated financial statements reserves related claims based specific facts circumstances insured event past experience similar claims trend analysis adjust loss estimates calculation accruals based upon actual claim settlements reported claims loss estimates individual claims adjusted based upon actual claim judgments settlements reported claims actual outcome claims could differ significantly estimated amounts changes assumptions estimates could potentially negative impact earnings largely selfinsured physical damage property rigs equipment automobiles due large deductibles selfinsurance contingencies periodically required record loss contingencies relate lawsuits claims proceedings taxrelated audits normal course operations consolidated balance sheet record loss contingency matters probable liability incurred amount loss reasonably estimated periodically review loss contingencies ensure recorded index financial statements appropriate liabilities balance sheet adjust liabilities based estimates judgments made management respect likely outcome matters including effect applicable insurance coverage litigation matters estimates judgments could change based new information changes laws regulations changes management’s plans intentions outcome legal proceedings settlements factors actual results could vary materially reserves record liabilities environmental assessment indicates site remediation efforts probable costs reasonably estimated measure environmental liabilities based part relevant past experience currently enacted laws regulations existing technology sitespecific costs costsharing arrangements recognition joint several liability based upon best estimate final prorata share liability low amount range estimates assumptions involve judgments estimates management changes assumptions new information could lead increases decreases ultimate liability changes recognized immediately earnings record legal obligations retire tangible longlived assets balance sheet liabilities recorded discount incur liability significant judgment involved estimating future cash flows associated obligations well ultimate timing cash flows estimates amount timing cash flows change may material impact results operations income taxes account deferred income taxes using asset liability method provide income taxes significant temporary differences management determines current tax liability well taxes incurred result current operations yet deferred future periods current taxes payable represent liability related income tax return current year net deferred tax expense benefit represents change balance deferred tax assets liabilities reported consolidated balance sheets management estimates changes deferred tax assets liabilities using basis assets liabilities financial reporting purposes enacted rates management estimates effect differences reverse management makes certain assumptions timing temporary tax differences differing treatment certain items tax accounting purposes whether differences permanent final determination tax liability involves interpretation local tax laws tax treaties related authorities jurisdiction well significant use estimates assumptions regarding scope future operations results achieved timing nature income earned expenditures incurred establish valuation allowances reduce deferred tax assets determine likely eg likelihood 50 deferred tax assets realized future periods assess likelihood use estimates judgment regarding future taxable income well jurisdiction taxable income generated determine whether valuation allowance required evidence include current financial position results operations actual forecasted results reversal deferred tax liabilities tax planning strategies well current forecasted business economics industry additionally record uncertain tax positions net recognizable amount based amount management deems likely sustained upon ultimate settlement tax authorities domestic international tax jurisdictions operate estimates assumptions regarding current deferred tax items inaccurate modified changes could potentially material negative impacts earnings estimates depreciable lives use estimated depreciable lives longlived assets rigs heavyduty trucks trailers compute depreciation expense estimate future asset retirement obligations conduct impairment tests base estimates depreciable lives number factors environment assets operate industry factors including forecasted prices competition assumption provide appropriate amount capital expenditures asset operation maintain economical operation asset prevent untimely demise scrap useful lives intangible assets determined years expect assets generate benefit based legal contractual expectations index financial statements depreciate operational assets depreciable lives salvage value generally 10 acquisition cost recognize gain loss upon ultimate disposal asset based difference carrying value asset disposal date proceeds receive connection disposal periodically analyze estimates depreciable lives fixed assets determine depreciable periods salvage value continue appropriate also analyze useful lives salvage value events conditions occur could shorten remaining depreciable life asset review depreciable periods salvage values reasonableness given current conditions result depreciation expense based upon estimates depreciable lives fixed assets salvage value economic factors require management make significant judgments estimates determine depreciable lives different originally estimated depreciation expense may increase decrease impairments carrying values fixed assets may result could negatively impact earnings valuation indefinitelived intangible assets periodically review intangible assets subject amortization including goodwill determine whether impairment assets may exist tests must made least annual basis often circumstances indicate assets may impaired circumstances include limited significant adverse changes business climate fourth quarter 2011 adopted provisions asu 201108 intangibles goodwill topic 350 testing goodwill impairment test impairment indefinitelived intangible assets allows us first assess qualitative factors determine whether “more likely not” fair value reporting unit less carrying amount basis determining whether necessary perform twostep goodwill impairment test qualitative analysis shows “more likely not” fair value reporting unit less carrying amount perform twostep goodwill impairment test first step fair value calculated reporting units fair value compared current carrying value reporting unit including reporting unit’s goodwill fair value reporting unit exceeds carrying value potential impairment second step performed carrying value exceeds fair value reporting unit second step required second step test impairment compares implied fair value reporting unit’s goodwill current carrying value implied fair value reporting unit’s goodwill determined manner amount goodwill would recognized business combination purchase price equal fair value reporting unit implied fair value reporting unit’s goodwill excess carrying value impairment charge recorded carrying value reporting unit’s goodwill excess implied fair value impairment charge equal excess recorded conduct annual impairment test goodwill intangible assets subject amortization december 31 year determining fair value reporting units use weightedaverage approach three commonly used valuation techniques discounted cash flow method guideline companies method similar transactions method assign weight results methods based facts circumstances existence testing period assigned weight discounted cash flow method addition estimates made management regarding weighting various valuation techniques creation techniques requires make significant estimates assumptions discounted cash flow method assigned highest weight management current year requires us make assumptions future cash flows future growth rates tax rates future periods booktax differences carrying value assets future periods discount rates assumptions future cash flows growth rates based current budgets future periods well strategic plans beliefs management future activity levels analysts’ expectations revenues profitability cash flows future periods assumptions future tax rates booktax differences carrying value assets future periods based assumptions future cash flows growth rates management’s knowledge beliefs tax law practice current index financial statements future periods assumptions discount rates include assessment specific risk associated reporting unit tested developed assistance thirdparty valuation consultant ultimate conclusions valuation techniques remain responsibility test required annual basis also required frequently based changes external factors triggering events conducted recent annual test impairment goodwill indefinitelived intangible assets december 31 2011 date reporting units purposes impairment testing rig services fluid management services intervention services fishing rental services russian canadian argentine reporting units goodwill reporting unit december 31 2011 follows thousands except percentages also intangible assets amortized 37 million 87 million related fishing rental services reporting unit russian reporting unit respectively performed qualitative analysis goodwill impairment december 31 2011 based analysis rig services fluid management services coiled tubing services fishing rental services canadian reporting unit triggering events would indicate “more likely not” fair value reporting units higher carrying amount however determined necessary perform first step goodwill impairment test russia argentine reporting units first step goodwill impairment test compared fair value reporting unit carrying amount including goodwill based results step 1 fair value argentine reporting unit significantly exceeded carrying value fair value russia reporting unit exceeded carrying value approximately 13 key assumption model revenue related reporting unit increase future years based growth pricing increases potential events could affect assumption level development exploration production activity corresponding capital spending oil natural gas companies russia oil natural gas production costs government regulations conditions worldwide oil natural gas industry possible events could affect assumption ability acquire additional assets deployment assets region test concluded fair value russian reporting unit exceeded carrying value second step goodwill impairment test required fair value reporting units exceeded carrying values determined potential impairment goodwill associated reporting units existed december 31 2011 step two impairment test required noted determination fair value reporting units heavily dependent upon certain estimates assumptions make reporting units estimates assumptions made regarding reporting units 2011 annual test indicated fair values reporting units exceeded carrying values although believe estimates assumptions reasonable possible changes estimates assumptions could impact determination fair value reporting units discount rates use future periods could change substantially cost debt equity index financial statements significantly increase decrease choose different comparable companies determining appropriate discount rate reporting units additionally future projected cash flows reporting units could significantly impact fair value reporting units current projections future activity levels pricing cost structure inaccurate fair value reporting units could change materially current recovery overall economy temporary nature significant rapid adverse change business near midterm reporting units current estimates fair value reporting units could decrease significantly leading possible impairment charges future periods based current knowledge beliefs feel material adverse changes current estimates assumptions reporting units would fail step one impairment test reasonably possible valuation tangible finitelived intangible assets fixed assets finitelived intangibles tested potential impairment circumstances events indicate possible impairment may exist circumstances events referred “trigger events” examples trigger events include limited adverse change market conditions significant decrease benefits derived acquired business change use asset significant disposal particular asset class trigger event occurs impairment test performed based undiscounted cash flow analysis perform impairment test make judgments estimates assumptions regarding longterm forecasts revenues expenses relating assets subject review market conditions energy prices estimated depreciable lives assets discount rate assumptions legal factors impact operations significant effect estimates use determine whether assets impaired results analysis indicate carrying value assets tested impairment recoverable record impairment charge write carrying value assets fair value using different judgments assumptions estimates could potentially arrive materially different fair value assets tested impairment may result impairment charge fourth quarter 2011 largest customer argentina significantly reduced business us decline expected continue least first half 2012 identified trigger event required us test fixed assets argentina impairment based analysis expected undiscounted cash flows assets exceeded carrying value indication impairment existed believe material adverse changes estimates assumptions would cause carrying value assets argentina exceed fair value reasonably possible identify trigger events causing us test tangible finitelived intangible assets impairment first second third quarters 2011 valuation equitybased compensation granted stock options stocksettled stock appreciation rights “sars” restricted stock “rsas” “rsus” phantom shares performance units employees nonemployee directors option sar awards grant fair valued using blackscholes option model grant date amortized compensation expense vesting period option award net estimated actual forfeitures compensation related rsas rsus based fair value award grant date recognized based vesting requirements satisfied period phantom shares accounted fair value changes fair value awards recorded compensation expense period performance units provide cash incentive award unit value determined reference common stock performance units measured based two performance periods end performance period 100 50 0 individual’s performance units period vest based relative placement total shareholder return within peer group consisting key five companies utilizing blackscholes option pricing model determine fair values awards certain assumptions made based subjective expectations subject change one assumptions would impact expense associated future grants key assumptions include volatility price common stock riskfree interest rate expected life awards index financial statements grant stock options years ended december 31 2011 2010 used following weighted average assumptions blackscholes option pricing model determining fair value stock option grants year ended december 31 2009 calculate expected volatility stock option grants measuring volatility historical stock price period equal expected life option ending time option granted determine riskfree interest rate based upon interest rate us treasury bill term equal expected life option time option granted estimating expected lives stock options sars elected use simplified method sufficient historical exercise information past legal restrictions exercise stock options expected life less term option holders experience exercise forfeit options term option required recalculate fair value stock option grants estimated using blackscholes option pricing model initial calculation unless original option grant terms modified new accounting standards adopted report asu 200913 october 2009 fasb issued asu 200913 revenue recognition topic 605 multipledeliverable revenue arrangements consensus fasb emerging issues task force “asu 200913” asu 200913 addresses accounting multipledeliverable arrangements products services accounted separately rather combined unit addresses separate deliverables measure allocate arrangement consideration one units accounting result asu 200913 multipledeliverable arrangements separated circumstances prior guidance asu 200913 establishes selling price hierarchy determining selling price deliverable selling price based vendorspecific objective evidence “vsoe” available thirdparty evidence vsoe available estimated selling price neither vsoe thirdparty evidence available asu 200913 also requires entity determine best estimate selling price manner consistent used determine selling price deliverable standalone basis increases disclosure requirements related entity’s multipledeliverable revenue arrangements asu 200913 must prospectively applied revenue arrangements entered materially modified fiscal years beginning june 15 2010 entities may elect required adopt amendments retrospectively periods presented adopted provisions asu 200913 january 1 2011 adoption standard material impact financial position results operations cash flows asu 200914 october 2009 fasb issued asu 200914 software topic 985 certain revenue arrangements include software elements consensus fasb emerging issues task force “asu 200914” asu 200914 issued address concerns relating accounting revenue arrangements contain tangible products software “more incidental” product whole asu 200914 changes accounting model revenue arrangements include tangible products software elements exclude software components essential tangible products’ core functionality addition asu 200914 also requires hardware components tangible product containing software components always excluded software revenue recognition guidance provides guidance determine software relating tangible products considered essential tangible products’ functionality excluded scope software revenue recognition guidance asu 200914 also provides guidance allocate arrangement consideration deliverables arrangement contains tangible products software essential product’s functionality asu 200914 issued concurrently asu 200913 also requires entities provide disclosures required asu 200913 index financial statements included within scope asu 200914 asu 200914 effective prospectively revenue arrangements entered materially modified fiscal years beginning june 15 2010 entities may also elect required adopt asu 200914 retrospectively prior periods must adopt asu 200914 period using transition methods uses adopt asu 200913 adopted provisions asu 200914 january 1 2011 adoption standard material impact financial position results operations cash flows asu 201013 april 2010 fasb issued asu 201013 compensation stock compensation topic 718 effect denominating exercise price sharebased payment award currency market underlying equity security trades asu codifies consensus reached eitf issue 09j “effect denominating exercise price sharebased payment award currency market underlying equity security trades” amendments codification clarify employee sharebased payment award exercise price denominated currency market substantial portion entity’s equity shares trades considered contain condition market performance service condition therefore entity would classify award liability otherwise qualifies equity asu 201013 effective fiscal years beginning december 15 2010 amendments update applied recording cumulativeeffect adjustment opening balance retained earnings cumulativeeffect adjustment calculated awards outstanding beginning fiscal year amendments initially applied amendments applied consistently since inception award cumulativeeffect adjustment presented separately adopted provisions asu 201013 january 1 2011 adoption standard material impact financial position results operations cash flows asu 201028 december 2010 fasb issued asu 201028 intangibles goodwill topic 350 perform step 2 goodwill impairment test reporting units zero negative carrying amounts asu reflects decision reached eitf issue 10a amendments asu modify step 1 goodwill impairment test reporting units zero negative carrying amounts reporting units entity required perform step 2 goodwill impairment test likely goodwill impairment exists determining whether likely goodwill impairment exists entity consider whether adverse qualitative factors indicating impairment may exist qualitative factors consistent existing guidance examples require goodwill reporting unit tested impairment annual tests event occurs circumstances change would likely reduce fair value reporting unit carrying amount public entities amendments asu effective fiscal years interim periods within years beginning december 15 2010 adopted provisions asu 201028 january 1 2011 adoption standard material impact financial position results operations cash flows asu 201029 december 2010 fasb issued asu 201029 business combinations topic 805 disclosure supplementary pro forma information business combinations asu reflects decision reached eitf issue 10g amendments asu affect public entity defined topic 805 business combinations enters business combinations material individual aggregate basis amendments asu specify public entity presents comparative financial statements entity disclose revenue earnings combined entity though business combinations occurred current year occurred beginning comparable prior annual reporting period amendments also expand supplemental pro forma disclosures include description nature amount material nonrecurring pro forma adjustments directly attributable business combination included reported pro forma revenue earnings asu 201029 effective prospectively business combinations acquisition date beginning first annual reporting period beginning december 15 2010 adopted provisions asu 201029 january 1 2011 adoption standard required us modify expand disclosures related 2011 acquisition material impact financial position results operations cash flows asu 201105 june 2011 fasb issued asu 201105 comprehensive income topic 220 presentation comprehensive income amendments asu allow entity option present total comprehensive income components net income components comprehensive income index financial statements either single continuous statement comprehensive income two separate consecutive statements choices entity required present component net income along total net income component comprehensive income along total comprehensive income total amount comprehensive income asu eliminates option present components comprehensive income part statement changes stockholders’ equity asu 201105 applied retrospectively interim annual reporting periods beginning december 15 2011 early adoption permitted early adopted provisions asu 201105 fourth quarter 2011 adoption standard material impact financial position results operations cash flows asu 201112 december 2011 fasb issued asu 201112 deferral effective date amendment presentation reclassifications items accumulated comprehensive income topic 220 presentation comprehensive income asu defers guidance whether require entities present reclassification adjustments accumulated comprehensive income component statement net income presented statement comprehensive income presented interim annual financial statements asu 201112 reinstated requirements presentation reclassifications place prior issuance asu 201105 change effective date asu 201105 asu 201112 applied consistently asu 201105 accordingly asu applied retrospectively interim annual reporting periods beginning december 15 2011 early adoption permitted early adopted provisions asu 201112 fourth quarter 2011 adoption standard material impact financial position results operations cash flows asu 201108 september 2011 fasb issued asu 201108 intangibles goodwill topic 350 testing goodwill impairment asu intended simplify entities public nonpublic test goodwill impairment asu 201108 permits entity first assess qualitative factors determine whether “more likely not” fair value reporting unit less carrying amount basis determining whether necessary perform twostep goodwill impairment test described topic 350 intangibles goodwill asu 201108 effective annual interim goodwill impairment tests performed fiscal years beginning december 15 2011 early adoption permitted adopted provisions asu 201108 fourth quarter 2011 adoption standard material impact financial position results operations cash flows accounting standards yet adopted report asu 201104 may 2011 fasb issued asu 201104 fair value measurement topic 820 amendments achieve common fair value measurement disclosure requirements us gaap ifrs asu represents converged guidance fasb iasb measuring fair value disclosing information fair value measurements amendments asu clarify board’s intent application existing fair value measurement disclosure requirements changes particular principles requirements measuring fair value disclosing information fair value measurements asu 201104 effective prospectively interim annual reporting periods beginning december 15 2011 adopted provisions asu 201104 january 1 2012 adoption standard material impact financial position results operations cash flows item 7a nannanitem 7a quantitive qualitative disclosures market risk special note certain statements set forth caption constitute forwardlooking statements see special note regarding forwardlooking statements additional factors relating statements primary objective following information provide forwardlooking quantitative qualitative information keys potential exposure market risks term market risk refers risk loss arising adverse changes foreign currency exchange risk interest rates oil gas prices disclosures meant precise indicators expected future losses rather indicators reasonably possible losses forwardlooking information provides indicators key views manages ongoing market risk exposures interest rate risk june 30 1999 key longterm debt outstanding 699978000 amount 368545000 52 bears interest fixed rates follows remaining 331433000 debt outstanding june 30 1999 bears interest floating rates averaged approximately 875 end 1999 10 increase shortterm interest rates floatingrate debt outstanding end 1999 would equal approximately 875 basis points increase interest rates would increase keys fiscal 2000 interest expense approximately 29 million assuming borrowed amounts remain outstanding see note 5 consolidated financial statements discussion sensitivity analysis interest rate risk excludes accounts receivable accounts payable accrued liabilities shortterm maturity instruments foreign currency risk keys net assets net earnings cash flows argentina subsidiaries currently exposed foreign currency risk argentinas currency tied u dollar keys net assets net earnings cash flows canadian subsidiary based us dollar equivalent amounts measured canadian dollars assets liabilities canadian operations translated us dollars using applicable exchange rate end reporting period revenues expenses cash flow translated using average exchange rate reporting period 10 change canadiantou dollar exchange rate would material net assets net earnings cash flows key commodity price risk keys major market risk exposure oil gas production operations pricing applicable oil gas sales realized pricing primarily driven prevailing worldwide price crude oil spot market prices natural gas pricing oil gas production volatile unpredictable several years key periodically enters financial hedging activities respect portion projected oil natural gas production commodity option contracts whereby key receive fixed price production market price excess contracts stated price key pays premium option contracts premiums amortized oil gas revenues life related option contracts financial hedging activities intended support oil natural gas prices targeted levels manage keys exposure oil gas price fluctuations realized gains settlement financial hedging instruments recognized oil gas sales associated production occurs gains losses realized result hedging activities substantially offset cash market hedged commodity delivered key hold issue derivative instruments trading purposes june 30 1999 key oil gas price hedging instruments place represented 22000 barrels oil production per month approximately 100000 mmbtu gas production per month total fiscal 2000 hedged oil gas volumes represent approximately 100 62 respectively expected calendar year total production 10 increase index price oil gas levels june 30 1999 would impact companys net assets net earnings cash flows derived commodity option contracts put options outstanding june 30 1999 inthemoney see note 8 consolidated financial statements discussion item 8item 7a quantitative qualitative disclosures market risk special note certain statements set forth caption constitute forwardlooking statements see special note regarding forwardlooking statements additional factors relating statements primary objective following information provide forwardlooking quantitative qualitative information keys potential exposure market risks term market risk refers risk loss arising adverse changes foreign currency exchange risk interest rates oil natural gas prices disclosures meant precise indicators expected future losses rather indicators reasonably possible losses forwardlooking information provides indicators key views manages ongoing market risk exposures interest rate risk june 30 2000 key longterm debt outstanding 666600000 amount 352741000 53 bears interest fixed rates follows remaining 313859000 debt outstanding june 30 2000 bears interest floating rates averaged approximately 1001 june 30 2000 10 increase shortterm interest rates floatingrate debt outstanding june 30 2000 would equal approximately 100 basis points increase interest rates would increase keys fiscal 2001 interest expense approximately 31 million assuming borrowed amounts remain outstanding sensitivity analysis interest rate risk excludes accounts receivable accounts payable accrued liabilities shortterm maturity instruments foreign currency risk keys net assets net earnings cash flows argentina subsidiaries currently exposed foreign currency risk argentinas currency tied us dollar keys net assets net earnings cash flows canadian subsidiary based us dollar equivalent amounts measured canadian dollars assets liabilities canadian operations translated us dollars using applicable exchange rate end reporting period revenues expenses cash flow translated using average exchange rate reporting period 10 change canadiantous dollar exchange rate would material net assets net earnings cash flows key commodity price risk keys major market risk exposure oil natural gas production operations pricing applicable oil natural gas sales realized pricing primarily driven prevailing worldwide price crude oil spot market prices natural gas pricing oil natural gas production volatile unpredictable several years key periodically enters financial hedging activities respect portion projected oil natural gas production commodity option collar contracts key pays premium option contracts premiums amortized oil natural gas revenues life related option contracts financial hedging activities intended support oil natural gas prices targeted levels manage keys exposure oil natural gas price fluctuations realized gains settlement financial hedging instruments recognized oil natural gas sales associated production occurs gains losses realized result hedging activities substantially offset cash market hedged commodity delivered june 30 2000 key oil gas price collars place represented 9000 barrels oil production per month approximately 70000 mmbtu gas production per month total fiscal 2000 hedged oil natural gas volumes represent approximately 46 40 respectively expected calendar year total production 10 increase index price oil gas levels june 30 2000 would impact companys net assets net earnings cash flows derived commodity option contracts item 8item 7a quantitative qualitative disclosures market risk special note certain statements set forth caption constitute forwardlooking statements see special note regarding forwardlooking statements additional factors relating statements primary objective following information provide forwardlooking quantitative qualitative information keys potential exposure market risks term market risk refers risk loss arising adverse changes foreign currency exchange risk interest rates oil natural gas prices disclosures meant precise indicators expected future losses rather indicators reasonably possible losses forwardlooking information provides indicators key views manages ongoing market risk exposures interest rate risk june 30 2001 key longterm debt outstanding 493907000 amount 468943000 949 bears interest fixed rates follows remaining 24964000 debt outstanding june 30 2001 bears interest floating rates averaged approximately 934 june 30 2001 10 increase shortterm interest rates floatingrate debt outstanding june 30 2001 would equal approximately 93 basis points increase interest rates would increase keys fiscal 2002 interest expense approximately 200000 assuming borrowed amounts remain outstanding sensitivity analysis interest rate risk excludes accounts receivable accounts payable accrued liabilities shortterm maturity instruments foreign currency risk keys net assets net earnings cash flows argentina subsidiaries currently exposed foreign currency risk argentinas currency tied us dollar keys net assets net earnings cash flows canadian subsidiary based us dollar equivalent amounts measured canadian dollars assets liabilities canadian operations translated us dollars using applicable exchange rate end reporting period revenues expenses cash flow translated using average exchange rate reporting period 10 change canadiantous dollar exchange rate would material net assets net earnings cash flows key commodity price risk keys major market risk exposure oil natural gas production operations pricing applicable oil natural gas sales realized pricing primarily driven prevailing worldwide price crude oil spot market prices natural gas pricing oil natural gas production volatile unpredictable several years company periodically hedges portion oil natural gas production collar option agreements purpose hedges provide measure stability volatile environment oil natural gas prices manage exposure commodity price risk existing sales commitments companys risk management objective lock range pricing expected production volumes allows company forecast future earnings within predictable range company meets objective entering collar option arrangements allow acceptable cap floor prices june 30 2001 key oil natural gas price collars put options place detailed following table total fiscal 2001 hedged oil natural gas volumes represent approximately 32 20 respectively expected calendar year total production 10 variation market price oil natural gas levels june 30 2001 would material impact companys net assets net earnings cash flows derived commodity option contracts following table sets forth future volumes hedged year weightedaverage strike price option contracts june 30 2001 2000 strike prices oil collars put based nymex spot price west texas intermediate strike prices natural gas collars based inside fercwest texas waha spot price strike price natural gas put based inside fercel paso permian spot price item 8item 7a quantitative qualitative disclosures market risk exposed certain market risks part ongoing business operations including risks changes interest rates foreign currency exchange rates could impact financial condition results operations cash flows plan manage exposure risks regular operating financing activities limited basis use derivative financial instruments extent use derivative financial instruments use risk management tools speculative investment purposes interest rate risk december 31 2006 longterm debt variable interest rates subjects us changes interest expense associated movements market interest rates december 31 2006 3960 million variablerate debt bears interest companys option prime rate plus margin eurodollar libor rate plus margin december 31 2006 elected libor rates borrowings increase 10 3month libor rate december 31 2006 levels would result increase approximately 21 million annual interest expense discussed item 8item 7a quantitative qualitative disclosures market risk exposed certain market risks part ongoing business operations including risks changes interest rates foreign currency exchange rates equity prices could impact financial position results operations cash flows manage exposure risks regular operating financing activities may limited basis use derivative financial instruments manage risk extent use derivative financial instruments use risk management tools speculative investment purposes interest rate risk december 31 2007 principal debt obligation 4250 million 8375 senior notes due 2014 notes fixedrate obligations subject us risks associated changes interest rates borrowings 2007 senior secured credit facility capital lease obligations notes payable former owners moncla bear interest variable interest rates therefore expose us interest rate risk december 31 2007 weighted average interest rate outstanding variablerate debt obligations 59787 hypothetical 10 increase rate would increase annual interest expense instruments approximately 06 million foreign currency risk december 31 2007 conduct operations argentina mexico also canadian subsidiary functional currency local currency entities therefore poses risk us related changes exchange rate us dollar respective local currencies hypothetical 10 decrease value us dollar relative value local currencies argentinean mexican canadian subsidiaries would increase net income approximately 03 million net assets would unaffected decrease changes value foreign subsidiaries assets liabilities would offset changes accumulated comprehensive income equity risk equitybased compensation account equitybased compensation awards fair value provisions sfas 123r certain awards fair values determined based upon price companys common stock measurement date increase price companys common stock would lead corresponding increase fair value awards 10 increase price companys common stock value december 31 2007 would increase annual compensation expense recognized awards approximately 02 million equitymethod investment iroc currently possess 197 ownership interest iroc publiclytraded canadian company exert significant influence operations iroc control account investment equitymethod investment guidance provided accounting principles board opinion apb 18 equity method accounting investments common stock apb 18 impairment review equity method investment iroc performed quarterly basis determine decline fair value temporary fair value asset measured using quoted market prices absence quoted market prices fair value based estimate discounted cash flows determining whether decline temporary consider cyclicality industry investment operates historical performance relation peers current economic environment future conditions industry operating performance relation peers future economic environment may vary current assessment recoverability future conditions could therefore result determination decline fair value temporary irocs stock price currently depressed later determine decline temporary would record writedown carrying value asset current fair market value item 8item 7a quantitative qualitative disclosures market risk exposed certain market risks part ongoing business operations including risks changes interest rates foreign currency exchange rates equity prices could impact financial position results operations cash flows manage exposure risks regular operating financing activities may limited basis use derivative financial instruments manage risk extent use derivative financial instruments use risk management tools speculative investment purposes interest rate risk december 31 2008 outstanding 4250 million 8375 senior notes due 2014 notes fixedrate obligations subject us risks associated changes interest rates borrowings senior secured credit facility capital lease obligations moncla notes bear interest variable interest rates therefore expose us interest rate risk december 31 2008 weighted average interest rate outstanding variablerate debt obligations 417 hypothetical 10 increase rate would increase annual interest expense instruments approximately 05 million foreign currency risk december 31 2008 conduct operations argentina mexico also canadian subsidiaries equitymethod investments canadian company russian company functional currency local currency entities exposed risk changes exchange rates us dollar local currencies balances denominated foreign subsidiaries’ local currency changes value subsidiaries’ assets liabilities due changes exchange rates deferred accumulated comprehensive income liquidate investment balances denominated currencies local currency foreign subsidiaries must remeasure balance end period equivalent amount local currency changes reflected earnings period hypothetical 10 decrease average value us dollar relative value local currencies argentinean mexican canadian subsidiaries canadian russian investments would decrease net income approximately 13 million equity risk account equitybased compensation awards fair value provisions sfas 123r certain awards’ fair values determined based upon price company’s common stock measurement date increase price company’s common stock would lead corresponding increase fair value awards 10 increase price company’s common stock value december 31 2008 would increase annual compensation expense recognized awards approximately 01 million item 8item 7a quantitative qualitative disclosures market risk exposed certain market risks part ongoing business operations including risks changes interest rates foreign currency exchange rates equity prices could impact financial position results operations cash flows manage exposure risks regular operating financing activities may limited basis use derivative financial instruments manage risk extent use derivative financial instruments use risk management tools speculative investment purposes interest rate risk december 31 2009 outstanding 4250 million 8375 senior notes due 2014 notes fixedrate obligations subject us risks associated changes interest rates borrowings senior secured credit facility capital lease obligations related party notes bear interest variable interest rates therefore expose us interest rate risk december 31 2009 weighted average interest rate outstanding variablerate debt obligations 324 hypothetical 10 increase rate would increase annual interest expense instruments approximately 04 million foreign currency risk december 31 2009 conduct operations argentina mexico russian federation also canadian subsidiaries equitymethod investments two canadian companies functional currency local currency entities exposed risk changes exchange rates us dollar local currencies balances denominated foreign subsidiaries’ local currency changes value subsidiaries’ assets liabilities due changes exchange rates deferred accumulated comprehensive income liquidate investment balances denominated currencies local currency foreign subsidiaries must remeasure balance end period equivalent amount local currency changes reflected earnings period hypothetical 10 decrease average value us dollar relative value local currencies argentinean mexican russian canadian subsidiaries canadian investments would decrease net income approximately 02 million equity risk certain equitybased compensation awards’ fair values determined based upon price common stock measurement date increase price common stock would lead corresponding increase fair value awards 10 increase price common stock value december 31 2009 would increase annual compensation expense recognized awards approximately 01 million item 8item 7a quantitative qualitative disclosures market risk exposed certain market risks part ongoing business operations including risks changes interest rates foreign currency exchange rates equity prices could impact financial position results operations cash flows manage exposure risks regular operating financing activities may limited basis use derivative financial instruments manage risk extent use derivative financial instruments use risk management tools speculative investment purposes interest rate risk december 31 2010 outstanding 4250 million 8375 senior notes due 2014 notes fixedrate obligations subject us risks associated changes interest rates borrowings senior secured credit facility capital lease obligations bear interest variable interest rates therefore expose us interest rate risk december 31 2010 weighted average interest rate outstanding variablerate debt obligations 178 hypothetical 10 increase rate would increase annual interest expense instruments less 01 million foreign currency risk december 31 2010 conduct operations mexico colombia middle east russia argentina also canadian subsidiary equitymethod investments canadian companies functional currency local currency entities except colombia middle east exposed risk changes exchange rates us dollar local currencies balances denominated foreign subsidiaries’ local currency changes value subsidiaries’ assets liabilities due changes exchange rates deferred accumulated comprehensive income liquidate investment balances denominated currencies local currency foreign subsidiaries must remeasure balance end period equivalent amount local currency changes reflected earnings period hypothetical 10 decrease average value us dollar relative value local currencies argentinean mexican russian canadian subsidiaries canadian investments would decrease net income approximately 38 million equity risk certain equitybased compensation awards’ fair values determined based upon price common stock measurement date increase price common stock would lead corresponding increase fair value awards 10 increase price common stock value december 31 2010 would increase annual compensation expense recognized awards approximately 01 million item 8item 7a quantitative qualitative disclosures market risk exposed certain market risks part ongoing business operations including risks changes interest rates foreign currency exchange rates equity prices could impact financial position results operations cash flows manage exposure risks regular operating financing activities may limited basis use derivative financial instruments manage risk derivative financial instruments used years ended december 31 2012 2011 2010 extent use derivative financial instruments use risk management tools speculative investment purposes interest rate risk december 31 2012 outstanding 6750 million 2021 notes 36 million 2014 notes fixedrate obligations subject us risks associated changes interest rates borrowings senior secured credit facility capital lease obligations bear interest variable interest rates therefore expose us interest rate risk december 31 2012 weighted average interest rate outstanding variablerate debt obligations 270 hypothetical 10 increase rate would increase annual interest expense instruments 04 million foreign currency risk december 31 2012 conduct operations mexico colombia middle east russia also canadian subsidiary december 31 2011 functional currency mexico russia canada local currency functional currency colombia middle east u dollar due significant changes economic facts circumstances functional currency mexico canada changed us dollar effective january 1 2012 balances denominated russian subsidiaries’ local currency changes value assets liabilities due changes exchange rates deferred accumulated comprehensive income liquidate investment russian foreign subsidiaries must remeasure account balances end period equivalent amount local currency changes reflected earnings period hypothetical 10 decrease average value us dollar relative value local currency russian subsidiaries would increase net income less 01 million equity risk certain equitybased compensation awards’ fair values determined based upon price common stock measurement date increase price common stock would lead corresponding increase fair value awards 10 increase price common stock value december 31 2012 would increase annual compensation expense recognized awards approximately less 01 million item 8item 7a quantitative qualitative disclosures market risk exposed certain market risks part ongoing business operations including risks changes interest rates foreign currency exchange rates equity prices could impact financial position results operations cash flows manage exposure risks regular operating financing activities may limited basis use derivative financial instruments manage risk derivative financial instruments used years ended december 31 2013 2012 2011 extent use derivative financial instruments use risk management tools speculative investment purposes interest rate risk december 31 2013 outstanding 6750 million 2021 notes 36 million 2014 notes fixedrate obligations subject us risks associated changes interest rates borrowings 2011 credit facility bear interest variable interest rates therefore expose us interest rate risk december 31 2013 weighted average interest rates outstanding variablerate debt obligations 288 hypothetical 10 increase rate would increase annual interest expense instruments 02 million foreign currency risk december 31 2013 conduct operations mexico colombia ecuador middle east russia also canadian subsidiary december 31 2011 functional currency mexico russia canada local currency functional currency colombia middle east u dollar due significant changes economic facts circumstances functional currency mexico canada changed us dollar effective january 1 2012 balances denominated russian subsidiaries’ local currency changes value assets liabilities due changes exchange rates deferred accumulated comprehensive income liquidate investment russian foreign subsidiaries must remeasure account balances end period equivalent amount local currency changes reflected earnings period hypothetical 10 decrease average value us dollar relative value local currency russian subsidiaries would increase net income 01 million item 8item 7a quantitative qualitative disclosures market risk exposed certain market risks part ongoing business operations including risks changes interest rates foreign currency exchange rates equity prices could impact financial position results operations cash flows manage exposure risks regular operating financing activities may limited basis use derivative financial instruments manage risk derivative financial instruments used years ended december 31 2014 2013 2012 extent use derivative financial instruments use risk management tools speculative investment purposes interest rate risk december 31 2014 outstanding 6750 million 2021 notes fixedrate obligations subject us risks associated changes interest rates borrowings 2011 credit facility bear interest variable interest rates therefore expose us interest rate risk december 31 2014 weighted average interest rate outstanding variablerate debt obligations 314 hypothetical 10 increase rate would increase annual interest expense instruments 02 million foreign currency risk december 31 2014 conduct operations mexico colombia ecuador middle east russia also canadian subsidiary december 31 2011 functional currency mexico russia canada local currency functional currency colombia middle east u dollar due significant changes economic facts circumstances functional currency mexico canada changed us dollar effective january 1 2012 balances denominated russian subsidiaries’ local currency changes value assets liabilities due changes exchange rates deferred accumulated comprehensive income liquidate investment russian foreign subsidiaries must remeasure account balances end period equivalent amount us dollars changes reflected earnings period hypothetical 10 decrease average value us dollar relative value local currency russian subsidiaries would increase net income 04 million item 8item 7a quantitative qualitative disclosures market risk exposed certain market risks part ongoing business operations including risks changes interest rates foreign currency exchange rates could impact financial position results operations cash flows manage exposure risks regular operating financing activities may limited basis use derivative financial instruments manage risk derivative financial instruments used years ended december 31 2016 2015 2014 extent use derivative financial instruments use risk management tools speculative investment purposes interest rate risk borrowings term loan facility bear interest variable interest rates therefore expose us interest rate risk december 31 2016 interest rate outstanding variablerate debt obligations 1125 hypothetical 10 increase rate would increase annual interest expense instruments 28 million borrowings abl facility also bear interest variable interest rates however borrowings facility december 31 2016 foreign currency risk december 31 2016 conduct operations russia also canadian subsidiary local currency functional currency operations russia balances denominated russian subsidiaries’ local currency changes value assets liabilities due changes exchange rates deferred accumulated comprehensive income liquidate investment russian subsidiary must remeasure account balances end period equivalent amount us dollars changes reflected earnings period hypothetical 10 decrease average value us dollar relative value local currency russian subsidiaries would increase net income 02 million item 8item 7a quantitative qualitative disclosures market risk operations russia sold third quarter 2017 exposed certain market risks part former business operations including risks changes interest rates foreign currency exchange rates could impacted financial position results operations cash flows managed exposure risks regular operating financing activities could limited basis used derivative financial instruments manage risk derivative financial instruments used years ended december 31 2017 2016 2015 extent would used derivative financial instruments would used risk management tools speculative investment purposes interest rate risk borrowings term loan facility bear interest variable interest rates therefore expose us interest rate risk december 31 2017 interest rate outstanding variablerate debt obligations 1161 hypothetical 10 increase rate would increase annual interest expense instruments 29 million borrowings abl facility also bear interest variable interest rates however borrowings facility december 31 2017 foreign currency risk december 31 2017 longer conduct operations russia completed sale russian subsidiary third quarter 2017 also canadian subsidiary sold second quarter 2017 local currency functional currency former operations russia balances denominated former russian subsidiarys local currency changes value assets liabilities due changes exchange rates deferred accumulated comprehensive income liquidated investment former russian subsidiary remeasured account balances end period equivalent amount us dollars changes reflected earnings periods hypothetical 10 decrease average value us dollar relative value local currency former russian subsidiary would increased net loss 02 million item 8item 7a quantitative qualitative disclosures market risk interest rate risk borrowings new term loan facility bear interest variable interest rates therefore expose us interest rate risk interest rate new term loans bear interest per annum rate equal libor six months plus 1025 march 6 2020 512 outstanding debt hypothetical 10 increase rate would increase annual interest expense instruments 05 million company option pay interest kind annual rate libor plus 1225 outstanding principal amount new term loans first two years following closing restructuring continuing term loans bear interest per annum rate equal libor one two three six consent term loan lenders 12 months company option pay interest kind 100 basis points per annum interest due continuing term loans borrowings new abl facility also bear interest variable interest rates however currently borrowings facility foreign currency risk december 31 2017 longer conduct operations russia completed sale russian subsidiary third quarter 2017 also canadian subsidiary sold second quarter 2017 local currency functional currency former operations russia balances denominated former russian subsidiary’s local currency changes value assets liabilities due changes exchange rates deferred accumulated comprehensive income liquidated investment former russian subsidiary remeasured account balances end period equivalent amount us dollars changes reflected earnings periods hypothetical 10 decrease average value us dollar relative value local currency former russian subsidiary would increased 2017 net loss 02 million item 8item 7a quantitative qualitative disclosures market risk exposed certain market risks part ongoing business operations including risks changes interest rates foreign currency exchange rates equity prices could impact financial position results operations cash flows manage exposure risks regular operating financing activities may limited basis use derivative financial instruments manage risk derivative financial instruments used years ended december 31 2015 2014 2013 extent use derivative financial instruments use risk management tools speculative investment purposes interest rate risk december 31 2015 outstanding 6750 million 2021 notes fixedrate obligations subject us risks associated changes interest rates borrowings term loan facility bear interest variable interest rates therefore expose us interest rate risk december 31 2015 interest rate outstanding variablerate debt obligations 1025 hypothetical 10 increase rate would increase annual interest expense instruments 32 million borrowings abl facility also bear interest variable interest rates however borrowings facility foreign currency risk december 31 2015 conduct operations mexico russia also canadian subsidiary local currency functional currency operations russia balances denominated russian subsidiaries’ local currency changes value assets liabilities due changes exchange rates deferred accumulated comprehensive income liquidate investment russian foreign subsidiaries must remeasure account balances end period equivalent amount us dollars changes reflected earnings period hypothetical 10 decrease average value us dollar relative value local currency russian subsidiaries would increase net income 14 million item 8item 7a quantitative qualitative disclosures market risk operations russia sold third quarter 2017 exposed certain market risks part former business operations including risks changes interest rates foreign currency exchange rates could impacted financial position results operations cash flows managed exposure risks regular operating financing activities could limited basis used derivative financial instruments manage risk derivative financial instruments used years ended december 31 2018 2017 2016 extent would used derivative financial instruments would used risk management tools speculative investment purposes interest rate risk borrowings term loan facility bear interest variable interest rates therefore expose us interest rate risk december 31 2018 interest rate outstanding variablerate debt obligations 1242 hypothetical 10 increase rate would increase annual interest expense instruments 31 million borrowings abl facility also bear interest variable interest rates however borrowings facility december 31 2018 foreign currency risk december 31 2017 longer conduct operations russia completed sale russian subsidiary third quarter 2017 also canadian subsidiary sold second quarter 2017 local currency functional currency former operations russia balances denominated former russian subsidiary’s local currency changes value assets liabilities due changes exchange rates deferred accumulated comprehensive income liquidated investment former russian subsidiary remeasured account balances end period equivalent amount us dollars changes reflected earnings periods hypothetical 10 decrease average value us dollar relative value local currency former russian subsidiary would increased 2017 net loss 02 million item 8nanitem 7a quantitative qualitative disclosures market risk special note certain statements set forth caption constitute forwardlooking statements see special note regarding forwardlooking statements additional factors relating statements primary objective following information provide forwardlooking quantitative qualitative information keys potential exposure market risks term market risk refers risk loss arising adverse changes foreign currency exchange risk interest rates oil natural gas prices disclosures meant precise indicators expected future losses rather indicators reasonably possible losses forwardlooking information provides indicators key views manages ongoing market risk exposures interest rate risk june 30 2002 key longterm debt outstanding 443610000 amount 420781000 949 bears interest fixed rates follows remaining 22829000 debt outstanding june 30 2002 bears interest floating rates averaged approximately 666 june 30 2002 10 increase shortterm interest rates floatingrate debt outstanding june 30 2002 would equal approximately 67 basis points increase interest rates would increase keys fiscal 2003 interest expense approximately 200000 assuming borrowed amounts remain outstanding sensitivity analysis interest rate risk excludes accounts receivable accounts payable accrued liabilities shortterm maturity instruments foreign currency risk fiscal 2002 argentine government suspended law tying argentine peso us dollar conversion ratio 11 created dual currency system argentina keys net assets argentina subsidiaries based us dollar equivalent amounts measured argentine pesos december 31 2001 assets liabilities argentine operations translated us dollars june 30 2002 using applicable free market conversion ratio 391 translated future dates using applicable free market conversion ratio dates keys net earnings cash flows argentina subsidiaries tied us dollar six months ended december 31 2001 based us dollar equivalent amounts measured argentine pesos periods december 31 2001 revenues expenses cash flow translated using average exchange rates periods december 31 2001 see note 18 consolidated financial statements change argentine peso us dollar exchange rate since december 31 2001 reduced stockholders equity 48383000 charge comprehensive loss june 30 2002 keys net assets net earnings cash flows canadian subsidiary based us dollar equivalent amounts measured canadian dollars assets liabilities canadian operations translated us dollars using applicable exchange rate end reporting period revenues expenses translated using average exchange rate reporting period 10 change canadiantous dollar exchange rate would material net assets net earnings cash flows company commodity price risk keys major market risk exposure oil natural gas production operations pricing applicable oil natural gas sales realized pricing primarily driven prevailing worldwide price crude oil spot market prices natural gas pricing oil natural gas production volatile unpredictable several years company periodically hedges portion oil natural gas production collar option agreements purpose hedges provide measure stability volatile environment oil natural gas prices manage exposure commodity price risk existing sales commitments companys risk management objective lock range pricing expected production volumes allows company forecast future earnings within predictable range company meets objective entering collar option arrangements allow acceptable cap floor prices june 30 2002 key oil natural gas price collars put options place detailed following table total fiscal 2002 hedged oil natural gas volumes represent approximately 41 32 respectively expected 2002 calendar year total production 10 variation market price oil natural gas levels june 30 2002 would material impact companys net assets net earnings cash flows derived commodity option contracts following table sets forth future volumes hedged year weightedaverage strike price option contracts june 30 2002 2001 strike prices oil collars puts based nymex spot price west texas intermediate strike prices natural gas collars based inside fercwest texas waha spot price strike price natural gas put based inside fercel paso permian spot price item 8item 7a quantitative qualitative disclosures market risk exposed certain market risks part ongoing business operations including risks changes interest rates foreign currency exchange rates equity prices could impact financial position results operations cash flows manage exposure risks regular operating financing activities may limited basis use derivative financial instruments manage risk derivative financial instruments used years ended december 31 2011 2010 2009 extent use derivative financial instruments use risk management tools speculative investment purposes index financial statements interest rate risk december 31 2011 outstanding 4750 million 675 senior notes due 2021 36 million 8375 senior notes due 2014 notes fixedrate obligations subject us risks associated changes interest rates borrowings senior secured credit facility capital lease obligations bear interest variable interest rates therefore expose us interest rate risk december 31 2011 weighted average interest rate outstanding variablerate debt obligations 272 hypothetical 10 increase rate would increase annual interest expense instruments 14 million foreign currency risk december 31 2011 conduct operations mexico colombia middle east russia argentina also canadian subsidiary functional currency local currency entities except colombia middle east exposed risk changes exchange rates us dollar local currencies balances denominated foreign subsidiaries’ local currency changes value subsidiaries’ assets liabilities due changes exchange rates deferred accumulated comprehensive income liquidate investment balances denominated currencies local currency foreign subsidiaries must remeasure balance end period equivalent amount local currency changes reflected earnings period hypothetical 10 decrease average value us dollar relative value local currencies argentinean mexican russian canadian subsidiaries would decrease net income approximately 08 million equity risk certain equitybased compensation awards’ fair values determined based upon price common stock measurement date increase price common stock would lead corresponding increase fair value awards 10 increase price common stock value december 31 2011 would increase annual compensation expense recognized awards approximately 03 million index financial statements item 8 item 8 financial statements supplementary data presented herein consolidated financial statements key energy group inc subsidiaries june 30 1996 1995 years ended june 30 1996 1995 1994 also included report kpmg peat marwick llp independent certified public accountants consolidated financial statements june 30 1996 1995 three years ended june 30 1996 page consolidated balance sheets 21 consolidated statements operations 22 consolidated statements cash flows 23 consolidated statements stockholders equity 24 notes consolidated financial statements 25 independent auditors report 45 20 key energy group inc subsidiaries consolidated balance sheets june 30 june 30 thousands except share per share data 1996 1995 assets current assets cash 3240 865 restricted cash 971 410 restricted marketable securities 267 accounts receivable net allowance doubtful accounts 1942 133 respectively 20570 8133 inventories 1957 1257 prepaid expenses current assets 743 358 total current assets 27481 11290 property equipment oilfield service equipment 66432 23726 oil gas well drilling equipment 4862 2014 motor vehicles 1159 526 oil gas properties related equipmentsuccessful efforts method 17663 7652 furniture equipment 716 332 buildings land 5295 2086 95127 36336 accumulated depreciation depletion 8920 4394 net property equipment 87207 31942 assets 7034 2011 total assets 121722 45243 liabilities stockholders equity current liabilities accounts payable 11086 3930 accrued liabilities 11002 2612 accrued interest 417 145 accrued income taxes 53 174 deferred tax liability 310 118 current portion longterm debt 1471 2249 total current liabilities 24339 9228 longterm debtless current portion 45354 13700 noncurrent accrued expenses 4909 deferred income taxes 4244 2204 minority interest 1252 commitments contingencies stockholders equity common stock 10 par value 25000000 shares authorized 10413513 6913513 issued outstanding june 30 1996 1995 respectively 1041 691 additional paidin capital 32763 15186 retained earnings 7820 4234 total stockholders equity 41624 20111 total liabilities stockholders equity 121722 45243 see accompanying notes integral part consolidated financial statements 21 key energy group inc subsidiaries consolidated statements operations fiscal year ended june 30 thousands except per share data 1996 1995 1994 revenues oilfield services 55933 40105 32616 oil gas 4175 2334 1936 oil gas well drilling 6188 1932 net 182 318 69 66478 44689 34621 costs expenses oilfield services 40737 30592 25992 oil gas 1350 757 593 oil gas well drilling 5030 1444 depreciation depletion amortization 4701 2738 1371 general administrative 6608 4352 3540 interest 2477 1478 830 60903 41361 32326 income taxes minority interest 5575 3328 2295 income tax expense 1888 1150 950 minority interest net income 101 net income 3586 2178 1345 earnings per share primary income taxes minority interest 070 050 044 net income 045 033 026 assuming full dilution income taxes minority interest 069 050 043 net income 044 033 025 weighted average outstanding primary 7941 6647 5274 assuming full dilution 8114 6647 5288 see accompanying notes integral part consolidated financial statements 22 key energy group inc subsidiaries consolidated statements cash flows fiscal year ended june 30 thousands 1996 1995 1994 cash flows operating activities net income 3586 2178 1345 adjustments reconcile income operations net cash provided operations depreciation depletion amortization 4701 2738 1371 deferred income taxes 1618 1370 493 minority interest net income 101 gain sale assets 186 noncash items 6 312 change assets liabilities net effects acquisitions increase accounts receivable 2180 1327 389 increase decrease current assets 765 940 613 decrease accounts payable accrued expenses 1293 154 392 assets liabilities 3 295 27 net cash provided operating activities 7121 3258 1842 cash flows investing activities capital expenditures oilwell service operations 5188 2839 4395 capital expenditures oil gas operations 1879 2823 1253 capital expenditures oil gas well drilling operations 598 143 proceeds sale fixed assets 574 cash received welltech merger 1168 acquisitions oil gas operations 7895 1348 redemption purchase restricted marketable securities 267 1 40 net cash used investing activities 13551 7154 5608 cash flows financing activities principal payments debt 2601 2148 1771 borrowings payments lineofcredit 1100 605 1551 borrowings longterm debt 10867 6751 4536 net cash provided financing activities 9366 3998 4316 net increase cash restricted cash 2936 102 550 cash restricted cash beginning period 1275 1173 623 cash restricted cash end period 4211 1275 1173 see accompanying notes integral part consolidated financial statements 23 key energy group inc subsidiaries consolidated statements stockholders equity common stock number additional shares amount paidin retained thousands outstanding par capital earnings total balance june 30 1993 5124 512 6057 711 7280 issuance common stock odessa exploration inc 150 15 623 638 net income 1345 balance june 30 1994 5274 527 6680 2056 9263 issuance common stock welltech west texas assets 1635 164 8420 8584 issuance warrants welltech west texas assets 63 issuance common stock clint hurt drilling assets 5 23 net income 2178 balance june 30 1995 6914 691 15186 4234 20111 issuance common stock welltech merger 3500 350 17577 17927 net income 3586 balance june 30 1996 10414 1041 32763 7820 41624 see accompanying notes integral part consolidated financial statements 24 key energy group inc subsidiaries notes consolidated financial statements june 30 1996 1995 1994 1 organization summary significant accounting policies company key energy group inc herein referred company key organized april 1977 commenced operations july 1978 results operations twelve months ended june 30 1996 1995 1994 include companys oilfield service operations conducted whollyowned subsidiary yale e key inc yale e key companys oil gas exploration production whollyowned subsidiary odessa exploration incorporated odessa exploration companys oil gas well drilling operations conducted companys whollyowned subsidiary key energy drilling inc dba clint hurt drilling clint hurt drilling clint hurt drilling acquired march 1995 see note 2 also included results operations fiscal year ended june 30 1996 approximately three months operating results companys whollyowned subsidiary welltech eastern inc welltech eastern currently holds assets acquired merger welltech inc welltech march 26 1996 see note 2 welltech eastern operates two divisions welltech midcontinent division welltech eastern division addition result welltech acquisition company acquired 63 ownership servicious welltech sa servicious argentinean corporation servicious conducts oilfield services operations argentina accounted using consolidation minority interest method basis presentation companys consolidated financial statements include accounts company majorityowned subsidiaries significant intercompany transactions balances eliminated accounting policies presented followed preparing accompanying financial statements companys ownership less 50 owned entities accounted cost equity methods depending companys ownership percentage preparation financial statements requires use management estimates cash restricted cash marketable securities company holds significant cash certain financial institutions restricted cash 971000 410000 june 30 1996 1995 respectively consists monies held keys cash lockbox certifcates deposit cash lockbox requirement line credit cit see note 5 restricted marketable securities 267000 june 30 1995 consist primarily investment mutual fund invests primarily shortterm intermediate government securities recorded market value june 30 1995 investment held escrow letterofcredit issued amount approximately 244000 workers compensation insurance fiscal 1996 investment converted certificate deposit recorded cost inventories consist primarily oilwell service parts supplies held use operations key valued lower cost firstin firstout method market 25 key energy group inc subsidiaries notes consolidated financial statements continued property equipment company provides depreciation amortization nonoil gas properties using straightline method following estimated useful lives assets description years oilfield service equipment 3 20 oil gas well drilling equipment 3 15 motor vehicles 3 7 furniture equipment 3 10 buildings improvements 10 40 gas processing facilities 10 upon disposition retirement property equipment cost related accumulated depreciation removed accounts gain loss thereon included results operations odessa explorations aggregate oil gas properties stated cost excess total estimated future net revenues net related income tax effects odessa exploration utilizes successful efforts method accounting oil gas properties method costs associated productive wells nonproductive development wells capitalized nonproductive exploration costs geological geophysical costs expensed capitalized costs relating proved properties depleted using unitofproduction method upon disposition carrying amounts properties sold otherwise disposed related allowance depletion eliminated accounts gainloss included results operations gas balancing deferred income associated gas balancing accounted entitlements method represents amounts received gas sold gas balancing arrangements excess odessa explorations interest properties covered agreements odessa exploration deferred income associated gas balancing 198000 253000 june 30 1996 1995 respectively environmental company subject extensive federal state local environmental laws regulations laws constantly changing regulate discharge materials environment may require company remove mitigate environmental effects disposal release petroleum chemical substances various sites environmental expenditures expensed capitalized depending future economic benefit expenditures relate existing condition caused past operations future economic benefits expensed liabilities expenditures noncapital nature recorded environmental assessment andor remediation probable costs reasonably estimated assets goodwill june 30 1996 1995 assets consisted primarily goodwill security escrow deposits keys workers compensation retrospective insurance program addition interest approximately 13 insurance company insurance company affiliated keys workers compensation carrier 26 key energy group inc subsidiaries notes consolidated financial statements continued june 30 1996 1995 company classified goodwill cost excess fair value net assets acquired purchase transactions goodwill amortized straightline basis ten twentyfive years management continually evaluates whether events circumstances occurred indicate remaining useful life goodwill may warrant revision remaining balance goodwill may recoverable goodwill amortization expense totaled 100000 year ended june 30 1996 earnings per share primary earnings per common share determined dividing net earnings applicable common stock weighted average number common shares actually outstanding year common equivalent shares resulting assumed exercise stock options warrants using treasury stock method except periods reported losses inclusion common stock equivalents would antidilutive fully diluted earnings per common share based increased number shares would outstanding assuming conversion dilutive outstanding convertible securities using converted method income taxes company accounts income taxes based upon statement financial accounting standards 109 accounting income taxes sfas 109 sfas 109 deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rate recognized income period includes enactment date valuation allowance deferred tax assets recognized likely benefit deferred tax assets realized company whollyowned subsidiaries file consolidated federal income tax return concentration credit risk financial instruments potentially subject company concentrations credit risk consist primarily temporary cash investments trade receivables company restricts investment temporary cash investments financial institutions high credit standing policy limits amount credit exposure one financial institution companys customer base consists primarily multinational foreign national independent oil natural gas producers see note 11 additional information regarding customers accounted 10 consolidated revenues company performs ongoing credit evaluations customers generally require collateral trade receivables credit risk considered management limited due large number customers comprising companys customer base company maintains reserves potential credit losses within managements expectations impact sfas 121 march 1995 financial accounting standards board issued statement financial accounting standards 121 accounting longlived assets longlived assets disposed sfas 121 regarding impairment longlived assets identifiable intangibles goodwill related assets sfas 121 effective financial statements fiscal years beginning december 15 1995 although earlier adoption encouraged sfas 121 entity shall review longlived assets certain identifiable intangibles held used impairment whenever events changes circumstances indicate carrying amount asset may recoverable 27 key energy group inc subsidiaries notes consolidated financial statements continued book value longlived assets exceeds future cash flows expected result use assets reduction carrying amount impaired assets estimated fair values required company currently estimates implementation sfas 121 material effect companys financial position company implement sfas 121 beginning july 1 1996 cash flows cash flow purposes company considers highly liquid investments less three month maturity purchased cash equivalents 2 business property acquisitions welltech inc march 26 1996 company acquired merger welltech key surviving entity merger net consideration merger 3500000 shares companys common stock warrants purchase 500000 additional shares merger welltech stockholders received aggregate 4929962 shares companys common stock warrants purchase 750000 shares companys common stock 675 per share part merger 1429962 1635000 shares companys common stock owned welltech previously issued warrants purchase 250000 shares companys common stock 500 per share cancelled welltechs principal line business oil gas well servicing operates midcontinent northeast areas united states argentina acquisition accounted using purchase method results operations acquisition included companys since march 26 1996 odessa exploration properties april 1996 odessa exploration purchased approximately 69 million oil gas producing properties unrelated company financing acquisition came bank financing acquisition accounted using purchase method results operations acquired properties included consolidated statements operations beginning april 26 1996 clint hurt drilling march 30 1995 company clint hurt associates inc cha entered asset purchase agreement pursuant cha sold company assets west texas assets mainly consisted four oil gas drilling rigs related equipment consideration acquisition company paid cha 1750000 1000000 paid cash balance form 725000 note payable cha note paid full july 1995 mr clint hurt entered consulting noncompetition agreements company consideration company issued 5000 shares common stock acquisition accounted using purchase method results operations clint hurt drilling included company since april 1 1995 welltech west texas december 1993 company welltech entered purchase agreement pursuant company purchased substantially assets used welltech west texas operations acquisition dependent shareholder approval occurred august 1994 consideration acquisition 28 key energy group inc subsidiaries notes consolidated financial statements continued company issued welltech 1635000 shares common stock company warrants acquire 250000 additional shares common stock 500 per share expire february 5 1997 issued warrants subsequently modified result welltech merger described closing transaction occurred august 11 1994 prior closing company whollyowned subsidiary yale e key inc operated managed operations welltech west texas region connection interim operating agreement companys consolidated statements operations december 10 1993 august 11 1994 include direct revenues expenses west texas operations welltech period august 11 1994 results operations include effects ownership welltech west texas following unaudited pro forma results operations prepared though welltech eastern clint hurt drilling welltech west texas acquired july 1 1993 unaudited year ended june 30 thousands except per share data 1996 1995 1994 revenues 113022 119645 97111 net income 5247 4875 4266 earnings per share primary 050 048 042 fullydiluted 047 045 040 weighted average shares outstanding primary 10414 10106 fullydiluted 11106 10798 3 assets consist following june 30 thousands 1996 1995 investment insurance company common stock 368 workers compensation security premiums 1117 326 deferred acquisition costs 200 goodwill net amortization 200 5400 963 149 154 7034 2011 represents approximately 13 ownership 4 commitments contingencies various suits claims arising ordinary course business pending company management believe disposition items result material adverse impact consolidated financial position company june 30 1996 company reserved 425000 potential suits claims 1995 company entered employment agreements certain officers employment agreements generally run june 30 1997 automatically extended yearly basis 29 key energy group inc subsidiaries notes consolidated financial statements continued unless terminated company applicable officer addition providing base salary officer employment agreements provide severance payments officer varying 12 24 months officers base salary current annual base salaries officers covered employment agreements total approximately 800000 5 longterm debt july 1996 company completed offering 52000000 7 convertible subordinated debentures due 2003 debentures offering private offering pursuant rule 144a securities act proceeds offering approximately 52000000 used substantially repay existing longterm debt approximately 352 million remaining proceeds intended fund expansion companys services acquisitions businesses assets working capital general corporate purposes longterm debt repaid proceeds offering july 1996 term note cit groupcredit finance inc cit approximately 211 million bank debt associated odessa exploration previously norwest bank texas na norwest approximately 141 million debentures mature july 1 2003 convertible time november 1 1996 maturity unless previously redeemed shares companys common stock conversion price 9 34 per share subject adjustment certain events addition holders debentures convert prior july 1 1999 receive addition companys common stock payment generally equal 50 interest otherwise payable converted debentures date conversion july 1 1999 payable cash common stock companys option interest debentures payable semiannually january 1 july 1 year commencing january 1 1997 august 1996 interest rate increased 7 12 due certain modifications debenture indenture involving certain subsidiarys inability guarantee obligations indenture specifically servicious 7 12 effective interest rate expected remain foreseeable future debentures redeemable july 15 1999 thereafter debentures redeemable option company whole part declining redemption prices set forth original debenture prospectus together accrued unpaid interest thereon debentures also may redeemed option holder change control defined original debenture prospectus 100 principal amount together accrued interest thereon january 1996 prior completed merger described note 2 prior consummation offering described company yale e key clint hurt welltech entered separate credit facilities cit totaling approximately 35 million combined maximum credit limit credit facilities combined one facility consummation welltech merger result separate credit facilities interest rate yale e key lowered two onehalf one onequarter percent stated prime rate 825 june 30 1996 cit term notes required principal interest payments due first day month beginning february 1 1996 plus final payment unpaid balance note due december 31 1998 expiration lines credit december 31 1998 30 key energy group inc subsidiaries notes consolidated financial statements continued result offering described subsequent repayment longterm debt cit except lines credit company currently renegotiating overall credit facilities cit including limited maximum credit availability interest rate maturity dates components longterm debt prior offering described follows june 30 thousands 1996 1995 term notes cit interest principal payable monthly 21062 6032 revolving lines credit cit interest payable monthly 9910 3846 revolver note norwest interest payable monthly ii 6300 4237 term notes norwest interest principal payable monthly iii 7000 944 notes payable 2554 890 46826 15949 less current portion 1472 2249 longterm debt 45354 13700 iprior offering described cit term note amended required principal payments approximately 275000 plus interest due first day month plus final payment unpaid balance note due december 31 1998 interest rate one onequarter percent stated prime rate 825 june 30 1996 note collateralized assets including equipment inventory yale e key clint hurt welltech eastern cit line credit amended currently requires monthly payments interest one onequarter percent stated prime rate 825 june 30 1996 line credit collateralized accounts receivable yale e key clint hurt welltech eastern june 30 1996 credit line availability agreement cit included certain restrictive covenants restrictive prohibits company making distributions declaring dividends common stock ii prior offering described odessa exploration loan agreement amended norwest loan agreement provided 75 million revolving line credit note subject borrowing base limitation approximately 63 million june 30 1996 borrowing base redetermined least semiannual basis borrowing base reduced approximately 100000 per month october 1997 maturity note notes interest rate onehalf one percent norwests prime rate 825 june 30 1996 note secured substantially oil gas properties odessa exploration 31 key energy group inc subsidiaries notes consolidated financial statements continued loan agreement contained various restrictive covenants compliance requirements included prohibits odessa exploration declaring paying dividends odessa explorations common stock b limiting incurrence additional indebtedness odessa exploration c limitation disposition assets various financial covenants iii april 1996 result acquisition certain properties odessa exploration prior offering described odessa exploration entered loan agreement norwest loan agreement provided term loan 93 million reduced 24 million principal amount consummation acquisition certain properties odessa exploration notes interest rate onehalf one percent norwests prime rate 825 june 30 1996 note required interest payments beginning june 1 1996 note secured substantially oil gas properties odessa exploration result offering described note repaid full july 1996 march 1995 clint hurt entered loan agreement norwest loan agreement provided 1 million term note 200000 line credit note 1 million term note required principal payments approximately 28000 per month plus interest first payment due may 5th 1995 monthly thereafter 36 months maturity date april 1998 200000 line credit note required principal payments 20000 per month beginning july 5 1995 plus interest maturity april 1996 notes interest rate norwest prime rate 825 june 30 1996 plus 34 one percent notes secured equipment clint hurt drilling guaranteed company january 1996 result new credit facilities cit described prior offering also described clint hurt loan line credit norwest repaid full presented schedule repayment requirements longterm debt reflects revised payment terms offering next five years thereafter june 30 1996 thousands fiscal year principal ended amount 1997 1472 1998 111 1999 9956 2000 39 2001 38 thereafter 35210 46826 32 key energy group inc subsidiaries notes consolidated financial statements continued 6 accrued liabilities accrued liabilities consist following june 30 thousands 1996 1995 accrued payroll taxes 2614 624 group medical insurance 1536 workers compensation 1067 704 state sales use property taxes 414 208 gas imbalance deferred income 198 253 revenue distribution 437 215 acquisition accrual 3720 1016 608 total 11002 2612 7 stockholders equity 1995 stock option plan october 5 1995 stock option plan 1995 plan approved companys board directors plan became effective july 1 1995 unless terminated earlier terminate july 1 2005 1995 plan administered committee consisting least three directors key disinterested person within meaning rule 16b3 exchange act outside director within meaning section 162m code total number shares companys common stock may subject options 1995 plan may exceed 1150000 aggregate total amount common stock respect options may granted life 1995 plan single employee shall exceed 500000 shares aggregate options canceled forfeited expired expire terms without exercised shall available future grants 1995 plan committee may determine may determine key employees company subsidiary persons shall granted options 1995 plan terms options number shares may purchased option individuals eligible receive options 1995 plan consist key employees including officers may members board directors neither employees members committee individuals render services special importance management operation development key subsidiary contributed may expected contribute materially success key subsidiary provided however key employees eligible receive options price shares common stock may purchased upon exercise option specified committee time option granted case individual stock option except certain conditions may less fair market value common stock date grant duration option determined committee discretion shall specified option agreement individual stock option may exercisable expiration ten years 33 key energy group inc subsidiaries notes consolidated financial statements continued 1995 outside directors stock option plan october 5 1995 outside directors stock option plan approved companys board directors plan individuals outside directors eligible participate directors plan outside director defined member board directors employee company subsidiaries directors plan outside directors divided three groups dependent upon certain dates length service board nonqualified stock options nsos may granted directors plan nso granted directors plan shall expire ten years date grant nso may granted directors plan july 1 1998 directors plan provides issuance aggregate 300000 shares common stock may authorized unissued shares treasury shares purchased open market exercise price nso shall fair market value date grant following table summarizes stock option activity related companys plans price shares per share outstanding july 1 1995 granted 1075000 500 750 cancelled exercised outstanding june 30 1996 1075000 500 750 exercisable june 30 1996 281250 500 750 8 income taxes components income tax expense benefit follows fiscal year ended june 30 thousands 1996 1995 1994 federal state current 270 220 457 deferred 1618 1370 493 1888 1150 950 34 key energy group inc subsidiaries notes consolidated financial statements continued income tax expense benefit differs amounts computed applying statutory federal rate follows fiscal year ended june 30 thousands 1996 1995 1994 income tax computed statutory rate 340 state taxes net federal benefit 24 expiration capital loss carryover 44 meals entertainment disallowance 17 22 accrual return adjustments 15 10 03 07 5 339 345 413 deferred tax assets liabilities comprised following fiscal year ended june 30 thousands 1996 1995 1994 net operating loss carryforwards net allowance sec 382 limitations 6293 1140 1143 property equipment 10942 3437 2095 95 25 net deferred tax liability 4554 2322 952 valuation allowance provided likely portion deferred tax assets realized based expectations future management determined taxable income company likely sufficient fully utilize available carryforwards prior ultimate expiration company estimates june 30 1996 company available approximately 186837042 net operating loss carryforwards begin expire 2001 net operating loss carryforwards subject annual limitation approximately 940000 sections 382 383 internal revenue code 9 leasing arrangements among leases company primarily subsidiaries lease certain automotive equipment noncancellable operating leases expire various dates 1999 term operating leases generally run 36 60 months varying payment dates throughout month addition case yale e key lease includes option purchase equipment excess mileage charge defined leases 35 key energy group inc subsidiaries notes consolidated financial statements continued june 30 1996 future minimum lease payments noncancellable operating leases thousands follows fiscal year lease ending june 30 payments 1997 2819 1998 2217 1999 1371 2000 587 2001 286 7280 operating lease expense approximately 2897000 1930000 1640000 fiscal years ended june 30 1996 1995 1994 respectively 10 employee benefit plans june 30 1996 result welltech merger note 2 company maintains two 401k plans employees welltech eastern eligible participation one plan welltech 401k plan employees eligible participation plan key 401k plan company intends merge two plans fiscal 1997 401k plans cover substantially employees company make contribution key 401k plan fiscal year ended june 30 1994 however beginning july 1 1994 company agreed match employees contributions 10 employees contribution key 401k plan contributions totaled approximately 19000 20000 years ended june 30 1996 1995 respectively additionally company contributed 37000 welltech 401k plan period march 26 1996 date welltech merger june 30 1996 company agreed match employee contributions 50 maximum 1000 per employee employees contributions welltech 401k plan 11 major customers sales customers representing 10 consolidated revenues years ended june 30 1996 1995 1994 follows fiscal year ended june 30 1996 1995 1994 customer 20 18 15 customer b 11 10 14 accounts receivable balance customers b june 30 1996 1603000 835000 respectively 36 key energy group inc subsidiaries notes consolidated financial statements continued 12 transactions related parties welltech eastern paid 18000 period march 26 1996 date welltech merger june 30 1996 officeyard rental expense officer company welltech eastern interest opinion board directors company based boards review competitive bids transaction terms least favorable company could obtained third party connection odessa exploration acquisition see note 2 company granted kirk edwards president odessa exploration percentage reversionary working interest five deep gas wells located west texas upon repayment 1622000 bank debt assumed company acquisition companys earnings five wells percentage reversionary working interest decreases based date repayment assumed bank debt ranges 20 earnings five wells repayment occurs prior july 7 1995 5 earnings five wells repayment occurs july 7 1996 value reversionary interest assigned insignificant july 1 1993 key leases automotive equipment independent third party see note 9 independent third party purchases automotive equipment automobile dealership former officer owns majority interest net proceeds automobile dealership totaled 399000 1058000 years ended june 30 1995 1994 respectively leases considered operating leases opinion board directors company net proceeds automotive equipment terms least favorable company could obtained third party opinion based information provided third party leasing company affiliated former officer company board directors regarding purchase prices equipment lease rentals offered third parties key paid 55000 year ended june 30 1994 oilfield related services equipment two oilfield related companies two officers key interest opinion board directors company based boards review competitive bids transactions terms least favorable company could obtained third party 13 concentrations credit risk company concentration customers oil gas industry substantially companys customers major integrated oil companies major independent producers oil gas smaller independent producers may affect companys overall exposure credit risk either positively negatively much customers effected economic conditions oil gas industry historically cyclical however accounts receivable well diversified among many customers significant portion receivables major oil companies management believes minimizes potential credit risk historically credit losses insignificant receivables generally collateralized although company may generally secure receivable time filing mechanics materialmans lien well serviced 37 key energy group inc subsidiaries notes consolidated financial statements continued 14 business segment information companys operations business segment follows year ended june 30 thousands 1996 1995 1994 revenues oil gas 4175 2334 1936 oilfield services 55933 40105 32616 oil gas well drilling services 6188 1932 182 318 69 66478 44689 34621 income minority interest income taxes oil gas 1596 941 814 oilfield services 6482 4105 2823 oil gas well drilling services 639 367 interest expense 2477 1478 830 general corporate 665 607 512 5575 3328 2295 identifiable assets oil gas 18170 8289 5258 oilfield services 94962 33516 22022 oil gas well drilling services 5583 3160 general corporate 3007 278 815 121722 45243 28095 capital expenditures oil gas 9774 3736 4449 oilfield services 5188 11422 4395 oil gas well drilling services 598 2141 15560 17299 8844 depreciation depletion amortization oil gas 618 426 412 oilfield services 3862 2279 959 oil gas well drilling services 221 33 4701 2738 1371 key operates variety oilfield service equipment including workover rigs hot oil units transports various oilfield servicing equipment addition key performs variety oilfield services including fishing tools frac tanks blowout preventers 38 key energy group inc subsidiaries notes consolidated financial statements continued oil gas production conducted odessa exploration odessa exploration acquires manages interests producing oil gas properties account sponsored investors company engaged drilling production oil natural gas united states odessa exploration acquires producing oil gas properties major independent producers acquisition odessa exploration may either rework acquired well increase production andor form drilling partnerships additional development wells oil gas well drilling services conducted clint hurt drilling clint hurt drilling operates six drilling rigs drill oil gas west texas area 15 information oil gas activities unaudited capitalized costs june 30 thousands 1996 1995 oil gas properties proved properties 17290 7652 unproven properties less accumulated depletion 1364 766 net capitalized costs 15926 6886 costs incurred june 30 thousands 1996 1995 1994 proved property acquisition costs 7786 1054 4390 development costs 1848 2581 40 total costs incurred 9634 3635 4430 results operations oil gas sales 3555 1793 1483 production costs including production taxes 1350 756 573 depletion 598 398 386 income taxes 546 217 178 results operations oil gas producing activities 1061 422 346 computed statutory rate 34 excludes corporate overhead financing costs 39 key energy group inc subsidiaries notes consolidated financial statements continued oil gas reserve information estimates odessa explorations proved oil gas reserves june 30 1996 1995 1994 prepared company reviewed independent petroleum reservoir engineering firms estimates made accordance guidelines established securities exchange commission proved oil gas reserves estimated quantities crude oil natural gas geological engineering data demonstrate reasonable certainty recoverable future years known reservoirs existing economic conditions ie prices costs date estimate made prices utilized reflect consideration changes existing prices provided contractual arrangements escalations based upon future conditions reserve estimates presented utilizing average oil price 1917 bbl average natural gas price 195 mcf june 30 1996 proved developed oil gas reserves expected recovered existing equipment operating methods proved undeveloped oil gas reserves proved reserves expected recovered new wells undrilled acreage existing wells relatively major expenditure required recompletion secondary tertiary recovery reserves assigned undrilled acreage limited drilling units offset productive units reasonably certain production drilled major discovery favorable adverse event occurred since july 1 1996 believed caused significant change estimated proved oil gas reserves odessa exploration odessa explorations estimate reserves filed included reports federal agency securities exchange commission oil gas reserve quantity estimates subject numerous uncertainties inherent estimation quantities proved reserves projection future rates production timing development expenditures accuracy estimates function quality available data engineering geological interpretation judgment results subsequent drilling testing production may cause either upward downward revision previous estimates volumes considered commercially recoverable fluctuate changes prices operating costs company emphasizes reserve estimates inherently imprecise estimates new discoveries imprecise currently producing oil gas properties accordingly estimates expected change additional information becomes available future continued next page 40 key energy group inc subsidiaries notes consolidated financial statements continued oil gas producing activities oil natural condensate gas bbls mcf total proved reserves balance july 1 1993 purchases mineralsinplace 129291 7338452 production 14383 552791 balance june 30 1994 114908 6785661 revisions previous estimates 92080 1945659 purchases mineralsinplace 1515559 6036937 production 40330 770197 balance june 30 1995 1682217 13998060 revisions previous estimates 275499 4520007 discoveries extensions 162643 1793111 purchases mineralsinplace 3162099 16456993 production 97130 1026577 balance june 30 1996 5185328 35741594 proved developed reserves june 30 1994 114908 6785661 june 30 1995 750604 11203232 june 30 1996 2727967 24517362 standardized measure discounted future cash flows following schedules present estimates standardized measure discounted future net cash flows companys proved reserves june 30 1996 analysis changes amounts years ended june 30 1996 1995 1994 estimated future cash flows determined using yearend prices adjusted fixed determinable increases natural gas provided contractual agreement estimated future production development costs based economic conditions yearend future federal income taxes computed applying statutory federal income tax rate 34 difference future pretax net cash flows tax basis proved oil gas properties considering investment tax credits net operating loss carryforwards associated properties discounted future cash flow estimates like shown intended represent estimates fair value oil gas properties estimates fair value also consider probable reserves anticipated future oil gas prices interest rates changes development production costs risks associated future production considerations estimate fair value necessarily subjective imprecise 41 key energy group inc subsidiaries notes consolidated financial statements continued june 30 thousands 1996 1995 standardized measure future cash inflows 171000 51830 future production costs 61521 11852 future development costs 15495 6160 future income taxes 12092 10477 future aftertax net cash flows 81892 23341 10 annual discount 42188 8183 standardized measure 39704 15158 changes standardized measure standardized measure july 1 1993 oil gas sales net production costs 910 purchases minerals place 6030 net change income taxes 381 accretion discount standardized measure june 30 1994 4739 oil gas sales net production costs 1037 purchases minerals place 13033 net change income taxes 5881 accretion discount 512 revision quantity estimates 1745 change future development costs 1227 net change sales prices 79 changes production rates timing 741 standardized measure june 30 1995 15158 oil gas sales net production costs 2205 purchases minerals place 24216 net change income taxes 75 accretion discount 2142 revision quantity estimates 6189 change future development costs 982 extensions discoveries 2952 net change sales prices 1397 changes production rates timing 9238 standardized measure june 30 1996 39704 42 key energy group inc subsidiaries notes consolidated financial statements continued 16 cash flow disclosures supplemental cash flow disclosures years ended june 30 1996 1995 1994 presented year ended june 30 thousands 1996 1995 1994 interest paid 2205 1422 759 taxes paid 391 53 10 supplemental schedule noncash investing financing transactions years ended june 30 1996 1995 1994 presented year ended june 30 thousands 1996 1995 1994 fair value common stock issued odessa exploration inc 638 assumption odessa exploration inc liabilities 2752 acquisition odessa exploration inc property equipment 3196 fair value common stock issued clint hurt drilling 23 fair value common stock warrants issued welltech west texas 8647 capital lease obligation reduced purchase asset 275 proceeds sale assets received 132 property equipment additions acquisition costs paid june 30th 1015 issuance note payable clint hurt drilling acquisition 725 fair value common stock issued welltech inc 17729 assumption welltech inc working capital deficit 1734 assumption welltech inc noncurrent liabilities debt 27570 acquisition welltech inc property equipment assets 47455 43 key energy group inc subsidiaries notes consolidated financial statements continued 17 quarterly results operations unaudited summarized quarterly financial data 1996 1995 follows first second third fourth quarter thousands except per share amounts revenues 12398 12394 14302 27384 earnings operations 3522 3763 4180 7895 net earnings 726 768 827 1265 earnings per share 11 12 16 weighted average common shares equivalents outstanding 6914 6981 7941 revenues 11181 10781 11049 11678 earnings operations 2645 2683 3083 3485 net earnings 519 492 631 536 earnings per share 09 08 10 08 weighted average common shares equivalents outstanding 6091 6500 6637 6647 18 derivative financial instruments company utilizes derivative financial instruments manage welldefined commodity price risks company exposed credit losses event nonperformance counterparties commodity hedges company anticipates however counterparties able fully satisfy obligations contracts company obtain collateral security support financial instruments subject credit risk monitors credit standing counterparties company utilizes option contracts hedge effect price changes future oil gas production market prices oil gas exceed strike price put options expire unexercised therefore reducing effective price received oil gas sales cost related option june 30 1996 odessa exploration 6000 bbls oil per month hedged strike price 1950 per bbl period july 1 1996 december 31 1996 premiums paid commodity options contracts amortized oil gas sales terms agreements unamortized premiums 91789 included current assets consolidated balance sheet june 30 1996 amounts receivable commodity option contracts accrued increase oil gas sales applicable periods 44 independent auditors report board directors stockholders key energy group inc audited accompanying consolidated balance sheets key energy group inc subsidiaries june 30 1996 1995 related consolidated statements operations stockholders equity cash flows three years ended june 30 1996 consolidated financial statements responsibility companys management responsibility express opinion consolidated financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects consolidated financial position key energy group inc subsidiaries june 30 1996 1995 results operations cash flows three years ended june 30 1996 conformity generally accepted accounting principles kpmg peat marwick llp midland texas september 13 1996 45 item 9item 8 financial statements supplementary data presented herein consolidated financial statements key energy group inc subsidiaries june 30 1997 1996 years ended june 30 1997 1996 1995 also included report kpmg peat marwick llp independent certified public accountants consolidated financial statements june 30 1997 1996 years ended june 30 1997 1996 1995 page consolidated balance sheets 20 consolidated statements operations 21 consolidated statements cash flows 22 consolidated statements stockholders equity 23 notes consolidated financial statements 24 independent auditors report 51 19 key energy group inc subsidiaries consolidated balance sheets see accompanying notes integral part consolidated financial statements 20 key energy group inc subsidiaries consolidated statements operations see accompanying notes integral part consolidated financial statements 21 key energy group inc subsidiaries consolidated statements cash flows see accompanying notes integral part consolidated financial statements 22 key energy group inc subsidiaries consolidated statements stockholders equity see accompanying notes integral part consolidated financial statements 23 key energy group inc subsidiaries notes consolidated financial statements june 30 1997 1996 1995 1 organization summary significant accounting policies company key energy group inc herein referred company key organized april 1977 commenced operations july 1978 results operations twelve months ended june 30 1997 1996 1995 include companys oilfield service operations conducted whollyowned subsidiary yale e key inc yale e key companys oil gas exploration production whollyowned subsidiary odessa exploration incorporated odessa exploration companys oil gas well drilling operations conducted companys whollyowned subsidiary key energy drilling inc dba clint hurt drilling clint hurt drilling clint hurt drilling acquired march 1995 also included results operations fiscal year ended june 30 1997 approximately three months fiscal year ended june 30 1996 operating results companys whollyowned subsidiary welltech eastern inc welltech eastern currently holds assets acquired merger welltech inc welltech march 26 1996 see note 2 welltech eastern operates two divisions welltech midcontinent division welltech eastern division addition result welltech acquisition company acquired 63 ownership servicios welltech sa servicios argentinean corporation servicios conducts oilfield services operations argentina accounted using consolidation minority interest method basis presentation companys consolidated financial statements include accounts company whollyowned subsidiaries significant intercompany transactions balances eliminated accounting policies presented followed preparing accompanying consolidated financial statements companys ownership less 50 owned entities accounted cost equity methods depending companys ownership percentage estimates uncertainties preparation accompanying consolidated financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amount assets liabilities disclosures contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates inventories consist primarily oilwell service parts supplies held use operations key valued lower average cost market property equipment company provides depreciation amortization nonoil gas properties using straightline method following estimated useful lives assets table follows next page 24 key energy group inc subsidiaries notes consolidated financial statements continued description years oilfield service equipment 3 20 oil gas well drilling equipment 3 15 motor vehicles 3 7 furniture equipment 3 10 buildings improvements 10 40 gas processing facilities 10 upon disposition retirement property equipment cost related accumulated depreciation removed accounts gain loss thereon included results operations odessa exploration utilizes successful efforts method accounting oil gas properties method costs associated productive wells nonproductive development wells capitalized nonproductive exploration costs geological geophysical costs expensed capitalized costs relating proved properties depleted using unitofproduction method upon disposition carrying amounts properties sold otherwise disposed related allowance depletion eliminated accounts gainloss included results operations gas balancing deferred income associated gas balancing accounted entitlements method represents amounts received gas sold gas balancing arrangements excess odessa explorations interest properties covered agreements odessa exploration deferred income associated gas balancing approximately 155000 198000 253000 june 30 1997 1996 1995 respectively environmental company subject extensive federal state local environmental laws regulations laws constantly changing regulate discharge materials environment may require company remove mitigate environmental effects disposal release petroleum chemical substances various sites environmental expenditures expensed capitalized depending future economic benefit expenditures relate existing condition caused past operations future economic benefits expensed liabilities expenditures noncapital nature recorded environmental assessment andor remediation probable costs reasonably estimated assets goodwill june 30 1997 1996 1995 assets consisted primarily goodwill capitalized debt issuance costs security escrow deposits keys workers compensation retrospective insurance program addition interest approximately 13 insurance company insurance company affiliated keys workers compensation carrier 25 key energy group inc subsidiaries notes consolidated financial statements continued june 30 1997 1996 1995 company classified goodwill cost excess fair value net tangible assets acquired purchase transactions goodwill amortized straightline basis ten twentyfive years management continually evaluates whether events circumstances occurred indicate remaining useful life goodwill may warrant revision remaining balance goodwill may recoverable goodwill amortization expense totaled 622000 fiscal 1997 100000 fiscal 1996 100000 fiscal 1995 debt issuance cost amortization expense totaled 344000 year ended june 30 1997 amortized term applicable debt earnings per share primary earnings per common share determined dividing net earnings applicable common stock weighted average number common shares actually outstanding year common equivalent shares resulting assumed exercise stock options warrants using treasury stock method except periods reported losses inclusion common stock equivalents would antidilutive fully diluted earnings per common share based increased number shares would outstanding assuming conversion dilutive outstanding convertible securities using converted method income taxes company accounts income taxes based upon statement financial accounting standards 109 accounting income taxes sfas 109 sfas 109 deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rate recognized income period includes enactment date valuation allowance deferred tax assets recognized likely benefit deferred tax assets realized company eligible subsidiaries file consolidated u federal income tax return certain subsidiaries consolidated financial reporting purposes eligible included consolidated u federal income tax return separate provisions income taxes determined entities groups entities concentration credit risk financial instruments potentially subject company concentrations credit risk consist primarily temporary cash investments trade receivables company restricts investment temporary cash investments financial institutions high credit standing policy limits amount credit exposure one financial institution companys customer base consists primarily multinational foreign national independent oil natural gas producers see note 12 additional information regarding customers accounted 10 consolidated revenues company performs ongoing credit evaluations customers generally require collateral trade receivables credit risk considered management limited due large number customers comprising companys customer base company maintains reserves potential credit losses within managements expectations 26 key energy group inc subsidiaries notes consolidated financial statements continued impact sfas 121 july 1 1996 company adopted provisions statement financial accounting standards 121 accounting impairment longlived assets longlived assets disposed sfas 121 statement requires longlived assets certain identifiable intangibles reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable adoption statement impact companys financial position results operations liquidity stockbased compensation company accounts employee stockbased compensation using intrinsic value method prescribed accounting principles board opinion 25 accounting stock issued employees apb 25 accordingly company adopted disclosure provisions statement financial accounting standards 123 accounting stockbased compensation sfas 123 see note 8 pro forma disclosures compensation expense determined fairvalue provisions sfas 123 cash flows cash flow purposes company considers unrestricted highly liquid investments less three month maturity purchased cash equivalents reclassifications certain reclassifications made fiscal 1996 1995 consolidated financial statements conform fiscal 1997 presentation impact recently issued accounting standards financial accounting standards board recently issued following accounting standards adopted company future statement financial accounting standards 128 sfas 128 earnings per share effective periods ending december 15 1997 fas 128 replaces presentation primary earnings per share eps presentation basic eps excludes dilution computed dividing income available common shareholders weightedaverage number common shares outstanding period sfas 128 also requires dual presentation basic eps diluted eps face income statement requires reconciliation numerators denominators basic eps diluted epsthe company adopt sfas 128 quarter ended december 31 1997 statement financial accounting standards 130 sfas 130 reporting comprehensive income effective fiscal years beginning december 15 1997 reclassification financial statements earlier periods provided comparative purposes required company adopt sfas 130 fiscal year ended june 30 1999 statement financial accounting standards 131 sfas 131 disclosures segments enterprise related information effective financial statements periods beginning december 15 1997 sfas 131 need applied interim financial statements initial year application however comparative information interim periods initial year application reported financial statements interim periods second year application company adopt sfas 131 fiscal year ended june 30 1999 27 key energy group inc subsidiaries notes consolidated financial statements continued management believes adoption sfas 128 sfas 130 sfas 131 material effect financial position results operations company impact inflation operations although complex environment extremely difficult make accurate assessment impact inflation companys operations management opinion inflation significant impact business 2 business property acquisitions following described acquisitions completed current year included companys results operations twelve months ended june 30 1997 wellco oil service inc june 26 1997 company completed acquisition wellco oil service inc wellco operates 79 oilwell service rigs related equipment west texas wellco acquired 175 million cash 240000 shares companys common stock wellco operated companys west texas subsidiary yale e key results operations wellco included companys results operations effective june 26 1997 acquisition accounted using purchase method phoenix well service inc june 10 1997 company completed acquisition phoenix well service inc phoenix operates 11 oilwell service rigs related equipment west texas phoenix acquired 23 million cash phoenix operated companys west texas subsidiary yale e key results operations phoenix included companys results operations effective june 26 1997 acquisition accounted using purchase method southwest oilfield services inc june 10 1997 company completed acquisition southwest oilfield services inc southwest operates 3 oilwell service rigs related equipment western oklahoma southwest acquired 455000 cash southwest operated welltech midcon division welltech eastern inc results operations southwest included companys results operations effective june 10 1997 acquisition accounted using purchase method wireline excavation assets may 1 1997 company completed acquisition ten wireline units related equipment approximately 600000 cash assets operated west virginia welltech eastern division welltech eastern may 5 1997 company completed acquisition several dump trucks related excavation equipment 410000 cash assets operated michigan welltech eastern division welltech eastern results operations assets included companys results operations effective may 1 1997 acquisition accounted using purchase method shreves well service april 18 1997 company completed acquisition assets shreves well service inc shreves operated west virginia shreves assets acquired 550000 cash included five well service rigs related equipment shreves assets operated welltech eastern division welltech 28 key energy group inc subsidiaries notes consolidated financial statements continued eastern results operations shreves included companys results operations effective may 1 1997 acquisition accounted using purchase method argentine drilling rigs april 16 1997 company acquired three drilling rigs related equipment argentina drillers inc 15 million cash drilling rigs operated welltech servicios companys argentine subsidiary diamond well service april 3 1997 company completed acquisition assets diamond well service inc diamond 675000 cash diamond assets included four oilwell service rigs related equipment oklahoma diamond assets operated welltech midcontinent division welltech eastern results operations diamond included companys results operations effective april 1 1997 acquisition accounted using purchase method kalkaska construction service inc kalkaska oilfield service inc elder well service inc march 31 1997 company completed acquisition assets kalkaska construction service inc kalkaska oilfield service inc kalcon elder well service inc elder based michigan kalcon assets included 40 vacuum fluid transport trucks 40 trucks used oilfield equipment hauling seven saltwater disposal wells oilfield related equipment acquired approximately 85 million cash 77998 shares companys common stock elder assets included six oilwell service rigs related equipment acquired 609000 cash kalcon elder assets operated welltech eastern division welltech eastern operating results kalcon elder included companys results operations effective april 1 1997 acquisition accounted using purchase method tst paraffin service co inc march 27 1997 company completed acquisition tst paraffin service co inc tst 87 million cash tst operates approximately 61 trucks 22 hot oil units related equipment west texas tst operated companys west texas subsidiary yale e key inc operating results tst included companys results operations effective april 1 1997 acquisition accounted using purchase method tristate wellhead valve inc company completed acquisition assets tristate wellhead valve inc tristate march 17 1997 550000 cash 83770 shares companys common stock tristate assets consisted wellhead equipment rental business five oilwell service rigs assets operated welltech midcontinent division welltech eastern operating results assets included companys results operations effective april 1 1997 acquisition accounted using purchase method cobra industries inc effective january 13 1997 company completed purchase cobra industries inc cobra 5 million cash 175000 shares companys common stock cobra operates 26 oilwell service rigs southeastern new mexico operating results cobra included companys results operations effective february 1 1997 acquisition accounted using purchase method 29 key energy group inc subsidiaries notes consolidated financial statements continued talon trucking co effective january 7 1997 company completed acquisition assets talon trucking co talon 27 million cash talon operated three oilwell service rigs 21 trucks related fluid transportation disposal assets oklahoma assets currently operated welltech midcontinent division welltech eastern operating results assets included companys results operations effective january 7 1997 acquisition accounted using purchase method bl hotshot inc effective december 13 1996 company completed acquisition bl hotshot inc affiliated entities bl 49 million cash bl provides trucking related services oil natural gas wells michigan operations currently conducted welltech eastern division welltech eastern operating results bl included companys results operations effective january 1 1997 acquisition accounted using purchase method brooks well servicing inc effective december 1 1996 company completed acquisition brooks well servicing inc brooks 917500 shares companys common stock brooks whollyowned subsidiary hunt oil company operated 32 oilwell service rigs ancillary equipment east texas operations currently conducted welltech midcontinent division welltech eastern operating results brooks included companys results operations effective december 1 1996 acquisition accounted using purchase method hitwell surveys inc effective december 2 1996 company completed purchase hitwell surveys inc hitwell approximately 13 million cash hitwell operates eight oilwell logging perforating trucks appalachian basin michigan operating results hitwell included companys results operations effective december 1 1996 acquisition accounted using purchase method energy air drilling services co effective november 1 1996 company completed acquisition certain assets energy air drilling services co energy air 500000 cash 4386 shares companys common stock energy air operated four air drilling packages west texas operations currently conducted yale e key acquisition accounted using purchase method brownlee well service inc effective october 24 1996 company completed purchase brownlee well service inc brownlee integrity fishing rental tools inc integrity consideration acquisition 65 million cash 61069 shares companys common stock brownlee integrity operate 16 oilwell service rigs ancillary equipment variety oilfield fishing tools west texas operating results brownlee included companys results operations effective november 1 1996 acquisition accounted using purchase method 30 key energy group inc subsidiaries notes consolidated financial statements continued woodward well service inc effective october 1 1996 company completed acquisition woodward well service inc woodward 75000 shares companys common stock approximately 100000 cash payable fouryear period woodward operated five oilwell service units oklahoma operations currently conducted welltech midcontinent division welltech eastern operating results woodward included companys results operations effective october 1 1996 acquisition accounted using purchase method acquisitions completed prior june 30 1996 odessa exploration properties april 1996 odessa exploration purchased approximately 69 million cash oil gas producing properties unrelated company using proceeds bank borrowings indebtedness subsequently repaid see note 5 acquisition accounted using purchase method welltech inc march 26 1996 company completed merger welltech inc welltech company net consideration merger 3500000 shares companys common stock warrants purchase 500000 additional shares common stock exercise price 675 per share welltech conducted oil gas well servicing operations midcontinent northeast areas united states argentina acquisition accounted using purchase method pro forma results operationsunaudited following unaudited pro forma results operations prepared though welltech eastern wellco cobra tst acquired july 1 1995 proforma amounts necessarily indicative results may reported future year ended thousands except per share data june 30 1997 june 30 1996 revenues 198088 162988 net income 11591 8964 earnings per share 092 076 3 assets consist following june 30 thousands 1997 1996 investment insurance company common stock 368 workers compensation security premiums 1817 1117 debt issuance costs net amortization 1997 344 7045 goodwill net amortization 1997 822 1996 200 9256 5400 90 149 18576 7034 represents approximately 13 ownership 31 key energy group inc subsidiaries notes consolidated financial statements continued 4 commitments contingencies various suits claims arising ordinary course business pending company management believe disposition items result material adverse impact consolidated financial position company june 30 1997 company reserved 133000 potential suits claims 1995 company entered employment agreements certain officers employment agreements generally run june 30 1997 automatically extended yearly basis unless terminated company applicable officer addition providing base salary officer employment agreements provide severance payments officer varying 12 24 months officers base salary current annual base salaries officers covered employment agreements total approximately 800000 5 longterm debt june 6 1997 company entered agreement bank credit agreement pnc bank na administrative agent norwest bank texas na collateral agent lehman commercial paper inc advisor arranger syndication agent lenders named thereas pursuant lenders provided 255 million credit facility consisting 120 million sevenyear term loan 135 million fiveyear revolver interest rate term loan libor plus 275 percent interest rate revolver varies based libor level companys indebtedness currently libor plus 225 percent company used proceeds facility repay existing bank debt ii make additional acquisitions capital expenditures iii provide working capital addition credit facility provides certain conditions repurchase portion companys outstanding common stock open market time connection credit facility company incurred capitalized 4979000 debt issuance costs amortized life credit facility credit facility contains certain restrictive covenants requires certain financial ratios longterm debt repaid proceeds agreement june 1997 included debt cit groupcredit finance inc cit approximately 543 million bank debt associated odessa exploration previously norwest bank texas na norwest approximately 21 million july 1996 company completed offering 52000000 7 convertible subordinated debentures due 2003 debentures august 1996 interest rate debentures increased 7 12 result companys purchase remaining 37 ownership servicios interest rate reduced 7 july 1997 offering private offering pursuant rule 144a securities act 1933 proceeds offering used substantially repay existing longterm debt approximately 352 million connection offering debentures company capitalized incurred 2410000 debt issuance costs amortized life debentures debenture contains certain restrictive covenants requires certain financial ratios debentures mature july 1 2003 convertible time november 1 1996 maturity unless previously redeemed shares companys common stock conversion price 9 34 per share subject adjustment certain events addition holders debentures convert prior july 1 1999 receive addition companys common stock payment generally equal 50 interest otherwise payable converted debentures date conversion july 1 1999 payable cash common stock companys option interest debentures payable semiannually january 1 july 1 year commencing january 1 1997 august 1996 interest rate increased 7 12 due certain modifications debenture indenture involving certain subsidiarys 32 key energy group inc subsidiaries notes consolidated financial statements continued inability guarantee obligations indenture relating debentures prospectus specifically servicios result companys purchase remaining 37 ownership servicios interest rate reduced 7 july 1997 debentures redeemable company july 15 1999 thereafter debentures redeemable option company whole part declining redemption prices set forth original prospectus together accrued unpaid interest thereonsee note 17 discussion january 1996 prior consummation bank credit agreement offering described company yale e key clint hurt welltech entered separate credit facilities cit totaling approximately 35 million combined maximum credit limit credit facilities combined one facility consummation welltech merger result separate credit facilities interest rate yale e key lowered two onehalf one onequarter percent stated prime rate 825 june 30 1996 cit term notes required principal interest payments due first day month beginning february 1 1996 plus final payment unpaid balance note due december 31 1998 expiration lines credit december 31 1998 components longterm debt follows june 30 thousands 1997 1996 term note 120000 subordinated debentures ii 52000 term notes cit interest principal payable monthly iii 21062 revolving lines credit cit interest payable monthly iii 9910 revolver note norwest interest payable monthly iv 6300 term notes norwest interest principal payable monthly v 7000 notes payable 2167 2553 174167 46825 less current portion 1404 1471 longterm debt 172763 45354 bank credit agreement term loan 120 million requires interest payments termination libor interest period term loan seven years interest rate libor plus 275 percent principal payments 500000 june 30 1998 125000 end quarter beginning september 30 1998 june 30 2002 8750000 end quarter beginning september 30 2002 june 30 2003 20625000 beginning september 30 2003 final payment 20625000 june 30 2004 company used proceeds facility repay existing bank debt ii make additional acquisitions capital expenditures iii provide working capital addition credit facility 135 million provides certain conditions repurchase portion companys outstanding common stock open market time june 30 1997 135 million available credit facility credit facility company may obligated pay certain fees including commitment fee ranges 25 375 based unused portion credit facility 33 key energy group inc subsidiaries notes consolidated financial statements continued ii debentures mature july 1 2003 convertible time november 1 1996 maturity unless previously redeemed shares companys common stock conversion price 9 34 per share subject adjustment certain events addition holders debentures convert prior july 1 1999 receive addition companys common stock payment generally equal 50 interest otherwise payable converted debentures date conversion july 1 1999 payable cash common stock companys option interest debentures payable semiannually january 1 july 1 year commencing january 1 1997 august 1996 interest rate increased 7 12 due certain modifications debenture indenture involving certain subsidiarys inability guarantee obligations indenture relating debentures prospectus specifically servicios result companys purchase remaining 37 ownership servicios interest rate reduced 7 july 1997 iii cit term note amended required principal payments approximately 275000 plus interest due first day month plus final payment unpaid balance note due december 31 1998 interest rate one onequarter percent stated prime rate 825 june 30 1996 note collateralized assets including equipment inventory yale e key clint hurt welltech eastern cit line credit amended required monthly payments interest one onequarter percent stated prime rate 825 june 30 1996 line credit collateralized accounts receivable yale e key clint hurt welltech eastern agreement cit included certain restrictive covenants restrictive prohibited company making distributions declaring dividends common stock iv prior agreement offering described odessa exploration loan agreement amended norwest loan agreement provided 75 million revolving line credit note subject borrowing base limitation approximately 63 million june 30 1996 borrowing base redetermined least semiannual basis borrowing base reduced approximately 100000 per month october 1997 maturity note notes interest rate onehalf one percent norwests prime rate 825 june 30 1996 note secured substantially oil gas properties odessa exploration loan agreement contained various restrictive covenants compliance requirements included prohibits odessa exploration declaring paying dividends odessa explorations common stock b limiting incurrence additional indebtedness odessa exploration c limitation disposition assets various financial covenants v april 1996 result acquisition certain properties odessa exploration prior offering described odessa exploration entered loan agreement norwest loan agreement provided term loan 93 million reduced 24 million principal amount consummation acquisition certain properties odessa exploration notes interest rate onehalf one percent norwests prime rate 825 june 30 1996 note required interest payments beginning june 1 1996 note secured substantially oil gas properties odessa exploration presented schedule repayment requirements longterm debt next five years thereafter june 30 1997 34 key energy group inc subsidiaries notes consolidated financial statements continued thousands fiscal year principal ended amount 1998 1404 1999 1392 2000 701 2001 637 2002 533 thereafter 169500 174167 6 fair value financial instruments carrying amount cash equivalents accounts receivable accounts payable accrued expenses current assets current liabilities approximates fair value short maturity instruments based borrowing rates currently estimated available company loans similar terms fair value longterm debt approximates carrying amount june 30 1997 1996 except subordinated convertible debentures carrying value 52 million fair value approximately 989 million june 30 1997 7 accrued liabilities accrued liabilities consist following june 30 thousands 1997 1996 accrued payroll taxes 6674 2614 group medical insurance 891 1536 workers compensation 1683 1067 state sales use taxes 247 414 gas imbalance deferred income 155 198 revenue distribution 145 437 acquisition reorganization accrual 838 3720 1874 1016 total 12507 11002 8 stockholders equity 1995 stock option plan march 26 1996 stock option plan 1995 plan approved companys stockholders plan became effective july 1 1995 unless terminated earlier terminate july 1 2005 1995 plan administered committee consisting least three directors key disinterested person within meaning rule 16b3 exchange act outside director within meaning section 162m code 35 key energy group inc subsidiaries notes consolidated financial statements continued total number shares companys common stock may subject options 1995 plan may exceed 1800000 aggregate total amount common stock respect options may granted life 1995 plan single employee shall exceed 500000 shares aggregate options canceled forfeited expired expire terms without exercised shall available future grants 1995 plan committee may determine key employees company subsidiary persons shall granted options 1995 plan terms options number shares may purchased option individuals eligible receive options 1995 plan consist key employees including officers may members board directors neither employees members committee individuals render services special importance management operation development key subsidiary contributed may expected contribute materially success key subsidiary provided however key employees eligible receive options price shares common stock may purchased upon exercise option specified committee time option granted case individual stock option except certain conditions may less fair market value common stock date grant duration option determined committee discretion shall specified option agreement individual stock option may exercisable expiration ten years 1995 outside directors stock option plan march 26 1996 outside directors stock option plan approved companys shareholders directors plan individuals outside directors eligible participate directors plan outside director defined member board directors employee company subsidiaries directors plan outside directors divided three groups dependent upon certain dates length service board nonqualified stock options nsos may granted directors plan nso granted directors plan shall expire ten years date grant nso may granted directors plan july 1 1998 directors plan provides issuance aggregate 400000 shares common stock may authorized unissued shares treasury shares purchased open market exercise price nso shall fair market value date grant following table summarizes stock option activity related companys plans price shares per share outstanding july 1 1995 granted 1075000 500 outstanding june 30 1996 1075000 granted 175000 750 175000 8313 50000 8375 25000 850 25000 11125 535000 1325 25000 1450 36 key energy group inc subsidiaries notes consolidated financial statements continued price shares per share 50000 16875 canceled 26668 500 exercised 28332 500 outstanding june 30 1997 2080000 exercisable june 30 1997 810417 company applies apb 25 related interpretations accounting stock option awards accordingly compensation expense recognized stock option awards compensation expense stock option awards determined consistent sfas 123 companys net income net income per share years ended june 30 1997 1996 would adjusted following pro forma amounts unaudited year ended june 30 1997 1996 net income thousands 8680 2945 primary net income per share 071 037 fullydiluted net income per share 061 035 pro forma net income pro forma net income per share amounts noted likely representative pro forma amounts reported future years pro forma adjustments future years include compensation expense associated options granted fiscal year 1996 1997 plus compensation expense associated options awarded future years result pro forma compensation expense likely higher levels reflected 1996 1997 options awarded future years sfas 123 fair value stock option grant estimated date grant using blackscholes option pricing model following weighted average assumptions used grant 1997 1996 1997 1996 riskfree interest rate 659 654 expected life 5 years 5 years expected volatility 28 29 expected dividend yield 0 total fair value options granted june 30 1997 6541000 37 key energy group inc subsidiaries notes consolidated financial statements continued 9 income taxes components income tax expense benefit follows fiscal year ended june 30 thousands 1997 1996 1995 federal state current 1664 270 220 deferred 3836 1618 1370 5500 1888 1150 income tax expense benefit differs amounts computed applying statutory federal rate follows fiscal year ended june 30 thousands 1997 1996 1995 income tax computed statutory rate 350 340 amortization goodwill disallowance 15 meals entertainment disallowance 08 17 22 accrual return adjustments 03 15 10 01 03 07 377 339 345 deferred tax assets liabilities comprised following fiscal year ended june 30 thousands 1997 1996 1995 net operating loss carryforwards 4628 6293 1140 property equipment 40410 10942 3437 82 95 25 net deferred tax liability 35864 4554 2322 valuation allowance provided likely portion deferred tax assets realized based expectations future management determined taxable income company likely sufficient fully utilize available carryforwards prior ultimate expiration company estimates june 30 1997 company available approximately 148414060 net operating loss carryforwards begin expire 2001 net operating loss carryforwards subject annual limitation approximately 940000 sections 382 383 internal revenue code 38 key energy group inc subsidiaries notes consolidated financial statements continued 10 leasing arrangements among leases company primarily subsidiaries lease certain automotive equipment noncancelable operating leases expire various dates 2002 term operating leases generally run 36 60 months varying payment dates throughout month addition case yale e key lease includes option purchase equipment excess mileage charge defined leases june 30 1997 future minimum lease payments noncancelable operating leases thousands follows fiscal year lease ending june 30 payments 1998 4348 1999 3433 2000 2044 2001 1122 2002 391 11338 operating lease expense approximately 5299000 2897000 1930000 fiscal years ended june 30 1997 1996 1995 respectively 11 employee benefit plans june 30 1997 result welltech merger note 2 company maintains two 401k plans employees welltech eastern eligible participation one plan welltech 401k plan employees eligible participation plan key 401k plan company intends merge two plans january 1 1998 401k plans cover substantially employees company matches employees contributions 10 employees contribution key 401k plan contributions totaled approximately 35000 19000 20000 years ended june 30 1997 1996 1995 respectively additionally company contributed 300000 37000 welltech 401k plan year ended june 30 1997 period march 26 1996 date welltech merger june 30 1996 respectively company agreed match employee contributions 50 maximum 1000 per employee employees contributions welltech 401k plan 12 major customers sales customers representing 10 consolidated revenues years ended june 30 1997 1996 1995 follows fiscal year ended june 30 1997 1996 1995 customer 13 20 18 customer b 7 11 10 39 key energy group inc subsidiaries notes consolidated financial statements continued 13 transactions related parties welltech eastern paid 78000 18000 year ended june 30 1997 period march 26 1996 date welltech merger june 30 1996 respectively officeyard rental expense officer company welltech eastern interest opinion board directors company based boards review competitive bids transaction terms least favorable company could obtained third party connection odessa exploration acquisition see note 2 company granted kirk edwards president odessa exploration percentage reversionary working interest five deep gas wells located west texas upon repayment 1622000 bank debt assumed company acquisition companys earnings five wells percentage reversionary working interest decreases based date repayment assumed bank debt ranges 20 earnings five wells repayment occurs prior july 7 1995 5 earnings five wells repayment occurs july 7 1996 key leases automotive equipment independent third party see note 10 independent third party purchases automotive equipment automobile dealership former officer owns majority interest net proceeds automobile dealership totaled 399000 year ended june 30 1995 leases considered operating leases opinion board directors company net proceeds automotive equipment terms least favorable company could obtained third party opinion based information provided third party leasing company affiliated former officer company board directors regarding purchase prices equipment lease rentals offered third parties space left blank intentionally 40 key energy group inc subsidiaries notes consolidated financial statements continued 14 concentrations credit risk company concentration customers oil gas industry substantially companys customers major integrated oil companies major independent producers oil gas smaller independent producers may affect companys overall exposure credit risk either positively negatively much customers effected economic conditions oil gas industry historically cyclical however accounts receivable well diversified among many customers significant portion receivables major oil companies management believes minimizes potential credit risk historically credit losses insignificant receivables generally collateralized although company may generally secure receivable time filing mechanics materialmans lien well serviced 15 business segment information companys operations business segment follows year ended june 30 thousands 1997 1996 1995 revenues oil gas 8180 4175 2334 oilfield services 144385 55933 40105 oil gas well drilling services 9956 6188 1932 1109 182 318 163630 66478 44689 income minority interest income taxes oil gas 3719 1596 941 oilfield services 20639 6482 4105 oil gas well drilling services 1036 639 367 interest expense 7535 2477 1478 general corporate 3257 665 607 14602 5575 3328 identifiable assets oil gas 23544 18170 8289 oilfield services 242001 94962 33516 oil gas well drilling services 8365 5583 3160 general corporate 46185 3007 278 320095 121722 45243 41 key energy group inc subsidiaries notes consolidated financial statements continued year ended june 30 thousands 1997 1996 1995 capital expenditures excluding acquisitions oil gas 8188 1879 2823 oilfield services 15084 5188 2839 oil gas well drilling services 1483 598 143 24755 7665 5805 depreciation depletion amortization oil gas 870 618 426 oifield services 9198 3862 2279 oil gas well drilling services 436 221 33 general corporate 916 11420 4701 2738 key operates variety oilfield service equipment including workover rigs hot oil units transports various oilfield servicing equipment addition key performs variety oilfield services including fishing tools frac tanks blowout preventers oil gas production conducted odessa exploration odessa exploration acquires manages interests producing oil gas properties account sponsored investors odessa exploration engaged drilling production oil natural gas united states odessa exploration acquires producing oil gas properties major independent producers acquisition odessa exploration may either rework acquired wells increase production andor form drilling partnerships additional development wells oil gas well drilling services conducted clint hurt drilling clint hurt drilling operates six drilling rigs drill oil gas west texas area 16 derivative financial instruments company utilizes derivative financial instruments manage welldefined commodity price risks company exposed credit losses event nonperformance counterparties commodity hedges company anticipates however counterparties able fully satisfy obligations contracts company obtain collateral security support financial instruments subject credit risk monitors credit standing counterparties company utilizes option contracts hedge effect price changes future oil gas production market prices oil gas exceed strike price put options expire unexercised therefore reducing effective price received oil gas sales cost related option june 30 1996 odessa exploration 6000 bbls oil per month hedged strike price 1950 per bbl period july 1 1996 december 31 1996 premiums paid commodity options contracts amortized oil gas sales terms agreements unamortized premiums 91789 0 included current assets consolidated balance sheet june 30 1996 1997 respectively amounts receivable commodity option contracts accrued increase oil gas sales applicable periods 42 key energy group inc subsidiaries notes consolidated financial statements continued 17 subsequent events acquisitions announced yet completed june 30 1997 following described acquisitions announced yet completed june 30 1997 included companys results operations twelve months ended june 30 1997 brw drilling inc august 4 1997 company announced signed letter intent acquire brw drilling inc brw approximately 150 million cash brw operates 7 drilling rigs related equipment permian basin west texas closing brw acquisition expected upon negotiation definitive agreement completion companys standard due diligence receipt regulatory clearances required upon completion brw acquisition combined clint hurts drilling operations permian basin west texas form thirteen rig shallow drilling operation frontier well service inc august 21 1997 company announced definitive agreement acquisition frontier well service inc frontier approximately 35 million cash frontier operates 12 oilwell service rigs related equipment wyoming closing frontier acquisition expected upon negotiation definitive agreement completion companys standard due diligence receipt regulatory clearances required dunbar well service inc august 4 1997 company announced signed letter intent acquire dunbar well service inc dunbar approximately 118 million cash dunbar operates 38 oilwell service rigs related equipment wyoming closing dunbar acquisition expected upon negotiation definitive agreement completion companys standard due diligence receipt regulatory clearances required jw gibson well service company august 4 1997 company announced definitive agreement acquisition jw gibson well service company gibson cash stock warrants estimated value approximately 250 million gibson operates 74 oilwell service rigs related equipment eight western states closing gibson acquisition expected october 1997 company manage operations gibson interim period acquired rocky mountain operations gibson together acquired dunbar frontier operations operate separate subsidiary key energy big well service co sunco trucking co justis supply co july 21 1997 company announced signed letter intent acquire big well service co sunco trucking co justis supply co collectively big asunco cash stock estimated value approximately 310 million big asunco operates 29 oilwell service rigs four drilling rigs 75 fluid hauling trucks machine shopsupply store related equipment four corners region southwestern united states closing big asunco acquisition expected upon negotiation definitive agreement completion companys standard due diligence receipt regulatory clearances required acquired big asunco operations operate separate subsidiary key energy 43 key energy group inc subsidiaries notes consolidated financial statements continued acquisitions completed june 30 1997 following described acquisitions completed june 30 1997 included companys results operations twelve months ended june 30 1997 landmark fishing rental inc september 16 1997 company closed acquisition landmark fishing rental inc landmark approximately 33 million cash landmark operates rental tool business western oklahoma texas panhandle landmark operated welltech midcontinent division welltech eastern operating results landmark included companys results operations effective september 16 1997 ram oil well service inc rowland trucking co inc september 1 1997 company completed acquisition ram oil well service inc rowland trucking co inc ramrowland 215 million cash ramrowland operates approximately 17 oilwell service rigs 93 fluid hauling trucks 290 frac tanks three disposal brine wells dirt construction equipment west texas southeast new mexico ramrowland operated companys west texas subsidiary yale e key inc operating results ramrowland included companys results operations effective september 1 1997 mosley well service inc august 22 1997 company completed acquisition mosley well service inc mosley operates east texas northern louisiana arkansas mosley acquired approximately 162 million cash included thirtysix well service rigs related equipment moseley integrated brooks division welltech eastern operating results mosley included companys results operations effective september 1 1997 kenting holdings argentina sa july 30 1997 company completed acquisition assets kenting holdings argentina sa kenting 101 million cash kenting assets included six oilwell service rigs three drilling rigs related equipment argentina kenting assets operated servicios patrick well service inc july 17 1997 company completed acquisition assets patrick well service inc patrick 70 million cash patrick assets included 29 oilwell service rigs related equipment located southwest kansas oklahoma southeast colorado patrick assets operated welltech midcontinent division welltech eastern 44 key energy group inc subsidiaries notes consolidated financial statements continued servicios welltech sa minority interest effective july 1 1997 company purchased remaining 37 interest servicios two unrelated parties 34 million cash result purchase company 100 servicios conversion convertible subordinated debentures september 11 1997 33245000 principal amount companys debentures converted companys common stock conversion option holders debentures converted 3552539 shares companys common stock conversion included 188488 shares addition conversion shares 975 per share additional consideration accounted increase companys equity however proportional amount debt issuance costs associated converted debentures expensed extraordinary item period occurs 18 quarterly results operations unaudited summarized quarterly financial data 1997 1996 follows fourth quarter fiscal 1997 includes adjustment 2 million previously unrecorded inventory 45 key energy group inc subsidiaries notes consolidated financial statements continued 19 supplemental information oil gas activities unaudited capitalized costs june 30 thousands 1997 1996 oil gas properties proved properties 23402 17290 unproved properties less accumulated depletion 1868 1364 net capitalized costs 21534 15926 costs incurred june 30 thousands 1997 1996 1995 proved property acquisition costs 7786 1054 development costs 8188 1848 2581 total costs incurred 8188 9634 3635 results operations june 30 thousands 1997 1996 1995 oil gas sales 6975 3555 1793 production costs including production taxes 3030 1350 756 depletion 835 598 398 income taxes 1057 546 217 results operations oil gas producing activities 2053 1061 422 computed statutory rate 35 excludes corporate overhead financing costs oil gas reserve information estimates odessa explorations proved oil gas reserves june 30 1997 1996 1995 prepared company reviewed independent petroleum reservoir engineering firm estimates made accordance guidelines established securities exchange commission proved oil gas reserves estimated quantities crude oil natural gas geological engineering data demonstrate reasonable certainty recoverable future years known reservoirs existing economic conditions ie prices costs date estimate made prices utilized reflect consideration changes existing prices provided contractual arrangements escalations based upon future conditions reserve estimates presented utilizing average oil price 2100 bbl average natural gas price 220 mcf june 30 1997 47 key energy group inc subsidiaries notes consolidated financial statements continued proved developed oil gas reserves expected recovered existing equipment operating methods proved undeveloped oil gas reserves proved reserves expected recovered new wells undrilled acreage existing wells relatively major expenditure required recompletion secondary tertiary recovery reserves assigned undrilled acreage limited drilling units offset productive units reasonably certain production drilled major discovery favorable adverse event occurred since july 1 1997 believed caused significant change estimated proved oil gas reserves odessa exploration odessa explorations estimate reserves filed included reports federal agency securities exchange commission oil gas reserve quantity estimates subject numerous uncertainties inherent estimation quantities proved reserves projection future rates production timing development expenditures accuracy estimates function quality available data engineering geological interpretation judgment results subsequent drilling testing production may cause either upward downward revision previous estimates volumes considered commercially recoverable fluctuate changes prices operating costs company emphasizes reserve estimates inherently imprecise estimates new discoveries imprecise currently producing oil gas properties accordingly estimates expected change additional information becomes available future oil gas producing activities oil natural condensate gas bbls mcf total proved reserves balance june 30 1994 114908 6785661 revisions previous estimates 92080 1945659 purchases mineralsinplace 1515559 6036937 production 40330 770197 balance june 30 1995 1682217 13998060 revisions previous estimates 438142 6313118 purchases mineralsinplace 3162099 16456993 production 97130 1026577 balance june 30 1996 5185328 35741594 table continued next page 47 key energy group inc subsidiaries notes consolidated financial statements continued oil natural condensate gas bbls mcf proved developed reserves june 30 1995 750604 11203232 june 30 1996 2727967 24517362 standardized measure discounted future cash flows following schedules present estimates standardized measure discounted future net cash flows companys proved reserves june 30 1996 analysis changes amounts years ended june 30 1996 1995 june 30 1997 information included current year oil gas producing activities longer considered significant accordance reporting requirements fas 14 financial reporting segments business enterprise estimated future cash flows determined using yearend prices adjusted fixed determinable increases natural gas provided contractual agreement estimated future production development costs based economic conditions yearend future federal income taxes computed applying statutory federal income tax rate 34 difference future pretax net cash flows tax basis proved oil gas properties considering investment tax credits net operating loss carryforwards associated properties discounted future cash flow estimates like shown intended represent estimates fair value oil gas properties estimates fair value also consider probable reserves anticipated future oil gas prices interest rates changes development production costs risks associated future production considerations estimate fair value necessarily subjective imprecise thousands june 30 1996 june 30 1995 standardized measure future cash inflows 171000 51830 future production costs 61521 11852 future development costs 15495 6160 future income taxes 12092 10477 future aftertax net cash flows 81892 23341 10 annual discount 42188 8183 standardized measure 39704 15158 table continued next page 48 key energy group inc subsidiaries notes consolidated financial statements continued changes standardized measure standardized measure june 30 1994 4739 oil gas sales net production costs 1037 purchases minerals place 13033 net change income taxes 5881 accretion discount 512 revision quantity estimates 1745 change future development costs 1227 net change sales prices 79 changes production rates timing 741 standardized measure june 30 1995 15158 oil gas sales net production costs 2205 purchases minerals place 24216 net change income taxes 75 accretion discount 2142 revision quantity estimates 6189 change future development costs 982 extensions discoveries 2952 net change sales prices 1397 changes production rates timing 9238 standardized measure june 30 1996 39704 20 cash flow disclosures supplemental cash flow disclosures years ended june 30 1997 1996 1995 presented year ended june 30 thousands 1997 1996 1995 interest paid 5850 2205 1422 taxes paid 391 53 supplemental schedule noncash investing financing transactions years ended june 30 1996 1995 presented year ended june 30 thousands 1996 1995 fair value common stock issued clint hurt drilling 23 fair value common stock warrants issued welltech west texas 8647 capital lease obligation reduced purchase asset 275 table continued next page 49 key energy group inc subsidiaries notes consolidated financial statements continued proceeds sale assets received 132 property equipment additions acquisition costs paid june 30th 1015 issuance note payable clint hurt drilling acquisition 725 fair value common stock issued welltech inc 17929 assumption welltech inc working capital deficit 1734 assumption welltech inc noncurrent liabilities debt 27570 acquisition welltech inc property equipment 47455 supplemental schedule noncash investing financing transactions year ended june 30 1997 presented 1 fair value issued common stock represents number common shares issued market value companys common stock acquisition date 50 independent auditors report board directors stockholders key energy group inc audited accompanying consolidated balance sheets key energy group inc subsidiaries june 30 1997 1996 related consolidated statements operations stockholders equity cash flows years threeyear period ended june 30 1997 consolidated financial statements responsibility companys management responsibility express opinion consolidated financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects consolidated financial position key energy group inc subsidiaries june 30 1997 1996 results operations cash flows years threeyear period ended june 30 1997 conformity generally accepted accounting principles kpmg peat marwick llp midland texas august 28 1997 item 9item 8 financial statements supplementary data presented herein consolidated financial statements key energy services inc june 30 1999 1998 years ended june 30 1999 1998 1997 also included report kpmg llp independent certified public accountants consolidated financial statements june 30 1999 1998 years ended june 30 1999 1998 1997 key energy services inc consolidated balance sheets see accompanying notes integral part consolidated financial statements key energy services inc consolidated statements operations see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries consolidated statements comprehensive income see accompanying notes integral part consolidated financial statements key energy services inc consolidated statements cash flows see accompanying notes integral part consolidated financial statements key energy services inc consolidated statements stockholders equity thousands see accompanying notes integral part consolidated financial statements key energy services inc notes consolidated financial statements june 30 1999 1998 1997 1 organization summary significant accounting policies company key energy services inc formerly known key energy group inc company key largest onshore rigbased well servicing contractor world approximately 1400 well service rigs 1200 oilfield trucks june 30 1999 company provides complete range well services major independent oil gas companies including rigbased well maintenance workover completion recompletion services including horizontal recompletions oilfield trucking ancillary oilfield services key conducts well servicing operations onshore continental united states gulf coast including south texas central gulf coast texas south louisiana arklatex region permian basin west texas eastern new mexico midcontinent region including anadarko hugoton arkoma basins four corners area including san juan piceance uinta paradox basins eastern region including appalachian michigan illinois basins rocky mountains including denverjulesberg powder river wind river green river williston basins california san joaquin basin internationally argentina ontario canada company also leading onshore drilling contractor 73 land drilling rigs june 30 1999 key conducts land drilling operations number major domestic producing basins well argentina ontario canada key also produces develops oil natural gas reserves permian basin texas panhandle basis presentation companys consolidated financial statements include accounts company whollyowned subsidiaries significant intercompany transactions balances eliminated accounting policies presented followed preparing accompanying consolidated financial statements estimates uncertainties preparation accompanying consolidated financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amount assets liabilities disclosures contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates inventories consist primarily oilfield service parts supplies held consumption parts supplies held sale companys various retail supply stores valued lower average cost market key energy services inc notes consolidated financial statements continued june 30 1999 1998 1997 1 organization summary significant accounting policies continued property equipment company provides depreciation amortization oilfield service related equipment using straightline method excluding drilling rigs following estimated useful lives assets components well service rig generally require replacement rigs life depreciated estimated useful lives range three 15 years basic rigs excluding components estimated useful lives date original manufacture ranging 25 35 years salvage values assigned rigs based estimate 10 effective july 1 1998 company made certain changes estimated useful lives well service rigs increasing lives 17 years 25 years change decreased net loss twelve months ended june 30 1999 approximately 3100000 011 per sharebasic change made effective july 1 1997 effect would increased net income fiscal year ended june 30 1998 1317000 008 per sharebasic change made better reflect expected utilization assets time better provide matching revenues expenses better reflect industry standard regards estimated useful lives workover rigs effective july 1 1997 company changed method calculating depreciation drilling rigs straightline method unitsofproduction method takes consideration number days rigs actually service month depreciation recorded least 15 days month rig available service company believes method appropriately reflects financial results better matching revenues expenses better reflect assets used time effect change net income fiscal 1998 1997 1996 material company uses successful efforts method accounting oil gas properties method costs associated productive wells nonproductive development wells capitalized nonproductive exploration costs geological geophysical costs expensed capitalized costs relating proved properties depleted using unitsofproduction method company adopted fasb statement 121 accounting impairment longlived assets longlived assets disposed statement requires longlived assets including certain identifiable intangibles held used company reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable purposes applying statement company groups longlived assets including goodwill yardbyyard basis compares estimated future cash flows yard yards key energy services inc notes consolidated financial statements continued june 30 1999 1998 1997 1 organization summary significant accounting policies continued net carrying value company would record impairment reducing yards net carrying value estimated fair value estimated future cash flows less yards net carrying value since adoption statement impairment losses required hedging derivative financial instruments company uses derivative financial instruments primarily commodity option contracts reduce exposure oil gas producing operations changes market price natural gas crude oil fix price natural gas crude oil independently physical sale financial instruments company accounts hedging contracts must meet following criteria underlying asset liability must expose company price risk offset another asset liability hedging contract must reduce price risk instrument must designated hedge inception contract throughout contract period order qualify hedge must clear correlation changes fair value financial instrument fair value underlying asset liability changes market value financial instrument offset effect price rate changes exposed items premiums paid commodity option contracts qualify hedges amortized oil gas sales terms contracts unamortized premiums included assets consolidated balance sheet amounts receivable commodity option contracts accrued increase oil gas sales applicable periods june 1998 fasb issued statement financial accounting standards 133 accounting derivative instruments hedging activities sfas 133 sfas 133 establishes accounting reporting standards requiring every derivative instrument including certain derivative instruments embedded contracts recorded balance sheet either asset liability measured fair value sfas 133 requires changes derivatives fair value recognized currently earnings unless specific hedge accounting criteria met special accounting qualifying hedges allows derivatives gains losses offset related results hedged item income statement companies must formally document designate assess effectiveness transactions receive hedge accounting sfas 133 effective fiscal years beginning june 15 2000 sfas 133 cannot applied retroactively must applied derivative instruments b certain derivative instruments embedded hybrid contracts issued acquired substantively modified december 31 1997 companys election january 1 1998 company yet quantified impact adopting sfas 133 financial statements determined timing method adoption sfas 133 comprehensive income company adopted statement financial accounting standards 130 reporting comprehensive income sfas 130 effective july 1 1998 sfas 130 establishes standards reporting presentation comprehensive income components sfas 130 requires items required recognized accounting standards components comprehensive income reported financial statement displayed prominence financial statements accordance provisions sfas 130 company presented components comprehensive income consolidated statements comprehensive income key energy services inc notes consolidated financial statements continued june 30 1999 1998 1997 1 organization summary significant accounting policies continued environmental company subject extensive federal state local environmental laws regulations laws constantly changing regulate discharge materials environment may require company remove mitigate adverse environmental effects disposal release petroleum chemical substances various sites environmental expenditures expensed capitalized depending future economic benefit expenditures relate existing condition caused past operations future economic benefits expensed liabilities expenditures noncapital nature recorded environmental assessment andor remediation probable costs reasonably estimated goodwill totaling 2169 million 472 million june 30 1999 1998 respectively represents cost excess fair value net tangible identifiable intangible assets acquired liabilities assumed purchase transactions goodwill 1697 million 371 million added 1999 1998 respectively goodwill amortized straightline basis periods ranging ten 25 years recorded net accumulated amortization 115 million 23 million june 30 1999 1998 respectively amortization goodwill fiscal 1999 1998 1997 9202000 1442000 622000 respectively carrying amount unamortized goodwill reviewed potential impairment loss whenever events changes circumstances indicate carrying amount goodwill may recoverable see property equipment discussion deferred costs deferred costs totaling 30488000 14213000 june 30 1999 1998 respectively represent debt issuance costs recorded net accumulated amortization 6709000 2044000 june 30 1999 1998 respectively deferred costs amortized interest expense using straightline method life applicable debt instrument amortization deferred costs totaled 4664000 2006000 344000 fiscal 1999 1998 1997 respectively income taxes company accounts income taxes based upon statement financial accounting standards 109 accounting income taxes sfas 109 sfas 109 deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases deferred tax assets liabilities measured using statutory tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rate recognized income period includes statutory enactment date valuation allowance deferred tax assets recognized likely benefit deferred tax assets realized company eligible subsidiaries file consolidated u federal income tax return certain subsidiaries consolidated financial reporting purposes eligible included consolidated u federal income tax return separate provisions income taxes determined entities groups entities key energy services inc notes consolidated financial statements continued june 30 1999 1998 1997 1 organization summary significant accounting policies continued earnings per share company accounts earnings per share upon statement financial accounting standards 128 earnings per share sfas 128 sfas 128 basic earnings per common share determined dividing net earnings applicable common stock weighted average number common shares actually outstanding year diluted earnings per common share based increased number shares would outstanding assuming conversion dilutive outstanding convertible securities using converted method fiscal 1999 earnings per share calculation excludes companys convertible debt outstanding warrants stock options effects instruments earning per share would antidilutive concentration credit risk financial instruments potentially subject company concentrations credit risk consist primarily temporary cash investments trade receivables company restricts investment temporary cash investments financial institutions high credit standing policy limits amount credit exposure one financial institution companys customer base consists primarily multinational foreign national independent oil natural gas producers may key energy services inc notes consolidated financial statements continued june 30 1999 1998 1997 1 organization summary significant accounting policies continued affect companys overall exposure credit risk either positively negatively much customers affected economic conditions oil gas industry historically cyclical however account receivables well diversified among many customers significant portion receivables major oil companies management believes minimizes potential credit risk historically credit losses insignificant receivables generally collateralized although company may generally secure receivable time filing mechanics materialmans lien well serviced company maintains reserves potential credit losses within managements expectations company one customer represented 10 consolidated revenues fiscal year ended june 30 1999 1998 year ended june 30 1997 company sales one customer totaled 13 consolidated revenues stockbased compensation company accounts stock option grants employees using intrinsic value method accounting prescribed apb opinion 25 accounting stock issued employees apb 25 companys stock incentive plans price stock grant date amount employee must pay exercise option acquire stock accordingly options intrinsic value grant date accordance provisions apb 25 compensation cost recognized october 1995 fasb issued statement financial accounting standards sfas 123 accounting stockbased compensation sets forth alternative accounting disclosure requirements stockbased compensation arrangements sfas 123 rescind existing accounting employee stockbased compensation apb 25 companies may continue follow current accounting measure recognize employee stockbased compensation however sfas 123 requires disclosure pro forma net income earnings per share would reported fair value based recognition provisions sfas 123 company disclosed note 10 pro forma information required sfas 123 foreign currency gains losses local currency functional currency companys foreign operations argentina canada cumulative translation gains losses resulting translating foreign subsidiarys financial statements functional currency us dollars included comprehensive income accumulated equity partial complete sale liquidation companys net investment foreign entity cash equivalents company considers unrestricted highly liquid investments less threemonth maturity purchased cash equivalents key energy services inc notes consolidated financial statements continued june 30 1999 1998 1997 1 organization summary significant accounting policies continued impact inflation operations although complex environment todays economy extremely difficult make accurate assessment impact inflation companys operations management opinion inflation significant impact business reclassifications certain reclassifications made fiscal 1998 1997 consolidated financial statements conform fiscal 1999 presentation 2 restructuring charge response industry downturn caused historically low oil gas prices resulting slowdown business december 7 1998 company announced companywide restructuring plan reduce operating costs beyond achieved companys consolidation efforts plan involved reduction size management onsite work force salary reductions averaging 21 senior management combination previously separate operating divisions elimination redundant overhead facilities restructuring plan resulted pretax charges earnings approximately 67 million second quarter ending december 31 1998 15 million third quarter ending march 31 1999 however due increase oil gas prices beginning companys fourth fiscal quarter company amended restructuring plan decrease number planned employee terminations increased demand companys services made terminations unnecessary would managements opinion restricted companys ability provide services customers consequently company utilize approximately 37 million pretax charges essentially unutilized portion restructuring charge reversed fourth quarter ending june 30 1999 resulting total pretax charge fiscal year ended june 30 1999 approximately 45 million charges include severance payments termination benefits approximately 97 employees lease commitments related closed facilities environmental studies performed closed leased yard locations company substantially completed plan june 30 1999 however remains approximately 180000 cobra benefits terminated employees 53000 contractual payments employee major components restructuring charge costs incurred date follows key energy services inc notes consolidated financial statements continued june 30 1999 1998 1997 3 business property acquisitions dawson production services inc september 1998 company completed acquisition capital stock dawson production services inc dawson aggregate consideration approximately 3826 million including approximately 2071 million cash paid dawson stock transactional fees approximately 1755 million net liabilities assumed expenditures dawson acquisition including acquisition costs less cash acquired follows thousands time closing dawson owned approximately 527 well service rigs 200 oilfield trucks 21 production testing units south texas gulf coast east texas louisiana permian basin west texas new mexico anadarko basin texas oklahoma california inland waters gulf mexico connection dawson acquisition company recognized liabilities estimated costs involuntarily terminate employees dawson exist certain activities dawson primarily dawsons lease liability corporate offices june 30 1999 company completed severance plan terminating 44 former dawson employees june 30 1999 company 592000 accrued representing estimated lease termination costs dawsons former corporate offices fiscal 1999 acquisitions addition acquisition dawson company acquired assets andor capital stock six well servicing contract drilling businesses fiscal 1999 increasing rig truck fleet total approximately 93 well service rigs 4 drilling rigs 185 oilfield trucks related equipment aggregate purchase price approximately 937 million cash acquisitions accounted using purchase method results operations generated acquired assets included companys results operations completion date acquisition acquisitions completed prior june 30 1998 fiscal 1998 company purchased capital stock 17 companies purchased assets 13 companies company paid cash approximately 244 million excluding purchase price adjustments issued common stock warrants purchase companys common stock valued approximately 138 million fiscal 1997 company purchased common stock 10 companies purchased assets 8 companies company paid cash approximately 62 million excluding purchase price adjustments issued common stock valued approximately 21 million acquisitions accounted using purchase method results operations acquisitions included companys results operations date completion acquisition key energy services inc notes consolidated financial statements continued june 30 1999 1998 1997 3 business property acquisitions continued pro forma results operationsunaudited following unaudited pro forma results operations prepared though dawson acquisition significant fiscal 1998 acquisitions ram oil well service inc rowland trucking co inc big well service co sunco trucking co justis supply co inc dunbar well service inc jw gibson well service co updike brothers inc lakota drilling co acquired july 1 1997 adjustments record specifically identifiable decreases direct costs general administrative expenses related termination individual employees pro forma amounts necessarily indicative results may reported future 4 commitments contingencies various suits claims arising ordinary course business pending company management believe disposition items result material adverse impact consolidated financial position results operations cash flows company order retain qualified senior management company enters employment agreements executive officers employment agreements run periods ranging three five years automatically extended yearly basis unless terminated company executive officer addition providing base salary executive officer employment agreements provide severance payments executive officer varying 1 3 years executive officers base salary current annual base salaries officers covered employment agreements total approximately 1280000 company also enters employment agreements key employees deems necessary order retain qualified personnel key energy services inc notes consolidated financial statements continued june 30 1999 1998 1997 5 longterm debt components longterm debt follows senior credit facility june 6 1997 company entered agreement initial credit agreement pnc bank na pnc administrative agent syndication lenders pursuant lenders provided 255 million credit facility consisting 120 million sevenyear term loan 135 million fiveyear revolver interest rate term loan libor plus 275 interest rate revolver varied based libor level companys indebtedness september 25 1997 company repaid term loan portion outstanding amounts revolver applying proceeds companys private placement 5 convertible subordinated notes discussed effective november 6 1997 company entered amended restated credit agreement amended credit agreement pnc administrative agent lender pursuant pnc agreed make revolving credit loans maximum loan commitment 200 million borrowings amended credit agreement companys option either eurodollar loans interest payable quarterly libor plus 125 ii base rate loans interest payable quarterly greater pnc prime rate federal funds effective rate plus 050 iii combination thereof effective december 3 1997 pnc completed syndication amended credit agreement connection therewith pnc administrative agent syndication lenders company entered first amendment amended credit agreement providing among things increase maximum commitment 250 million 200 million terms amended credit agreement remained unchanged companys acquisition dawson connection acquisition dawson company entered 550000000 second amended restated credit agreement dated june 6 1997 amended restated september 14 1998 among company pnc bank national association administrative agent norwest bank texas na collateral agent pnc capital markets inc arranger key energy services inc notes consolidated financial statements continued june 30 1999 1998 1997 5 longterm debt continued lenders named time parties thereto subsequently amended current credit agreement november 1998 july 1999 current credit agreement amended reduce maximum amount credit available thereunder 500 million ii change interest rates payable thereunder iii ease required financial covenant levels delete certain financial covenants add others iv add requirement company achieve certain minimum levels trailing 12month ebitda adjusted v tighten restrictions acquisitions vi modify amount prepaid company issues additional capital stock company excess cash flow defined company sells certain specific assets vii provide minimum levels consolidated liquidity current credit agreement provides senior credit facility consisting 150 million revolving loans 150 million tranche term loans 200 million tranche b term loans addition 20 million letters credit issued current credit agreement outstanding letters credit reduces borrowing availability revolving loans tranche term loans mature sixteen consecutive quarterly installments commencing december 14 1999 quarterly installment amounts equal applicable percentage particular quarter multiplied unamortized principal amount 4 installments 1 4 6 installments 58 7 installments 9 12 8 installments 13 16 tranche b term loans mature nineteen consecutive quarterly installments commencing december 14 1999 quarterly installment amounts equal applicable percentage particular quarter multiplied unamortized principal amount 025 installments 1 16 24 installments 1718 48 final installment commitment make revolving loans reduced 125 million 100 million respectively september 14 2001 september 14 2002 revolving commitment terminate september 14 2003 revolving loans must paid date revolving loans tranche term loans bear interest rates based upon companys option either prime rate plus margin ranging 075 200 eurodollar rate plus margin ranging 225 350 case depending upon ratio companys total debt less cash hand 5 million companys trailing 12month ebitda adjusted tranche b term loans bear interest rates based upon companys option either prime rate plus 250 eurodollar rate plus 400 company pays commitment fees unused portion revolving loan varying rate depending upon pricing ratio 025 050 current credit agreement contains various financial covenants including consolidated debttocapitalization ratio generally decreasing levels varying 79 65 ii consolidated interest coverage ratio generally increasing levels varying 200to100 350to100 iii consolidated senior leverage ratio generally decreasing levels varying 250to100 200to100 iv trailing 12month ebitda adjusted generally increasing levels varying 50 million 150 million addition company must maintain consolidated fixed charge coverage ratio generally decreasing levels varying 125to100 100 covenants consolidated senior leverage ratio consolidated interest coverage ratio imposed quarter ending march 31 2001 covenant levels consolidated debttocapitalization trailing 12month ebitda adjusted remain fixed 79 50 million respectively period company also required maintain consolidated liquidity level least 30 million key energy services inc notes consolidated financial statements continued june 30 1999 1998 1997 5 longterm debt continued current credit agreement subjects company restrictions including restrictions upon companys ability incur additional debt liens guarantee obligations merge consolidate persons sell assets make dividends purchases stock subordinated debt make capital expenditures excess levels ranging 375 million fiscal 1999 65 million fiscal 2004 make investments loans advances changes debt instruments organizational documents company permitted make acquisitions unless consolidated debt capitalization ratio 60 ii consolidated debt capitalization ratio increased acquisition funded solely capital stock company must also maintain consolidated net worth least 195 million plus ii 75 consolidated net income fiscal quarter beginning period ending december 31 1998 75 net cash proceeds issuance capital stock september 14 1998 75 increase consolidated net worth resulting conversion 5 convertible subordinated notes convertible debt issued september 14 1998 obligations senior credit facility guaranteed companys subsidiaries secured substantially companys assets including companys accounts receivable inventory equipment term loans current credit agreement must prepaid 100 net cash proceeds 75 million issuances companys equity 55 net cash proceeds issuances companys equity 75 million 16575 million 25 net cash proceeds issuances companys equity 16575 million ii unless required percentages lenders otherwise agree 75 companys excess cash flow defined fiscal year companys debtto capitalization ratio defined less 60 50 companys excess cash flow fiscal year thereafter portion net proceeds companys equity offering see note 10 used repay approximately 1066 million tranche term loans 222 million tranche b term loans thereby reducing principal amount outstanding june 30 1999 tranche term loans approximately 434 million principal amount outstanding june 30 1999 tranche b term loans approximately 1778 million tranche term loan prepayments tranche b term loan prepayments applied reduce mandatory repayment installments tranche b term loans respectively pro rata thereby equally reducing amortization payments without altering amortization schedule june 30 1999 approximately 89618000 outstanding revolving loans additionally company outstanding letters credit 10832000 2612000 june 30 1999 1998 respectively related workmans compensation insurance ii bridge loan connection dawson acquisition company entered bridge loan agreement amount 150000000 dated september 14 1998 among company lehman brothers inc arranger lehman commercial paper inc administrative agent lenders party thereto bridge loan agreement interest bridge loan agreement accrued libor plus 650 payable 16th day month beginning october 16 1998 bridge loan repaid january 1999 proceeds companys issuance 14 senior subordinated notes key energy services inc notes consolidated financial statements continued june 30 1999 1998 1997 5 longterm debt continued iii 14 senior subordinated notes january 22 1999 pursuant rule 144a regulation securities act 1933 amended securities act company completed private placement 150000 units consisting 150000000 14 senior subordinated notes due 2009 14 senior subordinated notes 150000 warrants purchase 2032565 shares common stock exercise price 488125 per share unit warrants cash proceeds private placement net fees expenses used repay substantially remaining 1486 million principal amount plus accrued interest owed bridge loan agreement january 15 2004 company may redeem 14 senior subordinated notes time varying redemption prices excess par plus accrued interest addition january 15 2002 company may redeem 35 aggregate principal amount 14 senior subordinated notes proceeds certain offerings equity 114 par plus accrued interest unit warrants separated 14 senior subordinated notes become exercisable january 25 2000 date issuance value unit warrants estimated 7434000 classified discount 14 senior subordinated notes companys consolidated balance sheet discount amortized interest expense term 14 senior subordinated notes 14 senior subordinated notes mature unit warrants expire january 15 2009 14 senior subordinated notes subordinate companys senior indebtedness defined indenture 14 senior subordinated notes issued includes borrowings current credit agreement dawson 9 38 senior notes event change control company defined indenture 14 senior subordinated notes issued holder 14 senior subordinated notes right holders option require company repurchase part holders 14 senior subordinated notes within 60 days event price equal 100 principal amount thereof together accrued unpaid interest thereon june 30 1999 150000000 principal amount 14 senior subordinated notes remained outstanding 14 senior subordinated notes pay interest semiannually january 15 july 15 year beginning july 15 1999 iv 5 convertible subordinated notes september 25 1997 company completed initial closing private placement 200 million 5 convertible subordinated notes due 2004 5 convertible subordinated notes october 7 1997 company completed second closing private placement additional 16 million 5 convertible subordinated notes pursuant exercise remaining portion overallotment option granted initial purchasers 5 convertible subordinated notes placements made private offerings pursuant rule 144a regulation securities act 5 convertible subordinated notes subordinate companys senior indebtedness defined indenture 5 convertible subordinated notes issued includes borrowings current credit agreement 14 senior subordinated key energy services inc notes consolidated financial statements continued june 30 1999 1998 1997 5 longterm debt continued notes dawson 9 38 senior notes 5 convertible subordinated notes convertible holders option shares companys common stock conversion price 3850 per share subject certain adjustments 5 convertible subordinated notes redeemable companys option september 15 2000 whole part together accrued unpaid interest initial redemption price 10286 year beginning september 15 2000 declines ratably thereafter annual basis event change control company defined indenture notes issued holder 5 convertible subordinated notes right holders option require company repurchase part holders 5 convertible subordinated notes within 60 days event price equal 100 principal amount thereof together accrued unpaid interest thereon june 30 1999 216000000 principal amount 5 convertible subordinated notes remained outstanding interest 5 convertible subordinated notes payable march 15 september 15 interest approximately 54 million paid march 15 1999 v 7 convertible subordinated debentures july 1996 company completed 52000000 private placement 7 convertible subordinated debentures due 2003 7 convertible subordinated debentures pursuant rule 144a securities act 7 convertible subordinated debentures subordinate companys senior indebtedness defined indenture 7 convertible subordinated debentures issued includes borrowings current credit agreement 14 senior subordinated notes dawson 9 38 senior notes debentures convertible time prior maturity holders option shares companys common stock conversion price 975 per share subject certain adjustments addition holders converted prior july 1 1999 entitled receive payment cash companys common stock companys option generally equal 50 interest otherwise payable date conversion july 1 1999 7 convertible subordinated debentures redeemable option company july 15 1999 redemption price 104 decreasing 1 per year anniversary date thereafter event change control company defined indenture 7 convertible subordinated debentures issued holder right holders option require company repurchase part holders 7 convertible subordinated debentures within 60 days event price equal 100 principal amount thereof together accrued unpaid interest thereon fiscal 1998 47400000 principal amount debentures converted 4861538 shares companys common stock additional 165423 shares common stock issued representing 50 interest otherwise payable date conversion july 1 1999 additional 35408 shares common stock issued inducement convert additional 165423 shares common stock representing 50 interest otherwise payable date key energy services inc notes consolidated financial statements continued june 30 1999 1998 1997 5 longterm debt continued conversion july 1 1999 included equity fair value additional 35408 shares common stock issued inducement convert 710186 recorded interest expense consolidated statement operations addition proportional amount unamortized debt issuance costs associated converted 7 convertible subordinated debentures charged additional paidin capital time conversion june 30 1999 4600000 principal amount 7 convertible subordinated debentures remained outstanding interest 7 convertible subordinated debentures payable january 1 july 1 year interest approximately 161000 paid july 1 1998 january 1 1999 vi dawson 9 38 senior notes result dawson acquisition see note 3 company subsidiaries us trust company texas na trustee us trust entered supplemental indenture dated september 21 1998 supplemental indenture pursuant company assumed obligations dawson indenture dated february 20 1997 dawson indenture dawson us trust companys subsidiaries guaranteed obligations senior notes due 2007 dawson 9 38 senior notes issued pursuant dawson indenture equally ratably secured obligations current credit agreement november 17 1998 company completed cash tender offer purchase full 140000000 outstanding principal amount dawson 9 38 senior notes 101 aggregate principal amount notes using borrowings current credit agreement tender offer 138594000 principal amount dawson 9 38 senior notes redeemed premium 1386000 paid addition accrued interest 4078000 paid redemption june 30 1999 1406000 principal amount dawson 9 38 senior notes remained outstanding interest dawson 9 38 senior notes payable february 1 august 1 year interest approximately 65906 paid february 1 1999 capitalized expenses repayment schedule interest expense company capitalized total approximately 16370000 fees expenses connection various financings fiscal 1999 key energy services inc notes consolidated financial statements continued june 30 1999 1998 1997 5 longterm debt continued presented schedule repayment requirements longterm debt next five years thereafter june 30 1999 companys interest expense years ended june 30 1999 1998 1997 consist following 6 debt issuance costs fiscal 1999 company recorded expense item 6307000 represented writeoff debt issuance costs debt issuance costs associated bridge loan agreement subsequently paid primarily proceeds companys private placement 14 senior subordinated notes see note 5 7 fair value financial instruments following table presents carrying amounts estimated fair values companys financial instruments june 30 1999 1998 fasb statement 107 disclosures fair value key energy services inc notes consolidated financial statements continued june 30 1999 1998 1997 7 fair value financial instruments continued financial instruments defines fair value financial instrument amount instrument could exchanged current transaction willing parties following methods assumptions used estimate fair value class financial instruments cash trade receivables trade payables carrying amounts approximate fair value short maturity instruments commodity option contracts carrying amount commodity option contracts comprised unamortized premiums paid option contracts fair value commodity option contracts estimated using discounted forward prices options index price term option contract notes receivableaffiliate amounts reported relate notes receivable officers company longterm debt fair value companys longterm debt based upon quoted market prices various notes debentures june 30 1999 1998 carrying amounts outstanding companys senior credit facility key energy services inc notes consolidated financial statements continued june 30 1999 1998 1997 8 derivative financial instruments company utilizes derivative financial instruments manage welldefined commodity price risks company exposed credit losses event nonperformance counterparties commodity hedges company deals reputable financial institutions counterparties anticipates counterparties able fully satisfy obligations contracts company obtain collateral security support financial instruments subject credit risk monitors credit standing counterparties company utilizes option contracts hedge effect price changes future oil gas production objective hedging activities achieve predictable revenues cash flows market prices oil gas exceeded strike price put options would expire unexercised therefore reducing effective price received oil gas sales cost related option strike price put options exceeds market prices oil gas company would receive payment counterparty contract equal contracted volumes times difference market price strike price increasing effective price received oil gas sales amount received counterparty gains amortization premiums paid option contracts recognized adjustment sales revenue related transactions hedged finalized net effect companys commodity hedging activities increased oil gas revenues year ended june 30 1999 1998 158500 16400 respectively following table sets forth future volumes hedged year weightedaverage strike price option contracts june 30 1999 1998 strike prices oil based nymex spot price west texas intermediate strike prices gas based inside ferchenry hub spot price june 30 1999 company net unamortized premiums 717000 classified assets consolidated balance sheet subsequent june 30 1999 company sold put options offset crude oil option contracts outstanding june 30 1999 purchased put options increasing strike prices option contracts 1950 per barrel key energy services inc notes consolidated financial statements continued june 30 1999 1998 1997 9 accrued liabilities accrued liabilities consist following 10 stockholders equity offering may 7 1999 company closed public offering 55300000 shares common stock 300000 shares sold pursuant underwriters overallotment option discussed 300 per share 166 million public offering addition company closed offering 3508772 shares common stock 285 per share 10 million concurrent offering together public offering equity offering addition june 7 1999 underwriters public offering exercised overallotment option purchase additional 5436000 million shares cover overallotments net proceeds equity offering approximately 1804 million used repay portion companys term loan borrowings senior credit facility stock incentive plans january 13 1998 companys shareholders approved key energy group inc 1997 incentive plan amended 1997 incentive plan 1997 incentive plan amendment restatement plans formerly known key energy group inc 1995 stock option plan 1995 option plan key energy group inc 1995 outside directors stock option plan 1995 directors plan collectively prior plans options previously granted prior plans outstanding november 17 1997 date companys board directors adopted plan assumed continued without modification 1997 incentive plan 1997 incentive plan company may grant following awards key employees directors employees outside directors consultants company controlled subsidiaries parent corporation incentive stock options isos defined section 422 internal revenue code 1986 amended code ii nonstatutory stock options nsos iii stock appreciation rights sars iv shares restricted stock v performance shares performance units vi stockbased awards vii supplemental tax key energy services inc notes consolidated financial statements continued june 30 1999 1998 1997 10 stockholders equity continued bonuses collectively incentive awards isos nsos sometimes referred collectively herein options company may grant incentive awards covering aggregate greater 3000000 shares companys common stock ii 10 shares companys common stock issued outstanding last day calendar quarter provided however decrease number issued outstanding shares companys common stock previous calendar quarter shall result decrease number shares available issuance 1997 incentive plan result companys equity offering discussed june 30 1999 number shares companys common stock may covered incentive awards increased approximately 827 million shares companys common stock issued forfeited subject incentive awards 1997 incentive plan expire terminate reason remain available issuance respect granting incentive awards term 1997 incentive plan except may otherwise provided applicable law shares companys common stock issued 1997 incentive plan may either newly issued treasury shares including shares companys common stock company receives connection exercise incentive awards number kind securities may issued 1997 incentive plan pursuant outstanding incentive awards subject adjustments prevent enlargement dilution rights resulting stock dividends stock splits recapitalizations reorganization similar transactions maximum number shares companys common stock subject incentive awards may granted may vest applicable one covered employee defined calendar year shall 500000 shares subject adjustment provisions 1997 incentive plan maximum aggregate cash payout subject incentive awards including sars performance units performance shares payable cash stockbased awards payable cash may granted one covered employee calendar year 2500000 purposes 1997 incentive plan covered employees means named executive officer one group covered employees defined section 162m code regulation promulgated thereunder ie generally chief executive officer four highly compensated executives given year 1997 incentive plan administrated compensation committee appointed board directors committee consisting less two directors outside director section 162m code ii nonemployee director rule 16b3 securities exchange act 1934 exercise price options 1997 incentive plan fair market value per share date options granted exercise nsos results u tax deduction company equal income tax effect difference exercise price market price exercise key energy services inc notes consolidated financial statements continued june 30 1999 1998 1997 10 stockholders equity continued date financial reporting purposes tax benefit accounted credit common stock following table summarizes stock option activity related companys plans shares thousands foregoing stock option activity summary reflects effective september 4 1998 committee authorized cancellation reissue stock options employees executive offices purpose changing exercise price vesting schedule options total 473556 stock options cancelled weighted average price approximately 1309 per share reissued exercise price 7125 per share vesting new options ratable threeyear period date grant following table summarizes information stock options outstanding june 30 1999 shares thousands key energy services inc notes consolidated financial statements continued june 30 1999 1998 1997 10 stockholders equity continued company applies intrinsic value method apb 25 accounting employee stock incentive plans accordingly compensation expense recognized stock options issued employee plans compensation expense stock options granted employees recognized based fair value grant dates using methodology prescribed sfas 123 companys net income loss earnings per share would reduced pro forma amounts indicated sfas 123 apply options granted prior january 1 1995 therefore pro forma effect disclosed may representative pro forma amounts future years total fair value stock options granted 1999 1998 1997 15695000 7994000 6541000 respectively fair value stock option grant estimated date grant using blacksholes optionpricing model based following weightedaverage assumptions key energy services inc notes consolidated financial statements continued june 30 1999 1998 1997 11 income taxes components income tax expense benefit follows company paid 9024000 income taxes fiscal 1998 income tax payments made fiscal 1999 1997 income tax expense benefit differs amounts computed applying statutory federal rate follows deferred tax assets liabilities comprised following valuation allowance provided likely portion deferred tax assets realized based expectations future management determined taxable income company likely sufficient fully utilize available carryforwards prior ultimate expiration key energy services inc notes consolidated financial statements continued june 30 1999 1998 1997 11 income taxes company estimates june 30 1999 company available approximately 273427000 net operating loss carryforwards begin expire fiscal 2000 approximately 110278000 net operating loss carryforwards subject annual limitation approximately 1012000 sections 382 383 internal revenue code 12 leasing arrangements company leases certain property equipment noncancelable operating leases generally expire various dates fiscal 2002 term operating leases generally run 24 36 months varying payment dates throughout month june 30 1999 future minimum lease payments noncancelable operating leases follows thousands operating lease expense approximately 7313000 8002000 5299000 fiscal years ended june 30 1999 1998 1997 respectively 13 employee benefit plans order retain quality personnel company maintains 401k plans part employee benefits package july 1 1998 december 31 1998 company matched 100 employee contributions 401k plan maximum 1000 per participant per year contributions totaling 908000 december 31 1998 company elected match employee contributions companys matching contributions fiscal 1998 1997 907509 335000 respectively 14 transactions related parties june 30 1999 company demand notes outstanding chief executive officer totaling 2835000 notes accrue interest libor plus 125 secured first mortgage borrowers principal residence see item 13 certain relationships related transactions discussion events subsequent june 30 1999 related transactions fiscal 1998 marcum natural gas services inc company one companys outside directors serves chairman board president chief executive officer sold certain assets held wholly owned subsidiary marcum gas transmission inc one companys wholly owned subsidiaries total purchase price approximately 700000 marcum natural gas services also granted companys subsidiary right first refusal participate future projects developed marcum gas transmission terms conditions identical provided marcum gas transmission key energy services inc notes consolidated financial statements continued june 30 1999 1998 1997 14 transactions related parties continued fiscal 1998 one companys wholly owned subsidiaries entered three real property leases entity one vice presidents served capacity portion fiscal 1998 owns interest lease standard form triplenet lease providing fiveyear term monthly rental payments 3000 leases yards west virginia pennsylvania michigan payments made leases totaled 108000 fiscal 1998 1999 fiscal 1998 company deposited approximately 250000 money market account collateral secure bank loan made business entity companys chief accounting officer owns interest amount still deposit collateral loan fiscal 1999 investment management firm one companys outside directors principal purchased 25 million principal amount companys borrowings bridge loan agreement proceeds companys units offering see note 5iii used repay bridge loan fiscal 1999 company entered consulting agreement investment banking firm one companys outside directors principal pursuant firm provided financial advisory services connection companys equity offering see note 10 firm received total 167000 15 business segment information company adopted statement financial accounting standards 131 disclosures segments enterprise related information sfas 131 sfas 131 establishes standards way public business enterprises report information operating segments interim annual financial statements company adopted sfas 131 fourth quarter fiscal 1999 adoption effect companys financial statements since required changes limited form content disclosures required company operates three business segments well servicing contract drilling oil gas production well servicing companys operations provide well servicing ongoing maintenance existing oil natural gas wells workover major repairs modifications necessary optimize level production existing oil natural gas wells production services fluid hauling fluid storage tank rental contract drilling company provides contract drilling services major independent oil companies onshore continental united states argentina ontario canada financial data presented accompanying table however reflects results operations keys separate contract drilling division permian basin key energy drilling oil gas production company produces crude oil natural gas permian basin panhandle areas west texas companys management evaluates performance operating segments based net income operating profits revenues less direct operating expenses corporate expenses include general corporate expenses associated managing reportable operating segments corporate assets key energy services inc notes consolidated financial statements continued june 30 1999 1998 1997 15 business segment information continued consist principally cash equivalents deferred debt financing costs deferred income tax assets operating revenues operating profit companys foreign operations includes argentina canada 267 million 52 million respectively year ended june 30 1999 operating revenues operating profit companys foreign operations includes argentina 325 million 65 million respectively year ended june 30 1998 118 million 35 million respectively year ended june 30 1997 company 545 million 422 million identifiable assets june 30 1999 1998 respectively related foreign operations addition companys well servicing operating revenues included 491 million 532 million contract drilling revenues years ended june 30 1999 1998 respectively included contract drilling segment data key energy services inc notes consolidated financial statements continued june 30 1999 1998 1997 16 supplemental schedule noncash investing financing activities 17 unaudited supplementary informationquarterly results operations summarized quarterly financial data 1999 1998 follows amounts reported first quarter 1998 differ amounts previously reported form 10q filed quarter ended september 30 1997 due noncash adjustments recorded fourth quarter associated 7 debentures converted first quarter fiscal year 1998 independent auditors report board directors stockholders key energy services inc formerly key energy group inc audited accompanying consolidated balance sheets key energy services inc formerly key energy group inc june 30 1999 1998 related consolidated statements operations comprehensive income cash flows stockholders equity years threeyear period ended june 30 1999 connection audits consolidated financial statements also audited financial statement schedule listed index item 14 consolidated financial statements financial statement schedule responsibility companys management responsibility express opinion consolidated financial statements financial statement schedule based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects consolidated financial position key energy services inc june 30 1999 1998 results operations cash flows years threeyear period ended june 30 1999 conformity generally accepted accounting principles also opinion related financial statement schedule considered relation basic consolidated financial statements taken whole present fairly material respects information set forth therein kpmg llp midland texas september 22 1999 item 9item 8 consolidated financial statements supplementary data presented herein consolidated financial statements key energy services inc june 30 2000 1999 years ended june 30 2000 1999 1998 also included report kpmg llp independent certified public accountants consolidated financial statements june 30 2000 1999 years ended june 30 2000 1999 1998 index consolidated financial statements key energy services inc consolidated balance sheets see accompanying notes integral part consolidated financial statements key energy services inc consolidated statements operations see accompanying notes integral part consolidated financial statements key energy services inc consolidated statements comprehensive income see accompanying notes integral part consolidated financial statements key energy services inc consolidated statements cash flows see accompanying notes integral part consolidated financial statements key energy services inc consolidated statements stockholders equity thousands see accompanying notes integral part consolidated financial statements key energy services inc notes consolidated financial statements june 30 2000 1999 1998 1 organization summary significant accounting policies company key energy services inc company key largest onshore rigbased well servicing contractor world approximately 1400 well service rigs 1200 oilfield trucks june 30 2000 company provides complete range well services major independent oil natural gas producing companies including rigbased well maintenance workover completion recompletion services including horizontal recompletions oilfield trucking ancillary oilfield services key conducts well servicing operations onshore continental united states following regions gulf coast including south texas central gulf coast texas south louisiana permian basin west texas eastern new mexico midcontinent including anadarko hugoton arkoma basins arklatex region four corners including san juan piceance uinta paradox basins eastern including appalachian michigan illinois basins rocky mountains including denverjulesberg powder river wind river green river williston basins california san joaquin basin internationally argentina ontario canada company also leading onshore drilling contractor 73 land drilling rigs june 30 2000 key conducts land drilling operations number major domestic producing basins well argentina ontario canada key also produces develops oil natural gas reserves permian basin texas panhandle basis presentation companys consolidated financial statements include accounts company whollyowned subsidiaries significant intercompany transactions balances eliminated accounting policies presented followed preparing accompanying consolidated financial statements estimates uncertainties preparation accompanying consolidated financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amount assets liabilities disclosures contingent assets liabilities date consolidated financial statements reported amounts revenues expenses reporting period actual results could differ estimates inventories consist primarily oilfield service parts supplies held consumption parts supplies held sale companys various retail supply stores valued lower average cost market key energy services inc notes consolidated financial statements continued june 30 2000 1999 1998 1 organization summary significant accounting policies continued property equipment company provides depreciation amortization oilfield service related equipment using straightline method excluding drilling rigs following estimated useful lives assets components well service rig generally require replacement rigs life depreciated estimated useful lives range three 15 years basic rigs excluding components estimated useful lives date original manufacture ranging 25 35 years salvage values assigned rigs based estimate 10 effective july 1 1998 company made certain changes estimated useful lives well service rigs increasing lives 17 years 25 years change decreased net loss twelve months ended june 30 1999 approximately 3100000 011 per sharebasic change made effective july 1 1997 effect would increased net income fiscal year ended june 30 1998 1317000 008 per sharebasic change made better reflect expected utilization assets time better provide matching revenues expenses better reflect industry standard regards estimated useful lives workover rigs effective july 1 1997 company changed method calculating depreciation drilling rigs straightline method unitsofproduction method takes consideration number days rigs actually service month depreciation recorded least 15 days month rig available service company believes method appropriately reflects financial results better matching revenues expenses better reflect assets used time effect change net income fiscal 1998 material company uses successful efforts method accounting oil gas properties method costs associated productive wells nonproductive development wells capitalized nonproductive exploration costs geological geophysical costs expensed capitalized costs relating proved properties depleted using unitsofproduction method company adopted fasb statement 121 accounting impairment longlived assets longlived assets disposed statement requires longlived assets including certain identifiable intangibles held used company reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable purposes applying statement company groups longlived assets including goodwill yardbyyard basis compares estimated future cash flows yard yards key energy services inc notes consolidated financial statements continued june 30 2000 1999 1998 1 organization summary significant accounting policies continued net carrying value including allocable goodwill company would record impairment reducing yards net carrying value estimated fair value estimated future cash flows less yards net carrying value since adoption statement impairment losses required hedging derivative financial instruments company uses derivative financial instruments primarily commodity option contracts reduce exposure oil gas producing operations changes market price natural gas crude oil fix price natural gas crude oil independently physical sale financial instruments company accounts hedging contracts must meet following criteria underlying asset liability must expose company price risk offset another asset liability hedging contract must reduce price risk instrument must designated hedge inception contract throughout contract period order qualify hedge must clear correlation changes fair value financial instrument fair value underlying asset liability changes market value financial instrument offset effect price rate changes exposed items premiums paid commodity option contracts qualify hedges amortized oil gas sales terms contracts unamortized premiums included assets consolidated balance sheet amounts receivable commodity option contracts accrued increase oil gas sales applicable periods june 1998 fasb issued statement financial accounting standards 133 accounting derivative instruments hedging activities sfas 133 sfas 133 establishes accounting reporting standards requiring every derivative instrument including certain derivative instruments embedded contracts recorded balance sheet either asset liability measured fair value sfas 133 requires changes derivatives fair value recognized currently earnings unless specific hedge accounting criteria met special accounting qualifying hedges allows derivatives gains losses offset related results hedged item income statement companies must formally document designate assess effectiveness transactions receive hedge accounting sfas 133 effective fiscal years beginning june 15 2000 adopted july 1 2000 company sfas 133 cannot applied retroactively must applied derivative instruments b certain derivative instruments embedded hybrid contracts issued acquired substantively modified december 31 1997 companys election january 1 1998 oil gas collars currently place marked market income statement time documented hedges comprehensive income company adopted statement financial accounting standards 130 reporting comprehensive income sfas 130 effective july 1 1998 sfas 130 establishes standards reporting presentation comprehensive income components sfas 130 requires items required recognized accounting standards components comprehensive income reported financial statement displayed prominence financial statements accordance provisions sfas 130 company presented components comprehensive income consolidated statements comprehensive income key energy services inc notes consolidated financial statements continued june 30 2000 1999 1998 1 organization summary significant accounting policies continued environmental company subject extensive federal state local environmental laws regulations laws constantly changing regulate discharge materials environment may require company remove mitigate adverse environmental effects disposal release petroleum chemical substances various sites environmental expenditures expensed capitalized depending future economic benefit expenditures relate existing condition caused past operations future economic benefits expensed liabilities expenditures noncapital nature recorded environmental assessment andor remediation probable costs reasonably estimated goodwill net goodwill totaling 1986 million 2054 million june 30 2000 1999 respectively represents cost excess fair value net tangible identifiable intangible assets acquired liabilities assumed purchase transactions goodwill amortized straightline basis periods ranging ten 25 years amortization goodwill fiscal 2000 1999 1998 9840000 9202000 1442000 respectively carrying amount unamortized goodwill reviewed potential impairment loss whenever events changes circumstances indicate carrying amount goodwill may recoverable see property equipment discussion deferred costs deferred costs totaling 30998000 30488000 june 30 2000 1999 respectively represent debt issuance costs recorded net accumulated amortization 12142000 6709000 june 30 2000 1999 respectively deferred costs amortized interest expense using straightline method life applicable debt instrument related debt retired method approximates amortization would recorded using effective interest method amortization deferred costs totaled 5176000 4664000 2006000 fiscal 2000 1999 1998 respectively income taxes company accounts income taxes based upon statement financial accounting standards 109 accounting income taxes sfas 109 sfas 109 deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases deferred tax assets liabilities measured using statutory tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rate recognized income period includes statutory enactment date valuation allowance deferred tax assets recognized likely benefit deferred tax assets realized company eligible subsidiaries file consolidated us federal income tax return certain subsidiaries consolidated financial reporting purposes eligible included consolidated us federal income tax return separate provisions income taxes determined entities groups entities key energy services inc notes consolidated financial statements continued june 30 2000 1999 1998 1 organization summary significant accounting policies continued earnings per share company accounts earnings per share statement financial accounting standards 128 earnings per share sfas 128 sfas 128 basic earnings per common share determined dividing net earnings applicable common stock weighted average number common shares actually outstanding year diluted earnings per common share based increased number shares would outstanding assuming conversion dilutive outstanding convertible securities using converted method key energy services inc notes consolidated financial statements continued june 30 2000 1999 1998 1 organization summary significant accounting policies continued fiscal 2000 1999 earnings per share calculations exclude companys convertible debt outstanding warrants stock options effects instruments earning per share would antidilutive concentration credit risk financial instruments potentially subject company concentrations credit risk consist primarily temporary cash investments trade receivables company restricts investment temporary cash investments financial institutions high credit standing policy limits amount credit exposure one financial institution companys customer base primarily consists multinational foreign national independent oil natural gas producers may affect companys overall exposure credit risk either positively negatively much customers affected economic conditions oil gas industry historically cyclical however accounts receivable well diversified among many customers significant portion receivables major oil companies management believes minimizes potential credit risk historically credit losses insignificant receivables generally collateralized although company may generally secure receivable time filing mechanics materialmans lien well serviced company maintains reserves potential credit losses within managements expectations company one customer represented 10 consolidated revenues fiscal year ended june 30 2000 1999 stockbased compensation company accounts stock option grants employees using intrinsic value method accounting prescribed apb opinion 25 accounting stock issued employees apb 25 companys stock incentive plans price stock grant date amount employee must pay exercise option acquire stock accordingly options intrinsic value grant date accordance provisions apb 25 compensation cost recognized october 1995 fasb issued statement financial accounting standards sfas 123 accounting stockbased compensation sets forth alternative accounting disclosure requirements stockbased compensation arrangements sfas 123 rescind existing accounting employee stockbased compensation apb 25 companies may continue follow current key energy services inc notes consolidated financial statements continued june 30 2000 1999 1998 1 organization summary significant accounting policies continued accounting measure recognize employee stockbased compensation however sfas 123 requires disclosure pro forma net income earnings per share would reported fair value based recognition provisions sfas 123 company disclosed note 10 pro forma information required sfas 123 foreign currency gains losses local currency functional currency companys foreign operations argentina canada cumulative translation gains losses resulting translating foreign subsidiarys financial statements functional currency us dollars included comprehensive income accumulated equity partial complete sale liquidation companys net investment foreign entity cash equivalents company considers unrestricted highly liquid investments less threemonth maturity purchased cash equivalents reclassifications certain reclassifications made fiscal 1999 1998 consolidated financial statements conform fiscal 2000 presentation 2 restructuring charge response industry downturn caused historically low oil gas prices resulting slowdown business december 7 1998 company announced companywide restructuring plan reduce operating costs beyond achieved companys consolidation efforts plan involved reduction size management onsite work force salary reductions averaging 21 senior management combination previously separate operating divisions elimination redundant overhead facilities restructuring plan resulted pretax charges earnings approximately 67 million second quarter ending december 31 1998 15 million third quarter ending march 31 1999 however due increase oil gas prices beginning companys fourth fiscal quarter company amended restructuring plan decrease number planned employee terminations increased demand companys services made terminations unnecessary would managements opinion restricted companys ability provide services customers consequently company utilize approximately 37 million pretax charges essentially unutilized portion restructuring charge reversed fourth quarter ending june 30 1999 resulting total pretax charge fiscal year ended june 30 1999 approximately 45 million charges include severance payments termination benefits approximately 97 employees lease commitments related closed facilities environmental studies performed closed yard locations company completed plan june 30 2000 remained approximately 180000 cobra benefits terminated employees 53000 contractual payments employee key energy services inc notes consolidated financial statements continued june 30 2000 1999 1998 2 restructuring charge continued june 30 1999 major components restructuring charge costs incurred june 30 1999 follows 3 business property acquisitions dawson production services inc september 1998 company completed acquisition capital stock dawson production services inc dawson aggregate consideration approximately 3826 million including approximately 2071 million cash paid dawson stock transactional fees approximately 1755 million net liabilities assumed expenditures dawson acquisition including acquisition costs less cash acquired follows thousands time closing dawson owned approximately 527 well service rigs 200 oilfield trucks 21 production testing units south texas gulf coast east texas louisiana permian basin west texas new mexico anadarko basin texas oklahoma california inland waters gulf mexico connection dawson acquisition company recognized liabilities estimated costs involuntarily terminate employees dawson exit certain activities dawson primarily dawsons lease liability corporate offices june 30 1999 company completed severance plan terminating 44 former dawson employees june 30 1999 company 592000 accrued representing estimated lease termination costs dawsons former corporate offices key energy services inc notes consolidated financial statements continued june 30 2000 1999 1998 3 business property acquisitions continued fiscal 1999 acquisitions addition acquisition dawson company acquired assets andor capital stock six well servicing contract drilling businesses fiscal 1999 increasing rig truck fleet total approximately 93 well service rigs 4 drilling rigs 185 oilfield trucks related equipment aggregate purchase price approximately 937 million cash acquisitions accounted