NOTE 11 — LONG-TERM DEBT:

Long-term debt consisted of the following:


	As of December 31,
	2012		2011
6³/₄% Senior Subordinated Notes due 2014	$	—	$	200,000
8⁵/₈% Senior Notes due 2017		375,000		375,000
1³/₄% Senior Convertible Notes due 2017		239,126		—
7¹/₂% Senior Notes due 2022		300,000		—
Bank debt		—		45,000

Total long-term debt	$	914,126	$	620,000

Bank Debt

On April 26, 2011, we entered into an amended and restated revolving credit facility with commitments totaling $700,000 (subject to borrowing base limitations) through a syndicated bank group, replacing our previous facility. Our bank credit facility matures on April 26, 2015. On October 22, 2012, the bank group reaffirmed our existing borrowing base at $400,000. As of December 31, 2012 and February 21, 2013, we had no outstanding borrowings under our bank credit facility and letters of credit totaling $20,954 had been issued pursuant to the facility, leaving $379,046 of availability under the facility.

The borrowing base under our bank credit facility is redetermined semi-annually, in May and November, by the lenders taking into consideration the estimated value of our oil and gas properties and those of our direct and indirect material subsidiaries in accordance with the lenders’ customary practices for oil and gas loans. In addition, we and the lenders each have discretion at any time, but not more than two additional times in any calendar year, to have the borrowing base redetermined. If a reduction in our borrowing base were to fall below any outstanding balances under the bank credit facility plus any outstanding letters of credit, our agreement with the banks allows us one or more of three options to cure the borrowing base deficiency: (1) repay amounts outstanding sufficient to cure the deficiency within 10 days after our written election to do so; (2) add additional oil and gas properties acceptable to the banks to the borrowing base and take such actions necessary to grant the banks a mortgage in the properties within 30 days after our written election to do so or (3) arrange to pay the deficiency in five equal monthly installments.

Our bank credit facility is guaranteed by our only subsidiary, Stone Offshore. Our bank credit facility is collateralized by substantially all of Stone’s and Stone Offshore’s assets. Stone and Stone Offshore are required to mortgage, and grant a security interest in, their oil and gas reserves representing at least 80% of the discounted present value of the future net cash flows from their oil and gas reserves reviewed in determining the borrowing base. At Stone’s option, loans under our bank credit facility will bear interest at a rate based on the adjusted London Interbank Offering Rate plus an applicable margin, or a rate based on the prime rate or federal funds rate plus an applicable margin.

Under the financial covenants of our bank credit facility, we must (i) maintain a ratio of consolidated debt to consolidated EBITDA, as defined in the credit agreement, for the preceding four quarterly periods of not greater than 3.25 to 1 and (ii) maintain a ratio of consolidated EBITDA to consolidated Net Interest Expense, as defined in the credit agreement, for the preceding four quarterly periods of not less than 3.0 to 1. As of December 31, 2012, our debt to EBITDA Ratio was 1.55 to 1 and our EBITDA to consolidated Net Interest Expense Ratio was approximately 21.56 to 1. In addition, our bank credit facility includes certain customary restrictions or requirements with respect to disposition of properties, incurrence of additional debt, change of ownership and reporting responsibilities. These covenants may limit or prohibit us from paying cash dividends but do allow for limited stock repurchases. These covenants also restrict our ability to prepay other indebtedness under certain circumstances.

Senior Convertible Notes

On March 6, 2012, we issued in a private offering $300,000 in aggregate principal amount of 1³/₄% Senior Convertible Notes due 2017 to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”). The 2017 Convertible Notes are fully and unconditionally guaranteed on a senior unsecured basis by Stone Offshore and by certain future restricted subsidiaries of Stone. The net proceeds from the sale of the 2017 Convertible Notes were approximately $291,145, after deducting fees and expenses. The 2017 Convertible Notes rank equally in right of payment with all of our existing and future senior unsecured indebtedness. The 2017 Convertible Notes are effectively subordinated to our secured indebtedness to the extent of the value of the related collateral. The 2017 Convertible Notes bear interest at a rate of 1.75% per year, payable on March 1 and September 1 of each year, beginning on September 1, 2012. The 2017 Convertible Notes mature on March 1, 2017, unless earlier converted or repurchased. We may not redeem the 2017 Convertible Notes at our option prior to the maturity date.

