Title of each class | Ticker Symbol(s) | Name of each exchange on which registered | ||||||||||||
| Common Shares, $0.01 par value share | VAL | New York Stock Exchange | ||||||||||||
| Warrants to purchase Common Shares | VAL WS | New York Stock Exchange | ||||||||||||
Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes ý☒ No o☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o☐ No ý☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý☒ No o☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (S232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý☒ No o☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act (Check one):Act:
| Large accelerated filer | ☒ | Accelerated filer | o | ||||||||||||||
| Non-Accelerated filer | o | Smaller reporting company | |||||||||||||||
| Emerging growth company | |||||||||||||||||
☒ Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
☐ If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.
☐ Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b).
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o☐ No ý☒
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes ☒ No ☐
The aggregate market value of the Class A ordinarycommon shares (based upon the closing price on the New York Stock Exchange on June 30, 20172023 of $5.16)$62.93 of Ensco plcthe registrant held by non-affiliates of Ensco plcValaris Limited at that datedate) was approximately $1,548,237,000.$4.1 billion.
As of February 21, 2018,16, 2024, there were 436,009,156 Class A ordinary72,410,233 common shares of Ensco plc issued andthe registrant outstanding.
| TABLE OF CONTENTS | ||||||||||||||
| PART I | ITEM 1. | |||||||||||||
| ITEM 1A. | ||||||||||||||
| ITEM 1B. | ||||||||||||||
| ITEM 1C. | ||||||||||||||
| ITEM 2. | ||||||||||||||
| ITEM 3. | ||||||||||||||
| ITEM 4. | ||||||||||||||
| PART II | ITEM 5. | |||||||||||||
| ITEM 6 | ||||||||||||||
ITEM 7. | ||||||||||||||
ITEM 7A. | ||||||||||||||
| ITEM 8. | ||||||||||||||
| ITEM 9. | ||||||||||||||
| ITEM 9A. | ||||||||||||||
| ITEM 9B. | ||||||||||||||
| ITEM 9C. | ||||||||||||||
| PART III | ITEM 10. | |||||||||||||
| ITEM 11. | ||||||||||||||
| ITEM 12. | ||||||||||||||
| ITEM 13. | ||||||||||||||
| ITEM 14. | ||||||||||||||
| PART IV | ITEM 15. | |||||||||||||
| ITEM 16. | ||||||||||||||
FORWARD-LOOKING STATEMENTS
Statements contained in this report that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements include words or phrases such as "anticipate," "believe," "estimate," "expect," "intend," "likely," "plan," "project," "could," "may," "might," "should," "will" and similar words and specifically include statements regarding expected financial performance; dividends; expected utilization, day rates, revenues, operating expenses, cash flows, contract status, terms and duration, contract backlog, capital expenditures, insurance, financing and funding; expected work commitments, awards and contracts; the timing of availability, delivery, mobilization, contract commencement or relocation or other movement of rigs and the timing thereof; future rig construction (including construction in progress and completion thereof), enhancement, upgrade or repair and timing and cost thereof; the suitability of rigs for future contracts; the offshore drilling market, including supply and demand, customer drilling programs, stacking of rigs, effects of new rigs on the market and effectseffect of declines inthe volatility of commodity prices; expected work commitments, awards, contracts and letters of intent; the availability, delivery, mobilization, contract commencement or relocation or other movement of rigs and the timing thereof; rig reactivations, enhancement, upgrade or repair and timing and cost thereof; the suitability of rigs for future contracts; performance of our joint ventures, including our joint venture with Saudi Arabian Oil Company ("Saudi Aramco"); timing of the delivery of the Saudi Aramco Rowan Offshore Drilling Company ("ARO") newbuild rigs and the timing of additional ARO newbuild orders; divestitures of assets; general market, business and industry conditions, trends and outlook; general political conditions, including political tensions, conflicts and war; the impacts and effects of public health crises, pandemics and epidemics; future operations; the effectiveness of our cybersecurity programs; expectations regarding our sustainability targets and strategy; the impact of increasing regulatory complexity; our program to high-grade the rig fleet by investing in new equipmentoutcome of tax disputes, assessments and divesting selected assets and underutilized rigs;settlements; expense management; and the likely outcome of litigation, legal proceedings, investigations or insurance or other claims or contract disputes and the timing thereof.
Such statements are subject to numerous risks, uncertainties and assumptions that may cause actual results to vary materially from those indicated, including:
•changes in worldwide rig supply and demand, competition or technology, including as a result of delivery of newbuild drilling rigs or reactivation of stacked drilling rigs;
•general economic and business conditions, including recessions, inflation, volatility affecting the banking system and financial markets and adverse changes in the level of international trade activity;
•requirements to make significant expenditures in connection with rig reactivations, customer drilling requirements and to comply with governing laws or regulations in the regions we operate;
•loss of a significant customer or customer contract, as well as customer consolidation and changes to customer strategy, including focusing on renewable energy projects;
•our ability to attract and retain skilled personnel on commercially reasonable terms, whether due to labor regulations, rising wages, unionization, or otherwise, or to retain employees;
•the occurrence of cybersecurity incidents, attacks or other breaches to our information technology systems, including our rig operating systems;
•the adequacy of sources of liquidity for us and our customers;
2
•risks inherent to drilling rig reactivations, repair, modification or upgrades, unexpected delays in equipment delivery, engineering, design or commissioning issues following delivery, or changes in the commencement, completion or service dates;
•our ability to generate operational efficiencies from our shared services center and potential risks relating to the processing of transactions and recording of financial information;
•downtime and other risks associated with offshore rig operations, including rig or equipment failure, damage and other unplanned repairs, the limited availability of transport vessels, hazards, self-imposed drilling limitations and other delays due to severe storms and hurricanes and the limited availability or high cost of insurance coverage for certain offshore perils, such as hurricanes in the Gulf of Mexico or associated removal of wreckage or debris;
•our customers cancelling or shortening the duration of our drilling contracts, cancelling future drilling programs and seeking pricing and other contract concessions from us;
•decreases in levels of drilling activity and capital expenditures by our customers, whether as a result of the global capital markets and liquidity, prices of oil and natural gas, changes in tax policy (such as the U.K.’s windfall tax on oil and gas producers in the British North Sea), climate change concerns or otherwise, which may cause us to idle, stack or retire additional rigs;
•impacts and effects of public health crises, pandemics and epidemics, the related public health measures implemented by governments worldwide, the duration and severity of the outbreak and its impact on global oil demand, the volatility in prices for oil and natural gas and the extent of disruptions to our operations;
•disruptions to the operations and business of our key customers, suppliers and other counterparties, including impacts affecting our supply chain and logistics;
•governmental action, terrorism, cyber-attacks, piracy, military action and political and economic uncertainties, including uncertainty or instability resulting from civil unrest, political demonstrations, mass strikes, or an escalation or additional outbreak of armed hostilities or other crises in oil or natural gas producing areas, of the Middle East, North Africa, West Africa or other geographic areas, which may result in expropriation, nationalization, confiscation or deprivation or destruction of our assets orassets; suspension and/or termination of contracts based on force majeure events or adverse environmental safety events; or volatility in prices of oil and natural gas;
•our ability to enter into, and the terms of, future drilling contracts, including contracts for our newbuild units andrigs or acquired rigs, for rigs currently idled and for rigs whose contracts are expiring;
•any failure to execute definitive contracts following announcements of letters of intent, letters of award or other expected work commitments;
•the outcome of litigation, legal proceedings, investigations or other claims or contract disputes, including any inability to collect receivables or resolve significant contractual or day rate disputes, and any renegotiation, nullification, cancellation or breach of contracts with customers or other partiesparties;
•internal control risk due to changes in management, hiring of employees, employee reductions and any failure to execute definitive contracts following announcements of letters of intent;our shared service center;
3
•governmental regulatory, legislative and permitting requirements affecting drilling operations, including limitations on drilling locations, (suchlimitations on new oil and gas leasing in U.S. federal lands and waters, and regulatory measures to limit or reduce greenhouse gas emissions ("GHG");
•governmental policies that could reduce demand for hydrocarbons, including mandating or incentivizing the conversion from internal combustion engine powered vehicles to electric-powered vehicles;
•forecasts or expectations regarding the global energy transition, including consumer preferences for alternative fuels and electric-powered vehicles, as part of the Gulfglobal energy transition;
•increased scrutiny from regulators, market and industry participants, stakeholders and others in regard to our sustainability practices and reporting;
•our ability to achieve our sustainability aspirations, targets, goals and commitments or the impact of Mexico during hurricane season);any changes to such matters;
•potential impacts on our business resulting from climate-change or GHG legislation or regulations, and the impact on our business from climate-change related physical changes or changes in weather patterns;
•new and future regulatory, legislative or permitting requirements, future lease sales, changes in laws, rules and regulations that have or may impose increased financial responsibility, additional oil spill abatement contingency plan capability requirements and other governmental actions that may result in claims of force majeure or otherwise adversely affect our existing drilling contracts, operations or financial results;
•environmental or other liabilities, risks, damages or losses, whether related to storms, hurricanes or hurricanesother weather-related events (including wreckage or debris removal), collisions, groundings, blowouts, fires, explosions, other accidents,cyberattacks, terrorism or otherwise, for which insurance coverage and contractual indemnities may be insufficient, unenforceable or otherwise unavailable;
•tax matters, including our effective tax rates, tax positions, results of audits, changes in tax laws, treaties and regulations, tax assessments and liabilities for taxes;
•the potentially dilutive impacts of warrants issued pursuant to the plan of reorganization;
•the costs, disruption and diversion of our management's attention associated with campaigns by operators;activist securityholders; and
•adverse changes in foreign currency exchange rates, including their effect on the fair value measurement of our derivative instruments; andrates.
In addition to the numerous risks, uncertainties and assumptions described above, you should also carefully read and consider "Item 1A. Risk Factors" in Part I and "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations" in Part II of this Annual Report on Form 10-K. Each forward-looking statement speaks only as of the date of the particular statement, and we undertake no obligation to publicly update or revise any forward-looking statements, except as required by law.
4
PART I
Item 1. Business
General
We are one of thea leading providersprovider of offshore contract drilling services to the international oil and gas industry.industry with operations in almost every major offshore market across six continents. We currently own and operate anthe world's largest offshore drilling rig fleet, of 62 rigs, with drilling operations in most of the strategic markets around the globe. We also have three rigs under construction. Our rig fleet includes12 drillships, 11 dynamically positioned semisubmersible rigs, four moored semisubmersible rigs and 38 jackup rigs, including rigs under construction. We operate the world's largest fleet amongst competitive rigs, including one of the newest ultra-deepwater fleets in the industry and a leading premium jackup fleet. We currently own 53 rigs, including 13 drillships, four dynamically positioned semisubmersible rigs, one moored semisubmersible rig, 35 jackup rigs and a 50% equity interest in ARO, our 50/50 unconsolidated joint venture with Saudi Aramco, which owns an additional eight rigs.
Our customers include many of the leading nationalinternational and internationalgovernment-owned oil and gas companies, in addition to many independent operators. We are among the most geographically diverse offshore drilling companies with current operations spanning 14 countries on six continents.global operations. The markets in which we operate include the U.S. Gulf of Mexico, Brazil, the Mediterranean,South America, the North Sea, the Middle East, West Africa Australia and Southeast Asia.Asia Pacific.
We provide drilling services on a "day rate"day rate contract basis. Under day rate contracts, we provide an integrated service that includes the provision of a drilling rig and rig crews for which we receive a daily rate that may vary between the full rate and zero rate throughout the duration of the contractual term. The day rate we earn can vary between the full day rate and zero rate,term, depending on the operations of the rig. We also may receive lump-sum fees or similar compensation for the mobilization, demobilization and capital upgrades of our rigs. Our customers bear substantially all of the costs of constructing the well and supporting drilling operations as well as the economic risk relative to the success of the well. In addition, our customers may pay all or a portion of the cost of moving our equipment and personnel
Demand for offshore drilling services continues to and from the well site.
Contract Drilling Operations
Our business consists of threefour operating segments: (1) Floaters, which includes our drillships and semisubmersible rigs, (2) Jackups, (3) ARO and (3)(4) Other, which consists of management services on rigs owned by third-parties. Our twothird parties and the activities associated with our lease arrangements with ARO. Floaters, Jackups and ARO are also reportable segments, Floaterssegments.
5
We own and Jackups, provide one service, contract drilling.
Our drilling rigs drill and complete oil and natural gas wells. From time to time, our drilling rigs may be utilized as accommodation units or for non-drillingother ancillary services such as well workovers and interventions, plug and abandonment and decommissioning work.work and carbon capture and sequestration projects. Demand for our drilling services is based upon many factors beyond our control. See “Item 1A.“Item 1A. Risk Factors - The success of our business largely depends on the level of activitiesactivity in theoffshore oil and natural gas industry,exploration, which can be significantly affected by volatile oil and natural gas prices.”
Our drilling contracts are the result of negotiationsnegotiated with our customers, and most contracts are awarded uponfollowing competitive bidding. The terms of our drilling contracts can vary, significantly, but generally contain the following commercial terms:
•contract duration or term for a specific period of time or a period necessary to drill one or more wells,
•term extension options, in favor ofexercisable by our customer, exercisablecustomers, upon advance notice to us, at mutually agreed, indexed, fixed rates or current rate at the date of extension,
•provisions permitting early termination of the contract, (i)which may include (1) if the rig is lost or destroyed, (ii)(2) if operations are suspended for a specified period of time due to various events, including damage or breakdown of major rig equipment, unsatisfactory performance, or "force majeure" events, (3) failure of the customer to receive final investment decision (FID) approval with respect to projects for which the drilling rig was contracted or (iii)(4) at the convenience (without cause) of the customer, (inexercisable upon advance notice to us, and in certain cases obligating the customer to pay uswithout making an early termination fee providing some levelpayment to us,
•payment of compensation to us for the remaining term),
•payment by us of the operating expenses of the drilling unit,rig, including crew labor and incidental rig supply and maintenance costs,
•mobilization and demobilization requirements of us to move the drilling unitrig to and from the planned drilling site, and may include reimbursement of all or a portion of these moving costs by the customer in the form of an up-front payment, additional day rate over the contract term or direct reimbursement, and
•provisions allowing us to recover certain labor and other operating cost increases including certain cost increases due to changes in applicable law, from our customers through day rate adjustment or direct reimbursement for contracts with termscertain cost increases due to changes in excess of one year. applicable law or rising operational expenses.
Backlog Information
6
| 2017 | 2016 | ||||||
| Floaters | $ | 1,578.3 | $ | 2,154.9 | |||
| Jackups | 1,013.0 | 1,185.0 | |||||
| Other | 229.7 | 281.4 | |||||
| Total | $ | 2,821.0 | $ | 3,621.3 | |||
| 2018 | 2019 | 2020 | 2021 and Beyond | Total | |||||||||||||||
| Floaters | $ | 851.2 | $ | 519.7 | $ | 207.4 | $ | — | $ | 1,578.3 | |||||||||
| Jackups | 499.1 | 214.6 | 137.5 | 161.8 | 1,013.0 | ||||||||||||||
| Other | 56.7 | 56.7 | 56.9 | 59.4 | 229.7 | ||||||||||||||
| Total | $ | 1,407.0 | $ | 791.0 | $ | 401.8 | $ | 221.2 | $ | 2,821.0 | |||||||||
Major Customers
We provide our contract drilling services to major international, government-owned and independent oil and gas companies. During 2017,the year ended December 31, 2023, our five largest customers accounted for 66%40% of consolidated revenues. Total, BP and Petrobras,plc, our largest customers,only customer who accounts for 10% or more of consolidated revenues, accounted for 22%, 15% and 11% of consolidated revenues, respectively.revenues.
Competition
The offshore contract drilling industry is highly competitive. Drilling contracts are, for the most part, awarded on a competitive bid basis. Price competition is often the primary factor in determining which contractor is awarded a contract, although quality of service, operational and safety performance, equipment suitability and availability, location of equipment, reputation and technical expertise also are factors. There are numerous competitors
Non-U.S. Operations
Revenues from non-U.S. operations were 80%, 78%, 87% and 81% of our total consolidated revenues during the years ended December 31, 2023 and 2022, eight months ended December 31, 2021 (Successor), and four months ended April 30, 2021 (Predecessor), respectively.
See "Item 1A. Risk Factors - Our non-U.S. operations involve additional risks not associated with significant resourcesU.S. operations."
Insurance and Indemnification Matters
Our insurance program provides coverage, subject to the policies' terms and conditions and to the extent not otherwise assumed by the customer under the indemnification provisions of the drilling contract, for third-party liability claims arising from our operations. Our insurance program provides coverage that is customary for our industry. Generally, our insurance program provides third-party liability coverage up to $805.0 million. We retain the risk for liability not indemnified by the customer in excess of, and for risks not covered by, our insurance coverage.
Our insurance program also provides hull and machinery coverage for physical damage (including total loss) to our rigs, cargo and equipment, excluding damage arising from a named windstorm in the offshoreU.S. Gulf of Mexico. We separately purchase a small limit of named windstorm insurance for our floater rigs in the U.S. Gulf of Mexico. We currently carry limited insurance for loss of hire for several of our rigs.
Our customers typically indemnify us for most well-control events. Well-control events generally include an unintended release from a well that cannot be contained by using equipment on site, such as a blowout preventer, by increasing the weight of drilling fluid or by diverting the fluids safely into production facilities. Subject to the exceptions noted below, our customers typically assume most of the responsibility for and indemnify us from any loss, damage or other liability resulting from pollution or contamination arising from operations. Such pollution or contamination may be as a result of blowouts, cratering and seepage, when the source of the pollution originates from the well or reservoir. Such indemnities typically include costs for clean-up and removal of pollution and third-party damages.
7
Our drilling contracts customarily provide that each party is responsible for injuries or death to their respective personnel and loss or damage to their respective property (including the personnel and property of each parties’ contractors and subcontractors) regardless of the cause of the loss or damage. However, exceptions may exist as it relates to damages due to our negligence. In addition, our drilling contracts typically provide for our customers to indemnify us, generally based on replacement cost minus some level of depreciation, for loss or damage to our down-hole equipment. In some cases, we are indemnified by our customer for a limited amount of the repair of or replacement cost of our subsea equipment. We also maintain insurance for exposures to personal injuries, damage to or loss of property and certain business risks.
We generally indemnify the customer for legal and financial consequences of spills of waste oil, fuels, lubricants, motor oils, pipe dope, paint, solvents, ballast, bilge, garbage, debris, sewage, hazardous waste and other liquids, the discharge of which originates from our rigs or equipment above the surface of the water and in some cases from our subsea equipment. Our contracts generally provide that, in the event of any such spill from our rigs, we are responsible for the related fines and penalties.
The above description of our insurance program and the indemnification provisions of our drilling contracts is only a summary as of the date hereof and is general in nature. In addition, our drilling contracts are individually negotiated, and the degree of indemnification we receive from operators against the liabilities discussed above can vary from contract to contract based on market conditions and customer requirements existing when the contract was negotiated and the interpretation and enforcement of applicable law when the claim is adjudicated. Our insurance program and the terms of our drilling industry.contracts may change in the future.
In certain cases, vendors who provide equipment or services to us limit their pollution liability to a specific monetary cap, and we assume the liability above that cap. Typically, in the case of original equipment manufacturers, the cap is a negotiated amount based on mutual agreement of the parties considering the risk profiles and thresholds of each party. However, for smaller vendors, the liability is usually limited to the value, or double the value, of the contract for the purchase of such equipment or services.
Additional information on insurance and indemnification matters and related risks is discussed in “Item 1A. Risk Factors,” which should be read in conjunction with the foregoing information.