using purchase method results operations generated acquired assets included companys results operations completion date acquisition acquisitions completed prior june 30 1998 fiscal 1998 company purchased capital stock 17 companies purchased assets 13 companies company paid cash approximately 244 million excluding purchase price adjustments issued common stock warrants purchase companys common stock valued approximately 138 million acquisitions accounted using purchase method results operations acquisitions included companys results operations date completion acquisition pro forma results operationsunaudited following unaudited pro forma results operations prepared though dawson acquisition significant fiscal 1998 acquisitions ram oil well service inc rowland trucking co inc big well service co sunco trucking co justis supply co inc dunbar well service inc jw gibson well service co updike brothers inc lakota drilling co acquired july 1 1997 adjustments record specifically identifiable decreases direct costs general administrative expenses related termination individual employees pro forma amounts necessarily indicative results may reported future 4 commitments contingencies various suits claims arising ordinary course business pending company management believe disposition items result material adverse impact consolidated financial position results operations cash flows company order retain qualified senior management company enters employment agreements executive officers employment agreements run periods ranging three five years automatically extended yearly basis unless terminated company executive officer addition providing base salary executive officer employment agreements provide severance payments executive officer varying 1 3 years executive officers base salary current annual base salaries executive officers covered key energy services inc notes consolidated financial statements continued june 30 2000 1999 1998 4 commitments contingencies continued employment agreements total approximately 1125000 company also enters employment agreements key employees deems necessary order retain qualified personnel 5 longterm debt components longterm debt follows senior credit facility june 6 1997 company entered agreement initial credit agreement pnc bank na pnc administrative agent syndication lenders pursuant lenders provided 255 million credit facility consisting 120 million sevenyear term loan 135 million fiveyear revolver interest rate term loan libor plus 275 interest rate revolver varied based libor level companys indebtedness september 25 1997 company repaid term loan portion outstanding amounts revolver applying proceeds companys private placement 5 convertible subordinated notes discussed effective november 6 1997 company entered amended restated credit agreement amended credit agreement pnc administrative agent lender pursuant pnc agreed make revolving credit loans maximum loan commitment 200 million borrowings amended credit agreement companys option either eurodollar loans interest payable quarterly libor plus 125 ii base rate loans interest payable quarterly greater pnc prime rate federal funds effective rate plus 050 iii combination thereof effective december 3 1997 pnc completed syndication amended credit agreement connection therewith pnc administrative agent syndication lenders company entered key energy services inc notes consolidated financial statements continued june 30 2000 1999 1998 5 longterm debt continued first amendment amended credit agreement providing among things increase maximum commitment 250 million 200 million terms amended credit agreement remained unchanged companys acquisition dawson september 1998 connection acquisition dawson company entered 550000000 second amended restated credit agreement dated june 6 1997 amended restated september 14 1998 among company pnc bank national association administrative agent norwest bank texas na collateral agent pnc capital markets inc arranger lenders named time parties thereto subsequently amended current credit agreement current credit agreement provides senior credit facility consisting 150 million revolving loans 150 million tranche term loans 200 million tranche b term loans amounts paid term loans cannot reborrowed addition 20 million letters credit issued current credit agreement outstanding letters credit reduces borrowing availability revolving loans tranche term loans mature sixteen consecutive quarterly installments commencing december 14 1999 quarterly installment amounts equal applicable percentage particular quarter multiplied unamortized principal amount 4 installments 14 6 installments 58 7 installments 912 8 installments 1316 tranche b term loans mature nineteen consecutive quarterly installments commencing december 14 1999 quarterly installment amounts equal applicable percentage particular quarter multiplied unamortized principal amount 025 installments 116 24 installments 1718 48 final installment commitment make revolving loans reduced 125 million 100 million september 14 2001 september 14 2002 respectively revolving commitment terminate september 14 2003 revolving loans must paid date revolving loans tranche term loan bear interest rates based upon companys option either prime rate plus margin ranging 075 200 eurodollar rate plus margin ranging 225 350 case depending upon ratio companys total debt less cash hand 5 million companys trailing 12month ebitda adjusted tranche b term loan bears interest rates based upon companys option either prime rate plus 250 eurodollar rate plus 400 company pays commitment fees unused portion revolving loan varying rate depending upon pricing ratio 025 050 current credit agreement contains various financial covenants including consolidated debttocapitalization ratio generally decreasing levels varying 79 65 ii consolidated interest coverage ratio generally increasing levels varying 200to100 350to100 iii consolidated senior leverage ratio generally decreasing levels varying 250to100 200to100 iv trailing 12month ebitda adjusted generally increasing levels varying 50 million 150 million addition company must maintain consolidated fixed charge coverage ratio generally decreasing levels varying 125to100 100 covenants consolidated senior leverage ratio consolidated interest coverage ratio imposed quarter ending march 31 2001 covenant levels consolidated debttocapitalization trailing 12month ebitda adjusted remain fixed 79 50 million respectively period company also required maintain consolidated liquidity level least 30 million key energy services inc notes consolidated financial statements continued june 30 2000 1999 1998 5 longterm debt continued current credit agreement subjects company restrictions including restrictions upon companys ability incur additional debt liens guarantee obligations merge consolidate persons sell assets make dividends purchases stock subordinated debt make capital expenditures excess levels ranging 375 million fiscal 1999 65 million fiscal 2004 make investments loans advances changes debt instruments organizational documents company permitted make acquisitions unless consolidated debt capitalization ratio 60 ii consolidated debt capitalization ratio increased acquisition funded solely capital stock company must also maintain consolidated net worth less 195 million plus 75 consolidated net income fiscal quarter beginning period ending december 31 1998 ii 75 net cash proceeds issuance capital stock september 14 1998 iii 75 increase consolidated net worth resulting conversion 5 convertible subordinated notes convertible debt issued september 14 1998 obligations senior credit facility guaranteed companys subsidiaries secured substantially companys assets including companys accounts receivable inventory equipment unless required percentages lenders otherwise agree term loans current credit agreement must prepaid 75 companys excess cash flow defined fiscal year companys debtto capitalization ratio defined less 60 50 companys excess cash flow fiscal year thereafter june 30 1999 principal amount outstanding tranche term loan tranche b term loan revolver 434 million 1778 million 896 million respectively fiscal 2000 company repaid approximately 222 million term loans increasing net borrowings revolver 3 million result june 30 2000 principal amount outstanding tranche term loan tranche b term loan revolver reduced approximately 230 1760 million 930 million respectively additionally company outstanding letters credit 15132000 10832000 june 30 2000 1999 respectively related workmans compensation insurance since june 30 2000 portion net proceeds companys equity offering see note 10 used repay entire outstanding balance tranche term loan 23 million tranche b term loan thereby reducing principal amount outstanding tranche b term loan approximately 174 million tranche b term loan prepayments applied reduce mandatory repayment installments tranche b term loan pro rata thereby equally reducing amortization payments without altering amortization schedule addition 65 million net proceeds equity offering used reduce principal amount outstanding revolver 28 million remainder net proceeds equity offering used retire longterm debt addition principal amount outstanding revolver reduced 23 million september 28 2000 ii bridge loan connection dawson acquisition company entered bridge loan agreement amount 150000000 dated september 14 1998 among company lehman brothers inc arranger lehman commercial paper inc administrative agent lenders party thereto bridge loan agreement interest bridge loan agreement accrued libor key energy services inc notes consolidated financial statements continued june 30 2000 1999 1998 5 longterm debt continued plus 650 payable 16th day month beginning october 16 1998 bridge loan repaid january 1999 proceeds companys issuance 14 senior subordinated notes iii 14 senior subordinated notes january 22 1999 pursuant rule 144a regulation securities act 1933 amended securities act company completed private placement 150000 units consisting 150000000 14 senior subordinated notes due 2009 14 senior subordinated notes 150000 warrants purchase 2032565 shares common stock exercise price 488125 per share unit warrants cash proceeds private placement net fees expenses used repay substantially remaining 1486 million principal amount plus accrued interest owed bridge loan agreement january 15 2004 company may redeem 14 senior subordinated notes time varying redemption prices excess par plus accrued interest addition january 15 2002 company may redeem 35 aggregate principal amount 14 senior subordinated notes proceeds certain offerings equity 114 par plus accrued interest unit warrants separated 14 senior subordinated notes became exercisable january 25 2000 date issuance value unit warrants estimated 7434000 classified discount 14 senior subordinated notes companys consolidated balance sheet discount amortized interest expense term 14 senior subordinated notes 14 senior subordinated notes mature unit warrants expire january 15 2009 14 senior subordinated notes subordinate companys senior indebtedness defined indenture 14 senior subordinated notes issued includes borrowings current credit agreement dawson 9 38 senior notes event change control company defined indenture 14 senior subordinated notes issued holder 14 senior subordinated notes right holders option require company repurchase part holders 14 senior subordinated notes within 60 days event price equal 100 principal amount thereof together accrued unpaid interest thereon june 30 2000 150000000 principal amount 14 senior subordinated notes remained outstanding 14 senior subordinated notes pay interest semiannually january 15 july 15 year beginning july 15 1999 interest approximately 10092000 paid july 15 1999 10500000 paid january 15 2000 june 30 2000 52000 unit warrants exercised producing approximately 3700000 proceeds company leaving 98000 unit warrants outstanding iv 5 convertible subordinated notes september 25 1997 company completed initial closing private placement 200 million 5 convertible subordinated notes due 2004 5 convertible subordinated notes october 7 1997 company completed second closing private placement key energy services inc notes consolidated financial statements continued june 30 2000 1999 1998 5 longterm debt continued additional 16 million 5 convertible subordinated notes pursuant exercise remaining portion overallotment option granted initial purchasers 5 convertible subordinated notes placements made private offerings pursuant rule 144a regulation securities act 5 convertible subordinated notes subordinate companys senior indebtedness defined indenture 5 convertible subordinated notes issued includes borrowings current credit agreement 14 senior subordinated notes dawson 9 38 senior notes 5 convertible subordinated notes convertible holders option shares companys common stock conversion price 3850 per share subject certain adjustments 5 convertible subordinated notes redeemable companys option september 15 2000 whole part together accrued unpaid interest initial redemption price 10286 year beginning september 15 2000 declines ratably thereafter annual basis event change control company defined indenture notes issued holder 5 convertible subordinated notes right holders option require company repurchase part holders 5 convertible subordinated notes within 60 days event price equal 100 principal amount thereof together accrued unpaid interest thereon quarter ended june 30 2000 company repurchased canceled 10190000 principal amount 5 convertible subordinated notes leaving 205810000 principal amount 5 convertible subordinated notes outstanding june 30 2000 repurchase resulted aftertax gain 1611000 since june 30 2000 company repurchased canceled 10196000 principal amount 5 convertible subordinated notes leaving 195614000 outstanding september 28 2000 interest 5 convertible subordinated notes payable march 15 september 15 interest approximately 54 million paid september 15 1999 march 15 2000 v 7 convertible subordinate debentures july 1996 company completed 52000000 private placement 7 convertible subordinated debentures due 2003 7 convertible subordinated debentures pursuant rule 144a securities act 7 convertible subordinated debentures subordinate companys senior indebtedness defined indenture 7 convertible subordinated debentures issued includes borrowings current credit agreement 14 senior subordinated notes dawson 9 38 senior notes debentures convertible time prior maturity holders option shares companys common stock conversion price 975 per share subject certain adjustments addition holders converted prior july 1 1999 entitled receive payment cash companys common stock companys option generally equal 50 interest otherwise payable date conversion july 1 1999 7 convertible subordinated debentures redeemable option company july 15 1999 redemption price 104 decreasing 1 per year anniversary date thereafter event change control company defined indenture key energy services inc notes consolidated financial statements continued june 30 2000 1999 1998 5 longterm debt continued 7 convertible subordinated debentures issued holder right holders option require company repurchase part holders 7 convertible subordinated debentures within 60 days event price equal 100 principal amount thereof together accrued unpaid interest thereon fiscal 1998 47400000 principal amount debentures converted 4861538 shares companys common stock additional 165423 shares common stock issued representing 50 interest otherwise payable date conversion july 1 1999 additional 35408 shares common stock issued inducement convert additional 165423 shares common stock representing 50 interest otherwise payable date conversion july 1 1999 included equity fair value additional 35408 shares common stock issued inducement convert 710186 recorded interest expense consolidated statement operations addition proportional amount unamortized debt issuance costs associated converted 7 convertible subordinated debentures charged additional paidin capital time conversion fiscal 2000 3600000 principal amount debentures converted 369229 shares companys common stock additional 11261 shares common stock issued representing 100 interest otherwise payable january 1 2000 july 1 2000 additional 11261 shares common stock representing 100 interest otherwise payable january 1 2000 july 1 2000 included equity addition proportional amount unamortized debt issuance costs associated converted 7 convertible subordinated debentures charged additional paidin capital time conversion june 30 2000 1000000 principal amount 7 convertible subordinated debentures remained outstanding august 31 2000 985000 principal amount 7 convertible subordinated debentures surrendered conversion holders thereof 101025 shares common stock issued september 1 2000 remaining 15000 principal amount outstanding 7 convertible subordinated debentures redeemed 103 principal amount plus accrued interest leaving none outstanding september 28 2000 interest 7 convertible subordinated debentures payable january 1 july 1 year interest approximately 161000 paid july 1 1999 january 1 2000 vi dawson 9 38 senior notes result dawson acquisition see note 3 company subsidiaries us trust company texas na trustee us trust entered supplemental indenture dated september 21 1998 supplemental indenture pursuant company assumed obligations dawson indenture dated february 20 1997 dawson indenture dawson us trust companys subsidiaries guaranteed obligations senior notes due 2007 dawson 9 38 senior notes issued pursuant dawson indenture equally ratably secured obligations current credit agreement november 17 1998 company completed cash tender offer purchase full 140000000 outstanding principal amount dawson 9 38 senior notes 101 aggregate principal amount notes using borrowings current credit agreement tender offer 138594000 principal amount dawson 9 38 key energy services inc notes consolidated financial statements continued june 30 2000 1999 1998 5 longterm debt continued senior notes redeemed premium 1386000 paid addition accrued interest 4078000 paid redemption june 30 1999 1406000 principal amount dawson 9 38 senior notes remained outstanding quarter ended june 30 2000 company repurchased 300000 principal amount dawson 9 38 senior notes leaving 1106000 principal amount dawson 9 38 senior notes remained outstanding june 30 2000 since june 30 2000 company repurchased 800000 principal amount dawson 9 38 senior notes leaving 306000 principal amount outstanding september 28 2000 interest dawson 9 38 senior notes payable february 1 august 1 year interest approximately 65906 paid august 1 1999 february 1 2000 capitalized expenses repayment schedule interest expense company capitalized total approximately 16370000 fees expenses connection various financings fiscal 1999 presented schedule repayment requirements longterm debt next five years thereafter june 30 2000 companys interest expense years ended june 30 2000 1999 1998 consist following key energy services inc notes consolidated financial statements continued june 30 2000 1999 1998 6 debt issuance costs fiscal 1999 company recorded expense item 6307000 represented writeoff debt issuance costs debt issuance costs associated bridge loan agreement subsequently paid primarily proceeds companys private placement 14 senior subordinated notes see note 5 fiscal 2000 company expensed 338000 debt issuance costs related conversion 7 notes prepayments debt 7 fair value financial instruments following table presents carrying amounts estimated fair values companys financial instruments june 30 2000 1999 fasb statement 107 disclosures fair value financial instruments defines fair value financial instrument amount instrument could exchanged current transaction willing parties following methods assumptions used estimate fair value class financial instruments cash trade receivables trade payables carrying amounts approximate fair value short maturity instruments commodity option contracts carrying amount commodity option contracts comprised unamortized premiums paid option contracts fair value commodity option contracts estimated using discounted forward prices options index price term option contract notes receivableaffiliate amounts reported relate notes receivable officers company key energy services inc notes consolidated financial statements continued june 30 2000 1999 1998 7 fair value financial instruments continued longterm debt fair value companys longterm debt based upon quoted market prices various notes debentures june 30 2000 1999 carrying amounts outstanding companys senior credit facility 8 derivative financial instruments company utilizes derivative financial instruments manage welldefined commodity price risks company exposed credit losses event nonperformance counterparties commodity hedges company deals reputable financial institutions counterparties anticipates counterparties able fully satisfy obligations contracts company obtain collateral security support financial instruments subject credit risk monitors credit standing counterparties company utilizes option collar contracts hedge effect price changes future oil gas production objective hedging activities achieve predictable revenues cash flows market prices oil gas exceeded strike price put options would expire unexercised therefore reducing effective price received oil gas sales cost related option strike price put options exceeds market prices oil gas company would receive payment counterparty contract equal contracted volumes times difference market price strike price increasing effective price received oil gas sales amount received counterparty market price oil gas outside collar contracts company pay receive payment increase decrease effective price received oil gas sales gains amortization premiums paid option contracts recognized adjustment sales revenue related transactions hedged finalized net effect companys commodity hedging activities decreased oil gas revenues year ended june 30 2000 822270 increased oil gas revenues year ended june 30 1999 158500 key energy services inc notes consolidated financial statements continued june 30 2000 1999 1998 8 derivative financial instruments continued following table sets forth future volumes hedged year weightedaverage strike price option contracts june 30 2000 1999 strike prices oil based nymex spot price west texas intermediate strike prices gas based inside fercwest texas waha spot price 9 accrued liabilities accrued liabilities consist following 10 stockholders equity offerings june 30 2000 company closed public offering 11000000 shares common 9625 per share approximately 106 million equity offering net proceeds equity offering approximately 101 million used repay portion companys term loan borrowings revolving line credit senior credit facility retire longterm debt may 7 1999 company closed public offering 55300000 shares common stock 300000 shares sold pursuant underwriters overallotment option discussed 300 per share 166 million prior public offering concurrently therewith company closed offering additional 3508772 shares common stock 285 per share 10 million key energy services inc notes consolidated financial statements continued june 30 2000 1999 1998 10 stockholders equity continued prior concurrent offering together prior public offering prior equity offerings addition june 7 1999 underwriters prior public offering exercised overallotment option purchase additional 5436000 million shares cover overallotments net proceeds prior equity offerings approximately 1804 million used repay portion companys term loan borrowings senior credit facility stock incentive plans january 13 1998 companys shareholders approved key energy group inc 1997 incentive plan subsequently amended 1997 incentive plan 1997 incentive plan amendment restatement plans formerly known key energy group inc 1995 stock option plan 1995 option plan key energy group inc 1995 outside directors stock option plan 1995 directors plan collectively prior plans options previously granted prior plans outstanding november 17 1997 date companys board directors adopted plan assumed continued without modification 1997 incentive plan 1997 incentive plan company may grant following awards key employees directors employees outside directors consultants company controlled subsidiaries parent corporation incentive stock options isos defined section 422 internal revenue code 1986 amended code ii nonstatutory stock options nsos iii stock appreciation rights sars iv shares restricted stock v performance shares performance units vi stockbased awards vii supplemental tax bonuses collectively incentive awards isos nsos sometimes referred collectively herein options company may grant incentive awards covering aggregate greater 3000000 shares companys common stock ii 10 shares companys common stock issued outstanding last day calendar quarter provided however decrease number issued outstanding shares companys common stock previous calendar quarter shall result decrease number shares available issuance 1997 incentive plan result companys equity offering discussed june 30 2000 number shares companys common stock may covered incentive awards increased approximately 968 million shares companys common stock issued forfeited subject incentive awards 1997 incentive plan expire terminate reason remain available issuance respect granting incentive awards term 1997 incentive plan except may otherwise provided applicable law shares companys common stock issued 1997 incentive plan may either newly issued treasury shares including shares companys common stock company receives connection exercise incentive awards number kind securities may issued 1997 incentive plan pursuant outstanding incentive awards subject adjustments prevent enlargement dilution rights resulting stock dividends stock splits recapitalizations reorganization similar transactions key energy services inc notes consolidated financial statements continued june 30 2000 1999 1998 10 stockholders equity continued maximum number shares companys common stock subject incentive awards may granted may vest applicable one covered employee defined calendar year shall 500000 shares subject adjustment provisions 1997 incentive plan maximum aggregate cash payout subject incentive awards including sars performance units performance shares payable cash stockbased awards payable cash may granted one covered employee calendar year 2500000 purposes 1997 incentive plan covered employees means named executive officer one group covered employees defined section 162m code regulation promulgated thereunder ie generally chief executive officer four highly compensated executives given year 1997 incentive plan administrated compensation committee appointed board directors committee consisting less two directors outside director section 162m code ii nonemployee director rule 16b3 securities exchange act 1934 addition subject applicable shareholder approval requirements company may issue nsos outside 1997 incentive plan exercise price options issued 1997 incentive plan outside 1997 incentive plan fair market value per share date options granted exercise nsos results us tax deduction company equal income tax effect difference exercise price market price exercise date following table summarizes stock option activity related companys plans shares thousands foregoing stock option activity summary reflects effective september 4 1998 committee authorized cancellation reissue stock options employees executive offices purpose changing exercise price vesting schedule options total 473556 stock options cancelled weighted average price approximately 1309 per share reissued exercise price 7125 per share vesting new options ratable threeyear period date grant key energy services inc notes consolidated financial statements continued june 30 2000 1999 1998 10 stockholders equity continued following table summarizes information stock options outstanding june 30 2000 shares thousands company applies intrinsic value method apb 25 accounting employee stock incentive plans accordingly compensation expense recognized stock options issued employee plans compensation expense stock options granted employees recognized based fair value grant dates using methodology prescribed sfas 123 companys net income loss earnings per share would reduced pro forma amounts indicated sfas 123 apply options granted prior january 1 1995 therefore pro forma effect disclosed may representative pro forma amounts future years key energy services inc notes consolidated financial statements continued june 30 2000 1999 1998 10 stockholders equity continued total fair value stock options granted 2000 1999 1998 19541000 15695000 7994000 respectively fair value stock option grant estimated date grant using blacksholes optionpricing model based following weightedaverage assumptions 11 income taxes components income tax expense benefit follows company paid 9024000 income taxes fiscal 1998 income tax payments made fiscal 2000 1999 income tax expense benefit continuing operations differs amounts computed applying statutory federal rate follows key energy services inc notes consolidated financial statements continued june 30 2000 1999 1998 11 income taxes continued deferred tax assets liabilities comprised following valuation allowance provided likely portion deferred tax assets realized due uncertainties arising lack earnings history based managements future expectations appear likely company able utilize available carryforwards prior ultimate expiration company estimates june 30 2000 company available approximately 249253000 net operating loss carryforwards begin expire fiscal 2001 approximately 51272000 net operating loss carryforwards subject annual limitation approximately 1012000 sections 382 383 internal revenue code 12 leasing arrangements company leases certain property equipment noncancelable operating leases generally expire various dates fiscal 2002 term operating leases generally run 24 60 months varying payment dates throughout month june 30 2000 future minimum lease payments noncancelable operating leases follows thousands key energy services inc notes consolidated financial statements continued june 30 2000 1999 1998 12 leasing arrangements continued operating lease expense approximately 6459698 7313000 8002000 fiscal years ended june 30 2000 1999 1998 respectively 13 employee benefit plans order retain quality personnel company maintains 401k plans part employee benefits package july 1 1998 december 31 1998 company matched 100 employee contributions 401k plan maximum 1000 per participant per year contributions totaling 907509 january 1 1999 march 31 2000 company elected match employee contributions commencing april 1 2000 company matches 100 employee contributions 401k plan maximum 250 per participant per year companys matching contributions fiscal 2000 1999 77000 907509 respectively 14 transactions related parties connection negotiation terms fiveyear employment agreement mr francis john chairman board president chief executive officer company inducement mr john enter employment agreement company entered separate agreement mr john dated august 2 1999 amended june 30 2000 provides 5 million loans previously made company mr john together accrued interest payable thereon forgiven ratably ten year period commencing july 1 2001 ending june 30 2010 agreement provides foregoing forgiveness indebtedness predicated conditioned upon mr john remaining employed company period addition event mr john terminated company cause defined agreement event mr john voluntarily terminates employment company agreement provides entire remaining principal balance loans together accrued interest payable thereon become immediately due payable mr john however event mr johns employment terminated good reason result mr johns death disability result change control defined agreement stipulates remaining principal balance outstanding loans together accrued interest thereon forgiven fiscal 1998 metretek technologies diversified provider products services natural gas industry company w phillip marcum one directors company serves chairman board president chief executive officer sold certain assets held wholly owned subsidiary marcum gas transmission odessa metretek technologies sold assets total consideration 700000 metretek technologies also granted odessa right first refusal participate future projects developed marcum gas transmission terms conditions identical provided future projects developed marcum gas transmission terms conditions identical provided marcum gas transmission fiscal 1998 company deposited 250000 money market account collateral secure bank loan made business entity danny r evatt chief information officer vice president financial operations company owns interest amount returned company fiscal 2000 key energy services inc notes consolidated financial statements continued june 30 2000 1999 1998 14 transactions related parties continued fiscal 1999 investment management firm david j breazzano one companys directors principal purchased 25 million principal amount companys borrowings bridge loan agreement since repaid full fiscal 1999 company entered consulting agreement investment banking firm kevin p collins one companys directors principal pursuant firm provided financial advisory services company connection equity offering completed fiscal 1999 firm received total 167000 connection negotiation employment agreement thomas k grundman companys executive vice president international operations chief financial officer chief accounting officer treasurer company made 240000 shortterm loan 150000 relocation loan assist mr grundmans relocation companys executive offices interest loans accrues rate 6125 per annum shortterm loan repaid relocation loan together accrued interest forgiven three installments 50000 july 1 2000 2001 2002 provided however mr grundmans employment terminated period way triggers severance obligations amounts owed shall immediately forgiven ii trigger severance obligations amounts owed shall immediately due payable 15 business segment information company operates three business segments well servicing contract drilling oil natural gas production well servicing companys operations provide well servicing ongoing maintenance existing oil natural gas wells workover major repairs modifications necessary optimize level production existing oil natural gas wells production services fluid hauling fluid storage tank rental contract drilling company provides contract drilling services major independent oil companies onshore continental united states argentina ontario canada oil natural gas production company produces crude oil natural gas permian basin panhandle areas west texas companys management evaluates performance operating segments based net income operating profits revenues less direct operating expenses corporate expenses include general corporate expenses associated managing reportable operating key energy services inc notes consolidated financial statements continued june 30 2000 1999 1998 15 business segment information continued segments corporate assets consist principally cash equivalents deferred debt financing costs deferred income tax assets net income loss contract drilling segment includes portion well servicing general administrative expenses allocated percentage revenue basis operating revenues operating profit companys foreign operations includes argentina canada 372 million 53 million respectively year ended june 30 2000 operating revenues operating profit companys foreign operations includes argentina canada 267 million 52 million respectively year ended june 30 1999 key energy services inc notes consolidated financial statements continued june 30 2000 1999 1998 15 business segment information continued 325 million 65 million respectively year ended june 30 1998 company 669 million 545 million identifiable assets june 30 2000 1999 respectively related foreign operations 16 supplemental schedule noncash investing financing activities 17 unaudited supplementary informationquarterly results operations summarized quarterly financial data 2000 1999 follows 18 volumetric production payment march 2000 key sold part future oil natural gas production odessa exploration incorporated wholly owned subsidiary gross proceeds 20 million pursuant agreement purchaser entitled receive share production certain oil natural gas properties amounts ranging 3500 10000 barrels oil 58800 122100 mmbtu natural gas per month six year period ending february 2006 total volume forward sale approximately 486000 barrels oil 6135 million mmbtus natural gas independent auditors report board directors key energy services inc audited accompanying consolidated balance sheets key energy services inc subsidiaries june 30 2000 1999 related consolidated statements operation stockholders equity comprehensive income cash flows years threeyear period ended june 30 2000 connection audits consolidated financial statements also audited financial statement schedule listed index item 14 consolidated financial statements financial statement schedule responsibility companys management responsibility express opinion consolidated financial statements financial statement schedule based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects consolidated financial position key energy services inc subsidiaries june 30 2000 1999 results operations cash flows years threeyear period ended june 30 2000 conformity generally accepted accounting principles also opinion related financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein kpmg llp midland texas august 31 2000 item 9item 8 consolidated financial statements supplementary data presented herein consolidated financial statements key energy services inc june 30 2001 2000 years ended june 30 2001 2000 1999 also included report kpmg llp independent certified public accountants consolidated financial statements june 30 2001 2000 years ended june 30 2001 2000 1999 index consolidated financial statements key energy services inc consolidated balance sheets see accompanying notes integral part consolidated financial statements key energy services inc consolidated statements operations see accompanying notes integral part consolidated financial statements key energy services inc consolidated statements comprehensive income see accompanying notes integral part consolidated financial statements key energy services inc consolidated statements cash flows see accompanying notes integral part consolidated financial statements key energy services inc consolidated statements stockholders equity thousands see accompanying notes integral part consolidated financial statements key energy services inc notes consolidated financial statements june 30 2001 2000 1999 1 organization summary significant accounting policies company key energy services inc company key largest onshore rigbased well servicing contractor world approximately 1477 well service rigs 1455 oilfield service vehicles june 30 2001 company provides complete range well services major oil companies independent oil natural gas production companies including rigbased well maintenance workover completion recompletion services including horizontal recompletions oilfield trucking services ancillary oilfield services key conducts well servicing operations onshore continental united states following regions gulf coast including south texas central gulf coast texas south louisiana permian basin west texas eastern new mexico midcontinent including anadarko hugoton arkoma basins arklatex region four corners including san juan piceance uinta paradox basins eastern including appalachian michigan illinois basins rocky mountains including denverjulesberg powder river wind river green river williston basins california san joaquin basin internationally argentina ontario canada company also leading onshore drilling contractor 79 land drilling rigs june 30 2001 key conducts land drilling operations number major domestic producing basins well argentina ontario canada key also produces develops oil natural gas reserves permian basin region texas panhandle basis presentation companys consolidated financial statements include accounts company whollyowned subsidiaries significant intercompany transactions balances eliminated accounting policies presented followed preparing accompanying consolidated financial statements estimates uncertainties preparation accompanying consolidated financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amount assets liabilities disclosures contingent assets liabilities date consolidated financial statements reported amounts revenues expenses reporting period actual results could differ estimates inventories consist primarily oilfield service parts supplies held consumption parts supplies held sale companys various retail supply stores valued lower average cost market key energy services inc notes consolidated financial statements continued june 30 2001 2000 1999 1 organization summary significant accounting policies continued property equipment company provides depreciation amortization oilfield service related equipment using straightline method excluding drilling rigs following estimated useful lives assets components well service rig generally require replacement rigs life depreciated estimated useful lives range three 15 years basic rigs excluding components estimated useful lives date original manufacture ranging 25 35 years salvage values assigned rigs based estimate 10 effective july 1 1998 company made certain changes estimated useful lives well service rigs increasing lives 17 years 25 years change decreased net loss twelve months ended june 30 1999 approximately 3100000 011 per sharebasic change made better reflect expected utilization assets time better provide matching revenues expenses better reflect industry standard regards estimated useful lives workover rigs company uses unitsofproduction method depreciate drilling rigs method takes consideration number days rigs actually service month depreciation recorded least 15 days month rig available service company believes method appropriately reflects financial results matching revenues expenses appropriately reflects assets used time company uses successful efforts method accounting oil gas properties method costs associated productive wells nonproductive development wells capitalized nonproductive exploration costs geological geophysical costs expensed capitalized costs relating proved properties depleted using unitsofproduction method company follows provisions fasb statement 121 accounting impairment longlived assets longlived assets disposed statement requires longlived assets including certain identifiable intangibles held used company reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable purposes applying statement company groups longlived assets including goodwill yardbyyard basis compares estimated future cash flows yard yards net carrying value including allocable goodwill company would record impairment charge reducing yards net carrying value estimated fair value key energy services inc notes consolidated financial statements continued june 30 2001 2000 1999 1 organization summary significant accounting policies continued estimated future cash flows less yards net carrying value since adoption statement impairment charges required hedging derivative financial instruments company uses derivative financial instruments primarily commodity option contracts reduce exposure oil gas producing operations changes market price natural gas crude oil fix price natural gas crude oil independently physical sale financial instruments company accounts hedging contracts must meet following criteria underlying asset liability must expose company price risk offset another asset liability hedging contract must reduce price risk instrument must designated hedge inception contract throughout contract period order qualify hedge must clear correlation changes fair value financial instrument fair value underlying asset liability changes market value financial instrument offset effect price rate changes exposed items prior adoption sfas 133 premiums paid commodity option contracts qualify hedges amortized oil natural gas sales terms contracts unamortized premiums included assets consolidated balance sheet amounts receivable commodity option contracts accrued increase oil natural gas sales applicable periods effective july 1 2000 company adopted sfas 133 accounting derivative instruments hedging activities sfas 133 amended sfas 137 138 sfas 138 sfas 133 establishes accounting reporting standards derivative instruments including certain derivative instruments embedded contracts hedging activities requires recognition derivative instruments assets liabilities companys balance sheet measurement instruments fair value accounting treatment changes fair value dependent upon whether derivative instrument designated hedge type hedge derivatives designated cash flow hedges changes fair value recognized comprehensive income hedged item recognized earnings see note 8 comprehensive income company follows provisions statement financial accounting standards 130 reporting comprehensive income sfas 130 sfas 130 establishes standards reporting presentation comprehensive income components sfas 130 requires items required recognized accounting standards components comprehensive income reported financial statement displayed prominence financial statements accordance provisions sfas 130 company presented components comprehensive income consolidated statements comprehensive income key energy services inc notes consolidated financial statements continued june 30 2001 2000 1999 1 organization summary significant accounting policies continued environmental company subject extensive federal state local environmental laws regulations laws constantly changing regulate discharge materials environment may require company remove mitigate adverse environmental effects disposal release petroleum chemical substances various sites environmental expenditures expensed capitalized depending future economic benefit expenditures relate existing condition caused past operations future economic benefits expensed liabilities expenditures noncapital nature recorded environmental assessment andor remediation probable costs reasonably estimated goodwill net goodwill totaling 1899 million 1986 million june 30 2001 2000 respectively represents cost excess fair value net tangible identifiable intangible assets acquired liabilities assumed purchase transactions goodwill amortized straightline basis periods ranging ten 25 years amortization goodwill fiscal 2001 2000 1999 approximately 9322000 9840000 9202000 respectively carrying amount unamortized goodwill reviewed potential impairment loss whenever events changes circumstances indicate carrying amount goodwill may recoverable see property equipment discussion deferred costs deferred costs totaling 31052000 30998000 june 30 2001 2000 respectively represent debt issuance costs recorded net accumulated amortization 13428000 12143000 june 30 2001 2000 respectively deferred costs amortized interest expense using straightline method life applicable debt instrument extraordinary loss related debt retired early method approximates amortization would recorded using effective interest method amortization deferred costs totaled approximately 3578000 5176000 4664000 fiscal 2001 2000 1999 respectively unamortized debt issuance costs included determination extraordinary gain loss retirement debt net tax totaled approximately 1620000 fiscal 2001 income taxes company accounts income taxes based upon statement financial accounting standards 109 accounting income taxes sfas 109 sfas 109 deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases deferred tax assets liabilities measured using statutory tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rate recognized income period includes statutory enactment date valuation allowance deferred tax assets recognized likely benefit deferred tax assets realized key energy services inc notes consolidated financial statements continued june 30 2001 2000 1999 1 organization summary significant accounting policies continued company eligible subsidiaries file consolidated u federal income tax return certain subsidiaries consolidated financial reporting purposes eligible included consolidated u federal income tax return separate provisions income taxes determined entities groups entities earnings per share company presents earnings per share information accordance provisions statement financial accounting standards 128 earnings per share sfas 128 sfas 128 basic earnings per common share determined dividing net earnings applicable common stock weighted average number common shares actually outstanding year diluted earnings per common share based increased number shares would outstanding assuming conversion dilutive outstanding convertible securities using converted method key energy services inc notes consolidated financial statements continued june 30 2001 2000 1999 1 organization summary significant accounting policies continued diluted earnings per share calculation year ended june 30 2001 excludes effect exercise 360000 stock options conversion companys 5 convertible subordinated notes effects instruments earnings per share would antidilutive diluted earnings per share calculation years ended june 30 2000 1999 excludes effect conversion companys outstanding convertible debt exercise companys outstanding warrants stock options effects instruments loss per share would antidilutive concentration credit risk financial instruments potentially subject company concentrations credit risk consist primarily temporary cash investments trade receivables company restricts investment temporary cash investments financial institutions high credit standing policy limits amount credit exposure one financial institution companys customer base consists primarily multinational independent oil natural gas producers may affect companys overall exposure credit risk either positively negatively much customers affected economic conditions oil gas industry historically cyclical however account receivables well diversified among many customers significant portion receivables major oil companies management believes minimizes potential credit risk historically credit losses insignificant receivables generally collateralized although company may generally secure receivable time filing mechanics materialmans lien well serviced company maintains reserves potential credit losses within managements expectations company one customer represented 10 consolidated revenues fiscal year ended june 30 2001 2000 1999 key energy services inc notes consolidated financial statements continued june 30 2001 2000 1999 1 organization summary significant accounting policies continued stockbased compensation company accounts stock option grants employees using intrinsic value method accounting prescribed apb opinion 25 accounting stock issued employees apb 25 companys stock incentive plans price stock grant date amount employee must pay exercise option acquire stock accordingly options intrinsic value grant date accordance provisions apb 25 compensation cost recognized statement financial accounting standards 123 sfas 123 accounting stockbased compensation sets forth alternative accounting disclosure requirements stockbased compensation arrangements companies may continue follow provisions apb 25 measure recognize employee stockbased compensation however sfas 123 requires disclosure pro forma net income earnings per share would reported fair value based recognition provisions sfas 123 company disclosed note 10 pro forma information required sfas 123 foreign currency gains losses local currency functional currency companys foreign operations argentina canada cumulative translation gains losses resulting translating foreign subsidiarys financial statements functional currency us dollars included comprehensive income accumulated stockholders equity partial complete sale liquidation companys net investment foreign entity cash equivalents company considers unrestricted highly liquid investments less threemonth maturity purchased cash equivalents reclassifications certain reclassifications made fiscal 2000 1999 consolidated financial statements conform fiscal 2001 presentation reclassifications consist primarily reclassifying oil natural gas productions revenues expenses oil natural gas production revenues related expenses reclassified revenues expenses company believe business segment material companys consolidated financial statements 2 restructuring charge response industry downturn caused historically low oil gas prices resulting slowdown business december 7 1998 company announced companywide restructuring plan reduce operating costs beyond achieved companys consolidation efforts plan involved reduction size management onsite work force salary reductions averaging 21 senior management combination previously separate operating divisions elimination redundant overhead facilities restructuring plan resulted pretax charges key energy services inc notes consolidated financial statements continued june 30 2001 2000 1999 2 restructuring charge continued earnings approximately 67 million second quarter ending december 31 1998 15 million third quarter ending march 31 1999 however due increase oil gas prices beginning quarter ended march 311999 company amended restructuring plan decrease number planned employee terminations increased demand companys services made terminations unnecessary would managements opinion restricted companys ability provide services customers consequently company utilize approximately 37 million pretax charges essentially unutilized portion restructuring charge reversed fourth quarter ending june 30 1999 resulting total pretax charge fiscal year ended june 30 1999 approximately 45 million charges included severance payments termination benefits approximately 97 employees lease commitments related closed facilities environmental studies performed closed leased yard locations company completed plan june 30 2000 remained approximately 180000 cobra benefits terminated employees 53000 contractual payments employee june 30 1999 major components restructuring charge costs incurred june 30 1999 follows 3 business property acquisitions completed fiscal 2001 2000 acquisitions completed company fiscal 2000 fiscal 2001 company completed several small acquisitions total consideration 11965000 paid using combination cash notes shares companys common stock acquisitions company acquired 34 well service rigs 8 trucking vehicles ancillary equipment five salt water disposal facilities acquisitions accounted using purchase method results operations generated acquired assets included companys results operations completion date acquisition dawson productions services inc september 1998 company completed acquisition capital stock dawson production services inc dawson aggregate consideration approximately 3826 million including approximately 2071 million cash paid dawson stock transactional fees approximately 1755 million net liabilities assumed key energy services inc notes consolidated financial statements continued june 30 2001 2000 1999 3 business property acquisitions continued expenditures dawson acquisition including acquisition costs less cash acquired follows thousands time closing dawson owned approximately 527 well service rigs 200 oilfield trucks 21 production testing units south texas gulf coast east texas louisiana permian basin west texas new mexico anadarko basin texas oklahoma california inland waters gulf mexico connection dawson acquisition company recognized liabilities estimated costs involuntarily terminate employees dawson exit certain activities dawson primarily dawsons lease liability corporate offices june 30 1999 company completed severance plan terminating 44 former dawson employees june 30 1999 company 592000 accrued representing estimated lease termination costs dawsons former corporate offices fiscal 1999 acquisitions addition acquisition dawson company acquired assets andor capital stock six well servicing contract drilling businesses fiscal 1999 increasing rig truck fleet total approximately 93 well service rigs 4 drilling rigs 185 oilfield trucks related equipment aggregate purchase price approximately 937 million cash acquisitions accounted using purchase method results operations generated acquired assets included companys results operations completion date acquisition pro forma results operationsunaudited following unaudited pro forma results operations prepared though dawson acquisition acquired july 1 1998 adjustments record specifically identifiable decreases direct costs general administrative expenses related termination individual employees pro forma amounts necessarily indicative results may reported future key energy services inc notes consolidated financial statements continued june 30 2001 2000 1999 4 commitments contingencies various suits claims arising ordinary course business pending company management believe disposition items result material adverse impact consolidated financial position results operations cash flows company order retain qualified senior management company enters employment agreements executive officers employment agreements run periods ranging three five years automatically extended yearly basis unless terminated company executive officer addition providing base salary executive officer employment agreements provide severance payments executive officer varying 1 3 years executive officers base salary june 30 2001 annual base salaries executive officers covered employment agreements totaled 1125000 company also enters employment agreements key employees deems necessary order retain qualified personnel 5 longterm debt components companys longterm debt follows senior credit facility june 30 2001 companys senior credit facility senior credit facility consisted 125 million revolving credit facility addition 20 million letters credit issued senior credit facility outstanding letters credit reduces borrowing availability revolver commitment make revolving loans reduced 100 million key energy services inc notes consolidated financial statements continued june 30 2001 2000 1999 5 longterm debt continued september 14 2001 reduce 75 million september 14 2002 revolving commitment terminate september 14 2003 revolving loans must paid date revolving loans bear interest rates based upon companys option either prime rate plus margin ranging 075 200 eurodollar rate plus margin ranging 225 350 case depending upon ratio companys total debt less cash hand 5 million companys trailing 12month ebitda adjusted company pays commitment fees unused portion revolving loan varying rate depending upon pricing ratio 025 050 senior credit facility contains various financial covenants including consolidated debttocapitalization ratio generally decreasing levels varying 79 65 ii consolidated interest coverage ratio generally increasing levels varying 200to100 350to100 iii consolidated senior leverage ratio generally decreasing levels varying 250to100 200to100 iv trailing 12month ebitda adjusted generally increasing levels varying 50 million 150 million addition company must maintain consolidated fixed charge coverage ratio generally decreasing levels varying 125to100 100 covenants consolidated senior leverage ratio consolidated interest coverage ratio imposed quarter ending march 31 2001 covenant levels consolidated debttocapitalization trailing 12month ebitda adjusted remain fixed 79 50 million respectively period company also required maintain consolidated liquidity level least 30 million senior credit facility subjects company restrictions including restrictions upon companys ability incur additional debt liens guarantee obligations merge consolidate persons sell assets make dividends purchases stock subordinated debt make capital expenditures excess levels ranging 375 million fiscal 1999 65 million fiscal 2004 make investments loans advances changes debt instruments organizational documents company permitted make acquisitions unless consolidated debt capitalization ratio 60 ii consolidated debt capitalization ratio increased acquisition funded solely capital stock company must also maintain consolidated net worth less 195 million plus 75 consolidated net income fiscal quarter beginning period ending december 31 1998 ii 75 net cash proceeds issuance capital stock september 14 1998 iii 75 increase consolidated net worth resulting conversion 5 convertible subordinated notes convertible debt issued september 14 1998 obligations senior credit facility guaranteed companys subsidiaries secured substantially companys assets including companys accounts receivable inventory equipment fiscal 2001 portion net proceeds equity offering see note 10 used repay entire outstanding balance tranche term loan outstanding senior credit facility 23 million tranche b term loan outstanding senior credit facility addition 65 million net proceeds equity offering used reduce principal amount outstanding revolver remainder net proceeds equity offering used retire longterm debt portion proceeds companys 8 38 key energy services inc notes consolidated financial statements continued june 30 2001 2000 1999 5 longterm debt continued senior note offering fiscal 2001 used repay entire outstanding balance tranche b term loan outstanding senior credit facility approximately 591 million revolver june 30 2001 approximately 2000000 outstanding revolving loans additionally company outstanding letters credit 11995000 15132000 june 30 2001 2000 respectively related workers compensation insurance ii 8 38 senior notes march 6 2001 company completed private placement 175000000 8 38 senior notes due 2008 8 38 senior notes net cash proceeds private placement used repay remaining balance original term loans senior credit facility portion revolving loan facility senior credit facility 8 38 senior notes senior unsecured obligations ranking equally companys senior unsecured indebtedness 8 38 senior notes effectively subordinated keys secured indebtedness includes borrowings senior credit facility dawson 9 38 senior notes march 1 2005 company may redeem 8 38 senior notes time varying redemption prices excess par plus accrued interest addition march 1 2004 company may redeem 35 aggregate principal amount 8 38 senior notes proceeds certain sales equity 108375 par plus accrued interest june 30 2001 175000000 principal amount 8 38 senior notes remained outstanding 8 38 senior notes pay interest semiannually march 1 september 1 year iii 14 senior subordinated notes january 22 1999 company completed private placement 150000 units consisting 150000000 14 senior subordinated notes due 2009 14 senior subordinated notes 150000 warrants purchase 2173433 shares common stock exercise price 488125 per share unit warrants net cash proceeds private placement used repay substantially remaining 1486 million principal amount plus accrued interest owed companys bridge loan facility arranged connection acquisition dawson production services inc dawson january 15 2004 company may redeem 14 senior subordinated notes time varying redemption prices excess par plus accrued interest addition january 15 2002 company may redeem 35 aggregate principal amount 14 senior subordinated notes proceeds certain sales equity 114 par plus accrued interest june 11 2001 company exercised right redemption 10313000 principal amount 14 senior subordinated notes price 114 principal amount plus accrued interest leaving 139687000 principal amount outstanding june 30 2001 unit warrants separated 14 senior subordinated notes became exercisable january 25 2000 date issuance value unit warrants estimated key energy services inc notes consolidated financial statements continued june 30 2001 2000 1999 5 longterm debt continued 7434000 classified discount 14 senior subordinated notes companys consolidated balance sheet discount amortized interest expense term 14 senior subordinated notes 14 senior subordinated notes mature unit warrants expire january 15 2009 14 senior subordinated notes subordinate companys senior indebtedness includes borrowings current senior credit facility dawson 9 38 senior notes 8 38 senior notes event change control company defined indenture 14 senior subordinated notes issued holder 14 senior subordinated notes right holders option require company repurchase part holders 14 senior subordinated notes within 60 days event price equal 100 principal amount thereof together accrued unpaid interest thereon fiscal 2001 company repurchased cancelled 10313000 principal amount 14 senior subordinated notes paid premium approximately 1444000 june 30 2001 139687000 principal amount 14 senior subordinated notes remained outstanding 14 senior subordinated notes pay interest semiannually january 15 july 15 year beginning july 15 1999 interest approximately 10500000 paid july 15 2000 january 15 2001 june 30 2001 62500 unit warrants exercised producing approximately 4173000 proceeds company leaving 87500 unit warrants outstanding iv 5 convertible subordinated notes late september early october 1997 company completed private placement 216 million 5 convertible subordinated notes due 2004 5 convertible subordinated notes 5 convertible subordinated notes subordinate companys senior indebtedness includes borrowings senior credit facility 14 senior subordinated notes dawson 9 38 senior notes 8 38 senior notes 5 convertible subordinated notes convertible holders option shares companys common stock conversion price 3850 per share subject certain adjustments 5 convertible subordinated notes redeemable companys option september 15 2000 whole part together accrued unpaid interest initial redemption price 10286 year beginning september 15 2000 declines ratably thereafter annual basis fiscal 2001 company repurchased cancelled 47384000 principal amount 5 convertible subordinated notes leaving 158426000 principal amount 5 convertible subordinated notes outstanding june 30 2001 repurchases resulted tax gain approximately 32 million interest 5 convertible subordinated notes payable march 15 september 15 interest approximately 4890000 paid september 15 2000 4815000 paid march 15 2001 respectively v dawson 9 38 senior notes result dawson acquisition see note 3 company subsidiaries us trust company texas na trustee us trust entered supplemental indenture dated key energy services inc notes consolidated financial statements continued june 30 2001 2000 1999 5 longterm debt continued september 21 1998 supplemental indenture pursuant company assumed obligations dawson indenture dated february 20 1997 dawson indenture dawson us trust senior notes due 2007 dawson 9 38 senior notes issued pursuant dawson indenture equally ratably secured obligations senior credit facility result mandatory tender offer made connection dawson acquisition subsequent repurchases 1106000 principal amount dawson 9 38 senior notes remained outstanding june 30 2000 fiscal 2001 company repurchased 860000 principal amount dawson 9 38 senior notes leaving 246000 principal amount outstanding june 30 2001 interest dawson 9 38 senior notes payable february 1 august 1 year interest approximately 52000 approximately 14000 paid august 1 2000 february 1 2001 respectively vi 7 convertible subordinated debentures july 1996 company completed private placement 52000000 principal amount 7 convertible subordinated debentures due 2003 7 convertible subordinated debentures quarter ended september 30 2000 985000 principal amount 7 convertible subordinated debentures surrendered conversion holders thereof 101025 shares common stock issued september 1 2000 connection conversion september 1 2000 remaining 15000 principal amount outstanding 7 convertible subordinated debentures redeemed 103 principal amount plus accrued interest leaving none outstanding interest 7 convertible subordinated debentures payable january 1 july 1 year interest approximately 35000 paid july 1 2000 capitalized debt issuance costs repayment schedule interest expense company capitalized total approximately 4958000 16370000 fees costs connection various financings fiscal 2001 1999 respectively company incure fees costs connection financing activities fiscal 2000 presented schedule repayment requirements longterm debt next five years thereafter june 30 2001 key energy services inc notes consolidated financial statements continued june 30 2001 2000 1999 5 longterm debt continued companys interest expense years ended june 30 2001 2000 1999 consisted following 6 debt issuance costs fiscal 1999 company recorded expense item 6307000 represented writeoff debt issuance costs debt issuance costs associated bridge loan incurred connection dawson acquisition subsequently paid primarily proceeds companys private placement 14 senior subordinated notes see note 5 fiscal 2000 company expensed 338000 debt issuance costs related conversion 7 convertible subordinated debentures prepayments debt 7 fair value financial instruments following table presents carrying amounts estimated fair values companys financial instruments june 30 2001 2000 fasb statement 107 disclosures fair value financial instruments defines fair value financial instrument amount instrument could exchanged current transaction willing parties key energy services inc notes consolidated financial statements continued june 30 2001 2000 1999 7 fair value financial instruments continued following methods assumptions used estimate fair value class financial instruments cash trade receivables trade payables carrying amounts approximate fair value short maturity instruments commodity option contracts fiscal 2001 sfas 133 carrying amount commodity option contracts approximate fair value fiscal 2000 carrying value comprised unamortized premiums paid option contracts fair value commodity option contracts estimated using discounted forward prices options index price term option contract notes receivablerelated parties amounts reported relate notes receivable officers company longterm debt fair value companys longterm debt based upon quoted market prices various notes debentures june 30 2001 2000 carrying amounts outstanding companys senior credit facility 8 derivative financial instruments company utilizes derivative financial instruments manage well defined commodity price risks company exposed credit losses event nonperformance counterparties commodity hedges company deals reputable financial institutions counterparties anticipates counterparties able fully satisfy obligations contracts company obtain collateral security support financial instruments subject credit risk monitors credit standing counterparties company periodically hedges portion oil natural gas production collar option agreements purpose hedges provide measure stability volatile environment oil natural gas prices manage exposure commodity price risk existing sales commitments companys risk management objective lock range pricing expected production volumes allows company forecast future earnings within predictable range company meets objective entering collar option arrangements allow acceptable cap floor prices company enter derivative instruments purpose economic hedging company speculate using derivative instruments company identified following derivative instruments freestanding derivatives march 30 2000 company entered collar arrangement 22month period whereby company pay specified price cap index counterparty pay price fall floor index hedge defines range cash flows bounded cap floor prices may 25 2001 company entered option arrangement 12month period beginning march 2002 whereby counterparty pay price fall floor index company desires measure stability ensure cash flows fall certain level key energy services inc notes consolidated financial statements continued june 30 2001 2000 1999 8 derivative financial instruments continued prior adoption sfas 133 discussed note 1 collars options accounted cash flow type hedges accordingly transition adjustment resulted recording 778000 liability fair value collars accumulated comprehensive income 520000 recognized earnings fiscal 2001 estimated remaining 258000 transition adjustment recognized earnings next fiscal year arrangement intended economic hedge july 1 2000 company documented march 30 2000 oil natural gas collars cash flow hedges therefore reported charge operations 565000 increase fair value liability september 30 2000 income october 1 2000 company documented collars cash flow hedges may 25 2001 company documented may 25 2001 oil natural gas options cash flow hedges therefore included income 768000 increase fair value asset june 30 2001 income july 1 2001 company documented options cash flow hedges fiscal 2001 company recorded net increase 999000 derivative assets net derivative liabilities 132000 represented ineffectiveness credited earnings embedded derivatives company party volumetric production payment meets definition embedded derivative sfas 133 effective july 1 2000 company determined documented volumetric production payment excluded scope sfas 133 normal purchasessales exclusion set forth sfas 138 fiscal 2000 1999 gains amortization premiums paid option contracts recognized adjustment sales revenue related transactions hedged finalized net effect companys commodity hedging activities decreased oil natural gas revenues year ended june 30 2000 822270 increased oil natural gas revenues year ended june 30 1999 158500 following table sets forth future volumes hedged year weightedaverage strike price option contracts june 30 2001 2000 strike prices oil options based nymex spot price west texas intermediate strike prices natural gas collars based inside fercwest texas key energy services inc notes consolidated financial statements continued june 30 2001 2000 1999 8 derivative financial instruments continued waha spot price strike price natural gas put based inside fercel paso permian spot price 9 accrued liabilities accrued liabilities consist following 10 stockholders equity offerings june 30 2000 company closed public offering 11000000 shares common stock 9625 per share approximately 106 million equity offering net proceeds equity offering approximately 101 million used repay portion companys term loan borrowings revolving line credit senior credit facility retire longterm debt may 7 1999 company closed public offering 55300000 shares common stock 300000 shares sold pursuant underwriters overallotment option discussed 300 per share 166 million prior public offering concurrently therewith company closed offering 3508772 shares common stock 285 per share 10 million prior concurrent offering together prior public offering prior equity offerings addition june 7 1999 underwriters prior public offering exercised overallotment option purchase additional 5436000 million shares cover overallotments net proceeds prior equity offerings approximately 1804 million used repay portion companys term loan borrowings senior credit facility stock incentive plans january 13 1998 companys shareholders approved key energy group inc 1997 incentive plan amended 1997 incentive plan 1997 incentive plan amendment restatement plans formerly known key energy group inc 1995 stock option plan 1995 option plan key energy group inc 1995 outside directors stock option plan 1995 directors plan collectively prior plans key energy services inc notes consolidated financial statements continued june 30 2001 2000 1999 10 stockholders equity continued options previously granted prior plans outstanding november 17 1997 date companys board directors adopted plan assumed continued without modification 1997 incentive plan 1997 incentive plan company may grant following awards key employees directors employees outside directors consultants company controlled subsidiaries parent corporation incentive stock options isos defined section 422 internal revenue code 1986 amended code ii nonstatutory stock options nsos iii stock appreciation rights sars iv shares restricted stock v performance shares performance units vi stockbased awards vii supplemental tax bonuses collectively incentive awards isos nsos sometimes referred collectively herein options company may grant incentive awards covering aggregate greater 3000000 shares companys common stock ii 10 shares companys common stock issued outstanding last day calendar quarter provided however decrease number issued outstanding shares companys common stock previous calendar quarter shall result decrease number shares available issuance 1997 incentive plan result companys equity offering discussed june 30 2001 number shares companys common stock may covered incentive awards increased approximately 101 million shares companys common stock issued forfeited subject incentive awards 1997 incentive plan expire terminate reason remain available issuance respect granting incentive awards term 1997 incentive plan except may otherwise provided applicable law shares companys common stock issued 1997 incentive plan may either newly issued treasury shares including shares companys common stock company receives connection exercise incentive award number kind securities may issued 1997 incentive plan pursuant outstanding incentive awards subject adjustments prevent enlargement dilution rights resulting stock dividends stock splits recapitalizations reorganization similar transactions maximum number shares companys common stock subject incentive awards may granted may vest applicable one covered employee defined calendar year shall 500000 shares subject adjustment provisions 1997 incentive plan maximum aggregate cash payout subject incentive awards including sars performance units performance shares payable cash stockbased awards payable cash may granted one covered employee calendar year 2500000 purposes 1997 incentive plan covered employees means named executive officer one group covered employees defined section 162m code regulation promulgated thereunder ie generally chief executive officer four highly compensated executive officers given year key energy services inc notes consolidated financial statements continued june 30 2001 2000 1999 10 stockholders equity continued 1997 incentive plan administrated compensation committee appointed board directors committee consisting less two directors outside director section 162m code ii nonemployee director rule 16b3 securities exchange act 1934 addition subject applicable shareholder approval requirements company may issue nsos outside 1997 incentive plan exercise price options granted 1997 incentive plan outside 1997 incentive plan fair market value per share date options granted exercise nsos results u tax deduction company equal income tax effect difference exercise price market price exercise date following table summarizes stock option activity related companys plans shares thousands stock incentive plans foregoing stock option activity summary reflects effective september 4 1998 committee authorized cancellation reissue stock options employees executive officers purpose changing exercise price vesting schedule options total 473556 stock options cancelled weighted average price approximately 1309 per share reissued exercise price 7125 per share vesting new options ratable threeyear period date grant following table summarizes information stock options outstanding june 30 2001 shares thousands key energy services inc notes consolidated financial statements continued june 30 2001 2000 1999 10 stockholders equity continued company applies intrinsic value method apb 25 accounting employee stock incentive plans accordingly compensation expense recognized stock options issued employee plans compensation expense stock options granted employees recognized based fair value grant dates using methodology prescribed sfas 123 companys net income loss earnings per share would reduced pro forma amounts indicated sfas 123 apply options granted prior january 1 1995 therefore pro forma effect disclosed may representative pro forma amounts future years total fair value stock options granted fiscal 2001 2000 1999 approximately 11217000 19541000 15695000 respectively fair value stock option grant estimated date grant using blacksholes optionpricing model based following weightedaverage assumptions 11 income taxes key energy services inc notes consolidated financial statements continued june 30 2001 2000 1999 11 income taxes continued components income tax expense benefit follows income tax payments made fiscal 2001 2000 1999 additionally deferred tax benefit 7004000 allocated stockholders equity fiscal 2001 compensation expense income tax purposes excess amounts recognized financial reporting purposes income tax expense benefit differs amounts computed applying statutory federal rate follows deferred tax assets liabilities comprised following key energy services inc notes consolidated financial statements continued june 30 2001 2000 1999 11 income taxes continued valuation allowance provided likely portion deferred tax assets realized described due annual limitations certain net operating loss carryforwards appear likely company able utilize available carryforwards prior ultimate expiration company estimates june 30 2001 company available approximately 185474305 net operating loss carryforwards continue expire fiscal 2002 approximately 53570522 net operating loss carryforwards subject annual limitation approximately 1012000 sections 382 383 internal revenue code 12 leasing arrangements company leases certain property equipment noncancelable operating leases generally expire various dates fiscal 2006 term operating leases generally run 24 60 months varying payment dates throughout month june 30 2001 future minimum lease payments noncancelable operating leases follows thousands operating lease expense approximately 6072000 6460000 7313000 fiscal years ended june 30 2001 2000 1999 respectively 13 employee benefit plans order retain quality personnel company maintains 401k plans part employee benefits package july 1 1998 december 31 1998 company matched 100 employee contributions 401k plan maximum 1000 per participant per year january 1 1999 march 31 2000 company elected match employee contributions commencing april 1 2000 company matches 100 employee contributions 401k plan maximum 250 per participant per year maximum limit increased 500 effective october 1 2000 750 effective january 1 2001 1000 effective july 1 2001 companys matching contributions fiscal 2001 2000 1999 approximately 1857000 77000 908000 respectively key energy services inc notes consolidated financial statements continued june 30 2001 2000 1999 14 transactions related parties connection negotiation terms fiveyear employment agreement mr francis john chairman board president chief executive officer company inducement mr john enter employment agreement company entered separate agreement mr john dated august 2 1999 amended june 30 2001 provides 65 million loans previously made company mr john together accrued interest payable thereon forgiven ratably ten year period commencing july 1 2001 ending june 30 2010 agreement provides foregoing forgiveness indebtedness predicated conditioned upon mr john remaining employed company period addition event mr john terminated company cause defined agreement event mr john voluntarily terminates employment company agreement provides entire remaining principal balance loans together accrued interest payable thereon become immediately due payable mr john however event mr johns employment terminated good reason result mr johns death disability result change control defined agreement stipulates remaining principal balance outstanding loans together accrued interest thereon forgiven connection negotiation employment agreement thomas k grundman companys executive vice president chief financial officer chief accounting officer company made 240000 shortterm loan 150000 relocation loan assist mr grundmans relocation companys executive offices interest loans accrues rate 6125 per annum shortterm loan repaid relocation loan together accrued interest forgiven three installments 50000 july 1 2000 2001 2002 provided however mr grundmans employment terminated period way triggers severance obligations amounts owed shall immediately forgiven ii trigger severance obligations amounts owed shall immediately due payable 15 business segment information companys reportable business segments well servicing contract drilling oil natural gas production operations previously presented separately reportable business segment included corporateother well servicing companys operations provide well servicing ongoing maintenance existing oil natural gas wells workover major repairs modifications necessary optimize level production existing oil natural gas wells production services fluid hauling fluid storage tank rental contract drilling company provides contract drilling services major independent oil companies onshore continental united states argentina ontario canada companys management evaluates performance operating segments based net income operating profits revenues less direct operating expenses corporate expenses include general corporate expenses associated managing reportable operating segments corporate key energy services inc notes consolidated financial statements continued june 30 2001 2000 1999 15 business segment information continued assets consist principally cash equivalents deferred debt financing costs deferred income tax assets net income loss extraordinary gain loss contract drilling segment includes portion well servicing general administrative expenses allocated percentage revenue basis operating revenues operating profit companys foreign operations includes argentina canada 545 million 134 million respectively year ended june 30 2001 operating revenues operating profit companys foreign operations includes argentina canada 377 million 73 million respectively year ended june 30 2000 operating revenues operating profit companys foreign operations includes argentina canada 269 million 54 million respectively year ended june 30 1999 company 841 million 669 million identifiable assets june 30 2001 2000 respectively related foreign operations key energy services inc notes consolidated financial statements continued june 30 2001 2000 1999 16 supplemental schedule noncash investing financing activities 17 unaudited supplementary informationquarterly results operations summarized quarterly financial data fiscal 2001 2000 1999 follows key energy services inc notes consolidated financial statements continued june 30 2001 2000 1999 17 unaudited supplementary informationquarterly results operations continued 18 volumetric production payment march 2000 key sold portion future oil natural gas production odessa exploration incorporated wholly owned subsidiary gross proceeds 20 million pursuant agreement purchaser entitled receive share production certain oil natural gas properties amounts ranging 3500 10000 barrels oil 58800 122100 mmbtus natural gas per month six year period ending february 2006 total volume forward sale approximately 486000 barrels oil 6135 million mmbtus natural gas 19 condensed consolidating financial information companys senior notes guaranteed companys subsidiaries except foreign subsidiaries whollyowned guarantees joint several full complete unconditional currently restrictions ability subsidiary guarantors tranfer funds parent company accompanying condensed consolidating financial information prepared presented pursuant sec regulation sx rule 310 financial statements guarantors issuers guaranteed securities registered information intended present financial position results operations cash flows individual companies groups companies accordance generally accepted accounting principles key energy services inc notes consolidated financial statements continued june 30 2001 2000 1999 condensed consolidating balance sheets key energy services inc notes consolidated financial statements continued june 30 2001 2000 1999 condensed consolidating statements operations key energy services inc notes consolidated financial statements continued june 30 2001 2000 1999 key energy services inc notes consolidated financial statements continued june 30 2001 2000 1999 independent auditors report board directors stockholders key energy services inc audited accompanying consolidated balance sheets key energy services inc subsidiaries june 30 2001 2000 related consolidated statements operations comprehensive income cash flows stockholders equity years threeyear period ended june 30 2001 connection audits consolidated financial statements also audited financial statement schedule listed index item 14 consolidated financial statements financial statement schedule responsibility companys management responsibility express opinion consolidated financial statements financial statement schedule based audits conducted audits accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects consolidated financial position key energy services inc subsidiaries june 30 2001 2000 results operations cash flows years threeyear period ended june 30 2001 conformity accounting principles generally accepted united states america also opinion related financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein discussed note 8 consolidated financial statements company changed method accounting derivative instruments hedging activities 2001 kpmg llp midland texas august 16 2001 item 9item 8 consolidated financial statements supplementary data financial statements supplementary data required item listed part iv item 15 exhibits financial statement schedules annual report presented beginning page incorporated reference item 9item 8 consolidated financial statements supplementary data key energy services inc subsidiaries index consolidated financial statements page report independent registered public accounting firm report independent registered public accounting firm internal control financial reporting consolidated balance sheets consolidated statements operations consolidated statements comprehensive income consolidated statements cash flows consolidated statements stockholders equity notes consolidated financial statements report independent registered public accounting firm board directors shareholders key energy services inc audited accompanying consolidated balance sheets key energy services inc subsidiaries maryland corporation december 31 2007 2006 related consolidated statements operations comprehensive income stockholders equity cash flows three years period ended december 31 2007 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position key energy services inc subsidiaries december 31 2007 2006 results operations cash flows three years period ended december 31 2007 conformity accounting principles generally accepted united states america discussed note 1 consolidated financial statements effective january 1 2006 company adopted provisions statement financial accounting standards 123 revised 2004 share based payments discussed note 1 consolidated financial statements effective january 1 2007 company adopted provisions financial accounting standards interpretation 48 accounting uncertainty income taxes discussed note 1 consolidated financial statements effective january 1 2007 company adopted provisions fsp eitf 00192 accounting registration payment arrangements also audited accordance standards public company accounting oversight board united states effectiveness key energy services inc subsidiaries internal control financial reporting december 31 2007 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso report dated february 26 2008 expressed adverse opinion effectiveness internal control financial reporting grant thornton llp houston texas february 26 2008 report independent registered public accounting firm board directors shareholders key energy services inc audited key energy services inc subsidiaries maryland corporation internal control financial reporting december 31 2007 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso key energy services inc subsidiaries management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying managements report internal control financial reporting responsibility express opinion key energy services inc subsidiaries internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate material weakness deficiency combination control deficiencies internal control financial reporting reasonable possibility material misstatement companys annual interim financial statements prevented detected timely basis following material weaknesses identified included managements assessment afinancial close reporting company determined material weakness existed regard financial reporting close process controls put place ensure completeness accuracy timeliness appropriate valuation proper presentation disclosure financial transactions place fourth quarter 2007 due timing companys controls put place sufficient instances operating effectiveness controls occurred december 31 2007 bauthorizations expenditures company determined material weakness existed due inability ensure evidence expenditures covering substantially aspects spending approved appropriate level management accordance established policies result lack appropriate approvals expenditure transactions either made procurement system made outside system crecording revenues company determined material weakness existed regarding recording revenues revenue process heavily dependent manual reviews approvals credit terms amounts billed recorded adjustments bad debts manual reviews approvals could adequately substantiated operating effectively december 31 2007 dproperty plant equipment company determined material weakness existed related timing assets placed service timing recognition gains losses asset dispositions timing lack appropriate approvals asset dispositions due design utilization companys procurement system practices certain final costs asset may captured timely manner result asset may physically placed service prior cost information received delay accumulating necessary cost information may delay timing asset begins depreciated additionally evidence appropriate approval disposition well timing receipt information may result delays recording disposition appropriate reporting periods euser developed applications company determined material weakness existed use certain spreadsheets database programs course preparing consolidated financial statements company employed numerous spreadsheets database programs user developed applications user developed applications utilized calculating estimates reconciling payroll hours tracking inventory costs making cost allocations among things material weakness result user developed applications secured access logical security changes data integrity fapplication access segregation duties company determined material weaknesses existed four aspects information technology general controls security segregation duties primary financial systems include security administration procedures administrator access privileges database file access password controls weaknesses information technology general control areas evidenced related deficiencies various access controls financial reporting system level resulting inappropriate access segregation duties issues significant processes gpayroll company determined deficiencies surrounding payroll process particular adequacy personnel involved process lack proper documentation concerning hours worked rate changes coupled deficiencies reconciliations payroll data major component constituted material weakness system internal controls opinion effect material weaknesses described achievement objectives control criteria key energy services inc subsidiaries maintained effective internal control financial reporting december 31 2007 based criteria established internal controlintegrated framework issued coso also audited accordance standards public company accounting oversight board united states consolidated balance sheets statements operations comprehensive income stockholders equity cash flows key energy services inc subsidiaries material weaknesses identified considered determining nature timing extent audit tests applied audit 2007 consolidated financial statements report affect report dated february 26 2008 expressed unqualified opinion consolidated financial statements grant thornton llp houston texas february 26 2008 key energy services inc subsidiaries consolidated balance sheets thousands except share data see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries consolidated statements operations thousands except per share data see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries consolidated statements comprehensive income thousands see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries consolidated statements cash flows thousands see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries consolidated statements stockholders equity thousands see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries notes consolidated financial statements 1 organization summary significant accounting policies company key energy services inc maryland corporation references key company us intended refer key energy services inc subsidiaries provide broad array services including well servicing oilfield transportation services casedhole electric wireline services contract drilling services pressure pumping well stimulation services fishing rental services key conducts onshore well servicing operations every major oil natural gas producing region continental united states also provide limited drilling services appalachian basin well servicing equipment conduct pressure pumping cementing operations number major domestic producing regions including california permian basin san juan basin midcontinent region barnett shale north texas fishing rental services located primarily gulf coast permian basin regions texas well california midcontinent region also limited operations offshore internationally conduct onshore well servicing contract drilling operations argentina second quarter 2007 began conducting well servicing operations northern region mexico september 2007 acquired advanced measurements inc ami privatelyheld canadian technology company october 25 2007 key energy services llc delaware limited liability company whollyowned subsidiary company purchased outstanding shares membership interests moncla well service inc related entities moncla december 2007 acquired well servicing assets related equipment kings oil tools privatelyheld well servicing company operating california kings see note 2acquisitions basis presentation financial statements associated schedules included annual report form 10k present financial position results operations cash flows periods presented accordance generally accepted accounting principles united states gaap preparation consolidated financial statements requires us develop estimates make assumptions affect financial position results operations cash flows estimates also impact nature extent disclosure contingent liabilities among things use estimates analyze assets possible impairment ii determine depreciable lives assets iii assess future tax exposure realization deferred tax assets iv determine amounts accrue contingencies v value tangible intangible assets vi assess workers compensation vehicular liability selfinsured risk accruals insurance reserves vii provide allowances uncollectible accounts receivable review significant estimates recurring basis record effect necessary adjustments prior publication financial statements adjustments made respect use estimates relate improved information previously available limitations inherent process actual results may differ materially estimates believe estimates reasonable certain reclassifications made prior period amounts conform current period financial statement classifications reclassifications relate recasting prior periods conform realignment certain employment positions previously reported key energy services inc subsidiaries notes consolidated financial statements continued 1 organization summary significant accounting policies continued component direct expenses reported general administrative reclassifications effect previously reported income continuing operations net income following tables summarize effects reclassifications previously reported amounts thousands january 2005 sold majority contract drilling assets pattersonuti energy present results operations cash flows related activities discontinued operations consolidated statements operations consolidated statements cash flows 2005 apply provisions eitf 0410 determining whether aggregate operating segments meet quantitative thresholds eitf 0410 segment reporting note 18segment information provisions eitf 0410 operating segments individually meet aggregation criteria described statement financial accounting standards sfas 131 disclosures segments enterprise related information sfas 131 may combined operating segments individually meet aggregation criteria form separate reportable segment combined operating segments individually meet aggregation criteria established sfas 131 form corporate segment reporting principles consolidation within consolidated financial statements include accounts majorityowned controlled subsidiaries eliminate intercompany accounts transactions account interest entities significant control influence cost method interest entity exert significant influence control account interest using equity method key energy services inc subsidiaries notes consolidated financial statements continued 1 organization summary significant accounting policies continued discussed note 2acquisitions september 2007 completed acquisition ami privatelyheld canadian company focused oilfield technology prior acquisition ami owned portion another canadian company advanced flow technologies inc afti part acquisition ami increased ownership percentage afti 5146 consolidate assets liabilities results operations cash flows afti consolidated financial statements portion afti remaining outside control forming minority interest consolidated financial statements apply financial accounting standards board fasb interpretation fin 46 consolidation variable interest entitiesan interpretation arb 51 revised 2003 fin 46r determining whether consolidate variable interest entity vie fin 46r requires equity investor vie significant equity risk generally minimum 10 hold controlling interest evidenced voting rights absorb majority entitys expected losses receive majority entitys expected returns equity investor unable evidence characteristics entity retains ownership characteristics required consolidate vie revenue recognition revenue recognized following criteria met evidence arrangement exists ii delivery occurred services rendered iii price customer fixed determinable iv collectibility reasonably assured •evidence arrangement exists final understanding company customer occurred generally evidenced signed customer purchase order field ticket supplier contract master service agreement •delivery occurred services rendered company completed required pursuant terms arrangement generally evidenced customer signed field ticket service log •the price customer fixed determinable amount required paid agreed upon evidence price fixed determinable generally evidenced contractual terms company price book signed customer purchase order signed customer field ticket •collectibility reasonably assured result company screening customers providing goods services customers granted credit terms accordance companys credit policy accordance eitf issue 0603 taxes collected customers remitted governmental authorities presented income statement gross versus net presentation eitf 0603 present revenues net sales taxes collected us customers required remitted local state governmental taxing authorities cash equivalents consider shortterm investments original maturity less three months cash equivalents none cash restricted entered compensating balance key energy services inc subsidiaries notes consolidated financial statements continued 1 organization summary significant accounting policies continued arrangements however december 31 2007 obligations 2007 senior secured credit facility hereinafter defined secured assets including assets held subsidiaries includes cash equivalents restrict investment cash financial institutions high credit standing limit amount credit exposure one financial institution december 31 2007 approximately 93 million cash equivalents held bank accounts located foreign countries representing approximately 159 total cash equivalents total amount held foreign bank accounts december 31 2007 approximately 44 million located argentina 03 million located canada approximately 45 million held mexico remaining 01 million located countries investment debt equity securities account investments debt equity securities provisions sfas 115 accounting certain investments debt equity securities sfas 115 sfas 115 investments classified either trading available sale held maturity depending managements intent regarding investment securities classified trading carried fair value unrealized holding gains losses reported currently earnings securities classified available sale held maturity carried fair value unrealized holding gains losses net tax reported separate component shareholders equity comprehensive income december 31 2007 2006 company investments debt equity securities classified trading held maturity third quarter 2006 company began investing auctionrate securities ars variablerate demand notes vrdn investments longterm bonds whose returns tied shortterm interest rates periodically reset periods ranging 7 days 6 months result longterm nature underlying security bonds contractual lives ranging 20 30 years company accounts ars vrdn investments available sale securities december 31 2007 2006 aggregate value investments ars vrdn zero 444 million respectively sold ars vrdn investments third quarter 2007 used proceeds fund part acquisition moncla see note 2acquisitions addition ars vrdn investments company also began investing 270day commercial paper certain bond investments instruments treated available sale securities carried fair value shortterm investments companys consolidated balance sheets maturity dates within one year date investment unrealized holding gains losses securities recorded net tax separate component stockholders equity comprehensive income date maturity point gains losses reclassified earnings use specific identification method determining amount realized gain loss upon date maturity aggregate fair value available sale investments approximately 03 million 618 million december 31 2007 2006 respectively key energy services inc subsidiaries notes consolidated financial statements continued 1 organization summary significant accounting policies continued accounts receivable allowance doubtful accounts historically credit losses material establish provisions losses accounts receivable determine collect part outstanding balances regularly review collectibility establish adjust allowance necessary using specific identification method time entitled proceeds insurance policies accordance fin 39 offsetting amounts related certain contracts interpretation apb 10 fasb statement 105 fin 39 present insurance receivables gross balance sheet component accounts receivable separate corresponding liability concentration credit risk significant customers keys customers include major oil natural gas production companies independent oil natural gas production companies foreign national oil natural gas production companies periods presented single customer accounted ten percent consolidated revenues inventories consist primarily equipment parts use well servicing operations sand chemicals pressure pumping operations supplies held consumption valued lower average cost market property equipment property equipment carried cost less accumulated depreciation provided assets estimated depreciable lives assets using straightline method depreciate operational assets depreciable lives salvage value fair value higher assets value scrap generally salvage value approximates 10 operational assets acquisition cost operational asset stacked taken service review physical condition depreciable life ultimate salvage value determine asset longer operable whether remaining depreciable life salvage value adjusted company leases certain operating assets capital lease obligations whose terms generally run 55 60 months change estimate useful lives first quarter 2007 management reassessed estimated useful lives assigned companys equipment light higher activity utilization levels experienced due recent market conditions result maximum estimated useful lives certain assets adjusted reflect higher annual utilization result useful life expected well service rig reduced average expected life 17 years 15 years respect oilfield trucks trailers related equipment expected life reduced average expected life 15 years 12 years management also determined life assigned selfremanufactured well service rig 15year life assigned newly constructed well service rig acquired third parties key energy services inc subsidiaries notes consolidated financial statements continued 1 organization summary significant accounting policies continued following table identifies impact change depreciation amortization expense year ended december 31 2007 thousands december 31 2007 estimated useful lives companys asset classes follows asset retirement obligations connection well servicing activities operate number salt water disposal swd facilities operations involve transportation handling disposal fluids swd facilities byproducts drilling process determined harmful environment swd facilities used connection fluid hauling operations subject future costs associated abandonment properties result incurred costs associated proper storage disposal materials accordance sfas 143 accounting asset retirement obligations sfas 143 recognize liability fair value legal obligations associated retirement tangible longlived assets capitalize equal amount cost asset depreciate additional cost estimated useful life assets obligations perform asset retirement activities unconditional despite uncertainties may exist surrounding individual retirement activity accordingly recognize liability fair value conditional asset retirement obligation fair value reasonably estimated significant judgment involved estimating future cash flows associated obligations well ultimate timing cash flows estimates amount timing cash flows change changes may material impact results operations key energy services inc subsidiaries notes consolidated financial statements continued 1 organization summary significant accounting policies continued annual amortization assets associated asset retirement obligations 06 million 05 million 05 million years ended december 31 2007 2006 2005 respectively summary changes asset retirement obligations follows thousands longlived asset impairments apply sfas 144 accounting impairment disposal longlived assets sfas 144 reviewing longlived assets possible impairment statement requires longlived assets held used us including certain identifiable intangibles reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable purposes testing impairment group longlived assets divisions based geographical regions cases services provided compare estimated future cash flows division divisions net carrying value division level represents lowest level identifiable cash flows available would record impairment charge reducing divisions net carrying value estimated fair value estimated future cash flows less divisions net carrying value trigger events defined sfas 144 cause us evaluate fixed assets recoverability possible impairment may include changes market conditions adverse movements prices oil natural gas could reduce fair value certain property equipment development future cash flows determination fair value division involves significant judgment estimates 2007 2006 2005 trigger events identified management capitalized interest capitalized average amount accumulated expenditures equipment undergoing major modifications reconstruction prior placed service interest capitalized using effective interest rate based related debt equipment placed service key energy services inc subsidiaries notes consolidated financial statements continued 1 organization summary significant accounting policies continued longterm debt gains losses early extinguishment debt record gains losses extinguishment debt part continuing operations discussed note 11longterm debt recognized loss approximately 96 million fourth quarter 2007 associated termination 2005 senior secured credit facility hereinafter defined 2005 recognized losses early extinguishment debt approximately 209 million connection retirement 2003 senior secured credit facility hereinafter defined 6375 senior notes due 2013 8375 senior notes due 2008 deferred financing costs connection longterm debt capitalized costs expenses approximately 134 million 05 million 132 million years ended december 31 2007 2006 2005 respectively costs amortized interest expense using effective interest method life related debt instrument related debt instrument retired remaining unamortized costs included determination gain loss extinguishment debt amortization deferred financing costs totaled 17 million 16 million 14 million years ended december 31 2007 2006 2005 respectively unamortized debt issuance costs written included determination gain loss extinguishment debt 96 million zero 80 million years ended december 31 2007 2006 2005 respectively goodwill intangible assets goodwill results business acquisitions represents excess acquisition costs fair value net assets acquired account goodwill intangible assets provisions sfas 142 goodwill intangible assets sfas 142 goodwill intangible assets subject amortization tested impairment annually december 31 frequently events changes circumstances indicate asset might impaired sfas 142 requires twostep process testing impairment first fair value reporting unit compared carrying value determine whether indication impairment exists impairment indicated fair value reporting units goodwill determined allocating units fair value assets liabilities including unrecognized intangible assets reporting unit acquired business combination amount impairment goodwill measured excess carrying value fair value conduct annual impairment assessments recent december 31 2007 assessments result indication goodwill impairment major classes intangible assets subject amortization sfas 142 consist noncompete agreements patents trademarks customer backlog customer relationships developed technology amortization expense noncompete agreements patents trademarks developed technology calculated using straightline method period agreement estimated economic useful live intangible asset intangible assets related customer relationships amortized utilizing estimated pattern consumption economic benefit estimated lives key energy services inc subsidiaries notes consolidated financial statements continued 1 organization summary significant accounting policies continued derivative instruments hedging activities company applies sfas 133 accounting derivative instruments hedging activities sfas 133 amended sfas 137 sfas 138 sfas 149 sfas 137 sfas 138 sfas 149 respectively accounting derivative instruments sfas 133 establishes accounting reporting standards derivative instruments including certain derivative instruments embedded contracts hedging activities requires recognition derivative instruments assets liabilities balance sheet measurement instruments fair value accounting treatment changes fair value dependent upon whether derivative instrument designated hedge type hedge account financial instrument hedge contract must meet following criteria underlying asset liability must expose company risk offset another asset liability hedging contract must reduce risk instrument must properly designated hedge inception contract throughout contract period effective hedge must high correlation changes fair value financial instrument fair value underlying asset liability changes market value financial instrument would offset effect price changes exposed items derivatives designated cash flow hedges effective portion change fair value hedging instrument recognized comprehensive income hedged item recognized earnings ineffective portion changes fair value hedging instrument recognized currently earnings years ended december 31 2007 2006 company interest rate swaps foreign currency instruments qualify derivative instruments sfas 133 see note 9derivative financial instruments discussion litigation estimating liabilities related litigation take account available facts circumstances order determine whether loss probable reasonably estimable accordance sfas 5 accounting contingencies sfas 5 various suits claims arising ordinary course business pending us due locations conduct business continental united states often subject jury verdicts arbitration hearings result favor plaintiffs believe disposition items result material adverse impact consolidated financial position results operations cash flows see note 12commitments contingencies description currently pending litigation environmental operations subject various federal state local laws regulations intended protect environment operations routinely involve storage handling transport disposal bulk waste materials contain oil contaminants regulated substances various environmental laws regulations require prevention necessary cleanup spills leaks materials operations must obtain permits limiting discharge materials failure comply environmental requirements permits may result fines penalties remediation orders revocation permits laws regulations become stringent years certain circumstances may impose strict liability rendering us liable key energy services inc subsidiaries notes consolidated financial statements continued 1 organization summary significant accounting policies continued environmental damage without regard negligence fault part cleanup costs penalties damages arising result environmental laws costs associated changes environmental laws regulations could substantial could material adverse effect financial condition results operations cash flows time claims made litigation brought us laws environmental expenditures expensed capitalized depending future economic benefit expenditures relate existing condition caused past operations future economic benefits expensed liabilities expenditures noncapital nature recorded environmental assessment andor remediation probable costs reasonably estimated see note 12commitments contingencies discussion guarantees account guarantees fin 45 guarantors accounting disclosure requirements guarantees including indirect guarantees indebtedness others fin 45 november 2005 fasb issued fasb staff position 453 application fasb interpretation 45 minimum revenue guarantees granted business owners fsp fin 453 served amendment fin 45 adding minimum revenue guarantees list examples contracts fin 45 applies fsp fin 453 guarantor required recognize inception guarantee liability fair value obligation undertaken issuing guarantee fsp fin 453 effective new minimum revenue guarantees issued modified january 1 2006 december 31 2007 2006 company guarantees accounted guidance provided fin 45 fsp fin 453 income taxes account income taxes based upon sfas 109 accounting income taxes sfas 109 sfas 109 deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases deferred tax assets liabilities measured using statutory tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rate recognized income period includes statutory enactment date valuation allowance deferred tax assets recognized likely benefit deferred tax assets realized eligible subsidiaries file consolidated us federal income tax return certain foreign subsidiaries consolidated financial reporting purposes eligible included consolidated us federal income tax return subject jurisdiction number taxing authorities income earned various jurisdictions taxed differing bases final determination tax liability involves interpretation local tax laws tax treaties related authorities jurisdiction well significant use estimates assumptions regarding scope future operations results achieved timing nature income earned expenditures incurred file separate income tax returns countries foreign subsidiaries operate made election described accounting principles board apb opinion 23 accounting income taxesspecial areas earnings foreign entities reinvested indefinitely foreign subsidiaries negative earnings profits key energy services inc subsidiaries notes consolidated financial statements continued 1 organization summary significant accounting policies continued december 31 2007 2006 accordingly deferred taxes provided subsidiarys current earnings years fin 48 fsp fin 481 june 2006 fasb issued fin 48 accounting uncertainty income taxesan interpretation fasb statement 109 fin 48 provides clarification sfas 109 respect recognition income tax benefits uncertain tax positions financial statements fin 48 requires uncertain tax positions reviewed assessed recognition measurement tax benefit based likely standard may 2007 fasb issued fasb staff position fin 481 definition settlement fasb interpretation 48 fsp fin 481 fsp fin 481 provides guidance enterprise determine whether tax position effectively settled purpose recognizing previously unrecognized tax benefits determining whether tax position effectively settled entities must evaluate whether taxing authorities completed examination procedures ii whether entity intends appeal litigate aspect tax position included completed evaluation iii whether remote taxing authority would examine reexamine aspect taxing position fsp fin 481 applied upon initial adoption fin 48 recognize accrued interest penalties related unrecognized tax benefits component income tax expense adopted provisions fin 48 fsp fin 481 january 1 2007 recorded 13 million decrease balance retained earnings january 1 2007 reflect cumulative effect adopting standards see note 10income taxes discussion impact adoption standards earnings per share present earnings per share information accordance provisions sfas 128 earnings per share sfas 128 sfas 128 basic earnings per common share determined dividing net earnings applicable common stock weighted average number shares common stock actually outstanding year diluted earnings per common share based increased number shares would outstanding assuming conversion exercise dilutive outstanding securities stock options using converted method see note 5earnings per share discussion stockbased compensation account stockbased compensation provisions sfas 123 revised 2004 sharebased payment sfas 123r adopted january 1 2006 prior january 1 2006 accounted sharebased payments provisions sfas 123 accounting stockbased compensation sfas 123 allowed companies continue use intrinsic value methods established apb opinion 25 accounting stock issued employees apb 25 adopted sfas 123r using modified prospective transition method cumulative effect recorded adoption date sfas 123r record stockbased compensation according salary classification award recipient primarily component general administrative expense key energy services inc subsidiaries notes consolidated financial statements continued 1 organization summary significant accounting policies continued sfas 123 set forth alternative accounting disclosure requirements stockbased compensation arrangements companies permitted continue following provisions apb 25 measure recognize employee stockbased compensation prior january 1 2006 however sfas 123 required disclosure pro forma net income earnings per share would reported fair value recognition provisions sfas 123 table illustrates effect net income earnings per share applied fair value recognition principles sfas 123 stockbased employee compensation 2005 noted followed guidance established apb 25 measure stockbased compensation year stockbased compensation expense included net income table represents compensation expense 875180 options net forfeitures granted prior years strike prices ranging 010 253 market price common stock date grant years applied apb 25 elected amortize compensation cost straightline basis vesting period award accordance fin 28 accounting stock appreciation rights variable stock option award plans interpretation apb opinions 15 25 fin 28 adoption sfas 123r elected amortize compensation cost associated fair value equitybased awards vesting period award based graded vesting using straightline attribution method additional information regarding computations presented see note 16equitybased compensation june 2005 company began granting shares common stock nonemployee directors restricted stock certain employees awards vesting periods ranging zero three years subject provisions sfas 123r company recognizes expense earnings related awards equal fair value shares vesting period net actual estimated forfeitures key energy services inc subsidiaries notes consolidated financial statements continued 1 organization summary significant accounting policies continued december 2006 company began granting phantom shares certain employees vest ratably fouryear period date grant phantom shares convey right grantee receive cash payment anniversary grant date equal fair market value phantom shares vesting date grantees permitted defer payout later date phantom shares qualify liability awards sfas 123r company accounts awards fair value fair value phantom shares recorded liability consolidated balance sheets changes fair value liability net actual estimated forfeitures recorded earnings compensation expense august 2007 company issued stock appreciation rights sars executive officers sar award tenyear term date grant vests equal annual installments first second third anniversaries date grant upon exercise sar recipient receive amount equal difference exercise price fair market value share companys common stock date exercise multiplied number shares common stock sar exercised payments made shares companys common stock prior exercise sar entitle recipient receive shares companys common stock provide recipient voting stockholder rights company accounts sars equity awards sfas 123r recognizes compensation expense vesting period award based fair value date issuance net estimated actual forfeitures foreign currency gains losses local currency functional currency foreign operations argentina mexico canada cumulative translation gains losses resulting translating foreign subsidiarys financial statements functional currency us dollars included separate component stockholders equity comprehensive income partial complete sale liquidation net investment foreign entity time foreign subsidiaries may enter transactions denominated currencies functional currency transactions initially recorded functional currency subsidiary based applicable exchange rate effect date transaction end month transactions remeasured equivalent amount functional currency based applicable exchange rates effect time adjustment required remeasure transaction equivalent amount functional currency end month recorded income loss foreign subsidiary component income expense see note 13foreign currency translation leases account leases accordance sfas 13 accounting leases sfas 13 certain operating lease agreements structured include scheduled specified rent increases term lease agreement increases may result inducement rent holiday conveyed us early lease included reflect anticipated effects inflation apply provisions fasb technical bulletin 853 accounting operating leases scheduled rent increases ftb 853 accounting scheduled specified rent increases ftb 853 provides effects scheduled specified rent increases recognized straightline basis lease term unless another systematic rational allocation key energy services inc subsidiaries notes consolidated financial statements continued 1 organization summary significant accounting policies continued basis representative time pattern leased property physically employed recognize scheduled specified rent increases straightline basis term lease agreement addition certain operating lease agreements contain incentives induce us enter lease agreement upfront cash payments us payment lessor costs moving expenses assumption lessor preexisting lease agreements third parties payments made us behalf represent incentives consider reduction rent expense recognized straightline basis term lease agreement amortize leasehold improvements operating leases shorter economic lives lease term new accounting standards affecting report fin 48 fsp fin 481 june 2006 fasb issued fin 48 provides clarification sfas 109 respect recognition income tax benefits uncertain tax positions financial statements fin 48 requires uncertain tax positions reviewed assessed recognition measurement tax benefit based likely standard may 2007 fasb issued fsp fin 481 fsp fin 481 provides guidance enterprise determine whether tax position effectively settled purpose recognizing previously unrecognized tax benefits determining whether tax position effectively settled entities must evaluate whether taxing authorities completed examination procedures ii whether entity intends appeal litigate aspect tax position included completed evaluation iii whether remote taxing authority would examine reexamine aspect taxing position fsp fin 481 applied upon initial adoption fin 48 adopted provisions fin 48 fsp fin 481 january 1 2007 recorded 13 million decrease balance retained earnings january 1 2007 reflect cumulative effect adopting standards see note 10income taxes discussion impact adoption standards fsp eitf 00192 december 2006 fasb issued fasb staff position eitf 00192 accounting registration payment arrangements fsp eitf 00192 fsp eitf 00192 addresses accounting registration payment arrangements rpas provisions within financial instruments equity shares warrants debt instruments issuer agrees file registration statement registration statement declared effective securities exchange commission sec within specified grace period registration statement declared effective within grace period effectiveness maintained period time specified rpa issuer must compensate counterparty fasb staff concluded contingent obligation make future payments otherwise transfer consideration rpa recognized liability measured accordance sfas 5 fasb interpretation 14 reasonable estimation amount loss rpa recognized measured separately instrument rpa attached january 1999 company completed private placement 150000 units consisting 1500 million 14 senior subordinated notes due january 25 2009 14 senior subordinated notes 150000 warrants purchase aggregate approximately 22 million shares companys common stock exercise price 488125 per share warrants key energy services inc subsidiaries notes consolidated financial statements continued 1 organization summary significant accounting policies continued december 31 2007 65000 warrants exercised leaving 85000 warrants outstanding exercisable aggregate approximately 12 million shares terms warrants required maintain effective registration statement covering shares common stock issuable upon exercise unable maintain effective registration statement required make semiannual liquidated damages payments periods effective registration statement maintained due past failure file sec reports timely manner effective registration statement covering warrants required make liquidated damages payments continue required make payments time effective registration statement file exercise warrants warrant shares issuable thereunder eligible resale without registration pursuant sec rule 144 otherwise requirement make liquidated damages payments constitutes rpa provisions fsp eitf 00192 prescribed transition provisions standard january 1 2007 company recorded pretax current liability approximately 10 million equivalent payments warrant rpa one year offsetting adjustment opening balance retained earnings accounting standards yet adopted report sfas 157 september 2006 fasb issued sfas 157 fair value measurements sfas 157 sfas 157 establishes framework measuring fair value requires expanded disclosure information used measure fair value statement applies whenever statements require permit assets liabilities measured fair value expand use fair value accounting new circumstances february 2008 fasb issued fasb staff position fin 1572 fsp fin 1572 delayed effective date companies must adopt provisions sfas 157 fsp fin 1572 defers effective date sfas 157 fiscal years beginning november 15 2008 interim periods within fiscal years adoption standard anticipated material impact financial position results operations cash flows sfas 159 february 2007 fasb issued sfas 159 fair value option financial assets liabilities including amendment fasb statement 115 sfas 159 sfas 159 permits companies choose specified election dates measure eligible items fair value fair value option companies choosing election would report unrealized gains losses items fair value option elected earnings subsequent reporting period standard effective beginning first fiscal year begins november 15 2007 adopted provisions standard january 1 2008 elect measure financial assets liabilities using fair value option assess measurement date whether use fair value option future financial assets liabilities permitted pursuant provisions sfas 159 sfas 141r december 2007 fasb issued sfas 141 revised 2007 business combinations sfas 141r sfas 141r significantly change accounting business combinations sfas 141r acquiring entity required recognize assets key energy services inc subsidiaries notes consolidated financial statements continued 1 organization summary significant accounting policies continued liabilities assumed transaction acquisitiondate fair value limited exceptions specific changes sfas 141r previously issued guidance include •acquisition costs generally expensed incurred •noncontrolling interests valued fair value acquisition date •acquired contingent liabilities recorded fair value acquisition date subsequently remeasured either higher amount determined existing guidance nonacquired contingencies •inprocess research development recorded fair value indefinitelived intangible asset acquisition date •restructuring costs associated business combination generally expensed subsequent acquisition date •changes deferred tax asset valuation allowances income tax uncertainties acquisition date generally affect income tax expense sfas 141r also includes new disclosure requirements related business combinations statement applies business combinations acquisition date beginning first annual reporting period beginning december 15 2008 earlier adoption prohibited company still process determining impact adoption standard companys financial position results operations cash flows sfas 160 december 2007 fasb issued sfas 160 noncontrolling interests consolidated financial statements amendment arb 51 sfas 160 sfas 160 establishes new accounting reporting standards noncontrolling interest formerly referred minority interests subsidiary deconsolidation subsidiary specifically statement requires recognition noncontrolling interest equity consolidated financial statements separate parents equity amount net income attributable noncontrolling interest included consolidated net income face income statement sfas 160 clarifies changes parents ownership interest subsidiary result deconsolidation equity transactions parent retains controlling financial interest addition sfas 160 requires parent recognize gain loss net income subsidiary deconsolidated gains loss measured using fair value noncontrolling equity investment deconsolidation date sfas 160 also includes expanded disclosure requirements regarding interests parent noncontrolling interest sfas 160 effective fiscal years interim periods within fiscal years beginning december 15 2008 early adoption prohibited company still process determining impact adoption standard companys financial position results operations cash flows 2 acquisitions moncla well service inc related entities october 25 2007 completed acquisition moncla operates texas louisiana mississippi alabama florida collectively moncla assets included daylight rigs well servicing workovers twentyfour hour rigs shallow drilling sidetracking deep workovers addition moncla operated barge rigs owned rigup swab hot oil anchor trucks tubing key energy services inc subsidiaries notes consolidated financial statements continued 2 acquisitions continued testing units rental equipment moncla acquisition made order expand service offerings meet customers service needs texas louisiana mississippi alabama florida purchase price moncla approximately 1460 million consisted net assets acquired 1313 million assumed debt 147 million amounts transferred closing consisted 1086 million cash ii issuance unsecured promissory note 125 million payable lump sum october 25 2009 accrued interest payable anniversary date closing acquisition iii issuance unsecured promissory note 100 million payable five annual installments 20 million plus accrued interest annual anniversary date closing acquisition promissory notes bear interest federal funds rate adjusted annually anniversary closing date longterm debt assumed acquisition repaid simultaneously closing transaction purchase price subject working capital adjustment finalized moncla purchase agreement entitles former owners moncla receive earnout payments next five anniversary dates closing date acquisition 50 million 250 million total earnout payments based achievement certain revenue targets profit percentage targets next five years payable upon achieving annual targets cumulative target fifth anniversary date payments represent additional element cost acquired entity accounted increase goodwill contingent payment made total purchase price allocated monclas net tangible identifiable intangible assets based estimated fair values excess purchase price net assets recorded goodwill preliminary allocation purchase price based upon preliminary valuations estimates subject change valuations finalized primary areas purchase price allocation yet finalized relate identifiable intangible assets completion analysis acquired tax bases assets premerger contingencies related environmental exposures final valuation net assets expected completed later fourth quarter 2008 key energy services inc subsidiaries notes consolidated financial statements continued 2 acquisitions continued following table summarizes preliminary estimated fair values assets acquired liabilities assumed date acquisition thousands preliminary allocation purchase price based upon fair values assets liabilities acquired fair values property equipment determined using market approach depending asset valued fair values identified intangible assets determined using income approach measure present worth anticipated economic benefits also performed economic obsolescence analysis confirm values identified methods allocation still preliminary time may potentially change material amount purchase accounting finalized goodwill recognized part acquisition moncla purchase price exceeded fair value acquired assets liabilities believe goodwill associated moncla acquisition related acquired workforce potential future expansion ability expand service offerings therefore allocated assets liabilities acquired 283 million acquired identified intangible assets subject amortization sfas 142 weightedaverage remaining useful life approximately nine years intangible assets relate customer relationships 251 million noncompete agreements 32 million noncompete agreements amortized expense straightline basis expected duration respective agreement intangible asset associated customer relationships amortized value relationships realized using rates 656 3133 1949 1274 878 2110 2007 2008 2009 2010 2011 remaining periods respectively 343 million goodwill associated purchase moncla allocated well servicing segment amount approximately 256 million expected deductible income tax purposes following presents consolidated financial information company pro forma basis assuming acquisition moncla occurred january 1 2006 historical financial information adjusted give effect pro forma items directly attributable acquisition expected continuing impact consolidated results items include adjustments record incremental amortization depreciation expense related increase fair key energy services inc subsidiaries notes consolidated financial statements continued 2 acquisitions continued value acquired assets reflect change depreciation methodology reclassify certain items conform companys financial reporting presentation unaudited financial information set forth compiled historical financial statements information necessarily indicative results actually would achieved transaction occurred dates indicated may achieved future kings oil tools inc december 7 2007 company acquired well service assets related equipment kings californiabased well service company acquired assets located california include 36 marketed well service rigs 10 stacked well service rigs related support equipment made acquisition expand business california total consideration paid transaction approximately 451 million cash including transactionrelated costs analyzed acquisition required sfas 141 business combinations sfas 141 determined acquired assets facts circumstances transaction met criteria business term defined eitf 983 determining whether nonmonetary transaction involves receipt productive assets business eitf 983 accounted asset purchase business combination following table summarizes preliminary estimated fair values assets acquired liabilities assumed date acquisition thousands preliminary allocation purchase price specific assets liabilities based upon fair values identified assets liabilities acquired fair values property equipment determined property equipment using market cost approach depending asset valued allocation still preliminary time may potentially change material amount key energy services inc subsidiaries notes consolidated financial statements continued 2 acquisitions continued purchase accounting finalized believe certain customerrelated intangibles also acquired purchase utilizing income approach value items completed analysis valuation however allocated purchase price asset financial statements anticipate finalizing allocation purchase price second quarter 2008 valuation intangible assets completed goodwill recognized part acquisition assets kings purchase price exceeded fair value acquired assets liabilities absent allocation value identified intangible assets believe goodwill associated acquisition related primarily acquired workforce therefore allocated assets liabilities acquired 110 million acquired intangible assets related noncompete agreement subject amortization sfas 142 weightedaverage remaining useful life 5 years 190 million purchase price preliminarily associated goodwill allocated well servicing segment entire amount expected deductible income tax purposes including proforma effect acquisition impact material results operations advanced measurements inc september 5 2007 company whollyowned canadian subsidiary purchased outstanding shares ami privatelyheld canadian technology company focused oilfield service equipment controls data acquisition digital information work flow made acquisition order improve access oilfield services technology purchase price approximately 66 million cash approximately 29 million assumed debt repaid september november 2007 purchase agreement also provided deferred cash payments 18 million related retention key ami employees deferred payments recognized expense period services rendered date acquisition ami owned 48 interest afti privatelyheld canadian technology company focused lowcost wireless gas well production monitoring part purchase ami required exercise option increase amis interest afti 5146 cost exercise option approximately 05 million result acquisition ami 5146 interest afti consolidate afti financial statements remaining 4854 representing minority interest key energy services inc subsidiaries notes consolidated financial statements continued 2 acquisitions continued following table summarizes preliminary estimated fair values assets acquired liabilities assumed date acquisition thousands preliminary allocation purchase price based upon fair values assets liabilities acquired fair values identified intangible assets determined using income approach measure present worth anticipated economic benefits also performed business enterprise valuation confirm values identified income approach goodwill recognized part acquisition ami purchase price exceeded fair value acquired assets liabilities believe goodwill associated ami acquisition related acquired workforce potential future development technology workforce therefore allocated assets liabilities acquired 59 million acquired identified intangible assets subject amortization sfas 142 weightedaverage remaining useful life approximately 36 years intangible assets identified relate developed technology 48 million customer backlog 10 million noncompete agreements 01 million 45 million goodwill associated purchase allocated well servicing segment technologies developed anticipated benefit operations amount none expected deductible income tax purposes preliminary allocation purchase price based upon preliminary valuations estimates subject change valuations finalized primary areas purchase price allocation yet finalized relate completion analysis acquired tax bases assets final valuation net assets expected completed later third quarter 2008 connection acquisition ami also became party revolving credit agreement maximum outstanding amount 09 million facility extinguished november 2007 outstanding balance paid cash including proforma effect acquisition impact material results operations key energy services inc subsidiaries notes consolidated financial statements continued 3 supplemental financial information key energy services inc subsidiaries notes consolidated financial statements continued 3 supplemental financial information continued cash paid interest includes cash payments interest longterm debt capital lease obligations commitment agency fees paid cash paid settle interest rate swaps associated termination 2005 senior secured credit facility included 2007 consolidated statement cash flows approximately 212 million cash outflows related settlement litigation former chief executive officer amount previously accrued 2004 key energy services inc subsidiaries notes consolidated financial statements continued 4 goodwill intangible assets following table presents summarization activity goodwill accounts years ended december 31 2007 2006 following tables present gross carrying values accumulated amortization identified intangible assets determinable lives subject amortization sfas 142 december 31 2007 2006 key energy services inc subsidiaries notes consolidated financial statements continued 4 goodwill intangible assets continued amortization expense intangible assets determinable lives follows weighted average remaining amortization periods expected amortization expense next five years intangible assets follows included capitalized costs associated noncompete agreements 2007 approximately 18 million related twoyear noncompete agreement former chief executive officer december 31 2007 amortization noncompete agreement approximately 04 million noncompete agreement expires july 1 2009 key energy services inc subsidiaries notes consolidated financial statements continued 5 earnings per share following table presents basic diluted earnings per share years ended december 31 2007 2006 2005 stock options warrants stock appreciation rights included computation diluted earnings per share using treasury stock method restricted stock grants legally considered issued outstanding included basic diluted earnings per share extent vested unvested restricted stock included computation diluted earnings per share using treasury stock method diluted earnings per share calculation years ended december 31 2007 2006 2005 excludes options purchase 495875 381750 266875 shares companys common stock weighted average exercise prices 1478 1508 1288 key energy services inc subsidiaries notes consolidated financial statements continued 5 earnings per share continued respectively exercise prices exceeded average price companys stock years would therefore antidilutive 6 saleleaseback transactions lease certain equipment tractors trailers frac tanks forklifts financial institutions master lease agreements former master lease agreements required provide current annual quarterly financial reports lessors due inability provide audited financial statements year ended december 31 2003 subsequent periods required seek waivers amendments equipment lessors pay outstanding leases lessors refused grant waivers demanded settlement obligation purchase equipment entered two new master lease agreements august 31 2005 october 14 2005 new lessor equipment leased lessors demanded settlement sold new lessor subsequently leased back lessor account capital leases received aggregate amount 58 million proceeds saleleaseback transactions realized gain 11 million one saleleaseback transactions amortized term new lease amounts recognized earnings related amortization deferred gain 02 million 02 million 01 million years ended december 31 2007 2006 2005 respectively saleleaseback transaction realized loss less 01 million immediately recognized earnings 7 investment iroc energy services corp july 22 2004 entered agreement iroc agreement iroc energy services corp albertabased oilfield services company iroc sell iroc ten remanufactured skytop well service rigs along supporting equipment inventory began delivery rigs fall 2004 rigs operated iroc western canada purchase price rigs 70 million usd amount converted agreed exchange rate 07634 917 million cdn paid way issuance 8187058 common shares iroc stock deemed issuance price 112 cdn per share final four rigs delivered 2005 recognized gain 19 million upon delivery represents difference aggregate carrying value delivered rigs fair market value delivery date iroc shares received consideration four rigs july 2005 sold additional well service rig support equipment iroc 09 million usd amount converted agreed exchange rate 07937 11 million cdn paid way issuance 547411 shares iroc common stock additional shares deemed issuance price 209 cdn per share recognized gain 07 million related transaction represents difference carrying value transferred equipment fair value additional shares transaction date december 31 2007 owned approximately 87 million shares iroc common stock represents approximately 197 irocs shares date september 15 2005 iroc completed private placement series unsecured nonconvertible debentures also included 1050000 warrants purchase common shares iroc exercises warrants potentially dilutive keys ownership percentage iroc shares trade toronto venture stock key energy services inc subsidiaries notes consolidated financial statements continued 7 investment iroc energy services corp continued exchange closing price 074 cdn per share december 31 2007 pursuant terms iroc agreement mr william austin chief financial officer mr newton w wilson iii general counsel appointed board directors iroc significant influence operations iroc control account investment iroc using equity method value investment iroc recorded consolidated balance sheets noncurrent asset pro rata share irocs earnings losses entitled recorded consolidated statements operations component income expense offsetting increase decrease value investment appropriate earnings distributed back us iroc form dividends would result decrease value equity investment iroc net income approximately 20 million 18 million 18 million usd years ended december 31 2007 2006 2005 respectively irocs total assets december 31 2007 2006 1405 million 769 million usd respectively investment iroc totaled 112 million 107 million december 31 2007 2006 respectively addition prorata share irocs net income value investment increased 2007 due strengthening canadian dollar us dollar increase offset accumulated comprehensive income years ended december 31 2007 2006 2005 recorded 04 million 04 million 05 million respectively equity income related investment iroc years ended december 31 2007 2006 2005 earnings distributed us iroc distributed earnings gains losses arising disposal investment reportable income tax purposes result amounts record prorata share irocs earnings losses entitled result temporary difference book taxable income provisions sfas 109 record deferred tax asset liability appropriate account temporary differences impairment review equity method investment iroc performed quarterly basis determine decline fair value temporary fair value asset measured using quoted market prices absence quoted market prices fair value based estimate discounted cash flows determining whether decline temporary consider cyclicality industry investment operates historical performance relation peers current economic environment future conditions industry operating performance relation peers future economic environment may vary current assessment recoverability future conditions could therefore result determination decline fair value temporary irocs stock price currently depressed later determine decline temporary would record writedown carrying value asset current fair market value 8 estimated fair value financial instruments following summary carrying amounts estimated fair values financial instruments december 31 2007 2006 sfas 107 disclosures fair value financial instruments sfas 107 defines fair value financial instrument amount instrument could exchanged current transaction willing parties key energy services inc subsidiaries notes consolidated financial statements continued 8 estimated fair value financial instruments continued cash equivalents shortterm investments accounts payable accrued liabilities carrying amounts approximate fair value short maturity instruments carrying value equal fair value instruments balance sheet date notes receivablerelated parties amounts reported relate notes receivable certain employees company related relocation retention agreements carrying values notes approximate fair values applicable balance sheet dates cash flow hedges carrying value cash flow hedges equal fair value instruments december 31 2006 cash flow hedges december 31 2007 8375 senior notes due 2014 fair value longterm debt based upon quoted market prices face value various debt securities december 31 2007 carrying value notes december 31 2007 4250 million fair value 4346 million 2007 senior secured credit facility revolving loans variable interest rates fair values revolving loans borrowed 2007 senior secured credit facility approximate carrying values december 31 2007 carrying fair values loans december 31 2007 approximately 500 million 2005 senior secured credit facility term loans variable interest rates fair values term loans borrowed 2005 senior secured credit facility approximate carrying values december 31 2006 carrying fair values loans december 31 2006 3960 million loans repaid november 2007 proceeds 8375 senior notes due 2014 notes payablerelated parties amounts reported relate seller financing arrangement entered connection acquisition moncla see note 2acquisitions carrying value notes approximate fair values december 31 2007 9 derivative financial instruments interest rate swaps term loan portion 2005 senior secured credit facility exposed risks related variable interest rates march 10 2006 entered two key energy services inc subsidiaries notes consolidated financial statements continued 9 derivative financial instruments continued 1000 million notional amount interest rate swaps effectively fix interest rate portion debt swaps met criteria derivative instruments company uses historic simulation based regression analysis assess effectiveness swaps hedge future cash flows forecasted transaction historical prospective basis simulation regresses monthly changes cash flows associated hedging instrument hedged item results regression indicated swaps highly effective offsetting future cash flows items hedged could reasonably assumed highly effective ongoing basis based results analysis companys intent use instruments reduce exposure changes future cash flows attributable interest payments company elected account swaps cash flow hedges measurement hedge ineffectiveness based comparison cumulative change fair value actual swap designated hedging instrument cumulative change fair value perfectly effective hypothetical derivative perfect hypothetical derivative defined derivatives implementation group dig issue g7 perfectly effective hypothetical swap mimics terms debt fixed interest rate assumed hedge instrument method measuring ineffectiveness known hypothetical derivative method actual swap recorded fair value companys consolidated balance sheets accumulated comprehensive income adjusted balance reflects lesser either cumulative change fair value actual swap cumulative change fair value perfect hypothetical derivative amount ineffectiveness equal excess cumulative change fair value actual swap cumulative change fair value perfect hypothetical derivative recorded currently earnings component income expense companys consolidated statements operations connection termination 2005 senior secured credit facility november 2007 see note 11longterm debt settled outstanding interest rate swap arrangements recognized loss approximately 23 million related settlement interest rate swaps recorded consolidated statements operations component interest expense call options 8375 senior notes due 2014 indenture related 4250 million 8375 senior notes due 2014 see note 11longterm debt contains provisions option may redeem notes varying prices stated maturity date certain provisions based contingent events future equity offering us change control company provisions contingent nature one noncontingent scenarios price could retire notes based part variable interest rate analyzed provisions indenture allow us repay notes early order determine call options constitute embedded derivative instrument sfas 133 require bifurcation separate measurement host contract followed guidance provided paragraphs 6 12 13 61 sfas 133 dig issues b16 b39 determining whether call options required bifurcation separate measurement based analysis believe options require bifurcation separate measurement foreign currency instruments connection acquisition ami september 2007 see note 2acquisitions became party four swap arrangements exchanged singaporean dollars canadian dollars arrangements meet definition derivative sfas 133 key energy services inc subsidiaries notes consolidated financial statements continued 9 derivative financial instruments continued elected treat derivatives cash flow hedges result gains losses arising changes fair value contracts recorded unrealized gains losses consolidated statements operations component income expense december 31 2007 aggregate notional amount contracts approximately 04 million usd aggregate fair value contracts less 01 million usd last contracts settled january 2008 year ended december 31 2007 unrealized holding loss associated contracts material 10 income taxes components income tax expense follows made net federal income tax payments approximately 855 million 876 million 108 million years ended december 31 2007 2006 2005 respectively made net state income tax payments approximately 66 million 84 million 10 million years ended december 31 2007 2006 2005 respectively made net foreign tax payments approximately 42 million 30 million 54 million years ended december 31 2007 2006 2005 respectively years ended december 31 2007 2006 tax benefits allocated stockholders equity compensation expense income tax purposes excess amounts recognized financial reporting purposes 34 million less 01 million respectively year ended december 31 2005 tax expense allocated stockholders equity compensation expense income tax purposes less amounts recognized financial reporting purposes company allocated tax benefits stockholders equity prior years compensation expense income tax purposes excess amounts recognized financial reporting purposes key energy services inc subsidiaries notes consolidated financial statements continued 10 income taxes continued income tax expense differs amounts computed applying statutory federal rate follows december 31 2007 2006 deferred tax assets liabilities comprised following 2007 deferred tax liabilities decreased 02 million adjustments accumulated comprehensive loss 2006 deferred tax liabilities increased 02 million adjustments accumulated comprehensive loss key energy services inc subsidiaries notes consolidated financial statements continued 10 income taxes continued recording deferred income tax assets consider whether likely portion deferred income tax assets realized ultimate realization deferred income tax assets dependent upon generation future taxable income periods deferred income tax assets would deductible consider scheduled reversal deferred income tax liabilities projected future taxable income determination fully realize deferred income tax assets related federal net operating loss carryforwards valuation allowance due section 382 limitations would need generate future federal taxable income approximately 59 million next ten years certain exceptions noted believe considering available objective evidence positive negative historical prospective greater weight given historical evidence likely assets realized estimate december 31 2007 2006 2005 available 82 million 93 million 140 million respectively federal net operating loss carryforwards approximately 58 million net operating losses december 31 2007 subject 11 million annual section 382 limitation expire 2018 approximately 24 million net operating losses december 31 2007 subject 5000 annual section 382 limitation expire 2016 2018 valuation allowance provided likely portion deferred tax assets realized due annual limitations sections 382 383 management believes able utilize available carryforwards prior ultimate expiration deferred tax asset associated remaining federal net operating loss carryforwards expire utilization due section 382 limitations 23 million includes valuation allowance 08 million result section 382 limitations december 31 2007 2006 respectively estimate december 31 2007 2006 2005 available 19 million 31 million 43 million respectively state net operating loss carryforwards expire 2008 2025 fully realize deferred income tax assets related state net operating loss carryforwards would need generate future west virginia taxable income 142 million next 18 years future pennsylvania taxable income 35 million next 18 years management believes likely able utilize available carryforwards prior ultimate expiration deferred tax asset associated remaining state net operating loss carryforwards december 31 2007 17 million includes valuation allowance less 01 million result second quarter 2006 texas margins tax see enacted point time deferred tax asset approximately 02 million related texas net operating losses complete valuation allowance effectively converted texas margins tax credit longer requires valuation allowance tax benefit net federal tax effect recorded second quarter 2006 relating release valuation allowance fourth quarter 2006 implemented plans internal reorganization legal entity structure occur year end reorganization state net operating losses previously subject valuation allowances 23 million longer require valuation allowances tax benefit net federal tax effect recorded fourth quarter 2006 relating release valuation allowance 2007 company began operations mexico resulted net operating loss 20 million deferred tax asset related net operating loss carryforward 06 million mexico enacted new flat tax rate effective january 1 2008 flat tax function addition key energy services inc subsidiaries notes consolidated financial statements continued 10 income taxes continued regular corporate tax rate 28 tax expense calculated methods flat tax greater regular tax additional tax expense regular tax assessed addition regular tax calculation recorded full valuation allowance related mexico net operating loss carryforwards 06 million december 31 2007 management believes enactment mexico flat tax net operating loss carryforwards related mexico operations likely fully realized future based future reversal deferred tax liabilities net operating loss expires 2017 2007 company made stock acquisition ami canadian company december 31 2007 companys canadian operations net operating loss 32 million deferred tax asset related net operating loss carryforward 10 million net operating loss comprised approximately 20 million net operating loss acquisition date additional 12 million net operating loss operations four months ended december 31 2007 recorded valuation allowance related canadian net operating loss carryforwards december 31 2007 management believes net operating loss carryforwards related canadian operations likely fully realized future fully realize deferred income tax assets related canadian net operating loss carryforwards would need generate 02 million future canadian taxable income next eight years 31 million future canadian taxable income next nineteen years net operating losses expire 2015 2027 december 2006 fasb issued fin 48 fin 48 clarifies accounting uncertainty income taxes recognized enterprises financial statements accordance sfas 109 fin 48 prescribes recognition threshold measurement attributes financial statement recognition measurement income tax position taken expected taken income tax return fin 48 also provides guidance derecognition classification interest penalties accounting interim periods disclosure transition may 2007 fasb issued fsp fin 481 fsp fin 481 provides guidance enterprise determine whether tax position effectively settled purpose recognizing previously unrecognized tax benefits determining whether tax position effectively settled entities must evaluate whether taxing authorities completed examination procedures ii whether entity intends appeal litigate aspect tax position included completed evaluation iii whether remote taxing authority would examine reexamine aspect taxing position fsp fin 481 applied upon initial adoption fin 48 adopted provisions fin 48 fsp fin 481 january 1 2007 recorded 13 million decrease balance retained earnings reflect cumulative effect adopting standards part acquisitions made 2007 company acquired assumed unrecognized tax benefits defined fin 48 cumulative effect acquisition unrecognized tax benefits 32 million consisted primarily rig refurbishment meals entertainment expense january 1 2007 december 31 2007 approximately 38 million 68 million respectively unrecognized tax benefits net federal benefit recognized would impact effective tax rate accrued approximately 23 million 10 million payment key energy services inc subsidiaries notes consolidated financial statements continued 10 income taxes continued interest penalties december 31 2007 january 1 2007 respectively possible changes occur due settlement examinations expiration statute limitations anticipate significant changes unrecognized tax benefit liability next 12 months file income tax returns united states federal jurisdiction various states foreign jurisdictions january 2005 internal revenue service concluded examination companys federal tax returns tax years june 30 1997 december 31 2002 examinations substantially concluded us federal income tax matters year ended december 31 2002 however due use net operating losses subsequent years audited tax years well subsequent unaudited 20032007 tax years remain open december 31 2007 significant filings argentina examined 2006 state texas tax filings remain open 2003 2006 certain subsidiaries company expirations statutes limitations 2007 would require release fin 48 reserve however change circumstances surrounding audit egyptian operations resulted decrease fin 48 reserve related audit approximately 07 million current reserve related egyptian audit 04 million following table presents activity 2007 related fin 48 reserve thousands tax legislative changes american jobs creation act 2004 american jobs creation act 2004 added section 199 deduction internal revenue code allows tax deduction qualifying domestic production activities defined limited internal revenue code concluded receive benefits 20 million 16 million 06 million deduction years ended december 31 2007 2006 2005 respectively texas margins tax may 2006 state texas enacted new law effective january 1 2007 substantially changes tax system texas law replaces taxable capital earned surplus components franchise tax new tax based modified gross revenue law imposes tax unitary group affiliated entities net receipts rather earned surplus separate entity company recognized tax benefit 04 million second quarter 2006 related enactment new law 2007 company incurred 55 million state income tax expense related texas margins tax key energy services inc subsidiaries notes consolidated financial statements continued 11 longterm debt components longterm debt follows 8375 senior notes due 2014 november 29 2007 company issued 4250 million aggregate principal amount 8375 senior notes due 2014 notes indenture dated november 29 2007 indenture among us guarantors party thereto guarantors bank new york trust company na trustee notes priced 100 face value yield 8375 net proceeds deducting initial purchasers discounts estimated offering expenses approximately 4161 million used approximately 3949 million net proceeds retire term loans including accrued unpaid interest 2005 senior secured credit facility balance used general corporate purposes 2005 senior secured credit facility terminated connection entry 2007 senior secured credit facility described notes general unsecured senior obligations key accordingly rank effectively subordinate existing future secured indebtedness notes jointly severally guaranteed senior unsecured basis certain existing future domestic subsidiaries interest notes payable june 1 december 1 year beginning june 1 2008 notes mature december 1 2014 december 1 2011 notes subject redemption time option whole part upon less 30 60 days notice redemption prices expressed percentages principal amount redeemed set forth plus accrued unpaid interest thereon applicable redemption date redeemed twelvemonth period beginning december 1 years indicated notwithstanding foregoing time december 1 2010 company may one occasions redeem 35 aggregate principal amount key energy services inc subsidiaries notes consolidated financial statements continued 11 longterm debt continued outstanding notes redemption price 108375 principal amount thereof plus accrued unpaid interest thereon redemption date net cash proceeds one equity offerings provided least 65 aggregate principal amount notes issued indenture remains outstanding immediately redemption provided redemption shall occur within 180 days date closing equity offering addition time prior december 1 2011 company may option redeem portion notes redemption price equal 100 principal amount thereof plus applicable premium defined indenture respect notes plus accrued unpaid interest thereon redemption date company experiences change control subject certain exceptions must give holders notes opportunity sell company notes whole part purchase price equal 101 aggregate principal amount thereof plus accrued unpaid interest thereon date purchase company restricted subsidiaries subject certain negative covenants indenture governing notes indenture limits ability company restricted subsidiaries among things sell assets ii pay dividends make distributions capital stock subordinated indebtedness iii make investments iv incur additional indebtedness issue preferred stock v create certain liens vi enter agreements restrict dividends payments subsidiaries vii consolidate merge transfer substantially assets viii engage transactions affiliates ix create unrestricted subsidiaries covenants subject certain exceptions qualifications addition substantially covenants terminate notes mature one two specified ratings agencies assigns notes investment grade rating future events default exist indenture covenants cease apply us result achieving investment grade rating restored even credit rating assigned notes later falls investment grade rating connection sale notes company entered registration rights agreement initial purchasers pursuant agreed file exchange offer registration statement sec respect offer exchange notes substantially identical notes registered securities act use reasonable best efforts cause registration statement become effective prior november 29 2008 additionally company agreed commence registered exchange offer use reasonable best efforts issue prior date 60 days date exchange offer registration statement became effective exchange notes exchange notes tendered prior thereto registered exchange offer circumstances lieu registered exchange offer company agreed file shelf registration statement cover resales notes certain holders thereof use reasonable best efforts keep shelf registration statement effective period least two years shorter period ending earlier notes available sale thereunder sold pursuant thereto ii longer restricted securities defined rule 144 securities act successor rule thereof company guarantors required pay additional interest fail comply obligations register notes within specified time periods key energy services inc subsidiaries notes consolidated financial statements continued 11 longterm debt continued december 31 2007 company compliance covenants required notes 2007 senior secured credit facility simultaneously closing offering notes company entered new credit agreement credit agreement several lenders credit agreement provides senior secured credit facility 2007 senior secured credit facility consisting revolving credit facility letter credit subfacility swing line facility aggregate principal amount 4000 million mature later november 29 2012 2007 senior secured credit facility obligations thereunder secured substantially assets company guaranteed certain companys existing future domestic subsidiaries 2007 senior secured credit facility replaced companys 2005 senior secured credit facility terminated connection closing offering notes interest rate per annum applicable amounts borrowed 2007 senior secured credit facility companys option libor plus applicable margin ii higher x bank americas prime rate federal funds rate plus 05 plus applicable margin applicable margin libor loans ranges 150 200 basis points applicable margin loans ranges 50 100 basis points depend upon companys consolidated leverage ratio 2007 senior secured credit facility contains certain financial covenants among things require maintenance consolidated leverage ratio exceed 350 100 consolidated interest coverage ratio less 300 100 limit companys capital expenditures 2500 million per fiscal year 50 amount may carried expenditure following fiscal year ratios referred calculated quarterly consolidated basis trailing four fiscal quarter period addition 2007 senior secured credit facility contains certain affirmative negative covenants including without limitation restrictions liens ii debt guarantees contingent obligations iii mergers consolidations iv sales transfers dispositions property assets v loans acquisitions joint ventures investments acquisitions permitted long giving pro forma effect thereto default event default exists 2007 senior secured credit facility consolidated leverage ratio exceed 275 100 company compliance consolidated interest coverage ratio company least 25 million availability 2007 senior secured credit facility vi dividends distributions redemptions repurchases equity holders vii prepaying redeeming repurchasing subordinated contractually structurally debt viii granting negative pledges lenders ix changes nature companys business x amending organizational documents amending otherwise modifying debt related document material agreement amendment modification would material adverse effect xi changes accounting policies reporting practices foregoing cases certain exceptions 2007 senior secured credit facility permits share repurchases 2000 million provides share repurchases excess 2000 million made debt capitalization ratio 50 key energy services inc subsidiaries notes consolidated financial statements continued 11 longterm debt continued december 31 2007 company compliance covenants required 2007 senior secured credit facility company may prepay 2007 senior secured credit facility whole part time without premium penalty subject certain reimbursements lenders breakage redeployment costs december 31 2007 company approximately 500 million outstanding borrowings revolving portion 2007 senior secured credit facility company also 611 million committed letters credit facility 2889 million available borrow facility terms agreement committed letters credit count borrowing capacity revolving credit facility addition interest also pay quarterly commitment fee 03 available balance revolver annual fee committed letters credit equal 15 balance committed letters credit seller financing arrangement moncla purchase connection acquisition moncla see note 2acquisitions company entered two promissory notes sellers first unsecured note amount 125 million due payable lumpsum together accrued interest october 25 2009 interest note due anniversary closing acquisition moncla october 25 2007 second unsecured note amount 100 million payable annual installments 20 million plus accrued interest beginning october 25 2008 2012 notes bears interest federal funds rate adjusted annually anniversary date closing date december 31 2007 interest rate notes 475 federal funds rate represent rate would resulted independent borrower independent lender negotiated similar transaction comparable terms conditions equal incremental borrowing rate accordance apb 21 interest receivables payables apb 21 sfas 141 recorded promissory notes fair value resulted discount recorded discount recognized interest expense life promissory notes using effective interest method 2005 senior secured credit facility july 29 2005 entered credit agreement 2005 senior secured credit facility 2005 senior secured credit facility consisted revolving credit facility aggregate principal amount 650 million mature july 29 2010 ii senior term loan facility original aggregate principal amount 4000 million mature june 30 2012 iii prefunded letter credit facility aggregate amount 823 million mature july 29 2010 revolving credit facility included 250 million subfacility additional letters credit proceeds term loan facility along cash hand used redeem repay previous senior notes defined borrowings 2005 senior secured credit facility december 31 2005 bore interest upon outstanding principal balance companys option prime rate plus margin 175 eurodollar rate plus margin 275 margins increased december 31 2005 050 june 30 2006 050 company meet key energy services inc subsidiaries notes consolidated financial statements continued 11 longterm debt continued certain filing targets 2003 annual report form 10k also required pay certain fees connection credit facilities including commitment fee percentage aggregate commitments november 1 2005 july 27 2007 amended 2005 senior secured credit facility three times order among things extend filing deadlines 2006 annual report form 10k quarterly reports 2005 2006 first two quarters 2007 ii reduce eurodollar spreads commitment fees associated term loans facility iii increase limitations capital expenditures iv increase permitted stock repurchase basket agreement v increase subsequently eliminate permitted acquisitions basket agreement vi eliminate provisions requiring company prepay term loans facility excess cash flow paid total approximately 17 million fees amendments november 29 2007 company issued notes used proceeds retire term loan amounts outstanding 2005 senior secured credit facility recognized loss approximately 96 million upon extinguishment 2005 senior secured credit facility 2003 senior secured credit facility november 10 2003 entered fourth amended restated credit agreement 2003 senior secured credit facility 2003 senior secured credit facility consisted 1750 million revolving loan facility entire amount available letters credit previously right subject certain terms conditions increase total commitment facility 2250 million unable obtain additional lending commitments failure file 2003 annual report form 10k timely basis violated covenants 2003 senior secured credit facility march 31 2004 july 20 2005 amended terms 2003 senior secured credit facility six times waive covenants extend due date 2003 annual report form 10k filings 2005 paid total 11 million fees related various amendments 2003 senior secured credit facility july 29 2005 entered 2005 senior secured credit facility replaced 2003 senior secured credit facility previous senior notes may 14 2003 completed public offering 1500 million 6375 senior notes due may 1 2013 6375 senior notes proceeds public offering net fees expenses used repay balance revolving loan facility outstanding thenexisting credit facility remainder used general corporate purposes 6375 senior notes required semiannual interest payments may 1 november 1 year interest 89 million paid notes 2005 march 6 2001 completed private placement 1750 million 8375 senior notes due march 1 2008 8375 senior notes together 6375 senior notes previous senior notes net cash proceeds private placement used repay remaining balance prior term loans portion revolving credit facility outstanding thenexisting credit facility march 1 2002 completed public offering additional 1000 million 8375 senior notes net cash proceeds used repay key energy services inc subsidiaries notes consolidated financial statements continued 11 longterm debt continued outstanding balance revolving loan facility thenexisting credit facility 8375 senior notes required semiannual interest payments march 1 september 1 year interest 273 million paid notes 2005 defaults previous senior note indentures repayment previous senior notes failure file 2003 annual report form 10k sec deliver trustee indentures previous senior notes march 30 2004 constituted default indentures 2004 2005 amended terms indentures three times waive covenant noncompliance extend due date 2003 annual report form 10k filings order obtain amendments consents incurred costs totaling 90 million 2005 final amendment indentures established due dates may 31 2005 filing 2003 annual report form 10k july 31 2005 filing 2004 annual report form 10k 2004 quarterly reports form 10q consents also provided due date october 31 2005 filing quarterly reports form 10q first second quarters 2005 failed meet deadlines june 6 2005 trustee previous senior notes sent us notice financial reporting violation triggered 60day cure period due failure cure default september 28 2005 received valid acceleration notice trustee 6375 senior notes 6375 senior notes repaid october 5 2005 price 100 outstanding principal amount plus accrued unpaid interest repayment date resulting net cash outlay 1541 million redeemed 2750 million outstanding principal amount 8375 senior notes november 8 2005 8375 senior notes redeemed price 104188 principal amount plus accrued unpaid interest redemption date net cash outlay 2909 million resulting loss 141 million recognized losses totaling 164 million related transactions proceeds 2005 senior secured credit facility cash hand used repay previous senior notes default lease agreements discussed note 6saleleaseback transactions lease certain equipment tractors trailers frac tanks forklifts financial institutions master lease agreements certain master lease agreements required provide current annual quarterly financial reports certain leases obtained series waivers financial institutions regarding filing reports last allowed us september 30 2006 file annual report form 10k 2003 due inability provide audited financial statements year ended december 31 2003 comply sec rules compliance terms equipment leases intend seek additional waivers financial institutions result equipment lessors may demand leases repaid december 31 2007 formal demands repayment made lessors december 31 2007 total amount outstanding lease agreements approximately 27 million recorded current liability 17 million consolidated balance sheets december 31 2007 represents obligation lease agreements accounted capital leases remaining 10 million represents remaining payments leases lessors account operating leases key energy services inc subsidiaries notes consolidated financial statements continued 11 longterm debt continued longterm debt principal repayment interest expense presented schedule repayment requirements longterm debt next five years thereafter december 31 2007 presented schedule estimated minimum lease payments capital lease obligations next five years thereafter december 31 2007 key energy services inc subsidiaries notes consolidated financial statements continued 11 longterm debt continued interest expense years ended december 31 2007 2006 2005 consisted following december 31 2007 weighted average interest rate variable rate debt 59787 12 commitments contingencies operating lease arrangements key leases certain property equipment noncancelable operating leases generally expire various dates 2020 varying payment dates throughout month december 31 2007 future minimum lease payments noncancelable operating leases follows thousands operating lease expense 164 million 170 million 195 million years ended december 31 2007 2006 2005 respectively litigation normal course business various suits claims arising ordinary course business pending us due locations conduct business continental united states often subject jury verdicts arbitration hearings result favor plaintiffs believe disposition items result material adverse impact financial position results operations cash flows gonzales matter september 2005 class action lawsuit gonzales v key energy services inc filed ventura county california superior court alleging key pay hourly key energy services inc subsidiaries notes consolidated financial statements continued 12 commitments contingencies continued employees travel time yard wellhead certain employees denied meal rest periods shifts recorded liability matter expect conclusion matter material impact financial position results operations cash flows litigation former officers employees named lawsuit former general counsel jack loftis jr filed us district court district new jersey april 21 2006 alleges whistleblower claim sarbanesoxley act breach contract breach good faith fair dealing breach fiduciary duty wrongful termination mr loftis previously filed whistleblower claim department labor dol found reasonable cause believe violated sarbanesoxley act terminated mr loftis dismissed complaint june 28 2007 new jersey district court transferred case us district court eastern district pennsylvania pending july 6 2007 delivered notice mr loftis counsel intention treat termination employment effective july 8 2004 cause employment agreement august 17 2007 company filed counterclaims mr loftis alleging attorney malpractice breach contract breach fiduciary duties counterclaims company seeks repayment severance paid mr loftis date approximately 08 million plus benefits paid period july 8 2004 september 21 2004 well damages relating allegations malpractice breach fiduciary duties september 21 2007 companys board directors determined mr loftis terminated cause effective july 8 2004 found vested unvested stock options deemed expired september 3 2006 former controller assistant controller filed joint complaint company 133rd district court harris county texas alleging constructive termination breach contract discovery ongoing case additionally january 11 2008 former chief operating officer james byerlotzer filed lawsuit 55th district court harris county texas alleging breach contract based inability exercise stock options period key current sec filings based keys failure provide shares restricted stock vigorously defending claims however cannot predict outcome lawsuits august 21 2006 former chief financial officer royce w mitchell filed suit company 385th district court midland county texas alleging breach contract regard alleged bonuses benefits expense reimbursements conditional stock grants stock options well relief theories quantum meruit promissory estoppel specific performance february 15 2008 parties settled matter 05 million included reimbursement expenses attorneys fees approximately 04 million shareholder class action suits derivative actions since june 2004 certain officers directors named defendant six class action complaints alleged violations federal securities laws filed federal district court texas six actions consolidated one action november 1 2005 plaintiffs filed consolidated amended class action complaint brought behalf class putative class purchasers securities april 29 2003 june 4 2004 complaint generally alleges made false key energy services inc subsidiaries notes consolidated financial statements continued 12 commitments contingencies continued misleading statements omitted material information public statements sec reports class period violation securities exchange act 1934 including alleged overstatement revenues net income earnings per share ii failure take writedowns assets consisting primarily idle equipment iii failure amortize companys goodwill iv failure disclose company lacked adequate internal controls therefore unable ascertain true financial condition company v material inflation companys financial results relevant times vi misrepresentation value acquired businesses vii failure disclose misappropriation funds employees four shareholder derivative actions filed certain shareholders purporting act behalf asserting various claims named officer director defendants derivative actions generally allege facts shareholder class action suits also allege breach fiduciary duty abuse control waste corporate assets unjust enrichment defendants september 7 2007 reached agreements principle settle pending securities class action derivative lawsuits consideration payments totaling 166 million exchange full complete releases defendants key required pay approximately 11 million final approval settlement shareholder class action claims court anticipated occur first quarter 2008 recorded appropriate liability matter expired option holders september 24 2007 belinda taylor behalf similarly situated residents texas filed lawsuit 11th judicial district harris county texas alleging company breached contracts current former employees held vested options expired april 28 2004 date company became current financial statements expired option holders suit also alleges company breached fiduciary duties good faith fair dealing pricing stock options granted expired option holders based upon alleged overstatement assets prior companys restatement ms taylor amended lawsuit september 25 2007 include expired option holders regardless residence company denied allegations expect resolution matter material impact financial position results operations cash flows tax audits routinely subject audits tax authorities received material assessments tax auditors december 31 2007 recorded reserves management feels appropriate future potential liabilities result audits believe fully reserved assessments ultimate amount settlement vary estimate connection former egyptian operations terminated 2005 undergoing income tax audits periods operations december 31 2006 company recorded liability approximately 11 million relating open egyptian tax audits fourth quarter 2007 company reached preliminary settlement egyptian tax authorities 2003 2004 tax years recording tax benefit 07 million reducing tax liability accrued december 31 2007 approximately 04 million selfinsurance reserves maintain reserves workers compensation vehicle liability balance sheet based judgment estimates using actuarial method based claims key energy services inc subsidiaries notes consolidated financial statements continued 12 commitments contingencies continued incurred estimate general liability claims casebycase basis maintain insurance policies workers compensation vehicle liability general liability claims insurance policies carry selfinsured retention limits deductibles per occurrence basis retention limits deductibles accounted accrual process workers compensation vehicular liability general liability claims december 31 2007 december 31 2006 recorded 690 million 690 million respectively selfinsurance reserves related workers compensation vehicular liabilities general liability claims partially offsetting liabilities approximately 81 million 57 million insurance receivables december 31 2007 2006 respectively environmental remediation liabilities environmental reserve matters including remediation efforts current locations relating previouslydisposed properties record liabilities remediation efforts probable costs conduct remediation efforts reasonably estimated environmental reserves reflect managements assessment insurance coverage may apply matters issue coverage available whereas litigation reserves reflect application insurance coverage december 31 2007 december 31 2006 recorded 31 million 46 million respectively environmental remediation liabilities provide performance bonds provide financial surety assurances remediation maintenance swd properties comply environmental protection standards costs swd properties may mandatory comply applicable laws regulations future required divest cease operations optimization improve operations safety regulatory compliance argentina payroll matters argentinean subsidiary key energy services sa previously underpaid social security contributions administración federal de ingressos públicos afip result applying incorrect rate calculation obligations additionally also underpaid afip result incorrect use food stamp equivalents provided employees compensation correct amounts reflected financial statements may 31 2007 paid afip 35 million representing cumulative amount underpayment interest result underpayment afip imposed fines penalties us begun audit filings made prior years recorded appropriate liability matter expect ultimate resolution matter material impact financial position results operations cash flows 13 foreign currency translation local currency functional currency operations argentina mexico canada cumulative translation gains losses resulting translating foreign subsidiarys financial statements functional currency us dollars included comprehensive income accumulated stockholders equity partial complete sale liquidation net investment foreign entity table summarizes conversion ratios used translate key energy services inc subsidiaries notes consolidated financial statements continued 13 foreign currency translation continued financial statements cumulative currency translation gains losses net tax foreign subsidiaries 1foreign currency translation gains canada include translation gains related acquisition ami companys equitymethod investment iroc systems corp 14 employee benefit plans maintain 401k plan part employee benefits package match 100 employee contributions 4 employees salary 401k plan subject maximums 9000 8800 8400 years ended december 31 2007 2006 2005 respectively matching contributions 102 million 74 million 58 million years ended december 31 2007 2006 2005 respectively effective january 1 2006 longer offered participants option purchase units company stock 401k plan fund discontinued option participants transferred units key stock another 401k plan fund affect ability plan participants manage contributions 15 stockholders equity common stock december 31 2007 200000000 shares common stock authorized 010 par value 131142905 shares common stock issued outstanding dividends issued december 31 2006 200000000 shares common stock authorized 010 par value 131624038 shares common stock issued outstanding dividends issued terms notes 2007 senior secured credit facility must meet certain financial covenants may pay dividends currently intend pay dividends share repurchase program october 26 2007 companys board directors authorized share repurchase program company may spend 3000 million repurchase shares common stock open market program expires end first quarter 2009 2007 company repurchased aggregate 2341400 shares total cost approximately 322 million represents fair market value shares based price companys stock dates purchase key energy services inc subsidiaries notes consolidated financial statements continued 15 stockholders equity continued tax withholding june 2006 company began purchasing shares restricted common stock previously granted certain companys executive officers pursuant agreement individuals permitted sell shares back company order satisfy minimum income tax withholding requirements related vesting grants repurchased total 72847 80835 shares aggregate cost 13 million 12 million 2007 2006 respectively represented fair market value shares based price companys stock dates purchase december 31 2007 share repurchase program tax withholdings share acquisitions prior years repurchased approximately 29 million shares common stock aggregate cost 443 million common stock warrants january 1999 issued 150000 warrants exercisable aggregate approximately 22 million shares companys common stock exercise price 488125 per underlying share warrants recorded fair value date issuance component stockholders equity fourth quarter 2007 2500 warrants exercised 23226 shares common stock exercises made cashless exercise provisions warrants december 31 2007 85000 warrants remained outstanding exercisable approximately 12 million shares common stock warrants expire january 15 2009 terms warrants required maintain effective registration statement covering shares common stock issuable upon exercise unable maintain effective registration statement required pay liquidated damages periods effective registration statement maintained unable maintain effective registration statement due past inability timely file required periodic reports sec filed new registration statement result paid liquidated damages 09 million 09 million 07 million years ended december 31 2007 2006 2005 respectively 16 equitybased compensation 1997 incentive plan january 13 1998 keys shareholders approved key energy group inc 1997 incentive plan amended 1997 incentive plan 1997 incentive plan amendment restatement plans formerly known key energy group inc 1995 stock option plan key energy group inc 1995 outside directors stock option plan november 17 2007 1997 incentive plan terminated pursuant terms 1997 incentive plan key allowed grant following awards certain key employees directors employees outside directors consultants key controlled subsidiaries parent corporation incentive stock options isos defined section 422 internal revenue code 1986 amended code iinonstatutory stock options nsos iii stock appreciation rights sars iv shares restricted stock v performance shares performance units vi stockbased awards vii supplemental tax bonuses number kind securities issued 1997 incentive plan pursuant thenoutstanding incentive awards subject adjustments prevent key energy services inc subsidiaries notes consolidated financial statements continued 16 equitybased compensation continued enlargement dilution rights resulting stock dividends stock splits recapitalizations reorganization similar transactions exercise price options granted 1997 incentive plan fair market value per share date options granted 1997 incentive plan shares common stock listed securities exchange fair market value determined using closing sales price immediate preceding business day reported securities exchange shares listed exchange includes period april 2005 october 2007 fair market value determined using published closing price common stock pink sheets business day immediately preceding date grant exercise nsos results us tax deduction us equal difference exercise price market price exercise date period 20002001 board directors granted 37 million stock options outside 1997 incentive plan 180000 remained outstanding december 31 2007 37 million nonplan options addition include options granted 1997 incentive plan conformity certain terms 1997 incentive plan 2007 incentive plan december 6 2007 companys shareholders approved 2007 equity cash incentive plan 2007 incentive plan 2007 incentive plan administered board committee designated board committee company publicly traded company committee may consist solely two members board qualify outside directors within meaning section 162m internal revenue code 1986 amended code nonemployee directors rule 16b3 promulgated section 16 securities exchange act 1934 board committee administrator power authority select participants defined 2007 incentive plan grant awards defined participants pursuant terms 2007 incentive plan subject adjustment total number shares companys common stock par value 010 per share available grant awards 2007 incentive plan may exceed 4000000 shares however purposes limitation stock subject award canceled forfeited expires prior exercise realization become available issuance 2007 incentive plan subject adjustment participant granted one year period options purchase common stock andor stock appreciation rights respect 500000 shares common stock available distribution 2007 incentive plan come authorized unissued shares reacquired company manner awards may form options incentive stock options nonstatutory stock options restricted stock restricted stock units performance compensation awards stock appreciation rights collectively awards may granted employees directors cases consultants individuals administrator determines reasonably expected become employees directors consultants following grant date award participants however incentive stock options may granted employees key energy services inc subsidiaries notes consolidated financial statements continued 16 equitybased compensation continued 2007 incentive plan provides event certain corporate events changes companys common stock awards maximum number shares subject awards 2007 incentive plan maximum number shares awarded one person adjusted reflect event adjustment made incentive stock option made accordance section 424a code adjustment made nonstatutory option made violate section 409a code event change control defined 2007 incentive plan unless otherwise provided award agreement options stock appreciation rights become immediately exercisable respect 100 shares subject option stock appreciation rights restrictions expire immediately respect 100 shares restricted stock restricted stock units subject award including waiver applicable performance goals addition unless otherwise provided award agreement incomplete performance periods respect performance compensation award end upon change control administrator determine extent performance goals respect performance period met b cause paid applicable participant partial full performance compensation awards respect performance goals performance period based upon administrators determination degree attainment performance goals c cause award previously deferred settled full soon possible event change control administrator may discretion upon advance notice affected persons cancel outstanding awards pay holders thereof cash stock combination thereof value awards based upon price per share companys common stock received shareholders company event upon exercise payment delivery pursuant award participant required certify participant engaged detrimental activity defined 2007 incentive plan subject terms applicable award agreement administrator may cancel rescind suspend withhold otherwise limit restrict unexpired unpaid deferred awards time participant engages detrimental activity participant engages detrimental activity exercise payment delivery pursuant award period restrictive covenant prohibiting activity applicable participant exercise payment delivery may rescinded within one year thereafter event rescission participant pay company amount gain realized payment received result exercise payment delivery manner terms conditions may required company board time may amend terminate 2007 incentive plan however except provided otherwise 2007 incentive plan amendment effective unless approved stockholders company extent stockholder approval necessary satisfy applicable law securities exchange listing requirements december 31 2007 awards granted 2007 incentive plan key energy services inc subsidiaries notes consolidated financial statements continued 16 equitybased compensation continued stock option awards stock option awards granted 1997 incentive plan maximum contractual term ten years date grant shares issuable upon exercise stock option issued authorized unissued shares companys common stock following table summarizes stock option activity related 1997 incentive plan options granted outside 1997 incentive plan 180000 outstanding december 31 2007 shares thousands 1cancelledexpired options 2006 include approximately 39 million options previously held former chief executive officer cancelled connection termination key energy services inc subsidiaries notes consolidated financial statements continued 16 equitybased compensation continued following table summarizes information stock options outstanding december 31 2007 shares thousands total fair value stock options granted years ended december 31 2007 2006 2005 71 million 60 million 23 million respectively year ended december 31 2007 company recognized approximately 35 million pretax expense related stock options unvested stock option awards outstanding december 31 2007 expect recognize approximately 73 million compensation expense weighted average remaining vesting period approximately 058 years tax benefits 07 million recognized year ended december 31 2007 related stock options common stock awards june 2005 began granting shares common stock outside directors certain employees common stock awards granted outside directors vest immediately granted employees vest ratably threeyear period subject forfeiture total fair market value common stock awards granted years ended december 31 2007 2006 2005 47 million 59 million 65 million respectively key energy services inc subsidiaries notes consolidated financial statements continued 16 equitybased compensation continued pursuant agreement issued common stock awards recipients awards may shares withheld order satisfy individuals income tax obligations associated vesting awards granted shares withheld tax withholding purposes totaled 72847 80835 years ended december 31 2007 2006 respectively aggregate repurchase values 13 million 12 million respectively connection vesting june 2006 one recipients permitted amount withheld excess required minimum withholding current tax law sfas 123r required account grant liability award compensation expense award years ended december 31 2007 2006 2005 01 million 02 million 01 million respectively following table summarizes information years ended december 31 2007 2006 2005 common share awards issued company shares thousands 1shares common stock issued nonemployee directors vest immediately upon issuance common stock grants vest immediately upon issuance record expense equal fair market value shares date grant common stock awards immediately key energy services inc subsidiaries notes consolidated financial statements continued 16 equitybased compensation continued vest recognize compensation expense ratably vesting period grant net estimated actual forfeitures years ended december 31 2007 2006 2005 recognized 56 million 36 million 25 million respectively pretax expense associated common stock awards net estimated actual forfeitures connection expense related common stock awards recognized year ended december 31 2007 recognized tax benefits approximately 12 million unvested common stock awards outstanding december 31 2007 company anticipates recognize approximately 52 million pretax expense next 065 years phantom share plan december 2006 announced implementation phantom share plan certain employees granted phantom shares phantom shares vest ratably fouryear period convey right grantee receive cash payment anniversary date grant equal fair market value phantom shares vesting date grantees permitted defer payment later date phantom shares liability type award sfas 123r account awards fair value recognize compensation expense related phantom shares based change fair value awards period percentage service requirement performed net estimated actual forfeitures offsetting liability recorded consolidated balance sheets 2007 recognized approximately 33 million pretax compensation expense associated phantom shares december 31 2007 recorded current noncurrent liabilities 24 million 09 million respectively represented aggregate fair value phantom shares date december 31 2006 amount compensation expense liabilities recorded related phantom share plan consolidated financial statements material recognized income tax benefits associated phantom shares 13 million 2007 unvested phantom share awards outstanding december 31 2007 expect recognize approximately 34 million compensation expense weighted average remaining vesting period approximately 15 years first payout phantom share plan made january 2008 time paid approximately 16 million cash holders phantom shares vested december 2007 stock appreciation rights august 2007 company issued approximately 587000 stock appreciation rights sars executive officers sar tenyear term date grant vests equal annual installments first second third anniversaries date grant upon exercise sar recipient receive amount equal difference exercise price fair market value share companys common stock date exercise multiplied number shares common stock sar exercised payments made shares companys common stock prior exercise sar entitle recipient receive shares companys common stock provide recipient voting stockholders rights company accounts sars equity awards sfas 123r recognizes compensation expense ratably vesting period sar based fair value date issuance net estimated actual forfeitures key energy services inc subsidiaries notes consolidated financial statements continued 16 equitybased compensation continued compensation expense recognized 2007 connection sars approximately 06 million income tax benefits approximately 02 million recognized company connection expense unvested sars outstanding december 31 2007 company anticipates recognize approximately 28 million expense next 16 years valuation assumptions stock options stock appreciation rights fair value stock option grant sar estimated date grant using blackscholes optionpricing model based following weightedaverage assumptions 17 transactions related parties employee loans advances time continuing comparative periods contained report made certain retention loans relocation loans employees executive officers retention loans forgiven various time periods long employee continues employment company relocation loans repaid upon employee selling prior residence december 31 2007 loans aggregate total approximately 02 million amount less 01 million made former officers company remainder made current employees company seller financing arrangement associated moncla acquisition connection acquisition moncla see note 2acquisitions company entered two promissory notes payable agreement seller subsequent acquisition became officer company first unsecured note amount 125 million due payable lumpsum together accrued interest october 25 2009 interest note payable anniversary closing acquisition moncla october 25 2007 second unsecured note amount 100 million payable annual installments 20 million plus accrued interest beginning october 25 2008 2012 notes bears interest federal funds rate adjusted annually anniversary date closing date federal funds rate represent rate would resulted independent borrower independent lender negotiated similar transaction comparable terms conditions equal incremental borrowing rate accordance apb 21 sfas 141 recorded promissory notes fair value resulted discount recorded key energy services inc subsidiaries notes consolidated financial statements continued 17 transactions related parties continued discount recognized interest expense life promissory notes using effective interest method board director relationship customer october 2007 added member companys board directors senior vice president general counsel chief administrative officer anadarko petroleum corporation anadarko one customers sales anadarko comprised less 2 total revenues year ended december 31 2007 transactions anadarko services made market prices 18 segment information 2007 reportable operating business segments well servicing pressure pumping fishing rental evaluate performance operating segments based revenue ebitda nongaap measure disclosed well servicing operations provide full range well services including rigbased services oilfield transportation services casedhole wireline services ancillary oilfield services necessary complete maintain workover oil natural gas producing wells argentina mexico operations included well servicing segment aggregate operating divisions engaged well servicing activities well servicing reportable segment pressure pumping operations provide well stimulation cementing services stimulation includes fracturing nitrogen services acidizing services used enhance production oil natural gas wells formations exhibit restricted flow oil natural gas cementing services include pumping cement well casing wellbore fishing rental operations provide services include fishing recover lost stuck equipment wellbore use fishing tools addition segment offers full line services rental equipment designed use onshore offshore drilling workover services includes inventory consisting tubulars handling tools pressurecontrol equipment power swivels corporate apply provisions eitf 0410 segment reporting provisions eitf 0410 operating segments individually meet aggregation criteria described sfas 131 may combined operating segments individually meet aggregation criteria form separate reportable segment combined operating segments individually meet aggregation criteria established sfas 131 form corporate segment reporting corporate expenses include general expenses associated managing reportable operating segments corporate assets consist principally cash equivalents shortterm investments deferred financing costs investments key energy services inc subsidiaries notes consolidated financial statements continued 18 segment information continued subsidiaries accounts notes receivable subsidiaries companys investment iroc services corp deferred income tax assets key energy services inc subsidiaries notes consolidated financial statements continued 18 segment information continued following table presents information related foreign operations thousands us dollars key energy services inc subsidiaries notes consolidated financial statements continued 19 unaudited supplementary informationquarterly results operations set forth unaudited summarized quarterly information two recent years covered consolidated financial statements thousands except per share data 1quarterly earnings per common share based weighted average number shares outstanding quarter sum quarters may equal annual earnings per common share 2revenues gross margins income taxes net income earnings per share impacted fourth quarter 2007 due acquisitions moncla kings ami see note 2acquisitions 20 condensed consolidating financial statements notes guaranteed virtually domestic subsidiaries whollyowned guarantees joint several full complete unconditional restrictions ability subsidiary guarantors transfer funds parent company result guarantee arrangements required present following condensed consolidating financial information pursuant sec regulation sx rule 310 financial statements guarantors issuers guaranteed securities registered key energy services inc subsidiaries notes consolidated financial statements continued 20 condensed consolidating financial statements continued condensed consolidating balance sheet key energy services inc subsidiaries notes consolidated financial statements continued 20 condensed consolidating financial statements continued condensed consolidating statement operations condensed consolidating statement cash flows item 9item 8 consolidated financial statements supplementary data key energy services inc subsidiaries index consolidated financial statements report independent registered public accounting firm board directors shareholders key energy services inc audited accompanying consolidated balance sheets key energy services inc subsidiaries maryland corporation december 31 2008 2007 related consolidated statements operations comprehensive income stockholders’ equity cash flows three years period ended december 31 2008 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position key energy services inc subsidiaries december 31 2008 2007 results operations cash flows three years period ended december 31 2008 conformity accounting principles generally accepted united states america discussed note 1 consolidated financial statements effective january 1 2007 company adopted provisions financial accounting standards interpretation 48 accounting uncertainty income taxes discussed note 1 consolidated financial statements effective january 1 2007 company adopted provisions fsp eitf 00192 accounting registration payment arrangements also audited accordance standards public company accounting oversight board united states effectiveness key energy services inc subsidiaries’ internal control financial reporting december 31 2008 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso report dated february 24 2009 expressed adverse opinion effectiveness internal control financial reporting grant thornton llp houston texas february 24 2009 report independent registered public accounting firm board directors shareholders key energy services inc audited key energy services inc’s subsidiaries maryland corporation internal control financial reporting december 31 2008 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso key energy services inc subsidiaries’ management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion key energy services inc subsidiaries’ internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate material weakness deficiency combination control deficiencies internal control financial reporting reasonable possibility material misstatement company’s annual interim financial statements prevented detected timely basis following material weakness identified included management’s assessment payroll company determined deficiencies surrounding payroll process particular lack proper documentation concerning hours worked employee master file data rate changes coupled deficiencies reconciliations payroll related data major component constituted material weakness system internal controls opinion effect material weakness described achievement objectives control criteria key energy services inc subsidiaries maintained effective internal control financial reporting december 31 2008 based criteria established internal control integrated framework issued coso also audited accordance standards public company accounting oversight board united states consolidated balance sheets statements operations comprehensive income stockholders’ equity cash flows key energy services inc subsidiaries material weakness identified considered determining nature timing extent audit tests applied audit 2008 consolidated financial statements report affect report dated february 24 2009 expressed unqualified opinion consolidated financial statements grant thornton llp houston texas february 24 2009 key energy services inc subsidiaries consolidated balance sheets see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries consolidated statements operations see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries consolidated statements comprehensive income see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries consolidated statements cash flows see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries consolidated statements stockholders’ equity see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries notes consolidated financial statements note 1 organization summary significant accounting policies key energy services inc whollyowned subsidiaries controlled subsidiaries collectively “key” “company” “we” “us” “its” “our” provide complete range well services major oil companies foreign national oil companies independent oil natural gas production companies including rigbased well maintenance workover well completion recompletion services fluid management services pressure pumping services fishing rental services ancillary oilfield services operate major oil natural gas producing regions united states well internationally argentina mexico also technology development company based canada equity interests oilfield service companies canada russian federation basis presentation consolidated financial statements associated schedules included annual report form 10k present financial position results operations cash flows periods presented accordance generally accepted accounting principles united states “gaap” preparation consolidated financial statements requires us develop estimates make assumptions affect financial position results operations cash flows estimates also impact nature extent disclosure contingent liabilities among things use estimates analyze assets possible impairment ii determine depreciable lives assets iii assess future tax exposure realization deferred tax assets iv determine amounts accrue contingencies v value tangible intangible assets vi assess workers’ compensation vehicular liability selfinsured risk accruals insurance reserves vii provide allowances uncollectible accounts receivable viii value equitybased compensation review significant estimates recurring basis record effect necessary adjustments prior publication financial statements adjustments made respect use estimates relate improved information previously available limitations inherent process actual results may differ materially estimates believe estimates reasonable certain reclassifications made prior period amounts conform current period financial statement classifications present shortterm investments marketable securities component current assets accompanying consolidated balance sheets prior years presented amounts separate component current assets apply provisions emerging issues task force “eitf” issue 0410 determining whether aggregate operating segments meet quantitative thresholds “eitf 0410” segment reporting “note 19 segment information” provisions eitf 0410 operating segments individually meet aggregation criteria described statement financial accounting standards “sfas” 131 disclosures segments enterprise related information “sfas 131” may combined operating segments individually meet aggregation criteria form separate reportable segment combined operating segments individually meet aggregation criteria established sfas 131 form “corporate other” segment reporting principles consolidation within consolidated financial statements include accounts majorityowned controlled subsidiaries eliminate intercompany accounts transactions interest entity significant control influence account interest using cost method interest entity exert significant influence control account interest using equity method key energy services inc subsidiaries notes consolidated financial statements continued discussed “note 2 acquisitions” september 2007 completed acquisition advanced measurements inc “ami” privatelyheld canadian company focused oilfield technology prior acquisition ami owned portion another canadian company advanced flow technologies inc “afti” part acquisition ami increased ownership percentage afti 5146 december 31 2007 consolidated assets liabilities results operations cash flows afti consolidated financial statements portion afti remaining outside control forming minority interest consolidated financial statements ownership afti declined 4873 fourth quarter 2008 due issuance additional shares afti result deconsolidated afti consolidated financial statements december 31 2008 accounted interest equity method apply financial accounting standards board “fasb” interpretation “fin” 46 consolidation variable interest entities interpretation arb 51 revised 2003 “fin 46r” determining whether consolidate variable interest entity “vie” fin 46r requires equity investor vie significant equity risk generally minimum 10 hold controlling interest evidenced voting rights absorb majority entity’s expected losses receive majority entity’s expected returns equity investor unable evidence characteristics entity retains ownership characteristics required consolidate vie determined interest vie primary beneficiary variable interest vie holder significant variable interest vie revenue recognition recognize revenue following criteria established securities exchange commission “sec” staff accounting bulletin “sab” 101 revenue recognition financial statements “sab 101” amended sab 104 revenue recognition “sab 104” met evidence arrangement exists ii delivery occurred services rendered iii price customer fixed determinable iv collectibility reasonably assured • evidence arrangement exists final understanding company customer occurred evidenced completed customer purchase order field ticket supplier contract master service agreement • delivery occurred services rendered company completed required pursuant terms arrangement evidenced completed field ticket service log • price customer fixed determinable amount required paid agreed upon evidence price fixed determinable evidenced contractual terms company price book completed customer purchase order completed customer field ticket • collectibility reasonably assured result company screening customers providing goods services customers granted credit terms accordance company’s credit policy accordance eitf issue 0603 taxes collected customers remitted governmental authorities presented income statement gross versus net presentation “eitf 0603” present revenues net sales taxes collected us customers required remitted local state governmental taxing authorities key energy services inc subsidiaries notes consolidated financial statements continued cash equivalents consider shortterm investments original maturity less three months cash equivalents none cash restricted entered compensating balance arrangements however december 31 2008 obligations senior secured credit facility secured assets including assets held subsidiaries includes cash equivalents restrict investment cash financial institutions high credit standing limit amount credit exposure one financial institution maintain cash bank deposit brokerage accounts exceed federally insured limits december 31 2008 accounts guaranteed federal deposit insurance corporation “fdic” 250000 substantially company’s accounts held deposits excess fdic limits certain cash accounts zerobalance controlled disbursement accounts right offset cash balances accordance fin 39 offsetting amounts related certain contracts interpretation apb 10 fasb statement 105 “fin 39” present outstanding checks written zerobalance accounts component accounts payable accompanying consolidated balance sheets investment debt equity securities account investments debt equity securities provisions sfas 115 accounting certain investments debt equity securities “sfas 115” sfas 115 investments classified either “trading” “available sale” “held maturity” depending management’s intent regarding investment securities classified “trading” carried fair value unrealized holding gains losses reported currently earnings securities classified “available sale” “held maturity” carried fair value unrealized holding gains losses net tax reported separate component shareholders’ equity comprehensive income accounts receivable allowance doubtful accounts establish provisions losses accounts receivable determine collect part outstanding balances regularly review collectibility establish adjust allowance necessary using specific identification method time entitled proceeds insurance policies accordance fin 39 present insurance receivables gross balance sheet component accounts receivable separate corresponding liability concentration credit risk significant customers key’s customers include major oil natural gas production companies independent oil natural gas production companies foreign national oil natural gas production companies perform ongoing credit evaluations customers usually require material collateral maintain reserves potential credit losses necessary results operations financial condition considered light fluctuations demand experienced oilfield service companies changes oil gas producers’ expenditures budgets occur fluctuations impact results operations financial condition supply demand factors directly affect utilization hours primary determinants net cash provided operating activities periods presented single customer accounted ten percent consolidated revenue key energy services inc subsidiaries notes consolidated financial statements continued inventories consist primarily equipment parts use well servicing operations sand chemicals pressure pumping operations supplies held consumption valued lower average cost market property equipment property equipment carried cost less accumulated depreciation provided assets estimated depreciable lives assets using straightline method depreciate operational assets depreciable lives salvage value fair value higher assets’ value scrap salvage value approximates 10 operational asset’s acquisition cost operational asset stacked taken service review physical condition depreciable life ultimate salvage value determine asset longer operable whether remaining depreciable life salvage value adjusted first quarter 2007 management reassessed estimated useful lives assigned company’s equipment light higher activity utilization levels experienced 2006 early 2007 result maximum estimated useful lives certain assets adjusted reflect higher annual utilization result useful life expected well service rig reduced average expected life 17 years 15 years respect oilfield trucks trailers related equipment expected life reduced average expected life 15 years 12 years management also determined life assigned selfremanufactured well service rig 15year life assigned newly constructed well service rig acquired third parties december 31 2008 estimated useful lives company’s asset classes follows company leases certain operating assets capital lease obligations whose terms run 55 60 months assets depreciated estimated useful lives term capital lease obligation whichever shorter apply sfas 144 accounting impairment disposal longlived assets “sfas 144” reviewing longlived assets possible impairment statement requires longlived assets held used us including certain identifiable intangibles reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable purposes testing impairment group longlived assets divisions based geographical regions services provided compare estimated future cash flows division’s net carrying value division level represents lowest level identifiable cash flows available would record impairment charge reducing division’s net carrying value estimated fair value estimated future cash flows less division’s net carrying value “trigger events” defined sfas 144 cause us evaluate fixed assets recoverability possible impairment may include changes market conditions adverse movements prices oil natural gas could reduce fair value certain property equipment development key energy services inc subsidiaries notes consolidated financial statements continued future cash flows determination fair value division involves significant judgment estimates 2007 2006 trigger events identified management fourth quarter 2008 impairment company’s goodwill identified trigger event management result undiscounted cash flow analysis performed longlived assets impairment indicated asset retirement obligations accordance sfas 143 accounting asset retirement obligations “sfas 143” recognize liability fair value legal obligations associated retirement tangible longlived assets capitalize equal amount cost asset depreciate additional cost estimated useful life assets obligations perform asset retirement activities unconditional despite uncertainties may exist surrounding individual retirement activity accordingly recognize liability fair value conditional asset retirement obligation fair value reasonably estimated significant judgment involved estimating future cash flows associated obligations well ultimate timing cash flows estimates amount timing cash flows change changes may material impact results operations see “note 7 asset retirement obligations” capitalized interest capitalized average amount accumulated expenditures major capital projects using effective interest rate based related debt underlying assets placed service capitalized interest added cost assets amortized depreciation amortization expense useful life assets included depreciation amortization line accompanying consolidated statements operations longterm debt deferred financing costs associated longterm debt carried cost expensed term applicable longterm debt facility term notes costs amortized interest expense using effective interest method life related debt instrument related debt instrument retired remaining unamortized costs included determination gain loss extinguishment debt record gains losses extinguishment debt part continuing operations see “note 12 longterm debt” goodwill intangible assets goodwill results business combinations represents excess acquisition costs fair value net assets acquired account goodwill intangible assets provisions sfas 142 accounting goodwill intangible assets “sfas 142” goodwill intangible assets subject amortization tested impairment annually frequently events changes circumstances indicate asset might impaired test impairment indefinitelived intangibles two step test first step test fair value calculated company’s reporting units fair value compared carrying value reporting unit including reporting unit’s goodwill fair value reporting unit exceeds carrying value impairment second step test performed carrying value exceeds fair value reporting unit second step test required second step test compares implied fair value reporting unit’s goodwill carrying value implied fair value reporting unit’s goodwill determined manner amount key energy services inc subsidiaries notes consolidated financial statements continued goodwill recognized business combination purchase price equal fair value reporting unit implied fair value reporting unit’s goodwill excess carrying value impairment recorded carrying value excess implied fair value impairment equal excess recorded assist management preparation analysis valuation company’s reporting units management utilized services thirdparty valuation consultant reviewed management’s estimates assumptions calculations ultimate conclusions valuation techniques remain sole responsibility company’s management company conducts annual impairment test december 31 year annual test completed december 31 2008 impairment company’s goodwill indicated test required annual basis also required frequently based changes external factors currently expect additional tests would result additional charges determination fair value used test heavily impacted market prices equity debt securities see “note 5 goodwill intangible assets” internaluse software required statement position “sop” 981 accounting costs computer software developed obtained internal use “sop 981” capitalize costs incurred application development stage internaluse software amortize costs estimated useful life generally five years costs incurred related selection maintenance internaluse software expensed incurred see “note 4 property equipment” derivative instruments hedging activities company applies sfas 133 accounting derivative instruments hedging activities “sfas 133” amended accounting derivative instruments sfas 133 establishes accounting reporting standards derivative instruments including certain derivative instruments embedded contracts hedging activities requires recognition derivative instruments assets liabilities balance sheet measurement instruments fair value accounting treatment changes fair value dependent upon whether derivative instrument designated hedge type hedge account financial instrument hedge contract must meet following criteria underlying asset liability must expose company risk offset another asset liability hedging contract must reduce risk instrument must properly designated hedge inception contract throughout contract period effective hedge must high correlation changes fair value financial instrument fair value underlying asset liability changes market value financial instrument would offset effect price changes exposed items derivatives designated cash flow hedges effective portion change fair value hedging instrument recognized comprehensive income hedged item recognized earnings ineffective portion changes fair value hedging instrument recognized currently earnings derivative contracts entered company analyzes derivative contracts embedded instruments accounts instruments based current guidance years ended december 31 2007 2006 company interest rate swaps foreign currency instruments qualified derivative instruments sfas 133 2008 company derivative instruments see “note 10 derivative financial instruments” discussion key energy services inc subsidiaries notes consolidated financial statements continued litigation estimating liabilities related litigation take account available