The 2017 Convertible Notes are convertible into cash, shares of our common stock or a combination of cash and shares of our common stock, at our election, based on an initial conversion rate of 23.4449 shares of our common stock per $1 principal amount of 2017 Convertible Notes, which corresponds to an initial conversion price of approximately $42.65 per share of our common stock. On December 31, 2012, our closing share price was $20.52. The conversion rate, and thus the conversion price, may be adjusted under certain circumstances as described in the indenture related to the 2017 Convertible Notes.

The 2017 Convertible Notes may be converted by the holder, in multiples of $1 principal amount, only under the following circumstances:

•

prior to December 1, 2016, on any date during any calendar quarter beginning after June 30, 2012 (and only during such calendar quarter) if the closing sale price of our common stock was more than 130% of the then current conversion price for at least 20 trading days in the period of the 30 consecutive trading days ending on the last trading day of the previous calendar quarter;

•

prior to December 1, 2016, if we distribute to all or substantially all holders of our common stock rights, options or warrants entitling them to purchase, for a period of 45 calendar days or less from the declaration date for such distribution, shares of our common stock at a price per share less than the average closing sale price of our common stock for the 10 consecutive trading days immediately preceding, but excluding, the declaration date for such distribution;

•

prior to December 1, 2016, if we distribute to all or substantially all holders of our common stock cash, other assets, securities or rights to purchase our securities, which distribution has a per share value exceeding 10% of the closing sale price of our common stock on the trading day immediately preceding the declaration date for such distribution, or if we engage in certain corporate transactions described in the indenture related to the 2017 Convertible Notes;

•

prior to December 1, 2016, during the five consecutive business-day period following any five consecutive trading-day period in which the trading price per $1 principal amount of 2017 Convertible Notes for each trading day during such five trading-day period was less than 98% of the closing sale price of our common stock for each trading day during such five trading-day period multiplied by the then current conversion rate; or

•

on or after December 1, 2016, and prior to the close of business on the second scheduled trading day immediately preceding the maturity date of the 2017 Convertible Notes, which is March 1, 2017, without regard to the foregoing conditions.

Upon conversion, we will be obligated to pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. If we satisfy our conversion obligation solely in cash or through payment and delivery, as the case may be, of a combination of cash and shares of our common stock, the amount of cash and shares of common stock, if any, due upon conversion will be based on a daily conversion value (as described in the indenture related to the 2017 Convertible Notes) calculated on a proportionate basis for each trading day in a 25 consecutive trading-day conversion period (as described in the indenture related to the 2017 Convertible Notes). Upon any conversion, subject to certain exceptions, holders of the 2017 Convertible Notes will not receive any cash payment representing accrued and unpaid interest. Instead, interest will be deemed to be paid by the cash, shares of our common stock or a combination of cash and shares of our common stock paid or delivered, as the case may be, upon conversion of a 2017 Convertible Note.

If we undergo a fundamental change (as defined in the indenture related to the 2017 Convertible Notes) prior to maturity, holders of the 2017 Convertible Notes will have the right, at their option, to require us to repurchase for cash some or all of their 2017 Convertible Notes at a repurchase price equal to 100% of the principal amount of the 2017 Convertible Notes being repurchased, plus accrued and unpaid interest (including additional interest, if any) to, but excluding, the fundamental change repurchase date.

If holders elect to convert the 2017 Convertible Notes in connection with certain fundamental change transactions described in the indenture related to the 2017 Convertible Notes, we will increase the conversion rate by a number of additional shares determined by reference to the provisions contained in the indenture related to the 2017 Convertible Notes based on the effective date of, and the price paid (or deemed paid) per share of our common stock in, such make-whole fundamental change. If holders of our common stock receive only cash in connection with certain make-whole fundamental changes, the price paid (or deemed paid) per share will be the cash amount paid per share. Otherwise, the price paid (or deemed paid) per share will be equal to the average of the closing sale prices of our common stock on the five trading days prior to, but excluding, the effective date of such make-whole fundamental change.