Governmental Regulation and Environmental Matters
Our operations are affected by laws, regulations and political initiatives and by laws and regulations that relate to the oil and natural gas industry, including laws and regulations that have or may impose increased oil-spill related and financial responsibility and oil spill abatement contingency plan capability requirements. Accordingly, we will be directly affected by the approval and adoption of lawsLaws and regulations curtailing exploration and development drilling for oil and natural gas will directly affect us for economic, environmental, safety or other policy reasons. It is also possible that these laws, and regulations and political initiatives could adversely affect our operations in the future by significantly increasing our operating costs or restricting areas open for drilling activity. See "ItemWe incorporate by reference herein the disclosures on governmental regulations, including environmental matters, contained in the following sections of this Annual Report on Form 10-K:
•"Item 1A. Risk Factors- Increasing regulatory complexity could adversely impact the costs associated with our offshore drilling operations."Factors – Regulatory, Legal and Tax Risks";
•"Item 1A. Risk Factors – Sustainability Risks";
•"Item 3. Legal Proceedings"; and
•"Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Effects of Climate Change and Climate Change Regulation.
8
The International Convention on Oil Pollution Preparedness, Response and Cooperation, the International Convention on Civil Liability for Oil Pollution Damage 1992, the U.K. Merchant Shipping Act 1995, Marpol 73/78 (the International Convention for the Prevention of Pollution from Ships), the U.K. Merchant Shipping (Oil Pollution Preparedness, Response and Co-operation Convention) Regulations 1998, as amended, and other related legislation and regulations and the Oil Pollution Act of 1990 ("OPA 90"), as amended, the Clean Water Act and other U.S. federal statutes applicable to us and our operations, as well as similar statutes in Texas, Louisiana, other coastal states and other non-U.S. jurisdictions, address oil spill prevention, reporting and control and have significantly expanded potential liability, fine and penalty exposure across many segments of the oil and natural gas industry. Such statutes and related regulations impose a variety of obligations on us related to the prevention of oil spills, disposal of waste and liability for resulting damages. For instance, OPA 90 imposes strict and, with limited exceptions, joint and several liability upon each responsible party for oil removal costs as well as a variety of fines, penalties and damages. Similar environmental laws apply in our other areas of operation. Failure to comply with these statutes and regulations including OPA 90, may subject us to civil or criminal enforcement action, which may not be covered by contractual indemnification or insurance, or for which indemnity is prohibited under applicable law, and could have a material adverse effect on our financial position, operating results and cash flows.
Although it is not possible at this time to time, legislative proposals have been introduced thatpredict how compliance with any such legislation or new regulations would materially limit or prohibit offshore drilling in certain areas. We are adversely affected by restrictions on drilling in certain areas of the U.S. Gulf of Mexico and elsewhere, including the adoption of additional safety requirements and policies regarding the approval of drilling permits and restrictions on development and production activities in the U.S. Gulf of Mexico that have and may further impact our operations.
Sustainability
Consistent with our purpose of providing responsible solutions that deliver energy to the world, we are focused on sustainability-related matters. Our board of directors' Safety and Sustainability Committee regularly meets to address sustainability topics and is responsible for overseeing the Company’s policies, programs and practices related to sustainability and the Company’s management of risks in such areas. We have a dedicated department focused on sustainability and new energy and also have an employee-led cross-functional working group to identify and evaluate opportunities and promote sustainable business practices.
We publish our annual sustainability report aligned with the standards of the Task Force on Climate-Related Financial Disclosures (TCFD), in addition to the Sustainability Accounting Standards Board (SASB), with references to other frameworks such as the Global Reporting Initiative (GRI) and the Carbon Disclosure Project (CDP), where relevant, and report scope 1, 2 and 3 GHG emissions. For further discussion of sustainability-related risks and considerations see “Risk Factors” in Item 1A and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Annual Report on Form 10-K.
We encourage you to review our latest Sustainability Report, located on our website (www.valaris.com), for more detailed information regarding our sustainability and human capital targets, including our GHG emissions intensity reduction target, programs and initiatives. Nothing on our website, including our Sustainability Report or sections thereof, shall be materially adversely affected. See "Item 1A. Risk Factors - Compliancedeemed incorporated by reference into this Annual Report on Form 10-K or other filings that we make with or breachthe SEC.
9
Human Capital
We believe our people are one of environmental laws can be costly and could limit our operations."
Purpose and Culture
At Valaris, our purpose is to provide responsible solutions that deliver energy to the world. Our values are designed to guide us in support of our purpose:
•Integrity – Doing the right thing; whether or not anyone is watching;
•Safety – Causing no harm is always a priority;
•Excellence – Delivering value to our customers while consistently raising the bar on performance;
•Respect – Treating others the way we would like to be treated;
•Ingenuity – Solving problems creatively; and
•Stewardship – Safeguarding where we work for the next generation.
Our Ethics and Compliance Policy and our Code of Conduct (the “Code”) form the foundation of our compliance and ethics program, which provides guidance on how to uphold our values. We have translated the Code into nine different languages, making it widely accessible to our employees across the globe. We maintain an Ethics Hotline that is available to all employees, either online or by phone, to confidentially seek guidance or raise a concern.
The Code is reviewed on a periodic basis and approved by our board of directors. To further support our values of respect and integrity, we have policies prohibiting corruption, bribery (including facilitation payments), money laundering, retaliation, and reprisals for raising concerns, including those related to worker rights, working conditions, mistreatment, fraud, and misconduct. In addition, we have adopted a policy against modern slavery and human trafficking in our business and our supply chains.
Employees
We had a global workforce of approximately 5,985 persons including contractors, and approximately 4,261 persons excluding contractors, as of December 31, 2023. Our personnel represented 74 nationalities spread across 23 locations. The majority of our personnel work on our offshore installations and are compensated on an hourly basis. A portion of our employees and contractors working outside of the U.S. are represented under collective bargaining or similar agreements, which are subject to political, economicperiodic salary negotiation. As of December 31, 2023, women comprised 30% of our onshore employees and 1% of our offshore employees.
Employee Wellbeing and Engagement
We believe that one of the best ways to serve our customers is through creating a healthy, safe and engaging working and learning environment, where our employees are confident and comfortable to put their best work forward. We seek to promote a healthy environment by prioritizing the mental and physical health and other uncertainties, including:
10
Feedback from our employees plays a key role in creating an agile, collaborative and trustworthy culture. We use surveys to measure employee engagement as well as our ability to align and execute around a common vision and foster innovation and creativity. These surveys help our leaders analyze the impact of company practices and culture on performance and have created a roadmap for improvement.
We are focused on developing talent and leadership among both our onshore and offshore employees. In 2021, we launched the Building Organizational Leadership (BOLD) training program. This program is designed to engage, support and provide leadership tools for our offshore supervisors, helping them assess and develop their team’s understanding and use of contracts,
our safety processes and policies. Approximately 492 personnel attended the program in 2023. We implemented an onshore leadership program in 2023, which included eight separate onshore leadership sessions, which was delivered to 157 personnel.Safety
Our policies set the expectation that causing no harm is a priority while conducting our operations. We seek to control major operational hazards with effective safeguards and to implement our management systems to protect the health and safety of our personnel.
Our Safe Systems of Work are designed with the aim of completing each job safely and efficiently:
•Work Instruction – Step-by-step description of how to complete specific work activities, including mandatory precautions to be implemented;
•Permit to Work – Formal authorization and control process for the safe execution of potentially hazardous work that may present risk to people, environment or other geographic areasassets;
•Energy Isolation – Formal isolation of all energy sources before performing work on equipment;
•Job Safety Analysis – Identification and control of job hazards before starting work; and
•Stop Work Authority – Empowerment to stop work if a risk to people, environment or assets is perceived to exist.
As mentioned above, the Valaris Basic Training Program demonstrates our dedication to a safety-first work culture, and the ways in which we operate,implement our Safe Systems of Work into our work.
11
Executive Officers
Officers generally serve for a one-year term or until successors are elected and qualified to serve. The table below sets forth certain information regarding our executive officers:
officers as of February 22, 2024:
| Name | Age | Position | ||||||||||||||
| Anton Dibowitz | 52 | |||||||||||||||
| President and Chief Executive Officer | ||||||||||||||||
| 51 | ||||||||||||||||
| Senior Vice President and Chief Financial Officer | ||||||||||||||||
| 52 | Senior Vice President | |||||||||||||||
| 49 | Senior Vice President | |||||||||||||||
| 50 | Senior Vice President | |||||||||||||||
Set forth below is certain additional information on our executive officers, including the business experience of each executive officer for at least the last five years:
Christopher Weber became the developmentSenior Vice President and deploymentChief Financial Officer of newValaris in August 2022. Previously, he served as Chief Financial Officer of LUFKIN Industries, a leading global provider of rod lift optimization solutions, products, technologies and has been a member of several industry advisory boards in this capacity. Mr. Trowell is onservices to the advisory board of Energy Ventures, a venture capital company investing in oil and gas technology. In August 2016,industry, from February 2021 to July 2022. Mr. Trowell became a non-executive director on the boardWeber has also served as Chief Financial Officer of Ophir Energy plc.Abaco Drilling Technologies from July 2019 to February 2021 and Chief Financial Officer of Haliburton Company from June 2017 to November 2018. Prior to Halliburton, Mr. Trowell has a PhDWeber served as Chief Financial Officer of Parker Drilling Company, and held senior finance roles at Valaris predecessor companies, Ensco plc and Pride International, Inc. He received an MBA in Earth SciencesFinance and Strategy from the University of Cambridge, a Master of Business Administration from The Open UniversityWharton School and a Bachelor of Science degreeBA in GeologyEconomics and English Literature from Imperial College London.Vanderbilt.
12
Davor Vukadin was appointed Senior Vice President, General Counsel and Secretary.Secretary in May 2022. Before being named to his current position, Mr. Vukadin served as Associate General Counsel and Secretary from June 2021 to May 2022. Previously, he served as Associate General Counsel and Assistant Secretary from November 2018 to June 2021. He joined Valaris as Senior Counsel in 2014. Prior to joining Ensco,Valaris, Mr. McGuinty served as General Counsel and Company Secretary of Abu Dhabi National Energy Company. Previously, Mr. McGuinty spent 18 years with Schlumberger where he held various senior legal management positions in the United States, Europe and the Middle East including Director of Compliance, Deputy General Counsel - Corporate and M&A and Director of Legal Operations. Prior to Schlumberger, Mr. McGuintyVukadin practiced corporate and commercialsecurities law in Canada and France. Mr. McGuintywith the law firm of Norton Rose Fulbright for thirteen years. He holds a Bachelor of Laws and BachelorArts degree in Economics from The University of Civil Law from McGill UniversityChicago and a Bachelorlaw degree from The University of Social SciencesTexas School of Law.
Emergence from Financial Restructuring
On August 19, 2020 (the “Petition Date”), Valaris plc (“Legacy Valaris” or “Predecessor”) and certain of its direct and indirect subsidiaries (collectively, the “Debtors”) filed voluntary petitions for reorganization under chapter 11 of the Bankruptcy Code in the Bankruptcy Court under the caption In re Valaris plc, et al., Case No. 20-34114 (MI) (the “Chapter 11 Cases”). On March 3, 2021, the Bankruptcy Court confirmed the Debtors' chapter 11 plan of reorganization.
On April 30, 2021 (the "Effective Date"), we successfully completed our financial restructuring and together with the Debtors emerged from the UniversityChapter 11 Cases. Upon emergence from the Chapter 11 Cases, we eliminated $7.1 billion of Ottawa.debt and obtained a $520 million capital injection by issuing the first lien secured notes (the "First Lien Notes"). See “Note 8 - Debt" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for additional information on the First Lien Notes. On the Effective Date, the Legacy Valaris Class A ordinary shares were cancelled and common shares of Valaris with a nominal value of $0.01 per share (the “Common Shares”) were issued. Also, former holders of Legacy Valaris' equity were issued warrants (the "Warrants") to purchase Common Shares. See “Note 9 - Shareholders' Equity" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for additional information on the issuance of the Common Shares and Warrants.
Available Information
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports that we file with, or furnish to, the SECSecurities and Exchange Commission ("SEC") in accordance with the Exchange Act as amended, are available free of charge on our website at www.enscoplc.com. Thesewww.valaris.com/investors. In addition, the SEC maintains a website at www.sec.gov that contains reports, also are available in print without charge by contacting our Investor Relations Department at 713-430-4607 as soon as reasonably practicable after weproxy and information statements, and other information regarding issuers that file electronically file the information with or furnish it to, the SEC. The information contained on our website is not included as part of, or incorporated by reference into, this report.
13
RISK FACTORS SUMMARY
An investment in our securities involves a high degree of risk. You should consider carefully all of the risks described below, together with the other information contained in this Form 10-K, before making a decision to invest in our securities. If any of the following events occur, our business, financial condition and operating results may be materially adversely affected. In that event, the trading price of our securities could decline, and you could lose all or part of your investment.
Risks Related to Our Business, Operations, Financing Arrangements and Market Conditions
•The offshore contract drilling industry is highly competitive and cyclical.
•Our current backlog of whichcontract drilling revenue may not be fully realized and may decline significantly in the future.
•Our business will be materially adversely affected if we are beyond our control. The following is a description of significant factors that might cause our future operating resultsunable to differ materially from those currently expected. The risks described belowsecure contracts on economically favorable terms or if option periods in existing contracts are not the only risks facing our Company. Additional risks and uncertainties not specified herein, not currently knownexercised as expected.
•Our customers may be unable or unwilling to fulfill their contractual commitments to us, including their obligations to pay for losses, damages or currently deemedother liabilities.
•The loss of a significant customer or customer contract, as well as customer consolidation and changes to be immaterial also maycustomer strategy, could materially adversely affect our business,business.
•Our long-term contracts are subject to the risk of cost increases, which could adversely affect our profitability.
•Our network and systems, including rig operating systems and critical data, are subject to cybersecurity risks and technical disruptions.
•Rig reactivation, upgrade and enhancement projects are subject to risks, including delays and cost overruns, which could materially adversely affect our financial position, operating results or cash flows.
•We make significant expenditures to meet customer requirements, maintain our fleet to comply with laws and the applicable regulations and standards of governmental authorities and organizations, or to expand our fleet, and we may be required to make significant expenditures to maintain our competitiveness.
•Failure to recruit and retain skilled personnel could adversely affect our business.
•Our shared service center may not create the operational efficiencies that we expect and may create risks relating to the processing of transactions and recording of financial information.
•We may not realize the expected benefits of our ARO joint venture.
•Joint venture investments could be adversely affected by our joint venture partners’ actions, financial condition and liquidity and disputes between us and our joint venture partners.
•Our business involves operating hazards, and our insurance and indemnities from our customers may not be adequate to cover any potential losses.
•Geopolitical events and violence could materially adversely affect the markets for our services and have a material adverse effect on our business and cost and availability of insurance.
•Our drilling contracts with national oil companies may expose us to greater risks than we normally assume in drilling contracts with non-governmental customers.
•Unionization efforts and labor regulations in certain countries in which we operate could materially increase our costs or limit our flexibility with regard to the management of our personnel.
14
•Significant equipment or part shortages, supplier capacity constraints, supplier production disruptions, supplier quality and sourcing issues or price increases could materially adversely affect our financial position, operating results or cash flows.
•Our operating and maintenance costs will not necessarily fluctuate in proportion to changes in our operating revenues.
•Our ability to pay our operating and capital expenses and make payments due on our debt depends on many factors beyond our control.
•The agreements governing our debt, including the Indenture and the Credit Agreement, contain various covenants that impose restrictions on us and certain of our subsidiaries.
•We may experience risks associated with future mergers, acquisitions or dispositions of businesses or assets or other strategic transactions.
•Our actual financial results after emergence from bankruptcy may not be comparable to our projections filed with the Bankruptcy Court in the course of the Chapter 11 Cases.
•The exercise of all or any number of outstanding warrants or the issuance of stock-based awards may dilute the holders of our Common Shares.
Regulatory, Legal and Tax Risks
•Failure to comply with anti-corruption and anti-bribery statutes could result in fines, criminal penalties and drilling contract terminations.
•Increasing regulatory complexity could adversely impact our operations and reduce demand.
•Compliance with or breach of environmental laws can be costly and limit our operations.
•The U.S. Internal Revenue Service (“IRS”) may not agree with the conclusion that we should be treated as a foreign corporation for U.S. federal tax purposes.
•Governments may pass laws that subject us to additional taxation or may challenge our tax positions.
•Our consolidated effective income tax rate may vary substantially over time.
•We are subject to litigation that could have a material adverse effect on us.
•As a Bermuda company, it may be difficult enforcing judgments against us, our directors and officers.
•Our bye-laws restrict shareholders from bringing legal action against our officers and directors.
•Provisions in our bye-laws could delay or prevent a change in control of our company.
•Legislation enacted in Bermuda as to Economic Substance may affect our operations.
•Our business could be affected as a result of activist investors.
Risks Related to Our International Operations
•Our non-U.S. operations involve additional risks not typically associated with U.S. operations.
Sustainability Risks
•Regulation of GHGs and climate change could have a negative impact on our business.
•Consumer preferences for alternative fuels and electric-powered vehicles, as part of the global energy transition, may lead to reduced demand for our services.
•Increased scrutiny from stakeholders and others regarding our sustainability practices, initiatives and reporting responsibilities could result in additional costs or risks.
15
Item 1A.Risk Factors
Risks Related to Our Business, Operations, Financing Arrangements and Market Conditions
The success of our business largely depends on the level of activity in theoffshore oil and natural gas industry,exploration, development and production, which can be significantly affected by volatile oil and natural gas prices.
The success of our business largely depends on the level of activity in offshore oil and natural gas exploration, development and production. Oil and natural gas prices, and market expectations of potential changes in these prices, significantly affect the level of drilling activity. Historically, when drilling activity and operator capital spending decline,declines, utilization and day rates also decline and drilling may be reduced or discontinued, resulting in an oversupply of drilling rigs. The oversupply of drilling rigs will be exacerbated by the entry of newbuild rigs into the market. Oil and natural gas prices have historically been volatile, and have declined significantly from prices in excess of $100 since mid-2014 causing operators to reduce capital spending and cancel or defer existing programs, substantially reducing the opportunities for new drilling contracts. Oil prices have rebounded off the 12-year lows experienced during early 2016, and during 2017 have experienced the first increase in average prices since 2014, with prices ranging from a low of $44 to $67 per barrel. While commodity prices have improved, they have not improved to a level that supports increased rig demand sufficient to absorb existing rig supply and generate meaningful increases in day rates. We expect these trends to continue as long as commodity prices and rig supply remain at current levels. The lack of a meaningful recovery of oil and natural gas prices or further price reductions or volatility in prices, may cause our customers to maintain historically low levels or further reduce their overall level of activity, in which case demand for our services may further decline and revenues may continue to be adversely affected through lower rig utilization and/or lower day rates. decline.
Numerous factors may affect oil and natural gas prices and the level of demand for our services, including:
•regional and global economic conditions and changes therein, including recessions,
•oil and natural gas supply and demand, which is affected by worldwide economic activity and population growth,
•expectations regarding future energy prices,
•the desire and ability of the Organization of Petroleum Exporting Countries ("OPEC")OPEC+, its members and other oil-producing nations, such as Russia, to reach further agreements to set and maintain production levels and pricing and to implement existing and future agreements,
•the availability of capital for oil and natural gas participants, including our customers, and capital allocation decisions by our customers, including the relative economics of offshore development versus onshorealternative prospects,
•the level of production by non-OPEC countries,
•U.S. and non-U.S. tax policy, including the U.K. windfall tax on oil and gas producers in the British North Sea,
•advances in exploration and development technology, including with respect to onshore shale,
•costs associated with exploring for, developing, producing and delivering oil and natural gas,
•the rate of discovery of new oil and natural gas reserves and the rate of decline of existing oil and gas reserves,
•investors reducing, or ceasing to provide, funding to the oil and natural gas industry in response to initiatives to limit climate change,
•laws and government regulations that limit, restrict or prohibit exploration and development of oil and natural gas in various jurisdictions, or materially increase the cost of such exploration and development,
•the development and exploitation of alternative fuels
or energy sources, resulting in reduced capital spending by our customers on oil and natural gas projects, and increased demand for electric-powered products, including electric-powered vehicles,•disruption to exploration and development activities due to hurricanes and other severeadverse weather conditions and the risk thereof,
•natural disasters or incidents resulting from operating hazards inherent in offshore drilling, such as oil spills, and
•the worldwide military or political environment, including the invasion of Ukraine by Russia and the conflict in the Middle East and any related political or economic responses, global macroeconomic effects of trade disputes and increased tariffs and sanctions and uncertainty or instability resulting from an escalation or additional outbreak of armed hostilities or other crises in oil or natural gas producing areas of the Middle East or geographic areas in which we operate, or acts of terrorism.terrorism, and
16
Higher commodity prices may not necessarily translate into increased activity, however, and even during periods of high commodity prices, customers may cancel or curtail their drilling programs, or reduce their levels of capital expenditures for exploration and production for a variety of reasons, including their expectations for future oil and natural gas prices, the cost of exploration efforts, extended periods of price volatility, their lack of success in exploration efforts. Advances in onshore explorationefforts and development technologies, particularly with respect to onshore shale, could also result in our customers allocating more of theirre-allocating capital expenditure budgets to onshore exploration and production activities and less to offshore activities. expenditures for renewable energy projects.