facts circumstances order determine whether loss probable reasonably estimable accordance sfas 5 accounting contingencies “sfas 5” various suits claims arising ordinary course business pending us due part locations conduct business continental united states often subject jury verdicts arbitration hearings result outcomes favor plaintiffs continually assess contingent liabilities including potential litigation liabilities well adequacy accruals need disclosure items accordance sfas 5 establish provision contingent liability probable liability incurred amount able estimated see “note 13 commitments contingencies” environmental operations subject various federal state local laws regulations intended protect environment operations routinely involve storage handling transport disposal bulk waste materials contain oil contaminants regulated substances various environmental laws regulations require prevention necessary cleanup spills leaks materials operations must obtain permits limiting discharge materials failure comply environmental requirements permits may result fines penalties remediation orders revocation permits laws regulations become stringent years certain circumstances may impose “strict liability” rendering us liable environmental damage without regard negligence fault part cleanup costs penalties damages arising result environmental laws costs associated changes environmental laws regulations could substantial could material adverse effect financial condition results operations cash flows time claims made litigation brought us laws environmental expenditures expensed capitalized depending future economic benefit expenditures relate existing condition caused past operations future economic benefits expensed environmental reserve matters including remediation efforts current locations relating previouslydisposed properties record liabilities remediation efforts probable costs conduct remediation efforts reasonably estimated litigation reserves reflect application insurance coverage environmental reserves reflect management’s assessment insurance coverage may apply matters issue see “note 13 commitments contingencies” discussion self insurance largely selfinsured physical damage equipment automobiles rigs accruals maintain consolidated balance sheet relate deductibles selfinsured retentions estimate use historical claims data trend analysis actual outcome claim could differ significantly estimated amounts adjust loss estimates calculation accruals based upon actual claim settlements reported claims income taxes accounting income taxes follow sfas 109 accounting income taxes “sfas 109” requires account deferred income taxes using asset liability method provide income taxes significant temporary differences management determines current tax liability well taxes incurred result current operations deferred future periods current taxes payable represent liability related income tax return current year net deferred tax key energy services inc subsidiaries notes consolidated financial statements continued expense benefit represents change balance deferred tax assets liabilities reported consolidated balance sheets management estimates changes deferred tax assets liabilities using basis assets liabilities financial reporting purposes enacted rates management estimates effect differences reverse management makes certain assumptions timing temporary tax differences differing treatment certain items tax accounting purposes whether differences permanent final determination tax liability involves interpretation local tax laws tax treaties related authorities jurisdiction well significant use estimates assumptions regarding scope future operations results achieved timing nature income earned expenditures incurred establish valuation allowances reduce deferred tax assets determine likely eg likelihood 50 portion deferred tax assets realized future periods assess likelihood use estimates judgment regarding future taxable income well jurisdiction taxable income generated determine whether valuation allowance required evidence include current financial position results operations actual forecasted results reversal deferred tax liabilities tax planning strategies well current forecasted business economics industry additionally record reserves uncertain tax positions subject management judgment related resolution tax positions completion audits tax authorities domestic international tax jurisdictions operate company subject revised texas franchise tax revised texas franchise tax income tax equal one percent texassourced revenue reduced greater cost goods sold defined texas law b compensation defined texas law c thirty percent texassourced revenue account revised texas franchise tax accordance sfas 109 tax derived taxable base consists income less deductible expenses see “note 11 income taxes” discussion accounting income taxes changes valuation allowance components tax rate reconciliation realization loss carryforwards earnings per share present earnings per share information accordance provisions sfas 128 earnings per share “sfas 128” sfas 128 basic earnings per common share determined dividing net earnings applicable common stock weighted average number common shares actually outstanding period diluted earnings per common share based increased number shares would outstanding assuming conversion dilutive outstanding convertible securities using treasury stock “as converted” methods see “note 6 earnings per share” discussion sharebased compensation account sharebased compensation provisions sfas 123 revised 2004 sharebased payment “sfas 123r” adopted january 1 2006 adopted sfas 123r using modified prospective transition method cumulative effect recorded adoption date sfas 123r record sharebased compensation component general administrative expense see “note 17 sharebased compensation” discussion foreign currency gains losses follow translation policy accordance sfas 52 foreign currency translation “sfas 52” international locations argentina mexico canada local currency functional currency assets liabilities translated rates exchange balance sheet date income expense items translated average rates exchange year resulting key energy services inc subsidiaries notes consolidated financial statements continued gains losses arising translation accounts functional currency us dollar included separate component stockholders’ equity comprehensive income partial complete sale liquidation net investment foreign entity time foreign subsidiaries may enter transactions denominated currencies functional currency transactions initially recorded functional currency subsidiary based applicable exchange rate effect date transaction end month transactions remeasured equivalent amount functional currency based applicable exchange rates effect time adjustment required remeasure transaction equivalent amount functional currency end month recorded income loss foreign subsidiary component income expense see “note 14 accumulated comprehensive loss” comprehensive income report display comprehensive income accordance sfas 130 reporting comprehensive income “sfas 130” establishes standards reporting displaying comprehensive income components sfas 130 requires enterprises display comprehensive income components enterprise’s financial statements classify items comprehensive income nature financial statements display accumulated balance comprehensive income separately shareholders’ equity leases account leases accordance sfas 13 accounting leases “sfas 13” certain operating lease agreements structured include scheduled specified rent increases term lease agreement increases may result inducement “rent holiday” conveyed us early lease included reflect anticipated effects inflation apply provisions fasb technical bulletin “ftb” 853 accounting operating leases scheduled rent increases “ftb 853” accounting scheduled specified rent increases ftb 853 provides effects scheduled specified rent increases recognized straightline basis lease term unless another systematic rational allocation basis representative time pattern leased property physically employed recognize scheduled specified rent increases straightline basis term lease agreement addition certain operating lease agreements contain incentives induce us enter lease agreement upfront cash payments us payment lessor costs moving expenses assumption lessor preexisting lease agreements third parties payments made us behalf represent incentives consider reduction rent expense recognized straightline basis term lease agreement amortize leasehold improvements operating leases shorter economic lives lease term new accounting standards adopted report fin 48 fsp fin 481 june 2006 fasb issued fin 48 accounting uncertainty income taxes interpretation fasb statement 109 “fin 48” provides clarification sfas 109 respect recognition income tax benefits uncertain tax positions financial statements fin 48 requires uncertain tax positions reviewed assessed recognition measurement tax benefit based “more likely not” standard may 2007 fasb issued fasb staff position “fsp” fin 481 “fsp fin 481” fsp fin 481 provides guidance enterprise determine whether tax position effectively settled key energy services inc subsidiaries notes consolidated financial statements continued purpose recognizing previously unrecognized tax benefits determining whether tax position effectively settled entities must evaluate whether taxing authorities completed examination procedures ii whether entity intends appeal litigate aspect tax position included completed evaluation iii whether remote taxing authority would examine reexamine aspect taxing position fsp fin 481 applied upon initial adoption fin 48 adopted provisions fin 48 fsp fin 481 january 1 2007 recorded 13 million decrease balance retained earnings january 1 2007 reflect cumulative effect adopting standards fsp eitf 00192 december 2006 fasb issued fsp eitf 00192 accounting registration payment arrangements “fsp eitf 00192” fsp eitf 00192 addresses accounting registration payment arrangements “rpas” provisions within financial instruments equity shares warrants debt instruments issuer agrees file registration statement registration statement declared effective sec within specified grace period registration statement declared effective within grace period effectiveness maintained period time specified rpa issuer must compensate counterparty fasb staff concluded contingent obligation make future payments otherwise transfer consideration rpa recognized liability measured accordance sfas 5 fin 14 reasonable estimation amount loss rpa recognized measured separately instrument rpa attached january 1999 company completed private placement 150000 units consisting 1500 million 14 senior subordinated notes due january 25 2009 “14 senior subordinated notes” 150000 warrants purchase aggregate approximately 22 million shares company’s common stock exercise price 488125 per share “warrants” terms warrants required maintain effective registration statement covering shares common stock issuable upon exercise warrants due past failure file sec reports timely manner effective registration statement covering warrants required make liquidated damages payments requirement make liquidated damages payments constituted rpa provisions fsp eitf 00192 prescribed transition provisions standard january 1 2007 company recorded pretax current liability approximately 10 million equivalent payments warrant rpa one year offsetting adjustment opening balance retained earnings sfas 157 september 2006 fasb issued sfas 157 fair value measurements “sfas 157” sfas 157 establishes framework measuring fair value requires expanded disclosure information used measure fair value statement applies whenever statements require permit assets liabilities measured fair value expand use fair value accounting new circumstances adoption standard material impact consolidated financial statements sfas 159 company adopted statement financial accounting standards 159 fair value option financial assets liabilities including amendment fasb statement 115 “sfas 159” january 1 2008 sfas 159 permits companies choose specified election dates measure eligible items fair value “fair value option” companies choosing election report unrealized gains losses items fair value option elected earnings subsequent reporting period elect measure financial assets liabilities using fair value option assess measurement date whether use fair value option future financial assets liabilities permitted pursuant provisions sfas 159 fsp sfas 1573 october 2008 fasb issued fsp sfas 1573 determining fair value financial asset market asset active “fsp 1573” fsp 1573 clarified key energy services inc subsidiaries notes consolidated financial statements continued application sfas 157 fsp 1573 demonstrated fair value financial asset determined market financial asset inactive fsp 1573 effective upon issuance including prior periods financial statements issued implementation standard material impact consolidated financial statements accounting standards yet adopted report fsp sfas 1423 april 2008 fasb issued fsp sfas 1423 determination useful life intangible assets “fsp 1423” fsp 1423 amends factors considered developing renewal extension assumptions used determine useful life recognized intangible asset sfas 142 fsp 1423 also requires expanded disclosure regarding determination intangible asset useful lives fsp 1423 effective fiscal years beginning december 15 2008 earlier adoption permitted currently evaluating potential impact adoption fsp 1423 consolidated financial statements sfas 161 march 2008 fasb issued sfas 161 disclosures derivative instruments hedging activities “sfas 161” sfas 161 amends expands disclosure requirements sfas 133 accounting derivative instruments hedging activities requires qualitative disclosures objectives strategies using derivatives quantitative disclosures fair value amounts gains losses derivative instruments disclosures creditriskrelated contingent features derivative agreements statement effective financial statements issued fiscal periods beginning november 15 2008 early application encouraged company currently financial instruments qualify derivatives expect adoption standard material impact company’s financial position results operations cash flows fsp sfas 1572 february 2008 fasb issued fsp sfas 1572 effective date fasb statement 157 “fsp 1572” partially defer sfas 157 fsp sfas 1572 defers effective date sfas 157 nonfinancial assets nonfinancial liabilities except recognized disclosed fair value financial statements recurring basis least annually fiscal years interim periods within fiscal years beginning november 15 2008 currently evaluating impact adopting provisions sfas 157 relates nonfinancial assets liabilities sfas 141r december 2007 fasb issued sfas 141 revised 2007 business combinations “sfas 141r” sfas 141r establishes principles requirements acquirer business combination recognizes measures financial statements identifiable assets acquired liabilities assumed noncontrolling interests acquiree well goodwill acquired significant changes current practice resulting sfas 141r include expansion definitions “business” “business combination” business combinations whether partial full step acquisitions acquirer record 100 assets liabilities acquired business including goodwill fair values contingent consideration recognized fair value acquisition date certain arrangements changes fair value recognized earnings settlement acquisitionrelated transaction restructuring costs expensed rather treated part cost acquisition sfas 141r also establishes disclosure requirements enable users evaluate nature financial effects business combination sfas 141r applies prospectively business combinations acquisition date beginning first annual reporting period beginning december 15 2008 sfas 141r may impact consolidated financial statements nature magnitude specific impact depend upon nature terms size acquisitions consummated effective date sfas 160 december 2007 fasb issued sfas 160 noncontrolling interests consolidated financial statements amendment arb 51 “sfas 160” sfas 160 amends accounting research bulletin 51 consolidated financial statements establish accounting reporting standards key energy services inc subsidiaries notes consolidated financial statements continued noncontrolling interest subsidiary deconsolidation subsidiary clarifies noncontrolling interest subsidiary sometimes referred minority interest thirdparty ownership interest consolidated entity reported component equity consolidated financial statements among requirements sfas 160 requires consolidated statement income reported amounts include amounts attributable parent noncontrolling interest sfas 160 also requires disclosure face consolidated statement income amounts consolidated net income attributable parent noncontrolling interest sfas 160 effective fiscal years interim periods within fiscal years beginning december 15 2008 earlier adoption permitted currently evaluating potential impact statement note 2 acquisitions time company may acquire businesses assets consistent longterm growth strategy results operations acquisitions included company’s financial statements beginning date acquisition acquisitions december 31 2008 accounted using purchase method accounting purchase price allocated assets acquired liabilities assumed based upon estimated fair values date acquisition final valuations assets liabilities obtained recorded soon practicable within one year date acquisition purchase price allocations yet finalized based preliminary information subject change final fair value determinations made assets acquired liabilities assumed acquisitions completed 2008 trienergy services llc january 17 2008 company purchased fishing rental assets trienergy services llc “trienergy” approximately 19 million cash assets integrated fishing rental segment equity interests trienergy owned employees company joined company october 2007 connection earlier acquisition 2007 moncla well service inc related entities collectively “moncla” purchase price allocated tangible intangible assets purchased acquisition trienergy assets accounted asset purchase result establishment goodwill assets acquired include identifiable intangible asset 11 million related customer relationships subject amortization sfas 142 asset amortized straightline basis two years acquisition date western drilling llc april 3 2008 company purchased outstanding equity interests western drilling llc “western” privatelyowned company based california operated 22 working well service rigs three stacked well service rigs equipment used workover rig relocation process acquired western increase service footprint california market purchase price 515 million cash paid april 3 2008 purchase price subject working capital adjustment 45 days closing date acquisition resulted additional consideration paid 01 million may 2008 company also incurred direct transaction costs approximately 04 million acquisition funded borrowings 500 million company’s senior secured credit facility see “note 12 longterm debt” cash hand acquisition western accounted business combination total purchase price allocated assets acquired liabilities assumed based estimated fair values excess purchase price fair value net assets acquired recorded goodwill allocation purchase price based upon preliminary valuations estimates subject change valuations finalized primary area purchase price allocation yet finalized relates premerger key energy services inc subsidiaries notes consolidated financial statements continued contingencies final valuation expected completed later first quarter 2009 following table summarizes preliminary estimated fair values assets acquired liabilities assumed date western acquisition thousands fair values property equipment determined using market approach fair values identified intangible assets determined using income approach measure present worth anticipated future economic benefits company also performed economic obsolescence analysis confirm values identified aforementioned methods allocation still preliminary time may potentially change material amount purchase price allocation finalized goodwill recognized part acquisition western purchase price exceeded fair value acquired assets assumed liabilities company believes goodwill associated western acquisition related acquired workforce potential future expansion western service offerings ability expand service offerings therefore allocated acquired assets assumed liabilities acquired identifiable intangible asset 90 million related customer relationships subject amortization sfas 142 customer relationships amortized value relationships realized using rates 17 19 15 12 9 7 6 5 4 3 2 1 2008 2019 respectively 82 million goodwill associated purchase western allocated well servicing segment assets results operations subsequent april 3 2008 also integrated well servicing segment goodwill recorded 82 million expected deductible income tax purposes hydrawalk inc may 30 2008 company purchased outstanding stock hydrawalk inc “hydrawalk” approximately 103 million cash performance earnout 20 million two years acquisition date certain financial operational performance measures met additionally third quarter 2008 company paid approximately 02 million additional consideration related holdback amount withheld seller pending completion seller closing requirement purchase price also subject postclosing working capital adjustment less 01 million paid third quarter 2008 company incurred direct transaction costs approximately 01 million company retained approximately 11 million hydrawalk’s net working capital result transaction assume debt hydrawalk leading provider pipe handling solutions oil gas industry operates 80 automated pipe handling units oklahoma texas wyoming acquired hydrawalk expand level integrated well servicing services able provide customers assets results operations hydrawalk integrated fishing rental segment beginning may 31 2008 key energy services inc subsidiaries notes consolidated financial statements continued acquisition hydrawalk accounted business combination purchase price allocated assets acquired liabilities assumed based estimated fair values excess purchase price fair value net assets acquired recorded goodwill allocation purchase price based upon preliminary valuations estimates subject change valuations finalized primary area purchase price allocation yet finalized relates premerger contingencies final valuation expected completed later second quarter 2009 business combination resulted acquisition 37 million tangible assets 45 million intangible assets 13 million goodwill fair values tangible assets determined using market approach fair values intangible assets determined using income approach measure present worth anticipated future economic benefits company also performed economic obsolescence analysis confirm values identified aforementioned methods allocation still preliminary time may potentially change material amount purchase price allocation finalized acquired identifiable intangible assets 45 million relate customer relationships tradename noncompete agreement intangible assets subject amortization sfas 142 customer relationships asset 40 million amortized value relationships realized using rates 19 24 17 13 9 6 4 3 2 2008 2017 respectively tradename asset 04 million amortized straightline 10 years noncompete agreement asset amortized straightline 3 years goodwill 13 million recognized part purchase price allocation purchase price exceeded fair value acquired assets assumed liabilities company believes goodwill associated hydrawalk acquisition related acquired workforce potential expansion service offerings therefore allocated acquired assets assumed liabilities 13 million goodwill allocated fishing rental segment 13 million expected deductible income tax purposes december 31 2008 hydrawalk operations met performance earnout requirements resulted additional consideration 05 million recorded additional goodwill leader energy services ltd july 22 2008 company acquired united statesbased assets leader energy services ltd “leader” canadian company consideration 346 million cash acquired assets include nine coiled tubing units seven nitrogen trucks twelve pumping trucks ancillary equipment additionally company paid approximately 07 million supplies inventory used pressure pumping operations company also incurred direct transaction costs approximately 01 million purchase price allocated tangible assets acquired acquisition leader assets accounted asset purchase assets acquired constitute business therefore result establishment goodwill company identify acquired intangible assets leader assets integrated pressure pumping segment acquisitions completed 2007 ami september 5 2007 company acquired ami operates canada technology company focused oilfield service equipment controls data acquisition digital information flow purchase price 66 million cash 29 million assumed debt paid september 2007 nine months ended september 30 2008 company refined fair value allocation assets acquired liabilities assumed increasing deferred tax asset balance 03 million decreasing deferred tax liability balance 10 million changes offset corresponding net decrease goodwill 13 million 2008 prior anniversary acquisition company made additional payments settle working capital adjustment former owners ami incurred key energy services inc subsidiaries notes consolidated financial statements continued additional transaction costs directly related business combination payments totaled 13 million resulted additional goodwill 13 million purchase price allocation completed third quarter 2008 moncla october 25 2007 company acquired moncla operated well service rigs barges ancillary equipment southeastern united states total consideration 1460 million 2008 company refined fair value allocation assets acquired liabilities assumed increasing working capital accounts excluding deferred tax assets 22 million decreasing fair value well service assets acquired 36 million decreasing deferred tax longterm asset balances 04 million increasing longterm deferred tax liability balance 21 million incurring additional fees related closing transaction less 02 million company also paid additional purchase consideration 08 million third quarter 2008 changes offset corresponding net increase goodwill 49 million purchase price allocation finalized fourth quarter 2008 kings oil tools december 7 2007 company acquired well service assets related equipment kings oil tools inc “kings” californiabased well service company approximately 451 million nine months ended september 30 2008 company revised fair value allocation assets acquired liabilities assumed increasing fair value well service assets acquired 16 million increasing deferred tax assets 04 million decreasing fair value working capital accounts 01 million incurring additional fees related closing transaction 01 million changes offset corresponding net decrease goodwill 17 million purchase price allocation finalized fourth quarter 2008 acquisitions completed 2006 made acquisitions 2006 note 3 current noncurrent liabilities key energy services inc subsidiaries notes consolidated financial statements continued note 4 property equipment property equipment consists following company capitalizes costs incurred application development stage internaluse software costs capitalized work progress time application put service years ended december 31 2008 2007 2006 company capitalized costs amount 45 million 19 million zero respectively interest capitalized average amount accumulated expenditures major capital projects using effective interest rate based related debt underlying assets placed service capitalized interest years ended december 31 2008 2007 2006 65 million 53 million 34 million respectively key energy services inc subsidiaries notes consolidated financial statements continued company obligated various capital leases certain vehicles equipment expire various dates next five years carrying value assets acquired capital leases consists following depreciation assets held capital leases approximately 43 million 59 million 60 million years ended december 31 2008 2007 2006 respectively included depreciation amortization expense accompanying consolidated statements operations note 5 goodwill intangible assets following table summarizes activity goodwill accounts years ended december 31 2008 2007 key energy services inc subsidiaries notes consolidated financial statements continued following tables present gross carrying values accumulated amortization identified intangible assets determinable lives subject amortization sfas 142 december 31 2008 2007 amortization expense intangible assets determinable lives follows key energy services inc subsidiaries notes consolidated financial statements continued weighted average remaining amortization periods expected amortization expense next five years intangible assets follows certain intangible assets denominated currencies us dollars values assets subject fluctuations associated changes exchange rates additionally certain assets also subject purchase accounting adjustments estimated fair values intangible assets obtained acquisitions consummated preceding twelve months based preliminary information subject change final valuations obtained perform annual impairment tests associated goodwill december 31 year frequently circumstances warrant dictated sfas 142 december 31 2008 2007 2006 three reporting units determined identified sfas 142 estimate fair values reporting units using three common valuation techniques discounted cash flow method guideline company method similar transaction method company’s management assigns weighting results method based facts circumstances exist assessment date discounted cash flows reporting unit tested based company’s financial budgets forecasts well management’s beliefs longterm growth patterns reporting units 2008 future cash flow projections discounted rates ranging 14 15 terminal growth rates approximately 3 part assessment management also considered current market capitalization company based publicly available information adjusted estimate control premium assessing reasonableness fair values reporting units based results valuation models assist management preparation analysis valuation company’s reporting units management utilized services thirdparty valuation consultant reviewed management’s estimates assumptions calculations ultimate conclusions valuation techniques remain sole responsibility company’s management company conducts annual impairment test december 31 year upon completion 2007 2006 assessments impairment indicated since estimated fair values reporting units excess carrying values upon completion 2008 assessment determined fair value associated reporting units comprising pressure pumping fishing rental reportable segments less carrying value reporting units segments indicating potential impairment indicators impairment existed reporting units performed step two sfas 142 impairment test units test required annual basis also required frequently based changes external factors currently expect additional tests would result additional charges determination fair value used test heavily impacted market prices equity debt securities key energy services inc subsidiaries notes consolidated financial statements continued accordance sfas 142 implied fair value goodwill reporting units tested determined manner hypothetical business combination fair value reporting unit representing purchase price result calculations step two test determined goodwill reporting units comprising pressure pumping fishing rental segments impaired amount impairment loss greater current carrying value reporting units’ goodwill recorded pretax impairment charge approximately 490 million 207 million pressure pumping fishing rental segments respectively fourth quarter 2008 note 6 earnings per share following table presents basic diluted earnings per share years ended december 31 2008 2007 2006 stock options warrants stock appreciation rights included computation diluted earnings per share using treasury stock method restricted stock grants legally considered issued outstanding included basic diluted earnings per share extent vested unvested restricted stock included computation diluted earnings per share using treasury stock method diluted earnings per share calculation years ended december 31 2008 2007 2006 exclude potential exercise 26 million 05 million 04 million stock options respectively effects exercises earnings per share periods would antidilutive diluted earnings per share calculation year ended december 31 2008 excludes potential exercise 04 million stocksettled stock appreciation rights “sars” effects exercises earnings per share periods would antidilutive shares considered antidilutive exercise prices exceeded average price company’s stock years key energy services inc subsidiaries notes consolidated financial statements continued material changes share amounts subsequent balance sheet date would material impact earnings per share calculation year ended december 31 2008 note 7 asset retirement obligations connection well servicing activities operate number saltwater disposal “swd” facilities operations involve transportation handling disposal fluids swd facilities byproducts drilling process determined harmful environment swd facilities used connection fluid hauling operations subject future costs associated abandonment properties result incurred costs associated proper storage disposal materials annual amortization assets associated asset retirement obligations 06 million 06 million 05 million years ended december 31 2008 2007 2006 respectively summary changes asset retirement obligations follows thousands note 8 equity method investments iroc energy services corp december 31 2008 2007 owned approximately 87 million shares iroc energy services corp “iroc” albertabased oilfield services company represented approximately 197 iroc’s outstanding common stock december 31 2008 2007 iroc shares trade toronto venture stock exchange closing price 054 cdn 074 cdn per share december 31 2008 2007 respectively mr william austin former chief financial officer mr newton w wilson iii chief operating officer serve board directors iroc december 31 2008 significant influence operations iroc ownership interest representation iroc’s board directors control account investment iroc using equity method investment iroc totaled 37 million 112 million december 31 2008 2007 respectively prorata share iroc’s earnings losses entitled recorded consolidated statements operations component income expense offsetting increase decrease carrying value investment appropriate earnings distributed back us iroc form dividends would result decrease carrying value equity investment value investment may also increase decrease period due changes exchange rate us dollar canadian dollar key energy services inc subsidiaries notes consolidated financial statements continued changes value investment due fluctuations exchange rates offset accumulated comprehensive income iroc net income approximately 08 million 20 million 18 million us dollars years ended december 31 2008 2007 2006 respectively addition prorata share iroc’s net income value investment changes based exchange rate us canadian dollars fourth quarter 2008 us dollar strengthened significantly canadian dollar reducing value investment decrease offset accumulated comprehensive income years ended december 31 2008 2007 2006 recorded 02 million 04 million 04 million respectively equity income related investment iroc years ended december 31 2008 2007 2006 earnings distributed us iroc distributed earnings gains losses arising disposal investment reportable income tax purposes result amounts record prorata share iroc’s earnings losses entitled result temporary difference book taxable income provisions sfas 109 record deferred tax asset liability appropriate account temporary differences impairment review equity method investment iroc performed quarterly basis determine decline fair value temporary fair value asset measured using quoted market prices absence quoted market prices fair value based estimate discounted cash flows determining whether decline temporary consider cyclicality industry investment operates historical performance relation peers current economic environment future conditions industry operating performance relation peers future economic environment may vary current assessment recoverability carrying value investment approximated fair value second quarter 2008 iroc’s stock price currently depressed historically volatile fourth quarter 2008 company’s management determined decline value investment iroc temporary recorded pretax charge 54 million order reduce carrying value investment fair value fair value determined using quoted market prices iroc shares december 31 2008 geostream services group october 31 2008 acquired 26 interest ooo geostream services group “geostream” 174 million incurred direct transaction costs approximately 19 million associated transaction geostream located russian federation provides drilling workover services subsurface engineering modeling russian federation connection initial investment three officers company became board members geostream representing 50 board membership exert significant influence operations geostream control therefore account using equity method fair value amounts invested geostream excess underlying book value investment currently performing valuation determine components difference basis preliminarily allocated substantially difference goodwill prorata share geostream’s net income two months ended december 31 2008 material contractually required purchase additional 24 geostream later march 31 2009 approximately 113 million december 31 2008 equivalent 159 million period exceed six years subsequent october 31 2008 option increase ownership percentage geostream 100 however acquired 100 geostream end sixyear period required arrange initial public offering shares key energy services inc subsidiaries notes consolidated financial statements continued advanced flow technologies inc september 2007 completed acquisition ami privatelyheld canadian company focused oilfield technology prior acquisition ami owned portion another canadian company afti part acquisition ami increased ownership percentage afti 5146 december 31 2007 consolidated assets liabilities results operations cash flows afti consolidated financial statements portion afti remaining outside control forming minority interest consolidated financial statements ownership afti declined 4873 december 31 2008 due issuance additional shares afti result deconsolidated afti results consolidated financial statements december 31 2008 account interest equity method note 9 estimated fair value financial instruments following summary carrying amounts estimated fair values financial instruments december 31 2008 2007 sfas 107 disclosures fair value financial instruments “sfas 107” defines fair value financial instrument amount instrument could exchanged current transaction willing parties cash equivalents shortterm investments accounts payable accrued liabilities carrying amounts approximate fair value short maturity instruments carrying value equal fair value instruments balance sheet date notes receivablerelated parties amounts reported relate notes receivable certain employees company related relocation retention agreements carrying values notes approximate fair values applicable balance sheet dates 8375 senior notes due 2014 fair value longterm debt based upon quoted market prices face value various debt securities december 31 2008 carrying value notes december 31 2008 4250 million fair value 2821 million senior secured credit facility revolving loans variable interest rates fair values revolving loans borrowed senior secured credit facility approximate carrying values december 31 2008 carrying fair values loans december 31 2008 approximately 1878 million notes payable related parties amounts reported relate seller financing arrangement entered connection acquisition moncla see “note 2 acquisitions” carrying value notes approximate fair values december 31 2008 key energy services inc subsidiaries notes consolidated financial statements continued note 10 derivative financial instruments interest rate swaps march 10 2006 entered two 1000 million notional amount interest rate swaps fix interest rate portion borrowings prior senior credit agreement dated july 29 2005 “prior credit facility” swaps met criteria derivative instruments connection termination prior credit facility november 2007 settled outstanding interest rate swap arrangements recognized loss approximately 23 million related settlement interest rate swaps recorded consolidated statements operations component interest expense call options 8375 senior notes due 2014 indenture related 4250 million 8375 senior notes due 2014 see “note 12 longterm debt” contains provisions option may redeem notes varying prices stated maturity date certain provisions based contingent events future equity offering us change control company provisions contingent nature one noncontingent scenarios price could retire notes based part variable interest rate analyzed provisions indenture allow us repay debt early order determine call options constitute embedded derivative instrument sfas 133 require bifurcation separate measurement host contract followed guidance provided paragraphs 6 12 13 61 sfas 133 derivatives implementation group “dig” issues b16 b39 determining whether call options required bifurcation separate measurement based analysis believe options require bifurcation separate measurement note 11 income taxes components income tax expense follows made net federal income tax payments approximately 335 million 855 million 876 million years ended december 31 2008 2007 2006 respectively made net state income tax payments approximately 66 million 66 million 84 million years ended december 31 2008 2007 2006 respectively made net foreign tax payments approximately 34 million 42 million 30 million years ended december 31 2008 2007 2006 respectively years ended december 31 2008 2007 2006 tax benefits allocated stockholders’ equity compensation expense income tax purposes excess amounts recognized financial reporting purposes 17 million 34 million less 01 million respectively company allocated tax benefits stockholders’ equity prior years compensation expense income tax purposes excess amounts recognized financial reporting purposes key energy services inc subsidiaries notes consolidated financial statements continued income tax expense differs amounts computed applying statutory federal rate follows december 31 2008 2007 deferred tax assets liabilities comprised following 2008 deferred tax liabilities decreased 10 million adjustments accumulated comprehensive loss 2007 deferred tax liabilities decreased 02 million adjustments accumulated comprehensive loss recording deferred income tax assets consider whether likely portion deferred income tax assets realized ultimate realization deferred income tax assets dependent upon generation future taxable income periods deferred income tax assets would deductible consider scheduled reversal deferred income tax liabilities projected future taxable income determination fully realize deferred income tax assets related federal net operating loss carryforwards valuation allowance due section 382 limitations would need generate future federal taxable income approximately 48 million next ten years certain exceptions noted believe considering available key energy services inc subsidiaries notes consolidated financial statements continued objective evidence positive negative historical prospective greater weight given historical evidence likely assets realized estimate december 31 2008 2007 2006 available 71 million 82 million 93 million respectively federal net operating loss carryforwards approximately 47 million net operating losses december 31 2008 subject 11 million annual section 382 limitation expire 2018 approximately 24 million net operating losses december 31 2008 subject 5000 annual section 382 limitation expire 2016 2018 valuation allowance provided likely portion deferred tax assets realized due annual limitations sections 382 383 management believes able utilize available carryforwards prior ultimate expiration deferred tax asset associated remaining federal net operating loss carryforwards expire utilization due section 382 limitations 23 million includes valuation allowance 08 million result section 382 limitations december 31 2008 2007 respectively estimate december 31 2008 2007 2006 available 16 million 19 million 31 million respectively state net operating loss carryforwards expire 2009 2025 fully realize deferred income tax assets related state net operating loss carryforwards would need generate future west virginia taxable income 129 million next 17 years future pennsylvania taxable income 20 million next 17 years management believes likely able utilize available carryforwards prior ultimate expiration deferred tax asset associated remaining state net operating loss carryforwards december 31 2008 14 million includes valuation allowance less 01 million result 2007 company began operations mexico resulted net operating loss 2 million deferred tax asset related net operating loss carryforward 06 million mexico enacted new flat tax rate effective january 1 2008 flat tax functions addition regular corporate tax rate 28 tax expense calculated methods flat tax greater regular tax additional tax expense regular tax assessed addition regular tax calculation 2007 recorded full valuation allowance related mexico net operating loss carryforwards 06 million management believed due enactment mexico flat tax net operating loss carryforwards related mexico operations likely fully realized future determined company would flat tax position 2008 2007 regular net operating loss utilized 2008 regular mexico income accordingly valuation allowance 06 million set 2007 released 2008 2007 company made stock acquisition ami canadian company december 31 2008 2007 company’s canadian operations net operating losses 38 million 32 million respectively december 31 2008 2007 deferred tax asset related net operating loss carryforward 11 million 10 million respectively recorded valuation allowance related canadian net operating loss carryforwards december 31 2008 2007 management believes net operating loss carryforwards related canadian operations likely fully realized future fully realize deferred income tax assets related canadian net operating loss carryforwards would need generate 02 million future canadian taxable income next seven years 36 million future canadian taxable income next nineteen years net operating losses expire 2015 2028 provide us income taxes withholding taxes 2008 unremitted earnings mexico subsidiaries earnings considered permanently reinvested unremitted earnings mexico subsidiaries representing tax basis accumulated earnings profits totaled approximately 63 million december 31 2008 provide us income taxes 2007 2006 unremitted earnings key energy services inc subsidiaries notes consolidated financial statements continued foreign subsidiaries tax basis foreign subsidiary excess book basis december 31 2007 2006 december 2006 fasb issued fin 48 fin 48 clarifies accounting uncertainty income taxes recognized enterprise’s financial statements accordance sfas 109 fin 48 prescribes recognition threshold measurement attributes financial statement recognition measurement income tax position taken expected taken income tax return fin 48 also provides guidance derecognition classification interest penalties accounting interim periods disclosure transition may 2007 fasb issued fsp fin 481 fsp fin 481 provides guidance enterprise determine whether tax position effectively settled purpose recognizing previously unrecognized tax benefits determining whether tax position effectively settled entities must evaluate whether taxing authorities completed examination procedures ii whether entity intends appeal litigate aspect tax position included completed evaluation iii whether remote taxing authority would examine reexamine aspect taxing position fsp fin 481 applied upon initial adoption fin 48 december 31 2008 december 31 2007 january 1 2007 approximately 56 million 68 million 34 million respectively unrecognized tax benefits net federal benefits recognized would impact effective tax rate accrued approximately 21 million 23 million 10 million payment interest penalties december 31 2008 december 31 2007 january 1 2007 respectively believe reasonably possible approximately 28 million currently remaining unrecognized tax positions individually insignificant may recognized end 2008 result lapse statute limitations file income tax returns united states federal jurisdiction various states foreign jurisdictions current federal tax examination federal tax years ending december 31 2005 forward open tax audits december 31 2008 significant filings argentina examined 2006 mexico initial stages 2007 tax audit initial year operations state texas tax filings remain open 2003 2006 certain subsidiaries company recognized tax benefits 2008 17 million expirations statutes limitations recorded income tax benefit 07 million increase deferred tax liabilities 05 million decrease goodwill 05 million related statute expirations following table presents activity 2008 related fin 48 reserve thousands tax legislative changes economic stimulus act 2008 economic stimulus act 2008 permits bonus firstyear depreciation deduction 50 adjusted basis qualified property personal property software acquired placed service december 31 2007 january 1 2009 key energy services inc subsidiaries notes consolidated financial statements continued estimated 123 million qualifying additions 2008 resulting additional 2008 tax depreciation 49 million american recovery reinvestment act 2009 american recovery reinvestment act 2009 extends bonus firstyear depreciation deduction 50 adjusted basis qualified property acquired placed service december 31 2008 january 1 2010 revised texas franchise tax may 2006 state texas enacted new law effective january 1 2007 substantially changes tax system texas law replaces taxable capital earned surplus components franchise tax new tax based modified gross revenue law imposes tax unitary group affiliated entities’ net receipts rather earned surplus separate entity note 12 longterm debt components longterm debt follows 8375 senior notes due 2014 november 29 2007 company issued 4250 million aggregate principal amount 8375 senior notes due 2014 “senior notes” indenture dated november 29 2007 “indenture” among us guarantors party thereto “guarantors” bank new york trust company na trustee senior notes priced 100 face value yield 8375 net proceeds deducting initial purchasers’ fees estimated offering expenses approximately 4161 million used approximately 3949 million net proceeds retire existing term loans including accrued unpaid interest balance used general corporate purposes senior notes general unsecured senior obligations key accordingly rank effectively subordinate existing future secured indebtedness senior notes jointly severally guaranteed senior unsecured basis certain existing future domestic subsidiaries interest senior notes payable june 1 december 1 year beginning june 1 2008 senior notes mature december 1 2014 december 1 2011 senior notes subject redemption time option whole part upon less 30 60 days’ notice redemption prices expressed percentages principal amount redeemed set forth plus accrued key energy services inc subsidiaries notes consolidated financial statements continued unpaid interest thereon applicable redemption date redeemed twelvemonth period beginning december 1 years indicated notwithstanding foregoing time december 1 2010 may one occasions redeem 35 aggregate principal amount outstanding senior notes redemption price 108375 principal amount thereof plus accrued unpaid interest thereon redemption date net cash proceeds one equity offerings provided least 65 aggregate principal amount senior notes issued indenture remains outstanding immediately redemption provided redemption shall occur within 180 days date closing equity offering addition time prior december 1 2011 company may option redeem portion senior notes redemption price equal 100 principal amount thereof plus applicable premium defined indenture respect senior notes plus accrued unpaid interest thereon redemption date company experiences change control subject certain exceptions must give holders senior notes opportunity sell company senior notes whole part purchase price equal 101 aggregate principal amount thereof plus accrued unpaid interest thereon date purchase company restricted subsidiaries subject certain negative covenants indenture governing senior notes indenture limits ability company restricted subsidiaries among things sell assets ii pay dividends make distributions capital stock subordinated indebtedness iii make investments iv incur additional indebtedness issue preferred stock v create certain liens vi enter agreements restrict dividends payments subsidiaries vii consolidate merge transfer substantially assets viii engage transactions affiliates ix create unrestricted subsidiaries connection sale senior notes company entered registration rights agreement initial purchasers pursuant agreed file exchange offer registration statement sec respect offer exchange senior notes substantially identical notes would registered securities act use reasonable best efforts cause registration statement become effective prior november 29 2008 accordance agreement company filed exchange offer registration statement sec august 19 2008 became effective august 22 2008 offered exchange aggregate principal amount 4250 million registered 8375 senior notes due 2014 company refers exchange notes original unregistered 8375 senior notes due 2014 issued private offering november 29 2007 terms exchange notes substantially identical terms original notes except transfer restrictions registration rights additional interest provisions relating originally issued notes apply exchange notes references “senior notes” herein includes exchange notes issued exchange offer december 31 2008 company compliance covenants required senior notes key energy services inc subsidiaries notes consolidated financial statements continued senior secured credit facility simultaneously closing offering senior notes company entered new credit agreement “credit agreement” several lenders credit agreement provides senior secured credit facility “senior secured credit facility” consisting revolving credit facility letter credit subfacility swing line facility aggregate principal amount 4000 million mature later november 29 2012 obligations senior secured credit facility guaranteed subsidiaries secured assets including accounts receivable inventory equipment senior secured credit facility replaced company’s prior credit facility repaid proceeds senior notes interest rate per annum applicable amounts borrowed senior secured credit facility company’s option libor plus applicable margin ii higher x bank america’s prime rate federal funds rate plus 05 plus applicable margin applicable margin libor loans ranges 150 200 basis points applicable margin loans ranges 50 100 basis points depend upon company’s consolidated leverage ratio senior secured credit facility contains certain financial covenants among things require maintenance consolidated leverage ratio exceed 350 100 consolidated interest coverage ratio less 300 100 limit company’s capital expenditures 2500 million per fiscal year 50 amount may carried expenditure following fiscal year ratios referred calculated quarterly consolidated basis trailing four fiscal quarter period addition senior secured credit facility contains certain affirmative negative covenants including without limitation restrictions liens ii debt guarantees contingent obligations iii mergers consolidations iv sales transfers dispositions property assets v loans acquisitions joint ventures investments acquisitions permitted long giving pro forma effect thereto default event default exists senior secured credit facility consolidated leverage ratio exceed 275 100 company compliance consolidated interest coverage ratio company least 25 million availability senior secured credit facility vi dividends distributions redemptions repurchases equity holders vii prepaying redeeming repurchasing subordinated contractually structurally debt viii granting negative pledges lenders ix changes nature company’s business x amending organizational documents amending otherwise modifying debt related document material agreement amendment modification would material adverse effect xi changes accounting policies reporting practices foregoing cases certain exceptions senior secured credit facility permits share repurchases 2000 million provides share repurchases excess 2000 million made debt capitalization ratio 50 december 31 2008 company compliance covenants required senior secured credit facility company may prepay senior secured credit facility whole part time without premium penalty subject certain reimbursements lenders breakage redeployment costs september 15 2008 lehman brothers holdings “lehman” filed bankruptcy protection chapter 11 united states bankruptcy code lehman commercial paper inc “lcpi” subsidiary lehman member syndicate banks participating senior secured credit facility lcpi’s commitment approximately 11 company’s total facility december 31 2008 company approximately 1393 million available senior secured credit facility availability reflects reduction approximately 193 million unfunded commitments lcpi company also key energy services inc subsidiaries notes consolidated financial statements continued 536 million committed letters credit facility terms agreement committed letters credit count borrowing capacity revolving credit facility seller financing arrangement moncla purchase connection acquisition moncla see “note 2 acquisitions” company entered two promissory notes sellers first unsecured note amount 125 million due payable lumpsum together accrued interest october 25 2009 interest note due anniversary closing acquisition moncla october 25 2007 second unsecured note amount 100 million payable annual installments 20 million plus accrued interest beginning october 25 2008 2012 notes bears interest federal funds rate adjusted annually anniversary closing date december 31 2008 interest rate notes 15 interest expense years ended december 31 2008 2007 12 million 02 million respectively two notes aggregate federal funds rate represent rate would resulted independent borrower independent lender negotiated similar transaction comparable terms conditions equal incremental borrowing rate accordance accounting principles board “apb” 21 interest receivables payables “apb 21” sfas 141 business combinations “sfas 141” recorded promissory notes fair value resulted discount recorded discount recognized interest expense life promissory notes using effective interest method amount discount remaining amortized december 31 2008 2007 02 million 03 million respectively notes aggregate total amount discount amortization included interest expense related notes years ended december 31 2008 2007 approximately 01 million less 01 million respectively longterm debt principal repayment interest expense presented schedule repayment requirements longterm debt next five years thereafter december 31 2008 key energy services inc subsidiaries notes consolidated financial statements continued presented schedule estimated minimum lease payments capital lease obligations next five years thereafter december 31 2008 interest expense years ended december 31 2008 2007 2006 consisted following december 31 2008 2007 weighted average interest rate variable rate debt 417 598 respectively deferred financing costs connection longterm debt capitalized costs expenses approximately 03 million 134 million 05 million years ended december 31 2008 2007 2006 respectively amortization deferred financing costs totaled 20 million 17 million 16 million years ended december 31 2008 2007 2006 respectively unamortized debt issuance costs written included determination gain loss extinguishment debt zero 96 million key energy services inc subsidiaries notes consolidated financial statements continued zero years ended december 31 2008 2007 2006 respectively net carrying values years presented appear table note 13 commitments contingencies operating lease arrangements key leases certain property equipment noncancelable operating leases expire various dates 2019 varying payment dates throughout month december 31 2008 future minimum lease payments noncancelable operating leases follows thousands company also party significant number monthtomonth leases cancelable time operating lease expense 224 million 164 million 170 million years ended december 31 2008 2007 2006 respectively litigation various suits claims arising ordinary course business pending us due part locations conduct business continental united states often subject jury verdicts arbitration hearings result outcomes favor plaintiffs continually assess contingent liabilities including potential litigation liabilities well adequacy accruals need disclosure items accordance sfas 5 establish provision contingent liability probable liability incurred amount estimable december 31 2008 aggregate amount provisions losses related litigation deemed probable estimable approximately 45 million believe disposition matters result additional loss materially excess amounts recorded year ended december 31 2008 recorded benefit approximately 22 million related settlement ongoing legal matters continued refinement liabilities recognized litigation deemed probable estimable provisions related litigation matters deemed probable estimable 68 million 2007 288 million 2006 key energy services inc subsidiaries notes consolidated financial statements continued gonzales matter september 2005 class action lawsuit gonzales v key energy services inc filed ventura county california superior court alleging key pay hourly employees travel time yard wellhead certain employees denied meal rest periods september 17 2008 reached agreement principle subject court approval settle claims related matter 12 million 2005 recorded liability lawsuit subsequent settlement matter 2008 material impact financial position results operations cash flows litigation former officers employees named lawsuit former general counsel jack loftis jr filed us district court district new jersey april 21 2006 alleges “whistleblower” claim sarbanesoxley act breach contract breach duties good faith fair dealing breach fiduciary duty wrongful termination august 17 2007 company filed counterclaims mr loftis alleging attorney malpractice breach contract breach fiduciary duties counterclaims company seeks repayment severance paid mr loftis date approximately 08 million plus benefits paid period july 8 2004 september 21 2004 damages relating allegations malpractice breach fiduciary duties case transferred pending us district court eastern district pennsylvania currently set trial fourth quarter 2009 recorded fourth quarter 2008 liability matter believe conclusion matter material impact financial position results operations cash flows october 17 2006 jane john exwife former chief executive officer francis john filed complaint bucks county pennsylvania exhusband company ms john alleges breach marital agreement breach options agreements civil conspiracy fraud alleges mr john company defrauded regard mr john’s compensation well disclosures marital property virtue assignments ms john holds 375000 stock options expired unexercised period company became current financial statements options could exercised resolving separate lawsuit company mr john mr john agreed indemnify company respect damages attributable ms john’s claims damages attributable alleged breach ms john’s stock option agreements company agreed indemnify mr john discovery case remains ongoing currently trial setting recorded liability matter third quarter 2008 believe conclusion matter material impact financial position results operations cash flows september 3 2006 former controller former assistant controller filed joint complaint company 133rd district court harris county texas alleging constructive termination breach contract additionally january 11 2008 former chief operating officer james byerlotzer filed lawsuit 55th district court harris county texas alleging breach contract based inability exercise stock options period current sec filings based failure provide shares restricted stock currently set trial matters second quarter 2009 recorded liability matters believe conclusion matters material impact financial position results operations cash flows august 21 2006 former chief financial officer royce w mitchell filed suit company 385th district court midland county texas alleging breach contract regard alleged bonuses benefits expense reimbursements conditional stock grants stock options well relief theories quantum meruit promissory estoppel specific performance february 15 2008 parties key energy services inc subsidiaries notes consolidated financial statements continued settled matter 05 million included reimbursement expenses attorneys fees approximately 04 million stockholder class action suits derivative actions since june 2004 certain officers directors named defendants six class action complaints brought behalf putative class purchasers securities alleged violations federal securities laws filed federal district court texas six actions consolidated one action four stockholder derivative actions also filed purportedly behalf generally alleging facts consolidated stockholder class action september 7 2007 reached agreements principle settle stockholder class action derivative lawsuits consideration payments totaling 166 million exchange full complete releases defendants company paid approximately 11 million received final approval settlement stockholder class action claims court march 6 2008 final court approval derivative settlement received august 8 2008 litigation stockholder class action derivative matters concluded expired option holders september 2007 belinda taylor filed lawsuit 11th judicial district harris county texas behalf similarly situated current former employees held vested options expired april 28 2004 date company became current financial statements “expired option holders” suit amended alleged company breached contracts expired option holders breached fiduciary duties good faith fair dealing pricing stock options granted expired option holders march 6 2008 parties agreed settle pending claims expired option holders excluding terminated cause previously filed suits us approximately 10 million includes taxes legal fees court entered final order approving settlement august 25 2008 dismissed case december 2008 payments class pursuant terms settlement completed lawsuits involved jane john former controller former assistant controller described “litigation former officers employees” also involve claims relating expired stock options automobile accident litigation august 22 2007 one employees involved automobile accident resulted third party fatality first quarter 2008 recorded appropriate liability matter lawsuit arising accident settled third quarter 2008 company recognized incremental expense less 05 million related settlement third quarter 2008 tax audits routinely subject audits tax authorities past received material assessments tax auditors december 31 2008 2007 recorded reserves management feels appropriate future potential liabilities result audits believe fully reserved assessments ultimate amount settlements vary estimates connection ongoing sales tax audit company recorded liability approximately 32 million third quarter 2008 relating state sales taxes collected company’s customers 2003 september 30 2008 therefore remitted appropriate state agency key energy services inc subsidiaries notes consolidated financial statements continued provision recorded general administrative expense expect ultimate resolution matter result loss materially excess amount already accrued connection former egyptian operations terminated 2005 undergoing income tax audits periods operations december 31 2008 company recorded liability approximately 04 million relating open egyptian income tax audits fourth quarter 2007 company reached preliminary settlement egyptian tax authorities 2003 2004 tax years recording tax benefit 07 million reducing tax liability accrued december 31 2007 approximately 04 million expect ultimate resolution matter result loss materially excess amount already accrued selfinsurance reserves maintain reserves workers’ compensation vehicle liability balance sheet based judgment estimates using actuarial method based claims incurred estimate general liability claims casebycase basis maintain insurance policies workers’ compensation vehicle liability general liability claims insurance policies carry selfinsured retention limits deductibles per occurrence basis retention limits deductibles accounted accrual process workers’ compensation vehicular liability general liability claims december 31 2008 2007 recorded 689 million 690 million respectively selfinsurance reserves related workers’ compensation vehicular liabilities general liability claims partially offsetting liabilities approximately 108 million 81 million insurance receivables december 31 2008 2007 respectively feel liabilities recorded appropriate based known facts circumstances expect losses materially excess amounts already accrued existing claims environmental remediation liabilities environmental reserve matters including remediation efforts current locations relating previouslydisposed properties record liabilities remediation efforts probable costs conduct remediation efforts reasonably estimated litigation reserves reflect application insurance coverage environmental reserves reflect management’s assessment insurance coverage may apply matters issue december 31 2008 2007 recorded 30 million 31 million respectively environmental remediation liabilities feel liabilities recorded appropriate based known facts circumstances expect losses materially excess amounts already accrued provide performance bonds provide financial surety assurances remediation maintenance swd properties comply environmental protection standards costs swd properties may mandatory comply applicable laws regulations future required divest cease operations optimization improve operations safety regulatory compliance registration payment arrangement january 1999 issued 150000 warrants “warrants” connection debt offering exercisable aggregate approximately 22 million shares company’s stock exercise price 488125 per share december 31 2008 83800 warrants exercised leaving 66200 outstanding exercisable approximately 10 million shares common stock termination notice provided holders outstanding warrants expired february 2 2009 terms warrants company required maintain effective registration statement covering shares potentially issuable upon exercise warrants company key energy services inc subsidiaries notes consolidated financial statements continued effective registration statement covering shares company required make liquidated damages payments holders warrants twelve months ended december 31 2008 2007 2006 company made liquidated damages payments totaling 08 million 09 million 09 million respectively august 21 2008 requisite registration statement required terms warrants became effective august 22 2008 additional liquidated damage payments required made company note 14 accumulated comprehensive loss components accumulated comprehensive loss follows local currency functional currency operations argentina mexico canada equity investments canada russian federation cumulative translation gains losses resulting translating foreign subsidiary’s financial statements functional currency us dollars included comprehensive income accumulated stockholders’ equity partial complete sale liquidation net investment foreign entity table summarizes conversion ratios used translate financial statements cumulative currency translation gains losses net tax currency note 15 employee benefit plans maintain 401k plan part employee benefits package match 100 employee contributions 4 employee’s salary 401k plan subject maximums 9200 9000 8800 years ended december 31 2008 2007 2006 respectively matching contributions 119 million 102 million 74 million years ended december 31 2008 2007 2006 respectively employees fully vested matching contributions made company effective january 1 2006 longer offered participants option purchase units company stock 401k plan fund discontinued option participants transferred units key stock another 401k plan fund affect ability plan participants manage contributions key energy services inc subsidiaries notes consolidated financial statements continued note 16 stockholders’ equity common stock december 31 2008 200000000 shares common stock authorized 010 par value 121305289 shares issued outstanding 2008 dividends paid december 31 2007 200000000 shares common stock authorized 010 par value 131142905 shares issued outstanding 2007 dividends paid terms senior notes senior secured credit facility must meet certain financial covenants may pay dividends currently intend pay dividends share repurchase program october 2007 board directors authorized share repurchase program 3000 million effective march 31 2009 inception program november 2007 december 31 2008 repurchased approximately 134 million shares common stock open market transactions aggregate price approximately 1673 million share repurchases 2008 approximately 111 million shares aggregate price approximately 1352 million repurchase program well amount timing future repurchases subject market conditions financial condition liquidity senior secured credit facility permits us make stock repurchases excess 2000 million consolidated debt capitalization ratio defined 50 december 31 2008 ratio 50 tax withholding june 2006 company began purchasing shares restricted common stock previously granted certain company’s officers pursuant agreement individuals permitted sell shares back company order satisfy minimum income tax withholding requirements related vesting grants repurchased total 97443 72847 shares aggregate cost 12 million 13 million 2008 2007 respectively represented fair market value shares based price company’s stock dates purchase december 31 2008 share repurchase program tax withholdings share acquisitions prior years repurchased approximately 137 million shares common stock aggregate cost 1710 million common stock warrants january 1999 issued 150000 warrants “warrants” connection debt offering exercisable aggregate approximately 22 million shares company’s stock exercise price 488125 per share december 31 2008 83800 warrants exercised leaving 66200 outstanding exercisable approximately 10 million shares common stock termination notice provided holders outstanding warrants expired february 2 2009 terms warrants company required maintain effective registration statement covering shares potentially issuable upon exercise warrants company effective registration statement covering shares company required make liquidated damages payments holders warrants company’s past failure timely file annual quarterly reports sec effective registration statement twelve months ended december 31 2008 2007 2006 company made liquidated damages payments totaling 08 09 million respectively august 21 2008 requisite registration statement required terms warrants became effective august 22 2008 additional liquidated damage payments required made company related warrants key energy services inc subsidiaries notes consolidated financial statements continued note 17 sharebased compensation incentive plan december 6 2007 company’s shareholders approved 2007 equity cash incentive plan “2007 incentive plan” 2007 incentive plan administered board committee designated board “committee” board committee “administrator” power authority select participants defined 2007 incentive plan grant awards defined participants pursuant terms 2007 incentive plan subject adjustment total number shares company’s common stock par value 010 per share available grant awards 2007 incentive plan may exceed 4000000 shares however purposes limitation stock subject award canceled forfeited expires prior exercise realization become available issuance 2007 incentive plan subject adjustment participant granted one year period options purchase common stock andor stock appreciation rights respect 500000 shares common stock available distribution 2007 incentive plan come authorized unissued shares reacquired company manner awards 2007 incentive plan granted fair market value date issuance awards may form options incentive stock options nonstatutory stock options restricted stock restricted stock units performance compensation awards stock appreciation rights collectively “awards” awards may granted employees directors cases consultants individuals administrator determines reasonably expected become employees directors consultants following grant date award “participants” however incentive stock options may granted employees vesting periods may set board’s discretion awards tenyear contractual lives board time may amend terminate 2007 incentive plan however except provided otherwise 2007 incentive plan amendment effective unless approved shareholders company extent shareholder approval necessary satisfy applicable law securities exchange listing requirements december 31 2008 1806556 awards granted 2250144 remaining grants available 2007 incentive plan incentive plan january 13 1998 key’s shareholders approved key energy group inc 1997 incentive plan amended “1997 incentive plan” together 2007 incentive plan “plans” 1997 incentive plan amendment restatement plans formerly known key energy group inc 1995 stock option plan key energy group inc 1995 outside directors stock option plan november 17 2007 1997 incentive plan terminated pursuant terms exercise price options granted 1997 incentive plan fair market value per share date options granted 1997 incentive plan shares common stock listed securities exchange fair market value determined using closing sales price immediate preceding business day reported securities exchange shares listed exchange includes period april 2005 october 2007 fair market value determined using published closing price common stock pink sheets business day immediately preceding date grant exercise nsos results us tax deduction us equal difference exercise price market price exercise date key energy services inc subsidiaries notes consolidated financial statements continued period 20002001 board directors granted 37 million stock options outside 1997 incentive plan 120000 remained outstanding december 31 2008 37 million nonplan options addition include options granted 1997 incentive plan conformity certain terms 1997 incentive plan accelerated vesting option sar awards declines company’s stock price company’s board directors resolved fourth quarter 2008 accelerate vesting period certain company’s outstanding unvested stock option awards stock appreciation rights affected approximately 280 employees result acceleration company recorded pretax charge approximately 109 million general administrative expense accompanying consolidated statement operations stock option awards stock option awards granted plans maximum contractual term ten years date grant shares issuable upon exercise stock option issued authorized unissued shares company’s common stock following table summarizes stock option activity related plans certain options granted prior years outside 1997 incentive plan 50 million options outstanding december 31 2008 23 million shares remained available issuance 2007 incentive plan december 31 2008 shares thousands key energy services inc subsidiaries notes consolidated financial statements continued 1 cancelledexpired options 2006 include approximately 39 million options previously held former chief executive officer cancelled connection termination following table summarizes information stock options outstanding december 31 2008 shares thousands total fair value stock options granted years ended december 31 2008 2007 2006 75 million 71 million 60 million respectively total fair value stock options vested year ended december 31 2008 194 million including 148 million resulting key energy services inc subsidiaries notes consolidated financial statements continued acceleration vesting certain company’s equity awards years ended december 31 2008 2007 2006 company recognized approximately 151 million 35 million 26 million pretax expense related stock options respectively unvested stock option awards outstanding december 31 2008 company expects recognize approximately less 01 million compensation expense weighted average remaining vesting period approximately 24 years weighted average remaining contractual term stock option awards exercisable december 31 2008 65 years intrinsic value options exercised years ended december 31 2008 2007 58 million 102 million respectively options exercised 2006 cash received exercise options year ended december 31 2008 67 million recognition associated tax benefits amount 52 million common stock awards june 2005 began granting shares common stock outside directors certain employees common stock awards granted outside directors vest immediately granted employees vest ratably threeyear period subject forfeiture total fair market value common stock awards granted years ended december 31 2008 2007 2006 65 million 47 million 59 million respectively pursuant agreement issued common stock awards recipients awards may shares withheld order satisfy individuals’ income tax obligations associated vesting awards granted shares withheld tax withholding purposes totaled 97443 72847 years ended december 31 2008 2007 respectively aggregate repurchase values 12 million 13 million respectively connection vesting june 2006 one recipients permitted amount withheld excess required minimum withholding current tax law sfas 123r company required account grant liability award compensation expense award years ended december 31 2008 2007 2006 less 01 million 01 million 02 million respectively last tranche shares associated award vested 2008 following table summarizes information years ended december 31 2008 2007 2006 common share awards issued company shares thousands key energy services inc subsidiaries notes consolidated financial statements continued 1 shares common stock issued nonemployee directors vest immediately upon issuance common stock grants vest immediately upon issuance company records expense equal fair market value shares date grant common stock awards immediately vest company recognizes compensation expense ratably vesting period grant net estimated actual forfeitures years ended december 31 2008 2007 2006 company recognized 61 million 56 million 36 million respectively pretax expense associated common stock awards including common stock grants outside directors net estimated actual forfeitures connection expense related common stock awards recognized year ended december 31 2008 company recognized tax benefits approximately 15 million unvested common stock awards outstanding december 31 2008 company anticipates recognize approximately 55 million pretax expense next 15 years phantom share plan december 2006 company announced implementation “phantom share plan” certain employees granted “phantom shares” phantom shares vest ratably fouryear period convey right grantee receive cash payment anniversary date grant equal fair market value phantom shares vesting date grantees permitted defer payment later date phantom shares “liability” type award sfas 123r account awards fair value recognize compensation expense related phantom shares based change fair value awards period percentage service requirement performed net estimated actual forfeitures offsetting liability recorded consolidated balance sheets recognized less 01 million pretax benefit approximately 33 million pretax compensation expense associated phantom shares years ended december 31 2008 2007 respectively december 31 2008 recorded current noncurrent liabilities 09 million 05 million respectively represented aggregate fair value key energy services inc subsidiaries notes consolidated financial statements continued phantom shares date december 31 2006 amount compensation expense liabilities recorded related phantom share plan consolidated financial statements material recognized income tax benefits associated phantom shares less 01 million 13 million 2008 2007 respectively unvested phantom share awards outstanding december 31 2008 expect recognize approximately 13 million compensation expense weighted average remaining vesting period approximately 17 years first payout phantom share plan made january 2008 time paid approximately 16 million cash holders phantom shares vested december 2007 stock appreciation rights august 2007 company issued approximately 587000 sars executive officers sar tenyear term date grant vests equal annual installments first second third anniversaries date grant upon exercise sar recipient receive amount equal difference exercise price fair market value share company’s common stock date exercise multiplied number shares common stock sar exercised payments made shares company’s common stock prior exercise sar entitle recipient receive shares company’s common stock provide recipient voting stockholders’ rights company accounts sars equity awards sfas 123r recognizes compensation expense ratably vesting period sar based fair value date issuance net estimated actual forfeitures compensation expense recognized 2008 2007 connection sars approximately 31 million 06 million respectively income tax benefits approximately 11 million 02 million 2008 2007 respectively recognized company connection expense vesting company’s outstanding sar awards accelerated fourth quarter 2008 therefore outstanding unvested sar awards december 31 2008 company recognize expense future periods associated awards valuation assumptions stock options stock appreciation rights fair value stock option grant sar estimated date grant using blackscholes optionpricing model based following weightedaverage assumptions note 18 transactions related parties employee loans advances time continuing comparative periods contained report made certain retention loans relocation loans employees executive officers retention loans forgiven various time periods long employee continues employment company relocation loans repaid upon employee selling prior residence december 31 2008 2007 loans aggregate totaled approximately 02 million 02 million respectively key energy services inc subsidiaries notes consolidated financial statements continued amount less 01 million made former officers company remainder made current employees company seller financing arrangement associated moncla acquisition connection acquisition moncla see “note 2 acquisitions” company entered two promissory notes payable agreement seller subsequent acquisition became officer company first unsecured note amount 125 million due payable lumpsum together accrued interest october 25 2009 interest note payable anniversary closing acquisition moncla october 25 2007 second unsecured note amount 100 million payable annual installments 20 million plus accrued interest beginning october 25 2008 2012 notes bears interest federal funds rate adjusted annually anniversary closing date federal funds rate represent rate would resulted independent borrower independent lender negotiated similar transaction comparable terms conditions equal incremental borrowing rate accordance apb 21 sfas 141 recorded promissory notes fair value resulted discount recorded discount recognized interest expense life promissory notes using effective interest method transactions employees connection acquisition western former owner western fred holmes became employee company mr holmes owned time acquisition continues exploration production company holmes western oil corporation “hwoc” customer western subsequent acquisition company continued provide services hwoc prices charged services rates average prices charged customers california market december 31 2008 receivables hwoc totaled approximately 02 million year ended december 31 2008 revenues hwoc totaled approximately 43 million board director relationship customer october 2007 added member company’s board directors senior vice president general counsel chief administrative officer anadarko petroleum corporation “anadarko” one customers sales anadarko comprised less 2 total revenues years ended december 31 2008 2007 respectively transactions anadarko services made market prices note 19 segment information 2008 reportable operating business segments well servicing pressure pumping fishing rental aggregate services create reportable segments accordance sfas 131 accounting policies reportable segments described “note 1 organization summary significant accounting policies” evaluate performance operating segments based revenue ebitda nongaap measure disclosed intersegment sales pricing based current market conditions well servicing operations provide full range well services including rigbased services oilfield transportation services casedhole wireline services ancillary oilfield services necessary complete maintain workover oil natural gas producing wells argentina mexico operations included well servicing segment aggregate operating divisions engaged well servicing activities well servicing reportable segment key energy services inc subsidiaries notes consolidated financial statements continued pressure pumping operations provide well stimulation cementing services stimulation includes fracturing nitrogen services acidizing services used enhance production oil natural gas wells formations exhibit restricted flow oil natural gas cementing services include pumping cement well casing wellbore fishing rental operations provide services include “fishing” recover lost stuck equipment wellbore use “fishing tools” addition segment offers full line services rental equipment designed use onshore offshore drilling workover services includes inventory consisting tubulars handling tools pressurecontrol equipment power swivels corporate apply provisions eitf 0410 segment reporting provisions eitf 0410 operating segments individually meet aggregation criteria described sfas 131 may combined operating segments individually meet aggregation criteria form separate reportable segment combined operating segments individually meet aggregation criteria established sfas 131 form “corporate other” segment reporting corporate expenses include general expenses associated managing reportable operating segments corporate assets consist principally cash equivalents shortterm investments deferred financing costs investments subsidiaries accounts notes receivable subsidiaries company’s investment iroc services corp deferred income tax assets key energy services inc subsidiaries notes consolidated financial statements continued key energy services inc subsidiaries notes consolidated financial statements continued following table presents information related foreign operations thousands us dollars note 20 supplemental schedule cash flow information cash paid interest includes cash payments interest longterm debt capital lease obligations commitment agency fees paid cash paid settle interest rate swaps associated termination prior credit facility key energy services inc subsidiaries notes consolidated financial statements continued note 21 unaudited supplementary information quarterly results operations set forth unaudited summarized quarterly information two recent years covered consolidated financial statements thousands except per share data 1 quarterly earnings per common share based weighted average number shares outstanding quarter sum quarters may equal annual earnings per common share 2 revenues gross margins income taxes net income earnings per share impacted fourth quarter 2007 due acquisitions moncla kings ami see “note 2 acquisitions” note 22 condensed consolidating financial statements notes guaranteed virtually domestic subsidiaries whollyowned guarantees joint several full complete unconditional restrictions ability subsidiary guarantors transfer funds parent company result guarantee arrangements required present following condensed consolidating financial information pursuant sec regulation sx rule 310 “financial statements guarantors issuers guaranteed securities registered” key energy services inc subsidiaries notes consolidated financial statements continued condensed consolidating balance sheet key energy services inc subsidiaries notes consolidated financial statements continued key energy services inc subsidiaries notes consolidated financial statements continued condensed consolidating statement operations key energy services inc subsidiaries notes consolidated financial statements continued key energy services inc subsidiaries notes consolidated financial statements continued condensed consolidating statement cash flows key energy services inc subsidiaries notes consolidated financial statements continued item 9item 8 financial statements supplementary data key energy services inc subsidiaries index consolidated financial statements report independent registered public accounting firm board directors stockholders key energy services inc audited accompanying consolidated balance sheets key energy services inc maryland corporation subsidiaries december 31 2009 2008 related consolidated statements operations comprehensive income stockholders’ equity cash flows three years period ended december 31 2009 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position key energy services inc subsidiaries december 31 2009 2008 results operations cash flows three years period ended december 31 2009 conformity accounting principles generally accepted united states america also audited accordance standards public company accounting oversight board united states effectiveness key energy services inc subsidiaries’ internal control financial reporting december 31 2009 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso report dated february 26 2010 expressed unqualified opinion effectiveness internal control financial reporting grant thornton llp houston texas february 26 2010 report independent registered public accounting firm board directors stockholders key energy services inc audited key energy services inc maryland corporation subsidiaries’ internal control financial reporting december 31 2009 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso key energy services inc subsidiaries’ management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion key energy services inc subsidiaries’ internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion key energy services inc subsidiaries maintained material respects effective internal control financial reporting december 31 2009 based criteria established internal control integrated framework issued coso also audited accordance standards public company accounting oversight board united states consolidated balance sheets statements operations comprehensive income stockholders’ equity cash flows key energy services inc subsidiaries report dated february 26 2010 expressed unqualified opinion consolidated financial statements grant thornton llp houston texas february 26 2010 key energy services inc subsidiaries consolidated balance sheets see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries consolidated statements operations see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries consolidated statements comprehensive income see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries consolidated statements cash flows see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries consolidated statements stockholders’ equity see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries notes consolidated financial statements note 1 organization summary significant accounting policies key energy services inc whollyowned subsidiaries controlled subsidiaries collectively “key” “company” “we” “us” “its” “our” provide complete range well services major oil companies foreign national oil companies independent oil natural gas production companies including rigbased well maintenance workover well completion recompletion services fluid management services pressure pumping services fishing rental services ancillary oilfield services operate major oil natural gas producing regions continental united states operations based mexico argentina russian federation also technology development company based canada equity interests oilfield service companies canada basis presentation consolidated financial statements included annual report form 10k present financial position results operations cash flows periods presented accordance generally accepted accounting principles united states “gaap” preparation consolidated financial statements requires us develop estimates make assumptions affect financial position results operations cash flows estimates also impact nature extent disclosure contingent liabilities among things use estimates analyze assets possible impairment ii determine depreciable lives assets iii assess future tax exposure realization deferred tax assets iv determine amounts accrue contingencies v value tangible intangible assets vi assess workers’ compensation vehicular liability selfinsured risk accruals insurance reserves vii provide allowances uncollectible accounts receivable viii value asset retirement obligations ix value equitybased compensation review significant estimates recurring basis record effect necessary adjustments prior publication financial statements adjustments made respect use estimates relate improved information previously available limitations inherent process actual results may differ materially estimates believe estimates reasonable certain reclassifications made prior period amounts conform current period financial statement classifications present income statement line items related gains losses early extinguishment debt interest income net gains losses disposal assets income expense single line item “other net” consolidated statements operations detail items provided “note 4 income expense” notes additionally show noncurrent portion notes accounts receivable related parties component noncurrent assets disclosed “note 19 transactions related parties” prior years amounts presented separate component noncurrent assets consolidated balance sheet discussed “note 21 segment information” first quarter 2009 changed reportable segments due reorganization us operations realign management structure resources financial information prior years recast reflect change segments none reclassifications presentation changes discussed impacted consolidated net income earnings per share total current assets total assets total stockholders’ equity evaluated events occurring balance sheet date included annual report form 10k possible disclosure subsequent event management monitored subsequent events date financial statements available issued subsequent events identified management required disclosure key energy services inc subsidiaries notes consolidated financial statements continued principles consolidation within consolidated financial statements include accounts majorityowned controlled subsidiaries eliminate intercompany accounts transactions interest entity significant control influence account interest using cost method interest entity exert significant influence control account interest using equity method discussed “note 2 acquisitions” september 2009 acquired additional 24 interest ooo geostream services group “geostream” bringing total investment geostream 50 prior acquisition additional interest accounted ownership geostream using equity method connection acquisition additional interest obtained majority representation geostream’s board directors controlling interest accounted acquisition business combination achieved stages since acquisition date consolidated assets liabilities results operations cash flows geostream consolidated financial statements portion geostream remaining outside control reflected noncontrolling interest consolidated financial statements acquisitions time acquire businesses assets consistent longterm growth strategy results operations acquisitions included financial statements beginning date acquisition acquisitions made january 1 2009 accounted using acquisition method acquisition method differs previous accounting guidance related business combinations expanding scope constitutes “business” must therefore accounted business combination business combinations whether partial full stages acquirer records 100 assets liabilities acquired business including goodwill fair values contingent consideration recognized fair value acquisition date certain arrangements changes fair value must recognized earnings settlement acquisitionrelated transaction restructuring costs must expensed rather treated part cost acquisition method also establishes new disclosure requirements enable users financial statements evaluate nature financial effects business combination final valuations assets liabilities obtained recorded soon practicable within one year date acquisition acquisitions december 31 2008 accounted using purchase method accounting purchase price allocated assets acquired liabilities assumed based upon estimated fair values date acquisition final valuations assets liabilities obtained recorded soon practicable within one year date acquisition revenue recognition recognize revenue following criteria met evidence arrangement exists ii delivery occurred services rendered iii price customer fixed determinable iv collectibility reasonably assured • evidence arrangement exists final understanding us customer occurred evidenced completed customer purchase order field ticket supplier contract master service agreement • delivery occurred services rendered completed requirements pursuant terms arrangement evidenced field ticket service log key energy services inc subsidiaries notes consolidated financial statements continued • price customer fixed determinable amount required paid agreed upon evidence price fixed determinable evidenced contractual terms price book completed customer purchase order completed customer field ticket • collectibility reasonably assured screen customers determine credit terms provide goods services customers granted credit accordance credit policy present revenues net sales taxes collected us customers required remitted local state governmental taxing authorities review contracts multiple element revenue arrangements deliverables separated units accounting assigned fair value standalone value customer objective reliable evidence fair value delivery undelivered items substantially controlled us believe negotiated prices deliverables services contracts representative fair value since acceptance nonacceptance element contract affect elements cash equivalents consider shortterm investments original maturity less three months cash equivalents december 31 2009 entered compensating balance arrangements obligations senior credit agreement syndicate banks bank america securities llc wells fargo bank na administrative agents “senior secured credit facility” secured assets including assets held subsidiaries includes cash equivalents restrict investment cash financial institutions high credit standing limit amount credit exposure one financial institution maintain cash bank deposit brokerage accounts exceed federally insured limits december 31 2009 accounts guaranteed federal deposit insurance corporation “fdic” 250000 per account substantially accounts held deposits excess fdic limits cash equivalents held russian subsidiary subject noncontrolling interest believe cash held whollyowned foreign subsidiaries could repatriated general corporate use without material withholdings time normal course business connection operations ongoing legal matters required place certain amounts cash deposit accounts restrictions limit ability withdraw funds december 31 2009 amount cash restricted arrangements 08 million certain cash accounts zerobalance controlled disbursement accounts right offset cash balances present outstanding checks written zerobalance accounts component accounts payable accompanying consolidated balance sheets accounts receivable allowance doubtful accounts establish provisions losses accounts receivable determine possibility collect part outstanding balances regularly review accounts 150 days past due invoice date collectibility establish adjust allowance necessary using specific identification method exhaust collection efforts determine balance never collected write accounts receivable associated allowance uncollectible accounts time entitled proceeds insurance policies amounts reserved self insurance liability present insurance receivables gross balance sheet component accounts receivable separate corresponding liability key energy services inc subsidiaries notes consolidated financial statements continued concentration credit risk significant customers include major oil natural gas production companies independent oil natural gas production companies foreign national oil natural gas production companies perform ongoing credit evaluations customers usually require material collateral maintain reserves potential credit losses necessary year ended december 31 2009 revenues one customers well servicing segment approximately 11 percent consolidated revenues single customer accounted 10 consolidated revenues year ended december 31 2009 years ended december 31 2008 2007 single customer accounted 10 consolidated revenues inventories consist primarily equipment parts use well servicing operations sand chemicals pressure pumping operations supplies held consumption valued lower average cost market property equipment property equipment carried cost less accumulated depreciation provided assets estimated depreciable lives assets using straightline method depreciation expense years ended december 31 2009 2008 2007 1563 million 1532 million 1247 million respectively depreciate operational assets depreciable lives salvage value fair value higher assets’ value scrap salvage value approximates 10 operational asset’s acquisition cost operational asset stacked taken service review physical condition depreciable life ultimate salvage value determine asset longer operable whether remaining depreciable life salvage value adjusted scrap asset accelerate depreciation asset salvage value dispose asset gain loss recognized december 31 2009 estimated useful lives asset classes follows lease certain operating assets capital lease obligations whose terms run 55 60 months assets depreciated estimated useful lives term capital lease obligation whichever shorter longlived asset group tested recoverability whenever events changes circumstances indicate carrying amount may recoverable purposes testing impairment group longlived assets along lines business based services provided lowest level identifiable cash flows largely independent cash flows assets liabilities asset group’s estimated future cash flows less net carrying value would record impairment charge reducing net carrying value estimated fair value events changes circumstance key energy services inc subsidiaries notes consolidated financial statements continued cause us evaluate fixed assets potential impairment may include changes market conditions adverse movements prices oil natural gas changes asset group expected future life intended use physical condition could reduce fair value certain property equipment development future cash flows determination fair value asset group involves significant judgment estimates discussed “note 6 property equipment” third quarter 2009 identified triggering event required us test longlived assets potential impairment result tests determined equipment pressure pumping operations impaired asset retirement obligations recognize liability fair value legal obligations associated retirement tangible longlived assets capitalize equal amount cost asset depreciate additional cost estimated useful life assets obligations perform asset retirement activities unconditional despite uncertainties may exist surrounding individual retirement activity accordingly recognize liability fair value conditional asset retirement obligation fair value reasonably estimated determining fair value examine inputs believe market participant would use transfer liability probabilityweight potential costs thirdparty would charge adjust cost inflation estimated life asset discount cost using credit adjusted risk free rate significant judgment involved estimating future cash flows associated obligations well ultimate timing cash flows estimates amount timing cash flows change changes may material impact results operations see “note 9 asset retirement obligations” capitalized interest capitalized average amount accumulated expenditures major capital projects construction using effective interest rate based related debt underlying assets placed service capitalized interest added cost assets amortized depreciation expense useful life assets included depreciation amortization line accompanying consolidated statements operations deferred financing costs deferred financing costs associated longterm debt carried cost amortized interest expense using effective interest method life related debt instrument related debt instrument retired remaining unamortized costs included determination gain loss extinguishment debt record gains losses extinguishment debt part continuing operations goodwill intangible assets goodwill results business combinations represents excess acquisition consideration fair value net assets acquired goodwill intangible assets subject amortization tested impairment annually frequently events changes circumstances indicate asset might impaired test impairment indefinitelived intangibles two step test first step test fair value calculated reporting units fair value compared carrying value reporting unit including reporting unit’s goodwill fair value reporting unit exceeds carrying value impairment second step test performed carrying value exceeds fair value reporting unit second step test required key energy services inc subsidiaries notes consolidated financial statements continued second step test compares implied fair value reporting unit’s goodwill carrying value implied fair value reporting unit’s goodwill determined manner amount goodwill recognized business combination purchase price equal fair value reporting unit implied fair value reporting unit’s goodwill excess carrying value impairment recorded carrying value excess implied fair value impairment equal excess recorded assist management preparation analysis valuation reporting units utilize services thirdparty valuation consultant reviews estimates assumptions calculations ultimate conclusions valuation techniques remain sole responsibility conduct annual impairment test december 31 year annual test completed december 31 2009 impairment goodwill indicated discussed “note 7 goodwill intangible assets” tests potential impairment longlived assets third quarter 2009 constituted event required us test goodwill potential impairment interim basis result test determined 05 million goodwill production services segment impaired recorded charge reduce goodwill zero currently expect additional tests would result additional charges determination fair value used test heavily impacted market prices equity debt securities well assumptions estimates future activity levels profitability cash flows internaluse software capitalize costs incurred application development stage internaluse software amortize costs estimated useful life generally five years costs incurred related selection maintenance internaluse software expensed incurred litigation estimating liabilities related litigation take account available facts circumstances order determine whether loss probable reasonably estimable various suits claims arising ordinary course business pending us due part locations conduct business continental united states often subject jury verdicts outcomes may favorable plaintiffs also exposed litigation foreign locations operate continually assess contingent liabilities including potential litigation liabilities well adequacy accruals need disclosure items establish provision contingent liability probable liability incurred amount able estimated see “note 14 commitments contingencies” environmental operations routinely involve storage handling transport disposal bulk waste materials contain oil contaminants regulated substances operations subject various federal state local laws regulations intended protect environment environmental expenditures expensed capitalized depending future economic benefit expenditures relate existing condition caused past operations future economic benefits expensed record liabilities undiscounted basis remediation efforts probable costs conduct remediation efforts reasonably estimated litigation reserves reflect application insurance coverage environmental reserves reflect management’s assessment insurance coverage may apply matters issue see “note 14 commitments contingencies” key energy services inc subsidiaries notes consolidated financial statements continued self insurance largely selfinsured physical damage caused equipment vehicles course operations accruals maintain consolidated balance sheet relate deductibles selfinsured retentions estimate use historical claims data trend analysis assist management liability amount self insurance reserves utilize services third party actuary actual outcome claim could differ significantly estimated amounts adjust loss estimates calculation accruals based upon actual claim settlements reported claims see “note 14 commitments contingencies” income taxes account deferred income taxes using asset liability method provide income taxes significant temporary differences management determines current tax liability well taxes incurred result current operations deferred future periods current taxes payable represent liability related income tax returns current year net deferred tax expense benefit represents change balance deferred tax assets liabilities reported consolidated balance sheets management estimates changes deferred tax assets liabilities using basis assets liabilities financial reporting purposes enacted rates management estimates effect differences reverse management makes certain assumptions timing temporary tax differences differing treatments certain items tax accounting purposes whether differences permanent final determination tax liability involves interpretation local tax laws tax treaties related authorities jurisdiction well significant use estimates assumptions regarding scope future operations results achieved timing nature income earned expenditures incurred establish valuation allowances reduce deferred tax assets determine likely eg likelihood 50 portion deferred tax assets realized future periods assess likelihood use estimates judgment regarding future taxable income well jurisdiction taxable income generated determine whether valuation allowance required evidence include current financial position results operations actual forecasted results reversal deferred tax liabilities tax planning strategies well current forecasted business economics industry additionally record uncertain tax positions net recognizable amount based amount management deems likely sustained upon ultimate settlement tax authorities domestic international tax jurisdictions operate see “note 12 income taxes” discussion accounting income taxes changes valuation allowance components tax rate reconciliation realization loss carryforwards earnings per share basic earnings per common share determined dividing net earnings applicable common stock weighted average number common shares actually outstanding period diluted earnings per common share based increased number shares would outstanding assuming conversion dilutive outstanding convertible securities using treasury stock “as converted” methods see “note 8 earnings per share” sharebased compensation past issued stock options shares restricted common stock appreciation rights “sars” phantom shares employees part employees’ compensation retention key energy services inc subsidiaries notes consolidated financial statements continued tool options restricted shares sars calculate fair value awards grant date amortize fair value compensation expense ratably vesting period award net estimated actual forfeitures fair value stock option sar awards estimated using blackscholes fair value model valuation stock options sars requires us estimate expected term award estimate using simplified method currently sufficient historical exercise information past legal restrictions exercise stock options additionally valuation stock option sar awards also dependent historical stock price volatility calculate using lookback period equivalent expected term award riskfree interest rate estimate future forfeitures grantdate fair value restricted stock awards determined using stock price grant date phantom shares treated “liability” awards carried fair value balance sheet date changes fair value recorded component compensation expense offsetting liability consolidated balance sheet record sharebased compensation component general administrative expense see “note 18 sharebased compensation” foreign currency gains losses international locations argentina mexico russian federation canada local currency functional currency assets liabilities translated rates exchange balance sheet date income expense items translated average rates exchange period resulting gains losses arising translation accounts functional currency us dollar included separate component stockholders’ equity comprehensive income partial complete sale liquidation net investment foreign entity time foreign subsidiaries may enter transactions denominated currencies functional currency transactions initially recorded functional currency subsidiary based applicable exchange rate effect date transaction end month transactions remeasured equivalent amount functional currency based applicable exchange rates effect time adjustment required remeasure transaction equivalent amount functional currency end month recorded income loss foreign subsidiary component income expense see “note 15 accumulated comprehensive loss” comprehensive income display comprehensive income components financial statements classify items comprehensive income nature financial statements display accumulated balance comprehensive income separately stockholders’ equity leases lease real property equipment various leasing arrangements enter leasing arrangement analyze terms arrangement determine whether lease accounted operating lease capital lease periodically incur costs improve assets lease arrangements record improvement component property equipment amortize improvement useful life improvement lease term whichever shorter certain operating lease agreements structured include scheduled specified rent increases term lease agreement increases may result inducement “rent holiday” key energy services inc subsidiaries notes consolidated financial statements continued conveyed us early lease included reflect anticipated effects inflation recognize scheduled specified rent increases straightline basis term lease agreement addition certain operating lease agreements contain incentives induce us enter lease agreement upfront cash payments us payment lessor costs moving expenses assumption lessor preexisting lease agreements third parties payments made us behalf represent incentives consider reduction rent expense recognized straightline basis term lease agreement new accounting standards adopted report sfas 141r december 2007 financial accounting standards board “fasb” issued sfas 141 revised 2007 business combinations “sfas 141r” sfas 141r establishes principles requirements acquirer business combination recognizes measures financial statements identifiable assets acquired liabilities assumed noncontrolling interests acquiree well goodwill acquired significant changes previous practice resulting sfas 141r include expansion definitions “business” “business combination” business combinations whether partial full step acquisitions acquirer record 100 assets liabilities acquired business including goodwill generally fair values contingent consideration recognized fair value acquisition date certain arrangements changes fair value recognized earnings settlement acquisitionrelated transaction restructuring costs expensed rather treated part cost acquisition sfas 141r also establishes disclosure requirements enable users evaluate nature financial effects business combination sfas 141r applies prospectively business combinations acquisition date beginning first annual reporting period beginning december 15 2008 company adopted provisions sfas 141r january 1 2009 consummate business combinations three months ended march 31 2009 sfas 141r may impact consolidated financial statements future nature magnitude specific impact depend upon nature terms size acquisitions consummated effective date sfas 160 december 2007 fasb issued sfas 160 noncontrolling interests consolidated financial statements amendment arb 51 “sfas 160” sfas 160 amends accounting research bulletin 51 consolidated financial statements establish accounting reporting standards noncontrolling interest subsidiary deconsolidation subsidiary clarifies noncontrolling interest subsidiary sometimes referred minority interest thirdparty ownership interest consolidated entity reported component equity consolidated financial statements among requirements sfas 160 requires consolidated statement income reported amounts include amounts attributable parent noncontrolling interest sfas 160 also requires disclosure face consolidated statement income amounts consolidated net income attributable parent noncontrolling interest adopted provisions sfas 160 january 1 2009 adoption standard material impact financial position results operations cash flows sfas 165 may 2009 fasb issued sfas 165 subsequent events “sfas 165” sfas 165 establishes general standards accounting disclosing events occur balance sheet date financial statements issued available issued sfas 165 significantly change types subsequent events entity reports requires disclosure date entity evaluated subsequent events basis date sfas 165 effective interim annual reporting requirements ending june 15 2009 adoption standard material impact financial position results operations cash flows key energy services inc subsidiaries notes consolidated financial statements continued asu 200901 june 2009 fasb issued accounting standards update “asu” 200901 fasb accounting standards codification hierarchy generally accepted accounting principles replacement fasb statement 162 “asu 200901” asu 200901 established accounting standards codification “codification” source authoritative gaap recognized fasb applied nongovernmental entities codification supersedes prior nonsec accounting reporting standards following asu 200901 fasb issue new accounting standards form fasb statements fasb staff positions emerging issues task force abstracts asu 200901 also modifies existing hierarchy gaap include two levels authoritative nonauthoritative asu 200901 effective financial statements issued interim annual periods ending september 15 2009 early adoption permitted adoption standard impact financial position results operations cash flows asu 200905 august 2009 fasb issued asu 200905 fair value measurements disclosures topic 820 measuring liabilities fair value “asu 200905” asu 200905 addresses concerns situations may lack observable market information measure fair value liability provides clarification circumstances quoted market price active market identical liability available cases reporting entities measure fair value using valuation technique uses quoted price identical liability traded asset quoted prices similar liabilities another valuation technique income market approach asu 200905 also clarifies estimating fair value liability reporting entity required include separate input adjustment inputs relating existence restriction prevents transfer liability asu 200905 effective first reporting period subsequent august 2009 adoption update material impact financial position results operations cash flows accounting standards yet adopted report sfas 166 june 2009 fasb issued sfas 166 accounting transfers financial assets amendment fasb statement 140 “sfas 166” sfas 166 amends application disclosure requirements sfas 140 accounting transfers servicing financial assets extinguishment liabilities replacement fasb statement 125 “sfas 140” removes concept “qualifying special purpose entity” sfas 140 removes exception applying fasb interpretation “fin” 46r consolidation variable interest entities interpretation arb 51 “fin 46r” qualifying special purpose entities sfas 166 effective first annual reporting period begins november 15 2009 early adoption permitted adoption standard anticipated material impact financial position results operations cash flows sfas 167 june 2009 fasb issued sfas 167 amendments fasb interpretation 46r “sfas 167” sfas 167 amends scope fin 46r include entities previously considered qualifying specialpurpose entities fin 46r concept qualifying specialpurpose entity eliminated sfas 166 standard shifts guidance determining enterprise variable interest entity consolidates entity quantitative consideration primary beneficiary qualitative focus entity power direct activities obligation absorb losses standard effective first annual reporting period begins november 15 2009 early adoption permitted adoption standard anticipated material impact financial position results operations cash flows asu 200913 october 2009 fasb issued asu 200913 revenue recognition topic 605 multipledeliverable revenue arrangements consensus fasb emerging issues task force “asu 200913” asu 200913 addresses accounting multipledeliverable arrangements products services accounted separately rather combined unit addresses separate key energy services inc subsidiaries notes consolidated financial statements continued deliverables measure allocate arrangement consideration one units accounting existing gaap requires entity use vendorspecific objective evidence “vsoe” thirdparty evidence selling price separate deliverables multipledeliverable selling arrangement result asu 200913 multipledeliverable arrangements separated circumstances current guidance asu 200913 establishes selling price hierarchy determining selling price deliverable selling price based vsoe available thirdparty evidence vsoe available estimated selling price neither vsoe thirdparty evidence available asu 200913 also requires entity determine best estimate selling price manner consistent used determine selling price deliverable standalone basis increases disclosure requirements related entity’s multipledeliverable revenue arrangements asu 200913 must prospectively applied revenue arrangements entered materially modified fiscal years beginning june 15 2010 early adoption permitted entities may elect required adopt amendments retrospectively periods presented expect adopt provisions asu 200913 january 1 2011 believe adoption standard material impact financial position results operations cash flows asu 200914 october 2009 fasb issued asu 200914 software topic 985 certain revenue arrangements include software elements consensus fasb emerging issues task force “asu 200914” asu 200914 issued address concerns relating accounting revenue arrangements contain tangible products software “more incidental” product whole existing guidance circumstances requires entities use vsoe selling price separate deliverables multipledeliverable arrangement reporting entities raised concerns current accounting model appropriately reflect economics underlying transactions softwareenabled products fall within scope current guidance originally intended asu 200914 changes current accounting model revenue arrangements include tangible products software elements exclude software components essential tangible products’ core functionality addition asu 200914 also requires hardware components tangible product containing software components always excluded software revenue recognition guidance provides guidance determine software relating tangible products considered essential tangible products’ functionality excluded scope software revenue recognition guidance asu 200914 also provides guidance allocate arrangement consideration deliverables arrangement contains tangible products software essential product’s functionality asu 200914 issued concurrently asu 200913 also requires entities provide disclosures required asu 200913 included within scope asu 200914 asu 200914 effective prospectively revenue arrangements entered materially modified fiscal years beginning june 15 2010 early adoption permitted entities may also elect required adopt asu 200914 retrospectively prior periods must adopt asu 200914 period using transition methods uses adopt asu 200913 expect adopt provisions asu 200914 january 1 2011 believe adoption standard material impact financial position results operations cash flows asu 200917 december 2009 fasb issued asu 200917 consolidations topic 810 improvements financial reporting enterprises involved variable interest entities asu 200917 replaces quantitativebased risk rewards calculation determining reporting entity controlling financial interest variable interest entity approach focused identifying reporting entity power direct activities variable interest entity significantly impact entity’s economic performance 1 obligation absorb losses entity 2 right receive benefits entity approach expected primarily qualitative effective identifying reporting entity controlling financial interest variable interest entity asu 200917 also requires additional disclosures reporting entity’s involvement variable interest entities key energy services inc subsidiaries notes consolidated financial statements continued provisions asu 200917 applied beginning first fiscal period beginning november 15 2009 adopt asu 200917 january 1 2010 anticipate adoption standard material effect financial position results operations cash flows asu 201002 january 2010 fasb issued asu 201002 consolidation topic 810 accounting reporting decreases ownership subsidiary scope clarification asu 201002 clarifies scope previous guidance accounting disclosure requirements related decreases ownership subsidiary apply subsidiary group assets business nonprofit entity ii subsidiary business nonprofit entity transferred equity method investee joint venture iii exchange group assets constitutes business nonprofit activity noncontrolling interest entity asu 201002 also expands disclosure requirements deconsolidation subsidiary derecognition group assets include valuation techniques used measure fair value retained investment ii nature continuing involvement subsidiary entity acquiring group assets iii whether transaction resulted deconsolidation derecognition related party whether former subsidiary entity acquiring assets become related party transaction provisions asu 201002 effective us first reporting period beginning december 13 2009 adopt provisions asu 201002 january 1 2010 anticipate adoption standard material impact financial position results operations cash flows asu 201006 january 2010 fasb issued asu 201006 fair value measurements disclosures topic 820 improving disclosures fair value measurements asu 201006 clarifies requirements certain disclosures around fair value measurements also requires registrants provide certain additional disclosures measurements new disclosure requirements include significant amounts transfers level 1 level 2 fair value measurements period along reason transfers ii separate presentation information purchases sales issuances settlements fair value measurements significant unobservable inputs asu 201006 effective interim annual reporting periods beginning december 15 2009 adopt provisions asu 201006 january 1 2010 anticipate adoption standard material impact financial position results operations cash flows note 2 acquisitions geostream services group september 1 2009 acquired additional 24 interest geostream 164 million second investment geostream pursuant agreement dated august 26 2008 amended second investment brings total investment geostream 50 prior acquisition additional interest accounted ownership geostream equitymethod investment upon acquiring 50 interest also obtained majority representation geostream’s board directors controlling interest accounted acquisition business combination achieved stages results geostream included consolidated financial statements since acquisition date portion outside control reflected noncontrolling interest geostream oilfield services company russian federation providing drilling workover services subsurface engineering modeling result acquisition expect expand international presence russia oil wells shallow suited services perform acquisition date fair value consideration transferred totaled 350 million consisted cash consideration second investment fair value previous equity interest acquisition date fair value previous equity interest 183 million recognized key energy services inc subsidiaries notes consolidated financial statements continued loss 02 million result remeasuring prior equity interest geostream held business combination included line item “other net” consolidated statements operations following table summarizes estimated fair values assets acquired liabilities assumed september 1 2009 process obtaining thirdparty valuation intangible certain tangible assets thus preliminary measurements intangible assets goodwill certain tangible assets subject change 115 million acquired intangible assets 84 million preliminarily assigned trade name intangibles subject amortization remaining 31 million acquired intangible assets 12 million relates three customer contracts amortized one year 19 million relates customer relationships amortized value relationships realized using rates 35 21 12 7 4 3 2 1 2010 2017 respectively portion already amortized 2009 noted fair value acquired identifiable intangible assets preliminary pending receipt final valuation assets fair value carrying value acquired accounts receivable september 1 2009 63 million 239 million goodwill assigned well servicing segment goodwill recognized attributable primarily international diversification assembled workforce geostream none goodwill expected deductible income tax purposes december 31 2009 changes recognized amount goodwill resulting acquisition geostream recognized 01 million acquisition related costs expensed year ended december 31 2009 costs included statements operations line item “general administrative expenses” year ended december 31 2009 included consolidated statements operations year ended december 31 2009 revenues 92 million net losses 04 million attributable geostream acquisition date period ended december 31 2009 september 1 2009 fair value 50 noncontrolling interest geostream estimated 350 million fair value noncontrolling interest estimated using combination income approach market approach geostream private company fair value measurement key energy services inc subsidiaries notes consolidated financial statements continued based significant inputs observable market thus represents level 3 measurement fair value estimates based discount rate range 16 19 ii terminal value based longterm constant growth rate two three percent iii financial data historical forecasted operating results geostream iv adjustments lack control lack marketability market participants would consider estimating fair value noncontrolling interest geostream conjunction second investment geostream agreed purchase us customized suite equipment including two workover rigs two drilling rigs associated complementary support equipment cementing equipment fishing tools approximately 230 million portion financed us concurrently second investment geostream paid us approximately 160 million cash representing payment equipment began deliver equipment fourth quarter 2009 recognized gain loss associated sale equipment geostream acquisitions western drilling llc april 3 2008 acquired western drilling llc “western” privatelyowned company based california provides workover drilling services purchase price totaled 520 million including direct transaction costs western incorporated well servicing segment hydrawalk inc may 30 2008 acquired hydrawalk inc “hydrawalk” privately owned company providing automated pipe handling services purchase price totaled 107 million including direct transaction costs purchase price also provides performance earnout potential 20 million two years acquisition date certain financial operational performance measures met 11 million paid 2009 leader energy services ltd july 22 2008 purchased united statesbased assets leader energy services ltd “leader” canadian company total consideration 354 million including direct transaction cots leader assets incorporated production services segment purchase price allocations 2008 acquisitions finalized 2009 acquisitions ami september 5 2007 acquired advanced measurements inc “ami” operates canada technology company focused oilfield service equipment controls data acquisition digital information flow purchase price totaled 79 million including direct transaction costs ami incorporated production services segment moncla october 25 2007 acquired moncla well service inc related entities “moncla” operated well service rigs barges ancillary equipment southeastern united states total consideration 1470 million including direct transaction costs moncla purchase agreement entitles former owners moncla receive earnout payments anniversary closing date acquisition 2012 50 million per year 250 million total earnout payments based achievement certain revenue targets profit percentage targets anniversary date cumulative target 2012 anniversary date moncla incorporated well servicing segment kings oil tools december 7 2007 purchased well service assets related equipment kings oil tools inc “kings” californiabased well service company totaling 452 million including direct transaction costs assets kings incorporated well servicing segment purchase price allocations 2007 acquisitions finalized 2008 key energy services inc subsidiaries notes consolidated financial statements continued note 3 current noncurrent liabilities table presents comparative detailed information current accrued liabilities december 31 2009 2008 table presents comparative detailed information noncurrent accrued liabilities december 31 2009 2008 key energy services inc subsidiaries notes consolidated financial statements continued note 4 income expense table presents comparative detailed information income expense shown consolidated statements operations “other net” years ended december 31 2009 2008 2007 note 5 allowance doubtful accounts table presents rollforward allowance doubtful accounts years ended december 31 2009 2008 2007 1 deductions represent write offs allowance deductions 2009 include approximately 52 million single customer specifically identified reserved prior 2007 key energy services inc subsidiaries notes consolidated financial statements continued note 6 property equipment property equipment consists following capitalize costs incurred application development stage internaluse software costs capitalized work progress time application put service years ended december 31 2009 2008 2007 capitalized costs amount 131 million 45 million 19 million respectively capitalized internaluse software 2009 consisted primarily expenditures new erp human resources information systems interest capitalized average amount accumulated expenditures major capital projects construction using effective interest rate based related debt underlying assets placed service capitalized interest years ended december 31 2009 2008 2007 43 million 65 million 53 million respectively obligated various capital leases certain vehicles equipment expire various dates next five years carrying value assets acquired capital leases consists following depreciation assets held capital leases 35 million 43 million 59 million years ended december 31 2009 2008 2007 respectively included depreciation amortization expense accompanying consolidated statements operations third quarter 2009 removed service retired portion us rig fleet associated support equipment resulting recording pretax asset retirement charge 659 million included retirement approximately 250 older less efficient rigs retired rigs order better align supply demand well servicing market activity remained low asset key energy services inc subsidiaries notes consolidated financial statements continued retirement charge included line item “asset retirements impairments” consolidated statements operations year ended december 31 2009 rigs retired certain assets stacked harvested spare parts certain assets cut sold scrap carrying value stacked rigs associated support equipment reduced salvage value 10 based expected fair value assets carrying value scrapped rigs components reduced quoted market prices scrap metal assets reported well servicing segment determined retirement rigs described event requiring assessment impairment asset groups within reporting units well servicing segment based analysis expected undiscounted cash flows asset groups exceeded carrying value indication impairment existed also third quarter 2009 due market overcapacity continued prolonged depression natural gas prices decreased activity levels major customer base related stimulation work consecutive quarterly operating losses production services segment determined events changes circumstances occurred indicating carrying value asset groups segment may recoverable performed assessment fair value asset groups using expected present value technique used discounted cash flow models involving assumptions based utilization equipment revenues direct expenses general administrative expenses applicable income taxes capital expenditures working capital requirements discounted cash flow projections based financial forecasts discounted using discount rate 14 based assessment pressure pumping assets impaired assessment resulted recording pretax impairment charge 934 million third quarter 2009 asset impairment charge included line item “asset retirements impairments” consolidated statements operations year ended december 31 2009 assets reported production services segment note 7 goodwill intangible assets changes carrying amount goodwill years ended december 31 2009 2008 follows key energy services inc subsidiaries notes consolidated financial statements continued components intangible assets december 31 2009 2008 follows amortization expense intangible assets determinable lives follows key energy services inc subsidiaries notes consolidated financial statements continued weighted average remaining amortization periods expected amortization expense next five years intangible assets follows certain intangible assets denominated currencies us dollars values assets subject fluctuations associated changes exchange rates expected amortization expense intangibles denominated currencies us dollars translated december 31 2009 rate additionally certain assets also subject purchase accounting adjustments estimated fair values intangible assets obtained acquisitions consummated preceding twelve months based preliminary information subject change final valuations obtained perform annual impairment tests associated goodwill december 31 year frequently circumstances warrant due recoverability tests impairments recorded longlived assets described “note 6 property equipment” required test goodwill impairment third quarter rather delaying testing annual assessment performed yearend first step goodwill impairment test compared fair value reporting unit carrying amount including goodwill impairment indicated test reporting units well servicing segment thus second step impairment test unnecessary however test concluded fair value fishing rental services reporting unit production services segment exceed carrying value therefore second step goodwill impairment test performed measure amount impairment loss result calculation step two test determined goodwill reporting unit impaired recorded pretax impairment charge 05 million production services segment third quarter 2009 impairment charge included line item “asset retirements impairments” consolidated statements operations year ended december 31 2009 tested goodwill potential impairment 2009 annual testing date results test indicated fair value reporting units goodwill substantially excess carrying value none reporting units risk failing step one 2009 annual goodwill impairment test upon completion 2008 assessment determined fair value associated two reporting units comprising production services segment less carrying value reporting units indicating potential impairment indicators impairment existed reporting units performed step two impairment test units result tests indicated implied fair value goodwill pressure pumping fishing rental lines business less carrying values key energy services inc subsidiaries notes consolidated financial statements continued implied fair value goodwill reporting units tested determined manner hypothetical business combination fair value reporting unit representing purchase price result calculations step two test determined goodwill pressure pumping fishing rental reporting units comprising production services segment impaired amount impairment loss greater current carrying value reporting units’ goodwill recorded pretax impairment charge 698 million production services segment fourth quarter 2008 impairment charge included item “asset retirements impairments” consolidated statements operations year ended december 31 2008 upon completion 2007 assessment impairment indicated since estimated fair values reporting units excess carrying values note 8 earnings per share following table presents basic diluted earnings per share years ended december 31 2009 2008 2007 stock options warrants sars included computation diluted earnings per share using treasury stock method restricted stock grants legally considered issued outstanding included basic diluted earnings per share extent vested unvested restricted stock included computation diluted earnings per share using treasury stock method diluted earnings per share calculation years ended december 31 2009 2008 2007 exclude potential exercise 35 million 26 million 05 million stock options respectively effects exercises earnings per share periods would antidilutive diluted earnings per share calculation years ended december 31 2009 2008 exclude potential exercise 04 million sars effects exercises earnings per share periods would antidilutive 2009 options sars would antidilutive net loss year 2008 2007 key energy services inc subsidiaries notes consolidated financial statements continued options sars considered antidilutive exercise prices exceeded average price stock years material changes share amounts subsequent balance sheet date would material impact earnings per share calculation year ended december 31 2009 note 9 asset retirement obligations connection well servicing activities operate number saltwater disposal “swd” facilities operations involve transportation handling disposal fluids swd facilities byproducts drilling process swd facilities used connection fluid hauling operations subject future costs associated retirement properties annual amortization assets associated asset retirement obligations 05 million 06 million 06 million years ended december 31 2009 2008 2007 respectively summary changes asset retirement obligations follows thousands note 10 equitymethod investments iroc energy services corp december 31 2009 2008 owned approximately 87 million shares iroc energy services corp “iroc” albertabased oilfield services company represented 201 197 iroc’s outstanding common stock december 31 2009 2008 respectively december 31 2009 significant influence operations iroc ownership interest control account investment iroc using equity method prorata share iroc’s earnings losses entitled recorded consolidated statements operations component income expense offsetting increase decrease carrying value investment appropriate earnings distributed back us iroc form dividends would result decrease carrying value equity investment value investment may also increase decrease period due changes exchange rate us dollar canadian dollar changes value investment due fluctuations exchange rates offset accumulated comprehensive income 2009 value investment iroc increased 06 million due changes exchange rates us canadian dollar key energy services inc subsidiaries notes consolidated financial statements continued years ended december 31 2009 2008 2007 recorded 01 million equity losses 02 million 04 million equity income related investment iroc respectively second quarter 2009 iroc declared dividend paid us june 2009 reducing value investment 02 million carrying value investment iroc totaled 40 million 37 million december 31 2009 2008 respectively carrying value investment iroc 56 million proportionate share book value net assets iroc december 31 2009 difference attributable certain longlived assets iroc proportionate share iroc’s net income loss adjusted future periods estimated remaining useful lives longlived assets market value iroc shares approximately 54 million december 31 2009 based quoted market prices iroc’s shares advanced flow technologies inc september 2007 completed acquisition ami privatelyheld canadian company focused oilfield technology ami owns portion another canadian company advanced flow technologies inc “afti” part acquisition ami increased ownership percentage afti 5146 subsequent acquisition date consolidated assets liabilities results operations cash flows afti consolidated financial statements portion afti remaining outside control forming noncontrolling interest consolidated financial statements ownership afti declined 4873 fourth quarter 2008 due issuance additional shares afti result deconsolidated afti consolidated financial statements december 31 2008 december 31 2009 2008 ami’s ownership percentage 4863 4873 respectively account interest afti using equity method recorded losses 02 million income less 01 million associated investment afti years ended december 31 2009 2008 carrying value investment afti totaled approximately 12 million december 31 2009 2008 respectively december 31 2009 carrying value investment afti exceeded proportionate share book value net assets afti 09 million difference attributable intangible assets recognized original purchase ami well unrecognized goodwill subject amortization 2009 value investment afti increased 02 million due changes exchange rates us canadian dollar increase offset accumulated comprehensive income key energy services inc subsidiaries notes consolidated financial statements continued note 11 estimated fair value financial instruments following summary carrying amounts estimated fair values financial instruments december 31 2009 2008 cash equivalents accounts payable accrued liabilities carrying amounts approximate fair value short maturity instruments carrying value equal fair value instruments balance sheet date notes receivablerelated parties amounts reported relate notes receivable certain employees related relocation retention agreements carrying values notes approximate fair values applicable balance sheet dates 8375 senior notes due 2014 fair value longterm debt based upon quoted market prices face value various debt securities december 31 2009 carrying value notes december 31 2009 4250 million fair value 4229 million 995 carrying value senior secured credit facility revolving loans variable interest rates recent amendment credit facility fair values revolving loans borrowed senior secured credit facility approximate carrying values december 31 2009 carrying fair values loans december 31 2009 approximately 878 million notes payable related parties amounts reported relate seller financing arrangement entered connection acquisition moncla variable interest rates discount applied notes carrying value notes approximate fair values december 31 2009 key energy services inc subsidiaries notes consolidated financial statements continued note 12 income taxes components income tax expense follows sources income loss income taxes noncontrolling interest follows made net federal income tax payments 01 million 335 million 855 million years ended december 31 2009 2008 2007 respectively made net state income tax payments 55 million 66 million 66 million years ended december 31 2009 2008 2007 respectively made net foreign tax payments 73 million 34 million 42 million years ended december 31 2009 2008 2007 respectively year ended december 31 2009 06 million tax expense allocated stockholders’ equity compensation expense financial reporting purposes excess amounts recognized income tax purposes years ended december 31 2008 2007 tax benefits allocated stockholders’ equity compensation expense income tax purposes excess amounts recognized financial reporting purposes 17 million 34 million respectively allocated tax benefits stockholders’ equity prior years compensation expense income tax purposes excess amounts recognized financial reporting purposes addition expect receive federal income tax refund approximately 500 million 2010 key energy services inc subsidiaries notes consolidated financial statements continued income tax expense differs amounts computed applying statutory federal rate follows december 31 2008 2007 deferred tax assets liabilities comprised following 2009 deferred tax liabilities decreased 04 million adjustments accumulated comprehensive loss 2008 deferred tax liabilities decreased 10 million adjustments accumulated comprehensive loss recording deferred income tax assets consider whether likely portion deferred income tax assets realized ultimate realization deferred income tax assets dependent upon generation future taxable income periods deferred income tax assets would deductible consider scheduled reversal deferred income tax liabilities projected future taxable income determination fully realize deferred income tax assets related federal net operating loss carryforwards valuation allowance due section 382 limitations would need generate future federal taxable income approximately 48 million next nine years certain exceptions noted believe considering available key energy services inc subsidiaries notes consolidated financial statements continued objective evidence positive negative historical prospective greater weight given historical evidence likely assets realized 2009 generated federal tax net operating loss 1421 million 2009 federal net operating loss carried back entirety prior year result refund approximately 500 million estimate december 31 2009 2008 2007 available 71 million 71 million 82 million respectively federal net operating loss carryforwards approximately 47 million net operating losses december 31 2009 subject 11 million annual section 382 limitation expire 2018 approximately 24 million net operating losses december 31 2009 subject 5000 annual section 382 limitation expire 2016 2018 valuation allowance provided likely portion deferred tax assets realized due annual limitations sections 382 383 management believes able utilize available carryforwards prior ultimate expiration december 31 2009 2008 valuation allowance 08 million related deferred tax asset associated remaining federal net operating loss carryforwards expire utilization due section 382 limitations estimate december 31 2009 2008 2007 available approximately 642 million 159 million 186 million respectively state net operating loss carryforwards expire 2019 2025 fully realize deferred income tax assets related state net operating loss carryforwards would need generate future west virginia taxable income 152 million next 20 years future pennsylvania taxable income 33 million next 20 years management believes likely able utilize available carryforwards prior ultimate expiration deferred tax asset associated remaining state net operating loss carryforwards december 31 2009 52 million includes valuation allowance less 01 million result 2007 began operations mexico resulted net operating loss 2 million deferred tax asset related net operating loss carryforward 06 million mexico enacted flat tax rate effective january 1 2008 flat tax functions addition regular corporate tax rate 28 tax expense calculated methods flat tax greater regular tax additional tax expense regular tax assessed addition regular tax calculation 2007 recorded full valuation allowance related mexico net operating loss carryforwards 06 million management believed due enactment mexico flat tax net operating loss carryforwards related mexico operations likely fully realized future determined flat tax position 2008 2007 regular net operating loss utilized 2008 regular mexico income accordingly valuation allowance 06 million set 2007 released 2008 december 31 2009 2008 canadian operations net operating losses 39 million 38 million respectively december 31 2009 2008 deferred tax asset related net operating loss carryforward 11 million 11 million respectively recorded valuation allowance related canadian net operating loss carryforwards december 31 2009 2008 management believes net operating loss carryforwards likely fully realized future fully realize deferred income tax assets related canadian net operating loss carryforwards would need generate 02 million future canadian taxable income next six years 37 million future canadian taxable income next nineteen years net operating losses expire 2015 2029 provided deferred us income taxes foreign withholding taxes unremitted cumulative earnings foreign subsidiaries earnings considered permanently reinvested operations unremitted earnings foreign subsidiaries considered permanently reinvested approximately 142 million december 31 2009 upon repatriation earnings would subject us income tax net available foreign tax credits december 31 2009 key energy services inc subsidiaries notes consolidated financial statements continued estimated amount unrecognized deferred tax liability permanently reinvested foreign earnings based current exchange rates assuming would able use foreign tax credits approximately 10 million december 31 2009 2008 2007 32 million 56 million 68 million respectively unrecognized tax benefits recognized would impact effective tax rate accrued 11 million 21 million 23 million payment interest penalties december 31 2009 2008 2007 respectively believe reasonably possible 17 million currently remaining unrecognized tax positions individually insignificant may recognized end 2010 result lapse statute limitations settlement audit former operations egypt file income tax returns united states federal jurisdiction various states foreign jurisdictions current federal tax examination federal tax years ending december 31 2006 forward open tax audits december 31 2009 significant filings argentina examined 2006 mexico intermediate stages 2007 tax audit initial year operations state texas tax filings remain open 2003 2006 certain subsidiaries company recognized tax benefits 2009 26 million expirations statutes limitations recorded income tax benefit 14 million increase deferred tax liabilities 04 million related statute expirations following table presents activity 2009 related liabilities uncertain tax positions thousands tax legislative changes economic stimulus act 2008 economic stimulus act 2008 permits bonus firstyear depreciation deduction 50 adjusted basis qualified property personal property software acquired placed service december 31 2007 january 1 2009 140 million qualifying additions 2008 resulting additional 2008 tax depreciation 70 million american recovery reinvestment act 2009 american recovery reinvestment act 2009 extends bonus firstyear depreciation deduction 50 adjusted basis qualified property acquired placed service december 31 2008 january 1 2010 estimated 66 million qualifying additions 2009 resulting additional 2009 tax depreciation 33 million key energy services inc subsidiaries notes consolidated financial statements continued note 13 longterm debt components longterm debt follows 8375 senior notes due 2014 november 29 2007 issued 4250 million senior notes indenture “indenture” senior notes priced 100 face value yield 8375 net proceeds deducting initial purchasers’ fees offering expenses approximately 4161 million senior notes registered public debt effective august 22 2008 senior notes general unsecured senior obligations company rank effectively subordinate existing future secured indebtedness senior notes jointly severally guaranteed senior unsecured basis certain existing future domestic subsidiaries senior notes mature december 1 2014 december 1 2011 senior notes subject redemption time option whole part redemption prices expressed percentages principal amount redeemed plus accrued unpaid interest applicable redemption date redeemed twelvemonth period beginning december 1 years indicated addition time december 1 2010 option redeem 35 aggregate principal amount outstanding senior notes redemption price 108375 plus accrued unpaid interest redemption date net cash proceeds one equity offerings provided least 65 aggregate principal amount senior notes issued indenture remains outstanding immediately redemption redemptions must occur within 180 days date closing equity offering addition time prior december 1 2011 may option redeem portion senior notes redemption price equal 100 principal amount plus applicable premium defined indenture respect senior notes plus accrued unpaid interest redemption date experience change control subject certain exceptions must give holders senior notes opportunity sell us senior notes whole part key energy services inc subsidiaries notes consolidated financial statements continued purchase price equal 101 aggregate principal amount plus accrued unpaid interest date purchase subject certain negative covenants indenture governing senior notes indenture limits ability among things • sell assets • pay dividends make distributions capital stock subordinated indebtedness • make investments • incur additional indebtedness issue preferred stock • create certain liens • enter agreements restrict dividends payments subsidiaries us • consolidate merge transfer substantially assets • engage transactions affiliates • create unrestricted subsidiaries covenants subject certain exceptions qualifications contain crossdefault provisions connection covenants senior secured credit facility substantially covenants terminate senior notes mature one two specified ratings agencies assigns senior notes investment grade rating future events default exist indenture december 31 2009 senior notes investment grade covenants cease apply us result achieving investment grade rating restored even credit rating assigned senior notes later falls investment grade rating compliance covenants december 31 2009 senior secured credit facility maintain senior secured credit facility pursuant revolving credit agreement syndicate banks bank america securities llc wells fargo bank na administrative agents entered senior secured credit facility november 29 2007 simultaneously offering senior notes entered amendment “amendment” senior secured credit facility october 27 2009 amended senior secured credit facility consists revolving credit facility letter credit subfacility swing line facility aggregate principal amount 3000 million mature later november 29 2012 amendment entered fourth quarter 2009 reduced total credit commitments facility 4000 million 3000 million effected pro rata reduction commitment lender facility ability request increases total commitments facility 1000 million aggregate increases subject certain requirements well lenders’ approval pursuant amendment also modified applicable interest rates financial covenants among changes interest rate per annum applicable senior secured credit facility amended option libor plus margin 350 450 basis points depending consolidated leverage ratio ii base rate defined higher x bank america’s prime rate federal funds rate plus 05 plus margin 250 350 basis points depending consolidated leverage ratio unused commitment fees facility range 050 075 depending upon consolidated leverage ratio senior secured credit facility contains certain financial covenants among things require us maintain certain financial ratios limit annual capital expenditures addition key energy services inc subsidiaries notes consolidated financial statements continued covenants impose restrictions ability repurchase shares assets owned domestic subsidiaries located outside united states limitations amended senior secured credit facility also requires • consolidated funded indebtedness greater 45 adjusted total capitalization • senior secured leverage ratio senior secured funded debt trailing four quarters earnings interest taxes depreciation amortization calculated pursuant terms senior secured credit facility “ebitda” greater 250 100 fiscal quarter ended december 31 2009 including fiscal quarter ending december 31 2010 ii thereafter 200 100 • maintain consolidated interest coverage ratio trailing four quarters ebitda interest expense least following amounts corresponding period • limit capital expenditures including made foreign subsidiaries whollyowned 1350 million fiscal year 2009 1200 million subsequent fiscal year consolidated leverage ratio total funded debt trailing four quarters ebitda greater 350 100 ii 2500 million consolidated leverage ratio total funded debt trailing four quarters ebitda equal less 350 100 subject certain adjustments • make acquisitions either completed equity consideration without regard leverage ii completed cash consideration consolidated leverage ratio total funded debt trailing four quarters ebitda 275 100 less x aggregate amount 250 million unused credit commitments facility pro forma compliance financial covenants contained credit agreement b consolidated leverage ratio total funded debt trailing four quarters ebitda greater 275 100 addition requirements subclauses x clause cash amount paid respect acquisitions limited 250 million per fiscal year subject potential increase using amounts available capital expenditures net cash proceeds receive october 27 2009 connection issuance sale equity interests incurrence issuance certain unsecured debt securities identified used purpose • limit investment foreign subsidiaries including way loans made us domestic subsidiaries foreign subsidiaries guarantees made us domestic subsidiaries debt foreign subsidiaries 750 million fiscal year aggregate amount october 27 2009 equal greater 2000 million 25 consolidated net worth plus ii net cash proceeds receive october 27 2009 connection issuance sale equity interests incurrence certain unsecured debt securities identified used purpose addition amended senior secured credit facility contains certain affirmative covenants including without limitation restrictions related liens ii debt guarantees contingent obligations iii mergers consolidations iv sales transfers dispositions property assets v loans acquisitions joint ventures investments vi dividends distributions redemptions repurchases equity holders vii prepaying redeeming repurchasing senior notes unsecured debt incurred pursuant sixth bullet point listed viii granting negative pledges key energy services inc subsidiaries notes consolidated financial statements continued lenders ix changes nature business x amending organizational documents amending otherwise modifying debt amendment modification would material adverse effect amending senior notes unsecured debt incurred pursuant sixth bullet point listed effect amendment shorten maturity senior notes unsecured debt xi changes accounting policies reporting practices foregoing cases certain exceptions compliance covenants december 31 2009 may prepay senior secured credit facility whole part time without premium penalty subject obligation reimburse lenders breakage redeployment costs connection amendment wrote proportionate amount unamortized deferred financing costs associated capacity reduction credit facility year ended december 31 2009 recognized 05 million pretax charges losses extinguishment debt associated writeoff unamortized deferred financing costs december 31 2009 878 million borrowings 552 million letters credit outstanding revolving credit facility leaving 1569 million availability revolving credit facility terms senior secured credit facility committed letters credit count borrowing capacity obligations senior secured credit facility guaranteed subsidiaries secured assets including accounts receivable inventory equipment weighted average interest rate outstanding borrowings senior secured credit facility 373 december 31 2009 notes payable related parties october 25 2007 entered two promissory notes related parties connection acquisition first unsecured note amount 125 million due paid lumpsum together accrued interest october 25 2009 second unsecured note amount 100 million payable annual installments 20 million plus accrued interest anniversary date issue october 2012 notes bore bears interest federal funds rate adjusted annually anniversary date note december 31 2009 interest rate second note 011 interest expense years ended december 31 2009 2008 02 million 12 million respectively two notes aggregate federal funds rate represent rate would resulted independent borrower independent lender negotiated similar transaction comparable terms conditions equal incremental borrowing rate recorded promissory notes fair value resulted discount recorded discount recognized interest expense life promissory notes using effective interest method amount discount remaining amortized december 31 2009 2008 less 01 million 02 million respectively notes aggregate total amount discount amortization included interest expense related notes years ended december 31 2009 2008 01 million key energy services inc subsidiaries notes consolidated financial statements continued longterm debt principal repayment interest expense presented schedule repayment requirements longterm debt next five years thereafter december 31 2009 presented schedule estimated minimum lease payments capital lease obligations next five years thereafter december 31 2009 key energy services inc subsidiaries notes consolidated financial statements continued interest expense years ended december 31 2009 2008 2007 consisted following december 31 2009 2008 weighted average interest rate variable rate debt 324 417 respectively deferred financing costs cost capitalized amortized written determination loss extinguishment debt years ended december 31 2009 2008 2007 presented table net carrying values years presented appear table note 14 commitments contingencies operating lease arrangements lease certain property equipment noncancelable operating leases expire various dates 2019 varying payment dates throughout month key energy services inc subsidiaries notes consolidated financial statements continued december 31 2009 future minimum lease payments noncancelable operating leases follows thousands also party significant number monthtomonth leases cancelable time operating lease expense 227 million 224 million 164 million years ended december 31 2009 2008 2007 respectively litigation various suits claims arising ordinary course business pending us due part locations conduct business continental united states often subject jury verdicts outcomes may favorable plaintiffs continually assess contingent liabilities including potential litigation liabilities well adequacy accruals need disclosure items establish provision contingent liability probable liability incurred amount reasonably estimable december 31 2009 aggregate amount liabilities related litigation deemed probable reasonably estimable approximately 27 million believe disposition matters material impact financial position results operations cash flows year ended december 31 2009 recorded net decrease reserves 37 million related settlement ongoing legal matters continued refinement liabilities recognized litigation deemed probable estimable liabilities related litigation matters deemed probable estimable december 31 2008 2007 45 million 68 million respectively litigation former officers employees former general counsel jack loftis jr filed lawsuit us district court district new jersey april 21 2006 alleges “whistleblower” claim sarbanesoxley act breach contract breach duties good faith fair dealing breach fiduciary duty wrongful termination august 17 2007 filed counterclaims mr loftis alleging attorney malpractice breach contract breach fiduciary duties counterclaims seeking repayment severance paid mr loftis approximately 08 million plus benefits paid period july 8 2004 september 21 2004 damages relating allegations malpractice breach fiduciary duties case currently pending us district court eastern district pennsylvania begin appear trial docket second quarter 2010 recorded liability matter fourth quarter 2008 october 17 2006 jane john exwife former chief executive officer francis john filed complaint bucks county pennsylvania exhusband us ms john alleged breach marital agreement breach options agreements civil conspiracy fraud virtue assignments ms john held 375000 stock options expired unexercised period current financial statements options could exercised mr john agreed indemnify us key energy services inc subsidiaries notes consolidated financial statements continued respect damages attributable ms john’s claims damages attributable alleged breach ms john’s stock option agreements reached settlement ms john regarding alleged breach stock option agreements recorded additional charge related settlement third quarter 2009 initially recorded liability matter third quarter 2008 september 3 2006 former controller former assistant controller filed suit us harris county texas alleging constructive termination breach contract reached agreement resolve matter arbitration included obligation pay minimum amount claimants regardless outcome recorded liability based upon minimum payment matter third quarter 2009 early december 2009 matter went trial arbitrator found favor key tax audits routinely subject audits tax authorities past received material assessments tax auditors december 31 2009 2008 recorded reserves management feels appropriate future potential liabilities result prior audits believe fully reserved assessments ultimate amount settlements vary estimates selfinsurance reserves maintain reserves workers’ compensation vehicle liability balance sheet based judgment estimates using actuarial method based claims incurred estimate general liability claims casebycase basis maintain insurance policies workers’ compensation vehicular liability general liability claims insurance policies carry selfinsured retention limits deductibles per occurrence basis retention limits deductibles accounted accrual process workers’ compensation vehicular liability general liability claims december 31 2009 2008 recorded 652 million 689 million respectively selfinsurance reserves related workers’ compensation vehicular liabilities general liability claims partially offsetting liabilities approximately 172 million 108 million insurance receivables december 31 2009 2008 respectively feel liabilities recorded appropriate based known facts circumstances expect losses materially excess amounts already accrued existing claims environmental remediation liabilities environmental reserve matters including remediation efforts current locations relating previouslydisposed properties record liabilities remediation efforts probable costs conduct remediation efforts reasonably estimated december 31 2009 2008 recorded 34 million 30 million respectively environmental remediation liabilities feel liabilities recorded appropriate based known facts circumstances expect losses materially excess amounts already accrued provide performance bonds provide financial surety assurances remediation maintenance swd properties comply environmental protection standards costs swd properties may mandatory comply applicable laws regulations future required divest cease operations optimization improve operations safety regulatory compliance key energy services inc subsidiaries notes consolidated financial statements continued note 15 accumulated comprehensive loss components accumulated comprehensive loss follows thousands local currency functional currency operations argentina mexico canada russian federation equity investments canada cumulative translation gains losses resulting translating foreign subsidiary’s financial statements functional currency us dollars included comprehensive income accumulated stockholders’ equity partial complete sale liquidation net investment foreign entity table summarizes conversion ratios used translate financial statements cumulative currency translation gains losses net tax currency note 16 employee benefit plans maintain 401k plan part employee benefits package first quarter 2009 management suspended 401k matching program part cost cutting efforts prior matched 100 employee contributions 4 employee’s salary 401k plan subject maximums 9200 9000 years ended december 31 2008 2007 respectively matching contributions 17 million 119 million 102 million years ended december 31 2009 2008 2007 respectively offer participants option purchase units common stock 401k plan fund note 17 stockholders’ equity common stock december 31 2009 200000000 shares common stock authorized 010 par value 123993480 shares issued outstanding december 31 2008 200000000 shares common stock authorized 010 par value 121305289 shares issued outstanding 2009 2008 dividends declared paid terms senior notes senior secured credit facility must meet certain financial covenants may pay dividends currently intend pay dividends key energy services inc subsidiaries notes consolidated financial statements continued share repurchase program october 2007 board directors authorized share repurchase program 3000 million effective march 31 2009 inception program november 2007 december 31 2008 repurchased approximately 134 million shares common stock open market transactions aggregate price approximately 1673 million repurchase shares program 2009 plan expired march 31 2009 tax withholding repurchase shares restricted common stock previously granted certain employees pursuant agreement individuals permitted sell shares back us order satisfy minimum income tax withholding requirements related vesting grants repurchased total 71954 97443 72847 shares aggregate cost 05 million 12 million 13 million 2009 2008 2007 respectively represented fair market value shares based price stock dates purchase common stock warrants january 1999 issued 150000 warrants “warrants” connection debt offering exercisable aggregate approximately 22 million shares stock exercise price 488125 per share december 31 2008 83800 warrants exercised leaving 66200 outstanding exercisable approximately 10 million shares common stock termination notice provided holders outstanding warrants expired unexercised february 2 2009 terms warrants required maintain effective registration statement covering shares potentially issuable upon exercise warrants make liquidated damages payments holders warrants august 21 2008 requisite registration statement required terms warrants became effective however effective registration statement date made liquidated damages payments totaling 08 09 million respectively 2008 2007 may 12 2009 connection settlement lawsuit issued two individuals warrants purchase shares key’s common stock warrants expire may 12 2014 exercisable 174000 shares common stock exercise price 456 per share received proceeds upon issuance warrants receive exercise price warrants exercised prior expiration warrants unregistered securities issued private placement therefore issuance exempt registration pursuant section 42 securities act 1933 december 31 2009 none warrants exercised note 18 sharebased compensation incentive plan june 4 2009 stockholders approved 2009 equity cash incentive plan “2009 incentive plan” 2009 incentive plan administered board directors committee designated board directors “committee” board directors committee “administrator” power authority select participants defined 2009 incentive plan grant awards defined participants pursuant terms 2009 incentive plan 2009 incentive plan expires june 4 2019 subject adjustment total number shares common stock available grant awards 2009 incentive plan may exceed 4000000 shares however purposes key energy services inc subsidiaries notes consolidated financial statements continued limitation stock subject award canceled forfeited expires prior exercise realization become available issuance 2009 incentive plan subject adjustment participant granted one year period options purchase common stock andor stock appreciation rights respect 500000 shares common stock available distribution 2009 incentive plan come authorized unissued shares reacquire manner awards 2009 incentive plan granted fair market value date issuance awards may form stock options incentive stock options nonqualified stock options restricted stock restricted stock units performance compensation awards stock appreciation rights collectively “awards” awards may granted employees directors cases consultants individuals administrator determines reasonably expected become employees directors consultants following grant date award “participants” however incentive stock options may granted employees vesting periods may set discretion board directors compensation committee generally set two four years awards directors generally subject vesting board directors may time amend terminate 2009 incentive plan however repricing stock options permitted unless approved stockholders except provided otherwise 2009 incentive plan amendment effective unless approved stockholders extent stockholder approval necessary satisfy applicable law securities exchange listing requirements december 31 2009 3835688 remaining shares available grant 2009 incentive plan incentive plan december 6 2007 stockholders approved 2007 equity cash incentive plan “2007 incentive plan” 2009 incentive plan based form 2007 incentive plan terms plans substantially similar however differences plans example 2009 incentive plan addresses treatment awards participant’s continuous service company terminates result retirement defined plan 2007 incentive plan specifically address situation also 2007 incentive plan allows transferability stock options laws descent distribution third party designee upon death may determined discretion administrator certain permitted transferees set forth 2007 incentive plan however 2009 incentive plan permits transferability laws descent distribution third party designee upon death subject adjustment total number shares common stock available grant awards 2007 incentive plan may exceed 4000000 shares however case 2009 incentive plan purposes limitation stock subject award canceled forfeited expires prior exercise realization become available issuance 2007 incentive plan board directors may time amend terminate 2007 incentive plan however except provided otherwise 2007 incentive plan amendment effective unless approved stockholders extent stockholder approval necessary satisfy applicable law securities exchange listing requirements december 31 2009 246537 remaining shares available grant 2007 incentive plan incentive plan january 13 1998 stockholders approved key energy group inc 1997 incentive plan amended “1997 incentive plan” 1997 incentive plan amendment restatement plans formerly known key energy group inc 1995 stock option plan key energy group inc key energy services inc subsidiaries notes consolidated financial statements continued 1995 outside directors stock option plan november 17 2007 1997 incentive plan terminated pursuant terms new awards could granted plan exercise price options granted 1997 incentive plan fair market value per share date options granted 1997 incentive plan shares common stock listed securities exchange fair market value determined using closing sales price immediate preceding business day reported securities exchange shares listed exchange included period april 2005 october 2007 fair market value determined using published closing price common stock pink sheets business day immediately preceding date grant period 2000 2001 board directors granted 37 million stock options outside 1997 incentive plan 120000 remained outstanding december 31 2009 37 million nonplan options addition include options granted 1997 incentive plan conformity certain terms 1997 incentive plan accelerated vesting option sar awards board directors resolved fourth quarter 2008 accelerate vesting period certain outstanding unvested stock option awards stock appreciation rights affected approximately 280 employees primarily result acceleration recorded pretax charge 109 million general administrative expense fourth quarter 2008 acceleration vesting term expense recognized awards periods subsequent december 31 2008 stock option awards stock option awards granted incentive plans maximum contractual term ten years date grant shares issuable upon exercise stock option issued authorized unissued shares common stock following table summarizes stock option activity fiscal years ended december 31 2009 2008 2007 shares thousands key energy services inc subsidiaries notes consolidated financial statements continued following table summarizes information stock options outstanding december 31 2009 shares thousands key energy services inc subsidiaries notes consolidated financial statements continued total fair value stock options granted years ended december 31 2009 2008 2007 less 01 million 75 million 71 million respectively total fair value stock options vested year ended december 31 2009 less 01 million years ended december 31 2009 2008 2007 recognized less 01 million 151 million 35 million pretax expense related stock options respectively recognized tax benefits less 01 million 52 million 07 million related stock options years ended december 31 2009 2008 2007 respectively compensation expense recognized 2008 related stock option awards included charge took accelerated vesting discussed unvested stock option awards outstanding december 31 2009 expect recognize less 01 million compensation expense weighted average remaining vesting period approximately 20 years weighted average remaining contractual term stock option awards exercisable december 31 2009 59 years intrinsic value options exercised years ended december 31 2009 2008 2007 19 million 58 million 102 million respectively cash received exercise options year ended december 31 2009 13 million recognition associated tax benefits amount 01 million common stock awards total fair market value common stock awards granted years ended december 31 2009 2008 2007 88 million 65 million 47 million respectively following table summarizes information years ended december 31 2009 2008 2007 common share awards issued shares thousands key energy services inc subsidiaries notes consolidated financial statements continued 1 includes 143100 47190 53648 shares common stock issued nonemployee directors vested immediately upon issuance 2009 2008 2007 respectively common stock grants vest immediately upon issuance record expense equal fair market value shares date grant common stock awards immediately vest recognize compensation expense ratably vesting period grant net estimated actual forfeitures years ended december 31 2009 2008 2007 recognized 60 million 61 million 56 million respectively pretax expense associated common stock awards including common stock grants outside directors connection expense related common stock awards recognized year ended december 31 2009 recognized tax benefits 20 million tax benefits years ended december 31 2008 2007 15 million 12 million respectively unvested common stock awards outstanding december 31 2009 anticipate recognize 65 million pretax expense next 12 years phantom share plan december 2006 announced implementation “phantom share plan” certain employees granted “phantom shares” phantom shares vest ratably fouryear period convey right grantee receive cash payment anniversary date grant equal fair market value phantom shares vesting date grantees permitted defer payment later date phantom shares “liability” type award account awards fair value recognize compensation expense related phantom shares based change fair value awards period percentage service requirement performed net estimated actual forfeitures offsetting liability recorded consolidated balance sheets recognized 19 million pretax compensation expense less 01 million pretax benefit approximately 33 million pretax compensation expense associated phantom shares years ended december 31 2009 2008 2007 respectively december 31 2009 recorded current noncurrent liabilities 15 million 05 respectively represented aggregate fair value phantom shares date key energy services inc subsidiaries notes consolidated financial statements continued recognized income tax benefits associated phantom shares 07 million less 01 million 13 million 2009 2008 2007 respectively unvested phantom share awards outstanding december 31 2009 based market price common stock date expect recognize approximately 09 million compensation expense weighted average remaining vesting period approximately 12 years 2009 cash payments related phantom shares totaled 12 million stock appreciation rights august 2007 issued approximately 587000 sars executive officers sar tenyear term date grant vesting outstanding sar awards accelerated fourth quarter 2008 upon exercise sar recipient receive amount equal difference exercise price fair market value share common stock date exercise multiplied number shares common stock sar exercised payments made shares common stock prior exercise sar entitle recipient receive shares common stock provide recipient voting stockholders’ rights account sars equity awards recognize compensation expense ratably vesting period sar based fair value date issuance net estimated actual forfeitures recognize expense associated awards 2009 compensation expense recognized 2008 2007 connection sars 31 million 06 million respectively recognized income tax benefits 11 million 02 million 2008 2007 respectively connection expense valuation assumptions stock options stock appreciation rights fair value stock option grant sar estimated date grant using blackscholes optionpricing model based following weightedaverage assumptions note 19 transactions related parties employee loans advances time made certain retention loans relocation loans employees executive officers retention loans forgiven various time periods long employee continues employment us relocation loans repaid upon employee selling prior residence december 31 2009 2008 loans aggregate totaled 02 amount less 01 million made former officers remainder made current employees related party notes payable october 25 2007 entered two promissory notes related parties connection acquisition first unsecured note amount 125 million due paid lumpsum together accrued interest october 25 2009 second unsecured note amount 100 million payable annual installments 20 million plus accrued interest anniversary date issue october 2012 notes bore bears interest federal funds rate adjusted key energy services inc subsidiaries notes consolidated financial statements continued annually anniversary date note december 31 2009 interest rate second note 011 interest expense years ended december 31 2009 2008 2007 02 million 12 million 02 million respectively two notes aggregate federal funds rate represent rate would resulted independent borrower independent lender negotiated similar transaction comparable terms conditions equal incremental borrowing rate recorded promissory notes fair value resulted discount recorded discount recognized interest expense life promissory notes using effective interest method transactions employees connection acquisition 2008 former owner acquiree became employee key time acquisition employee owned continues exploration production company subsequent acquisition continued provide services company prices charged services rates average prices charged customers california market december 31 2009 receivables company totaled 01 million year ended december 31 2009 revenues company totaled 34 million board director relationship customer one member board directors senior vice president general counsel chief administrative officer anadarko petroleum corporation “anadarko” one customers sales anadarko comprised less 2 total revenues years ended december 31 2009 2008 2007 sales anadarko less 1 anadarko’s revenues 2009 2008 2007 transactions anadarko services made terms consistent customers note 20 supplemental cash flow information cash paid interest includes cash payments interest longterm debt capital lease obligations commitment agency fees paid cash paid settle interest rate swaps associated termination prior credit facility 2007 key energy services inc subsidiaries notes consolidated financial statements continued note 21 segment information revised reportable business segments effective first quarter 2009 new operating segments well servicing production services financial results years ended december 31 2008 2007 restated reflect change operating segments revised segments align changes management’s resource allocation performance assessment making decisions regarding operations rig services fluid management services operations aggregated within well servicing segment pressure pumping services fishing rental services wireline services operations well technology development group canada aggregated within production services segment changes reflect current operating focus accounting policies segments described “note 1 organization summary significant accounting policies” intersegment sales pricing based current market conditions following description segments well servicing segment rig services include maintenance existing wells workover existing wells completion newly drilled wells drilling horizontal wells recompletion existing wells reentering well complete well new geologic zone formation plugging abandonment wells end useful lives workover services performed enhance production existing wells services include extensions existing wells drain new formations either deepening well bores new zones drilling horizontal lateral well bores improve reservoir drainage less extensive workovers rigs used seal depleted zones existing well bores access previously bypassed productive zone completion services prepare newly drilled oil natural gas well production typically provide well service rig may also provide equipment workover package assist completion process fluid management services include fluid management logistics including oilfield transportation producedwater disposal services oilfield transportation producedwater disposal services include vacuum truck services fluid transportation services disposal services operators whose oil natural gas wells produce saltwater fluids addition supplier frac tanks used temporary storage fluids conjunction fluid hauling operations fluid management services collect transport dispose saltwater fluids removed well site transported disposal swd well production services segment pressure pumping services include well stimulation cementing services oil natural gas producers well stimulation services include fracturing nitrogen acidizing cementing coiled tubing services may completion workover services provided oil natural gas producers used enhance production oil natural gas wells formations exhibit restricted flow oil natural gas fracturing process typically pump fluid sized sand proppants well high pressure order fracture formation thereby increase flow oil natural gas cementing services pump cement well casing well bore key energy services inc subsidiaries notes consolidated financial statements continued fishing rental services include recovery lost stuck equipment well bore utilizing “fishing tool” offer full line services rental equipment designed use onshore offshore drilling workover services rental tool inventory consists drill pipe tubulars handling tools including patented hydrawalk® pipehandling units services pressurecontrolled equipment power swivels foam air units wireline services include perforating completion logging production logging casing integrity services well bore cased cemented provide number services perforating creates flow path reservoir well bore production logging performed throughout life well measure temperature fluid type flow rate pressure reservoir characteristics service helps operator analyze monitor well performance determine well may need workover stimulation advanced measurements inc also included production services segment ami technology development company based canada ami focused oilfield service equipment controls data acquisition digital information flow functional support aggregated operating segments meet aggregation criteria form “functional support” segment services include expenses associated managing reportable operating segments functional support assets consist primarily cash equivalents accounts notes receivable investments subsidiaries equitymethod investment iroc deferred income tax assets following present segment information years ended december 31 2009 2008 2007 thousands key energy services inc subsidiaries notes consolidated financial statements continued following table presents selected financial information related operations geography thousands us dollars key energy services inc subsidiaries notes consolidated financial statements continued note 22 unaudited quarterly results operations set forth unaudited summarized quarterly information two recent years covered consolidated financial statements thousands except per share data 1 quarterly earnings per common share based weighted average number shares outstanding quarter sum quarters may equal annual earnings per common share key energy services inc subsidiaries notes consolidated financial statements continued note 23 condensed consolidating financial statements senior notes guaranteed virtually domestic subsidiaries whollyowned guarantees joint several full complete unconditional restrictions ability subsidiary guarantors transfer funds parent company result guarantee arrangements required present following condensed consolidating financial information condensed consolidating balance sheets key energy services inc subsidiaries notes consolidated financial statements continued key energy services inc subsidiaries notes consolidated financial statements continued condensed consolidating statements operations key energy services inc subsidiaries notes consolidated financial statements continued key energy services inc subsidiaries notes consolidated financial statements continued key energy services inc subsidiaries notes consolidated financial statements continued condensed consolidating statements cash flows key energy services inc subsidiaries notes consolidated financial statements continued key energy services inc subsidiaries notes consolidated financial statements continued item 9item 8 financial statements supplementary data key energy services inc subsidiaries index consolidated financial statements report independent registered public accounting firm board directors stockholders key energy services inc audited accompanying consolidated balance sheets key energy services inc maryland corporation subsidiaries december 31 2010 2009 related consolidated statements operations comprehensive income stockholders’ equity cash flows three years period ended december 31 2010 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position key energy services inc subsidiaries december 31 2010 2009 results operations cash flows three years period ended december 31 2010 conformity accounting principles generally accepted united states america also audited accordance standards public company accounting oversight board united states key energy services inc subsidiaries’ internal control financial reporting december 31 2010 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso report dated february 25 2011 expressed unqualified opinion effectiveness internal control financial reporting grant thornton llp houston texas february 25 2011 report independent registered public accounting firm board directors stockholders key energy services inc audited key energy services inc maryland corporation subsidiaries’ internal control financial reporting december 31 2010 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission “coso” key energy services inc subsidiaries’ management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting appearing item 9a responsibility express opinion key energy services inc subsidiaries’ internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion key energy services inc subsidiaries maintained material respects effective internal control financial reporting december 31 2010 based criteria established internal control integrated framework issued coso also audited accordance standards public company accounting oversight board united states consolidated balance sheets statements operations comprehensive income stockholders’ equity cash flows key energy services inc subsidiaries report dated february 25 2011 expressed unqualified opinion consolidated financial statements grant thornton llp houston texas february 25 2011 key energy services inc subsidiaries consolidated balance sheets see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries consolidated statements operations see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries consolidated statements comprehensive income see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries consolidated statements cash flows see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries consolidated statements stockholders’ equity see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries notes consolidated financial statements note 1 organization summary significant accounting policies key energy services inc whollyowned subsidiaries controlled subsidiaries collectively “key” “company” “we” “us” “our” provide full range well services major oil companies foreign national oil companies independent oil natural gas production companies services include rigbased coiled tubingbased well maintenance workover services well completion recompletion services fluid management services fishing rental services ancillary oilfield services additionally certain rigs capable specialty drilling applications operate major oil natural gas producing regions continental united states operations based mexico colombia middle east russia argentina addition technology development group based canada ownership interests two oilfield service companies based canada basis presentation consolidated financial statements included annual report form 10k present financial position results operations cash flows periods presented accordance generally accepted accounting principles united states “gaap” preparation consolidated financial statements requires us develop estimates make assumptions affect financial position results operations cash flows estimates also impact nature extent disclosure contingent liabilities among things use estimates analyze assets possible impairment ii determine depreciable lives assets iii assess future tax exposure realization deferred tax assets iv determine amounts accrue contingencies v value tangible intangible assets vi assess workers’ compensation vehicular liability selfinsured risk accruals insurance reserves vii provide allowances uncollectible accounts receivable viii value asset retirement obligations ix value equitybased compensation review significant estimates recurring basis record effect necessary adjustments prior publication financial statements adjustments made respect use estimates relate improved information previously available limitations inherent process actual results may differ materially estimates believe estimates reasonable certain reclassifications made prior period amounts conform current period financial statement presentation result sale pressure pumping wireline businesses 2010 show results operations businesses discontinued operations periods presented prior sale businesses sold pattersonuti energy inc “pattersonuti” reported part production services segment based entirely us presentation changes impact consolidated net income earnings per share total current assets total assets total stockholders’ equity evaluated events occurring balance sheet date included annual report form 10k possible disclosure subsequent event management monitored subsequent events date financial statements issued subsequent events identified management required disclosure described “note 26 subsequent events” financial statements principles consolidation within consolidated financial statements include accounts majorityowned controlled subsidiaries eliminate intercompany accounts transactions interest entity significant control influence account interest using cost method interest entity exert significant influence control account interest using equity method key energy services inc subsidiaries notes consolidated financial statements continued apply accounting standards codification “asc” 81010 consolidation variable interest entities revised december 2003 interpretation arb 51 “asc 81010” determining whether consolidate variable interest entity “vie” asc 81010 requires equity investor vie significant equity risk generally minimum 10 hold controlling interest evidenced voting rights absorb majority entity’s expected losses receive majority entity’s expected returns equity investor unable evidence characteristics entity retains ownership characteristics required consolidate vie acquisitions time acquire businesses assets consistent longterm growth strategy results operations acquisitions included financial statements beginning date acquisition accounted using acquisition method business combinations whether partial full stages acquirer records 100 assets liabilities acquired business including goodwill fair values including contingent consideration final valuations assets liabilities obtained recorded soon practicable within one year date acquisition revenue recognition recognize revenue following criteria met evidence arrangement exists ii delivery occurred services rendered iii price customer fixed determinable iv collectibility reasonably assured • evidence arrangement exists final understanding us customer occurred evidenced completed customer purchase order field ticket supplier contract master service agreement • delivery occurred services rendered completed requirements pursuant terms arrangement evidenced field ticket service log • price customer fixed determinable amount required paid agreed upon evidence price fixed determinable evidenced contractual terms price book completed customer purchase order completed customer field ticket • collectibility reasonably assured screen customers provide goods services customers according determined credit terms granted accordance credit policy present revenues net sales taxes collected us customers required remitted local state governmental taxing authorities review contracts multiple element revenue arrangements deliverables separated units accounting assigned fair value standalone value customer objective reliable evidence fair value delivery undelivered items substantially controlled us believe negotiated prices deliverables services contracts representative fair value since acceptance nonacceptance element contract affect elements cash equivalents consider shortterm investments original maturity less three months cash equivalents december 31 2010 entered compensating balance arrangements obligations senior credit agreement syndicate banks bank america securities llc wells fargo bank na administrative agents “senior secured credit facility” secured assets including assets held subsidiaries includes key energy services inc subsidiaries notes consolidated financial statements continued cash equivalents restrict investment cash financial institutions high credit standing limit amount credit exposure one financial institution maintain cash bank deposit brokerage accounts exceed federally insured limits december 31 2010 accounts guaranteed federal deposit insurance corporation “fdic” 250000 substantially accounts held deposits excess fdic limits cash equivalents held russian middle east subsidiaries subject noncontrolling interest cannot repatriated absent amounts believe cash held foreign subsidiaries could repatriated general corporate use without material withholdings time normal course business connection operations ongoing legal matters required place certain amounts cash deposit accounts restrictions limit ability withdraw funds certain cash accounts zerobalance controlled disbursement accounts right offset cash balances present outstanding checks written zerobalance accounts component accounts payable accompanying consolidated balance sheets accounts receivable allowance doubtful accounts establish provisions losses accounts receivable determine possibility collect part outstanding balances regularly review accounts 150 days past due invoice date collectibility establish adjust allowance necessary using specific identification method exhaust collection efforts determine balance never collected write accounts receivable associated provision uncollectible accounts time entitled proceeds insurance policies amounts reserved self insurance liability present insurance receivables gross balance sheet component accounts receivable separate corresponding liability concentration credit risk significant customers include major oil natural gas production companies independent oil natural gas production companies foreign national oil natural gas production companies perform ongoing credit evaluations customers usually require material collateral maintain reserves potential credit losses necessary results operations financial position considered light fluctuations demand experienced oilfield service companies changes oil gas producers’ expenditures budgets occur fluctuations impact results operations financial position supply demand factors directly affect utilization hours primary determinants net cash provided operating activities year ended december 31 2010 single customer accounted 10 consolidated revenues year ended december 31 2009 revenues one customers well servicing segment approximately 11 consolidated revenues single customer accounted 10 consolidated revenues year ended december 31 2009 single customer accounted 10 consolidated revenues year ended december 31 2008 receivables outstanding one customers well servicing segment approximately 25 total accounts receivable december 31 2009 single customer accounted 10 total accounts receivable december 31 2010 2008 key energy services inc subsidiaries notes consolidated financial statements continued inventories consist primarily equipment parts use well servicing operations supplies held consumption valued lower average cost market property equipment property equipment carried cost less accumulated depreciation provided assets estimated depreciable lives assets using straightline method depreciation expense years ended december 31 2010 2009 2008 1258 million 1353 million 1320 million respectively depreciate operational assets depreciable lives salvage value fair value higher assets’ value scrap salvage value approximates 10 operational asset’s acquisition cost operational asset stacked taken service review physical condition depreciable life ultimate salvage value determine asset longer operable whether remaining depreciable life salvage value adjusted scrap asset accelerate depreciation asset salvage value dispose asset gain loss recognized december 31 2010 estimated useful lives asset classes follows lease certain operating assets capital lease obligations whose terms run 55 60 months assets depreciated estimated useful lives term capital lease obligation whichever shorter longlived asset group tested recoverability whenever events changes circumstances indicate carrying amount may recoverable purposes testing impairment group longlived assets along lines business based services provided lowest level identifiable cash flows largely independent cash flows assets liabilities would record impairment charge reducing net carrying value estimated fair value asset group’s estimated future cash flows less net carrying value events changes circumstance cause us evaluate fixed assets recoverability possible impairment may include changes market conditions adverse movements prices oil natural gas changes asset group expected future life intended use physical condition could reduce fair value certain property equipment development future cash flows determination fair value asset group involves significant judgment estimates discussed “note 7 property equipment” third quarter 2009 identified triggering event required us test longlived assets potential impairment result tests determined equipment pressure pumping operations impaired identify triggering events record asset impairments 2010 key energy services inc subsidiaries notes consolidated financial statements continued asset retirement obligations recognize liability fair value legal obligations associated retirement tangible longlived assets capitalize equal amount cost asset depreciate additional cost estimated useful life assets obligations perform asset retirement activities unconditional despite uncertainties may exist surrounding individual retirement activity accordingly recognize liability fair value conditional asset retirement obligation fair value reasonably estimated determining fair value examine inputs believe market participant would use transfer liability probabilityweight potential costs thirdparty would charge adjust cost inflation estimated life asset discount cost using credit adjusted risk free rate significant judgment involved estimating future cash flows associated obligations well ultimate timing cash flows estimates amount timing cash flows change changes may material impact results operations see “note 10 asset retirement obligations” capitalized interest capitalized average amount accumulated expenditures major capital projects construction using effective interest rate based related debt underlying assets placed service capitalized interest added cost assets amortized depreciation expense useful life assets included depreciation amortization line accompanying consolidated statements operations deferred financing costs deferred financing costs associated longterm debt carried cost amortized interest expense using effective interest method life related debt instrument related debt instrument retired remaining unamortized costs included determination gain loss extinguishment debt record gains losses extinguishment debt part continuing operations goodwill intangible assets goodwill results business combinations represents excess acquisition consideration fair value net assets acquired goodwill intangible assets subject amortization tested impairment annually frequently events changes circumstances indicate asset might impaired test impairment indefinitelived intangibles two step test first step test fair value calculated reporting units fair value compared carrying value reporting unit including reporting unit’s goodwill fair value reporting unit exceeds carrying value impairment second step test performed carrying value exceeds fair value reporting unit second step test required second step test compares implied fair value reporting unit’s goodwill carrying value implied fair value reporting unit’s goodwill determined manner amount goodwill recognized business combination purchase price equal fair value reporting unit implied fair value reporting unit’s goodwill excess carrying value impairment recorded carrying value excess implied fair value impairment equal excess recorded assist management preparation analysis valuation reporting units utilize services thirdparty valuation consultant reviews estimates assumptions calculations key energy services inc subsidiaries notes consolidated financial statements continued ultimate conclusions valuation techniques remain sole responsibility determination fair value used test heavily impacted market prices equity debt securities well assumptions estimates future activity levels profitability cash flows conduct annual impairment test december 31 year annual test completed december 31 2010 impairment goodwill indicated see “note 8 goodwill intangible assets” discussion fourth quarter 2010 changed date annual goodwill impairment assessment russian reporting unit september 30 december 31 constitutes change method applying accounting principle believe preferable change made align testing russian reporting unit testing date reporting units change preferable also aligns timing annual russian goodwill impairment test planning budgeting process allow us utilize updated forecasts discounted cash flow models used determination fair value reporting units also november december months contract tendering periods russia providing current information anticipated activity change accounting principle effect current prior period financial statements performed annual goodwill impairment test russian reporting unit september 30 2010 indicators impairment noted retested russian reporting unit december 31 2010 impairment goodwill indicated internaluse software capitalize costs incurred application development stage internaluse software amortize costs software’s estimated useful life generally five years costs incurred related selection maintenance internaluse software expensed incurred litigation estimating liabilities related litigation take account available facts circumstances order determine whether loss probable reasonably estimable various suits claims arising ordinary course business pending us due part locations conduct business continental united states subject jury verdicts outcomes may favorable plaintiffs also exposed litigation foreign locations operate continually assess contingent liabilities including potential litigation liabilities well adequacy accruals need disclosure items establish provision contingent liability probable liability incurred amount able estimated see “note 16 commitments contingencies” environmental operations routinely involve storage handling transport disposal bulk waste materials contain oil contaminants regulated substances operations subject various federal state local laws regulations intended protect environment environmental expenditures expensed capitalized depending future economic benefit expenditures relate existing condition caused past operations future economic benefits expensed record liabilities undiscounted basis remediation efforts probable costs conduct remediation efforts reasonably estimated litigation reserves reflect application insurance coverage environmental reserves reflect management’s assessment insurance coverage may apply matters issue see “note 16 commitments contingencies” key energy services inc subsidiaries notes consolidated financial statements continued self insurance largely selfinsured physical damage equipment automobiles well workers’ compensation claims accruals maintain consolidated balance sheet relate deductibles selfinsured retentions estimate use historical claims data trend analysis assist management liability amount self insurance reserves utilize services third party actuary actual outcome claim could differ significantly estimated amounts adjust loss estimates calculation accruals based upon actual claim settlements reported claims see “note 16 commitments contingencies” income taxes account deferred income taxes using asset liability method provide income taxes significant temporary differences management determines current tax liability well taxes incurred result current operations deferred future periods current taxes payable represent liability related income tax returns current year net deferred tax expense benefit represents change balance deferred tax assets liabilities reported consolidated balance sheets management estimates changes deferred tax assets liabilities using basis assets liabilities financial reporting purposes enacted rates management estimates effect differences reverse management makes certain assumptions timing temporary tax differences differing treatments certain items tax accounting purposes whether differences permanent final determination tax liability involves interpretation local tax laws tax treaties related authorities jurisdiction well significant use estimates assumptions regarding scope future operations results achieved timing nature income earned expenditures incurred establish valuation allowances reduce deferred tax assets determine likely eg likelihood 50 portion deferred tax assets realized future periods assess likelihood use estimates judgment regarding future taxable income well jurisdiction taxable income generated determine whether valuation allowance required evidence include current financial position results operations actual forecasted results reversal deferred tax liabilities tax planning strategies well current forecasted business economics industry additionally record uncertain tax positions net recognizable amount based amount management deems likely sustained upon ultimate settlement tax authorities domestic international tax jurisdictions operate see “note 14 income taxes” discussion accounting income taxes changes valuation allowance components tax rate reconciliation realization loss carryforwards earnings per share basic earnings per common share determined dividing net earnings applicable common stock weighted average number common shares actually outstanding period diluted earnings per common share based increased number shares would outstanding assuming conversion dilutive outstanding convertible securities using treasury stock “as converted” methods see “note 9 earnings per share” sharebased compensation past issued stock options shares restricted common stock appreciation rights “sars” phantom shares performance units employees part employees’ compensation key energy services inc subsidiaries notes consolidated financial statements continued retention tool options restricted shares sars calculate fair value awards grant date amortize fair value compensation expense ratably vesting period award net estimated actual forfeitures fair value stock option sar awards estimated using blackscholes fair value model valuation stock options sars requires us estimate expected term award estimate using simplified method currently sufficient historical exercise information past legal restrictions exercise stock options additionally valuation stock option sar awards also dependent historical stock price volatility calculate using lookback period equivalent expected term award riskfree interest rate estimate future forfeitures grantdate fair value restricted stock awards determined using stock price grant date phantom shares performance units treated “liability” awards carried fair value balance sheet date changes fair value recorded component compensation expense offsetting liability consolidated balance sheet record sharebased compensation component general administrative expense see “note 20 sharebased compensation” foreign currency gains losses international locations argentina mexico russian federation canada local currency functional currency assets liabilities translated rates exchange balance sheet date income expense items translated average rates exchange period resulting gains losses arising translation accounts functional currency us dollar included separate component stockholders’ equity comprehensive income partial complete sale liquidation net investment foreign entity time foreign subsidiaries may enter transactions denominated currencies functional currency transactions initially recorded functional currency subsidiary based applicable exchange rate effect date transaction end month transactions remeasured equivalent amount functional currency based applicable exchange rates effect time adjustment required remeasure transaction equivalent amount functional currency end month recorded income loss foreign subsidiary component income expense see “note 17 accumulated comprehensive loss” comprehensive income display comprehensive income components financial statements classify items comprehensive income nature financial statements display accumulated balance comprehensive income separately stockholders’ equity leases lease real property equipment various leasing arrangements enter leasing arrangement analyze terms arrangement determine whether lease accounted operating lease capital lease periodically incur costs improve assets lease arrangements value leasehold improvements exceeds threshold capitalization record improvement component property equipment amortize improvement useful life improvement lease term whichever shorter certain operating lease agreements structured include scheduled specified rent increases term lease agreement increases may result inducement “rent holiday” key energy services inc subsidiaries notes consolidated financial statements continued conveyed us early lease included reflect anticipated effects inflation recognize scheduled specified rent increases straightline basis term lease agreement addition certain operating lease agreements contain incentives induce us enter lease agreement upfront cash payments us payment lessor costs moving expenses assumption lessor preexisting lease agreements third parties payments made us behalf represent incentives consider reduction rent expense recognized straightline basis term lease agreement new accounting standards adopted report asu 200916 december 2009 financial accounting standards board “fasb” issued accounting standards update “asu” 200916 transfers servicing topic 860 accounting transfers financial assets asu 200916 revises provisions former fasb statement 140 accounting transfers servicing financial assets extinguishment liabilities requires disclosure regarding transfers financial assets asu 200916 also eliminates concept “qualifying special purpose entity” changes requirements derecognizing financial assets increases disclosure requirements transfers financial assets reporting entity’s continuing involvement transferred financial assets adopted provisions asu 200916 january 1 2010 adoption standard material effect financial condition results operations cash flows asu 200917 december 2009 fasb issued asu 200917 consolidations topic 810 improvements financial reporting enterprises involved variable interest entities asu 200917 replaces quantitativebased risk rewards calculation determining reporting entity controlling financial interest variable interest entity approach focused identifying reporting entity power direct activities variable interest entity significantly impact entity’s economic performance obligation absorb losses entity ii right receive benefits entity approach expected primarily qualitative effective identifying reporting entity controlling financial interest variable interest entity asu 200917 also requires additional disclosures reporting entity’s involvement variable interest entities provisions asu 200917 applied beginning first fiscal period beginning november 15 2009 adopted asu 200917 january 1 2010 adoption standard material effect financial position results operations cash flows asu 201002 january 2010 fasb issued asu 201002 consolidation topic 810 accounting reporting decreases ownership subsidiary scope clarification asu 201002 clarifies scope previous guidance accounting disclosure requirements related decreases ownership subsidiary apply subsidiary group assets business nonprofit entity ii subsidiary business nonprofit entity transferred equity method investee joint venture iii exchange group assets constitutes business nonprofit activity noncontrolling interest entity asu 201002 also expands disclosure requirements deconsolidation subsidiary derecognition group assets include valuation techniques used measure fair value retained investment ii nature continuing involvement subsidiary entity acquiring group assets iii whether transaction resulted deconsolidation derecognition related party whether former subsidiary entity acquiring assets become related party transaction provisions asu 201002 effective first reporting period beginning december 13 2009 adopted provisions asu 201002 january 1 2010 adoption standard material impact financial position results operations cash flows asu 201006 january 2010 fasb issued asu 201006 fair value measurements disclosures topic 820 improving disclosures fair value measurements asu 201006 clarifies key energy services inc subsidiaries notes consolidated financial statements continued requirements certain disclosures around fair value measurements also requires registrants provide certain additional disclosures measurements new disclosure requirements include significant amounts transfers level 1 level 2 fair value measurements period along reason transfers ii separate presentation information purchases sales issuances settlements fair value measurements significant unobservable inputs asu 201006 effective interim annual reporting periods beginning december 15 2009 adopted provisions asu 201006 january 1 2010 adoption standard material impact financial position results operations cash flows asu 201009 february 2010 fasb issued asu 201009 subsequent events topic 855 amendments certain recognition disclosure requirements update provides amendments subtopic 85510 follows entity either sec filer b conduit bond obligor conduit debt securities traded public market domestic foreign stock exchange overthecountermarket including local regional markets required evaluate subsequent events date financial statements issued ii glossary topic 855 amended include definition sec filer sec filer entity required file furnish financial statements either sec respect entity subject section 12i securities exchange act 1934 amended appropriate agency section iii entity sec filer required disclose date subsequent events evaluated iv glossary topic 855 amended remove definition public entity definition public entity topic 855 used determine date subsequent events evaluated v scope reissuance disclosure requirements refined include revised financial statements term revised financial statements added glossary topic 855 revised financial statements include financial statements revised either result correction error retrospective application us generally accepted accounting principles adopted provisions asu 201009 march 1 2010 adoption standard material impact financial position results operations cash flows accounting standards yet adopted report asu 200913 october 2009 fasb issued asu 200913 revenue recognition topic 605 multipledeliverable revenue arrangements consensus fasb emerging issues task force “asu 200913” asu 200913 addresses accounting multipledeliverable arrangements products services accounted separately rather combined unit addresses separate deliverables measure allocate arrangement consideration one units accounting existing gaap requires entity use vendorspecific objective evidence “vsoe” thirdparty evidence selling price separate deliverables multipledeliverable selling arrangement result asu 200913 multipledeliverable arrangements separated circumstances current guidance asu 200913 establishes selling price hierarchy determining selling price deliverable selling price based vsoe available thirdparty evidence vsoe available estimated selling price neither vsoe thirdparty evidence available asu 200913 also requires entity determine best estimate selling price manner consistent used determine selling price deliverable standalone basis increases disclosure requirements related entity’s multipledeliverable revenue arrangements asu 200913 must prospectively applied revenue arrangements entered materially modified fiscal years beginning june 15 2010 early adoption permitted entities may elect required adopt amendments retrospectively periods presented adopted provisions asu 200913 january 1 2011 believe adoption standard material impact financial position results operations cash flows asu 200914 october 2009 fasb issued asu 200914 software topic 985 certain revenue arrangements include software elements consensus fasb emerging issues task key energy services inc subsidiaries notes consolidated financial statements continued force “asu 200914” asu 200914 issued address concerns relating accounting revenue arrangements contain tangible products software “more incidental” product whole existing guidance circumstances requires entities use vsoe selling price separate deliverables multipledeliverable arrangement reporting entities raised concerns current accounting model appropriately reflect economics underlying transactions softwareenabled products fall within scope current guidance originally intended asu 200914 changes current accounting model revenue arrangements include tangible products software elements exclude software components essential tangible products’ core functionality addition asu 200914 also requires hardware components tangible product containing software components always excluded software revenue recognition guidance provides guidance determine software relating tangible products considered essential tangible products’ functionality excluded scope software revenue recognition guidance asu 200914 also provides guidance allocate arrangement consideration deliverables arrangement contains tangible products software essential product’s functionality asu 200914 issued concurrently asu 200913 also requires entities provide disclosures required asu 200913 included within scope asu 200914 asu 200914 effective prospectively revenue arrangements entered materially modified fiscal years beginning june 15 2010 early adoption permitted entities may also elect required adopt asu 200914 retrospectively prior periods must adopt asu 200914 period using transition methods uses adopt asu 200913 adopted provisions asu 200914 january 1 2011 believe adoption standard material impact financial position results operations cash flows asu 201013 april 2010 fasb issued asu 201013 compensation stock compensation topic 718 effect denominating exercise price sharebased payment award currency market underlying equity security trades asu codifies consensus reached eitf issue 09j “effect denominating exercise price sharebased payment award currency market underlying equity security trades” amendments codification clarify employee sharebased payment award exercise price denominated currency market substantial portion entity’s equity shares trades considered contain condition market performance service condition therefore entity would classify award liability otherwise qualifies equity asu 201013 effective fiscal years beginning december 15 2010 early adoption permitted amendments update applied recording cumulativeeffect adjustment opening balance retained earnings cumulativeeffect adjustment calculated awards outstanding beginning fiscal year amendments initially applied amendments applied consistently since inception award cumulativeeffect adjustment presented separately adopted provisions asu 201013 january 1 2011 believe adoption standard material impact financial position results operations cash flows asu 201028 december 2010 fasb issued asu 201028 intangibles goodwill topic 350 perform step 2 goodwill impairment test reporting units zero negative carrying amounts asu reflects decision reached eitf issue 10a amendments asu modify step 1 goodwill impairment test reporting units zero negative carrying amounts reporting units entity required perform step 2 goodwill impairment test likely goodwill impairment exists determining whether likely goodwill impairment exists entity consider whether adverse qualitative factors indicating impairment may exist qualitative factors consistent existing guidance examples require goodwill reporting unit tested impairment annual tests event occurs circumstances change would likely reduce fair value reporting unit key energy services inc subsidiaries notes consolidated financial statements continued carrying amount public entities amendments asu effective fiscal years interim periods within years beginning december 15 2010 early adoption permitted adopted provisions asu 201028 january 1 2011 believe adoption standard material impact financial position results operations cash flows asu 201029 december 2010 fasb issued asu 201029 business combinations topic 805 disclosure supplementary pro forma information business combinations asu reflects decision reached eitf issue 10g amendments asu affect public entity defined topic 805 business combinations enters business combinations material individual aggregate basis amendments asu specify public entity presents comparative financial statements entity disclose revenue earnings combined entity though business combinations occurred current year occurred beginning comparable prior annual reporting period amendments also expand supplemental pro forma disclosures include description nature amount material nonrecurring pro forma adjustments directly attributable business combination included reported pro forma revenue earnings asu 201029 effective prospectively business combinations