In connection with the sale of the 2017 Convertible Notes, we entered into convertible note hedge transactions with respect to our common stock (the “Purchased Call Options”) with Barclays Capital Inc., acting as agent for Barclays Bank PLC, and Bank of America, N.A. (the “Dealers”). We paid an aggregate amount of approximately $70,830 to the Dealers for the Purchased Call Options. The Purchased Call Options cover, subject to customary antidilution adjustments, approximately 7,033,470 shares of our common stock at a strike price that corresponds to the initial conversion price of the 2017 Convertible Notes, also subject to adjustment, and are exercisable upon conversion of the 2017 Convertible Notes.

We also entered into separate warrant transactions whereby, in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act, we sold to the Dealers warrants to acquire, subject to customary antidilution adjustments, approximately 7,033,470 shares of our common stock (the “Sold Warrants”) at a strike price of $55.91 per share of common stock. We received aggregate proceeds of approximately $40,170 from the sale of the Sold Warrants to the Dealers. If, upon expiration of the Sold Warrants, the price per share of our common stock, as measured under the Sold Warrants, is greater than the strike price of the Sold Warrants, we will be required to issue, without further consideration, under each Sold Warrant a number of shares of our common stock with a value equal to the amount of such difference.

The Purchased Call Options and Sold Warrants are separate contracts entered into by Stone and each of the Dealers, are not part of the terms of the 2017 Convertible Notes and will not affect the holders’ rights under the 2017 Convertible Notes. The Purchased Call Options are expected generally to reduce the potential dilution upon conversion of the 2017 Convertible Notes in the event that the market value per share of our common stock at the time of exercise is greater than the strike price of the Purchased Call Options. The Sold Warrants could separately have a dilutive effect to the extent that the market value per share of our common stock exceeds the applicable strike price of the Sold Warrants.

The estimated liability and equity components of this offering were recorded in accordance with ASC 470-20. The initial carrying amount of the liability component of $229,170 was determined by measuring the fair value of a similar liability that does not have an associated equity component. An effective market interest rate of 7.51% was used in the fair value determination. The carrying amount of the equity component of $70,830 was determined by deducting the fair value of the liability component from the initial proceeds from the 2017 Convertible Notes. Transaction costs of approximately $8,855 were allocated to the liability and equity components in proportion to the allocation of proceeds and accounted for as debt issuance and equity issuance costs, respectively. The cost of the convertible note hedge of $70,830 and proceeds from the warrant transaction of $40,170 were recorded as adjustments to equity. A summary of the entries to record the proceeds from the 2017 Convertible Notes, the cost of the Purchased Call Options and the proceeds from the Sold Warrants is as follows:


Cash	$	260,485
Other assets (deferred financing costs)		6,764
Long-term debt		(229,170	)
Additional paid-in capital		(38,079	)

As of December 31, 2012, the carrying amount of the liability component of the 2017 Convertible Notes was $239,126. During the year ended December 31, 2012, we recorded $9,956 of interest cost for the amortization of the discount and $951 of interest cost for the amortization of deferred financing costs related to the 2017 Convertible Notes. During the year ended December 31, 2012, we recorded $4,302 of interest cost related to the contractual interest coupon on the 2017 Convertible Notes. At December 31, 2012, $1,750 had been accrued in connection with the March 1, 2013 interest payment.