These factors could cause our revenues and profits to decline further, as a result of declines in utilization and day rates, and limit our future growth prospects. Any significant decline in day rates or utilization of our drilling rigs particularly our high-specification floaters, could materially reduceadversely affect our revenuesfinancial position, operating results and profitability.cash flows. In addition, these risks could increase instability in the financial and insurance markets and make it more difficult for us to access capital and obtain insurance coverage that we consider adequate or are otherwise required by our contracts.
The offshore contract drilling industry historically has beenis highly competitive and cyclical, with periods of low demand and excess rig availability that could result in adverse effects on our business.cyclical.
Our industry is highly competitive, and our contracts are traditionally awarded on a competitive bid basis. Pricing, safety records and competency are key factors in determining which qualified contractor is awarded a job.contract. Rig availability, location and technical capabilities also can be significant factors in the determination. If we are not able to compete successfully, our revenues and profitability may be reduced.decline.
Our current backlog of contract drilling revenue may not be fully realized and may decline significantly in the future.
As of February 15, 2024 and February 21, 2023, our contract backlog was approximately $3.9 billion and $2.5 billion, respectively. This amount reflects the remaining contractual terms multiplied by the applicable contractual day rate. The contractual revenue may be higher than the actual revenue we ultimately receive because of a number of factors, including rig downtime or suspension of operations.
Several factors could cause rig downtime or a suspension of operations, many of which are beyond our control, including the early termination, repudiation or renegotiation of contracts, breakdowns of equipment, work stoppages, including labor strikes, shortages of material or skilled labor, surveys or inspections by government and maritime authorities, inability to obtain the requisite permits or approvals, periodic classification surveys, severe weather, strong ocean currents or harsh operating conditions, the occurrence or threat of epidemic or pandemic diseases, and any government response to such occurrence or threat and force majeure events.
17
Our customers may seek to terminate, repudiate or renegotiate our drilling contracts for various reasons, including in the event of damage or a total loss of the drilling rig, the suspension or interruption of operations for extended periods due to breakdown of major rig equipment, failure to comply with performance conditions or equipment specifications, the failure of the customer to receive final investment decision (FID) with respect to projects for which the drilling rig was contracted or other reasons and “force majeure” events beyond the control of either party or other specific conditions. Generally, our drilling contracts permit early termination of the contract by the customer for convenience (without cause), exercisable upon advance notice to us, and in certain cases without making an early termination payment to us. In cases where customers are required to make an early termination payment, such payments would provide some level of compensation to us for the lost revenue from the contract but in many cases would not fully compensate us for all of the lost revenue. There can be no assurances that our customers will be able to or willing to fulfill their contractual commitments to us.
A decline in oil and natural gas prices and any resulting downward pressure on utilization may cause some customers to consider early termination of select contracts despite having to pay onerous early termination fees in certain cases. Customers may request to renegotiate the terms of existing contracts, or they may request early termination or seek to repudiate contracts. In addition, financially distressed customers may seek to negotiate reduced termination fees as part of a restructuring package. Furthermore, as contracts expire, we may be unable to secure new contracts for our drilling rigs. Therefore, revenues recorded in future periods could differ materially from our current backlog. Our inability to realize the full amount of our contract backlog or to secure a new contract with substantially similar terms on a timely basis could materially adversely affect our financial position, operating results or cash flows.
Our business will be materially adversely affected if we are unable to secure contracts on economically favorable terms.terms or if option periods in existing contracts are not exercised as expected.
Our ability to renew expiring contracts or obtain new contracts and the terms of any such contracts will depend on market conditions. In December 2023, we took delivery of VALARIS DS-13 and VALARIS DS-14 (the "Newbuild Drillships") for an aggregate purchase price of approximately $337.0 million, which are currently uncontracted. Our customers’ decisions to exercise option periods resulting in additional work for the rig under contract also depend on market conditions. We may be unable to renew our expiring contracts, including contracts expiring due to a failure by the customer to exercise option periods, or obtain new contracts for the Newbuild Drillships or the drilling rigs under contracts that have expired or have been terminated, andterminated. In addition, the day rates under any new contracts or any renegotiated contracts may be substantially below the existing day rates, which could materially adversely affect our revenues and profitability.
Our customers may be unable or unwilling to fulfill their contractual commitments to us, including their obligations to pay for losses, damages or other liabilities resulting from operations under the contract.liabilities.
18
liability generally has caps for ordinary negligence, with much higher caps or unlimited liability where the damage is caused by our gross negligence.negligence or willful misconduct. Notwithstanding a contractual indemnity from a customer, there can be no assurance that our customers will be financially able to assumefulfill their responsibility, or honor their indemnityindemnification obligations to us for such losses. In addition, under the laws of certain jurisdictions, such indemnities under certain circumstances are not enforceable if the cause of the damage was our gross negligence or willful misconduct. This could result in us having to assume liabilities in excess of those agreed in our contracts due to customer balance sheet or liquidity issues or applicable law.
The loss of a significant customer or customer contract, as well as customer consolidation and changes to customer strategy, could materially adversely affect us.our business.
We provide our services to major international, government-owned and independent oil and natural gas companies. During 2017,2023, our five largest customers accounted for 66%40% of our consolidated revenues, in the aggregate, with our largest customer representing 22%11% of our consolidated revenues.revenues and a significant percentage of our operating cash flows. Our financial position, operating results or cash flows may be materially adversely affected if any of our higher day rate contracts were terminated or renegotiated on less favorable terms or if a major customer terminates its contracts with us, fails to renew its existing contracts with us, requires renegotiation of our contracts or declines to award new contracts to us.
Some of our customers have consolidated and could continue to consolidate and could use their size and purchasing power to achieve economies of scale and pricing concessions. In addition, certain of our customers are increasingly focusing their business strategy on renewable energy projects and away from oil and natural gas exploration and production. Such customer consolidation and strategic transitions could result in reduced capital spending by such customers, decreased demand for our drilling services, loss of competitive position and negative pricing impacts. If we cannot maintain service and pricing levels for existing customers or replace such revenues with increased business activities from other customers, our financial position, operating results and cash flows could be materially adversely affected.
Our current backloglong-term contracts are subject to the risk of cost increases, which could adversely impact our profitability.
In general, our costs increase as the demand for contract drilling revenueservices and skilled labor increase, which may materially adversely affect our financial position, operating results or cash flows. Our long-term contracts are subject to inflationary factors such as increases in skilled labor costs, material costs and overhead costs. While some of our contracts include cost escalation provisions that allow changes to our day rate based on stipulated cost increases or decreases, the timing and amount earned from these day rate adjustments may differ from our actual increase in costs and many contracts do not allow for such day rate adjustments. During times of reduced demand, reductions in costs may not be fully realizedimmediate as portions of the crew may be required to prepare our rigs for stacking, after which time the crew members are assigned to active rigs or dismissed. Moreover, as our rigs are mobilized from one geographic location to another, the labor and may decline significantlyother operating and maintenance costs can vary significantly. In general, labor costs increase primarily due to higher salary levels in a particular geographic location and inflation. Equipment maintenance expenses fluctuate depending upon the type of activity a drilling rig is performing and the age and condition of the equipment, as well as the impact of supply chain disruptions and inflation on the costs of parts and materials. Contract preparation expenses vary based on the scope and length of contract preparation required.
Our network and systems, including rig operating systems and critical data, are subject to cybersecurity risk and technical disruptions.
Our business depends on technologies, systems and networks, including both operational technology and information technology (“IT”), to conduct our offshore operations and help run our financial and onshore operations functions, including the collection of payments from customers, payments to vendors and employees and storage of company records. Some of these systems are managed or provided by third-party service providers, including cloud platform or cloud software providers.
19
Cybersecurity incidents, including unauthorized access, social engineering (including phishing), malware (including ransomware), distributed denial-of-service attacks, identity compromise and technical disruptions could materially impact our IT and operational technology systems, including critical systems and infrastructure, and our data, as well as impact our third-party service providers on whom we rely. The risks associated with the failure of our systems and cyber incidents and attacks on our systems could include disruptions of certain systems on our rigs; other impairments of our ability to conduct our operations, including disruptions in our ability to make or receive payments and financial and onshore operating functions, loss of intellectual property, proprietary information, customer and vendor data or other sensitive information; corruption or unauthorized release of our or our customer’s critical data; disruption of our or our customers’ operations; and increased costs to prevent, respond to or mitigate cybersecurity events. Our business operations could be materially impacted by an incident or interruption of systems we rely on that originates from, or compromises, third‐party networks or devices, including those of our third‐party service providers. Any such incident or attack could result in injury to people, loss of control of, or damage to, our, or our customer’s, assets, downtime, and loss of revenue or harm to the environment. Any such incident or attack could also compromise our networks or our customers’ and vendors’ networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in significant fines, civil and/or criminal claims or proceedings.
Laws and regulations governing cybersecurity and data privacy and the unauthorized disclosure of confidential or protected information pose increasingly complex compliance challenges and potential costs, and any failure to comply with these data cybersecurity and privacy requirements or other applicable laws and regulations in this area could result in significant regulatory or other penalties and legal liability. Disruption to our operations and damage to our reputation could materially adversely affect our financial position, operating results or cash flows.
There can also be no assurance that our efforts, or the efforts of our partners and vendors, to invest in the future,protection of information technology infrastructure and data will prevent or identify incidents in our systems. While we have a cybersecurity program and incident response plan in place to prepare for, detect, respond to, mitigate and recover from the impact of these attacks, cyber-attacks may leverage previously unknown vulnerabilities, sophisticated new techniques and emerging technologies and, there can be no assurance that our response will be successful or effectively address the incident on a timely basis. As a result of a cybersecurity incident, we could suffer interruptions in our ability to manage our operations, which may materially adversely affect our business and financial results. In addition, we may incur large expenditures to investigate or remediate, to recover data, to repair or replace networks or information systems, or to protect against similar future events. Regardless of the specific nature of a cybersecurity incident, we could experience material operational impact, financial loss, legal liability, regulatory violations or reputational harm.
Rig reactivation, upgrade and enhancement projects are subject to risks, including delays and cost overruns, which could materially adversely affect our financial position, operating results or cash flows.
The costs required to reactivate a stacked rig and return the rig to drilling service are significant. Depending on the length of time that a rig has been stacked, we may incur significant costs to restore the rig to drilling capability, which may also include capital expenditures due to, among other things, technological obsolescence or an equipment overhaul of the rig. Stacked drilling rigs require expenditures to return these rigs to drilling service. In the future, market conditions may not justify these types of expenditures or enable us to operate our rigs profitably during the remainder of their economic lives. In addition, we may not recover the expenditures incurred to reactivate rigs through the associated drilling contract or otherwise. We can provide no assurance that we will have access to adequate or economical sources of capital to fund the return of stacked rigs to drilling service.
20
During periods of increased rig reactivation, upgrade and enhancement projects, shipyards and third-party equipment vendors may be under significant resource constraints to meet delivery obligations. Such constraints may lead to substantial delivery and commissioning delays, equipment failures and/or quality deficiencies. Furthermore, drilling rigs may face start-up or other operational complications following completion of upgrades or maintenance. Other unexpected difficulties, including equipment failures, design or engineering problems, could result in significant downtime at reduced or zero day rates or the cancellation or termination of drilling contracts.
Rig reactivation, upgrade, life extension and repair projects are subject to the risks of delay or cost overruns, including the following: failure of third-party equipment to meet quality and/or performance standards, delays in equipment deliveries or shipyard construction, shortages of materials or skilled labor, disruptions occurring as the result of pandemics and/or epidemics and related public health measures implemented by governments worldwide, damage to shipyard facilities, including damage resulting from fire, explosion, flooding, severe weather, terrorism, war or other armed hostilities, unforeseen design or engineering problems, including those relating to the commissioning of newly designed equipment, unanticipated actual or purported change orders, strikes, labor disputes or work stoppages, financial or operating difficulties of equipment vendors or the shipyard while enhancing, upgrading, improving or repairing a materialrig or rigs, unanticipated cost increases, foreign currency exchange rate fluctuations impacting overall cost, inability to obtain the requisite permits or approvals, client acceptance delays, disputes with shipyards and suppliers, latent damages or deterioration to hull, equipment and machinery in excess of engineering estimates and assumptions, claims of force majeure events, and additional risks inherent to shipyard projects in a non-U.S. location. These risks could result in the cancellation or termination of drilling contracts for which the drilling rig was contracted or reduce the likelihood that such drilling rigs will receive a drilling contract if not already contracted.
We make significant expenditures to meet customer requirements, maintain our fleet to comply with laws and the applicable regulations and standards of governmental authorities and organizations, or to expand our fleet, and we may be required to make significant expenditures to maintain our competitiveness.
We make substantial expenditures to maintain our fleet. These expenditures could increase as a result of changes in offshore drilling technology, the cost of labor and materials, customer requirements, fleet size, the cost of replacement parts for existing drilling rigs, the geographic location of the drilling rigs, length of drilling contracts, governmental regulations, maritime regulations and technical standards relating to safety, security or the environment, and industry standards.
Changes in offshore drilling technology, customer requirements for new or upgraded equipment, and competition within our industry may require us to make significant capital expenditures. In addition, changes in governmental regulations relating to decarbonization, environmental, emissions, safety or equipment standards, as well as compliance with standards imposed by maritime self-regulatory organizations, may require us to make additional unforeseen capital expenditures. In addition, commitments made by us, or our customers, to reduce emissions, or decarbonize, may require us to upgrade or retrofit our drilling rigs with additional equipment, less carbon intensive equipment or instrumentation. As a result, we may be required to take our drilling rigs out of service for extended periods of time, with corresponding losses of revenues, in order to make such alterations or to add such equipment. In the future, market conditions may not justify these expenditures or enable us to operate our drilling rigs profitably during the remainder of their economic useful lives.
Additionally, in order to expand our fleet, we may require additional capital in the future. If we are unable to fund capital requirements with cash flows from operations or proceeds from sales of non-core assets, we may be required to either incur additional borrowings or raise capital through the sale of debt or equity securities. Our ability to access the capital markets may be limited by our financial condition at the time, by restrictive covenants in our debt agreements, bye-laws and regulations and by adverse effectmarket conditions resulting from, among others, general economic conditions, contingencies and uncertainties that are beyond our control. Similarly, when lenders and institutional investors reduce, and in some cases cease to provide, funding to industry borrowers, the liquidity and financial condition of us and our customers can be adversely impacted. If we raise funds by issuing equity securities, existing shareholders may experience dilution, and if we raise funds by issuing additional debt securities,
21
we may have to pledge additional assets as collateral. Our failure to obtain the funds for necessary future capital expenditures could materially adversely affect our business and on our financial position, operating results or cash flows.
Failure to recruit and retain skilled personnel could materially adversely affect our business.
We require skilled personnel to operate our drilling rigs and to provide technical services and support for our business, and further rig reactivations will require that we hire additional skilled personnel. As demand for our services and the number of December 31, 2017, our contract backlog was approximately $2.8 billion, which representsactive drilling rigs has increased, competition for the labor required for drilling operations and construction projects has intensified, leading to shortages of qualified personnel in the industry. During periods of intensified competition, it is more difficult and costly to recruit, train and retain qualified employees, including in foreign countries that require a declinecertain percentage of $800.3 million since December 31, 2016. This amount reflectsnational employees. The most recent prolonged industry downturn and resulting reductions in offshore personnel wages further reduced the remaining contractual terms multiplied bynumber of qualified personnel available. Hiring qualified and experienced personnel with the applicable contractual day rate. The contractual revenuespecialized skills and qualifications required to operate an offshore drilling rig is difficult due to the competitive labor market and lack of experience. In the current environment where competition for labor is intense, we may be higher thanrequired to increase existing levels of compensation to stay competitive in retaining a skilled workforce.
In addition, new personnel that we hire may need to undergo training to develop the actual revenue we receive because of a number of factors, including rig downtime or suspension of operations. Several factors could cause rig downtime or a suspension of operations, many of which are beyond our control, including:
We also are subject to potential legislative or regulatory action that may impact working conditions, paid time off or other conditions of employment, including mandated vaccination programs. These conditions could further increase our costs or limit our ability to fully staff and operate our drilling rigs.
The increases in employment costs cause an increase in operating expenses, with a resulting reduction in net income, and our ability to fully staff and operate our drilling rigs may be negatively affected.
Our shared service center may not create the operational efficiencies that we expect and may create risks relating to the processing of transactions and recording of financial information, which could materially adversely affect our financial condition, operating results or cash flows.
We have implemented a shared service center program pursuant to which we have outsourced certain finance, human resources, supply chain and IT functions. We have and will continue to align the design and operation of our financial control environment as part of our shared service center program. As part of this program, we are outsourcing, and will continue to outsource, certain accounting, payroll, human resources, supply chain and IT functions to a third-party service provider. The party that we utilize for these services may not be able to handle the volume of activity or willingperform the quality of service necessary to support our operations. The failure of the third-party to fulfill their contractual commitmentsits obligations could disrupt our operations. In addition, the move to us.
22
We may not realize the expected benefits of our ARO joint venture.
ARO, our 50/50 unconsolidated ARO joint venture and a provider of offshore drilling services, faces many of the same risks as we face. Operating through ARO, in which we have difficulty obtaininga shared interest, may result in our having less control over many decisions made with respect to projects, operations, safety, utilization, internal controls and other operating and financial matters. ARO may not apply the same controls and policies that we follow to manage our risks, and ARO’s controls and policies may not be as effective. As a result, operational, financial and control issues may arise, which could materially adversely affect our financial position, operating results or maintaining insurancecash flows. Additionally, in order to establish or preserve our relationship with our joint venture partner we may agree to risks and contributions of resources that are proportionately greater than the returns we could receive, which could reduce our income and return on our investment in ARO compared to what we may traditionally require in other areas of our business.
ARO’s income and accounts receivable are concentrated with Saudi Aramco. The loss of this customer, or a substantial decrease in demand by this customer for ARO’s services, would have a material adverse effect on ARO’s business, results of operations and financial condition, which could materially adversely affect our financial position, operating results or cash flows.
We have issued a 10-year shareholder notes receivable to ARO (the “Notes Receivable from ARO”), which are governed by the laws of Saudi Arabia. In the event of a dispute with ARO over the repayment of the Notes Receivable from ARO, our ability to enforce the payment obligations of ARO or to exercise other remedies are subject to several significant limitations, including that our ability to accelerate outstanding amounts under the Notes Receivable from ARO is subject to the consent of Saudi Aramco and that the Notes Receivable from ARO are governed by the laws of Saudi Arabia, and we are limited to the remedies available under Saudi law. In addition, our Notes Receivable from ARO are subordinated and junior in right of payment to ARO’s term loan described below, and as such, we may not be repaid the interest or principal amounts of the Notes Receivable from ARO.