acquisition date beginning first annual reporting period beginning december 15 2010 early adoption permitted adopted provisions asu 201029 january 1 2011 adoption standard may result additional disclosures material impact financial position results operations cash flows note 2 acquisitions ofs energy services llc “ofs” october 2010 acquired certain subsidiaries together associated assets owned ofs privatelyheld oilfield services company arclight capital partners llc accounted acquisition business combination results operations acquired businesses included consolidated financial statements since date acquisition total consideration acquisition 158 million shares common stock cash payment 758 million subject certain working capital adjustments closing registered shares common stock issued transaction securities act 1933 amended subject certain conditions ofs’ subsidiaries oilfield services companies provide well workover stimulation services well nitrogen pumping coiled tubing fluid handling wellsite construction preparation services transaction complemented existing rig fluids management businesses well significantly increased number coiled tubing units fleet ofs subsidiaries incorporated well servicing segment production services segment acquisitiondate fair value consideration transferred totaled 2297 million consisted following thousands fair value 158 million common shares issued 974 per share based closing market price acquisition date october 1 2010 key energy services inc subsidiaries notes consolidated financial statements continued following table summarizes estimated fair values assets acquired liabilities assumed acquisition date process finalizing thirdparty valuations tangible certain intangible assets thus provisional measurements tangible assets intangible assets goodwill deferred income tax assets preliminary subject change valuations complete continue assess fair values assets acquired liabilities assumed 210 million acquired intangible assets 200 million preliminarily assigned customer relationships amortized value relationships realized using rates 31 187 141 106 79 59 45 33 2018 remaining 10 million acquired intangible assets assigned noncompete agreements amortized straightline 18 months noted fair value acquired identifiable intangible assets preliminary pending receipt final valuation assets fair value accounts receivable acquired october 1 2010 234 million gross contractual amount 254 million company expects 20 million uncollectible goodwill acquired 913 million assigned coiled tubing services 18 million assigned fluid management services believe goodwill recognized attributable primarily acquired workforce expansion growing service line goodwill expected deductible income tax purposes fair value acquired goodwill preliminary pending receipt final valuation recognized 20 million acquisition related costs expensed year ended december 31 2010 costs included statements operations line item “general administrative expenses” year ended december 31 2010 company also recognized 01 million costs associated issuing registering shares included consolidated statements operations year ended december 31 2010 related acquisition revenues approximately 464 million operating income 146 million acquisition date period ended december 31 2010 key energy services inc subsidiaries notes consolidated financial statements continued following represents pro forma consolidated income statement ofs acquisition included consolidated results company january 1 years ended december 31 2010 2009 unaudited pro forma results based assumptions deemed appropriate management prepared informational purposes necessarily indicative company’s results acquisition occurred january 1 2010 2009 respectively twelve months ended december 31 2010 2009 amounts calculated applying company’s accounting policies adjusting results ofs changes applied january 1 together consequential tax effects enhanced oilfield technologies llc “eot” december 2010 acquired 100 equity interests eot privatelyheld oilfield technology company accounted acquisition business combination acquired business still developmental stage time acquisition accordingly results operations eot included consolidated financial statements year ended december 31 2010 key energy services inc subsidiaries notes consolidated financial statements continued total consideration acquisition cash payment 117 million closing eot oilfield technology company develops expandable liner hanger systems technology complement existing service offerings eot assets incorporated production services segment following table summarizes estimated fair values assets acquired acquisition date process performing thirdparty valuations intangible assets acquired thus provisional measurements intangible assets goodwill preliminary subject change 70 million acquired intangible assets preliminarily assigned patents expect amortized straightline 20 years noted fair value acquired identifiable intangible asset preliminary pending receipt final valuation assets valuation assets completed december 31 2010 due timing closing transaction goodwill acquired 47 million assigned fishing rental business believe goodwill recognized attributable primarily entrance new technology service offering goodwill expected deductible income tax purposes recognized less 01 million acquisition related costs expensed year ended december 31 2010 costs included statement operations line item “general administrative expenses” acquisitions made asset acquisitions 2010 part business strategy june 2010 acquired five large diameter capable coiled tubing units associated equipment approximately 127 million cash express energy services privatelyheld oilfield service companies also november 2010 acquired 13 rigs associated equipment five jab privatelyheld oilfield companies cash consideration approximately 146 million acquisitions geostream services group “geostream” september 1 2009 acquired additional 24 interest geostream 164 million second investment geostream pursuant agreement dated august 26 2008 amended second investment brought total investment geostream 50 prior acquisition additional interest accounted ownership geostream equitymethod investment upon acquiring 50 interest also obtained majority representation geostream’s board directors controlling interest accounted acquisition business combination achieved stages results geostream included consolidated financial statements since acquisition date portion outside control forming noncontrolling interest acquisition date fair value consideration transferred totaled approximately 350 million consisted cash consideration second investment fair value previous equity interest acquisition date fair value previous equity interest approximately 183 million recognized key energy services inc subsidiaries notes consolidated financial statements continued loss 02 million result remeasuring prior equity interest geostream held business combination included line item “other net” 2009 consolidated statements operations purchase price allocations 2009 acquisitions finalized 2010 without significant changes acquisitions leader energy services ltd “leader” july 22 2008 purchased united statesbased assets leader canadian company total consideration 354 million including direct transaction costs leader assets incorporated production services segment hydrawalk inc “hydrawalk” may 30 2008 acquired hydrawalk privately owned company providing automated pipe handling services purchase price totaled 107 million including direct transaction costs purchase price also provided performance earnout paid 11 million total hydrawalk incorporated production services segment western drilling llc “western” april 3 2008 acquired western privatelyowned company based california provides workover drilling services purchase price totaled 520 million including direct transaction costs western incorporated well servicing segment purchase price allocations 2008 acquisitions finalized 2009 note 3 discontinued operations october 1 2010 completed sale pressure pumping wireline businesses pattersonuti management determined sell businesses aligned core business strategy well intervention international expansion periods presented report show results operations related businesses discontinued operations periods prior sale businesses sold pattersonuti reported part production services segment based entirely us sale businesses represented sale significant portion reporting unit requires reassessment goodwill however due previous impairment charges goodwill related segment remaining 2010 agreedupon purchase price businesses exceeded carrying value assets sold record writedown assets date became classified held sale carrying value assets sold 765 million september 30 2010 743 million december 31 2009 discontinued depreciation amortization pressure pumping wireline property equipment june 30 2010 classified held sale key energy services inc subsidiaries notes consolidated financial statements continued following table presents results discontinued operations businesses sold connection transaction note 4 current noncurrent liabilities table presents comparative detailed information current accrued liabilities december 31 2010 2009 key energy services inc subsidiaries notes consolidated financial statements continued table presents comparative detailed information noncurrent accrued liabilities december 31 2010 2009 note 5 income expense table presents comparative detailed information income expense continuing operations years ended december 31 2010 2009 2008 note 6 allowance doubtful accounts table presents rollforward allowance doubtful accounts years ended december 31 2010 2009 2008 key energy services inc subsidiaries notes consolidated financial statements continued note 7 property equipment property equipment consists following capitalize costs incurred application development stage internaluse software costs capitalized work progress time application put service years ended december 31 2010 2009 2008 capitalized costs amount 147 million 131 million 45 million respectively capitalized internaluse software 2010 consisted primarily expenditures new erp human resources information systems interest capitalized average amount accumulated expenditures major capital projects construction using effective interest rate based related debt underlying assets placed service capitalized interest years ended december 31 2010 2009 2008 35 million 40 million 51 million respectively obligated various capital leases certain vehicles equipment expire various dates next five years carrying value assets acquired capital leases consists following depreciation assets held capital leases 32 million 35 million 43 million years ended december 31 2010 2009 2008 respectively included depreciation amortization expense accompanying consolidated statements operations key energy services inc subsidiaries notes consolidated financial statements continued retirement impairment charge third quarter 2009 removed service retired portion us rig fleet associated support equipment resulting recording pretax asset retirement charge 659 million retired rigs order better align supply demand well servicing market activity remained low asset retirement charge included line item “asset retirements impairments” consolidated statements operations year ended december 31 2009 assets reported well servicing segment also third quarter 2009 performed assessment fair value assets production services segment assessment resulted recording pretax impairment charge 311 million third quarter 2009 asset impairment charge included line item “asset retirements impairments” consolidated statements operations year ended december 31 2009 note 8 goodwill intangible assets changes carrying amount goodwill years ended december 31 2010 2009 follows 2010 purchase price adjustment relates previous acquisition 2007 2010 made full payment contingent consideration related earnout provisions purchase agreement key energy services inc subsidiaries notes consolidated financial statements continued components intangible assets december 31 2010 2009 follows amortization expense intangible assets determinable lives follows key energy services inc subsidiaries notes consolidated financial statements continued intangible assets december 31 2010 87 million indefinite lived intangibles subject amortization weighted average remaining amortization periods expected amortization expense next five years intangible assets follows certain intangible assets denominated currencies us dollars values assets subject fluctuations associated changes exchange rates additionally certain assets also subject purchase accounting adjustments estimated fair values intangible assets obtained acquisitions consummated preceding twelve months based preliminary information subject change final valuations obtained perform annual impairment tests associated goodwill december 31 year frequently circumstances warrant first step goodwill impairment test compared fair value reporting unit carrying amount including goodwill based results annual test fair value rig services coiled tubing services fluid management services reporting units russia canadian reporting units substantially exceeded carrying values fair value reporting units substantially exceeded carrying values determined potential impairment goodwill associated reporting units existed december 31 2010 step two impairment test required discussed “note 1 organization summary significant accounting policies” fourth quarter 2010 changed date annual goodwill impairment assessment russian reporting unit september 30 december 31 tested 246 million goodwill associated russian reporting unit december 31 2010 first step goodwill impairment test showed fair value reporting unit substantially exceeded carrying value key assumption model revenue related reporting unit increase future years potential events could affect assumption level development exploration production activity corresponding capital spending oil natural gas companies russian federation oil natural gas production costs government regulations conditions worldwide oil natural gas industry 2009 identified triggering events required us test goodwill impairment third quarter 2009 upon completion 2009 assessment recorded pretax impairment charge 05 million production services segment impairment charge included line item “asset retirements impairments” consolidated statements operations year ended december 31 2009 tested goodwill potential impairment 2009 annual testing date results test indicated none reporting units goodwill fair value substantially excess carrying value goodwill existed reporting units risk failing step one goodwill impairment test key energy services inc subsidiaries notes consolidated financial statements continued upon completion 2008 assessment determined goodwill pressure pumping fishing rental reporting units comprising production services segment impaired recorded pretax impairment charge 207 million production services segment fourth quarter 2008 note 9 earnings per share following table presents basic diluted earnings per share years ended december 31 2010 2009 2008 stock options warrants sars included computation diluted earnings per share using treasury stock method restricted stock grants legally considered issued outstanding included diluted earnings per share calculation years ended december 31 2010 2009 2008 exclude key energy services inc subsidiaries notes consolidated financial statements continued potential exercise 28 million 35 million 26 million stock options respectively effect would antidilutive diluted earnings per share calculation years ended december 31 2009 2008 exclude potential exercise 04 million sars effects exercises earnings per share periods would antidilutive 2010 2009 options sars would antidilutive net loss continuing operations years 2008 options sars considered antidilutive exercise prices exceeded average price stock years material changes share amounts subsequent balance sheet date would material impact earnings per share calculation year ended december 31 2010 however issued 11 million shares restricted stock february 4 2011 note 10 asset retirement obligations connection well servicing activities operate number saltwater disposal “swd” facilities operations involve transportation handling disposal fluids swd facilities byproducts drilling process swd facilities used connection fluid hauling operations subject future costs associated retirement properties result incurred costs associated proper storage disposal materials annual amortization assets associated asset retirement obligations 05 million 05 million 06 million years ended december 31 2010 2009 2008 respectively summary changes asset retirement obligations follows thousands note 11 equitymethod investments iroc energy services corp december 31 2010 2009 owned approximately 87 million shares iroc energy services corp “iroc” albertabased oilfield services company represented 201 iroc’s outstanding common stock december 31 2010 2009 december 31 2010 significant influence operations iroc ownership interest control account investment iroc using equity method prorata share iroc’s earnings losses entitled recorded consolidated statements operations component income expense offsetting increase decrease carrying value investment appropriate earnings distributed back us iroc form dividends would result decrease carrying value equity investment value key energy services inc subsidiaries notes consolidated financial statements continued investment may also increase decrease period due changes exchange rate us dollar canadian dollar changes value investment due fluctuations exchange rates offset accumulated comprehensive income 2010 value investment iroc increased 02 million due changes exchange rates us canadian dollar years ended december 31 2010 2009 2008 recorded equity losses less 01 million 01 million 02 million related investment iroc respectively first quarter 2010 iroc declared dividend paid us february 2010 reducing value investment 02 million carrying value investment iroc totaled 51 million 40 million december 31 2010 2009 respectively carrying value investment iroc 53 million proportionate share book value net assets iroc december 31 2010 difference attributable certain longlived assets iroc proportionate share iroc’s net income loss adjusted future periods estimated remaining useful lives longlived assets accordingly investment increased 11 million 2010 due accretion difference market value iroc shares approximately 104 million december 31 2010 based quoted market prices iroc’s shares note 12 variable interest entities march 7 2010 entered agreement almansoori petroleum services llc “almansoori” form joint venture almansoori key energy services llc laws abu dhabi uae purpose joint venture engage conventional workover drilling services pressure pumping services coiled tubing services fishing rental tools services rig monitoring services pipe handling services fluids waste treatment handling services wireline services almansoori holds 51 interest joint venture hold 49 interest future capital contributions joint venture made equal terms equal amounts future share capital increases issued proportion initial share capital percentages paid almansoori key equal amounts also share profits losses joint venture equal terms equal amounts almansoori however hold three five board directors seats controlling financial interest consolidate entity financial statements year ended december 31 2010 recognized 10 million revenue 15 million net loss statement operations associated joint venture also 2010 guaranteed timely performance joint venture sole contract valued 2 million december 31 2010 approximately 25 million assets joint venture key energy services inc subsidiaries notes consolidated financial statements continued note 13 estimated fair value financial instruments following summary carrying amounts estimated fair values financial instruments december 31 2010 2009 cash equivalents accounts payable accrued liabilities carrying amounts approximate fair value short maturity instruments carrying value equal fair value instruments balance sheet date notes receivablerelated parties amounts reported relate notes receivable certain employees related relocation retention agreements well services performed affiliated parties carrying values notes approximate fair values applicable balance sheet dates 8375 senior notes due 2014 fair value longterm debt based upon quoted market prices face value various debt securities december 31 2010 carrying value notes december 31 2010 4250 million fair value 4505 million 1060 carrying value senior secured credit facility revolving loans variable interest rates recent amendment credit facility fair values revolving loans borrowed senior secured credit facility approximated carrying values december 31 2009 october 4 2010 repaid outstanding balance loans notes payable related parties amounts reported relate seller financing arrangement entered connection acquisition moncla 2007 variable interest rates discount applied notes carrying value notes approximated fair values december 31 2009 may 13 2010 repaid outstanding principal balance note plus accrued unpaid interest key energy services inc subsidiaries notes consolidated financial statements continued note 14 income taxes components income tax expense follows sources income loss continuing operations income taxes noncontrolling interest follows made federal income tax payments year ended december 31 2010 made payments 01 million 335 million years ended december 31 2009 2008 respectively made net state income tax payments 05 million 55 million 66 million years ended december 31 2010 2009 2008 respectively made net foreign tax payments 42 million 73 million 34 million years ended december 31 2010 2009 2008 respectively years ended december 31 2010 2008 tax benefits allocated stockholders’ equity compensation expense income tax purposes excess amounts recognized financial reporting purposes 21 million 17 million respectively year ended december 31 2009 06 million tax expense allocated stockholders’ equity compensation expense financial reporting purposes excess amounts recognized income tax purposes addition received federal income tax refund approximately 532 million 2010 income tax expense differs amounts computed applying statutory federal rate follows key energy services inc subsidiaries notes consolidated financial statements continued december 31 2010 2009 deferred tax assets liabilities consisted following 2010 2009 deferred tax liabilities decreased 01 million 04 million respectively adjustments accumulated comprehensive loss recording deferred income tax assets consider whether likely portion deferred income tax assets realized ultimate realization deferred income tax assets dependent upon generation future taxable income periods deferred income tax assets would deductible consider scheduled reversal deferred income tax liabilities projected future taxable income determination fully realize deferred income tax assets related federal net operating loss carryforwards valuation allowance due section 382 limitations would need generate future federal taxable income approximately 26 million next eight years certain exceptions noted believe considering available objective evidence positive negative historical prospective greater weight given historical evidence likely assets realized estimate december 31 2010 2009 2008 available 49 million 71 million 82 million respectively federal net operating loss carryforwards approximately 25 million net operating losses december 31 2010 subject 11 million annual section 382 limitation expire 2018 approximately 24 million net operating losses december 31 2010 subject 5000 annual section 382 limitation expire 2016 2018 due annual limitations sections 382 383 management believes able utilize available carryforwards prior ultimate expiration december 31 2010 2009 valuation allowance 08 million related deferred tax asset associated remaining federal net operating loss carryforwards expire utilization due section 382 limitations estimate december 31 2010 2009 2008 available approximately 377 million 642 million 159 million respectively state net operating loss carryforwards expire key energy services inc subsidiaries notes consolidated financial statements continued 2020 2029 deferred tax asset associated remaining state net operating loss carryforwards december 31 2010 33 million management believes likely able utilize available carryforwards prior ultimate expiration estimate december 31 2010 2009 2008 available approximately 745 million 164 million 32 million respectively foreign net operating loss carryforwards expire 2014 2030 gross deferred tax asset associated foreign net operating loss carryforwards december 31 2010 222 million management believes likely able utilize net operating loss carryforwards prior ultimate expiration foreign jurisdictions exception argentina management believes likely portion net operating loss carryforwards argentina utilized prior ultimate expiration valuation allowance 21 million recorded year ended december 31 2010 provide us income taxes withholding taxes 2010 unremitted earnings mexico subsidiaries earnings considered permanently reinvested furthermore provide us income taxes unremitted earnings foreign subsidiaries 2010 prior years tax basis foreign subsidiaries exceeded book basis period file income tax returns united states federal jurisdiction various states foreign jurisdictions currently audit internal revenue service tax year ended december 31 2009 significant filings argentina mexico examined 2006 2008 respectively december 31 2010 2009 2008 22 million 32 million 56 million respectively unrecognized tax benefits recognized would impact effective tax rate accrued 08 million 11 million 21 million payment interest penalties december 31 2010 2009 2008 respectively believe reasonably possible 09 million currently remaining unrecognized tax positions individually insignificant may recognized end 2011 result lapse statute limitations settlement open audit recognized net tax benefit 10 million 2010 expirations statutes limitations recorded net income tax benefit 12 million increase deferred tax liabilities 02 million related statute expirations following table presents activity 2010 2009 related liabilities uncertain tax positions thousands key energy services inc subsidiaries notes consolidated financial statements continued tax legislative changes small business jobs act 2010 small business jobs act 2010 extends bonus firstyear depreciation deduction 50 adjusted basis qualified property acquired placed service 2010 increases deduction 100 adjusted basis qualified property acquired placed service september 8 2010 january 1 2012 estimated 62 million qualifying additions 2010 resulting bonus tax depreciation 385 million american recovery reinvestment act 2009 american recovery reinvestment act 2009 extends bonus firstyear depreciation deduction 50 adjusted basis qualified property acquired placed service december 31 2008 january 1 2010 66 million qualifying additions 2009 resulting additional 2009 tax depreciation 33 million note 15 longterm debt components longterm debt follows 8375 senior notes due 2014 november 29 2007 issued 4250 million senior notes indenture “indenture” senior notes priced 100 face value yield 8375 net proceeds deducting initial purchasers’ fees offering expenses approximately 4161 million senior notes registered public debt effective august 22 2008 senior notes general unsecured senior obligations company rank effectively subordinate existing future secured indebtedness senior notes jointly severally guaranteed senior unsecured basis certain existing future domestic subsidiaries senior notes mature december 1 2014 december 1 2011 senior notes subject redemption time option whole part redemption prices expressed percentages principal amount redeemed plus accrued unpaid interest applicable redemption date redeemed twelvemonth period beginning december 1 years indicated key energy services inc subsidiaries notes consolidated financial statements continued addition time prior december 1 2011 may option redeem portion senior notes redemption price equal 100 principal amount plus applicable premium defined indenture respect senior notes plus accrued unpaid interest redemption date experience change control subject certain exceptions must give holders senior notes opportunity sell us senior notes whole part purchase price equal 101 aggregate principal amount plus accrued unpaid interest date purchase subject certain negative covenants indenture governing senior notes indenture limits ability among things • sell assets • pay dividends make distributions capital stock subordinated indebtedness • make investments • incur additional indebtedness issue preferred stock • create certain liens • enter agreements restrict dividends payments subsidiaries us • consolidate merge transfer substantially assets • engage transactions affiliates • create unrestricted subsidiaries covenants subject certain exceptions qualifications contain crossdefault provisions connection covenants senior secured credit facility substantially covenants terminate senior notes mature one two specified ratings agencies assigns senior notes investment grade rating future events default exist indenture december 31 2010 senior notes investment grade covenants cease apply us result achieving investment grade rating restored even credit rating assigned senior notes later falls investment grade rating senior secured credit facility maintain senior secured credit facility pursuant revolving credit agreement syndicate banks bank america securities llc wells fargo bank na administrative agents amended senior secured credit facility consists revolving credit facility letter credit subfacility swing line facility aggregate principal amount 3000 million mature later november 29 2012 ability request increases total commitments facility 1000 million aggregate increases subject certain requirements well lenders’ approval interest rate per annum applicable senior secured credit facility amended option libor plus margin 350 450 basis points depending consolidated leverage ratio ii base rate defined higher x bank america’s prime rate federal funds rate plus 05 plus margin 250 350 basis points depending consolidated leverage ratio unused commitment fees facility range 050 075 depending upon consolidated leverage ratio senior secured credit facility contains certain financial covenants among things require us maintain certain financial ratios limit annual capital expenditures addition key energy services inc subsidiaries notes consolidated financial statements continued covenants impose restrictions ability repurchase shares assets owned domestic subsidiaries located outside united states limitations amended senior secured credit facility also requires • consolidated funded indebtedness greater 45 adjusted total capitalization • senior secured leverage ratio senior secured funded debt trailing four quarters earnings interest taxes depreciation amortization calculated pursuant terms senior secured credit facility “ebitda” greater 250 100 fiscal quarter ending december 31 2010 ii thereafter 200 100 • maintain consolidated interest coverage ratio trailing four quarters ebitda interest expense least following amounts corresponding period • limit capital expenditures including made foreign subsidiaries whollyowned 1200 million fiscal year consolidated leverage ratio total funded debt trailing four quarters ebitda greater 350 100 ii 2500 million consolidated leverage ratio total funded debt trailing four quarters ebitda equal less 350 100 subject certain adjustments • make acquisitions either completed equity consideration without regard leverage ii completed cash consideration consolidated leverage ratio total funded debt trailing four quarters ebitda 275 100 less x aggregate amount 250 million unused credit commitments facility pro forma compliance financial covenants contained credit agreement b consolidated leverage ratio total funded debt trailing four quarters ebitda greater 275 100 addition requirements subclauses x clause cash amount paid respect acquisitions limited 250 million per fiscal year subject potential increase using amounts available capital expenditures net cash proceeds receive october 27 2009 connection issuance sale equity interests incurrence issuance certain unsecured debt securities identified used purpose • limit investment foreign subsidiaries including way loans made us domestic subsidiaries foreign subsidiaries guarantees made us domestic subsidiaries debt foreign subsidiaries 750 million fiscal year aggregate amount october 27 2009 equal greater 2000 million 25 consolidated net worth plus ii net cash proceeds receive october 27 2009 connection issuance sale equity interests incurrence certain unsecured debt securities identified used purpose addition amended senior secured credit facility contains certain affirmative covenants including without limitation restrictions related liens ii debt guarantees contingent obligations iii mergers consolidations iv sales transfers dispositions property assets v loans acquisitions joint ventures investments vi dividends distributions redemptions repurchases equity holders vii prepaying redeeming repurchasing senior notes unsecured debt incurred pursuant sixth bullet point listed viii granting negative pledges lenders ix changes nature business x amending organizational documents amending otherwise modifying debt amendment modification would material adverse effect amending senior notes unsecured debt incurred pursuant sixth bullet point listed effect amendment shorten maturity senior notes key energy services inc subsidiaries notes consolidated financial statements continued unsecured debt xi changes accounting policies reporting practices foregoing cases certain exceptions may prepay senior secured credit facility whole part time without premium penalty subject obligation reimburse lenders breakage redeployment costs december 31 2010 594 million letters credit outstanding revolving credit facility leaving 2406 million availability revolving credit facility terms senior secured credit facility committed letters credit count borrowing capacity obligations senior secured credit facility guaranteed subsidiaries secured assets including accounts receivable inventory equipment notes payable related parties concurrently sale six barge rigs related equipment may 2010 repaid remaining 60 million outstanding note payable related party second two notes payable related parties “related party note” entered october 25 2007 first related party note unsecured note amount 125 million repaid october 25 2009 second related party note unsecured note amount 100 million payable annual installments 20 million longterm debt principal repayment interest expense presented schedule repayment requirements longterm debt next five years thereafter december 31 2010 key energy services inc subsidiaries notes consolidated financial statements continued presented schedule estimated minimum lease payments capital lease obligations next five years thereafter december 31 2010 interest expense years ended december 31 2010 2009 2008 consisted following december 31 2010 2009 weighted average interest rate variable rate debt 178 324 respectively deferred financing costs cost capitalized amortized written determination loss extinguishment debt years ended december 31 2010 2009 2008 presented table key energy services inc subsidiaries notes consolidated financial statements continued net carrying values years presented appear table note 16 commitments contingencies operating lease arrangements lease certain property equipment noncancelable operating leases expire various dates 2019 varying payment dates throughout month december 31 2010 future minimum lease payments noncancelable operating leases follows thousands also party significant number monthtomonth leases cancelable time operating lease expense 211 million 227 million 224 million years ended december 31 2010 2009 2008 respectively litigation various suits claims arising ordinary course business pending us due part locations conduct business continental united states subject jury verdicts outcomes may favorable plaintiffs continually assess contingent liabilities including potential litigation liabilities well adequacy accruals need disclosure items establish provision contingent liability probable liability incurred amount reasonably estimable december 31 2010 aggregate amount liabilities related litigation deemed probable reasonably estimable approximately 38 million believe disposition matters material impact financial position results operations cash flows year ended december 31 2010 recorded net increase reserves 11 million related settlement ongoing legal matters continued refinement liabilities recognized litigation deemed probable estimable liabilities related litigation matters deemed probable estimable december 31 2009 2008 27 million 45 million respectively key energy services inc subsidiaries notes consolidated financial statements continued litigation former officers employees former general counsel jack loftis jr filed lawsuit us district court district new jersey april 21 2006 alleged “whistleblower” claim sarbanesoxley act breach contract breach duties good faith fair dealing breach fiduciary duty wrongful termination august 17 2007 filed counterclaims mr loftis alleging attorney malpractice breach contract breach fiduciary duties counterclaims sought repayment severance paid mr loftis approximately 08 million plus benefits paid period july 8 2004 september 21 2004 damages relating allegations malpractice breach fiduciary duties september 2 2010 reached settlement mr loftis regarding alleged claims recorded additional charge related settlement resolution claim material effect results operations year ended december 31 2010 umma verdict may 3 2010 district court jury mcmullen county texas returned verdict case umma resources llc v key energy services inc lawsuit involved pipe recovery workover operations performed september 2003 december 2004 plaintiff alleged breached oral contract negligently performed work countersued unpaid invoices work performed jury found key breach contract key negligent performing work key entitled damages counterclaims december 15 2010 motion judgment notwithstanding verdict partially granted however court entered judgment favor umma one claims subsequent briefing motions new trial reconsideration parties reached settlement case recorded loss matter resolution matter material effect results operations year ended december 31 2010 tax audits routinely subject audits tax authorities past received material assessments tax auditors december 31 2010 2009 recorded reserves management feels appropriate future potential liabilities result prior audits believe fully reserved assessments ultimate amount settlements vary estimates selfinsurance reserves maintain reserves workers’ compensation vehicle liability balance sheet based judgment estimates using actuarial method based claims incurred estimate general liability claims casebycase basis maintain insurance policies workers’ compensation vehicular liability general liability claims insurance policies carry selfinsured retention limits deductibles per occurrence basis retention limits deductibles accounted accrual process workers’ compensation vehicular liability general liability claims december 31 2010 2009 recorded 603 million 652 million respectively selfinsurance reserves related workers’ compensation vehicular liabilities general liability claims partially offsetting liabilities approximately 154 million 172 million insurance receivables december 31 2010 2009 respectively feel liabilities recorded appropriate based known facts circumstances expect losses materially excess amounts already accrued existing claims environmental remediation liabilities environmental reserve matters including remediation efforts current locations relating previouslydisposed properties record liabilities remediation efforts probable costs key energy services inc subsidiaries notes consolidated financial statements continued conduct remediation efforts reasonably estimated december 31 2010 2009 recorded 40 million 34 million respectively environmental remediation liabilities feel liabilities recorded appropriate based known facts circumstances expect losses materially excess amounts already accrued provide performance bonds provide financial surety assurances remediation maintenance swd properties comply environmental protection standards costs swd properties may mandatory comply applicable laws regulations future required divest cease operations optimization improve operations safety regulatory compliance note 17 accumulated comprehensive loss components accumulated comprehensive loss follows thousands local currency functional currency operations argentina mexico canada russian federation equity investments canada cumulative translation gains losses resulting translating foreign subsidiary’s financial statements functional currency us dollars included comprehensive income accumulated stockholders’ equity partial complete sale liquidation net investment foreign entity table summarizes conversion ratios used translate financial statements cumulative currency translation gains losses net tax currency note 18 employee benefit plans maintain 401k plan part employee benefits package late first quarter 2009 management suspended 401k matching program part cost cutting efforts matching contributions made 2010 prior suspension matched 100 employee contributions 4 employee’s salary 401k plan subject maximums 9800 9200 years ended december 31 2009 2008 respectively matching contributions 17 million 119 million years ended december 31 2009 2008 respectively offer participants option purchase units common stock 401k plan fund reinstated 401k matching program effective january 1 2011 key energy services inc subsidiaries notes consolidated financial statements continued note 19 stockholders’ equity common stock december 31 2010 2009 200000000 shares common stock authorized 010 par value 141656426 shares issued outstanding december 31 2010 123993480 shares issued outstanding december 31 2009 2010 2009 dividends declared paid terms senior notes senior secured credit facility must meet certain financial covenants may pay dividends currently intend pay dividends tax withholding repurchase shares restricted common stock previously granted certain employees pursuant agreement individuals permitted sell shares back us order satisfy minimum income tax withholding requirements related vesting grants repurchased total 301837 71954 97443 shares aggregate cost 31 million 05 million 12 million 2010 2009 2008 respectively represented fair market value shares based price stock dates purchase common stock warrants may 12 2009 connection settlement lawsuit issued two individuals warrants purchase shares key’s common stock warrants expire may 12 2014 exercisable 174000 shares common stock exercise price 456 per share received proceeds upon issuance warrants receive exercise price warrants exercised prior expiration warrants unregistered securities issued private placement therefore issuance exempt registration pursuant section 42 securities act 1933 december 31 2010 54400 warrants exercised leaving 119600 outstanding note 20 sharebased compensation incentive plan june 4 2009 stockholders approved 2009 equity cash incentive plan “2009 incentive plan” 2009 incentive plan administered board directors committee designated board directors “committee” board directors committee “administrator” power authority select participants defined 2009 incentive plan grant awards defined participants pursuant terms 2009 incentive plan 2009 incentive plan expires june 4 2019 subject adjustment total number shares common stock available grant awards 2009 incentive plan may exceed 4000000 shares however purposes limitation stock subject award canceled forfeited expires prior exercise realization become available issuance 2009 incentive plan subject adjustment participant granted one year period options purchase common stock andor stock appreciation rights respect 500000 shares common stock available distribution 2009 incentive plan come authorized unissued shares reacquire manner awards 2009 incentive plan granted fair market value date issuance awards may form stock options incentive stock options nonqualified stock options restricted stock restricted stock units performance compensation awards stock appreciation rights collectively “awards” awards may granted employees directors cases consultants individuals administrator determines reasonably expected become employees directors key energy services inc subsidiaries notes consolidated financial statements continued consultants following grant date award “participants” however incentive stock options may granted employees vesting periods may set board’s discretion generally set two four years awards directors generally subject vesting board directors time may amend terminate 2009 incentive plan however repricing stock options permitted unless approved stockholders except provided otherwise 2009 incentive plan amendment effective unless approved stockholders extent stockholder approval necessary satisfy applicable law securities exchange listing requirements december 31 2010 22 million remaining shares available 2009 incentive plan incentive plan december 6 2007 stockholders approved 2007 equity cash incentive plan “2007 incentive plan” 2007 incentive plan substantially similar 2009 incentive plan except certain differences related treatment awards retirement transferability awards death subject adjustment total number shares common stock available grant awards 2007 incentive plan may exceed 4000000 shares however purposes limitation stock subject award canceled forfeited expires prior exercise realization become available issuance 2007 incentive plan board directors time may amend terminate 2007 incentive plan however except provided otherwise 2007 incentive plan amendment effective unless approved stockholders extent stockholder approval necessary satisfy applicable law securities exchange listing requirements december 31 2010 02 million remaining shares available 2007 incentive plan incentive plan january 13 1998 stockholders approved key energy group inc 1997 incentive plan amended “1997 incentive plan” 1997 incentive plan amendment restatement plans formerly known key energy group inc 1995 stock option plan key energy group inc 1995 outside directors stock option plan november 17 2007 1997 incentive plan terminated pursuant terms exercise price options granted 1997 incentive plan fair market value per share date options granted 1997 incentive plan shares common stock listed securities exchange fair market value determined using closing sales price immediate preceding business day reported securities exchange shares listed exchange includes period april 2005 october 2007 fair market value determined using published closing price common stock pink sheets business day immediately preceding date grant period 20002001 board directors granted 37 million stock options outside 1997 incentive plan 60000 remained outstanding december 31 2010 37 million nonplan options addition include options granted 1997 incentive plan conformity certain terms 1997 incentive plan accelerated vesting option sar awards board directors resolved fourth quarter 2008 accelerate vesting period certain outstanding unvested stock option awards stock appreciation rights affected key energy services inc subsidiaries notes consolidated financial statements continued approximately 280 employees result acceleration recorded pretax charge general administrative expense fourth quarter 2008 acceleration vesting term expense recognized awards periods subsequent december 31 2008 stock option awards stock option awards granted incentive plans maximum contractual term ten years date grant shares issuable upon exercise stock option issued authorized unissued shares common stock following table summarizes stock option activity certain options granted prior years outside 1997 incentive plan shares thousands key energy services inc subsidiaries notes consolidated financial statements continued following table summarizes information stock options outstanding december 31 2010 certain options granted prior years outside 1997 incentive plan shares thousands grant stock options year ended december 31 2010 total fair value stock options granted years ended december 31 2009 2008 less 01 million 75 million respectively total fair value stock options vested year ended december 31 2010 less 01 million years ended december 31 2010 2009 2008 recognized less 01 million less 01 million 151 million pretax expense related stock options respectively recognized tax benefits less 01 million less 01 million 52 million related stock options years ended december 31 2010 2009 2008 respectively compensation expense recognized 2008 related stock option awards included charge took accelerated vesting discussed unvested stock option awards outstanding december 31 2010 expect recognize less 01 million compensation expense weighted average remaining vesting period approximately 15 years weighted average remaining contractual term stock option awards exercisable december 31 2010 56 years intrinsic value options exercised years ended december 31 2010 2009 2008 40 million 19 million 58 million respectively cash received exercise options year ended december 31 2010 36 million recognition associated tax benefits amount 03 million key energy services inc subsidiaries notes consolidated financial statements continued common stock awards total fair market value common stock awards granted years ended december 31 2010 2009 2008 179 million 88 million 65 million respectively following table summarizes information years ended december 31 2010 2009 2008 common share awards issued shares thousands 1 includes 109410 143100 47190 shares common stock issued nonemployee directors vested immediately upon issuance 2010 2009 2008 respectively common stock grants vest immediately upon issuance record expense equal fair market value shares date grant common stock awards immediately vest recognize compensation expense ratably vesting period grant net estimated actual forfeitures years ended december 31 2010 2009 2008 recognized 106 million 60 million 61 million respectively pretax expense continuing operations associated common stock key energy services inc subsidiaries notes consolidated financial statements continued awards including common stock grants outside directors connection expense related common stock awards recognized year ended december 31 2010 recognized tax benefits 41 million tax benefits years ended december 31 2009 2008 20 million 15 million respectively unvested common stock awards outstanding december 31 2010 anticipate recognize 113 million pretax expense next 10 years performance units march 2010 issued total 06 million performance units certain employees officers performance units provide cash incentive award unit value determined reference common stock performance units measured based two performance periods one half performance units measured based performance period consisting first year grant date half measured based performance period consisting second year grant date end performance period 100 50 0 individual’s performance units period vest based relative placement total shareholder return within peer group consisting key five companies top third peer group 100 performance units vest middle third 50 vest bottom third performance units expire unvested payment made performance units vest given performance period award holder paid cash amount equal vested percentage performance units multiplied closing price common stock last trading day performance period account performance units liabilitytype award settled cash december 31 2010 fair value outstanding performance units issued march 2010 27 million accreted compensation expense vesting terms awards unrecognized compensation cost related unvested performance units estimated 12 million expected recognized weightedaverage period 10 years december 31 2010 phantom share plan december 2006 announced implementation “phantom share plan” certain employees granted “phantom shares” phantom shares vest ratably fouryear period convey right grantee receive cash payment anniversary date grant equal fair market value phantom shares vesting date grantees permitted defer payment later date phantom shares “liability” type award account awards fair value recognize compensation expense related phantom shares based change fair value awards period percentage service requirement performed net estimated actual forfeitures offsetting liability recorded consolidated balance sheets recognized 11 million 19 million pretax compensation expense continuing operations less 01 million pretax benefit associated phantom shares years ended december 31 2010 2009 2008 respectively december 31 2010 recorded current noncurrent liabilities 11 million 11 million respectively represented aggregate fair value phantom shares date recognized income tax benefits associated phantom shares 04 million 07 million less 01 million 2010 2009 2008 respectively unvested phantom share awards outstanding december 31 2010 based market price common stock date expect recognize 04 million compensation expense weighted average remaining vesting period approximately 08 years 2010 cash payments related phantom shares totaled 22 million stock appreciation rights august 2007 issued approximately 587000 sars executive officers sar tenyear term date grant vesting outstanding sar awards accelerated fourth quarter 2008 upon exercise sar recipient receive amount equal difference key energy services inc subsidiaries notes consolidated financial statements continued exercise price fair market value share common stock date exercise multiplied number shares common stock sar exercised payments made shares common stock prior exercise sar entitle recipient receive shares common stock provide recipient voting stockholders’ rights account sars equity awards recognize compensation expense ratably vesting period sar based fair value date issuance net estimated actual forfeitures recognize expense associated awards 2010 2009 compensation expense recognized 2008 connection sars 31 million recognized income tax benefits 11 million 2008 connection expense valuation assumptions stock options stock appreciation rights fair value stock option grant sar estimated date grant using blackscholes optionpricing model based following weightedaverage assumptions note 21 transactions related parties employee loans advances time made certain retention loans relocation loans employees executive officers retention loans forgiven various time periods long employee continues employment us relocation loans repaid upon employee selling prior residence december 31 2010 2009 loans aggregate totaled 01 million 02 million respectively amount less 01 million made former officers remainder made current employees receivables affiliates discussed “note 2 acquisitions” october 2010 acquired certain subsidiaries together associated assets owned ofs privatelyheld oilfield services company arclight capital partners llc time acquisition ofs conducted business companies owned one former owners employees ofs subsidiary purchased us subsequent acquisition continued provide services companies prices charged services rates equivalent prices charged customers us market december 31 2010 receivables related parties totaled 10 million revenues customers since date acquisition year ended december 31 2010 totaled 13 million related party notes payable concurrently sale six barge rigs related equipment may 2010 repaid remaining 60 million outstanding note payable related party second two notes payable related parties “related party note” entered october 25 2007 first related party note unsecured note amount 125 million repaid october 25 2009 second related party note unsecured note amount 100 million payable annual installments 20 million key energy services inc subsidiaries notes consolidated financial statements continued transactions employees connection acquisition 2008 former owner acquiree became employee key time acquisition employee owned continues exploration production company subsequent acquisition continued provide services company prices charged services rates average prices charged customers california market december 31 2010 receivables company totaled 02 million year ended december 31 2010 revenues company totaled 43 million board director relationships one members board directors senior vice president general counsel chief administrative officer anadarko petroleum corporation “anadarko” one customers sales anadarko approximately 4 total revenues year ended december 31 2010 less 2 total revenues years ended december 31 2009 2008 sales anadarko less 1 anadarko’s revenues 2010 2009 2008 receivables outstanding anadarko approximately 2 1 total accounts receivable december 31 2010 2009 respectively transactions anadarko services made terms consistent customers concurrent acquisition ofs october 2010 created new class iii directorship board term ending 2012 annual stockholder meeting vacancy filled nominee designated ofs pursuant terms purchase sale agreement note 22 supplemental cash flow information cash paid interest includes cash payments interest longterm debt capital lease obligations commitment agency fees paid note 23 segment information december 31 2010 operate two business segments well servicing production services rig services fluid management services operations aggregated within well servicing segment pressure pumping services coiled tubing services fishing rental services wireline services operations well technology development group canada aggregated within production services segment accounting policies segments described “note 1 organization summary significant accounting policies” intersegment sales pricing based current market conditions mentioned “note 3 discontinued operations” october 1 2010 completed sale pressure pumping wireline businesses pattersonuti significantly key energy services inc subsidiaries notes consolidated financial statements continued reduced involvement lines business revising reportable segments first quarter 2011 realign current business management structure following description segments december 31 2010 well servicing rigbased services include maintenance workover recompletion existing wells completion newly drilled wells plugging abandonment wells end useful lives also provide specialty drilling services oil natural gas producers certain larger well servicing rigs capable providing conventional horizontal drilling services maintenance services provided rigs include routine mechanical repairs pumps tubing equipment well removing debris formation material wellbore pulling rods downhole equipment wellbore identify resolve production problem workover services provide designed enhance production existing wells generally complex time consuming normal maintenance services workover services include deepening extending well bores new formations drilling horizontal lateral well bores sealing depleted production zones accessing previously bypassed production zones converting former production wells injection wells enhanced recovery operations conducting major subsurface repairs due equipment failures workover services may last days several weeks depending complexity workover completion recompletion services prepare newly drilled oil natural gas well production typically provide well service rig may also provide equipment workover package assist completion process fluid management services include fluid management logistics including oilfield transportation producedwater disposal services include vacuum truck services fluid transportation services disposal services operators whose oil natural gas wells produce saltwater nonhydrocarbon fluids addition supplier frac tanks used temporary storage fluids associated fluid hauling operations fluid management services collect transport dispose saltwater fluids removed well site transported disposal swd well production services segment historically production services segment included pressure pumping services fracturing nitrogen acidizing cementing wireline services perforating completion logging production logging casing integrity services coiled tubing services fishing rental services october 1 2010 completed sale pressure pumping wireline businesses pattersonuti significantly reduced involvement lines business united states discussed “note 3 discontinued operations” financial statements presented report show results operations pressure pumping wireline business discontinued operations periods presented december 31 2010 production services segment primarily consists coiled tubing fishing rental services production services segment also includes specialty pumping services nitrogen services cementing services key energy services inc subsidiaries notes consolidated financial statements continued coiled tubing services coiled tubing services involve use continuous metal pipe spooled large reel oil natural gas well applications wellbore cleanouts nitrogen jet lifts throughtubing fishing formation stimulations utilizing acid chemical treatments fracturing coiled tubing also used number horizontal well applications milling temporary plugs frac stages fishing rental services offer full line services rental equipment designed use onshore offshore drilling workover services fishing services involve recovering lost stuck equipment wellbore utilizing broad array “fishing tools” rental tool inventory consists drill pipe production tubulars handling tools including patented hydrawalk® pipehandling units services pressurecontrol equipment power swivels foam air units advanced measurements inc “ami” also included production services segment ami technology development company based canada ami focused oilfield service equipment controls data acquisition digital information flow functional support aggregated operating segments meet aggregation criteria form “functional support” segment services include expenses associated managing reportable operating segments functional support assets consist primarily cash equivalents accounts notes receivable investments subsidiaries equitymethod investment iroc deferred income tax assets following present segment information years ended december 31 2010 2009 2008 thousands key energy services inc subsidiaries notes consolidated financial statements continued following table presents selected financial information related operations geography thousands us dollars key energy services inc subsidiaries notes consolidated financial statements continued note 24 unaudited quarterly results operations set forth unaudited summarized quarterly information two recent years covered consolidated financial statements thousands except per share data 1 quarterly earnings per common share based weighted average number shares outstanding quarter sum quarters may equal annual earnings per common share key energy services inc subsidiaries notes consolidated financial statements continued note 25 condensed consolidating financial statements senior notes guaranteed virtually domestic subsidiaries whollyowned guarantees joint several full complete unconditional restrictions ability subsidiary guarantors transfer funds parent company result guarantee arrangements required present following condensed consolidating financial information condensed consolidating balance sheets key energy services inc subsidiaries notes consolidated financial statements continued key energy services inc subsidiaries notes consolidated financial statements continued condensed consolidating statements operations key energy services inc subsidiaries notes consolidated financial statements continued key energy services inc subsidiaries notes consolidated financial statements continued key energy services inc subsidiaries notes consolidated financial statements continued condensed consolidating statements cash flows key energy services inc subsidiaries notes consolidated financial statements continued key energy services inc subsidiaries notes consolidated financial statements continued key energy services inc subsidiaries notes consolidated financial statements continued note 26 subsequent events january 2011 acquired 10 swd wells equity energy company 143 million accounted purchase asset acquisition february 14 2011 commenced cash tender offer consent solicitation respect senior notes tender offer scheduled expire 1200 midnight new york city time march 14 2011 unless extended earlier terminated obligation accept purchase pay senior notes tender offer conditioned among things tender senior notes representing least majority aggregate principal amount senior notes outstanding prior march 14 2011 received replacement financing terms acceptable us intend fund repurchase senior notes plus related fees expenses proceeds one capital markets debt offerings borrowings senior secured credit facility item 9item 8 financial statements supplementary data key energy services inc subsidiaries index consolidated financial statements page report independent registered public accounting firm report independent registered public accounting firm internal control financial reporting consolidated balance sheets consolidated statements operations consolidated statements comprehensive income loss consolidated statements cash flows consolidated statements stockholders’ equity notes consolidated financial statements report independent registered public accounting firm board directors stockholders key energy services inc audited accompanying consolidated balance sheets key energy services inc maryland corporation subsidiaries “company” december 31 2012 2011 related consolidated statements income comprehensive income changes shareholders equity cash flows three years period ended december 31 2012 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position key energy services inc subsidiaries december 31 2012 2011 results operations cash flows three years period ended december 31 2012 conformity accounting principles generally accepted united states america also audited accordance standards public company accounting oversight board united states companys internal control financial reporting december 31 2012 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso report dated february 25 2013 expressed unqualified opinion effectiveness internal control financial reporting grant thornton llp houston texas february 25 2013 report independent registered public accounting firm board directors stockholders key energy services inc audited internal control financial reporting key energy services inc maryland corporation subsidiaries “company” december 31 2012 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso companys management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying managements report internal control financial reporting managements report responsibility express opinion companys internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion company maintained material respects effective internal control financial reporting december 31 2012 based criteria established internal controlintegrated framework issued coso also audited accordance standards public company accounting oversight board united states consolidated financial statements company year ended december 31 2012 report dated february 25 2013 expressed unqualified opinion financial statements grant thornton llp houston texas february 25 2013 key energy services inc subsidiaries consolidated balance sheets see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries consolidated statements operations see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries consolidated statements comprehensive income loss see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries consolidated statements cash flows see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries consolidated statements stockholders’ equity see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries notes consolidated financial statements note 1 organization summary significant accounting policies key energy services inc wholly owned subsidiaries controlled subsidiaries collectively “key” “company” “we” “us” “our” provide full range well services major oil companies foreign national oil companies independent oil natural gas production companies services include rigbased coiled tubingbased well maintenance workover services well completion recompletion services fluid management services fishing rental services ancillary oilfield services additionally certain rigs capable specialty drilling applications operate major oil natural gas producing regions continental united states operations mexico colombia middle east russia addition technology development control systems business based canada basis presentation consolidated financial statements included annual report form 10k present financial position results operations cash flows periods presented accordance generally accepted accounting principles united states “gaap” preparation consolidated financial statements requires us develop estimates make assumptions affect financial position results operations cash flows estimates also impact nature extent disclosure contingent liabilities among things use estimates analyze assets possible impairment ii determine depreciable lives assets iii assess future tax exposure realization deferred tax assets iv determine amounts accrue contingencies v value tangible intangible assets vi assess workers’ compensation vehicular liability selfinsured risk accruals insurance reserves vii provide allowances uncollectible accounts receivable viii value asset retirement obligations ix value equitybased compensation review significant estimates recurring basis record effect necessary adjustments prior publication financial statements adjustments made respect use estimates relate improved information previously available limitations inherent process actual results may differ materially estimates believe estimates reasonable certain reclassifications made prior period amounts conform current period financial statement classifications evaluated events occurring balance sheet date included annual report form 10k possible disclosure subsequent event management monitored subsequent events date financial statements issued february 17 2012 company announced decision sell business operations argentina business september 14 2012 completed sale argentina business accordance applicable accounting requirements guidance company reclassified presented argentina business discontinued operation periods presented principles consolidation within consolidated financial statements include accounts majorityowned controlled subsidiaries eliminate intercompany accounts transactions interest entity significant control influence account interest using cost method interest entity exert significant influence control account interest using equity method apply asc 81010 consolidation variable interest entities revised december 2009 improvements financial reporting enterprises involved variable interest entities “asu 200917” determining whether consolidate variable interest entity “vie” asc 81010 requires reporting entity power direct activities vie significantly impacts entity’s economic performance obligation absorb losses entity ii right receive benefits entity reporting entity characteristics required consolidate vie acquisitions time acquire businesses assets consistent longterm growth strategy results operations acquisitions included financial statements beginning date key energy services inc subsidiaries notes consolidated financial statements continued acquisition accounted using acquisition method business combinations whether partial full stages acquirer records 100 assets liabilities acquired business including goodwill fair values including contingent consideration final valuations assets liabilities obtained recorded soon practicable later one year date acquisition revenue recognition recognize revenue following criteria met evidence arrangement exists ii delivery occurred services rendered iii price customer fixed determinable iv collectability reasonably assured • evidence arrangement exists final understanding us customer occurred evidenced completed customer purchase order field ticket supplier contract master service agreement • delivery occurred services rendered completed requirements pursuant terms arrangement evidenced field ticket service log • price customer fixed determinable amount required paid agreed upon evidence price fixed determinable evidenced contractual terms price book completed customer purchase order field ticket • collectability reasonably assured screen customers provide goods services customers according determined credit terms granted accordance credit policy present revenues net sales taxes collected us customers required remitted local state governmental taxing authorities review contracts multiple element revenue arrangements deliverables separated units accounting assigned fair value standalone value customer objective reliable evidence fair value delivery undelivered items substantially controlled us believe negotiated prices deliverables services contracts representative fair value since acceptance nonacceptance element contract affect elements cash equivalents consider shortterm investments original maturity less three months cash equivalents december 31 2012 entered compensating balance arrangements obligations 2011 credit facility syndicate banks jpmorgan chase bank na administrative agent secured assets including assets held subsidiaries includes cash equivalents restrict investment cash financial institutions high credit standing limit amount credit exposure one financial institution maintain cash bank deposit brokerage accounts exceed federally insured limits december 31 2012 accounts guaranteed federal deposit insurance corporation “fdic” 250000 substantially accounts held deposits excess fdic limits cash equivalents held russian middle east subsidiaries subject noncontrolling interest cannot repatriated absent amounts believe cash held foreign subsidiaries could repatriated general corporate use without material withholdings time normal course business connection operations ongoing legal matters required place certain amounts cash deposit accounts restrictions limit ability withdraw funds certain cash accounts zerobalance controlled disbursement accounts right offset cash balances present outstanding checks written zerobalance accounts component accounts payable accompanying consolidated balance sheets accounts receivable allowance doubtful accounts establish provisions losses accounts receivable determine possibility collect part outstanding balances regularly review accounts 150 days past due invoice date collectability establish adjust allowance necessary using specific identification method exhaust collection efforts determine balance never collected write accounts receivable associated provision uncollectible accounts key energy services inc subsidiaries notes consolidated financial statements continued time entitled proceeds insurance policies amounts reserved selfinsurance liability present insurance receivables gross balance sheet component assets separate corresponding liability concentration credit risk significant customers include major oil natural gas production companies independent oil natural gas production companies foreign national oil natural gas production companies perform ongoing credit evaluations customers usually require material collateral maintain reserves potential credit losses necessary results operations financial position considered light fluctuations demand experienced oilfield service companies changes oil gas producers’ expenditures budgets occur fluctuations impact results operations financial position supply demand factors directly affect utilization hours primary determinants net cash provided operating activities year ended december 31 2012 mexican national oil company petróleos mexicanos “pemex” occidental petroleum corporation accounted 12 10 consolidated revenue respectively customer accounted 10 consolidated revenue 2012 single customer accounted 10 consolidated revenues year ended december 31 2011 december 31 2010 receivables outstanding pemex approximately 31 total accounts receivable december 31 2012 receivables outstanding pemex approximately 11 total accounts receivable december 31 2011 customers accounted 10 total accounts receivable december 31 2012 2011 inventories consist primarily equipment parts spares use operations supplies held consumption valued lower average cost market property equipment property equipment carried cost less accumulated depreciation provided assets estimated depreciable lives assets using straightline method depreciation expense years ended december 31 2012 2011 2010 1905 million 1457 million 1227 million respectively depreciate operational assets depreciable lives salvage value higher assets’ value scrap salvage value approximates 10 operational asset’s acquisition cost operational asset stacked taken service review physical condition depreciable life ultimate salvage value determine asset operable whether remaining depreciable life salvage value adjusted scrap asset accelerate depreciation asset salvage value dispose asset gain loss recognized december 31 2012 estimated useful lives asset classes follows time timewe lease certain operating assets capital lease obligations whose terms run 55 60 months assets depreciated estimated useful lives term capital lease obligation whichever shorter key energy services inc subsidiaries notes consolidated financial statements continued longlived asset group tested recoverability whenever events changes circumstances indicate carrying amount may recoverable purposes testing impairment group longlived assets along lines business based services provided lowest level identifiable cash flows largely independent cash flows assets liabilities would record impairment charge reducing net carrying value estimated fair value asset group’s estimated future cash flows less net carrying value events changes circumstance cause us evaluate fixed assets recoverability possible impairment may include changes market conditions adverse movements prices oil natural gas changes asset group expected future life intended use physical condition could reduce fair value certain property equipment development future cash flows determination fair value asset group involves significant judgment estimates identify triggering events record asset impairments 2012 2011 2010 asset retirement obligations recognize liability fair value legal obligations associated retirement tangible longlived assets capitalize equal amount cost asset depreciate additional cost estimated useful life assets obligations perform asset retirement activities unconditional despite uncertainties may exist surrounding individual retirement activity accordingly recognize liability fair value conditional asset retirement obligation fair value reasonably estimated determining fair value examine inputs believe market participant would use transfer liability probabilityweight potential costs thirdparty would charge adjust cost inflation estimated life asset discount cost using credit adjusted risk free rate significant judgment involved estimating future cash flows associated obligations well ultimate timing cash flows estimates amount timing cash flows change changes may material impact results operations see “note 10 asset retirement obligations” deposits due capacity constraints equipment manufacturers required make advanced payments certain oilfield service equipment items used normal course business december 31 2012 december 31 2011 deposits totaled 73 million 437 million respectively deposits december 31 2012 consisted primarily payments made related high demand longlead time items us mexico operations deposits december 31 2011 consisted primarily payments made related us mexico operations well equipment deposits related 2011 acquisition edge oilfield services llc summit oilfield services llc collectively “edge” capitalized interest capitalized average amount accumulated expenditures major capital projects construction using effective interest rate based related debt underlying assets placed service capitalized interest added cost assets amortized depreciation expense useful life assets included depreciation amortization line accompanying consolidated statements operations deferred financing costs deferred financing costs associated longterm debt carried cost amortized interest expense using effective interest method life related debt instrument related debt instrument retired remaining unamortized costs included determination gain loss extinguishment debt record gains losses extinguishment debt part continuing operations see “note 15 longterm debt” discussion key energy services inc subsidiaries notes consolidated financial statements continued goodwill intangible assets goodwill results business combinations represents excess acquisition consideration fair value net assets acquired goodwill intangible assets subject amortization tested impairment annually frequently events changes circumstances indicate asset might impaired test impairment indefinitelived intangible assets allows us first assess qualitative factors determine whether “more likely not” fair value reporting unit less carrying amount basis determining whether necessary perform twostep goodwill impairment test qualitative analysis shows “more likely not” fair value reporting unit less carrying amount perform twostep goodwill impairment test first step test fair value calculated reporting units fair value compared carrying value reporting unit including reporting unit’s goodwill fair value reporting unit exceeds carrying value impairment second step test performed carrying value exceeds fair value reporting unit second step test required second step test compares implied fair value reporting unit’s goodwill carrying value implied fair value reporting unit’s goodwill determined manner amount goodwill recognized business combination purchase price equal fair value reporting unit implied fair value reporting unit’s goodwill excess carrying value impairment recorded carrying value excess implied fair value impairment equal excess recorded assist management preparation analysis valuation reporting units utilize services thirdparty valuation consultant ultimate conclusions valuation techniques remain sole responsibility determination fair value used test heavily impacted market prices equity debt securities well assumptions estimates future activity levels profitability cash flows conduct annual impairment test december 31 year annual test completed december 31 2012 impairment goodwill indicated see “note 8 goodwill intangible assets” discussion internaluse software capitalize costs incurred application development stage internaluse software amortize costs software’s estimated useful life generally five seven years costs incurred related selection maintenance internaluse software expensed incurred litigation estimating liabilities related litigation take account available facts circumstances order determine whether loss probable reasonably estimable various suits claims arising ordinary course business pending us conduct business throughout continental united states may subject jury verdicts arbitrations result outcomes favor plaintiffs also exposed various claims abroad continually assess contingent liabilities including potential litigation liabilities well adequacy accruals need disclosure items establish provision contingent liability probable liability incurred amount reasonably estimable see “note 16 commitments contingencies” environmental operations routinely involve storage handling transport disposal bulk waste materials contain oil contaminants regulated substances operations subject various federal state local laws regulations intended protect environment environmental expenditures expensed capitalized depending future economic benefit expenditures relate existing condition caused past operations future economic benefits expensed record liabilities undiscounted basis remediation efforts probable costs conduct remediation efforts reasonably estimated litigation reserves reflect application insurance coverage environmental reserves reflect management’s assessment insurance coverage may apply matters issue see “note 16 commitments contingencies” selfinsurance largely selfinsured physical damage equipment automobiles well workers’ compensation claims accruals maintain consolidated balance sheet relate key energy services inc subsidiaries notes consolidated financial statements continued deductibles selfinsured retentions estimate use historical claims data trend analysis assist management liability amount selfinsurance reserves utilize services third party actuary actual outcome claim could differ significantly estimated amounts adjust loss estimates calculation accruals based upon actual claim settlements reported claims see “note 16 commitments contingencies” income taxes account deferred income taxes using asset liability method provide income taxes significant temporary differences management determines current tax liability well taxes incurred result current operations deferred future periods current taxes payable represent liability related income tax returns current year net deferred tax expense benefit represents change balance deferred tax assets liabilities reported consolidated balance sheets management estimates changes deferred tax assets liabilities using basis assets liabilities financial reporting purposes enacted rates management estimates effect differences reverse management makes certain assumptions timing temporary tax differences differing treatments certain items tax accounting purposes whether differences permanent final determination tax liability involves interpretation local tax laws tax treaties related authorities jurisdiction well significant use estimates assumptions regarding scope future operations results achieved timing nature income earned expenditures incurred establish valuation allowances reduce deferred tax assets determine likely eg likelihood 50 portion deferred tax assets realized future periods assess likelihood use estimates judgment regarding future taxable income well jurisdiction taxable income generated determine whether valuation allowance required evidence include current financial position results operations actual forecasted results reversal deferred tax liabilities tax planning strategies well current forecasted business economics industry additionally record uncertain tax positions net recognizable amount based amount management deems likely sustained upon ultimate settlement tax authorities domestic international tax jurisdictions operate see “note 14 income taxes” discussion accounting income taxes changes valuation allowance components tax rate reconciliation realization loss carryforwards earnings per share basic earnings per common share determined dividing net earnings applicable common stock weighted average number common shares actually outstanding period diluted earnings per common share based increased number shares would outstanding assuming conversion dilutive outstanding convertible securities using treasury stock “as converted” methods see “note 9 earnings per share” sharebased compensation past issued stock options shares restricted common stock restricted stock units stock appreciation rights “sars” phantom shares performance units employees part employees’ compensation retention tool options restricted shares sars calculate fair value awards grant date amortize fair value compensation expense ratably vesting period award net estimated actual forfeitures fair value stock option sar awards estimated using blackscholes fair value model valuation stock options sars requires us estimate expected term award estimated using simplified method sufficient historical exercise information past legal restrictions exercise stock options additionally valuation stock option sars awards also dependent historical stock price volatility calculate using lookback period equivalent expected term award riskfree interest rate estimate future forfeitures grantdate fair value restricted stock awards determined using stock price grant date phantom shares performance units treated “liability” awards carried fair value balance sheet date changes fair value recorded component compensation expense offsetting liability consolidated balance sheet record sharebased compensation component general administrative direct operating expense applicable individual see “note 20 sharebased compensation” key energy services inc subsidiaries notes consolidated financial statements continued foreign currency gains losses respect operations russia local currency functional currency assets liabilities translated rates exchange balance sheet date income expense items translated average rates exchange period resulting gains losses arising translation accounts functional currency us dollar included separate component stockholders’ equity comprehensive income partial complete sale liquidation net investment foreign entity december 31 2011 functional currency mexico russia canada local currency functional currency colombia middle east u dollar due significant changes economic facts circumstances functional currency mexico canada changed us dollar effective january 1 2012 see “note 17 accumulated comprehensive loss” time foreign subsidiaries may enter transactions denominated currencies functional currency transactions initially recorded functional currency subsidiary based applicable exchange rate effect date transaction end month transactions remeasured equivalent amount functional currency based applicable exchange rates effect time adjustment required remeasure transaction equivalent amount functional currency end month recorded income loss foreign subsidiary component income net comprehensive income display comprehensive income loss components financial statements classify items comprehensive income nature financial statements display accumulated balance comprehensive income separately stockholders’ equity leases lease real property equipment various leasing arrangements enter leasing arrangement analyze terms arrangement determine whether lease accounted operating lease capital lease periodically incur costs improve assets lease arrangements value leasehold improvements exceeds threshold capitalization record improvement component property equipment amortize improvement useful life improvement lease term whichever shorter certain operating lease agreements structured include scheduled specified rent increases term lease agreement increases may result inducement “rent holiday” conveyed us early lease included reflect anticipated effects inflation recognize scheduled specified rent increases straightline basis term lease agreement addition certain operating lease agreements contain incentives induce us enter lease agreement upfront cash payments us payment lessor costs moving expenses assumption lessor preexisting lease agreements third parties payments made us behalf represent incentives consider reduction rent expense recognized straightline basis term lease agreement new accounting standards adopted report asu 20114 may 2011 fasb issued asu 20114 fair value measurement topic 820 amendments achieve common fair value measurement disclosure requirements us gaap ifrs asu represents converged guidance fasb iasb measuring fair value disclosing information fair value measurements amendments asu clarify board’s intent application existing fair value measurement disclosure requirements changes particular principles requirements measuring fair value disclosing information fair value measurements asu 20114 effective prospectively interim annual reporting periods beginning december 15 2011 adopted provisions asu 20114 january 1 2012 adoption standard material impact financial position results operations cash flows note 2 acquisitions 2011 acquisitions edge august 5 2011 completed acquisition edge accounted acquisition business combination results operations edge included consolidated financial statements acquisition date total consideration acquisition approximately 3059 million consisting approximately 75 million shares common stock approximately 1879 million cash included 263 million reimburse edge growth capital expenditures incurred march 1 2011 date closing net working capital adjustments 18 million finalized purchase accounting related acquisition june 30 2012 following table summarizes fair values assets acquired liabilities assumed fair value 75 million common shares issued 1562 per share based closing price acquisition date august 5 2011 following table summarizes fair values assets acquired liabilities assumed 493 million acquired intangible assets 400 million assigned customer relationships amortized value relationships realized using expected rates 125 300 110 64 38 25 17 12 08 2011 2020 addition 51 million acquired intangible assets assigned tradenames subject amortization remaining 42 million acquired intangible assets assigned noncompete agreements amortized straightline basis 38 months fair value gross contractual amount accounts receivable acquired august 5 2011 211 million goodwill acquired assigned fishing rental business part us reportable segment believe goodwill recognized attributable primarily acquired workforce expansion growing service line goodwill expected deductible income tax purposes transaction costs related acquisition 36 million year ended december 31 2011 included general administrative expenses 2011 consolidated statement operations included consolidated statements operations year ended december 31 2011 related acquisition revenues 525 million operating income 147 million acquisition date december 31 2011 following represents pro forma consolidated income statement edge acquisition included consolidated results january 1 2010 years ended december 31 2011 2010 pro forma adjustments 1 depreciation amortization expense periods adjusted reflect additional expense would charged assuming fair value adjustments property equipment intangible assets applied january 1 2010 2 general administrative expenses years ended december 31 2011 2010 adjusted 36 million transaction costs removed 2011 included 2010 3 income tax expense benefit periods adjusted reflect applicable corporate tax edge acquired converted llc status january 1 2010 4 weighted average shares outstanding adjusted reflect issuance shares edge transaction occurred january 1 2010 unaudited pro forma results based assumptions deemed appropriate management prepared informational purposes necessarily indicative results acquisition occurred january 1 2010 years ended december 2011 2010 amounts calculated applying accounting policies adjusting results edge changes applied january 1 2010 together consequential tax effects equity energy company “eec” january 2011 acquired 10 saltwater disposal “swd” wells eec approximately 143 million swd wells located north dakota accounted purchase asset acquisition 2010 acquisitions results operations acquired businesses discussed included consolidated financial statements since date acquisition enhanced oilfield technologies llc “eot” december 2010 acquired 100 equity interests eot privately held oilfield technology company cash payment 117 million performance earnout equal 8 adjusted revenue five years acquisition date estimated liability earnout agreement 28 million accounted acquisition business combination acquired business time acquisition continues developmental stage goodwill acquired 101 million assigned fishing rental services included us reportable segment acquired intangible asset 44 million assigned developed technology amortized straight line basis period 20 years finalized thirdparty valuations intangible assets fourth quarter 2011 acquisition accounting final five jab inc affiliates “5 jab” november 2010 acquired 13 rigs associated equipment 5 jab cash consideration approximately 146 million accounted acquisition business combination goodwill acquired assigned rigbased services included us reportable segment completed valuations property equipment intangible assets acquired second quarter 2011 acquisition accounting final ofs energy services llc “ofs” october 2010 acquired certain subsidiaries together associated assets owned ofs oilfield services company owned arclight capital partners llc total consideration acquisition 158 million shares common stock cash payment 759 million including final working capital adjustment 01 million accounted acquisition business combination finalized thirdparty valuations tangible intangible assets second quarter 2011 acquisition accounting final acquisitions also completed asset acquisition 2010 part business strategy june 2010 acquired five largediameter capable coiled tubing units associated equipment approximately 127 million cash express energy services privately held oilfield services company note 3 discontinued operations september 2012 completed sale argentina operations approximately 125 million net transaction costs 125 million net proceeds sale argentina operations included 20 million received cash balance notes receivable three noninterest bearing notes due within 24 months included current assets accompanying 2012 consolidated balance sheet connection sale recognized total loss 858 million includes noncash impairment charge 415 million recorded first quarter 2012 writeoff 519 million cumulative translation adjustment previously recorded accumulated comprehensive loss reporting results argentina operations discontinued operations periods presented following table presents assets liabilities disposal group december 31 2011 following table presents results operations argentina business sold transaction three years ended december 31 2012 2011 2010 october 1 2010 completed sale pressure pumping wireline businesses pattersonuti energy “pattersonuti” management determined sell businesses aligned core business strategy well intervention international expansion periods presented report show results operations related businesses discontinued operations periods prior sale businesses sold pattersonuti reported part us segment sale businesses represented sale significant portion reporting unit requires reassessment goodwill however due previous impairment charges goodwill related reporting unit 2010 agreedupon purchase price businesses exceeded carrying value assets sold record writedown assets date became classified held sale carrying value assets sold 765 million september 30 2010 discontinued depreciation amortization pressure pumping wireline property equipment june 30 2010 classified held sale following table presents 2010 results discontinued operations businesses sold connection transaction key energy services inc subsidiaries notes consolidated financial statements continued note 4 balance sheet information table presents comparative detailed information current assets december 31 2012 2011 key energy services inc subsidiaries notes consolidated financial statements continued table presents comparative detailed information current liabilities december 31 2012 2011 table presents comparative detailed information noncurrent accrued liabilities december 31 2012 2011 note 5 income net table presents comparative detailed information income expense continuing operations years ended december 31 2012 2011 2010 note 6 allowance doubtful accounts table presents rollforward allowance doubtful accounts years ended december 31 2012 2011 2010 note 7 property equipment property equipment consists following capitalize costs incurred application development stage internaluse software costs capitalized work progress time application put service years ended december 31 2012 2011 2010 capitalized costs amount 15 million 12 million 147 million respectively interest capitalized average amount accumulated expenditures major capital projects construction using effective interest rate based related debt underlying assets placed service capitalized interest years ended december 31 2012 2011 2010 13 million 17 million 35 million respectively obligated various capital leases certain vehicles equipment expire various dates next two years carrying value assets acquired capital leases consists following depreciation assets held capital leases 28 million 28 million 32 million years ended december 31 2012 2011 2010 respectively included depreciation amortization expense accompanying consolidated statements operations asset impairment charges years ended december 31 2012 2011 2010 note 8 goodwill intangible assets changes carrying amount goodwill years ended december 31 2012 2011 follows components intangible assets december 31 2012 2011 follows amortization expense intangible assets determinable lives follows intangible assets december 31 2012 134 million indefinitelived tradenames subject amortization tradenames tested impairment annually using relief royalty method weighted average remaining amortization periods expected amortization expense next five years definite lived intangible assets follows certain goodwill intangible assets denominated currencies us dollars values assets subject fluctuations associated changes exchange rates additionally certain assets also subject purchase accounting adjustments additions goodwill intangibles 2011 relate edge acquisition purchase accounting adjustments 2012 relate reduction fixed assets acquired edge 2011 purchase accounting adjustments made 2011 related reduction fixed assets intangibles acquired ofs 2010 adjustments goodwill intangibles related eot 5 jab acquisitions believe impact purchase accounting adjustments material consolidated financial statements year ended december 31 2012 2011 performed qualitative analysis goodwill impairment december 31 2012 based analysis canadian reporting unit triggering event would indicate “more likely not” carrying value reporting unit higher fair value however determined necessary perform first step goodwill impairment test rig services fluid management services coiled tubing services fishing rental services russian reporting units first step goodwill impairment test compared fair value reporting unit carrying amount including goodwill based results step 1 fair value rig services fluid management services coiled tubing services fishing rental services russian reporting units exceeded carrying value 165 132 150 155 178 respectively key assumption model forecast increased revenue 2013 2014 rig services fishing rental services followed nominal revenue increases 2017 fluid management services anticipate decrease revenue 2013 2014 steady revenue 2014 2017 anticipate coiled tubing services russian reporting units increased revenue future years potential events could affect assumption include level development exploration production activity corresponding capital spending oil natural gas companies russia oil natural gas production costs government regulations conditions worldwide oil natural gas industry possible factors could affect assumption ability acquire deploy additional assets deployment assets region fair value reporting units exceeded carrying values determined impairment goodwill associated reporting units existed december 31 2012 step two impairment test required note 9 earnings per share following table presents basic diluted earnings per share years ended december 31 2012 2011 2010 stock options warrants sars included computation diluted earnings per share using treasury stock method restricted stock awards legally considered issued outstanding granted included basic weighted average shares outstanding diluted earnings per share calculation years ended december 31 2012 2011 2010 excludes potential exercise 20 million 13 million 28 million stock options respectively effect would antidilutive 2012 options considered antidilutive exercise prices exceeded average price stock diluted earnings per share calculation year ended december 31 2012 also excluded potential exercise 04 million sars effects exercises earnings per share periods would antidilutive none sars antidilutive year ended december 31 2011 diluted earnings per share calculation year ended december 31 2010 also excluded potential exercise 04 million sars 2010 options sars would antidilutive net loss continuing operations material changes share amounts subsequent balance sheet date would material impact earnings per share calculation year ended december 31 2012 however issued 09 million 06 million shares restricted stock january 21 2013 february 4 2013 respectively key energy services inc subsidiaries notes consolidated financial statements continued note 10 asset retirement obligations connection well servicing activities operate number swd facilities operations involve transportation handling disposal fluids swd facilities byproducts drilling process swd facilities used connection fluid hauling operations subject future costs associated retirement properties result incurred costs associated proper storage disposal materials annual amortization assets associated asset retirement obligations 06 million 06 million 05 million years ended december 31 2012 2011 2010 respectively summary changes asset retirement obligations follows thousands note 11 equity method investments iroc energy services corp april 2011 sold equity interest approximately 87 million shares iroc energy services corp albertabased oilfield services company 120 million net fees recorded net gain sale 48 million including writeoff cumulative translation adjustment 11 million net tax second quarter 2011 proceeds received exceeded carrying value investment december 31 2012 equity method investments material combined basis note 12 variable interest entities march 7 2010 entered agreement almansoori petroleum services llc “almansoori” form joint venture almansoori key energy services llc laws abu dhabi uae purpose joint venture engage conventional workover drilling services pressure pumping services coiled tubing services fishing rental tools services rig monitoring services pipe handling services fluids waste treatment handling services wireline services almansoori holds 51 interest joint venture hold 49 interest future capital contributions joint venture made equal terms equal amounts future share capital increases issued proportion initial share capital percentages paid almansoori key equal amounts also share profits losses joint venture equal terms equal amounts almansoori however hold three five board directors seats controlling financial interest joint venture sufficient resources carry activities without financial support accordingly determined variable interest entity primary beneficiary consolidate entity financial statements years ended december 31 2012 2011 recognized 162 million 102 million revenue respectively net income 26 million 03 million respectively associated joint venture also guaranteed performance joint venture sole services contract valued 20 million december 31 2012 2011 162 million 124 million assets respectively 147 million 134 million liabilities associated joint venture also creditors joint venture recourse us 20 million performance guarantee previously mentioned note 13 estimated fair value financial instruments following summary carrying amounts estimated fair values financial instruments december 31 2012 2011 cash equivalents accounts payable accrued liabilities carrying amounts approximate fair value short maturity instruments carrying value equal fair value instruments balance sheet date notes receivablerelated parties amounts reported relate notes receivable certain employees related relocation retention agreements certain trade accounts receivable affiliates carrying values items approximate fair values applicable balance sheet dates notes receivableargentina operations sale fair value notes receivable based upon quoted market treasury rates twelve eighteen twentyfour month maturity dates indicated carrying values items approximate fair values market rate interest used discount notes 675 senior notes due 2021 issued march 4 2011 fair value 675 senior notes due 2021 based upon quoted market prices securities dates indicated carrying value notes december 31 2012 4750 million fair value 4798 million 1010 carrying value 675 senior notes due 2021 issued march 8 2012 fair value 675 senior notes due 2021 based upon quoted market prices securities dates indicated carrying value notes december 31 2012 2000 million fair value 2008 million 1004 carrying value 8375 senior notes due 2014 fair value 8375 senior notes based upon quoted market prices securities dates indicated carrying value notes december 31 2012 36 million fair value 37 million 10232 carrying value credit facility revolving loans variable interest rates fair values revolving loans borrowed 2011 credit facility defined approximate carrying values carrying fair values loans december 31 2012 1650 million key energy services inc subsidiaries notes consolidated financial statements continued note 14 income taxes components income tax expense follows sources income loss continuing operations income taxes noncontrolling interest follows made federal income tax payments 51 million 532 million zero years ended december 31 2012 2011 2010 respectively made state income tax payments 29 million 76 million 05 million years ended december 31 2012 2011 2010 respectively made foreign tax payments 52 million 29 million 42 million years ended december 31 2012 2011 2010 respectively years ended december 31 2012 2011 2010 tax benefit expense allocated stockholders’ equity compensation expense income tax purposes excess amounts recognized financial reporting purposes 41 million 49 million 21 million respectively addition received federal income tax refunds 167 million 262 million years ended december 31 2012 2011 respectively income tax expense differs amounts computed applying statutory federal rate follows key energy services inc subsidiaries notes consolidated financial statements continued december 31 2012 2011 deferred tax assets liabilities consisted following 2012 2011 deferred tax liabilities decreased zero 07 million respectively adjustments accumulated comprehensive loss recording deferred income tax assets consider whether likely portion deferred income tax assets realized ultimate realization deferred income tax assets dependent upon generation future taxable income periods deferred income tax assets would deductible consider scheduled reversal deferred income tax liabilities projected future taxable income determination fully realize deferred income tax assets related federal net operating loss carryforwards valuation allowance due section 382 limitations would need generate future federal taxable income approximately 04 million next six years certain exceptions noted believe considering available objective evidence positive negative historical prospective greater weight given historical evidence likely assets realized estimate december 31 2012 2011 2010 available 28 million 793 million 49 million respectively federal net operating loss carryforwards approximately 04 million net operating losses december 31 2012 subject 11 million annual section 382 limitation expire 2018 approximately 24 million net operating losses december 31 2012 subject 5000 annual section 382 limitation expire 2016 2018 gross deferred tax asset associated federal net operating loss carryforward december 31 2012 10 million due annual limitations sections 382 383 management believes able utilize available carryforwards prior ultimate expiration december 31 2012 2011 valuation allowance 08 million related deferred tax asset associated remaining federal net operating loss carryforwards expire utilization due section 382 limitations estimate december 31 2012 2011 2010 available approximately 444 million 733 million 377 million respectively state net operating loss carryforwards expire 2014 2032 deferred tax asset associated remaining state net operating loss carryforwards december 31 2012 36 million management believes likely able utilize available carryforwards prior ultimate expiration estimate december 31 2012 2011 2010 available approximately 344 million 396 million 506 million respectively foreign net operating loss carryforwards expire 2020 2030 gross deferred tax asset associated foreign net operating loss carryforwards december 31 2012 85 million key energy services inc subsidiaries notes consolidated financial statements continued management believes likely able utilize net operating loss carryforwards prior ultimate expiration foreign jurisdictions currently operate company recognized valuation allowance 214 million december 31 2012 deferred tax asset associated capital loss carryforward capital loss carryforward expire 2017 provide us income taxes withholding taxes 2012 unremitted earnings mexico canada colombia middle east subsidiaries earnings considered permanently reinvested increasing demand services requires additional equipment working capital support businesses furthermore provide us income taxes unremitted earnings foreign subsidiaries 2012 prior years tax basis foreign subsidiaries exceeded book basis period file income tax returns united states federal jurisdiction various states foreign jurisdictions currently audit internal revenue service tax year ended december 31 2009 significant filings mexico examined 2008 december 31 2012 2011 2010 12 million 18 million 22 million respectively unrecognized tax benefits recognized would impact effective tax rate accrued 03 million 06 million 08 million payment interest penalties december 31 2012 2011 2010 respectively believe reasonably possible 09 million currently remaining unrecognized tax positions individually insignificant may recognized end 2013 result lapse statute limitations settlement open audit recognized net tax benefit 06 million 2012 expirations statutes limitations following table presents gross activity 2012 2011 related liabilities uncertain tax positions thousands tax legislative changes small business jobs act 2010 small business jobs act 2010 extended firstyear bonus depreciation deduction 50 adjusted basis qualified property acquired placed service 2010 increased deduction 100 adjusted basis qualified property acquired placed service september 8 2010 january 1 2012 estimated 1850 million qualifying additions 2012 resulting bonus depreciation 925 million 1999 million qualifying additions 2011 resulting bonus tax depreciation 1999 million 1319 million qualifying additions 2010 resulting bonus tax depreciation 880 million key energy services inc subsidiaries notes consolidated financial statements continued note 15 longterm debt components longterm debt follows 8375 senior notes due 2014 november 29 2007 issued 4250 million aggregate principal amount 8375 senior notes due 2014 “2014 notes” march 4 2011 repurchased 4213 million aggregate principal amount 2014 notes purchase price 1090 per 1000 principal amount march 15 2011 repurchased additional 01 million aggregate principal amount purchase price 1060 per 1000 principal amount connection repurchase 2014 notes incurred loss 443 million early extinguishment debt related premium paid tender payment related fees writeoff unamortized loan fees interest remaining 36 million aggregate principal amount 2014 notes outstanding payable june 1 december 1 year 675 senior notes due 2021 issued 4750 million aggregate principal amount 675 senior notes due 2021 march 4 2011 issued additional 2000 million notes march 8 2012 collectively “2021 notes” indenture dated march 4 2011 base indenture supplemented first supplemental indenture dated march 4 2011 amended supplemental indenture dated march 8 2012 supplemental indenture together base indenture used net proceeds repay senior secured indebtedness revolving bank credit facility capitalized 46 million financing costs associated issuance 2021 notes amortized term notes january 29 2013 commenced offer exchange 2000 million aggregate principal amount notes issued private placement march 8 2012 equal principal amount notes registered securities act 1933 exchange offer expire february 25 2013 scheduled close march 5 2013 2021 notes treated single class indenture assuming completion exchange offer exchange notes subject thereto 2021 notes bear cusip isin numbers 2021 notes general unsecured senior obligations effectively subordinated existing future secured indebtedness 2021 notes jointly severally guaranteed senior unsecured basis certain existing future domestic subsidiaries interest 2021 notes payable march 1 september 1 year 2021 notes mature march 1 2021 march 1 2016 2021 notes subject redemption time option whole part redemption prices expressed percentages principal amount redeemed plus accrued unpaid interest applicable redemption date redeemed twelvemonth period beginning march 1 years indicated key energy services inc subsidiaries notes consolidated financial statements continued time march 1 2014 may one occasions redeem 35 aggregate principal amount outstanding 2021 notes redemption price 106750 principal amount plus accrued unpaid interest redemption date net cash proceeds one equity offerings provided least 65 aggregate principal amount 2021 notes remains outstanding immediately redemption ii redemption shall occur within 180 days date closing equity offering addition time prior march 1 2016 may option redeem portion 2021 notes redemption price equal 100 principal amount plus premium respect 2021 notes plus accrued unpaid interest redemption date experience change control subject certain exceptions must give holders 2021 notes opportunity sell us 2021 notes whole part purchase price equal 101 aggregate principal amount plus accrued unpaid interest date purchase subject certain negative covenants indenture limits ability among things • incur additional indebtedness issue preferred equity interests • pay dividends make distributions repurchase redeem equity interests • make loans investments • enter sale leaseback transactions • sell transfer otherwise convey assets • create liens • enter transactions affiliates • enter agreements restricting subsidiaries’ ability pay dividends • designate future subsidiaries unrestricted subsidiaries • consolidate merge sell substantially applicable entities’ assets covenants subject certain exceptions qualifications contain crossdefault provisions relating covenants 2011 credit facility discussed substantially covenants terminate 2021 notes mature one two specified ratings agencies assigns 2021 notes investment grade rating future events default exist indenture december 31 2012 2021 notes investment grade covenants cease apply us result achieving investment grade rating restored even credit rating assigned 2021 notes later falls investment grade compliance covenants december 31 2012 senior secured credit facility party 5500 million senior secured revolving bank credit facility jpmorgan chase bank na administrative agent bank america na syndication agent capital one na wells fargo bank na credit agricole corporate investment bank dnb bank asa codocumentation agent amended 2011 credit facility important source liquidity us 2011 credit facility consists revolving credit facility letter credit subfacility swing line facility mature later march 31 2016 maximum amount may borrow facility may subject limitation due operation covenants contained facility 2011 credit facility allows us request increases total commitments facility 1000 million aggregate part full anytime term 2011 credit facility increases subject compliance restrictive covenants 2011 credit facility indenture governing 2021 senior notes well lender approval capitalized 49 million financing costs connection execution 2011 credit facility additional 14 million related subsequent amendment amortized term debt interest rate per annum applicable 2011 credit facility option adjusted libor plus applicable margin ii higher x jpmorgan’s prime rate federal funds rate plus 05 z onemonth adjusted libor plus 10 plus case applicable margin loans applicable margin libor loans ranges 225 300 basis points applicable margin loans ranges 125 200 basis points depending upon consolidated total leverage ratio defined 2011 credit facility unused commitment fees facility equal 050 2011 credit facility contains certain financial covenants among things limit annual capital expenditures restrict ability repurchase shares require us maintain certain financial ratios financial ratios require • ratio consolidated funded indebtedness total capitalization greater 45 key energy services inc subsidiaries notes consolidated financial statements continued • senior secured leverage ratio senior secured funded debt trailing four quarters earnings interest taxes depreciation amortization calculated pursuant terms 2011 credit facility “ebitda” greater 200 100 • maintain collateral coverage ratio aggregate book value collateral amount total commitments last day fiscal quarter least 200 100 • maintain consolidated interest coverage ratio trailing four quarters ebitda interest expense least 300 100 • limit capital expenditures investments foreign subsidiaries 2500 million per fiscal year consolidated total leverage ratio exceeds 300 100 addition 2011 credit facility contains certain affirmative negative covenants including without limitation restrictions liens ii debt guarantees contingent obligations iii mergers consolidations iv sales transfers dispositions property assets v loans acquisitions joint ventures investments acquisitions permitted long giving pro forma effect thereto default event default exists 2011 credit facility pro forma consolidated total leverage ratio exceed 400 100 compliance financial covenants least 250 million availability 2011 credit facility vi dividends distributions redemptions repurchases equityholders vii making investments loans advances viii selling properties ix prepaying redeeming repurchasing subordinated contractually structurally debt x engaging transactions affiliates xi entering hedging arrangements xii entering sale leaseback transactions xiii granting negative pledges lenders xiv changes nature business xv amending organizational documents xvi changes accounting policies reporting practices foregoing cases certain exceptions compliance covenants december 31 2012 may prepay 2011 credit facility whole part time without premium penalty subject certain reimbursements lenders breakage redeployment costs december 31 2012 borrowings 1650 million revolving credit facility 541 million letters credit outstanding leaving 3309 million unused borrowing capacity 2011 credit facility years ended december 31 2012 2011 weighted average interest rate outstanding borrowings 2011 credit facility 271 278 respectively key energy services inc subsidiaries notes consolidated financial statements continued longterm debt principal repayment interest expense presented schedule repayment requirements longterm debt next five years thereafter december 31 2012 presented schedule estimated minimum lease payments capital lease obligations next five years thereafter december 31 2012 interest expense years ended december 31 2012 2011 2010 consisted following december 31 2012 2011 2010 weighted average interest rate variable rate debt 270 272 178 respectively key energy services inc subsidiaries notes consolidated financial statements continued deferred financing costs summary deferred financing costs including cost capitalized amortized written determination loss extinguishment debt years ended december 31 2012 2011 presented table thousands note 16 commitments contingencies operating lease arrangements lease certain property equipment noncancelable operating leases expire various dates 2019 varying payment dates throughout month addition number leases scheduled expire 2013 december 31 2012 future minimum lease payments noncancelable operating leases follows thousands also party significant number monthtomonth leases cancelable time operating lease expense 244 million 266 million 211 million years ended december 31 2012 2011 2010 respectively litigation various suits claims arising ordinary course business pending us conduct business throughout continental united states may subject jury verdicts arbitrations result outcomes favor plaintiffs also exposed various claims abroad continually assess contingent liabilities including potential litigation liabilities well adequacy accruals need disclosure items establish provision contingent liability probable liability incurred amount reasonably estimable december 31 2012 aggregate amount liabilities related litigation deemed probable reasonably estimable 08 million believe disposition matters result additional loss materially excess amounts recorded liabilities related litigation matters deemed probable reasonably estimable december 31 2011 11 million key energy services inc subsidiaries notes consolidated financial statements continued patent settlement june 2011 agreed accept 55 million damages related settlement keyview® system patent infringement lawsuit paid full july 2011 recognized related legal fees expenses 14 million year ended december 31 2011 settlement amount recorded general administrative expenses consolidated statement operations resolution matter material effect results operations year ended december 31 2011 tax audits routinely subject audits tax authorities past received material assessments tax auditors december 31 2012 2011 recorded reserves management feels appropriate future potential liabilities result prior audits believe fully reserved assessments ultimate amount settlements vary estimates selfinsurance reserves maintain reserves workers’ compensation vehicle liability balance sheet based judgment estimates using actuarial method based claims incurred estimate general liability claims casebycase basis maintain insurance policies workers’ compensation vehicular liability general liability claims insurance policies carry selfinsured retention limits deductibles per occurrence basis retention limits deductibles accounted accrual process workers’ compensation vehicular liability general liability claims december 31 2012 2011 recorded 694 million 629 million respectively selfinsurance reserves related workers’ compensation vehicular liabilities general liability claims partially offsetting liabilities approximately 206 million 170 million insurance receivables december 31 2012 2011 respectively feel liabilities recorded appropriate based known facts circumstances expect losses materially excess amounts already accrued existing claims environmental remediation liabilities environmental reserve matters including remediation efforts current locations relating previouslydisposed properties record liabilities remediation efforts probable costs conduct remediation efforts reasonably estimated december 31 2012 2011 recorded 45 million 40 million respectively environmental remediation liabilities believe liabilities recorded appropriate based known facts circumstances expect losses materially excess amounts already accrued provide performance bonds provide financial surety assurances remediation maintenance swd properties comply environmental protection standards costs swd properties may mandatory comply applicable laws regulations future required divest cease operations optimization improve operations safety regulatory compliance key energy services inc subsidiaries notes consolidated financial statements continued note 17 accumulated comprehensive loss components accumulated comprehensive loss follows thousands upon completion sale argentina operations september 14 2012 accumulated foreign currency translation balance related argentina reversed accumulated comprehensive loss recorded part 2012 loss discontinued operations included 2011 accumulated comprehensive loss 505 million related accumulated translation adjustment argentina business local currency functional currency operations russia december 31 2011 functional currency mexico russia canada local currency functional currency colombia middle east u dollar due significant changes economic facts circumstances functional currency mexico canada changed us dollar effective january 1 2012 cumulative translation gains losses resulting translating financial statements functional currency us dollars included comprehensive income accumulated stockholders’ equity partial complete sale liquidation net investment entity table summarizes conversion ratios used translate financial statements cumulative currency translation gains losses net tax currency note 18 employee benefit plans maintain 401k plan part employee benefits package late first quarter 2009 management suspended 401k matching program part cost reduction efforts matching contributions made 2010 reinstated 401k matching program effective january 1 2011 match 100 employee contributions 4 employee’s salary vest immediately 401k plan subject maximums 10000 years ended december 31 2012 2011 matching contributions 107 million 88 million years ended december 31 2012 2011 respectively offer participants option purchase units common stock 401k plan fund key energy services inc subsidiaries notes consolidated financial statements continued note 19 stockholders’ equity common stock december 31 2012 2011 200000000 shares common stock authorized par value 010 per share 151069609 shares issued outstanding december 31 2012 150733022 shares issued outstanding december 31 2011 2012 2011 2010 dividends declared paid terms senior notes 2011 credit facility must meet certain financial covenants may pay dividends currently intend pay dividends tax withholding repurchase shares restricted common stock previously granted certain employees pursuant agreement individuals permitted sell shares back us order satisfy minimum income tax withholding requirements related vesting grants repurchased total 482951 383884 301837 shares aggregate cost 75 million 57 million 31 million 2012 2011 2010 respectively represented fair market value shares based price stock dates purchase common stock warrants may 12 2009 connection settlement lawsuit issued two individuals warrants purchase 174000 shares common stock exercise price 456 per share december 31 2012 warrants exercised note 20 sharebased compensation 2012 incentive plan may 17 2012 stockholders approved 2012 equity cash incentive plan “2012 incentive plan” 2012 incentive plan administered board directors committee designated board directors “committee” board directors committee “administrator” power authority select participants defined 2012 incentive plan grant awards defined participants pursuant terms 2012 incentive plan 2012 incentive plan expires may 17 2022 subject adjustment total number shares common stock available grant awards 2012 incentive plan may exceed 4000000 shares however purposes limitation stock subject award canceled forfeited expires otherwise terminates without issuance stock settled cash exchanged administrators permission prior issuance stock award involving stock become available issuance 2012 incentive plan however full number stock appreciation rights granted settled issuance stock count plan limit described regardless number shares stock actually issued upon settlement stock appreciation rights shares stock surrendered withheld payment exercise price option shares stock withheld company satisfy tax withholding obligations count plan limit described subject adjustment participant granted one year period options purchase common stock andor stock appreciation rights respect 500000 shares common stock available distribution 2012 incentive plan authorized unissued shares treasury shares reacquire manner awards may form stock options incentive stock options nonqualified stock options restricted stock restricted stock units performance compensation awards stock appreciation rights collectively awards may granted employees directors cases consultants individuals administrator determines reasonably expected become employees directors consultants following grant date award “participants” however incentive stock options may granted employees board directors time may amend terminate 2012 incentive plan however except provided otherwise 2012 incentive plan amendment effective unless approved stockholders company extent stockholder approval necessary satisfy applicable law securities exchange listing requirements exercise price option including incentive stock option exceeds fair market value common stock given date committee authority reduce exercise price option new exercise price less thencurrent fair market value common stock provided action shall first approved vote stockholders administrator time may amend terms key energy services inc subsidiaries notes consolidated financial statements continued one awards however amendment would constitute impairment rights award must request consent participant must consent writing expressly contemplated board may amend 2012 incentive plan respect board directors deem necessary advisable provide eligible employees maximum benefits provided provisions code regulations promulgated thereunder relating incentive stock options andor bring 2012 incentive plan andor awards granted compliance therewith december 31 2012 38 million shares available grant 2012 incentive plan 2009 incentive plan june 4 2009 stockholders approved 2009 equity cash incentive plan “2009 incentive plan” 2009 incentive plan administered board directors committee administrator power authority select participants 2009 incentive plan grant awards participants pursuant terms 2009 incentive plan 2009 incentive plan expires june 4 2019 subject adjustment total number shares common stock available grant awards 2009 incentive plan may exceed 4000000 shares however purposes limitation stock subject award canceled forfeited expires prior exercise realization become available issuance 2009 incentive plan subject adjustment participant granted one year period options purchase common stock andor stock appreciation rights respect 500000 shares common stock available distribution 2009 incentive plan come authorized unissued shares reacquire manner awards 2009 incentive plan granted fair market value date issuance awards may granted employees directors cases consultants individuals administrator determines reasonably expected become employees directors consultants following grant date award “participants” however incentive stock options may granted employees vesting periods may set board’s discretion generally set two four years awards directors generally subject vesting board directors time may amend terminate 2009 incentive plan however repricing stock options permitted unless approved stockholders except provided otherwise 2009 incentive plan amendment effective unless approved stockholders extent stockholder approval necessary satisfy applicable law securities exchange listing requirements december 31 2012 05 million shares available grant 2009 incentive plan key energy services inc subsidiaries notes consolidated financial statements continued 2007 incentive plan december 6 2007 stockholders approved 2007 equity cash incentive plan “2007 incentive plan” 2007 incentive plan substantially similar 2009 incentive plan except certain differences related treatment awards retirement transferability awards death 2007 incentive plan expires december 6 2017 subject adjustment total number shares common stock available grant awards 2007 incentive plan may exceed 4000000 shares however purposes limitation stock subject award canceled forfeited expires prior exercise realization become available issuance 2007 incentive plan board directors time may amend terminate 2007 incentive plan however except provided otherwise 2007 incentive plan amendment effective unless approved stockholders extent stockholder approval necessary satisfy applicable law securities exchange listing requirements december 31 2012 01 million shares available grant 2007 incentive plan stock option awards stock option awards granted incentive plans maximum contractual term ten years date grant shares issuable upon exercise stock option issued authorized unissued shares common stock following tables summarize stock option activity certain options granted prior years outside 1997 incentive plan shares thousands key energy services inc subsidiaries notes consolidated financial statements continued following tables summarize information stock options outstanding december 31 2012 certain options granted prior years outside 1997 incentive plan shares thousands grant stock options years ended december 31 2012 2011 2010 total fair value stock options vested year ended december 31 2012 01 million years ended december 31 2012 2011 2010 recognized less 01 million pretax expense related stock options recognized tax benefits less 01 million related stock options years ended december 31 2012 2011 2010 stock option awards vested december 31 2012 weighted average remaining contractual term stock option awards exercisable december 31 2012 39 years intrinsic value options exercised years ended december 31 2012 2011 2010 06 million 30 million 40 million respectively cash received exercise options year ended december 31 2012 09 million recognition associated tax benefits amount 01 million key energy services inc subsidiaries notes consolidated financial statements continued common stock awards total fair market value common stock awards granted years ended december 31 2012 2011 2010 149 million 184 million 179 million respectively following tables summarize information years ended december 31 2012 2011 2010 common share awards issued shares thousands 1 includes 153063 shares 99999 shares 109410 shares common stock issued nonemployee directors vested immediately upon issuance 2012 2011 2010 respectively common stock grants vest immediately upon issuance record expense equal fair market value shares date grant common stock awards immediately vest recognize compensation expense ratably graded vesting period grant net estimated actual forfeitures years ended december 31 2012 2011 2010 recognized 117 million 156 million 106 million respectively pretax expense continuing operations associated common stock awards including common stock grants outside directors connection expense related common stock awards recognized year ended december 31 2012 recognized tax benefits 42 million tax benefits years ended december 31 2011 2010 60 million 41 million respectively unvested common stock awards outstanding december 31 2012 anticipate recognize 137 million pretax expense next 08 years key energy services inc subsidiaries notes consolidated financial statements continued performance units january 16 2012 compensation committee board directors adopted 2012 performance unit plan “2012 pu plan” performance units provide cash incentive award unit value determined reference common stock believe 2012 pu plan enable us obtain retain employees contribute long term success providing compensation linked directly increases share value january 2012 issued 01 million performance units officers 2009 equity cash incentive plan additionally february 2012 issued 01 million performance units certain employees 2012 pu plan performance units measured based two performance periods january 1 2012 december 31 2012 january 1 2013 december 31 2013 one half performance units measured based first performance period half measured based second performance period number performance units may earned participant determined end performance period based relative placement keys total stockholder return period within peer group follows performance units vest given performance period award holder paid cash amount equal vested percentage performance units multiplied closing stock price common stock last trading day performance period account performance units liabilitytype award settled cash december 31 2012 fair value outstanding performance units 14 million accreted compensation expense vesting terms awards december 31 2012 unrecognized compensation cost related unvested performance units estimated 03 million expected recognized weightedaverage period 10 years march 2010 issued total 06 million performance units certain employees officers performance units measured based two performance periods one half performance units measured based performance period consisting first year grant date half measured based performance period consisting second year grant date end performance period 100 50 0 individual’s performance units period vest based relative placement total shareholder return within peer group consisting key five companies top third peer group 100 performance units vest middle third 50 vest bottom third performance units expire unvested payment made performance units vest given performance period award holder paid cash amount equal vested percentage performance units multiplied closing price common stock last trading day performance period account performance units liabilitytype award settled cash december 31 2012 none performance units issued march 2010 outstanding key energy services inc subsidiaries notes consolidated financial statements continued phantom share plan december 2006 announced implementation “phantom share plan” certain employees granted “phantom shares” phantom shares vest ratably fouryear period convey right grantee receive cash payment anniversary date grant equal fair market value phantom shares vesting date grantees permitted defer payment later date phantom shares “liability” type award account awards fair value recognize compensation expense related phantom shares based change fair value awards period percentage service requirement performed net estimated actual forfeitures offsetting liability recorded consolidated balance sheets recognized less 01 million pretax compensation benefit continuing operation associated phantom shares year end december 31 2012 03 million 11 million pretax compensation expense continuing operations associated phantom shares years ended december 31 2011 2010 respectively december 31 2012 phantom shares outstanding recognized income tax benefit associated phantom shares less 01 million 2012 recognized income tax benefits associated phantom shares 01 million 04 million 2011 2010 respectively 2012 cash payments related phantom shares totaled 05 million stock appreciation rights august 2007 issued approximately 587000 sars executive officers sar tenyear term date grant vesting outstanding sar awards accelerated fourth quarter 2008 upon exercise sar recipient receive amount equal difference exercise price fair market value share common stock date exercise multiplied number shares common stock sar exercised payments made shares common stock prior exercise sar entitle recipient receive shares common stock provide recipient voting stockholders’ rights account sars equity awards recognize compensation expense ratably vesting period sar based fair value date issuance net estimated actual forfeitures recognize expense associated awards 2012 2011 2010 forfeited less 01 million sars 2012 december 31 2012 03 million sars remain unexercised note 21 transactions related parties employee loans advances time made certain retention loans relocation loans employees executive officers retention loans forgiven various time periods long employee continues employment us relocation loans repaid upon employee selling prior residence december 31 2012 employee loans advance outstanding december 2011 loans aggregate totaled less 01 million transactions affiliates discussed “note 2 acquisitions” october 2010 acquired certain subsidiaries together associated assets ofs oilfield services company owned arclight capital partners llc time acquisition ofs conducted business companies owned former owner employee ofs subsidiary purchased subsequent acquisition continued provide services companies prices charged companies services rates equivalent prices charged customers us market december 31 2012 2011 receivables related parties totaled 02 million revenues customers years ended december 31 2012 2011 27 million 27 million respectively revenue customers since date acquisition year ended december 31 2010 13 million provide services exploration production company owned one former employees prices charged company services rates average prices charged customers california market services provided december 31 2012 2011 receivables company totaled 02 million 05 million respectively revenues company totaled 51 million 52 million 43 million years ended december 31 2012 2011 2010 respectively board director relationships member board directors senior vice president general counsel chief administrative officer anadarko petroleum corporation “anadarko” one customers sales anadarko 370 million 372 million 494 million years ended december 31 2012 2011 2010 respectively receivables outstanding anadarko 35 million 51 million december 31 2012 2011 respectively transactions anadarko services made terms consistent customers former member board directors resigned may 2011 member managing director general partner indirect majority owner one customers sales customer 04 million 10 million 04 million years ended december 31 2012 2011 2010 respectively receivables outstanding customer less 01 million december 31 2012 2011 transactions customer made terms consistent customers member board directors serves united states advisory board alexander proudfoot practice management consulting group plc “proudfoot” provided consulting services us 2012 2011 related general administrative cost restructuring initiative payments proudfoot 19 million 41 million years ended december 31 2012 december 31 2011 respectively payments made proudfoot year ended december 31 2010 note 22 supplemental cash flow information cash paid interest includes cash payments interest longterm debt capital lease obligations commitment agency fees paid note 23 segment information operating segments us international also “functional support” segment associated managing reportable operating segments domestic rig services fluid management services fishing rental services coiled tubing services formerly intervention services aggregated within us reportable segment international rig services business canadian technology development group aggregated within international reportable segment evaluate performance operating segments based revenue income measures intersegment sales pricing based current market conditions following description segments us segment rig services rigbased services include completion newly drilled wells workover recompletion existing oil natural gas wells well maintenance plugging abandonment wells end useful lives also provide specialty drilling services oil natural gas producers certain larger rigs capable providing conventional horizontal drilling services rigs encompass various sizes capabilities allowing us service types wells depths 20000 feet many rigs outfitted proprietary keyview® technology captures reports well site operating data provides safety control systems believe technology allows customers crews better monitor well site operations improves efficiency safety adds value services offer completion recompletion services provided rigs prepare wells production whether newly drilled recently extended workover operation completion process may involve selectively perforating well casing access production zones stimulating testing zones installing tubular downhole equipment typically provide well service rig may also provide equipment assist completion process completion services vary well work may take days several weeks perform depending nature completion workover services provide designed enhance production existing wells generally complex time consuming normal maintenance services workover services include deepening extending wellbores new formations drilling horizontal lateral wellbores sealing depleted production zones accessing previously bypassed production zones converting former production wells injection wells enhanced recovery operations conducting major subsurface repairs due equipment failures workover services may last days several weeks depending complexity workover maintenance services provided rig fleet generally required throughout life cycle oil natural gas well examples maintenance services include routine mechanical repairs pumps tubing equipment removing debris formation material wellbores pulling rods downhole equipment wellbores identify resolve production problems maintenance services generally less complicated completion workover related services require less time perform rig fleet also used process permanently shuttingin oil natural gas wells end productive lives plugging abandonment services generally require auxiliary equipment addition well servicing rig demand plugging abandonment services significantly impacted demand oil natural gas well operators required state regulations plug wells longer productive fluid management services provide transportation wellsite storage services various fluids utilized connection drilling completions workover maintenance activities also provide disposal services fluids produced subsequent well completion fluids removed well site transported disposal saltwater disposal “swd” wells owned us third party addition operate fleet hot oilers capable pumping heated fluids used clear soluble restrictions wellbore demand pricing services generally correspond demand well service rigs coiled tubing services coiled tubing services involve use continuous metal pipe spooled onto large reel deployed oil natural gas wells perform various applications wellbore cleanouts nitrogen jet lifts throughtubing fishing formation stimulations utilizing acid chemical treatments coiled tubing also used number horizontal well applications milling temporary isolation plugs separate frac zones various pre post hydraulic fracturing well preparation services fishing rental services offer full line services rental equipment designed use providing onshore offshore drilling workover services fishing services involve recovering lost stuck equipment wellbore utilizing broad array “fishing tools” rental tool inventory consists drill pipe tubulars handling tools including patented hydrawalk® pipehandling units services pressurecontrol equipment pumps power swivels reversing units foam air units result 2011 acquisition edge rental inventory also includes frac stack equipment used support hydraulic fracturing operations associated flowback frac fluids proppants oil natural gas also provide well testing services demand fishing rental services also closely related capital spending oil natural gas producers generally function oil natural gas prices international segment international segment includes operations mexico colombia middle east russia addition technology development control systems business based canada also prior sale argentina business third quarter 2012 operated argentina reporting results argentina business discontinued operations periods presented provide rigbased services maintenance workover recompletion existing oil wells completion newlydrilled wells plugging abandonment wells end useful lives international markets addition mexico provide drilling coiled tubing wireline project management consulting services work mexico also requires us provide third party services varies scope project middle east operate kingdom bahrain third quarter 2012 began operations oman business bahrain currently conducted joint venture controlling interest joint venture operations russia provide drilling workover reservoir engineering services also included international segment technology development control systems business based canada business focused development hardware software related oilfield service equipment controls data acquisition digital information flow functional support segment functional support segment includes unallocated overhead costs associated administrative support us international reporting segments following table presents segment information years ended december 31 2012 2011 2010 thousands year ended december 31 2012 year ended december 31 2011 year ended december 31 2010 1 long lived assets include fixed assets goodwill intangibles assets 2 functional support geographically located united states note 24 unaudited quarterly results operations set forth unaudited summarized quarterly information two recent years covered consolidated financial statements thousands except per share data 1 quarterly earnings per common share based weighted average number shares outstanding quarter sum quarters may equal annual earnings per common share key energy services inc subsidiaries notes consolidated financial statements continued note 25 condensed consolidating financial statements 2021 notes guaranteed virtually domestic subsidiaries wholly owned guarantees joint several full complete unconditional restrictions ability subsidiary guarantors transfer funds parent company result guarantee arrangements required present following condensed consolidating financial information condensed consolidating balance sheets key energy services inc subsidiaries notes consolidated financial statements continued key energy services inc subsidiaries notes consolidated financial statements continued condensed consolidating statements operations key energy services inc subsidiaries notes consolidated financial statements continued key energy services inc subsidiaries notes consolidated financial statements continued condensed consolidating statements cash flows key energy services inc subsidiaries notes consolidated financial statements continued key energy services inc subsidiaries notes consolidated financial statements continued item 9item 8 financial statements supplementary data key energy services inc subsidiaries index consolidated financial statements page report independent registered public accounting firm report independent registered public accounting firm internal control financial reporting consolidated balance sheets consolidated statements operations consolidated statements comprehensive income loss consolidated statements cash flows consolidated statements stockholders’ equity notes consolidated financial statements report independent registered public accounting firm board directors stockholders key energy services inc audited accompanying consolidated balance sheets key energy services inc maryland corporation subsidiaries “company” december 31 2013 2012 related consolidated statements income comprehensive income changes shareholders equity cash flows three years period ended december 31 2013 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position key energy services inc subsidiaries december 31 2013 2012 results operations cash flows three years period ended december 31 2013 conformity accounting principles generally accepted united states america also audited accordance standards public company accounting oversight board united states companys internal control financial reporting december 31 2013 based criteria established 1992 internal controlintegrated framework issued committee sponsoring organizations treadway commission coso report dated february 25 2014 expressed unqualified opinion effectiveness internal control financial reporting grant thornton llp houston texas february 25 2014 report independent registered public accounting firm board directors stockholders key energy services inc audited internal control financial reporting key energy services inc maryland corporation subsidiaries “company” december 31 2013 based criteria established 1992 internal controlintegrated framework issued committee sponsoring organizations treadway commission coso companys management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying managements report internal control financial reporting responsibility express opinion companys internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion company maintained material respects effective internal control financial reporting december 31 2013 based criteria established 1992 internal controlintegrated framework issued coso also audited accordance standards public company accounting oversight board united states consolidated financial statements company year ended december 31 2013 report dated february 25 2014 expressed unqualified opinion financial statements grant thornton llp houston texas february 25 2014 key energy services inc subsidiaries consolidated balance sheets see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries consolidated statements operations see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries consolidated statements comprehensive income loss see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries consolidated statements cash flows see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries consolidated statements stockholders’ equity see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries notes consolidated financial statements note 1 organization summary significant accounting policies key energy services inc wholly owned subsidiaries controlled subsidiaries collectively “key” “company” “we” “us” “our” provide full range well services major oil companies foreign national oil companies independent oil natural gas production companies services include rigbased coiled tubingbased well maintenance workover services well completion recompletion services fluid management services fishing rental services ancillary oilfield services additionally certain rigs capable specialty drilling applications operate major oil natural gas producing regions continental united states operations mexico colombia ecuador middle east russia addition technology development control systems business based canada basis presentation consolidated financial statements included annual report form 10k present financial position results operations cash flows periods presented accordance generally accepted accounting principles united states “gaap” preparation consolidated financial statements requires us develop estimates make assumptions affect financial position results operations cash flows estimates also impact nature extent disclosure contingent liabilities among things use estimates analyze assets possible impairment ii determine depreciable lives assets iii assess future tax exposure realization deferred tax assets iv determine amounts accrue contingencies v value tangible intangible assets vi assess workers’ compensation vehicular liability selfinsured risk accruals insurance reserves vii provide allowances uncollectible accounts receivable viii value asset retirement obligations ix value equitybased compensation review significant estimates recurring basis record effect necessary adjustments prior publication financial statements adjustments made respect use estimates relate improved information previously available limitations inherent process actual results may differ materially estimates believe estimates reasonable evaluated events occurring balance sheet date included annual report form 10k possible disclosure subsequent event management monitored subsequent events date financial statements issued february 17 2012 company announced decision sell business operations argentina “argentina business” september 14 2012 completed sale argentina business accordance applicable accounting requirements guidance company reclassified presented argentina business discontinued operation 2011 2012 periods principles consolidation within consolidated financial statements include accounts majorityowned controlled subsidiaries eliminate intercompany accounts transactions interest entity significant control influence account interest using cost method interest entity exert significant influence control account interest using equity method acquisitions time acquire businesses assets consistent longterm growth strategy results operations acquisitions included financial statements beginning date acquisition accounted using acquisition method business combinations whether partial full stages acquirer records 100 assets liabilities acquired business including goodwill fair values including contingent consideration final valuations assets liabilities obtained recorded soon practicable later one year date acquisition revenue recognition recognize revenue following criteria met evidence arrangement exists ii delivery occurred services rendered iii price customer fixed determinable iv collectability reasonably assured key energy services inc subsidiaries notes consolidated financial statements continued • evidence arrangement exists final understanding us customer occurred evidenced completed customer purchase order field ticket supplier contract master service agreement • delivery occurred services rendered completed requirements pursuant terms arrangement evidenced field ticket service log • price customer fixed determinable amount required paid agreed upon evidence price fixed determinable evidenced contractual terms price book completed customer purchase order field ticket • collectability reasonably assured screen customers provide goods services customers according determined credit terms granted accordance credit policy present revenues net sales taxes collected us customers required remitted local state governmental taxing authorities review contracts multiple element revenue arrangements deliverables separated units accounting assigned fair value standalone value customer objective reliable evidence fair value delivery undelivered items substantially controlled us believe negotiated prices deliverables services contracts representative fair value since acceptance nonacceptance element contract affect elements cash equivalents consider shortterm investments original maturity less three months cash equivalents december 31 2013 entered compensating balance arrangements obligations 2011 credit facility defined syndicate banks jpmorgan chase bank na administrative agent secured assets including assets held subsidiaries includes cash equivalents restrict investment cash financial institutions high credit standing limit amount credit exposure one financial institution maintain cash bank deposit brokerage accounts exceed federally insured limits december 31 2013 accounts guaranteed federal deposit insurance corporation “fdic” 250000 substantially accounts held deposits excess fdic limits believe cash held foreign subsidiaries could repatriated general corporate use without material withholdings time normal course business connection operations ongoing legal matters required place certain amounts cash deposit accounts restrictions limit ability withdraw funds certain cash accounts zerobalance controlled disbursement accounts right offset cash balances present outstanding checks written zerobalance accounts component accounts payable accompanying consolidated balance sheets accounts receivable allowance doubtful accounts establish provisions losses accounts receivable determine possibility collect part outstanding balances regularly review accounts 150 days past due invoice date collectability establish adjust allowance necessary using specific identification method exhaust collection efforts determine balance never collected write accounts receivable associated provision uncollectible accounts time entitled proceeds insurance policies amounts reserved selfinsurance liability present insurance receivables gross balance sheet component assets separate corresponding liability concentration credit risk significant customers include major oil natural gas production companies independent oil natural gas production companies foreign national oil natural gas production companies perform ongoing credit evaluations customers usually require material collateral maintain reserves potential credit losses necessary results operations financial position considered light fluctuations demand experienced oilfield service companies changes oil gas producers’ expenditures budgets occur fluctuations impact results operations financial position supply demand factors directly affect utilization hours primary determinants net cash provided operating activities key energy services inc subsidiaries notes consolidated financial statements continued year ended december 31 2013 chevron texaco exploration production accounted 15 consolidated revenue year ended december 31 2012 pemex occidental petroleum corporation accounted 12 10 consolidated revenue respectively customer accounted 10 consolidated revenue 2013 2012 single customer accounted 10 consolidated revenue year ended december 31 2011 receivables outstanding pemex approximately 19 31 total accounts receivable december 31 2013 2012 respectively customer accounted 10 total accounts receivable december 31 2013 2012 inventories consist primarily equipment parts spares use operations supplies held consumption valued lower average cost market property equipment property equipment carried cost less accumulated depreciation provided assets estimated depreciable lives assets using straightline method depreciation expense years ended december 31 2013 2012 2011 2062 million 1905 million 1457 million respectively depreciate operational assets depreciable lives salvage value higher assets’ value scrap salvage value approximates 10 operational asset’s acquisition cost operational asset stacked taken service review physical condition depreciable life ultimate salvage value determine asset operable whether remaining depreciable life salvage value adjusted scrap asset accelerate depreciation asset salvage value dispose asset gain loss recognized december 31 2013 estimated useful lives asset classes follows time lease certain operating assets capital lease obligations whose terms run 55 60 months assets depreciated estimated useful lives term capital lease obligation whichever shorter longlived asset group tested recoverability whenever events changes circumstances indicate carrying amount may recoverable purposes testing impairment group longlived assets along lines business based services provided lowest level identifiable cash flows largely independent cash flows assets liabilities would record impairment charge reducing net carrying value estimated fair value asset group’s estimated future cash flows less net carrying value events changes circumstance cause us evaluate fixed assets recoverability possible impairment may include changes market conditions adverse movements prices oil natural gas changes asset group expected future life intended use physical condition could reduce fair value certain property equipment development future cash flows determination fair value asset group involves significant judgment estimates identify triggering events record asset impairments 2013 2012 2011 asset retirement obligations recognize liability fair value legal obligations associated retirement tangible longlived assets capitalize equal amount cost asset depreciate additional cost estimated useful life assets obligations perform asset retirement activities unconditional despite uncertainties may exist surrounding individual retirement activity accordingly recognize liability fair value conditional asset key energy services inc subsidiaries notes consolidated financial statements continued retirement obligation fair value reasonably estimated determining fair value examine inputs believe market participant would use transfer liability probabilityweight potential costs thirdparty would charge adjust cost inflation estimated life asset discount cost using credit adjusted risk free rate significant judgment involved estimating future cash flows associated obligations well ultimate timing cash flows estimates amount timing cash flows change changes may material impact results operations see “note 11 asset retirement obligations” deposits due capacity constraints equipment manufacturers required make advanced payments certain oilfield service equipment items used normal course business december 31 2013 december 31 2012 deposits totaled 15 million 73 million respectively deposits december 31 2012 consisted primarily payments made related high demand longlead time items capitalized interest capitalized average amount accumulated expenditures major capital projects construction using effective interest rate based related debt underlying assets placed service capitalized interest added cost assets amortized depreciation expense useful life assets included depreciation amortization line accompanying consolidated statements operations deferred financing costs deferred financing costs associated longterm debt carried cost amortized interest expense using effective interest method life related debt instrument related debt instrument retired remaining unamortized costs included determination gain loss extinguishment debt record gains losses extinguishment debt part continuing operations see “note 15 longterm debt” discussion goodwill intangible assets goodwill results business combinations represents excess acquisition consideration fair value net assets acquired goodwill intangible assets subject amortization tested impairment annually frequently events changes circumstances indicate asset might impaired test impairment indefinitelived intangible assets allows us first assess qualitative factors determine whether “more likely not” fair value reporting unit less carrying amount basis determining whether necessary perform twostep goodwill impairment test qualitative analysis shows “more likely not” fair value reporting unit less carrying amount perform twostep goodwill impairment test first step test fair value calculated reporting units fair value compared carrying value reporting unit including reporting unit’s goodwill fair value reporting unit exceeds carrying value impairment second step test performed carrying value exceeds fair value reporting unit second step test required second step test compares implied fair value reporting unit’s goodwill carrying value implied fair value reporting unit’s goodwill determined manner amount goodwill recognized business combination purchase price equal fair value reporting unit implied fair value reporting unit’s goodwill excess carrying value impairment recorded carrying value excess implied fair value impairment equal excess recorded assist management preparation analysis valuation reporting units utilize services thirdparty valuation consultant ultimate conclusions valuation techniques remain sole responsibility determination fair value used test heavily impacted market prices equity debt securities well assumptions estimates future activity levels profitability cash flows conduct annual impairment test october 1 year annual test completed october 1 2013 impairment goodwill indicated see “note 9 goodwill intangible assets” discussion internaluse software capitalize costs incurred application development stage internaluse software amortize costs software’s estimated useful life generally five seven years costs incurred related selection maintenance internaluse software expensed incurred key energy services inc subsidiaries notes consolidated financial statements continued litigation estimating liabilities related litigation take account available facts circumstances order determine whether loss probable reasonably estimable various suits claims arising ordinary course business pending us conduct business throughout continental united states may subject jury verdicts arbitrations result outcomes favor plaintiffs also exposed various claims abroad continually assess contingent liabilities including potential litigation liabilities well adequacy accruals need disclosure items establish provision contingent liability probable liability incurred amount reasonably estimable see “note 16 commitments contingencies” environmental operations routinely involve storage handling transport disposal bulk waste materials contain oil contaminants regulated substances operations subject various federal state local laws regulations intended protect environment environmental expenditures expensed capitalized depending future economic benefit expenditures relate existing condition caused past operations future economic benefits expensed record liabilities undiscounted basis remediation efforts probable costs conduct remediation efforts reasonably estimated litigation reserves reflect application insurance coverage environmental reserves reflect management’s assessment insurance coverage may apply matters issue see “note 16 commitments contingencies” selfinsurance largely selfinsured physical damage equipment automobiles well workers’ compensation claims accruals maintain consolidated balance sheet relate deductibles selfinsured retentions estimate use historical claims data trend analysis assist management liability amount selfinsurance reserves utilize services third party actuary actual outcome claim could differ significantly estimated amounts adjust loss estimates calculation accruals based upon actual claim settlements reported claims see “note 16 commitments contingencies” income taxes account deferred income taxes using asset liability method provide income taxes significant temporary differences management determines current tax liability well taxes incurred result current operations deferred future periods current taxes payable represent liability related income tax returns current year net deferred tax expense benefit represents change balance deferred tax assets liabilities reported consolidated balance sheets management estimates changes deferred tax assets liabilities using basis assets liabilities financial reporting purposes enacted rates management estimates effect differences reverse management makes certain assumptions timing temporary tax differences differing treatments certain items tax accounting purposes whether differences permanent final determination tax liability involves interpretation local tax laws tax treaties related authorities jurisdiction well significant use estimates assumptions regarding scope future operations results achieved timing nature income earned expenditures incurred establish valuation allowances reduce deferred tax assets determine likely eg likelihood 50 portion deferred tax assets realized future periods assess likelihood use estimates judgment regarding future taxable income well jurisdiction taxable income generated determine whether valuation allowance required evidence include current financial position results operations actual forecasted results reversal deferred tax liabilities tax planning strategies well current forecasted business economics industry additionally record uncertain tax positions net recognizable amount based amount management deems likely sustained upon ultimate settlement tax authorities domestic international tax jurisdictions operate see “note 14 income taxes” discussion accounting income taxes changes valuation allowance components tax rate reconciliation realization loss carryforwards earnings per share basic earnings per common share determined dividing net earnings applicable common stock weighted average number common shares actually outstanding period diluted earnings per common share based key energy services inc subsidiaries notes consolidated financial statements continued increased number shares would outstanding assuming conversion dilutive outstanding convertible securities using treasury stock “as converted” methods see “note 10 earnings per share” sharebased compensation past issued stock options shares restricted common stock restricted stock units stock appreciation rights “sars” phantom shares performance units employees part employees’ compensation retention tool options restricted shares sars calculate fair value awards grant date amortize fair value compensation expense ratably vesting period award net estimated actual forfeitures fair value stock option sar awards estimated using blackscholes fair value model valuation stock options sars requires us estimate expected term award estimated using simplified method sufficient historical exercise information past legal restrictions exercise stock options additionally valuation stock option sars awards also dependent historical stock price volatility calculate using lookback period equivalent expected term award riskfree interest rate estimate future forfeitures grantdate fair value restricted stock awards determined using stock price grant date phantom shares performance units treated “liability” awards carried fair value balance sheet date changes fair value recorded component compensation expense offsetting liability consolidated balance sheet record sharebased compensation component general administrative direct operating expense applicable individual see “note 20 sharebased compensation” foreign currency gains losses respect operations russia local currency functional currency assets liabilities translated rates exchange balance sheet date income expense items translated average rates exchange period resulting gains losses arising translation accounts functional currency us dollar included separate component stockholders’ equity comprehensive income partial complete sale liquidation net investment foreign entity december 31 2011 functional currency mexico russia canada local currency functional currency colombia middle east u dollar due significant changes economic facts circumstances functional currency mexico canada changed us dollar effective january 1 2012 see “note 17 accumulated comprehensive loss” time foreign subsidiaries may enter transactions denominated currencies functional currency transactions initially recorded functional currency subsidiary based applicable exchange rate effect date transaction end month transactions remeasured equivalent amount functional currency based applicable exchange rates effect time adjustment required remeasure transaction equivalent amount functional currency end month recorded income loss foreign subsidiary component income net comprehensive income display comprehensive income loss components financial statements classify items comprehensive income nature financial statements display accumulated balance comprehensive income separately stockholders’ equity leases lease real property equipment various leasing arrangements enter leasing arrangement analyze terms arrangement determine whether lease accounted operating lease capital lease periodically incur costs improve assets lease arrangements value leasehold improvements exceeds threshold capitalization record improvement component property equipment amortize improvement useful life improvement lease term whichever shorter certain operating lease agreements structured include scheduled specified rent increases term lease agreement increases may result inducement “rent holiday” conveyed us early lease included reflect anticipated effects inflation recognize scheduled specified rent increases straightline basis term lease agreement addition certain operating lease agreements contain incentives induce us enter lease agreement upfront cash payments us payment lessor costs moving expenses assumption lessor preexisting lease agreements third parties payments made key energy services inc subsidiaries notes consolidated financial statements continued us behalf represent incentives consider reduction rent expense recognized straightline basis term lease agreement new accounting standards adopted report new accounting standards adopted yet adopted report note 2 acquisitions 2013 acquisition noncontrolling interests geostream october 31 2008 acquired 26 interest geostream limited liability company incorporated russian federation provides wide range drilling workover reservoir engineering services 174 million september 1 2009 acquired additional 24 interest 164 million brought total investment geostream 50 provided us controlling interest representation geostreams board directors accounted second investment business combination achieved stages results geostream included consolidated financial statements since initial acquisition date portion outside control forming noncontrolling interest april 9 2013 completed acquisition remaining 50 noncontrolling interest geostream 146 million geostream wholly owned subsidiary acquisition accounted equity transaction therefore acquisition noncontrolling interest geostream second quarter 2013 result gain loss almansoori key energy services llc march 7 2010 entered agreement almansoori petroleum services llc “almansoori” form joint venture almansoori key energy services llc joint venture laws abu dhabi uae purpose joint venture engage conventional workover drilling services coiled tubing services fishing rental services rig monitoring services pipe handling services fluids waste treatment handling services although almansoori held 51 interest joint venture held 49 interest held three five board directors seats controlling financial interest addition profits losses joint venture shared equal terms equal amounts almansoori joint venture sufficient resources carry activities without financial support determined variable interest entity primary beneficiary consolidated entity financial statements august 5 2013 agreed dissolution almansoori key energy services llc acquisition underlying business 51 million 51 million expected paid 2014 recorded current liabilities 2013 consolidated balance sheet acquisition 51 noncontrolling interest almansoori key energy services llc accounted equity transaction therefore result gain loss effects changes ownership interests geostream almansoori key energy services llc year ended december 31 2013 follows thousands 2011 acquisitions edge oilfield services llc “edge” august 5 2011 completed acquisition edge accounted acquisition business combination results operations edge included consolidated financial statements acquisition date total consideration acquisition approximately 3059 million consisting approximately 75 million shares common stock approximately 1879 million cash included 263 million reimburse edge growth capital expenditures incurred march 1 2011 date closing net working capital adjustments 18 million finalized purchase accounting related acquisition june 30 2012 following table summarizes fair values assets acquired liabilities assumed thousands fair value 75 million common shares issued 1562 per share based closing price acquisition date august 5 2011 following table summarizes fair values assets acquired liabilities assumed thousands 493 million acquired intangible assets 400 million assigned customer relationships amortized value relationships realized using expected rates 125 300 110 64 38 25 17 12 08 2011 2020 addition 51 million acquired intangible assets assigned tradenames subject amortization remaining 42 million acquired intangible assets assigned noncompete agreements amortized straightline basis 38 months fair value gross contractual amount accounts receivable acquired august 5 2011 211 million goodwill acquired assigned fishing rental business part us reportable segment believe goodwill recognized attributable primarily acquired workforce expansion growing service line goodwill expected deductible income tax purposes transaction costs related acquisition 36 million year ended december 31 2011 included general administrative expenses 2011 consolidated statement operations included consolidated statements operations year ended december 31 2011 related acquisition revenues 525 million operating income 147 million acquisition date december 31 2011 following represents pro forma consolidated income statement edge acquisition included consolidated results prior 2011 year ended december 31 2011 1 depreciation amortization expense adjusted reflect additional expense would charged assuming fair value adjustments property equipment intangible assets applied prior 2011 2 transaction costs 36 million removed costs would occurred prior 2011 3 income tax expense adjusted reflect applicable corporate tax edge acquired converted llc status prior 2011 4 weighted average shares outstanding adjusted reflect issuance shares edge transaction occurred prior 2011 unaudited pro forma results based assumptions deemed appropriate management prepared informational purposes necessarily indicative results acquisition occurred year ended december 2011 amounts calculated applying accounting policies adjusting results edge changes applied prior 2011 together consequential tax effects equity energy company “eec” january 2011 acquired purchase lease 10 saltwater disposal “swd” wells eec approximately 143 million swd wells located north dakota accounted purchase asset acquisition note 3 discontinued operations september 2012 completed sale argentina operations approximately 125 million net transaction costs 125 million net proceeds sale argentina operations included 20 million received cash balance notes receivable comprised three sets noninterest bearing notes total six notes first set notes originally due september 2013 one note paid full retired second note restructured maturity date september 16 2014 payable thirteen monthly payments first four payments totaling 06 million includes repayment first note received fourth quarter 2013 remaining nine payments expected follow month thereafter maturity dates payment terms balances remaining two sets notes change notes included current assets condensed consolidated balance sheets connection sale recognized total loss 858 million includes noncash impairment charge 415 million recorded first quarter 2012 writeoff 519 million cumulative translation adjustment previously recorded accumulated comprehensive loss third quarter 2012 reporting results argentina operations discontinued operations periods presented following table presents results operations argentina business sold transaction years ended december 31 2012 2011 note 4 severance contract termination mobilization costs second quarter 2013 implemented significant restructuring fluid management services corporate cost structure better align current market conditions result restructuring recognized approximately 63 million severance expenses second quarter 2013 severance costs based obligations existing severance agreements furthermore recognized lease cancellation fees 19 million primarily related fluid management services additionally international business due customer spending reductions mexico began redeploying idle rigs north region mexico higher demand markets incurring mobilization cost 23 million costs reflected consolidated statements operations include 83 million direct operating expenses 22 million general administrative expenses segment basis 26 million associated us operations 72 million associated international operations remaining 07 million associated functional support segment restructuring activities implemented second quarter 2013 completed fourth quarter 2013 presented categories liabilities recorded connection restructuring segment consolidation key energy services inc subsidiaries notes consolidated financial statements continued note 5 balance sheet information table presents comparative detailed information current assets december 31 2013 2012 table presents comparative detailed information current liabilities december 31 2013 2012 table presents comparative detailed information noncurrent accrued liabilities december 31 2013 2012 note 6 income net table presents comparative detailed information income expense continuing operations years ended december 31 2013 2012 2011 note 7 allowance doubtful accounts table presents rollforward allowance doubtful accounts years ended december 31 2013 2012 2011 note 8 property equipment property equipment consists following interest capitalized average amount accumulated expenditures major capital projects construction using effective interest rate based related debt underlying assets placed service capitalized interest years ended december 31 2013 2012 2011 06 million 13 million 17 million respectively december 31 2013 capital lease obligations carrying value assets acquired capital leases december 31 2012 follows thousands depreciation assets held capital leases 19 million 28 million 28 million years ended december 31 2013 2012 2011 respectively included depreciation amortization expense accompanying consolidated statements operations asset impairment charges years ended december 31 2013 2012 2011 note 9 goodwill intangible assets changes carrying amount goodwill years ended december 31 2013 2012 follows components intangible assets december 31 2013 2012 follows amortization expense intangible assets determinable lives follows intangible assets december 31 2013 136 million indefinitelived tradenames subject amortization tradenames tested impairment annually using relief royalty method weighted average remaining amortization periods expected amortization expense next five years definite lived intangible assets follows certain goodwill intangible assets denominated russian rubles values assets subject fluctuations associated changes exchange rates additionally certain assets also subject purchase accounting adjustments purchase accounting adjustments 2012 relate reduction fixed assets acquired edge 2011 believe impact purchase accounting adjustments material consolidated financial statements year ended december 31 2012 historically evaluated goodwill impairment one level reporting segment level reporting unit level annually december 31 frequently impairment indicators arose accordance accounting standards codification asc topic 350 third quarter 2013 changed date annual assessment goodwill impairment october 1 year change assessment date delay accelerate avoid cause impairment charge change result adjustments previously issued financial statements believe change date aligns planning cycle create synergy allow goodwill impairment analysis embedded projection future results business planning purposes believe enhance quality goodwill impairment analysis also change date allows us time identify respond issues noted analysis finalization sec filings improve quality financial reporting company prospectively applied change annual goodwill impairment testing date beginning fourth quarter 2013 performed qualitative analysis goodwill impairment october 1 2013 based analysis canadian reporting unit triggering event would indicate “more likely not” carrying value reporting unit higher fair value however determined necessary perform first step goodwill impairment test rigbased services coiled tubing services fishing rental services fluid management services russian reporting units first step goodwill impairment test compared fair value reporting unit carrying amount including goodwill based results step 1 fair value rigbased services fluid management services coiled tubing services fishing rental services russian reporting units exceeded carrying value 11 4 19 21 86 respectively key assumption model forecast increased revenue 2014 rigbased services fluid management services fishing rental services followed nominal revenue increases 2018 anticipate coiled tubing services russian reporting units increased revenue future years potential events could affect assumption include level development exploration production activity corresponding capital spending oil natural gas companies russia oil natural gas production costs government regulations conditions worldwide oil natural gas industry possible factors could affect assumption ability acquire deploy additional assets deployment assets region fair value reporting units exceeded carrying values determined impairment goodwill associated reporting units existed october 1 2013 step two impairment test required note 10 earnings per share following table presents basic diluted earnings per share “eps” years ended december 31 2013 2012 2011 stock options warrants sars included computation diluted earnings per share using treasury stock method restricted stock awards legally considered issued outstanding granted included basic weighted average shares outstanding diluted earnings per share calculation year ended december 31 2013 exclude potential exercise 17 million stock options 03 million sars due net losses continuing operations december 31 2012 2011 excludes potential exercise 20 million 13 million stock options respectively effect would antidilutive due exercise prices exceeding average price stock diluted earnings per share calculation year ended december 31 2012 also excluded potential exercise 04 million sars effects exercises earnings per share would antidilutive none sars antidilutive year ended december 31 2011 material changes share amounts subsequent balance sheet date would material impact earnings per share calculation year ended december 31 2013 however issued 09 million shares restricted stock january 30 2014 key energy services inc subsidiaries notes consolidated financial statements continued note 11 asset retirement obligations connection well servicing activities operate number swd facilities operations involve transportation handling disposal fluids swd facilities byproducts drilling process swd facilities used connection fluid hauling operations subject future costs associated retirement properties result incurred costs associated proper storage disposal materials annual accretion assets associated asset retirement obligations 06 million years ended december 31 2013 2012 2011 summary changes asset retirement obligations follows thousands note 12 equity method investments iroc energy services corp april 2011 sold equity interest approximately 87 million shares iroc energy services corp albertabased oilfield services company 120 million net fees recorded net gain sale 48 million including writeoff cumulative translation adjustment 11 million net tax second quarter 2011 proceeds received exceeded carrying value investment december 31 2013 equity method investments material combined basis note 13 estimated fair value financial instruments following summary carrying amounts estimated fair values financial instruments december 31 2013 2012 cash equivalents accounts receivable accounts payable accrued liabilities carrying amounts approximate fair value short maturity instruments carrying value equal fair value instruments balance sheet date notes receivable argentina operations sale fair value notes based upon quoted market treasury rates dates indicated carrying values items approximate fair values due maturity dates rapidly approaching thus giving way discount rates similar 675 senior notes due 2021 fair value notes based upon quoted market prices securities dates indicated carrying value notes december 31 2013 6750 million fair value 6904 million 1023 carrying value 8375 senior notes due 2014 fair value notes based upon quoted market prices securities dates indicated carrying value notes december 31 2013 36 million fair value 36 million 1015 carrying value credit facility revolving loans variable interest rates fair values revolving loans borrowed 2011 credit facility approximate carrying values carrying fair values loans december 31 2013 850 million note 14 income taxes components income tax expense follows sources income loss continuing operations income taxes noncontrolling interest follows made federal income tax payments 300 million 51 million 532 million years ended december 31 2013 2012 2011 respectively made state income tax payments 29 million 29 million 76 million years ended december 31 2013 2012 2011 respectively made foreign tax payments 23 million 52 million 29 million years ended december 31 2013 2012 2011 respectively years ended december 31 2013 2012 2011 tax benefit expense allocated stockholders’ equity compensation expense income tax purposes excess amounts recognized financial reporting purposes 18 million 41 million 49 million respectively addition received federal income tax refunds 251 million 167 million 262 million years ended december 31 2013 2012 2011 respectively key energy services inc subsidiaries notes consolidated financial statements continued income tax expense differs amounts computed applying statutory federal rate follows december 31 2013 2012 deferred tax assets liabilities consisted following december 31 2013 net deferred tax liability balance comprised 2845 million longterm deferred tax liability less 117 million current deferred tax asset 223 million longterm deferred tax asset december 31 2012 net deferred liability balance comprised 2595 million longterm deferred tax liability less 200 million current deferred tax asset 29 million longterm deferred tax asset recording deferred income tax assets consider whether likely portion deferred income tax assets realized ultimate realization deferred income tax assets dependent upon generation future taxable income periods deferred income tax assets would deductible consider scheduled reversal deferred income tax liabilities projected future taxable income determination fully realize deferred income tax assets related federal net operating loss carryforwards valuation allowance due section 382 limitations would need generate future federal taxable income approximately 01 million next five years certain exceptions noted believe considering available objective evidence positive negative historical prospective greater weight given historical evidence likely assets realized estimate december 31 2013 2012 2011 available 24 million 28 million 793 million respectively federal net operating loss carryforwards approximately 24 million net operating losses december 31 2013 subject 5000 annual section 382 limitation expire 2016 2018 gross deferred tax asset associated federal net operating loss carryforward december 31 2013 08 million due annual limitations sections 382 383 management believes able utilize available carryforwards key energy services inc subsidiaries notes consolidated financial statements continued prior ultimate expiration december 31 2013 2012 valuation allowance 08 million related deferred tax asset associated remaining federal net operating loss carryforwards expire utilization due section 382 limitations estimate december 31 2013 2012 2011 available approximately 649 million 444 million 733 million respectively state net operating loss carryforwards expire 2014 2032 deferred tax asset associated remaining state net operating loss carryforwards december 31 2013 33 million net federal tax benefit management believes likely able utilize available state carryforwards prior ultimate expiration estimate december 31 2013 2012 2011 available approximately 1176 million 344 million 396 million respectively foreign net operating loss carryforwards expire 2020 2030 gross deferred tax asset associated foreign net operating loss carryforwards december 31 2013 327 million management believes likely able utilize net operating loss carryforwards prior ultimate expiration foreign jurisdictions currently operate company recognized valuation allowance 214 million december 31 2013 deferred tax asset associated capital loss carryforward capital loss carryforward expire 2017 provide us income taxes withholding taxes unremitted earnings mexico canada colombia ecuador middle east subsidiaries earnings considered permanently reinvested cash flow generated businesses needed fund additional equipment working capital requirements furthermore provide us income taxes unremitted earnings foreign subsidiaries tax basis foreign subsidiaries exceeded book basis file income tax returns united states federal jurisdiction various states foreign jurisdictions currently audit internal revenue service tax year ended december 31 2010 2011 significant filings mexico examined 2008 december 31 2013 2012 2011 09 million 12 million 18 million respectively unrecognized tax benefits recognized would impact effective tax rate accrued 04 million 03 million 06 million payment interest penalties december 31 2013 2012 2011 respectively believe reasonably possible 04 million currently remaining unrecognized tax positions individually insignificant may recognized end 2014 result lapse statute limitations settlement open audit recognized net tax benefit 05 million 2013 expirations statutes limitations following table presents gross activity 2013 2012 related liabilities uncertain tax positions thousands tax legislative changes small business jobs act 2010 small business jobs act 2010 extended firstyear bonus depreciation deduction 50 adjusted basis qualified property acquired placed service 2010 increased deduction 100 adjusted basis qualified property acquired placed service september 8 2010 january 1 2012 1999 million qualifying additions 2011 resulting bonus tax depreciation 1999 million 2012 2018 million qualifying additions resulting bonus depreciation 1009 million key energy services inc subsidiaries notes consolidated financial statements continued note 15 longterm debt components longterm debt follows 8375 senior notes due 2014 november 29 2007 issued 4250 million aggregate principal amount 8375 senior notes due 2014 “2014 notes” march 4 2011 repurchased 4213 million aggregate principal amount 2014 notes purchase price 1090 per 1000 principal amount march 15 2011 repurchased additional 01 million aggregate principal amount purchase price 1060 per 1000 principal amount connection repurchase 2014 notes incurred loss 443 million early extinguishment debt related premium paid tender payment related fees writeoff unamortized loan fees interest remaining 36 million aggregate principal amount 2014 notes outstanding payable june 1 december 1 year 675 senior notes due 2021 issued 4750 million aggregate principal amount 675 senior notes due 2021 “initial 2021 notes” march 4 2011 issued additional 2000 million aggregate principal amount 2021 notes “additional 2021 notes” together initial 2021 notes “2021 notes” private placement march 8 2012 indenture dated march 4 2011 “base indenture” supplemented first supplemental indenture dated march 4 2011 amended supplemental indenture dated march 8 2012 “supplemental indenture” together base indenture “indenture” used net proceeds repay senior secured indebtedness revolving bank credit facility capitalized 46 million financing costs associated issuance 2021 notes amortized term notes march 5 2013 completed offer exchange 2000 million aggregate principal amount unregistered additional 2021 notes equal principal amount notes registered securities act 1933 2021 notes treated single class indenture closing exchange offer bear cusip isin numbers 2021 notes general unsecured senior obligations effectively subordinated existing future secured indebtedness 2021 notes jointly severally guaranteed senior unsecured basis certain existing future domestic subsidiaries interest 2021 notes payable march 1 september 1 year 2021 notes mature march 1 2021 march 1 2016 2021 notes subject redemption time option whole part redemption prices expressed percentages principal amount redeemed plus accrued unpaid interest applicable redemption date redeemed twelvemonth period beginning march 1 years indicated key energy services inc subsidiaries notes consolidated financial statements continued time march 1 2014 may one occasions redeem 35 aggregate principal amount outstanding 2021 notes redemption price 106750 principal amount plus accrued unpaid interest redemption date net cash proceeds one equity offerings provided least 65 aggregate principal amount 2021 notes remains outstanding immediately redemption ii redemption shall occur within 180 days date closing equity offering addition time prior march 1 2016 may option redeem portion 2021 notes redemption price equal 100 principal amount plus premium respect 2021 notes plus accrued unpaid interest redemption date premium excess present value redemption price 103375 principal amount plus remaining scheduled interest payments due march 1 2016 discounted treasury rate plus 05 ii principal amount note experience change control subject certain exceptions must give holders 2021 notes opportunity sell us 2021 notes whole part purchase price equal 101 aggregate principal amount plus accrued unpaid interest date purchase subject certain negative covenants indenture limits ability among things • incur additional indebtedness issue preferred equity interests • pay dividends make distributions repurchase redeem equity interests • make loans investments • enter sale leaseback transactions • sell transfer otherwise convey assets • create liens • enter transactions affiliates • enter agreements restricting subsidiaries’ ability pay dividends • designate future subsidiaries unrestricted subsidiaries • consolidate merge sell substantially applicable entities’ assets covenants subject certain exceptions qualifications contain crossdefault provisions relating covenants 2011 credit facility discussed substantially covenants terminate 2021 notes mature one two specified ratings agencies assigns 2021 notes investment grade rating future events default exist indenture december 31 2013 2021 notes investment grade covenants cease apply us result achieving investment grade rating restored even credit rating assigned 2021 notes later falls investment grade compliance covenants december 31 2013 senior secured credit facility party 5500 million senior secured revolving bank credit facility jpmorgan chase bank na administrative agent bank america na syndication agent capital one na wells fargo bank na credit agricole corporate investment bank dnb bank asa codocumentation agent amended “2011 credit facility” important source liquidity us 2011 credit facility consists revolving credit facility letter credit subfacility swing line facility mature later march 31 2016 maximum amount may borrow facility may subject limitation due operation covenants contained facility 2011 credit facility allows us request increases total commitments facility 1000 million aggregate part full anytime term 2011 credit facility increases subject compliance restrictive covenants 2011 credit facility indenture well lender approval capitalized 49 million financing costs connection execution 2011 credit facility additional 14 million related subsequent amendment amortized term debt interest rate per annum applicable 2011 credit facility option adjusted libor plus applicable margin ii higher x jpmorgan’s prime rate federal funds rate plus 05 z onemonth adjusted libor plus 10 plus case applicable margin loans applicable margin libor loans ranges 225 300 basis points applicable margin loans ranges 125 200 basis points depending upon consolidated total leverage ratio defined 2011 credit facility unused commitment fees facility equal 050 key energy services inc subsidiaries notes consolidated financial statements continued 2011 credit facility contains certain financial covenants among things limit annual capital expenditures restrict ability repurchase shares require us maintain certain financial ratios financial ratios require • ratio consolidated funded indebtedness total capitalization greater 45 • senior secured leverage ratio senior secured funded debt trailing four quarters earnings interest taxes depreciation amortization calculated pursuant terms 2011 credit facility “ebitda” greater 200 100 • maintain collateral coverage ratio aggregate book value collateral amount total commitments last day fiscal quarter least 200 100 • maintain consolidated interest coverage ratio trailing four quarters ebitda interest expense least 300 100 • limit capital expenditures investments foreign subsidiaries 2500 million per fiscal year consolidated total leverage ratio exceeds 300 100 addition 2011 credit facility contains certain affirmative negative covenants including without limitation restrictions liens ii debt guarantees contingent obligations iii mergers consolidations iv sales transfers dispositions property assets v loans acquisitions joint ventures investments acquisitions permitted long giving pro forma effect thereto default event default exists 2011 credit facility pro forma consolidated total leverage ratio exceed 400 100 compliance financial covenants least 250 million availability 2011 credit facility vi dividends distributions redemptions repurchases equityholders vii making investments loans advances viii selling properties ix prepaying redeeming repurchasing subordinated contractually structurally debt x engaging transactions affiliates xi entering hedging arrangements xii entering sale leaseback transactions xiii granting negative pledges lenders xiv changes nature business xv amending organizational documents xvi changes accounting policies reporting practices foregoing cases certain exceptions compliance covenants december 31 2013 may prepay 2011 credit facility whole part time without premium penalty subject certain reimbursements lenders breakage redeployment costs december 31 2013 borrowings 850 million revolving credit facility 541 million letters credit outstanding leaving 4109 million undrawn borrowing capacity subject covenant compliance 2011 credit facility years ended december 31 2013 2012 weighted average interest rates outstanding borrowings 2011 credit facility 276 271 respectively letter credit facility november 7 2013 entered uncommitted unsecured 150 million letter credit facility used solely issuances performance letters credit december 31 2013 48 million letters credit outstanding leaving 102 million unused borrowing capacity facility longterm debt principal repayment interest expense presented schedule repayment requirements longterm debt next five years thereafter december 31 2013 key energy services inc subsidiaries notes consolidated financial statements continued interest expense years ended december 31 2013 2012 2011 consisted following december 31 2013 2012 2011 weighted average interest rates variable rate debt 288 270 272 respectively deferred financing costs summary deferred financing costs including cost capitalized amortized written determination loss extinguishment debt years ended december 31 2013 2012 presented table thousands note 16 commitments contingencies operating lease arrangements lease certain property equipment noncancelable operating leases expire various dates 2021 varying payment dates throughout month addition number leases scheduled expire 2014 december 31 2013 future minimum lease payments noncancelable operating leases follows thousands also party significant number monthtomonth leases cancelable time operating lease expense 239 million 244 million 266 million years ended december 31 2013 2012 2011 respectively key energy services inc subsidiaries notes consolidated financial statements continued litigation various suits claims arising ordinary course business pending us conduct business throughout continental united states may subject jury verdicts arbitrations result outcomes favor plaintiffs also exposed various claims abroad continually assess contingent liabilities including potential litigation liabilities well adequacy accruals need disclosure items establish provision contingent liability probable liability incurred amount reasonably estimable december 31 2013 aggregate amount liabilities related litigation deemed probable reasonably estimable 03 million believe disposition matters result additional loss materially excess amounts recorded liabilities related litigation matters deemed probable reasonably estimable december 31 2012 08 million second third quarter 2013 three lawsuits similar allegations violations californias wage hour laws filed california lawsuits allege failure pay overtime failure pay minimum wages improper payroll deductions failure pay final wages timely manner violations california meal break period laws among claims intend vigorously investigate defend actions however cases early stages cannot predict outcome lawsuits time accordingly cannot estimate possible loss range loss patent settlement june 2011 agreed accept 55 million damages paid full july 2011 related settlement keyview® system patent infringement lawsuit recognized related legal fees expenses 14 million year ended december 31 2011 settlement amount recorded general administrative expenses consolidated statement operations resolution matter material effect results operations year ended december 31 2011 tax audits routinely subject audits tax authorities past received material assessments tax auditors december 31 2013 2012 recorded reserves management feels appropriate future potential liabilities result prior audits believe fully reserved assessments ultimate amount settlements vary estimates selfinsurance reserves maintain reserves workers’ compensation vehicle liability balance sheet based judgment estimates using actuarial method based claims incurred estimate general liability claims casebycase basis maintain insurance policies workers’ compensation vehicular liability general liability claims insurance policies carry selfinsured retention limits deductibles per occurrence basis retention limits deductibles accounted accrual process workers’ compensation vehicular liability general liability claims december 31 2013 2012 recorded 621 million 694 million respectively selfinsurance reserves related workers’ compensation vehicular liabilities general liability claims partially offsetting liabilities approximately 185 million 206 million insurance receivables december 31 2013 2012 respectively feel liabilities recorded appropriate based known facts circumstances expect losses materially excess amounts already accrued existing claims environmental remediation liabilities environmental reserve matters including remediation efforts current locations relating previouslydisposed properties record liabilities remediation efforts probable costs conduct remediation efforts reasonably estimated december 31 2013 2012 recorded 62 million 45 million respectively environmental remediation liabilities believe liabilities recorded appropriate based known facts circumstances expect losses materially excess amounts already accrued provide performance bonds provide financial surety assurances remediation maintenance swd properties comply environmental protection standards costs swd properties may mandatory comply applicable laws regulations future required divest cease operations optimization improve operations safety regulatory compliance key energy services inc subsidiaries notes consolidated financial statements continued note 17 accumulated comprehensive loss components accumulated comprehensive loss follows thousands upon completion sale argentina operations september 14 2012 accumulated foreign currency translation balance related argentina reversed accumulated comprehensive loss recorded part 2012 loss discontinued operations local currency functional currency operations russia december 31 2011 functional currency mexico russia canada local currency functional currency colombia middle east us dollar due significant changes economic facts circumstances functional currency mexico canada changed us dollar effective january 1 2012 cumulative translation gains losses resulting translating financial statements functional currency us dollars included comprehensive income accumulated stockholders’ equity partial complete sale liquidation net investment entity table summarizes conversion ratios used translate financial statements cumulative currency translation gains losses net tax currency note 18 employee benefit plans maintain 401k plan part employee benefits package match 100 employee contributions 4 employee’s salary vest immediately 401k plan subject maximums 10200 10000 years ended december 31 2013 2012 respectively matching contributions 104 million 107 million years ended december 31 2013 2012 respectively offer participants option purchase shares common stock 401k plan fund note 19 stockholders’ equity common stock december 31 2013 2012 200000000 shares common stock authorized par value 010 per share 152331006 shares issued outstanding december 31 2013 151069609 shares issued outstanding december 31 2012 2013 2012 2011 dividends declared paid terms 2014 notes 2021 notes 2011 credit facility must meet certain financial covenants may pay dividends currently intend pay dividends tax withholding repurchase shares restricted common stock previously granted certain employees pursuant agreement individuals permitted sell shares back us order satisfy minimum income tax withholding requirements related vesting grants repurchased total 416101 shares 482951 shares 383884 shares aggregate cost 32 million 75 million 57 million 2013 2012 2011 respectively represented fair market value shares based price stock dates purchase key energy services inc subsidiaries notes consolidated financial statements continued note 20 sharebased compensation 2012 incentive plan may 17 2012 stockholders approved 2012 equity cash incentive plan “2012 incentive plan” 2012 incentive plan administered board directors committee designated board directors “committee” board directors committee “administrator” power authority select participants defined 2012 incentive plan grant awards defined participants pursuant terms 2012 incentive plan 2012 incentive plan expires may 17 2022 subject adjustment total number shares common stock available grant awards 2012 incentive plan may exceed 4000000 shares however purposes limitation stock subject award canceled forfeited expires otherwise terminates without issuance stock settled cash exchanged administrators permission prior issuance stock award involving stock become available issuance 2012 incentive plan however full number sars granted settled issuance stock count plan limit described regardless number shares stock actually issued upon settlement stock appreciation rights shares stock surrendered withheld payment exercise price option shares stock withheld company satisfy tax withholding obligations count plan limit described subject adjustment participant granted one year period options purchase common stock andor sars respect 500000 shares common stock available distribution 2012 incentive plan authorized unissued shares treasury shares reacquire manner awards may form stock options incentive stock options nonqualified stock options restricted stock restricted stock units performance compensation awards sars collectively awards may granted employees directors cases consultants individuals administrator determines reasonably expected become employees directors consultants following grant date award “participants” however incentive stock options may granted employees board directors time may amend terminate 2012 incentive plan however except provided otherwise 2012 incentive plan amendment effective unless approved stockholders company extent stockholder approval necessary satisfy applicable law securities exchange listing requirements exercise price option including incentive stock option exceeds fair market value common stock given date committee authority reduce exercise price option new exercise price less thencurrent fair market value common stock provided action shall first approved vote stockholders administrator time may amend terms one awards however amendment would constitute impairment rights award must request consent participant must consent writing expressly contemplated board may amend 2012 incentive plan respect board directors deem necessary advisable provide eligible employees maximum benefits provided provisions internal revenue code 1986 amended regulations promulgated thereunder relating incentive stock options andor bring 2012 incentive plan andor awards granted compliance therewith december 31 2013 16 million shares available grant 2012 incentive plan 2009 incentive plan june 4 2009 stockholders approved 2009 equity cash incentive plan “2009 incentive plan” 2009 incentive plan administered board directors applicable committee designated board administrator power authority select participants 2009 incentive plan grant awards participants pursuant terms 2009 incentive plan 2009 incentive plan expires june 4 2019 subject adjustment total number shares common stock available grant awards 2009 incentive plan may exceed 4000000 shares however purposes limitation stock subject award canceled forfeited expires prior exercise realization become available issuance 2009 incentive plan subject adjustment participant granted one year period options purchase common stock andor sars respect 500000 shares common stock available distribution 2009 incentive plan come authorized unissued shares reacquire manner awards 2009 incentive plan granted fair market value date issuance awards may granted employees directors cases consultants individuals administrator determines reasonably expected become employees directors consultants following grant date key energy services inc subsidiaries notes consolidated financial statements continued award “participants” however incentive stock options may granted employees vesting periods may set board’s discretion generally set two four years awards directors generally subject vesting board directors time may amend terminate 2009 incentive plan however repricing stock options permitted unless approved stockholders except provided otherwise 2009 incentive plan amendment effective unless approved stockholders extent stockholder approval necessary satisfy applicable law securities exchange listing requirements december 31 2013 06 million shares available grant 2009 incentive plan 2007 incentive plan december 6 2007 stockholders approved 2007 equity cash incentive plan “2007 incentive plan” 2007 incentive plan substantially similar 2009 incentive plan except certain differences related treatment awards retirement transferability awards death 2007 incentive plan expires december 6 2017 subject adjustment total number shares common stock available grant awards 2007 incentive plan may exceed 4000000 shares however purposes limitation stock subject award canceled forfeited expires prior exercise realization become available issuance 2007 incentive plan board directors time may amend terminate 2007 incentive plan however except provided otherwise 2007 incentive plan amendment effective unless approved stockholders extent stockholder approval necessary satisfy applicable law securities exchange listing requirements december 31 2013 03 million shares available grant 2007 incentive plan stock option awards stock option awards granted incentive plans maximum contractual term ten years date grant shares issuable upon exercise stock option issued authorized unissued shares common stock following tables summarize stock option activity shares thousands key energy services inc subsidiaries notes consolidated financial statements continued following tables summarize information stock options outstanding december 31 2013 shares thousands grant stock options years ended december 31 2013 2012 2011 stock options vested year ended december 31 2013 recognized zero less 01 million less 01 million pretax expense related stock options years ended december 31 2013 2012 2011 respectively recognized tax benefits zero less 01 million less 01 million related stock options years ended december 31 2013 2012 2011 respectively stock option awards vested december 31 2012 weighted average remaining contractual term stock option awards exercisable december 31 2013 31 years intrinsic value options exercised years ended december 31 2013 2012 2011 less 01 million 06 million 30 million respectively cash received exercise options year ended december 31 2013 less 01 million zero associated tax benefits key energy services inc subsidiaries notes consolidated financial statements continued common stock awards total fair market value common stock awards granted years ended december 31 2013 2012 2011 157 million 149 million 184 million respectively following tables summarize information years ended december 31 2013 2012 2011 common share awards issued shares thousands 1 includes 288780 shares 153063 shares 99999 shares common stock issued nonemployee directors vested immediately upon issuance 2013 2012 2011 respectively common stock grants vest immediately upon issuance record expense equal fair market value shares date grant common stock awards immediately vest recognize compensation expense ratably graded vesting period grant net estimated actual forfeitures years ended december 31 2013 2012 2011 recognized 138 million 133 million 156 million respectively pretax expense continuing operations associated common stock awards including common stock grants outside directors connection expense related common stock awards recognized year ended december 31 2013 recognized tax benefits 52 million tax benefits years ended december 31 2012 2011 42 million 60 million respectively unvested common stock awards outstanding december 31 2013 anticipate recognize 88 million pretax expense next 09 years key energy services inc subsidiaries notes consolidated financial statements continued performance units january 21 2013 compensation committee board directors adopted performance unit award agreement “2012 pu award agreement” 2012 incentive plan 2013 performance unit plan “2013 pu plan” believe 2013 pu plan 2012 pu award agreement enable us obtain retain employees contribute long term success aligning interests executives interests stockholders providing compensation linked directly increases share value january 2013 issued 04 million performance units executive officers 2012 incentive plan material terms set forth 2012 pu award agreement february 2013 issued 02 million performance units certain employees 2013 pu plan performance units measured based two performance periods january 1 2013 december 31 2013 january 1 2014 december 31 2014 one half performance units measured based first performance period half measured based second performance period number performance units may earned participant determined end performance period based relative placement keys total stockholder return period within peer group follows performance units vest given performance period award holder paid cash amount equal vested percentage performance units multiplied closing stock price common stock last trading day performance period account performance units liabilitytype award settled cash december 31 2013 fair value outstanding performance units 22 million accreted compensation expense vesting terms awards december 31 2013 unrecognized compensation cost related unvested performance units estimated 11 million expected recognized weightedaverage period 10 years phantom share plan december 2006 announced implementation “phantom share plan” certain employees granted “phantom shares” phantom shares vest ratably fouryear period convey right grantee receive cash payment anniversary date grant equal fair market value phantom shares vesting date grantees permitted defer payment later date phantom shares “liability” type award account awards fair value recognize compensation expense related phantom shares based change fair value awards period percentage service requirement performed net estimated actual forfeitures offsetting liability recorded consolidated balance sheets recognized pretax compensation benefit continuing operation associated phantom shares zero less 01 million 03 million years ended december 31 2013 2012 2011 respectively december 31 2013 phantom shares outstanding recognized income tax benefit associated phantom shares zero less 01 million 01 million years ended december 31 2013 2012 2011 respectively 2013 cash payments related phantom shares key energy services inc subsidiaries notes consolidated financial statements continued stock appreciation rights august 2007 issued approximately 587000 sars executive officers sar tenyear term date grant vesting outstanding sar awards accelerated fourth quarter 2008 upon exercise sar recipient receive amount equal difference exercise price fair market value share common stock date exercise multiplied number shares common stock sar exercised payments made shares common stock prior exercise sar entitle recipient receive shares common stock provide recipient voting stockholders’ rights account sars equity awards recognize compensation expense ratably vesting period sar based fair value date issuance net estimated actual forfeitures recognize expense associated awards 2013 2012 2011 forfeit sars 2013 december 31 2013 03 million sars remained unexercised note 21 transactions related parties employee loans advances time made certain retention loans relocation loans employees executive officers retention loans forgiven various time periods long employee continues employment us relocation loans repaid upon employee selling prior residence december 31 2013 2012 employee loans advances outstanding transactions affiliates october 2010 acquired certain subsidiaries together associated assets ofs energy services llc “ofs” oilfield services company owned arclight capital partners llc time acquisition ofs conducted business companies owned former owner employee ofs subsidiary purchased subsequent acquisition continued provide services companies prices charged companies services rates equivalent prices charged customers us market december 31 2013 2012 receivables related parties totaled less 01 million 02 million respectively revenues customers years ended december 31 2013 2012 2011 01 million 27 million 27 million respectively provide services exploration production company owned one former employees prices charged company services rates average prices charged customers california market services provided december 31 2013 2012 receivables company totaled less 01 million 02 million respectively revenues company totaled 11 million 51 million 52 million years ended december 31 2013 2012 2011 respectively board director relationships member board directors executive vice president general counsel chief administrative officer anadarko petroleum corporation “anadarko” one customers sales anadarko 412 million 370 million 372 million years ended december 31 2013 2012 2011 respectively receivables outstanding anadarko 49 million 35 million december 31 2013 2012 respectively transactions anadarko services made terms consistent customers former member board directors resigned may 2011 member managing director general partner indirect majority owner one customers sales customer 04 million 04 million 10 million years ended december 31 2013 2012 2011 respectively receivables outstanding customer less 01 million december 31 2013 2012 transactions customer made terms consistent customers member board directors serves united states advisory board alexander proudfoot practice management consulting group plc “proudfoot” provided consulting services related general administrative cost restructuring initiative payments proudfoot zero 19 million 41 million years ended december 31 2013 2012 2011 respectively note 22 supplemental cash flow information cash paid interest includes cash payments interest longterm debt capital lease obligations commitment agency fees paid note 23 segment information operating segments us international also “functional support” segment associated managing reportable operating segments domestic rigbased services fluid management services fishing rental services coiled tubing services formerly intervention services aggregated within us reportable segment international rigbased services business canadian technology development group aggregated within international reportable segment evaluate performance operating segments based revenue income measures intersegment sales pricing based current market conditions following description segments us segment rigbased services rigbased services include completion newly drilled wells workover recompletion existing oil natural gas wells well maintenance plugging abandonment wells end useful lives also provide specialty drilling services oil natural gas producers certain larger rigs capable providing conventional horizontal drilling services rigs encompass various sizes capabilities allowing us service types wells depths 20000 feet many rigs outfitted proprietary keyview® technology captures reports well site operating data provides safety control systems believe technology allows customers crews better monitor well site operations improves efficiency safety adds value services offer completion recompletion services provided rigs prepare wells production whether newly drilled recently extended workover operation completion process may involve selectively perforating well casing access production zones stimulating testing zones installing tubular downhole equipment typically provide well service rig may also provide equipment assist completion process completion services vary well work may take days several weeks perform depending nature completion workover services provide designed enhance production existing wells generally complex time consuming normal maintenance services workover services include deepening extending wellbores new formations drilling horizontal lateral wellbores sealing depleted production zones accessing previously bypassed production zones converting former production wells injection wells enhanced recovery operations conducting major subsurface repairs due equipment failures workover services may last days several weeks depending complexity workover maintenance services provided rig fleet generally required throughout life cycle oil natural gas well examples maintenance services include routine mechanical repairs pumps tubing equipment removing debris formation material wellbores pulling rods downhole equipment wellbores identify resolve production problems maintenance services generally less complicated completion workover related services require less time perform rig fleet also used process permanently shuttingin oil natural gas wells end productive lives plugging abandonment services generally require auxiliary equipment addition well servicing rig demand plugging abandonment services significantly impacted demand oil natural gas well operators required state regulations plug wells longer productive fluid management services provide transportation wellsite storage services various fluids utilized connection drilling completions workover maintenance activities also provide disposal services fluids produced subsequent well completion fluids removed well site transported disposal swds wells owned us third party addition operate fleet hot oilers capable pumping heated fluids used clear soluble restrictions wellbore demand pricing services generally correspond demand well service rigs coiled tubing services coiled tubing services involve use continuous metal pipe spooled onto large reel deployed oil natural gas wells perform various applications wellbore cleanouts nitrogen jet lifts throughtubing fishing formation stimulations utilizing acid chemical treatments coiled tubing also used number horizontal well applications milling temporary isolation plugs separate frac zones various pre post hydraulic fracturing well preparation services fishing rental services offer full line services rental equipment designed use providing onshore offshore drilling workover services fishing services involve recovering lost stuck equipment wellbore utilizing broad array “fishing tools” rental tool inventory consists drill pipe tubulars handling tools including patented hydrawalk® pipehandling units services pressurecontrol equipment pumps power swivels reversing units foam air units result 2011 acquisition edge rental inventory also includes frac stack equipment used support hydraulic fracturing operations associated flowback frac fluids proppants oil natural gas also provide well testing services demand fishing rental services also closely related capital spending oil natural gas producers generally function oil natural gas prices international segment international segment includes operations mexico colombia ecuador middle east russia addition technology development control systems business based canada also prior sale argentina business third quarter 2012 operated argentina reporting results argentina business discontinued operations 2011 2012 periods provide rigbased services maintenance workover recompletion existing oil wells completion newlydrilled wells plugging abandonment wells end useful lives international markets addition mexico provide drilling coiled tubing wireline project management consulting services work mexico also requires us provide third party services varies scope project middle east operate kingdom bahrain oman august 5 2013 agreed dissolution almansoori key energy services llc joint venture formed laws abu dhabi uae acquisition underlying business 51 million see “note 2 acquisitions” discussion russian operations provide drilling workover reservoir engineering services april 9 2013 completed acquisition remaining 50 noncontrolling interest geostream 146 million 100 geostream see “note 2 acquisitions” discussion technology development control systems business based canada focused development hardware software related oilfield service equipment controls data acquisition digital information flow functional support segment functional support segment includes unallocated overhead costs associated administrative support us international reporting segments following table presents segment information years ended december 31 2013 2012 2011 thousands year ended december 31 2013 year ended december 31 2012 year ended december 31 2011 1 long lived assets include fixed assets goodwill intangibles assets 2 functional support geographically located united states note 24 unaudited quarterly results operations set forth unaudited summarized quarterly information two recent years covered consolidated financial statements thousands except per share data 1 quarterly earnings per common share based weighted average number shares outstanding quarter sum quarters may equal annual earnings per common share key energy services inc subsidiaries notes consolidated financial statements continued note 25 condensed consolidating financial statements 2021 notes guaranteed virtually domestic subsidiaries wholly owned guarantees joint several full complete unconditional restrictions ability