Senior Notes

On November 8, 2012, we completed the public offering of $300,000 aggregate principal amount of 7¹/₂% Senior Notes due 2022, which are fully and unconditionally guaranteed on a senior unsecured basis by Stone Offshore and by certain future restricted subsidiaries of Stone. The net proceeds from the offering after deducting underwriting discounts, commissions, fees and expenses totaled $293,203. The 2022 Notes rank equally in right of payment with all of our existing and future senior debt, and rank senior in right of payment to all of our existing and future subordinated debt. The 2022 Notes mature on November 15, 2022, and interest is payable on the 2022 Notes on each May 15 and November 15, commencing on May 15, 2013. We may redeem some or all of the 2022 Notes at any time on or after November 15, 2017 at the redemption prices specified in the indenture, and we may redeem some or all of the 2022 Notes prior to November 15, 2017 at a make-whole redemption price as specified in the indenture. We also may redeem up to 35% of the 2022 Notes prior to November 15, 2015 with cash proceeds from certain equity offerings at a redemption price of 107.500% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date. If we sell certain assets and do not reinvest the proceeds or repay senior indebtedness, or we experience certain changes of control, each as described in the indenture, we must offer to repurchase the 2022 Notes. The 2022 Notes provide for certain covenants, which include, without limitation, restrictions on liens, indebtedness, asset sales, dividend payments and other restricted payments. The violation of any of these covenants could give rise to a default, which if not cured could give the holder of the 2022 Notes a right to accelerate payment. At December 31, 2012, $3,313 had been accrued in connection with the May 15, 2013 interest payment.

On January 26, 2010, we completed a public offering of $275,000 aggregate principal amount of 8⁵/₈% Senior Notes due 2017, which are fully and unconditionally guaranteed on a senior unsecured basis by Stone Offshore and by certain future restricted subsidiaries of Stone. The net proceeds from the offering after deducting underwriting discounts, commissions, fees and expenses totaled $265,299. On November 17, 2010, we completed a public offering of an additional $100,000 aggregate principal amount of our 2017 Notes. The net proceeds from this offering after deducting underwriting discounts, commissions, fees and expenses totaled approximately $98,227. The 2017 Notes rank equally in right of payment with all of our existing and future senior debt, and rank senior in right of payment to all of our existing and future subordinated debt. The 2017 Notes mature on February 1, 2017, and interest is payable on each February 1 and August 1, commencing on August 1, 2010. We may, at our option, redeem all or part of the 2017 Notes at any time prior to February 1, 2014 at a make-whole redemption price, and at any time on or after February 1, 2014 at fixed redemption prices. In addition, prior to February 1, 2013, we may, at our option, redeem up to 35% of the 2017 Notes with the cash proceeds of certain equity offerings. The 2017 Notes provide for certain covenants, which include, without limitation, restrictions on liens, indebtedness, asset sales, dividend payments and other restricted payments. The violation of any of these covenants could give rise to a default, which if not cured could give the holder of the 2017 Notes a right to accelerate payment. At December 31, 2012, $13,477 had been accrued in connection with the February 1, 2013 interest payment.

Senior Subordinated Notes

On December 15, 2004, we issued $200,000 6³/₄% Senior Subordinated Notes due 2014. In November 2012, we used proceeds from the 2022 Notes offering to purchase a portion of our 2014 Notes pursuant to a tender offer and consent solicitation. In December 2012, the remaining 2014 Notes were redeemed in full. The total cost of the redemption was $204,355, which included $200,681 to redeem the notes plus accrued and unpaid interest of $3,674. The transaction resulted in a charge to earnings of $1,972 in 2012.

On December 5, 2001, we issued $200,000 8¹/₄% Senior Subordinated Notes due 2011 (the “2011 Notes”). In January 2010, we used the proceeds from the 2017 Notes offering to purchase our 2011 Notes pursuant to a tender offer and consent solicitation. In February 2010, the remaining 2011 Notes were redeemed in full. The total cost of the redemption was $202,382, which included $200,483 to redeem the notes plus accrued and unpaid interest of $1,899. The transaction resulted in a charge to earnings of $1,820 in 2010.

Deferred Financing Cost and Interest Cost

Other assets at December 31, 2012 and 2011 included approximately $27,753 and $14,437, respectively, of deferred financing costs, net of accumulated amortization. These costs at December 31, 2012 related primarily to the issuance of the 2017 Convertible Notes, the 2022 Notes, the 2017 Notes and our bank credit facility. The costs associated with the 2017 Convertible Notes, the 2022 Notes and the 2017 Notes are being amortized over the life of the notes using a method that applies effective interest rates of 7.51%, 7.75% and 8.08%, respectively. The costs associated with our bank credit facility are being amortized over the term of the facility.

Total interest cost incurred, before capitalization, on all obligations for the years ended December 31, 2012, 2011 and 2010 was $68,031, $51,322 and $42,975 respectively.