We have a potential obligation to fund ARO for newbuild jackup rigs. The shareholder agreement governing the joint venture (the "Shareholder Agreement") specifies that ARO shall purchase 20 newbuild jackup rigs over an approximate 10-year period. The first two newbuild jackups were ordered in January 2020. The first rig, Kingdom 1, was delivered in the fourth quarter of 2023 and the second is expected to be delivered in the first half of 2024. ARO is expected to commit to orders for two additional newbuild jackups in the near term. There can be no assurance that the new jackup rigs will begin operations as anticipated.
The joint venture partners intend for the newbuild jackup rigs to be financed out of ARO's available cash on hand or from operations and/or funds available from third-party financing. In October 2023, ARO entered into a $359.0 million term loan to finance the remaining payments due upon delivery of the first two newbuild jackups and for general corporate purposes. Further, in the event ARO has insufficient cash or is unable to obtain third-party financing, each partner may periodically be required to make additional capital contributions to ARO, up to a maximum aggregate contribution of $1.25 billion from each partner to fund the newbuild program. Beginning with the delivery of the second newbuild, each partner's commitment shall be reduced by the lesser of the actual cost of each newbuild rig, or $250.0 million, on a proportionate basis. Any required capital contributions we make could negatively impact our liquidity position and financial condition.
As a result of these risks, it may take longer than expected for us to realize the expected returns on our investment in ARO or such returns may ultimately be less than anticipated. Additionally, if we are unable to make any required contributions, our ownership in ARO could be diluted which could hinder our ability to effectively manage ARO and could materially adversely affect our financial position, operating results or cash flows.
23
Joint venture investments could be adversely affected by our joint venture partners’ actions, financial condition and liquidity and disputes between us and our joint venture partners.
We have made investments in joint ventures other than ARO. Such investments are subject to the risk that the other shareholders of the joint venture, who may have different business or investment strategies than us or with whom we may have a disagreement or dispute, may have the ability to block business, financial, or management decisions (such as the decision to distribute dividends or appoint members of management), which may be crucial to the success of our investment in the joint venture, or could otherwise implement initiatives which may be contrary to our interests. Our partners may be unable, or unwilling, to fulfil their obligations under the relevant agreements regarding such joint ventures (for example by non-contributing working capital or other resources), or may experience financial, operational, or other difficulties that may adversely impact our investment in a particular joint venture. In addition, our partners may lack sufficient controls and procedures which could expose us to risk. If any of the foregoing were to occur, such occurrence could materially adversely affect our financial position, operating results or cash flows.
We may pursue other joint ventures that we believe will enable us to further expand or enhance our business. Any such joint venture would be evaluated on a case-by-case basis, and its consummation would depend upon numerous factors, including identifying suitable opportunities that align with our business strategy, reaching agreement with the potential counterparty on acceptable terms, the receipt of any applicable regulatory and other approvals, and other conditions. Any such joint venture would involve various risks, including among others (1) difficulties related to integrating or managing applicable parts of a joint venture and unanticipated changes in customer and other third-party relationships subsequent to closing, (2) diversion of management’s attention from day-to-day operations, (3) failure to realize anticipated benefits, such as cost savings, revenue enhancements or business synergies, (4) the potential for substantial transaction expenses and (5) potential accounting impairment or actual diminution or loss of value of our investment if future on terms we find acceptablemarket, business or other conditions ultimately differ from our assumptions at the time any such transaction is consummated.
Our business involves operating hazards, and our insurance coverageand indemnities from our customers may not protect us against allbe adequate to cover any potential losses.
The drilling of the risksoil and natural gas wells involves numerous operating hazards, we face, including those specific to offshore operations.
24
considers contractual indemnity for damages and losses resulting from our gross negligence and willful misconduct and forcriminal fines and penalties to be against public policy, and punitive damages leviedthe enforceability of an indemnity as to other matters may be limited.
Our insurance policies and drilling contracts contain rights to indemnity that may not adequately cover our losses, and we do not have insurance coverage or assessed directly against us.rights to indemnity for all risks. We also maintainhave two main types of insurance coverage: (1) hull and machinery coverage for personal injuries,physical damage to or loss ofour property and equipment and other(2) excess liability coverage, which generally covers our liabilities arising from our operations, such as personal injury and property claims, including wreck removal and pollution. We have no hull and machinery insurance coverage for various business risks.damages caused by named storms in the U.S. Gulf of Mexico for our jack-up fleet and only limited coverage for our floater fleet. We also retain the risk for any liability that exceeds our excess liability coverage. Pollution and environmental risks generally are not completely insurable.
rigs, and applicable legal requirements. Althoughcertain other claims may also not be reimbursed, in part or full, by insurance carriers. Any such lack of reimbursement may cause us to incur substantial costs. In addition, we could decide to retain more risk in the future, resulting in higher risk of losses, which could be material. Moreover, we may not be able to maintain what we believe to be an appropriate level ofadequate insurance covering hazards and risks we currently encounter during our operations, no assurance can be givenin the future at rates that we willconsider reasonable or be able to obtain insurance against all potential risks and hazards, or that we will be able to maintain the same levels and types of coverage that we have maintained in the past.
certain risks. Furthermore, our insurance carriers may interpretassert that our insurance policies such that they do not cover lossesprovide coverage for all of our claims.losses. Our insurance policies may also have exclusions of coverage for some losses. Uninsured exposures may include radiation hazards, certain loss or damage to property onboard our rigsof hire and losses relating to shore-based terrorist acts or strikes.
Geopolitical events and violence could materially adversely affect the markets for our services and have a material adverse effect on our business and cost and availability of insurance.
Geopolitical events have resulted in military actions, terrorist, pirate and other armed attacks, civil unrest, political demonstrations, mass strikes and government responses to such events. Military action by the U.S. or other event occursnations could escalate, and is not fully covered byacts of terrorism, piracy, kidnapping, extortion, acts of war, violence, civil war or general disorder may initiate or continue. Such acts could be directed against us or our assets. Such developments have caused instability in the world’s financial and insurance markets in the past. In addition, these developments could lead to increased volatility in prices for oil and natural gas and could materially adversely affect the markets for our services, particularly to the extent that such events take place in regions with significant oil and natural gas reserves, refining facilities or contractual indemnity (or if our contractual indemnity is not enforceable under applicable law), ittransportation infrastructure. For example, the ongoing conflicts, and the continuation of, or any increase in the severity of, the conflicts in Ukraine and the Middle East, has led and may continue to lead to an increase in the volatility of global oil and natural gas prices. Insurance premiums could increase and coverage for these kinds of events may be unavailable in the future. Any or all of these effects could materially adversely affect our financial position, operating results or cash flows.
25
Our drilling contracts with national oil companies may expose us to greater risks than we normally assume in drilling contracts with non-governmental customers.
We currently own and operate 1813 drilling rigs that are contracted with national oil companies. The terms of these contracts are often non-negotiable and may expose us to greater commercial, political and operational risks than we assume in other contracts, such as exposure to materially greater environmental liability, personal injury and other claims for damages (including consequential damages), or, in certain cases, the risk thatof early termination of the contract may be terminated by our customer without cause on short-termfor convenience (without cause), exercisable upon advance notice to us, contractually or by governmental action, under certain conditions that may not provide us withwithout making an early termination payment. payment to us. We can provide no assurance that the increased risk exposure will not have an adverse impact on our future operations or that we will not increase the number of drilling rigs contracted to national oil companies with commensurate additional contractual risks.
Public health crises, pandemics and epidemics and fear of such events may adversely impact our operations, the operations of our customers and the global economy, including the worldwide demand for oil and natural gas and the level of demand for our services. Other effects of such public health crises, pandemics and epidemics may include significant volatility and disruption of the global financial markets; continued volatility of crude oil prices and related uncertainties around OPEC+ production; disruption of our operations, including suspension of drilling activities; impact to costs; loss of workers; labor shortages; supply chain disruptions or equipment shortages; logistics constraints; customer demand for our services and industry demand generally; capital spending by oil and natural gas companies; our liquidity; the price of our securities and trading markets with respect thereto; our ability to access capital markets; asset impairments and other accounting changes; certain of our customers experiencing bankruptcy or otherwise becoming unable to pay vendors, including us; and employee impacts from illness, travel restrictions, including border closures and other community response measures. Such public health crises, pandemics and epidemics are continuously evolving and the extent to which our business operations and financial results may be affected depends on various factors beyond our control, such as the duration, severity and sustained geographic resurgence of public health crises, pandemics and epidemics; the impact and effectiveness of governmental actions to contain and treat such outbreaks, including government policies and restrictions; vaccine hesitancy, vaccine mandates, and voluntary or mandatory quarantines; and the global response surrounding such uncertainties.
Unionization efforts and labor regulations in certain countries in which we operate could materially increase our costs or limit our flexibility with regard to the management of our personnel.
Outside of the U.S., we are often subject to collective bargaining agreements that require periodic salary negotiations, which usually result in higher personnel expenses and other benefits. Efforts have been made from time to time to unionize other portions of our workforce. In addition, we have been subjected to strikes or work stoppages and other labor disruptions in certain countries. Additional unionization efforts, new collective bargaining agreements or work stoppages could materially increase our costs, reduce our profitability or suspendlimit our dividendflexibility.
Certain legal obligations require us to contribute certain amounts to retirement funds or other benefit plans and restrict our ability to dismiss employees. Future regulations or court interpretations established in the future.countries in which we conduct our operations could increase our costs and materially adversely affect our financial position, operating results or cash flows.
26
Significant equipment or part shortages, supplier capacity constraints, supplier production disruptions, supplier quality and sourcing issues or price increases could materially adversely affect our financial position, operating results or cash flows.
Our Board of Directors declared a $0.01 quarterly cash dividend per Class A ordinary share for each quarter during 2016reliance on third-party suppliers, manufacturers and 2017, a $0.14 reduction from the $0.15 dividend per share paid for each quarter during 2015. In the future, our Board of Directors may, without advance notice, further reduce or suspend our dividend in orderservice providers to improve our financial flexibilitysecure equipment, parts, components and best position us for long-term success. The declaration and amount of future dividends is at the discretion of our Board of Directors and will depend on our profitability, liquidity, financial condition, market outlook, reinvestment opportunities, capital requirements, restrictions and limitationssub-systems used in our credit facilityoperations exposes us to potential volatility in the quality, prices and other debt documentsavailability of such items. Certain high-specification parts and other factors and restrictions our Board of Directors deems relevant. There can be no assuranceequipment that we will payuse in our operations may be available only from a dividendsmall number of suppliers, manufacturers or service providers, or in some cases must be sourced through a single supplier, manufacturer or service provider. Industry consolidation has reduced and may continue to reduce the number of available suppliers, and our suppliers have been and may continue to be impacted by supply chain and logistics disruptions that began during the COVID-19 pandemic. A disruption in the future.
Our operating and maintenance costs will not necessarily fluctuate in proportion to changes in our operating revenues.
Our operating and maintenance costs will not necessarily be proportional to changes in our operating revenues. Operating costs are affected by many factors, including inflation, while maintenance costs depend on, among other factors, market conditions for drilling services as well as unplanned downtime events or idle periods between contracts. Costs for operating a rig are therefore generally not correlated to the day rate being earned. As our rigs are mobilized from one geographic location to another, the labor and other operating and maintenance costs can vary significantly. Equipment maintenance costs fluctuate depending upon the age and condition of the equipment, and these costs could increase for short or extended periods as a result of new regulatory or customer requirements. Any of the foregoing could impact our liquidity or may cause us to miss our financial guidance for a given period, which could adversely impact the market price for our Common Shares. In addition, certain of our drilling contracts are partially payable in local currency. The amounts, if any, of local currency received under these drilling contracts may exceed our local currency needs to pay local operating and maintenance costs, leading to an accumulation of excess local currency balances, which, in certain instances, may be subject to either restrictions or other difficulties in converting to U.S. dollars, our functional currency, or to other currencies of the locations where we operate. Excess amounts of local currency may also expose us to the risk of currency exchange losses.
Our ability to pay our operating and capital expenses and make payments due on our debt depends on many factors beyond our control.
Our ability to pay our operating and capital expenses and make payments due on our debt depends on our future performance, which will be affected by financial, business, economic, legislative and other factors, many of which are uninsuredbeyond our control. Our business may not generate sufficient cash flow from operations in the future, which could result in our being unable to fund liquidity needs or repay indebtedness. A range of economic, business and relateindustry factors will affect our financial performance, and many of these factors, such as the condition of our industry, the global economy and initiatives of our competitors, are beyond our control. If we do not generate enough cash flow from operations to intellectual property, commercial, operational, employment, regulatorysatisfy our debt obligations, we may have to undertake alternative financing plans, such as selling assets; reducing or delaying capital investments; seeking to raise additional capital; or restructuring or refinancing all or a portion of our indebtedness at or before maturity.
27
We cannot be assured that we will be able to accomplish any of these alternatives on terms acceptable to us or at all. In addition, the terms of existing or future debt agreements may restrict us from adopting any of these alternatives. The failure to generate sufficient cash flow or to achieve any of these alternatives could materially adversely affect our ability to fund liquidity needs or pay amounts due under our debt.
The agreements governing our debt, including the Indenture and the Credit Agreement, contain various covenants that impose restrictions on us and certain of our subsidiaries that may affect our ability to operate our business and to make payments on our debt.
The Indenture, the Credit Agreement and the related agreements governing our indebtedness contain covenants that, among other things, limit our ability and the ability of certain of our subsidiaries to:
•incur additional debt and issue preferred stock;
•incur or create liens;
•redeem and/or prepay certain debt;
•pay dividends on our shares or repurchase shares;
•make certain investments;
•engage in specified sales of assets;
•enter into transactions with affiliates; and
•engage in consolidation, mergers and acquisitions.
In addition, the Credit Agreement contains financial covenants requiring us to maintain (i) a minimum book value of equity to total assets ratio, (ii) a minimum interest coverage ratio and (iii) a minimum amount of liquidity. Any future indebtedness may also require us to comply with similar or other activities.covenants. These restrictions on our ability to operate our business could seriously harm our business by, among other things, limiting our ability to take advantage of financings, mergers, acquisitions and other business opportunities.
Various risks, uncertainties and events beyond our control could affect our ability to comply with these covenants. Failure to comply with any of the covenants in our existing or future financing agreements could result in a default under those agreements and under other agreements containing cross-default provisions. A default would permit lenders to accelerate the maturity for the debt under these agreements and to foreclose upon any collateral securing the debt. Under these circumstances, we might not have sufficient funds or other resources to satisfy all of our obligations. In addition, the limitations imposed by financing agreements on our ability to incur additional debt and to take other actions might significantly impair our ability to obtain other financing. This could have serious consequences to our financial condition and results of operations and could cause us to become bankrupt or insolvent.
We may experience risks associated with future mergers, acquisitions or dispositions of businesses or assets or other strategic transactions.
We may pursue mergers, acquisitions or dispositions of businesses or assets or other strategic transactions that we believe will strengthen, streamline or expand our business. Each such transaction would be dependent upon several factors, including identifying suitable companies, businesses or assets that align with our business strategies, reaching agreement with the potential counterparties on acceptable terms, the receipt of any applicable regulatory and other approvals, and other conditions. These transactions involve various risks, including among others, (1) difficulties related to integrating or managing applicable parts of an acquired business or joint venture and unanticipated changes in customer and other third-party relationships subsequent to closing, (2) diversion of management's attention from day-to-day operations, (3) applicable antitrust laws and other regulations that may limit our ability to acquire targets or require us to divest an acquired business or assets, (4) failure to realize anticipated benefits, such as cost savings, revenue enhancements or strengthening or broadening our business, (5)
28
potentially substantial transaction costs associated with acquisitions, joint ventures or investments if we or a transaction counterparty seeks to exit or terminate an interest in the joint venture or investment, and (6) potential accounting impairment or actual diminution or loss of value of our investment if future market, business or other conditions ultimately differ from our assumptions at the time such transaction is consummated.
Our actual financial results after emergence from bankruptcy may not be comparable to our projections filed with the Bankruptcy Court in the course of the Chapter 11 Cases.
In connection with the disclosure statement we filed with the Bankruptcy Court and the hearing to consider confirmation of the plan of reorganization, we prepared projected financial information to demonstrate to the Bankruptcy Court the feasibility of the plan of reorganization and our ability to continue operations upon our emergence from the Chapter 11 Cases. Those projections were prepared solely for the purpose of the Chapter 11 Cases and have not been and will not be updated and should not be relied upon by investors. At the time they were prepared, the projections reflected numerous assumptions concerning our anticipated future performance with respect to then prevailing and anticipated market and economic conditions that were and remain beyond our control and that may not materialize. We have not updated the projections prepared solely for the purpose of our Chapter 11 Cases or the assumptions on which they were based after our emergence. Projections are inherently subject to substantial and numerous uncertainties and to a wide variety of significant business, economic and competitive risks, and the assumptions underlying the projections or valuation estimates may prove to be wrong in material respects. Actual results may vary significantly from those contemplated by the projections. As a result, investors should not rely on these projections.
The exercise of all or any number of outstanding warrants or the issuance or settlement of stock-based awards may dilute the holders of our Common Shares.
On the Effective Date, we issued 75.0 million Common Shares and 5.6 million warrants to purchase 5.6 million Common Shares at an exercise price of $131.88 per share, exercisable for a seven-year period commencing on the Effective Date. Additionally, on May 3, 2021, our board of directors approved and ratified the Valaris Limited 2021 Management Incentive Plan (the “MIP”) and reserved 9.0 million of our Common Shares for issuance under the MIP primarily for employees and directors. The grant and settlement of equity awards in the future, any exercise of the warrants into Common Shares and any sale of Common Shares underlying outstanding warrants will have a dilutive effect to the holdings of our existing shareholders and could have a material adverse effect on the market for our Common Shares, including the price that an investor could obtain for their Common Shares.
Regulatory, Legal and Tax Risks
Failure to comply with anti-corruption and anti-bribery statutes, such as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act 2010, could result in fines, criminal penalties, drilling contract terminations and materially adversely affect our financial position, operating results or cash flows.
We operate in a number of countries throughout the world, including countries known to have a reputation for corruption and are subject to the U.S. Foreign Corrupt Practices Act of 1977 (“FCPA”), the U.S. Treasury Department'sDepartment’s Office of Foreign Assets Control ("OFAC"(“OFAC”) regulations, the U.K. Bribery Act ("UKBA"(“UKBA”), other U.S. laws and regulations governing our international operations and similar laws in other countries.
Any violation of the FCPA, OFAC regulations, the UKBA or other applicable anti-corruption laws by us, our partners, agents and our and their respective affiliated entities or their respective officers, directors, employees and agents could in some cases provide a customer with termination rights and other remedies under a contractthe terms of their contracts(s) with us and also result in substantial fines, sanctions, civil and/or criminal penalties and curtailment of operations in certain jurisdictions and could materially adversely affect our financial condition, operating results or cash flows or the availability of funds under our revolving credit facility.flows. Further, we may incur significant costs and consume significant internal resources in our efforts to detect, investigate and resolve actual or alleged violations.
29
Increasing regulatory complexity could adversely impact the costs associated with our offshore drilling operations.operations and reduce demand for our services.
Any new or additional regulatory, legislative, permitting or certification requirements in the U.S., and other areas in which we operate, including laws and regulations that have or may impose increased financial responsibility, oil spill abatement contingency plan capability requirements, or additional operational requirements and certifications, could materially adversely affect our financial position, operating results or cash flows.
We anticipate that government regulation in other countries where we operate may follow the U.S. in regard to enhanced safety and environmental regulation, which could also result in governments imposing sanctions on contractors when operators fail to comply with regulations that impact drilling operations. Even if not a requirement in these countries, most international operating companies, and many others, are voluntarily complying with some or all of the U.S. inspections and safety and environmental guidelines when operating outside the U.S. Such additional governmental regulation and voluntary compliance by operators could increase the cost of our operations and expose us to greater liability.
Compliance with or breach of environmental laws can be costly and could limit our operations.