subsidiary guarantors transfer funds parent company result guarantee arrangements required present following condensed consolidating financial information condensed consolidating balance sheets key energy services inc subsidiaries notes consolidated financial statements continued condensed consolidating balance sheets key energy services inc subsidiaries notes consolidated financial statements continued condensed consolidating statements operations key energy services inc subsidiaries notes consolidated financial statements continued condensed consolidating statements operations key energy services inc subsidiaries notes consolidated financial statements continued condensed consolidating statements cash flows key energy services inc subsidiaries notes consolidated financial statements continued condensed consolidating statements cash flows key energy services inc subsidiaries notes consolidated financial statements continued condensed consolidating statements cash flows item 9item 8 financial statements supplementary data key energy services inc subsidiaries index consolidated financial statements page report independent registered public accounting firm report independent registered public accounting firm internal control financial reporting consolidated balance sheets consolidated statements operations consolidated statements comprehensive income loss consolidated statements cash flows consolidated statements stockholders’ equity notes consolidated financial statements report independent registered public accounting firm board directors stockholders key energy services inc audited accompanying consolidated balance sheets key energy services inc maryland corporation subsidiaries “company” december 31 2014 2013 related consolidated statements operations comprehensive income loss changes shareholders equity cash flows three years period ended december 31 2014 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position key energy services inc subsidiaries december 31 2014 2013 results operations cash flows three years period ended december 31 2014 conformity accounting principles generally accepted united states america also audited accordance standards public company accounting oversight board united states companys internal control financial reporting december 31 2014 based criteria established 2013 internal controlintegrated framework issued committee sponsoring organizations treadway commission coso report dated february 24 2015 expressed unqualified opinion effectiveness internal control financial reporting grant thornton llp houston texas february 24 2015 report independent registered public accounting firm board directors stockholders key energy services inc audited internal control financial reporting key energy services inc maryland corporation subsidiaries “company” december 31 2014 based criteria established 2013 internal controlintegrated framework issued committee sponsoring organizations treadway commission coso companys management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying managements report internal control financial reporting responsibility express opinion companys internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion company maintained material respects effective internal control financial reporting december 31 2014 based criteria established 2013 internal controlintegrated framework issued coso also audited accordance standards public company accounting oversight board united states consolidated financial statements company year ended december 31 2014 report dated february 24 2015 expressed unqualified opinion financial statements grant thornton llp houston texas february 24 2015 key energy services inc subsidiaries consolidated balance sheets see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries consolidated statements operations see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries consolidated statements comprehensive income loss see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries consolidated statements cash flows see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries consolidated statements stockholders’ equity see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries notes consolidated financial statements note 1 organization summary significant accounting policies key energy services inc wholly owned subsidiaries collectively “key” “company” “we” “us” “our” provide full range well services major oil companies foreign national oil companies independent oil natural gas production companies services include rigbased coiled tubingbased well maintenance workover services well completion recompletion services fluid management services fishing rental services ancillary oilfield services additionally certain rigs capable specialty drilling applications operate major oil natural gas producing regions continental united states operations mexico colombia ecuador middle east russia addition technology development control systems business based canada basis presentation consolidated financial statements included annual report form 10k present financial position results operations cash flows periods presented accordance generally accepted accounting principles united states “gaap” preparation consolidated financial statements requires us develop estimates make assumptions affect financial position results operations cash flows estimates also impact nature extent disclosure contingent liabilities among things use estimates analyze assets possible impairment ii determine depreciable lives assets iii assess future tax exposure realization deferred tax assets iv determine amounts accrue contingencies v value tangible intangible assets vi assess workers’ compensation vehicular liability selfinsured risk accruals insurance reserves vii provide allowances uncollectible accounts receivable viii value asset retirement obligations ix value equitybased compensation review significant estimates recurring basis record effect necessary adjustments prior publication financial statements adjustments made respect use estimates relate improved information previously available limitations inherent process actual results may differ materially estimates believe estimates reasonable evaluated events occurring balance sheet date included annual report form 10k possible disclosure subsequent event management monitored subsequent events date financial statements issued revised reportable business segments effective fourth quarter 2014 connection revision revised disclosures corresponding items segment information years ended december 31 2013 2012 revised reportable segments us rig services fluid management services coiled tubing services fishing rental services international also “functional support” segment associated overhead costs support reportable segments revised segments reflect changes management’s resource allocation performance assessment making decisions regarding business us rig services fluid management services coiled tubing services fishing rental services operate geographically within united states international reportable segment includes operations mexico colombia ecuador russia bahrain oman canadian subsidiary also reflected international reportable segment changes reflect current operating focus compliance accounting standards codification “asc” 280 segment reporting “asc 280” presentation changes impact consolidated net income earnings per share total current assets total assets total stockholders’ equity february 17 2012 company announced decision sell business operations argentina “argentina business” september 14 2012 completed sale argentina business accordance applicable accounting requirements guidance company reclassified presented argentina business discontinued operation 2012 period principles consolidation within consolidated financial statements include accounts majorityowned controlled subsidiaries eliminate intercompany accounts transactions interest entity significant control influence account interest using cost method interest entity exert significant influence control account interest using equity method key energy services inc subsidiaries notes consolidated financial statements continued acquisitions time acquire businesses assets consistent longterm growth strategy results operations acquisitions included financial statements beginning date acquisition accounted using acquisition method business combinations whether partial full stages acquirer records 100 assets liabilities acquired business including goodwill fair values including contingent consideration final valuations assets liabilities obtained recorded soon practicable later one year date acquisition revenue recognition recognize revenue following criteria met evidence arrangement exists ii delivery occurred services rendered iii price customer fixed determinable iv collectability reasonably assured • evidence arrangement exists final understanding us customer occurred evidenced completed customer purchase order field ticket supplier contract master service agreement • delivery occurred services rendered completed requirements pursuant terms arrangement evidenced field ticket service log • price customer fixed determinable amount required paid agreed upon evidence price fixed determinable evidenced contractual terms price book completed customer purchase order field ticket • collectability reasonably assured screen customers provide goods services customers according determined credit terms granted accordance credit policy present revenues net sales taxes collected us customers required remitted local state governmental taxing authorities review contracts multiple element revenue arrangements deliverables separated units accounting assigned fair value standalone value customer objective reliable evidence fair value delivery undelivered items substantially controlled us believe negotiated prices deliverables services contracts representative fair value since acceptance nonacceptance element contract affect elements cash equivalents consider shortterm investments original maturity less three months cash equivalents december 31 2014 entered compensating balance arrangements obligations 2011 credit facility defined syndicate banks jpmorgan chase bank na administrative agent secured assets including assets held subsidiaries includes cash equivalents restrict investment cash financial institutions high credit standing limit amount credit exposure one financial institution maintain cash bank deposit brokerage accounts exceed federally insured limits december 31 2014 accounts guaranteed federal deposit insurance corporation “fdic” 250000 substantially accounts held deposits excess fdic limits believe cash held foreign subsidiaries could repatriated general corporate use without material withholdings time normal course business connection operations ongoing legal matters required place certain amounts cash deposit accounts restrictions limit ability withdraw funds certain cash accounts zerobalance controlled disbursement accounts right offset cash balances present outstanding checks written zerobalance accounts component accounts payable accompanying consolidated balance sheets accounts receivable allowance doubtful accounts establish provisions losses accounts receivable determine possibility collect part outstanding balances regularly review accounts 150 days past due invoice date collectability establish adjust allowance necessary using specific identification method exhaust collection efforts determine balance never collected write accounts receivable associated provision uncollectible accounts key energy services inc subsidiaries notes consolidated financial statements continued time entitled proceeds insurance policies amounts reserved selfinsurance liability present insurance receivables gross balance sheet component assets separate corresponding liability concentration credit risk significant customers include major oil natural gas production companies independent oil natural gas production companies foreign national oil natural gas production companies perform ongoing credit evaluations customers usually require material collateral maintain reserves potential credit losses necessary results operations financial position considered light fluctuations demand experienced oilfield service companies changes oil gas producers’ expenditures budgets occur fluctuations impact results operations financial position supply demand factors directly affect utilization hours primary determinants net cash provided operating activities years ended december 31 2014 december 31 2013 chevron texaco exploration production accounted approximately 15 consolidated revenue year ended december 31 2012 pemex occidental petroleum corporation accounted approximately 12 10 consolidated revenue respectively customer accounted 10 consolidated revenue 2014 2013 2012 receivables outstanding pemex approximately 19 total accounts receivable december 31 2013 customer accounted 10 total accounts receivable december 31 2014 2013 inventories consist primarily equipment parts spares use operations supplies held consumption valued lower average cost market property equipment property equipment carried cost less accumulated depreciation provided assets estimated depreciable lives assets using straightline method depreciation expense years ended december 31 2014 2013 2012 1919 million 2062 million 1905 million respectively depreciate operational assets depreciable lives salvage value higher assets’ value scrap salvage value approximates 10 operational asset’s acquisition cost operational asset stacked taken service review physical condition depreciable life ultimate salvage value determine asset operable whether remaining depreciable life salvage value adjusted scrap asset accelerate depreciation asset salvage value dispose asset gain loss recognized december 31 2014 estimated useful lives asset classes follows time lease certain operating assets capital lease obligations whose terms run 55 60 months assets depreciated estimated useful lives term capital lease obligation whichever shorter key energy services inc subsidiaries notes consolidated financial statements continued longlived asset group tested recoverability whenever events changes circumstances indicate carrying amount may recoverable purposes testing impairment group longlived assets along lines business based services provided lowest level identifiable cash flows largely independent cash flows assets liabilities would record impairment charge reducing net carrying value estimated fair value asset group’s estimated future cash flows less net carrying value events changes circumstance cause us evaluate fixed assets recoverability possible impairment may include changes market conditions adverse movements prices oil natural gas changes asset group expected future life intended use physical condition could reduce fair value certain property equipment development future cash flows determination fair value asset group involves significant judgment estimates identified triggering event third quarter 2014 resulted recording reduction value fixed assets 621 million fishing rental services segment identify trigger events causing us test tangible finitelived intangible assets impairment years ended december 31 2013 2012 see “note 8 property equipment” discussion asset retirement obligations recognize liability fair value legal obligations associated retirement tangible longlived assets capitalize equal amount cost asset depreciate additional cost estimated useful life assets obligations perform asset retirement activities unconditional despite uncertainties may exist surrounding individual retirement activity accordingly recognize liability fair value conditional asset retirement obligation fair value reasonably estimated determining fair value examine inputs believe market participant would use transfer liability probabilityweight potential costs thirdparty would charge adjust cost inflation estimated life asset discount cost using credit adjusted risk free rate significant judgment involved estimating future cash flows associated obligations well ultimate timing cash flows estimates amount timing cash flows change changes may material impact results operations see “note 11 asset retirement obligations” deposits due capacity constraints equipment manufacturers required make advanced payments certain oilfield service equipment items used normal course business december 31 2014 december 31 2013 deposits totaled 101 million 15 million respectively deposits consist primarily payments made related high demand longlead time items capitalized interest capitalized average amount accumulated expenditures major capital projects construction using effective interest rate based related debt underlying assets placed service capitalized interest added cost assets amortized depreciation expense useful life assets included depreciation amortization line accompanying consolidated statements operations deferred financing costs deferred financing costs associated longterm debt carried cost amortized interest expense using effective interest method life related debt instrument related debt instrument retired remaining unamortized costs included determination gain loss extinguishment debt record gains losses extinguishment debt part continuing operations see “note 14 longterm debt” discussion goodwill intangible assets goodwill results business combinations represents excess acquisition consideration fair value net assets acquired goodwill intangible assets subject amortization tested impairment annually frequently events changes circumstances indicate asset might impaired test impairment indefinitelived intangible assets allows us first assess qualitative factors determine whether “more likely not” fair value reporting unit less carrying amount basis determining whether necessary perform twostep goodwill impairment test qualitative analysis shows “more likely not” fair value reporting unit less carrying amount perform twostep goodwill impairment test first step test fair value calculated reporting units fair value compared carrying value reporting unit including reporting unit’s goodwill fair value reporting key energy services inc subsidiaries notes consolidated financial statements continued unit exceeds carrying value impairment second step test performed carrying value exceeds fair value reporting unit second step test required second step test compares implied fair value reporting unit’s goodwill carrying value implied fair value reporting unit’s goodwill determined manner amount goodwill recognized business combination purchase price equal fair value reporting unit implied fair value reporting unit’s goodwill excess carrying value impairment recorded carrying value excess implied fair value impairment equal excess recorded assist management preparation analysis valuation reporting units utilize services thirdparty valuation consultant ultimate conclusions valuation techniques remain sole responsibility determination fair value used test heavily impacted market prices equity debt securities well assumptions estimates future activity levels profitability cash flows conduct annual impairment test october 1 year test required annual basis also required frequently based changes external factors triggering events 2014 experienced several triggering events required us perform additional interim testing possible impairment goodwill resulted recording reduction value goodwill 415 million intangible assets 176 million see “note 9 goodwill intangible assets” discussion internaluse software capitalize costs incurred application development stage internaluse software amortize costs software’s estimated useful life generally five seven years costs incurred related selection maintenance internaluse software expensed incurred litigation estimating liabilities related litigation take account available facts circumstances order determine whether loss probable reasonably estimable various suits claims arising ordinary course business pending us conduct business throughout continental united states may subject jury verdicts arbitrations result outcomes favor plaintiffs also exposed various claims abroad continually assess contingent liabilities including potential litigation liabilities well adequacy accruals need disclosure items establish provision contingent liability probable liability incurred amount reasonably estimable see “note 15 commitments contingencies” environmental operations routinely involve storage handling transport disposal bulk waste materials contain oil contaminants regulated substances operations subject various federal state local laws regulations intended protect environment environmental expenditures expensed capitalized depending future economic benefit expenditures relate existing condition caused past operations future economic benefits expensed record liabilities undiscounted basis remediation efforts probable costs conduct remediation efforts reasonably estimated litigation reserves reflect application insurance coverage environmental reserves reflect management’s assessment insurance coverage may apply matters issue see “note 15 commitments contingencies” selfinsurance largely selfinsured physical damage equipment automobiles well workers’ compensation claims accruals maintain consolidated balance sheet relate deductibles selfinsured retentions estimate use historical claims data trend analysis assist management liability amount selfinsurance reserves utilize services third party actuary actual outcome claim could differ significantly estimated amounts adjust loss estimates calculation accruals based upon actual claim settlements reported claims see “note 15 commitments contingencies” income taxes account deferred income taxes using asset liability method provide income taxes significant temporary differences management determines current tax liability well taxes incurred result current operations deferred future periods current taxes payable represent liability related income tax key energy services inc subsidiaries notes consolidated financial statements continued returns current year net deferred tax expense benefit represents change balance deferred tax assets liabilities reported consolidated balance sheets management estimates changes deferred tax assets liabilities using basis assets liabilities financial reporting purposes enacted rates management estimates effect differences reverse management makes certain assumptions timing temporary tax differences differing treatments certain items tax accounting purposes whether differences permanent final determination tax liability involves interpretation local tax laws tax treaties related authorities jurisdiction well significant use estimates assumptions regarding scope future operations results achieved timing nature income earned expenditures incurred establish valuation allowances reduce deferred tax assets determine likely eg likelihood 50 portion deferred tax assets realized future periods assess likelihood use estimates judgment regarding future taxable income well jurisdiction taxable income generated determine whether valuation allowance required evidence include current financial position results operations actual forecasted results reversal deferred tax liabilities tax planning strategies well current forecasted business economics industry additionally record uncertain tax positions net recognizable amount based amount management deems likely sustained upon ultimate settlement tax authorities domestic international tax jurisdictions operate see “note 13 income taxes” discussion accounting income taxes changes valuation allowance components tax rate reconciliation realization loss carryforwards earnings per share basic earnings per common share determined dividing net earnings applicable common stock weighted average number common shares actually outstanding period diluted earnings per common share based increased number shares would outstanding assuming conversion dilutive outstanding convertible securities using treasury stock “as converted” methods see “note 10 earnings per share” sharebased compensation past issued stock options shares restricted common stock restricted stock units stock appreciation rights “sars” phantom shares performance units employees part employees’ compensation retention tool options restricted shares sars calculate fair value awards grant date amortize fair value compensation expense ratably vesting period award net estimated actual forfeitures fair value stock option sar awards estimated using blackscholes fair value model valuation stock options sars requires us estimate expected term award estimated using simplified method sufficient historical exercise information past legal restrictions exercise stock options additionally valuation stock option sars awards also dependent historical stock price volatility calculate using lookback period equivalent expected term award riskfree interest rate estimate future forfeitures grantdate fair value restricted stock awards determined using stock price grant date phantom shares performance units treated “liability” awards carried fair value balance sheet date changes fair value recorded component compensation expense offsetting liability consolidated balance sheet record sharebased compensation component general administrative direct operating expense applicable individual see “note 19 sharebased compensation” foreign currency gains losses respect operations russia local currency functional currency assets liabilities translated rates exchange balance sheet date income expense items translated average rates exchange period resulting gains losses arising translation accounts functional currency us dollar included separate component stockholders’ equity comprehensive income partial complete sale liquidation net investment foreign entity december 31 2011 functional currency mexico russia canada local currency functional currency colombia middle east u dollar due significant changes economic facts circumstances functional currency mexico canada changed us dollar effective january 1 2012 see “note 16 accumulated comprehensive loss” time foreign subsidiaries may enter transactions denominated currencies functional currency transactions initially recorded functional currency subsidiary based applicable exchange rate effect date transaction end month transactions remeasured equivalent amount functional currency based applicable exchange rates effect time adjustment key energy services inc subsidiaries notes consolidated financial statements continued required remeasure transaction equivalent amount functional currency end month recorded income loss foreign subsidiary component income net comprehensive income display comprehensive income loss components financial statements classify items comprehensive income nature financial statements display accumulated balance comprehensive income separately stockholders’ equity leases lease real property equipment various leasing arrangements enter leasing arrangement analyze terms arrangement determine whether lease accounted operating lease capital lease periodically incur costs improve assets lease arrangements value leasehold improvements exceeds threshold capitalization record improvement component property equipment amortize improvement useful life improvement lease term whichever shorter certain operating lease agreements structured include scheduled specified rent increases term lease agreement increases may result inducement “rent holiday” conveyed us early lease included reflect anticipated effects inflation recognize scheduled specified rent increases straightline basis term lease agreement addition certain operating lease agreements contain incentives induce us enter lease agreement upfront cash payments us payment lessor costs moving expenses assumption lessor preexisting lease agreements third parties payments made us behalf represent incentives consider reduction rent expense recognized straightline basis term lease agreement accounting standards adopted yet adopted report new accounting standards adopted report asu 201409 may 2014 fasb issued asu 201409 revenue contracts customers topic 606 objective asu establish principles report useful information users financial statements nature amount timing uncertainty revenue contracts customers core principle recognize revenue depict transfer promised goods services customers amount reflects consideration entity expects entitled exchange goods services asu 201409 effective interim annual reporting periods beginning december 15 2016 must adopted using either full retrospective method modified retrospective method currently evaluating standard determine impact adoption consolidated financial statements note 2 acquisitions 2013 acquisition noncontrolling interests geostream october 31 2008 acquired 26 interest ooo geostream services group “geostream” 174 million geostream limited liability company incorporated russian federation provides wide range drilling workover reservoir engineering services september 1 2009 acquired additional 24 interest 164 million brought total investment geostream 50 provided us controlling interest representation geostreams board directors accounted second investment business combination achieved stages results geostream included consolidated financial statements since initial acquisition date portion outside control forming noncontrolling interest april 9 2013 completed acquisition 50 noncontrolling interest geostream 146 million geostream wholly owned subsidiary acquisition 50 noncontrolling interest accounted equity transaction therefore acquisition noncontrolling interest geostream second quarter 2013 result gain loss almansoori key energy services llc march 7 2010 entered agreement almansoori petroleum services llc “almansoori” form joint venture almansoori key energy services llc joint venture laws abu dhabi uae purpose joint venture engage conventional workover drilling services coiled tubing services fishing rental services rig monitoring services pipe handling services fluids waste treatment handling services although almansoori held 51 interest joint venture held 49 interest held three five board directors seats controlling financial interest addition profits losses joint venture key energy services inc subsidiaries notes consolidated financial statements continued shared equal terms equal amounts almansoori joint venture sufficient resources carry activities without financial support determined variable interest entity primary beneficiary consolidated entity financial statements august 5 2013 agreed dissolution almansoori key energy services llc “joint venture” acquisition underlying business 51 million acquisition 51 noncontrolling interest almansoori key energy services llc accounted equity transaction therefore result gain loss fourth quarter joint venture formally liquidated 51 million transferred almansoori note 3 discontinued operations september 2012 completed sale argentina operations approximately 125 million net transaction costs 125 million net proceeds sale argentina operations included 20 million received cash balance notes receivable comprised noninterest bearing notes included current assets condensed consolidated balance sheets connection sale recognized total loss 858 million includes noncash impairment charge 415 million recorded first quarter 2012 writeoff 519 million cumulative translation adjustment previously recorded accumulated comprehensive loss third quarter 2012 reporting results argentina operations discontinued operations 2012 following table presents results operations argentina business sold transaction year ended december 31 2012 thousands note 4 severance contract termination mobilization costs second quarter 2013 implemented significant restructuring fluid management services corporate cost structure better align current market conditions result restructuring recognized approximately 63 million severance expenses second quarter 2013 severance costs based obligations existing severance agreements furthermore recognized lease cancellation fees 19 million primarily related fluid management services additionally international business due customer spending reductions mexico began redeploying idle rigs north region mexico higher demand markets incurring mobilization cost 23 million costs reflected consolidated statements operations include 83 million direct operating expenses 22 million general administrative expenses segment basis 72 million 23 million 03 million 07 million associated international fluid management services us rig services functional support segments respectively restructuring activities implemented second quarter 2013 completed fourth quarter 2013 key energy services inc subsidiaries notes consolidated financial statements continued note 5 balance sheet information table presents comparative detailed information current assets december 31 2014 2013 table presents comparative detailed information noncurrent assets december 31 2014 2013 table presents comparative detailed information current liabilities december 31 2014 2013 key energy services inc subsidiaries notes consolidated financial statements continued table presents comparative detailed information noncurrent liabilities december 31 2014 2013 note 6 expense income net table presents comparative detailed information income expense continuing operations years ended december 31 2014 2013 2012 note 7 allowance doubtful accounts table presents rollforward allowance doubtful accounts years ended december 31 2014 2013 2012 key energy services inc subsidiaries notes consolidated financial statements continued note 8 property equipment property equipment consists following interest capitalized average amount accumulated expenditures major capital projects construction using effective interest rate based related debt underlying assets placed service capitalized interest years ended december 31 2014 2013 2012 zero 06 million 13 million respectively december 31 2014 2013 capital lease obligations depreciation assets held capital leases zero 19 million 28 million years ended december 31 2014 2013 2012 respectively included depreciation amortization expense accompanying consolidated statements operations decline market value common stock comparison carrying value assets third quarter 2014 determined triggering event triggering event required us perform step one goodwill impairment test identify potential impairment step one testing indicated potential impairment fishing rental services segment required us perform step two goodwill impairment test determine amount impairment preliminary step two testing performed third quarter 2014 using discounted cash flow model determine fair value concluded certain assets primarily frac stack well testing assets impaired result recorded estimated pretax charge 608 million third quarter 2014 preliminary step two testing also indicated impairment goodwill fishing rental services segment fourth quarter 2014 finalized step two testing preliminarily performed third quarter 2014 based additional analysis performed outside consultants result recorded additional pretax asset impairment charge 13 million fourth quarter 2014 fourth quarter market value stock continued decline determined necessary perform first step goodwill impairment test us rig services coiled tubing services fishing rental services fluid management services segments results step one analysis indicated potential impairment coiled tubing services segment step two goodwill impairment testing coiled tubing services segment performed preliminarily fourth quarter 2014 analysis concluded impairment goodwill addition analysis concluded impairment fixed assets step two testing coiled tubing services segment concluded first quarter 2015 adjustment amount recorded could differ materially recorded first quarter 2015 asset impairment charges years ended 2013 2012 key energy services inc subsidiaries notes consolidated financial statements continued note 9 goodwill intangible assets changes carrying amount goodwill years ended december 31 2014 2013 follows components intangible assets december 31 2014 2013 follows key energy services inc subsidiaries notes consolidated financial statements continued amortization expense intangible assets determinable lives follows intangible assets december 31 2014 27 million indefinitelived tradenames patents subject amortization tradenames tested impairment annually using relief royalty method weighted average remaining amortization periods expected amortization expense next five years definite lived intangible assets follows certain intangible assets denominated russian rubles values assets subject fluctuations associated changes exchange rates perform analysis goodwill impairment annual basis unless event occurs triggers additional interim testing 2014 identified several triggering events requiring us perform testing possible goodwill impairment deterioration capital investment climate russia result geopolitical events occurring second quarter 2014 determined triggering event triggering event required us perform testing possible goodwill impairment russian business reporting unit included international reporting segment analysis concluded russias 224 million goodwill fully impaired 63 million russias tradename intangible assets impaired well concluded impairment russias longlived assets decline market value common stock comparison carrying value assets third quarter 2014 determined triggering event requiring us perform testing possible goodwill impairment us rig services coiled tubing services fishing rental services fluid management services segments step one testing indicated may impairment fishing rental services segment impairment indicated us segments step two goodwill impairment testing fishing rental service segment performed preliminarily third quarter 2014 preliminary analysis concluded impairment goodwill indicate impairment fixed assets fourth quarter 2014 engaged outside consultants finalize step two testing additional analysis preformed consultants confirmed impairment goodwill analysis conclude 77 million customer relationship 36 million tradename intangible assets fishing rental services segment impaired fourth quarter performed annual qualitative analysis goodwill impairment october 1 2014 based analysis determined canadian reporting unit included international reporting segment indication impairment however market value stock continued decline fourth quarter determined necessary perform first step goodwill impairment test us rig services coiled tubing services fishing rental services fluid management services segments based results step one analysis fair value us rig services fluid management services fishing rental services segments key energy services inc subsidiaries notes consolidated financial statements continued exceeded carrying values indicated potential impairment coiled tubing services segment step two goodwill impairment testing coiled tubing services segment performed preliminarily fourth quarter 2014 analysis concluded 191 million goodwill impaired recorded fourth quarter analysis concluded impairment fixed assets step two testing concluded first quarter 2015 adjustment amount recorded could differ materially recorded first quarter 2015 see “note 8 property equipment” discussion note 10 earnings per share following table presents basic diluted earnings per share “eps” years ended december 31 2014 2013 2012 stock options warrants sars included computation diluted earnings per share using treasury stock method restricted stock awards legally considered issued outstanding granted included basic weighted average shares outstanding diluted earnings per share calculation years ended december 31 2014 2013 2012 exclude potential exercise 14 million 17 million 20 million stock options respectively 03 million 03 million 04 million sars respectively effects exercises earnings per share would antidilutive material changes share amounts subsequent balance sheet date would material impact earnings per share calculation year ended december 31 2014 however issued 09 million shares restricted stock january 30 2015 key energy services inc subsidiaries notes consolidated financial statements continued note 11 asset retirement obligations connection well servicing activities operate number swd facilities operations involve transportation handling disposal fluids swd facilities byproducts drilling process swd facilities used connection fluid hauling operations subject future costs associated retirement properties result incurred costs associated proper storage disposal materials annual accretion assets associated asset retirement obligations 06 million years ended december 31 2014 2013 2012 summary changes asset retirement obligations follows thousands note 12 estimated fair value financial instruments following summary carrying amounts estimated fair values financial instruments december 31 2014 2013 cash equivalents accounts receivable accounts payable accrued liabilities carrying amounts approximate fair value short maturity instruments carrying value equal fair value instruments balance sheet date notes receivable argentina operations sale fair value notes based upon quoted market treasury rates dates indicated carrying values items approximate fair values due maturity dates rapidly approaching thus giving way discount rates similar 675 senior notes due 2021 fair value notes based upon quoted market prices securities dates indicated carrying value notes december 31 2014 6750 million fair value 4134 million 613 carrying value 8375 senior notes due 2014 december 31 2013 fair value 2014 notes based upon quoted market prices securities dates indicated notes redeemed february 2014 credit facility revolving loans variable interest rates loans approximate current market rates fair values revolving loans borrowed 2011 credit facility approximate carrying values carrying fair values loans december 31 2014 700 million key energy services inc subsidiaries notes consolidated financial statements continued note 13 income taxes components income tax expense follows sources income loss continuing operations income taxes noncontrolling interest follows made federal income tax payments zero 300 million 51 million years ended december 31 2014 2013 2012 respectively made state income tax payments 16 million 29 million 29 million years ended december 31 2014 2013 2012 respectively made foreign tax payments 11 million 23 million 52 million years ended december 31 2014 2013 2012 respectively years ended december 31 2014 2013 2012 tax benefit expense allocated stockholders’ equity compensation expense income tax purposes excess amounts recognized financial reporting purposes 12 million 18 million 41 million respectively addition received federal income tax refunds 119 million 251 million 167 million years ended december 31 2014 2013 2012 respectively income tax expense differs amounts computed applying statutory federal rate follows key energy services inc subsidiaries notes consolidated financial statements continued december 31 2014 2013 deferred tax assets liabilities consisted following december 31 2014 net deferred tax liability balance comprised 2284 million longterm deferred tax liability less 118 million current deferred tax asset 352 million longterm deferred tax asset december 31 2013 net deferred liability balance comprised 2845 million longterm deferred tax liability less 117 million current deferred tax asset 223 million longterm deferred tax asset recording deferred income tax assets consider whether likely portion deferred income tax assets realized ultimate realization deferred income tax assets dependent upon generation future taxable income periods deferred income tax assets would deductible consider scheduled reversal deferred income tax liabilities projected future taxable income determination fully realize deferred income tax assets related federal net operating loss carryforwards valuation allowance due section 382 limitations would need generate future federal taxable income approximately 01 million next four years certain exceptions noted believe considering available objective evidence positive negative historical prospective greater weight given historical evidence likely assets realized estimate december 31 2014 2013 2012 available 507 million 24 million 28 million respectively federal net operating loss carryforwards approximately 24 million net operating losses december 31 2014 subject 5000 annual section 382 limitation expire 2016 2018 gross deferred tax asset associated federal net operating loss carryforward december 31 2014 178 million due annual limitations sections 382 383 management believes able utilize available carryforwards prior ultimate expiration december 31 2014 2013 valuation allowance 08 million related deferred tax asset associated remaining federal net operating loss carryforwards expire utilization due section 382 limitations estimate december 31 2014 2013 2012 available approximately 1020 million 649 million 444 million respectively state net operating loss carryforwards expire 2015 2034 deferred tax asset associated remaining state net operating loss carryforwards december 31 2014 52 million net federal tax benefit management believes likely able utilize available state carryforwards prior ultimate expiration estimate december 31 2014 2013 2012 available approximately 1775 million 1176 million 344 million respectively foreign net operating loss carryforwards expire 2020 2030 gross deferred tax asset associated foreign net operating loss carryforwards december 31 2014 504 key energy services inc subsidiaries notes consolidated financial statements continued million management believes likely able utilize net operating loss carryforwards prior ultimate expiration foreign jurisdictions currently operate company recognized valuation allowance 214 million december 31 2014 deferred tax asset associated capital loss carryforward capital loss carryforward expire 2017 provide us income taxes withholding taxes unremitted earnings mexico canada colombia middle east subsidiaries earnings considered permanently reinvested cash flow generated businesses needed fund additional equipment working capital requirements jurisdictions furthermore provide us income taxes unremitted earnings foreign subsidiaries tax basis foreign subsidiaries exceeded book basis file income tax returns united states federal jurisdiction various states foreign jurisdictions 2014 internal revenue service “irs” concluded audit returns tax years ended december 31 2010 2011 2012 material changes significant filings mexico currently examined tax years 2009 2010 december 31 2014 2013 2012 10 million 09 million 12 million respectively unrecognized tax benefits recognized would impact effective tax rate accrued 01 million 04 million 03 million payment interest penalties december 31 2014 2013 2012 respectively believe reasonably possible 06 million currently remaining unrecognized tax positions individually insignificant may recognized end 2015 result lapse statute limitations settlement open audit recognized net tax benefit less 01 million 2014 expirations statutes limitations following table presents gross activity 2014 2013 related liabilities uncertain tax positions thousands tax legislative changes tax increase prevention act 2014 december 19 2014 hr 5771 tax increase prevention act 2014 signed law new law retroactively extends one year end 2014 provisions american taxpayer relief act expired end 2013 including firstyear bonus depreciation deduction 50 adjusted basis qualified property acquired placed service 2014 september 13 2013 united states treasury department irs issued final regulations providing comprehensive guidance tax treatment costs incurred acquire repair improve tangible property final regulations generally effective taxable years beginning january 1 2014 january 16 2015 irs issued procedural guidance taxpayers follow respect filing applications changes accounting methods guidance includes method change procedures taxpayers must follow adopting tangible property regulations currently assessing future impacts regulations anticipate material impact financial condition results operations cash flows key energy services inc subsidiaries notes consolidated financial statements continued note 14 longterm debt components longterm debt follows 8375 senior notes due 2014 november 29 2007 issued 4250 million aggregate principal amount 8375 senior notes due 2014 “2014 notes” march 2011 repurchased 4214 million aggregate principal amount 2014 notes february 25 2014 redeemed remaining 36 million aggregate principal amount paid 01 million accrued interest 2014 notes pursuant indenture dated november 29 2007 supplemented “indenture” 2014 notes general unsecured senior obligations subordinate existing future secured indebtedness 2014 notes jointly severally guaranteed senior unsecured basis certain existing future domestic subsidiaries interest 2014 notes payable june 1 december 1 year 675 senior notes due 2021 issued 4750 million aggregate principal amount 675 senior notes due 2021 “initial 2021 notes” march 4 2011 issued additional 2000 million aggregate principal amount 2021 notes “additional 2021 notes” together initial 2021 notes “2021 notes” private placement march 8 2012 indenture dated march 4 2011 “base indenture” supplemented first supplemental indenture dated march 4 2011 amended supplemental indenture dated march 8 2012 “supplemental indenture” together base indenture “indenture” used net proceeds repay senior secured indebtedness revolving bank credit facility capitalized 46 million financing costs associated issuance 2021 notes amortized term notes march 5 2013 completed offer exchange 2000 million aggregate principal amount unregistered additional 2021 notes equal principal amount notes registered securities act 1933 2021 notes treated single class indenture closing exchange offer bear cusip isin numbers 2021 notes general unsecured senior obligations effectively subordinated existing future secured indebtedness 2021 notes jointly severally guaranteed senior unsecured basis certain existing future domestic subsidiaries interest 2021 notes payable march 1 september 1 year 2021 notes mature march 1 2021 march 1 2016 2021 notes subject redemption time option whole part redemption prices expressed percentages principal amount redeemed plus accrued unpaid interest applicable redemption date redeemed twelvemonth period beginning march 1 years indicated time prior march 1 2016 may option redeem portion 2021 notes redemption price equal 100 principal amount plus premium respect 2021 notes plus accrued key energy services inc subsidiaries notes consolidated financial statements continued unpaid interest redemption date premium excess present value redemption price 103375 principal amount plus remaining scheduled interest payments due march 1 2016 discounted treasury rate plus 05 ii principal amount note experience change control subject certain exceptions must give holders 2021 notes opportunity sell us 2021 notes whole part purchase price equal 101 aggregate principal amount plus accrued unpaid interest date purchase subject certain negative covenants indenture limits ability among things • incur additional indebtedness issue preferred equity interests • pay dividends make distributions repurchase redeem equity interests • make loans investments • enter sale leaseback transactions • sell transfer otherwise convey assets • create liens • enter transactions affiliates • enter agreements restricting subsidiaries’ ability pay dividends • designate future subsidiaries unrestricted subsidiaries • consolidate merge sell substantially applicable entities’ assets covenants subject certain exceptions qualifications contain crossdefault provisions relating covenants 2011 credit facility discussed substantially covenants terminate 2021 notes mature one two specified ratings agencies assigns 2021 notes investment grade rating future events default exist indenture december 31 2014 2021 notes rated investment grade covenants cease apply us result achieving investment grade rating restored even credit rating assigned 2021 notes later falls investment grade compliance covenants december 31 2014 senior secured credit facility december 5 2014 entered second amendment credit agreement “amendment” 4000 million senior secured revolving bank credit facility jpmorgan chase bank na administrative agent bank america na syndication agent capital one na wells fargo bank na credit agricole corporate investment bank dnb bank asa codocumentation agent amended “2011 credit facility” important source liquidity us amendment decreased total commitments lenders credit facility 5500 million 4000 million automatically reduced 4000 million 3500 million july 1 2015 among changes amendment modified definition earnings interest taxes depreciation amortization calculated pursuant terms 2011 credit facility “ebitda” allow add back expenses incurred second third quarters 2014 related company’s compliance fcpa ii 500 million additional expenses incurred relation company’s fcpa compliance commencing fourth quarter 2014 2011 credit facility consists revolving credit facility letter credit subfacility swing line facility mature later march 31 2016 maximum amount may borrow facility may subject limitation due operation covenants contained facility 2011 credit facility allows us request increases total commitments facility 1000 million aggregate part full anytime term 2011 credit facility increases subject compliance restrictive covenants 2011 credit facility indenture well lender approval capitalized 49 million financing costs connection execution 2011 credit facility additional 14 million related first amendment amortized term debt 04 million remaining unamortized financing costs related first amendment written time second amendment interest rate per annum applicable 2011 credit facility option adjusted libor plus applicable margin ii higher x jpmorgan’s prime rate federal funds rate plus 05 z onemonth adjusted libor plus 10 plus case applicable margin loans applicable margin libor loans ranges 225 300 basis points applicable margin loans ranges 125 200 basis points depending upon consolidated total leverage ratio defined 2011 credit facility unused commitment fees facility equal 05 key energy services inc subsidiaries notes consolidated financial statements continued 2011 credit facility contains certain financial covenants among things limit annual capital expenditures restrict ability repurchase shares require us maintain certain financial ratios financial ratios require • ratio consolidated funded indebtedness total capitalization greater 55 • senior secured leverage ratio senior secured funded debt trailing four quarters ebitda greater 200 100 • maintain consolidated interest coverage ratio trailing four quarters ebitda interest expense less ratio specified fiscal quarter indicated table • maintain collateral coverage ratio aggregate book value collateral amount total commitments last day fiscal quarter least 200 100 • limit capital expenditures investments foreign subsidiaries 2500 million per fiscal year consolidated total leverage ratio exceeds 300 100 addition 2011 credit facility contains certain affirmative negative covenants including without limitation restrictions liens ii debt guarantees contingent obligations iii mergers consolidations iv sales transfers dispositions property assets v loans acquisitions joint ventures investments acquisitions permitted long giving pro forma effect thereto default event default exists 2011 credit facility pro forma consolidated total leverage ratio exceed 400 100 compliance financial covenants least 250 million availability 2011 credit facility vi dividends distributions redemptions repurchases equityholders vii making investments loans advances viii selling properties ix prepaying redeeming repurchasing subordinated contractually structurally debt x engaging transactions affiliates xi entering hedging arrangements xii entering sale leaseback transactions xiii granting negative pledges lenders xiv changes nature business xv amending organizational documents xvi changes accounting policies reporting practices foregoing cases certain exceptions compliance covenants december 31 2014 may prepay 2011 credit facility whole part time without premium penalty subject certain reimbursements lenders breakage redeployment costs december 31 2014 borrowings 700 million revolving credit facility 504 million letters credit outstanding borrowing capacity 2796 million available considering covenant constraints 2011 credit facility years ended december 31 2014 2013 weighted average interest rates outstanding borrowings 2011 credit facility 297 276 respectively letter credit facility november 7 2013 entered uncommitted unsecured 150 million letter credit facility used solely issuances performance letters credit december 31 2014 30 million letters credit outstanding facility key energy services inc subsidiaries notes consolidated financial statements continued longterm debt principal repayment interest expense presented schedule repayment requirements longterm debt next five years thereafter december 31 2014 interest expense years ended december 31 2014 2013 2012 consisted following december 31 2014 2013 2012 weighted average interest rates variable rate debt 314 288 270 respectively deferred financing costs summary deferred financing costs including capitalized costs writeoffs amortization years ended december 31 2014 2013 presented table thousands note 15 commitments contingencies operating lease arrangements lease certain property equipment noncancelable operating leases expire various dates 2021 varying payment dates throughout month addition number leases scheduled expire 2015 key energy services inc subsidiaries notes consolidated financial statements continued december 31 2014 future minimum lease payments noncancelable operating leases follows thousands also party significant number monthtomonth leases canceled time operating lease expense 223 million 239 million 244 million years ended december 31 2014 2013 2012 respectively litigation various suits claims arising ordinary course business pending us conduct business throughout continental united states may subject jury verdicts arbitrations result outcomes favor plaintiffs also exposed various claims abroad continually assess contingent liabilities including potential litigation liabilities well adequacy accruals need disclosure items establish provision contingent liability probable liability incurred amount reasonably estimable december 31 2014 aggregate amount liabilities related litigation deemed probable reasonably estimable 01 million believe disposition matters result additional loss materially excess amounts recorded liabilities related litigation matters deemed probable reasonably estimable december 31 2013 03 million may 2013 june 2014 five lawsuits four class actions one enforcement action filed california involving alleged violations californias wage hour laws general lawsuits allege failure pay wages including overtime minimum wages failure pay final wages upon employment terminations timely manner failure reimburse reasonable necessary business expenses failure provide wage statements consistent california law violations california meal break period laws among claims intend vigorously investigate defend actions cases relatively early stages yet briefed class certification issues cannot predict outcome lawsuits time accordingly cannot estimate possible loss range loss january 2014 sec advised us investigating possible violations us foreign corrupt practices act “fcpa” involving business activities key’s operations russia april 2014 became aware allegation involving mexico operations true could potentially constitute violation certain policies including code business conduct fcpa applicable laws special committee board directors investigating allegation well possible violations fcpa involving business activities operations russia special committee’s investigations also include review certain aspects company’s operations colombia well international locations ongoing may 30 2014 voluntarily disclosed allegation involving mexico operations information company’s initial investigation sec department justice “doj” fully cooperating investigations sec doj time unable predict ultimate resolution matters agencies accordingly cannot estimate possible loss range loss special committee board directors currently expects substantially complete factfinding phase investigation end march 2015 august 2014 two class action lawsuits filed us district court southern district texas houston division individually behalf persons similarly situated company certain officers company alleging violations federal securities laws specifically violations section 10b rule 10b5 section 20a securities exchange act 1934 lawsuits styled follows sean cady individually behalf persons similarly situated v key energy services inc richard j alario j marshall dodson 414cv2368 filed august 15 2014 ian w davidson individually behalf persons similarly situated v key energy services inc richard j alario j marshall dodson 414cv2403 filed august 21 2014 december 11 2014 court entered order consolidated two lawsuits one action along future filed tagalong key energy services inc subsidiaries notes consolidated financial statements continued actions brought behalf purchasers key energy services inc common stock order also appointed interlocal pension fund lead plaintiff class action approved law firm spector roseman kodroff willis pc lead counsel consolidated class kendall law group llp local counsel consolidated class lead plaintiff filed consolidated amended complaint february 13 2015 among changes consolidated amended complaint adds taylor whichard iii newton w wilson iii defendants expands class period include timeframe september 4 2012 july 17 2014 case early stages cannot predict outcome time accordingly cannot estimate possible loss range loss addition letter dated september 4 2014 purported shareholder company demanded board commence independent internal investigation legal proceedings member board former member board certain officers company alleged violations maryland andor federal law letter alleges board senior officers breached fiduciary duties company including duty loyalty due care improperly accounting goodwill ii causing company potentially violate fcpa resulting investigation sec iii causing company engage improper conduct related company’s russia operations iv making false statements regarding failing properly account certain contracts pemex described letter purported shareholder believes legal proceedings seek recovery damages unspecified amount allegedly sustained company board directors referred demand letter special committee cannot predict outcome matter tax audits routinely subject audits tax authorities past received material assessments tax auditors december 31 2014 2013 recorded reserves management feels appropriate future potential liabilities result prior audits believe fully reserved assessments ultimate amount settlements vary estimates selfinsurance reserves maintain reserves workers’ compensation vehicle liability balance sheet based judgment estimates using actuarial method based claims incurred estimate general liability claims casebycase basis maintain insurance policies workers’ compensation vehicular liability general liability claims insurance policies carry selfinsured retention limits deductibles per occurrence basis retention limits deductibles accounted accrual process workers’ compensation vehicular liability general liability claims december 31 2014 2013 recorded 610 million 621 million respectively selfinsurance reserves related workers’ compensation vehicular liabilities general liability claims partially offsetting liabilities approximately 187 million 185 million insurance receivables december 31 2014 2013 respectively believe liabilities recorded appropriate based known facts circumstances expect losses materially excess amounts already accrued existing claims environmental remediation liabilities environmental reserve matters including remediation efforts current locations relating previouslydisposed properties record liabilities remediation efforts probable costs conduct remediation efforts reasonably estimated december 31 2014 2013 recorded 57 million 62 million respectively environmental remediation liabilities believe liabilities recorded appropriate based known facts circumstances expect losses materially excess amounts already accrued provide performance bonds provide financial surety assurances remediation maintenance swd properties comply environmental protection standards costs swd properties may mandatory comply applicable laws regulations future required divest cease operations optimization improve operations safety regulatory compliance note 16 accumulated comprehensive loss components accumulated comprehensive loss follows thousands key energy services inc subsidiaries notes consolidated financial statements continued upon completion sale argentina operations september 14 2012 accumulated foreign currency translation balance related argentina reversed accumulated comprehensive loss recorded part 2012 loss discontinued operations local currency functional currency operations russia december 31 2014 2013 one us dollar equal 5645 3277 russian rubles respectively december 31 2011 functional currency mexico russia canada local currency functional currency colombia middle east us dollar due significant changes economic facts circumstances functional currency mexico canada changed us dollar effective january 1 2012 cumulative translation gains losses resulting translating financial statements functional currency us dollars included comprehensive income accumulated stockholders’ equity partial complete sale liquidation net investment entity note 17 employee benefit plans maintain 401k plan part employee benefits package match 100 employee contributions 4 employee’s salary vest immediately 401k plan subject maximums 10400 10200 10000 years ended december 31 2014 2013 2012 respectively matching contributions 109 million 104 million 107 million years ended december 31 2014 2013 2012 respectively offer participants option purchase shares common stock 401k plan fund note 18 stockholders’ equity common stock december 31 2014 2013 200000000 shares common stock authorized par value 010 per share 153557108 shares issued outstanding december 31 2014 152331006 shares issued outstanding december 31 2013 2014 2013 2012 dividends declared paid terms 2021 notes 2011 credit facility must meet certain financial covenants may pay dividends currently intend pay dividends tax withholding repurchase shares restricted common stock previously granted certain employees pursuant agreement individuals permitted sell shares back us order satisfy minimum income tax withholding requirements related vesting grants repurchased total 290697 shares 416101 shares 482951 shares aggregate cost 22 million 32 million 75 million 2014 2013 2012 respectively represented fair market value shares based price stock dates purchase note 19 sharebased compensation 2014 incentive plan may 15 2014 stockholders approved 2014 equity cash incentive plan “2014 incentive plan” 2014 incentive plan administered board directors committee designated board directors “committee” board directors committee “administrator” power authority select participants defined 2014 plan grant awards defined participants pursuant terms 2014 incentive plan 2014 incentive plan expires may 15 2024 2014 plan established successor company’s 2012 equity cash incentive plan “2012 incentive plan” 2009 equity cash incentive plan “2009 incentive plan” 2007 equity cash incentive plan “2007 incentive plan” collectively 2012 plan 2009 plan “prior plans” prior plans merged 2014 plan effective may 15 2014 outstanding awards prior plans continue effect according terms effect merger prior plans 2014 plan subject amendments administrator deems appropriate shares respect outstanding grants prior plans issued transferred 2014 plan additional grants made prior plans subject adjustment total number shares common stock available grant awards 2014 plan may exceed 12310750 shares however purposes limitation stock subject award canceled forfeited expires otherwise terminates without issuance stock settled cash exchanged administrators permission prior issuance stock award involving stock become available issuance 2014 incentive plan awards may form stock options incentive stock options nonqualified key energy services inc subsidiaries notes consolidated financial statements continued stock options restricted stock restricted stock units performance compensation awards sars collectively awards may granted employees directors cases consultants individuals administrator determines reasonably expected become employees directors consultants following grant date award “participants” however incentive stock options may granted employees board directors time may amend terminate 2014 incentive plan however except provided otherwise 2014 incentive plan amendment effective unless approved stockholders company extent stockholder approval necessary satisfy applicable law securities exchange listing requirements exercise price option including incentive stock option exceeds fair market value common stock given date committee authority reduce exercise price option new exercise price less thencurrent fair market value common stock provided action shall first approved vote stockholders administrator time may amend terms one awards however amendment would constitute impairment rights award must request consent participant must consent writing expressly contemplated board may amend 2014 incentive plan respect board directors deem necessary advisable provide eligible employees maximum benefits provided provisions internal revenue code 1986 amended regulations promulgated thereunder relating incentive stock options andor bring 2014 incentive plan andor awards granted compliance therewith december 31 2014 100 million shares available grant 2014 incentive plan stock option awards stock option awards granted incentive plans maximum contractual term ten years date grant shares issuable upon exercise stock option issued authorized unissued shares common stock following tables summarize stock option activity shares thousands grant stock options years ended december 31 2014 2013 2012 stock options vested year ended december 31 2014 recognized zero less 01 million pretax expense related stock options years ended december 31 2014 2013 2012 respectively recognized tax benefits zero less 01 million related stock options years ended december 31 2014 2013 2012 respectively stock option awards vested december 31 2012 weighted average remaining contractual term stock option awards exercisable december 31 2014 13 years intrinsic value options exercised years ended december 31 2014 2013 2012 zero less 01 million 06 million respectively received cash exercise options year ended december 31 2014 zero associated tax benefits key energy services inc subsidiaries notes consolidated financial statements continued common stock awards common stock awards include restricted stock awards restricted stock units weighted average grant date fair market value common stock awards granted years ended december 31 2014 2013 2012 731 756 1344 respectively total fair market value common stock awards vested years ended december 31 2014 2013 2012 120 million 166 million 142 million respectively following tables summarize information year ended december 31 2014 unvested common stock awards outstanding shares thousands issued 197865 shares 288780 shares 153063 shares common stock nonemployee directors vested immediately upon issuance 2014 2013 2012 respectively common stock grants vest immediately upon issuance record expense equal fair market value shares date grant common stock awards immediately vest recognize compensation expense ratably graded vesting period grant net estimated actual forfeitures years ended december 31 2014 2013 2012 recognized 109 million 138 million 133 million respectively pretax expense continuing operations associated common stock awards including common stock grants outside directors connection expense related common stock awards recognized year ended december 31 2014 recognized tax benefits 38 million tax benefits years ended december 31 2013 2012 52 million 42 million respectively unvested common stock awards outstanding december 31 2014 anticipate recognize 82 million pretax expense next 09 years performance units january 30 2014 compensation committee board directors adopted 2014 performance unit plan “2014 pu plan” granted performance units pursuant performance award agreement “2012 pu award agreement” key energy services inc 2012 equity cash incentive plan “2012 plan” believe 2014 pu plan 2012 pu award agreement enable us obtain retain employees contribute long term success aligning interests executives interests stockholders providing compensation linked directly increases share value key energy services inc subsidiaries notes consolidated financial statements continued january 2014 issued 05 million performance units executive officers 2012 plan material terms set forth 2012 pu award agreement february 2014 issued 01 million performance units certain employees 2014 pu plan performance units measured based two performance periods january 1 2014 december 31 2014 january 1 2015 december 31 2015 one half performance units measured based first performance period half measured based second performance period number performance units may earned participant determined end performance period based relative placement key’s total stockholder return period within peer group follows performance units vest given performance period award holder paid cash amount equal vested percentage performance units multiplied closing stock price common stock last trading day performance period account performance units liabilitytype award settled cash december 31 2014 fair value outstanding performance units 05 million accreted compensation expense vesting terms awards december 31 2014 unrecognized compensation cost related unvested performance units estimated 03 million expected recognized weightedaverage period 10 years phantom share plan december 2006 announced implementation “phantom share plan” certain employees granted “phantom shares” phantom shares vest ratably fouryear period convey right grantee receive cash payment anniversary date grant equal fair market value phantom shares vesting date grantees permitted defer payment later date phantom shares “liability” type award account awards fair value recognize compensation expense related phantom shares based change fair value awards period percentage service requirement performed net estimated actual forfeitures offsetting liability recorded consolidated balance sheets recognized pretax compensation benefit continuing operations associated phantom shares zero less 01 million years ended december 31 2014 2013 2012 respectively december 31 2014 phantom shares outstanding recognized income tax benefit associated phantom shares zero less 01 million years ended december 31 2014 2013 2012 respectively 2014 cash payments related phantom shares key energy services inc subsidiaries notes consolidated financial statements continued stock appreciation rights august 2007 issued approximately 587000 sars executive officers sar tenyear term date grant vesting outstanding sar awards accelerated fourth quarter 2008 upon exercise sar recipient receive amount equal difference exercise price fair market value share common stock date exercise multiplied number shares common stock sar exercised payments made shares common stock prior exercise sar entitle recipient receive shares common stock provide recipient voting stockholders’ rights account sars equity awards recognize compensation expense ratably vesting period sar based fair value date issuance net estimated actual forfeitures recognize expense associated awards 2014 2013 2012 forfeit sars 2014 december 31 2014 03 million sars remained unexercised note 20 transactions related parties board director relationships member board directors executive vice president general counsel chief administrative officer anadarko petroleum corporation “anadarko” one customers sales anadarko 325 million 412 million 370 million years ended december 31 2014 2013 2012 respectively receivables outstanding anadarko 29 million 49 million december 31 2014 2013 respectively transactions anadarko services made terms consistent customers member board directors serves united states advisory board alexander proudfoot practice management consulting group plc “proudfoot” provided consulting services related general administrative cost restructuring initiative 2012 payments proudfoot zero 19 million years ended december 31 2014 2013 2012 respectively note 21 supplemental cash flow information cash paid interest includes cash payments interest longterm debt capital lease obligations commitment agency fees paid note 22 segment information revised reportable business segments fourth quarter 2014 revised reportable segments us rig services fluid management services coiled tubing services fishing rental services international also “functional support” segment associated overhead costs support reportable segments segment disclosures years ended december 31 2013 2012 revised reflect change reportable segments revised segments reflect changes management’s resource allocation performance assessment making decisions regarding business us rig services fluid management services coiled tubing services fishing rental services operate geographically within united states international reportable segment includes operations mexico colombia ecuador russia bahrain oman canadian subsidiary also reflected international reportable segment evaluate performance segments based gross margin measures intersegment sales pricing based current market conditions changes reflect current operating focus compliance asc 280 aggregate services create reportable segments accordance asc 280 accounting policies segments described “note 1 organization summary significant accounting policies” key energy services inc subsidiaries notes consolidated financial statements continued us rig services us rig services include completion newly drilled wells workover recompletion existing oil natural gas wells well maintenance plugging abandonment wells end useful lives also provide specialty drilling services oil natural gas producers certain larger rigs capable providing conventional horizontal drilling services rigs encompass various sizes capabilities allowing us service types wells depths 20000 feet many rigs outfitted proprietary keyview® technology captures reports well site operating data provides safety control systems believe technology allows customers crews better monitor well site operations improves efficiency safety adds value services offer completion recompletion services provided rigs prepare wells production whether newly drilled recently extended workover operation completion process may involve selectively perforating well casing access production zones stimulating testing zones installing tubular downhole equipment typically provide well service rig may also provide equipment assist completion process completion services vary well work may take days several weeks perform depending nature completion workover services provide designed enhance production existing wells generally complex time consuming normal maintenance services workover services include deepening extending wellbores new formations drilling horizontal lateral wellbores sealing depleted production zones accessing previously bypassed production zones converting former production wells injection wells enhanced recovery operations conducting major subsurface repairs due equipment failures workover services may last days several weeks depending complexity workover maintenance services provided rig fleet generally required throughout life cycle oil natural gas well examples maintenance services include routine mechanical repairs pumps tubing equipment removing debris formation material wellbores pulling rods downhole equipment wellbores identify resolve production problems maintenance services generally less complicated completion workover related services require less time perform rig fleet also used process permanently shuttingin oil natural gas wells end productive lives plugging abandonment services generally require auxiliary equipment addition well servicing rig demand plugging abandonment services significantly impacted demand oil natural gas well operators required state regulations plug wells longer productive fluid management services provide transportation wellsite storage services various fluids utilized connection drilling completions workover maintenance activities also provide disposal services fluids produced subsequent well completion fluids removed well site transported disposal swd wells owned us third party addition operate fleet hot oilers capable pumping heated fluids used clear soluble restrictions wellbore demand pricing services generally correspond demand well service rigs coiled tubing services coiled tubing services involve use continuous metal pipe spooled onto large reel deployed oil natural gas wells perform various applications wellbore cleanouts nitrogen jet lifts throughtubing fishing formation stimulations utilizing acid chemical treatments coiled tubing also used number horizontal well applications milling temporary isolation plugs separate frac zones various pre post hydraulic fracturing well preparation services fishing rental services offer full line services rental equipment designed use providing onshore offshore drilling workover services fishing services involve recovering lost stuck equipment wellbore utilizing broad array “fishing tools” rental tool inventory consists drill pipe tubulars handling tools including patented hydrawalk® pipehandling units services pressurecontrol equipment pumps power swivels reversing units foam air units frac stack equipment used support hydraulic fracturing operations associated flowback frac fluids proppants oil natural gas also provide well testing services demand fishing rental services closely related capital spending oil natural gas producers generally function oil natural gas prices key energy services inc subsidiaries notes consolidated financial statements continued international segment includes operations mexico colombia ecuador middle east russia addition technology development control systems business based canada also prior sale argentina business third quarter 2012 operated argentina reporting results argentina business discontinued operations 2012 period provide rigbased services maintenance workover recompletion existing oil wells completion newlydrilled wells plugging abandonment wells end useful lives international markets addition mexico provide drilling coiled tubing wireline project management consulting services work mexico also requires us provide third party services varies scope project middle east operate kingdom bahrain oman august 5 2013 agreed dissolution almansoori key energy services llc joint venture formed laws abu dhabi uae acquisition underlying business 51 million see “note 2 acquisitions” discussion russian operations provide drilling workover reservoir engineering services april 9 2013 completed acquisition remaining 50 noncontrolling interest geostream 146 million 100 geostream see “note 2 acquisitions” discussion technology development control systems business based canada focused development hardware software related oilfield service equipment controls data acquisition digital information flow functional support functional support segment includes unallocated overhead costs associated administrative support us international reporting segments key energy services inc subsidiaries notes consolidated financial statements continued financial summary following table presents segment information years ended december 31 2014 2013 2012 thousands year ended december 31 2014 key energy services inc subsidiaries notes consolidated financial statements continued year ended december 31 2013 key energy services inc subsidiaries notes consolidated financial statements continued year ended december 31 2012 1 longlived assets include fixed assets goodwill intangibles assets 2 functional support geographically located united states note 23 unaudited quarterly results operations following table presents summarized unaudited quarterly information two recent years covered consolidated financial statements thousands except per share data key energy services inc subsidiaries notes consolidated financial statements continued 1 quarterly earnings per common share based weighted average number shares outstanding quarter sum quarters may equal annual earnings per common share note 24 condensed consolidating financial statements 2021 notes guaranteed virtually domestic subsidiaries wholly owned guarantees joint several full complete unconditional restrictions ability subsidiary guarantors transfer funds parent company result guarantee arrangements required present following condensed consolidating financial information pursuant sec regulation sx rule 310 “financial statements guarantors issuers guaranteed securities registered” condensed consolidating balance sheets key energy services inc subsidiaries notes consolidated financial statements continued condensed consolidating balance sheets key energy services inc subsidiaries notes consolidated financial statements continued condensed consolidating statements operations key energy services inc subsidiaries notes consolidated financial statements continued condensed consolidating statements operations key energy services inc subsidiaries notes consolidated financial statements continued condensed consolidating statements cash flows key energy services inc subsidiaries notes consolidated financial statements continued condensed consolidating statements cash flows key energy services inc subsidiaries notes consolidated financial statements continued condensed consolidating statements cash flows item 9item 8 financial statements supplementary data key energy services inc subsidiaries index consolidated financial statements page report independent registered public accounting firm report independent registered public accounting firm internal control financial reporting consolidated balance sheets consolidated statements operations consolidated statements comprehensive income loss consolidated statements cash flows consolidated statements stockholders’ equity notes consolidated financial statements report independent registered public accounting firm board directors stockholders key energy services inc audited accompanying consolidated balance sheets key energy services inc delaware corporation subsidiaries “company” december 31 2016 successor 2015 predecessor related consolidated statements operations comprehensive income loss stockholders’ equity cash flows period december 16 2016 december 31 2016 successor period january 1 2016 december 15 2016 predecessor years ended december 31 2015 2014 predecessor financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position key energy services inc subsidiaries december 31 2016 successor 2015 predecessor results operations cash flows period december 16 2016 december 31 2016 successor period january 1 2016 december 15 2016 predecessor years ended december 31 2015 2014 predecessor conformity accounting principles generally accepted united states america discussed note 2 consolidated financial statements december 6 2016 united states bankruptcy court district delaware entered order confirming petition reorganization became effective december 15 2016 accordingly accompanying consolidated financial statements prepared conformity accounting standards codification 852 reorganizations successor new entity assets liabilities capital structure carrying amounts comparable prior periods described note 1 also audited accordance standards public company accounting oversight board united states companys internal control financial reporting december 31 2016 based criteria established 2013 internal controlintegrated framework issued committee sponsoring organizations treadway commission coso report dated march 2 2017 expressed unqualified opinion effectiveness internal control financial reporting grant thornton llp houston texas march 2 2017 report independent registered public accounting firm board directors stockholders key energy services inc audited internal control financial reporting key energy services inc delaware corporation subsidiaries “company” december 31 2016 based criteria established 2013 internal controlintegrated framework issued committee sponsoring organizations treadway commission coso companys management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying managements report internal control financial reporting responsibility express opinion companys internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion company maintained material respects effective internal control financial reporting december 31 2016 based criteria established 2013 internal controlintegrated framework issued coso also audited accordance standards public company accounting oversight board united states consolidated financial statements company december 31 2016 successor period december 16 2016 december 31 2016 successor period january 1 2016 december 15 2016 predecessor report dated march 2 2017 expressed unqualified opinion financial statements grant thornton llp houston texas march 2 2017 key energy services inc subsidiaries consolidated balance sheets thousands except per share amounts see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries consolidated statements operations thousands except per share amounts see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries consolidated statements comprehensive income loss thousands see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries consolidated statements cash flows thousands see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries consolidated statements stockholders’ equity see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries notes consolidated financial statements note 1 organization summary significant accounting policies key energy services inc wholly owned subsidiaries collectively “key” “company” “we” “us” “its” “our” provide full range well services major oil companies foreign national oil companies independent oil natural gas production companies services include rigbased coiled tubingbased well maintenance workover services well completion recompletion services fluid management services fishing rental services ancillary oilfield services additionally certain rigs capable specialty drilling applications operate major oil natural gas producing regions continental united states operations russia attempting sell addition technology development control systems business based canada basis presentation consolidated financial statements included annual report form 10k present financial position results operations cash flows periods presented accordance gaap preparation consolidated financial statements requires us develop estimates make assumptions affect financial position results operations cash flows estimates also impact nature extent disclosure contingent liabilities among things use estimates analyze assets possible impairment ii determine depreciable lives assets iii assess future tax exposure realization deferred tax assets iv determine amounts accrue contingencies v value tangible intangible assets vi assess workers’ compensation vehicular liability selfinsured risk accruals insurance reserves vii provide allowances uncollectible accounts receivable viii value asset retirement obligations ix value equitybased compensation review significant estimates recurring basis record effect necessary adjustments prior publication financial statements adjustments made respect use estimates relate improved information previously available limitations inherent process actual results may differ materially estimates believe estimates reasonable october 24 2016 key certain domestic subsidiaries filed voluntary petitions reorganization chapter 11 united states bankruptcy code united states bankruptcy court district delaware pursuant prepackaged plan reorganization “the plan” plan confirmed bankruptcy court december 6 2016 company emerged bankruptcy proceedings december 15 2016 “the effective date” upon emergence effective date company adopted fresh start accounting resulted creation new entity financial reporting purposes result application fresh start accounting well effects implementation plan consolidated financial statements december 16 2016 comparable consolidated financial statements prior date refer “note 3 fresh start accounting” additional information references “successor” “successor company” relate financial position results operations reorganized company subsequent december 15 2016 references “predecessor” “predecessor company” refer financial position results operations company prior december 15 2016 evaluated events occurring balance sheet date included annual report form 10k possible disclosure subsequent event management monitored subsequent events date financial statements issued principles consolidation within consolidated financial statements include accounts majorityowned controlled subsidiaries eliminate intercompany accounts transactions interest entity significant control influence account interest using cost method interest entity exert significant influence control account interest using equity method acquisitions time acquire businesses assets consistent longterm growth strategy results operations acquisitions included financial statements beginning date acquisition accounted using acquisition method business combinations whether partial full stages acquirer records 100 assets liabilities acquired business including goodwill fair values including contingent consideration final valuations assets liabilities obtained recorded soon practicable later one year date acquisition key energy services inc subsidiaries notes consolidated financial statements continued revenue recognition recognize revenue following criteria met evidence arrangement exists ii delivery occurred services rendered iii price customer fixed determinable iv collectability reasonably assured • evidence arrangement exists final understanding us customer occurred evidenced completed customer purchase order field ticket supplier contract master service agreement • delivery occurred services rendered completed requirements pursuant terms arrangement evidenced field ticket service log • price customer fixed determinable amount required paid agreed upon price fixed determinable evidenced contractual terms price book completed customer purchase order field ticket • collectability reasonably assured screen customers provide goods services according determined credit terms granted accordance credit policy present revenues net sales taxes collected us customers required remitted local state governmental taxing authorities review contracts multiple element revenue arrangements deliverables separated units accounting assigned fair value standalone value customer objective reliable evidence fair value delivery undelivered items substantially controlled us believe negotiated prices deliverables services contracts representative fair value since acceptance nonacceptance element contract affect elements cash equivalents consider shortterm investments original maturity less three months cash equivalents december 31 2016 obligations abl facility term loan facility secured assets including assets held subsidiaries includes cash equivalents restrict investment cash financial institutions high credit standing limit amount credit exposure one financial institution maintain cash bank deposit brokerage accounts exceed federally insured limits december 31 2016 accounts guaranteed federal deposit insurance corporation “fdic” 250000 substantially accounts held deposits excess fdic limits believe cash held foreign subsidiaries could repatriated general corporate use without material withholdings time normal course business connection operations ongoing legal matters required place certain amounts cash deposit accounts restrictions limit ability withdraw funds restricted cash primarily used maintain compliance abl facility certain cash accounts zerobalance controlled disbursement accounts right offset cash balances present outstanding checks written zerobalance accounts component accounts payable accompanying consolidated balance sheets accounts receivable allowance doubtful accounts establish provisions losses accounts receivable determine possibility collect part outstanding balances regularly review accounts 150 days past due invoice date collectability establish adjust allowance necessary using specific identification method exhaust collection efforts determine balance never collected write accounts receivable associated provision uncollectible accounts time entitled proceeds insurance policies amounts reserved selfinsurance liability present insurance receivables gross balance sheet component assets separate corresponding liability key energy services inc subsidiaries notes consolidated financial statements continued concentration credit risk significant customers include major oil natural gas production companies independent oil natural gas production companies foreign national oil natural gas production companies perform ongoing credit evaluations customers usually require material collateral maintain reserves potential credit losses necessary results operations financial position considered light fluctuations demand experienced oilfield service companies changes oil gas producers’ expenditures budgets occur fluctuations impact results operations financial position supply demand factors directly affect utilization hours primary determinants net cash provided operating activities period january 1 2016 december 15 2016 chevron texaco exploration production oxy usa inc accounted approximately 14 13 consolidated revenue respectively years ended december 31 2015 2014 chevron texaco exploration production accounted approximately 15 consolidated revenue customer accounted 10 consolidated revenue periods january 1 2016 december 15 2016 december 16 2016 december 31 2016 years ended december 31 2015 2014 receivables outstanding oxy usa inc approximately 11 total accounts receivable december 31 2016 customers accounted 10 total accounts receivable december 31 2016 2015 inventories consist primarily equipment parts spares use operations supplies held consumption valued lower average cost market property equipment property equipment carried cost less accumulated depreciation provided assets estimated depreciable lives assets using straightline method depreciation expense period december 16 2016 december 31 2016 period january 1 2016 december 15 2016 years ended december 31 2015 2014 36 million 1295 million 1761 million 1919 million respectively depreciate operational assets depreciable lives salvage value higher assets’ value scrap salvage value approximates 10 operational asset’s acquisition cost operational asset stacked taken service review physical condition depreciable life ultimate salvage value determine asset operable whether remaining depreciable life salvage value adjusted scrap asset accelerate depreciation asset salvage value dispose asset gain loss recognized december 31 2016 estimated useful lives asset classes follows key energy services inc subsidiaries notes consolidated financial statements continued longlived asset group tested recoverability whenever events changes circumstances indicate carrying amount may recoverable purposes testing impairment group longlived assets along lines business based services provided lowest level identifiable cash flows largely independent cash flows assets liabilities would record impairment charge reducing net carrying value estimated fair value asset group’s estimated future cash flows less net carrying value events changes circumstance cause us evaluate fixed assets recoverability possible impairment may include changes market conditions adverse movements prices oil natural gas changes asset group expected future life intended use physical condition could reduce fair value certain property equipment development future cash flows determination fair value asset group involves significant judgment estimates see “note 10 property equipment” discussion asset retirement obligations recognize liability fair value legal obligations associated retirement tangible longlived assets capitalize equal amount cost asset depreciate additional cost estimated useful life assets obligations perform asset retirement activities unconditional despite uncertainties may exist surrounding individual retirement activity accordingly recognize liability fair value conditional asset retirement obligation fair value reasonably estimated determining fair value examine inputs believe market participant would use transfer liability probabilityweight potential costs thirdparty would charge adjust cost inflation estimated life asset discount cost using credit adjusted risk free rate significant judgment involved estimating future cash flows associated obligations well ultimate timing cash flows estimates amount timing cash flows change changes may material impact results operations see “note 13 asset retirement obligations” deposits due capacity constraints equipment manufacturers sometimes required make advanced payments certain oilfield service equipment items used normal course business december 31 2016 december 31 2015 deposits totaled 83 million 35 million respectively deposits consist primarily deposit requirements insurance companies payments made related high demand longlead time items capitalized interest capitalized average amount accumulated expenditures major capital projects construction using effective interest rate based related debt underlying assets placed service capitalized interest added cost assets amortized depreciation expense useful life assets included depreciation amortization line accompanying consolidated statements operations deferred financing costs deferred financing costs associated longterm debt carried cost amortized interest expense using effective interest method life related debt instrument related debt instrument retired remaining unamortized costs included determination gain loss extinguishment debt record gains losses extinguishment debt part continuing operations accordance asu 201503 record debt financing costs reduction longterm debt see “note 16 longterm debt” discussion goodwill intangible assets goodwill results business combinations represents excess acquisition consideration fair value net assets acquired goodwill intangible assets subject amortization tested impairment annually frequently events changes circumstances indicate asset might impaired test impairment indefinitelived intangible assets allows us first assess qualitative factors determine whether “more likely not” fair value reporting unit less carrying amount basis determining whether necessary perform twostep goodwill impairment test qualitative analysis shows “more likely not” fair value reporting unit less carrying amount perform twostep goodwill impairment test first step test fair value calculated reporting units fair value compared carrying value reporting unit including reporting unit’s goodwill fair value reporting unit exceeds carrying value impairment second step test performed carrying value exceeds fair value reporting unit second step test required key energy services inc subsidiaries notes consolidated financial statements continued second step test compares implied fair value reporting unit’s goodwill carrying value implied fair value reporting unit’s goodwill determined manner amount goodwill recognized business combination purchase price equal fair value reporting unit implied fair value reporting unit’s goodwill excess carrying value impairment recorded carrying value excess implied fair value impairment equal excess recorded assist management preparation analysis valuation reporting units utilize services thirdparty valuation consultant ultimate conclusions valuation techniques remain sole responsibility determination fair value used test heavily impacted market prices equity debt securities well assumptions estimates future activity levels profitability cash flows internaluse software capitalize costs incurred application development stage internaluse software amortize costs software’s estimated useful life generally five seven years costs incurred related selection maintenance internaluse software expensed incurred litigation estimating liabilities related litigation take account available facts circumstances order determine whether loss probable reasonably estimable various suits claims arising ordinary course business pending us conduct business throughout continental united states may subject jury verdicts arbitrations result outcomes favor plaintiffs also exposed various claims abroad continually assess contingent liabilities including potential litigation liabilities well adequacy accruals need disclosure items establish provision contingent liability probable liability incurred amount reasonably estimable see “note 17 commitments contingencies” environmental operations routinely involve storage handling transport disposal bulk waste materials contain oil contaminants regulated substances operations subject various federal state local laws regulations intended protect environment environmental expenditures expensed capitalized depending future economic benefit expenditures relate existing condition caused past operations future economic benefits expensed record liabilities undiscounted basis remediation efforts probable costs conduct remediation efforts reasonably estimated litigation reserves reflect application insurance coverage environmental reserves reflect management’s assessment insurance coverage may apply matters issue see “note 17 commitments contingencies” selfinsurance primarily selfinsured physical damage equipment automobiles well workers’ compensation claims accruals maintain consolidated balance sheet relate deductibles selfinsured retentions estimate use historical claims data trend analysis assist management liability amount selfinsurance reserves utilize services third party actuary actual outcome claim could differ significantly estimated amounts adjust loss estimates calculation accruals based upon actual claim settlements reported claims see “note 17 commitments contingencies” income taxes account deferred income taxes using asset liability method provide income taxes significant temporary differences management determines current tax liability well taxes incurred result current operations yet deferred future periods current taxes payable represent liability related income tax returns current year net deferred tax expense benefit represents change balance deferred tax assets liabilities reported consolidated balance sheets deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled management makes certain assumptions timing temporary tax differences differing treatment certain items tax accounting purposes whether differences permanent final determination tax liability involves interpretation local tax laws tax treaties related authorities jurisdiction well significant use estimates assumptions regarding scope future operations results achieved timing nature income earned expenditures incurred key energy services inc subsidiaries notes consolidated financial statements continued record valuation allowances reduce deferred tax assets determine likely eg likelihood 50 deferred tax assets realized future periods assess likelihood use estimates judgment regarding future taxable income well jurisdiction taxable income generated determine whether valuation allowance required ultimate realization deferred tax assets depends ability generate sufficient taxable income appropriate character related jurisdiction future evidence supporting ability include current financial position results operations actual forecasted results reversal deferred tax liabilities tax planning strategies well current forecasted business economics industry additionally record uncertain tax positions financial statements net recognizable amount based amount management deems likely sustained upon ultimate settlement tax authorities domestic international tax jurisdictions operate estimates assumptions regarding current deferred tax items inaccurate modified changes could potentially material negative impacts earnings see “note 15 income taxes” discussion accounting income taxes changes valuation allowance components tax rate reconciliation realization loss carryforwards earnings per share basic earnings per common share determined dividing net earnings applicable common stock weighted average number common shares actually outstanding period diluted earnings per common share based increased number shares would outstanding assuming conversion dilutive outstanding convertible securities using treasury stock “as converted” methods see “note 12 earnings per share” sharebased compensation issue time based vesting performance based vesting stock options time based vesting performance based vesting restricted stock units restricted stock awards employees part employees’ compensation retention tool nonemployee directors calculate fair value awards grant date amortize fair value compensation expense ratably vesting period award net estimated actual forfeitures grant date fair value restricted stock awards restricted stock units determined using stock price grant date fair value stock option awards estimated using blackscholes fair value model valuation stock options requires us estimate expected term award estimate using simplified method sufficient historical exercise information additionally valuation stock option awards also dependent historical stock price volatility view limited amount time elapsed since reorganization volatility calculated based historical stock price volatility peer group lookback period equivalent expected term award fair value performance based stock options restricted stock units estimated manner time based awards assumes performance goals achieved awards vest performance based awards vest previously recognized compensation costs reversed record sharebased compensation component general administrative direct operating expense based role applicable individual see “note 21 sharebased compensation” foreign currency gains losses respect operations russia local currency functional currency assets liabilities translated rates exchange effect balance sheet date income expense items translated average rates exchange period resulting gains losses arising translation accounts functional currency us dollar included separate component stockholders’ equity comprehensive income partial complete sale liquidation net investment foreign entity see “note 18 accumulated comprehensive loss” time foreign subsidiaries may enter transactions denominated currencies functional currency transactions initially recorded functional currency subsidiary based applicable exchange rate effect date transaction end month transactions remeasured equivalent amount functional currency based applicable exchange rates effect time adjustment required remeasure transaction equivalent amount functional currency end month recorded income loss foreign subsidiary component income net comprehensive income loss display comprehensive income loss components financial statements classify items comprehensive income loss nature financial statements display accumulated balance comprehensive income loss separately stockholders’ equity key energy services inc subsidiaries notes consolidated financial statements continued leases lease real property equipment various leasing arrangements enter leasing arrangement analyze terms arrangement determine whether lease accounted operating lease capital lease periodically incur costs improve assets lease arrangements value leasehold improvements exceeds threshold capitalization record improvement component property equipment amortize improvement useful life improvement lease term whichever shorter certain operating lease agreements structured include scheduled specified rent increases term lease agreement increases may result inducement “rent holiday” conveyed us early lease included reflect anticipated effects inflation recognize scheduled specified rent increases straightline basis term lease agreement addition certain operating lease agreements contain incentives induce us enter lease agreement upfront cash payments us payment lessor costs moving expenses assumption lessor preexisting lease agreements third parties payments made us behalf represent incentives consider reduction rent expense recognized straightline basis term lease agreement recent accounting developments asu 201618 november 2016 fasb issued asu 201618 statement cash flows topic 230 restricted cash standard provides guidance presentation restricted cash restricted cash equivalents statement cash flows restricted cash restricted cash equivalents included cash equivalents reconciling beginningofperiod endofperiod amounts shown statements cash flows amendments asu applied using retrospective transition method effective reporting periods beginning december 15 2017 early adoption permitted revised statement cash flows presentation restricted cash adoption asu 201616 expected impact consolidated financial statements asu 201615 august 2016 fasb issued asu 201615 “statement cash flows topic 230 classification certain cash receipts cash payments consensus fasb emerging issues task force asu 201615” clarifies entities classify certain cash receipts cash payments statement cash flows guidance also clarifies predominance principle applied cash receipts cash payments aspects one class cash flows guidance effective annual periods beginning december 15 2017 interim periods within annual periods early adoption permitted company evaluating effect asu 201615 consolidated financial statements asu 201613 june 2016 fasb issued asu 201613 measurement credit losses financial instruments” change companies measure credit losses financial assets certain instruments aren’t measured fair value net income standard replace today’s “incurred loss” approach “expected loss” model instruments measured amortized cost availableforsale debt securities entities required record allowances rather reduce carrying amount amendments update effective annual periods beginning december 15 2019 interim periods within annual periods early adoption permitted annual periods beginning december 15 2018 company evaluating effect asu 201613 consolidated financial statements asu 201609 march 2016 fasb issued asu 201609 compensationstock compensation topic 718 improvements employee sharebased payment accounting updated guidance changes companies account certain aspects sharebased payment awards employees including accounting income taxes forfeitures statutory tax withholding requirements well classification statement cash flows company adopt accounting guidance january 1 2017 adoption asu material impact company’s consolidated financial statements asu 201602 february 2016 fasb issued asu 201602 leases topic 842 replace existing lease guidance standard intended provide enhanced transparency comparability requiring lessees record rightofuse assets corresponding lease liabilities balance sheet additional disclosure requirements include qualitative disclosures along specific quantitative disclosures objective enabling users financial statements assess amount timing uncertainty cash flows arising leases asu 201602 effective company annual reporting periods beginning december 15 2018 including interim periods within fiscal years early adoption permitted new standard required applied modified retrospective approach prior reporting period presented currently evaluating standard determine impact adoption consolidated financial statements key energy services inc subsidiaries notes consolidated financial statements continued asu 201517 november 2015 fasb issued asu 201517 balance sheet classification deferred taxes topic 740 objective asu simplify current guidance requires entities separately present deferred tax assets liabilities current noncurrent classified balance sheet new guidance require entities present deferred tax assets liabilities noncurrent classified balance sheet adopted asu 201517 fourth quarter 2016 reclassified net current deferred tax assets 101 million noncurrent deferred tax asset liabilities adopted asu 201517 prospectively prior periods restated conform new presentation adoption effect net income cash flows asu 201409 may 2014 fasb issued asu 201409 revenue contracts customers topic 606 objective asu establish principles report useful information users financial statements nature amount timing uncertainty revenue contracts customers core principle recognize revenue depict transfer promised goods services customers amount reflects consideration entity expects entitled exchange goods services asu 201409 must adopted using either full retrospective method modified retrospective method july 2015 meeting fasb affirmed proposal defer effective date new revenue standard entities one year result asu 201409 effective company interim annual reporting periods beginning december 15 2017 early adoption permitted interim annual reporting periods beginning december 15 2016 currently evaluating standard determine impact adoption consolidated financial statements however management believes impact financial statements material note 2 emergence voluntary reorganization october 24 2016 key certain domestic subsidiaries collectively “debtors” filed voluntary petitions reorganization chapter 11 united states bankruptcy code united states bankruptcy court district delaware pursuant prepackaged plan reorganization plan confirmed bankruptcy court december 6 2016 company emerged bankruptcy proceedings december 15 2016 effective date company • reincorporated successor company state delaware adopted amended restated certificate incorporation bylaws • appointed new members successor company’s board directors replace directors predecessor company • issued predecessor company’s former stockholders exchange cancellation discharge predecessor company’s common stock ◦ 815887 shares successor company’s common stock ◦ 919004 warrants expire december 15 2020 919004 warrants expire december 15 2021 exercisable one share successor company’s common stock • issued former holders predecessor company’s 675 senior notes exchange cancellation discharge notes 7500000 shares successor company’s common stock • issued 11769014 shares successor company’s common stock certain participants rights offerings conducted pursuant plan • issued soter capital llc “soter” sole share successor company’s series preferred stock confers certain rights elect directors economic rights • entered new 80 million abl facility increased 100 million february 3 2017 250 million term loan facility upon termination predecessor company’s assetbased revolving credit facility term loan facility • entered registration rights agreement certain stockholders successor company • adopted 2016 incentive plan officers directors employees successor company subsidiaries • entered corporate advisory services agreement “casa” successor company platinum equity advisors llc “platinum” pursuant platinum provide certain business advisory services company foregoing summary substantive provisions plan related transactions intended complete description substitute full complete reading plan documents referred note 3 fresh start accounting accordance asc 852 reorganizations “asc 852” freshstart accounting required upon company’s emergence key energy services inc subsidiaries notes consolidated financial statements continued chapter 11 holders existing voting shares predecessor received less 50 voting shares successor ii reorganization value predecessor assets immediately prior confirmation plan less total postpetition liabilities allowed claims conditions required adoption freshstart accounting met company’s plan reorganization became effective december 15 2016 implementation plan application freshstart accounting materially changed carrying amounts classifications reported company’s consolidated financial statements resulted company becoming new entity financial reporting purposes result application freshstart accounting effects implementation plan financial statements december 15 2016 comparable financial statements prior december 15 2016 upon application freshstart accounting company allocated reorganization value individual assets liabilities conformity asc 805 business combinations “asc 805” reorganization value represents fair value successor company’s assets considering liabilities excess reorganization value fair value identified tangible intangible assets reported goodwill reorganization value asc 852 successor company must determine value assigned equity emerging company date adoption freshstart accounting facilitate calculation company estimated enterprise value successor company relying discounted cash flow “dcf” analysis income approach company also considered guideline public company guideline transactions methods market approach reasonableness checks indications income approach enterprise value represents fair value entity’s interestbearing debt stockholders’ equity disclosure statement associated plan confirmed bankruptcy court company estimated range enterprise values 425 million 475 million midpoint 450 million company deemed appropriate use midpoint low end high end range determine final enterprise value 450 million utilized freshstart accounting enterprise value plus excess cash adjustments approximately 52 million less fair value debt 250 million resulted equity value successor 2521 million estimate enterprise value utilizing dcf method company established estimate future cash flows period ranging 2016 2025 discounted estimated future cash flows present value expected cash flows period 2016 2025 based financial projections assumptions utilized disclosure statement expected cash flows period 2016 2025 derived earnings forecasts assumptions regarding growth margin projections applicable terminal value included based cash flows final year forecast period discount rate 145 estimated based aftertax weighted average cost capital “wacc” reflecting rate return would expected market participant wacc also takes consideration company specific risk premium reflecting risk associated overall uncertainty financial projections used estimate future cash flows guideline public company guideline transaction analysis identified group comparable companies transactions operating financial characteristics comparable certain respects company including example comparable lines business risks market presence methodologies certain financial multiples ratios measure financial performance value calculated selected company transactions compared implied multiples dcf analysis company considered enterprise value multiple selected company transactions publicly available earnings interest taxes depreciation amortization “ebitda” estimated enterprise value equity value highly dependent achievement future financial results contemplated projections set forth plan estimates assumptions made valuation inherently subject significant uncertainties primary assumptions reasonable possibility occurrence variation would significantly affected reorganization value include assumptions regarding revenue growth operating expenses amount timing capital expenditures discount rate utilized freshstart accounting reflects value successor company determined confirmed plan freshstart accounting asset values remeasured allocated based respective fair values conformity purchase method accounting business combinations asc 805 liabilities existing effective date deferred taxes recorded present value amounts expected paid using appropriate risk adjusted interest rates deferred taxes determined conformity applicable accounting standards predecessor accumulated depreciation accumulated amortization accumulated comprehensive loss retained deficit eliminated significant assumptions related valuations assets liabilities connection freshstart accounting include following key energy services inc subsidiaries notes consolidated financial statements continued machinery equipment estimate fair value machinery equipment company considered income approach cost approach sales comparison market approach primary approaches relied upon value assets cost approach market approach although income approach applied value machinery equipment assets individually company consider earnings enterprise assets part one approach used develop valuation various approaches reconciled determine final value conclusion typical starting point basis valuation estimate replacement cost new rcn reproduction cost new crn combination rcn crn estimates adjusted physical functional conditions compared market data indications value available confirm results obtained cost approach direct rcn estimates available deemed inappropriate crn machinery equipment estimated using indirect trending method percentage changes applicable price indices applied historical costs convert indications current costs estimate crn amounts inflation indices established external sources applied historical costs estimate crn asset market approach measures value asset analysis recent sales offerings comparable property takes account physical functional economic conditions direct comparable matches could reasonably obtained company utilized percent cost technique market approach technique looks general sales listings auction data major asset category information used conjunction asset’s effective age develop ratios sales price rcn crn similar asset types marketbased depreciation curve developed applied asset categories sufficient sales auction information existed market information available market approach deemed inappropriate company developed cost approach indicated value derived deducting physical deterioration rcn crn identifiable asset group assets physical deterioration loss value usefulness property due using expiration useful life caused wear tear deterioration exposure various elements physical stresses similar factors functional economic obsolescence related also considered functional obsolescence due excess capital costs eliminated direct method cost approach estimate rcn functional obsolescence applied form costtocure penalty certain personal property assets needing significant capital repairs economic obsolescence also applied stacked underutilized assets based status asset economic obsolescence also considered situations earnings applicable business segment assets employed suggest economic obsolescence penalizing assets economic obsolescence additional economic obsolescence penalty levied considering scrap value floor value asset land building establishing fair value real property assets three traditional approaches value income approach market approach cost approach considered company primarily relied market cost approaches land valuing fee simple interest land company utilized sales comparison approach market approach sales comparison approach estimates value based purchasers sellers market agreed price comparable properties approach based principle substitution states limits prices rents rates tend set prevailing prices rents rates equally desirable substitutes conducting sales comparison approach data gathered comparable properties adjustments made factors including market conditions size accessfrontage zoning location conditions sale greatest weight typically given comparable sales proximity similar size owned sites cases market participants contacted augment analysis confirm conclusions value building site improvements valuing fee simple interest real property improvements company utilized direct indirect methods cost approach direct method cost approach analysis starting point basis cost approach rcn order estimate rcn buildings site improvements various factors considered including building size year built number stories breakout space property history maintenance history used data collected calculate rcn buildings using recognized estimating sources developing replacement reproduction insurable value costs application indirect method cost approach first step estimate crn improvement via indirect trending method cost approach estimate crn amounts company applied published inflation indices key energy services inc subsidiaries notes consolidated financial statements continued obtained third party sources asset’s historical cost convert known cost indication current cost historical cost used starting point estimating rcn considered approach assets historical records rcn crn improvements computed company estimated allowance physical depreciation buildings land improvements based upon respective age intangible assets financial information used estimate fair values intangible assets consistent information used estimating company’s enterprise value trademarks tradenames valued primarily utilizing relief royalty method income approach resulting value intangible assets based application approach 520 significant inputs assumptions included remaining useful lives forecasted revenue streams applicable royalty rates tax rates applicable discount rates customer relationships considered analysis based valuation excess earnings methodology value attributed customer relationships debt fair value debt 250 million 25 million represents current portion fair value debt determined using income approach based market yields comparable securities fair value respect term loan estimated approximate par value asset retirement obligations fair value asset retirement obligations determined using estimated plugging abandonment costs december 15 2016 adjusted inflation using annual average 126 discounted appropriate creditadjusted risk free rate ranging 22 29 depending life well fair value asset retirement obligations estimated 91 million income taxes amount deferred income taxes recorded determined accordance asc 740 income taxes “asc 740” warrants pursuant plan effective date company issued two series warrants former holders predecessor companys common stock one series warrants expire december 15 2020 series warrants expire december 15 2021 warrant exercisable one share company’s common stock par value 001 issuance warrants recorded fair value determined using blackscholes option pricing model assumptions detailed following table warrants equity classified issuance recorded increase additional paidin capital amount 38 million assumptions blackscholes option pricing model key energy services inc subsidiaries notes consolidated financial statements continued following freshstart condensed consolidated balance sheet presents implementation plan adoption freshstart accounting december 15 2016 reorganization adjustments recorded within condensed consolidated balance sheet reflect effects plan including discharge liabilities subject compromise adoption freshstart accounting accordance asc 852 thousands reorganization fresh start adjustments reorganization adjustments thousand represents amounts recorded effective date implementation plan including settlement liabilities subject compromise issuance new debt repayment old debt reinstatement contract rejection obligations writeoff debt issuance costs proceeds received rights offering distributions successor common stock warrants cancellation predecessor common stock cancellation predecessor stock incentive plan key energy services inc subsidiaries notes consolidated financial statements continued key energy services inc subsidiaries notes consolidated financial statements continued key energy services inc subsidiaries notes consolidated financial statements continued key energy services inc subsidiaries notes consolidated financial statements continued note 4 liabilities subject compromise pursuant asc 852 liabilities subject compromise chapter 11 cases distinguished liabilities nonfiling entities liabilities expected compromised postpetition liabilities amount liabilities subject compromise represent company’s estimate determinable known potential prepetition claims addressed connection bankruptcy proceedings liabilities reported company’s current estimate allowed claim amounts even though claims may settled lesser amounts prior settlements pursuant plan liabilities subject compromise comprised following thousands note 5 reorganization items asc 852 requires financial statements periods subsequent filing chapter 11 cases distinguish transactions events directly associated reorganization ongoing operations business revenues expenses realized gains losses adjustments expected amount allowed claims liabilities subject compromise provisions losses directly associated reorganization restructuring business reported “reorganization items net” consolidated statements operations following table summarizes reorganizations items thousands key energy services inc subsidiaries notes consolidated financial statements continued exception 152 million professional fess 10 million settlement rejection damages reorganization items non cash expenses note 6 assets held sale april 2015 announced decision exit markets participate outside north america strategy sell relocate assets businesses operating markets fourth quarter 2015 assets related liabilities russian business unit included international reporting segment met criteria assets held sale expect sale occur first half 2017 third quarter 2016 assets related liabilities mexican business unit sold october 2016 prior sale included international reporting segment met criteria assets held sale recorded 400 million 44 million impairment third quarter fourth quarter respectively mexican assets reduce carrying value assets fair market value following assets related liabilities classified held sale december 31 2016 consolidated balance sheet thousands note 7 balance sheet information table presents comparative detailed information current assets december 31 2016 2015 thousands key energy services inc subsidiaries notes consolidated financial statements continued table presents comparative detailed information noncurrent assets december 31 2016 2015 thousands table presents comparative detailed information current liabilities december 31 2016 2015 thousands table presents comparative detailed information noncurrent liabilities december 31 2016 2015 thousands note 8 income loss net table presents comparative detailed information income expense period december 16 2016 december 31 2016 period january 1 2016 december 15 2016 years ended december 31 2015 2014 thousands note 9 allowance doubtful accounts table presents rollforward allowance doubtful accounts period december 16 2016 december 31 2016 period january 1 2016 december 15 2016 years ended december 31 2015 2014 thousands connection application fresh start accounting december 15 2016 carrying value trade receivables adjusted fair value eliminating reserve doubtful accounts see “note 3 fresh start accounting” details note 10 property equipment property equipment consists following thousands key energy services inc subsidiaries notes consolidated financial statements continued interest capitalized average amount accumulated expenditures major capital projects construction using effective interest rate based related debt underlying assets placed service capitalized interest period december 16 2016 december 31 2016 period january 1 2016 december 15 2016 years ended december 31 2015 2014 zero december 31 2016 2015 capital lease obligations decline market value common stock comparison carrying value assets third quarter 2014 determined triggering event triggering event required us perform step one goodwill impairment test identify potential impairment step one testing indicated potential impairment fishing rental services segment required us perform step two goodwill impairment test determine amount impairment preliminary step two testing performed third quarter 2014 using discounted cash flow model determine fair value concluded certain assets primarily frac stack well testing assets impaired result recorded estimated pretax charge 608 million third quarter 2014 preliminary step two testing also indicated impairment goodwill fishing rental services segment fourth quarter 2014 finalized step two testing preliminarily performed third quarter 2014 based additional analysis performed outside consultants result recorded additional pretax asset impairment charge 13 million fourth quarter 2014 decline market value common stock comparison carrying value assets third quarter 2015 well persistent low oil prices affect low oil prices industry determined goodwill testing triggering events triggering events required us perform step one goodwill impairment test identify potential impairment step one testing indicated potential impairment coiled tubing services segment required us perform step two goodwill impairment test determine amount impairment preliminary step two testing performed third quarter 2015 using discounted cash flow model determine fair value concluded certain fixed assets impaired result recorded estimated pretax charge 450 million third quarter 2015 fourth quarter 2015 finalized step two testing preliminarily performed third quarter 2015 based additional analysis performed outside consultants result recorded additional pretax asset impairment charge 61 million fourth quarter 2015 note 11 goodwill intangible assets components intangible assets december 31 2016 2015 follows thousands key energy services inc subsidiaries notes consolidated financial statements continued amortization expense intangible assets determinable lives follows thousands weighted average remaining amortization periods expected amortization expense next five years definite lived intangible assets follows thousands result sale enhanced oilfield technology business unit assets longer using certain developed technology patent result fully impaired 34 million patent 2015 addition longer use edge tradename result fully impaired 15 million tradename 2015 edge tradename enhanced oilfield technology developed technology patent part fishing rental services segment perform analysis goodwill impairment annual basis unless event occurs triggers additional interim testing 2014 identified several triggering events requiring us perform testing possible goodwill impairment deterioration capital investment climate russia result geopolitical events occurring second quarter 2014 determined triggering event triggering event required us perform testing possible goodwill impairment russian business reporting unit included international reporting segment analysis concluded russias 44 million goodwill fully impaired 63 million russias tradename intangible assets impaired well concluded impairment russias longlived assets decline market value common stock comparison carrying value assets third quarter 2014 determined triggering event requiring us perform testing possible goodwill impairment us rig services coiled tubing services fishing rental services fluid management services segments step one testing indicated may impairment fishing rental services segment impairment indicated us segments step two goodwill impairment testing fishing rental service segment performed preliminarily third quarter 2014 preliminary analysis concluded impairment goodwill indicate impairment fixed assets fourth quarter 2014 engaged outside consultants finalize analysis needed complete step two testing additional analysis performed consultants confirmed impairment goodwill analysis conclude 77 million customer relationship 36 million tradename intangible assets fishing rental services segment impaired fourth quarter 2014 performed annual qualitative analysis goodwill impairment october 1 2014 based analysis determined canadian reporting unit included international reporting segment indication impairment however market value stock continued decline fourth quarter determined necessary perform first step goodwill impairment test us rig services coiled tubing services fishing rental services fluid management services segments based results step one analysis fair value us rig services fluid management services fishing rental services segments exceeded carrying values indicated potential impairment coiled tubing services segment step two goodwill impairment testing coiled tubing services segment performed preliminarily fourth quarter 2014 analysis concluded 191 million goodwill impaired recorded fourth quarter analysis concluded impairment fixed assets first quarter 2015 engaged outside consultants assist us finalizing key energy services inc subsidiaries notes consolidated financial statements continued analysis needed complete step two testing based additional analysis performed concluded additional 217 million goodwill impaired additional decline market value stock third quarter 2015 well persistent low oil prices affect low oil prices industry also determined triggering events making necessary perform testing possible goodwill impairment us rig services coiled tubing services fishing rental services fluid management services international segments analysis concluded remaining 5610 million goodwill segments fully impaired also goodwill analysis indication impairment fixed assets coiled tubing services segment see “note 10 property equipment” discussion note 12 earnings per share following table presents basic diluted earnings per share “eps” years ended december 31 2016 2015 2014 thousands except per share amounts stock options warrants stock appreciation rights “sars” included computation diluted earnings per share using treasury stock method restricted stock awards legally considered issued outstanding granted included basic weighted average shares outstanding company issued potentially dilutive instruments stock options sars warrants however company included instruments calculation diluted loss per share periods presented include would antidilutive following table shows potentially dilutive instruments thousands material changes share amounts subsequent balance sheet date would material impact earnings per share calculation note 13 asset retirement obligations connection well servicing activities operate number saltwater disposal “swd” facilities operations involve transportation handling disposal fluids swd facilities byproducts drilling process swd facilities used connection fluid hauling operations subject future costs associated retirement properties result incurred costs associated proper storage disposal materials key energy services inc subsidiaries notes consolidated financial statements continued annual accretion assets associated asset retirement obligations less 01 million 06 million 06 million periods december 16 2016 december 31 2016 january 1 2016 december 15 2016 year ended december 31 2015 2014 respectively application freshstart accounting effectiveness companys plan reorganization resulted financial statements predecessor successor comparable summary changes asset retirement obligations follows thousands note 14 estimated fair value financial instruments cash equivalents accounts receivable accounts payable accrued liabilities carrying amounts approximate fair value short maturity instruments carrying value equal fair value instruments balance sheet date following summary carrying amounts estimated fair values financial instruments december 31 2016 2015 thousands term loan facility due 2021 predecessor term loan facility variable interest rates loans approximate current market rates fair values loans borrowed facility approximate carrying values 675 senior notes fair value notes based upon quoted market prices securities date indicated key energy services inc subsidiaries notes consolidated financial statements continued note 15 income taxes components income tax expense follows thousands made federal income tax payments zero period december 16 2016 december 31 2016 period january 1 2016 december 15 2016 years ended december 31 2015 2014 addition received federal income tax refunds zero 04 million 69 million 119 million period december 16 2016 december 31 2016 period january 1 2016 december 15 2016 years ended december 31 2015 2014 respectively income tax benefit differs amounts computed applying statutory federal rate follows key energy services inc subsidiaries notes consolidated financial statements continued december 31 2016 2015 deferred tax assets liabilities consisted following thousands december 31 2016 net deferred tax liability comprised 2936 million deferred tax asset valuation allowance 663 million deferred tax liability valuation allowance deferred tax assets increased approximately 636 million december 31 2015 december 31 2016 increase primarily due increase us net operating losses deferred tax assets liabilities recognized estimated future tax effects temporary differences tax basis asset liability reported amount consolidated financial statements measurement deferred tax assets liabilities based enacted tax laws rates currently effect jurisdictions operations 2015 deferred tax assets liabilities classified current noncurrent according classification related asset liability financial reporting 2016 adopted asu 201517 classify net deferred tax assets liabilities noncurrent recording deferred income tax assets consider whether likely portion deferred income tax assets realized ultimate realization deferred income tax assets dependent upon generation future taxable income appropriate character periods deferred income tax assets would deductible consider scheduled reversal deferred income tax liabilities projected future taxable income determination due history losses recent years current downturn oil gas industry management believes likely able realize net deferred tax assets therefore valuation allowance entire net deferred tax asset established adopted asu 201517 balance sheet classification deferred taxes topic 740 fourth quarter 2016 objective asu simplify current guidance requires entities separately present deferred tax assets liabilities current noncurrent classified balance sheet new guidance require entities present deferred tax assets liabilities noncurrent classified balance sheet adopted asu 201517 prospectively prior periods restated conform new presentation adoption effect net income cash flows estimate december 31 2016 2015 2014 available 2338 millionafter attribute reduction 2438 million 507 million respectively federal net operating loss carryforwards however internal revenue code sections 382 383 impose limitations corporation’s ability utilize tax attributes corporation experiences “ownership change” company experienced ownership change december 15 2016 debtors’ emergence key energy services inc subsidiaries notes consolidated financial statements continued chapter 11 bankruptcy proceedings considered change ownership purposes irc section 382 result approximately 2253 million net operating losses december 31 2016 subject annual 95 million section 382 limitation expire 2035 2036 subsequent ownership change occur result future transactions company’s stock company’s use remaining us tax attributes may limited estimate december 31 2016 2015 2014 available 3788 million 2589 million 1020 million respectively state net operating loss carryforwards expire 2016 2034 estimate capital loss carryforwards 612 million 814 million capital loss carryforwards expire 2017 2021 respectively provide us income taxes withholding taxes unremitted earnings subsidiary canada earnings considered permanently reinvested cash flow generated business needed fund additional equipment working capital requirements jurisdiction furthermore provide us income taxes unremitted earnings foreign subsidiaries december 15 2016 december 31 2016 company’s noncanadian foreign subsidiaries accumulated deficit earnings company intend repatriate earnings foreign subsidiaries earnings could become subject us income tax remitted deemed remitted dividend due complexities tax laws manner repatriation practicable estimate amount taxes might payable undistributed earnings file income tax returns us including federal various state filings certain foreign jurisdictions number years open statute limitations subject audit varies depending tax jurisdiction 2014 internal revenue service “irs” concluded audit returns tax years ended december 31 2010 2011 2012 material changes 2015 irs concluded audit returns tax year ended december 31 2014 changes significant filings mexico examined tax years 2010 plan substantial portion company’s prepetition debt securities revolving credit facility obligations extinguished absent exception debtor recognizes cancellation indebtedness income “codi” upon discharge outstanding indebtedness amount consideration less adjusted issue price internal revenue code 1986 amended “irc” provides debtor bankruptcy case may exclude codi taxable income must reduce certain tax attributes amount codi realized result consummation plan reorganization amount codi realized taxpayer adjusted issue price indebtedness discharged less sum amount cash paid ii issue price new indebtedness issued iii fair market value consideration including equity issued result market value equity upon emergence chapter 11 bankruptcy proceedings estimated amount us codi approximately 2958 million reduce value key’s us net operating losses including federal state value 5188 million december 15 2016 actual reduction tax attributes occur first day company’s tax year subsequent date emergence december 16 2016 key energy services inc subsidiaries notes consolidated financial statements continued uncertainty income taxes december 31 2016 2015 2014 03 million 04 million 1 million respectively unrecognized tax benefits recognized would impact effective tax rate recognized net tax benefit 02 million 2016 expirations statutes limitations reconciliation gross change unrecognized tax benefits follows thousands tax legislative changes tax increase prevention act 2014 december 19 2014 hr 5771 tax increase prevention act 2014 signed law new law retroactively extends one year end 2014 provisions american taxpayer relief act expired end 2013 including firstyear bonus depreciation deduction 50 adjusted basis qualified property acquired placed service 2014 september 13 2013 united states treasury department irs issued final regulations providing comprehensive guidance tax treatment costs incurred acquire repair improve tangible property final regulations generally effective taxable years beginning january 1 2014 january 16 2015 irs issued procedural guidance taxpayers follow respect filing applications changes accounting methods guidance includes method change procedures taxpayers must follow adopting tangible property regulations currently assessing future impacts regulations anticipate material impact financial condition results operations cash flows note 16 longterm debt components longterm debt follows thousands key energy services inc subsidiaries notes consolidated financial statements continued 675 senior notes due 2021 prior effective date outstanding 6750 million 675 senior notes due 2021 “2021 notes” 2021 notes general unsecured senior obligations effectively subordinated existing future secured indebtedness 2021 notes would jointly severally guaranteed senior unsecured basis certain existing future domestic subsidiaries interest 2021 notes payable march 1 september 1 year 2021 notes scheduled mature march 1 2021 period october 24 2016 effective date contractual interest expense related 675 senior notes due 2021 65 million recorded allowed claim chapter 11 bankruptcy proceedings december 15 2016 upon emergence chapter 11 bankruptcy 2021 notes indenture issued terminated accordingly company exempt reporting requirements rule 310 regulation sx sec respect 2021 notes see “note 2 emergence voluntary reorganization” details abl facility december 15 2016 company key energy services llc borrowers “abl borrowers” entered abl facility financial institutions party thereto time lenders “abl lenders” bank america na administrative agent lenders bank america na wells fargo bank national association cocollateral agents lenders abl facility provides aggregate initial commitments abl lenders 80 million february 3 2017 increased 100 million matures june 15 2021 abl facility provides abl borrowers ability borrow aggregate principal amount equal lesser aggregate revolving commitments effect ii sum 85 value eligible accounts receivable plus b 80 value eligible unbilled accounts receivable subject limit equal greater x 35 million 25 commitments amount may borrowed abl facility subject increase reduction based certain segregated cash reserves provided abl facility addition percentages accounts receivable unbilled accounts receivable included calculation described subject reduction extent certain bad debt writedowns dilutive items provided abl facility borrowings abl facility bear interest abl borrowers’ option per annum rate equal libor 30 60 90 180 consent abl lenders 360 days plus applicable margin varies 250 450 depending borrowers’ fixed charge coverage ratio time ii base rate equal sum greatest x prime rate federal funds rate plus 050 z 30day libor plus 10 plus b applicable margin varies 150 350 depending borrowers’ fixed charge coverage ratio time addition abl facility provides unused line fees 10 125 per year depending utilization letter credit fees certain factors abl facility may future guaranteed certain company’s existing future subsidiaries “abl guarantors” together abl borrowers “abl loan parties” secure obligations abl facility abl loan parties granted grant applicable administrative agent firstpriority security interest benefit abl lenders present future accounts receivable inventory related assets proceeds foregoing “abl priority collateral” addition obligations abl loan parties abl facility secured secondpriority liens term priority collateral described “term loan facility” revolving loans abl facility may voluntarily prepaid whole part without premium penalty subject breakage similar costs abl facility contains certain affirmative negative covenants including covenants restrict ability abl loan parties take certain actions including among things subject certain significant exceptions incurrence debt granting liens making investments entering transactions affiliates payment dividends sale assets abl facility also contains requirement abl borrowers comply certain periods fixed charge coverage ratio 100 december 31 2016 borrowings outstanding abl facility 385 million letters credit outstanding borrowing capacity 277 million available subject covenant constraints abl facility key energy services inc subsidiaries notes consolidated financial statements continued term loan facility december 15 2016 company entered term loan facility among company borrower certain subsidiaries company named guarantors therein financial institutions party thereto time lenders collectively “term loan lenders” cortland capital market services llc cortland products corp agent lenders term loan facility outstanding principal amount 250 million effective date term loan facility mature december 15 2021 although maturity date may company’s request extended one term loan lenders pursuant terms term loan facility borrowings term loan facility bear interest company’s option per annum rate equal libor one two three six consent term loan lenders 12 months plus 1025 ii base rate equal sum greatest x prime rate federal funds rate plus 050 z 30day libor plus 10 plus b 925 term loan facility guaranteed certain company’s existing future subsidiaries “term loan guarantors” together company “term loan parties” secure obligations term loan facility term loan parties granted grant applicable agent firstpriority security interest benefit term loan lenders substantially term loan party’s assets certain excluded assets abl priority collateral “term priority collateral” addition obligations term loan parties term loan facility secured secondpriority liens abl priority collateral described “abl facility” loans term loan facility may prepaid company’s option subject payment prepayment premium certain circumstances provided term loan facility prepayment made prior first anniversary loan prepayment must made makewhole amount calculation makewhole amount specified term loan facility prepayment made first anniversary loan prior second anniversary prepayment must made 106 principle amount prepayment made second anniversary prior third anniversary prepayment must made 103 principle amount third anniversary prepayment made prepayment premium due company required make principal payments amount 625000 per quarter commencing quarter ending march 31 2017 addition pursuant term loan facility company must prepay offer prepay applicable term loans net cash proceeds certain debt incurrences asset sales excess cash flow upon certain change control transactions subject case certain exceptions term loan facility contains certain affirmative negative covenants including covenants restrict ability term loan parties take certain actions including among things subject certain significant exceptions incurrence debt granting liens making investments entering transactions affiliates payment dividends sale assets term loan facility also contains financial covenants requiring company maintain asset coverage ratio least 135 10 liquidity defined term loan facility must less 375 million least 200 million must cash equivalents held deposit accounts last day fiscal quarter subject certain exceptions cure rights weighted average interest rates outstanding borrowings abl facility term loan facility period december 16 2016 december 31 2016 follows predecessor abl facility june 1 2015 company entered loan security agreement “predecessor abl facility” among company key energy services llc borrowers collectively “predecessor abl borrowers” certain subsidiaries predecessor abl borrowers named guarantors therein financial institutions party thereto time lenders collectively “predecessor abl lenders” bank america na administrative agent lenders bank america na wells fargo bank national association cocollateral agents lenders predecessor abl facility provided aggregate initial commitments abl lenders 100 million “commitments” scheduled mature february 28 2020 borrowings predecessor abl facility bore interest predecessor abl borrowers’ option per annum rate equal libor 30 60 90 180 consent predecessor abl lenders 360 days plus 45 ii key energy services inc subsidiaries notes consolidated financial statements continued base rate equal sum greatest x prime rate federal funds rate plus 050 z 30day libor plus 10 plus b 35 addition predecessor abl facility provided unused line fees 100 125 per year depending utilization letter credit fees certain fees upon occurrence effective date company’s predecessor abl facility terminated accordance plan see “note 2 emergence voluntary reorganization” details predecessor term loan facility june 1 2015 company entered term loan security agreement “predecessor term loan facility” among company borrower certain subsidiaries company named guarantors therein financial institutions party thereto time lenders collectively “predecessor term loan lenders” cortland capital market services llc agent lenders merrill lynch pierce fenner smith incorporated sole lead arranger sole bookrunner june 1 2015 company parties thereto closed predecessor term loan facility company borrowed 315 million prior giving effect upfront discount 3 resulted net proceeds company prior expenses approximately 3055 million company used portion proceeds repay prior credit facility predecessor term loan facility provided incremental facility subject agreement one predecessor term loan lenders institutional lenders agreeing provide additional loans satisfaction certain terms conditions would enable company borrow additional amounts predecessor term loan facility long aggregate outstanding amount borrowings thereunder exceed 400 million predecessor term loan facility scheduled mature june 1 2020 borrowings predecessor term loan facility bore interest company’s option per annum rate equal libor one two three six consent predecessor term loan lenders 12 months plus 925 ii base rate equal sum greatest x prime rate federal funds rate plus 050 z 30day libor plus 10 plus b 825 upon occurrence effective date company’s predecessor term loan facility terminated accordance plan see “note 2 emergence voluntary reorganization” details weighted average interest rates outstanding borrowings predecessor abl facility predecessor term loan facility period january 1 2016 december 15 2016 year ended december 31 2015 follows letter credit facility november 7 2013 entered uncommitted unsecured 150 million letter credit facility used solely issuances performance letters credit december 31 2016 20 million letters credit outstanding facility key energy services inc subsidiaries notes consolidated financial statements continued longterm debt principal repayment interest expense presented schedule repayment requirements longterm debt next five years thereafter december 31 2016 interest expense period december 16 2016 december 31 2016 period january 1 2016 december 15 2016 years ended december 31 2015 2014 consisted following thousands deferred financing costs summary deferred financing costs including capitalized costs writeoffs amortization presented table thousands predecessor balance 148 million eliminated accordance asc 852 recorded reorganization item consolidated statement operations see “note 5 reorganization items” details key energy services inc subsidiaries notes consolidated financial statements continued note 17 commitments contingencies operating lease arrangements lease certain property equipment noncancelable operating leases expire various dates 2030 varying payment dates throughout month addition number leases scheduled expire 2017 december 31 2016 future minimum lease payments noncancelable operating leases follows thousands also party significant number monthtomonth leases canceled time operating lease expense less 01 million 114 million 169 million 223 million period december 16 2016 december 31 2016 period january 1 2016 december 15 2016 years ended december 31 2015 2014 respectively litigation various suits claims arising ordinary course business pending us conduct business throughout continental united states may subject jury verdicts arbitrations result outcomes favor plaintiffs also exposed various claims abroad continually assess contingent liabilities including potential litigation liabilities well adequacy accruals need disclosure items establish provision contingent liability probable liability incurred amount reasonably estimable december 31 2016 aggregate amount liabilities related litigation deemed probable reasonably estimable 54 million believe disposition matters result additional loss materially excess amounts recorded liabilities related litigation matters deemed probable reasonably estimable december 31 2015 16 million november 2015 santa barbara county district attorney filed criminal complaint two former employees key specifically alleging three counts violations california labor code section 6425a key complaint sought unspecified penalties key related october 12 2013 accident resulted death one key employee drilling site near santa maria california arraignment held february 10 2016 key former employees pleaded guilty charges january 10 2017 key entered settlement santa barbara county district attorney key agreed plead contest one felony count 2 violation california labor code 6425a santa barbara county district attorney also agreed recommend total restitution fines fees surcharges exceed 450000 court dismissed remaining charges counts 1 3 key parties agreed postpone sentencing matter january 20 2018 parties agreed key pays total restitution fines fees surcharges january 20 2018 santa barbara county district attorney object key withdrawing plea felony count 2 entering plea misdemeanor november 23 2015 north dakota industrial commission “ndic” filed notice county burleigh county nd alleging statutory violations key energy services llc operator two salt water disposal wells state north dakota ndic pled approximately 888000 fines costs october 2016 company settled ndic 88750 october 24 2016 key certain domestic subsidiaries filed voluntary petitions reorganization chapter 11 united states bankruptcy code united states bankruptcy court district delaware pursuant prepackaged plan reorganization plan confirmed bankruptcy court december 6 2016 company key energy services inc subsidiaries notes consolidated financial statements continued emerged bankruptcy proceedings december 15 2016 information regarding bankruptcy see “note 2 emergence voluntary reorganization” tax audits routinely subject audits tax authorities past received material assessments tax auditors december 31 2016 2015 recorded reserves management feels appropriate future potential liabilities result prior audits believe fully reserved assessments ultimate amount settlements vary estimates selfinsurance reserves maintain reserves workers’ compensation vehicle liability balance sheet based judgment estimates using actuarial method based claims incurred estimate general liability claims casebycase basis maintain insurance policies workers’ compensation vehicular liability general liability claims insurance policies carry selfinsured retention limits deductibles per occurrence basis retention limits deductibles accounted accrual process workers’ compensation vehicular liability general liability claims december 31 2016 2015 recorded 587 million 564 million respectively selfinsurance reserves related workers’ compensation vehicular liabilities general liability claims partially offsetting liabilities approximately 163 million 173 million insurance receivables december 31 2016 2015 respectively believe liabilities recorded appropriate based known facts circumstances expect losses materially excess amounts already accrued existing claims environmental remediation liabilities environmental reserve matters including remediation efforts current locations relating previouslydisposed properties record liabilities remediation efforts probable costs conduct remediation efforts reasonably estimated december 31 2016 2015 recorded 34 million 55 million respectively environmental remediation liabilities believe liabilities recorded appropriate based known facts circumstances expect losses materially excess amounts already accrued provide performance bonds provide financial surety assurances remediation maintenance swd properties comply environmental protection standards costs swd properties may mandatory comply applicable laws regulations future required divest cease operations optimization improve operations safety regulatory compliance note 18 accumulated comprehensive income loss components accumulated comprehensive loss follows thousands local currency functional currency operations russia december 31 2016 december 31 2015 one us dollar equal 6123 7316 russian rubles respectively cumulative translation gains losses resulting translating financial statements functional currency us dollars included comprehensive income accumulated stockholders’ equity partial complete sale liquidation net investment entity key energy services inc subsidiaries notes consolidated financial statements continued note 19 employee benefit plans maintain 401k plan part employee benefits package third quarter 2015 management suspended 401k matching program part cost cutting efforts prior matched 100 employee contributions 4 employee’s salary vest immediately 401k plan subject maximums 10600 10400 years ended december 31 2016 2015 2014 respectively matching contributions zero 55 million 109 million period december 16 2016 december 31 2016 period january 1 2016 december 15 2016 years ended december 31 2015 2014 respectively offer participants option purchase shares common stock 401k plan fund note 20 stockholders’ equity preferred stock december 31 2016 10000000 shares preferred stock authorized par value 001 per share december 31 2016 sole share successor company’s series preferred stock confers certain rights elect directors economic rights held soter common stock december 31 2016 100000000 shares common stock authorized par value 001 per share 20096462 shares issued outstanding december 31 2015 200000000 shares common stock authorized par value 010 per share 157543259 shares issued outstanding 2016 2015 2014 dividends declared paid currently intend pay dividends tax withholding repurchase shares restricted common stock previously granted certain employees pursuant agreement individuals permitted sell shares back us order satisfy minimum income tax withholding requirements related vesting grants repurchased total zero 1614047 shares 239636 shares 290697 shares aggregate cost zero 02 million 04 million 22 million period december 16 2016 december 31 2016 period january 1 2016 december 15 2016 years ended december 31 2015 2014 respectively represented fair market value shares based price stock dates purchase key energy services inc subsidiaries notes consolidated financial statements continued note 21 sharebased compensation equity cash incentive plan effective date pursuant plan company adopted new management incentive plan titled key energy services inc 2016 equity cash incentive plan 2016 incentive plan authorizes grant compensation described following sentence comprised stock economic rights tied value stock collectively representing 11 fully diluted shares common stock effective date without regard shares reserved issuance pursuant warrants increased board initial pool 7 fully diluted shares effective date permitted terms 2016 incentive plan 2016 incentive plan provides awards restricted stock restricted stock units options stock appreciation rights cashbased awards distribution officers directors employees company subsidiaries determined new board effective date new board authorized committee thereof authorized without approval key equity holders execute deliver agreements documents instruments certificates relating 2016 incentive plan perform obligations thereunder accordance subject terms 2016 incentive plan december 31 2016 12 million shares available grant 2016 ecip stock option awards stock option awards granted incentive plans maximum contractual term ten years date grant shares issuable upon exercise stock option issued authorized unissued shares common stock following tables summarize stock option activity period december 16 2016 december 31 2016 shares thousands stock options exercised vested period december 16 2016 december 31 2016we recognized 01 million pretax expense zero tax benefits related stock options period december 16 2016 december 31 2016 weighted average remaining contractual term stock option awards exercisable december 31 2016 100 years common stock awards common stock awards include restricted stock awards restricted stock units weighted average grant date fair market value common stock awards granted period december 16 2016 december 31 2016 3199 common stock awards vested period december 16 2016 december 31 2016 following tables summarize information period december 16 2016 december 31 2016 unvested common stock awards outstanding shares thousands issued 19535 shares common stock nonemployee directors period december 16 2016 december 31 2016 recognize compensation expense ratably graded vesting period grant net key energy services inc subsidiaries notes consolidated financial statements continued estimated actual forfeitures period december 16 2016 december 31 2016 recognized 04 pretax expense continuing operations associated common stock awards unvested common stock awards outstanding december 31 2016 anticipate recognize 213 million pretax expense next 24 years predecessor sharebased compensation prior effective date shares sharebased awards outstanding 2014 equity cash incentive plan “2014 incentive plan” conjunction plan see note 2 “emergence voluntary reorganization” shares options common stock awards sharebased awards outstanding effective date canceled stock option awards following tables summarize stock option activity period january 1 2016 december 15 2016shares thousands grant stock options period january 1 2016 december 15 2016 years ended december 31 2015 2014 stock options vested period january 1 2016 december 15 2016 recognized 01 million zero pretax expense zero tax benefits related stock options period january 1 2016 december 15 2016 years ended december 31 2015 2014 common stock awards common stock awards include restricted stock awards restricted stock units weighted average grant date fair market value common stock awards granted years ended december 31 2016 2015 2014 026 189 731 respectively total fair market value common stock awards vested years ended december 31 2016 2015 2014 145 million 132 million 120 million respectively following tables summarize information period january 1 2016 december 15 2016 unvested common stock awards shares thousands issued zero shares 598860 shares 197865 shares common stock nonemployee directors vested immediately upon issuance period january 1 2016 december 15 2016 years ended december 31 2015 2014 respectively common stock grants vest immediately upon issuance record expense equal fair market value shares date grant common stock awards immediately vest recognize compensation expense ratably graded vesting period grant net estimated actual forfeitures period january 1 2016 december 15 2016 years ended december 31 2015 2014 recognized 57 million 102 million 109 million respectively pretax expense continuing operations associated common stock awards including common stock grants outside directors note 22 transactions related parties board director relationships former member board directors executive vice president general counsel chief administrative officer anadarko petroleum corporation “anadarko” one customers sales anadarko 02 million 53 million 121 million 325 million period december 16 2016 december 31 2016 period january 1 2016 december 15 2016 years ended december 31 2015 2014 respectively receivables outstanding anadarko 05 million 09 million december 31 2016 2015 respectively transactions anadarko services made terms consistent customers current member board directors c christopher gaut chief executive officer forum energy technologies inc “fet” one equipment suppliers sales key fet periods december 16 2016 december 31 2016 january 1 2016 december 15 2016 zero 76467 respectively addition fet owns approximately 48 global tubing llc “global” sales key global zero 29 million periods december 16 2016 december 31 2016 january 1 2016 december 15 2016 respectively transactions fet global services made terms consistent equipment suppliers note 23 supplemental cash flow information presented schedule noncash investing financing activities supplemental cash flow entries thousands cash paid interest includes cash payments interest longterm debt capital lease obligations commitment agency fees paid note 24 segment information reportable business segments us rig services fluid management services coiled tubing services fishing rental services international also “functional support” segment associated overhead costs support reportable segments us rig services fluid management services coiled tubing services fishing rental services operate geographically within united states international reportable segment includes current former operations mexico colombia ecuador russia bahrain oman canadian subsidiary also reflected international reportable segment second half 2015 ceased operations colombia ecuador middle east fourth quarter 2016 completed sale business mexico currently discussions sell business russia evaluate performance segments based gross margin measures intersegment sales pricing based current market conditions aggregate services create reportable segments accordance asc 280 accounting policies segments described “note 1 organization summary significant accounting policies” us rig services us rig services include completion newly drilled wells workover recompletion existing oil natural gas wells well maintenance plugging abandonment wells end useful lives also provide specialty drilling services oil natural gas producers certain larger rigs capable providing conventional horizontal drilling services rigs encompass various sizes capabilities allowing us service types oil gas wells many rigs outfitted proprietary keyview® technology captures reports well site operating data provides safety control systems believe technology allows customers crews better monitor well site operations improves efficiency safety adds value services offer key energy services inc subsidiaries notes consolidated financial statements continued completion recompletion services provided rigs prepare wells production whether newly drilled recently extended workover operation completion process may involve selectively perforating well casing access production zones stimulating testing zones installing tubular downhole equipment typically provide well service rig may also provide equipment assist completion process completion services vary well work may take days several weeks perform depending nature completion workover services provide designed enhance production existing wells generally complex time consuming normal maintenance services workover services include deepening extending wellbores new formations drilling horizontal lateral wellbores sealing depleted production zones accessing previously bypassed production zones converting former production wells injection wells enhanced recovery operations conducting major subsurface repairs due equipment failures workover services may last days several weeks depending complexity workover maintenance services provided rig fleet generally required throughout life cycle oil natural gas well examples maintenance services include routine mechanical repairs pumps tubing equipment removing debris formation material wellbores pulling rods downhole equipment wellbores identify resolve production problems maintenance services generally less complicated completion workover related services require less time perform rig fleet also used process permanently shuttingin oil natural gas wells end productive lives plugging abandonment services generally require auxiliary equipment addition well servicing rig demand plugging abandonment services significantly impacted demand oil natural gas well operators required state regulations plug wells longer productive fluid management services provide transportation wellsite storage services various fluids utilized connection drilling completions workover maintenance activities also provide disposal services fluids produced subsequent well completion fluids removed well site transported disposal swd wells owned us third party addition operate fleet hot oilers capable pumping heated fluids used clear soluble restrictions wellbore demand pricing services generally correspond demand well service rigs coiled tubing services coiled tubing services involve use continuous metal pipe spooled onto large reel deployed oil natural gas wells perform various applications wellbore cleanouts nitrogen jet lifts throughtubing fishing formation stimulations utilizing acid chemical treatments coiled tubing also used number horizontal well applications milling temporary isolation plugs separate frac zones various pre post hydraulic fracturing well preparation services fishing rental services offer full line services rental equipment designed use providing drilling workover services fishing services involve recovering lost stuck equipment wellbore utilizing broad array “fishing tools” rental tool inventory consists drill pipe tubulars handling tools including patented hydrawalk® pipehandling units services pressurecontrol equipment pumps power swivels reversing units foam air units frac stack equipment used support hydraulic fracturing operations associated flowback frac fluids proppants oil natural gas also provide well testing services demand fishing rental services closely related capital spending oil natural gas producers generally function oil natural gas prices key energy services inc subsidiaries notes consolidated financial statements continued international reportable segment includes current former operations mexico colombia ecuador russia bahrain oman canadian subsidiary also reflected international reportable segment second half 2015 ceased operations colombia ecuador middle east fourth quarter 2016 completed sale business mexico currently discussions sell business russia provide rigbased services maintenance workover recompletion existing oil wells completion newlydrilled wells plugging abandonment wells end useful lives international markets addition mexico provided drilling coiled tubing wireline project management consulting services work mexico also required us provide thirdparty services varied scope project also technology development control systems business based canada focused development hardware software related oilfield service equipment controls data acquisition digital information flow april 2015 announced decision exit markets participate outside north america strategy sell relocate assets businesses operating markets december 31 2015 sold subsidiary bahrain certain assets oman ecuador colombia longer operating markets fourth quarter 2016 completed sale mexican business currently discussions sell subsidiary russia functional support functional support segment includes unallocated overhead costs associated administrative support us international reporting segments financial summary following table presents segment information period december 16 2016 december 31 2016 period january 1 2016 december 15 2016 years ended december 31 2015 2014 thousands december 31 2016 period december 16 2016 december 31 2016 key energy services inc subsidiaries notes consolidated financial statements continued december 15 2016 period january 1 2016 december 15 2016 key energy services inc subsidiaries notes consolidated financial statements continued year ended december 31 2015 year ended december 31 2014 1 longlived assets include fixed assets goodwill intangibles assets 2 functional support geographically located united states key energy services inc subsidiaries notes consolidated financial statements continued note 25 unaudited quarterly results operations following table presents summarized unaudited quarterly information two recent years covered consolidated financial statements thousands except per share data key energy services inc subsidiaries notes consolidated financial statements continued 1 quarterly earnings per common share based weighted average number shares outstanding quarter sum quarters may equal annual earnings per common share note 26 condensed consolidating financial statements senior notes predecessor company registered securities result registered securities required present following condensed consolidating financial information pursuant sec regulation sx rule 310 “financial statements guarantors issuers guaranteed securities registered” abl facility term loan facility successor company registered securities presentation condensed consolidating financial information required successor period key energy services inc subsidiaries notes consolidated financial statements continued condensed consolidating balance sheets thousands condensed consolidating statements operations thousands key energy services inc subsidiaries notes consolidated financial statements continued condensed consolidating statements operations thousands condensed consolidating statements operation thousands key energy services inc subsidiaries notes consolidated financial statements continued condensed consolidating statements cash flows thousands key energy services inc subsidiaries notes consolidated financial statements continued condensed consolidating statements cash flows thousands key energy services inc subsidiaries notes consolidated financial statements continued condensed consolidating statements cash flows thousands item 9item 8 financial statements supplementary data key energy services inc subsidiaries index consolidated financial statements page report independent registered public accounting firm report independent registered public accounting firm internal control financial reporting consolidated balance sheets consolidated statements operations consolidated statements comprehensive income loss consolidated statements cash flows consolidated statements stockholders’ equity notes consolidated financial statements report independent registered public accounting firm board directors stockholders key energy services inc opinion financial statements audited accompanying consolidated balance sheets key energy services inc delaware corporation subsidiaries “company” december 31 2017 2016 related consolidated statements operations comprehensive income loss stockholders’ equity cash flows year ended december 31 2017 successor period december 16 2016 december 31 2016 successor period january 1 2016 december 15 2016 predecessor year ended december 31 2015 predecessor related notes collectively referred “financial statements” opinion financial statements present fairly material respects financial position company december 31 2017 2016 results operations cash flows year ended december 31 2017 successor period december 16 2016 december 31 2016 successor period january 1 2016 december 15 2016 predecessor year ended december 31 2015 predecessor conformity accounting principles generally accepted united states america also audited accordance standards public company accounting oversight board united states “pcaob” company’s internal control financial reporting december 31 2017 based criteria established 2013 internal controlintegrated framework issued committee sponsoring organizations treadway commission “coso” report dated february 28 2018 expressed unqualified opinion basis opinion financial statements responsibility company’s management responsibility express opinion company’s financial statements based audits public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether due error fraud audits included performing procedures assess risks material misstatement financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence supporting amounts disclosures financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation financial statements believe audits provide reasonable basis opinion grant thornton llp served company’s auditor since 2006 houston texas february 28 2018 report independent registered public accounting firm board directors stockholders key energy services inc opinion internal control financial reporting audited internal control financial reporting key energy services inc delaware corporation subsidiaries “company” december 31 2017 based criteria established 2013 internal controlintegrated framework issued committee sponsoring organizations treadway commission “coso” opinion company maintained material respects effective internal control financial reporting december 31 2017 based criteria established 2013 internal controlintegrated framework issued coso also audited accordance standards public company accounting oversight board united states “pcaob” consolidated financial statements company year ended december 31 2017 report dated february 28 2018 expressed unqualified opinion financial statements basis opinion company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audit accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion definition limitations internal control financial reporting company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate grant thornton llp houston texas february 28 2018 key energy services inc subsidiaries consolidated balance sheets thousands except per share amounts see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries consolidated statements operations thousands except per share amounts see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries consolidated statements comprehensive income loss thousands see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries consolidated statements cash flows thousands see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries consolidated statements stockholders’ equity thousands except per share data see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries notes consolidated financial statements note 1 organization summary significant accounting policies key energy services inc wholly owned subsidiaries collectively “key” “company” “we” “us” “its” “our” provide full range well services major oil companies independent oil natural gas production companies services include rigbased coiled tubingbased well maintenance workover services well completion recompletion services fluid management services fishing rental services ancillary oilfield services additionally certain rigs capable specialty drilling applications operate major oil natural gas producing regions continental united states basis presentation consolidated financial statements included annual report form 10k present financial position results operations cash flows periods presented accordance gaap preparation consolidated financial statements requires us develop estimates make assumptions affect financial position results operations cash flows estimates also impact nature extent disclosure contingent liabilities among things use estimates analyze assets possible impairment ii determine depreciable lives assets iii assess future tax exposure realization deferred tax assets iv determine amounts accrue contingencies v value tangible intangible assets vi assess workers’ compensation vehicular liability selfinsured risk accruals insurance reserves vii provide allowances uncollectible accounts receivable viii value asset retirement obligations ix value equitybased compensation review significant estimates recurring basis record effect necessary adjustments prior publication financial statements adjustments made respect use estimates relate improved information previously available limitations inherent process actual results may differ materially estimates believe estimates reasonable october 24 2016 key certain domestic subsidiaries filed voluntary petitions reorganization chapter 11 united states bankruptcy code united states bankruptcy court district delaware pursuant prepackaged plan reorganization “the plan” plan confirmed bankruptcy court december 6 2016 company emerged bankruptcy proceedings december 15 2016 “the effective date” upon emergence effective date company adopted fresh start accounting resulted creation new entity financial reporting purposes result application fresh start accounting well effects implementation plan consolidated financial statements december 16 2016 comparable consolidated financial statements prior date refer “note 3 fresh start accounting” additional information references “successor” “successor company” relate financial position results operations reorganized company subsequent december 15 2016 references “predecessor” “predecessor company” refer financial position results operations company prior december 15 2016 evaluated events occurring balance sheet date included annual report form 10k possible disclosure subsequent event management monitored subsequent events date financial statements issued principles consolidation within consolidated financial statements include accounts majorityowned controlled subsidiaries eliminate intercompany accounts transactions interest entity significant control influence account interest using cost method interest entity exert significant influence control account interest using equity method acquisitions time acquire businesses assets consistent longterm growth strategy results operations acquisitions included financial statements beginning date acquisition accounted using acquisition method business combinations whether partial full stages acquirer records 100 assets liabilities acquired business including goodwill fair values including contingent consideration final valuations assets liabilities obtained recorded soon practicable later one year date acquisition revenue recognition recognize revenue following criteria met evidence arrangement exists ii delivery occurred services rendered iii price customer fixed determinable iv collectability reasonably assured key energy services inc subsidiaries notes consolidated financial statements continued • evidence arrangement exists final understanding us customer occurred evidenced completed customer purchase order field ticket supplier contract master service agreement • delivery occurred services rendered completed requirements pursuant terms arrangement evidenced field ticket service log • price customer fixed determinable amount required paid agreed upon price fixed determinable evidenced contractual terms price book completed customer purchase order field ticket • collectability reasonably assured screen customers provide goods services according determined credit terms granted accordance credit policy present revenues net sales taxes collected us customers required remitted local state governmental taxing authorities review contracts multiple element revenue arrangements deliverables separated units accounting assigned fair value standalone value customer objective reliable evidence fair value delivery undelivered items substantially controlled us believe negotiated prices deliverables services contracts representative fair value since acceptance nonacceptance element contract affect elements cash equivalents consider shortterm investments original maturity less three months cash equivalents december 31 2017 obligations abl facility term loan facility secured assets including assets held subsidiaries includes cash equivalents restrict investment cash financial institutions high credit standing limit amount credit exposure one financial institution maintain cash bank deposit brokerage accounts exceed federally insured limits december 31 2017 accounts guaranteed federal deposit insurance corporation “fdic” 250000 substantially accounts held deposits excess fdic limits believe cash held foreign subsidiaries could repatriated general corporate use without material withholdings time normal course business connection operations ongoing legal matters required place certain amounts cash deposit accounts restrictions limit ability withdraw funds restricted cash primarily used maintain compliance abl facility certain cash accounts zerobalance controlled disbursement accounts right offset cash balances present outstanding checks written zerobalance accounts component accounts payable accompanying consolidated balance sheets accounts receivable allowance doubtful accounts establish provisions losses accounts receivable determine possibility collect part outstanding balances regularly review accounts 150 days past due invoice date collectability establish adjust allowance necessary using specific identification method exhaust collection efforts determine balance never collected write accounts receivable associated provision uncollectible accounts time entitled proceeds insurance policies amounts reserved selfinsurance liability present insurance receivables gross balance sheet component assets separate corresponding liability concentration credit risk significant customers include major oil natural gas production companies independent oil natural gas production companies natural gas production companies perform ongoing credit evaluations customers usually require material collateral maintain reserves potential credit losses necessary results operations financial position considered light fluctuations demand experienced oilfield service companies changes oil gas producers’ expenditures budgets occur fluctuations impact results operations financial position supply demand factors directly affect utilization hours primary determinants net cash provided operating activities year ended december 31 2017 period january 1 2016 december 15 2016 year ended december 31 2015 chevron texaco exploration production accounted approximately 12 14 15 key energy services inc subsidiaries notes consolidated financial statements continued consolidated revenue respectively period january 1 2016 december 15 2016 oxy usa inc accounted approximately 13 consolidated revenue customer accounted 10 consolidated revenue year ended december 31 2017 periods ended january 1 2016 december 15 2016 december 16 2016 december 31 2016 year ended december 31 2016 receivables outstanding oxy usa inc approximately 11 total accounts receivable december 31 2016 customers accounted 10 total accounts receivable december 31 2017 2016 inventories consist primarily equipment parts spares use operations supplies held consumption valued lower average cost market property equipment property equipment carried cost less accumulated depreciation provided assets estimated depreciable lives assets using straightline method depreciation expense year ended december 31 2017 period december 16 2016 december 31 2016 period january 1 2016 december 15 2016 year ended december 31 2015 845 million 36 million 1295 million 1761 million respectively depreciate operational assets depreciable lives salvage value higher assets’ value scrap salvage value approximates 10 operational asset’s acquisition cost operational asset stacked taken service review physical condition depreciable life ultimate salvage value determine asset operable whether remaining depreciable life salvage value adjusted scrap asset accelerate depreciation asset salvage value dispose asset gain loss recognized december 31 2017 estimated useful lives asset classes follows longlived asset group tested recoverability whenever events changes circumstances indicate carrying amount may recoverable purposes testing impairment group longlived assets along lines business based services provided lowest level identifiable cash flows largely independent cash flows assets liabilities would record impairment charge reducing net carrying value estimated fair value asset group’s estimated future cash flows less net carrying value events changes circumstance cause us evaluate fixed assets recoverability possible impairment may include changes market conditions adverse movements prices oil natural gas changes asset group expected future life intended use physical condition could reduce fair value certain property equipment development future cash flows determination fair value asset group involves significant judgment estimates see “note 10 property equipment” discussion asset retirement obligations recognize liability fair value legal obligations associated retirement tangible longlived assets capitalize equal amount cost asset depreciate additional cost estimated useful life assets obligations perform asset retirement activities unconditional despite uncertainties may exist surrounding individual retirement activity accordingly recognize liability fair value conditional asset retirement obligation fair value reasonably estimated determining fair value examine inputs believe market participant would use transfer liability probabilityweight potential costs thirdparty would charge adjust cost inflation estimated life asset discount cost using credit adjusted risk free rate significant judgment involved estimating future cash flows associated obligations well ultimate timing cash flows estimates amount timing cash flows change changes may material impact results operations see “note 13 asset retirement obligations” key energy services inc subsidiaries notes consolidated financial statements continued deposits due capacity constraints equipment manufacturers sometimes required make advanced payments certain oilfield service equipment items used normal course business december 31 2017 december 31 2016 deposits totaled 12 million 83 million respectively deposits consist primarily deposit requirements insurance companies payments made related high demand longlead time items capitalized interest capitalized average amount accumulated expenditures major capital projects construction using effective interest rate based related debt underlying assets placed service capitalized interest added cost assets amortized depreciation expense useful life assets included depreciation amortization line accompanying consolidated statements operations deferred financing costs deferred financing costs associated longterm debt carried cost amortized interest expense using effective interest method life related debt instrument related debt instrument retired remaining unamortized costs included determination gain loss extinguishment debt record gains losses extinguishment debt part continuing operations accordance asu 201503 record debt financing costs reduction longterm debt see “note 16 longterm debt” discussion goodwill intangible assets goodwill results business combinations represents excess acquisition consideration fair value net assets acquired goodwill intangible assets subject amortization tested impairment annually frequently events changes circumstances indicate asset might impaired test impairment indefinitelived intangible assets allows us first assess qualitative factors determine whether “more likely not” fair value reporting unit less carrying amount basis determining whether necessary perform twostep goodwill impairment test qualitative analysis shows “more likely not” fair value reporting unit less carrying amount perform twostep goodwill impairment test first step test fair value calculated reporting units fair value compared carrying value reporting unit including reporting unit’s goodwill fair value reporting unit exceeds carrying value impairment second step test performed carrying value exceeds fair value reporting unit second step test required second step test compares implied fair value reporting unit’s goodwill carrying value implied fair value reporting unit’s goodwill determined manner amount goodwill recognized business combination purchase price equal fair value reporting unit implied fair value reporting unit’s goodwill excess carrying value impairment recorded carrying value excess implied fair value impairment equal excess recorded assist management preparation analysis valuation reporting units utilize services thirdparty valuation consultant ultimate conclusions valuation techniques remain sole responsibility determination fair value used test heavily impacted market prices equity debt securities well assumptions estimates future activity levels profitability cash flows internaluse software capitalize costs incurred application development stage internaluse software amortize costs software’s estimated useful life generally five seven years costs incurred related selection maintenance internaluse software expensed incurred litigation estimating liabilities related litigation take account available facts circumstances order determine whether loss probable reasonably estimable various suits claims arising ordinary course business pending us conduct business throughout continental united states may subject jury verdicts arbitrations result outcomes favor plaintiffs also exposed various claims abroad continually assess contingent liabilities including potential litigation liabilities well adequacy accruals need disclosure items establish provision key energy services inc subsidiaries notes consolidated financial statements continued contingent liability probable liability incurred amount reasonably estimable see “note 17 commitments contingencies” environmental operations routinely involve storage handling transport disposal bulk waste materials contain oil contaminants regulated substances operations subject various federal state local laws regulations intended protect environment environmental expenditures expensed capitalized depending future economic benefit expenditures relate existing condition caused past operations future economic benefits expensed record liabilities undiscounted basis remediation efforts probable costs conduct remediation efforts reasonably estimated litigation reserves reflect application insurance coverage environmental reserves reflect management’s assessment insurance coverage may apply matters issue see “note 17 commitments contingencies” selfinsurance primarily selfinsured physical damage equipment automobiles well workers’ compensation claims accruals maintain consolidated balance sheet relate deductibles selfinsured retentions estimate use historical claims data trend analysis assist management liability amount selfinsurance reserves utilize services third party actuary actual outcome claim could differ significantly estimated amounts adjust loss estimates calculation accruals based upon actual claim settlements reported claims see “note 17 commitments contingencies” income taxes account deferred income taxes using asset liability method provide income taxes significant temporary differences management determines current tax liability well taxes incurred result current operations yet deferred future periods current taxes payable represent liability related income tax returns current year net deferred tax expense benefit represents change balance deferred tax assets liabilities reported consolidated balance sheets deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled management makes certain assumptions timing temporary tax differences differing treatment certain items tax accounting purposes whether differences permanent final determination tax liability involves interpretation local tax laws tax treaties related authorities jurisdiction well significant use estimates assumptions regarding scope future operations results achieved timing nature income earned expenditures incurred record valuation allowances reduce deferred tax assets determine likely eg likelihood 50 deferred tax assets realized future periods assess likelihood use estimates judgment regarding future taxable income well jurisdiction taxable income generated determine whether valuation allowance required ultimate realization deferred tax assets depends ability generate sufficient taxable income appropriate character related jurisdiction future evidence supporting ability include current financial position results operations actual forecasted results reversal deferred tax liabilities tax planning strategies well current forecasted business economics industry additionally record uncertain tax positions financial statements net recognizable amount based amount management deems likely sustained upon ultimate settlement tax authorities domestic international tax jurisdictions operate estimates assumptions regarding current deferred tax items inaccurate modified changes could potentially material negative impacts earnings see “note 15 income taxes” discussion accounting income taxes changes valuation allowance components tax rate reconciliation realization loss carryforwards earnings per share basic earnings per common share determined dividing net earnings applicable common stock weighted average number common shares actually outstanding period diluted earnings per common share based increased number shares would outstanding assuming conversion dilutive outstanding convertible securities using treasury stock “as converted” methods see “note 12 earnings per share” key energy services inc subsidiaries notes consolidated financial statements continued sharebased compensation issue issued timebased vesting performancebased vesting stock options timebased vesting performancebased vesting restricted stock units restricted stock awards employees part employees’ compensation retention tool nonemployee directors calculate fair value awards grant date amortize fair value compensation expense ratably vesting period award net forfeitures grantdate fair value timebased restricted stock units restricted stock awards determined using stock price grant date grantdate fair value performancebased restricted stock units determined using stock price grant date assuming 10x payout target however maximum 20x payout could achieved certain ebitdabased performance measures met fair value stock option awards estimated using blackscholes fair value model valuation stock options requires us estimate expected term award estimate using simplified method sufficient historical exercise information additionally valuation stock option awards also dependent historical stock price volatility view limited amount time elapsed since reorganization volatility calculated based historical stock price volatility peer group lookback period equivalent expected term award fair value performancebased stock options restricted stock units estimated manner timebased awards assumes performance goals achieved awards vest performance based awards vest previously recognized compensation costs reversed record sharebased compensation component general administrative direct operating expense based role applicable individual see “note 21 sharebased compensation” foreign currency gains losses respect former operations russia sold third quarter 2017 local currency functional currency assets liabilities translated rates exchange effect balance sheet date income expense items translated average rates exchange period resulting gains losses arising translation accounts functional currency us dollar included separate component stockholders’ equity comprehensive income partial complete sale liquidation net investment foreign entity see “note 18 accumulated comprehensive loss” time former foreign subsidiaries may entered transactions denominated currencies functional currency transactions initially recorded functional currency subsidiary based applicable exchange rate effect date transaction end month transactions remeasured equivalent amount functional currency based applicable exchange rates effect time adjustment required remeasure transaction equivalent amount functional currency end month recorded income loss foreign subsidiary component income net comprehensive loss display comprehensive loss components financial statements classify items comprehensive income loss nature financial statements display accumulated balance comprehensive income loss separately stockholders’ equity leases lease real property equipment various leasing arrangements enter leasing arrangement analyze terms arrangement determine whether lease accounted operating lease capital lease periodically incur costs improve assets lease arrangements value leasehold improvements exceeds threshold capitalization record improvement component property equipment amortize improvement useful life improvement lease term whichever shorter certain operating lease agreements structured include scheduled specified rent increases term lease agreement increases may result inducement “rent holiday” conveyed us early lease included reflect anticipated effects inflation recognize scheduled specified rent increases straightline basis term lease agreement addition certain operating lease agreements contain incentives induce us enter lease agreement upfront cash payments us payment lessor costs moving expenses assumption lessor preexisting lease agreements third parties payments made us behalf represent incentives consider reduction rent expense recognized straightline basis term lease agreement key energy services inc subsidiaries notes consolidated financial statements continued recent accounting developments asu 201618 november 2016 fasb issued asu 201618 statement cash flows topic 230 restricted cash standard provides guidance presentation restricted cash restricted cash equivalents statement cash flows restricted cash restricted cash equivalents included cash equivalents reconciling beginningofperiod endofperiod amounts shown statements cash flows amendments asu applied using retrospective transition method effective reporting periods beginning december 15 2017 early adoption permitted revised statement cash flows presentation restricted cash adoption asu 201616 expected impact consolidated financial statements asu 201615 august 2016 fasb issued asu 201615 “statement cash flows topic 230 classification certain cash receipts cash payments consensus fasb emerging issues task force asu 201615” clarifies entities classify certain cash receipts cash payments statement cash flows guidance also clarifies predominance principle applied cash receipts cash payments aspects one class cash flows guidance effective annual periods beginning december 15 2017 interim periods within annual periods early adoption permitted adoption asu 201615 expected impact consolidated financial statements asu 201613 june 2016 fasb issued asu 201613 measurement credit losses financial instruments” change companies measure credit losses financial assets certain instruments aren’t measured fair value net income standard replace today’s “incurred loss” approach “expected loss” model instruments measured amortized cost availableforsale debt securities entities required record allowances rather reduce carrying amount amendments update effective annual periods beginning december 15 2019 interim periods within annual periods early adoption permitted annual periods beginning december 15 2018 company evaluating effect asu 201613 consolidated financial statements asu 201609 march 2016 fasb issued asu 201609 compensationstock compensation topic 718 improvements employee sharebased payment accounting standard changes companies account certain aspects sharebased payment awards employees including accounting income taxes forfeitures statutory tax withholding requirements well classification statement cash flows company adopted accounting guidance january 1 2017 prospective basis elected account forfeitures equity awards occur adoption guidance material impact consolidated financial statements exception excess tax benefits tax deficiencies recognized income tax expense benefit income statement rather additional paid capital balance sheet classification statement cash flow operating activity rather financing activity asu 201602 february 2016 fasb issued asu 201602 leases topic 842 replace existing lease guidance standard intended provide enhanced transparency comparability requiring lessees record rightofuse assets corresponding lease liabilities balance sheet additional disclosure requirements include qualitative disclosures along specific quantitative disclosures objective enabling users financial statements assess amount timing uncertainty cash flows arising leases asu 201602 effective company annual reporting periods beginning december 15 2018 including interim periods within fiscal years early adoption permitted new standard required applied modified retrospective approach prior reporting period presented currently evaluating standard determine impact adoption consolidated financial statements asu 201409 may 2014 fasb issued asu 201409 revenue contracts customers topic 606 objective asu establish principles report useful information users financial statements nature amount timing uncertainty revenue contracts customers core principle recognize revenue depict transfer promised goods services customers amount reflects consideration entity expects entitled exchange goods services asu 201409 must adopted using either full retrospective method modified retrospective method formed project team implement standard team scoped identified relevant revenue streams documented procedures control changes required address impacts asu 201409 may business process training staff procedures controls went effect january 1 2018 implementation efforts included identification revenue streams similar contract structures performing detailed review key contracts revenue stream comparing historical policies practices new standard company’s services rental contracts principally charge day rate basis primarily shortterm nature therefore based assessment company concluded adoption asu material impact consolidated financial statements adopted new standard effective january 1 2018 using full retrospective method key energy services inc subsidiaries notes consolidated financial statements continued note 2 emergence voluntary reorganization october 24 2016 key certain domestic subsidiaries filed voluntary petitions reorganization chapter 11 united states bankruptcy code united states bankruptcy court district delaware pursuant prepackaged plan reorganization plan confirmed bankruptcy court december 6 2016 company emerged bankruptcy proceedings december 15 2016 effective date company • reincorporated successor company state delaware adopted amended restated certificate incorporation bylaws • appointed new members successor company’s board directors replace directors predecessor company • issued predecessor company’s former stockholders exchange cancellation discharge predecessor company’s common stock ◦ 815887 shares successor company’s common stock ◦ 919004 warrants expire december 15 2020 919004 warrants expire december 15 2021 exercisable one share successor company’s common stock • issued former holders predecessor company’s 675 senior notes exchange cancellation discharge notes 7500000 shares successor company’s common stock • issued 11769014 shares successor company’s common stock certain participants rights offerings conducted pursuant plan • issued soter capital llc “soter” sole share successor company’s series preferred stock confers certain rights elect directors economic rights • entered new 80 million abl facility increased 100 million february 3 2017 250 million term loan facility upon termination predecessor company’s assetbased revolving credit facility term loan facility • entered registration rights agreement certain stockholders successor company • adopted 2016 incentive plan officers directors employees successor company subsidiaries • entered corporate advisory services agreement successor company platinum equity advisors llc “platinum” pursuant platinum provide certain business advisory services company foregoing summary substantive provisions plan related transactions intended complete description substitute full complete reading plan documents referred note 3 fresh start accounting accordance asc 852 reorganizations “asc 852” freshstart accounting required upon company’s emergence chapter 11 holders existing voting shares predecessor received less 50 voting shares successor ii reorganization value predecessor assets immediately prior confirmation plan less total postpetition liabilities allowed claims key energy services inc subsidiaries notes consolidated financial statements continued conditions required adoption freshstart accounting met company’s plan reorganization became effective december 15 2016 implementation plan application freshstart accounting materially changed carrying amounts classifications reported company’s consolidated financial statements resulted company becoming new entity financial reporting purposes result application freshstart accounting effects implementation plan financial statements december 15 2016 comparable financial statements prior december 15 2016 upon application freshstart accounting company allocated reorganization value individual assets liabilities conformity asc 805 business combinations “asc 805” reorganization value represents fair value successor company’s assets considering liabilities excess reorganization value fair value identified tangible intangible assets reported goodwill reorganization value asc 852 successor company must determine value assigned equity emerging company date adoption freshstart accounting facilitate calculation company estimated enterprise value successor company relying discounted cash flow “dcf” analysis income approach company also considered guideline public company guideline transactions methods market approach reasonableness checks indications income approach enterprise value represents fair value entity’s interestbearing debt stockholders’ equity disclosure statement associated plan confirmed bankruptcy court company estimated range enterprise values 425 million 475 million midpoint 450 million company deemed appropriate use midpoint low end high end range determine final enterprise value 450 million utilized freshstart accounting enterprise value plus excess cash adjustments approximately 52 million less fair value debt 250 million resulted equity value successor 2521 million estimate enterprise value utilizing dcf method company established estimate future cash flows period ranging 2016 2025 discounted estimated future cash flows present value expected cash flows period 2016 2025 based financial projections assumptions utilized disclosure statement expected cash flows period 2016 2025 derived earnings forecasts assumptions regarding growth margin projections applicable terminal value included based cash flows final year forecast period discount rate 145 estimated based aftertax weighted average cost capital “wacc” reflecting rate return would expected market participant wacc also takes consideration company specific risk premium reflecting risk associated overall uncertainty financial projections used estimate future cash flows guideline public company guideline transaction analysis identified group comparable companies transactions operating financial characteristics comparable certain respects company including example comparable lines business risks market presence methodologies certain financial multiples ratios measure financial performance value calculated selected company transactions compared implied multiples dcf analysis company considered enterprise value multiple selected company transactions publicly available earnings interest taxes depreciation amortization “ebitda” estimated enterprise value equity value highly dependent achievement future financial results contemplated projections set forth plan estimates assumptions made valuation inherently subject significant uncertainties primary assumptions reasonable possibility occurrence variation would significantly affected reorganization value include assumptions regarding revenue growth operating expenses amount timing capital expenditures discount rate utilized freshstart accounting reflects value successor company determined confirmed plan freshstart accounting asset values remeasured allocated based respective fair values conformity purchase method accounting business combinations asc 805 liabilities existing effective date deferred taxes recorded present value amounts expected paid using appropriate risk adjusted interest rates deferred taxes determined conformity applicable accounting standards predecessor accumulated depreciation accumulated amortization accumulated comprehensive loss retained deficit eliminated significant assumptions related valuations assets liabilities connection freshstart accounting include following key energy services inc subsidiaries notes consolidated financial statements continued machinery equipment estimate fair value machinery equipment company considered income approach cost approach sales comparison market approach primary approaches relied upon value assets cost approach market approach although income approach applied value machinery equipment assets individually company consider earnings enterprise assets part one approach used develop valuation various approaches reconciled determine final value conclusion typical starting point basis valuation estimate replacement cost new rcn reproduction cost new crn combination rcn crn estimates adjusted physical functional conditions compared market data indications value available confirm results obtained cost approach direct rcn estimates available deemed inappropriate crn machinery equipment estimated using indirect trending method percentage changes applicable price indices applied historical costs convert indications current costs estimate crn amounts inflation indices established external sources applied historical costs estimate crn asset market approach measures value asset analysis recent sales offerings comparable property takes account physical functional economic conditions direct comparable matches could reasonably obtained company utilized percent cost technique market approach technique looks general sales listings auction data major asset category information used conjunction asset’s effective age develop ratios sales price rcn crn similar asset types marketbased depreciation curve developed applied asset categories sufficient sales auction information existed market information available market approach deemed inappropriate company developed cost approach indicated value derived deducting physical deterioration rcn crn identifiable asset group assets physical deterioration loss value usefulness property due using expiration useful life caused wear tear deterioration exposure various elements physical stresses similar factors functional economic obsolescence related also considered functional obsolescence due excess capital costs eliminated direct method cost approach estimate rcn functional obsolescence applied form costtocure penalty certain personal property assets needing significant capital repairs economic obsolescence also applied stacked underutilized assets based status asset economic obsolescence also considered situations earnings applicable business segment assets employed suggest economic obsolescence penalizing assets economic obsolescence additional economic obsolescence penalty levied considering scrap value floor value asset land building establishing fair value real property assets three traditional approaches value income approach market approach cost approach considered company primarily relied market cost approaches land valuing fee simple interest land company utilized sales comparison approach market approach sales comparison approach estimates value based purchasers sellers market agreed price comparable properties approach based principle substitution states limits prices rents rates tend set prevailing prices rents rates equally desirable substitutes conducting sales comparison approach data gathered comparable properties adjustments made factors including market conditions size accessfrontage zoning location conditions sale greatest weight typically given comparable sales proximity similar size owned sites cases market participants contacted augment analysis confirm conclusions value building site improvements valuing fee simple interest real property improvements company utilized direct indirect methods cost approach direct method cost approach analysis starting point basis cost approach rcn order estimate rcn buildings site improvements various factors considered including building size year built number stories breakout space property history maintenance history used data collected calculate rcn buildings using recognized estimating sources developing replacement reproduction insurable value costs application indirect method cost approach first step estimate crn improvement via indirect trending method cost approach estimate crn amounts company applied published inflation indices key energy services inc subsidiaries notes consolidated financial statements continued obtained third party sources asset’s historical cost convert known cost indication current cost historical cost used starting point estimating rcn considered approach assets historical records rcn crn improvements computed company estimated allowance physical depreciation buildings land improvements based upon respective age intangible assets financial information used estimate fair values intangible assets consistent information used estimating company’s enterprise value trademarks tradenames valued primarily utilizing relief royalty method income approach resulting value intangible assets based application approach 520 significant inputs assumptions included remaining useful lives forecasted revenue streams applicable royalty rates tax rates applicable discount rates customer relationships considered analysis based valuation excess earnings methodology value attributed customer relationships debt fair value debt 250 million 25 million represents current portion fair value debt determined using income approach based market yields comparable securities fair value respect term loan estimated approximate par value asset retirement obligations fair value asset retirement obligations determined using estimated plugging abandonment costs december 15 2016 adjusted inflation using annual average 126 discounted appropriate creditadjusted risk free rate ranging 22 29 depending life well fair value asset retirement obligations estimated 91 million income taxes amount deferred income taxes recorded determined accordance asc 740 income taxes “asc 740” warrants pursuant plan effective date company issued two series warrants former holders predecessor companys common stock one series warrants expire december 15 2020 series warrants expire december 15 2021 warrant exercisable one share company’s common stock par value 001 issuance warrants recorded fair value determined using blackscholes option pricing model assumptions detailed following table warrants equity classified issuance recorded increase additional paidin capital amount 38 million assumptions blackscholes option pricing model key energy services inc subsidiaries notes consolidated financial statements continued following freshstart condensed consolidated balance sheet presents implementation plan adoption freshstart accounting december 15 2016 reorganization adjustments recorded within condensed consolidated balance sheet reflect effects plan including discharge liabilities subject compromise adoption freshstart accounting accordance asc 852 thousands reorganization fresh start adjustments reorganization adjustments thousands represents amounts recorded effective date implementation plan including settlement liabilities subject compromise issuance new debt repayment old debt reinstatement contract rejection obligations writeoff debt issuance costs proceeds received rights offering distributions successor common stock warrants cancellation predecessor common stock cancellation predecessor stock incentive plan key energy services inc subsidiaries notes consolidated financial statements continued key energy services inc subsidiaries notes consolidated financial statements continued key energy services inc subsidiaries notes consolidated financial statements continued key energy services inc subsidiaries notes consolidated financial statements continued note 4 liabilities subject compromise pursuant asc 852 liabilities subject compromise chapter 11 cases distinguished liabilities nonfiling entities liabilities expected compromised postpetition liabilities amount liabilities subject compromise represent company’s estimate determinable known potential prepetition claims addressed connection bankruptcy proceedings liabilities reported company’s current estimate allowed claim amounts even though claims may settled lesser amounts prior settlements pursuant plan liabilities subject compromise comprised following thousands note 5 reorganization items asc 852 requires financial statements periods subsequent filing chapter 11 cases distinguish transactions events directly associated reorganization ongoing operations business revenues expenses realized gains losses adjustments expected amount allowed claims liabilities subject compromise provisions losses directly associated reorganization restructuring business reported “reorganization items net” consolidated statements operations key energy services inc subsidiaries notes consolidated financial statements continued following table summarizes reorganizations items thousands exception 15 million 152 million professional fees year ended december 31 2017 period december 16 2016 december 31 2016 respectively 10 million settlement rejection damages period december 16 2016 december 31 2016 reorganization items non cash expenses note 6 assets held sale april 2015 announced decision exit markets participate outside north america strategy sell relocate assets businesses operating markets fourth quarter 2015 assets related liabilities russian business unit included international reporting segment met criteria assets held sale russian business unit completed third quarter 2017 note 7 balance sheet information table presents comparative detailed information current assets december 31 2017 2016 thousands table presents comparative detailed information noncurrent assets december 31 2017 2016 thousands key energy services inc subsidiaries notes consolidated financial statements continued table presents comparative detailed information current liabilities december 31 2017 2016 thousands table presents comparative detailed information noncurrent liabilities december 31 2017 2016 thousands note 8 income loss net table presents comparative detailed information income expense year ended december 31 2017 period december 16 2016 december 31 2016 period january 1 2016 december 15 2016 year ended december 31 2015 thousands key energy services inc subsidiaries notes consolidated financial statements continued note 9 allowance doubtful accounts table presents rollforward allowance doubtful accounts year ended december 31 2017 period december 16 2016 december 31 2016 period january 1 2016 december 15 2016 year ended december 31 2015 thousands connection application fresh start accounting december 15 2016 carrying value trade receivables adjusted fair value eliminating reserve doubtful accounts see “note 3 fresh start accounting” details note 10 property equipment property equipment consists following thousands interest capitalized average amount accumulated expenditures major capital projects construction using effective interest rate based related debt underlying assets placed service capitalized interest year ended december 31 2017 period december 16 2016 december 31 2016 period january 1 2016 december 15 2016 year ended december 31 2015 zero december 31 2017 2016 capital lease obligations decline market value common stock comparison carrying value assets third quarter 2015 well persistent low oil prices affect low oil prices industry determined goodwill testing triggering events triggering events required us perform step one goodwill impairment test identify potential impairment step one testing indicated potential impairment coiled tubing services segment required us perform step two goodwill impairment test determine amount impairment preliminary step two testing performed third quarter 2015 using discounted cash flow model determine fair value concluded certain fixed assets impaired result recorded estimated pretax charge 450 million third quarter 2015 fourth quarter 2015 finalized step two testing preliminarily performed third quarter 2015 based additional analysis performed outside consultants result recorded additional pretax asset impairment charge 61 million fourth quarter 2015 key energy services inc subsidiaries notes consolidated financial statements continued note 11 goodwill intangible assets components intangible assets december 31 2017 2016 follows thousands amortization expense intangible assets determinable lives follows thousands weighted average remaining amortization periods expected amortization expense next five years definite lived intangible assets follows thousands result sale enhanced oilfield technology business unit assets longer using certain developed technology patent result fully impaired 34 million patent 2015 addition longer use edge tradename result fully impaired 15 million tradename 2015 edge tradename enhanced oilfield technology developed technology patent part fishing rental services segment perform analysis goodwill impairment annual basis unless event occurs triggers additional interim testing decline market value stock third quarter 2015 well persistent low oil prices affect low oil prices industry also determined triggering events making necessary perform testing possible goodwill impairment us rig services coiled tubing services fishing rental services fluid management services international segments analysis concluded remaining 5610 million goodwill segments fully impaired also goodwill analysis indication impairment fixed assets coiled tubing services segment see “note 10 property equipment” discussion note 12 earnings per share following table presents basic diluted earnings per share “eps” years ended december 31 2017 2016 2015 thousands except per share amounts stock options warrants stock appreciation rights “sars” included computation diluted earnings per share using treasury stock method restricted stock awards legally considered issued outstanding granted included basic weighted average shares outstanding company issued potentially dilutive instruments rsus stock options sars warrants however company included instruments calculation diluted loss per share periods presented include would antidilutive following table shows potentially dilutive instruments thousands material changes share amounts subsequent balance sheet date would material impact earnings per share calculation note 13 asset retirement obligations connection well servicing activities operate number saltwater disposal “swd” facilities operations involve transportation handling disposal fluids swd facilities byproducts drilling process swd facilities used connection fluid hauling operations subject future costs associated retirement properties result incurred costs associated proper storage disposal materials key energy services inc subsidiaries notes consolidated financial statements continued annual accretion assets associated asset retirement obligations 02 million less 01 million 06 million year ended december 31 2017 periods december 