Our operations are subject to laws and regulations controlling the discharge of materials into the environment, pollution, contamination and hazardous waste disposal or otherwise relating to the protection of the environment. Environmental laws and regulations specifically applicable to our business activities could impose significant liability on us for damages, clean-up costs, fines and penalties in the event of oil spills or similar discharges of pollutants or contaminants into the environment or improper disposal of hazardous waste generated in the course of our operations. To date, such laws and regulations have not had a material adverse effect on our operating results, and we have not experienced an accident that has exposed us to material liability arising out of or relating to discharges of pollutants into the environment. However, the legislative, judicial and regulatory response to a well incident could substantially increase our and our customers'customers’ liabilities. In addition to potential increased liabilities, such legislative, judicial or regulatory action could impose increased financial, insurance or other requirements that may adversely impact the entire offshore drilling industry. See“Item 1. Business – Governmental Regulations and Environmental Matters” and “Item 3. Legal Proceedings – Environmental Matters.”
The IRS may not agree with the conclusion that we should be treated as a foreign corporation for U.S. federal tax purposes following the Merger.purposes.
Although Ensco plcValaris Limited is incorporated in Bermuda (and thus would generally be considered a “foreign” corporation (or non-U.S. tax resident)), the United Kingdom, the U.S. Internal Revenue Service (“IRS”) mayIRS could assert that we should be treated as a U.S. corporation (and therefore, a U.S. tax resident) for U.S. federal income tax purposes followingpursuant to the Merger pursuant torules under Section 7874 of the Internal Revenue Code. For U.S. federal income tax purposes, a corporation is generally consideredWhile we do not believe we are a U.S. “domestic” corporation (or U.S. tax resident) if it is organized in the United States, and a corporation is generally considered a “foreign” corporation (or non-U.S. tax resident) if it is not a U.S. domestic corporation. Because Ensco plc is an entity incorporated in England and Wales, it would generally be classified as a foreign corporation (or non-U.S. tax resident) under these rules. Section 7874 of the Internal Revenue Code provides an exception under which a foreign incorporated entity may, in certain circumstances, be treated as a U.S. domestic corporation for U.S. federal income tax purposes.
Governments may pass laws that subject us to additional taxation or may challenge our tax positions, which could adversely affect our financial position, operating results or cash flows.positions.
There is increasing uncertainty with respect to tax laws, regulations and treaties, and the interpretation and enforcement thereof that may affect our business. TheFor example, the Organization for Economic Cooperation and Development (“OECD”) has issued its final reports on Base Erosion, the European Union, and Profit Shifting, which generally focus on situations where profits are earnedcertain other countries (including countries in low-tax jurisdictions, or payments are made between affiliates from jurisdictions with high tax rates to jurisdictions with lower tax rates. Certain countries within which we operate have recently enactedoperate) are committed to enacting substantial changes to theirnumerous long-standing tax lawsprinciples impacting how large multinational enterprises are taxed. In particular, the OECD’s Pillar Two initiative introduces a 15% global minimum tax applied on a country-by-country basis and for which many jurisdictions committed to an effective enactment date starting January 1, 2024, though not all jurisdictions were expected to meet this target deadline. The impact of these potential new rules as well as any other changes in response to the OECD recommendations or otherwisedomestic and theseinternational tax rules and other countries may enact changes to their tax laws or practices in the future (prospectively or retroactively), which mayregulations could have a material adverse effect on our financial position, operating results or cash flows. The recently enacted U.S. federal incomeeffective tax reform legislation, informally known as the Tax Cuts and Jobs Act of 2017, made substantial changes in the taxation of U.S. and multinational corporations, including a significant reduction in the statutory corporate income tax rate, a limitation on the ability of corporations to deduct interest expense, the imposition of tax on low taxed intangible income of foreign subsidiaries, and the imposition of a base erosion anti-abuse tax.rate.
In addition, our tax positions are subject to audit by U.K., U.S. and other foreign tax authorities. Such tax authorities may, and do from time to time, disagree with our interpretations or assessments of the effects of tax laws, treaties or regulations or their applicability to our corporate structure or certain transactions we have undertaken. We currently are subject to tax assessments in various jurisdictions, which we are contesting. Even if we are successful in maintaining our tax positions, we may incur significant expenses in defending our positions and contesting claims asserted by tax authorities. If we are unsuccessful in defending our tax positions, the resulting assessments or rulings could significantly impact our consolidated income taxes in past or future periods.
As required by law, we file periodic tax returns that are subject to review and examination by various revenue agencies within the jurisdictions in which we operate. We are currently subject to tax assessments in various jurisdictions, which we are contesting.
As a result of these uncertainties, as well as changes in the administrative practices and precedents of tax authorities or other matters, (suchsuch as changes in applicable accounting rules)rules, that increase the amounts we have provided for income taxes or deferred tax assets and liabilities in our consolidated financial statements, we cannot provide any assurances as to what our consolidated effective income tax rate will be in future periods. If we are unable to mitigate the negative consequences of any change in law, audit or other matters, this could cause our consolidated income taxes to increase and cause a material adverse effect onmaterially adversely affect our financial position, operating results or cash flows.
31
Our consolidated effective income tax rate may vary substantially from one reporting period to another.over time.
We cannot provide any assurances as to what our future consolidated effective income tax rate will be because of, among other matters, uncertainty regarding the nature and extent of our business activities in any particular jurisdiction in the future and the tax laws of such jurisdictions, as well as potential changes in U.K., U.S. and other foreign tax laws, regulations or treaties or the interpretation or enforcement thereof, changes in the administrative practices and precedents of tax authorities or other matters (such as changes in applicable accounting rules) that increase the amounts we have provided for income taxes or deferred tax assets and liabilities in our consolidated financial statements. In addition, as a result of frequent changes in the taxing jurisdictions in which our drilling rigs are operated and/or owned, changes in the overall level of our income and changes in tax laws, our consolidated effective income tax rate may vary substantially from one reporting period to another. In periods of declining profitability, our income tax expense may not decline proportionately with income. Further, we may continue to incur income tax expense in periods in which we operate at a loss. Income tax rates imposed in the tax jurisdictions in which our subsidiaries conduct operations vary, as does the tax base to which the rates are applied. In some cases, tax rates may be applicable to gross revenues, statutory or negotiated deemed profits or other bases utilized under local tax laws, rather than to net income. In some instances, the movement of drilling rigs among taxing jurisdictions will involve the transfer of ownership of the drilling rigs among our subsidiaries.subsidiaries, which may result in the imposition of transaction taxes, which could be material. If we are unable to mitigate the negative consequences of any change in law, audit, business activity or other matters, this could cause our consolidated effective income tax rate to increase and causematerially adversely affect our financial position, operating results or cash flows.
We are subject to litigation that could have a material adverse effect on us.
We are, from time to time, involved in various litigation matters. These matters may include, among other things, contract disputes, personal injury claims, toxic tort claims, environmental claims or proceedings, employment matters, issues related to employee or representative conduct, governmental claims for taxes or duties, and other litigation that arises in the ordinary course of our business. Although we intend to defend or pursue such matters vigorously, we cannot predict with certainty the outcome or effect of any claim or other litigation matter, and there can be no assurance as to the ultimate outcome of any litigation. Litigation could materially adversely affect our financial position, operating results or cash flows because of potential negative outcomes, legal fees, the allocation of management’s time and attention, and other factors.
We could also face increased climate-related litigation with respect to our operations both in the U.S. and around the world. Governmental and other entities in various states, such as California and New York, have filed lawsuits against coal, oil and natural gas companies. These suits allege damages as a result of climate change, and the plaintiffs are seeking unspecified damages and abatement under various legal theories. Similar lawsuits may be filed in other jurisdictions both in the U.S. and globally. Although we are not currently a party to any such lawsuit, these suits present uncertainty regarding the extent to which companies who are not producing oil or natural gas, but who are engaged to provide services to support production activities, such as offshore drilling companies, face an increased risk of liability stemming from climate-related litigation, which risk would also adversely impact the oil and natural gas industry and impact demand for our services.
32
We are a Bermuda company and it may be difficult to enforce judgments against us or our directors and executive officers.
We are a Bermuda exempted company. As a result, the rights of holders of our Common Shares are governed by Bermuda law and our memorandum of association and bye-laws. The rights of shareholders under Bermuda law may differ from the rights of shareholders of companies incorporated in other jurisdictions. Some of our directors and officers are not residents of the U.S., and a substantial portion of our assets are located outside the U.S. As a result, it may be difficult for investors to effect service of process on those persons in the U.S. or to enforce in the U.S. judgments obtained in U.S. courts against us or those persons based on the civil liability provisions of the U.S. securities laws. It is doubtful whether courts in Bermuda will enforce judgments obtained in other jurisdictions, including the U.S., against us or our directors or officers under the securities laws of those jurisdictions or entertain actions in Bermuda against us or our directors or officers under the securities laws of other jurisdictions.
Our bye-laws restrict shareholders from bringing legal action against our officers and directors.
Our bye-laws contain a broad waiver by our shareholders of any claim or right of action, both individually and on our behalf, against any of our officers or directors. The waiver applies to any action taken by an officer or director, or the failure of an officer or director to take any action, in the performance of his or her duties, except with respect to any matter involving any fraud or dishonesty on the part of the officer or director. This waiver limits the right of shareholders to assert claims against our officers and directors unless the act or failure to act involves fraud or dishonesty.
Provisions in our bye-laws could delay or prevent a change in control of our company, which could materially adversely affect the price of our Common Shares.
Some of the provisions in our bye-laws could delay or prevent a change in control of our company that a shareholder may consider favorable, which could materially adversely affect the price of our Common Shares. Certain provisions of our bye-laws could make it more difficult for a third party to acquire control of our company, even if the change of control would be beneficial to our shareholders. These provisions include:
•authority of our board of directors to determine its size;
•the ability of our board of directors to issue preferred shares without shareholder approval;
•limitations on the removal of directors; and
•limitations on the ability of our shareholders to act by written consent in lieu of a meeting.
In addition, our bye-laws establish advance notice provisions for shareholder proposals and nominations for elections to the board of directors to be acted upon at meetings of shareholders.
Legislation enacted in Bermuda as to Economic Substance may affect our operations.
The Economic Substance Act came into effect in Bermuda on January 1, 2019. This law requires a registered entity other than an entity which is resident for tax purposes in certain jurisdictions outside Bermuda that carries as a business any one or more of the “relevant activities” must comply with economic substance requirements. The Economic Substance Act may require in-scope Bermuda entities, which are engaged in such “relevant activities,” to be directed and managed in Bermuda, have an adequate level of qualified employees in Bermuda, incur an adequate level of annual expenditure in Bermuda, maintain physical offices and premises in Bermuda or perform core income-generating activities in Bermuda. The list of “relevant activities” includes carrying on any one or more of: banking, insurance, fund management, financing and leasing, headquarters, shipping, distribution and service center, intellectual property and holding entities. The Economic Substance Act could affect the manner in which we operate our business. To the extent we or any of our Bermuda subsidiaries carry on any relevant activities for the purposes of the Economic Substance Act, we or such subsidiaries will be required to comply with such economic substance requirements. Our compliance with the Economic Substance Act
33
may result in additional costs that could have a material adverse effect on our financial position or results of operations.
Our business could be affected as a result of activist investors.
Publicly traded companies have increasingly become subject to campaigns by activist investors advocating corporate actions such as actions related to sustainability matters, financial restructuring, increased borrowing, dividends, share repurchases or sales of assets or even the entire company. Responding to proxy contests and other actions by such activist investors or others could be costly and time-consuming, disrupt our operations and divert the attention of our board of directors and senior management from the pursuit of our business strategies, which could materially adversely affect our financial position, operating results or cash flows. Additionally, perceived uncertainties as to our future direction as a result of investor activism or changes to the composition of the board of directors may lead to the perception of a change in the direction of our business, instability or lack of continuity, which may be exploited by our competitors, cause concern to our current or potential customers, and make it more difficult to attract and retain qualified personnel. If customers choose to delay, defer or reduce transactions with us or transact with our competitors instead of us because of any such issues, then our financial position, operating results or cash flows could be materially adversely affected. In addition, the trading price of our shares could experience periods of increased volatility as a result of investor activism.
Risks Related to Our International Operations
Our non-U.S. operations involve additional risks not typically associated with U.S. operations.
Revenues from non-U.S. operations were 80%, 78%, 87% and 81% of our total consolidated revenues for the years ended December 31, 2023 and 2022, and eight months ended December 31, 2021 (Successor) and for four months ended April 30, 2021 (Predecessor), respectively. Our non-U.S. operations and shipyard rig construction and enhancement projects are subject to political, economic and other uncertainties, including:
•terrorist acts, war and civil disturbances,
•expropriation, nationalization, deprivation or confiscation of our equipment or our customer’s property,
•repudiation or nationalization of contracts,
•assaults on property or personnel,
•piracy, kidnapping and extortion demands,
•significant governmental influence over many aspects of local economies and customers,
•unexpected changes in law and regulatory requirements, including changes in interpretation or enforcement of existing laws,
•work stoppages, such as labor strikes,
•complications associated with repairing and replacing equipment in remote locations,
•limitations on insurance coverage, such as war risk coverage, in certain areas,
•imposition of trade barriers,
•wage and price controls,
•import-export quotas,
•exchange restrictions, currency fluctuations and changes in monetary policy,
•uncertainty or instability resulting from hostilities or other crises in the Middle East, West Africa, Latin America, Southeastern Asia, Eastern Europe or other geographic areas in which we operate,
•changes in the manner or rate of taxation,
34
•limitations on our ability to recover amounts due,
•increased risk of government and vendor/supplier corruption,
•increased local content requirements,
•the occurrence or threat of epidemic or pandemic diseases and any government response to such occurrence or threat,
•changes in political conditions, and
•other forms of government regulation and economic conditions that are beyond our control.
We historically have maintained insurance coverage and obtained contractual indemnities that protect us from some, but not all, of the risks associated with our non-U.S. operations such as nationalization, deprivation, expropriation, confiscation, political and war risks. However, there can be no assurance that any particular type of contractual or insurance protection will be available in the future or that we will be able to purchase our desired level of insurance coverage at commercially feasible rates. Moreover, we may initiate a self-insurance program through one or more captive insurance subsidiaries. In circumstances where we have insurance protection for some or all of the risks associated with non-U.S. operations, such insurance may be subject to cancellation on short notice, and it is unlikely that we would be able to remove our rig or rigs from the affected area within the notice period. Accordingly, a significant event for which we are uninsured, underinsured or self-insured, or for which we have not received an enforceable contractual indemnity from a customer, could materially adversely affect our financial position, operating results or cash flows.
Our non-U.S. operations are also subject to various laws and regulations in the countries in which we operate, including laws and regulations relating to the operation of drilling rigs and the requirements for equipment. We may be required to make significant capital expenditures to operate in such countries, which may not be reimbursed by our customers. Governments in some countries are active in regulating and controlling the ownership of oil, natural gas and mineral concessions and companies holding such concessions, the exploration of oil and natural gas and other aspects of the oil and natural gas industry in their countries. In some areas of the world, government activity has materially adversely affected the amount of exploration and development work performed by major international oil companies and may continue to do so. Moreover, certain countries accord preferential treatment to local contractors or joint ventures or impose specific quotas for local goods and services, which can increase our operational costs and place us at a competitive disadvantage. There can be no assurance that such laws and regulations or activities will not materially adversely affect our financial position, operating results or cash flows.
The shipment of goods, services and technology across international borders subjects us to extensive trade laws and regulations. Our import activities are governed by specific customs laws and regulations in each of the countries where we operate. Moreover, many countries, including the U.S., control the export and re-export of certain goods, services and technology and impose related export recordkeeping and reporting obligations. Governments also may impose express or de facto economic sanctions against certain countries, persons and other entities that may restrict or prohibit transactions involving such countries, persons and entities.
35
The laws and regulations concerning import activity, export recordkeeping and reporting, export control and economic sanctions are complex and frequently changing. These laws and regulations may be enacted, amended, enforced or interpreted in a manner materially impacting our operations. Shipments can be delayed and denied export or entry for a variety of reasons, some of which are outside our control and some of which may result from failure to comply with existing legal and regulatory regimes. Shipping delays or denials could cause unscheduled operational downtime, reduced day rates during such downtime and contract cancellations. Any failure to comply with applicable legal and regulatory trading obligations also could result in criminal and civil penalties and sanctions, such as fines, imprisonment, exclusion from government contracts, seizure of shipments and loss of import and export privileges.
Our partners, agents and our and their respective affiliated entities or respective officers, directors, employees and agents may take actions in violation of our Class A ordinary sharespolicies and procedures designed to promote compliance with the laws of the jurisdictions in which we operate. Any such violation could materially adversely affect our financial position, operating results or cash flows.
Sustainability Risks
Regulation of GHG and climate change could have a negative impact on our business.
Governments around the world are increasingly focused on enacting laws and regulations regarding climate change and regulation of GHG that may be subject to stamp dutyimpact our operations, profitability and competitiveness. Restrictions on GHG emissions or stamp duty reserve tax (“SDRT”)other related legislative or regulatory enactments could have an indirect effect in those industries that use significant amounts of petroleum products, which could potentially result in a reduction in demand for petroleum products and, consequently, our offshore contract drilling services. Lawmakers and regulators in the U.K., which wouldU.S. and certain jurisdictions where we operate have proposed or enacted regulations requiring reporting of GHG emissions and the restriction thereof, including increased fuel efficiency standards, carbon taxes or cap and trade systems, restrictive permitting, and incentives for renewable energy. For example, the SEC has proposed a mandatory climate change reporting framework that, if implemented, is likely to materially increase the costamount of dealingtime, monitoring, diligence, and reporting costs related to these matters. In 2023, the current U.S. administration continued initiatives targeting the reduction of methane emissions, including a focus on the energy sector. In December 2023, the EPA adopted a final rule enacting a series of actions targeting methane and other emission reductions in our Class A ordinary shares.
Laws or regulations incentivizing or mandating the use of alternative energy sources such as wind power and solar energy have also been enacted in certain jurisdictions. Additionally, numerous large cities globally and several countries have adopted programs to mandate or incentivize the conversion from internal combustion engine powered vehicles to electric-powered vehicles and placed restrictions on non-public transportation. Such policies or other laws, regulations, treaties and international agreements related to GHG and climate change may negatively impact the price of oil relative to other energy sources, reduce demand for hydrocarbons, limit drilling in the offshore oil and natural gas industry, or otherwise unfavorably impact our business, our suppliers and our customers, and result in increased compliance costs and additional operating restrictions, all of which could materially adversely affect our financial position, operating results or cash flows.
36
In addition to potential impacts on our business resulting from climate-change legislation or regulations, our business also could be materially adversely affected by climate-change related physical changes, such as changing weather patterns. An increase in severe weather patterns could result in damage to or loss of our drilling rigs, impact our ability to conduct our operations and/or result in a disruption of our customers’ operations. Finally, increasing attention to the depository. Anyrisks of climate change has resulted in an increased possibility of lawsuits or investigations brought by public and private entities against oil and natural gas companies in connection with their GHG emissions. Should we be targeted by any such shares willlitigation or investigations, we may incur liability, which could be evidenced byimposed without regard to the causation of or contribution to the asserted damage, or to other mitigating factors. The ultimate impact of GHG emissions-related agreements, legislation and measures on our financial performance is highly uncertain because we are unable to predict, in a receipt issued bymultitude of jurisdictions, the depository. Before the transfer can be registered in our share register, the transferor will also be required to provide the transfer agent sufficient funds to settle the resultant liabilityoutcome of political decision-making processes.
Consumer preferences for SDRT, which will be charged at a rate of 1.5%alternative fuels and electric-powered vehicles, as part of the valueglobal energy transition, may lead to reduced demand for our services.
The increasing penetration of renewable energy into the energy supply mix, the increased production of electric-powered vehicles and improvements in energy storage, as well as changes in consumer preferences, including increased consumer demand for alternative fuels, energy sources and electric-powered vehicles may materially adversely affect the demand for oil and natural gas and our drilling services. This evolving transition of the shares.
In recent years the investment community, including investment advisors and certain sovereign wealth, pension and endowment funds, has promoted the divestment of civil judgments against usfossil fuel equities and pressured lenders to cease or limit funding to companies engaged in the extraction of fossil fuel reserves. Such initiatives could ultimately interfere with our access to capital, business activities and operations.
In addition to such initiatives, sustainability matters more generally have been the subject of increased focus by investors, customers, investment funds, political advocacy groups, and other market and industry participants, as well as certain regulators, including in the U.S. and the EU. We publish an annual Sustainability Report, which includes disclosure of our sustainability practices, aspirations, targets and goals. Our disclosures on these matters rely on management’s expectations as of the date the statements are first made, as well as standards for measuring progress that are still in development and may change or fail to be more difficult.
37
particularly given the complexity of claims against usour supply chain, our reliance on third-party manufacturers, and the potential for jurisdictions in courts in England than it would bewhich we operate to bring similar claims against a U.S. company in a U.S. court.enact opposing or incompatible regulations. Actions we may take to achieve our sustainability initiatives, including the development and implementation of new emissions-reduction technology, may require increased expenditures, which may materially adversely affect our financial position, operating results or cash flows.
38
Item 1B.Unresolved Staff Comments
None.
39
Item 1C.Cybersecurity
We have less flexibility as a U.K. public limited company with respectcybersecurity program to certain aspectsassess, identify, and manage risks from cybersecurity threats. The Company’s cybersecurity program includes administrative, technical, and physical safeguards that address our information systems, including our IT and operational technology environments. The program is designed to ensure the confidentiality, security, integrity, and availability of capitalthose systems and the information residing therein.
Strategy and Risk Management:
Our cybersecurity strategy leverages administrative safeguards that include policies, procedures, and processes to assess, identify, and manage risks from cybersecurity threats. We have adopted a Cybersecurity Incident Response Policy (the “CIRP”), which provides a framework and guidance for investigating, containing, documenting and mitigating incidents, including reporting findings and keeping senior management than U.S. corporations due to increased shareholder approval requirements.
Additionally, all of common stock authorized in their certificatesthe Company’s employees undertake an annual cybersecurity training program on how to identify characteristics of incorporation that were not already issued or reserved. The business corporation lawsvarious cybersecurity threats, which is augmented by additional training and communications on IT and cybersecurity matters throughout the year. Periodically during the year, the Company’s IT department leads simulations of Delawarecybersecurity incidents with employees to test the organization’s ability to respond to a variety of cybersecurity-related scenarios.
Our policies, procedures, and processes are aligned with our technical tools, which include continuous security monitoring and alerting, an AI-based tool to facilitate cybersecurity incident identification and remediation, and other U.S. statestechnologies, to ensure the security of our systems and information. We also provide substantial flexibilityhave implemented certain physical safeguards, such as restricted access to areas containing critical IT and operational technology equipment, to mitigate risks to our physical environment.
Cybersecurity is integrated into our enterprise risk management ("ERM") process. Cybersecurity-related risks are included in establishingour ERM risk register, which are reviewed by internal stakeholders who designate the termsrelative level of preferred stock. However, English law provides that a boardseverity of directors may only allot shares with the prior authorization of an ordinary resolution of the shareholders,identified risks. The ERM risk register, which authorization must state the maximum amount of shares that may be allotted under itincludes any identified cybersecurity-related risks, is reviewed by our Executive Management Committee and specify the date on which it will expire, which must not be more than five years from the date on which the shareholder resolution is passed. An ordinary resolution was passed by shareholders at our last annual general meeting in 2017reported quarterly to authorize the allotment of additional shares for a one-year term and this authority was further increased by shareholders at an additional general meeting in October 2017. As this authority will expire in August 2018, an ordinary resolution will be put to shareholders at our next annual shareholder meeting seeking their approval to renew the board's authority to allot shares for an additional one-year term.
Oversight:
The Audit Committee is generally authorized to allot shares, to exclude pre-emption rights by a special resolutionresponsible for, and actively engaged in, the oversight of our IT and cybersecurity program, including the oversight of risks from cybersecurity threats. All members of the shareholdersAudit Committee have prior work experience relating to cybersecurity or byhave obtained a provisioncertification or degree in cybersecurity. The Audit Committee, at least quarterly, receives reports from the Company’s Senior Director – Information Technology (“SDIT”) on, among other things, the Company’s cybersecurity incidents, risks and measures, training and organizational readiness. The board of directors is kept apprised of cybersecurity risk matters, including through participation in the articlesquarterly cybersecurity briefings to the Audit Committee that are described above. We have protocols by which certain cybersecurity incidents are escalated within the Company and, where appropriate, reported in a timely manner to the board of association. Such exclusiondirectors and Audit Committee.
40
At the management level, the SDIT and his team are responsible for leading enterprise-wide information security strategy, policy, standards, architecture and processes, including the assessment and management of pre-emption rights will commonly ceasematerial risks from cybersecurity threats. The Company’s SDIT reports to have effect at the same time asChief Financial Officer. The SDIT has extensive cybersecurity knowledge and skills, gained from over 25 years of relevant work experience. The SDIT is informed about and monitors the general allotment authorityprevention, detection, mitigation, and remediation of cybersecurity incidents in accordance with the CIRP and policies and procedures, which may include reports from the IT team. The SDIT also regularly reviews risk management measures implemented by the Company to which it relates is revoked or expires. Ifidentify and mitigate cybersecurity risks.
Third Parties and Assessments:
We engage third-party service providers in various capacities to enhance our internal cybersecurity capabilities. The Company engages consultants to assist with cybersecurity assessments, including with respect to cloud security and network vulnerability testing. Internal Audit, along with other internal stakeholders, including IT, determine the general allotment authority is renewed, the authority excluding pre-emption rights may also be renewed by a special resolution of the shareholders. A special resolution was passed,Company’s need for cybersecurity assessments in conjunction with an allotment authority atannual cybersecurity risk assessment process.
Further, pursuant to our last annual general shareholder meeting in 2017,CIRP, we have engaged third-party support under a retainer agreement to disapply pre-emption rights forenable an effective and timely response to a one-year termsignificant cybersecurity incident.
In addition to assessing our own cybersecurity preparedness, we also consider and evaluate cybersecurity risks associated with use of third-party service providers. We obtain Systems and Organization Controls ("SOC") 1 and SOC 2 reports, as applicable, from our third-party service providers which assess those entities' controls to cover security, availability, integrity, confidentiality and privacy. Any applicable findings of this authority wasthird-party assessment are analyzed by the appropriate employees and further increased by shareholders at an additional general meeting in October 2017. Asaction is taken as needed.
Impact of Cybersecurity Risks and Threats:
While we have not experienced any material cybersecurity threats or incidents as of the date of this authority will expire in August 2018, special resolutions willAnnual Report on Form 10-K, there can be put to shareholders at our next annual shareholder meeting seeking their approval to renew the board's authority to disapply pre-emption rights for an additional one-year term.
41
Item 2.Properties
Contract Drilling Fleet
The following table provides certain information about the rigs in our drilling fleet by reportable segment as of February 20, 2018:
15, 2024:
Rig Name | Rig Type | Year | Design | Maximum Water Depth/ Drilling Depth | Location | Status | ||||||||||||||||||||||||||||||
| Floaters | ||||||||||||||||||||||||||||||||||||
| VALARIS DS-4 | Drillship | 2010 | Dynamically Positioned | 12,000'/40,000' | Brazil | Under contract | ||||||||||||||||||||||||||||||
| Drillship | 2013 | Dynamically Positioned | 10,000'/40,000' | Spain | ||||||||||||||||||||||||||||||||
| Drillship | 2015 | Dynamically Positioned | 12,000'/40,000' | Brazil | Under contract | |||||||||||||||||||||||||||||||
| Drillship | 2015 | Dynamically Positioned | 12,000'/40,000' | Angola | Under contract | |||||||||||||||||||||||||||||||
| VALARIS DS-10 | Drillship | 2017 | Dynamically Positioned | 12,000'/40,000' | Nigeria | Under contract | ||||||||||||||||||||||||||||||
| VALARIS DS-11 | Drillship | 2013 | Dynamically Positioned | 12,000'/40,000' | Spain | Preservation stacked(1) | ||||||||||||||||||||||||||||||
| Drillship | 2013 | Dynamically Positioned | 12,000'/40,000' | Egypt | Under contract | |||||||||||||||||||||||||||||||
| Drillship | 2023 | Dynamically Positioned | ||||||||||||||||||||||||||||||||||
| 12,000'/40,000' | ||||||||||||||||||||||||||||||||||||
Mobilizing(3) | ||||||||||||||||||||||||||||||||||||
| Drillship | 2023 | Dynamically Positioned | 12,000'/40,000' | Mobilizing(3) | ||||||||||||||||||||||||||||||||
| 2014 | Dynamically Positioned | 12,000'/40,000' | Brazil | Under contract | ||||||||||||||||||||||||||||||||
| 2014 | Dynamically Positioned | 12,000'/40,000' | Gulf of Mexico | Under contract | ||||||||||||||||||||||||||||||||
| VALARIS DS-17 | 2014 | Dynamically Positioned | 12,000'/40,000' | Brazil | Under contract | |||||||||||||||||||||||||||||||
| VALARIS DS-18 | Drillship | 2015 | Dynamically Positioned | 12,000'/40,000' | Gulf of Mexico | Under contract | ||||||||||||||||||||||||||||||
| VALARIS DPS-1 | Semisubmersible | 2012 | Dynamically Positioned | 10,000'/35,000' | Australia | Under contract | ||||||||||||||||||||||||||||||
| VALARIS DPS-3 | Semisubmersible | 2010 | Dynamically Positioned | 8,500'/37,500' | Gulf of Mexico | Preservation stacked(1) | ||||||||||||||||||||||||||||||
| Semisubmersible | 2012 | Dynamically Positioned | 8,500'/35,000' | Mexico | Under contract | |||||||||||||||||||||||||||||||
| Semisubmersible | 2012 | |||||||||||||||||||||||||||||||||||
| Dynamically Positioned | ||||||||||||||||||||||||||||||||||||
| 8,500'/35,000' | Gulf of Mexico | Preservation stacked(1) | ||||||||||||||||||||||||||||||||||
| Semisubmersible | 2011 | F&G ExD Millennium, Moored | 8,200'/40,000 | Australia | Under contract | |||||||||||||||||||||||||||||||
| Jackups | ||||||||||||||||||||||||||||||||||||
| VALARIS 72 | Jackup | 1981 | Hitachi K1025N | 225'/25,000' | United Kingdom | Under contract | ||||||||||||||||||||||||||||||
| VALARIS 75 | Jackup | 1999 | MLT Super 116-C | 400'/30,000' | Gulf of Mexico | Preservation stacked(1) | ||||||||||||||||||||||||||||||
| 2000 | MLT Super 116-C | 350'/30,000' | Saudi Arabia | Preparing for lease contract(4) | ||||||||||||||||||||||||||||||||
| VALARIS 92 | 1982 | MLT 116-C | 210'/25,000' | United Kingdom | Under contract | |||||||||||||||||||||||||||||||
| VALARIS 102 | Jackup | 2002 | KFELS MOD V-A | 400'/30,000' | Gulf of Mexico | Preservation stacked(1) | ||||||||||||||||||||||||||||||
| 2002 | KFELS MOD V-B | 400'/30,000' | ||||||||||||||||||||||||||||||||||
Preservation stacked(1) | ||||||||||||||||||||||||||||||||||||
| 2005 | KFELS MOD V-B | 400'/30,000' | Indonesia | Under contract | ||||||||||||||||||||||||||||||||
| 2006 | KFELS MOD V-B | 400'/30,000' | Australia | Under contract | ||||||||||||||||||||||||||||||||
| VALARIS 108 | Jackup | 2007 | KFELS MOD V-B | 400'/30,000' | ||||||||||||||||||||||||||||||||
| Saudi Arabia | ||||||||||||||||||||||||||||||||||||
| Jackup | 2008 | |||||||||||||||||||||||||||||||||||
| KFELS MOD V-Super B | 350'/35,000' | Namibia | Preservation stacked(1) | |||||||||||||||||||||||||||||
| VALARIS 110 | Jackup | 2015 | KFELS MOD V-B | 400'/35,000' | Qatar | Under contract | ||||||||||||||||||||||||||
| VALARIS 111 | Jackup | 2003 | KFELS MOD V Enhanced B-Class | 400'/36,000' | Croatia | Preservation stacked(1) | ||||||||||||||||||||||||||
| VALARIS 115 | Jackup | 2013 | Baker Marine Pacific Class 400 | 400'/30,000' | Brunei | Under contract | ||||||||||||||||||||||||||
| VALARIS 116 | Jackup | 2008 | LT 240- C | 375'/35,000' | Saudi Arabia | Leased to ARO drilling | ||||||||||||||||||||||||||
| VALARIS 117 | Jackup | 2009 | LT 240- C | 350'/35,000' | Mexico | Under contract | ||||||||||||||||||||||||||
| VALARIS 118 | Jackup | 2012 | LT 240- C | 350'/35,000 | Trinidad | Under contract | ||||||||||||||||||||||||||
| VALARIS 120 | Jackup | 2013 | KFELS Super A | 400'/40,000' | United Kingdom | Under contract | ||||||||||||||||||||||||||
| VALARIS 121 | Jackup | 2013 | KFELS Super A | 400'/40,000' | United Kingdom | Under contract | ||||||||||||||||||||||||||
| VALARIS 122 | Jackup | 2013 | KFELS Super A | 400'/40,000' | United Kingdom | Under contract | ||||||||||||||||||||||||||
42
| Rig Name | Rig Type | Year Delivered | Design | Maximum Water Depth/ Drilling Depth | Location | Status | ||||||||||||||||||||||||||||||
| Jackups (Continued) | ||||||||||||||||||||||||||||||||||||
| VALARIS 123 | Jackup | 2019 | KFELS Super A | 400'/40,000' | United Kingdom | Preparing for contract | ||||||||||||||||||||||||||||||
| VALARIS 140 | Jackup | 2016 | LT Super 116E | 340'/30,000' | Saudi Arabia | Leased to ARO drilling | ||||||||||||||||||||||||||||||
| VALARIS 141 | Jackup | 2016 | LT Super 116E | 340'/30,000' | Saudi Arabia | Leased to ARO drilling | ||||||||||||||||||||||||||||||
| VALARIS 143 | Jackup | 2010 | LT EXL Super 116-E | 350'/35,000' | Saudi Arabia | Leased to ARO drilling | ||||||||||||||||||||||||||||||
| VALARIS 144 | Jackup | 2010 | LT Super 116-E | 350'/35,000' | Gulf of Mexico | Under contract | ||||||||||||||||||||||||||||||
| VALARIS 145 | Jackup | 2010 | LT Super 116-E | 350'/35,000' | Gulf of Mexico | Preservation stacked(1) | ||||||||||||||||||||||||||||||
| VALARIS 146 | Jackup | 2011 | LT EXL Super 116-E | 320'/35,000' | Saudi Arabia | Leased to ARO drilling | ||||||||||||||||||||||||||||||
| VALARIS 147 | Jackup | 2013 | LT Super 116-E | 350'/30,000' | Saudi Arabia | Leased to ARO drilling | ||||||||||||||||||||||||||||||
| VALARIS 148 | Jackup | 2013 | LT Super 116-E | 350'/30,000' | Saudi Arabia | Leased to ARO drilling | ||||||||||||||||||||||||||||||
| VALARIS 247 | Jackup | 1998 | LT Super Gorilla | 400'/35,000' | United Kingdom | Preparing for contract | ||||||||||||||||||||||||||||||
| Jackup | 2000 | LT Super Gorilla | 400'/35,000' | United Kingdom | Under contract | |||||||||||||||||||||||||||||||
| VALARIS 249 | Jackup | 2001 | LT Super Gorilla | 400'/ | Trinidad | |||||||||||||||||||||||||||||||
| VALARIS 250 | 2003 | LT Super Gorilla XL | 550'/35,000' | Saudi Arabia | Leased to ARO drilling | |||||||||||||||||||||||||||||||
| VALARIS Viking | Jackup | 2010 | KEFLS N Class | 435'/35,000' | United Kingdom | Preservation stacked(1) | ||||||||||||||||||||||||||||||
| VALARIS Stavanger | Jackup | 2011 | KEFLS N Class | 400'/35,000' | United Kingdom | Preparing for contract | ||||||||||||||||||||||||||||||
| Jackup | 2011 | KEFLS N Class | 400'/35,000' | United Kingdom | ||||||||||||||||||||||||||||||||
| Under contract | ||||||||||||||||||||||||||||||||||||
(1)Prior to stacking, upfront steps are taken to preserve the rig. This may include a quayside power source to dehumidify key equipment and/or provide electric current to the hull to prevent corrosion. Also, certain equipment may be removed from the rig for storage in a temperature-controlled environment. While stacked, large equipment that remains on the rig is periodically inspected and maintained by Valaris personnel. These steps are designed to reduce time and lower cost to reactivate the rig once returned to the active fleet.
(2)Rig is being reactivated for a firm contract.
(3)Rigs are mobilizing from South Korea to Las Palmas, Spain, where they will be stacked.
(4)Rigs are under-going contract preparations for lease contracts with ARO drilling.
The equipment on our drilling rigs includes engines, drawworks,draw works, derricks, pumps to circulate drilling fluid, well control systems, drill string and related equipment. The engines power a top-drive mechanism that turns the drill string and drill bit so that the hole is drilled by grinding subsurface materials, which are then returned to the rig by the drilling fluid. The intended water depth, well depth and geological conditions are the principal factors that determine the size and type of rig most suitable for a particular drilling project.
Floater rigs consist of drillships and semisubmersibles. Drillships are purpose-built maritime vessels outfitted with drilling apparatus. Drillships are self-propelled and can be positioned over a drill site through the use of a computer-controlled propellerpropellers or "thruster" (dynamic positioning) system.dynamic positioning systems. Our drillships are capable of drilling in water depths of up to 12,000 feet and are suitable for deepwater drilling in remote locations because of their superior mobility and large load-carrying capacity. Although drillships are most often used for deepwater drilling and exploratory well drilling, drillships can also be used as a platform to carry out well maintenance or completion work such as casing and tubing installation or subsea tree installations.
43
Semisubmersibles are mobile offshore drilling unitsrigs with pontoons and columns that are partially submerged at the drilling location to provide added stability during drilling operations. Semisubmersibles are held in a fixed location over the ocean floor either by being anchored to the sea bottom with mooring chains (moored semisubmersible rig) or dynamically positioned by computer-controlled propellers or "thrusters" (dynamically positioned semisubmersible rig) similar to that used by our drillships. Moored semisubmersibles are most commonly used for drilling in water depths of 4,499 feet or less. However, ENSCO 5006 and ENSCOVALARIS MS-1, which areis a moored semisubmersibles, aresemisubmersible, is capable of deepwater drilling in water depths greater than 5,000 feet. Dynamically positioned semisubmersibles generally are outfitted for drilling in deeper water depths and are well-suited for deepwater development and exploratory well drilling. Further, we have threetwo hybrid semisubmersibles, ENSCO 8503, ENSCO 8504VALARIS DPS-3 and ENSCO 8505,VALARIS DPS-5, which leverage both moored and dynamically positioned configurations. This hybrid design provides multi-faceted drilling solutions to customers with both shallow water and deepwater requirements.
Jackup rigs stand on the ocean floor with their hull and drilling equipment elevated above the water on connected leg supports. Jackups are generally preferred over other rig types in shallow water depths of 400 feet or less, primarily because jackups provide a more stable drilling platform with above water well-control equipment. Our jackups are of the independent leg design where each leg can be fixed into the ocean floor at varying depths and equipped with a cantilever that allows the drilling equipment to extend outward from the hull over fixed platforms enabling safer drilling of both exploratory and development wells. The jackup hull supports the drilling equipment, jacking system, crew quarters, storage and loading facilities, helicopter landing pad and related equipment and supplies.