16 2016 december 31 2016 january 1 2016 december 15 2016 year ended december 31 2015 respectively application freshstart accounting effectiveness companys plan reorganization resulted financial statements predecessor successor comparable summary changes asset retirement obligations follows thousands note 14 estimated fair value financial instruments cash equivalents accounts receivable accounts payable accrued liabilities carrying amounts approximate fair value short maturity instruments carrying value equal fair value instruments balance sheet date term loan facility due 2021 variable interest rates loans approximate current market rates fair values loans borrowed facility approximate carrying values note 15 income taxes us tax cuts jobs act “2017 tax act” enacted december 22 2017 tax act comprehensive tax reform legislation contains significant changes corporate taxation provisions enacted law include permanent reduction corporate income tax rate 35 21 imposing mandatory onetime tax unrepatriated accumulated earnings foreign subsidiaries partial limitation deductibility business interest expense limitation net operating losses 80 taxable income year shift us taxation multinational corporations tax worldwide income partial territorial system along rules create new us minimum tax earnings foreign subsidiaries related provisions maintain us tax base recognized income tax effects 2017 tax act accordance staff accounting bulletin 118 provides sec staff guidance application asc topic 740 income taxes guidance allows measurement period one year enactment date finalize recording related tax impacts 2017 financial results reflect provisional income tax effects 2017 tax act accounting asc topic 740 incomplete reasonable estimate could determined identify items income tax effects 2017 tax act could reasonably estimated december 31 2017 due changes us tax laws result 2017 tax act recorded provisional amount related following key energy services inc subsidiaries notes consolidated financial statements continued reduction us corporate income tax rate measure deferred tax assets liabilities using enacted tax rates apply years temporary differences expected reverse accordingly deferred tax assets liabilities remeasured reflect reduction us corporate income tax rate 35 21 resulting provisional 824 million income tax expense recorded however change also resulted corresponding provisional 824 million income tax benefit respect existing valuation allowance recorded net deferred tax assets december 31 2017 offsetting provisional amounts recorded fourth quarter 2017 necessary information analyze effects 2017 tax act believe provisional amounts recorded fourth quarter 2017 represent reasonable estimate accounting implications us tax reform ultimate determination tax impacts may differ provisional amounts recorded fourth quarter 2017 due regulatory guidance expected issued future tax law technical corrections possible changes interpretations assumptions actions taken result tax legislation clarification addition still analyzing certain aspects 2017 tax act refining calculations could potentially affect measurement provisional balances continue evaluate 2017 tax act adjustment provisional amounts reported reporting period adjustments determined later fourth quarter 2018 components income tax expense follows thousands made federal income tax payments zero year ended december 31 2017 period december 16 2016 december 31 2016 period january 1 2016 december 15 2016 year ended december 31 2015 respectively addition received federal income tax refunds zero 04 million 69 million 119 million year ended december 31 2017 period december 16 2016 december 31 2016 period january 1 2016 december 15 2016 year ended december 31 2015 respectively key energy services inc subsidiaries notes consolidated financial statements continued income tax expense benefit differs amounts computed applying statutory federal rate follows december 31 2017 2016 deferred tax assets liabilities consisted following thousands december 31 2017 net deferred tax asset comprised 2086 million deferred tax assets valuation allowance 331 million deferred tax liabilities valuation allowance net deferred tax asset decreased approximately 518 million december 31 2016 december 31 2017 decrease primarily due reduction us corporate income tax rate enactment 2017 tax act key energy services inc subsidiaries notes consolidated financial statements continued deferred tax assets liabilities recognized estimated future tax effects temporary differences tax basis asset liability reported amount consolidated financial statements measurement deferred tax assets liabilities based enacted tax laws rates currently effect jurisdictions operations recording deferred income tax assets consider whether likely portion deferred income tax assets realized ultimate realization deferred income tax assets dependent upon generation future taxable income appropriate character periods deferred income tax assets would deductible consider scheduled reversal deferred income tax liabilities projected future taxable income determination due history losses recent years continued challenges oil gas industry management continues believe likely able realize net deferred tax assets therefore valuation allowance remains net deferred tax asset balance estimate december 31 2017 2016 2015 available 3731 million 2528 million attribute reduction 2438 million respectively federal net operating loss carryforwards however internal revenue code sections 382 383 impose limitations corporation’s ability utilize tax attributes corporation experiences “ownership change” company experienced ownership change december 15 2016 emergence company certain domestic subsidiaries chapter 11 bankruptcy proceedings considered change ownership purposes irc section 382 result approximately 24 million net operating losses december 31 2017 subject section 382 limitation expire 2019 2020 subsequent ownership change occur result future transactions company’s stock company’s use remaining us tax attributes may limited estimate december 31 2017 2016 2015 available 4856 million 3788 million 2589 million respectively state net operating loss carryforwards expire 2018 2037 estimate remaining capital loss carryforward 780 million 612 million expired 2017 remaining capital loss carryforwards expire 2021 provide us income taxes withholding taxes unremitted earnings subsidiary canada earnings considered permanently reinvested cash flow generated business needed fund additional equipment working capital requirements jurisdiction furthermore provide us income taxes unremitted earnings foreign subsidiaries december 31 2017 company’s noncanadian foreign subsidiaries accumulated deficit earnings company intend repatriate earnings foreign subsidiaries file income tax returns us including federal various state filings certain foreign jurisdictions number years open statute limitations subject audit varies depending tax jurisdiction 2014 internal revenue service “irs” concluded audit returns tax years ended december 31 2010 2011 2012 material changes 2015 irs concluded audit returns tax year ended december 31 2014 changes significant filings mexico examined tax years 2010 plan substantial portion company’s prepetition debt securities revolving credit facility obligations extinguished absent exception debtor recognizes cancellation indebtedness income “codi” upon discharge outstanding indebtedness amount consideration less adjusted issue price internal revenue code 1986 amended “irc” provides debtor bankruptcy case may exclude codi taxable income must reduce certain tax attributes amount codi realized result consummation plan reorganization amount codi realized taxpayer adjusted issue price indebtedness discharged less sum amount cash paid ii issue price new indebtedness issued iii fair market value consideration including equity issued result market value equity upon emergence chapter 11 bankruptcy proceedings estimated amount us codi approximately 2958 million reduce value key’s us net operating losses including federal state value 5188 million december 15 2016 actual reduction tax attributes occur first day company’s tax year subsequent date emergence december 16 2016 uncertainty income taxes december 31 2017 december 31 2016 december 16 2016 december 31 2015 01 million 04 million 04 million 06 million respectively unrecognized tax benefits recognized would impact effective tax rate recognized net tax benefit 03 million 2017 zero period ended december 31 2016 02 million period ended december 15 2016 09 million 2015 statutes limitations expiration expect remaining reserve key energy services inc subsidiaries notes consolidated financial statements continued uncertain tax positions reverse within next twelve months reconciliation gross change unrecognized tax benefits follows thousands note 16 longterm debt components longterm debt follows thousands abl facility december 15 2016 company key energy services llc borrowers “abl borrowers” entered abl facility financial institutions party thereto time lenders “abl lenders” bank america na administrative agent lenders bank america na wells fargo bank national association cocollateral agents lenders abl facility provides aggregate initial commitments abl lenders 80 million february 3 2017 increased 100 million matures june 15 2021 abl facility provides abl borrowers ability borrow aggregate principal amount equal lesser aggregate revolving commitments effect ii sum 85 value eligible accounts receivable plus b 80 value eligible unbilled accounts receivable subject limit equal greater x 35 million 25 commitments amount may borrowed abl facility subject increase reduction based certain segregated cash reserves provided abl facility addition percentages accounts receivable unbilled accounts receivable included calculation described subject reduction extent certain bad debt writedowns dilutive items provided abl facility key energy services inc subsidiaries notes consolidated financial statements continued borrowings abl facility bear interest abl borrowers’ option per annum rate equal libor 30 60 90 180 consent abl lenders 360 days plus applicable margin varies 250 450 depending borrowers’ fixed charge coverage ratio time ii base rate equal sum greatest x prime rate federal funds rate plus 050 z 30day libor plus 10 plus b applicable margin varies 150 350 depending borrowers’ fixed charge coverage ratio time addition abl facility provides unused line fees 10 125 per year depending utilization letter credit fees certain factors abl facility may future guaranteed certain company’s existing future subsidiaries “abl guarantors” together abl borrowers “abl loan parties” secure obligations abl facility abl loan parties granted grant applicable administrative agent firstpriority security interest benefit abl lenders present future accounts receivable inventory related assets proceeds foregoing “abl priority collateral” addition obligations abl loan parties abl facility secured secondpriority liens term priority collateral described “term loan facility” revolving loans abl facility may voluntarily prepaid whole part without premium penalty subject breakage similar costs abl facility contains certain affirmative negative covenants including covenants restrict ability abl loan parties take certain actions including among things subject certain significant exceptions incurrence debt granting liens making investments entering transactions affiliates payment dividends sale assets abl facility also contains requirement abl borrowers comply certain periods fixed charge coverage ratio 100 december 31 2017 borrowings outstanding abl facility 356 million letters credit outstanding borrowing capacity 247 million available subject covenant constraints abl facility term loan facility december 15 2016 company entered term loan facility among company borrower certain subsidiaries company named guarantors therein financial institutions party thereto time lenders collectively “term loan lenders” cortland capital market services llc cortland products corp agent lenders term loan facility outstanding principal amount 250 million term loan facility mature december 15 2021 although maturity date may company’s request extended one term loan lenders pursuant terms term loan facility borrowings term loan facility bear interest company’s option per annum rate equal libor one two three six consent term loan lenders 12 months plus 1025 ii base rate equal sum greatest x prime rate federal funds rate plus 050 z 30day libor plus 10 plus b 925 term loan facility guaranteed certain company’s existing future subsidiaries “term loan guarantors” together company “term loan parties” secure obligations term loan facility term loan parties granted grant applicable agent firstpriority security interest benefit term loan lenders substantially term loan party’s assets certain excluded assets abl priority collateral “term priority collateral” addition obligations term loan parties term loan facility secured secondpriority liens abl priority collateral described “abl facility” loans term loan facility may prepaid company’s option subject payment prepayment premium certain circumstances provided term loan facility prepayment made first anniversary loan prior second anniversary prepayment must made 106 principle amount prepayment made second anniversary prior third anniversary prepayment must made 103 principle amount third anniversary prepayment made prepayment premium due company required make principal payments amount 625000 per quarter commencing quarter ending march 31 2017 addition pursuant term loan facility company must prepay offer prepay applicable term loans net cash proceeds certain debt incurrences asset sales excess cash flow upon certain change control transactions subject case certain exceptions term loan facility contains certain affirmative negative covenants including covenants restrict ability term loan parties take certain actions including among things subject certain significant exceptions incurrence debt granting liens making investments entering transactions affiliates payment dividends sale assets term loan facility also contains financial covenants requiring company maintain asset coverage ratio least 135 10 liquidity defined term loan facility must less 375 key energy services inc subsidiaries notes consolidated financial statements continued million least 200 million must cash equivalents held deposit accounts last day fiscal quarter subject certain exceptions cure rights weighted average interest rates outstanding borrowings term loan facility year ended december 31 2017 follows longterm debt principal repayment interest expense presented schedule repayment requirements longterm debt next five years thereafter december 31 2017 thousands interest expense year ended december 31 2017 period december 16 2016 december 31 2016 period january 1 2016 december 15 2016 year ended december 31 2015 consisted following thousands key energy services inc subsidiaries notes consolidated financial statements continued deferred financing costs summary deferred financing costs including capitalized costs writeoffs amortization presented table thousands predecessor balance 148 million eliminated accordance asc 852 recorded reorganization item consolidated statement operations see “note 5 reorganization items” details note 17 commitments contingencies operating lease arrangements lease certain property equipment noncancelable operating leases expire various dates 2024 varying payment dates throughout month addition number leases scheduled expire 2018 december 31 2017 future minimum lease payments noncancelable operating leases follows thousands also party significant number monthtomonth leases canceled time operating lease expense 64 million less 01 million 114 million 169 million year ended december 31 2017 period december 16 2016 december 31 2016 period january 1 2016 december 15 2016 year ended december 31 2015 respectively key energy services inc subsidiaries notes consolidated financial statements continued litigation various suits claims arising ordinary course business pending us conduct business throughout continental united states may subject jury verdicts arbitrations result outcomes favor plaintiffs also exposed various claims abroad continually assess contingent liabilities including potential litigation liabilities well adequacy accruals need disclosure items establish provision contingent liability probable liability incurred amount reasonably estimable december 31 2017 aggregate amount liabilities related litigation deemed probable reasonably estimable 47 million believe disposition matters result additional loss materially excess amounts recorded liabilities related litigation matters deemed probable reasonably estimable december 31 2016 54 million november 2015 santa barbara county district attorney filed criminal complaint two former employees key specifically alleging three counts violations california labor code section 6425a key complaint sought unspecified penalties key related october 12 2013 accident resulted death one key employee drilling site near santa maria california arraignment held february 10 2016 key former employees pleaded guilty charges january 10 2017 key entered settlement santa barbara county district attorney key agreed plead contest one felony count 2 violation california labor code 6425a santa barbara county district attorney also agreed recommend total restitution fines fees surcharges exceed 450000 court dismissed remaining charges counts 1 3 key parties agreed postpone sentencing matter january 31 2018 parties agreed key pays total restitution fines fees surcharges january 31 2018 santa barbara county district attorney object key withdrawing plea felony count 2 entering plea misdemeanor january 31 2018 sentence entered misdemeanor matter concluded tax audits routinely subject audits tax authorities past received material assessments tax auditors december 31 2017 2016 recorded reserves management feels appropriate future potential liabilities result prior audits believe fully reserved assessments ultimate amount settlements vary estimates selfinsurance reserves maintain reserves workers’ compensation vehicle liability balance sheet based judgment estimates using actuarial method based claims incurred estimate general liability claims casebycase basis maintain insurance policies workers’ compensation vehicular liability general liability claims insurance policies carry selfinsured retention limits deductibles per occurrence basis retention limits deductibles accounted accrual process workers’ compensation vehicular liability general liability claims deductibles 5 million maxim per vehicular liability claim 2 million per general liability claim december 31 2017 2016 recorded 522 million 587 million respectively selfinsurance reserves related workers’ compensation vehicular liabilities general liability claims partially offsetting liabilities approximately 151 million 163 million insurance receivables december 31 2017 2016 respectively believe liabilities recorded appropriate based known facts circumstances expect losses materially excess amounts already accrued existing claims environmental remediation liabilities environmental reserve matters including remediation efforts current locations relating previouslydisposed properties record liabilities remediation efforts probable costs conduct remediation efforts reasonably estimated december 31 2017 2016 recorded 20 million 34 million respectively environmental remediation liabilities believe liabilities recorded appropriate based known facts circumstances expect losses materially excess amounts already accrued provide performance bonds provide financial surety assurances remediation maintenance swd properties comply environmental protection standards costs swd properties may mandatory comply applicable laws regulations future required divest cease operations optimization improve operations safety regulatory compliance key energy services inc subsidiaries notes consolidated financial statements continued note 18 accumulated comprehensive income loss components accumulated comprehensive loss follows thousands local currency functional currency former operations russia sold third quarter 2017 december 31 2017 december 31 2016 one us dollar equal 5761 6123 russian rubles respectively cumulative translation gains losses resulting translating financial statements functional currency us dollars included comprehensive loss accumulated stockholders’ equity partial complete sale liquidation net investment entity note 19 employee benefit plans maintain 401k plan part employee benefits package third quarter 2015 management suspended 401k matching program part cost cutting efforts prior matched 100 employee contributions 4 employee’s salary vest immediately 401k plan subject maximums 10800 10600 years ended december 31 2017 2016 2015 respectively matching contributions zero 55 million year ended december 31 2017 period december 16 2016 december 31 2016 period january 1 2016 december 15 2016 year ended december 31 2015 respectively offer participants option purchase shares common stock 401k plan fund note 20 stockholders’ equity preferred stock december 31 2017 10000000 shares preferred stock authorized par value 001 per share december 31 2017 sole share successor company’s series preferred stock confers certain rights elect directors economic rights held soter common stock december 31 2017 december 31 2016 100000000 shares common stock authorized par value 001 per share 20217641 20096462 shares issued outstanding respectively 2017 2016 2015 dividends declared paid currently intend pay dividends tax withholding repurchase shares restricted common stock previously granted certain employees pursuant agreement individuals permitted sell shares back us order satisfy minimum income tax withholding requirements related vesting grants repurchased total 56328 shares zero shares 1614047 shares 239636 shares aggregate cost 07 million zero 02 million 04 million year ended december 31 2017 period december 16 2016 december 31 2016 period january 1 2016 december 15 2016 year ended december 31 2015 respectively represented fair market value shares based price stock dates purchase key energy services inc subsidiaries notes consolidated financial statements continued note 21 sharebased compensation equity cash incentive plan effective date pursuant plan company adopted new management incentive plan titled key energy services inc 2016 equity cash incentive plan 2016 incentive plan authorizes grant compensation described following sentence comprised stock economic rights tied value stock collectively representing 11 fully diluted shares common stock effective date without regard shares reserved issuance pursuant warrants increased board initial pool 7 fully diluted shares effective date permitted terms 2016 incentive plan 2016 incentive plan provides awards restricted stock restricted stock units options stock appreciation rights cashbased awards distribution officers directors employees company subsidiaries determined new board effective date new board authorized committee thereof authorized without approval key equity holders execute deliver agreements documents instruments certificates relating 2016 incentive plan perform obligations thereunder accordance subject terms 2016 incentive plan december 31 2017 10 million shares available grant 2016 ecip stock option awards stock option awards granted incentive plans maximum contractual term ten years date grant shares issuable upon exercise stock option issued authorized unissued shares common stock following tables summarize stock option activity year ended december 31 2017 shares thousands cancellations year ended december 31 2017 include 05 million options forfeited employees exchange new grant time based performance based rsus different vesting terms forfeited options weighted average grant date fair market stock options granted year ended december 31 2017 period december 16 2016 december 31 2016 period january 1 2016 december 15 2016 year ended december 31 2015 1214 1053 zero respectively total fair value stock options vested year ended december 31 2017 period december 16 2016 december 31 2016 period january 1 2016 december 15 2016 year ended december 31 2015 17 million zero respectively year ended december 31 2017 period december 16 2016 december 31 2016 period january 1 2016 december 15 2016 year ended december 31 2015 recognized 18 million 01 million zero pretax expense related stock options respectively weighted average remaining contractual term stock option awards exercisable december 31 2017 90 years key energy services inc subsidiaries notes consolidated financial statements continued common stock awards common stock awards include restricted stock awards restricted stock units weighted average grant date fair market value common stock awards granted year ended december 31 2017 period december 16 2016 december 31 2016 period january 1 2016 december 15 2016 year ended december 31 2015 1237 3199 026 189 respectively total fair market value common stock awards vested year ended december 31 2017 period december 16 2016 december 31 2016 period january 1 2016 december 15 2016 year ended december 31 2015 62 million zero 145 million 132 million respectively following tables summarize information year ended december 31 2017 unvested common stock awards outstanding shares thousands cancellations year ended december 31 2017 include 05 million rsus forfeited employees exchange new grant time based performance based rsus different vesting terms forfeited rsus grantdate fair value timebased restricted stock units restricted stock awards determined using stock price grant date grantdate fair value performancebased restricted stock units determined using stock price grant date assuming 10x payout target however maximum 20x payout could achieved certain ebitdabased performance measures met recognize compensation expense ratably graded vesting period grant net forfeitures year ended december 31 2017 period december 16 2016 december 31 2016 period january 1 2016 december 15 2016 year ended december 31 2015 recognized 53 million 04 million 57 million 102 million respectively pretax expense continuing operations associated common stock awards unvested common stock awards outstanding december 31 2017 anticipate recognize 133 million pretax expense next 20 years phantom share plan december 2017 implemented “phantom share plan” certain employees granted “phantom shares” phantom shares vest ratably threeyear period convey right grantee receive cash payment anniversary date grant equal fair market value phantom shares vesting date grantees permitted defer payment later date phantom shares “liability” type award account awards fair value recognize compensation expense related phantom shares based change fair value awards period percentage service requirement performed net forfeitures offsetting liability recorded consolidated balance sheets note 22 transactions related parties board director relationships company purchased equipment services affiliates certain directors dollar amounts related party activities material company’s condensed consolidated financial statements key energy services inc subsidiaries notes consolidated financial statements continued note 23 supplemental cash flow information presented schedule noncash investing financing activities supplemental cash flow entries thousands cash paid interest includes cash payments interest longterm debt capital lease obligations commitment agency fees paid note 24 segment information reportable business segments us rig services fluid management services coiled tubing services fishing rental services international also “functional support” segment associated overhead costs support reportable segments us rig services fluid management services coiled tubing services fishing rental services operate geographically within united states international segment includes former operations mexico canada colombia ecuador russia bahrain oman second half 2015 ceased operations colombia ecuador middle east fourth quarter 2016 completed sale business mexico completed sale canadian subsidiary russian subsidiary second third quarters 2017 respectively evaluate performance segments based gross margin measures intersegment sales pricing based current market conditions aggregate services create reportable segments accordance asc 280 accounting policies segments described “note 1 organization summary significant accounting policies” us rig services us rig services include completion newly drilled wells workover recompletion existing oil natural gas wells well maintenance plugging abandonment wells end useful lives also provide specialty drilling services oil natural gas producers certain larger rigs capable providing conventional horizontal drilling services rigs encompass various sizes capabilities allowing us service types oil gas wells many rigs outfitted proprietary keyview® technology captures reports well site operating data provides safety control systems believe technology allows customers crews better monitor well site operations improves efficiency safety adds value services offer completion recompletion services provided rigs prepare wells production whether newly drilled recently extended workover operation completion process may involve selectively perforating well casing access production zones stimulating testing zones installing tubular downhole equipment typically provide well service rig may also provide equipment assist completion process completion services vary well work may take days several weeks perform depending nature completion workover services provide designed enhance production existing wells generally complex time consuming normal maintenance services workover services include deepening extending wellbores new formations drilling horizontal lateral wellbores sealing depleted production zones accessing previously bypassed production zones converting former production wells injection wells enhanced recovery operations conducting major subsurface repairs due equipment failures workover services may last days several weeks depending complexity workover maintenance services provided rig fleet generally required throughout life cycle oil natural gas well examples maintenance services include routine mechanical repairs pumps tubing equipment removing debris formation material wellbores pulling rods downhole equipment wellbores identify key energy services inc subsidiaries notes consolidated financial statements continued resolve production problems maintenance services generally less complicated completion workover related services require less time perform rig fleet also used process permanently shuttingin oil natural gas wells end productive lives plugging abandonment services generally require auxiliary equipment addition well servicing rig demand plugging abandonment services significantly impacted demand oil natural gas well operators required state regulations plug wells longer productive fluid management services provide transportation wellsite storage services various fluids utilized connection drilling completions workover maintenance activities also provide disposal services fluids produced subsequent well completion fluids removed well site transported disposal swd wells owned us third party addition operate fleet hot oilers capable pumping heated fluids used clear soluble restrictions wellbore demand pricing services generally correspond demand well service rigs coiled tubing services coiled tubing services involve use continuous metal pipe spooled onto large reel deployed oil natural gas wells perform various applications wellbore cleanouts nitrogen jet lifts throughtubing fishing formation stimulations utilizing acid chemical treatments coiled tubing also used number horizontal well applications milling temporary isolation plugs separate frac zones various pre post hydraulic fracturing well preparation services fishing rental services offer full line services rental equipment designed use providing drilling workover services fishing services involve recovering lost stuck equipment wellbore utilizing broad array “fishing tools” rental tool inventory consists drill pipe tubulars handling tools including patented hydrawalk® pipehandling units services pressurecontrol equipment pumps power swivels reversing units foam air units rental inventory also included frac stack equipment used support hydraulic fracturing operations associated flowback frac fluids proppants oil natural gas also provided well testing services frac stack equipment well testing services sold second quarter 2017 demand fishing rental services closely related capital spending oil natural gas producers generally function oil natural gas prices international segment includes former operations mexico canada colombia ecuador russia bahrain oman april 2015 announced decision exit markets participate outside north america end second half 2015 ceased operations colombia ecuador middle east fourth quarter 2016 completed sale business mexico completed sale canadian subsidiary russian subsidiary second third quarters 2017 respectively services international markets consisted rigbased services maintenance workover recompletion existing oil wells completion newlydrilled wells plugging abandonment wells end useful lives also technology development control systems business based canada focused development hardware software related oilfield service equipment controls data acquisition digital information flow functional support functional support segment includes unallocated overhead costs associated administrative support us international reporting segments key energy services inc subsidiaries notes consolidated financial statements continued financial summary following table presents segment information year ended december 31 2017 period december 16 2016 december 31 2016 period january 1 2016 december 15 2016 year ended december 31 2015 thousands successor company year ended december 31 2017 successor company december 31 2016 period december 16 2016 december 31 2016 key energy services inc subsidiaries notes consolidated financial statements continued predecessor company december 15 2016 period january 1 2016 december 15 2016 predecessor company year ended december 31 2015 1 longlived assets include fixed assets goodwill intangibles assets 2 functional support geographically located united states key energy services inc subsidiaries notes consolidated financial statements continued note 25 unaudited quarterly results operations following table presents summarized unaudited quarterly information two recent years covered consolidated financial statements thousands except per share data 1 quarterly earnings per common share based weighted average number shares outstanding quarter sum quarters may equal annual earnings per common share key energy services inc subsidiaries notes consolidated financial statements continued note 26 condensed consolidating financial statements senior notes predecessor company registered securities result registered securities required present following condensed consolidating financial information pursuant sec regulation sx rule 310 “financial statements guarantors issuers guaranteed securities registered” abl facility term loan facility successor company registered securities presentation condensed consolidating financial information required successor period following condensed consolidated statement operations statement cash flows predecessor periods thousands condensed consolidating statements operations thousands condensed consolidating statements operations thousands key energy services inc subsidiaries notes consolidated financial statements continued condensed consolidating statements cash flows thousands key energy services inc subsidiaries notes consolidated financial statements continued condensed consolidating statements cash flows thousands item 9item 8 financial statements supplementary data key energy services inc subsidiaries index consolidated financial statements page report independent registered public accounting firm report independent registered public accounting firm internal control financial reporting consolidated balance sheets consolidated statements operations consolidated statements comprehensive loss consolidated statements cash flows consolidated statements stockholders’ equity notes consolidated financial statements report independent registered public accounting firm board directors shareholders key energy services inc opinion financial statements audited accompanying consolidated balance sheets key energy services inc delaware corporation subsidiaries “company” december 31 2019 2018 related consolidated statements operations comprehensive loss stockholders’ equity cash flows three years period ended december 31 2019 related notes collectively referred “financial statements” opinion financial statements present fairly material respects financial position company december 31 2019 2018 results operations cash flows three years period ended december 31 2019 conformity accounting principles generally accepted united states america also audited accordance standards public company accounting oversight board united states “pcaob” company’s internal control financial reporting december 31 2019 based criteria established 2013 internal controlintegrated framework issued committee sponsoring organizations treadway commission “coso” report dated march 12 2020 expressed unqualified opinion change accounting principle discussed note 1 consolidated financial statements company changed method accounting leases year ended december 31 2019 due adoption fasb accounting standards codification topic 842 leases basis opinion financial statements responsibility company’s management responsibility express opinion company’s financial statements based audits public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether due error fraud audits included performing procedures assess risks material misstatement financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence supporting amounts disclosures financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation financial statements believe audits provide reasonable basis opinion grant thornton llp served company’s auditor since 2006 houston texas march 12 2020 report independent registered public accounting firm board directors shareholders key energy services inc opinion internal control financial reporting audited internal control financial reporting key energy services inc delaware corporation subsidiaries “company” december 31 2019 based criteria established 2013 internal controlintegrated framework issued committee sponsoring organizations treadway commission “coso” opinion company maintained material respects effective internal control financial reporting december 31 2019 based criteria established 2013 internal controlintegrated framework issued coso also audited accordance standards public company accounting oversight board united states “pcaob” consolidated financial statements company year ended december 31 2019 report dated march 12 2020 expressed unqualified opinion financial statements basis opinion company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audit accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion definition limitations internal control financial reporting company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate grant thornton llp houston tx march 12 2020 key energy services inc subsidiaries consolidated balance sheets thousands except per share amounts see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries consolidated statements operations thousands except per share amounts see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries consolidated statements comprehensive loss thousands see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries consolidated statements cash flows thousands see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries consolidated statements stockholders’ equity thousands except per share data see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries notes consolidated financial statements note 1 organization summary significant accounting policies key energy services inc wholly owned subsidiaries collectively “key” “company” “we” “us” “its” “our” provide full range well services major oil companies independent oil natural gas production companies services include rigbased coiled tubingbased well maintenance workover services well completion recompletion services fluid management services fishing rental services ancillary oilfield services additionally certain rigs capable specialty drilling applications operate major oil natural gas producing regions continental united states previously operations canada russia sold second third quarters 2017 respectively basis presentation consolidated financial statements included annual report form 10k present financial position results operations cash flows periods presented accordance gaap preparation consolidated financial statements requires us develop estimates make assumptions affect financial position results operations cash flows estimates also impact nature extent disclosure contingent liabilities among things use estimates analyze assets possible impairment ii determine depreciable lives assets iii assess future tax exposure realization deferred tax assets iv determine amounts accrue contingencies v value tangible intangible assets vi assess workers’ compensation vehicular liability selfinsured risk accruals insurance reserves vii provide allowances uncollectible accounts receivable viii value asset retirement obligations ix value equitybased compensation review significant estimates recurring basis record effect necessary adjustments prior publication financial statements adjustments made respect use estimates relate improved information previously available limitations inherent process actual results may differ materially estimates believe estimates reasonable evaluated events occurring balance sheet date included annual report form 10k possible disclosure subsequent event management monitored subsequent events date financial statements issued principles consolidation within consolidated financial statements include accounts majorityowned controlled subsidiaries eliminate intercompany accounts transactions interest entity significant control influence account interest using cost method interest entity exert significant influence control account interest using equity method restructuring reverse stock split march 6 2020 closed previously announced restructuring capital structure indebtedness “restructuring” pursuant restructuring support agreement dated january 24 2020 “rsa” lenders prior term loan facility defined collectively holding 995 “supporting term lenders” principal amount company’s outstanding term loans pursuant rsa restructuring contemplated thereby among things effected following transactions changes capital structure governance • pursuant exchange agreements entered closing restructuring exchanged approximately 2419 million aggregate outstanding principal term loans together accrued interest thereon held supporting term lenders prior term loan facility approximately 134 million newly issued shares common stock representing 97 company’s outstanding shares giving effect issuance without giving effect dilution new warrants mip defined ii 20 million term loans new 512 million term loan facility “new term loan facility” pro rata basis based holdings term loans prior term loan facility • distributed common stockholders record february 18 2020 two series warrants “new warrants” • entered 512 million new term loan facility 30 million funded closing restructuring new cash proceeds supporting term lenders 20 million issued exchange term loans held supporting term lenders prior term loan facility described ii approximate 12 million senior secured term loan tranche respect term loans held lenders prior term loan facility supporting term lenders • entered new abl facility defined • adopted new management incentive plan “mip” representing 9 company’s outstanding shares giving effect issuance shares described key energy services inc subsidiaries notes consolidated financial statements continued • made certain changes company’s governance including changes board directors “board” amendments governing documents entry stockholders agreement defined supporting term lenders accordance rsa closing restructuring company amended restated certificate incorporation entered stockholders agreement “stockholders agreement” supporting term lenders order among things provide board seven members pursuant stockholders agreement board consists chief executive officer six members appointed various supporting term lenders specifically pursuant stockholders agreement supporting term lenders hold 25 company’s outstanding shares closing restructuring entitled nominate two directors supporting term lenders hold 10 25 company’s outstanding shares closing restructuring entitled nominate one director appointees nominees supporting term lenders directed appointed nominated soter capital llc “soter” must meet “independent director” requirements set forth section 303a nyse listed company manual addition pursuant stockholders agreement supporting term lenders entitled appoint nonvoting board observer subject specified ownership thresholds accordance rsa following closing restructuring company distributed stockholders record february 18 2020 new warrants new warrants issued two series fouryear exercise period first series entitles holders purchase aggregate 1669730 newly issued shares common stock representing 10 company’s common shares closing restructuring asexercised basis giving effect exercise new warrants subject dilution issuances mip aggregate exercise price first series new warrants 1923 determined based aggregate outstanding principal amount term loans prior term loan facility plus accrued interest thereon default rate closing restructuring second series new warrants entitles holders purchase aggregate 1252297 newly issued shares common stock representing 75 company’s common shares closing restructuring asexercised basis giving effect exercise new warrants subject dilution issuances mip aggregate strike price second series new warrants 2885 determined based product aggregate outstanding principal amount term loans prior term loan facility plus accrued interest thereon default rate closing restructuring multiplied ii 150 information new term loan facility new abl facility entered connection restructuring see “note 12 longterm debt” effective immediately following closing restructuring completed 1for50 reverse stock split outstanding common stock result stock split issued outstanding common stock decreased approximately 207 million shares approximately 410000 shares accordingly share per share information contained financial statements restated retroactively show effect stock split acquisitions time acquire businesses assets consistent longterm growth strategy results operations acquisitions included financial statements beginning date acquisition accounted using acquisition method business combinations whether partial full stages acquirer records 100 assets liabilities acquired business including goodwill fair values including contingent consideration final valuations assets liabilities obtained recorded soon practicable later one year date acquisition revenue recognition recognize revenue following criteria met contract customer identified ii performance obligations contract identified iii transaction price determined iv transaction price allocated performance obligations v revenue recognized performance obligations satisfied • identifying contract customer ensures understanding company customer specific nature terms transaction finalized • inception contract company assesses goods services promised contract customer identifies performance obligation promise transfer customer either good service bundle goods services distinct ii series distinct goods services substantially pattern transfer customer • transaction price amount consideration company expects entitled exchange transferring promised goods services customer excluding amounts collected behalf third parties transaction price may include fixed amounts variable amounts nature variable amounts transaction key energy services inc subsidiaries notes consolidated financial statements continued price inherent uncertainty amount ultimately expected realized determinable outset contract however company shall estimate amount variable consideration contract inception subject certain limitations • separate performance obligations identified transaction price determined company allocates transaction price performance obligations generally done proportion standalone selling prices result discount within contract generally allocated proportionally separate performance obligations contract • revenue recognized satisfies identified performance obligation transferring promised good service customer good service considered transferred customer obtains control typical business contracts customers may include multiple performance obligations arrangements allocate revenues performance obligation based relative standalone selling price generally determine standalone selling prices based prices charged customers using expected costplus margin combined products services within contract account individual products services separately distinct ie product service separately identifiable items contract customer benefit resources readily available customer consideration including discounts allocated separate products services within contract based prices separately sell services items sold separately estimate standalone selling prices using expected costplus margin approach cash equivalents consider shortterm investments original maturity less three months cash equivalents december 31 2019 obligations prior abl facility prior term loan facility secured assets including assets held subsidiaries includes cash equivalents restrict investment cash financial institutions high credit standing limit amount credit exposure one financial institution maintain cash bank deposit brokerage accounts exceed federally insured limits december 31 2019 accounts guaranteed federal deposit insurance corporation “fdic” 250000 substantially accounts held deposits excess fdic limits certain cash accounts zerobalance controlled disbursement accounts right offset cash balances present outstanding checks written zerobalance accounts component accounts payable accompanying consolidated balance sheets accounts receivable allowance doubtful accounts establish provisions losses accounts receivable determine possibility collect part outstanding balances regularly review accounts 150 days past due invoice date collectability establish adjust allowance necessary using specific identification method exhaust collection efforts determine balance never collected write accounts receivable associated provision uncollectible accounts time entitled proceeds insurance policies amounts reserved selfinsurance liability present insurance receivables gross balance sheet component assets separate corresponding liability concentration credit risk significant customers include major oil natural gas production companies independent oil natural gas production companies natural gas production companies perform ongoing credit evaluations customers usually require material collateral maintain reserves potential credit losses necessary results operations financial position considered light fluctuations demand experienced oilfield service companies changes oil gas producers’ expenditures budgets occur fluctuations impact results operations financial position supply demand factors directly affect utilization hours primary determinants net cash provided operating activities year ended 2017 chevron texaco exploration production accounted approximately 12 consolidated revenue customer accounted 10 consolidated revenue years ended december 31 2019 2018 2017 customers accounted 10 total accounts receivable december 31 2019 2018 key energy services inc subsidiaries notes consolidated financial statements continued inventories consist primarily equipment parts spares use operations supplies held consumption valued lower average cost market property equipment property equipment carried cost less accumulated depreciation provided assets estimated depreciable lives assets using straightline method depreciation expense years ended december 31 2019 2018 2017 569 million 826 million 845 million respectively depreciate operational assets depreciable lives salvage value higher assets’ value scrap salvage value approximates 10 operational asset’s acquisition cost operational asset stacked taken service review physical condition depreciable life ultimate salvage value determine asset operable whether remaining depreciable life salvage value adjusted scrap asset accelerate depreciation asset salvage value dispose asset gain loss recognized december 31 2019 estimated useful lives asset classes follows longlived asset group tested recoverability whenever events changes circumstances indicate carrying amount may recoverable purposes testing impairment group longlived assets along lines business based services provided lowest level identifiable cash flows largely independent cash flows assets liabilities would record impairment charge reducing net carrying value estimated fair value asset group’s estimated future cash flows less net carrying value events changes circumstance cause us evaluate fixed assets recoverability possible impairment may include changes market conditions adverse movements prices oil natural gas changes asset group expected future life intended use physical condition could reduce fair value certain property equipment development future cash flows determination fair value asset group involves significant judgment estimates see “note 6 property equipment” discussion asset retirement obligations recognize liability fair value legal obligations associated retirement tangible longlived assets capitalize equal amount cost asset depreciate additional cost estimated useful life assets obligations perform asset retirement activities unconditional despite uncertainties may exist surrounding individual retirement activity accordingly recognize liability fair value conditional asset retirement obligation fair value reasonably estimated determining fair value examine inputs believe market participant would use transfer liability probabilityweight potential costs thirdparty would charge adjust cost inflation estimated life asset discount cost using credit adjusted risk free rate significant judgment involved estimating future cash flows associated obligations well ultimate timing cash flows estimates amount timing cash flows change changes may material impact results operations see “note 10 asset retirement obligations” deposits due capacity constraints equipment manufacturers sometimes required make advanced payments certain oilfield service equipment items used normal course business years ended december 31 2019 2018 deposits totaled 87 million 13 million respectively deposits consist primarily deposit requirements insurance companies payments made related high demand longlead time items key energy services inc subsidiaries notes consolidated financial statements continued capitalized interest capitalized average amount accumulated expenditures major capital projects construction using effective interest rate based related debt underlying assets placed service capitalized interest added cost assets amortized depreciation expense useful life assets included depreciation amortization line accompanying consolidated statements operations deferred financing costs deferred financing costs associated longterm debt carried cost amortized interest expense using effective interest method life related debt instrument related debt instrument retired remaining unamortized costs included determination gain loss extinguishment debt record gains losses extinguishment debt part continuing operations accordance asu 201503 record debt financing costs reduction longterm debt see “note 12 longterm debt” discussion valuation tangible finitelived intangible assets fixed assets finitelived intangibles tested potential impairment circumstances events indicate possible impairment may exist circumstances events referred “trigger events” examples trigger events include limited adverse change market conditions significant decrease benefits derived acquired business change use asset significant disposal particular asset class trigger event occurs impairment test performed based undiscounted cash flow analysis perform impairment test make judgments estimates assumptions regarding longterm forecasts revenues expenses relating assets subject review market conditions energy prices estimated depreciable lives assets discount rate assumptions legal factors impact operations significant effect estimates use determine whether assets impaired results undiscounted cash flow analysis indicate carrying value assets tested impairment recoverable record impairment charge write carrying value assets fair value using different judgments assumptions estimates could potentially arrive materially different fair value assets tested impairment may result impairment charge internaluse software capitalize costs incurred application development stage internaluse software amortize costs software’s estimated useful life generally five seven years costs incurred related selection maintenance internaluse software expensed incurred litigation estimating liabilities related litigation take account available facts circumstances order determine whether loss probable reasonably estimable various suits claims arising ordinary course business pending us conduct business throughout continental united states may subject jury verdicts arbitrations result outcomes favor plaintiffs continually assess contingent liabilities including potential litigation liabilities well adequacy accruals need disclosure items establish provision contingent liability probable liability incurred amount reasonably estimable see “note 13 commitments contingencies” environmental operations routinely involve storage handling transport disposal bulk waste materials contain oil contaminants regulated substances operations subject various federal state local laws regulations intended protect environment environmental expenditures expensed capitalized depending future economic benefit expenditures relate existing condition caused past operations future economic benefits expensed record liabilities undiscounted basis remediation efforts probable costs conduct remediation efforts reasonably estimated litigation reserves reflect application insurance coverage environmental reserves reflect management’s assessment insurance coverage may apply matters issue see “note 13 commitments contingencies” key energy services inc subsidiaries notes consolidated financial statements continued selfinsurance primarily selfinsured physical damage equipment automobiles well workers’ compensation claims accruals maintain consolidated balance sheet relate deductibles selfinsured retentions estimate use historical claims data trend analysis assist management liability amount selfinsurance reserves utilize services third party actuary actual outcome claim could differ significantly estimated amounts adjust loss estimates calculation accruals based upon actual claim settlements reported claims see “note 13 commitments contingencies” income taxes account deferred income taxes using asset liability method provide income taxes significant temporary differences management determines current tax liability well taxes incurred result current operations yet deferred future periods current taxes payable represent liability related income tax returns current year net deferred tax expense benefit represents change balance deferred tax assets liabilities reported consolidated balance sheets deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled management makes certain assumptions timing temporary tax differences differing treatment certain items tax accounting purposes whether differences permanent final determination tax liability involves interpretation local tax laws tax treaties related authorities jurisdiction well significant use estimates assumptions regarding scope future operations results achieved timing nature income earned expenditures incurred record valuation allowances reduce deferred tax assets determine likely eg likelihood 50 deferred tax assets realized future periods assess likelihood use estimates judgment regarding future taxable income well jurisdiction taxable income generated determine whether valuation allowance required ultimate realization deferred tax assets depends ability generate sufficient taxable income appropriate character related jurisdiction future evidence supporting ability include current financial position results operations actual forecasted results reversal deferred tax liabilities tax planning strategies well current forecasted business economics industry additionally record uncertain tax positions financial statements net recognizable amount based amount management deems likely sustained upon ultimate settlement tax authorities domestic international tax jurisdictions operate estimates assumptions regarding current deferred tax items inaccurate modified changes could potentially material negative impacts earnings see “note 11 income taxes” discussion accounting income taxes changes valuation allowance components tax rate reconciliation realization loss carryforwards earnings per share basic earnings per common share determined dividing net earnings applicable common stock weighted average number common shares actually outstanding period diluted earnings per common share based increased number shares would outstanding assuming conversion dilutive outstanding convertible securities using treasury stock “as converted” methods see “note 8 earnings per share” sharebased compensation issue issued timebased vesting performancebased vesting stock options timebased vesting performancebased vesting restricted stock units restricted stock awards employees part employees’ compensation retention tool nonemployee directors calculate fair value awards grant date amortize fair value compensation expense ratably vesting period award net forfeitures grantdate fair value timebased restricted stock units restricted stock awards determined using stock price grant date grantdate fair value performancebased restricted stock units determined using stock price grant date assuming 10x payout target however maximum 20x payout could achieved certain ebitdabased performance measures met fair value stock option awards estimated using blackscholes fair value model key energy services inc subsidiaries notes consolidated financial statements continued valuation stock options requires us estimate expected term award estimate using simplified method sufficient historical exercise information additionally valuation stock option awards also dependent historical stock price volatility view limited amount time elapsed since reorganization volatility calculated based historical stock price volatility peer group lookback period equivalent expected term award fair value performancebased stock options restricted stock units estimated manner timebased awards assumes performance goals achieved awards vest performance based awards vest previously recognized compensation costs reversed record sharebased compensation component general administrative direct operating expense based role applicable individual see “note 16 sharebased compensation” foreign currency gains losses respect former operations russia sold third quarter 2017 local currency functional currency assets liabilities translated rates exchange effect balance sheet date income expense items translated average rates exchange period resulting gains losses arising translation accounts functional currency us dollar included separate component stockholders’ equity comprehensive income partial complete sale liquidation net investment foreign entity time former foreign subsidiaries may entered transactions denominated currencies functional currency transactions initially recorded functional currency subsidiary based applicable exchange rate effect date transaction end month transactions remeasured equivalent amount functional currency based applicable exchange rates effect time adjustment required remeasure transaction equivalent amount functional currency end month recorded income loss foreign subsidiary component income net comprehensive loss display comprehensive loss components financial statements classify items comprehensive income loss nature financial statements display accumulated balance comprehensive income loss separately stockholders’ equity leases lease real property equipment various leasing arrangements enter leasing arrangement analyze terms arrangement determine whether lease accounted operating lease capital lease periodically incur costs improve assets lease arrangements value leasehold improvements exceeds threshold capitalization record improvement component property equipment amortize improvement useful life improvement lease term whichever shorter certain operating lease agreements structured include scheduled specified rent increases term lease agreement increases may result inducement “rent holiday” conveyed us early lease included reflect anticipated effects inflation recognize scheduled specified rent increases straightline basis term lease agreement addition certain operating lease agreements contain incentives induce us enter lease agreement upfront cash payments us payment lessor costs moving expenses assumption lessor preexisting lease agreements third parties payments made us behalf represent incentives consider reduction rent expense recognized straightline basis term lease agreement recent accounting developments asu 201613 june 2016 fasb issued asu 201613 financial instrumentscredit losses topic 326 measurement credit losses financial instruments change companies measure credit losses financial assets certain instruments aren’t measured fair value net income standard replace today’s “incurred loss” approach “expected loss” model instruments measured amortized cost availableforsale debt securities entities required record allowances rather reduce carrying amount amendments update effective annual periods beginning december 15 2019 interim periods within annual periods adoption asu 201613 expected material impact consolidated financial statements key energy services inc subsidiaries notes consolidated financial statements continued asu 201602 february 2016 fasb issued asu 201602 leases topic 842 replaced existing lease guidance new standard intended provide enhanced transparency comparability requiring lessees record rightofuse assets corresponding lease liabilities balance sheet additional disclosure requirements include qualitative disclosures along specific quantitative disclosures objective enabling users financial statements assess amount timing uncertainty cash flows arising leases asu 201602 effective company annual reporting periods beginning december 15 2018 including interim periods within fiscal years early adoption permitted part assessment created additional internal controls financial reporting made changes business practices processes related asu key elected new prospective “comparatives 840” transition method defined asu 201811 adopted new standard january 1 2019 part adoption company elected several practical expedients contracts existed time adoption allowed company reassess whether existing contracts contained leases classification lease ie operating leases remain operating leases initial direct costs land easement arrangements part adoption company also made several accounting policy elections allow company apply standard short term leases well choose separate nonlease components lease components instead account components single lease component adoption standard impact consolidated statement operations consolidated statement cash flows immaterial impact consolidated balance sheet right use assets obtained exchange operating leases liabilities 41 million time adoption standard note 2 revenue contracts customers revenues recognized control promised goods services transferred customers amount reflects consideration expect entitled exchange goods services following table presents revenues disaggregated revenue source thousands sales taxes excluded revenues disaggregation revenue disaggregated revenues reportable segments including rig services fishing rental services coiled tubing services fluid management services rig services rig services include completion newly drilled wells workover recompletion existing oil natural gas wells well maintenance plugging abandonment wells end useful lives also provide specialty drilling services oil natural gas producers certain larger rigs capable providing conventional horizontal drilling services rigs encompass various sizes capabilities allowing us service types oil gas wells recognize revenue within rig services segment measuring progress toward satisfying performance obligation manner best depicts transfer goods services customer control services transferred services rendered customer specifically recognize revenue services provided typically daily right invoice customer services performed rig services billed monthly payment terms rig services usually 30 days invoice receipt key energy services inc subsidiaries notes consolidated financial statements continued fishing rental services offer full line services rental equipment designed use providing drilling workover services fishing services involve recovering lost stuck equipment wellbore utilizing broad array “fishing tools” rental tool inventory consists drill pipe tubulars handling tools including patented hydrawalk® pipehandling units services pressurecontrol equipment pumps power swivels reversing units foam air units recognize revenue within fishing rental services segment measuring progress toward satisfying performance obligation manner best depicts transfer goods services customer control services transferred services rendered customer specifically recognize revenue services provided typically daily right invoice customer services performed fishing rental services billed paid monthly payment terms fishing rental services usually 30 days invoice receipt coiled tubing services coiled tubing services involve use continuous metal pipe spooled onto large reel deployed oil natural gas wells perform various applications wellbore cleanouts nitrogen jet lifts throughtubing fishing formation stimulations utilizing acid chemical treatments coiled tubing also used number horizontal well applications milling temporary isolation plugs separate frac zones various pre posthydraulic fracturing well preparation services recognize revenue within coiled tubing services segment measuring progress toward satisfying performance obligation manner best depicts transfer goods services customer control services transferred services rendered customer specifically recognize revenue typically daily services provided right invoice customer services performed coiled tubing services billed paid monthly payment terms coiled tubing services usually 30 days invoice receipt fluid management services provide transportation wellsite storage services various fluids utilized connection drilling completions workover maintenance activities also provide disposal services fluids produced subsequent well completion fluids removed well site transported disposal saltwater disposal wells owned us third party recognize revenue within fluid management services segment measuring progress toward satisfying performance obligation manner best depicts transfer goods services customer control services transferred services rendered customer specifically recognize revenue services provided typically daily right invoice customer services performed fluid management services billed paid monthly payment terms fluid management services usually 30 days invoice receipt international segment included former operations canada russia completed sale canadian subsidiary russian subsidiary second third quarters 2017 respectively services russia consisted rigbased services maintenance workover recompletion existing oil wells completion newlydrilled wells plugging abandonment wells end useful lives canadian subsidiary technology development control systems business focused development hardware software related oilfield service equipment controls data acquisition digital information flow recognized revenue within international segment measuring progress toward satisfying performance obligation manner best depicted transfer goods services customer control services transferred services rendered customer specifically recognized revenue services provided typically daily right invoice customer services performed services within international segment billed paid monthly payment terms services within international segment usually 30 days invoice receipt key energy services inc subsidiaries notes consolidated financial statements continued arrangements multiple performance obligations typical business contracts customers may include multiple performance obligations arrangements allocate revenues performance obligation based relative standalone selling price generally determine standalone selling prices based prices charged customers using expected costplus margin combined products services within contract account individual products services separately distinct ie product service separately identifiable items contract customer benefit resources readily available customer consideration including discounts allocated separate products services within contract based prices separately sell services items sold separately estimate standalone selling prices using expected costplus margin approach contract balances revenue contracts invoice customers performance obligations satisfied point payment unconditional accordingly revenue contracts give rise contract assets liabilities asc 606 practical expedients exemptions generally expense sales commissions incurred amortization period would one year less costs recorded within general administrative expenses majority services shortterm nature contract term one year less contracts utilized practical expedient asc 606105014 exempting company disclosure transaction price allocated remaining performance obligations performance obligation part contract original expected duration one year less additionally payment terms shortterm nature settlements one year less therefore utilized practical expedient asc 606103218 exempting company adjusting promised amount consideration effects significant financing component given period entity transfers promised good service customer pays good service one year less many service contracts right consideration customer amount corresponds directly value customer entity’s performance completed date example service contract entity bills fixed amount hour service provided contracts utilized practical expedient asc 606105518 exempting company disclosure entity recognize revenue amount company right invoice accordingly disclose value unsatisfied performance obligations contracts original expected length one year less ii contracts recognize revenue amount right invoice services performed note 3 balance sheet information table presents comparative detailed information current assets december 31 2019 2018 thousands key energy services inc subsidiaries notes consolidated financial statements continued table presents comparative detailed information noncurrent assets december 31 2019 2018 thousands table presents comparative detailed information current liabilities december 31 2019 2018 thousands table presents comparative detailed information noncurrent liabilities december 31 2019 2018 thousands key energy services inc subsidiaries notes consolidated financial statements continued note 4 income net table presents comparative detailed information income expense years ended december 31 2019 2018 2017 thousands note 5 allowance doubtful accounts table presents rollforward allowance doubtful accounts years ended december 31 2019 2018 2017 thousands note 6 property equipment property equipment consist following thousands note 7 intangible assets components intangible assets december 31 2019 2018 follows thousands key energy services inc subsidiaries notes consolidated financial statements continued weighted average remaining amortization periods expected amortization expense next five years definite lived intangible assets follows thousands amortization expense intangible assets less 01 million years ended december 31 2019 2018 2017 note 8 earnings per share following table presents basic diluted earnings per share “eps” years ended december 31 2019 2018 2017 thousands except per share amounts stock options warrants stock appreciation rights “sars” included computation diluted earnings per share using treasury stock method restricted stock awards legally considered issued outstanding granted included basic weighted average shares outstanding company issued potentially dilutive instruments rsus stock options sars warrants however company include instruments calculation diluted loss per share periods presented include would antidilutive following table shows potentially dilutive instruments thousands material changes share amounts subsequent balance sheet date would material impact earnings per share calculation note 9 estimated fair value financial instruments cash equivalents accounts receivable accounts payable accrued liabilities carrying amounts approximate fair value short maturity instruments carrying value equal fair value instruments balance sheet date prior term loan facility due 2021 variable interest rates loans approximate current market rates fair values loans borrowed facility approximate carrying values prior term loan replaced new term loan march 9 2020 also variable interest rates key energy services inc subsidiaries notes consolidated financial statements continued note 10 asset retirement obligations connection well servicing activities operate number saltwater disposal “swd” facilities operations involve transportation handling disposal fluids swd facilities byproducts drilling process swd facilities used connection fluid hauling operations subject future costs associated retirement properties result incurred costs associated proper storage disposal materials annual accretion assets associated asset retirement obligations 02 million 02 million 02 million years ended december 31 2019 2018 2017 summary changes asset retirement obligations follows thousands note 11 income taxes us tax cuts jobs act “2017 tax act” enacted december 22 2017 tax act comprehensive tax reform legislation contains significant changes corporate taxation provisions enacted law include permanent reduction corporate income tax rate 35 21 imposing mandatory onetime tax unrepatriated accumulated earnings foreign subsidiaries partial limitation deductibility business interest expense limitation net operating losses 80 taxable income year shift us taxation multinational corporations tax worldwide income partial territorial system along rules create new us minimum tax earnings foreign subsidiaries related provisions maintain us tax base recognized income tax effects 2017 tax act accordance staff accounting bulletin 118 sab 118 2017 sab 118 provided sec staff guidance application asc topic 740 income taxes allowed measurement period one year enactment date finalize recording related tax impacts 2017 financial results reflected provisional income tax effects 2017 tax act accounting asc topic 740 incomplete reasonable estimate could determined identify items income tax effects 2017 tax act could reasonably estimated december 31 2017 additional clarifying guidance law corrections issued us government 2018 related 2017 tax act provided insight properly accounting impacts us tax reform 2018 finalized accounting matter concluded adjustments required provisionally recorded amounts 2017 longer provisionally recorded items related enactment 2017 tax act december 31 2018 addition material 2017 tax act changes clarifications affected accounting year ended december 31 2019 components income tax expense follows thousands key energy services inc subsidiaries notes consolidated financial statements continued made federal income tax payments zero years ended december 31 2019 2018 2017 addition received federal income tax refunds 44 million 11 million zero years ended december 31 2019 2018 2017 respectively income tax expense benefit differs amounts computed applying statutory federal rate follows december 31 2019 2018 deferred tax assets liabilities consisted following thousands december 31 2019 net deferred tax asset comprised 2196 million deferred tax assets valuation allowance 179 million deferred tax liabilities valuation allowance net deferred tax asset increased approximately 109 million december 31 2018 december 31 2019 deferred tax assets liabilities recognized estimated future tax effects temporary differences tax basis asset liability reported amount consolidated financial statements measurement deferred key energy services inc subsidiaries notes consolidated financial statements continued tax assets liabilities based enacted tax laws rates currently effect jurisdictions operations recording deferred income tax assets consider whether likely portion deferred income tax assets realized ultimate realization deferred income tax assets dependent upon generation future taxable income appropriate character periods deferred income tax assets would deductible consider scheduled reversal deferred income tax liabilities projected future taxable income determination due history losses recent years continued challenges oil gas industry management continues believe likely able realize net deferred tax assets therefore valuation allowance remains net deferred tax asset balance estimate december 31 2019 2018 2017 available 4653 million 4342 million 3731 million attribute reduction respectively federal net operating loss carryforwards however internal revenue code sections 382 383 impose limitations corporation’s ability utilize tax attributes corporation experiences “ownership change” company experienced ownership change december 15 2016 emergence company certain domestic subsidiaries chapter 11 bankruptcy proceedings considered change ownership purposes irc section 382 completion companys restructuring march 6 2020 ownership change occurred cause company’s use remaining us tax attributes may limited estimate december 31 2019 2018 2017 available 4534 million 4293 million 4856 million respectively state net operating loss carryforwards expire 2020 2039 estimate remaining capital loss carryforward 730 million remaining capital loss carryforwards expire 2021 longer subject examination tax years 2015 federal state jurisdictions upon emergence bankruptcy december 15 2016 substantial portion company’s prepetition debt securities revolving credit facility obligations extinguished absent exception debtor recognizes cancellation indebtedness income “codi” upon discharge outstanding indebtedness amount consideration less adjusted issue price internal revenue code 1986 amended “irc” provides debtor bankruptcy case may exclude codi taxable income must reduce certain tax attributes amount codi realized result consummation plan reorganization amount codi realized taxpayer adjusted issue price indebtedness discharged less sum amount cash paid ii issue price new indebtedness issued iii fair market value consideration including equity issued result market value equity upon emergence chapter 11 bankruptcy proceedings estimated amount us codi approximately 2958 million reduced value key’s us net operating losses including federal state value 5188 million december 15 2016 actual reduction tax attributes occur first day company’s tax year subsequent date emergence december 16 2016 uncertainty income taxes december 31 2019 2018 2017 zero 01 million respectively unrecognized tax benefits recognized would impact effective tax rate years ended december 31 2019 2018 2017 recognized net tax benefit zero 01 million 03 million respectively statutes limitations expiration december 31 2019 ending balance uncertain tax position remains zero due statute limitations lapse reconciliation gross change unrecognized tax benefits follows thousands key energy services inc subsidiaries notes consolidated financial statements continued note 12 longterm debt components longterm debt december 31 2019 2018 set forth table thousands subsequent periods presented debt substantially exchanged shares common stock pursuant restructuring see additional information prior longterm debt arrangements previously announced october 29 2019 company entered forbearance agreement amended december 6 2019 december 20 2019 january 10 2020 january 31 2020 “abl forbearance agreement” bank america na administrative agent “administrative agent” lenders party thereto “lenders” regarding crossdefault loan security agreement dated december 15 2016 among key administrative agent lenders february 28 2020 company lenders party thereto amended abl forbearance agreement “forbearance agreement amendment” pursuant forbearance agreement amendment lenders party thereto agreed among things extend forbearance period earliest march 6 2020 ii occurrence certain specified early termination events iii date previously announced restructuring support agreement company certain lenders company’s term loan facility terminated accordance terms connection forbearance agreement company elected make scheduled interest payments due october 18 2019 january 20 2020 term loan facility company’s failure make interest payments resulted default term loan facility cross default abl facility defaults “specified defaults” prior restructuring company party two credit facilities company key energy services llc borrowers “abl borrowers” abl facility financial institutions party thereto time lenders “abl lenders” bank america na administrative agent lenders “administrative agent” bank america na sole collateral agent lenders providing aggregate commitments abl lenders 100 million “prior abl facility” addition december 15 2016 company entered term loan facility among company borrower certain subsidiaries company named guarantors therein financial institutions party thereto time lenders collectively “term loan lenders” cortland capital market services llc cortland products corp agent lenders “prior term loan facility” effective march 6 2020 upon closing restructuring entered new term loan facility new abl facility superseded prior term loan facility prior abl facility description new prior facilities follows new abl facility march 6 2020 company key energy services llc borrowers “abl borrowers” entered amendment 3 company’s existing abl facility dated december 15 2016 amended “new abl facility” financial institutions party thereto time lenders “abl lenders” bank america na administrative agent collateral agent “abl agent” abl lenders new abl facility provides aggregate commitments abl lenders 70 million mature earlier x april 5 2024 181 days prior scheduled maturity date company’s term loan facility scheduled maturity date company’s material debt aggregate principal amount exceeding 15 million new abl facility provides abl borrowers ability borrow aggregate principal amount equal lesser aggregate revolving commitments effect ii sum 85 value eligible accounts receivable plus b 80 value eligible unbilled accounts receivable subject limit equal greater x 30 key energy services inc subsidiaries notes consolidated financial statements continued million 25 commitments amount may borrowed new abl facility subject increase reduction based certain segregated cash reserves provided new abl facility addition percentages accounts receivable unbilled accounts receivable included calculation described subject reduction extent certain bad debt writedowns dilutive items provided new abl facility borrowings new abl facility bear interest abl borrowers’ option per annum rate equal libor 30 60 90 180 consent abl lenders 360 days plus applicable margin varies 275 325 depending abl borrowers’ fixed charge coverage ratio time ii base rate equal sum greatest x prime rate federal funds rate plus 050 z 30day libor plus 10 plus b applicable margin varies 175 225 depending abl borrowers’ fixed charge coverage ratio time new abl facility provides event libor becomes unascertainable requested interest period otherwise becomes unavailable replaced benchmark interest rates company abl agent may amend new abl facility purpose replacing libor one sofrbased rates another alternate benchmark rate giving consideration general practice similar us dollar denominated syndicated credit facilities addition new abl facility provides unused line fees 05 0375 per year depending utilization letter credit fees certain factors new abl facility may future guaranteed certain company’s existing future subsidiaries “abl guarantors” together abl borrowers “abl loan parties” secure obligations new abl facility abl loan parties granted grant applicable abl agent firstpriority security interest benefit abl lenders present future accounts receivable inventory related assets proceeds foregoing “abl priority collateral” addition obligations abl loan parties abl facility secured secondpriority liens term priority collateral described “new term loan facility” revolving loans new abl facility may voluntarily prepaid whole part without premium penalty subject breakage similar costs new abl facility contains certain affirmative negative covenants including covenants restrict ability abl loan parties take certain actions including among things subject certain significant exceptions incurrence debt granting liens making investments entering transactions affiliates payment dividends sale assets new abl facility also contains requirement abl borrowers comply certain periods fixed charge coverage ratio 100 march 6 2020 borrowings outstanding new abl facility 363 million letters credit outstanding borrowing capacity 136 million available subject covenant constraints new abl facility new term loan facility march 6 2020 company entered amendment restatement agreement supporting term lenders cortland capital market services llc cortland products corp agent “term agent” amended restated prior term loan facility among company borrower certain subsidiaries company named guarantors therein financial institutions party thereto time lenders term agent amended restated amendment restatement agreement “new term loan facility” prior closing restructuring approximately 2431 million aggregate principal amount term loans outstanding prior term loan facility following closing restructuring new term loan facility comprised 30 million new money term loans funded supporting term lenders 20 million amended term loans issued exchange existing term loans held supporting term lenders collectively “new term loans” ii approximate 12 million senior secured term loan tranche respect existing term loans held lenders supporting term lenders “continuing term loans” new term loan facility mature august 28 2025 respect new term loans december 15 2021 respect continuing term loans maturity date may company’s request extended one term loan lenders pursuant terms new term loan facility new term loans bear interest per annum rate equal libor six months plus 1025 company option pay interest kind annual rate libor plus 1225 outstanding principal amount new term loans first two years following closing restructuring continuing term loans bear interest per annum rate equal libor one two three six consent term loan lenders 12 months company option pay interest kind 100 basis points per annum interest due continuing term loans new term loan facility guaranteed certain company’s existing future subsidiaries “term loan guarantors” together company “term loan parties” ensure obligations new term loan facility term loan parties granted grant applicable term agent firstpriority security interest key energy services inc subsidiaries notes consolidated financial statements continued benefit term loan lenders substantially term loan party’s assets certain excluded assets abl priority collateral “term priority collateral” addition obligations term loan parties new term loan facility secured secondpriority liens abl priority collateral described “abl facility” new term loans may prepaid company’s option subject payment prepayment premium may waived lenders holding new term loans new term loan facility representing least twothirds aggregate outstanding principal amount new term loans certain circumstances provided new term loan facility prepayment made prior first anniversary closing restructuring prepayment premium equal 3 principal amount new term loans prepaid prepayment made first anniversary second anniversary closing restructuring prepayment premium equal 2 principal amount new term loans prepaid prepayment made second anniversary third anniversary closing restructuring prepayment premium equal 1 principal amount new term loans prepaid prepayment premium thereafter company required make principal payments respect continuing term loans amount 3125 per quarter commencing quarter ending march 31 2020 required pay 1190625 maturity date continuing term loans addition pursuant new term loan facility company must prepay offer prepay applicable term loans net cash proceeds certain debt incurrences asset sales excess cash flow receipt extraordinary cash proceeds eg tax insurance upon certain change control transactions subject case certain exceptions new term loan facility contains certain affirmative negative covenants including covenants restrict ability term loan parties take certain actions including among things subject certain significant exceptions incurrence debt granting liens making investments entering transactions affiliates payment dividends sale assets new term loan facility also contains financial covenant requiring company maintain liquidity defined new term loan facility less 10 million last day fiscal quarter subject certain exceptions cure rights prior abl facility described company key energy services llc borrowers prior abl facility provided aggregate commitments abl lenders 80 million april 5 2019 abl borrowers financial institutions party thereto lenders bank america na “abl agent” administrative agent lenders entered amendment 1 “amendment 1” prior abl facility among abl borrowers financial institutions party thereto time lenders abl agent cocollateral agents lenders bank america na wells fargo bank national association amendment among things lowered applicable margin borrowings 250 450 200 250 libor borrowings ii 150 350 100 150 base rate borrowings december 20 2019 company lenders amended abl forbearance agreement loan agreement among things reduce minimum availability key required maintain abl forbearance agreement 125 million 10 million ii reduce aggregate revolving commitments loan agreement 100 million 80 million prior abl facility provided abl borrowers ability borrow aggregate principal amount equal lesser aggregate revolving commitments effect ii sum 85 value eligible accounts receivable plus b 80 value eligible unbilled accounts receivable subject limit equal greater x 35 million 25 commitments contractual interest rates prior abl facility abl borrowers’ option per annum rate equal libor 30 60 90 180 consent abl lenders 360 days plus applicable margin varies 250 450 depending abl borrowers’ fixed charge coverage ratio time ii base rate equal sum greatest x prime rate federal funds rate plus 050 z 30day libor plus 10 plus b applicable margin varied 150 350 depending abl borrowers’ fixed charge coverage ratio time addition prior abl facility provided unused line fees 10 125 per year depending utilization letter credit fees certain factors december 31 2019 borrowings outstanding abl facility 346 million letters credit outstanding borrowing capacity 119 million available subject covenant constraints abl facility key energy services inc subsidiaries notes consolidated financial statements continued prior term loan facility described company certain subsidiaries parties prior term loan facility initial outstanding principal amount 250 million borrowings prior term loan facility bore interest company’s option per annum rate equal libor one two three six consent term loan lenders 12 months plus 1025 ii base rate equal sum greatest x prime rate federal funds rate plus 050 z 30day libor plus 10 plus b 925 weighted average interest rates outstanding borrowings prior term loan facility year ended december 31 2019 follows longterm debt principal repayment interest expense presented schedule repayment requirements longterm debt december 31 2019 thousands subsequent december 31 2019 debt described substantially exchanged shares common stock pursuant restructuring interest expense years ended december 31 2019 2018 2017 consisted following thousands key energy services inc subsidiaries notes consolidated financial statements continued deferred financing costs summary deferred financing costs including capitalized costs amortization presented table thousands note 13 commitments contingencies operating lease arrangements lease certain property equipment noncancelable operating leases expire various dates 2030 varying payment dates throughout month addition number leases scheduled expire 2020 december 31 2019 future minimum lease payments noncancelable operating leases follows thousands also party significant number monthtomonth leases cancelled time operating lease expenses 46 million 48 million 64 million years ended december 31 2019 2018 2017 respectively litigation various suits claims arising ordinary course business pending us conduct business throughout continental united states may subject jury verdicts arbitrations result outcomes favor plaintiffs continually assess contingent liabilities including potential litigation liabilities well adequacy accruals need disclosure items establish provision contingent liability probable liability incurred amount reasonably estimable december 31 2019 aggregate amount liabilities related litigation deemed probable reasonably estimable 70 million believe disposition matters result additional loss materially excess amounts recorded liabilities related litigation matters deemed probable reasonably estimable december 31 2018 44 million tax audits routinely subject audits tax authorities past received material assessments tax auditors december 31 2019 2018 recorded reserves management feels appropriate future potential liabilities result prior audits believe fully reserved assessments ultimate amount settlements vary estimates key energy services inc subsidiaries notes consolidated financial statements continued selfinsurance reserves maintain reserves workers’ compensation vehicle liability balance sheet based judgment estimates using actuarial method based claims incurred estimate general liability claims casebycase basis maintain insurance policies workers’ compensation vehicular liability general liability claims insurance policies carry selfinsured retention limits deductibles per occurrence basis retention limits deductibles accounted accrual process workers’ compensation vehicular liability general liability claims deductibles 5 million maximum per vehicular liability claim 2 million maximum per general liability claim 1 million maximum per workers’ compensation claim december 31 2019 2018 recorded 514 million 501 million respectively selfinsurance reserves related workers’ compensation vehicular liabilities general liability claims partially offsetting liabilities approximately 134 million 131 million insurance receivables december 31 2019 2018 respectively believe liabilities recorded appropriate based known facts circumstances expect losses materially excess amounts already accrued existing claims environmental remediation liabilities environmental reserve matters including remediation efforts current locations relating previouslydisposed properties record liabilities remediation efforts probable costs conduct remediation efforts reasonably estimated december 31 2019 2018 recorded 20 million 22 million respectively environmental remediation liabilities believe liabilities recorded appropriate based known facts circumstances expect losses materially excess amounts already accrued provide performance bonds provide financial surety assurances remediation maintenance swd properties comply environmental protection standards costs swd properties may mandatory comply applicable laws regulations future required divest cease operations optimization improve operations safety regulatory compliance note 14 employee benefit plans maintain 401k plan part employee benefits package third quarter 2015 management suspended 401k matching program part cost cutting efforts 401k matching program reinstated january 1 2019 pursuant matched 100 employee contributions 4 employee’s salary vest immediately 401k plan subject maximums 11200 11000 10800 years ended december 31 2019 2018 2017 respectively matching contributions 45 million zero years ended december 31 2019 2018 2017 respectively offer participants option purchase shares common stock 401k plan fund note 15 stockholders’ equity preferred stock december 31 2019 10000000 shares preferred stock authorized par value 050 per share december 31 2019 sole share company’s series preferred stock conferred certain rights elect directors economic rights held soter subsequent december 31 2019 connection completion restructuring share series preferred stock redeemed cancelled consideration series preferred stock eliminated certificate incorporation common stock december 31 2019 december 31 2018 2000000 shares common stock authorized 410990 407264 shares issued outstanding respectively subsequent december 31 2019 connection completion restructuring increased number shares common stock authorized 150000000 13775267 shares issued outstanding giving effect 1for50 reverse stock split closing restructuring 2019 2018 2017 dividends declared paid currently intend pay dividends tax withholding repurchase shares restricted common stock previously granted certain employees pursuant agreement individuals permitted sell shares back us order satisfy minimum income tax withholding requirements related vesting grants repurchased total 826 shares 968 shares 1127 shares aggregate cost less 01 million 03 million 07 million years ended december 31 2019 2018 2017 respectively represented fair market value shares based price stock dates purchase key energy services inc subsidiaries notes consolidated financial statements continued note 16 sharebased compensation equity cash incentive plan may 1 2019 stockholders approved 2019 equity cash incentive plan “2019 incentive plan” 2019 incentive plan established successor incentive compensation plan 2016 “2016 incentive plan” provide company omnibus plan company may continue design structure awards restricted stock restricted stock units options stock appreciation rights cashbased awards distribution officers directors employees company subsidiaries determined board authorized committee thereof authorized without approval key equity holders execute deliver agreements documents instruments certificates relating 2019 incentive plan perform obligations thereunder accordance subject terms 2019 incentive plan march 6 2020 board approved amendment restatement 2019 incentive plan among things reserve 1239775 shares common stock grant awards plan following closing restructuring addition shares remaining available grant 2016 plan additional shares become available grant due termination expiration forfeiture cancellation cash settlement awards stock option awards stock option awards granted 2016 incentive plans maximum contractual term ten years date grant shares issuable upon exercise stock option issued authorized unissued shares common stock following tables summarize stock option activity year ended december 31 2019 shares thousands stock options granted exercised year ended december 31 2019 total fair value stock options vested year ended december 31 2019 2018 2017 zero 17 million respectively years ended december 31 2019 2018 2017 recognized zero 18 million pretax expenses related stock options respectively outstanding stock options vested december 31 2019 weighted average remaining contractual term stock option awards exercisable december 31 2019 70 years common stock awards common stock awards 2019 2016 incentive plans include restricted stock awards restricted stock units weighted average grant date fair market value common stock awards granted years ended december 31 2019 2018 2017 11184 68700 61850 respectively total fair market value common stock awards vested years ended december 31 2019 2018 2017 20 million 23 million 62 million respectively following tables summarize information year ended december 31 2019 unvested common stock awards outstanding shares thousands key energy services inc subsidiaries notes consolidated financial statements continued grantdate fair value timebased restricted stock units restricted stock awards determined using stock price grant date grantdate fair value performancebased restricted stock units determined using stock price grant date assuming 10x payout target however maximum 20x payout could achieved certain ebitdabased performance measures met recognize compensation expense ratably graded vesting period grant net forfeitures years ended december 31 2019 2018 2017 recognized 07 million 59 million 57 million respectively pretax expenses continuing operations associated common stock awards unvested common stock awards outstanding december 31 2019 anticipate recognize 10 million pretax expense next 09 years weighted average years phantom share plan december 2017 implemented “phantom share plan” certain employees granted “phantom shares” phantom shares vest ratably threeyear period convey right grantee receive cash payment anniversary date grant equal fair market value phantom shares vesting date grantees permitted defer payment later date phantom shares “liability” type award account awards fair value recognize compensation expense related phantom shares based change fair value awards period percentage service requirement performed net forfeitures offsetting liability recorded consolidated balance sheets years ended december 31 2019 2018 2017 recognized less 01 million 03 million zero respectively pretax expenses continuing operations associated phantom share awards unvested phantom share awards outstanding december 31 2019 anticipate recognize zero pretax expense next 1 weighted average year note 17 transactions related parties company purchased sold equipment services affiliates certain directors additionally company previously party corporate advisory services agreement platinum equity advisors llc “platinum” pursuant platinum provided certain business advisory services company corporate advisory services agreement expired 2019 dollar amounts related party activities material company’s condensed consolidated financial statements company also party stockholders agreement supporting term lenders also lenders new term loan facility note 18 supplemental cash flow information presented schedule noncash investing financing activities supplemental cash flow entries thousands cash paid interest includes cash payments interest longterm debt finance lease obligations commitment agency fees paid note 19 segment information reportable business segments rig services fishing rental services coiled tubing services fluid management services reportable business segments previously included international segment also “functional support” segment associated overhead costs support reportable segments rig services fishing key energy services inc subsidiaries notes consolidated financial statements continued rental services coiled tubing services fluid management services operate geographically within united states international segment included former operations canada russia completed sale canadian subsidiary russian subsidiary second third quarters 2017 respectively evaluate performance segments based gross margin measures intersegment sales pricing based current market conditions aggregate services create reportable segments accordance asc 280 accounting policies segments described “note 1 organization summary significant accounting policies” rig services rig services include completion newly drilled wells workover recompletion existing oil natural gas wells well maintenance plugging abandonment wells end useful lives also provide specialty drilling services oil natural gas producers certain larger rigs capable providing conventional horizontal drilling services rigs encompass various sizes capabilities allowing us service types oil gas wells many rigs outfitted proprietary keyview® technology captures reports well site operating data provides safety control systems believe technology allows customers crews better monitor well site operations improves efficiency safety adds value services offer completion recompletion services provided rigs prepare wells production whether newly drilled recently extended workover operation completion process may involve selectively perforating well casing access production zones stimulating testing zones installing tubular downhole equipment typically provide well service rig may also provide equipment assist completion process completion services vary well work may take days several weeks perform depending nature completion workover services provide designed enhance production existing wells generally complex time consuming normal maintenance services workover services include deepening extending wellbores new formations drilling horizontal lateral wellbores sealing depleted production zones accessing previously bypassed production zones converting former production wells injection wells enhanced recovery operations conducting major subsurface repairs due equipment failures workover services may last days several weeks depending complexity workover maintenance services provided rig fleet generally required throughout life cycle oil natural gas well examples maintenance services include routine mechanical repairs pumps tubing equipment removing debris formation material wellbores pulling rods downhole equipment wellbores identify resolve production problems maintenance services generally less complicated completion workover related services require less time perform rig fleet also used process permanently shuttingin oil natural gas wells end productive lives plugging abandonment services generally require auxiliary equipment addition well servicing rig demand plugging abandonment services significantly impacted demand oil natural gas well operators required state regulations plug wells longer productive fishing rental services offer full line services rental equipment designed use providing drilling workover services fishing services involve recovering lost stuck equipment wellbore utilizing broad array “fishing tools” rental tool inventory consists drill pipe tubulars handling tools including patented hydrawalk® pipehandling units services pressurecontrol equipment pumps power swivels reversing units foam air units rental inventory also included frac stack equipment used support hydraulic fracturing operations associated flowback frac fluids proppants oil natural gas also provided welltesting services frac stack equipment welltesting services business sold second quarter 2017 demand fishing rental services closely related capital spending oil natural gas producers generally driven oil natural gas prices coiled tubing services coiled tubing services involve use continuous metal pipe spooled onto large reel deployed oil natural gas wells perform various applications wellbore cleanouts nitrogen jet lifts throughtubing fishing formation stimulations utilizing acid chemical treatments coiled tubing also used number horizontal well applications milling temporary isolation plugs separate frac zones various pre post hydraulic fracturing well preparation services key energy services inc subsidiaries notes consolidated financial statements continued fluid management services provide transportation wellsite storage services various fluids utilized connection drilling completions workover maintenance activities also provide disposal services fluids produced subsequent well completion fluids removed well site transported disposal swd wells owned us third party addition operate fleet hot oilers capable pumping heated fluids used clear soluble restrictions wellbore demand pricing services generally correspond demand well service rigs international segment included former operations canada russia completed sale canadian subsidiary russian subsidiary second third quarters 2017 respectively services russia consisted rigbased services maintenance workover recompletion existing oil wells completion newlydrilled wells plugging abandonment wells end useful lives canadian subsidiary technology development control systems business focused development hardware software related oilfield service equipment controls data acquisition digital information flow functional support functional support segment includes unallocated overhead costs associated administrative support us international reporting segments key energy services inc subsidiaries notes consolidated financial statements continued financial summary following table presents segment information years ended december 31 2019 2018 2017 thousands year ended december 31 2019 year ended december 31 2018 key energy services inc subsidiaries notes consolidated financial statements continued year ended december 31 2017 1 longlived assets include fixed assets goodwill intangibles assets note 20 unaudited quarterly results operations following table presents summarized unaudited quarterly information two recent years covered consolidated financial statements thousands except per share data key energy services inc subsidiaries notes consolidated financial statements continued 1 quarterly earnings per common share based weighted average number shares outstanding quarter sum quarters may equal annual earnings per common share note 21 leases operating leases certain corporate offices operating locations finance leases certain vehicles determine contract lease contains embedded lease inception contract operating lease rightofuse “rou” assets included current noncurrent assets operating lease liabilities included current noncurrent liabilities consolidated balance sheets finance lease rou assets included property equipment net finance lease liabilities included current portion longterm debt longterm debt consolidated balance sheets rou assets represent right use underlying asset lease term lease liabilities represent obligation make lease payments arising lease operating finance lease rou assets liabilities recognized commencement date based present value lease payments lease term leases provide implicit rate use risk adjusted incremental borrowing rate based information available commencement date determining present value lease payments use implicit rate readily determinable lease terms may include options extend terminate lease leases remaining lease terms less one year five years include options extend leases five years include options terminate leases within one year lease expense lease payments recognized straightline basis noncancelable term lease recognized 3 million costs related operating leases twelve months ended december 31 2019 december 31 2019 operating leases weighted average remaining lease term 26 years weighted average discount rate 588 recognized 02 million costs related finance leases twelve months ended december 31 2019 december 31 2019 finance leases weighted average remaining lease term 36 years weighted average discount rate 477 supplemental balance sheet information related leases december 31 2019 follows thousands key energy services inc subsidiaries notes consolidated financial statements continued maturities operating finance lease liabilities december 31 2019 follows thousands item 9item 8 financial statements supplementary data key energy services inc subsidiaries index consolidated financial statements page report independent registered public accounting firm report independent registered public accounting firm internal control financial reporting consolidated balance sheets consolidated statements operations consolidated statements comprehensive income loss consolidated statements cash flows consolidated statements stockholders’ equity notes consolidated financial statements report independent registered public accounting firm board directors stockholders key energy services inc audited accompanying consolidated balance sheets key energy services inc maryland corporation subsidiaries “company” december 31 2015 2014 related consolidated statements operations comprehensive income loss changes stockholders equity cash flows three years period ended december 31 2015 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position key energy services inc subsidiaries december 31 2015 2014 results operations cash flows three years period ended december 31 2015 conformity accounting principles generally accepted united states america also audited accordance standards public company accounting oversight board united states companys internal control financial reporting december 31 2015 based criteria established 2013 internal controlintegrated framework issued committee sponsoring organizations treadway commission coso report dated march 4 2016 expressed unqualified opinion effectiveness internal control financial reporting grant thornton llp houston texas march 4 2016 report independent registered public accounting firm board directors stockholders key energy services inc audited internal control financial reporting key energy services inc maryland corporation subsidiaries “company” december 31 2015 based criteria established 2013 internal controlintegrated framework issued committee sponsoring organizations treadway commission coso companys management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying managements report internal control financial reporting responsibility express opinion companys internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion company maintained material respects effective internal control financial reporting december 31 2015 based criteria established 2013 internal controlintegrated framework issued coso also audited accordance standards public company accounting oversight board united states consolidated financial statements company year ended december 31 2015 report dated march 4 2016 expressed unqualified opinion financial statements grant thornton llp houston texas march 4 2016 key energy services inc subsidiaries consolidated balance sheets see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries consolidated statements operations see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries consolidated statements comprehensive income loss see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries consolidated statements cash flows see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries consolidated statements stockholders’ equity see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries notes consolidated financial statements note 1 organization summary significant accounting policies key energy services inc wholly owned subsidiaries collectively “key” “company” “we” “us” “our” provide full range well services major oil companies foreign national oil companies independent oil natural gas production companies services include rigbased coiled tubingbased well maintenance workover services well completion recompletion services fluid management services fishing rental services ancillary oilfield services additionally certain rigs capable specialty drilling applications operate major oil natural gas producing regions continental united states operations mexico russia addition technology development control systems business based canada second half 2015 ceased operations colombia ecuador middle east basis presentation consolidated financial statements included annual report form 10k present financial position results operations cash flows periods presented accordance generally accepted accounting principles united states “gaap” preparation consolidated financial statements requires us develop estimates make assumptions affect financial position results operations cash flows estimates also impact nature extent disclosure contingent liabilities among things use estimates analyze assets possible impairment ii determine depreciable lives assets iii assess future tax exposure realization deferred tax assets iv determine amounts accrue contingencies v value tangible intangible assets vi assess workers’ compensation vehicular liability selfinsured risk accruals insurance reserves vii provide allowances uncollectible accounts receivable viii value asset retirement obligations ix value equitybased compensation review significant estimates recurring basis record effect necessary adjustments prior publication financial statements adjustments made respect use estimates relate improved information previously available limitations inherent process actual results may differ materially estimates believe estimates reasonable evaluated events occurring balance sheet date included annual report form 10k possible disclosure subsequent event management monitored subsequent events date financial statements issued principles consolidation within consolidated financial statements include accounts majorityowned controlled subsidiaries eliminate intercompany accounts transactions interest entity significant control influence account interest using cost method interest entity exert significant influence control account interest using equity method acquisitions time acquire businesses assets consistent longterm growth strategy results operations acquisitions included financial statements beginning date acquisition accounted using acquisition method business combinations whether partial full stages acquirer records 100 assets liabilities acquired business including goodwill fair values including contingent consideration final valuations assets liabilities obtained recorded soon practicable later one year date acquisition revenue recognition recognize revenue following criteria met evidence arrangement exists ii delivery occurred services rendered iii price customer fixed determinable iv collectability reasonably assured • evidence arrangement exists final understanding us customer occurred evidenced completed customer purchase order field ticket supplier contract master service agreement • delivery occurred services rendered completed requirements pursuant terms arrangement evidenced field ticket service log key energy services inc subsidiaries notes consolidated financial statements continued • price customer fixed determinable amount required paid agreed upon price fixed determinable evidenced contractual terms price book completed customer purchase order field ticket • collectability reasonably assured screen customers provide goods services according determined credit terms granted accordance credit policy present revenues net sales taxes collected us customers required remitted local state governmental taxing authorities review contracts multiple element revenue arrangements deliverables separated units accounting assigned fair value standalone value customer objective reliable evidence fair value delivery undelivered items substantially controlled us believe negotiated prices deliverables services contracts representative fair value since acceptance nonacceptance element contract affect elements cash equivalents consider shortterm investments original maturity less three months cash equivalents december 31 2015 entered compensating balance arrangements obligations abl facility term loan facility defined secured assets including assets held subsidiaries includes cash equivalents restrict investment cash financial institutions high credit standing limit amount credit exposure one financial institution maintain cash bank deposit brokerage accounts exceed federally insured limits december 31 2015 accounts guaranteed federal deposit insurance corporation “fdic” 250000 substantially accounts held deposits excess fdic limits believe cash held foreign subsidiaries could repatriated general corporate use without material withholdings time normal course business connection operations ongoing legal matters required place certain amounts cash deposit accounts restrictions limit ability withdraw funds certain cash accounts zerobalance controlled disbursement accounts right offset cash balances present outstanding checks written zerobalance accounts component accounts payable accompanying consolidated balance sheets accounts receivable allowance doubtful accounts establish provisions losses accounts receivable determine possibility collect part outstanding balances regularly review accounts 150 days past due invoice date collectability establish adjust allowance necessary using specific identification method exhaust collection efforts determine balance never collected write accounts receivable associated provision uncollectible accounts time entitled proceeds insurance policies amounts reserved selfinsurance liability present insurance receivables gross balance sheet component assets separate corresponding liability concentration credit risk significant customers include major oil natural gas production companies independent oil natural gas production companies foreign national oil natural gas production companies perform ongoing credit evaluations customers usually require material collateral maintain reserves potential credit losses necessary results operations financial position considered light fluctuations demand experienced oilfield service companies changes oil gas producers’ expenditures budgets occur fluctuations impact results operations financial position supply demand factors directly affect utilization hours primary determinants net cash provided operating activities years ended december 31 2015 2014 2013 chevron texaco exploration production accounted approximately 15 consolidated revenue customer accounted 10 consolidated revenue years ended december 31 2015 2014 2013 customer accounted 10 total accounts receivable december 31 2015 2014 key energy services inc subsidiaries notes consolidated financial statements continued inventories consist primarily equipment parts spares use operations supplies held consumption valued lower average cost market property equipment property equipment carried cost less accumulated depreciation provided assets estimated depreciable lives assets using straightline method depreciation expense years ended december 31 2015 2014 2013 1761 million 1919 million 2062 million respectively depreciate operational assets depreciable lives salvage value higher assets’ value scrap salvage value approximates 10 operational asset’s acquisition cost operational asset stacked taken service review physical condition depreciable life ultimate salvage value determine asset operable whether remaining depreciable life salvage value adjusted scrap asset accelerate depreciation asset salvage value dispose asset gain loss recognized december 31 2015 estimated useful lives asset classes follows longlived asset group tested recoverability whenever events changes circumstances indicate carrying amount may recoverable purposes testing impairment group longlived assets along lines business based services provided lowest level identifiable cash flows largely independent cash flows assets liabilities would record impairment charge reducing net carrying value estimated fair value asset group’s estimated future cash flows less net carrying value events changes circumstance cause us evaluate fixed assets recoverability possible impairment may include changes market conditions adverse movements prices oil natural gas changes asset group expected future life intended use physical condition could reduce fair value certain property equipment development future cash flows determination fair value asset group involves significant judgment estimates see “note 8 property equipment” discussion asset retirement obligations recognize liability fair value legal obligations associated retirement tangible longlived assets capitalize equal amount cost asset depreciate additional cost estimated useful life assets obligations perform asset retirement activities unconditional despite uncertainties may exist surrounding individual retirement activity accordingly recognize liability fair value conditional asset retirement obligation fair value reasonably estimated determining fair value examine inputs believe market participant would use transfer liability probabilityweight potential costs thirdparty would charge adjust cost inflation estimated life asset discount cost using credit adjusted risk free rate significant judgment involved estimating future cash flows associated obligations well ultimate timing cash flows estimates amount timing cash flows change changes may material impact results operations see “note 11 asset retirement obligations” deposits due capacity constraints equipment manufacturers required make advanced payments certain oilfield service equipment items used normal course business december 31 2015 december 31 2014 deposits totaled 35 million 101 million respectively deposits consist primarily payments made related high demand longlead time items key energy services inc subsidiaries notes consolidated financial statements continued capitalized interest capitalized average amount accumulated expenditures major capital projects construction using effective interest rate based related debt underlying assets placed service capitalized interest added cost assets amortized depreciation expense useful life assets included depreciation amortization line accompanying consolidated statements operations deferred financing costs deferred financing costs associated longterm debt carried cost amortized interest expense using effective interest method life related debt instrument related debt instrument retired remaining unamortized costs included determination gain loss extinguishment debt record gains losses extinguishment debt part continuing operations see “note 14 longterm debt” discussion goodwill intangible assets goodwill results business combinations represents excess acquisition consideration fair value net assets acquired goodwill intangible assets subject amortization tested impairment annually frequently events changes circumstances indicate asset might impaired test impairment indefinitelived intangible assets allows us first assess qualitative factors determine whether “more likely not” fair value reporting unit less carrying amount basis determining whether necessary perform twostep goodwill impairment test qualitative analysis shows “more likely not” fair value reporting unit less carrying amount perform twostep goodwill impairment test first step test fair value calculated reporting units fair value compared carrying value reporting unit including reporting unit’s goodwill fair value reporting unit exceeds carrying value impairment second step test performed carrying value exceeds fair value reporting unit second step test required second step test compares implied fair value reporting unit’s goodwill carrying value implied fair value reporting unit’s goodwill determined manner amount goodwill recognized business combination purchase price equal fair value reporting unit implied fair value reporting unit’s goodwill excess carrying value impairment recorded carrying value excess implied fair value impairment equal excess recorded assist management preparation analysis valuation reporting units utilize services thirdparty valuation consultant ultimate conclusions valuation techniques remain sole responsibility determination fair value used test heavily impacted market prices equity debt securities well assumptions estimates future activity levels profitability cash flows conduct annual impairment test october 1 year test required annual basis also required frequently based changes external factors triggering events 2015 experienced several triggering events required us perform additional interim testing possible impairment goodwill analysis third quarter 2015 concluded 5610 million goodwill fully impaired see “note 9 goodwill intangible assets” discussion internaluse software capitalize costs incurred application development stage internaluse software amortize costs software’s estimated useful life generally five seven years costs incurred related selection maintenance internaluse software expensed incurred litigation estimating liabilities related litigation take account available facts circumstances order determine whether loss probable reasonably estimable various suits claims arising ordinary course business pending us conduct business throughout continental united states may subject jury verdicts arbitrations result outcomes favor plaintiffs also exposed various claims abroad continually assess contingent liabilities including potential litigation liabilities well adequacy accruals need disclosure items establish key energy services inc subsidiaries notes consolidated financial statements continued provision contingent liability probable liability incurred amount reasonably estimable see “note 15 commitments contingencies” environmental operations routinely involve storage handling transport disposal bulk waste materials contain oil contaminants regulated substances operations subject various federal state local laws regulations intended protect environment environmental expenditures expensed capitalized depending future economic benefit expenditures relate existing condition caused past operations future economic benefits expensed record liabilities undiscounted basis remediation efforts probable costs conduct remediation efforts reasonably estimated litigation reserves reflect application insurance coverage environmental reserves reflect management’s assessment insurance coverage may apply matters issue see “note 15 commitments contingencies” selfinsurance primarily selfinsured physical damage equipment automobiles well workers’ compensation claims accruals maintain consolidated balance sheet relate deductibles selfinsured retentions estimate use historical claims data trend analysis assist management liability amount selfinsurance reserves utilize services third party actuary actual outcome claim could differ significantly estimated amounts adjust loss estimates calculation accruals based upon actual claim settlements reported claims see “note 15 commitments contingencies” income taxes account deferred income taxes using asset liability method provide income taxes significant temporary differences management determines current tax liability well taxes incurred result current operations deferred future periods current taxes payable represent liability related income tax returns current year net deferred tax expense benefit represents change balance deferred tax assets liabilities reported consolidated balance sheets management estimates changes deferred tax assets liabilities using basis assets liabilities financial reporting purposes enacted rates management estimates effect differences reverse management makes certain assumptions timing temporary tax differences differing treatments certain items tax accounting purposes whether differences permanent final determination tax liability involves interpretation local tax laws tax treaties related authorities jurisdiction well significant use estimates assumptions regarding scope future operations results achieved timing nature income earned expenditures incurred establish valuation allowances reduce deferred tax assets determine likely eg likelihood 50 portion deferred tax assets realized future periods assess likelihood use estimates judgment regarding future taxable income well jurisdiction taxable income generated determine whether valuation allowance required evidence include current financial position results operations actual forecasted results reversal deferred tax liabilities tax planning strategies well current forecasted business economics industry additionally record uncertain tax positions net recognizable amount based amount management deems likely sustained upon ultimate settlement tax authorities domestic international tax jurisdictions operate see “note 13 income taxes” discussion accounting income taxes changes valuation allowance components tax rate reconciliation realization loss carryforwards earnings per share basic earnings per common share determined dividing net earnings applicable common stock weighted average number common shares actually outstanding period diluted earnings per common share based increased number shares would outstanding assuming conversion dilutive outstanding convertible securities using treasury stock “as converted” methods see “note 10 earnings per share” key energy services inc subsidiaries notes consolidated financial statements continued sharebased compensation past issued stock options shares restricted common stock restricted stock units stock appreciation rights “sars” performance units employees part employees’ compensation retention tool options restricted shares sars calculate fair value awards grant date amortize fair value compensation expense ratably vesting period award net estimated actual forfeitures fair value stock option sar awards estimated using blackscholes fair value model valuation stock options sars requires us estimate expected term award estimated using simplified method sufficient historical exercise information past legal restrictions exercise stock options additionally valuation stock option sars awards also dependent historical stock price volatility calculate using lookback period equivalent expected term award riskfree interest rate estimate future forfeitures grantdate fair value restricted stock awards determined using stock price grant date performance units treated “liability” awards carried fair value balance sheet date changes fair value recorded component compensation expense offsetting liability consolidated balance sheet determine fair value performance units using monte carlo simulation model record sharebased compensation component general administrative direct operating expense applicable individual see “note 19 sharebased compensation” foreign currency gains losses respect operations russia local currency functional currency assets liabilities translated rates exchange balance sheet date income expense items translated average rates exchange period resulting gains losses arising translation accounts functional currency us dollar included separate component stockholders’ equity comprehensive income partial complete sale liquidation net investment foreign entity see “note 16 accumulated comprehensive loss” time foreign subsidiaries may enter transactions denominated currencies functional currency transactions initially recorded functional currency subsidiary based applicable exchange rate effect date transaction end month transactions remeasured equivalent amount functional currency based applicable exchange rates effect time adjustment required remeasure transaction equivalent amount functional currency end month recorded income loss foreign subsidiary component income net comprehensive income loss display comprehensive income loss components financial statements classify items comprehensive income loss nature financial statements display accumulated balance comprehensive income loss separately stockholders’ equity leases lease real property equipment various leasing arrangements enter leasing arrangement analyze terms arrangement determine whether lease accounted operating lease capital lease periodically incur costs improve assets lease arrangements value leasehold improvements exceeds threshold capitalization record improvement component property equipment amortize improvement useful life improvement lease term whichever shorter certain operating lease agreements structured include scheduled specified rent increases term lease agreement increases may result inducement “rent holiday” conveyed us early lease included reflect anticipated effects inflation recognize scheduled specified rent increases straightline basis term lease agreement addition certain operating lease agreements contain incentives induce us enter lease agreement upfront cash payments us payment lessor costs moving expenses assumption lessor preexisting lease agreements third parties payments made us behalf represent incentives consider reduction rent expense recognized straightline basis term lease agreement key energy services inc subsidiaries notes consolidated financial statements continued recent accounting developments asu 201517 november 2015 fasb issued asu 201517 balance sheet classification deferred taxes topic 740 objective asu simplify current guidance requires entities separately present deferred tax assets liabilities current noncurrent classified balance sheet new guidance require entities present deferred tax assets liabilities noncurrent classified balance sheet asu 201517 effective fiscal years beginning december 15 2016 interim periods within years may applied either prospectively deferred tax assets liabilities retrospectively periods presented currently evaluating standard determine impact adoption consolidated financial statements asu 201503 april 2015 fasb issued asu 201503 interestimputation interest subtopic 83530 simplifying presentation debt issuance costs objective asu simplify presentation debt issuance costs requiring debt issuance costs related recognized debt liability presented balance sheet direct deduction carrying amount debt liability consistent debt discounts recognition measurement guidance debt issuance costs affected amendments update asu effective annual periods beginning december 15 2015 interim periods within annual periods early adoption permitted adopted asu 201503 second quarter 2015 using retrospective transition method result 107 million unamortized deferred financing costs december 31 2014 balance sheet reclassified noncurrent assets direct deduction longterm debt adoption standard affect results operations cash flows asu 201409 may 2014 fasb issued asu 201409 revenue contracts customers topic 606 objective asu establish principles report useful information users financial statements nature amount timing uncertainty revenue contracts customers core principle recognize revenue depict transfer promised goods services customers amount reflects consideration entity expects entitled exchange goods services asu 201409 must adopted using either full retrospective method modified retrospective method july 2015 meeting fasb affirmed proposal defer effective date new revenue standard entities one year result asu 201409 effective company interim annual reporting periods beginning december 15 2017 early adoption permitted interim annual reporting periods beginning december 15 2016 currently evaluating standard determine impact adoption consolidated financial statements note 2 acquisitions 2013 acquisition noncontrolling interests geostream october 31 2008 acquired 26 interest ooo geostream services group “geostream” 174 million geostream limited liability company incorporated russian federation provides wide range drilling workover reservoir engineering services september 1 2009 acquired additional 24 interest 164 million brought total investment geostream 50 provided us controlling interest representation geostreams board directors accounted second investment business combination achieved stages results geostream included consolidated financial statements since initial acquisition date portion outside control forming noncontrolling interest april 9 2013 completed acquisition 50 noncontrolling interest geostream 146 million geostream wholly owned subsidiary acquisition 50 noncontrolling interest accounted equity transaction therefore acquisition noncontrolling interest geostream second quarter 2013 result gain loss almansoori key energy services llc march 7 2010 entered agreement almansoori petroleum services llc “almansoori” form joint venture almansoori key energy services llc joint venture laws abu dhabi uae purpose joint venture engage conventional workover drilling services coiled tubing services fishing rental services rig monitoring services pipe handling services fluids waste treatment handling services although almansoori held 51 interest joint venture held 49 interest held three five board directors seats controlling financial interest addition profits losses joint venture shared equal terms equal amounts almansoori joint venture sufficient resources carry activities without financial support determined variable interest entity primary beneficiary consolidated entity financial statements august 5 2013 agreed dissolution almansoori key energy services llc “joint venture” acquisition underlying business 51 million acquisition 51 noncontrolling interest almansoori key energy services llc accounted equity transaction therefore result gain loss fourth quarter 2014 joint venture formally liquidated 51 million transferred almansoori key energy services inc subsidiaries notes consolidated financial statements continued note 3 assets held sale april 2015 announced decision exit markets participate outside north america strategy sell relocate assets businesses operating markets second quarter 2015 certain assets oman business unit included international reporting segment met criteria assets held sale completed sale assets fourth quarter recorded 214 million impairment fixed assets reduce carrying value assets fair market value third quarter 2015 transferred four rigs ecuador us sold remaining operating assets ecuadorian business unit auction recorded impairment 41 million reduce carrying value assets price sold additionally third quarter 2015 assets related liabilities bahrain business unit certain assets colombian business unit included international reporting segment enhanced oilfield technology business unit included fishing rental reporting segment met criteria assets held sale bahrain completed sale subsidiary 49 million fourth quarter 2015 colombia relocated one rig us third quarter 2015 sold thirteen rigs remaining property equipment net inventories fourth quarter also planning sell certain assets enhanced oilfield technology business unit expect sale complete end 2016 recorded impairment 70 million 253 million 60 million bahraini colombian enhanced oilfield technology business units respectively reduce carrying value assets related liabilities fair market value fourth quarter 2015 assets related liabilities russian business unit included international reporting segment met criteria assets held sale expect sale occur first half 2016 recorded 230 million impairment russian fixed assets reduce carrying value assets fair market value following assets related liabilities classified held sale december 31 2015 consolidated balance sheet key energy services inc subsidiaries notes consolidated financial statements continued note 4 severance contract termination mobilization costs second quarter 2013 implemented significant restructuring fluid management services corporate cost structure better align current market conditions result restructuring recognized approximately 63 million severance expenses second quarter 2013 severance costs based obligations existing severance agreements furthermore recognized lease cancellation fees 19 million primarily related fluid management services additionally international business due customer spending reductions mexico began redeploying idle rigs north region mexico higher demand markets incurring mobilization cost 23 million costs reflected consolidated statements operations include 83 million direct operating expenses 22 million general administrative expenses segment basis 72 million 23 million 03 million 07 million associated international fluid management services us rig services functional support segments respectively restructuring activities implemented second quarter 2013 completed fourth quarter 2013 note 5 balance sheet information table presents comparative detailed information current assets december 31 2015 2014 table presents comparative detailed information noncurrent assets december 31 2015 2014 key energy services inc subsidiaries notes consolidated financial statements continued table presents comparative detailed information current liabilities december 31 2015 2014 table presents comparative detailed information noncurrent liabilities december 31 2015 2014 note 6 income loss net table presents comparative detailed information income expense years ended december 31 2015 2014 2013 key energy services inc subsidiaries notes consolidated financial statements continued note 7 allowance doubtful accounts table presents rollforward allowance doubtful accounts years ended december 31 2015 2014 2013 note 8 property equipment property equipment consists following interest capitalized average amount accumulated expenditures major capital projects construction using effective interest rate based related debt underlying assets placed service capitalized interest years ended december 31 2015 2014 2013 zero 06 million respectively december 31 2015 2014 capital lease obligations depreciation assets held capital leases zero 19 million years ended december 31 2015 2014 2013 respectively included depreciation amortization expense accompanying consolidated statements operations decline market value common stock comparison carrying value assets third quarter 2014 determined triggering event triggering event required us perform step one goodwill impairment test identify potential impairment step one testing indicated potential impairment fishing rental services segment required us perform step two goodwill impairment test determine amount impairment preliminary step two testing performed third quarter 2014 using discounted cash flow model determine fair value concluded certain assets primarily frac stack well testing assets impaired result recorded estimated pretax charge 608 million third quarter 2014 preliminary step two testing also indicated impairment goodwill fishing rental services segment fourth quarter 2014 finalized step two testing preliminarily performed third quarter 2014 based additional analysis performed outside consultants result recorded additional pretax asset impairment charge 13 million fourth quarter 2014 decline market value common stock comparison carrying value assets third quarter 2015 well persistent low oil prices affect low oil prices industry determined goodwill testing triggering events triggering events required us perform step one goodwill impairment test identify potential impairment step one testing indicated potential impairment coiled tubing services segment required us perform step two goodwill impairment test determine amount impairment preliminary key energy services inc subsidiaries notes consolidated financial statements continued step two testing performed third quarter 2015 using discounted cash flow model determine fair value concluded certain fixed assets impaired result recorded estimated pretax charge 450 million third quarter 2015 fourth quarter 2015 finalized step two testing preliminarily performed third quarter 2015 based additional analysis performed outside consultants result recorded additional pretax asset impairment charge 61 million fourth quarter 2015 asset impairment charges year ended december 31 2013 note 9 goodwill intangible assets changes carrying amount goodwill years ended december 31 2015 2014 follows components intangible assets december 31 2015 2014 follows key energy services inc subsidiaries notes consolidated financial statements continued amortization expense intangible assets determinable lives follows intangible assets december 31 2015 09 million indefinitelived tradenames subject amortization tradenames tested impairment annually using relief royalty method weighted average remaining amortization periods expected amortization expense next five years definite lived intangible assets follows certain intangible assets denominated russian rubles values assets subject fluctuations associated changes exchange rates result planned sale certain enhanced oilfield technology business units assets longer using certain developed technology patent result fully impaired 34 million patent addition longer use edge tradename result fully impaired 15 million tradename edge tradename enhanced oilfield technology developed technology patent part fishing rental services segment perform analysis goodwill impairment annual basis unless event occurs triggers additional interim testing 2014 identified several triggering events requiring us perform testing possible goodwill impairment deterioration capital investment climate russia result geopolitical events occurring second quarter 2014 determined triggering event triggering event required us perform testing possible goodwill impairment russian business reporting unit included international reporting segment analysis concluded russias 224 million goodwill fully impaired 63 million russias tradename intangible assets impaired well concluded impairment russias longlived assets decline market value common stock comparison carrying value assets third quarter 2014 determined triggering event requiring us perform testing possible goodwill impairment us rig services coiled tubing services fishing rental services fluid management services segments step one testing indicated may impairment fishing rental services segment impairment indicated us segments step two goodwill impairment testing fishing rental service segment performed preliminarily third quarter 2014 preliminary analysis concluded impairment goodwill indicate impairment fixed assets fourth quarter 2014 engaged outside consultants finalize analysis needed complete step two testing additional analysis preformed consultants confirmed impairment goodwill analysis conclude 77 million customer relationship 36 million tradename intangible assets fishing rental services segment impaired fourth quarter 2014 performed annual qualitative analysis goodwill impairment october 1 2014 based analysis determined canadian reporting unit included international reporting segment indication impairment however market value stock continued decline key energy services inc subsidiaries notes consolidated financial statements continued fourth quarter determined necessary perform first step goodwill impairment test us rig services coiled tubing services fishing rental services fluid management services segments based results step one analysis fair value us rig services fluid management services fishing rental services segments exceeded carrying values indicated potential impairment coiled tubing services segment step two goodwill impairment testing coiled tubing services segment performed preliminarily fourth quarter 2014 analysis concluded 191 million goodwill impaired recorded fourth quarter analysis concluded impairment fixed assets first quarter 2015 engaged outside consultants assist us finalizing analysis needed complete step two testing based additional analysis performed concluded additional 217 million goodwill impaired additional decline market value stock third quarter 2015 well persistent low oil prices affect low oil prices industry also determined triggering events making necessary perform testing possible goodwill impairment us rig services coiled tubing services fishing rental services fluid management services international segments analysis concluded remaining 5610 million goodwill segments fully impaired also goodwill analysis indication impairment fixed assets coiled tubing services segment see “note 8 property equipment” discussion note 10 earnings per share following table presents basic diluted earnings per share “eps” years ended december 31 2015 2014 2013 stock options warrants sars included computation diluted earnings per share using treasury stock method restricted stock awards legally considered issued outstanding granted included basic weighted average shares outstanding diluted earnings per share calculation years ended december 31 2015 2014 2013 exclude potential exercise 13 million 14 million 17 million stock options respectively 03 million 03 million 03 million sars respectively effects exercises earnings per share would antidilutive material changes share amounts subsequent balance sheet date would material impact earnings per share calculation year ended december 31 2015 however issued 41 million shares restricted stock january 30 2016 note 11 asset retirement obligations connection well servicing activities operate number swd facilities operations involve transportation handling disposal fluids swd facilities byproducts drilling process swd facilities used connection fluid hauling operations subject future costs associated retirement properties result incurred costs associated proper storage disposal materials key energy services inc subsidiaries notes consolidated financial statements continued annual accretion assets associated asset retirement obligations 06 million years ended december 31 2015 2014 2013 summary changes asset retirement obligations follows thousands note 12 estimated fair value financial instruments following summary carrying amounts estimated fair values financial instruments december 31 2015 2014 cash equivalents accounts receivable accounts payable accrued liabilities carrying amounts approximate fair value short maturity instruments carrying value equal fair value instruments balance sheet date notes receivable argentina operations sale 40 million valuation allowance collectibility notes receivable recorded first quarter 2015 additional 38 million reserve recorded third quarter 2015 675 senior notes due 2021 fair value notes based upon quoted market prices securities dates indicated carrying value notes december 31 2015 6750 million fair value 1756 million 260 carrying value term loan facility due 2020 variable interest rates loans approximate current market rates fair values loans borrowed facility approximate carrying values credit facility revolving loans connection entering abl facility term loan facility terminated 2011 credit facility june 1 2015 key energy services inc subsidiaries notes consolidated financial statements continued note 13 income taxes components income tax expense follows sources income loss continuing operations income taxes noncontrolling interest follows made federal income tax payments zero 300 million years ended december 31 2015 2014 2013 respectively made state income tax payments 08 million 16 million 29 million years ended december 31 2015 2014 2013 respectively made foreign tax payments 02 million 11 million 23 million years ended december 31 2015 2014 2013 respectively years ended december 31 2015 2014 2013 tax expense allocated stockholders’ equity compensation expense income tax purposes excess amounts recognized financial reporting purposes 34 million 12 million 18 million respectively addition received federal income tax refunds 69 million 119 million 251 million years ended december 31 2015 2014 2013 respectively income tax benefit differs amounts computed applying statutory federal rate follows key energy services inc subsidiaries notes consolidated financial statements continued december 31 2015 2014 deferred tax assets liabilities consisted following december 31 2015 net deferred tax asset balance comprised 101 million current deferred tax asset 63 million longterm deferred tax asset less 143 million longterm deferred tax liability december 31 2014 net deferred liability balance comprised 2284 million longterm deferred tax liability less 118 million current deferred tax asset 352 million longterm deferred tax asset recording deferred income tax assets consider whether likely portion deferred income tax assets realized ultimate realization deferred income tax assets dependent upon generation future taxable income periods deferred income tax assets would deductible consider scheduled reversal deferred income tax liabilities projected future taxable income determination due history losses recent years current downturn oil gas industry management believes likely able realize substantial portion net deferred tax assets estimate december 31 2015 2014 2013 available 2438 million 507 million 24 million respectively federal net operating loss carryforwards addition approximately 24 million net operating losses december 31 2015 subject 5000 annual section 382 limitation expire 2016 2018 remaining net operating loss carryforward subject section 382 begin expire 2035 estimate december 31 2015 2014 2013 available 2589 million 1020 million 649 million respectively state net operating loss carryforwards expire 2016 2034 estimate december 31 2015 2014 2013 available 2896 million 1775 million 1176 million respectively foreign net operating loss carryforwards expire 2020 2030 capital loss carryforward expire 2017 provide us income taxes withholding taxes unremitted earnings subsidiary canada earnings considered permanently reinvested cash flow generated business needed fund additional equipment working capital requirements jurisdiction furthermore provide us income taxes unremitted earnings foreign subsidiaries tax basis foreign subsidiaries exceeded book basis file income tax returns united states federal jurisdiction various states foreign jurisdictions 2014 internal revenue service “irs” concluded audit returns tax years ended december 31 2010 2011 2012 material changes significant filings mexico examined tax years 2010 key energy services inc subsidiaries notes consolidated financial statements continued december 31 2015 2014 2013 04 million 10 million 09 million respectively unrecognized tax benefits recognized would impact effective tax rate accrued less 01 million 01 million 04 million payment interest penalties december 31 2015 2014 2013 respectively believe reasonably possible 02 million currently remaining unrecognized tax positions individually insignificant may recognized end 2016 result lapse statute limitations settlement open audit recognized net tax benefit 06 million 2015 expirations statutes limitations following table presents gross activity 2015 2014 related liabilities uncertain tax positions thousands tax legislative changes tax increase prevention act 2014 december 19 2014 hr 5771 tax increase prevention act 2014 signed law new law retroactively extends one year end 2014 provisions american taxpayer relief act expired end 2013 including firstyear bonus depreciation deduction 50 adjusted basis qualified property acquired placed service 2014 september 13 2013 united states treasury department irs issued final regulations providing comprehensive guidance tax treatment costs incurred acquire repair improve tangible property final regulations generally effective taxable years beginning january 1 2014 january 16 2015 irs issued procedural guidance taxpayers follow respect filing applications changes accounting methods guidance includes method change procedures taxpayers must follow adopting tangible property regulations currently assessing future impacts regulations anticipate material impact financial condition results operations cash flows note 14 longterm debt components longterm debt follows key energy services inc subsidiaries notes consolidated financial statements continued 675 senior notes due 2021 outstanding 6750 million 675 senior notes due 2021 “2021 notes” 2021 notes general unsecured senior obligations effectively subordinated existing future secured indebtedness 2021 notes jointly severally guaranteed senior unsecured basis certain existing future domestic subsidiaries interest 2021 notes payable march 1 september 1 year 2021 notes mature march 1 2021 march 1 2016 2021 notes subject redemption time option whole part redemption prices expressed percentages principal amount redeemed plus accrued unpaid interest applicable redemption date redeemed twelvemonth period beginning march 1 years indicated time prior march 1 2016 may option redeem portion 2021 notes redemption price equal 100 principal amount plus premium respect 2021 notes plus accrued unpaid interest redemption date premium excess present value redemption price 103375 principal amount plus remaining scheduled interest payments due march 1 2016 discounted treasury rate plus 05 ii principal amount note experience change control subject certain exceptions must give holders 2021 notes opportunity sell us 2021 notes whole part purchase price equal 101 aggregate principal amount plus accrued unpaid interest date purchase subject certain negative covenants indenture limits ability among things • incur additional indebtedness issue preferred equity interests • pay dividends make distributions repurchase redeem equity interests • make loans investments • enter sale leaseback transactions • sell transfer otherwise convey assets • create liens • enter transactions affiliates • enter agreements restricting subsidiaries’ ability pay dividends • designate future subsidiaries unrestricted subsidiaries • consolidate merge sell substantially applicable entities’ assets substantially covenants terminate 2021 notes mature one two specified ratings agencies assigns 2021 notes investment grade rating future events default exist indenture december 31 2015 2021 notes rated investment grade covenants cease apply us result achieving investment grade rating restored even credit rating assigned 2021 notes later falls investment grade compliance covenants december 31 2015 abl facility june 1 2015 company entered loan security agreement “abl facility” among company key energy services llc borrowers collectively “abl borrowers” certain subsidiaries abl borrowers named guarantors therein financial institutions party thereto time lenders collectively “abl lenders” bank america na administrative agent lenders bank america na wells fargo bank national association cocollateral agents lenders abl facility provides aggregate initial commitments abl lenders 100 million “commitments” matures february 28 2020 abl facility provides abl borrowers ability borrow aggregate principal amount equal lesser commitments ii sum 85 value eligible accounts receivable plus b 80 value eligible unbilled accounts receivable subject limit equal greater x 35 million 25 commitments plus c certain cash equivalents deposited benefit abl lenders subject limit 15 key energy services inc subsidiaries notes consolidated financial statements continued million amount may borrowed abl facility subject reduction certain reserves provided abl facility addition percentages accounts receivable unbilled accounts receivable included calculation described subject reduction extent certain bad debt writedowns similar amounts provided abl facility borrowings abl facility bear interest abl borrowers’ option per annum rate equal libor 30 60 90 180 consent abl lenders 360 days plus 45 ii base rate equal sum greatest x prime rate federal funds rate plus 050 z 30day libor plus 10 plus b 35 addition abl facility provides unused line fees 100 125 per year depending utilization letter credit fees certain fees abl facility guaranteed certain company’s existing future subsidiaries “abl guarantors” together abl borrowers “abl loan parties” secure obligations abl facility abl loan parties granted administrative agent firstpriority security interest benefit abl lenders present future accounts receivable inventory related assets proceeds foregoing “abl priority collateral” addition obligations abl loan parties abl facility secured secondpriority liens term priority collateral described “term loan facility” revolving loans abl facility may voluntarily prepaid whole part without premium penalty subject breakage similar costs abl facility contains certain affirmative negative covenants including covenants restrict ability abl loan parties take certain actions without permission abl lenders permitted abl facility including incurrence debt granting liens making investments payment dividends sale assets abl facility also contains requirement abl borrowers comply minimum liquidity covenant asset coverage ratio certain periods fixed charge coverage ratio asset coverage ratio covenant abl borrowers must maintain asset coverage ratio least 15 10 asset coverage ratio generally defined ratio sum value term priority collateral plus b certain cash equivalents excess 100 million held benefit term loan lenders ii sum amount outstanding term loan facility following repayment term loan facility amount outstanding abl facility plus b amount fine settlement respect fcpa matter defined abl facility secured lien abl priority collateral term priority collateral “asset coverage ratio” fixed charge coverage ratio covenant abl borrowers must maintain fixed charge coverage ratio least 10 period commencing day availability abl facility less greater 20 million 20 commitments continuing 90th day following day availability abl facility greater 20 million 20 commitments fixed charge coverage ratio generally defined ratio ebitda minus certain capital expenditures cash taxes paid ii sum cash interest expenses scheduled principal payments borrowed money certain distributions abl facility permits abl borrowers calculating ebitda add back certain amounts respect investigatory expenses associated fcpa matter amounts paid settlement fcpa matter extent amounts exceed net liquidity defined certain cash equivalents minus principal amount loans outstanding abl facility minimum liquidity covenant “minimum liquidity covenant” abl borrowers must permit liquidity defined sum availability abl facility plus ii certain unrestricted cash equivalents less 1000 million last day fiscal quarter immediately cash payment settlement fine connection fcpa matter abl facility contains customary representations warranties conditions borrowing including absence default event default accuracy material respects representations warranties abl loan parties contained abl facility absence event circumstance could reasonably expected material adverse effect abl facility contains customary events default occurrence entitle abl lenders accelerate maturity amounts outstanding abl facility exercise customary remedies event triggered immediately cash payment settlement fcpa matter cash borrowings abl facility used fund payment company shall fail compliance minimum liquidity key energy services inc subsidiaries notes consolidated financial statements continued covenant ii loans abl facility outstanding date cash payment availability abl facility less 33 borrowing base effect date term loan facility june 1 2015 company entered term loan security agreement “term loan facility” among company borrower certain subsidiaries company named guarantors therein financial institutions party thereto time lenders collectively “term loan lenders” cortland capital market services llc agent lenders merrill lynch pierce fenner smith incorporated sole lead arranger sole bookrunner june 1 2015 company parties thereto closed term loan facility company borrowed 315 million prior giving effect upfront discount 3 resulted net proceeds company prior expenses approximately 3055 million company used portion proceeds repay prior credit facility term loan facility provides incremental facility subject agreement one term loan lenders institutional lenders agreeing provide additional loans satisfaction certain terms conditions would enable company borrow additional amounts term loan facility long aggregate outstanding amount borrowings thereunder exceed 400 million term loan facility mature june 1 2020 although maturity date may company’s request extended one term loan lenders pursuant terms term loan facility borrowings term loan facility bear interest company’s option per annum rate equal libor one two three six consent term loan lenders 12 months plus 925 ii base rate equal sum greatest x prime rate federal funds rate plus 050 z 30day libor plus 10 plus b 825 term loan facility guaranteed certain company’s existing future subsidiaries “term loan guarantors” together company “term loan parties” secure obligations term loan facility term loan parties granted agent firstpriority security interest benefit term loan lenders substantially term loan party’s assets certain excluded assets abl priority collateral “term priority collateral” addition obligations term loan parties term loan facility secured secondpriority liens abl priority collateral described “abl facility” loans term loan facility may prepaid company’s option subject payment prepayment premium certain circumstances provided term loan facility company required make principal payments amount 787500 per quarter commencing quarter ended september 30 2015 addition pursuant term loan facility company must offer prepay term loans net cash proceeds defined term loan facility certain asset sales fiscal year beginning company’s fiscal year ending december 31 2015 company must offer prepay term loans aggregate principal amount equal 50 company’s excess cash flow defined term loan facility fiscal year within 30 days following change control defined term loan facility company must offer prepay term loans price 101 amount thereof giving effect change control asset coverage ratio least 15 10 ii price equal greater 101 amount thereof applicable prepayment premium provided term loan facility giving effect change control asset coverage ratio less 15 10 term loan facility contains customary representations warranties certain affirmative negative covenants including covenants restrict ability term loan parties take certain actions without permission term loan lenders permitted term loan facility including incurrence debt granting liens making investments payment dividends sale assets term loan facility also contains financial covenants requiring company maintain asset coverage ratio least 15 10 liquidity defined term loan facility must less 100 million last day fiscal quarter immediately cash payment settlement fine connection fcpa matter term loan facility contains events default occurrence entitle term loan lenders accelerate maturity amounts outstanding term loan facility exercise customary remedies compliance covenants abl facility term loan facility december 31 2015 december 31 2015 borrowings outstanding abl facility 479 million letters credit outstanding borrowing capacity 272 million available subject covenant constraints abl facility ability fund operations pay principal interest longterm debt satisfy obligations depend upon available liquidity amount cash flows able generate operations key energy services inc subsidiaries notes consolidated financial statements continued 2015 cash used operations 224 million industry conditions improve may negative cash flows operations 2016 believe internally generated cash flows operations current reserves cash availability abl facility sufficient finance cash requirements current future operations budgeted capital expenditures debt service obligations next twelve months however light current conditions industry continue analyze variety transactions mechanisms designed reduce debt improve liquidity future operating performance ability refinance affected results operations economic capital market conditions oil natural gas prices factors many beyond control may required repay portion debt accelerated basis certain circumstances fail comply covenants restrictions agreements governing debt unable cure obtain waiver amendment could lead event default consequent acceleration obligation repay outstanding debt ability comply debt covenants restrictions may affected events beyond control including general economic financial conditions particular terms indebtedness must comply certain financial ratios satisfy certain financial condition tests could require us take action reduce debt take action order comply ability satisfy required financial ratios tests affected events beyond control including prevailing economic financial industry conditions may able continue meet ratios tests future breach covenants ratios tests could result default indebtedness default lenders abl facility longer obligated extend credit us well trustee outstanding notes administrative agent term loan facility could elect declare amounts outstanding debt together accrued interest immediately due payable results actions would significant negative impact results operations financial position cash flows addition access liquidity provided abl facility predicated upon ability satisfy conditions borrowing conditions require representations warranties facility including representations warranties related solvency absence material adverse effect remain true correct weighted average interest rates outstanding borrowings abl facility term loan facility year ended december 31 2015 follows senior secured credit facility june 1 2015 connection entering abl facility term loan facility terminated senior secured revolving bank credit facility dated march 31 2011 amended december 5 2014 “2011 credit facility” scheduled mature later march 31 2016 2011 credit facility provided senior secured credit facility consisting revolving credit facility letter credit subfacility swing line facility aggregate principal amount 4000 million 2011 credit facility terminated without prepayment penalties remaining unamortized deferred financing costs 08 million written time termination interest rate per annum applicable 2011 credit facility option adjusted libor plus applicable margin ii higher x jpmorgan’s prime rate federal funds rate plus 05 z onemonth adjusted libor plus 10 plus case applicable margin loans applicable margin libor loans ranged 225 300 basis points applicable margin loans ranges 125 200 basis points depending upon consolidated total leverage ratio defined 2011 credit facility unused commitment fees facility equal 05 five months ended june 1 2015 year ended december 31 2014 weighted average interest rates outstanding borrowings 2011 credit facility 314 297 respectively key energy services inc subsidiaries notes consolidated financial statements continued letter credit facility november 7 2013 entered uncommitted unsecured 150 million letter credit facility used solely issuances performance letters credit december 31 2015 20 million letters credit outstanding facility longterm debt principal repayment interest expense presented schedule repayment requirements longterm debt next five years thereafter december 31 2015 interest expense years ended december 31 2015 2014 2013 consisted following deferred financing costs summary deferred financing costs including capitalized costs writeoffs amortization years ended december 31 2015 2014 presented table thousands key energy services inc subsidiaries notes consolidated financial statements continued note 15 commitments contingencies operating lease arrangements lease certain property equipment noncancelable operating leases expire various dates 2027 varying payment dates throughout month addition number leases scheduled expire 2016 december 31 2015 future minimum lease payments noncancelable operating leases follows thousands also party significant number monthtomonth leases canceled time operating lease expense 169 million 223 million 239 million years ended december 31 2015 2014 2013 respectively litigation various suits claims arising ordinary course business pending us conduct business throughout continental united states may subject jury verdicts arbitrations result outcomes favor plaintiffs also exposed various claims abroad continually assess contingent liabilities including potential litigation liabilities well adequacy accruals need disclosure items establish provision contingent liability probable liability incurred amount reasonably estimable december 31 2015 aggregate amount liabilities related litigation deemed probable reasonably estimable 16 million believe disposition matters result additional loss materially excess amounts recorded liabilities related litigation matters deemed probable reasonably estimable december 31 2014 01 million may 2013 june 2014 five lawsuits four class actions one enforcement action filed california involving alleged violations californias wage hour laws general lawsuits allege failure pay wages including overtime minimum wages failure pay final wages upon employment terminations timely manner failure reimburse reasonable necessary business expenses failure provide wage statements consistent california law violations california meal break period laws among claims two five cases consolidated united states district court central district california december 22 2015 court issued order granting part denying part class certification motion court certified class hourly paid nonexempt oilfield employees allege receive reimbursement business expenses allege receive rest breaks required california law court determine whether key liable class members court one remaining cases stayed pending outcome class certification motion recently issued order lifting stay fourth case waiting decision regarding whether move forward california state court federal court fifth case enforcement action civil penalties based california’s private attorneys general act pending california state court investigated claims five lawsuits intend vigorously defend time cannot estimate possible loss range loss january 2014 sec advised key investigating possible violations us foreign corrupt practices act “fcpa” involving business activities key’s operations russia april 2014 became aware allegation involving mexico operations true could potentially constitute violation certain policies including code business conduct fcpa applicable laws may 30 2014 key voluntarily disclosed allegation involving mexico operations certain information company’s initial investigation sec department justice “doj” special committee board directors conducted independent investigation regarding allegation well possible violations fcpa involving business activities operations russia key energy services inc subsidiaries notes consolidated financial statements continued special committee’s independent review also included review certain aspects company’s operations colombia well risk assessment regard international locations completed continuing cooperate sec doj time unable predict ultimate resolution matters agencies accordingly cannot reasonably estimate possible loss range loss august 2014 two class action lawsuits filed us district court southern district texas houston division individually behalf persons similarly situated company certain officers company alleging violations federal securities laws specifically violations section 10b rule 10b5 section 20a securities exchange act 1934 lawsuits styled follows sean cady individually behalf persons similarly situated v key energy services inc richard j alario j marshall dodson 414cv2368 filed august 15 2014 ian w davidson individually behalf persons similarly situated v key energy services inc richard j alario j marshall dodson 414cv2403 filed august 21 2014 december 11 2014 court entered order consolidated two lawsuits one action along future filed tagalong actions brought behalf purchasers key energy services inc common stock order also appointed interlocal pension fund lead plaintiff class action approved law firm spector roseman kodroff willis pc lead counsel consolidated class kendall law group llp local counsel consolidated class lead plaintiff filed consolidated amended complaint february 13 2015 among changes consolidated amended complaint adds taylor whichard iii newton w wilson iii defendants seeks represent class purchasers companys stock september 4 2012 july 17 2014 defendants key energy services inc richard j alario j marshall dodson newton w wilson iii filed motion dismiss april 14 2015 defendant taylor whichard iii filed joinder motion dismiss date lead plaintiff filed opposition motion defendants filed reply briefs support motion court ruled upon case early stages cannot predict outcome time accordingly cannot estimate possible loss range loss addition letter dated september 4 2014 purported shareholder company demanded board commence independent internal investigation legal proceedings member board former member board certain officers company alleged violations maryland andor federal law letter alleges board senior officers breached fiduciary duties company including duty loyalty due care improperly accounting goodwill ii causing company potentially violate fcpa resulting investigation sec iii causing company engage improper conduct related company’s russia operations iv making false statements regarding failing properly account certain contracts pemex described letter purported shareholder believes legal proceedings seek recovery damages unspecified amount allegedly sustained company board directors referred demand letter special committee cannot predict outcome matter march 2015 two collective action lawsuits filed southern district texas corpus christi division individually behalf others similarly situated alleging violations fair labor standards act 1938 “flsa” agreed conditional certification first lawsuit notice case issued 56 putative class members roughly 20 eligible putative class members timely filed notice consent join lawsuit soon begin meritbased discovery first lawsuit last least six months also agreed conditional certification second lawsuit notice case recently issued 14 putative class members four putative class members including name plaintiff filed notice consent join lawsuit thus far roughly month half remaining others join parties begin meritbased discovery second case soon notice period closes cases early stages cannot predict outcome cases time accordingly cannot estimate possible loss range loss either case may 2015 class collective action lawsuit filed southern district texas houston division individually behalf others similarly situated alleging violations flsa new mexico minimum wage act agreed conditional certification putative class notice issued 174 putative class members notice period closed early february roughly 15 eligible putative class members timely filed consent join lawsuit parties soon begin meritbased discovery case likely last six nine months case early stages cannot predict outcome time accordingly cannot estimate possible loss range loss case november 2015 santa barbara county district attorney filed criminal complaint two former employees key specifically alleging three counts violations california labor code section 6425a key complaint seeks unspecified penalties key related october 12 2013 accident resulted death one key employee drilling site near santa maria california arraignment held february 10 2016 key former employees key energy services inc subsidiaries notes consolidated financial statements continued pleaded guilty charges matter early stages cannot predict outcome time accordingly cannot estimate possible loss range loss november 23 2015 north dakota industrial commission ndic filed notice county burleigh county nd alleging statutory violations key energy services llc operator two salt water disposal wells state north dakota ndic pled approximately 888000 fines costs company currently discussions ndic able estimate possible loss range loss time tax audits routinely subject audits tax authorities past received material assessments tax auditors december 31 2015 2014 recorded reserves management feels appropriate future potential liabilities result prior audits believe fully reserved assessments ultimate amount settlements vary estimates selfinsurance reserves maintain reserves workers’ compensation vehicle liability balance sheet based judgment estimates using actuarial method based claims incurred estimate general liability claims casebycase basis maintain insurance policies workers’ compensation vehicular liability general liability claims insurance policies carry selfinsured retention limits deductibles per occurrence basis retention limits deductibles accounted accrual process workers’ compensation vehicular liability general liability claims december 31 2015 2014 recorded 564 million 610 million respectively selfinsurance reserves related workers’ compensation vehicular liabilities general liability claims partially offsetting liabilities approximately 173 million 187 million insurance receivables december 31 2015 2014 respectively believe liabilities recorded appropriate based known facts circumstances expect losses materially excess amounts already accrued existing claims environmental remediation liabilities environmental reserve matters including remediation efforts current locations relating previouslydisposed properties record liabilities remediation efforts probable costs conduct remediation efforts reasonably estimated december 31 2015 2014 recorded 55 million 57 million respectively environmental remediation liabilities believe liabilities recorded appropriate based known facts circumstances expect losses materially excess amounts already accrued provide performance bonds provide financial surety assurances remediation maintenance swd properties comply environmental protection standards costs swd properties may mandatory comply applicable laws regulations future required divest cease operations optimization improve operations safety regulatory compliance note 16 accumulated comprehensive loss components accumulated comprehensive loss follows thousands local currency functional currency operations russia december 31 2015 2014 one us dollar equal 7316 5645 russian rubles respectively cumulative translation gains losses resulting translating financial statements functional currency us dollars included comprehensive income accumulated stockholders’ equity partial complete sale liquidation net investment entity key energy services inc subsidiaries notes consolidated financial statements continued note 17 employee benefit plans maintain 401k plan part employee benefits package third quarter 2015 management suspended 401k matching program part cost cutting efforts prior matched 100 employee contributions 4 employee’s salary vest immediately 401k plan subject maximums 10600 10400 10200 years ended december 31 2015 2014 2013 respectively matching contributions 55 million 109 million 104 million years ended december 31 2015 2014 2013 respectively offer participants option purchase shares common stock 401k plan fund note 18 stockholders’ equity common stock december 31 2015 2014 200000000 shares common stock authorized par value 010 per share 157543259 shares issued outstanding december 31 2015 153557108 shares issued outstanding december 31 2014 2015 2014 2013 dividends declared paid terms senior notes due 2021 credit facilities due 2020 must meet certain financial covenants may pay dividends currently intend pay dividends tax withholding repurchase shares restricted common stock previously granted certain employees pursuant agreement individuals permitted sell shares back us order satisfy minimum income tax withholding requirements related vesting grants repurchased total 239636 shares 290697 shares 416101 shares aggregate cost 04 million 22 million 32 million years ended december 31 2015 2014 2013 respectively represented fair market value shares based price stock dates purchase note 19 sharebased compensation 2014 incentive plan may 15 2014 stockholders approved 2014 equity cash incentive plan “2014 incentive plan” 2014 incentive plan administered board directors committee designated board directors “committee” board directors committee “administrator” power authority select participants defined 2014 plan grant awards defined participants pursuant terms 2014 incentive plan 2014 incentive plan expires may 15 2024 2014 plan established successor company’s 2012 equity cash incentive plan “2012 incentive plan” 2009 equity cash incentive plan “2009 incentive plan” 2007 equity cash incentive plan “2007 incentive plan” collectively 2012 plan 2009 plan “prior plans” prior plans merged 2014 plan effective may 15 2014 outstanding awards prior plans continue effect according terms effect merger prior plans 2014 plan subject amendments administrator deems appropriate shares respect outstanding grants prior plans issued transferred 2014 plan additional grants made prior plans subject adjustment total number shares common stock available grant awards 2014 plan may exceed 12310750 shares however purposes limitation stock subject award canceled forfeited expires otherwise terminates without issuance stock settled cash exchanged administrators permission prior issuance stock award involving stock become available issuance 2014 incentive plan awards may form stock options incentive stock options nonqualified stock options restricted stock restricted stock units performance compensation awards sars collectively awards may granted employees directors cases consultants individuals administrator determines reasonably expected become employees directors consultants following grant date award “participants” however incentive stock options may granted employees board directors time may amend terminate 2014 incentive plan however except provided otherwise 2014 incentive plan amendment effective unless approved stockholders company extent stockholder approval necessary satisfy applicable law securities exchange listing requirements exercise price option including incentive stock option exceeds fair market value common stock given date committee authority reduce exercise price option new exercise price less thencurrent fair market value common stock provided action shall first key energy services inc subsidiaries notes consolidated financial statements continued approved vote stockholders administrator time may amend terms one awards however amendment would constitute impairment rights award must request consent participant must consent writing expressly contemplated board may amend 2014 incentive plan respect board directors deem necessary advisable provide eligible employees maximum benefits provided provisions internal revenue code 1986 amended regulations promulgated thereunder relating incentive stock options andor bring 2014 incentive plan andor awards granted compliance therewith december 31 2015 45 million shares available grant 2014 incentive plan stock option awards stock option awards granted incentive plans maximum contractual term ten years date grant shares issuable upon exercise stock option issued authorized unissued shares common stock following tables summarize stock option activity shares thousands grant stock options years ended december 31 2015 2014 2013 stock options vested year ended december 31 2015 recognized zero pretax expense zero tax benefits related stock options years ended december 31 2015 2014 2013 stock option awards vested december 31 2012 weighted average remaining contractual term stock option awards exercisable december 31 2015 17 years intrinsic value options exercised years ended december 31 2015 2014 2013 zero less 01 million respectively common stock awards common stock awards include restricted stock awards restricted stock units weighted average grant date fair market value common stock awards granted years ended december 31 2015 2014 2013 189 731 756 respectively total fair market value common stock awards vested years ended december 31 2015 2014 2013 132 million 120 million 166 million respectively following tables summarize information year ended december 31 2015 unvested common stock awards outstanding shares thousands issued 598860 shares 197865 shares 288780 shares common stock nonemployee directors vested immediately upon issuance 2015 2014 2013 respectively common stock grants vest immediately upon issuance record expense equal fair market value shares date grant common stock awards immediately vest recognize compensation expense ratably graded vesting period grant net estimated actual forfeitures years ended december 31 2015 2014 2013 recognized 102 million 109 million 138 million respectively pretax expense continuing operations associated common key energy services inc subsidiaries notes consolidated financial statements continued stock awards including common stock grants outside directors unvested common stock awards outstanding december 31 2015 anticipate recognize 82 million pretax expense next 09 years performance units first quarter 2015 compensation committee board directors adopted 2014 performance award agreement “2014 pu award agreement” key energy services inc 2014 equity cash incentive plan “2014 plan” 2015 performance unit plan “2015 pu plan” believe 2015 pu plan 2014 pu award agreement enable us obtain retain employees contribute long term success aligning interests executives interests stockholders providing compensation linked directly increases share value january 2015 issued 21 million performance units executive officers 2014 plan material terms set forth 2014 pu award agreement february 2015 issued 04 million performance units certain employees 2015 pu plan performance units measured based one threeyear performance period january 1 2015 december 31 2017 number performance units may earned participant determined end performance period based relative placement key’s total stockholder return period within peer group follows performance units vest given performance period award holder paid cash amount equal vested percentage performance units multiplied closing stock price common stock last trading day performance period account performance units liabilitytype award settled cash december 31 2015 fair value outstanding performance units 08 million accreted compensation expense vesting terms awards december 31 2015 unrecognized compensation cost related unvested performance units estimated 05 million expected recognized weightedaverage period 20 years stock appreciation rights august 2007 issued approximately 587000 sars executive officers sar tenyear term date grant vesting outstanding sar awards accelerated fourth quarter 2008 upon exercise sar recipient receive amount equal difference exercise price fair market value share common stock date exercise multiplied number shares common stock sar exercised payments made shares common stock prior exercise sar entitle recipient receive shares common stock provide recipient voting stockholders’ rights account sars equity awards recognize compensation expense ratably vesting period sar based fair value date issuance net estimated actual forfeitures recognize expense associated awards 2015 2014 2013 forfeit sars 2015 december 31 2015 02 million sars remained unexercised note 20 transactions related parties board director relationships member board directors executive vice president general counsel chief administrative officer anadarko petroleum corporation “anadarko” one customers sales anadarko 121 million 325 million 412 million years ended december 31 2015 2014 2013 respectively receivables outstanding anadarko 09 million 29 million december 31 2015 2014 respectively transactions anadarko services made terms consistent customers note 21 supplemental cash flow information cash paid interest includes cash payments interest longterm debt capital lease obligations commitment agency fees paid note 22 segment information revised reportable business segments fourth quarter 2014 revised reportable segments us rig services fluid management services coiled tubing services fishing rental services international also “functional support” segment associated overhead costs support reportable segments segment disclosures year ended december 31 2013 revised reflect change reportable segments revised segments reflect changes management’s resource allocation performance assessment making decisions regarding business us rig services fluid management services coiled tubing services fishing rental services operate geographically within united states international reportable segment includes operations mexico colombia ecuador russia bahrain oman canadian subsidiary also reflected international reportable segment second half 2015 ceased operations colombia ecuador middle east evaluate performance segments based gross margin measures intersegment sales pricing based current market conditions changes reflect current operating focus compliance asc 280 aggregate services create reportable segments accordance asc 280 accounting policies segments described “note 1 organization summary significant accounting policies” us rig services us rig services include completion newly drilled wells workover recompletion existing oil natural gas wells well maintenance plugging abandonment wells end useful lives also provide specialty drilling services oil natural gas producers certain larger rigs capable providing conventional horizontal drilling services rigs encompass various sizes capabilities allowing us service types wells depths 20000 feet many rigs outfitted proprietary keyview® technology captures reports well site operating data provides safety control systems believe technology allows customers crews better monitor well site operations improves efficiency safety adds value services offer completion recompletion services provided rigs prepare wells production whether newly drilled recently extended workover operation completion process may involve selectively perforating well casing access production zones stimulating testing zones installing tubular downhole equipment typically provide well service rig may also provide equipment assist completion process completion services vary well work may take days several weeks perform depending nature completion key energy services inc subsidiaries notes consolidated financial statements continued workover services provide designed enhance production existing wells generally complex time consuming normal maintenance services workover services include deepening extending wellbores new formations drilling horizontal lateral wellbores sealing depleted production zones accessing previously bypassed production zones converting former production wells injection wells enhanced recovery operations conducting major subsurface repairs due equipment failures workover services may last days several weeks depending complexity workover maintenance services provided rig fleet generally required throughout life cycle oil natural gas well examples maintenance services include routine mechanical repairs pumps tubing equipment removing debris formation material wellbores pulling rods downhole equipment wellbores identify resolve production problems maintenance services generally less complicated completion workover related services require less time perform rig fleet also used process permanently shuttingin oil natural gas wells end productive lives plugging abandonment services generally require auxiliary equipment addition well servicing rig demand plugging abandonment services significantly impacted demand oil natural gas well operators required state regulations plug wells longer productive fluid management services provide transportation wellsite storage services various fluids utilized connection drilling completions workover maintenance activities also provide disposal services fluids produced subsequent well completion fluids removed well site transported disposal swd wells owned us third party addition operate fleet hot oilers capable pumping heated fluids used clear soluble restrictions wellbore demand pricing services generally correspond demand well service rigs coiled tubing services coiled tubing services involve use continuous metal pipe spooled onto large reel deployed oil natural gas wells perform various applications wellbore cleanouts nitrogen jet lifts throughtubing fishing formation stimulations utilizing acid chemical treatments coiled tubing also used number horizontal well applications milling temporary isolation plugs separate frac zones various pre post hydraulic fracturing well preparation services fishing rental services offer full line services rental equipment designed use providing onshore offshore drilling workover services fishing services involve recovering lost stuck equipment wellbore utilizing broad array “fishing tools” rental tool inventory consists drill pipe tubulars handling tools including patented hydrawalk® pipehandling units services pressurecontrol equipment pumps power swivels reversing units foam air units frac stack equipment used support hydraulic fracturing operations associated flowback frac fluids proppants oil natural gas also provide well testing services demand fishing rental services closely related capital spending oil natural gas producers generally function oil natural gas prices international segment includes operations mexico russia second half 2015 ceased operations colombia ecuador middle east provide rigbased services maintenance workover recompletion existing oil wells completion newlydrilled wells plugging abandonment wells end useful lives international markets addition mexico provide drilling coiled tubing wireline project management consulting services work mexico also requires us provide thirdparty services vary scope project also technology development control systems business based canada focused development hardware software related oilfield service equipment controls data acquisition digital information flow april 2015 announced decision exit markets participate outside north america strategy sell relocate assets businesses operating markets middle east operated kingdom bahrain oman august 5 2013 agreed dissolution almansoori key energy services llc joint venture formed laws abu dhabi uae acquisition underlying business 51 million see “note 2 acquisitions” discussion december 31 2015 sold subsidiary bahrain certain assets key energy services inc subsidiaries notes consolidated financial statements continued oman ecuador colombia longer operating markets currently discussions sell subsidiary russia russian operations provide drilling workover reservoir engineering services april 9 2013 completed acquisition remaining 50 noncontrolling interest geostream 146 million 100 geostream see “note 2 acquisitions” discussion functional support functional support segment includes unallocated overhead costs associated administrative support us international reporting segments financial summary following table presents segment information years ended december 31 2015 2014 2013 thousands year ended december 31 2015 key energy services inc subsidiaries notes consolidated financial statements continued year ended december 31 2014 key energy services inc subsidiaries notes consolidated financial statements continued year ended december 31 2013 1 longlived assets include fixed assets goodwill intangibles assets 2 functional support geographically located united states note 23 unaudited quarterly results operations following table presents summarized unaudited quarterly information two recent years covered consolidated financial statements thousands except per share data key energy services inc subsidiaries notes consolidated financial statements continued 1 quarterly earnings per common share based weighted average number shares outstanding quarter sum quarters may equal annual earnings per common share note 24 condensed consolidating financial statements 2021 notes guaranteed virtually domestic subsidiaries wholly owned guarantees joint several full complete unconditional restrictions ability subsidiary guarantors transfer funds parent company result guarantee arrangements required present following condensed consolidating financial information pursuant sec regulation sx rule 310 “financial statements guarantors issuers guaranteed securities registered” condensed consolidating balance sheets key energy services inc subsidiaries notes consolidated financial statements continued condensed consolidating balance sheets condensed consolidating statements operations key energy services inc subsidiaries notes consolidated financial statements continued condensed consolidating statements operations condensed consolidating statements operations key energy services inc subsidiaries notes consolidated financial statements continued condensed consolidating statements cash flows key energy services inc subsidiaries notes consolidated financial statements continued condensed consolidating statements cash flows key energy services inc subsidiaries notes consolidated financial statements continued condensed consolidating statements cash flows item 9item 8 financial statements supplementary data key energy services inc subsidiaries index consolidated financial statements page report independent registered public accounting firm report independent registered public accounting firm internal control financial reporting consolidated balance sheets consolidated statements operations consolidated statements comprehensive loss consolidated statements cash flows consolidated statements stockholders’ equity notes consolidated financial statements report independent registered public accounting firm board directors shareholders key energy services inc opinion financial statements audited accompanying consolidated balance sheets key energy services inc delaware corporation subsidiaries “company” december 31 2018 2017 related consolidated statements operations comprehensive loss stockholders’ equity cash flows years ended december 31 2018 successor december 31 2017 successor period december 16 2016 december 31 2016 successor period january 1 2016 december 15 2016 predecessor related notes collectively referred “financial statements” opinion financial statements present fairly material respects financial position company december 31 2018 2017 results operations cash flows years ended december 31 2018 successor december 31 2017 successor period december 16 2016 december 31 2016 successor period january 1 2016 december 15 2016 predecessor conformity accounting principles generally accepted united states america also audited accordance standards public company accounting oversight board united states “pcaob” company’s internal control financial reporting december 31 2018 based criteria established 2013 internal controlintegrated framework issued committee sponsoring organizations treadway commission “coso” report dated march 15 2019 expressed unqualified opinion basis opinion financial statements responsibility company’s management responsibility express opinion company’s financial statements based audits public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether due error fraud audits included performing procedures assess risks material misstatement financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence supporting amounts disclosures financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation financial statements believe audits provide reasonable basis opinion grant thornton llp served company’s auditor since 2006 houston texas march 15 2019 report independent registered public accounting firm board directors shareholders key energy services inc opinion internal control financial reporting audited internal control financial reporting key energy services inc delaware corporation subsidiaries “company” december 31 2018 based criteria established 2013 internal controlintegrated framework issued committee sponsoring organizations treadway commission “coso” opinion company maintained material respects effective internal control financial reporting december 31 2018 based criteria established 2013 internal controlintegrated framework issued coso also audited accordance standards public company accounting oversight board united states “pcaob” consolidated financial statements company year ended december 31 2018 report dated march 15 2019 expressed unqualified opinion financial statements basis opinion company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audit accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion definition limitations internal control financial reporting company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate grant thornton llp houston texas march 15 2019 key energy services inc subsidiaries consolidated balance sheets thousands except per share amounts see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries consolidated statements operations thousands except per share amounts see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries consolidated statements comprehensive loss thousands see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries consolidated statements cash flows thousands see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries consolidated statements stockholders’ equity thousands except per share data see accompanying notes integral part consolidated financial statements key energy services inc subsidiaries notes consolidated financial statements note 1 organization summary significant accounting policies key energy services inc wholly owned subsidiaries collectively “key” “company” “we” “us” “its” “our” provide full range well services major oil companies independent oil natural gas production companies services include rigbased coiled tubingbased well maintenance workover services well completion recompletion services fluid management services fishing rental services ancillary oilfield services additionally certain rigs capable specialty drilling applications operate major oil natural gas producing regions continental united states previously operations mexico sold fourth quarter 2016 canada russia sold second third quarters 2017 respectively basis presentation consolidated financial statements included annual report form 10k present financial position results operations cash flows periods presented accordance gaap preparation consolidated financial statements requires us develop estimates make assumptions affect financial position results operations cash flows estimates also impact nature extent disclosure contingent liabilities among things use estimates analyze assets possible impairment ii determine depreciable lives assets iii assess future tax exposure realization deferred tax assets iv determine amounts accrue contingencies v value tangible intangible assets vi assess workers’ compensation vehicular liability selfinsured risk accruals insurance reserves vii provide allowances uncollectible accounts receivable viii value asset retirement obligations ix value equitybased compensation review significant estimates recurring basis record effect necessary adjustments prior publication financial statements adjustments made respect use estimates relate improved information previously available limitations inherent process actual results may differ materially estimates believe estimates reasonable october 24 2016 key certain domestic subsidiaries filed voluntary petitions reorganization chapter 11 united states bankruptcy code united states bankruptcy court district delaware pursuant prepackaged plan reorganization “the plan” plan confirmed bankruptcy court december 6 2016 company emerged bankruptcy proceedings december 15 2016 “the effective date” upon emergence effective date company adopted fresh start accounting resulted creation new entity financial reporting purposes result application fresh start accounting well effects implementation plan consolidated financial statements december 16 2016 comparable consolidated financial statements prior date refer “note 3 fresh start accounting” additional information references “successor” “successor company” relate financial position results operations reorganized company subsequent december 15 2016 references “predecessor” “predecessor company” refer financial position results operations company prior december 15 2016 evaluated events occurring balance sheet date included annual report form 10k possible disclosure subsequent event management monitored subsequent events date financial statements issued principles consolidation within consolidated financial statements include accounts majorityowned controlled subsidiaries eliminate intercompany accounts transactions interest entity significant control influence account interest using cost method interest entity exert significant influence control account interest using equity method acquisitions time acquire businesses assets consistent longterm growth strategy results operations acquisitions included financial statements beginning date acquisition accounted using acquisition method business combinations whether partial full stages acquirer records 100 assets liabilities acquired business including goodwill fair values including contingent consideration final valuations assets liabilities obtained recorded soon practicable later one year date acquisition key energy services inc subsidiaries notes consolidated financial statements continued revenue recognition recognize revenue following criteria met contract customer identified ii performance obligations contract identified iii transaction price determined iv transaction price allocated performance obligations v revenue recognized performance obligations satisfied • identifying contract customer ensures understanding company customer specific nature terms transaction finalized • inception contract company assesses goods services promised contract customer identifies performance obligation promise transfer customer either good service bundle goods services distinct ii series distinct goods services substantially pattern transfer customer • transaction price amount consideration company expects entitled exchange transferring promised goods services customer excluding amounts collected behalf third parties transaction price may include fixed amounts variable amounts nature variable amounts transaction price inherent uncertainty amount ultimately expected realized determinable outset contract however company shall estimate amount variable consideration contract inception subject certain limitations • separate performance obligations identified transaction price determined company allocates transaction price performance obligations generally done proportion standalone selling prices result discount within contract generally allocated proportionally separate performance obligations contract • revenue recognized satisfies identified performance obligation transferring promised good service customer good service considered transferred customer obtains control typical business contracts customers may include multiple performance obligations arrangements allocate revenues performance obligation based relative standalone selling price generally determine standalone selling prices based prices charged customers using expected costplus margin combined products services within contract account individual products services separately distinct ie product service separately identifiable items contract customer benefit resources readily available customer consideration including discounts allocated separate products services within contract based prices separately sell services items sold separately estimate standalone selling prices using expected costplus margin approach cash equivalents consider shortterm investments original maturity less three months cash equivalents december 31 2018 obligations abl facility term loan facility secured assets including assets held subsidiaries includes cash equivalents restrict investment cash financial institutions high credit standing limit amount credit exposure one financial institution maintain cash bank deposit brokerage accounts exceed federally insured limits december 31 2018 accounts guaranteed federal deposit insurance corporation “fdic” 250000 substantially accounts held deposits excess fdic limits believe cash held foreign subsidiaries could repatriated general corporate use without material withholdings time normal course business connection operations ongoing legal matters required place certain amounts cash deposit accounts restrictions limit ability withdraw funds restricted cash primarily used maintain compliance abl facility certain cash accounts zerobalance controlled disbursement accounts right offset cash balances present outstanding checks written zerobalance accounts component accounts payable accompanying consolidated balance sheets accounts receivable allowance doubtful accounts establish provisions losses accounts receivable determine possibility collect part outstanding balances regularly review accounts 150 days past due invoice date collectability establish adjust allowance necessary using specific identification method exhaust collection efforts determine balance never collected write accounts receivable associated provision uncollectible accounts key energy services inc subsidiaries notes consolidated financial statements continued time entitled proceeds insurance policies amounts reserved selfinsurance liability present insurance receivables gross balance sheet component assets separate corresponding liability concentration credit risk significant customers include major oil natural gas production companies independent oil natural gas production companies natural gas production companies perform ongoing credit evaluations customers usually require material collateral maintain reserves potential credit losses necessary results operations financial position considered light fluctuations demand experienced oilfield service companies changes oil gas producers’ expenditures budgets occur fluctuations impact results operations financial position supply demand factors directly affect utilization hours primary determinants net cash provided operating activities year ended 2017 period january 1 2016 december 15 2016 chevron texaco exploration production accounted approximately12 14 consolidated revenue respectively period january 1 2016 december 15 2016 oxy usa inc accounted approximately 13 consolidated revenue customer accounted 10 consolidated revenue years ended december 31 2018 2017 period december 16 2016 december 31 2016 period january 1 2016 december 15 2016 customers accounted 10 total accounts receivable december 31 2018 2017 inventories consist primarily equipment parts spares use operations supplies held consumption valued lower average cost market property equipment property equipment carried cost less accumulated depreciation provided assets estimated depreciable lives assets using straightline method depreciation expense years ended december 31 2018 2017 period december 16 2016 december 31 2016 period january 1 2016 december 15 2016 826 million 845 million 36 million 1295 million respectively depreciate operational assets depreciable lives salvage value higher assets’ value scrap salvage value approximates 10 operational asset’s acquisition cost operational asset stacked taken service review physical condition depreciable life ultimate salvage value determine asset operable whether remaining depreciable life salvage value adjusted scrap asset accelerate depreciation asset salvage value dispose asset gain loss recognized december 31 2018 estimated useful lives asset classes follows key energy services inc subsidiaries notes consolidated financial statements continued longlived asset group tested recoverability whenever events changes circumstances indicate carrying amount may recoverable purposes testing impairment group longlived assets along lines business based services provided lowest level identifiable cash flows largely independent cash flows assets liabilities would record impairment charge reducing net carrying value estimated fair value asset group’s estimated future cash flows less net carrying value events changes circumstance cause us evaluate fixed assets recoverability possible impairment may include changes market conditions adverse movements prices oil natural gas changes asset group expected future life intended use physical condition could reduce fair value certain property equipment development future cash flows determination fair value asset group involves significant judgment estimates see “note 10 property equipment” discussion asset retirement obligations recognize liability fair value legal obligations associated retirement tangible longlived assets capitalize equal amount cost asset depreciate additional cost estimated useful life assets obligations perform asset retirement activities unconditional despite uncertainties may exist surrounding individual retirement activity accordingly recognize liability fair value conditional asset retirement obligation fair value reasonably estimated determining fair value examine inputs believe market participant would use transfer liability probabilityweight potential costs thirdparty would charge adjust cost inflation estimated life asset discount cost using credit adjusted risk free rate significant judgment involved estimating future cash flows associated obligations well ultimate timing cash flows estimates amount timing cash flows change changes may material impact results operations see “note 14 asset retirement obligations” deposits due capacity constraints equipment manufacturers sometimes required make advanced payments certain oilfield service equipment items used normal course business years ended december 31 2018 2017 deposits totaled 13 million 12 million respectively deposits consist primarily deposit requirements insurance companies payments made related high demand longlead time items capitalized interest capitalized average amount accumulated expenditures major capital projects construction using effective interest rate based related debt underlying assets placed service capitalized interest added cost assets amortized depreciation expense useful life assets included depreciation amortization line accompanying consolidated statements operations deferred financing costs deferred financing costs associated longterm debt carried cost amortized interest expense using effective interest method life related debt instrument related debt instrument retired remaining unamortized costs included determination gain loss extinguishment debt record gains losses extinguishment debt part continuing operations accordance asu 201503 record debt financing costs reduction longterm debt see “note 16 longterm debt” discussion valuation tangible finitelived intangible assets fixed assets finitelived intangibles tested potential impairment circumstances events indicate possible impairment may exist circumstances events referred “trigger events” examples trigger events include limited adverse change market conditions significant decrease benefits derived acquired business change use asset significant disposal particular asset class trigger event occurs impairment test performed based undiscounted cash flow analysis perform impairment test make judgments estimates assumptions regarding longterm forecasts revenues expenses relating assets subject review market conditions energy prices estimated depreciable lives assets discount rate assumptions legal factors impact operations significant effect estimates use determine whether assets impaired results undiscounted cash flow analysis indicate carrying value assets tested impairment recoverable record impairment charge write carrying value assets fair value using different judgments assumptions estimates could potentially arrive materially different fair value assets tested impairment may result impairment charge key energy services inc subsidiaries notes consolidated financial statements continued internaluse software capitalize costs incurred application development stage internaluse software amortize costs software’s estimated useful life generally five seven years costs incurred related selection maintenance internaluse software expensed incurred litigation estimating liabilities related litigation take account available facts circumstances order determine whether loss probable reasonably estimable various suits claims arising ordinary course business pending us conduct business throughout continental united states may subject jury verdicts arbitrations result outcomes favor plaintiffs also exposed various claims abroad continually assess contingent liabilities including potential litigation liabilities well adequacy accruals need disclosure items establish provision contingent liability probable liability incurred amount reasonably estimable see “note 17 commitments contingencies” environmental operations routinely involve storage handling transport disposal bulk waste materials contain oil contaminants regulated substances operations subject various federal state local laws regulations intended protect environment environmental expenditures expensed capitalized depending future economic benefit expenditures relate existing condition caused past operations future economic benefits expensed record liabilities undiscounted basis remediation efforts probable costs conduct remediation efforts reasonably estimated litigation reserves reflect application insurance coverage environmental reserves reflect management’s assessment insurance coverage may apply matters issue see “note 17 commitments contingencies” selfinsurance primarily selfinsured physical damage equipment automobiles well workers’ compensation claims accruals maintain consolidated balance sheet relate deductibles selfinsured retentions estimate use historical claims data trend analysis assist management liability amount selfinsurance reserves utilize services third party actuary actual outcome claim could differ significantly estimated amounts adjust loss estimates calculation accruals based upon actual claim settlements reported claims see “note 17 commitments contingencies” income taxes account deferred income taxes using asset liability method provide income taxes significant temporary differences management determines current tax liability well taxes incurred result current operations yet deferred future periods current taxes payable represent liability related income tax returns current year net deferred tax expense benefit represents change balance deferred tax assets liabilities reported consolidated balance sheets deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled management makes certain assumptions timing temporary tax differences differing treatment certain items tax accounting purposes whether differences permanent final determination tax liability involves interpretation local tax laws tax treaties related authorities jurisdiction well significant use estimates assumptions regarding scope future operations results achieved timing nature income earned expenditures incurred record valuation allowances reduce deferred tax assets determine likely eg likelihood 50 deferred tax assets realized future periods assess likelihood use estimates judgment regarding future taxable income well jurisdiction taxable income generated determine whether valuation allowance required ultimate realization deferred tax assets depends ability generate sufficient taxable income appropriate character related jurisdiction future evidence supporting ability include current financial position results operations actual forecasted results reversal deferred tax liabilities tax planning strategies well current forecasted business economics industry additionally record uncertain tax positions financial statements net recognizable amount based amount management deems likely sustained upon ultimate settlement tax authorities domestic international tax jurisdictions operate key energy services inc subsidiaries notes consolidated financial statements continued estimates assumptions regarding current deferred tax items inaccurate modified changes could potentially material negative impacts earnings see “note 15 income taxes” discussion accounting income taxes changes valuation allowance components tax rate reconciliation realization loss carryforwards earnings per share basic earnings per common share determined dividing net earnings applicable common stock weighted average number common shares actually outstanding period diluted earnings per common share based increased number shares would outstanding assuming conversion dilutive outstanding convertible securities using treasury stock “as converted” methods see “note 12 earnings per share” sharebased compensation issue issued timebased vesting performancebased vesting stock options timebased vesting performancebased vesting restricted stock units restricted stock awards employees part employees’ compensation retention tool nonemployee directors calculate fair value awards grant date amortize fair value compensation expense ratably vesting period award net forfeitures grantdate fair value timebased restricted stock units restricted stock awards determined using stock price grant date grantdate fair value performancebased restricted stock units determined using stock price grant date assuming 10x payout target however maximum 20x payout could achieved certain ebitdabased performance measures met fair value stock option awards estimated using blackscholes fair value model valuation stock options requires us estimate expected term award estimate using simplified method sufficient historical exercise information additionally valuation stock option awards also dependent historical stock price volatility view limited amount time elapsed since reorganization volatility calculated based historical stock price volatility peer group lookback period equivalent expected term award fair value performancebased stock options restricted stock units estimated manner timebased awards assumes performance goals achieved awards vest performance based awards vest previously recognized compensation costs reversed record sharebased compensation component general administrative direct operating expense based role applicable individual see “note 20 sharebased compensation” foreign currency gains losses respect former operations russia sold third quarter 2017 local currency functional currency assets liabilities translated rates exchange effect balance sheet date income expense items translated average rates exchange period resulting gains losses arising translation accounts functional currency us dollar included separate component stockholders’ equity comprehensive income partial complete sale liquidation net investment foreign entity time former foreign subsidiaries may entered transactions denominated currencies functional currency transactions initially recorded functional currency subsidiary based applicable exchange rate effect date transaction end month transactions remeasured equivalent amount functional currency based applicable exchange rates effect time adjustment required remeasure transaction equivalent amount functional currency end month recorded income loss foreign subsidiary component income net comprehensive loss display comprehensive loss components financial statements classify items comprehensive income loss nature financial statements display accumulated balance comprehensive income loss separately stockholders’ equity leases lease real property equipment various leasing arrangements enter leasing arrangement analyze terms arrangement determine whether lease accounted operating lease capital lease periodically incur costs improve assets lease arrangements value leasehold improvements exceeds threshold capitalization record improvement component property equipment amortize improvement useful life improvement lease term whichever shorter key energy services inc subsidiaries notes consolidated financial statements continued certain operating lease agreements structured include scheduled specified rent increases term lease agreement increases may result inducement “rent holiday” conveyed us early lease included reflect anticipated effects inflation recognize scheduled specified rent increases straightline basis term lease agreement addition certain operating lease agreements contain incentives induce us enter lease agreement upfront cash payments us payment lessor costs moving expenses assumption lessor preexisting lease agreements third parties payments made us behalf represent incentives consider reduction rent expense recognized straightline basis term lease agreement recent accounting developments asu 201802 february 2018 fasb issued asu 201802 income statementreporting comprehensive income topic 220 reclassification certain tax effects accumulated comprehensive income standard allows reclassification accumulated comprehensive income loss retained earnings stranded tax effects resulting us tax cuts jobs act “2017 tax act” enacted december 22 2017 adopted guidance january 1 2018 adoption standard impact consolidated financial statements asu 201618 november 2016 fasb issued asu 201618 statement cash flows topic 230 restricted cash standard provides guidance presentation restricted cash restricted cash equivalents statement cash flows restricted cash restricted cash equivalents included cash equivalents reconciling beginningofperiod endofperiod amounts shown statements cash flows amendments asu applied using retrospective transition method effective reporting periods beginning december 15 2017 early adoption permitted adopted new standard effective january 1 2018 revised statement cash flows presentation restricted cash adoption standard impact consolidated financial statements asu 201615 august 2016 fasb issued asu 201615 statement cash flows topic 230 classification certain cash receipts cash payments clarifies entities classify certain cash receipts cash payments statement cash flows guidance also clarifies predominance principle applied cash receipts cash payments aspects one class cash flows guidance effective annual periods beginning december 15 2017 interim periods within annual periods early adoption permitted adopted new standard effective january 1 2018 adoption standard material impact consolidated financial statements asu 201613 june 2016 fasb issued asu 201613 