We lease various office, warehouse and storage facilities worldwide, including our executivecorporate offices in London, EnglandHouston, Texas and other offices and facilities located in addition to office spacevarious countries in Houston, Aberdeen, Abu Dhabi, Australia, Dubai, Egypt, Holland, Indonesia, Malaysia, Malta, Mexico, Nigeria, Saudi Arabia, Singapore, ThailandNorth America, South America, Europe, Africa and Qatar.the Asia Pacific region. We own offices and other facilities in Louisiana,United States (Louisiana), Angola Australia and Brazil.
Item 3. Legal Proceedings
Environmental Matters
We are currently subject to pending notices of assessment relating to spills of drilling fluids, oil, brine, chemicals, grease or fuel from drilling rigs operating offshore Brazil from 2008 to 2017,2019, pursuant to which the governmental authorities have assessed, or are anticipated to assess, fines. We have contested these notices and appealed certain adverse decisions and are awaiting decisions in these cases. Although we do not expect final disposition of these assessments to have a material adverse effect on our financial position, operating results and cash flows, there can be no assurance as to the ultimate outcome of these assessments. A $190,000$0.4 million liability related to these matters was included in accruedAccrued liabilities and other on our consolidated balance sheetConsolidated Balance Sheet as of December 31, 2017.2023 included in "Item 8. Financial Statements."
Other Matters
In addition to the foregoing, we are named defendants or parties in certain other lawsuits, claims or proceedings incidental to our business and are involved from time to time as parties to governmental investigations or proceedings, including matters related to taxation, arising in the ordinary course of business. Although the outcome of such lawsuits or other proceedings cannot be predicted with certainty and the amount of any liability that could arise with respect to such lawsuits or other proceedings cannot be predicted accurately, we do not expect these matters to have a material adverse effect on our financial position, operating results andor cash flows.
Item 4. Mine Safety Disclosures
Not applicable.
45
PART II
| Item 5. | Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities | ||||
Market Information
On April 30, 2021, pursuant to the highplan of reorganization, the Company issued an aggregate of approximately 75.0 million Common Shares and low sales price of our Class A ordinary shares, par value U.S. $0.10 per share, for each period indicated during5.6 million Warrants and has listed the last two fiscal years:
First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Year | ||||||||||||||||
| 2017 High | $ | 11.73 | $ | 9.30 | $ | 5.96 | $ | 6.24 | $ | 11.73 | ||||||||||
| 2017 Low | $ | 8.32 | $ | 5.05 | $ | 4.14 | $ | 4.90 | $ | 4.14 | ||||||||||
| 2016 High | $ | 16.10 | $ | 12.36 | $ | 10.89 | $ | 12.03 | $ | 16.10 | ||||||||||
| 2016 Low | $ | 7.25 | $ | 9.00 | $ | 6.50 | $ | 7.19 | $ | 6.50 | ||||||||||
Many of our shareholders hold shares electronically, all of which are owned by a nominee of DTC.the Depository Trust Company. We had 7767 shareholders of record on February 1, 2018.2024.
Dividends
First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Year | ||||||||||||||||
| 2017 | $ | .01 | $ | .01 | $ | .01 | $ | .01 | $ | .04 | ||||||||||
| 2016 | $ | .01 | $ | .01 | $ | .01 | $ | .01 | $ | .04 | ||||||||||
Bermuda Tax
We have been designated by the Bermuda Monetary Authority as a non-resident for Bermuda exchange control purposes. This designation allows us to engage in transactions in currencies other than the Bermudian dollar, and there are no restrictions on our ability to transfer funds (other than funds denominated in Bermudian dollars) in and out of Bermuda or on the conductto pay dividends to United States residents who are holders of our operations.Common Shares.
Equity Compensation Plans
For information on shares issued or to be issued in connection with our equity compensation plans, see "Part III, Item 12.12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters."
Issuer PurchasesRepurchases of Equity Securities
In 2022, our board of directors authorized a share repurchase program under which we may purchase up to $100.0 million of our outstanding Common Shares. In April 2023, the board of directors authorized an increase of this amount to $300.0 million and in February 2024, they authorized a further increase to $600.0 million. The share repurchase program does not have a fixed expiration, may be modified, suspended or discontinued at any time and is subject to compliance with applicable covenants and restrictions under our financing agreements.
46
The following table provides a summary of our repurchases of our equity securities during the quarter ended December 31, 2017.2023 (in millions, except average price per share):
| Issuer Purchases of Equity Securities | Issuer Purchases of Equity Securities | Issuer Purchases of Equity Securities | ||||||||||||||||||||||||||||||||||||||||||||||||||
Period | Total Number of Securities Purchased(1) | Average Price Paid per Security | Total Number of Securities Purchased as Part of Publicly Announced Plans or Programs (2) | Approximate Dollar Value of Securities that May Yet Be Purchased Under Plans or Programs | Period | Total Number of Securities Purchased | Average Price Paid per Security | Total Number of Securities Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Securities that May Yet Be Purchased Under Plans or Programs | |||||||||||||||||||||||||||||||||||||||||||
| October 1 - October 31 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| October 1 - October 31 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| October 1 - October 31 | 2,850 | $ | 5.54 | — | $ | 2,000,000,000 | ||||||||||||||||||||||||||||||||||||||||||||||
| November 1 - November 30 | 7,547 | $ | 5.47 | — | $ | 2,000,000,000 | ||||||||||||||||||||||||||||||||||||||||||||||
| December 1 - December 31 | 5,541 | $ | 5.79 | — | $ | 2,000,000,000 | ||||||||||||||||||||||||||||||||||||||||||||||
| Total | 15,938 | $ | 5.59 | — | ||||||||||||||||||||||||||||||||||||||||||||||||
Cumulative Total Shareholder Return
The chart below presents a comparison of the five-year cumulative total shareholder return, assuming $100 invested on December 31, 2012May 3, 2021 (first trading date after our emergence from the Chapter 11 Cases) for Ensco plc,Valaris Limited, the Standard & Poor's MidCap 400 Index and a self-determined peer group.Total return assumes the reinvestment of dividends, if any, in the security on the ex-dividend date. The StandardDow Jones US Select Oil Equipment & Poor's MidCap 400Services Index includes Ensco and has been included as a comparison. Since Ensco operates exclusively as an offshore drilling company, a self-determined peer group composed exclusively of major offshore drilling companies has been included as a comparison.* (the "Industry Index").
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN(1)
Among Ensco plc,Valaris Limited, the S&P MidCap 400 Index and Peer GroupIndustry Index
47
| May 3, 2021 | Fiscal Year Ended December 31, | ||||||||||||||||||||||
| Relisting | 2021 | 2022 | 2023 | ||||||||||||||||||||
| Valaris Limited | 100.0 | 151.9 | 285.3 | 289.3 | |||||||||||||||||||
| S&P MidCap 400 | 100.0 | 104.6 | 91.0 | 105.9 | |||||||||||||||||||
| Industry Index | 100.0 | 96.5 | 160.7 | 168.4 | |||||||||||||||||||
(1)100 Total return assuming reinvestment of dividends. Assumes $100 invested on 12/31/2012 in stock or index, including reinvestment of dividends.May 3, 2021, which represents the first trading date after our emergence from the Chapter 11 Cases.
| Fiscal Year Ended December 31, | |||||||||||||||||
| 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | ||||||||||||
| Ensco plc | 100.0 | 100.2 | 56.2 | 29.8 | 18.9 | 11.6 | |||||||||||
| S&P MidCap 400 | 100.0 | 133.5 | 146.5 | 143.4 | 173.1 | 201.2 | |||||||||||
| Peer Group | 100.0 | 110.6 | 50.0 | 29.2 | 28.3 | 20.4 | |||||||||||
Item 6. Selected Financial DataReserved
| Year Ended December 31, | |||||||||||||||||||
| 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||
| (in millions, except per share amounts) | |||||||||||||||||||
| Consolidated Statement of Operations Data | |||||||||||||||||||
| Revenues | $ | 1,843.0 | $ | 2,776.4 | $ | 4,063.4 | $ | 4,564.5 | $ | 4,323.4 | |||||||||
| Operating expenses | |||||||||||||||||||
| Contract drilling (exclusive of depreciation) | 1,189.5 | 1,301.0 | 1,869.6 | 2,076.9 | 1,947.1 | ||||||||||||||
| Loss on impairment | 182.9 | — | 2,746.4 | 4,218.7 | — | ||||||||||||||
| Depreciation | 444.8 | 445.3 | 572.5 | 537.9 | 496.2 | ||||||||||||||
| General and administrative | 157.8 | 100.8 | 118.4 | 131.9 | 146.8 | ||||||||||||||
| Operating income (loss) | (132.0 | ) | 929.3 | (1,243.5 | ) | (2,400.9 | ) | 1,733.3 | |||||||||||
| Other income (expense), net | (64.0 | ) | 68.2 | (227.7 | ) | (147.9 | ) | (100.1 | ) | ||||||||||
| Income tax expense (benefit) | 109.2 | 108.5 | (13.9 | ) | 140.5 | 203.1 | |||||||||||||
| Income (loss) from continuing operations | (305.2 | ) | 889.0 | (1,457.3 | ) | (2,689.3 | ) | 1,430.1 | |||||||||||
Income (loss) from discontinued operations, net(1) | 1.0 | 8.1 | (128.6 | ) | (1,199.2 | ) | (2.2 | ) | |||||||||||
| Net income (loss) | (304.2 | ) | 897.1 | (1,585.9 | ) | (3,888.5 | ) | 1,427.9 | |||||||||||
| Net (income) loss attributable to noncontrolling interests | .5 | (6.9 | ) | (8.9 | ) | (14.1 | ) | (9.7 | ) | ||||||||||
| Net income (loss) attributable to Ensco | $ | (303.7 | ) | $ | 890.2 | $ | (1,594.8 | ) | $ | (3,902.6 | ) | $ | 1,418.2 | ||||||
| Earnings (loss) per share – basic | |||||||||||||||||||
| Continuing operations | $ | (.91 | ) | $ | 3.10 | $ | (6.33 | ) | $ | (11.70 | ) | $ | 6.09 | ||||||
| Discontinued operations | — | .03 | (.55 | ) | (5.18 | ) | (.01 | ) | |||||||||||
| $ | (.91 | ) | $ | 3.13 | $ | (6.88 | ) | $ | (16.88 | ) | $ | 6.08 | |||||||
| Earnings (loss) per share - diluted | |||||||||||||||||||
| Continuing operations | $ | (.91 | ) | $ | 3.10 | $ | (6.33 | ) | $ | (11.70 | ) | $ | 6.08 | ||||||
| Discontinued operations | — | .03 | (.55 | ) | (5.18 | ) | (.01 | ) | |||||||||||
| $ | (.91 | ) | $ | 3.13 | $ | (6.88 | ) | $ | (16.88 | ) | $ | 6.07 | |||||||
| Net income (loss) attributable to Ensco shares - Basic and Diluted | $ | (304.1 | ) | $ | 873.6 | $ | (1,596.8 | ) | $ | (3,910.5 | ) | $ | 1,403.1 | ||||||
| Weighted-average shares outstanding | |||||||||||||||||||
| Basic | 332.5 | 279.1 | 232.2 | 231.6 | 230.9 | ||||||||||||||
| Diluted | 332.5 | 279.1 | 232.2 | 231.6 | 231.1 | ||||||||||||||
| Cash dividends per share | $ | .04 | $ | .04 | $ | .60 | $ | 3.00 | $ | 2.25 | |||||||||
| Year Ended December 31, | |||||||||||||||||||
| 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||
| (in millions) | |||||||||||||||||||
| Consolidated Balance Sheet and Cash Flow Statement Data | |||||||||||||||||||
| Working capital | $ | 853.5 | $ | 2,424.9 | $ | 1,509.6 | $ | 1,788.9 | $ | 466.9 | |||||||||
| Total assets | 14,625.9 | 14,374.5 | 13,610.5 | 16,023.3 | 19,446.8 | ||||||||||||||
| Long-term debt | 4,750.7 | 4,942.6 | 5,868.6 | 5,868.1 | 4,709.3 | ||||||||||||||
| Ensco shareholders' equity | 8,732.1 | 8,250.6 | 6,512.9 | 8,215.0 | 12,791.6 | ||||||||||||||
| Cash flows from operating activities of continuing operations | 259.4 | 1,077.4 | 1,697.9 | 2,057.9 | 1,811.2 | ||||||||||||||
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following information should be read in conjunction with "Item 1A. Risk Factors" and our consolidated financial statements and the notes thereto in "Item 8. Financial Statements and Supplementary Data" of this report.
The discussion of our results of operations and liquidity in this section includes comparisons for the years ended December 31, 2023 and 2022 (Successor). For a similar discussion, including comparisons for the year ended December 31, 2022, eight months ended December 31, 2021 (Successor), and the four months ended April 30, 2021 (Predecessor), see “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our annual report onForm 10-K for the year ended December 31, 2022, filed with the SEC on February 21, 2023.
INTRODUCTION
Our Business
We are one of thea leading providersprovider of offshore contract drilling services to the international oil and gas industry.industry with operations in almost every major offshore market across six continents. We currently own and operate anthe world's largest offshore drilling rig fleet, of 62 rigs, with drilling operations in most of the strategic markets around the globe. We also have three rigs under construction. Our rig fleet includes 12 drillships, 11 dynamically positioned semisubmersible rigs, four moored semisubmersible rigs and 38 jackup rigs, including rigs under construction. We operate the world's largest fleet amongst competitive rigs, including one of the newest ultra-deepwater fleets in the industry and a leading premium jackup fleet. We currently own 53 rigs, including 13 drillships, four dynamically positioned semisubmersible rigs, one moored semisubmersible rig, 35 jackup rigs and a 50% equity interest in ARO, our 50/50 unconsolidated joint venture with Saudi Aramco, which owns an additional eight rigs.
Our customers include many of the leading nationalinternational and internationalgovernment-owned oil and gas companies, in addition to many independent operators. We are among the most geographically diverse offshore drilling companies with current operations spanning 14 countries on six continents.global operations. The markets in which we operate include the U.S. Gulf of Mexico, Brazil, the Mediterranean,South America, the North Sea, the Middle East, West Africa Australia and Southeast Asia.Asia Pacific.
We provide drilling services on a "day rate"day rate contract basis. Under day rate contracts, we provide an integrated service that includes the provision of a drilling rig and rig crews for which we receive a daily rate that may vary between the full rate and zero rate throughout the duration of the contractual term. The day rate we earn can vary between the full day rate and zero rate,term, depending on the operations of the rig. We also may receive lump-sum fees or similar compensation for the mobilization, demobilization and capital upgrades of our rigs. Our customers bear substantially all of the costs of constructing the well and supporting drilling operations as well as the economic risk relative to the success of the well. In addition, our customers may pay all or a portion
Chapter 11 Proceedings, Emergence from Chapter 11 and Fresh Start Accounting
On the Petition Date, the Debtors filed voluntary petitions for reorganization under chapter 11 of the cost of moving our equipment and personnel to and fromBankruptcy Code in the well site.Bankruptcy Court.
48
On May 29, 2017, we entered into an Agreement and Plan of MergerApril 30, 2021 (the “Merger Agreement”) with Atwood and Echo Merger Sub, LLC, our wholly-owned subsidiary, and on October 6, 2017 (the "Merger"Effective Date"), we successfully completed our acquisition of Atwood pursuant to the Merger Agreement (the “Merger”).
References to the financial position and results of operations of the "Successor" or "Successor Company" relate to the financial position and results of operations of the Company after the Effective Date. References to the financial position and results of operations of the "Predecessor" or "Predecessor Company" refer to the financial position and results of operations of Legacy Valaris on and prior to the Effective Date. References to the “Company,” “we,” “us” or “our” in this Annual Report are to Valaris Limited, together with its consolidated subsidiaries, when referring to periods following the Effective Date, and to Legacy Valaris, together with its consolidated subsidiaries, when referring to periods prior to and including the Effective Date.
Upon emergence from the Chapter 11 Cases, we utilized cash acquiredqualified for and adopted fresh start accounting. The application of $445.4 million and cash on hand to extinguish Atwood's revolving credit facility, outstanding senior notes and accrued interest totaling $1.3 billion. The estimated fair values assigned to assets acquired net of liabilities assumed exceeded the consideration transferred, resultingfresh start accounting resulted in a bargain purchase gainnew basis of $140.2 millionaccounting, and the Company became a new entity for financial reporting purposes. Accordingly, our financial statements and notes after the Effective Date are not comparable to our financial statements and notes on and prior to that was recognized duringdate.
See“Note 2 – Chapter 11 Proceedings” and "Note 3 - Fresh Start Accounting" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for additional details regarding the fourth quarter.bankruptcy, our emergence and fresh start accounting.
Our Industry
Operating results in the offshore contract drilling industry are highly cyclical and are directly related to the demand for drilling rigs and the available supply of drilling rigs. Low demand and excess supply can independently affect day rates and utilization of drilling rigs. Therefore, adverse changes in either of these factors can result in adverse changes in our industry. While the cost of moving a rig and the availability of rig-moving vessels may cause the balance of supply and demand to vary somewhat between regions, significant variations betweenmostregions are generally of a short-term nature due to rig mobility.
49
Inflationary pressures remain elevated and have resulted in significantly reducedincreased personnel costs as well as in the prices of goods and services required to operate our rigs or execute capital projects. We expect that our costs will continue to rise in the near term and although certain of our long-term contracts contain provisions for escalating costs, we cannot predict with certainty our ability to successfully claim recoveries of higher costs from our customers under these contractual stipulations. Despite the inflationary trends and macroeconomic uncertainty, we continue to see recovery in our industry.
Backlog
Our contract drilling backlog reflects commitments, represented by signed drilling contracts, and is calculated by multiplying the contracted operating day rate by the contract period. The contracted day rate excludes certain types of lump sum fees for rig mobilization, demobilization, contract preparation, as well as customer reimbursables and bonus opportunities. Our backlog excludes ARO's backlog, but includes backlog from our rigs leased to ARO at the contractual rates, which are subject to adjustment under the terms of the shareholder agreement governing the joint venture.
The ARO backlog presented below is 100% of ARO's backlog and utilization.is inclusive of backlog on both ARO owned rigs and rigs leased from us. As an unconsolidated 50/50 joint venture, when ARO realizes revenue from its backlog, 50% of the earnings thereon would be reflected in our results in equity in earnings of ARO in our Consolidated Statement of Operations. The earnings from ARO backlog with respect to rigs leased from us will be net of, among other things, payments to us under bareboat charters for those rigs. See "Note 5 - Equity Method Investment in ARO" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for additional information.
The contracting environment remained challengingfollowing table summarizes our and 100% of ARO's contract backlog of business as of February 15, 2024 and February 21, 2023 (in millions):
| February 15, 2024 | February 21, 2023 | ||||||||||
Floaters (1) | $ | 2,531.7 | $ | 1,376.9 | |||||||
Jackups (2) | 1,167.4 | 742.3 | |||||||||
Other (3) | 222.3 | 344.0 | |||||||||
| Total | $ | 3,921.4 | $ | 2,463.2 | |||||||
ARO (4) | $ | 2,138.1 | $ | 1,731.8 | |||||||
(1)The increase in Floaters is primarily due to long-term contracts for VALARIS DS-4 and VALARIS DS-8 offshore drilling contractors during 2017. Although oil prices have rebounded significantly offBrazil, VALARIS DS-7 offshore West Africa, VALARIS DS-16 in the 12-year lows experienced during early 2016U.S. Gulf of Mexico and a 250-day contract extension for VALARIS DS-15 offshore Brazil, which resulted in incremental aggregate backlog of approximately $1.7 billion. These increases were partially offset by revenues realized.
(2)The increase in Jackups is primarily due to levels above $60 per barrel, we expectcontract awards and extensions for VALARIS 120, VALARIS 72, VALARIS 92, VALARIS 121, VALARIS 107, VALARIS 118, VALARIS 249 and VALARIS Stavanger which resulted in incremental aggregate backlog of approximately $620.0 million. These increases were partially offset by revenues realized.