financial instrumentscredit losses topic 326 measurement credit losses financial instruments change companies measure credit losses financial assets certain instruments aren’t measured fair value net income standard replace today’s “incurred loss” approach “expected loss” model instruments measured amortized cost availableforsale debt securities entities required record allowances rather reduce carrying amount amendments update effective annual periods beginning december 15 2019 interim periods within annual periods early adoption permitted annual periods beginning december 15 2018 company evaluating effect standard consolidated financial statements asu 201602 february 2016 fasb issued asu 201602 leases topic 842 replace existing lease guidance new standard intended provide enhanced transparency comparability requiring lessees record rightofuse assets corresponding lease liabilities balance sheet additional disclosure requirements include qualitative disclosures along specific quantitative disclosures objective enabling users financial statements assess amount timing uncertainty cash flows arising leases asu 201602 effective company annual reporting periods beginning december 15 2018 including interim periods within fiscal years early adoption permitted part assessment work todate formed implementation work team conducted training relevant staff regarding potential impacts new asu continuing contract analysis policy review engaged external resources assist us efforts complete analysis potential changes current accounting practices additionally created additional internal controls financial reporting made changes business practices processes related asu key elected new prospective “comparatives 840” transition method defined asu 201811 adopted new standard january 1 2019 applying comparatives 840 transition method adoption new standard require cumulative effect adjustment retained earnings believe immaterial asu 201409 may 2014 fasb issued asu 201409 revenue contracts customers topic 606 objective asu establish principles report useful information users financial statements nature amount timing uncertainty revenue contracts customers core principle recognize revenue depict key energy services inc subsidiaries notes consolidated financial statements continued transfer promised goods services customers amount reflects consideration entity expects entitled exchange goods services asu 201409 must adopted using either full retrospective method modified retrospective method adopted new standard effective january 1 2018 using full retrospective method adoption standard material impact consolidated financial statements note 2 emergence voluntary reorganization october 24 2016 key certain domestic subsidiaries filed voluntary petitions reorganization chapter 11 united states bankruptcy code united states bankruptcy court district delaware pursuant prepackaged plan reorganization plan confirmed bankruptcy court december 6 2016 company emerged bankruptcy proceedings december 15 2016 effective date company • reincorporated successor company state delaware adopted amended restated certificate incorporation bylaws • appointed new members successor company’s board directors replace directors predecessor company • issued predecessor company’s former stockholders exchange cancellation discharge predecessor company’s common stock ◦ 815887 shares successor company’s common stock ◦ 919004 warrants expire december 15 2020 919004 warrants expire december 15 2021 exercisable one share successor company’s common stock • issued former holders predecessor company’s 675 senior notes exchange cancellation discharge notes 7500000 shares successor company’s common stock • issued 11769014 shares successor company’s common stock certain participants rights offerings conducted pursuant plan • issued soter capital llc “soter” sole share successor company’s series preferred stock confers certain rights elect directors economic rights • entered new 80 million abl facility increased 100 million february 3 2017 250 million term loan facility upon termination predecessor company’s assetbased revolving credit facility term loan facility • entered registration rights agreement certain stockholders successor company • adopted 2016 incentive plan officers directors employees successor company subsidiaries • entered corporate advisory services agreement successor company platinum equity advisors llc “platinum” pursuant platinum provide certain business advisory services company foregoing summary substantive provisions plan related transactions intended complete description substitute full complete reading plan documents referred note 3 fresh start accounting accordance asc 852 reorganizations “asc 852” freshstart accounting required upon company’s emergence chapter 11 holders existing voting shares predecessor received less 50 voting shares successor ii reorganization value predecessor assets immediately prior confirmation plan less total postpetition liabilities allowed claims key energy services inc subsidiaries notes consolidated financial statements continued conditions required adoption freshstart accounting met company’s plan reorganization became effective december 15 2016 implementation plan application freshstart accounting materially changed carrying amounts classifications reported company’s consolidated financial statements resulted company becoming new entity financial reporting purposes result application freshstart accounting effects implementation plan financial statements december 15 2016 comparable financial statements prior december 15 2016 upon application freshstart accounting company allocated reorganization value individual assets liabilities conformity asc 805 business combinations “asc 805” reorganization value represents fair value successor company’s assets considering liabilities excess reorganization value fair value identified tangible intangible assets reported goodwill reorganization value asc 852 successor company must determine value assigned equity emerging company date adoption freshstart accounting facilitate calculation company estimated enterprise value successor company relying discounted cash flow “dcf” analysis income approach company also considered guideline public company guideline transactions methods market approach reasonableness checks indications income approach enterprise value represents fair value entity’s interestbearing debt stockholders’ equity disclosure statement associated plan confirmed bankruptcy court company estimated range enterprise values 425 million 475 million midpoint 450 million company deemed appropriate use midpoint low end high end range determine final enterprise value 450 million utilized freshstart accounting enterprise value plus excess cash adjustments approximately 52 million less fair value debt 250 million resulted equity value successor 2521 million estimate enterprise value utilizing dcf method company established estimate future cash flows period ranging 2016 2025 discounted estimated future cash flows present value expected cash flows period 2016 2025 based financial projections assumptions utilized disclosure statement expected cash flows period 2016 2025 derived earnings forecasts assumptions regarding growth margin projections applicable terminal value included based cash flows final year forecast period discount rate 145 estimated based aftertax weighted average cost capital “wacc” reflecting rate return would expected market participant wacc also takes consideration company specific risk premium reflecting risk associated overall uncertainty financial projections used estimate future cash flows guideline public company guideline transaction analysis identified group comparable companies transactions operating financial characteristics comparable certain respects company including example comparable lines business risks market presence methodologies certain financial multiples ratios measure financial performance value calculated selected company transactions compared implied multiples dcf analysis company considered enterprise value multiple selected company transactions publicly available earnings interest taxes depreciation amortization “ebitda” estimated enterprise value equity value highly dependent achievement future financial results contemplated projections set forth plan estimates assumptions made valuation inherently subject significant uncertainties primary assumptions reasonable possibility occurrence variation would significantly affected reorganization value include assumptions regarding revenue growth operating expenses amount timing capital expenditures discount rate utilized freshstart accounting reflects value successor company determined confirmed plan freshstart accounting asset values remeasured allocated based respective fair values conformity purchase method accounting business combinations asc 805 liabilities existing effective date deferred taxes recorded present value amounts expected paid using appropriate risk adjusted interest rates deferred taxes determined conformity applicable accounting standards predecessor accumulated depreciation accumulated amortization accumulated comprehensive loss retained deficit eliminated significant assumptions related valuations assets liabilities connection freshstart accounting include following key energy services inc subsidiaries notes consolidated financial statements continued machinery equipment estimate fair value machinery equipment company considered income approach cost approach sales comparison market approach primary approaches relied upon value assets cost approach market approach although income approach applied value machinery equipment assets individually company consider earnings enterprise assets part one approach used develop valuation various approaches reconciled determine final value conclusion typical starting point basis valuation estimate replacement cost new rcn reproduction cost new crn combination rcn crn estimates adjusted physical functional conditions compared market data indications value available confirm results obtained cost approach direct rcn estimates available deemed inappropriate crn machinery equipment estimated using indirect trending method percentage changes applicable price indices applied historical costs convert indications current costs estimate crn amounts inflation indices established external sources applied historical costs estimate crn asset market approach measures value asset analysis recent sales offerings comparable property takes account physical functional economic conditions direct comparable matches could reasonably obtained company utilized percent cost technique market approach technique looks general sales listings auction data major asset category information used conjunction asset’s effective age develop ratios sales price rcn crn similar asset types marketbased depreciation curve developed applied asset categories sufficient sales auction information existed market information available market approach deemed inappropriate company developed cost approach indicated value derived deducting physical deterioration rcn crn identifiable asset group assets physical deterioration loss value usefulness property due using expiration useful life caused wear tear deterioration exposure various elements physical stresses similar factors functional economic obsolescence related also considered functional obsolescence due excess capital costs eliminated direct method cost approach estimate rcn functional obsolescence applied form costtocure penalty certain personal property assets needing significant capital repairs economic obsolescence also applied stacked underutilized assets based status asset economic obsolescence also considered situations earnings applicable business segment assets employed suggest economic obsolescence penalizing assets economic obsolescence additional economic obsolescence penalty levied considering scrap value floor value asset land building establishing fair value real property assets three traditional approaches value income approach market approach cost approach considered company primarily relied market cost approaches land valuing fee simple interest land company utilized sales comparison approach market approach sales comparison approach estimates value based purchasers sellers market agreed price comparable properties approach based principle substitution states limits prices rents rates tend set prevailing prices rents rates equally desirable substitutes conducting sales comparison approach data gathered comparable properties adjustments made factors including market conditions size accessfrontage zoning location conditions sale greatest weight typically given comparable sales proximity similar size owned sites cases market participants contacted augment analysis confirm conclusions value building site improvements valuing fee simple interest real property improvements company utilized direct indirect methods cost approach direct method cost approach analysis starting point basis cost approach rcn order estimate rcn buildings site improvements various factors considered including building size year built number stories breakout space property history maintenance history used data collected calculate rcn buildings using recognized estimating sources developing replacement reproduction insurable value costs application indirect method cost approach first step estimate crn improvement via indirect trending method cost approach estimate crn amounts company applied published inflation indices key energy services inc subsidiaries notes consolidated financial statements continued obtained third party sources asset’s historical cost convert known cost indication current cost historical cost used starting point estimating rcn considered approach assets historical records rcn crn improvements computed company estimated allowance physical depreciation buildings land improvements based upon respective age intangible assets financial information used estimate fair values intangible assets consistent information used estimating company’s enterprise value trademarks tradenames valued primarily utilizing relief royalty method income approach resulting value intangible assets based application approach 520 significant inputs assumptions included remaining useful lives forecasted revenue streams applicable royalty rates tax rates applicable discount rates customer relationships considered analysis based valuation excess earnings methodology value attributed customer relationships debt fair value debt 250 million 25 million represents current portion fair value debt determined using income approach based market yields comparable securities fair value respect term loan estimated approximate par value asset retirement obligations fair value asset retirement obligations determined using estimated plugging abandonment costs december 15 2016 adjusted inflation using annual average 126 discounted appropriate creditadjusted risk free rate ranging 22 29 depending life well fair value asset retirement obligations estimated 91 million income taxes amount deferred income taxes recorded determined accordance asc 740 income taxes “asc 740” warrants pursuant plan effective date company issued two series warrants former holders predecessor company’s common stock one series warrants expire december 15 2020 series warrants expire december 15 2021 warrant exercisable one share company’s common stock par value 001 issuance warrants recorded fair value determined using blackscholes option pricing model assumptions detailed following table warrants equity classified issuance recorded increase additional paidin capital amount 38 million assumptions blackscholes option pricing model key energy services inc subsidiaries notes consolidated financial statements continued following freshstart condensed consolidated balance sheet presents implementation plan adoption freshstart accounting december 15 2016 reorganization adjustments recorded within condensed consolidated balance sheet reflect effects plan including discharge liabilities subject compromise adoption freshstart accounting accordance asc 852 thousands reorganization fresh start adjustments reorganization adjustments thousands represents amounts recorded effective date implementation plan including settlement liabilities subject compromise issuance new debt repayment old debt reinstatement contract rejection obligations writeoff debt issuance costs proceeds received rights offering distributions successor common stock warrants cancellation predecessor common stock cancellation predecessor stock incentive plan key energy services inc subsidiaries notes consolidated financial statements continued key energy services inc subsidiaries notes consolidated financial statements continued key energy services inc subsidiaries notes consolidated financial statements continued key energy services inc subsidiaries notes consolidated financial statements continued note 4 liabilities subject compromise pursuant asc 852 liabilities subject compromise chapter 11 cases distinguished liabilities nonfiling entities liabilities expected compromised postpetition liabilities amount liabilities subject compromise represent company’s estimate determinable known potential prepetition claims addressed connection bankruptcy proceedings liabilities reported company’s current estimate allowed claim amounts even though claims may settled lesser amounts prior settlements pursuant plan liabilities subject compromise comprised following thousands note 5 reorganization items asc 852 requires financial statements periods subsequent filing chapter 11 cases distinguish transactions events directly associated reorganization ongoing operations business revenues expenses realized gains losses adjustments expected amount allowed claims liabilities subject compromise provisions losses directly associated reorganization restructuring business reported “reorganization items net” consolidated statements operations key energy services inc subsidiaries notes consolidated financial statements continued following table summarizes reorganizations items thousands exception 15 million 152 million professional fees year ended december 31 2017 period december 16 2016 december 31 2016 respectively 10 million settlement rejection damages period december 16 2016 december 31 2016 reorganization items noncash expenses note 6 revenue contracts customers january 1 2018 adopted asc 606 using full retrospective method applied contracts completed december 15 2016 noted prior periods emerged voluntary reorganization chapter 11 united states bankruptcy code december 15 2016 therefore applied freshstart accounting adopted asc 606 effect freshstart accounting date result electing use full retrospective adoption approach described results reporting periods beginning december 15 2016 presented asc 606 adoption asc 606 material impact consolidated financial statements record adjustments opening retained earnings december 15 2016 services rental contracts principally charged hourly daily rate basis primarily shortterm nature typically less 30 days revenues recognized control promised goods services transferred customers amount reflects consideration expect entitled exchange goods services following table presents revenues disaggregated revenue source thousands sales taxes excluded revenues disaggregation revenue disaggregated revenues reportable segments including rig services fishing rental services coiled tubing services fluid management services rig services rig services include completion newly drilled wells workover recompletion existing oil natural gas wells well maintenance plugging abandonment wells end useful lives also provide specialty drilling services oil natural gas producers certain larger rigs capable providing conventional horizontal drilling services rigs encompass various sizes capabilities allowing us service types oil gas wells key energy services inc subsidiaries notes consolidated financial statements continued recognize revenue within rig services segment measuring progress toward satisfying performance obligation manner best depicts transfer goods services customer control services transferred services rendered customer specifically recognize revenue services provided typically daily right invoice customer services performed rig services billed monthly payment terms rig services usually 30 days invoice receipt fishing rental services offer full line services rental equipment designed use providing drilling workover services fishing services involve recovering lost stuck equipment wellbore utilizing broad array “fishing tools” rental tool inventory consists drill pipe tubulars handling tools including patented hydrawalk® pipehandling units services pressurecontrol equipment pumps power swivels reversing units foam air units recognize revenue within fishing rental services segment measuring progress toward satisfying performance obligation manner best depicts transfer goods services customer control services transferred services rendered customer specifically recognize revenue services provided typically daily right invoice customer services performed fishing rental services billed paid monthly payment terms fishing rental services usually 30 days invoice receipt coiled tubing services coiled tubing services involve use continuous metal pipe spooled onto large reel deployed oil natural gas wells perform various applications wellbore cleanouts nitrogen jet lifts throughtubing fishing formation stimulations utilizing acid chemical treatments coiled tubing also used number horizontal well applications milling temporary isolation plugs separate frac zones various pre posthydraulic fracturing well preparation services recognize revenue within coiled tubing services segment measuring progress toward satisfying performance obligation manner best depicts transfer goods services customer control services transferred services rendered customer specifically recognize revenue typically daily services provided right invoice customer services performed coiled tubing services billed paid monthly payment terms coiled tubing services usually 30 days invoice receipt fluid management services provide transportation wellsite storage services various fluids utilized connection drilling completions workover maintenance activities also provide disposal services fluids produced subsequent well completion fluids removed well site transported disposal saltwater disposal wells owned us third party recognize revenue within fluid management services segment measuring progress toward satisfying performance obligation manner best depicts transfer goods services customer control services transferred services rendered customer specifically recognize revenue services provided typically daily right invoice customer services performed fluid management services billed paid monthly payment terms fluid management services usually 30 days invoice receipt international former international segment included former operations mexico canada russia services mexico russia consisted rigbased services maintenance workover recompletion existing oil wells completion newlydrilled wells plugging abandonment wells end useful lives also technology development control systems business based canada focused development hardware software related oilfield service equipment controls data acquisition digital information flow recognized revenue within international segment measuring progress toward satisfying performance obligation manner best depicted transfer goods services customer control services transferred services rendered customer specifically recognized revenue services provided typically daily right invoice customer services performed services within international segment billed paid monthly payment terms services within international segment usually 30 days invoice receipt key energy services inc subsidiaries notes consolidated financial statements continued arrangements multiple performance obligations typical business contracts customers may include multiple performance obligations arrangements allocate revenues performance obligation based relative standalone selling price generally determine standalone selling prices based prices charged customers using expected costplus margin combined products services within contract account individual products services separately distinct ie product service separately identifiable items contract customer benefit resources readily available customer consideration including discounts allocated separate products services within contract based prices separately sell services items sold separately estimate standalone selling prices using expected costplus margin approach contract balances revenue contracts invoice customers performance obligations satisfied point payment unconditional accordingly revenue contracts give rise contract assets liabilities asc 606 practical expedients exemptions generally expense sales commissions incurred amortization period would one year less costs recorded within general administrative expenses majority services shortterm nature contract term one year less contracts utilized practical expedient asc 606105014 exempting company disclosure transaction price allocated remaining performance obligations performance obligation part contract original expected duration one year less additionally payment terms shortterm nature settlements one year less therefore utilized practical expedient asc 606103218 exempting company adjusting promised amount consideration effects significant financing component given period entity transfers promised good service customer pays good service one year less many service contracts right consideration customer amount corresponds directly value customer entity’s performance completed date example service contract entity bills fixed amount hour service provided contracts utilized practical expedient asc 606105518 exempting company disclosure entity recognize revenue amount company right invoice accordingly disclose value unsatisfied performance obligations contracts original expected length one year less ii contracts recognize revenue amount right invoice services performed note 7 balance sheet information table presents comparative detailed information current assets december 31 2018 2017 thousands key energy services inc subsidiaries notes consolidated financial statements continued table presents comparative detailed information noncurrent assets december 31 2018 2017 thousands table presents comparative detailed information current liabilities december 31 2018 2017 thousands table presents comparative detailed information noncurrent liabilities december 31 2018 2017 thousands key energy services inc subsidiaries notes consolidated financial statements continued note 8 income loss net table presents comparative detailed information income expense years ended december 31 2018 2017 period december 16 2016 december 31 2016 period january 1 2016 december 15 2016 thousands note 9 allowance doubtful accounts table presents rollforward allowance doubtful accounts years ended december 31 2018 2017 period december 16 2016 december 31 2016 period january 1 2016 december 15 2016 thousands connection application fresh start accounting december 15 2016 carrying value trade receivables adjusted fair value eliminating reserve doubtful accounts see “note 3 fresh start accounting” details note 10 property equipment property equipment consists following thousands interest capitalized average amount accumulated expenditures major capital projects construction using effective interest rate based related debt underlying assets placed service capitalized interest key energy services inc subsidiaries notes consolidated financial statements continued years ended december 31 2018 2017 period december 16 2016 december 31 2016 period january 1 2016 december 15 2016 zero december 31 2018 2017 capital lease obligations note 11 intangible assets components intangible assets december 31 2018 2017 follows thousands amortization expense intangible assets determinable lives follows thousands weighted average remaining amortization periods expected amortization expense next five years definite lived intangible assets follows thousands note 12 earnings per share following table presents basic diluted earnings per share “eps” years ended december 31 2018 2017 2016 thousands except per share amounts key energy services inc subsidiaries notes consolidated financial statements continued stock options warrants stock appreciation rights “sars” included computation diluted earnings per share using treasury stock method restricted stock awards legally considered issued outstanding granted included basic weighted average shares outstanding company issued potentially dilutive instruments rsus stock options sars warrants however company include instruments calculation diluted loss per share periods presented include would antidilutive following table shows potentially dilutive instruments thousands material changes share amounts subsequent balance sheet date would material impact earnings per share calculation note 13 estimated fair value financial instruments cash equivalents accounts receivable accounts payable accrued liabilities carrying amounts approximate fair value short maturity instruments carrying value equal fair value instruments balance sheet date term loan facility due 2021 variable interest rates loans approximate current market rates fair values loans borrowed facility approximate carrying values note 14 asset retirement obligations connection well servicing activities operate number saltwater disposal “swd” facilities operations involve transportation handling disposal fluids swd facilities byproducts drilling process swd facilities used connection fluid hauling operations subject future costs associated retirement properties result incurred costs associated proper storage disposal materials key energy services inc subsidiaries notes consolidated financial statements continued annual accretion assets associated asset retirement obligations 02 million 02 million less 01 million 06 million years ended december 31 2018 2017 period december 16 2016 december 31 2016 period january 1 2016 december 15 2016 respectively application freshstart accounting effectiveness company’s plan reorganization resulted financial statements predecessor successor comparable summary changes asset retirement obligations follows thousands note 15 income taxes us tax cuts jobs act “2017 tax act” enacted december 22 2017 tax act comprehensive tax reform legislation contains significant changes corporate taxation provisions enacted law include permanent reduction corporate income tax rate 35 21 imposing mandatory onetime tax unrepatriated accumulated earnings foreign subsidiaries partial limitation deductibility business interest expense limitation net operating losses 80 taxable income year shift us taxation multinational corporations tax worldwide income partial territorial system along rules create new us minimum tax earnings foreign subsidiaries related provisions maintain us tax base recognized income tax effects 2017 tax act accordance staff accounting bulletin 118 “sab 118” 2017 sab 118 provided sec staff guidance application asc topic 740 income taxes allowed measurement period one year enactment date finalize recording related tax impacts 2017 financial results reflected provisional income tax effects 2017 tax act accounting asc topic 740 incomplete reasonable estimate could determined identify items income tax effects 2017 tax act could reasonably estimated december 31 2017 additional clarifying guidance law corrections issued us government 2018 related 2017 tax act provided insight properly accounting impacts us tax reform 2018 finalized accounting matter concluded adjustments required provisionally recorded amounts 2017 longer provisionally recorded items related enactment 2017 tax act december 31 2018 key energy services inc subsidiaries notes consolidated financial statements continued components income tax expense follows thousands made federal income tax payments zero years ended december 31 2018 2017 period december 16 2016 december 31 2016 period january 1 2016 december 15 2016 respectively addition received federal income tax refunds 11 million zero 04 million 69 million years ended december 31 2018 2017 period december 16 2016 december 31 2016 period january 1 2016 december 15 2016 respectively income tax expense benefit differs amounts computed applying statutory federal rate follows key energy services inc subsidiaries notes consolidated financial statements continued december 31 2018 2017 deferred tax assets liabilities consisted following thousands december 31 2018 net deferred tax asset comprised 2166 million deferred tax assets valuation allowance 258 million deferred tax liabilities valuation allowance net deferred tax asset increased approximately 152 million december 31 2017 december 31 2018 deferred tax assets liabilities recognized estimated future tax effects temporary differences tax basis asset liability reported amount consolidated financial statements measurement deferred tax assets liabilities based enacted tax laws rates currently effect jurisdictions operations recording deferred income tax assets consider whether likely portion deferred income tax assets realized ultimate realization deferred income tax assets dependent upon generation future taxable income appropriate character periods deferred income tax assets would deductible consider scheduled reversal deferred income tax liabilities projected future taxable income determination due history losses recent years continued challenges oil gas industry management continues believe likely able realize net deferred tax assets therefore valuation allowance remains net deferred tax asset balance estimate december 31 2018 2017 2016 available 4342 million 3731 million 2528 million attribute reduction respectively federal net operating loss carryforwards however internal revenue code sections 382 383 impose limitations corporation’s ability utilize tax attributes corporation experiences “ownership change” company experienced ownership change december 15 2016 emergence company certain domestic subsidiaries chapter 11 bankruptcy proceedings considered change ownership purposes irc section 382 result approximately 24 million net operating losses december 31 2018 subject section 382 limitation expire 2019 2020 subsequent ownership change occur result future transactions company’s stock company’s use remaining us tax attributes may limited estimate december 31 2018 2017 2016 available 4293 million 4856 million 3788 million respectively state net operating loss carryforwards expire 2019 2038 estimate remaining capital loss carryforward 753 million remaining capital loss carryforwards expire 2021 longer subject examination tax years 2015 federal state jurisdictions plan substantial portion company’s prepetition debt securities revolving credit facility obligations extinguished absent exception debtor recognizes cancellation indebtedness income “codi” upon discharge key energy services inc subsidiaries notes consolidated financial statements continued outstanding indebtedness amount consideration less adjusted issue price internal revenue code 1986 amended “irc” provides debtor bankruptcy case may exclude codi taxable income must reduce certain tax attributes amount codi realized result consummation plan reorganization amount codi realized taxpayer adjusted issue price indebtedness discharged less sum amount cash paid ii issue price new indebtedness issued iii fair market value consideration including equity issued result market value equity upon emergence chapter 11 bankruptcy proceedings estimated amount us codi approximately 2958 million reduce value key’s us net operating losses including federal state value 5188 million december 15 2016 actual reduction tax attributes occur first day company’s tax year subsequent date emergence december 16 2016 uncertainty income taxes december 31 2018 december 31 2017 december 31 2016 december 16 2016 zero 01 million 04 million 04 million respectively unrecognized tax benefits recognized would impact effective tax rate recognized net tax benefit 01 million 2018 03 million 2017 zero period ended december 31 2016 02 million period ended december 15 2016 statutes limitations expiration december 31 2018 ending balance uncertain tax position reserves zero due statute limitations lapse reconciliation gross change unrecognized tax benefits follows thousands note 16 longterm debt components longterm debt follows thousands abl facility december 15 2016 company key energy services llc borrowers “abl borrowers” entered abl facility financial institutions party thereto time lenders “abl lenders” bank america na administrative agent lenders bank america na wells fargo bank national association cocollateral agents lenders abl facility provides aggregate initial commitments abl lenders 80 million february 3 2017 increased 100 million matures june 15 2021 abl facility provides abl borrowers ability borrow aggregate principal amount equal lesser aggregate revolving commitments effect ii sum 85 value eligible accounts receivable plus b 80 value eligible unbilled accounts receivable subject limit equal greater x 35 key energy services inc subsidiaries notes consolidated financial statements continued million 25 commitments amount may borrowed abl facility subject increase reduction based certain segregated cash reserves provided abl facility addition percentages accounts receivable unbilled accounts receivable included calculation described subject reduction extent certain bad debt writedowns dilutive items provided abl facility borrowings abl facility bear interest abl borrowers’ option per annum rate equal libor 30 60 90 180 consent abl lenders 360 days plus applicable margin varies 250 450 depending borrowers’ fixed charge coverage ratio time ii base rate equal sum greatest x prime rate federal funds rate plus 050 z 30day libor plus 10 plus b applicable margin varies 150 350 depending borrowers’ fixed charge coverage ratio time addition abl facility provides unused line fees 10 125 per year depending utilization letter credit fees certain factors abl facility may future guaranteed certain company’s existing future subsidiaries “abl guarantors” together abl borrowers “abl loan parties” secure obligations abl facility abl loan parties granted grant applicable administrative agent firstpriority security interest benefit abl lenders present future accounts receivable inventory related assets proceeds foregoing “abl priority collateral” addition obligations abl loan parties abl facility secured secondpriority liens term priority collateral described “term loan facility” revolving loans abl facility may voluntarily prepaid whole part without premium penalty subject breakage similar costs abl facility contains certain affirmative negative covenants including covenants restrict ability abl loan parties take certain actions including among things subject certain significant exceptions incurrence debt granting liens making investments entering transactions affiliates payment dividends sale assets abl facility also contains requirement abl borrowers comply certain periods fixed charge coverage ratio 100 december 31 2018 borrowings outstanding abl facility 348 million letters credit outstanding borrowing capacity 240 million available subject covenant constraints abl facility term loan facility december 15 2016 company entered term loan facility among company borrower certain subsidiaries company named guarantors therein financial institutions party thereto time lenders collectively “term loan lenders” cortland capital market services llc cortland products corp agent lenders term loan facility outstanding principal amount 250 million term loan facility mature december 15 2021 although maturity date may company’s request extended one term loan lenders pursuant terms term loan facility borrowings term loan facility bear interest company’s option per annum rate equal libor one two three six consent term loan lenders 12 months plus 1025 ii base rate equal sum greatest x prime rate federal funds rate plus 050 z 30day libor plus 10 plus b 925 term loan facility guaranteed certain company’s existing future subsidiaries “term loan guarantors” together company “term loan parties” secure obligations term loan facility term loan parties granted grant applicable agent firstpriority security interest benefit term loan lenders substantially term loan party’s assets certain excluded assets abl priority collateral “term priority collateral” addition obligations term loan parties term loan facility secured secondpriority liens abl priority collateral described “abl facility” loans term loan facility may prepaid company’s option subject payment prepayment premium certain circumstances provided term loan facility prepayment made first anniversary loan prior second anniversary prepayment must made 106 principle amount prepayment made second anniversary prior third anniversary prepayment must made 103 principle amount third anniversary prepayment made prepayment premium due company required make principal payments amount 625000 per quarter commencing quarter ending march 31 2017 addition pursuant term loan facility company must prepay offer prepay applicable term loans net cash proceeds certain debt incurrences asset sales excess cash flow upon certain change control transactions subject case certain exceptions key energy services inc subsidiaries notes consolidated financial statements continued term loan facility contains certain affirmative negative covenants including covenants restrict ability term loan parties take certain actions including among things subject certain significant exceptions incurrence debt granting liens making investments entering transactions affiliates payment dividends sale assets term loan facility also contains financial covenants requiring company maintain asset coverage ratio least 135 10 liquidity defined term loan facility must less 375 million least 200 million must cash equivalents held deposit accounts last day fiscal quarter subject certain exceptions cure rights weighted average interest rates outstanding borrowings term loan facility year ended december 31 2018 follows debt compliance december 31 2018 compliance financial covenants abl facility term loan facility based management’s current projections expect compliance covenants abl facility term loan facility next twelve months breach covenants ratios tests could result default indebtedness longterm debt principal repayment interest expense presented schedule repayment requirements longterm debt december 31 2018 thousands interest expense years ended december 31 2018 2017 period december 16 2016 december 31 2016 period january 1 2016 december 15 2016 consisted following thousands key energy services inc subsidiaries notes consolidated financial statements continued deferred financing costs summary deferred financing costs including capitalized costs writeoffs amortization presented table thousands predecessor balance 148 million eliminated accordance asc 852 recorded reorganization item consolidated statement operations see “note 5 reorganization items” details note 17 commitments contingencies operating lease arrangements lease certain property equipment noncancelable operating leases expire various dates 2024 varying payment dates throughout month addition number leases scheduled expire 2018 december 31 2018 future minimum lease payments noncancelable operating leases follows thousands also party significant number monthtomonth leases cancelled time operating lease expenses 48 million 64 million less 01 million 114 million years ended december 31 2018 2017 period december 16 2016 december 31 2016 period january 1 2016 december 15 2016 respectively key energy services inc subsidiaries notes consolidated financial statements continued litigation various suits claims arising ordinary course business pending us conduct business throughout continental united states may subject jury verdicts arbitrations result outcomes favor plaintiffs also exposed various claims abroad continually assess contingent liabilities including potential litigation liabilities well adequacy accruals need disclosure items establish provision contingent liability probable liability incurred amount reasonably estimable december 31 2018 aggregate amount liabilities related litigation deemed probable reasonably estimable 44 million believe disposition matters result additional loss materially excess amounts recorded liabilities related litigation matters deemed probable reasonably estimable december 31 2017 47 million tax audits routinely subject audits tax authorities past received material assessments tax auditors december 31 2018 2017 recorded reserves management feels appropriate future potential liabilities result prior audits believe fully reserved assessments ultimate amount settlements vary estimates selfinsurance reserves maintain reserves workers’ compensation vehicle liability balance sheet based judgment estimates using actuarial method based claims incurred estimate general liability claims casebycase basis maintain insurance policies workers’ compensation vehicular liability general liability claims insurance policies carry selfinsured retention limits deductibles per occurrence basis retention limits deductibles accounted accrual process workers’ compensation vehicular liability general liability claims deductibles 5 million maximum per vehicular liability claim 2 million maximum per general liability claim 1 million maximum per workers’ compensation claim december 31 2018 2017 recorded 501 million 522 million respectively selfinsurance reserves related workers’ compensation vehicular liabilities general liability claims partially offsetting liabilities approximately 131 million 151 million insurance receivables december 31 2018 2017 respectively believe liabilities recorded appropriate based known facts circumstances expect losses materially excess amounts already accrued existing claims environmental remediation liabilities environmental reserve matters including remediation efforts current locations relating previouslydisposed properties record liabilities remediation efforts probable costs conduct remediation efforts reasonably estimated december 31 2018 2017 recorded 22 million 20 million respectively environmental remediation liabilities believe liabilities recorded appropriate based known facts circumstances expect losses materially excess amounts already accrued provide performance bonds provide financial surety assurances remediation maintenance swd properties comply environmental protection standards costs swd properties may mandatory comply applicable laws regulations future required divest cease operations optimization improve operations safety regulatory compliance note 18 employee benefit plans maintain 401k plan part employee benefits package third quarter 2015 management suspended 401k matching program part cost cutting efforts prior matched 100 employee contributions 4 employee’s salary vest immediately 401k plan subject maximums 11000 10800 10600 years ended december 31 2018 2017 2016 respectively matching contributions zero years ended december 31 2018 2017 period december 16 2016 december 31 2016 period january 1 2016 december 15 2016 401k matching program reinstated january 1 2019 offer participants option purchase shares common stock 401k plan fund key energy services inc subsidiaries notes consolidated financial statements continued note 19 stockholders’ equity preferred stock december 31 2018 10000000 shares preferred stock authorized par value 001 per share december 31 2018 sole share successor company’s series preferred stock confers certain rights elect directors economic rights held soter common stock december 31 2018 december 31 2017 100000000 shares common stock authorized par value 001 per share 20363198 20217641 shares issued outstanding respectively 2018 2017 2016 dividends declared paid currently intend pay dividends tax withholding repurchase shares restricted common stock previously granted certain employees pursuant agreement individuals permitted sell shares back us order satisfy minimum income tax withholding requirements related vesting grants repurchased total 48403 shares 56328 shares zero shares 1614047 shares aggregate cost 03 million 07 million zero 02 million years ended december 31 2018 2017 period december 16 2016 december 31 2016 period january 1 2016 december 15 2016 respectively represented fair market value shares based price stock dates purchase note 20 sharebased compensation equity cash incentive plan effective date pursuant plan company adopted new management incentive plan titled key energy services inc 2016 equity cash incentive plan 2016 incentive plan authorizes grant compensation described following sentence comprised stock economic rights tied value stock collectively representing 11 fully diluted shares common stock effective date without regard shares reserved issuance pursuant warrants increased board initial pool 7 fully diluted shares effective date permitted terms 2016 incentive plan 2016 incentive plan provides awards restricted stock restricted stock units options stock appreciation rights cashbased awards distribution officers directors employees company subsidiaries determined new board effective date new board authorized committee thereof authorized without approval key equity holders execute deliver agreements documents instruments certificates relating 2016 incentive plan perform obligations thereunder accordance subject terms 2016 incentive plan december 31 2018 04 million shares available grant 2016 ecip stock option awards stock option awards granted incentive plans maximum contractual term ten years date grant shares issuable upon exercise stock option issued authorized unissued shares common stock following tables summarize stock option activity year ended december 31 2018 shares thousands stock options granted exercised year ended december 31 2018 total fair value stock options vested year ended december 31 2018 2017 periods december 16 2016 december 31 2016 january 1 2016 december 15 2016 period january 1 2016 december 15 2016 zero 17 million zero respectively years ended december 31 2018 2017 period december 16 2016 december key energy services inc subsidiaries notes consolidated financial statements continued 31 2016 period january 1 2016 december 15 2016 recognized zero 18 million 01 million zero pretax expenses related stock options respectively outstanding stock options vested december 31 2018the weighted average remaining contractual term stock option awards exercisable december 31 2018 80 years common stock awards common stock awards include restricted stock awards restricted stock units weighted average grant date fair market value common stock awards granted years ended december 31 2018 2017 periods december 16 2016 december 31 2016 january 1 2016 december 15 2016 1374 1237 3199 026 respectively total fair market value common stock awards vested years ended december 31 2018 2017 periods december 16 2016 december 31 2016 january 1 2016 december 15 2016 23 million 62 million zero 145 million respectively following tables summarize information year ended december 31 2018 unvested common stock awards outstanding shares thousands grantdate fair value timebased restricted stock units restricted stock awards determined using stock price grant date grantdate fair value performancebased restricted stock units determined using stock price grant date assuming 10x payout target however maximum 20x payout could achieved certain ebitdabased performance measures met recognize compensation expense ratably graded vesting period grant net forfeitures years ended december 31 2018 2017 periods december 16 2016 december 31 2016 january 1 2016 december 15 2016 recognized 26 million 53 million 04 million 57 million respectively pretax expenses continuing operations associated common stock awards unvested common stock awards outstanding december 31 2018 anticipate recognize 55 million pretax expense next 15 years weighted average years phantom share plan december 2017 implemented “phantom share plan” certain employees granted “phantom shares” phantom shares vest ratably threeyear period convey right grantee receive cash payment anniversary date grant equal fair market value phantom shares vesting date grantees permitted defer payment later date phantom shares “liability” type award account awards fair value recognize compensation expense related phantom shares based change fair value awards period percentage service requirement performed net forfeitures offsetting liability recorded consolidated balance sheets years ended december 31 2018 2017 periods december 16 2016 december 31 2016 january 1 2016 december 15 2016 recognized 03 million zero respectively pretax expenses continuing operations associated common stock awards unvested common stock awards outstanding december 31 2018 anticipate recognize 01 million pretax expense next 15 weighted average years note 21 transactions related parties company purchased sold equipment services affiliates certain directors additionally company corporate advisory services agreement platinum equity advisors llc “platinum” pursuant platinum provides certain business advisory services company dollar amounts related party activities material company’s condensed consolidated financial statements key energy services inc subsidiaries notes consolidated financial statements continued note 22 supplemental cash flow information presented schedule noncash investing financing activities supplemental cash flow entries thousands cash paid interest includes cash payments interest longterm debt capital lease obligations commitment agency fees paid note 23 segment information reportable business segments rig services fishing rental services coiled tubing services fluid management services reportable business segments previously included international segment also “functional support” segment associated overhead costs support reportable segments rig services fishing rental services coiled tubing services fluid management services operate geographically within united states international segment included former operations mexico canada russia fourth quarter 2016 completed sale business mexico completed sale canadian subsidiary russian subsidiary second third quarters 2017 respectively evaluate performance segments based gross margin measures intersegment sales pricing based current market conditions aggregate services create reportable segments accordance asc 280 accounting policies segments described “note 1 organization summary significant accounting policies” rig services rig services include completion newly drilled wells workover recompletion existing oil natural gas wells well maintenance plugging abandonment wells end useful lives also provide specialty drilling services oil natural gas producers certain larger rigs capable providing conventional horizontal drilling services rigs encompass various sizes capabilities allowing us service types oil gas wells many rigs outfitted proprietary keyview® technology captures reports well site operating data provides safety control systems believe technology allows customers crews better monitor well site operations improves efficiency safety adds value services offer completion recompletion services provided rigs prepare wells production whether newly drilled recently extended workover operation completion process may involve selectively perforating well casing access production zones stimulating testing zones installing tubular downhole equipment typically provide well service rig may also provide equipment assist completion process completion services vary well work may take days several weeks perform depending nature completion workover services provide designed enhance production existing wells generally complex time consuming normal maintenance services workover services include deepening extending wellbores new formations drilling horizontal lateral wellbores sealing depleted production zones accessing previously bypassed production zones converting former production wells injection wells enhanced recovery operations conducting major subsurface repairs due equipment failures workover services may last days several weeks depending complexity workover maintenance services provided rig fleet generally required throughout life cycle oil natural gas well examples maintenance services include routine mechanical repairs pumps tubing equipment removing debris formation material wellbores pulling rods downhole equipment wellbores identify key energy services inc subsidiaries notes consolidated financial statements continued resolve production problems maintenance services generally less complicated completion workover related services require less time perform rig fleet also used process permanently shuttingin oil natural gas wells end productive lives plugging abandonment services generally require auxiliary equipment addition well servicing rig demand plugging abandonment services significantly impacted demand oil natural gas well operators required state regulations plug wells longer productive fishing rental services offer full line services rental equipment designed use providing drilling workover services fishing services involve recovering lost stuck equipment wellbore utilizing broad array “fishing tools” rental tool inventory consists drill pipe tubulars handling tools including patented hydrawalk® pipehandling units services pressurecontrol equipment pumps power swivels reversing units foam air units rental inventory also included frac stack equipment used support hydraulic fracturing operations associated flowback frac fluids proppants oil natural gas also provided welltesting services frac stack equipment welltesting services business sold second quarter 2017 demand fishing rental services closely related capital spending oil natural gas producers generally driven oil natural gas prices coiled tubing services coiled tubing services involve use continuous metal pipe spooled onto large reel deployed oil natural gas wells perform various applications wellbore cleanouts nitrogen jet lifts throughtubing fishing formation stimulations utilizing acid chemical treatments coiled tubing also used number horizontal well applications milling temporary isolation plugs separate frac zones various pre post hydraulic fracturing well preparation services fluid management services provide transportation wellsite storage services various fluids utilized connection drilling completions workover maintenance activities also provide disposal services fluids produced subsequent well completion fluids removed well site transported disposal swd wells owned us third party addition operate fleet hot oilers capable pumping heated fluids used clear soluble restrictions wellbore demand pricing services generally correspond demand well service rigs international segment included former operations mexico canada russia april 2015 announced decision exit markets participate outside north america fourth quarter 2016 completed sale business mexico completed sale canadian subsidiary russian subsidiary second third quarters 2017 respectively services international markets consisted rigbased services maintenance workover recompletion existing oil wells completion newlydrilled wells plugging abandonment wells end useful lives also technology development control systems business based canada focused development hardware software related oilfield service equipment controls data acquisition digital information flow functional support functional support segment includes unallocated overhead costs associated administrative support us international reporting segments key energy services inc subsidiaries notes consolidated financial statements continued financial summary following table presents segment information years ended december 31 2018 2017 period december 16 2016 december 31 2016 period january 1 2016 december 15 2016 thousands successor company year ended december 31 2018 successor company year ended december 31 2017 key energy services inc subsidiaries notes consolidated financial statements continued successor company december 31 2016 period december 16 2016 december 31 2016 predecessor company december 15 2016 period january 1 2016 december 15 2016 1 longlived assets include fixed assets goodwill intangibles assets key energy services inc subsidiaries notes consolidated financial statements continued 2 functional support geographically located united states note 24 unaudited quarterly results operations following table presents summarized unaudited quarterly information two recent years covered consolidated financial statements thousands except per share data 1 quarterly earnings per common share based weighted average number shares outstanding quarter sum quarters may equal annual earnings per common share key energy services inc subsidiaries notes consolidated financial statements continued note 25 condensed consolidating financial statements senior notes predecessor company registered securities result registered securities required present following condensed consolidating financial information pursuant sec regulation sx rule 310 “financial statements guarantors issuers guaranteed securities registered” abl facility term loan facility successor company registered securities presentation condensed consolidating financial information required successor period following condensed consolidated statement operations statement cash flows predecessor periods thousands key energy services inc subsidiaries notes consolidated financial statements continued item 9item 8 financial statements supplementary data presented herein consolidated financial statements key energy group inc subsidiaries june 30 1998 1997 years ended june 30 1998 1997 1996 also included report kpmg peat marwick llp independent certified public accountants consolidated financial statements june 30 1998 1997 years ended june 30 1998 1997 1996 page consolidated balance sheets 20 consolidated statements operations 21 consolidated statements cash flows 22 consolidated statements stockholders equity 23 notes consolidated financial statements 24 independent auditors report 50 key energy group inc subsidiaries consolidated balance sheets key energy group inc subsidiaries consolidated statements operations key energy group inc subsidiaries consolidated statements cash flows key energy group inc subsidiaries consolidated statements stockholders equity key energy group inc subsidiaries notes consolidated financial statements june 30 1998 1997 1996 1 organization summary significant accounting policies company key energy group inc herein referred company key organized april 1977 commenced operations july 1978 results operations twelve months ended june 30 1998 1997 1996 include companys oilfield service operations conducted whollyowned subsidiary yale e key inc yale e key companys oil gas exploration production whollyowned subsidiary odessa exploration incorporated odessa exploration companys oil gas well drilling operations conducted companys whollyowned subsidiary key energy drilling inc key energy drilling also included results operations fiscal year ended june 30 1998 1997 approximately three months fiscal year ended june 30 1996 operating results companys whollyowned subsidiary welltech eastern inc welltech eastern currently holds assets acquired merger welltech inc welltech march 26 1996 see note 2 addition result welltech acquisition company acquired 63 ownership servicios welltech sa servicios argentina corporation july 1997 company acquired remaining 37 ownership servicios conducts oilfield services operations argentina consolidated minority interest prior july 1997 addition results operations portion fiscal year ended june 30 1998 operating results companys whollyowned subsidiaries key rocky mountain inc key rocky mountain key four corners inc key four corners formed result several acquisitions fiscal year ended june 30 1998 see note 2 basis presentation companys consolidated financial statements include accounts company whollyowned subsidiaries significant intercompany transactions balances eliminated accounting policies presented followed preparing accompanying consolidated financial statements estimates uncertainties preparation accompanying consolidated financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amount assets liabilities disclosures contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates inventories consist primarily well service parts supplies parts supplies held sale companys various retail supply stores valued lower average cost market property equipment company provides depreciation amortization well service related equipment using straightline method overall average salvage value approximately 10 following estimated useful lives assets table follows next page key energy group inc subsidiaries notes consolidated financial statements continued description years oilfield service equipment 3 20 motor vehicles 3 7 furniture equipment 3 10 buildings improvements 10 40 gas processing facilities 10 upon disposition retirement property equipment cost related accumulated depreciation removed accounts gain loss thereon included results operations odessa exploration utilizes successful efforts method accounting oil gas properties method costs associated productive wells nonproductive development wells capitalized nonproductive exploration costs geological geophysical costs expensed capitalized costs relating proved properties depleted using unitofproduction method upon disposition carrying amounts properties sold otherwise disposed related allowance depletion eliminated accounts gainloss included results operations july 1 1997 company changed method calculating depreciation oil gas well drilling rigs straightline method unitsofproduction method new method takes consideration number days rigs actually service month depreciation recorded least 15 days month rig available service company believes new method appropriately reflect financial results better matching revenues expenses better reflect assets used time effect change net income 1998 1997 1996 material environmental company subject extensive federal state local environmental laws regulations laws constantly changing regulate discharge materials environment may require company remove mitigate environmental effects disposal release petroleum chemical substances various sites environmental expenditures expensed capitalized depending future economic benefit expenditures relate existing condition caused past operations future economic benefits expensed liabilities expenditures noncapital nature recorded environmental assessment andor remediation probable costs reasonably estimated assets goodwill assets consist primarily goodwill capitalized debt issuance costs investment common stock accounted using costmethod security escrow deposits keys workers compensation retrospective insurance program addition interest approximately 13 insurance company insurance company affiliated keys workers compensation carrier marketable equity securities deemed management available sale classified consolidated balance sheet fair value approximately 12307000 longterm assets net unrealized gains approximately 2346000 reported within stockholders equity june 30 1998 1997 1996 company classified goodwill cost excess fair value net tangible assets acquired purchase transactions goodwill 37122000 added 1998 goodwill amortized straightline basis ten twentyfive years management continually evaluates whether events circumstances occurred indicate remaining useful life goodwill may warrant revision remaining balance goodwill may recoverable goodwill amortization expense totaled 1442000 fiscal 1998 622000 fiscal 1997 100000 fiscal 1996 debt issuance costs amortized term applicable debt amortization classified interest expense amortization debt issuance costs totaled 2006000 344000 fiscal years ended 1998 1997 respectively key energy group inc subsidiaries notes consolidated financial statements continued earnings per share company accounts earnings per share upon statement financial accounting standards 128 earnings per share sfas 128 sfas 128 basic earnings per common share determined dividing net earnings applicable common stock weighted average number common shares actually outstanding year diluted earnings per common share based increased number shares would outstanding assuming conversion dilutive outstanding convertible securities using converted method year ended thousands except per share data 63098 63097 63096 basic eps computation numerator net income 24175 9098 3586 denominator weighted average common shares outstanding 17153 11216 7789 basic eps 141 081 046 diluted eps computation numerator net income 24175 9098 3586 effect dilutive securities tax effected convertible securities 5331 2578 29506 11676 3586 denominator weighted average common shares outstanding 17153 11216 7789 warrants 141 340 stock options 1266 743 152 7 convertible debentures 1191 5333 5 convertible debentures 4273 24024 17632 7941 diluted eps 123 066 045 income taxes company accounts income taxes based upon statement financial accounting standards 109 accounting income taxes sfas 109 sfas 109 deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered key energy group inc subsidiaries notes consolidated financial statements continued settled effect deferred tax assets liabilities change tax rate recognized income period includes enactment date valuation allowance deferred tax assets recognized likely benefit deferred tax assets realized company eligible subsidiaries file consolidated u federal income tax return certain subsidiaries consolidated financial reporting purposes eligible included consolidated u federal income tax return separate provisions income taxes determined entities groups entities concentration credit risk financial instruments potentially subject company concentrations credit risk consist primarily temporary cash investments trade receivables company restricts investment temporary cash investments financial institutions high credit standing policy limits amount credit exposure one financial institution companys customer base consists primarily multinational foreign national independent oil natural gas producers see note 12 additional information regarding customers accounted 10 consolidated revenues company performs ongoing credit evaluations customers generally require collateral trade receivables credit risk considered management limited due large number customers comprising companys customer base company maintains reserves potential credit losses within managements expectations impact sfas 121 july 1 1996 company adopted provisions statement financial accounting standards 121 accounting impairment longlived assets longlived assets disposed fas 121 statement requires longlived assets goodwill certain identifiable intangibles reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable adoption statement impact companys consolidated financial position results operations liquidity stockbased compensation company accounts employee stockbased compensation using intrinsic value method prescribed accounting principles board opinion 25 accounting stock issued employees apb 25 accordingly company adopted disclosure provisions statement financial accounting standards 123 accounting stockbased compensation sfas 123 see note 8 pro forma disclosures compensation expense determined fairvalue provisions sfas 123 cash equivalents cash flow purposes company considers unrestricted highly liquid investments less three month maturity purchased cash equivalents reclassifications certain reclassifications made fiscal 1997 1996 consolidated financial statements conform fiscal 1998 presentation impact recently issued accounting standards financial accounting standards board recently issued following accounting standards adopted company future key energy group inc subsidiaries notes consolidated financial statements continued statement financial accounting standards 130 sfas 130 reporting comprehensive income effective fiscal years beginning december 15 1997 sfas 130 establishes standards reporting display comprehensive income components full set generalpurpose financial statements specifially sfas 130 requires enterprise classify items comprehensive income nature financial statement ii display accumulated balance comprehensive income separately retained earnings additional paidin capital equity section statement financial position reclassification financial statements earlier periods provided comparative purposes required company adopt sfas 130 first quarter fiscal year ended june 30 1999 statement financial accounting standards 131 sfas 131 disclosures segments enterprise related information effective financial statements periods beginning december 15 1997 sfas 131 establishes standards way companys report information operating segments annual financial statements requires companys report selected information operating segments interim financial reports issued shareholders statement also establishes standards related disclosures products services geographic areas major customers sfas 131 need applied interim financial statements initial year application however comparative information interim periods initial year application reported financial statements interim periods second year application company adopt sfas 131 fiscal year ended june 30 1999 impact inflation operations although complex environment extremely difficult make accurate assessment impact inflation companys operations management opinion inflation significant impact business 2 business property acquisitions following acquisitions completed fiscal 1998 included companys results operations twelve months ended june 30 1998 acquisitions accounted using purchase method accounting unless otherwise noted purchase prices specified based cash paid andor fair value companys common stock par value 010 common stock transportes dimopulos srl june 5 1998 company completed acquisition transportes dimopulos srl transportes operates argentina transportes acquired approximately 22 million cash future obligations included approximately 28 oilfield service trucks trailers located argentina operating results transportes included companys results operations effective june 5 1998 watson truck supply inc may 19 1998 company completed acquisition certain assets watson truck supply inc watson approximately 26 million cash asset purchased included repair refurbishment facility supply store mills wyoming operating results watson included companys results operations effective june 1 1998 key energy group inc subsidiaries notes consolidated financial statements continued lakota drilling company may 22 1998 company completed acquisition assets lakota drilling company lakota approximately 12 million cash lakota operates seven drilling rigs permian basin region west texas operating results lakota included companys results operations effective june 1 1998 odessa exploration properties june 14 1998 odessa exploration completed purchase approximately 87 million oil gas producing undeveloped properties group sellers unrelated company jpf well service inc jpf lease service inc april 20 1998 company completed acquisition assets jpf well service inc jpf lease service inc collectively jpf approximately 62 million cash jpf operates nine well service rigs oilfield construction equipment southeast texas operating results jpf included companys results operations effective april 20 1998 edwards transport inc march 27 1998 company completed acquisition assets edwards transport inc edwards approximately 30 million cash edwards operates fifteen vacuum pump trucks west texas operating results edwards included companys results operations effective april 1 1998 lundy vacuum service inc march 3 1998 company completed acquisition assets lundy vacuum service inc lundy approximately 14 million cash lundy operates eight vacuum trucks oilfield fluid hauling trucks oilfield construction site buisiness east texas operating results lundy included companys results operations effective march 3 1998 lauffer well service inc march 2 1998 company completed acquisition assets lauffer well service inc lauffer approximately 400000 cash lauffer operates four well service rigs kentucky operating results lauffer included companys results operations effective march 2 1998 updike brothers inc february 6 1998 company completed acquisition updike brothers inc updike approximately 106 million cash updike operates 25 well service rigs wyoming operating results updike included companys results operations effective february 6 1998 four corners drilling company february 4 1998 company completed acquisition assets four corners drilling company four corners approximately 100 million cash four corners owns 12 drilling rigs four corners region southwestern united states operating results four corners included companys results operations effective february 4 1998 kingsley enterprises inc dba legacy drilling co january 30 1998 company completed acquisition kingley enterprises inc dba legacy drilling co legacy approximately 26 million cash legacy operates four drilling rigs permian basin region key energy group inc subsidiaries notes consolidated financial statements continued west texas operating results legacy included companys results operations effective february 1 1998 circle vacuum services inc january 30 1998 company completed acquisition assets circle vacuum services inc circle approximately 800000 cash circle operates four vacuum trucks trailers salt water disposal well southeast texas operating results circle included companys results operations effective february 1 1998 hot oil plus inc january 29 1998 company completed acquisition assets hot oil plus inc hot oil plus approximately 22 million cash hot oil plus operates eight hot oil trucks pump truck steam heater southeast texas operating results hot oil plus included companys results operations effective february 1 1998 jw gibson well service company january 8 1998 company completed acquisition jw gibson well service company gibson approximately 258 million consisting 239 million cash 100000 shares common stock warrants acquire 265000 shares common stock exercise price 1800 per share subject certain adjustments gibson operates 74 well service rigs related equipment eight states august 1 1997 closing acquisition company managed operations gibson pursuant interim operating agreement operating agreement company received management fee equal operating income gibsons operations less 25000 per month received onetime management fee 300000 total management fee earned august 1 1997 september 30 1998 361000 classified revenue consolidated statement operations operating results gibson included companys consolidated results operations effective january 8 1998 payment management fee contingent upon closing transaction sitton drilling co january 1 1998 company completed acquisition sitton drilling co sitton approximately 150 million including 129 million cash 100000 shares common stock sitton operates five drilling rigs permian basin region west texas operating results sitton included companys results operations effective january 1 1998 wellcorps llc white rhino drilling inc sr cable inc december 2 1997 company completed acquisition assets wellcorps llc white rhino drilling inc sr cable inc collectively critchfield assets approximately 84 million consisting 27 million cash 240000 shares common stock critchfield assets consist five land drilling rigs five well service rigs related equipment michigan operating results critchfield assets included companys results operations effective december 2 1997 wintex drilling co inc wintex trucking corporation november 24 1997 company completed acquisition wintex drilling co inc wintex trucking corporation wintex approximately 65 million cash wintex operates six land drilling rigs trucks trailers related equipment west texas operating results wintex included companys results operations effective december 1 1997 key energy group inc subsidiaries notes consolidated financial statements continued jeter service co november 18 1997 company completed acquisition jeter service co jeter approximately 67 million cash jeter operates 15 well service rigs oilfield supply store oilfield location constructionmaintenance business 15 trucks related equipment oklahoma operating results jeter included companys results operations effective december 1 1997 gsi trucking company inc kahlden production services inc mccurdy well service inc october 3 1997 company acquired certain assets gsi trucking company inc kahlden production services inc mccurdy well service inc gsi kahlden mccurdy approximately 18 million cash gsi kahlden mccurdy operate 12 fluid 5 equipment hauling trucks southeast texas operating results gsi kahlden mccurdy included companys results operations effective october 3 1997 big well service co sunco trucking co justis supply co inc october 1 1997 company completed acquisition substantially assets big well service co sunco trucking co justis supply co inc collectively big asunco approximately 311 million consisting 27 million cash 125000 shares common stock big asunco operates 25 well service rigs four drilling rigs 75 oilfield trucks related equipment machine shopsupply store four corners region southwestern united states operating results big asunco included companys results operations effective october 1 1997 frontier well service inc september 30 1997 company completed acquisition frontier well service inc frontier approximately 35 million cash frontier operates 12 well service rigs related equipment wyoming operating results frontier included companys results operations effective october 1 1997 dunbar well service inc september 29 1997 company completed acquisition dunbar well service inc dunbar approximately 118 million cash dunbar operates 38 well service rigs related equipment wyoming operating results dunbar included companys results operations effective october 1 1997 brw drilling inc september 25 1997 company completed acquisition brw drilling inc brw approximately 146 million cash brw operates seven drilling rigs related equipment permian basin region west texas eastern new mexico operating results brw included companys results operations effective october 1 1997 landmark fishing rental inc september 16 1997 company completed acquisition landmark fishing rental inc landmark approximately 38 million cash landmark operates rental tool business western oklahoma texas panhandle operating results landmark included companys results operations effective september 16 1997 waco oil gas co inc september 1 1997 company completed acquisition certain assets waco oil gas co inc waco approximately 70 million cash waco assets included 12 well service rigs three drilling rigs 33 oilfield trucks operated west virginia following consummation acquisition three drilling rigs acquired waco sold independent third party 23 million cash gain loss recognized sale rigs operating results waco included companys results operations effective september 23 1997 key energy group inc subsidiaries notes consolidated financial statements continued ram oil well service inc rowland trucking co inc september 1 1997 company completed acquisition ram oil well service inc rowland trucking co inc ramrowland 215 million cash ramrowland operates 17 well service rigs 93 oilfield trucks 290 frac tanks three disposal brine wells dirt construction equipment permian basin region west texas southeastern new mexico operating results ramrowland included companys results operations effective september 1 1997 mosley well service inc august 22 1997 company completed acquisition mosley well service inc mosley operates 36 well service rigs related equipment east texas northern louisiana arkansas approximately 172 million cash operating results mosley included companys results operations effective august 22 1997 kenting holdings argentina sa july 30 1997 company completed acquisition kenting holdings argentina sa kenting approximately 101 million cash kenting sole shareholder kenting drilling argentina sa operates six well service rigs three drilling rigs related equipment argentina operating results kenting included companys results operations effective august 1 1997 patrick well service inc july 17 1997 company completed acquisition patrick well service inc patrick approximately 70 million cash patrick operates 29 well service rigs related equipment southwest kansas oklahoma southeast colorado operating results patrick included companys results operations effective august 1 1997 servicios welltech sa july 1 1997 company purchased remaining 37 minority interest servicios welltech sa servicios two unrelated parties approximately 34 million cash result purchase company owns 100 servicios operating results remaining minority interest servicios included companys results operations effective july 1 1997 acquisition completed prior june 30 1997 wellco oil service inc june 26 1997 company completed acquisition wellco oil service inc wellco operates 79 well service rigs related equipment west texas wellco acquired 175 million cash 240000 shares companys common stock results operations wellco included companys results operations effective june 26 1997 phoenix well service inc june 10 1997 company completed acquisition phoenix well service inc phoenix operates 11 well service rigs related equipment west texas phoenix acquired 23 million cash results key energy group inc subsidiaries notes consolidated financial statements continued operations phoenix included companys results operations effective june 26 1997 southwest oilfield services inc june 10 1997 company completed acquisition southwest oilfield services inc southwest operates 3 well service rigs related equipment western oklahoma southwest acquired 455000 cash results operations southwest included companys results operations effective june 10 1997 wireline excavation assets may 1 1997 company completed acquisition ten wireline units related equipment approximately 600000 cash may 5 1997 company completed acquisition several dump trucks related excavation equipment 410000 cash results operations assets included companys results operations effective may 1 1997 shreves well service april 18 1997 company completed acquisition assets shreves well service inc shreves operated west virginia shreves assets acquired 550000 cash included five well service rigs related equipment results operations shreves included companys results operations effective may 1 1997 argentine drilling rigs april 16 1997 company acquired three drilling rigs related equipment argentina drillers inc 15 million cash drilling rigs operated welltech servicios companys argentine subsidiary diamond well service april 3 1997 company completed acquisition assets diamond well service inc diamond 675000 cash diamond assets included four oilwell service rigs related equipment oklahoma results operations diamond included companys results operations effective april 1 1997 kalkaska construction service inc kalkaska oilfield service inc elder well service inc march 31 1997 company completed acquisition assets kalkaska construction service inc kalkaska oilfield service inc kalcon elder well service inc elder based michigan kalcon assets included 40 vacuum fluid transport trucks 40 trucks used oilfield equipment hauling seven saltwater disposal wells oilfield related equipment acquired approximately 85 million cash 77998 shares companys common stock elder assets included six well service rigs related equipment acquired 609000 cash operating results kalcon elder included companys results operations effective april 1 1997 tst paraffin service co inc march 27 1997 company completed acquisition tst paraffin service co inc tst 87 million cash tst operates approximately 61 trucks 22 hot oil units related equipment west texas operating results tst included companys results operations effective april 1 1997 key energy group inc subsidiaries notes consolidated financial statements continued tristate wellhead valve inc company completed acquisition assets tristate wellhead valve inc tristate march 17 1997 550000 cash 83770 shares companys common stock tristate assets consisted wellhead equipment rental business five well service rigs operating results assets included companys results operations effective april 1 1997 cobra industries inc effective january 13 1997 company completed purchase cobra industries inc cobra 5 million cash 175000 shares companys common stock cobra operates 26 well service rigs southeastern new mexico operating results cobra included companys results operations effective february 1 1997 talon trucking co effective january 7 1997 company completed acquisition assets talon trucking co talon 27 million cash talon operated three well service rigs 21 trucks related fluid transportation disposal assets oklahoma operating results assets included companys results operations effective january 7 1997 bl hotshot inc effective december 13 1996 company completed acquisition bl hotshot inc affiliated entities bl 49 million cash bl provides trucking related services oil natural gas wells michigan operating results bl included companys results operations effective january 1 1997 brooks well servicing inc effective december 1 1996 company completed acquisition brooks well servicing inc brooks 917500 shares companys common stock brooks whollyowned subsidiary hunt oil company operated 32 well service rigs ancillary equipment east texas operating results brooks included companys results operations effective december 1 1996 hitwell surveys inc effective december 2 1996 company completed purchase hitwell surveys inc hitwell approximately 13 million cash hitwell operates eight well logging perforating trucks appalachian basin michigan operating results hitwell included companys results operations effective december 1 1996 energy air drilling services co effective november 1 1996 company completed acquisition certain assets energy air drilling services co energy air 500000 cash 4386 shares companys common stock energy air operated four air drilling packages west texas brownlee well service inc effective october 24 1996 company completed purchase brownlee well service inc brownlee integrity fishing rental tools inc integrity consideration acquisition 65 million cash key energy group inc subsidiaries notes consolidated financial statements continued 61069 shares companys common stock brownlee integrity operate 16 well service rigs ancillary equipment variety oilfield fishing tools west texas operating results brownlee included companys results operations effective november 1 1996 woodward well service inc effective october 1 1996 company completed acquisition woodward well service inc woodward 75000 shares companys common stock approximately 100000 cash payable fouryear period woodward operated five well service units oklahoma operating results woodward included companys results operations effective october 1 1996 acquisitions completed prior june 30 1996 odessa exploration properties april 1996 odessa exploration purchased approximately 69 million cash oil gas producing properties unrelated company using proceeds bank borrowings indebtedness subsequently repaid welltech inc march 26 1996 company completed merger welltech inc welltech company net consideration merger 3500000 shares companys common stock warrants purchase 500000 additional shares common stock exercise price 675 per share welltech conducted oil gas well servicing operations midcontinent northeast areas united states argentina pro forma results operations unaudited following unaudited pro forma results operations prepared though wellco cobra tst ramrowland coleman dunbar gibson updike lakota acquired july 1 1996 proforma amounts necessarily indicative results may reported future year ended thousands except per share data june 30 1998 june 30 1997 revenues 459764 316656 net income 26075 13342 basic earnings per share 152 119 3 assets consist following june 30 thousands 1998 1997 investment securities 12325 workers compensation security deposits 1418 1817 debt issuance costs net amortization 1998 2350 1997 344 11869 7045 1383 458 26995 9320 key energy group inc subsidiaries notes consolidated financial statements continued 4 commitments contingencies various suits claims arising ordinary course business pending company management believe disposition items result material adverse impact consolidated financial position company 1995 subsequent fiscal years company entered employment agreements certain officers employment agreements generally run two fiscal years automatically extended yearly basis unless terminated company applicable officer addition providing base salary officer employment agreements provide severance payments officer varying 12 24 months officers base salary current annual base salaries officers covered employment agreements total approximately 1189000 5 longterm debt components longterm debt follows june 30 thousands 1998 1997 pnc credit facility 172000 120000 5 subordinated debentures ii 216000 7 subordinated debentures iii 4600 52000 notes payable iv 7179 2167 399779 174167 less current portion 1848 1404 longterm debt 397931 172763 pnc credit facility june 6 1997 company entered agreement initial credit agreement pnc bank na pnc administrative agent syndication lenders pursuant lenders provided 255 million credit facility consisting 120 million sevenyear term loan 135 million fiveyear revolver interest rate term loan libor plus 275 percent interest rate revolver varied based libor level companys indebtedness initial credit agreement contained certain restrictive covenants required company maintain certain financial ratios september 25 1997 company repaid term loan portion outstanding amounts revolver applying proceeds initial second closings companys private placement 216 million 5 convertible subordinated notes discussed effective november 6 1997 company entered amended restated credit agreement pnc amended pnc credit agreement administrative agent lender pursuant pnc agreed make revolving credit loans maximum loan commitment 200 million maximum commitment decreases 175 million november 6 2000 125 million november 6 2001 loan commitment terminates november 6 2002 borrowings credit facility may either eurodollar loans interest currently payable quarterly libor plus 125 subject adjustment based certain financial ratios ii base rate loans interest payable quarterly greater pnc prime rate federal funds effective rate plus 12 iii combination thereof companys option amended pnc credit agreement contains certain restrictive covenants requires company maintain certain financial ratios change control company defined amended pnc credit agreement event default borrowings amended pnc credit agreement secured substantially assets company domestic subsidiaries key energy group inc subsidiaries notes consolidated financial statements continued effective december 3 1997 pnc completed syndication amended pnc credit agreement connection therewith pnc administrative agent syndication lenders company entered first amendment amended pnc credit agreement providing among things increase maximum commitment 250 million 200 million connection acquisition dawson total consideration paid dawson shares pursuant tender offer first merger approximately 1817 million companys source funds pay amount certain outstanding debt dawson company related fees expenses bridge loan agreement amount 150000000 dated september 14 1998 among company lehman brothers inc arranger lehman commercial paper inc administrative agent lenders party thereto bridge loan agreement ii 550000000 second amended restated credit agreement dated june 6 1997 amended restated september 14 1998 among company pnc bank national association administrative agent norwest bank texas na collateral agent pnc capital markets inc arranger lenders named time parties thereto second amended restated credit agreement connection bridge loan agreement company entered registration rights agreements registration rights agreements lehman brothers inc lehman commercial paper inc pursuant company agreed file securities exchange commission within certain time period registration statement respect offer exchange borrowings bridge loan agreement new issue debt securities company ii resale warrants shares common stock company issued upon exercise warrant purchase shares common stock company issued lehman brothers inc connection bridge loan agreement loans outstanding one year pursuant bridge loan agreement convert term loans may exchanged holders thereof exchange notes issued pursuant indenture dated september 14 1998 indenture company bank new york trustee addition company subsidiaries us trust company texas na trustee us trust entered supplemental indenture dated september 21 1998 supplemental indenture pursuant company assumed obligations dawson indenture dated february 20 1997 dawson indenture dawson us trust companys subsidiaries guarantied obligations notes issued pursuant dawson indenture equally ratably secured obligations second amended restated credit agreement terms dawson indenture company required commence cash tender offer purchase 101 aggregate principal amount outstanding notes outstanding amount 140 million midoctober 1998 source funds borrowings second amended restated credit agreement additionally company outstanding letters credit 2612000 fiscal 1998 1997 related workers compensation insurance also company contractually restricted paying dividends terms bridge loan agreement first amendment amended pnc credit agreement ii 5 convertible subordinated notes september 25 1997 company completed initial closing private placement 200 million 5 convertible subordinated notes due 2004 notes october 7 1997 company completed second closing private placement additional 16 million notes pursuant exercise remaining portion overallotment option granted initial purchasers notes placements made private offerings pursuant rule 144a regulation securities act notes subordinate companys senior indebtedness defined indenture notes issued includes borrowings amended pnc credit agreement amended notes convertible holders option shares common stock conversion price 3850 per share subject certain adjustments notes redeemable companys option september 15 2000 whole part together accrued unpaid interest initial redemption price 10286 year beginning september 15 2000 declines ratably thereafter annual basis key energy group inc subsidiaries notes consolidated financial statements continued event change control company defined indenture notes issued holder notes right holders option require company repurchase part holders notes within 60 days event price equal 100 principal amount thereof together accrued unpaid interest thereon proceeds placement notes used repay balances companys credit facilities see june 30 1998 216000000 principal amount notes outstanding interest notes payable march 15 september 15 interest approximately 51 million paid march 15 1998 iii 7 convertible subordinated debentures july 1996 company completed 52000000 private offering 7 convertible subordinated debentures due 2003 debentures pursuant rule 144a securities act 1933 amended securities act debentures subordinate companys senior indebtedness defined indenture pursuant debentures issued includes borrowings amended pnc credit agreement amended debentures convertible time prior maturity holders option shares common stock conversion price 975 per share subject certain adjustments addition debenture holders convert prior july 1 1999 entitled receive payment cash common stock companys option generally equal 50 interest otherwise payable date conversion july 1 1999 debentures redeemable option company july 15 1999 redemption price 104 decreasing 1 per year anniversary date thereafter event change control company defined indenture debentures issued holder debentures right holders option require company repurchase part holders debentures within 60 days event price equal 100 principal amount thereof together accrued unpaid interest thereon june 30 1998 47400000 principal amount debentures converted 4861538 shares common stock option holders additional 165423 shares common stock issued representing 50 interest otherwise payable date conversion july 1 1999 additional 35408 shares common stock issued inducement convert additional 165423 shares common stock representing 50 interest otherwise payable date conversion july 1 1999 included equity fair value additional 35408 shares common stock issued inducement convert 710186 recorded interest expense consolidated statement operations addition proportional amount unamortized debt issuance costs associated converted debentures charged additional paidin capital time conversion june 30 1998 4600000 principal amount debentures remained outstanding interest debentures payable january 1 july 1 year iv notes payable june 30 1998 notes payable consist primarily capital leases automotive equipment leases varying interest rates principal interest payments key energy group inc subsidiaries notes consolidated financial statements continued presented schedule repayment requirements longterm debt next five years thereafter june 30 1998 thousands fiscal year principal ended amount 1999 1848 2000 2194 2001 1417 2002 991 2003 177329 thereafter 216000 399779 6 fair value financial instruments carrying amount cash equivalents accounts receivable accounts payable accrued expenses current assets current liabilities approximates fair value short maturity instruments marketable equity securities total cost approximately 9961000 deemed management available sale classified consolidated balance sheet fair value approximately 12307000 longterm assets net unrealized gains approximately 2346000 reported within stockholders equity fair value companys borrowing pnc credit facility approximates carrying amount june 30 1998 1997 based borrowing rates currently estimated available company loans similar terms 7 subordinated convertible debentures carrying value 46 million 52 million fair value approximately 67 million 989 million june 30 1998 1997 respectively addition 5 notes carrying value 216 million fair value approximately 1641 million june 30 1998 fair value debentures estimated using quoted market prices 7 accrued liabilities accrued liabilities consist following june 30 thousands 1998 1997 accrued payroll taxes 10852 6674 unvouchered accounts payable 3428 group medical insurance 695 891 workers compensation 794 1683 state sales use taxes 1030 247 gas imbalance deferred income 155 oil gas revenue distribution 201 145 acquisition reorganization accrual 2066 838 401k monies payable 405 2768 1874 total 22239 12507 key energy group inc subsidiaries notes consolidated financial statements continued 8 stockholders equity january 13 1998 companys shareholders approved key energy group inc 1997 incentive plan 1997 incentive plan 1997 incentive plan amendment restatement plans formerly known key energy group inc 1995 stock option plan 1995 option plan key energy group inc 1995 outside directors stock option plan 1995 directors plan collectively prior plans outstanding options previously granted prior plans outstanding november 17 1997 date companys board directors adopted planwere assumed continued without modification 1997 incentive plan 1997 incentive plan company may grant following awards key employees directors employees outside directors consultants company controlled subsidiaries parent corporation incentive stock options isos defined section 422 internal revenue code 1986 amended code ii nonstatutory stock options nsos iii stock appreciation rights sars iv shares restricted stock v performance shares performance units vi stockbased awards vii supplemental tax bonuses collectively incentive awards isos nsos sometimes referred collectively herein options company may grant incentive awards covering aggregate greater 3000000 shares companys common stock ii 10 shares common stock issued outstanding last day calendar quarter provided however decrease number issued outstanding shares common stock previous calendar quarter shall result decrease common stock available issuance 1997 incentive plan 3000000 shares common stock shall available incentive stock options shares common stock issued forfeited subject incentive awards 1997 incentive plan expire terminate reason remain available issuance respect granting incentive awards term 1997 incentive plan except may otherwise provided applicable law shares common stock issued 1997 incentive plan may either newly issued treasury shares including shares common stock company receives connection exercise incentive awards number kind securities may issued 1997 incentive plan pursuant outstanding incentive awards subject adjustments prevent enlargement dilution rights resulting stock dividends stock splits recapitalizations reorganization similar transactions maximum number shares common stock subject incentive awards may granted may vest applicable one covered employee defined calendar year shall 500000 shares subject adjustment provisions 1997 incentive plan maximum aggregate cash payout subject incentive awards including sars performance units performance shares payable cash stockbased awards payable cash may granted one covered employee calendar year 2500000 purposes 1997 incentive plan covered employees means named executive officer one group covered employees defined section 162m code regulation promulgated thereunder ie generally chief executive officer four highly compensated executives given year 1997 incentive plan administrated compensation committee appointed board directors committee consisting less two key energy group inc subsidiaries notes consolidated financial statements continued directors outside director section 162m code ii nonemployee director rule 16b3 securities exchange act 1934 following table summarizes stock option activity related companys plans price shares per share outstanding july 1 1995 granted 1075000 500 outstanding june 30 1996 1075000 granted 175000 750 granted 175000 8313 granted 50000 8375 granted 25000 850 granted 25000 11125 granted 535000 1325 granted 25000 1450 granted 50000 16875 canceled 27000 500 exercised 28000 500 outstanding june 30 1997 2080000 granted 20000 18125 granted 250000 204375 granted 15000 2050 granted 116000 1500 granted 15000 1600 exercised 209000 500 outstanding june 30 1998 2287000 company applies apb 25 related interpretations accounting stock option awards accordingly compensation expense recognized stock option awards compensation expense stock option awards determined consistent sfas 123 companys net income net income per share years ended june 30 1998 1997 would adjusted following pro forma amounts unaudited year ended june 30 1998 1997 net income thousands 22452 8680 basic net income per share 131 071 diluted net income per share 114 061 pro forma net income pro forma net income per share amounts noted likely representative pro forma amounts reported future years pro forma adjustments future years include compensation expense associated options granted fiscal year 1998 1997 plus compensation expense associated options awarded future years result pro forma compensation expense likely higher levels reflected 1998 1997 options awarded future years sfas 123 fair value stock option grant estimated date grant using blackscholes option pricing model following weighted average assumptions used grant 1998 1997 key energy group inc subsidiaries notes consolidated financial statements continued 1998 1997 riskfree interest rate 579 659 expected life 5 years 5 years expected volatility 136 28 expected dividend yield 0 total fair value options granted june 30 1998 1997 14098000 6541000 respectively 9 income taxes components income tax expense follows fiscal year ended june 30 thousands 1998 1997 1996 federal state current 7343 1664 270 deferred 7287 3836 1618 14630 5500 1888 income tax expense differs amounts computed applying statutory federal rate follows fiscal year ended june 30 thousands 1998 1997 1996 income tax computed statutory rate 350 340 amortization goodwill disallowance 11 15 meals entertainment disallowance 07 08 17 state taxes 07 2 02 04 18 377 379 339 deferred tax assets liabilities comprised following fiscal year ended june 30 thousands 1998 1997 1996 net operating loss tax credit carryforwards 5564 4628 6293 property equipment 99664 40410 10942 2363 82 95 net deferred tax liability 91737 35864 4554 valuation allowance provided likely portion deferred tax assets realized based expectations future management determined taxable income company likely sufficient fully utilize available carryforwards prior ultimate expiration company estimates june 30 1998 company available approximately 3290000 net operating loss carryforwards begin expire 2001 net operating loss carryforwards subject annual limitation approximately 940000 sections 382 383 internal revenue code key energy group inc subsidiaries notes consolidated financial statements continued 10 leasing arrangements among leases company primarily subsidiaries leases certain automotive equipment noncancelable operating leases expire various dates 2002 term operating leases generally run 36 60 months varying payment dates throughout month addition case yale e key lease includes option purchase equipment excess mileage charge defined leases june 30 1998 future minimum lease payments noncancelable operating leases thousands follows lease fiscal year payments ending june 30 thousands 1999 7249 2000 6022 2001 3492 2002 1641 2003 660 19064 operating lease expense approximately 8002000 5299000 2897000 fiscal years ended june 30 1998 1997 1996 respectively 11 employee benefit plans prior january 1 1998 company maintained two 401k plans old plans employees welltech eastern eligible participation one plan welltech 401k plan employees eligible participation plan key 401k plan january 1 1998 company merged two old plans one plan new plan old plans new plan cover substantially employees company january 1 1998 new plan company matches 100 employees contributions maximum 1000 per participant per year contributions new plan january 1 1998 totaled 699108 prior january 1 1998 old plans company matched employees contributions 10 employees contribution key 401k plan contributions totaled approximately 36000 35000 19000 six month period ended december 31 1997 years ended june 30 1997 1996 respectively additionally company contributed 172401 300000 welltech 401k plan six month period ended december 31 1997 year ended june 30 1997 respectively company matched employee contributions 50 maximum 1000 per employee employees contributions welltech 401k plan 12 major customers sales customers representing 10 consolidated revenues years ended june 30 1997 1996 follows fiscal year ended june 30 1997 1996 customer 13 20 customer b 7 11 company one customer represented 10 consolidated revenues fiscal year ended june 30 1998 key energy group inc subsidiaries notes consolidated financial statements continued 13 transactions related parties welltech eastern paid 108000 78000 years ended june 30 1998 1997 respectively officeyard rental expense officer company welltech eastern interest opinion board directors company based boards review competitive bids transaction terms least favorable company could obtained third party odessa exploration paid 702000 year ended june 30 1998 certain oil gas assets transaction involving company president outside director company june 30 1998 company owed 300000 company 14 concentrations credit risk company concentration customers oil gas industry substantially companys customers major integrated oil companies major independent producers oil gas smaller independent producers may affect companys overall exposure credit risk either positively negatively much customers effected economic conditions oil gas industry historically cyclical however accounts receivable well diversified among many customers significant portion receivables major oil companies management believes minimizes potential credit risk historically credit losses insignificant receivables generally collateralized although company may generally secure receivable time filing mechanics materialmans lien well serviced 15 business segment information companys operations business segment follows year ended june 30 thousands 1998 1997 1996 identifiable assets oilfield services 513583 242001 94962 oil gas well drilling services 84579 8365 5583 oil gas 39047 23544 18170 general corporate 61431 46185 3007 698640 320095 121722 capital expenditures excluding acquisitions oilfield services 44284 15084 5188 oil gas well drilling services 5385 1483 598 oil gas 7849 8188 1879 57518 24755 7665 depreciation depletion amortization oilfield services 26060 9198 3862 oil gas well drilling services 2450 436 221 oil gas 2043 870 618 general corporate 448 572 31001 11076 4701 key energy group inc subsidiaries notes consolidated financial statements continued companys oilfield services subsidiaries operate variety oilfield service equipment including workover rigs hot oil units transports various oilfield servicing equipment addition perform variety oilfield services including fishing tools frac tanks blowout preventers oil gas production conducted odessa exploration odessa exploration acquires manages interests producing oil gas properties account sponsored investors odessa exploration engaged drilling production oil natural gas united states odessa exploration acquires producing oil gas properties major independent producers acquisition odessa exploration may either rework acquired wells increase production andor form drilling partnerships additional development wells oil gas well drilling services conducted primarily key energy drilling key energy drilling operates forty drilling rigs drill oil gas west texas new mexico area 16 subsequent events acquisitions completed june 30 1998 following acquisitions completed june 30 1998 included companys results operations twelve months ended june 30 1998 colorado well service inc july 15 1998 company closed acquisition assets colorado well service inc colorado approximately 65 million cash colorado operates seventeen well service rigs one drilling rig utah colorado transtexas assets august 19 1998 company completed acquisition certain oilfield service assets transtexas gas corporation transtexas approximately 205 million cash future obligations transtexas assets based laredo texas include nine well service rigs approximately 80 oilfield service trucks 173 frac tanks flint asset purchase september 16 1998 company closed acquisition certain assets flint engineering construction co subsidiary flint industries inc flint approximately 119 million cash flint operates 55 well service rigs 25 oilfield trucks rocky mountains four corners area midcontinent region permian basin arklatex region iceberg sa september 24 1998 company closed acquisition assets iceberg sa iceberg approximately 44 million cash iceberg operates four well service rigs comodoro rivadavia argentina hsi group september 24 1998 company closed acquisition substantially operating assets hellums services ii inc superior completion services inc south texas disposal inc elsik ii inc hsi group 479 million cash hsi group operates among assets approximately 80 oilfield trucks eight well service rigs south texas key energy group inc subsidiaries notes consolidated financial statements continued dawson production services inc september 15 1998 midland acquisition corporation midland new jersey corporation whollyowned subsidiary company completed cash tender offer tender offer outstanding shares common stock par value 001 per share dawson shares including associated common stock purchase rights dawson price 1750 per share tender offer expired 830 new york city time tuesday september 15 1998 midland accepted payment 10021601 dawson shares total purchase price approximately 1754 million acceptance tendered dawson shares together dawson shares previously owned midland company prior commencement tender offer resulted midland company acquiring approximately 970 outstanding dawson shares purchase price dawson shares pursuant tender offer merger agreement determined pursuant armslength negotiations parties based variety factors including without limitation anticipated earnings cash flows dawson tender offer made pursuant agreement plan merger agreement dated august 11 1998 among midland company dawson september 18 1998 pursuant terms merger agreement midland merged dawson first merger laws states new jersey texas dawson shares owned midland cancelled retired converted right receive 1750 cash september 21 1998 dawson merged company second merger pursuant laws states maryland texas total consideration paid dawson shares pursuant tender offer first merger approximately 1817 million dawson operates approximately 527 well service rigs 200 oilfield trucks 21 production testing units south texas gulf coast east texas louisiana permian basin west texas new mexico anadarko basin texas oklahoma california inland waters gulf mexico key energy group inc subsidiaries notes consolidated financial statements continued 17 cash flow disclosures supplemental cash flow disclosures years ended june 30 1998 1997 1996 presented year ended june 30 thousands 1998 1997 1996 interest paid 16441 5850 2205 taxes paid 9024 391 supplemental schedule detailing purchase price acquisitions including noncash consideration paid year ended june 30 1996 presented thousands fair value common stock issued welltech inc 17929 assumption welltech inc working capital deficit 1734 assumption welltech inc noncurrent liabilities debt 27570 acquisition welltech inc property equipment 47455 supplemental schedule detailing purchase price acquisitions including noncash consideration paid year ended june 30 1997 presented thousands key energy group inc subsidiaries notes consolidated financial statements continued supplemental schedule detailing purchase price acquisitions including noncash consideration paid year ended june 30 1998 presented thousands key energy group inc subsidiaries notes consolidated financial statements continued 18 unaudited supplementary information quarterly results operations summarized quarterly financial data 1998 1997 follows thousands except per first second third fourth share amounts quarter revenues 75399 109595 120724 114328 earnings operations 22780 33960 37281 37074 net earnings 4111 7345 7082 5637 earnings per share 29 40 39 31 weighted average common shares equivalents outstanding 14126 18151 18295 18261 revenues 31462 36197 43050 52921 earnings operations 2396 3022 3563 5621 net earnings 1554 2043 2365 3136 earnings per share 15 19 20 26 weighted average common shares equivalents outstanding 10425 10850 11612 11979 fourth quarter fiscal 1997 includes adjustment 2 million previously unrecorded inventory amounts reported first quarter 1998 differ amounts previously reported form 10q filed quarter ended september 30 1997 due noncash adjustments recorded fourth quarter associated 7 debentures converted first quarter fiscal year 1998 independent auditors report board directors stockholders key energy group inc audited accompanying consolidated balance sheets key energy group inc subsidiaries june 30 1998 1997 related consolidated statements operations stockholders equity cash flows years threeyear period ended june 30 1998 consolidated financial statements responsibility companys management responsibility express opinion consolidated financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects consolidated financial position key energy group inc subsidiaries june 30 1998 1997 results operations cash flows years threeyear period ended june 30 1998 conformity generally accepted accounting principles kpmg peat marwick llp midland texas september 1 1998 item 9item 8 consolidated financial statements supplementary data presented herein consolidated financial statements key energy services inc june 30 2002 2001 years ended june 30 2002 2001 2000 also included report kpmg llp independent certified public accountants consolidated financial statements june 30 2002 2001 years ended june 30 2002 2001 2000 index consolidated financial statements key energy services inc consolidated balance sheets see accompanying notes integral part consolidated financial statements key energy services inc consolidated statements operations see accompanying notes integral part consolidated financial statements key energy services inc consolidated statements comprehensive income see accompanying notes integral part consolidated financial statements key energy services inc consolidated statements cash flows see accompanying notes integral part consolidated financial statements key energy services inc consolidated statements stockholders equity thousands see accompanying notes integral part consolidated financial statements key energy services inc notes consolidated financial statements june 30 2002 2001 2000 1 organization summary significant accounting policies company key energy services inc company key largest onshore rigbased well servicing contractor world approximately 1486 well service rigs 1719 oilfield service vehicles june 30 2002 company provides complete range well services major oil companies independent oil natural gas production companies including rigbased well maintenance workover completion recompletion services including horizontal recompletions oilfield trucking services ancillary oilfield services key conducts well servicing operations onshore continental united states following regions gulf coast including south texas central gulf coast texas south louisiana permian basin west texas eastern new mexico midcontinent including anadarko hugoton arkoma basins arklatex region four corners including san juan piceance uinta paradox basins eastern including appalachian michigan illinois basins rocky mountains including denverjulesberg powder river wind river green river williston basins california san joaquin basin internationally argentina ontario canada company also leading onshore drilling contractor 79 land drilling rigs june 30 2002 key conducts land drilling operations number major domestic producing basins well argentina ontario canada key also produces develops oil natural gas reserves permian basin region texas panhandle basis presentation companys consolidated financial statements include accounts company whollyowned subsidiaries significant intercompany transactions balances eliminated accounting policies presented followed preparing accompanying consolidated financial statements estimates uncertainties preparation accompanying consolidated financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amount assets liabilities disclosures contingent assets liabilities date consolidated financial statements reported amounts revenues expenses reporting period actual results could differ estimates inventories consist primarily oilfield service parts supplies held consumption valued lower average cost market property equipment company provides depreciation amortization oilfield service related equipment using straightline method excluding drilling rigs following estimated useful lives assets components well service rig generally require replacement rigs life depreciated estimated useful lives range three 15 years basic rigs excluding components estimated useful lives date original manufacture ranging 25 35 years salvage values assigned rigs based estimate 10 company uses unitsofproduction method depreciate drilling rigs method takes consideration number days rigs actually service month depreciation recorded least 15 days month rig available service company believes method appropriately reflects financial results matching revenues expenses appropriately reflects assets used time company uses successful efforts method accounting oil gas properties method costs associated productive wells nonproductive development wells capitalized nonproductive exploration costs geological geophysical costs expensed capitalized costs relating proved properties depleted using unitsofproduction method company provide disclosures oil gas properties accordance fasb statement 69 disclosures oil gas producing activities company follows provisions fasb statement 121 accounting impairment longlived assets longlived assets disposed statement requires longlived assets including certain identifiable intangibles held used company reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable purposes applying statement company groups longlived assets yardbyyard basis compares estimated future cash flows yard yards net carrying value company would record impairment charge reducing yards net carrying value estimated fair value estimated future cash flows less yards net carrying value impairment charges required hedging derivative financial instruments company uses derivative financial instruments primarily commodity option contracts reduce exposure oil gas producing operations changes market price natural gas crude oil fix price natural gas crude oil independently physical sale financial instruments company accounts hedging contracts must meet following criteria underlying asset liability must expose company price risk offset another asset liability hedging contract must reduce price risk instrument must designated hedge inception contract throughout contract period order qualify hedge must clear correlation changes fair value financial instrument fair value underlying asset liability changes market value financial instrument offset effect price rate changes exposed items prior adoption sfas 133 premiums paid commodity option contracts qualify hedges amortized oil natural gas sales terms contracts unamortized premiums included assets consolidated balance sheet amounts receivable commodity option contracts accrued increase oil natural gas sales applicable periods effective july 1 2000 company adopted sfas 133 accounting derivative instruments hedging activities sfas 133 amended sfas 137 138 sfas 138 sfas 133 establishes accounting reporting standards derivative instruments including certain derivative instruments embedded contracts hedging activities requires recognition derivative instruments assets liabilities companys balance sheet measurement instruments fair value accounting treatment changes fair value dependent upon whether derivative instrument designated hedge type hedge derivatives designated cash flow hedges changes fair value recognized comprehensive income hedged item recognized earnings see note 6 comprehensive income company follows provisions statement financial accounting standards 130 reporting comprehensive income sfas 130 sfas 130 establishes standards reporting presentation comprehensive income components sfas 130 requires items required recognized accounting standards components comprehensive income reported financial statement displayed prominence financial statements accordance provisions sfas 130 company presented components comprehensive income consolidated statements comprehensive income environmental company subject extensive federal state local environmental laws regulations laws constantly changing regulate discharge materials environment may require company remove mitigate adverse environmental effects disposal release petroleum chemical substances various sites environmental expenditures expensed capitalized depending future economic benefit expenditures relate existing condition caused past operations future economic benefits expensed liabilities expenditures noncapital nature recorded environmental assessment andor remediation probable costs reasonably estimated goodwill intangible assets company adopted statement financial accounting standards 142 goodwill intangible assets sfas 142 july 1 2001 sfas 142 eliminates amortization goodwill intangible assets indefinite lives intangible assets lives restricted contractual legal means continue amortized useful lives goodwill intangible assets subject amortization tested impairment annually frequently events changes circumstances indicate asset might impaired sfas 142 requires twostep process testing impairment first fair value reporting unit compared carrying value determine whether indication impairment exists impairment indicated fair value reporting units goodwill determined allocating units fair value assets liabilities including unrecognized intangible assets reporting unit acquired business combination amount impairment goodwill measured excess carrying value fair value company completed assessment goodwill impairment date adoption three months ended december 31 2001 allowed sfas 142 subsequent annual impairment assessment june 30 2002 assessments result indication goodwill impairment either date intangible assets subject amortization sfas 142 consist noncompete agreements amortization expense calculated using straightline method period agreement ranging three five years gross carrying amount noncompete agreements subject amortization totaled approximately 11727000 8324000 june 30 2002 2001 respectively accumulated amortization related intangible assets totaled approximately 6130000 4953000 june 30 2002 2001 respectively amortization expense years ended june 30 2002 2001 2000 approximately 1914000 1801000 1410000 respectively amortization expense next five succeeding fiscal years estimated 2126000 1143000 968000 797000 513000 company identified reporting segments well servicing contract drilling goodwill allocated reporting segments june 30 2002 186819000 14250000 respectively change carrying amount goodwill year ended june 30 2002 11194000 relates principally goodwill well servicing assets acquired period translation adjustment argentina effects adoption sfas 142 net income earnings per share years ended june 30 2001 2000 follows deferred costs deferred costs totaling 32928000 31052000 june 30 2002 2001 respectively represent debt issuance costs recorded net accumulated amortization 20348000 13428000 june 30 2002 2001 respectively deferred costs amortized interest expense using straightline method life applicable debt instrument extraordinary loss related debt retired early method approximates amortization would recorded using effective interest method amortization deferred costs totaled approximately 2581000 3578000 5176000 fiscal 2002 2001 2000 respectively unamortized debt issuance costs written included determination extraordinary loss retirement debt tax fiscal 2002 totaled approximately 4339000 extraordinary gain retirement debt tax fiscal 2001 totaled approximately 2583000 income taxes company accounts income taxes based upon statement financial accounting standards 109 accounting income taxes sfas 109 sfas 109 deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases deferred tax assets liabilities measured using statutory tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rate recognized income period includes statutory enactment date valuation allowance deferred tax assets recognized likely benefit deferred tax assets realized company eligible subsidiaries file consolidated u federal income tax return certain subsidiaries consolidated financial reporting purposes eligible included consolidated u federal income tax return separate provisions income taxes determined entities groups entities earnings per share company presents earnings per share information accordance provisions statement financial accounting standards 128 earnings per share sfas 128 sfas 128 basic earnings per common share determined dividing net earnings applicable common stock weighted average number common shares actually outstanding year diluted earnings per common share based increased number shares would outstanding assuming conversion dilutive outstanding convertible securities using converted method diluted earnings per share calculation years ended june 30 2002 2001 excludes effect potential exercise stock options 1177000 360000 respectively potential conversion companys 5 convertible subordinated notes effects instruments earnings per share would antidilutive diluted earnings per share calculation year ended june 30 2000 excludes effect potential conversion companys outstanding convertible debt potential exercise companys outstanding warrants stock options effects instruments loss per share would antidilutive concentration credit risk financial instruments potentially subject company concentrations credit risk consist primarily temporary cash investments trade receivables company restricts investment temporary cash investments financial institutions high credit standing policy limits amount credit exposure one financial institution companys customer base consists primarily multinational independent oil natural gas producers may affect companys overall exposure credit risk either positively negatively much customers affected economic conditions oil gas industry historically cyclical however account receivables well diversified among many customers significant portion receivables major oil companies management believes minimizes potential credit risk historically credit losses insignificant receivables generally collateralized although company may generally secure receivable time filing mechanics materialmans lien well serviced company maintains reserves potential credit losses within managements expectations keys customers include major oil companies independent oil natural gas production companies foreign national oil natural gas production companies one customer fiscal 2002 occidental petroleum corporation accounted 10 keys consolidated revenues company one customer represented 10 consolidated revenues fiscal years ended june 30 2001 2000 stockbased compensation company accounts stock option grants employees using intrinsic value method accounting prescribed apb opinion 25 accounting stock issued employees apb 25 companys stock incentive plans price stock grant date amount employee must pay exercise option acquire stock accordingly options intrinsic value grant date accordance provisions apb 25 compensation cost recognized statement financial accounting standards 123 sfas 123 accounting stockbased compensation sets forth alternative accounting disclosure requirements stockbased compensation arrangements companies may continue follow provisions apb 25 measure recognize employee stockbased compensation however sfas 123 requires disclosure pro forma net income earnings per share would reported fair value based recognition provisions sfas 123 company disclosed note 8 pro forma information required sfas 123 foreign currency gains losses local currency functional currency companys foreign operations argentina canada cumulative translation gains losses resulting translating foreign subsidiarys financial statements functional currency us dollars included comprehensive income accumulated stockholders equity partial complete sale liquidation companys net investment foreign entity cash equivalents company considers unrestricted highly liquid investments less threemonth maturity purchased cash equivalents reclassifications certain reclassifications made consolidated financial statements years ended june 30 2001 2000 conform year end june 30 2002 presentation reclassifications consist primarily reclassifying certain items general administrative expense direct expenses 2 business property acquisitions fiscal 2002 2001 company completed several small acquisitions total consideration 44378000 11965000 respectively consisted combination cash notes shares companys common stock none acquisitions completed fiscal 2002 individually material thus pro forma effect acquisitions required presented acquisitions accounted using purchase method results operations generated acquired assets included companys results operations completion date acquisition acquisitions completed company fiscal 2000 3 commitments contingencies various suits claims arising ordinary course business pending company management believe disposition items result material adverse impact consolidated financial position results operations cash flows company order retain qualified senior management company enters employment agreements executive officers employment agreements run periods ranging three five years automatically extended yearly basis unless terminated company executive officer addition providing base salary executive officer employment agreements provide severance payments executive officer varying three five years executive officers base salary june 30 2002 annual base salaries executive officers covered employment agreements totaled 1165000 company also enters employment agreements key employees deems necessary order retain qualified personnel 4 longterm debt components companys longterm debt follows senior credit facility fiscal 2002 companys senior credit facility prior senior credit facility consisted 100 million revolving credit facility addition 30 million letters credit could issued prior senior credit facility outstanding letters credit reduced borrowing availability revolver company drew approximately 43 million january 14 2002 order redeem 14 senior subordinated notes funds repaid issuance additional 8 38 notes march 2002 revolving loans bore interest rates based upon companys option either prime rate plus variable margin 075 200 eurodollar rate plus variable margin 225 350 company paid commitment fees unused portion revolving loan varying rate depending upon pricing ratio 025 050 fiscal 2001 portion net proceeds 2000 equity offering see note 8 used repay entire outstanding balance tranche term loan outstanding prior senior credit facility 23 million tranche b term loan outstanding prior senior credit facility addition 65 million net proceeds 2000 equity offering used reduce principal amount outstanding revolver remainder net proceeds 2000 equity offering used retire longterm debt portion proceeds companys 8 38 senior note offering fiscal 2001 used repay entire outstanding balance tranche b term loan outstanding prior senior credit facility approximately 591 million revolver june 30 2002 balance outstanding revolving loans additionally company outstanding letters credit 27963000 11995000 june 30 2002 2001 respectively senior credit facility related workers compensation insurance ii 8 38 senior notes march 6 2001 company completed private placement 175000000 8 38 senior notes due 2008 8 38 senior notes net cash proceeds private placement used repay remaining balance original term loans senior credit facility portion revolving loan facility senior credit facility outstanding march 1 2002 company completed public offering additional 100000000 8 38 senior notes due 2008 net cash proceeds public offering used repay remaining balance revolving loan facility senior credit facility 8 38 senior notes senior unsecured obligations 8 38 senior notes effectively subordinated keys secured indebtedness includes borrowings senior credit facility march 1 2005 company may redeem 8 38 senior notes time varying redemption prices excess par plus accrued interest addition march 1 2004 company may redeem 35 aggregate principal amount 8 38 senior notes proceeds certain sales equity 108375 par plus accrued interest june 30 2002 275000000 principal amount 8 38 senior notes remained outstanding 8 38 senior notes require semiannual interest payments march 1 september 1 year interest payments approximately 7125000 7328000 paid september 1 2001 march 1 2002 respectively iii 14 senior subordinated notes january 22 1999 company completed private placement 150000 units consisting 150000000 14 senior subordinated notes due 2009 14 senior subordinated notes 150000 warrants purchase 2173433 shares companys common stock exercise price 488125 per share unit warrants net cash proceeds private placement used repay substantially remaining 148600000 principal amount plus accrued interest owed companys bridge loan facility arranged connection acquisition dawson production services inc dawson january 15 2004 company may redeem 14 senior subordinated notes time varying redemption prices excess par plus accrued interest addition january 15 2002 company allowed redeem 35 aggregate principal amount 14 senior subordinated notes 114 par plus accrued interest proceeds certain sales equity fiscal 2001 company exercised right redemption 10313000 principal amount 14 senior subordinated notes price 114 principal amount plus accrued interest transaction resulted extraordinary loss taxes approximately 2561000 january 14 2002 company exercised right redemption 35403000 principal amount 14 senior subordinated notes price 114 principal amount plus accrued interest transaction resulted extraordinary loss taxes approximately 8468000 also fiscal 2002 company purchased canceled 6784000 principal amount 14 senior subordinated notes price 116 principal amount plus accrued interest transactions resulted extraordinary losses taxes approximately 1821000 unit warrants separated 14 senior subordinated notes became exercisable january 25 2000 date issuance value unit warrants estimated 7434000 classified discount 14 senior subordinated notes companys consolidated balance sheet discount amortized interest expense term 14 senior subordinated notes 14 senior subordinated notes mature unit warrants expire january 15 2009 14 senior subordinated notes subordinate companys senior indebtedness includes borrowings senior credit facility 8 38 senior notes june 30 2002 97500000 principal amount 14 senior subordinated notes remained outstanding 14 senior subordinated notes pay interest semiannually january 15 july 15 year interest payments approximately 9778000 6825000 made july 15 2001 january 15 2002 respectively june 30 2002 63500 unit warrants exercised producing approximately 4173000 proceeds company leaving 86500 unit warrants outstanding iv 5 convertible subordinated notes late september early october 1997 company completed private placement 216000000 5 convertible subordinated notes due 2004 5 convertible subordinated notes 5 convertible subordinated notes subordinate companys senior indebtedness includes borrowings senior credit facility 14 senior subordinated notes 8 38 senior notes 5 convertible subordinated notes convertible holders option shares companys common stock conversion price 3850 per share subject certain adjustments 5 convertible subordinated notes redeemable companys option september 15 2000 whole part together accrued unpaid interest initial redemption price 10286 year beginning september 15 2000 declines ratably thereafter annual basis fiscal 2001 company repurchased canceled 47384000 principal amount 5 convertible subordinated notes repurchases resulted extraordinary gains taxes approximately 4564000 fiscal 2002 company repurchased canceled 108475000 principal amount 5 convertible subordinated notes leaving 49951000 principal amount 5 convertible subordinated notes outstanding june 30 2002 repurchases resulted extraordinary gains taxes approximately 5633000 interest 5 convertible subordinated notes payable march 15 september 15 year interest approximately 3027000 1259000 paid september 15 2001 march 15 2002 respectively capitalized debt issuance costs repayment schedule interest expense company capitalized total approximately 1877000 4958000 fees costs connection various financings fiscal 2002 2001 respectively company incur fees costs connection financing activities fiscal 2000 presented schedule repayment requirements longterm debt excluding discount 14 senior subordinated notes premium 8 38 senior notes next five years thereafter june 30 2002 companys interest expense years ended june 30 2002 2001 2000 consisted following 5 fair value financial instruments following table presents carrying amounts estimated fair values companys financial instruments june 30 2002 2001 fasb statement 107 disclosures fair value financial instruments defines fair value financial instrument amount instrument could exchanged current transaction willing parties following methods assumptions used estimate fair value class financial instruments cash trade receivables trade payables carrying amounts approximate fair value short maturity instruments commodity option contracts sfas 133 carrying amount commodity option contracts approximate fair value fair value commodity option contracts estimated using discounted forward prices options index price term option contract notes receivablerelated parties amounts reported relate notes receivable officers company longterm debt fair value companys longterm debt based upon quoted market prices various notes debentures june 30 2002 2001 carrying amounts outstanding companys senior credit facility 6 derivative financial instruments company utilizes derivative financial instruments manage well defined commodity price risks company exposed credit losses event nonperformance counterparties commodity hedges company deals reputable financial institutions counterparties anticipates counterparties able fully satisfy obligations contracts company obtain collateral security support financial instruments subject credit risk monitors credit standing counterparties company periodically hedges portion oil natural gas production collar option agreements purpose hedges provide measure stability volatile environment oil natural gas prices manage exposure commodity price risk existing sales commitments companys risk management objective lock range pricing expected production volumes allows company forecast future earnings within predictable range company meets objective entering collar option arrangements allow acceptable cap floor prices company enter derivative instruments purpose economic hedging company speculate using derivative instruments company identified following derivative instruments freestanding derivatives march 30 2000 company entered collar arrangement 22month period whereby company pay specified price cap index counterparty pay price fall floor index hedge defines range cash flows bounded cap floor prices may 25 2001 company entered option arrangement 12month period beginning march 2002 whereby counterparty pay price fall floor index may 2 2002 company entered option arrangement 12month period beginning march 2003 whereby counterparty pay price fall floor index company desires measure stability ensure cash flows fall certain level prior adoption sfas 133 discussed note 1 collars options accounted cash flow type hedges accordingly transition adjustment resulted recording 778000 liability fair value collars accumulated comprehensive income 258000 520000 recognized earnings fiscal 2002 2001 respectively arrangement intended economic hedge july 1 2000 company documented march 30 2000 oil natural gas collars cash flow hedges therefore reported charge operations 565000 increase fair value liability september 30 2000 income october 1 2000 company documented collars cash flow hedges may 25 2001 company documented may 25 2001 oil natural gas options cash flow hedges therefore included income 768000 increase fair value asset june 30 2001 income july 1 2001 company documented options cash flow hedges may 2 2002 company documented may 2 2002 oil natural gas options cash flow hedges company recorded net decrease derivative assets net derivative liabilities 543000 net increase 999000 fiscal 2002 2001 respectively company recorded earnings ineffectiveness expense 85000 ineffectiveness income 132000 fiscal 2002 2001 respectively embedded derivatives company party volumetric production payment meets definition embedded derivative sfas 133 effective july 1 2000 company determined documented volumetric production payment excluded scope sfas 133 normal purchasessales exclusion set forth sfas 138 fiscal 2000 gains amortization premiums paid option contracts recognized adjustment sales revenue related transactions hedged finalized net effect companys commodity hedging activities decreased oil natural gas revenues year ended june 30 2000 822270 following table sets forth future volumes hedged year weightedaverage strike price option contracts june 30 2002 2001 strike prices oil collars puts based nymex spot price west texas intermediate strike prices natural gas collars based inside fercwest texas waha spot price strike price natural gas put based inside fercel paso permian spot price 7 accrued liabilities accrued liabilities consist following noncurrent accrued expenses consist primarily workers compensation reserves 8 stockholders equity offerings december 19 2001 company closed public offering 5400000 shares common stock yielding approximately 432 million 800 per share company equity offering net proceeds equity offering approximately 426 million used temporarily reduce amounts outstanding companys revolving line credit net proceeds equity offering ultimately used january 2002 redeem portion companys 14 senior subordinated notes fully utilizing companys equity clawback rights 35 original 150 million issued june 30 2000 company closed public offering 11000000 shares common stock 9625 per share approximately 106 million 2000 equity offering net proceeds 2000 equity offering approximately 101 million used repay portion companys term loan borrowings revolving line credit senior credit facility retire longterm debt stock incentive plans january 13 1998 companys shareholders approved key energy group inc 1997 incentive plan amended 1997 incentive plan 1997 incentive plan amendment restatement plans formerly known key energy group inc 1995 stock option plan 1995 option plan key energy group inc 1995 outside directors stock option plan 1995 directors plan collectively prior plans options previously granted prior plans outstanding november 17 1997 date companys board directors adopted plan assumed continued without modification 1997 incentive plan 1997 incentive plan company may grant following awards key employees directors employees outside directors consultants company controlled subsidiaries parent corporation incentive stock options isos defined section 422 internal revenue code 1986 amended code ii nonstatutory stock options nsos iii stock appreciation rights sars iv shares restricted stock v performance shares performance units vi stockbased awards vii supplemental tax bonuses collectively incentive awards isos nsos sometimes referred collectively herein options company may grant incentive awards covering aggregate greater 3000000 shares companys common stock ii 10 shares companys common stock issued outstanding last day calendar quarter provided however decrease number issued outstanding shares companys common stock previous calendar quarter shall result decrease number shares available issuance 1997 incentive plan result companys equity offerings discussed june 30 2002 number shares companys common stock may covered incentive awards increased approximately 110 million shares companys common stock issued forfeited subject incentive awards 1997 incentive plan expire terminate reason remain available issuance respect granting incentive awards term 1997 incentive plan except may otherwise provided applicable law shares companys common stock issued 1997 incentive plan may either newly issued treasury shares including shares companys common stock company receives connection exercise incentive award number kind securities may issued 1997 incentive plan pursuant outstanding incentive awards subject adjustments prevent enlargement dilution rights resulting stock dividends stock splits recapitalizations reorganization similar transactions maximum number shares companys common stock subject incentive awards may granted may vest applicable one covered employee defined calendar year shall 500000 shares subject adjustment provisions 1997 incentive plan maximum aggregate cash payout subject incentive awards including sars performance units performance shares payable cash stockbased awards payable cash may granted one covered employee calendar year 2500000 purposes 1997 incentive plan covered employees means named executive officer one group covered employees defined section 162m code regulation promulgated thereunder ie generally chief executive officer four highly compensated executive officers given year 1997 incentive plan administrated compensation committee appointed board directors committee consisting less two directors outside director section 162m code ii nonemployee director rule 16b3 securities exchange act 1934 addition subject applicable shareholder approval requirements company may issue nsos outside 1997 incentive plan exercise price options granted 1997 incentive plan outside 1997 incentive plan fair market value per share date options granted exercise nsos results u tax deduction company equal income tax effect difference exercise price market price exercise date following table summarizes stock option activity related companys plans shares thousands following table summarizes information stock options outstanding june 30 2002 shares thousands company applies intrinsic value method apb 25 accounting employee stock incentive plans accordingly compensation expense recognized stock options issued employee plans compensation expense stock options granted employees recognized based fair value grant dates using methodology prescribed sfas 123 companys net income loss earnings loss per share would reduced pro forma amounts indicated sfas 123 apply options granted prior january 1 1995 therefore pro forma effect disclosed may representative pro forma amounts future years total fair value stock options granted fiscal 2002 2001 2000 approximately 7700000 11217000 19541000 respectively fair value stock option grant estimated date grant using blacksholes optionpricing model based following weightedaverage assumptions 9 income taxes components income tax expense benefit follows company made income tax payments offset reimbursement fiscal 2002 2001 2000 additionally deferred tax benefit 267000 7004000 allocated stockholders equity fiscal 2002 2001 respectively compensation expense income tax purposes excess amounts recognized financial reporting purposes income tax expense benefit differs amounts computed applying statutory federal rate follows deferred tax assets liabilities comprised following valuation allowance provided likely portion deferred tax assets realized described due annual limitations certain net operating loss carryforwards appear likely company able utilize available carryforwards prior ultimate expiration company estimates june 30 2002 company available approximately 193021646 net operating loss carryforwards continue expire fiscal 2003 approximately 51521895 net operating loss carryforwards subject annual limitation approximately 1012000 sections 382 383 internal revenue code 10 leasing arrangements company leases certain property equipment noncancelable operating leases generally expire various dates fiscal 2007 term operating leases generally run 24 60 months varying payment dates throughout month june 30 2002 future minimum lease payments noncancelable operating leases follows thousands operating lease expense approximately 6456000 6072000 6460000 fiscal years ended june 30 2002 2001 2000 respectively 11 employee benefit plans order retain quality personnel company maintains 401k plans part employee benefits package july 1 1998 december 31 1998 company matched 100 employee contributions 401k plan maximum 1000 per participant per year january 1 1999 march 31 2000 company elected match employee contributions commencing april 1 2000 company matches 100 employee contributions 401k plan maximum 250 per participant per year maximum limit increased 500 effective october 1 2000 750 effective january 1 2001 1000 effective july 1 2001 companys matching contributions fiscal 2002 2001 2000 approximately 2123000 1857000 77000 respectively 12 transactions related parties effective july 1 2001 company entered amended restated employment agreement francis john employment agreement pursuant mr john serves chairman board president chief executive officer company employment agreement provided payment onetime retention incentive payment purpose retention incentive payment retire amounts owed mr john incentivebased loans previously made certain performance criteria previously met company scheduled forgive ratably tenyear period long mr john continued serve company present capacity process provide mr john incentive remain company next ten years december 1 2001 incentive retention payment paid mr john comprised two components approximately 75 million principal interest accrued date payment ii approximately 56 million tax grossup payment entire payment withheld company used satisfy mr johns tax obligations loans pursuant employment agreement mr john earn incentive retention payment tenyear period beginning july 1 2001 onetenth total bonus earned june 30 year beginning june 30 2002 fiscal 2002 mr john earned approximately 13 million retention incentive payment mr john voluntarily terminates employment company mr john terminated company cause defined employment agreement mr john obligated repay entire remaining unearned balance retention incentive payment immediately upon termination however mr johns employment company terminated company cause ii mr john good reason defined employment agreement iii result mr johns death disability defined employment agreement iv result change control defined employment agreement remaining unearned balance retention incentive payment treated earned date event 13 business segment information companys reportable business segments well servicing contract drilling oil natural gas production operations presented corporateother well servicing companys operations provide well servicing ongoing maintenance existing oil natural gas wells workover major repairs modifications necessary optimize level production existing oil natural gas wells production services fluid hauling fluid storage tank rental contract drilling company provides contract drilling services major independent oil companies onshore continental united states argentina ontario canada companys management evaluates performance operating segments based net income operating profits revenues less direct operating expenses corporate expenses include general corporate expenses associated managing reportable operating segments corporate assets consist principally cash equivalents deferred debt financing costs deferred income tax assets net income loss extraordinary gain loss contract drilling segment includes portion well servicing general administrative expenses allocated percentage revenue basis operating revenues operating profit companys foreign operations includes argentina canada 332 million 64 million respectively year ended june 30 2002 operating revenues operating profit companys foreign operations includes argentina canada 545 million 134 million respectively year ended june 30 2001 operating revenues operating profit companys foreign operations includes argentina canada 377 million 73 million respectively year ended june 30 2002 company 279 million 841 million identifiable assets june 30 2002 2001 respectively related foreign operations 14 supplemental schedule noncash investing financing activities 15 unaudited supplementary information quarterly results operations summarized quarterly financial data fiscal 2002 2001 follows 16 volumetric production payment march 2000 key sold portion future oil natural gas production odessa exploration incorporated wholly owned subsidiary gross proceeds 20 million pursuant agreement purchaser entitled receive share production certain oil natural gas properties amounts ranging 3500 10000 barrels oil 58800 122100 mmbtus natural gas per month six year period ending february 2006 total volume forward sale approximately 486000 barrels oil 6135 million mmbtus natural gas 17 condensed consolidating financial information companys senior notes guaranteed companys operating subsidiaries except oil natural gas production subsidiary foreign subsidiaries whollyowned guarantees joint several full complete unconditional currently restrictions ability subsidiary guarantors transfer funds parent company accompanying condensed consolidating financial information prepared presented pursuant sec regulation sx rule 310 financial statements guarantors issuers guaranteed securities registered information intended present financial position results operations cash flows individual companies groups companies accordance generally accepted accounting principles condensed consolidating balance sheets condensed consolidating statements operations condensed consolidating statements cash flows 18 argentina foreign currency transaction loss local currency functional currency companys foreign operations argentina canada cumulative translation gains losses resulting translating foreign subsidiarys financial statements functional currency us dollars included comprehensive income accumulated stockholders equity partial complete sale liquidation companys net investment foreign entity since 1991 argentine peso tied us dollar conversion ratio 11 however december 2001 government argentina announced exchange holiday result argentine pesos could exchanged currencies december 31 2001 january 5 6 2002 argentine congress senate gave president argentina emergency powers ability suspend law created fixed conversion ratio 11 government subsequently announced creation dual currency system certain qualifying transactions settled expected fixed conversion ratio 141 transactions settled using free floating market conversion ratio existing guidance dividends would receive fixed conversion ratio january 11 2002 exchange holiday lifted making possible buy sell argentine pesos banks legally allowed exchange currencies transactions limited generally took place exchange houses transactions conducted primarily individuals opposed commercial transactions occurred free conversion ratios ranging 161 171 due events described resulted temporary lack exchangeability two currencies december 31 2001 company translated assets liabilities argentine subsidiary december 31 2001 using conversion ratio 161 management believes indicative free floating conversion ratio currency market reopened january 11 2002 june 30 2002 company used conversion ratio 391 translate assets liabilities argentine subsidiary result foreign currency translation loss approximately 483 million included comprehensive income component stockholders equity june 30 2002 since 11 conversion ratio existence prior december 2001 income statement cash flows information six months ended december 31 2001 translated using historical 11 conversion ratio december 31 2001 revenues expenses translated using average exchange rate reporting period additionally argentine government indicated part monetary policy changes redenominate certain consumer loans us dollardenominated argentine peso denominated result company recorded foreign currency transaction loss 18 million three months ended december 31 2001 related accounts receivable subject certain us dollardenominated contracts held argentine subsidiary subject redenomination receivables subject additional negotiation companys customers may result recovery portion loss six months ended june 30 2002 company recovered approximately 04 million resulting net foreign currency transaction loss approximately 14 million fiscal 2002 19 subsequent eventsacquisition q services inc unaudited july 19 2002 company acquired q services inc qsi pursuant agreement plan merger dated may 13 2002 amended among company key merger sub inc qsi consideration merger company issued approximately 172 million shares common stock qsi shareholders assumed approximately 74 million qsis indebtedness net working capital aggregate value purchase price approximately 221 million prior acquisition qsi privately held corporation conducting field production pressure pumping service operations louisiana new mexico oklahoma texas gulf mexico 20 subsequent eventsnew senior credit facility unaudited july 15 2002 company entered third amended restated credit agreement new senior credit facility new senior credit facility consists 150000000 revolving loan facility 40000000 sublimit letters credit loans secured tangible intangible assets company revolving loan commitment terminate july 15 2005 revolving loans must paid date revolving loans bear interest based upon companys option prime rate plus variable margin 000 075 eurodollar rate plus variable margin 125 275 new senior credit facility contains various financial covenants including maximum consolidated senior leverage ratio 275 100 ii minimum consolidated fixed coverage ratio 150 100 iii maximum consolidated total leverage ratio 350 100 company also required maintain minimum net worth 436972000 plus 50 consolidated net income ii 75 net cash proceeds sale equity new senior credit facility subjects company restrictions including restrictions upon companys ability incur additional debt liens guarantee obligations merge consolidate persons make acquisitions sell assets make dividends purchases stock subordinated debt make investments loans advances changes debt instruments organizational documents obligations new senior credit facility guaranteed companys subsidiaries secured companys assets including companys accounts receivable inventory equipment september 30 2002 result retiring certain longterm debt qsi approximately 620 million outstanding new senior credit facility revolver 280 million outstanding letters credit independent auditors report board directors stockholders key energy services inc audited accompanying consolidated balance sheets key energy services inc subsidiaries june 30 2002 2001 related consolidated statements operations comprehensive income cash flows stockholders equity years threeyear period ended june 30 2002 connection audits consolidated financial statements also audited financial statement schedule listed index item 15 consolidated financial statements financial statement schedule responsibility companys management responsibility express opinion consolidated financial statements financial statement schedule based audits conducted audits accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects consolidated financial position key energy services inc subsidiaries june 30 2002 2001 results operations cash flows years threeyear period ended june 30 2002 conformity accounting principles generally accepted united states america also opinion related financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein discussed note 1 consolidated financial statements company changed method accounting goodwill intangible assets 2002 discussed note 6 consolidated financial statements company changed method accounting derivative instruments hedging activities 2001 kpmg llp dallas texas august 16 2002 item 9item 8 financial statements supplementary data key energy services inc subsidiaries index consolidated financial statements page report independent registered public accounting firm report independent registered public accounting firm internal control financial reporting consolidated balance sheets consolidated statements operations consolidated statements comprehensive income loss consolidated statements cash flows consolidated statements stockholders’ equity notes consolidated financial statements index financial statements report independent registered public accounting firm board directors stockholders key energy services inc audited accompanying consolidated balance sheets key energy services inc maryland corporation subsidiaries december 31 2011 2010 related consolidated statements operations comprehensive income loss stockholders’ equity cash flows three years period ended december 31 2011 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position key energy services inc subsidiaries december 31 2011 2010 results operations cash flows three years period ended december 31 2011 conformity accounting principles generally accepted united states america also audited accordance standards public company accounting oversight board united states key energy services inc subsidiaries’ internal control financial reporting december 31 2011 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso report dated february 29 2012 expressed unqualified opinion effectiveness internal control financial reporting grant thornton llp houston texas february 29 2012 index financial statements report independent registered public accounting firm board directors stockholders key energy services inc audited key energy services inc maryland corporation subsidiaries’ internal control financial reporting december 31 2011 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso key energy services inc subsidiaries’ management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting management’s report appearing item 9a responsibility express opinion key energy services inc subsidiaries’ internal control financial reporting based audit opinion key energy services inc subsidiaries internal control financial reporting include internal control financial reporting edge oilfield services llc summit oilfield services llc collectively “acquired companies” wholly owned subsidiaries whose combined financial statements reflect total assets revenues constituting fourteen three percent respectively related consolidated financial statement amounts year ended december 31 2011 indicated management’s report acquired companies acquired 2011 therefore management’s assertion effectiveness key energy services inc subsidiaries internal control financial reporting excluded internal control financial reporting acquired companies conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion key energy services inc subsidiaries maintained material respects effective internal control financial reporting december 31 2011 based criteria established internal control integrated framework issued coso also audited accordance standards public company accounting oversight board united states consolidated balance sheets statements operations comprehensive income loss stockholders’ equity cash flows key energy services inc subsidiaries report dated february 29 2012 expressed unqualified opinion consolidated financial statements grant thornton llp houston texas february 29 2012 index financial statements key energy services inc subsidiaries consolidated balance sheets see accompanying notes integral part consolidated financial statements index financial statements key energy services inc subsidiaries consolidated statements operations see accompanying notes integral part consolidated financial statements index financial statements key energy services inc subsidiaries consolidated statements comprehensive income loss see accompanying notes integral part consolidated financial statements index financial statements key energy services inc subsidiaries consolidated statements cash flows see accompanying notes integral part consolidated financial statements index financial statements key energy services inc subsidiaries consolidated statements stockholders’ equity see accompanying notes integral part consolidated financial statements index financial statements key energy services inc subsidiaries notes consolidated financial statements note 1 organization summary significant accounting policies key energy services inc wholly owned subsidiaries controlled subsidiaries collectively “key” “company” “we” “us” “our” provide full range well services major oil companies foreign national oil companies independent oil natural gas production companies services include rigbased coiled tubingbased well maintenance workover services well completion recompletion services fluid management services fishing rental services ancillary oilfield services additionally certain rigs capable specialty drilling applications operate major oil natural gas producing regions continental united states operations mexico colombia middle east russia argentina addition technology development control systems business based canada basis presentation consolidated financial statements included annual report form 10k present financial position results operations cash flows periods presented accordance generally accepted accounting principles united states “gaap” preparation consolidated financial statements requires us develop estimates make assumptions affect financial position results operations cash flows estimates also impact nature extent disclosure contingent liabilities among things use estimates analyze assets possible impairment ii determine depreciable lives assets iii assess future tax exposure realization deferred tax assets iv determine amounts accrue contingencies v value tangible intangible assets vi assess workers’ compensation vehicular liability selfinsured risk accruals insurance reserves vii provide allowances uncollectible accounts receivable viii value asset retirement obligations ix value equitybased compensation review significant estimates recurring basis record effect necessary adjustments prior publication financial statements adjustments made respect use estimates relate improved information previously available limitations inherent process actual results may differ materially estimates believe estimates reasonable certain reclassifications made prior period amounts conform current period financial statement classifications revised reportable business segments effective first quarter 2011 connection revision restated corresponding items segment information periods presented new operating segments us international revised segments reflect changes management’s resource allocation performance assessment making decisions regarding company fluid management services fishing rental services intervention services domestic rig services businesses aggregated within us segment international rig services business canadian technology development group aggregated within international segment changes reflect current operating focus compliance accounting standards codification “asc” 280 segment reporting “asc 280” presentation changes impact consolidated net income earnings per share total current assets total assets total stockholders’ equity evaluated events occurring balance sheet date included annual report form 10k possible disclosure subsequent event management monitored subsequent events date financial statements issued subsequent events identified management required disclosure described “note 26 subsequent events” financial statements principles consolidation within consolidated financial statements include accounts majorityowned controlled subsidiaries eliminate intercompany accounts transactions index financial statements key energy services inc subsidiaries notes consolidated financial statements continued interest entity significant control influence account interest using cost method interest entity exert significant influence control account interest using equity method apply asc 81010 consolidation variable interest entities revised december 2009 improvements financial reporting enterprises involved variable interest entities “asu 200917” determining whether consolidate variable interest entity “vie” asc 81010 requires reporting entity power direct activities vie significantly impacts entity’s economic performance obligation absorb losses entity ii right receive benefits entity reporting entity characteristics required consolidate vie acquisitions time acquire businesses assets consistent longterm growth strategy results operations acquisitions included financial statements beginning date acquisition accounted using acquisition method business combinations whether partial full stages acquirer records 100 assets liabilities acquired business including goodwill fair values including contingent consideration final valuations assets liabilities obtained recorded soon practicable later one year date acquisition revenue recognition recognize revenue following criteria met evidence arrangement exists ii delivery occurred services rendered iii price customer fixed determinable iv collectability reasonably assured • evidence arrangement exists final understanding us customer occurred evidenced completed customer purchase order field ticket supplier contract master service agreement • delivery occurred services rendered completed requirements pursuant terms arrangement evidenced field ticket service log • price customer fixed determinable amount required paid agreed upon evidence price fixed determinable evidenced contractual terms price book completed customer purchase order field ticket • collectability reasonably assured screen customers provide goods services customers according determined credit terms granted accordance credit policy present revenues net sales taxes collected us customers required remitted local state governmental taxing authorities review contracts multiple element revenue arrangements deliverables separated units accounting assigned fair value standalone value customer objective reliable evidence fair value delivery undelivered items substantially controlled us believe negotiated prices deliverables services contracts representative fair value since acceptance nonacceptance element contract affect elements cash equivalents consider shortterm investments original maturity less three months cash equivalents december 31 2011 entered compensating balance arrangements obligations amended 2011 credit facility defined syndicate banks index financial statements key energy services inc subsidiaries notes consolidated financial statements continued jpmorgan chase bank na administrative agent secured assets including assets held subsidiaries includes cash equivalents restrict investment cash financial institutions high credit standing limit amount credit exposure one financial institution maintain cash bank deposit brokerage accounts exceed federally insured limits december 31 2011 accounts guaranteed federal deposit insurance corporation “fdic” 250000 substantially accounts held deposits excess fdic limits cash equivalents held russian middle east subsidiaries subject noncontrolling interest cannot repatriated absent amounts believe cash held foreign subsidiaries could repatriated general corporate use without material withholdings time normal course business connection operations ongoing legal matters required place certain amounts cash deposit accounts restrictions limit ability withdraw funds certain cash accounts zerobalance controlled disbursement accounts right offset cash balances present outstanding checks written zerobalance accounts component accounts payable accompanying consolidated balance sheets accounts receivable allowance doubtful accounts establish provisions losses accounts receivable determine possibility collect part outstanding balances regularly review accounts 150 days past due invoice date collectability establish adjust allowance necessary using specific identification method exhaust collection efforts determine balance never collected write accounts receivable associated provision uncollectible accounts time entitled proceeds insurance policies amounts reserved selfinsurance liability present insurance receivables gross balance sheet component assets separate corresponding liability concentration credit risk significant customers include major oil natural gas production companies independent oil natural gas production companies foreign national oil natural gas production companies perform ongoing credit evaluations customers usually require material collateral maintain reserves potential credit losses necessary results operations financial position considered light fluctuations demand experienced oilfield service companies changes oil gas producers’ expenditures budgets occur fluctuations impact results operations financial position supply demand factors directly affect utilization hours primary determinants net cash provided operating activities years ended december 31 2011 2010 single customer accounted 10 consolidated revenues year ended december 31 2009 mexican national oil company petróleos mexicanos “pemex” accounted approximately 11 consolidated revenues customer accounted 10 consolidated revenues year ended december 31 2009 receivables outstanding pemex approximately 10 total accounts receivable december 31 2011 single customer accounted 10 total accounts receivable december 31 2010 pemex accounted approximately 25 total accounts receivable december 31 2009 customers accounted 10 total accounts receivable december 31 2011 2009 index financial statements key energy services inc subsidiaries notes consolidated financial statements continued inventories consist primarily equipment parts spares use operations supplies held consumption valued lower average cost market property equipment property equipment carried cost less accumulated depreciation provided assets estimated depreciable lives assets using straightline method depreciation expense years ended december 31 2011 2010 2009 1484 million 1258 million 1353 million respectively depreciate operational assets depreciable lives salvage value fair value higher assets’ value scrap salvage value approximates 10 operational asset’s acquisition cost operational asset stacked taken service review physical condition depreciable life ultimate salvage value determine asset longer operable whether remaining depreciable life salvage value adjusted scrap asset accelerate depreciation asset salvage value dispose asset gain loss recognized december 31 2011 estimated useful lives asset classes follows lease certain operating assets capital lease obligations whose terms run 55 60 months assets depreciated estimated useful lives term capital lease obligation whichever shorter longlived asset group tested recoverability whenever events changes circumstances indicate carrying amount may recoverable purposes testing impairment group longlived assets along lines business based services provided lowest level identifiable cash flows largely independent cash flows assets liabilities would record impairment charge reducing net carrying value estimated fair value asset group’s estimated future cash flows less net carrying value events changes circumstance cause us evaluate fixed assets recoverability possible impairment may include changes market conditions adverse movements prices oil natural gas changes asset group expected future life intended use physical condition could reduce fair value certain property equipment development future cash flows determination fair value asset group involves significant judgment estimates discussed “note 7 property equipment” fourth quarter 2011 identified triggering event required us test longlived assets argentina potential impairment based results test determined assets argentina impaired identify triggering events record asset impairments 2010 third quarter 2009 identified triggering event required us test longlived assets potential impairment result tests determined equipment pressure pumping operations impaired see “note 7 property equipment” discussion index financial statements key energy services inc subsidiaries notes consolidated financial statements continued asset retirement obligations recognize liability fair value legal obligations associated retirement tangible longlived assets capitalize equal amount cost asset depreciate additional cost estimated useful life assets obligations perform asset retirement activities unconditional despite uncertainties may exist surrounding individual retirement activity accordingly recognize liability fair value conditional asset retirement obligation fair value reasonably estimated determining fair value examine inputs believe market participant would use transfer liability probabilityweight potential costs thirdparty would charge adjust cost inflation estimated life asset discount cost using credit adjusted risk free rate significant judgment involved estimating future cash flows associated obligations well ultimate timing cash flows estimates amount timing cash flows change changes may material impact results operations see “note 10 asset retirement obligations” deposits due capacity constraints equipment manufacturers required make advanced payments certain oilfield service equipment items used normal course business december 31 2011 deposits totaled 437 million consisted mostly payments made related high demand longlead time items us mexico operations well equipment deposits related recent acquisition edge oilfield services llc summit oilfield services llc collectively “edge” december 31 2010 deposits totaled 15 million consisted escrow workers’ compensation insurance security deposits leases capitalized interest capitalized average amount accumulated expenditures major capital projects construction using effective interest rate based related debt underlying assets placed service capitalized interest added cost assets amortized depreciation expense useful life assets included depreciation amortization line accompanying consolidated statements operations deferred financing costs deferred financing costs associated longterm debt carried cost amortized interest expense using effective interest method life related debt instrument related debt instrument retired remaining unamortized costs included determination gain loss extinguishment debt record gains losses extinguishment debt part continuing operations see “note 15 longterm debt” discussion goodwill intangible assets goodwill results business combinations represents excess acquisition consideration fair value net assets acquired goodwill intangible assets subject amortization tested impairment annually frequently events changes circumstances indicate asset might impaired fourth quarter 2011 adopted provisions asu 201108 intangibles goodwill topic 350 testing goodwill impairment test impairment indefinitelived intangible assets allows us first assess qualitative factors determine whether “more likely not” fair value reporting unit less carrying amount basis determining whether necessary perform twostep goodwill impairment test qualitative analysis shows “more likely not” fair value reporting unit less carrying amount perform twostep goodwill impairment index financial statements key energy services inc subsidiaries notes consolidated financial statements continued test first step test fair value calculated reporting units fair value compared carrying value reporting unit including reporting unit’s goodwill fair value reporting unit exceeds carrying value impairment second step test performed carrying value exceeds fair value reporting unit second step test required second step test compares implied fair value reporting unit’s goodwill carrying value implied fair value reporting unit’s goodwill determined manner amount goodwill recognized business combination purchase price equal fair value reporting unit implied fair value reporting unit’s goodwill excess carrying value impairment recorded carrying value excess implied fair value impairment equal excess recorded assist management preparation analysis valuation reporting units utilize services thirdparty valuation consultant ultimate conclusions valuation techniques remain sole responsibility determination fair value used test heavily impacted market prices equity debt securities well assumptions estimates future activity levels profitability cash flows conduct annual impairment test december 31 year annual test completed december 31 2011 impairment goodwill indicated see “note 8 goodwill intangible assets” discussion internaluse software capitalize costs incurred application development stage internaluse software amortize costs software’s estimated useful life generally five seven years costs incurred related selection maintenance internaluse software expensed incurred litigation estimating liabilities related litigation take account available facts circumstances order determine whether loss probable reasonably estimable various suits claims arising ordinary course business pending us conduct business throughout continental united states may subject jury verdicts arbitrations result outcomes favor plaintiffs also exposed various claims abroad continually assess contingent liabilities including potential litigation liabilities well adequacy accruals need disclosure items establish provision contingent liability probable liability incurred amount reasonably estimable see “note 16 commitments contingencies” environmental operations routinely involve storage handling transport disposal bulk waste materials contain oil contaminants regulated substances operations subject various federal state local laws regulations intended protect environment environmental expenditures expensed capitalized depending future economic benefit expenditures relate existing condition caused past operations future economic benefits expensed record liabilities undiscounted basis remediation efforts probable costs conduct remediation efforts reasonably estimated litigation reserves reflect application insurance coverage environmental reserves reflect management’s assessment insurance coverage may apply matters issue see “note 16 commitments contingencies” index financial statements key energy services inc subsidiaries notes consolidated financial statements continued selfinsurance largely selfinsured physical damage equipment automobiles well workers’ compensation claims accruals maintain consolidated balance sheet relate deductibles selfinsured retentions estimate use historical claims data trend analysis assist management liability amount selfinsurance reserves utilize services third party actuary actual outcome claim could differ significantly estimated amounts adjust loss estimates calculation accruals based upon actual claim settlements reported claims see “note 16 commitments contingencies” income taxes account deferred income taxes using asset liability method provide income taxes significant temporary differences management determines current tax liability well taxes incurred result current operations deferred future periods current taxes payable represent liability related income tax returns current year net deferred tax expense benefit represents change balance deferred tax assets liabilities reported consolidated balance sheets management estimates changes deferred tax assets liabilities using basis assets liabilities financial reporting purposes enacted rates management estimates effect differences reverse management makes certain assumptions timing temporary tax differences differing treatments certain items tax accounting purposes whether differences permanent final determination tax liability involves interpretation local tax laws tax treaties related authorities jurisdiction well significant use estimates assumptions regarding scope future operations results achieved timing nature income earned expenditures incurred establish valuation allowances reduce deferred tax assets determine likely eg likelihood 50 portion deferred tax assets realized future periods assess likelihood use estimates judgment regarding future taxable income well jurisdiction taxable income generated determine whether valuation allowance required evidence include current financial position results operations actual forecasted results reversal deferred tax liabilities tax planning strategies well current forecasted business economics industry additionally record uncertain tax positions net recognizable amount based amount management deems likely sustained upon ultimate settlement tax authorities domestic international tax jurisdictions operate see “note 14 income taxes” discussion accounting income taxes changes valuation allowance components tax rate reconciliation realization loss carryforwards earnings per share basic earnings per common share determined dividing net earnings applicable common stock weighted average number common shares actually outstanding period diluted earnings per common share based increased number shares would outstanding assuming conversion dilutive outstanding convertible securities using treasury stock “as converted” methods see “note 9 earnings per share” sharebased compensation past issued stock options shares restricted common stock restricted stock units stock appreciation rights “sars” phantom shares performance units employees part employees’ compensation retention tool options restricted shares sars calculate fair value awards grant date amortize fair value compensation expense ratably vesting period award net estimated actual forfeitures fair value stock option sar awards index financial statements key energy services inc subsidiaries notes consolidated financial statements continued estimated using blackscholes fair value model valuation stock options sars requires us estimate expected term award estimated using simplified method sufficient historical exercise information past legal restrictions exercise stock options additionally valuation stock option sars awards also dependent historical stock price volatility calculate using lookback period equivalent expected term award riskfree interest rate estimate future forfeitures grantdate fair value restricted stock awards determined using stock price grant date phantom shares performance units treated “liability” awards carried fair value balance sheet date changes fair value recorded component compensation expense offsetting liability consolidated balance sheet record sharebased compensation component general administrative direct operating expense applicable individual see “note 20 sharebased compensation” foreign currency gains losses international locations argentina mexico russia canada local currency functional currency assets liabilities translated rates exchange balance sheet date income expense items translated average rates exchange period resulting gains losses arising translation accounts functional currency us dollar included separate component stockholders’ equity comprehensive income partial complete sale liquidation net investment foreign entity see “note 17 accumulated comprehensive loss” time foreign subsidiaries may enter transactions denominated currencies functional currency transactions initially recorded functional currency subsidiary based applicable exchange rate effect date transaction end month transactions remeasured equivalent amount functional currency based applicable exchange rates effect time adjustment required remeasure transaction equivalent amount functional currency end month recorded income loss foreign subsidiary component income net comprehensive income display comprehensive income loss components financial statements classify items comprehensive income nature financial statements display accumulated balance comprehensive income separately stockholders’ equity leases lease real property equipment various leasing arrangements enter leasing arrangement analyze terms arrangement determine whether lease accounted operating lease capital lease periodically incur costs improve assets lease arrangements value leasehold improvements exceeds threshold capitalization record improvement component property equipment amortize improvement useful life improvement lease term whichever shorter certain operating lease agreements structured include scheduled specified rent increases term lease agreement increases may result inducement “rent holiday” conveyed us early lease included reflect anticipated effects inflation recognize scheduled specified rent increases straightline basis term lease agreement addition certain operating lease agreements contain incentives induce us enter lease agreement upfront cash payments us payment lessor costs moving expenses assumption lessor preexisting lease agreements third parties payments made us behalf index financial statements key energy services inc subsidiaries notes consolidated financial statements continued represent incentives consider reduction rent expense recognized straightline basis term lease agreement new accounting standards adopted report asu 200913 october 2009 fasb issued asu 200913 revenue recognition topic 605 multipledeliverable revenue arrangements consensus fasb emerging issues task force “asu 200913” asu 200913 addresses accounting multipledeliverable arrangements products services accounted separately rather combined unit addresses separate deliverables measure allocate arrangement consideration one units accounting result asu 200913 multipledeliverable arrangements separated circumstances prior guidance asu 200913 establishes selling price hierarchy determining selling price deliverable selling price based vendorspecific objective evidence “vsoe” available thirdparty evidence vsoe available estimated selling price neither vsoe thirdparty evidence available asu 200913 also requires entity determine best estimate selling price manner consistent used determine selling price deliverable standalone basis increases disclosure requirements related entity’s multipledeliverable revenue arrangements asu 200913 must prospectively applied revenue arrangements entered materially modified fiscal years beginning june 15 2010 entities may elect required adopt amendments retrospectively periods presented adopted provisions asu 200913 january 1 2011 adoption standard material impact financial position results operations cash flows asu 200914 october 2009 fasb issued asu 200914 software topic 985 certain revenue arrangements include software elements consensus fasb emerging issues task force “asu 200914” asu 200914 issued address concerns relating accounting revenue arrangements contain tangible products software “more incidental” product whole asu 200914 changes accounting model revenue arrangements include tangible products software elements exclude software components essential tangible products’ core functionality addition asu 200914 also requires hardware components tangible product containing software components always excluded software revenue recognition guidance provides guidance determine software relating tangible products considered essential tangible products’ functionality excluded scope software revenue recognition guidance asu 200914 also provides guidance allocate arrangement consideration deliverables arrangement contains tangible products software essential product’s functionality asu 200914 issued concurrently asu 200913 also requires entities provide disclosures required asu 200913 included within scope asu 200914 asu 200914 effective prospectively revenue arrangements entered materially modified fiscal years beginning june 15 2010 entities may also elect required adopt asu 200914 retrospectively prior periods must adopt asu 200914 period using transition methods uses adopt asu 200913 adopted provisions asu 200914 january 1 2011 adoption standard material impact financial position results operations cash flows asu 201013 april 2010 fasb issued asu 201013 compensation stock compensation topic 718 effect denominating exercise price sharebased payment award currency market underlying equity security trades asu codifies consensus reached eitf issue 09j “effect denominating exercise price sharebased payment award currency market underlying equity security trades” amendments codification clarify employee sharebased payment award exercise price denominated currency market substantial portion entity’s equity shares trades considered contain condition market performance service condition therefore entity would classify award liability otherwise qualifies equity asu 201013 effective fiscal years beginning december 15 index financial statements key energy services inc subsidiaries notes consolidated financial statements continued 2010 amendments update applied recording cumulativeeffect adjustment opening balance retained earnings cumulativeeffect adjustment calculated awards outstanding beginning fiscal year amendments initially applied amendments applied consistently since inception award cumulativeeffect adjustment presented separately adopted provisions asu 201013 january 1 2011 adoption standard material impact financial position results operations cash flows asu 201028 december 2010 fasb issued asu 201028 intangibles goodwill topic 350 perform step 2 goodwill impairment test reporting units zero negative carrying amounts asu reflects decision reached eitf issue 10a amendments asu modify step 1 goodwill impairment test reporting units zero negative carrying amounts reporting units entity required perform step 2 goodwill impairment test likely goodwill impairment exists determining whether likely goodwill impairment exists entity consider whether adverse qualitative factors indicating impairment may exist qualitative factors consistent existing guidance examples require goodwill reporting unit tested impairment annual tests event occurs circumstances change would likely reduce fair value reporting unit carrying amount public entities amendments asu effective fiscal years interim periods within years beginning december 15 2010 adopted provisions asu 201028 january 1 2011 adoption standard material impact financial position results operations cash flows asu 201029 december 2010 fasb issued asu 201029 business combinations topic 805 disclosure supplementary pro forma information business combinations asu reflects decision reached eitf issue 10g amendments asu affect public entity defined topic 805 business combinations enters business combinations material individual aggregate basis amendments asu specify public entity presents comparative financial statements entity disclose revenue earnings combined entity though business combinations occurred current year occurred beginning comparable prior annual reporting period amendments also expand supplemental pro forma disclosures include description nature amount material nonrecurring pro forma adjustments directly attributable business combination included reported pro forma revenue earnings asu 201029 effective prospectively business combinations acquisition date beginning first annual reporting period beginning december 15 2010 adopted provisions asu 201029 january 1 2011 adoption standard required us modify expand disclosures related 2011 acquisition material impact financial position results operations cash flows asu 201105 june 2011 fasb issued asu 201105 comprehensive income topic 220 presentation comprehensive income amendments asu allow entity option present total comprehensive income components net income components comprehensive income either single continuous statement comprehensive income two separate consecutive statements choices entity required present component net income along total net income component comprehensive income along total comprehensive income total amount comprehensive income asu eliminates option present components comprehensive income part statement changes stockholders’ equity asu 201105 applied retrospectively interim annual reporting periods beginning december 15 2011 early adoption permitted early adopted provisions asu 201105 fourth quarter 2011 adoption standard material impact financial position results operations cash flows asu 201112 december 2011 fasb issued asu 201112 deferral effective date amendment presentation reclassifications items accumulated comprehensive income topic 220 presentation comprehensive income asu defers guidance whether require entities present reclassification adjustments accumulated comprehensive income component index financial statements key energy services inc subsidiaries notes consolidated financial statements continued statement net income presented statement comprehensive income presented interim annual financial statements asu 201112 reinstated requirements presentation reclassifications place prior issuance asu 201105 change effective date asu 201105 asu 201112 applied consistently asu 201105 accordingly asu applied retrospectively interim annual reporting periods beginning december 15 2011 early adoption permitted early adopted provisions asu 201112 fourth quarter 2011 adoption standard material impact financial position results operations cash flows asu 201108 september 2011 fasb issued asu 201108 intangibles goodwill topic 350 testing goodwill impairment asu intended simplify entities public nonpublic test goodwill impairment asu 201108 permits entity first assess qualitative factors determine whether “more likely not” fair value reporting unit less carrying amount basis determining whether necessary perform twostep goodwill impairment test described topic 350 intangibles goodwill asu 201108 effective annual interim goodwill impairment tests performed fiscal years beginning december 15 2011 early adoption permitted adopted provisions asu 201108 fourth quarter 2011 adoption standard material impact financial position results operations cash flows accounting standards yet adopted report asu 201104 may 2011 fasb issued asu 201104 fair value measurement topic 820 amendments achieve common fair value measurement disclosure requirements us gaap ifrs asu represents converged guidance fasb iasb measuring fair value disclosing information fair value measurements amendments asu clarify board’s intent application existing fair value measurement disclosure requirements changes particular principles requirements measuring fair value disclosing information fair value measurements asu 201104 effective prospectively interim annual reporting periods beginning december 15 2011 adopted provisions asu 201104 january 1 2012 adoption standard material impact financial position results operations cash flows note 2 acquisitions 2011 acquisitions edge oilfield services llc summit oilfield services llc collectively “edge” august 5 2011 completed acquisition edge accounted acquisition business combination results operations edge included consolidated financial statements acquisition date index financial statements key energy services inc subsidiaries notes consolidated financial statements continued total consideration acquisition approximately 3059 million consisting approximately 75 million shares common stock approximately 1879 million cash included 263 million reimburse edge growth capital expenditures incurred march 1 2011 date closing net working capital adjustments 18 million edge primarily rents frac stack equipment used support hydraulic fracturing operations associated flowback frac fluids proppants oil natural gas also provides well testing services rental equipment pumps power swivels oilfield fishing services transaction complements existing fishing rental services business significantly increases fleet rental equipment acquisitiondate fair value consideration transferred totaled 3059 million consisted following thousands fair value 75 million common shares issued 1562 per share based closing price acquisition date august 5 2011 following table summarizes estimated fair values assets acquired liabilities assumed still process finalizing thirdparty valuations tangible intangible assets thus provisional measurements preliminary subject change valuations complete continue assess fair values assets acquired liabilities assumed 487 million acquired intangible assets 407 million preliminarily assigned customer relationships amortized value relationships realized using expected rates 122 292 121 74 39 25 16 10 07 02 2011 2021 addition 37 million acquired intangible assets assigned tradenames remaining 43 million acquired intangible assets assigned noncompete agreements amortized straightline basis 38 months noted fair value acquired identifiable intangible assets preliminary pending receipt final valuation assets index financial statements key energy services inc subsidiaries notes consolidated financial statements continued fair value gross contractual amount accounts receivable acquired august 5 2011 216 million expect receivables uncollectible goodwill acquired assigned fishing rental business part us reportable segment believe goodwill recognized attributable primarily acquired workforce expansion growing service line goodwill expected deductible income tax purposes fair value acquired goodwill preliminary pending receipt final valuation transaction costs related acquisition 36 million year ended december 31 2011 included general administrative expenses consolidated statements operations included consolidated statements operations year ended december 31 2011 related acquisition revenues 525 million operating income 147 million acquisition date december 31 2011 following represents pro forma consolidated income statement edge acquisition included consolidated results january 1 2010 years ended december 31 2011 2010 pro forma adjustments 1 depreciation amortization expense periods adjusted reflect additional expense would charged assuming fair value adjustments property equipment intangible assets applied january 1 2010 index financial statements key energy services inc subsidiaries notes consolidated financial statements continued 2 general administrative expenses years ended december 31 2011 2010 adjusted 36 million transaction costs removed 2011 included 2010 3 income tax expense benefit periods adjusted reflect applicable corporate tax edge acquired converted llc status january 1 2010 4 weighted average shares outstanding adjusted reflect issuance shares edge transaction occurred january 1 2010 unaudited pro forma results based assumptions deemed appropriate management prepared informational purposes necessarily indicative results acquisition occurred january 1 2010 years ended december 31 2011 2010 amounts calculated applying accounting policies adjusting results edge changes applied january 1 2010 together consequential tax effects equity energy company “eec” january 2011 acquired 10 saltwater disposal “swd” wells eec approximately 143 million swd wells located north dakota accounted purchase asset acquisition 2010 acquisitions enhanced oilfield technologies llc “eot” december 2010 acquired 100 equity interests eot privately held oilfield technology company cash payment 117 million performance earnout equal 8 adjusted revenue five years acquisition date estimated liability earnout agreement 28 million accounted acquisition business combination acquired business time acquisition continues developmental stage goodwill acquired 101 million assigned fishing rental services included us reportable segment acquired intangible asset 44 million assigned developed technology amortized straight line basis period 20 years finalized thirdparty valuations intangible assets fourth quarter 2011 acquisition accounting final five jab inc affiliates “5 jab” november 2010 acquired 13 rigs associated equipment 5 jab cash consideration approximately 146 million accounted acquisition business combination goodwill acquired assigned rigbased services included us reportable segment completed valuations property equipment intangible assets acquired second quarter 2011 acquisition accounting final ofs energy services llc “ofs” october 2010 acquired certain subsidiaries together associated assets owned ofs oilfield services company owned arclight capital partners llc total consideration acquisition 158 million shares common stock cash payment 759 million including final working capital adjustment 01 million accounted acquisition business combination results operations acquired businesses included consolidated financial statements since date acquisition finalized thirdparty valuations tangible intangible assets second quarter 2011 acquisition accounting final acquisitions also completed asset acquisition 2010 part business strategy june 2010 acquired five largediameter capable coiled tubing units associated equipment approximately 127 million cash express energy services privately held oilfield services company 2009 acquisitions geostream services group “geostream” september 1 2009 acquired additional 24 interest geostream 164 million second investment geostream pursuant agreement dated august 26 2008 amended second investment brought total investment geostream 50 index financial statements key energy services inc subsidiaries notes consolidated financial statements continued prior acquisition additional interest accounted ownership geostream equity method investment upon acquiring 50 interest also obtained majority representation geostream’s board directors controlling interest accounted acquisition business combination achieved stages results geostream included consolidated financial statements since acquisition date portion outside control forming noncontrolling interest acquisition date fair value consideration transferred totaled approximately 350 million consisted cash consideration second investment fair value previous equity interest acquisition date fair value previous equity interest approximately 183 million recognized loss 02 million result remeasuring prior equity interest geostream held business combination included line item “other income net” 2009 consolidated statements operations purchase price allocations 2009 acquisitions finalized 2010 without significant changes note 3 discontinued operations october 1 2010 completed sale pressure pumping wireline businesses pattersonuti energy “pattersonuti” management determined sell businesses aligned core business strategy well intervention international expansion periods presented report show results operations related businesses discontinued operations periods prior sale businesses sold pattersonuti reported part us segment sale businesses represented sale significant portion reporting unit requires reassessment goodwill however due previous impairment charges goodwill related segment remaining 2010 agreedupon purchase price businesses exceeded carrying value assets sold record writedown assets date became classified held sale carrying value assets sold 765 million september 30 2010 743 million december 31 2009 discontinued depreciation amortization pressure pumping wireline property equipment june 30 2010 classified held sale following table presents results discontinued operations businesses sold connection transaction index financial statements key energy services inc subsidiaries notes consolidated financial statements continued note 4 current accrued liabilities noncurrent liabilities table presents comparative detailed information current accrued liabilities december 31 2011 2010 table presents comparative detailed information noncurrent accrued liabilities december 31 2011 2010 note 5 income net table presents comparative detailed information income expense continuing operations years ended december 31 2011 2010 2009 index financial statements key energy services inc subsidiaries notes consolidated financial statements continued note 6 allowance doubtful accounts table presents rollforward allowance doubtful accounts years ended december 31 2011 2010 2009 note 7 property equipment property equipment consists following capitalize costs incurred application development stage internaluse software costs capitalized work progress time application put service years ended december 31 2011 2010 2009 capitalized costs amount 12 million 147 million 131 million respectively interest capitalized average amount accumulated expenditures major capital projects construction using effective interest rate based related debt underlying assets placed service capitalized interest years ended december 31 2011 2010 2009 17 million 35 million 40 million respectively index financial statements key energy services inc subsidiaries notes consolidated financial statements continued obligated various capital leases certain vehicles equipment expire various dates next two years carrying value assets acquired capital leases consists following depreciation assets held capital leases 28 million 32 million 35 million years ended december 31 2011 2010 2009 respectively included depreciation amortization expense accompanying consolidated statements operations fourth quarter 2011 largest customer argentina significantly reduced business us decline expected continue least first half 2012 determined event requiring impairment assessment longlived asset group within reporting unit based analysis expected undiscounted cash flows asset group exceeded carrying value indication impairment existed asset impairment charges years ended december 31 2011 2010 third quarter 2009 removed service retired portion us rig fleet associated support equipment resulting recording pretax asset retirement charge 659 million retired rigs order better align supply demand well servicing market activity remained low asset retirement charge included line item “asset retirements impairments” consolidated statements operations year ended december 31 2009 assets reported us segment also third quarter 2009 performed assessment fair value assets us segment assessment resulted recording pretax impairment charge 311 million third quarter 2009 asset impairment charge included line item “asset retirements impairments” consolidated statements operations year ended december 31 2009 index financial statements key energy services inc subsidiaries notes consolidated financial statements continued note 8 goodwill intangible assets changes carrying amount goodwill years ended december 31 2011 2010 follows components intangible assets december 31 2011 2010 follows index financial statements key energy services inc subsidiaries notes consolidated financial statements continued amortization expense intangible assets determinable lives follows intangible assets december 31 2011 124 million indefinitelived tradenames subject amortization weighted average remaining amortization periods expected amortization expense next five years definite lived intangible assets follows certain goodwill intangible assets denominated currencies us dollars values assets subject fluctuations associated changes exchange rates additionally certain assets also subject purchase accounting adjustments estimated fair values intangible assets obtained edge acquisition based preliminary information subject change final valuation obtained additions goodwill intangibles 2011 relate edge acquisition subject purchase accounting adjustments purchase accounting adjustments 2011 relate reduction fixed assets intangibles acquired ofs 2010 adjustments goodwill intangibles related eot 5 jab acquisitions believe impact purchase accounting adjustments material consolidated financial statements year ended december 31 2010 performed qualitative analysis goodwill impairment december 31 2011 based analysis rig services fluid management services intervention services fishing rental services canadian reporting unit triggering events would indicate “more likely not” fair value reporting units higher carrying amount however determined necessary perform first step goodwill impairment test russia argentine reporting units first step goodwill impairment test compared fair value reporting unit carrying amount including goodwill based results step 1 fair value argentine russian reporting units exceeded carrying value key assumption model revenue related reporting unit increase future years based growth pricing increases potential events could affect index financial statements key energy services inc subsidiaries notes consolidated financial statements continued assumption level development exploration production activity corresponding capital spending oil natural gas companies russia oil natural gas production costs government regulations conditions worldwide oil natural gas industry possible events could affect assumption ability acquire additional assets deployment assets region test concluded fair value russian reporting unit exceeded carrying value second step goodwill impairment test required fair value reporting units exceeded carrying values determined impairment goodwill associated reporting units existed december 31 2011 step two impairment test required upon completion 2010 assessment fair value rig services coiled tubing services fluid management services reporting units russian canadian reporting units substantially exceeded carrying values fair value reporting units substantially exceeded carrying values determined potential impairment goodwill associated reporting units existed december 31 2010 step two impairment test required 2009 identified triggering events required us test goodwill impairment third quarter 2009 upon completion 2009 assessment recorded pretax impairment charge 05 million us segment impairment charge included line item “asset retirements impairments” consolidated statements operations year ended december 31 2009 tested goodwill potential impairment 2009 annual testing date results test indicated none reporting units goodwill fair value substantially excess carrying value goodwill existed reporting units risk failing step one goodwill impairment test index financial statements key energy services inc subsidiaries notes consolidated financial statements continued note 9 earnings per share following table presents basic diluted earnings per share years ended december 31 2011 2010 2009 stock options warrants sars included computation diluted earnings per share using treasury stock method restricted stock awards legally considered issued outstanding granted included basic weighted average shares outstanding diluted earnings per share calculation years ended december 31 2011 2010 2009 excludes potential exercise 13 million 28 million 35 million stock options respectively effect would antidilutive 2011 options considered antidilutive exercise prices exceeded average price stock none sars antidilutive year ended december 31 2011 diluted earnings per share calculation years ended december 31 2010 2009 exclude potential exercise 04 million sars effects exercises earnings per share periods would antidilutive 2010 2009 options sars would antidilutive net loss continuing operations years index financial statements key energy services inc subsidiaries notes consolidated financial statements continued material changes share amounts subsequent balance sheet date would material impact earnings per share calculation year ended december 31 2011 however issued 05 million 03 million shares restricted stock january 16 2012 february 4 2012 respectively note 10 asset retirement obligations connection well servicing activities operate number swd facilities operations involve transportation handling disposal fluids swd facilities byproducts drilling process swd facilities used connection fluid hauling operations subject future costs associated retirement properties result incurred costs associated proper storage disposal materials annual amortization assets associated asset retirement obligations 06 million 05 million 05 million years ended december 31 2011 2010 2009 respectively summary changes asset retirement obligations follows thousands note 11 equity method investments iroc energy services corp april 2011 sold equity interest approximately 87 million shares iroc energy services corp “iroc” albertabased oilfield services company 120 million net fees recorded net gain sale 48 million including writeoff cumulative translation adjustment 11 million net tax second quarter 2011 proceeds received exceeded carrying value investment note 12 variable interest entities march 7 2010 entered agreement almansoori petroleum services llc “almansoori” form joint venture almansoori key energy services llc laws abu dhabi uae purpose joint venture engage conventional workover drilling services pressure pumping services coiled tubing services fishing rental tools services rig monitoring services pipe handling services fluids waste treatment handling services wireline services almansoori holds 51 interest joint venture hold 49 interest future capital contributions joint venture made equal terms equal amounts future share capital increases issued proportion initial share capital percentages paid almansoori key equal amounts also share profits losses index financial statements key energy services inc subsidiaries notes consolidated financial statements continued joint venture equal terms equal amounts almansoori however hold three five board directors seats controlling financial interest joint venture sufficient resources carry activities without financial support accordingly determined variable interest entity primary beneficiary consolidate entity financial statements years ended december 31 2011 2010 recognized 102 million 10 million revenue respectively 03 million net income 15 million net loss respectively associated joint venture also guaranteed performance joint venture sole services contract valued 20 million december 31 2011 2010 124 million 25 million assets respectively 134 million 40 million liabilities associated joint venture also creditors joint venture recourse us 20 million performance guarantee previously mentioned note 13 estimated fair value financial instruments following summary carrying amounts estimated fair values financial instruments december 31 2011 2010 cash equivalents accounts payable accrued liabilities carrying amounts approximate fair value short maturity instruments carrying value equal fair value instruments balance sheet date notes receivablerelated parties amounts reported relate notes receivable certain employees related relocation retention agreements certain trade accounts receivable affiliates carrying values items approximate fair values applicable balance sheet dates 675 senior notes due 2021 fair value 2021 notes based upon quoted market prices securities dates indicated carrying value notes december 31 2011 4750 million fair value 4726 million 995 carrying value 8375 senior notes due 2014 fair value 2014 notes based upon quoted market prices securities dates indicated carrying value notes december 31 2011 36 million fair value 37 million 10443 carrying value credit facility revolving loans variable interest rates fair values revolving loans borrowed amended 2011 credit facility approximate carrying values carrying fair values loans december 31 2011 2950 million index financial statements key energy services inc subsidiaries notes consolidated financial statements continued note 14 income taxes components income tax expense follows sources income loss continuing operations income taxes noncontrolling interest follows made federal income tax payments 532 million zero 01 million years ended december 31 2011 2010 2009 respectively made net state income tax payments 76 million 05 million 55 million years ended december 31 2011 2010 2009 respectively made net foreign tax payments 29 million 42 million 73 million years ended december 31 2011 2010 2009 respectively years ended december 31 2011 2010 2009 tax benefits expense allocated stockholders’ equity compensation expense income tax purposes excess amounts recognized financial reporting purposes 49 million 21 million 06 million respectively addition received federal income tax refund 262 million 2011 income tax expense differs amounts computed applying statutory federal rate follows index financial statements key energy services inc subsidiaries notes consolidated financial statements continued december 31 2011 2010 deferred tax assets liabilities consisted following 2011 2010 deferred tax liabilities decreased 07 million 01 million respectively adjustments accumulated comprehensive loss recording deferred income tax assets consider whether likely portion deferred income tax assets realized ultimate realization deferred income tax assets dependent upon generation future taxable income periods deferred income tax assets would deductible consider scheduled reversal deferred income tax liabilities projected future taxable income determination fully realize deferred income tax assets related federal net operating loss carryforwards valuation allowance due section 382 limitations would need generate future federal taxable income approximately 26 million next seven years 744 million next fifteen years certain exceptions noted believe considering available objective evidence positive negative historical prospective greater weight given historical evidence likely assets realized estimate december 31 2011 2010 2009 available 793 million 49 million 71 million respectively federal net operating loss carryforwards approximately 25 million net operating losses december 31 2011 subject 11 million annual section 382 limitation expire 2018 approximately 24 million net operating losses december 31 2011 subject 5000 annual section 382 limitation expire 2016 2018 due annual limitations sections 382 383 management believes able utilize available carryforwards prior ultimate expiration december 31 2011 2010 valuation allowance 08 million related deferred tax asset associated remaining federal net operating loss carryforwards expire utilization due section 382 limitations estimate december 31 2011 2010 2009 available approximately 733 million 377 million 642 million respectively state net operating loss carryforwards expire 2019 2031 deferred tax asset associated remaining state net operating loss carryforwards index financial statements key energy services inc subsidiaries notes consolidated financial statements continued december 31 2011 58 million management believes likely able utilize available carryforwards prior ultimate expiration estimate december 31 2011 2010 2009 available approximately 756 million 745 million 164 million respectively foreign net operating loss carryforwards expire 2014 2030 gross deferred tax asset associated foreign net operating loss carryforwards december 31 2011 233 million management believes likely able utilize net operating loss carryforwards prior ultimate expiration foreign jurisdictions exception argentina management believes likely portion net operating loss carryforwards argentina utilized prior ultimate expiration valuation allowance 21 million recorded year ended december 31 2010 provide us income taxes withholding taxes 2011 unremitted earnings mexico subsidiaries earnings considered permanently reinvested increasing demand services requires additional equipment working capital support business furthermore provide us income taxes unremitted earnings foreign subsidiaries 2011 prior years tax basis foreign subsidiaries exceeded book basis period file income tax returns united states federal jurisdiction various states foreign jurisdictions currently audit internal revenue service tax year ended december 31 2009 significant filings argentina mexico examined 2006 2008 respectively december 31 2011 2010 2009 18 million 22 million 32 million respectively unrecognized tax benefits recognized would impact effective tax rate accrued 06 million 08 million 11 million payment interest penalties december 31 2011 2010 2009 respectively believe reasonably possible 09 million currently remaining unrecognized tax positions individually insignificant may recognized end 2012 result lapse statute limitations settlement open audit recognized net tax benefit 05 million 2011 expirations statutes limitations following table presents activity 2011 2010 related liabilities uncertain tax positions thousands index financial statements key energy services inc subsidiaries notes consolidated financial statements continued tax legislative changes small business jobs act 2010 small business jobs act 2010 extended firstyear bonus depreciation deduction 50 adjusted basis qualified property acquired placed service 2010 increased deduction 100 adjusted basis qualified property acquired placed service september 8 2010 january 1 2012 estimated 2146 million qualifying additions 2011 resulting bonus tax depreciation 2146 million 1319 million qualifying additions 2010 resulting bonus tax depreciation 880 million american recovery reinvestment act 2009 american recovery reinvestment act 2009 extended firstyear bonus depreciation deduction 50 adjusted basis qualified property acquired placed service december 31 2008 january 1 2010 66 million qualifying additions 2009 resulting additional 2009 tax depreciation 33 million note 15 longterm debt components longterm debt follows 8375 senior notes due 2014 november 29 2007 issued 4250 million aggregate principal amount 8375 senior notes due 2014 “2014 notes” march 4 2011 repurchased 4213 million aggregate principal amount 2014 notes purchase price 1090 per 1000 principal amount march 15 2011 repurchased additional 01 million aggregate principal amount purchase price 1060 per 1000 principal amount connection repurchase 2014 notes incurred loss 443 million early extinguishment debt related premium paid tender payment related fees writeoff unamortized loan fees interest remaining 36 million aggregate principal amount 2014 notes outstanding payable june 1 december 1 year 675 senior notes due 2021 march 4 2011 issued 4750 million aggregate principal amount 675 senior notes due 2021 “2021 notes” net proceeds deducting underwriters’ fees offering expenses 4660 million used net proceeds repurchase 2014 notes described including accrued unpaid interest fees expenses capitalized 102 million financing costs associated issuance 2021 notes amortized term notes 2021 notes general unsecured senior obligations subordinate existing future secured indebtedness 2021 notes jointly severally guaranteed senior unsecured basis certain existing future domestic subsidiaries interest 2021 notes payable march 1 september 1 year beginning september 1 2011 2021 notes mature march 1 2021 index financial statements key energy services inc subsidiaries notes consolidated financial statements continued march 1 2016 2021 notes subject redemption time option whole part redemption prices expressed percentages principal amount redeemed plus accrued unpaid interest applicable redemption date redeemed twelvemonth period beginning march 1 years indicated time march 1 2014 may one occasions redeem 35 aggregate principal amount outstanding 2021 notes redemption price 106750 principal amount plus accrued unpaid interest redemption date net cash proceeds one equity offerings provided least 65 aggregate principal amount 2021 notes remains outstanding immediately redemption ii redemption shall occur within 180 days date closing equity offering addition time prior march 1 2016 may option redeem portion 2021 notes redemption price equal 100 principal amount plus premium respect 2021 notes plus accrued unpaid interest redemption date experience change control subject certain exceptions must give holders 2021 notes opportunity sell us 2021 notes whole part purchase price equal 101 aggregate principal amount plus accrued unpaid interest date purchase subject certain negative covenants indenture governing 2021 notes “indenture” indenture limits ability among things • incur additional indebtedness issue preferred equity interests • pay dividends make distributions repurchase redeem equity interests • make loans investments • enter sale leaseback transactions • sell transfer otherwise convey assets • create liens • enter transactions affiliates • enter agreements restricting subsidiaries’ ability pay dividends • designate future subsidiaries unrestricted subsidiaries • consolidate merge sell substantially applicable entities’ assets covenants subject certain exceptions qualifications contain crossdefault provisions relating covenants 2011 credit facility discussed substantially covenants terminate 2021 notes mature one two specified ratings agencies assigns 2021 notes investment grade rating future events default exist indenture december 31 2011 2021 notes investment grade covenants cease apply us result achieving investment grade rating restored even credit rating assigned 2021 notes later falls investment grade compliance covenants december 31 2011 index financial statements key energy services inc subsidiaries notes consolidated financial statements continued senior secured credit facility march 31 2011 simultaneously terminated without prepayment penalty 300 million credit agreement dated november 29 2007 amended mature later november 29 2012 entered new credit agreement “2011 credit facility” several lenders jpmorgan chase bank na administrative agent swing line lender bank america na syndication agent capital one na wells fargo bank na codocumentation agents 2011 credit facility consists revolving credit facility letter credit subfacility swing line facility mature later march 31 2016 connection termination previous credit agreement incurred loss 22 million early extinguishment debt related writeoff unamortized portion deferred financing costs july 27 2011 entered first amendment 2011 credit facility “amendment” several lenders jpmorgan chase bank na administrative agent bank america na syndication agent capital one na wells fargo bank na credit agricole corporate investment bank dnb bank asa codocumentation agents amendment effective july 27 2011 amends certain provisions 2011 credit facility among changes amendment increased total commitments lenders 2011 credit facility 4000 million 5500 million effected increase commitments certain existing lenders facility addition certain new lenders amendment also modifies 2011 credit facility increasing 5000 million 6500 million maximum aggregate amount commitments permitted 2011 credit facility pursuant option increase commitments lenders amended 2011 credit facility obligations thereunder secured substantially assets subsidiary guarantors guaranteed certain existing future domestic subsidiaries capitalized 49 million financing costs connection execution 2011 credit facility additional 14 million related amendment amortized term debt interest rate per annum applicable amended 2011 credit facility option adjusted libor plus applicable margin ii higher x jpmorgan’s prime rate federal funds rate plus 05 z onemonth adjusted libor plus 10 plus case applicable margin loans applicable margin libor loans ranges 225 300 basis points applicable margin loans ranges 125 200 basis points depending upon consolidated total leverage ratio defined 2011 credit facility unused commitment fees facility equal 050 amended 2011 credit facility contains certain financial covenants among things limit annual capital expenditures restrict ability repurchase shares require us maintain certain financial ratios financial ratios require • ratio consolidated funded indebtedness total capitalization greater percentages specified • senior secured leverage ratio senior secured funded debt trailing four quarters earnings interest taxes depreciation amortization calculated pursuant terms 2011 credit facility “ebitda” greater 200 100 index financial statements key energy services inc subsidiaries notes consolidated financial statements continued • maintain collateral coverage ratio aggregate book value collateral amount total commitments last day fiscal quarter least • maintain consolidated interest coverage ratio trailing four quarters ebitda interest expense least 300 100 • limit capital expenditures investments foreign subsidiaries 2500 million per fiscal year consolidated total leverage ratio exceeds 300 100 addition amended 2011 credit facility contains certain affirmative negative covenants including without limitation restrictions liens ii debt guarantees contingent obligations iii mergers consolidations iv sales transfers dispositions property assets v loans acquisitions joint ventures investments acquisitions permitted long giving pro forma effect thereto default event default exists 2011 credit facility pro forma consolidated total leverage ratio exceed 400 100 compliance financial covenants least 250 million availability 2011 credit facility vi dividends distributions redemptions repurchases equityholders vii making investments loans advances viii selling properties ix prepaying redeeming repurchasing subordinated contractually structurally debt x engaging transactions affiliates xi entering hedging arrangements xii entering sale leaseback transactions xiii granting negative pledges lenders xiv changes nature business xv amending organizational documents xvi changes accounting policies reporting practices foregoing cases certain exceptions compliance covenants december 31 2011 may prepay amended 2011 credit facility whole part time without premium penalty subject certain reimbursements lenders breakage redeployment costs december 31 2011 borrowings 2950 million revolving credit facility 643 million letters credit outstanding leaving 1907 million available borrowing capacity amended 2011 credit facility weighted average interest rate outstanding borrowings amended 2011 credit facility 278 year ended december 31 2011 longterm debt principal repayment interest expense presented schedule repayment requirements longterm debt next five years thereafter december 31 2011 index financial statements key energy services inc subsidiaries notes consolidated financial statements continued presented schedule estimated minimum lease payments capital lease obligations next five years thereafter december 31 2011 interest expense years ended december 31 2011 2010 2009 consisted following december 31 2011 2010 2009 weighted average interest rate variable rate debt 272 178 324 respectively deferred financing costs summary deferred financing costs including cost capitalized amortized written determination loss extinguishment debt years ended december 31 2011 2010 presented table thousands index financial statements key energy services inc subsidiaries notes consolidated financial statements continued note 16 commitments contingencies operating lease arrangements lease certain property equipment noncancelable operating leases expire various dates 2019 varying payment dates throughout month addition number leases scheduled expire 2012 2013 december 31 2011 future minimum lease payments noncancelable operating leases follows thousands also party significant number monthtomonth leases cancelable time operating lease expense 266 million 211 million 227 million years ended december 31 2011 2010 2009 respectively litigation various suits claims arising ordinary course business pending us conduct business throughout continental united states may subject jury verdicts arbitrations result outcomes favor plaintiffs also exposed various claims abroad continually assess contingent liabilities including potential litigation liabilities well adequacy accruals need disclosure items establish provision contingent liability probable liability incurred amount reasonably estimable december 31 2011 aggregate amount liabilities related litigation deemed probable reasonably estimable 11 million believe disposition matters result additional loss materially excess amounts recorded year ended december 31 2011 recorded net decrease reserves 27 million related settlement ongoing legal matters continued refinement liabilities recognized litigation deemed probable estimable liabilities related litigation matters deemed probable estimable december 31 2010 2009 38 million 27 million respectively patent settlement june 2011 agreed accept 55 million damages related settlement keyview® system patent infringement lawsuit paid full july 2011 recognized related legal fees expenses 14 million year ended december 31 2011 settlement amount recorded general administrative expenses consolidated statement operations resolution matter material effect results operations year ended december 31 2011 index financial statements key energy services inc subsidiaries notes consolidated financial statements continued shareholder derivative demand december 7 2011 received letter behalf arkansas public employees retirement systems “apers” stating apers key stockholder alleging certain officers one director breached fiduciary duties violated internal corporate policies unjustly enriched connection oversight administration compliance health safety labor motor vehicle similar laws rules regulations key subject letter demands board directors take action officers director remedy conduct alleged letter threatens apers commence shareholder derivative suit behalf key absent action board directors knowledge complaint filed connection letter board established special committee consisting independent members board review evaluate allegations made letter special committee engaged independent legal counsel assist review currently underway review completed special committee expected report findings board directors recommend whether suit filed action taken response allegations letter investigation ongoing management basis time believe material misstatements 2011 past financial statements grounds accrual probable penalties assessments tax audits routinely subject audits tax authorities past received material assessments tax auditors december 31 2011 2010 recorded reserves management feels appropriate future potential liabilities result prior audits believe fully reserved assessments ultimate amount settlements vary estimates selfinsurance reserves maintain reserves workers’ compensation vehicle liability balance sheet based judgment estimates using actuarial method based claims incurred estimate general liability claims casebycase basis maintain insurance policies workers’ compensation vehicular liability general liability claims insurance policies carry selfinsured retention limits deductibles per occurrence basis retention limits deductibles accounted accrual process workers’ compensation vehicular liability general liability claims december 31 2011 2010 recorded 629 million 603 million respectively selfinsurance reserves related workers’ compensation vehicular liabilities general liability claims partially offsetting liabilities approximately 170 million 154 million insurance receivables december 31 2011 2010 respectively feel liabilities recorded appropriate based known facts circumstances expect losses materially excess amounts already accrued existing claims environmental remediation liabilities environmental reserve matters including remediation efforts current locations relating previouslydisposed properties record liabilities remediation efforts probable costs conduct remediation efforts reasonably estimated december 31 2011 2010 recorded 40 million environmental remediation liabilities feel liabilities recorded appropriate based known facts circumstances expect losses materially excess amounts already accrued provide performance bonds provide financial surety assurances remediation maintenance swd properties comply environmental protection standards costs swd properties may mandatory comply applicable laws regulations future required divest cease operations optimization improve operations safety regulatory compliance index financial statements key energy services inc subsidiaries notes consolidated financial statements continued note 17 accumulated comprehensive loss components accumulated comprehensive loss follows thousands local currency functional currency operations argentina mexico canada russia equity investments canada cumulative translation gains losses resulting translating foreign subsidiary’s financial statements functional currency us dollars included comprehensive income accumulated stockholders’ equity partial complete sale liquidation net investment foreign entity table summarizes conversion ratios used translate financial statements cumulative currency translation gains losses net tax currency note 18 employee benefit plans maintain 401k plan part employee benefits package late first quarter 2009 management suspended 401k matching program part cost reduction efforts matching contributions made 2010 reinstated 401k matching program effective january 1 2011 match 100 employee contributions 4 employee’s salary vest immediately 401k plan subject maximums 9800 years ended december 31 2011 2009 matching contributions 88 million 17 million years ended december 31 2011 2009 respectively offer participants option purchase units common stock 401k plan fund note 19 stockholders’ equity common stock december 31 2011 2010 200000000 shares common stock authorized 010 par value per share 150733022 shares issued outstanding december 31 2011 141656426 shares issued outstanding december 31 2010 2011 2010 2009 dividends declared paid terms senior notes 2011 credit facility must meet certain financial covenants may pay dividends currently intend pay dividends tax withholding repurchase shares restricted common stock previously granted certain employees pursuant agreement individuals permitted sell shares back us order satisfy minimum income tax withholding requirements related vesting grants index financial statements key energy services inc subsidiaries notes consolidated financial statements continued repurchased total 383884 301837 71954 shares aggregate cost 57 million 31 million 05 million 2011 2010 2009 respectively represented fair market value shares based price stock dates purchase common stock warrants may 12 2009 connection settlement lawsuit issued two individuals warrants purchase 174000 shares common stock exercise price 456 per share december 31 2011 warrants exercised note 20 sharebased compensation 2009 incentive plan june 4 2009 stockholders approved 2009 equity cash incentive plan “2009 incentive plan” 2009 incentive plan administered board directors committee designated board directors “committee” board directors committee “administrator” power authority select participants defined 2009 incentive plan grant awards defined participants pursuant terms 2009 incentive plan 2009 incentive plan expires june 4 2019 subject adjustment total number shares common stock available grant awards 2009 incentive plan may exceed 4000000 shares however purposes limitation stock subject award canceled forfeited expires prior exercise realization become available issuance 2009 incentive plan subject adjustment participant granted one year period options purchase common stock andor stock appreciation rights respect 500000 shares common stock available distribution 2009 incentive plan come authorized unissued shares reacquire manner awards 2009 incentive plan granted fair market value date issuance awards may form stock options incentive stock options nonqualified stock options restricted stock restricted stock units performance compensation awards stock appreciation rights collectively “awards” awards may granted employees directors cases consultants individuals administrator determines reasonably expected become employees directors consultants following grant date award “participants” however incentive stock options may granted employees vesting periods may set board’s discretion generally set two four years awards directors generally subject vesting board directors time may amend terminate 2009 incentive plan however repricing stock options permitted unless approved stockholders except provided otherwise 2009 incentive plan amendment effective unless approved stockholders extent stockholder approval necessary satisfy applicable law securities exchange listing requirements december 31 2011 11 million remaining shares available 2009 incentive plan 2007 incentive plan december 6 2007 stockholders approved 2007 equity cash incentive plan “2007 incentive plan” 2007 incentive plan substantially similar 2009 incentive plan except certain differences related treatment awards retirement transferability awards death 2007 incentive plan expires december 6 2017 subject adjustment total number shares common stock available grant awards 2007 incentive plan may exceed 4000000 shares however purposes limitation index financial statements key energy services inc subsidiaries notes consolidated financial statements continued stock subject award canceled forfeited expires prior exercise realization become available issuance 2007 incentive plan board directors time may amend terminate 2007 incentive plan however except provided otherwise 2007 incentive plan amendment effective unless approved stockholders extent stockholder approval necessary satisfy applicable law securities exchange listing requirements december 31 2011 03 million remaining shares available 2007 incentive plan incentive plan january 13 1998 stockholders approved key energy group inc 1997 incentive plan amended “1997 incentive plan” 1997 incentive plan amendment restatement plans formerly known key energy group inc 1995 stock option plan key energy group inc 1995 outside directors stock option plan november 17 2007 1997 incentive plan terminated pursuant terms exercise price options granted 1997 incentive plan fair market value per share date options granted 1997 incentive plan shares common stock listed securities exchange fair market value determined using closing sales price immediate preceding business day reported securities exchange shares listed exchange includes period april 2005 october 2007 fair market value determined using published closing price common stock pink sheets business day immediately preceding date grant period 20002001 board directors granted 37 million stock options outside 1997 incentive plan none remained outstanding december 31 2011 37 million nonplan options addition include options granted 1997 incentive plan conformity certain terms 1997 incentive plan stock option awards stock option awards granted incentive plans maximum contractual term ten years date grant shares issuable upon exercise stock option issued authorized unissued shares common stock following tables summarize stock option activity certain options granted prior years outside 1997 incentive plan shares thousands index financial statements key energy services inc subsidiaries notes consolidated financial statements continued following tables summarize information stock options outstanding december 31 2011 certain options granted prior years outside 1997 incentive plan shares thousands index financial statements key energy services inc subsidiaries notes consolidated financial statements continued grant stock options years ended december 31 2011 2010 total fair value stock options granted year ended december 31 2009 less 01 million total fair value stock options vested year ended december 31 2011 less 01 million years ended december 31 2011 2010 2009 recognized less 01 million pretax expense related stock options recognized tax benefits less 01 million related stock options years ended december 31 2011 2010 2009 unvested stock option awards outstanding december 31 2011 expect recognize less 01 million compensation expense weighted average remaining vesting period approximately 09 years weighted average remaining contractual term stock option awards exercisable december 31 2011 48 years intrinsic value options exercised years ended december 31 2011 2010 2009 30 million 40 million 19 million respectively cash received exercise options year ended december 31 2011 80 million recognition associated tax benefits amount 09 million common stock awards total fair market value common stock awards granted years ended december 31 2011 2010 2009 184 million 179 million 88 million respectively following tables summarize information years ended december 31 2011 2010 2009 common share awards issued shares thousands index financial statements key energy services inc subsidiaries notes consolidated financial statements continued 1 includes 99999 109410 143100 shares common stock issued nonemployee directors vested immediately upon issuance 2011 2010 2009 respectively common stock grants vest immediately upon issuance record expense equal fair market value shares date grant common stock awards immediately vest recognize compensation expense ratably graded vesting period grant net estimated actual forfeitures years ended december 31 2011 2010 2009 recognized 156 million 106 million 60 million respectively pretax expense continuing operations associated common stock awards including common stock grants outside directors connection expense related common stock awards recognized year ended december 31 2011 recognized tax benefits 60 million tax benefits years ended december 31 2010 2009 41 million 20 million respectively unvested common stock awards outstanding december 31 2011 anticipate recognize 134 million pretax expense next 08 years performance units march 2010 issued total 06 million performance units certain employees officers performance units provide cash incentive award unit value determined reference common stock performance units measured based two performance periods one half performance units measured based performance period consisting first year grant date half measured based performance period consisting second year grant date end performance period 100 50 0 individual’s performance units period vest based relative placement total shareholder return within peer group consisting key five companies top third peer group 100 performance units vest middle third 50 vest bottom third performance units expire unvested payment made performance units vest given performance period award index financial statements key energy services inc subsidiaries notes consolidated financial statements continued holder paid cash amount equal vested percentage performance units multiplied closing price common stock last trading day performance period account performance units liabilitytype award settled cash december 31 2011 fair value outstanding performance units issued march 2010 28 million accreted compensation expense vesting terms awards unrecognized compensation cost related unvested performance units estimated 02 million expected recognized weightedaverage period 02 years december 31 2011 phantom share plan december 2006 announced implementation “phantom share plan” certain employees granted “phantom shares” phantom shares vest ratably fouryear period convey right grantee receive cash payment anniversary date grant equal fair market value phantom shares vesting date grantees permitted defer payment later date phantom shares “liability” type award account awards fair value recognize compensation expense related phantom shares based change fair value awards period percentage service requirement performed net estimated actual forfeitures offsetting liability recorded consolidated balance sheets recognized 03 million 11 million 19 million pretax compensation expense continuing operations associated phantom shares years ended december 31 2011 2010 2009 respectively december 31 2011 recorded current liabilities 06 million represented aggregate fair value phantom shares date recognized income tax benefits associated phantom shares 01 million 04 million 07 million 2011 2010 2009 respectively unvested phantom share awards outstanding december 31 2011 based market price common stock date expect recognize 01 million compensation expense weighted average remaining vesting period approximately 04 years 2011 cash payments related phantom shares totaled 07 million stock appreciation rights august 2007 issued approximately 587000 sars executive officers sar tenyear term date grant vesting outstanding sar awards accelerated fourth quarter 2008 upon exercise sar recipient receive amount equal difference exercise price fair market value share common stock date exercise multiplied number shares common stock sar exercised payments made shares common stock prior exercise sar entitle recipient receive shares common stock provide recipient voting stockholders’ rights account sars equity awards recognize compensation expense ratably vesting period sar based fair value date issuance net estimated actual forfeitures recognize expense associated awards 2011 2010 2009 december 31 2011 04 million sars remain unexercised index financial statements key energy services inc subsidiaries notes consolidated financial statements continued valuation assumptions stock options stock appreciation rights fair value stock option grant sar estimated date grant using blackscholes optionpricing model based following weightedaverage assumptions note 21 transactions related parties employee loans advances time made certain retention loans relocation loans employees executive officers retention loans forgiven various time periods long employee continues employment us relocation loans repaid upon employee selling prior residence december 31 2011 2010 loans aggregate totaled less 01 million transactions affiliates discussed “note 2 acquisitions” october 2010 acquired certain subsidiaries together associated assets ofs oilfield services company owned arclight capital partners llc time acquisition ofs conducted business companies owned former owner employee ofs subsidiary purchased subsequent acquisition continued provide services companies prices charged companies services rates equivalent prices charged customers us market december 31 2011 2010 receivables related parties totaled 02 million 10 million respectively revenues customers year ended december 31 2011 27 million revenues customers since date acquisition year ended december 31 2010 13 million provide services exploration production company owned one former employees owner business acquired prices charged company services rates average prices charged customers california market services provided december 31 2011 2010 receivables company totaled 05 million 02 million respectively revenues company totaled 52 million 43 million 34 million years ended december 31 2011 2010 2009 respectively board director relationships member board directors senior vice president general counsel chief administrative officer anadarko petroleum corporation “anadarko” one customers sales anadarko 372 million 494 million 136 million years ended december 31 2011 2010 2009 respectively receivables outstanding anadarko 51 million 49 million december 31 2011 2010 respectively transactions anadarko services made terms consistent customers former member board directors resigned may 2011 member managing director general partner indirect majority owner one customers sales customer 10 million 04 million years ended december 31 2011 2010 receivables outstanding customer less 01 million 03 million december 31 2011 2010 respectively transactions customer made terms consistent customers index financial statements key energy services inc subsidiaries notes consolidated financial statements continued member board directors serves united states advisory board alexander proudfoot practice management consulting group plc “proudfoot” provided consulting services us 2011 related general administrative cost restructuring initiative payments proudfoot 41 million year ended december 31 2011 payments made proudfoot years ended december 31 2010 2009 note 22 supplemental cash flow information cash paid interest includes cash payments interest longterm debt capital lease obligations commitment agency fees paid note 23 segment information revised reportable business segments first quarter 2011 revised operating segments us international also “functional support” segment associated managing reportable operating segments financial results years ended december 31 2010 2009 restated reflect change operating segments revised segments reflect changes management’s resource allocation performance assessment making decisions regarding business domestic rig services fluid management services fishing rental services intervention services aggregated within us reportable segment international rig services business canadian technology development group aggregated within international reportable segment changes reflect current operating focus compliance asc 280 aggregate services create reportable segments accordance asc 280 accounting policies segments described “note 1 organization summary significant accounting policies” evaluate performance operating segments based revenue income measures intersegment sales pricing based current market conditions following description segments us segment rig services rigbased services include completion newly drilled wells workover recompletion existing oil natural gas wells well maintenance plugging abandonment wells end useful lives also provide specialty drilling services oil natural gas producers certain larger rigs capable providing conventional horizontal drilling services rigs encompass various sizes capabilities allowing us service types wells depths 20000 feet many rigs outfitted proprietary keyview® technology captures reports well site operating data believe technology allows customers crews better monitor well site operations improves efficiency safety adds value services offer index financial statements key energy services inc subsidiaries notes consolidated financial statements continued completion recompletion services provided rigs prepare newly drilled well recently extended workover production completion process may involve selectively perforating well casing access production zones stimulating testing zones installing tubular downhole equipment typically provide well service rig may also provide equipment assist completion process completion process usually takes days several weeks depending nature completion workover services provide designed enhance production existing wells generally complex time consuming normal maintenance services workover services include deepening extending wellbores new formations drilling horizontal lateral wellbores sealing depleted production zones accessing previously bypassed production zones converting former production wells injection wells enhanced recovery operations conducting major subsurface repairs due equipment failures workover services may last days several weeks depending complexity workover maintenance services provide rig fleet generally required throughout life cycle oil natural gas well examples maintenance services include routine mechanical repairs pumps tubing equipment removing debris formation material wellbores pulling rods downhole equipment wellbores identify resolve production problems maintenance services generally take less 48 hours complete rig fleet also used process permanently shuttingin oil natural gas wells end productive lives plugging abandonment services generally require auxiliary equipment addition well servicing rig demand plugging abandonment services significantly impacted demand oil natural gas well operators required state regulations plug wells longer productive fluid management services provide fluid management services including oilfield fluid transportation produced water disposal services fleet heavy mediumduty trucks specific services offered include vacuum truck services fluid transportation services disposal services operators whose wells produce saltwater nonhydrocarbon fluids also supply frac tanks used temporary storage fluids associated fluid hauling operations addition provide equipment trucks used move large pieces equipment one well site next operate fleet hot oilers capable pumping heated fluids used clear soluble restrictions wellbore fluid hauling trucks utilized connection drilling completions workover maintenance activities tend use large amounts various fluids connection activities well site transport fresh brine water well site provide temporary storage disposal produced saltwater drilling workover fluids removed well site transported disposal saltwater disposal well owned us third party intervention services intervention services line business includes coiled tubing pumping nitrogen service offerings coiled tubing services involve use continuous metal pipe spooled onto large reel deployed oil natural gas wells perform various applications wellbore cleanouts nitrogen jet lifts throughtubing fishing formation stimulations utilizing acid chemical treatments coiled tubing also used number horizontal well applications milling temporary isolation plugs separate frac zones various pre post hydraulic fracturing well preparation services index financial statements key energy services inc subsidiaries notes consolidated financial statements continued fishing rental services offer full line services rental equipment designed use providing onshore offshore drilling workover services fishing services involve recovering lost stuck equipment wellbore utilizing broad array “fishing tools” rental tool inventory consists drill pipe tubulars handling tools including patented hydrawalk® pipehandling units services pressurecontrol equipment pumps power swivels reversing units foam air units result edge acquisition rental inventory also includes frac stack equipment used support hydraulic fracturing operations associated flowback frac fluids proppants oil natural gas also provide well testing services international segment international segment includes operations mexico colombia middle east russia argentina services locations include rigbased services maintenance workover recompletion existing oil wells completion newlydrilled wells plugging abandonment wells end useful lives also provide drilling services regions work provide engineering consulting services development reservoirs operations mexico consist mainly workover wireline project management consulting services generate significant revenue contracts pemex argentina operations consist drilling workover services colombia provide workover services russia provide drilling workover reservoir engineering services russian operations structured 5050 joint venture controlling financial interest middle east formed joint venture first quarter 2010 controlling financial interest operations middle east consist mainly workover services kingdom bahrain also included international segment technology development control systems business based canada business focused development software related oilfield service equipment controls data acquisition digital information flow functional support segment functional support segment manages us international operating segments functional support assets consist primarily cash equivalents accounts notes receivable investments subsidiaries deferred financing costs equity method investments deferred income tax assets index financial statements key energy services inc subsidiaries notes consolidated financial statements continued following table presents segment information years ended december 31 2011 2010 2009 thousands year ended december 31 2011 year ended december 31 2010 index financial statements key energy services inc subsidiaries notes consolidated financial statements continued year ended december 31 2009 long lived assets include fixed assets goodwill intangibles assets functional support geographically located united states note 24 unaudited quarterly results operations set forth unaudited summarized quarterly information two recent years covered consolidated financial statements thousands except per share data index financial statements key energy services inc subsidiaries notes consolidated financial statements continued 1 quarterly earnings per common share based weighted average number shares outstanding quarter sum quarters may equal annual earnings per common share index financial statements key energy services inc subsidiaries notes consolidated financial statements continued note 25 condensed consolidating financial statements 2021 notes guaranteed virtually domestic subsidiaries wholly owned guarantees joint several full complete unconditional restrictions ability subsidiary guarantors transfer funds parent company result guarantee arrangements required present following condensed consolidating financial information condensed consolidating balance sheets index financial statements key energy services inc subsidiaries notes consolidated financial statements continued index financial statements key energy services inc subsidiaries notes consolidated financial statements continued condensed consolidating statements operations index financial statements key energy services inc subsidiaries notes consolidated financial statements continued index financial statements key energy services inc subsidiaries notes consolidated financial statements continued index financial statements key energy services inc subsidiaries notes consolidated financial statements continued condensed consolidating statements cash flows index financial statements key energy services inc subsidiaries notes consolidated financial statements continued index financial statements key energy services inc subsidiaries notes consolidated financial statements continued index financial statements key energy services inc subsidiaries notes consolidated financial statements continued note 26 subsequent events potential sale argentina operations february 2012 announced decision exit argentine market began marketing business potential buyers strategy monetize assets reinvest capital growing international markets assets meet held sale criteria december 31 2011 results operations reported continuing operations periods presented business disposed reported part international segment based entirely argentina december 31 2011 2010 841 million 691 million assets respectively 419 million 283 million liabilities associated operations following table presents comparative pro forma results operations discontinued december 31 2011 2010 thousands except per share amounts index financial statements item 9 nannannannannanitem 15 exhibits financial statement schedules following financial statements schedules exhibits filed part report 1financial statementssee index consolidated financial statements page 2financial statement schedules filed part iv annual report listed • schedule iivaluation qualifying accounts omitted financial statement schedules required applicable required information shown financial statements notes financial statements exhibit index exhibit description 21 asset purchase agreement dated december 7 2004 among company key energy drilling inc key energy drilling beneficial lp key four corners inc key rocky mountain inc pattersonuti drilling company lp lllp incorporated reference exhibit 25 companys current report form 8k dated october 19 2006 file 18038 31 articles restatement company 32 unanimous consent board directors company dated january 11 2000 limiting designation additional authorized shares common stock incorporated reference exhibit 32 companys quarterly report form 10q quarter ended march 31 2000 file 18038 33 second amended restated bylaws key energy services inc incorporated reference exhibit 31 companys form 8k filed september 22 2006 file 18038 41 warrant agreement dated january 22 1999 company bank new york new york banking corporation warrant agent incorporated reference exhibit 99b companys form 8k filed february 3 1999 file 18038 42 warrant registration rights agreement dated january 22 1999 among company lehman brothers inc bear stearns co inc fac equities division first albany corporation dain rauscher wessels division dain rauscher incorporated reference exhibit 99e companys form 8k filed february 3 1999 file 18038 43 first supplemental indenture dated march 1 2002 among registrant guarantors defined therein us bank national association incorporated reference exhibit 41 companys current report form 8k dated march 1 2002 file 18038 44 first supplemental indenture dated may 9 2003 dated may 14 2003 company us bank national association trustee incorporated reference exhibit 41 companys current report form 8k dated may 14 2003 file 18038 45 consent solicitation statement company dated july 6 2004 regarding solicitation consents holders outstanding 6375 senior notes due 2013 8375 senior notes due 2008 incorporated reference exhibit 992 companys current report form 8k dated july 7 2004 file 18038 46 second supplemental indenture dated july 12 2004 company us bank national association trustee incorporated reference exhibit 42 companys current report form 8k dated october 19 2006 file 18038 47 fourth supplemental indenture dated july 12 2004 among company guarantors defined therein us bank national association trustee incorporated reference exhibit 43 companys current report form 8k dated october 19 2006 file 18038 48 supplement july 6 2004 consent solicitation statement company dated july 15 2004 regarding solicitation consents holders outstanding 6375 senior notes due 2013 8375 senior notes due 2008 incorporated reference exhibit 993 companys current report form 8k dated july 16 2004 file 18038 49 third supplemental indenture dated july 19 2004 company us bank national association trustee incorporated reference exhibit 44 companys current report form 8k dated october 19 2006 file 18038 410 fifth supplemental indenture dated july 19 2004 among company guarantors defined therein us bank national association trustee incorporated reference exhibit 45 companys current report form 8k dated october 19 2006 file 18038 411 consent solicitation statement key energy services inc dated january 7 2005 regarding solicitation consents holders outstanding 6375 senior notes due 2013 8375 senior notes due 2008 incorporated reference exhibit 992 companys current report form 8k dated january 7 2005 file 18038 412 fourth supplemental indenture dated january 19 2005 among key energy services inc guarantors party thereto us bank national association trustee respect companys 6375 senior notes due 2008 incorporated reference exhibit 41 companys current report form 8k dated january 24 2005 file 18038 413 sixth supplemental indenture dated january 21 2005 among key energy services inc guarantors party thereto us bank national association trustee respect companys 8375 senior notes due 2008 incorporated reference exhibit 41 companys current report form 8k dated january 24 2005 file 18038 414 fifth supplemental indenture dated april 5 2005 among key energy services inc guarantors party thereto us bank national association trustee respect companys 6375 senior notes due 2013 incorporated reference exhibit 42 companys current report form 8k dated april 7 2005 415 seventh supplemental indenture dated april 5 2005 among key energy services inc guarantors party thereto us bank national association trustee respect companys 8375 senior notes due 2008 incorporated reference exhibit 43 companys current report form 8k dated april 7 2005 file 18038 101 key energy group inc 1997 incentive plan amendment restatement effective november 17 1997 key energy group inc 1995 outside directors stock option plan incorporated reference exhibit b companys schedule 14a proxy statement filed november 26 1997 file 00022665 102 employment agreement key energy services inc richard j alario dated effective may 1 2004 incorporated reference exhibit 102 companys current report form 8k dated october 19 2006 file 18038 103 first amendment employment agreement company richard j alario effective june 24 2005 incorporated reference exhibit 1011 companys current report form 8k dated october 19 2006 file 18038 104 acknowledgment waiver richard j alario dated march 25 2005 regarding rescinded option grant incorporated reference exhibit 101 companys current report form 8k dated march 29 2005 105 employment agreement key energy services inc william bill austin dated march 1 2005 incorporated reference exhibit 101 companys current report form 8k dated march 7 2005 file 18038 106 first amendment employment agreement company william austin effective june 24 2005 incorporated reference exhibit 1012 companys current report form 8k dated october 19 2006 file 18038 107 employment agreement key energy services inc newton w trey wilson iii dated january 24 2005 incorporated reference exhibit 101 companys current report form 8k dated january 28 2005 file 18038 108 first amendment employment agreement company newton w wilson iii effective june 24 2005 incorporated reference exhibit 1013 companys current report form 8k dated october 19 2006 file 18038 109 acknowledgment waiver newton w wilson iii dated march 25 2005 regarding rescinded option grant incorporated reference exhibit 102 companys current report form 8k dated march 29 2005 1010 restated employment agreement dated effective january 1 2007 kim b clarke key energy services inc incorporated reference exhibit 101 companys current report form 8k dated october 19 2006 file 18038 1011 employment agreement key energy services inc jim flynt dated january 1 2004 incorporated reference exhibit 106 companys current report form 8k dated october 19 2006 file 18038 1012 employment agreement key energy services inc phil coyne dated november 17 2004 incorporated reference exhibit 108 companys current report form 8k dated october 19 2006 file 18038 1013 first amendment employment agreement company phil coyne effective january 24 2005 incorporated reference exhibit 109 companys current report form 8k dated october 19 2006 file 18038 1014 employment agreement key energy services inc weinheimer dated october 2 2006 incorporated reference exhibit 1017 companys current report form 8k dated october 19 2006 file 18038 1015 form restricted stock agreement key energy group inc 1997 incentive plan 1016 third amended restated credit agreement dated july 15 2002 among key energy services inc several lenders time parties thereto pnc bank national association administrative agent pnc capital markets inc wells fargo bank texas collead arrangers credit lyonnais new york bank lehman commercial paper inc royal bank canada documentation agents incorporated reference exhibit 101 companys quarterly report form 10q quarter ended september 30 2002 file 18038 1017 first amendment dated december 20 2002 third amended restated credit facility dates july 15 2002 among key energy services inc several lenders time parties thereto pnc bank national association administrative agent pnc capital markets inc wells fargo bank texas colead arrangers credit lyonnais new york bank lehman commercial paper inc royal bank canada documentation agents incorporated reference exhibit 1029 companys annual transition report form 10kt file 18038 1018 second amendment dated may 9 2003 third amended restated credit facility dated july 15 2002 among key energy services inc several lenders time parties thereto pnc bank national association administrative agent pnc capital markets inc wells fargo bank texas colead arrangers credit lyonnais new york bank lehman commercial paper inc royal bank canada documentation agents incorporated reference exhibit 101 companys current report form 8k dated may 9 2003 file 18038 1019 fourth amended restated credit agreement dated june 7 1997 amended restated november 10 2003 among company several lenders time parties thereto guarantors pnc bank national association administrative agent pnc capital markets inc wells fargo bank texas colead arrangers credit lyonnais new york branch syndication agent bank one na comerica bank codocumentation agents incorporated reference exhibit 991 companys current report form 8k dated november 13 2003 file 18038 1020 waiver first amendment credit agreement fourth amended restated credit agreement dated april 5 2004 among registrant guarantors defined credit agreement lenders defined credit agreement pnc bank national association administrative agent pnc capital markets inc wells fargo bank national association successorbymerger wells fargo bank texas national association colead arrangers credit lyonnais new york branch syndication agent bank one na comerica bank codocumentation agents incorporated reference exhibit 992 companys form 8k report dated april 7 2004 file 18038 1021 modification waiver second amendment fourth amended restated credit agreement dated august 31 2004 among company guarantors defined credit agreement lenders defined credit agreement pnc bank national association administrative agent pnc capital markets inc wells fargo bank national association successorbymerger wells fargo bank texas national association colead arrangers calyon new york branch successor merger credit lyonnais new york branch syndication agent jpmorgan chase bank na comerica bank codocumentation agents incorporated reference exhibit 991 companys current report form 8k report dated september 7 2004 file 18038 1022 second modification waiver third amendment fourth restated credit agreement december 17 2004 among company guarantors defined credit agreement lenders defined credit agreement pnc bank national association administrative agent pnc capital markets inc wells fargo bank national association successor bymerger wells fargo bank texas national association colead arrangers calyon new york branch successor merger credit lyonnais new york branch syndication agent jpmorgan chase bank na comerica bank codocumentation agents incorporated reference exhibit 991 companys current report form 8k report dated december 22 2004 file 18038 1023 third modification waiver fourth amendment fourth amended restated credit agreement dated march 30 2005 among company guarantors defined credit agreement lenders defined credit agreement pnc bank national association administrative agent pnc capital markets inc wells fargo bank national association successorbymerger wells fargo bank texas national association colead arrangers calyon new york branch successor merger credit lyonnais new york branch syndication agent jpmorgan chase bank na comerica bank codocumentation agents incorporated reference exhibit 101 companys current report form 8k dated april 5 2003 file 18038 1024 fourth modification waiver fifth amendment fourth amended restated credit agreement dated april 29 2005 among company guarantors defined credit agreement lenders defined credit agreement pnc bank national association administrative agent pnc capital markets inc wells fargo bank national association successorbymerger wells fargo bank texas national association colead arrangers calyon new york branch successorbymerger credit lyonnais new york branch syndication agent jpmorgan chase bank na comerica bank codocumentation agents incorporated reference exhibit 101 companys current report form 8k dated may 3 2005 1025 fifth modification wavier sixth amendment fourth amended restated credit agreement dates may 26 2005 among company guarantors defined credit agreement lenders defined credit agreement pnc bank national association administrative agent pnc capital markets inc wells fargo bank national association successorbymerger wells fargo bank texas national association coleas arrangers calyon new york branch successorbymerger credit lyonnais new york branch syndication agent jpmorgan chase bank na comerica bank codocumentation agents incorporated reference exhibit 101 companys current report form 8k dated june 1 2005 1026 agreement supply operation workover rigs pulling units vehicles equipment related services apache corporation registrant dated march 28 2002 incorporated reference exhibit 1018 companys current report form 8k dated october 19 2006 file 18038 1027 office lease effective january 20 2005 crescent 1301 mckinney lp key energy services inc incorporated reference exhibit 101 companys current report form 8k dated january 26 2005 file 18038 1028 first amendment office lease dated march 15 2005 crescent 1301 mckinney lp key energy services inc incorporated reference exhibit 101 companys current report form 8k dated june 30 2005 file 13038 1029 commitment letter dated june 1 2005 lehman brothers inc lehman commercial paper inc key energy services inc incorporated reference exhibit 101 companys current report form 8k dated june 2 2005 file 18038 1030 second amendment office lease dated july 24 2005 crescent 1301 mckinney lp key energy services inc incorporated reference exhibit 102 companys current report form 8k dated june 30 2005 file 18038 1031 credit agreement dated june 29 2005 among company borrower several lenders time party thereto lehman brothers inc sole lead arranger sole book runner lehman commercial paper inc syndication agent administrative agent collateral agent wells fargo foothill inc revolving administrative agent incorporated reference exhibit 101 companys current report form 8k dated august 4 2005 file 18038 1032 first amendment credit agreement first amendment guaranty collateral agreement dated november 1 2005 among company borrower guarantors lenders lehman commercial paper inc administrative agent lenders collateral agent lenders secured parties incorporated reference exhibit 101 companys current report form 8k dated november 7 2005 file 18038 1033 second amendment credit agreement dated november 21 2006 among company borrower guarantors lenders lehman commercial paper inc administrative agent lenders collateral agent lenders secured parties incorporated reference exhibit 101 companys current report form 8k dated october 19 2006 file 18038 1034 2006 phantom share plan key energy services inc incorporated reference exhibit 101 companys current report form 8k dated october 19 2006 file 18038 1035 form award agreement 2006 phantom share plan key energy services inc incorporated reference exhibit 102 companys current report form 8k dated october 19 2006 file 18038 1036 third amendment credit agreement dated july 27 2007 among company borrower guarantors lenders lehman commercial paper inc administrative agent lenders collateral agent lenders secured parties incorporated reference exhibit 101 companys current report form 8k dated july 31 2007 file 18038 161 letter dated december 7 2006 kpmg llp incorporated reference exhibit 42 companys current report form 8k dated october 19 2006 file 18038 21 significant subsidiaries company 311 certification ceo pursuant securities exchange act rules 13a14a 15d14a adopted pursuant section 302 sarbanesoxley act 2002 312 certification cfo pursuant securities exchange act rules 13a14a 15d14a adopted pursuant section 302 sarbanesoxley act 2002 32 certification ceo cfo pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 indicates management contract compensatory plan contract arrangement director executive officer participates filed herewith signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized date august 13 2007 key energy services inc william austin william austin senior vice president chief financial officer power attorney person whose signature appears hereby constitutes appoints richard j alario william austin true lawful attorneyinfact agent full powers substitution name place stead capacities sign amendments annual report form 10k file exhibits thereto documents connection therewith securities exchange commission granting said attorneysinfact full power authority perform act behalf undersigned required done connection therewith pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature title date richard j alario richard j alario chairman board directors president chief executive officer principal executive officer august 13 2007 william austin william austin senior vice president chief financial officer principal financial officer august 13 2007 j marshall dodson j marshall dodson vice president chief accounting officer principal accounting officer august 13 2007 david j breazzano david j breazzano director august 13 2007 kevin p collins kevin p collins director august 13 2007 william fertig william fertig director august 13 2007 w phillip marcum w phillip marcum director august 13 2007 ralph michael iii ralph michael iii director august 13 2007 william f owens william f owens director august 13 2007 j robinson west j robinson west director august 13 2007 morton wolkowitz morton wolkowitz director august 13 2007 index consolidated financial statements page report independent registered public accounting firm report independent registered public accounting firm internal control financial reporting consolidated balance sheets consolidated statements operations consolidated statements comprehensive income loss consolidated statements cash flows consolidated statements stockholders equity notes consolidated financial statements report independent registered public accounting firm board directors shareholders key energy services inc audited accompanying consolidated balance sheets key energy services inc subsidiaries maryland corporation december 31 2006 2005 2004 related consolidated statements operations comprehensive income stockholders equity cash flows three years period ended december 31 2006 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position key energy services inc subsidiaries december 31 2006 2005 2004 results operations cash flows three years period ended december 31 2006 conformity accounting principles generally accepted united states america discussed note 1 consolidated financial statements effective january 1 2006 company adopted provisions statement financial accounting standards 123 revised 2004 sharebased payments discussed note 1 consolidated financial statements error resulting overstatement deferred tax liabilities overstatement retained deficit previously reported december 31 2003 discovered company management current year accordingly adjustment made retained deficit december 31 2003 correct error also audited accordance standards public company accounting oversight board united states effectiveness key energy services inc subsidiaries internal control financial reporting december 31 2006 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso report dated august 11 2007 expressed unqualified opinion managements assessment effectiveness internal control financial reporting adverse opinion effectiveness internal financial reporting grant thornton llp houston texas august 11 2007 report independent registered public accounting firm board directors shareholders key energy services inc audited managements assessment included accompanying managements report internal control financial reporting key energy services inc subsidiaries maryland corporation maintain effective internal control financial reporting december 31 2006 effect material weaknesses identified managements assessment based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso key energy services inc subsidiaries management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinion managements assessment opinion effectiveness companys internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting evaluating managements assessment testing evaluating design operating effectiveness internal control performing procedures considered necessary circumstances believe audit provides reasonable basis opinions companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate material weakness control deficiency combination control deficiencies results remote likelihood material misstatement annual interim financial statements prevented detected following material weaknesses identified included managements assessment aauthorizations expenditures company determined material weakness existed due inability ensure evidence expenditures including capital operating general administrative expenses changes salaries payrollrelated items approved appropriate level management accordance companys established policies result lack systematic process ensure expenditure related transactions reviewed approved appropriate level management brecognition expenditures company determined material weakness existed expendituresconsisting largely individually immaterial corporate expendituresthat captured companys procurement system controls place operating effectively december 31 2006 ensure expenses properly accrued recorded appropriate period additionally company sufficient controls place ensure expenditures accrued procurement system recorded correct period changes amounts previously accrued system appropriately adjusted recorded appropriate period crecording revenues company determined material weakness existed revenue recognition collection process heavily dependent manual reviews approvals credit terms amounts billed recorded adjustments bad debts result many instances evidence approvals maintained ensure work performed billed recorded appropriately additionally adequate controls place december 31 2006 ensure amounts recorded correct periods dproperty plant equipment ppe company determined material weakness existed december 31 2006 company established effective controls recording ppe including associated depreciation expense accumulated depreciation result ongoing restatement process company perform monthly accounting ppe first quarter 2004 2006 accordingly companys controls include monthly reconciliations determination propriety cost capitalization disposals computation depreciation expense euser developed applications company determined material weakness existed use certain spreadsheets database programs course preparing consolidated financial statements company employed numerous spreadsheets database programs user developed applications user developed applications utilized calculating estimates tracking inventory costs making cost allocations among things course testing company identified numerous instances user developed applications secured access logical security changes data integrity fapplication access segregation duties company determined material weaknesses existed four aspects information technology general controls security segregation duties primary financial systems include security administration procedures administrator access privileges database file access password controls weaknesses information technology general control areas evidenced related deficiencies various access controls financial system level causing inappropriate access segregation duties issues significant processes gaccount reconciliations company determined material weakness existed processes evidence timely accurate preparation review account reconciliations including calculations underlying amounts recorded financial statements account reconciliations including final underlying calculations numerous accounts prepared evidenced timely manner preparing consolidated financial statements contained annual report companys accounting staff hired throughout 2006 along outside consultants performed procedures determine appropriate amounts record 2004 2006 periods course process company developed account reconciliations supporting calculations documentation company however course procedures incur time expense necessary follow document compliance control procedures identified respect accounts haccounting income taxes company determined material weakness existed processes account income taxes timely manner due significant amount changes implemented companys processes accounting income taxes prepared evidenced timely manner preparing consolidated financial statements contained annual report companys recently hired accounting staff along outside consultants performed procedures determine appropriate amounts record 2004 2006 periods course process company developed account reconciliations rollforwards tax basis information documentation company however course procedures incur time expense necessary follow document compliance control procedures identified respect accounts ifinancial close reporting company determined previous processes preparing consolidated financial statements clearly defined lacked appropriate controls ensure completeness accuracy timeliness appropriate valuation proper presentation disclosure financial transactions preparing consolidated financial statements contained annual report companys recently hired accounting staff along outside consultants performed procedures determine appropriate amounts record 2004 2006 periods course process company developed methodologies supporting calculations documentation company however course procedures incur time expense necessary evidence compliance methodologies material weaknesses considered determining nature timing extent audit tests applied audit 2006 consolidated financial statements report affect report dated august 11 2007 expressed unqualified opinion consolidated financial statements opinion managements assessment key energy services inc subsidiaries maintain effective internal control financial reporting december 31 2006 fairly stated material respects based internal controlintegrated framework issued committee sponsoring organizations treadway commission coso also opinion effect material weaknesses described achievement objectives control criteria key energy services inc subsidiaries maintained effective internal control financial reporting december 31 2006 based internal controlintegrated framework issued committee sponsoring organizations treadway commission coso grant thornton llp houston texas august 11 2007 key energy services inc consolidated balance sheets thousands see accompanying notes integral part consolidated financial statements key energy services inc consolidated statements operations thousands except per share data see accompanying notes integral part consolidated financial statements key energy services inc consolidated statements comprehensive income loss thousands see accompanying notes integral part consolidated financial statements key energy services inc consolidated statements cash flows thousands see accompanying notes integral part consolidated financial statements key energy services inc consolidated statements stockholders equity thousands see accompanying notes integral part consolidated financial statements key energy services inc notes consolidated financial statements december 31 2006 2005 2004 1 organization summary significant accounting policies company key energy services inc maryland corporation organized april 1977 commenced operations july 1978 name national environmental group inc emerged prepackaged bankruptcy plan december 1992 key energy group inc december 9 1998 changed name key energy services inc key company believe leading onshore rigbased well servicing contractor united states 1994 2002 company grew rapidly series 100 acquisitions today provide complete range well services major oil companies independent oil natural gas production companies including rigbased well maintenance workover well completion recompletion services oilfield transportation services casedhole electric wireline services ancillary oilfield services fishing rental services pressure pumping services 2006 key conducted well servicing operations onshore continental united states following regions gulf coast including south texas central gulf coast texas south louisiana permian basin west texas eastern new mexico midcontinent including anadarko hugoton arkoma basins arklatex north texas regions four corners including san juan piceance uinta paradox basins appalachian basin rocky mountains including denverjulesberg powder river wind river green river williston basins california san joaquin basin internationally argentina also provide limited onshore drilling services rocky mountains appalachian basin argentina 2006 conducted pressure pumping cementing operations number major domestic producing basins including california permian basin san juan basin midcontinent region barnett shale north texas fishing rental services located primarily gulf coast permian basin regions texas well california midcontinent region basis presentation report delayed due restatement financial reporting process periods ending december 31 2003 began march 2004 process completed october 19 2006 2003 financial informational report form 8ka filed securities exchange commission sec october 26 2006 included audited 2003 consolidated balance sheet presented financial condition december 31 2003 accordance generally accepted accounting principles gaap present consolidated financial statements accordance gaap unable determine sufficient certainty appropriate periods 2003 record certain writeoffs writedowns identified restatement process former registered public accounting firm expressed unqualified opinion 2003 balance sheet fairly presented financial condition december 31 2003 firm also audited financial statements presented 2003 financial informational report opined financial statements 2003 balance sheet fairly present financial condition results operations cash flows periods covered accordance gaap investors refer 2003 financial informational report full description restatement financial reporting process periods prior 2004 financial statements associated schedules included annual report form 10k present financial condition results operations cash flows periods presented accordance gaap preparation consolidated financial statements requires us develop estimates make assumptions affect financial position results operations cash flows estimates also impact nature extent disclosure contingent liabilities among things use estimates 1 analyze assets possible impairment 2 determine depreciable lives assets 3 assess future tax exposure realization deferred tax assets 4 determine amounts accrue contingencies 5 value tangible intangible assets 6 assess workers compensation vehicular liability selfinsured risk accruals insurance reserves actual results may differ materially estimates believe estimates reasonable due delay filing annual report discussed additional information regarding certain liabilities uncertainties existed date report become available either additional facts ultimate settlement resolution liability uncertainty taken additional information come light account estimates disclosure potential liabilities contingencies date report accordance statement financial accounting standards 5 accounting contingencies sfas 5 certain reclassifications made prior period amounts conform current period financial statement classifications reclassifications primarily relate change reportable segments prior 2004 pressure pumping fishing rental segments reported part well servicing segment pressure pumping fishing rental presented independent reportable segments additionally discussed note 3discontinued operations sold majority contract drilling assets pattersonuti energy january 15 2005 assets previously reported part contract drilling reportable segment result show assets net assets discontinued operations consolidated balance sheets results operations related activities presented discontinued operations consolidated statements operations periods presented remaining contract drilling operations reported part well servicing segment apply provisions eitf issue 0410 determining whether aggregate operating segments meet quantitative thresholds eitf 0410 segment reporting note 16segment information remaining contract drilling operations meet quantitative thresholds described statement financial accounting standards 131 disclosures segments enterprise related information sfas 131 provisions eitf 410 since operating segments meet aggregation criteria combined information segment similar segments individually meet quantitative thresholds produce reportable segment restatement error connection preparation financial statements identified error balance sheet december 31 2003 error affected retained earnings deferred tax liabilities accounts arose result lack rollforwards appropriate reconciliations differences book tax bases fixed assets error carried forward consolidated balance sheets december 31 2003 differences initially arose 1999 fiscal year resulted overstatement retained deficit december 31 2003 approximately 10 million overstatement deferred tax liability date amount retained earnings deferred tax liabilities adjusted december 31 2003 correct error adjustment reflected consolidated financial statements total liabilities stockholders equity december 31 2003 impacted error principles consolidation within consolidated financial statements include accounts majorityowned controlled subsidiaries eliminate intercompany accounts transactions account interest entities significant control influence cost method interest entity exert significant influence control account interest using equity method see note 9investment iroc systems corp january 2003 financial accounting standards board fasb issued interpretation 46 consolidation variable interest entitiesan interpretation arb 51 fin 46 december 2003 fasb issued updated final interpretation arb 51 fin 46r fin 46r requires equity investor variable interest entity significant equity risk generally minimum 10 increase 3 required previous guidance hold controlling interest evidenced voting rights absorb majority entitys expected losses receive majority entitys expected returns equity investor unable evidence characteristics entity retains ownership characteristics required consolidate variable interest entities created obtained march 15 2004 adoption fin 46r materially impact consolidated financial statements revenue recognition well servicing rigs well servicing revenue consists primarily maintenance services workover services completion services plugging abandonment services recognize revenue services performed collection relevant receivable probable persuasive evidence arrangement exists price fixed determinable criteria typically met time complete job customer primarily price well servicing rig services hour service performed depending type job may charge project day oilfield transportation oilfield transportation revenue consists primarily fluid equipment transportation services frac tanks used conjunction fluid hauling services recognize revenue services performed collection relevant receivable probable persuasive evidence arrangement exists price fixed determinable criteria typically met time complete job customer primarily price oilfield trucking services hour quantities hauled pressure pumping fishing rental services recognize revenue services performed collection relevant receivable probable persuasive evidence arrangement exists price fixed determinable criteria typically met time complete job customer generally price fishing rental tool services day pressure pumping services job ancillary oilfield services ancillary oilfield services include services wireline operations wellsite construction roustabout services foam units air drilling services recognize revenue services performed collection relevant receivable probable persuasive evidence arrangement exists price fixed determinable criteria typically met time complete job customer price ancillary oilfield services hour day project depending type services performed cash equivalents consider shortterm investments original maturity less three months cash equivalents none cash restricted entered compensating balance arrangements however december 31 2006 obligations senior secured credit facility hereinafter defined secured assets including assets held subsidiaries includes cash equivalents restrict investment cash financial institutions high credit standing limit amount credit exposure one financial institution investment debt equity securities account investments debt equity securities provisions statement financial accounting standards 115 accounting certain investments debt equity securities sfas 115 sfas 115 investments classified either trading available sale held maturity depending managements intent regarding investment securities classified trading carried fair value companys consolidated balance sheets unrealized holding gains losses reported currently earnings consolidated statements operations securities classified available sale carried fair value companys consolidated balance sheets unrealized holding gains losses net tax reported separate component shareholders equity accumulated comprehensive income december 31 2006 2005 2004 company investments debt equity securities classified trading held maturity third quarter 2006 company began investing auctionrate securities ars variablerate demand notes vrdn investments longterm bonds whose returns tied shortterm interest rates periodically reset periods ranging 7 days 6 months result longterm nature underlying security bonds contractual lives ranging 20 30 years company accounts ars vrdn investments available sale securities addition ars vrdn investments company also began investing 270day commercial paper certain bond investments instruments treated available sale securities carried fair value shortterm investments companys consolidated balance sheets maturity dates within one year date investment unrealized holding gains losses securities recorded net tax separate component stockholders equity accumulated comprehensive income date maturity point gains losses reclassified earnings use specific identification method determining amount realized gain loss upon date maturity aggregate fair value available sale investments december 31 2006 approximately 618 million accounts receivable allowance doubtful accounts keys customers include major oil natural gas production companies independent oil natural gas production companies foreign national oil natural gas production companies historically credit losses material establish provisions losses accounts receivable determine collect part outstanding balances regularly review collectiblity establish adjust allowance necessary using specific identification method time entitled proceeds insurance policies accordance fasb interpretation 39 offsetting amounts related certain contracts interpretation apb 10 fasb statement 105 fin 39 present insurance receivables gross balance sheet component accounts receivable separate corresponding liability inventories consist primarily equipment parts use well servicing operations sand chemicals pressure pumping operations supplies held consumption valued lower average cost market property equipment property equipment carried cost less accumulated depreciation provided oilfield service related equipment excluding drilling rigs using straightline method following estimated depreciable lives assets depreciate operational assets depreciable lives salvage value fair value higher assets value scrap generally salvage value approximates 10 rigs acquisition cost rig stacked taken service review physical condition depreciable life ultimate salvage value determine asset longer operable whether remaining depreciable life salvage value adjusted following table presents net carrying value property plant equipment leased capital lease obligations december 31 2006 2005 2004 asset retirement obligations connection well servicing activities operate number salt water disposal swd facilities operations involve transportation handling disposal fluids swd facilities determined harmful environment swd facilities used connection fluid hauling operations subject future costs associated abandonment properties result incurred costs associated proper storage disposal materials accordance statement financial accounting standards 143 accounting asset retirement obligations sfas 143 recognize liability fair value legal obligations associated retirement tangible longlived assets capitalize equal amount cost asset depreciate additional cost estimated useful life assets significant judgment involved estimating future cash flows associated obligations well ultimate timing cash flows estimates amount timing cash flows change changes may material impact results operations adoption sfas 143 required companies fiscal years beginning june 15 2002 annual amortization assets associated asset retirement obligations 05 million 05 million 05 million year ended december 31 2006 2005 2004 respectively summary changes asset retirement obligations follows millions march 2005 fasb issued interpretation 47 accounting conditional retirement obligationsan interpretation fasb statement 143 fin 47 became effective years ending december 15 2005 early adoption encouraged interpretation clarifies term conditional asset retirement obligation used sfas 143 refers legal obligation perform asset retirement activities timing method settlement conditional future event may within companys control obligations perform asset retirement activities unconditional despite uncertainties may exist surrounding individual retirement activity accordingly recognize liability fair value conditional asset retirement obligation fair value reasonably estimated adoption fin 47 material impact consolidated financial statements asset investment impairments apply statement financial accounting standards 144 accounting impairment disposal longlived assets sfas 144 reviewing longlived assets investments possible impairment statement requires longlived assets held used us including certain identifiable intangibles reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable purposes applying statement group longlived assets divisionbydivision basis compare estimated future cash flows division divisions net carrying value division level represents lowest level identifiable cash flows available would record impairment charge reducing divisions net carrying value estimated fair value estimated future cash flows less divisions net carrying value trigger events defined sfas 144 cause us evaluate fixed assets recoverability possible impairment may include market conditions adverse changes prices oil natural gas could reduce fair value certain property equipment development future cash flows determination fair value division involves significant judgment estimates december 31 2006 2005 2004 trigger events identified management however third quarter 2004 connection sale majority contract drilling assets pattersonuti energy inc january 15 2005 reduced carrying value held sale assets fair values reduction resulted pretax charge earnings approximately 108 million 2004 see note 3discontinued operations gains losses extinguishment debt record gains losses extinguishment debt part continuing operations years ended december 31 2005 2004 conducted number refinancings debt association refinancings extinguished several debt instruments recorded 209 million 120 million losses associated extinguishment debt years ended december 31 2005 2004 respectively deferred costs connection various financings capitalized 05 million 116 million zero fees costs years ended december 31 2006 2005 2004 respectively deferred costs amortized interest expense using effective interest method life debt instrument gain loss early extinguishment debt amortization deferred costs totaled 16 million 16 million 23 million years ended december 31 2006 2005 2004 respectively unamortized debt issuance costs written included determination gain loss early extinguishment debt years ended december 31 2006 2005 2004 totaled zero 80 million 30 million respectively goodwill intangible assets goodwill results business acquisitions represents excess acquisition costs fair value net assets acquired account goodwill intangible assets provisions statement financial accounting standards 142 goodwill intangible assets sfas 142 sfas 142 eliminates amortization goodwill intangible assets indefinite lives intangible assets lives restricted contractual legal means continue amortized expected useful lives goodwill intangible assets subject amortization tested impairment annually frequently events changes circumstances indicate asset might impaired sfas 142 requires twostep process testing impairment first fair value reporting unit compared carrying value determine whether indication impairment exists impairment indicated fair value reporting units goodwill determined allocating units fair value assets liabilities including unrecognized intangible assets reporting unit acquired business combination amount impairment goodwill measured excess carrying value fair value conduct annual impairment assessments recent december 31 2006 assessments result indication goodwill impairment however third quarter 2004 connection sale majority contract drilling assets pattersonuti energy inc reduced carrying value drilling segments goodwill fair value reduction resulted pretax charge earnings approximately 17 million 2004 see note 3discontinued operations intangible assets subject amortization sfas 142 consist noncompete agreements patents trademarks amortization expense noncompete agreements calculated using straightline method period agreement ranging three seven years cost accumulated amortization retired noncompete agreement fully amortized longer enforceable amortization expense patents trademarks calculated using straightline method useful life patent trademark ranging five seven years first acquired patents july 16 2002 amortization expense next five years noncompete agreements effect december 31 2006 estimated 12 million 03 million 2007 2008 respectively zero three succeeding years amortization expense next five years patents trademarks effect december 31 2006 estimated 07 million 06 million 03 million 01 million less 01 million respectively weighted average remaining amortization periods noncompete agreements patents trademarks 13 years 36 years respectively amortization expense intangible assets determinable lives follows derivative instruments hedging activities company applies statement financial accounting standards 133 accounting derivative instruments hedging activities sfas 133 amended statement financial accounting standards 137 138 149 sfas 137 sfas 138 sfas 149 respectively accounting derivative instruments sfas 133 establishes accounting reporting standards derivative instruments including certain derivative instruments embedded contracts hedging activities requires recognition derivative instruments assets liabilities balance sheet measurement instruments fair value accounting treatment changes fair value dependent upon whether derivative instrument designated hedge type hedge derivatives designated cash flow hedges effective portion change fair value hedging instrument recognized comprehensive income hedged item recognized earnings ineffective portion changes fair value hedging instrument recognized currently earnings account financial instrument hedge contract must meet following criteria underlying asset liability must expose company risk offset another asset liability hedging contract must reduce risk instrument must properly designated hedge inception contract throughout contract period effective hedge must high correlation changes fair value financial instrument fair value underlying asset liability changes market value financial instrument would offset effect price changes exposed items march 2006 terms senior secured credit facility company required mitigate risk changes future cash flows posed changes interest rates associated variable interestrate term loan portion senior secured credit facility entered two interest rate swap arrangements order offset risk swaps classified derivative instruments designated inception cash flow hedges management believes instruments highly effective inception offset changes future cash flows underlying liabilities continue highly effective throughout life hedge see note 8derivative financial instruments discussion litigation various suits claims arising ordinary course business pending us due locations conduct business continental united states often subject jury verdicts arbitration hearings result favor plaintiffs believe disposition items result material adverse impact consolidated financial position results operations cash flows see note 12commitments contingencies description currently pending litigation estimating liabilities related litigation december 31 2006 take account available facts circumstances order determine whether loss probable reasonably estimable accordance sfas 5 environmental operations subject various federal state local laws regulations intended protect environment operations routinely involve storage handling transport disposal bulk waste materials contain oil contaminants regulated substances various environmental laws regulations require prevention necessary cleanup spills leaks materials operations must obtain permits limiting discharge materials failure comply environmental requirements permits may result fines penalties remediation orders revocation permits laws regulations become stringent years certain circumstances may impose strict liability rendering us liable environmental damage without regard negligence fault part cleanup costs penalties damages arising result environmental laws costs associated changes environmental laws regulations could substantial could material adverse effect financial condition results operations cash flows time claims made litigation brought us laws environmental expenditures expensed capitalized depending future economic benefit expenditures relate existing condition caused past operations future economic benefits expensed liabilities expenditures noncapital nature recorded environmental assessment andor remediation probable costs reasonably estimated guarantees november 2002 fasb issued interpretation 45 guarantors accounting disclosure requirements guarantees including indirect guarantees indebtedness others fin 45 january 1 2003 adopted initial recognition measurement provisions guarantees issued modified december 31 2002 november 2005 fasb issued fasb staff position 453 application fasb interpretation 45 minimum revenue guarantees granted business owners fsp fin 453 served amendment fin 45 adding minimum revenue guarantees list examples contracts fin 45 applies fsp fin 453 guarantor required recognize inception guarantee liability fair value obligation undertaken issuing guarantee fsp fin 453 effective new minimum revenue guarantees issued modified january 1 2006 adoption fin 45 fsp fin 453 material impact consolidated financial statements income taxes account income taxes based upon statement financial accounting standards 109 accounting income taxes sfas 109 sfas 109 deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases deferred tax assets liabilities measured using statutory tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rate recognized income period includes statutory enactment date valuation allowance deferred tax assets recognized likely benefit deferred tax assets realized eligible subsidiaries file consolidated us federal income tax return certain foreign subsidiaries consolidated financial reporting purposes eligible included consolidated us federal income tax return subject jurisdiction number taxing authorities income earned various jurisdictions taxed differing bases final determination tax liability involves interpretation local tax laws tax treaties related authorities jurisdiction well significant use estimates assumptions regarding scope future operations results achieved timing nature income earned expenditures incurred file separate income tax returns countries foreign subsidiaries operate made election described accounting principles board opinion 23 accounting income taxesspecial areas earnings foreign entities reinvested indefinitely foreign subsidiary argentina negative earnings profits years ended december 31 2006 2005 2004 2003 accordingly deferred taxes provided subsidiarys current earnings years earnings per share present earnings per share information accordance provisions statement financial accounting standards 128 earnings per share sfas 128 sfas 128 basic earnings per common share determined dividing net earnings applicable common stock weighted average number common shares actually outstanding year diluted earnings per common share based increased number shares would outstanding assuming conversion exercise dilutive outstanding securities stock options using converted method diluted earnings per share calculation years ended december 31 2006 2005 excludes potential exercise 381750 266875 stock options respectively effects exercises earnings per share years would antidilutive diluted earnings per share calculation year ended december 31 2004 excludes potential exercise thenoutstanding stock options potential conversion 5 convertible subordinated notes effects instruments earnings per share would antidilutive stockbased compensation account stockbased compensation provisions statement financial accounting standards 123 revised 2004 sharebased payment sfas 123r adopted january 1 2006 prior january 1 2006 accounted sharebased payments provisions accounting principles board opinion 25 accounting stock issued employees apb 25 permitted statement financial accounting standards 123 accounting stockbased compensation sfas 123 adopted provisions sfas 123r using modified prospective transition method sfas 123 sets forth alternative accounting disclosure requirements stockbased compensation arrangements companies permitted continue following provisions apb 25 measure recognize employee stockbased compensation prior january 1 2006 however sfas 123 requires disclosure pro forma net income earnings per share would reported fair value recognition provisions sfas 123 following table illustrates effect net income earnings per share applied fair value recognition principles sfas 123 stockbased employee compensation 2004 2005 noted followed apb 25 account stockbased compensation years stockbased compensation expense included net income loss following table represents compensation expense 875180 options net forfeitures granted strike prices ranging 010 253 market price common stock date grant years applied apb 25 elected amortize compensation cost straightline basis vesting period award accordance fasb interpretation 28 accounting stock appreciation rights variable stock option award plans interpretation apb opinions 15 25 fin 28 adoption sfas 123r elected amortize compensation cost associated fair value equitybased awards ratably vesting period award additional information regarding computations presented see note 14stockholders equity addition stock option grants discussed beginning 2005 began making grants shares restricted shares common stock certain employees nonemployee directors shares vesting periods ranging zero three years shares immediate vesting company recognized currently earnings expense amount equal intrinsic value shares date grant restricted shares immediately vest compensation cost equal intrinsic value grant net actual estimated forfeitures recognized earnings ratably vesting period grant 2006 subject provisions sfas 123r company recognized expense earnings equal fair value shares vesting period net actual estimated forfeitures december 2006 company began granting phantom shares certain employees vest ratably fouryear period date grant phantom shares convey right grantee receive cash payment anniversary grant date equal fair market value phantom shares vesting date grantees permitted defer payout later date phantom shares qualify liabilitytype award provisions sfas 123r company accounts phantom shares fair value fair value phantom shares recorded liability consolidated balance sheets changes fair value liability net actual estimated forfeitures recorded currently earnings compensation expense foreign currency gains losses local currency functional currency foreign operations argentina former canadian operations us dollar functional currency former operations egypt cumulative translation gains losses resulting translating foreign subsidiarys financial statements functional currency us dollars included separate component stockholders equity comprehensive income partial complete sale liquidation net investment foreign entity leases account leases accordance statement financial accounting standards 13 accounting leases sfas 13 certain operating lease agreements structured include scheduled specified rent increases term lease agreement increases may result inducement rent holiday conveyed us early lease included reflect anticipated effects inflation apply provisions fasb technical bulletin 853 accounting operating leases scheduled rent increases ftb 853 accounting scheduled specified rent increases ftb 853 provides effects scheduled specified rent increases recognized straightline basis lease term unless another systematic rational allocation basis representative time pattern leased property physically employed recognize scheduled specified rent increases straightline basis term lease agreement addition certain operating lease agreements contain incentives induce us enter lease agreement upfront cash payments us payment lessor costs moving expenses assumption lessor preexisting lease agreements third parties payments made us behalf represent incentives consider reduction rent expense recognized straightline basis term lease agreement amortize leasehold improvements operating leases shorter economic lives lease term sales taxes accordance eitf issue 0603 taxes collected customers remitted governmental authorities presented income statement gross versus net presentation eitf 0603 show revenues net sales taxes collected us customers required remitted local state governmental taxing authorities new accounting pronouncements sfas 157 september 2006 fasb issued statement financial accounting standards 157 fair value measurements sfas 157 sfas 157 establishes framework measuring fair value requires expanded disclosure information used measure fair value statement applies whenever statements require permit assets liabilities measured fair value sfas 157 expand use fair value accounting new circumstances effective company year ended december 31 2008 interim periods included year early adoption encouraged company evaluating effect adoption sfas 157 financial position results operations cash flows sfas 158 september 2006 fasb issued statement financial accounting standards 158 employers accounting defined benefit pension postretirement plansan amendment fasb statements 87 88 106 123r sfas 158 sfas 158 requires entity sponsor plan within scope statement recognize balance sheet asset plans overfunded status liability plans underfunded status b measure plans assets obligations end entitys fiscal year c recognize changes funded status plans year changes occur adjustments comprehensive income adoption provisions sfas 158 required public companies first fiscal year ending december 15 2006 company sponsor defined postretirement benefit plan defined sfas 158 adoption standard material impact companys financial position results operations cash flows fin 48 december 2006 financial accounting standards board fasb issued fasb interpretation 48 accounting uncertainty income taxesan interpretation fasb statement 109 fin 48 fin 48 clarifies accounting uncertainty income taxes recognized enterprises financial statements accordance fasb statement 109 fin 48 prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return fin 48 also provides guidance derecognition classification interest penalties accounting interim periods disclosure transition provisions fin 48 effective fiscal years beginning december 15 2006 cumulative effect adopting fin 48 recorded adjustment retained earnings january 1 2007 evaluation adopting fin 48 expect adoption material impact consolidated financial statements fsp eitf 00192 december 2006 fasb issued fasb staff position eitf 00192 accounting registration payment arrangements fsp eitf 00192 fsp eitf 00192 addresses accounting registration payment arrangements rpas provisions within financial instruments equity shares warrants debt instruments issuer agrees file registration statement registration statement declared effective sec within specified grace period registration statement declared effective within grace period effectiveness maintained period time specified rpa issuer must compensate counterparty fasb staff concluded contingent obligation make future payments otherwise transfer consideration rpa recognized liability measured accordance sfas 5 fasb interpretation 14 reasonable estimation amount loss rpa recognized measured separately instrument rpa attached discussed fully note 11longterm debt january 1999 company completed private placement 150000 units consisting 1500 million 14 senior subordinated notes due january 25 2009 14 senior subordinated notes 150000 warrants purchase 1253350 shares companys common stock exercise price 488125 per share warrants december 31 2006 63500 warrants exercised leaving 86500 outstanding terms warrants required maintain effective registration statement covering shares common stock issuable upon exercise unable maintain effective registration statement required pay liquidated damages periods effective registration statement maintained due failure file sec reports timely manner unable maintain effective registration statement requirement make liquidated damages payments terms warrant agreement constitutes rpa provisions fsp eitf 00192 january 1 2007 company recorded current liability approximately 10 million balance sheet offsetting adjustment opening balance retained earnings prescribed transition provisions fsp eitf 00192 equivalent payments warrant rpa one year amount represents low end range possible outcomes continue unable maintain effective registration statement sec total amount liquidated damages payable warrant rpa could high 14 million subsequent changes carrying value rpa liability recorded contemporaneously earnings income expense sfas 159 february 2007 fasb issued statement financial accounting standards 159 fair value option financial assets liabilities including amendment fasb statement 115 sfas 159 sfas 159 permits companies choose specified election dates measure eligible items fair value fair value option companies choosing election would report unrealized gains losses items fair value option elected earnings subsequent reporting period standard effective beginning first fiscal year begins november 15 2007 adoption standard anticipated material impact financial position results operations cash flows 2 saleleaseback transactions lease certain equipment tractors trailers frac tanks forklifts financial institutions master lease agreements former master lease agreements required provide current annual quarterly financial reports lessor due inability provide audited financial statements year ended december 31 2003 subsequent periods required seek waivers amendments equipment lessors pay outstanding leases lessors refused grant waivers demanded settlement obligation purchase equipment entered two new master lease agreements august 31 2005 october 14 2005 new lessor equipment leased lessors demanded settlement sold new lessor subsequently leased back lessor account capital leases received aggregate amount 58 million proceeds saleleaseback transactions realized gain 11 million one saleleaseback transactions amortized interest expense term new lease saleleaseback transaction realized loss less 01 million immediately recognized earnings see note 11longterm debtdefault capital lease obligations discussion current status lease obligations 3 discontinued operations january 15 2005 sold majority contract drilling operations pattersonuti energy inc 620 million cash received approximately 605 million cash paying fees related sale result sale operation previously reported contract drilling segment presented discontinued operation periods recorded aftertax loss discontinued operations 34 million 003 per diluted share year ended december 31 2005 aftertax loss 57 million 004 per diluted share year ended december 31 2004 assets sold pattersonuti energy inc classified held sale beginning third quarter 2004 classified assets held sale adjusted carrying values assets fair value adjustments resulted pretax reductions carrying value goodwill approximately 17 million property plant equipment approximately 108 million adjustments included costs expenses discontinued operations year ended december 31 2004 results activities reported discontinued operations follows balance sheet data attributable discontinued operations follows 4 current noncurrent accrued liabilities current accrued liabilities consist following noncurrent accrued expenses consist following 5 income taxes components income tax expense follows made net federal income tax payments approximately 876 million 108 million 02 million years ended december 31 2006 2005 2004 respectively made net state income tax payments approximately 84 million 10 million 04 million years ended december 31 2006 2005 2004 respectively made foreign tax payments approximately 30 million 54 million 58 million years ended december 31 2006 2005 2004 respectively years ended december 31 2006 2005 tax benefits allocated stockholders equity compensation expense income tax purposes excess amounts recognized financial reporting purposes less 01 million zero respectively year ended december 31 2004 tax expense allocated stockholders equity compensation expense income tax purposes less amounts recognized financial reporting purposes 01 million company allocated tax benefits stockholders equity prior years compensation expense income tax purposes excess amounts recognized financial reporting purposes income tax benefit expense differs amounts computed applying statutory federal rate follows deferred tax assets liabilities comprised following 2006 deferred tax liabilities increased 206000 adjustments accumulated comprehensive loss 2005 deferred tax liabilities increased 35000 adjustments accumulated comprehensive loss 2004 deferred tax liabilities decreased 12000 adjustments accumulated comprehensive loss increased 149000 adjustments additional paidin capital recording deferred income tax assets consider whether likely portion deferred income tax assets realized ultimate realization deferred income tax assets dependent upon generation future taxable income periods deferred income tax assets would deductible consider scheduled reversal deferred income tax liabilities projected future taxable income determination fully realize deferred income tax assets related federal net operating loss carryforwards valuation allowance due section 382 limitations would need generate future federal taxable income approximately 70 million next ten years certain exceptions noted believe considering available objective evidence positive negative historical prospective greater weight given historical evidence likely assets realized estimate december 31 2006 2005 2004 available 93 million 140 million 1000 million respectively federal net operating loss carryforwards approximately 69 million net operating losses december 31 2006 subject 11 million annual section 382 limitation expire 2018 approximately 24 million net operating losses december 31 2006 subject 5000 annual section 382 limitation expire 2016 2018 valuation allowance provided likely portion deferred tax assets realized due annual limitations sections 382 383 management believes able utilize available carryforwards prior ultimate expiration deferred tax asset associated remaining federal net operating loss carryforwards expire utilization due section 382 limitations 23 million includes valuation allowance result section 382 limitations estimate december 31 2006 2005 2004 available 31 million 43 million 70 million respectively state net operating loss carryforwards expire 2007 2025 fully realize deferred income tax assets related state net operating loss carryforwards would need generate future west virginia taxable income 165 million next 19 years future pennsylvania taxable income 46 million next 19 years management believes likely able utilize available carryforwards prior ultimate expiration deferred tax asset associated remaining state net operating loss carryforwards december 31 2006 03 million includes valuation allowance result second quarter 2006 texas margins tax see enacted point time deferred tax asset approximately 02 million related texas nols complete valuation allowance effectively converted texas margins tax credit longer requires valuation allowance tax benefit net federal tax effect recorded second quarter 2006 relating release valuation allowance fourth quarter 2006 implemented plans internal reorganization legal entity structure occur year end reorganization state nols previously subject valuation allowances 23 million longer require valuation allowances tax benefit net federal tax effect recorded fourth quarter 2006 relating release valuation allowance tax legislative changes american jobs creation act 2004 american jobs creation act 2004 added section 199 deduction internal revenue code allows tax deduction qualifying domestic production activities defined limited internal revenue code concluded receive benefits 16 million 06 million deduction years ended december 31 2006 2005 respectively texas margins tax may 2006 state texas enacted new law effective january 1 2007 substantially changes tax system texas law replaces taxable capital earned surplus components franchise tax new tax based modified gross revenue law imposes tax unitary group affiliated entities net receipts rather earned surplus separate entity company recognized tax benefit 04 million second quarter 2006 related enactment new law company believes taxes state texas increase 2007 future periods due new texas margins tax 6 supplemental schedule noncash investing financing activities 7 estimated fair value financial instruments following table presents carrying amounts estimated fair values financial instruments december 31 2006 2005 2004 fasb statement 107 disclosures fair value financial instruments defines fair value financial instrument amount instrument could exchanged current transaction willing parties following methods assumptions used estimate fair value class financial instruments cash available sale investments carrying amounts approximate fair value short maturity instruments carrying value equal fair value instruments balance sheet date notes receivablerelated parties amounts reported relate notes receivable certain employees company related relocation retention agreements carrying values notes approximate fair values applicable balance sheet dates cash flow hedges carrying value cash flow hedges equal fair value instruments balance sheet date longterm debt fair value longterm debt based upon quoted market prices face value various debt securities december 31 2006 2005 2004 respectively variable interest rates fair values term loan revolving loan amounts borrowed senior secured credit facility approximate carrying values applicable balance sheet dates 8 derivative financial instruments exposed risks due potential changes interest rates associated variablerate interest term loan senior secured credit facility december 31 2006 variable rate interest debt instruments comprised 100 total debt excluding capital lease obligations based exposure provisions contained senior secured credit facility march 10 2006 entered two 1000 million notional amount interest rate swaps effectively fix interest rate portion variable rate debt swaps meet criteria derivative instruments account derivative instruments using guidance provided sfas 133 amended sfas 133 establishes accounting reporting standards derivative instruments including certain derivative instruments embedded contracts hedging activities requires recognition derivative instruments assets liabilities balance sheet measurement instruments fair value accounting treatment changes fair value dependent upon whether derivative instrument designated hedge type hedge derivatives designated cash flow hedges effective portion change fair value hedging instrument recognized comprehensive income settlement forecasted hedged transaction ineffective portion changes fair value hedging instrument recognized currently earnings company uses historic simulation based regression analysis assess effectiveness swaps hedge future cash flows forecasted transaction historical prospective basis simulation regresses monthly changes cash flows associated hedging instrument hedged item results regression indicated swaps highly effective offsetting future cash flows items hedged could reasonably assumed highly effective ongoing basis based results analysis companys intent use instruments reduce exposure changes future cash flows attributable interest payments company elected account swaps cash flow hedges measurement hedge ineffectiveness based comparison cumulative change fair value actual swap designated hedging instrument cumulative change fair value perfectly effective hypothetical derivative perfect hypothetical derivative defined derivatives implementation group issue g7 perfectly effective hypothetical swap mimics terms debt fixed interest rate assumed hedge instrument method measuring ineffectiveness known hypothetical derivative method actual swap recorded fair value companys consolidated balance sheets accumulated comprehensive income adjusted balance reflects lesser either cumulative change fair value actual swap cumulative change fair value perfect hypothetical derivative amount ineffectiveness equal excess cumulative change fair value actual swap cumulative change fair value perfect hypothetical derivative recorded currently earnings component income expense companys consolidated statements income december 31 2006 recorded 02 million current assets 02 million longterm assets 01 million current liabilities consolidated balance sheets based fair value derivative instruments date year ended december 31 2006 amounts recorded related ineffective portion cash flow hedges material amounts excluded assessment hedge effectiveness related hedge future cash flows periods year ended december 31 2006 amounts reclassified earnings connection forecasted transactions whose occurrence longer considered probable next twelve months company anticipates amount accumulated comprehensive loss reclassified earnings upon settlement hedge transactions less 1 million 9 investment iroc systems corp july 22 2004 entered agreement iroc systems corp iroc albertabased oilfield services company sell iroc ten remanufactured skytop well servicing rigs along supporting equipment inventory began delivery rigs fall 2004 rigs operated iroc western canada purchase price rigs 70 million usd amount converted agreed exchange rate 07634 917 million cdn paid way issuance 8187058 common shares iroc stock consideration shares deemed purchase price 112 cdn per share 2004 recognized loss 01 million upon delivery first six rigs contract represents difference aggregate carrying value rigs transferred fair market value delivery date iroc common shares received consideration six rigs final four rigs delivered 2005 recognized gain 19 million upon delivery represents difference aggregate carrying value delivered rigs fair market value delivery date iroc shares received consideration four rigs july 2005 sold additional well service rig support equipment iroc 09 million usd amount converted agreed exchange rate 07937 11 million cdn paid way issuance 547411 shares additional shares iroc common stock deemed issuance price 209 cdn per share recognized gain 07 million related transaction represents difference carrying value transferred equipment fair value additional shares transaction date december 31 2006 owned 8734469 shares iroc common stock represents approximately 230 irocs shares september 15 2005 iroc completed private placement series unsecured nonconvertible debentures also included 1050000 warrants purchase common shares iroc exercises warrants potentially dilutive keys ownership percentage iroc shares trade toronto venture stock exchange closing price 210 cdn per share december 31 2006 pursuant terms agreement iroc mr william austin chief financial officer mr newton w wilson iii general counsel appointed board directors iroc significant influence operations iroc control account investment iroc using equity method value investment iroc recorded consolidated balance sheets component noncurrent assets pro rata share irocs earnings losses entitled recorded consolidated statements operations component income expense offsetting increase decrease value investment appropriate earnings distributed back us iroc form dividends would result decrease value equity investment iroc net income approximately 18 million 18 million 02 million usd years ended december 31 2006 2005 2004 respectively irocs total assets december 31 2006 2005 2004 769 million 566 million 163 million usd respectively investment iroc totaled 107 million 103 million 38 million december 31 2006 2005 2004 respectively years ended december 31 2006 2005 2004 recorded 04 million 05 million 01 million respectively equity income related investment iroc years ended december 31 2006 2005 2004 earnings distributed us iroc distributed earnings gains losses arising disposal investment reportable income tax purposes result amounts record prorata share irocs earnings losses entitled result temporary difference book taxable income provisions sfas 109 record deferred tax asset liability appropriate account temporary differences 10 argentina foreign currency translation loss local currency functional currency foreign operations argentina former operations canada functional currency former egyptian operations us dollar cumulative translation gains losses resulting translating foreign subsidiarys financial statements functional currency us dollars included comprehensive income accumulated stockholders equity partial complete sale liquidation net investment foreign entity foreign currency translation gains losses former canadian operations material used conversion ratios 311 301 translate assets liabilities argentine subsidiary resulting cumulative foreign currency translation losses net tax 367 million 366 million 364 million december 31 2006 2005 2004 respectively foreign currency translation loss included accumulated comprehensive loss component stockholders equity 11 longterm debt components longterm debt follows senior secured credit facility july 29 2005 entered credit agreement senior secured credit facility senior secured credit facility consists revolving credit facility aggregate principal amount 650 million mature july 29 2010 ii senior term loan facility original aggregate amount 4000 million mature june 30 2012 iii prefunded letter credit facility aggregate amount 823 million mature july 29 2010 revolving credit facility includes 250 million subfacility additional letters credit proceeds term loan facility along cash hand used refinance existing 8375 senior notes existing 6375 senior notes revolving credit facility may used general corporate purposes borrowings senior secured credit facility december 31 2005 bore interest upon outstanding principal balance companys option prime rate plus margin 175 eurodollar rate plus margin 275 margins increased december 31 2005 050 june 30 2006 050 company meet certain filing targets 2003 annual report form 10k also required pay certain fees connection credit facilities including commitment fee percentage aggregate commitments senior secured credit facility contains certain covenants among things require us maintain consolidated leverage ratio defined generally ratio consolidated total debt consolidated ebitda follows senior secured credit facility also requires maintain consolidated interest coverage ratio defined generally ratio consolidated ebitda consolidated interest expense last day fiscal quarter beginning fourth fiscal quarter 2005 less 30 10 upon occurrence certain events default payment default obligations senior secured credit facility may accelerated obligations senior secured credit facility guaranteed subsidiaries secured assets including accounts receivable inventory equipment first amendment senior secured credit facility november 1 2005 amended senior secured credit facility first amendment increase amount capital expenditures allowed facility 2005 2006 terms first amendment allowed make annual capital expenditures 1750 million 2005 2000 million 2006 additionally certain conditions 250 million capital expenditure limit spent permitted fiscal year could carried expenditures next succeeding fiscal year previously senior secured credit facility limited annual capital expenditures 1500 million second amendment senior secured credit facility november 21 2006 amended senior secured credit facility second amendment allow company july 31 2007 file 2006 annual report form 10k quarterly reports 2005 2006 quarterly reports 2007 due waive defaults due failure file compliant sec reports prior periods ii reduce eurodollar interest rate spread 375 250 commitment fees 050 0375 iii increase limitation capital expenditures 2009 2250 million iv increase permitted stock repurchase basket 500 million 2500 million permit repurchases company made required sec filings although company still subject securities laws limitations ability repurchase stock released current financial information v increase permitted acquisitions basket 500 million 1000 million vi eliminate provision requiring company prepay term loan excess cash flow paid total 05 million fees expenses connection second amendment december 31 2006 company borrowings revolving credit facility senior secured credit facility 3960 million borrowed threemonth eurodollar rates plus margin 250 described company interest rate swaps hedge portion interest rate expense term loan july 27 2007 entered third amendment senior secured credit facility please see note 19subsequent events discussion amendment senior secured credit facility prior senior credit facility november 10 2003 entered fourth amended restated credit agreement prior senior credit facility prior senior credit facility consisted 1750 million revolving loan facility entire facility available letters credit previously right subject certain conditions increase total commitment prior senior credit facility 1750 million 2250 million able obtain additional lending commitments revolving loan commitments scheduled terminate november 10 2007 revolving loans would required paid date revolving loans bore interest based upon option agents base rate loans agents reserveadjusted libor rate loans plus either case margin would fluctuate based upon consolidated total leverage ratio either case according pricing grid set forth prior senior credit facility prior senior credit facility contained various financial covenants applicable specific periods including maximum consolidated total leverage ratio ii minimum consolidated interest coverage ratio iii minimum net worth prior senior credit facility subjected us restrictions including restrictions upon ability incur additional debt liens guarantee obligations merge consolidate persons make acquisitions sell assets pay dividends repurchase stock subordinated debt make investments loans advances make changes debt instruments organizational documents obligations prior senior credit facility guaranteed subsidiaries secured assets including accounts receivable inventory equipment failure file 2003 annual report form 10k timely basis violated covenants prior credit facility march 31 2004 july 29 2005 amended terms prior senior credit facility six times waive covenants extend due date 2003 report filings paid total 11 million 13 million fees years ended december 31 2005 2004 respectively related various amendments prior senior credit facility final due date prior senior credit facility filing annual report form 10k 2004 quarterly reports form 10q first three quarters 2004 october 31 2005 last amendment also extended date quarterly reports form 10q first quarter second quarter 2005 filed december 31 2005 july 29 2005 entered senior secured credit facility replaced prior senior credit facility 6375 senior notes may 14 2003 completed public offering 1500 million 6375 senior notes due may 1 2013 6375 senior notes proceeds public offering net fees expenses used repay balance revolving loan facility outstanding thenexisting credit facility remainder used general corporate purposes 6375 senior notes senior unsecured obligations fully unconditionally guaranteed substantially subsidiaries 6375 senior notes effectively subordinated keys secured indebtedness included borrowings prior senior credit facility 6375 senior notes required semiannual interest payments may 1 november 1 year interest 96 million 89 million paid 6375 senior notes 2004 2005 respectively 6375 senior notes repaid october 5 2005 price 100 outstanding principal amount plus accrued unpaid interest repayment date resulting net cash outlay 1541 million recognized loss 23 million transaction proceeds senior secured credit facility cash hand used repay 6375 notes 8375 senior notes march 6 2001 completed private placement 1750 million 8375 senior notes due march 1 2008 8375 senior notes together 6375 senior notes senior notes net cash proceeds private placement used repay remaining balance prior term loans portion revolving loans outstanding thenexisting credit facility march 1 2002 completed public offering additional 1000 million 8375 senior notes net cash proceeds public offering used repay thenoutstanding balance revolving loan facility credit facility 8375 senior notes senior unsecured obligations 8375 senior notes effectively subordinated keys secured indebtedness included borrowings prior senior credit facility 8375 senior notes required semiannual interest payments march 1 september 1 year interest 230 million 273 million paid 8375 senior notes 2004 2005 respectively redeemed 2750 million outstanding principal amount 8375 notes november 8 2005 8375 senior notes redeemed redemption price 104188 principal amount plus accrued unpaid interest redemption date net cash outlay 2909 million resulting loss 141 million proceeds senior secured credit facility cash hand used repay 8375 notes consents amend extend reporting requirements senior note indentures failure file 2003 annual report form 10k sec deliver trustee senior note indentures march 30 2004 default indentures senior notes 2004 2005 amended terms senior note indentures three times waive covenant noncompliance extend due date 2003 annual report form 10k filings order obtain amendments consents incurred 90 million 51 million expenses 2005 2004 respectively required last consent holders series senior notes file 2003 annual report form 10k may 31 2005 2004 quarterly reports form 10q annual report form 10k 2004 july 31 2005 consent also provided quarterly reports form 10q first quarter second quarter 2005 filed later october 31 2005 failed meet deadlines result june 6 2005 trustee senior notes sent us notice financial reporting violation triggered 60day cure period due failure cure default september 28 2005 received valid acceleration notice trustee 6375 senior notes result 6375 senior notes repaid october 5 2005 also redeemed 8375 senior notes november 8 2005 senior notes repaid funds senior secured credit facility cash hand 14 senior subordinated notes january 22 1999 completed private placement 150000 units consisting 1500 million 14 senior subordinated notes due january 15 2009 14 senior subordinated notes 150000 warrants purchase 2173433 shares companys common stock exercise price 488125 per share warrants net cash proceeds private placement used repay substantially remaining 1486 million principal amount plus accrued interest owed bridge loan facility arranged connection acquisition dawson production services inc 14 senior subordinated notes issued discount amortized interest expense term 14 senior subordinated notes 14 senior subordinated notes required semiannual interest payments january 15 july 15 year 14 senior subordinated notes subordinated senior indebtedness included borrowings prior senior credit facility 8375 senior notes 6375 senior notes years prior 2004 redeemed approximately 525 million principal amount 14 senior subordinated notes varying times redemption prices plus accrued interest repaid remaining 975 million outstanding principal amount 14 senior subordinated notes january 15 2004 notes redeemed redemption price 107 principal amount outstanding plus accrued unpaid interest redemption date total cash outlay 1112 million transaction resulted loss 120 million december 31 2006 63500 warrants exercised providing 42 million proceeds us leaving 86500 warrants outstanding date issuance value warrants estimated 74 million classified equity terms warrants required maintain effective registration statement covering shares common stock issuable upon exercise unable maintain effective registration statement required pay liquidated damages periods effective registration statement maintained unable maintain effective registration statement due failure timely file sec reports result paid liquidated damages starting 005 per warrant per week escalating 020 per warrant per week total amounts paid holders warrants 09 million 07 million 69200 years ended december 31 2006 2005 2004 respectively 5 convertible subordinated notes 1997 completed private placement 2160 million 5 convertible subordinated notes due september 15 2004 5 convertible notes 5 convertible notes subordinated senior indebtedness 5 convertible notes convertible holders option shares keys common stock conversion price 3850 per share subject certain adjustments 5 convertible notes redeemable option september 15 2000 whole part together accrued unpaid interest initial redemption price 10286 year beginning september 15 2000 declined ratably thereafter annual basis years prior 2004 repurchased canceled open market transactions approximately 1872 million principal amount 5 convertible notes various times prices interest 5 convertible notes payable march 15 september 15 year interest approximately 05 million paid march 15 2004 remaining 187 million outstanding principal amount 5 convertible notes matured repaid par september 15 2004 plus accrued interest fees total cash outlay 192 million default lease agreements discussed note 2saleleaseback transactions lease certain equipment tractors trailers frac tanks forklifts financial institutions master lease agreements certain master lease agreements required provide current annual quarterly financial reports obtained series waivers financial institutions regarding filing reports last allowed us september 30 2006 file annual report form 10k 2003 due inability provide audited financial statements year ended december 31 2003 comply sec rules time required file report compliance terms equipment leases intend seek additional waivers financial institutions result equipment lessors may demand leases repaid formal demands repayment made lessors december 31 2006 total amount outstanding lease agreements approximately 72 million recorded current liability 42 million consolidated balance sheets december 31 2006 represents obligation lease agreements accounted capital leases remaining 30 million represents remaining payments leases lessors account operating leases longterm debt principal repayment interest expense presented schedule repayment requirements longterm debt next five years thereafter december 31 2006 presented schedule estimated minimum lease payments capital lease obligations next five years thereafter december 31 2006 interest expense years ended december 31 2006 2005 2004 consisted following 12 commitments contingencies litigation various suits claims arising ordinary course business pending us due locations conduct business continental united states often subject jury verdicts arbitration hearings result favor plaintiffs believe disposition items result material adverse impact consolidated financial position results operations cash flows government investigations march 29 2004 notified fort worth office sec commenced inquiry regarding company sec issued formal order investigation july 15 2004 may 30 2007 informed staff enforcement division sec completed investigation key intend recommend enforcement action addition january 5 2005 served subpoena issued grand jury midland texas asked production documents connection investigation conducted us attorneys office western district texas october 2006 notified us attorneys office would pursue criminal charges company gonzales matter september 2005 class action lawsuit gonzales v key energy services inc filed ventura county california superior court alleging key pay hourly employees travel time yard wellhead certain employees denied meal rest periods shifts discovery case underway class certified key moved legal determination regarding use onduty meal periods court issued ruling march 16 2007 contrary keys interpretation relevant law key recently filed petition writ court appeals state california intend vigorously defend action however cannot predict outcome lawsuit recorded liability matter expect conclusion matter material impact results operations cash flows financial position eustace matter joe eustace employed key 1999 2004 vice president regional manager pursuant employment agreement key terminated cause february 2004 filed suit january 2006 alleging breach contract fraud conversion seeking reinstatement stock options case transferred harris county midland county texas jury trial began may 7 2007 jury found key energy cause terminate employment made finding damages july 20 2007 court entered judgment favor mr eustace approximately 14 million key considering whether appeal decision see note 19subsequent events discussion courts ruling recorded liability matter expect conclusion matter material impact results operations cash flows financial position litigation former officers employees april 7 2006 delivered notice former chief executive officer francis john intention treat termination employment effective may 1 2004 cause employment agreement us response notice mr john filed lawsuit us district court southern district texas houston division may 19 2006 alleged among things breached stock option agreements employment agreement june 13 2006 filed answer counterclaim denying mr johns claims asserting claims mr john breach contract declaratory judgment including among things declaration cause exists mr johns employment agreement june 20 2007 settled litigation mr john 230 million please see note 19subsequent events discussion settlement mr john also named lawsuit former general counsel jack loftis jr us district court district new jersey april 21 2006 alleges whistleblower claim sarbanesoxley act breach contract breach good faith fair dealing breach fiduciary duty wrongful termination mr loftis previously filed whistleblower claim department labor dol found reasonable cause believe violated sarbanesoxley act terminated mr loftis dismissed complaint july 28 october 2 2006 key moved dismiss lawsuit lack jurisdiction key energy lack venue june 28 2007 court denied motions motion transferred case us district court eastern district pennsylvania additionally august 21 2006 former chief financial officer royce w mitchell filed suit company 385th district court midland county texas alleging breach contract regard alleged bonuses benefits expense reimbursements conditional stock grants stock options believes entitled well relief theories quantum meruit promissory estoppel specific performance although scheduling order case discovery underway former controller assistant controller filed joint complaint company september 3 2006 133rd district court harris county texas alleging constructive termination breach contract following keys removal case federal court plaintiff dismissed constructive termination allegation parties agreed remand case back state court discovery ongoing intend vigorously defend claims however cannot predict outcome lawsuits shareholder class action suits since june 2004 named defendant six class action complaints alleged violations federal securities laws filed federal district court texas follows cause mo04cv082 peter kaltman behalf others similarly situated v key energy services inc francis john royce w mitchell richard j alario james j byerlotzer filed united states district court western district texas cause mo04cv083 malcolm lord individually behalf others similarly situated v key energy services inc francis john richard j alario james j byerlotzer royce w mitchell filed united states district court western district texas cause mo04cv090 celeste navon behalf others similarly situated v key energy services inc francis john royce mitchell james byerlotzer richard alario filed united states district court western district texas cause mo04cv104 david w ortbals behalf others similarly situated v key energy services inc richard j alario james j byerlotzer francis john royce w mitchell filed united states district court western district texas cause mo04cv0254 paul e steward behalf others similarly situated v key energy services inc francis john royce w mitchell filed united states district court western district texas cause mo04cv0227 garco investment llp individually behalf others similarly situated v key energy services inc richard j alario james j byerlotzer francis john royce w mitchell filed united states district court western district texas six actions consolidated one action november 1 2005 plaintiffs filed consolidated amended class action complaint brought behalf putative class purchasers securities april 29 2003 june 4 2004 complaint names key francis john royce w mitchell richard j alario james j byerlotzer defendants complaint generally alleges made false misleading statements omitted material information public statements sec reports class period violation securities exchange act 1934 including alleged overstatement revenues net income earnings per share ii failure take writedowns assets consisting primarily idle equipment iii failure amortize companys goodwill iv failure disclose company lacked adequate internal controls therefore unable ascertain true financial condition company v material inflation companys financial results relevant times vi misrepresentation value acquired businesses vii failure disclose misappropriation funds employees filed motion dismiss case individual defendants also filed motions dismiss case august 11 2006 court denied motion dismiss granted dismissals messrs alario byerlotzer filed answer consolidated amended complaint september 11 2006 trial set march 3 2008 plaintiffs filed motion class certification class certification hearing scheduled held september 6 2007 parties engaged written discovery document production shareholder derivative actions four shareholder derivative actions filed certain shareholders follows cause 2004cv44728 moonlight investments ltd behalf nominal defendant key energy services inc vs francis john richard j alario james j byerlotzer royce w mitchell kevin p collins w phillip marcum ralph michael iii key energy services inc filed 385th judicial district court midland county texas cause ep04ca0457 sandra weissman derivatively behalf key energy services inc vs francis john david j breazzano kevin p collins william fertig w phillip marcum ralph michael iii j robinson west james j byerlotzer royce w mitchell richard j alario key energy services inc maryland corporation filed united states district court western district texas cause ep04ca0456 daniel bloom derivatively behalf key energy services inc vs francis john david j breazzano kevin p collins william fertig w phillip marcum ralph michael iii j robinson west james j byerlotzer royce w mitchell richard j alario key energy services inc maryland corporation filed united states district court western district texas cause 200731254 sandra weissman derivatively behalf key energy services inc v francis john david j breazzano kevin p collins william fertig w phillip marcum ralph michael iii j robinson west james j byerlotzer royce w mitchell richard j alario key energy services inc maryland corporation filed 270th judicial district harris county texas francis john david j breazzano kevin p collins william fertig w phillip marcum ralph michael iii j robinson west james j byerlotzer royce w mitchell richard j alario named defendants one actions filed individual shareholders purporting act behalf asserting various claims named officer director defendants derivative actions generally allege facts shareholder class action suits also allege breach fiduciary duty abuse control waste corporate assets unjust enrichment defendants first derivative suit filed august 9 2004 state court midland texas plaintiff amended suit assert claims former independent public accountants kpmg llp filed motion dismiss claims action granted court march 29 2005 failure make demand directors filing suit plaintiff appealed ruling may 18 2006 intermediate court appeals issued opinion affirming trial courts ruling plaintiff pleaded sufficient facts excuse failure make demand reversing procedural grounds filed motion rehearing denied june 15 2006 appealed texas supreme court june 8 2007 texas supreme court denied keys petition review appeal case sent back trial court proceedings two derivative suits filed federal court el paso texas december 10 2004 actions transferred federal court midland texas consolidated agreement parties filed motion dismiss stay consolidated action individual defendants also filed motion dismiss july 10 2006 court entered order dismissing two derivative actions failure make demand dismissal plaintiff sandra weissman made putative demand key may 22 2007 ms weissman refiled suit texas state court harris county texas key yet formally served lawsuit matters described plaintiffs seeking unspecified amount monetary damages time cannot ascertain ultimate aggregate amount monetary liability financial impact class actions derivative lawsuits directors officers insurance aggregate amount 50 million cannot determine whether actions suits claims proceedings individually collectively material adverse effect business results operations financial condition cash flows named directors officers intend vigorously defend actions suits claims proceedings tax audits routinely subject audits tax authorities received material assessments tax auditors december 31 2006 recorded reserves future potential liabilities result audits management feels appropriate reserved assessments ultimate amount settlement vary estimate connection egyptian operations undergoing income tax audits periods operations based work date determined probable additional income taxes owed recorded liability approximately 11 million selfinsurance reserves maintain insurance policies workers compensation vehicle liability general liability claims insurance policies carry selfinsured retention limits deductibles per occurrence basis retention limits deductibles accounted accrual process workers compensation vehicular liability general liability claims maintain reserves workers compensation vehicle liability balance sheet based judgment estimates using actuarial method based claims incurred estimate general liability claims casebycase basis december 31 2006 2005 2004 recorded 690 million 646 million 585 million respectively selfinsurance reserves related workers compensation vehicular liabilities general liability claims environmental remediation liabilities environmental reserve matters including remediation efforts current locations relating previouslydisposed properties record liabilities remediation efforts probable costs conduct remediation efforts reasonably estimated see note 1organization summary significant accounting policiesenvironmental discussion accounting environmental reserves compliance applicable federal state environmental laws operations may affect environment may require remediation environmental reserves reflect managements assessment insurance coverage may apply matters issue whereas litigation reserves reflect application insurance coverage december 31 2006 2005 2004 recorded 46 million 53 million 55 million respectively environmental remediation liabilities guarantees provide performance bonds provide financial surety assurances remediation maintenance swd properties comply environmental protection standards costs swd properties may mandatory comply applicable laws regulations future required divest cease operations optimization improve operations safety regulatory compliance employment agreements retain qualified senior management enter employment agreements executive officers employment agreements run periods ranging one three years automatically extended yearly basis unless terminated us executive officer according terms employment agreement addition providing base salary executive officer employment agreements provide severance payments executive officer equal one three years executive officers base salary depending terms specific agreement december 31 2006 annual base salaries executive officers covered employment agreements totaled 29 million argentina payroll matters argentinean subsidiary key energy services sa previously underpaid social security contributions administración federal de ingressos públicos afip result applying incorrect rate calculation obligation additionally also underpaid afip result incorrect use food stamp equivalents provided employees compensation correct amounts reflected financial statements may 31 2007 paid afip 35 million representing cumulative amount underpayment interest result underpayment afip imposed fines penalties us begun audit filings made prior years recorded fair estimate liability matter expect ultimate resolution matter material impact results operations cash flows financial position operating lease arrangements key leases certain property equipment noncancelable operating leases generally expire various dates calendar 2020 term operating leases generally run 12 180 months varying payment dates throughout month december 31 2006 future minimum lease payments noncancelable operating leases follows thousands operating lease expense 170 million 195 million 218 million years ended december 31 2006 2005 2004 respectively well service rig purchase contract october 2005 entered purchase sale agreement acquire 30 well service rigs option acquire terms agreement december 31 2006 ordered five additional rigs option received delivery 21 rigs purchase sale agreement cancelable option time cancel agreement prior taking delivery 30 well service rigs may required refund seller amount contractual discount provided seller previously delivered well service rigs equipment purchases course purchasing equipment business lines instances required provide deposits payments equipment ordered instances payments nonrefundable cancel orders december 31 2006 outstanding approximately 113 million prepayments equipment orders new lease agreements third quarter 2006 entered lease agreement rental property state colorado use fishing rental operations lease agreement commenced may 31 2007 runs period seven years contains standard default terms insurance coverage requirements rental payments lease agreement total 28 million term lease sand purchases june 2006 entered agreement purchase sand use fracturing operations fixed price supplier agreement commence upon completion suppliers facility term three years subject renewal options mutually agreed upon prices required purchase annual minimum quantity sand supplier terms agreement event required make payments supplier amounts taken contractual minimum subject terms agreement believe nonperformance part would material impact financial position cash flows results operations 13 employee benefit plans maintain 401k plan part employee benefits package match 100 employee contributions 4 employees salary 401k plan subject maximum 8800 8400 8200 per participant years ended december 31 2006 2005 2004 respectively matching contributions 74 million 58 million 58 million years ended december 31 2006 2005 2004 respectively effective january 1 2006 longer offered participants option purchase units company stock 401k plan fund discontinued option participants transferred units key stock another 401k plan fund affect ability plan participants manage contributions 14 stockholders equity common stock december 31 2006 200000000 shares common stock authorized 010 par value 131624038 shares common stock issued outstanding net 497501 shares held treasury dividends issued december 31 2005 200000000 shares common stock authorized 010 par value 131334196 shares common stock issued outstanding net 416666 shares held treasury dividends issued december 31 2004 200000000 shares common stock authorized 010 par value 130791338 shares issued outstanding net 416666 shares held treasury dividends issued terms senior secured credit facility must meet certain financial covenants may pay dividends currently intend pay dividends treasury stock june 2006 company purchased 80835 shares restricted common stock previously granted certain companys officers pursuant agreement individuals permitted sell shares back company order satisfy minimum income tax withholding requirements related vesting grants account treasury stock cost method recorded 12 million treasury stock date purchase represented fair market value shares based price companys stock date purchase common stock warrants december 31 2006 86500 warrants outstanding issued january 1999 connection 14 senior subordinated notes recorded equity december 31 2006 warrants exercisable 1253350 shares common stock exercise price 488125 per underlying share terms warrants required maintain effective registration statement covering shares common stock issuable upon exercise unable maintain effective registration statement required pay liquidated damages periods effective registration statement maintained unable maintain effective registration statement due failure timely file periodic financial reports sec result paid liquidated damages starting 005 per warrant per week escalating 020 per warrant per week total amounts paid holders warrants 899600 730925 69200 years ended december 31 2006 2005 2004 respectively stock incentive plans january 13 1998 keys shareholders approved key energy group inc 1997 incentive plan amended 1997 incentive plan 1997 incentive plan amendment restatement plans formerly known key energy group inc 1995 stock option plan key energy group inc 1995 outside directors stock option plan collectively prior plans options previously granted prior plans outstanding november 17 1997 date board directors adopted 1997 incentive plan assumed continued without modification 1997 incentive plan 1997 incentive plan key may grant following awards certain key employees directors employees outside directors consultants key controlled subsidiaries parent corporation incentive stock options isos defined section 422 internal revenue code 1986 amended code ii nonstatutory stock options nsos iii stock appreciation rights sars iv shares restricted stock v performance shares performance units vi stockbased awards vii supplemental tax bonuses collectively incentive awards isos nsos sometimes referred collectively herein options key may grant incentive awards covering aggregate greater 30 million shares common stock ii 10 shares common stock issued outstanding last day calendar quarter provided however decrease number issued outstanding shares common stock previous calendar quarter shall result decrease number shares available issuance 1997 incentive plan december 31 2006 number shares common stock may covered incentive awards approximately 132 million shares incentive awards issued 1997 incentive plan expire terminate forfeited reason remain available issuance respect granting incentive awards term 1997 incentive plan except may otherwise provided applicable law shares keys common stock issued 1997 incentive plan may either newly issued treasury shares including shares keys common stock receive connection exercise incentive award number kind securities may issued 1997 incentive plan pursuant thenoutstanding incentive awards subject adjustments prevent enlargement dilution rights resulting stock dividends stock splits recapitalizations reorganization similar transactions maximum number shares keys common stock subject incentive awards may granted may vest applicable one covered employee defined calendar year shall 500000 shares subject adjustment provisions 1997 incentive plan maximum aggregate cash payout subject incentive awards including sars performance units performance shares payable cash stockbased awards payable cash may granted one covered employee fiscal year 25 million purposes 1997 incentive plan covered employees means named executive officer one group covered employees defined section 162m code regulations promulgated thereunder ie generally chief executive officer four highly compensated executive officers given year 1997 incentive plan administered compensation committee appointed board directors committee consisting less two directors outside director section 162m code ii nonemployee director rule 16b3 securities exchange act 1934 addition subject applicable shareholder approval requirements may issue nsos outside 1997 incentive plan period 20002001 board directors granted 37 million stock options outside 1997 incentive plan 37 million nonplan options addition include options granted plan conformity certain terms plan exercise price options granted 1997 incentive plan fair market value per share date options granted 1997 incentive plan common shares listed securities exchange fair market value determined using closing sales price immediate preceding business day reported securities exchange shares listed exchange since april 2005 fair market value determined using published closing price common stock pink sheets business day immediately preceding date grant 2006 determined company incorrectly determined measurement date certain grants options prior 2004 therefore exercise price options fair market value measurement date exercise nsos results us tax deduction us equal difference exercise price market price exercise date following table summarizes stock option activity related 1997 incentive plan 37 million options granted outside 1997 incentive plan 640000 outstanding december 31 2006 2005 2004 shares thousands 1cancelledexpired options 2006 include approximately 39 million options previously held former chief executive officer cancelled connection termination 2the 229030 options exercised 2004 aggregate intrinsic value approximately 16 million following table summarizes information stock options outstanding december 31 2006 shares thousands total fair value stock options granted years ended december 31 2006 2005 2004 60 million 23 million 30 million respectively unvested stock option awards outstanding december 31 2006 expect recognize approximately 44 million compensation expense weighted average remaining vesting period approximately 18 years fair value stock option grant estimated date grant using blackscholes optionpricing model based following weightedaverage assumptions common stock awards june 2005 began granting shares common stock outside directors certain employees shares restricted exercisability transferability certain cases required service periods subject forfeiture vested vesting periods grants range zero immediately vested three years total fair market value common stock grants 59 million 65 million years ended december 31 2006 2005 respectively common stock awards granted prior june 2005 june 2006 pursuant agreement issued restricted stock certain companys officers number common shares withheld order satisfy individuals income tax obligations associated vesting first tranche shares conveyed june 2005 transaction company purchased 80835 shares officers fair market value approximately 12 million purchase date accounted treasury stock transaction one officers permitted amount withheld excess required minimum required withholding current tax law sfas 123r previously variable plan accounting apb 25 required account grant liability award compensation expense award years ended december 31 2006 2005 02 million 01 million respectively issued total 550000 common shares outside directors employees 2005 weightedaverage issuance price 1190 per share 50000 issued outside directors vested immediately remaining 500000 vest ratably three year period issued total 370677 common shares outside directors employees 2006 weightedaverage issuance price 1592 per share 45677 shares issued outside directors vested immediately remaining 325000 shares vest ratably three year period december 31 2005 42858 common shares vested weightedaverage issuance price 1190 per share december 31 2006 338534 common shares vested weighted average issuance price 1230 per share 2005 one outside directors refused common stock award 7143 shares director issued common stock award 2006 common stock grants vest immediately upon issuance record expense equal fair market value shares date grant common stock grants immediately vest recognize compensation cost ratably vesting period grant net actual estimated forfeitures years ended december 31 2006 2005 recognized 36 million 25 million respectively expense related common stock awards net estimated actual forfeitures unvested common stock awards outstanding december 31 2006 expect recognize approximately 63 million compensation expense weighted average remaining vesting period approximately 16 years phantom share plan december 22 2006 company announced implementation phantom share plan certain companys employees granted total 460500 phantom shares phantom shares vest ratably fouryear period convey right grantee receive cash payment anniversary date grant equal fair market value phantom shares vesting date grantees permitted defer payment later date phantom shares qualify liability type award sfas 123r account awards fair value recognize compensation expense related phantom shares based change fair value awards period percentage service requirement performed net estimated actual forfeitures offsetting liability recorded consolidated balance sheets december 31 2006 amount compensation expense liabilities recorded related phantom share plan consolidated financial statements material unvested phantom share awards outstanding december 31 2006 expect recognize approximately 72 million compensation expense weighted average remaining vesting period approximately 25 years 15 transactions related parties employee loans advances time continuing comparative periods contained report made certain retention loans relocation loans employees executive officers retention loans forgiven various time periods long employee continues employment company relocation loans repaid upon employee selling prior residence december 31 2006 loans aggregate total approximately 287000 amount approximately 255000 represents relocation loans made employees company approximately 24000 made former officers company 16 segment information 2006 reportable business segments well servicing pressure pumping fishing rental well servicing operations provide full range well services including rigbased services oilfield transportation services ancillary oilfield services necessary complete maintain workover oil natural gas producing wells argentina operations included well servicing segment aggregate operating divisions engaged well servicing activities well servicing reportable segment pressure pumping operations provide well stimulation cementing services stimulation includes fracturing nitrogen services acidizing services used enhance production oil natural gas wells formations exhibit restricted flow oil natural gas cementing services include pumping cement well casing wellbore fishing rental operations provide services include fishing recover lost stuck equipment wellbore use fishing tools addition segment offers full line services rental equipment designed use land offshore drilling workover services includes inventory consisting tubulars handling tools pressurecontrol equipment power swivels evaluate performance operating segments based revenue ebitda nongaap measure disclosed corporate expenses include general corporate expenses associated managing reportable operating segments corporate assets consist principally cash equivalents shortterm investments deferred debt financing costs deferred income tax assets operating revenues foreign operations 783 million 682 million 590 million years ended december 31 2006 2005 2004 respectively gross margins foreign operations 191 million 173 million 180 million years ended december 31 2006 2005 2004 respectively 779 million 588 million 551 million identifiable assets related foreign operations december 31 2006 2005 2004 respectively capital expenditures foreign operations 95 million 70 million 78 million years ended december 31 2006 2005 2004 respectively 17 unaudited supplementary informationquarterly results operations set forth unaudited summarized quarterly information periods covered consolidated financial statements 1quarterly earnings per common share based weighted average number shares outstanding quarter sum quarters may equal annual earnings per common share 18 condensed consolidating financial statements senior notes retired fourth quarter 2005 guaranteed virtually domestic subsidiaries whollyowned guarantees joint several full complete unconditional restrictions ability subsidiary guarantors transfer funds parent company result guarantee arrangements required present following condensed consolidating financial information pursuant sec regulation sx rule 310 financial statements guarantors issuers guaranteed securities registered condensed consolidating balance sheets condensed consolidating statements operations condensed consolidating statements cash flows 19 subsequent events pemex contract february 2007 pemex awarded mexican subsidiary key energy services de méxico de rl de cv 22month contract valued 458 million provide field production solutions well workover services terms contract initially provide three well service rigs outfitted proprietary keyview® system install two keyview systems pemexowned well service rigs contract grants pemex option call additional rigs keyview systems future although incremental services included 458 million award commenced operations mexico second quarter current project cover pemexs north region assets initially focus oil wells burgos poza ricaaltamira cerro azul assets depending success initial project potential expansion opportunities veracruz reynosa fields north plus entire pemex southern region villa hermosa tabasco may possible settlement litigation former chief executive officer june 20 2007 settled litigation former chief executive officer francis john may 19 2006 mr john filed lawsuit company us district court southern district texas houston division response companys notice intention treat termination employment effective may 1 2004 cause employment agreement company connection companys cause termination company cancelled 3910000 stock options weightedaverage exercise price 882 would required pay mr john severance benefits addition company sought recover unamortized balance mr johns prepaid retention bonus terms settlement agreement settlement agreement company mr john company paid mr john 230 million cash july 5 2007 payment complete settlement amounts sought mr john including claims payment mr johns severance benefits related employment agreement value cancelled stock options expense reimbursement exemplary damages attorneys fees mr john responsible income taxes connection settlement agreement retain unamortized balance prepaid retention bonus settlement agreement precludes mr john competing us period two years settlement agreement contains mutual general releases claims among parties thereto requirement company mr john submit joint proposed order court dismissing prejudice claims asserted mr johns lawsuit company companys counterclaims mr john mr john also agreed indemnify company certain claims asserted company former wife connection settlement recorded 212 million charge general administrative expense year ended december 31 2004 year mr john terminated also recorded bad debt expense 90 million year ended december 31 2004 representing writeoff unvested portion retention bonus previously paid mr john record intangible asset 18 million 2007 representing noncompete agreement mr john amendment senior secured credit facility july 27 2007 company entered third amendment senior secured credit facility amendment eliminated 100 million limitation permitted acquisitions ii increased permitted stock repurchase basket 250 million 300 million iii extended august 31 2007 date could file annual report date must file quarterly reports form 10q 2005 2006 iv extended october 31 2007 date must file quarterly reports quarters ending march 31 2007 june 30 2007 eustace matter july 20 2007 court entered judgment favor mr eustace approximately 14 million judgment includes value mr eustaces stock options severance payments attorneys fees court costs judgment subject preand post judgment interest 825 per annum considering whether appeal decision report independent registered public accounting firm board directors shareholders key energy services inc audited accordance standards public company accounting oversight board united states consolidated financial statements key energy services inc subsidiaries referred report dated august 11 2007 included annual report shareholders incorporated reference part ii form report consolidated financial statements includes explanatory paragraph discusses error resulting overstatement deferred tax liabilities overstatement retained deficit previously reported december 31 2003 explanatory paragraph discusses adoption provisions statement financial accounting standards 123 revised 2004 audits conducted purpose forming opinion consolidated financial statements taken whole schedule listed index consolidated financial statements presented purposes additional analysis required part consolidated financial statements schedule subjected auditing procedures applied audits consolidated financial statements opinion fairly stated material respects relation consolidated financial statements taken whole grant thornton llp houston texas august 11 2007 s1 key energy services schedule iivaluation qualifying accounts thousands s2 exhibit index exhibit description 21 asset purchase agreement dated december 7 2004 among company key energy drilling inc key energy drilling beneficial lp key four corners inc key rocky mountain inc pattersonuti drilling company lp lllp incorporated reference exhibit 25 companys current report form 8k dated october 19 2006 file 18038 31 articles restatement company 32 unanimous consent board directors company dated january 11 2000 limiting designation additional authorized shares common stock incorporated reference exhibit 32 companys quarterly report form 10q quarter ended march 31 2000 file 18038 33 second amended restated bylaws key energy services inc incorporated reference exhibit 31 companys form 8k filed september 22 2006 file 18038 41 warrant agreement dated january 22 1999 company bank new york new york banking corporation warrant agent incorporated reference exhibit 99b companys form 8k filed february 3 1999 file 18038 42 warrant registration rights agreement dated january 22 1999 among company lehman brothers inc bear stearns co inc fac equities division first albany corporation dain rauscher wessels division dain rauscher incorporated reference exhibit 99e companys form 8k filed february 3 1999 file 18038 43 first supplemental indenture dated march 1 2002 among registrant guarantors defined therein us bank national association incorporated reference exhibit 41 companys current report form 8k dated march 1 2002 file 18038 44 first supplemental indenture dated may 9 2003 dated may 14 2003 company us bank national association trustee incorporated reference exhibit 41 companys current report form 8k dated may 14 2003 file 18038 45 consent solicitation statement company dated july 6 2004 regarding solicitation consents holders outstanding 6375 senior notes due 2013 8375 senior notes due 2008 incorporated reference exhibit 992 companys current report form 8k dated july 7 2004 file 18038 46 second supplemental indenture dated july 12 2004 company us bank national association trustee incorporated reference exhibit 42 companys current report form 8k dated october 19 2006 file 18038 47 fourth supplemental indenture dated july 12 2004 among company guarantors defined therein us bank national association trustee incorporated reference exhibit 43 companys current report form 8k dated october 19 2006 file 18038 48 supplement july 6 2004 consent solicitation statement company dated july 15 2004 regarding solicitation consents holders outstanding 6375 senior notes due 2013 8375 senior notes due 2008 incorporated reference exhibit 993 companys current report form 8k dated july 16 2004 file 18038 49 third supplemental indenture dated july 19 2004 company us bank national association trustee incorporated reference exhibit 44 companys current report form 8k dated october 19 2006 file 18038 410 fifth supplemental indenture dated july 19 2004 among company guarantors defined therein us bank national association trustee incorporated reference exhibit 45 companys current report form 8k dated october 19 2006 file 18038 411 consent solicitation statement key energy services inc dated january 7 2005 regarding solicitation consents holders outstanding 6375 senior notes due 2013 8375 senior notes due 2008 incorporated reference exhibit 992 companys current report form 8k dated january 7 2005 file 18038 412 fourth supplemental indenture dated january 19 2005 among key energy services inc guarantors party thereto us bank national association trustee respect companys 6375 senior notes due 2008 incorporated reference exhibit 41 companys current report form 8k dated january 24 2005 file 18038 413 sixth supplemental indenture dated january 21 2005 among key energy services inc guarantors party thereto us bank national association trustee respect companys 8375 senior notes due 2008 incorporated reference exhibit 41 companys current report form 8k dated january 24 2005 file 18038 414 fifth supplemental indenture dated april 5 2005 among key energy services inc guarantors party thereto us bank national association trustee respect companys 6375 senior notes due 2013 incorporated reference exhibit 42 companys current report form 8k dated april 7 2005 415 seventh supplemental indenture dated april 5 2005 among key energy services inc guarantors party thereto us bank national association trustee respect companys 8375 senior notes due 2008 incorporated reference exhibit 43 companys current report form 8k dated april 7 2005 file 18038 101 key energy group inc 1997 incentive plan amendment restatement effective november 17 1997 key energy group inc 1995 outside directors stock option plan incorporated reference exhibit b companys schedule 14a proxy statement filed november 26 1997 file 00022665 102 employment agreement key energy services inc richard j alario dated effective may 1 2004 incorporated reference exhibit 102 companys current report form 8k dated october 19 2006 file 18038 103 first amendment employment agreement company richard j alario effective june 24 2005 incorporated reference exhibit 1011 companys current report form 8k dated october 19 2006 file 18038 104 acknowledgment waiver richard j alario dated march 25 2005 regarding rescinded option grant incorporated reference exhibit 101 companys current report form 8k dated march 29 2005 105 employment agreement key energy services inc william bill austin dated march 1 2005 incorporated reference exhibit 101 companys current report form 8k dated march 7 2005 file 18038 106 first amendment employment agreement company william austin effective june 24 2005 incorporated reference exhibit 1012 companys current report form 8k dated october 19 2006 file 18038 107 employment agreement key energy services inc newton w trey wilson iii dated january 24 2005 incorporated reference exhibit 101 companys current report form 8k dated january 28 2005 file 18038 108 first amendment employment agreement company newton w wilson iii effective june 24 2005 incorporated reference exhibit 1013 companys current report form 8k dated october 19 2006 file 18038 109 acknowledgment waiver newton w wilson iii dated march 25 2005 regarding rescinded option grant incorporated reference exhibit 102 companys current report form 8k dated march 29 2005 1010 restated employment agreement dated effective january 1 2007 kim b clarke key energy services inc incorporated reference exhibit 101 companys current report form 8k dated october 19 2006 file 18038 1011 employment agreement key energy services inc jim flynt dated january 1 2004 incorporated reference exhibit 106 companys current report form 8k dated october 19 2006 file 18038 1012 employment agreement key energy services inc phil coyne dated november 17 2004 incorporated reference exhibit 108 companys current report form 8k dated october 19 2006 file 18038 1013 first amendment employment agreement company phil coyne effective january 24 2005 incorporated reference exhibit 109 companys current report form 8k dated october 19 2006 file 18038 1014 employment agreement key energy services inc weinheimer dated october 2 2006 incorporated reference exhibit 1017 companys current report form 8k dated october 19 2006 file 18038 1015 form restricted stock agreement key energy group inc 1997 incentive plan 1016 third amended restated credit agreement dated july 15 2002 among key energy services inc several lenders time parties thereto pnc bank national association administrative agent pnc capital markets inc wells fargo bank texas collead arrangers credit lyonnais new york bank lehman commercial paper inc royal bank canada documentation agents incorporated reference exhibit 101 companys quarterly report form 10q quarter ended september 30 2002 file 18038 1017 first amendment dated december 20 2002 third amended restated credit facility dates july 15 2002 among key energy services inc several lenders time parties thereto pnc bank national association administrative agent pnc capital markets inc wells fargo bank texas colead arrangers credit lyonnais new york bank lehman commercial paper inc royal bank canada documentation agents incorporated reference exhibit 1029 companys annual transition report form 10kt file 18038 1018 second amendment dated may 9 2003 third amended restated credit facility dated july 15 2002 among key energy services inc several lenders time parties thereto pnc bank national association administrative agent pnc capital markets inc wells fargo bank texas colead arrangers credit lyonnais new york bank lehman commercial paper inc royal bank canada documentation agents incorporated reference exhibit 101 companys current report form 8k dated may 9 2003 file 18038 1019 fourth amended restated credit agreement dated june 7 1997 amended restated november 10 2003 among company several lenders time parties thereto guarantors pnc bank national association administrative agent pnc capital markets inc wells fargo bank texas colead arrangers credit lyonnais new york branch syndication agent bank one na comerica bank codocumentation agents incorporated reference exhibit 991 companys current report form 8k dated november 13 2003 file 18038 1020 waiver first amendment credit agreement fourth amended restated credit agreement dated april 5 2004 among registrant guarantors defined credit agreement lenders defined credit agreement pnc bank national association administrative agent pnc capital markets inc wells fargo bank national association successorbymerger wells fargo bank texas national association colead arrangers credit lyonnais new york branch syndication agent bank one na comerica bank codocumentation agents incorporated reference exhibit 992 companys form 8k report dated april 7 2004 file 18038 1021 modification waiver second amendment fourth amended restated credit agreement dated august 31 2004 among company guarantors defined credit agreement lenders defined credit agreement pnc bank national association administrative agent pnc capital markets inc wells fargo bank national association successorbymerger wells fargo bank texas national association colead arrangers calyon new york branch successor merger credit lyonnais new york branch syndication agent jpmorgan chase bank na comerica bank codocumentation agents incorporated reference exhibit 991 companys current report form 8k report dated september 7 2004 file 18038 1022 second modification waiver third amendment fourth restated credit agreement december 17 2004 among company guarantors defined credit agreement lenders defined credit agreement pnc bank national association administrative agent pnc capital markets inc wells fargo bank national association successor bymerger wells fargo bank texas national association colead arrangers calyon new york branch successor merger credit lyonnais new york branch syndication agent jpmorgan chase bank na comerica bank codocumentation agents incorporated reference exhibit 991 companys current report form 8k report dated december 22 2004 file 18038 1023 third modification waiver fourth amendment fourth amended restated credit agreement dated march 30 2005 among company guarantors defined credit agreement lenders defined credit agreement pnc bank national association administrative agent pnc capital markets inc wells fargo bank national association successorbymerger wells fargo bank texas national association colead arrangers calyon new york branch successor merger credit lyonnais new york branch syndication agent jpmorgan chase bank na comerica bank codocumentation agents incorporated reference exhibit 101 companys current report form 8k dated april 5 2003 file 18038 1024 fourth modification waiver fifth amendment fourth amended restated credit agreement dated april 29 2005 among company guarantors defined credit agreement lenders defined credit agreement pnc bank national association administrative agent pnc capital markets inc wells fargo bank national association successorbymerger wells fargo bank texas national association colead arrangers calyon new york branch successorbymerger credit lyonnais new york branch syndication agent jpmorgan chase bank na comerica bank codocumentation agents incorporated reference exhibit 101 companys current report form 8k dated may 3 2005 1025 fifth modification wavier sixth amendment fourth amended restated credit agreement dates may 26 2005 among company guarantors defined credit agreement lenders defined credit agreement pnc bank national association administrative agent pnc capital markets inc wells fargo bank national association successorbymerger wells fargo bank texas national association coleas arrangers calyon new york branch successorbymerger credit lyonnais new york branch syndication agent jpmorgan chase bank na comerica bank codocumentation agents incorporated reference exhibit 101 companys current report form 8k dated june 1 2005 1026 agreement supply operation workover rigs pulling units vehicles equipment related services apache corporation registrant dated march 28 2002 incorporated reference exhibit 1018 companys current report form 8k dated october 19 2006 file 18038 1027 office lease effective january 20 2005 crescent 1301 mckinney lp key energy services inc incorporated reference exhibit 101 companys current report form 8k dated january 26 2005 file 18038 1028 first amendment office lease dated march 15 2005 crescent 1301 mckinney lp key energy services inc incorporated reference exhibit 101 companys current report form 8k dated june 30 2005 file 13038 1029 commitment letter dated june 1 2005 lehman brothers inc lehman commercial paper inc key energy services inc incorporated reference exhibit 101 companys current report form 8k dated june 2 2005 file 18038 1030 second amendment office lease dated july 24 2005 crescent 1301 mckinney lp key energy services inc incorporated reference exhibit 102 companys current report form 8k dated june 30 2005 file 18038 1031 credit agreement dated june 29 2005 among company borrower several lenders time party thereto lehman brothers inc sole lead arranger sole book runner lehman commercial paper inc syndication agent administrative agent collateral agent wells fargo foothill inc revolving administrative agent incorporated reference exhibit 101 companys current report form 8k dated august 4 2005 file 18038 1032 first amendment credit agreement first amendment guaranty collateral agreement dated november 1 2005 among company borrower guarantors lenders lehman commercial paper inc administrative agent lenders collateral agent lenders secured parties incorporated reference exhibit 101 companys current report form 8k dated november 7 2005 file 18038 1033 second amendment credit agreement dated november 21 2006 among company borrower guarantors lenders lehman commercial paper inc administrative agent lenders collateral agent lenders secured parties incorporated reference exhibit 101 companys current report form 8k dated october 19 2006 file 18038 1034 2006 phantom share plan key energy services inc incorporated reference exhibit 101 companys current report form 8k dated october 19 2006 file 18038 1035 form award agreement 2006 phantom share plan key energy services inc incorporated reference exhibit 102 companys current report form 8k dated october 19 2006 file 18038 1036 third amendment credit agreement dated july 27 2007 among company borrower guarantors lenders lehman commercial paper inc administrative agent lenders collateral agent lenders secured parties incorporated reference exhibit 101 companys current report form 8k dated july 31 2007 file 18038 161 letter dated december 7 2006 kpmg llp incorporated reference exhibit 42 companys current report form 8k dated october 19 2006 file 18038 21 significant subsidiaries company 311 certification ceo pursuant securities exchange act rules 13a14a 15d14a adopted pursuant section 302 sarbanesoxley act 2002 312 certification cfo pursuant securities exchange act rules 13a14a 15d14a adopted pursuant section 302 sarbanesoxley act 2002 32 certification ceo cfo pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 indicates management contract compensatory plan contract arrangement director executive officer participates filed herewithitem 15 exhibits financial statement schedules following financial statements schedules exhibits filed part report 1financial statementssee index consolidated financial statements page 61 2financial statement schedules filed part iv annual report listed •schedule iivaluation qualifying accounts omitted financial statement schedules required applicable required information shown financial statements notes financial statements exhibit index exhibit description 31 articles restatement company incorporated reference exhibit 31 companys annual report form 10k fiscal year ended december 31 2006 file 18038 32 unanimous consent board directors company dated january 11 2000 limiting designation additional authorized shares common stock incorporated reference exhibit 32 companys quarterly report form 10q quarter ended march 31 2000 file 18038 33 second amended restated bylaws key energy services inc incorporated reference exhibit 31 companys form 8k filed september 22 2006 file 18038 34 amendment second amended restated bylaws key energy services inc incorporated reference exhibit 31 companys form 8k filed november 2 2007 file 18038 41 warrant agreement dated january 22 1999 company bank new york new york banking corporation warrant agent incorporated reference exhibit 99b companys form 8k filed february 3 1999 file 18038 42 warrant registration rights agreement dated january 22 1999 among company lehman brothers inc bear stearns co inc fac equities division first albany corporation dain rauscher wessels division dain rauscher incorporated reference exhibit 99e companys form 8k filed february 3 1999 file 18038 43 indenture dated november 29 2007 among key energy services inc guarantors party thereto bank new york trust company na trustee incorporated reference exhibit 41 companys form 8k filed november 30 2007 file 18038 44 registration rights agreement dated november 29 2007 among key energy services inc subsidiary guarantors company party thereto lehman brothers inc banc america securities llc morgan stanley co incorporated representatives several initial purchasers named therein incorporated reference exhibit 42 companys form 8k filed november 30 2007 file 18038 101 key energy group inc 1997 incentive plan amendment restatement effective november 17 1997 key energy group inc 1995 outside directors stock option plan incorporated reference exhibit b companys schedule 14a proxy statement filed november 26 1997 file 00022665 102 form restricted stock agreement key energy group inc 1997 incentive plan 103 2006 phantom share plan key energy services inc incorporated reference exhibit 101 companys current report form 8k dated october 19 2006 file 18038 104 form award agreement 2006 phantom share plan key energy services inc incorporated reference exhibit 102 companys current report form 8k dated october 19 2006 file 18038 105 form stock appreciation rights agreement incorporated reference exhibit 991 companys form 8k filed august 24 2007 file 18038 106 form nonplan option agreement incorporated reference exhibit 41 companys registration statement form s8 filed september 25 2007 file 333146294 107 key energy services inc 2007 equity cash incentive plan incorporated reference appendix companys schedule 14a proxy statement filed november 1 2007 file 18038 108 form nonstatutory stock option agreement 2007 equity cash incentive plan 109 restated employment agreement dated effective december 31 2007 among richard j alario key energy services inc key energy shared services llc incorporated reference exhibit 101 companys form 8k filed january 7 2008 file 18038 1010 acknowledgment waiver richard j alario dated march 25 2005 regarding rescinded option grant incorporated reference exhibit 101 companys current report form 8k dated march 29 2005 1011 restated employment agreement dated effective december 31 2007 among william austin key energy services inc key energy shared services llc incorporated reference exhibit 102 companys form 8k filed january 7 2008 file 18038 1012 restated employment agreement dated effective december 31 2007 among newton w wilson iii key energy services inc key energy shared services llc incorporated reference exhibit 103 companys form 8k filed january 7 2008 file 18038 1013 acknowledgment waiver newton w wilson iii dated march 25 2005 regarding rescinded option grant incorporated reference exhibit 102 companys current report form 8k dated march 29 2005 1014 restated employment agreement dated effective december 31 2007 among kim b clarke key energy services inc key energy shared services llc incorporated reference exhibit 104 companys form 8k filed january 7 2008 file 18038 1015 employment agreement key energy services inc jim flynt dated january 1 2004 incorporated reference exhibit 106 companys current report form 8k dated october 19 2006 file 18038 1016 first amendment employment agreement dated november 26 2007 key energy services inc jim flynt incorporated reference exhibit 102 companys form 8k filed november 30 2007 file 18038 1017 employment agreement key energy services inc phil coyne dated november 17 2004 incorporated reference exhibit 108 companys current report form 8k dated october 19 2006 file 18038 1018 first amendment employment agreement company phil coyne effective january 24 2005 incorporated reference exhibit 109 companys current report form 8k dated october 19 2006 file 18038 1019 amended restated employment agreement key energy services inc weinheimer dated december 31 2007 1020 employment agreement dated august 14 2007 company j marshall dodson incorporated reference exhibit 101 companys quarterly report form 10q quarter ended september 30 2007 file 18038 1021 employment agreement dated august 14 2007 company bryan norwood incorporated reference exhibit 102 companys quarterly report form 10q quarter ended september 30 2007 file 18038 1022 office lease effective january 20 2005 crescent 1301 mckinney lp key energy services inc incorporated reference exhibit 101 companys current report form 8k dated january 26 2005 file 18038 1023 first amendment office lease dated march 15 2005 crescent 1301 mckinney lp key energy services inc incorporated reference exhibit 101 companys current report form 8k dated june 30 2005 file 13038 1024 second amendment office lease dated july 24 2005 crescent 1301 mckinney lp key energy services inc incorporated reference exhibit 102 companys current report form 8k dated june 30 2005 file 18038 1025 credit agreement dated june 29 2005 among company borrower several lenders time party thereto lehman brothers inc sole lead arranger sole book runner lehman commercial paper inc syndication agent administrative agent collateral agent wells fargo foothill inc revolving administrative agent incorporated reference exhibit 101 companys current report form 8k dated august 4 2005 file 18038 1026 first amendment credit agreement first amendment guaranty collateral agreement dated november 1 2005 among company borrower guarantors lenders lehman commercial paper inc administrative agent lenders collateral agent lenders secured parties incorporated reference exhibit 101 companys current report form 8k dated november 7 2005 file 18038 1027 second amendment credit agreement dated november 21 2006 among company borrower guarantors lenders lehman commercial paper inc administrative agent lenders collateral agent lenders secured parties incorporated reference exhibit 101 companys current report form 8k dated october 19 2006 file 18038 1028 third amendment credit agreement dated july 27 2007 among company borrower guarantors lenders lehman commercial paper inc administrative agent lenders collateral agent lenders secured parties incorporated reference exhibit 101 companys current report form 8k dated july 31 2007 file 18038 1029 fourth amendment credit agreement dated november 12 2007 among key energy services inc borrower guarantors signatory thereto lenders lehman commercial paper inc administrative agent lenders collateral agent lenders secured parties incorporated reference exhibit 101 companys form 8k filed november 15 2007 file 18038 1030 credit agreement dated november 29 2007 among key energy services inc lender time party thereto bank america na paying agent coadministrative agent swing line lender lc issuer wells fargo bank national association coadministrative agent swing line lender lc issuer incorporated reference exhibit 101 companys form 8k filed november 30 2007 file 18038 1031 stock membership interest purchase agreement dated september 19 2007 incorporated reference exhibit 101 companys form 8k filed september 20 2007 file 18038 1032 first amendment stock membership interest purchase agreement dated october 25 2007 among key energy services llc sellers defined therein incorporated reference exhibit 103 companys quarterly report form 10q quarter ended september 30 2007 file 18038 1033 asset purchase agreement dated december 7 2007 among key energy services llc kings oil tools inc thomas fowler incorporated reference exhibit 101 companys form 8k filed december 13 2007 file 18038 1033 purchase agreement dated november 14 2007 among company certain domestic subsidiaries lehman brothers inc banc america securities llc morgan stanley co incorporated representatives initial purchasers incorporated reference exhibit 102 companys form 8k filed november 15 2007 file 18038 21 significant subsidiaries company 23 consent independent registered public accounting firm 311 certification ceo pursuant securities exchange act rules 13a14a 15d14a adopted pursuant section 302 sarbanesoxley act 2002 312 certification cfo pursuant securities exchange act rules 13a14a 15d14a adopted pursuant section 302 sarbanesoxley act 2002 32 certification ceo cfo pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 indicates management contract compensatory plan contract arrangement director executive officer participates filed herewith signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized date february 29 2008 key energy services inc william austin william austin senior vice president chief financial officer power attorney person whose signature appears hereby constitutes appoints richard j alario william austin true lawful attorneyinfact agent full powers substitution name place stead capacities sign amendments annual report form 10k file exhibits thereto documents connection therewith securities exchange commission granting said attorneysinfact full power authority perform act behalf undersigned required done connection therewith pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature title date richard j alario richard j alario chairman board directors president chief executive officer principal executive officer february 29 2008 william austin william austin senior vice president chief financial officer principal financial officer february 29 2008 j marshall dodson j marshall dodson vice president chief accounting officer principal accounting officer february 29 2008 david j breazzano david j breazzano director february 29 2008 lynn r coleman director february 29 2008 kevin p collins kevin p collins director february 29 2008 william fertig william fertig director february 29 2008 w phillip marcum w phillip marcum director february 29 2008 ralph michael iii ralph michael iii director february 29 2008 william f owens william f owens director february 29 2008 arlene yocum arlene yocum director february 29 2008 robert k reeves robert k reeves director february 29 2008 j robinson west j robinson west director february 29 2008 exhibit index exhibit description 31 articles restatement company incorporated reference exhibit 31 companys annual report form 10k fiscal year ended december 31 2006 file 18038 32 unanimous consent board directors company dated january 11 2000 limiting designation additional authorized shares common stock incorporated reference exhibit 32 companys quarterly report form 10q quarter ended march 31 2000 file 18038 33 second amended restated bylaws key energy services inc incorporated reference exhibit 31 companys form 8k filed september 22 2006 file 18038 34 amendment second amended restated bylaws key energy services inc incorporated reference exhibit 31 companys form 8k filed november 2 2007 file 18038 41 warrant agreement dated january 22 1999 company bank new york new york banking corporation warrant agent incorporated reference exhibit 99b companys form 8k filed february 3 1999 file 18038 42 warrant registration rights agreement dated january 22 1999 among company lehman brothers inc bear stearns co inc fac equities division first albany corporation dain rauscher wessels division dain rauscher incorporated reference exhibit 99e companys form 8k filed february 3 1999 file 18038 43 indenture dated november 29 2007 among key energy services inc guarantors party thereto bank new york trust company na trustee incorporated reference exhibit 41 companys form 8k filed november 30 2007 file 18038 44 registration rights agreement dated november 29 2007 among key energy services inc subsidiary guarantors company party thereto lehman brothers inc banc america securities llc morgan stanley co incorporated representatives several initial purchasers named therein incorporated reference exhibit 42 companys form 8k filed november 30 2007 file 18038 101 key energy group inc 1997 incentive plan amendment restatement effective november 17 1997 key energy group inc 1995 outside directors stock option plan incorporated reference exhibit b companys schedule 14a proxy statement filed november 26 1997 file 00022665 102 form restricted stock agreement key energy group inc 1997 incentive plan 103 2006 phantom share plan key energy services inc incorporated reference exhibit 101 companys current report form 8k dated october 19 2006 file 18038 104 form award agreement 2006 phantom share plan key energy services inc incorporated reference exhibit 102 companys current report form 8k dated october 19 2006 file 18038 105 form stock appreciation rights agreement incorporated reference exhibit 991 companys form 8k filed august 24 2007 file 18038 106 form nonplan option agreement incorporated reference exhibit 41 companys registration statement form s8 filed september 25 2007 file 333146294 107 key energy services inc 2007 equity cash incentive plan incorporated reference appendix companys schedule 14a proxy statement filed november 1 2007 file 18038 108 form nonstatutory stock option agreement 2007 equity cash incentive plan 109 restated employment agreement dated effective december 31 2007 among richard j alario key energy services inc key energy shared services llc incorporated reference exhibit 101 companys form 8k filed january 7 2008 file 18038 1010 acknowledgment waiver richard j alario dated march 25 2005 regarding rescinded option grant incorporated reference exhibit 101 companys current report form 8k dated march 29 2005 1011 restated employment agreement dated effective december 31 2007 among william austin key energy services inc key energy shared services llc incorporated reference exhibit 102 companys form 8k filed january 7 2008 file 18038 1012 restated employment agreement dated effective december 31 2007 among newton w wilson iii key energy services inc key energy shared services llc incorporated reference exhibit 103 companys form 8k filed january 7 2008 file 18038 1013 acknowledgment waiver newton w wilson iii dated march 25 2005 regarding rescinded option grant incorporated reference exhibit 102 companys current report form 8k dated march 29 2005 1014 restated employment agreement dated effective december 31 2007 among kim b clarke key energy services inc key energy shared services llc incorporated reference exhibit 104 companys form 8k filed january 7 2008 file 18038 1015 employment agreement key energy services inc jim flynt dated january 1 2004 incorporated reference exhibit 106 companys current report form 8k dated october 19 2006 file 18038 1016 first amendment employment agreement dated november 26 2007 key energy services inc jim flynt incorporated reference exhibit 102 companys form 8k filed november 30 2007 file 18038 1017 employment agreement key energy services inc phil coyne dated november 17 2004 incorporated reference exhibit 108 companys current report form 8k dated october 19 2006 file 18038 1018 first amendment employment agreement company phil coyne effective january 24 2005 incorporated reference exhibit 109 companys current report form 8k dated october 19 2006 file 18038 1019 amended restated employment agreement key energy services inc weinheimer dated december 31 2007 1020 employment agreement dated august 14 2007 company j marshall dodson incorporated reference exhibit 101 companys quarterly report form 10q quarter ended september 30 2007 file 18038 1021 employment agreement dated august 14 2007 company bryan norwood incorporated reference exhibit 102 companys quarterly report form 10q quarter ended september 30 2007 file 18038 1022 office lease effective january 20 2005 crescent 1301 mckinney lp key energy services inc incorporated reference exhibit 101 companys current report form 8k dated january 26 2005 file 18038 1023 first amendment office lease dated march 15 2005 crescent 1301 mckinney lp key energy services inc incorporated reference exhibit 101 companys current report form 8k dated june 30 2005 file 13038 1024 second amendment office lease dated july 24 2005 crescent 1301 mckinney lp key energy services inc incorporated reference exhibit 102 companys current report form 8k dated june 30 2005 file 18038 1025 credit agreement dated june 29 2005 among company borrower several lenders time party thereto lehman brothers inc sole lead arranger sole book runner lehman commercial paper inc syndication agent administrative agent collateral agent wells fargo foothill inc revolving administrative agent incorporated reference exhibit 101 companys current report form 8k dated august 4 2005 file 18038 1026 first amendment credit agreement first amendment guaranty collateral agreement dated november 1 2005 among company borrower guarantors lenders lehman commercial paper inc administrative agent lenders collateral agent lenders secured parties incorporated reference exhibit 101 companys current report form 8k dated november 7 2005 file 18038 1027 second amendment credit agreement dated november 21 2006 among company borrower guarantors lenders lehman commercial paper inc administrative agent lenders collateral agent lenders secured parties incorporated reference exhibit 101 companys current report form 8k dated october 19 2006 file 18038 1028 third amendment credit agreement dated july 27 2007 among company borrower guarantors lenders lehman commercial paper inc administrative agent lenders collateral agent lenders secured parties incorporated reference exhibit 101 companys current report form 8k dated july 31 2007 file 18038 1029 fourth amendment credit agreement dated november 12 2007 among key energy services inc borrower guarantors signatory thereto lenders lehman commercial paper inc administrative agent lenders collateral agent lenders secured parties incorporated reference exhibit 101 companys form 8k filed november 15 2007 file 18038 1030 credit agreement dated november 29 2007 among key energy services inc lender time party thereto bank america na paying agent coadministrative agent swing line lender lc issuer wells fargo bank national association coadministrative agent swing line lender lc issuer incorporated reference exhibit 101 companys form 8k filed november 30 2007 file 18038 1031 stock membership interest purchase agreement dated september 19 2007 incorporated reference exhibit 101 companys form 8k filed september 20 2007 file 18038 1032 first amendment stock membership interest purchase agreement dated october 25 2007 among key energy services llc sellers defined therein incorporated reference exhibit 103 companys quarterly report form 10q quarter ended september 30 2007 file 18038 1033 asset purchase agreement dated december 7 2007 among key energy services llc kings oil tools inc thomas fowler incorporated reference exhibit 101 companys form 8k filed december 13 2007 file 18038 1033 purchase agreement dated november 14 2007 among company certain domestic subsidiaries lehman brothers inc banc america securities llc morgan stanley co incorporated representatives initial purchasers incorporated reference exhibit 102 companys form 8k filed november 15 2007 file 18038 21 significant subsidiaries company 23 consent independent registered public accounting firm 311 certification ceo pursuant securities exchange act rules 13a14a 15d14a adopted pursuant section 302 sarbanesoxley act 2002 312 certification cfo pursuant securities exchange act rules 13a14a 15d14a adopted pursuant section 302 sarbanesoxley act 2002 32 certification ceo cfo pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 indicates management contract compensatory plan contract arrangement director executive officer participates filed herewith report independent registered public accounting firm board directors shareholders key energy services inc audited accordance standards public company accounting oversight board united states consolidated financial statements key energy services inc subsidiaries referred report dated february 26 2008 included annual report security holders incorporated reference part ii form report consolidated financial statements includes explanatory paragraphs discuss adoption statement financial accounting standards 123 revised 2004 share based payments financial accounting standards interpretation 48 accounting uncertainty income taxes fsp eitf 00192 accounting registration payment arrangements audits basic financial statements included financial statement schedule listed index appearing item 15 responsibility companys management opinion financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein grant thornton llp houston texas february 26 2008 s1 key energy services inc subsidiaries schedule iivaluation qualifying accounts thousands s2item 15 exhibits financial statement schedules following financial statements schedules exhibits filed part report 1 financial statements see “index consolidated financial statements” page 64 2 financial statement schedules filed part iv report listed • schedule ii valuation qualifying accounts omitted financial statement schedules required applicable required information shown financial statements notes financial statements 3 exhibits  indicates management contract compensatory plan contract arrangement director executive officer participates filed herewith signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized key energy services inc j marshall dodson j marshall dodson vice president chief accounting officer principal financial officer date february 27 2009 power attorney person whose signature appears hereby constitutes appoints richard j alario j marshall dodson true lawful attorneyinfact agent full powers substitution name place stead capacities sign amendments annual report form 10k file exhibits thereto documents connection therewith securities exchange commission granting said attorneysinfact full power authority perform act behalf undersigned required done connection therewith pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated report independent registered public accounting firm board directors shareholders key energy services inc audited accordance standards public company accounting oversight board united states consolidated financial statements key energy services inc subsidiaries referred report dated february 24 2009 included annual report security holders incorporated reference part ii form report consolidated financial statements includes explanatory paragraphs discuss adoption financial accounting standards interpretation 48 accounting uncertainty income taxes fsp eitf 00192 accounting registration payment arrangements audits basic financial statements included financial statement schedule listed index appearing item 15 responsibility company’s management opinion financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein grant thornton llp houston texas february 24 2009 s1 key energy services inc subsidiaries schedule ii valuation qualifying accounts s2 exhibit index  indicates management contract compensatory plan contract arrangement director executive officer participates filed herewithitem 15 exhibits financial statement schedules following financial statements exhibits filed part report 1 financial statements see “index consolidated financial statements” page 54 2 omitted financial statement schedules required applicable required information shown financial statements notes financial statements 3 exhibits  indicates management contract compensatory plan contract arrangement director executive officer participates filed herewith signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized key energy services inc tm whichard iii tm whichard iii senior vice president chief financial officer principal financial officer date february 26 2010 power attorney person whose signature appears hereby constitutes appoints richard j alario tm whichard iii true lawful attorneyinfact agent full powers substitution name place stead capacities sign amendments annual report form 10k file exhibits thereto documents connection therewith securities exchange commission granting said attorneysinfact full power authority perform act behalf undersigned required done connection therewith pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities february 26 2010 exhibit index  indicates management contract compensatory plan contract arrangement director executive officer participates filed herewithitem 15 exhibits financial statement schedules following financial statements exhibits filed part report 1 financial statements see “index consolidated financial statements” page 48 2 omitted financial statement schedules required applicable required information shown financial statements notes financial statements 3 exhibits exhibit index follows signature pages report incorporated reference herein sets forth list exhibits report signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized key energy services inc tm whichard iii tm whichard iii senior vice president chief financial officer principal financial officer date february 25 2011 power attorney person whose signature appears hereby constitutes appoints richard j alario tm whichard iii true lawful attorneyinfact agent full powers substitution name place stead capacities sign amendments annual report form 10k file exhibits thereto documents connection therewith securities exchange commission granting said attorneysinfact full power authority perform act behalf undersigned required done connection therewith pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities february 25 2011 exhibit index  indicates management contract compensatory plan contract arrangement director executive officer participates filed herewithitem 15 exhibits financial statement schedules following financial statements exhibits filed part report 1 financial statements see “index consolidated financial statements” page 52 2 omitted financial statement schedules required applicable required information shown financial statements notes financial statements 3 exhibits exhibit index follows signature pages report incorporated reference herein sets forth list exhibits report signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized key energy services inc tm whichard iii tm whichard iii senior vice president chief financial officer duly authorized officer principal financial officer date february 25 2013 power attorney person whose signature appears hereby constitutes appoints richard j alario tm whichard iii true lawful attorneyinfact agent full powers substitution name place stead capacities sign amendments annual report form 10k file exhibits thereto documents connection therewith securities exchange commission granting said attorneysinfact full power authority perform act behalf undersigned required done connection therewith pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities february 25 2013 signature title richard j alario chairman board directors president chief richard j alario executive officer principal executive officer tm whichard iii senior vice president chief financial officer principal tm whichard iii financial officer mark cox vice president controller principal accounting officer mark cox lynn r coleman director lynn r coleman kevin p collins director kevin p collins william fertig director william fertig w phillip marcum director w phillip marcum exhibit indexitem 15 exhibits financial statement schedules following financial statements exhibits filed part report 1 financial statements see “index consolidated financial statements” page 44 2 omitted financial statement schedules required applicable required information shown financial statements notes financial statements 3 exhibits exhibit index follows signature pages report incorporated reference herein sets forth list exhibits report signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized key energy services inc j marshall dodson j marshall dodson senior vice president chief financial officer duly authorized officer principal financial officer date february 25 2014 power attorney person whose signature appears hereby constitutes appoints richard j alario j marshall dodson true lawful attorneyinfact agent full powers substitution name place stead capacities sign amendments annual report form 10k file exhibits thereto documents connection therewith securities exchange commission granting said attorneysinfact full power authority perform act behalf undersigned required done connection therewith pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities february 25 2014 signature title richard j alario chairman board directors president chief richard j alario executive officer principal executive officer j marshall dodson senior vice president chief financial officer principal j marshall dodson financial officer mark cox vice president controller principal accounting officer mark cox lynn r coleman director lynn r coleman kevin p collins director kevin p collins william fertig director william fertig w phillip marcum director w phillip marcum ralph michael iii director ralph michael iii william f owens director william f owens robert k reeves director robert k reeves mark h rosenberg director mark h rosenberg j robinson west director j robinson west arlene yocum director arlene yocum exhibit indexitem 15 exhibits financial statement schedules following financial statements exhibits filed part report 1 financial statements see “index consolidated financial statements” page 44 2 omitted financial statement schedules required applicable required information shown financial statements notes financial statements 3 exhibits exhibit index follows signature pages report incorporated reference herein sets forth list exhibits report signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized key energy services inc j marshall dodson j marshall dodson senior vice president chief financial officer duly authorized officer principal financial officer date february 24 2015 power attorney person whose signature appears hereby constitutes appoints richard j alario j marshall dodson true lawful attorneyinfact agent full powers substitution name place stead capacities sign amendments annual report form 10k file exhibits thereto documents connection therewith securities exchange commission granting said attorneysinfact full power authority perform act behalf undersigned required done connection therewith pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities february 24 2015 signature title richard j alario chairman board directors president chief richard j alario executive officer principal executive officer j marshall dodson senior vice president chief financial officer principal j marshall dodson financial officer mark cox vice president controller principal accounting officer mark cox lynn r coleman director lynn r coleman kevin p collins director kevin p collins william fertig director william fertig w phillip marcum director w phillip marcum ralph michael iii director ralph michael iii william f owens director william f owens robert k reeves director robert k reeves mark h rosenberg director mark h rosenberg arlene yocum director arlene yocum exhibit indexitem 15 exhibits financial statement schedules following financial statements exhibits filed part report 1 financial statements see “index consolidated financial statements” page 50 2 omitted financial statement schedules required applicable required information shown financial statements notes financial statements 3 exhibits exhibit index follows signature pages report incorporated reference herein sets forth list exhibits report item 16 form 10k summary applicable signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized key energy services inc j marshall dodson j marshall dodson senior vice president chief financial officer duly authorized officer principal financial officer date march 2 2017 power attorney person whose signature appears hereby constitutes appoints robert drummond j marshall dodson true lawful attorneyinfact agent full powers substitution name place stead capacities sign amendments annual report form 10k file exhibits thereto documents connection therewith securities exchange commission granting said attorneysinfact full power authority perform act behalf undersigned required done connection therewith pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities march 2 2017 signature title philip norment chairman philip norment robert drummond director robert drummond president chief executive officer principal executive officer j marshall dodson senior vice president chief financial officer j marshall dodson principal financial officer eddie picard vice president controller eddie picard principal accounting officer sherman k edmiston iii director sherman k edmiston iii c christopher gaut director c christopher gaut bryan kelln director bryan kelln jacob kotzubei director jacob kotzubei steven h pruett director steven h pruett mary ann sigler director mary ann sigler scott vogel director scott vogel hh tripp wommack iii director hh tripp wommack iii exhibit indexitem 15 exhibits financial statement schedules following financial statements exhibits filed part report 1 financial statements see “index consolidated financial statements” page 45 2 omitted financial statement schedules required applicable required information shown financial statements notes financial statements 3 exhibits exhibit index follows signature pages report incorporated reference herein sets forth list exhibits report item 16 form 10k summary applicable exhibit index signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized key energy services inc j marshall dodson j marshall dodson senior vice president chief financial officer duly authorized officer principal financial officer date february 28 2018 power attorney person whose signature appears hereby constitutes appoints robert drummond j marshall dodson true lawful attorneyinfact agent full powers substitution name place stead capacities sign amendments annual report form 10k file exhibits thereto documents connection therewith securities exchange commission granting said attorneysinfact full power authority perform act behalf undersigned required done connection therewith pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities february 28 2018 signature title philip norment chairman philip norment robert drummond director robert drummond president chief executive officer principal executive officer j marshall dodson senior vice president chief financial officer j marshall dodson principal financial officer eddie picard vice president controller eddie picard principal accounting officer sherman k edmiston iii director sherman k edmiston iii c christopher gaut director c christopher gaut bryan kelln director bryan kelln jacob kotzubei director jacob kotzubei steven h pruett director steven h pruett mary ann sigler director mary ann sigler scott vogel director scott vogel hh tripp wommack iii director hh tripp wommack iiiitem 15 exhibits financial statement schedules following financial statements exhibits filed part report 1 financial statements see “index consolidated financial statements” page 41 2 omitted financial statement schedules required applicable required information shown financial statements notes financial statements 3 exhibits exhibit index follows signature pages report incorporated reference herein sets forth list exhibits report item 16 form 10k summary applicable exhibit index signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized key energy services inc date march 12 2020 j marshall dodson j marshall dodson interim chief executive officer senior vice president chief financial officer duly authorized officer principal financial officer power attorney person whose signature appears hereby constitutes appoints j marshall dodson true lawful attorneyinfact agent full powers substitution name place stead capacities sign amendments annual report form 10k file exhibits thereto documents connection therewith securities exchange commission granting said attorneysinfact full power authority perform act behalf undersigned required done connection therewith pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities march 12 2020 signature title harry quarls chairman harry quarls j marshall dodson senior vice president chief financial officer interim chief executive officer j marshall dodson principal financial executive officer louis coale vice president controller louis coale principal accounting officer alan menkes director alan menkes hh tripp wommack iii director hh tripp wommack iii jacob kotzubei director jacob kotzubei marcus rowland director marcus rowland sherman k edmiston iii director sherman k edmiston iiiitem 15 exhibits financial statement schedules following financial statements exhibits filed part report 1 financial statements see “index consolidated financial statements” page 50 2 omitted financial statement schedules required applicable required information shown financial statements notes financial statements 3 exhibits exhibit index follows signature pages report incorporated reference herein sets forth list exhibits report signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized key energy services inc j marshall dodson j marshall dodson senior vice president chief financial officer duly authorized officer principal financial officer date march 4 2016 power attorney person whose signature appears hereby constitutes appoints richard j alario j marshall dodson true lawful attorneyinfact agent full powers substitution name place stead capacities sign amendments annual report form 10k file exhibits thereto documents connection therewith securities exchange commission granting said attorneysinfact full power authority perform act behalf undersigned required done connection therewith pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities march 4 2016 signature title richard j alario chief executive officer richard j alario principal executive officer j marshall dodson senior vice president chief financial officer j marshall dodson principal financial officer mark cox vice president controller mark cox principal accounting officer lynn r coleman director lynn r coleman kevin p collins director kevin p collins william fertig director william fertig w phillip marcum director w phillip marcum ralph michael iii director ralph michael iii william f owens director william f owens robert k reeves director robert k reeves mark h rosenberg director mark h rosenberg arlene yocum director arlene yocum exhibit indexitem 15 exhibits financial statement schedules following financial statements exhibits filed part report 1 financial statements see “index consolidated financial statements” page 45 2 omitted financial statement schedules required applicable required information shown financial statements notes financial statements 3 exhibits exhibit index follows signature pages report incorporated reference herein sets forth list exhibits report item 16 form 10k summary applicable exhibit index signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized key energy services inc date march 15 2019 j marshall dodson j marshall dodson senior vice president chief financial officer duly authorized officer principal financial officer power attorney person whose signature appears hereby constitutes appoints robert saltiel j marshall dodson true lawful attorneyinfact agent full powers substitution name place stead capacities sign amendments annual report form 10k file exhibits thereto documents connection therewith securities exchange commission granting said attorneysinfact full power authority perform act behalf undersigned required done connection therewith pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities march 15 2019 signature title philip norment chairman philip norment robert salteil director robert saltiel president chief executive officer principal executive officer j marshall dodson senior vice president chief financial officer j marshall dodson principal financial officer louis coale vice president controller louis coale principal accounting officer sherman k edmiston iii director sherman k edmiston iii bryan kelln director bryan kelln jacob kotzubei director jacob kotzubei steven h pruett director steven h pruett mary ann sigler director mary ann sigler scott vogel director scott vogel hh tripp wommack iii director hh tripp wommack iiinanitem 15 exhibits financial statements reports form 8k index exhibits following documents filed part report 1 see index financial statements set forth item 8 2 financial statements schedules key energy services inc consolidated supplementary financial statement schedule three years ended june 30 2002 schedule iiconsolidated valuation qualifying accountss1 supplemental schedules one listed omitted absence conditions required information included consolidated financial statements notes thereto 3 exhibits 31 amended restated articles incorporation company incorporated reference companys registration statement form s4 registration 333369 32 amended restated bylaws company incorporated reference companys registration statement form s4 dated march 8 1996 registration 333369 33 amendment amended restated articles incorporation company incorporated reference exhibit 31 companys current report form 8k dated february 2 1998 file 18038 34 amendment amended restated articles incorporation company incorporated reference exhibit definitive proxy statement schedule 14a filed company november 17 1998 file 18038 35 articles amendment amended restated articles incorporation company incorporated reference exhibit 31 companys quarterly report form 10q quarter ended march 31 2000 file 18038 36 unanimous consent board directors company dated january 11 2000 limiting designation additional authorized shares common stock incorporated reference exhibit 32 companys quarterly report form 10q quarter ended march 31 2000 file 18038 41 indenture dated september 25 1997 among key energy group inc american stock transfer trust company incorporated reference exhibit 10a companys quarterly report form 10q quarter ended september 30 1997 file 18038 42 warrant agreement dated january 22 1999 company bank new york new york banking corporation warrant agent incorporated reference exhibit 99b companys form 8k filed february 3 1999 file 18038 43 indenture dated january 22 1999 company bank new york trustee incorporated reference exhibit 99c companys form 8k filed february 3 1999 file 18038 44 warrant registration rights agreement dated january 22 1999 among company lehman brothers inc bear stearns co inc facequities division first albany corporation dain rauscher wessels division dain rauscher incorporated reference exhibit 99e companys form 8k filed february 3 1999 file 18038 45 indenture dated march 6 2001 company chase manhattan bank new york banking corporation trustee incorporated reference exhibit 41 companys form 8k filed march 20 2001 file 18038 101 employment agreement company kirk edwards dated july 1 1996 incorporated reference exhibit 101 companys annual report form 10k year ended june 30 1997 file 18038 102 550000000 second amended restated senior credit facility among key energy group inc pnc bank national association norwest bank texas na pnc capital markets inc several lenders time parties thereto dated june 6 1997 amended restated september 14 1998 incorporated reference exhibit 997 companys current report form 8k dated september 28 1998 file 18038 103 amended restated master guarantee collateral agreement made key energy group inc certain subsidiaries favor norwest bank texas na dated june 6 1998 amended restated september 14 1998 incorporated reference exhibit 998 companys current report form 8k dated september 28 1998 file 18038 104 intercreditor collateral agency agreement dated september 14 1998 incorporated reference exhibit 999 companys current report form 8k dated september 28 1998 file 18038 105 consulting agreement dated october 7 1998 among key energy group inc michael e little incorporated reference exhibit 10a companys quarterly report form 10q quarter ended december 31 1998 file 18038 106 noncompete agreement dated november 13 1998 key energy group inc james j byerlotzer incorporated reference exhibit 10c companys quarterly report form 10q quarter ended december 31 1998 file 18038 107 noncompete agreement dated october 20 1998 key energy group inc joseph b eustace incorporated reference exhibit 10e companys quarterly report form 10q quarter ended december 31 1998 file 18038 108 consulting agreement dated november 12 1998 among key energy group inc c ron laidley incorporated reference exhibit 10f companys quarterly report form 10q quarter ended december 31 1998 file 18038 109 key energy group inc performance compensation plan incorporated reference exhibit 10g companys quarterly report form 10q quarter ended december 31 1998 file 18038 1010 first amendment dated december 3 1997 second amended restated senior credit facility dated june 6 1997 amended restated november 6 1997 incorporated reference exhibit 10h companys quarterly report form 10q quarter ended december 31 1998 file 18038 1011 second amendment dated december 29 1998 second amended restated senior credit facility dated june 6 1997 amended restated september 14 1998 amended first amendment dated november 19 1998 incorporated reference exhibit 10i companys quarterly report form 10q quarter ended december 31 1998 file 18038 1012 purchase agreement dated january 19 1999 among registrant certain subsidiaries lehman brothers inc bear stearns co inc first albany corporation dain rauscher wessels division dain rauscher incorporated reference exhibit 99a companys form 8k filed february 3 1999 file 18038 1013 employment agreement company michael r furrow dated january 4 1999 incorporated reference exhibit 10g companys quarterly report form 10q quarter ended december 31 1998 file 18038 1014 third amendment dated april 8 1999 second amended restated senior credit facility among company several lenders time parties thereto pnc bank national association administrative agent norwest bank texas na collateral agent pnc capital markets inc arranger incorporated reference exhibit 995 companys current report form 10k dated april 8 1999 file 18038 1015 fourth amendment dated april 15 1999 second amended restated senior credit facility among company several lenders time parties thereto pnc bank national association administrative agent norwest bank texas na collateral agent pnc capital markets inc arranger incorporated reference exhibit 996 companys current report form 10k dated april 8 1999 file 18038 1016 fifth amendment dated may 10 1999 second amended restated senior credit facility among company several lenders time parties thereto pnc bank national association administrative agent norwest bank texas na collateral agent pnc capital markets inc arranger incorporated reference exhibit 1091 companys annual report form 10k dated june 30 1999 file 18038 1017 employment agreement dated august 5 1999 thomas k grundman key energy services inc incorporated reference exhibit 102 companys quarterly report form 10q quarter ended september 30 1999 file 18038 1018 agreement dated august 2 1999 francis john key energy services inc incorporated reference exhibit 105 companys quarterly report form 10q quarter ended september 30 1999 file 18038 1019 promissory note dated august 3 1999 made thomas k grundman favor key energy services inc incorporated reference exhibit 106 quarterly report form 10q quarter ended september 30 1999 file 18038 1020 demand note dated august 3 1999 made thomas k grundman favor key energy services inc incorporated reference exhibit 107 quarterly report form 10q quarter ended september 30 1999 file 18038 1021 amendment 1 dated december 1 1999 agreement dated august 2 1999 francis john key energy services inc incorporated reference exhibit 101 companys quarterly report form 10q quarter ended december 31 1999 file 18038 1022 sixth amendment dated july 14 1999 second amended restated senior credit facility among company several lenders time parties thereto pnc bank national association administrative agent norwest bank texas na collateral agent pnc capital markets inc arranger incorporated reference exhibit 101 companys quarterly report form 10q quarter ended march 31 2000 file 18038 1023 seventh amendment dated march 1 2000 second amended restated senior credit facility among company several lenders time parties thereto pnc bank national association administrative agent norwest bank texas na collateral agent pnc capital markets inc arranger incorporated reference exhibit 102 companys quarterly report form 10q quarter ended march 31 2000 file 18038 1024 production delivery agreement dated march 31 2000 among odessa exploration incorporated norwest energy capital inc incorporated reference exhibit 103 companys quarterly report form 10q quarter ended march 31 2000 file 18038 1025 agreement dated march 31 2000 among odessa exploration incorporated norwest energy capital inc company incorporated reference exhibit 104 companys quarterly report form 10q quarter ended march 31 2000 file 18038 1026 underwriting agreement dated june 27 2000 among company lehman brothers inc representative several underwriters named schedule thereto incorporated reference exhibit 11 companys current report form 8k dated june 29 2000 file 18038 1027 amendment 2 dated june 16 2000 agreement dated august 2 1999 amended francis john key energy services inc incorporated reference exhibit 1083 companys annual report form 10k dated june 20 2000 file 18038 1028 amendment dated july 1 2000 employment agreement dated august 5 1999 thomas k grundman key energy services inc incorporated reference exhibit 101 companys quarterly report form 10q quarter ended september 30 2000 file 18038 1029 letter agreement amendment dated july 1 2000 demand note dated august 3 1999 made thomas k grundman favor key energy services inc incorporated reference exhibit 102of companys quarterly report form 10q quarter ended september 30 2000 file 18038 1030 purchase agreement dated march 1 2001 among company certain subsidiaries lehman brothers inc bear stearns co inc incorporated reference exhibit 11 companys form 8k filed march 20 2001 file 18038 1031 eighth amendment second amended restated senior credit facility dated june 6 1997 amended restated september 14 1998 amended among key energy group inc known key energy services inc several lenders time parties thereto pnc bank national association administrative agent norwest bank texas na collateral agent pnc capital markets inc arranger incorporated reference exhibit 993 companys form 8k filed march 20 2001 file 18038 1032 amendment 3 dated may 14 2001 agreement dated august 2 1999 amended francis john key energy services inc incorporated reference exhibit 1049 companys annual report form 10k dated june 30 2001 file 18038 1033 second amended restated employment agreement dated october 16 2001 francis john key energy services inc incorporated reference exhibit 1050 companys annual report form 10ka dated june 30 2001 file 18038 1034 ninth amendment second amended restated credit agreement dated june 6 1997 amended restated september 14 1998 amended among key energy group inc known key energy services inc several lenders time parties thereto pnc bank national association administrative agent norwest bank texas na collateral agent pnc capital markets inc arranger incorporated reference exhibit 101 companys quarterly report form 10q dated september 30 2001 file 18038 1035 underwriting agreement dated december 13 2001 registrant lehman brothers inc incorporated reference exhibit 11 companys current report form 8k dated december 19 2001 file 18038 1036 tenth amendment second amended restated credit agreement dated june 6 1997 amended restated september 14 1998 amended among key energy group inc known key energy services inc several lenders time parties thereto pnc bank national association administrative agent norwest bank texas na collateral agent pnc capital markets inc arranger incorporated reference exhibit 101 companys form 8k filed december 19 2001 file 18038 1037 employment agreement key energy services inc royce w mitchell dated december 31 2001 incorporated reference exhibit 103 companys quarterly report form 10q dated december 31 2001 file 18038 1038 employment agreement key energy services inc james byerlotzer dated december 31 2001 incorporated reference exhibit 104 companys quarterly report form 10q dated december 31 2001 file 18038 1039 first amendment second amended restated employment agreement francis john key energy services inc dated december 31 2001 incorporated reference exhibit 105 companys quarterly report form 10q dated december 31 2001 file 18038 1040 underwriting agreement dated february 22 2002 among registrant lehman brothers inc bear stearns co inc first albany corporation incorporated reference exhibit 11 companys current report form 8k dated february 27 2002 file 18038 1041 eleventh amendment second amended restated credit agreement dated june 6 1997 amended restated september 14 1998 amended among key energy group inc known key energy services inc several lenders time parties thereto pnc bank national association administrative agent norwest bank texas na collateral agent pnc capital markets inc arranger incorporated reference exhibit 101 companys current report form 8k dated february 27 2002 file 18038 1042 twelfth amendment second amended restated credit agreement dated june 6 1997 amended restated september 14 1998 amended among key energy group inc known key energy services inc several lenders time parties thereto pnc bank national association administrative agent norwest bank texas na collateral agent pnc capital markets inc arranger incorporated reference exhibit 102 companys current report form 8k dated february 27 2002 file 18038 1043 indenture dated february 22 2002 among registrant us bank national association incorporated reference exhibit 41 companys current report form 8k dated february 27 2002 file 18038 1044 first supplemental indenture dated march 1 2002 among registrant guarantors defined therein us bank national association incorporated reference exhibit 41 companys current report form 8k dated march 1 2002 file 18038 1045 employment agreement key energy services inc thomas k grundman dated february 15 2002 incorporated reference exhibit 103 companys quarterly report form 10q dated march 31 2002 file 18038 1046 separation release agreement key energy services inc thomas k grundman dated may 6 2002 1047 plan agreement merger among key energy services inc key merger sub inc q services inc dated may 13 2002 incorporated reference exhibit 21 companys current report form 8k dated may 17 2002 file 18038 21 significant subsidiaries company 23 consent kpmg llp 251 statement eligibility trustee us bank national association national banking association form t1 incorporated reference exhibit 251 companys quarterly report form 8k dated february 27 2002 file 18038 991 certification ceo cfo pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 b reports form 8k company filed following reports form 8k quarter ended june 30 2002 current report form 8k dated may 17 2002 filed report signing definitive merger agreement q services inc dated may 13 2002 filed herewith signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized key energy services inc registrant dated september 30 2002 francis john francis john chairman board president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated dated september 30 2002 francis john francis john chairman board president chief executive officer dated september 30 2002 royce w mitchell royce w mitchell chief financial officer chief accounting officer dated september 30 2002 morton wolkowitz morton wolkowitz director dated september 30 2002 david j breazzano david j breazzano director dated september 30 2002 kevin p collins kevin p collins director dated september 30 2002 w phillip marcum w phillip marcum director dated september 30 2002 william fertig william fertig director dated september 30 2002 j robinson west j robinson west director francis john certify 1 reviewed annual report form 10k key energy services inc 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report date september 30 2002 francis john francis john chief executive officer certifications royce w mitchell certify 1 reviewed annual report form 10k key energy services inc 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report date september 30 2002 royce w mitchell royce w mitchell chief financial officer schedule ii key energy services inc consolidated valuation qualifying accounts june 30item 15 exhibits financial statement schedules following financial statements exhibits filed part report 1 financial statements see “index consolidated financial statements” page 52 2 omitted financial statement schedules required applicable required information shown financial statements notes financial statements 3 exhibits exhibit index follows signature pages report incorporated reference herein sets forth list exhibits report index financial statements signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized key energy services inc tm whichard iii tm whichard iii senior vice president chief financial officer duly authorized officer principal financial officer date february 29 2012 power attorney person whose signature appears hereby constitutes appoints richard j alario tm whichard iii true lawful attorneyinfact agent full powers substitution name place stead capacities sign amendments annual report form 10k file exhibits thereto documents connection therewith securities exchange commission granting said attorneysinfact full power authority perform act behalf undersigned required done connection therewith pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities february 29 2012 signature title richard j alario richard j alario chairman board directors president chief executive officer principal executive officer tm whichard iii tm whichard iii senior vice president chief financial officer principal financial officer ike c smith ike c smith vice president controller principal accounting officer lynn r coleman lynn r coleman director kevin p collins kevin p collins director william fertig william fertig director w phillip marcum w phillip marcum director index financial statements index financial statements exhibit index financial statements index financial statements index financial statements index financial statements  indicates management contract compensatory plan contract arrangement director executive officer participates filed herewith