(3)Other includes the recoverybareboat charter backlog for the jackup rigs leased to ARO to fulfill contracts between ARO and Saudi Aramco in demandaddition to backlog for our managed rig services. Substantially all the operating costs for jackups leased to ARO through the bareboat charter agreements will be borne by ARO.
(4)The increase in ARO backlog is primarily due to an eight-year contract for each of the two newbuild rigs, the first of which was delivered in October 2023 and the second is expected to be gradual with different segmentsdelivered in the first half of the market recovering more quickly than others.2024. These two contracts resulted in incremental aggregate backlog of approximately $924.0 million, which was partially offset by revenues realized.
50
The intense pressure on operating day ratesfollowing table summarizes our and 100% of ARO's contract backlog of business as of February 15, 2024 and the periods in recentwhich revenues are expected to be realized (in millions):
| 2024 | 2025 | 2026 and beyond | Total | ||||||||||||||||||||||||||
| Floaters | $ | 1,072.7 | $ | 830.8 | $ | 628.2 | $ | 2,531.7 | |||||||||||||||||||||
| Jackups | 548.2 | 352.6 | 266.6 | 1,167.4 | |||||||||||||||||||||||||
| Other | 100.1 | 55.8 | 66.4 | 222.3 | |||||||||||||||||||||||||
| Total | $ | 1,721.0 | $ | 1,239.2 | $ | 961.2 | $ | 3,921.4 | |||||||||||||||||||||
| ARO | $ | 603.3 | $ | 536.9 | $ | 997.9 | $ | 2,138.1 | |||||||||||||||||||||
The amount of actual revenues earned and the actual periods has resultedduring which revenues are earned will be different from amounts disclosed in rates that approximate direct operating expenses in certain instances. Therefore, we expect our results from operations to continue to decline into 2018 as current contracts with above market rates expire and new contracts are executed at lower rates.
Our drilling contracts generally contain provisions permitting early termination of the downturn, drilling contractors have retired approximately 100 floaters and 50 jackups. When demand for offshore drilling ultimately improves, we expect that newer, more capable rigs will becontract if the first to obtain contract awards, increasing the likelihood that older, less capable rigs do not return to the global active fleet.
BUSINESS ENVIRONMENT
Floaters
In recent years, the more constructive oil price environment has led to an improvement in contracting and tendering activity for floaters. The number of contracted benign environment floaters has increased to 123 at December 31, 2023 from a low of 101 in early 2021, contributing to a 12% increase in global utilization, from 73% to 85%, for the industry's active fleet over the same period. This increase in activity is particularly evident for 6th and 7th generation drillships, such as those included in our floater contractingfleet. Utilization for the global active 6th and 7th generation drillship fleet is currently at 92% and has, on average, exceeded 90% for more than twelve months, resulting in a meaningful improvement in day rates for this class of assets.
In 2022, we completed the reactivation of three stacked drillships and one stacked semisubmersible which have commenced long-term contracts. In 2023, we completed the reactivation of another two previously stacked drillships, VALARIS DS-8 and VALARIS DS-17, for contracts which commenced in the second half of 2023 for work offshore Brazil, and we are currently reactivating another stacked drillship VALARIS DS-7, for a long-term contract offshore West Africa expected to commence in mid-2024.
From a supply perspective, as of December 31, 2023, the number of benign environment continuesfloaters including stacked rigs declined by 42% to be challenged by reduced164 from a peak of 281 in late 2014. Across the stacked drillship fleet and newbuild drillships remaining at South Korean shipyards, we believe there are only ten uncontracted drillships remaining that are likely reactivation candidates over the next few years, including VALARIS DS-11 and the Newbuild Drillships. We anticipate that continued floater demand as well as excess supply. Floater demandgrowth will further reduce available drillship capacity. Also, given the expected high construction cost and lack of shipyard capacity, we do not believe that market conditions are supportive of newbuild construction for the foreseeable future.
51
Jackups
Contracting and tendering activity for jackups has declined significantlyimproved in recent years due to lower commodity prices which have caused our customers to reduce capital expenditures, resulting in the cancellation and delay of drilling programs. During 2017, we began to see increased activity that is translating into near-term utilization; however, further improvements in demand and/or reductions in supply will be necessary before meaningful increases in day rates are realized.
From a supply perspective, as of December 31, 2023, the number of jackups declined by 8% to 498 from a peak of 542 in early 2015. While the number of jackups has decreased less than floaters on a relative basis, 33% of the current jackup fleet is more than 30 years of age with limited useful lives remaining. Further, we believe that some of the jackups that are currently idle are not competitive, either due to their age or length of time stacked. Expenditures required to recertify some of these rigs may prove cost prohibitive and made the final milestone paymentdrilling contractors may instead elect to scrap a portion of $75.0 million,these rigs. Excluding ARO's newbuild program, there are only 17 newbuild jackups remaining at shipyards, of which was previously deferred into 2019. We expect ENSCO DS-10 to commence drilling operations offshore Nigeria in March 2018.
RESULTS OF OPERATIONS
The following table summarizes our consolidated resultsConsolidated Results of operationsOperations for each of the years in the three-year periodyear ended December 31, 20172023 and 2022 (in millions)millions, except percentages):
| 2017 | 2016 | 2015 | ||||||||||
| Revenues | $ | 1,843.0 | $ | 2,776.4 | $ | 4,063.4 | ||||||
| Operating expenses | ||||||||||||
| Contract drilling (exclusive of depreciation) | 1,189.5 | 1,301.0 | 1,869.6 | |||||||||
| Loss on impairment | 182.9 | — | 2,746.4 | |||||||||
| Depreciation | 444.8 | 445.3 | 572.5 | |||||||||
| General and administrative | 157.8 | 100.8 | 118.4 | |||||||||
| Operating income (loss) | (132.0 | ) | 929.3 | (1,243.5 | ) | |||||||
| Other income (expense), net | (64.0 | ) | 68.2 | (227.7 | ) | |||||||
| Provision for income taxes | 109.2 | 108.5 | (13.9 | ) | ||||||||
| Income (loss) from continuing operations | (305.2 | ) | 889.0 | (1,457.3 | ) | |||||||
| Income (loss) from discontinued operations, net | 1.0 | 8.1 | (128.6 | ) | ||||||||
| Net income (loss) | (304.2 | ) | 897.1 | (1,585.9 | ) | |||||||
| Net (income) loss attributable to noncontrolling interests | .5 | (6.9 | ) | (8.9 | ) | |||||||
| Net income (loss) attributable to Ensco | $ | (303.7 | ) | $ | 890.2 | $ | (1,594.8 | ) | ||||
| Year Ended December 31, | Change | % Change | |||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| Revenues | $ | 1,784.2 | $ | 1,602.5 | $ | 181.7 | 11 | % | |||||||||||||||
| Operating expenses | |||||||||||||||||||||||
| Contract drilling (exclusive of depreciation) | 1,543.6 | 1,383.2 | 160.4 | 12 | % | ||||||||||||||||||
| Loss on impairment | — | 34.5 | (34.5) | (100) | % | ||||||||||||||||||
| Depreciation | 101.1 | 91.2 | 9.9 | 11 | % | ||||||||||||||||||
| General and administrative | 99.3 | 80.9 | 18.4 | 23 | % | ||||||||||||||||||
| Total operating expenses | 1,744.0 | 1,589.8 | 154.2 | 10 | % | ||||||||||||||||||
| Equity in earnings of ARO | 13.3 | 24.5 | (11.2) | (46) | % | ||||||||||||||||||
| Operating income | 53.5 | 37.2 | 16.3 | 44 | % | ||||||||||||||||||
| Other income, net | 30.7 | 187.7 | (157.0) | (84) | % | ||||||||||||||||||
| Provision (benefit) for income taxes | (782.6) | 43.1 | (825.7) | nm | |||||||||||||||||||
| Net income | 866.8 | 181.8 | 685.0 | 377 | % | ||||||||||||||||||
| Net income attributable to noncontrolling interests | (1.4) | (5.3) | 3.9 | (74) | % | ||||||||||||||||||
| Net income attributable to Valaris | $ | 865.4 | $ | 176.5 | $ | 688.9 | 390 | % | |||||||||||||||
Revenues increased in 2023, compared to the prior year. The decline was2022, primarily due to fewer floateran increase in average daily revenue earned of $177.6 million primarily attributable to certain rigs that commenced new contracts during 2023 at a higher average daily revenue, $47.7 million from an increase in operating days under contract, lower average dayprimarily attributable to floaters that have commenced contracts following reactivation and $12.5 million of higher revenues earned from lease agreements with ARO primarily from higher lease rates across our fleet and the sale of ENSCO 6004, ENSCO 6003, ENSCO 53 and ENSCO 52. The decline in revenues wasfor certain rigs. These increases were partially offset by a $51.0 million fee recognized for the commencementearly termination of ENSCO DS-4 drilling operations and the addition of Atwood rigs to the fleet during the fourth quarter.VALARIS DS-11 contract in 2022.
52
Contract drilling expense declined by $111.5 million, or 9%, asincreased in 2023, compared to the prior year2022, primarily due to rig stackings, sale of ENSCO 6004, ENSCO 6003, ENSCO 94, ENSCO 53, ENSCO 52$123.0 million attributable to rigs that have commenced contracts following reactivation, a $43.1 million increase in repair costs for certain rigs and ENSCO 56 and cost control initiatives that reduced personnel costs and other daily rig operating expenses. This decline wasa $36.2 million increase in reactivation costs. These increases were partially offset by rig reactivationa $35.9 million decrease in the costs for certain claims and a $16.1 million decrease in operating costs for VALARIS 140 and VALARIS 141, which we started leasing to ARO at the commencementend of ENSCO DS-4 drilling operationsthe first quarter and the additionthird quarter of Atwood rigs2022, respectively.
During 2022, we recorded non-cash losses on impairment totaling $34.5 million with respect to customer-specific capital upgrades for VALARIS DS-11 made pursuant to the fleet.
Depreciation expense increased in 2023, compared to the prior year. The decline was2022, primarily due to fewer days under contract across our fleet, lower average day rates, sale of ENSCO 6003, ENSCO 6004 and ENSCO DS-1, and lower revenues from ENSCO DS-5. The declinenew assets placed in revenues was partially offset by the commencement of ENSCO DS-8 drilling operations and revenue generated from semisubmersibleservice for certain rigs that were undergoing shipyardunderwent reactivation projects during 2015.and capital upgrades.
Other income, net, decreased in 2016 as2023, compared to 20152022, primarily due to a $112.6 million lower shore-based headcount levels and various other cost control initiatives.
Rig Counts, Utilization and Average Day RatesDaily Revenue
The following table summarizes our and ARO's offshore drilling rigs by reportable segment, rigs under construction and rigs held-for-sale as of December 31, 2017, 20162023 and 2015:2022:
| 2023 | 2022 | ||||||||||
Floaters (1) | 18 | 16 | |||||||||
Jackups(2) | 27 | 28 | |||||||||
Other(3) | 8 | 8 | |||||||||
| Total Valaris | 53 | 52 | |||||||||
ARO(4) | 8 | 7 | |||||||||
| 2017 | 2016 | 2015 | ||||
Floaters(1) | 24 | 19 | 22 | |||
Jackups(2)(3) | 37 | 36 | 36 | |||
Under construction(1)(2) | 3 | 2 | 4 | |||
Held-for-sale(3)(4) | 1 | 2 | 6 | |||
| Total | 65 | 59 | 68 | |||
(1)During the fourth quarter of 2023, we took delivery of the Newbuild Drillships.
(2)During 2016,the second quarter of 2023, we sold ENSCO DS-1, ENSCO 6003 and ENSCO 6004.VALARIS 54.
(4)This represents the eight jackup rigs owned by ARO which are operating under long-term contracts with Saudi Aramco, including Kingdom 1, a jackup rig which was delivered in the fourth quarter of 2023.
We provide management services in the U.S. Gulf of Mexico on two rigs owned by a third-party not included in the table above.
Additionally, ARO has ordered a newbuild jackup which is under construction in the Middle East and ENSCO 141). Both rigs are expected to obtain drilling contracts for work commencing during 2018.be delivered in the first half of 2024. This rig is not included in the table above.
53 ENSCO 58, ENSCO 91 and ENSCO 94.
The following table summarizes our and ARO's rig utilization and average day rates from continuing operationsdaily revenue by reportable segmentsegment:
| Year Ended December 31, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
Rig Utilization - Total Fleet (1) | ||||||||||||||
| Floaters | 58% | 45% | ||||||||||||
| Jackups | 59% | 66% | ||||||||||||
Other(2) | 100% | 100% | ||||||||||||
| Total Valaris | 66% | 66% | ||||||||||||
| ARO | 93% | 92% | ||||||||||||
Rig Utilization - Active Fleet (1) | ||||||||||||||
| Floaters | 75% | 67% | ||||||||||||
| Jackups | 79% | 86% | ||||||||||||
Other(2) | 100% | 100% | ||||||||||||
| Total Valaris | 83% | 85% | ||||||||||||
| ARO | 93% | 92% | ||||||||||||
Average Daily Revenue (3) | ||||||||||||||
| Floaters | $ | 265,000 | $ | 229,000 | ||||||||||
| Jackups | 106,000 | 100,000 | ||||||||||||
Other(2) | 42,000 | 39,000 | ||||||||||||
| Total Valaris | $ | 130,000 | $ | 109,000 | ||||||||||
| ARO | $ | 96,000 | $ | 94,000 | ||||||||||
(1)Rig utilization for each of the years intotal fleet and active fleet are derived by dividing the three-year period ended December 31, 2017:
| 2017 | 2016 | 2015 | ||||||||||
Rig Utilization(1) | ||||||||||||
| Floaters | 45% | 54% | 69% | |||||||||
| Jackups | 60% | 60% | 73% | |||||||||
| Total | 55% | 58% | 72% | |||||||||
Average Day Rates(2) | ||||||||||||
| Floaters | $ | 327,736 | $ | 359,758 | $ | 416,346 | ||||||
| Jackups | 84,913 | 110,682 | 136,451 | |||||||||
| Total | $ | 158,484 | $ | 192,427 | $ | 233,325 | ||||||
(2)Includes our two management services contracts and our rigs leased to ARO under bareboat charter contracts.
(3)Average daily revenue is derived by dividing contract drilling revenues, adjusted to exclude certain types of non-recurring reimbursable revenues, revenues earned during suspension periods and revenues attributable to amortization of drilling operations for rigs withcontract intangibles, by the aggregate number of operating days. Beginning in 2023, we began presenting average daily revenue instead of the previously reported average day rate metric, which further excluded lump-sum revenues and amortization thereof. Average daily revenue is a contract or when the rig becomes available for drilling operations for rigs without a contract.
54
Operating Income by Segment
Our business consists of threefour operating segments: (1) Floaters, which includes our drillships and semisubmersible rigs, (2) Jackups, (3) ARO and (3)(4) Other, which consists of management services on rigs owned by third parties. parties and the activities associated with our arrangements with ARO under the bareboat charter arrangements (the "Lease Agreements"). Floaters, Jackups and ARO are also reportable segments.
Our two reportableonshore support costs included within Contract drilling expenses are not allocated to our operating segments Floatersfor purposes of measuring segment operating income (loss) and Jackups, provide one service, contract drilling.
Because ARO is a 50/50 unconsolidated joint venture, its full operating results included below are not included within our consolidated results and thus are deducted under "Reconciling Items" and replaced with our equity in earnings of ARO.
Segment information for the year ended December 31, 2023 and 2022 is as follows (in millions).
Year Ended December 31, 20172023
| Floaters | Jackups | ARO | Other | Reconciling Items | Consolidated Total | ||||||||||||||||||||||||||||||
| Revenues | $ | 948.7 | $ | 659.6 | $ | 496.6 | $ | 175.9 | $ | (496.6) | $ | 1,784.2 | |||||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||||||||||||||
| Contract drilling (exclusive of depreciation) | 812.0 | 517.4 | 365.9 | 75.2 | (226.9) | 1,543.6 | |||||||||||||||||||||||||||||
| Depreciation | 55.8 | 40.0 | 65.9 | 5.0 | (65.6) | 101.1 | |||||||||||||||||||||||||||||
| General and administrative | — | — | 22.2 | — | 77.1 | 99.3 | |||||||||||||||||||||||||||||
| Equity in earnings of ARO | — | — | — | — | 13.3 | 13.3 | |||||||||||||||||||||||||||||
| Operating income | $ | 80.9 | $ | 102.2 | $ | 42.6 | $ | 95.7 | $ | (267.9) | $ | 53.5 | |||||||||||||||||||||||
| Floaters | Jackups | Other | Operating Segments Total | Reconciling Items | Consolidated Total | ||||||||||||||||||
| Revenues | $ | 1,143.5 | $ | 640.3 | $ | 59.2 | $ | 1,843.0 | $ | — | $ | 1,843.0 | |||||||||||
| Operating expenses | |||||||||||||||||||||||
Contract drilling (exclusive of depreciation) | 624.2 | 512.1 | 53.2 | 1,189.5 | — | 1,189.5 | |||||||||||||||||
| Loss on impairment | 174.7 | 8.2 | — | 182.9 | — | 182.9 | |||||||||||||||||
| Depreciation | 297.4 | 131.5 | — | 428.9 | 15.9 | 444.8 | |||||||||||||||||
| General and administrative | — | — | — | — | 157.8 | 157.8 | |||||||||||||||||
| Operating income (loss) | $ | 47.2 | $ | (11.5 | ) | $ | 6.0 | $ | 41.7 | $ | (173.7 | ) | $ | (132.0 | ) | ||||||||
Year Ended December 31, 20162022
| Floaters | Jackups | ARO | Other | Reconciling Items | Consolidated Total | ||||||||||||||||||||||||||||||
| Revenues | $ | 700.5 | $ | 744.2 | $ | 459.5 | $ | 157.8 | $ | (459.5) | $ | 1,602.5 | |||||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||||||||||||||
| Contract drilling (exclusive of depreciation) | 646.0 | 538.9 | 341.8 | 76.4 | (219.9) | 1,383.2 | |||||||||||||||||||||||||||||
| Loss on impairment | 34.5 | — | — | — | — | 34.5 | |||||||||||||||||||||||||||||
| Depreciation | 50.0 | 36.1 | 63.4 | 4.6 | (62.9) | 91.2 | |||||||||||||||||||||||||||||
| General and administrative | — | — | 18.7 | — | 62.2 | 80.9 | |||||||||||||||||||||||||||||
| Equity in earnings of ARO | — | — | — | — | 24.5 | 24.5 | |||||||||||||||||||||||||||||
| Operating income (loss) | $ | (30.0) | $ | 169.2 | $ | 35.6 | $ | 76.8 | $ | (214.4) | $ | 37.2 | |||||||||||||||||||||||
55
| Floaters | Jackups | Other | Operating Segments Total | Reconciling Items | Consolidated Total | ||||||||||||||||||
| Revenues | $ | 1,771.1 | $ | 929.5 | $ | 75.8 | $ | 2,776.4 | $ | — | $ | 2,776.4 | |||||||||||
| Operating expenses | |||||||||||||||||||||||
Contract drilling (exclusive of depreciation) | 725.0 | 516.8 | 59.2 | 1,301.0 | — | 1,301.0 | |||||||||||||||||
| Depreciation | 304.1 | 123.7 | — | 427.8 | 17.5 | 445.3 | |||||||||||||||||
| General and administrative | — | — | — | — | 100.8 | 100.8 | |||||||||||||||||
| Operating income | $ | 742.0 | $ | 289.0 | $ | 16.6 | $ | 1,047.6 | $ | (118.3 | ) | $ | 929.3 | ||||||||||
| Floaters | Jackups | Other | Operating Segments Total | Reconciling Items | Consolidated Total | ||||||||||||||||||
| Revenues | $ | 2,466.0 | $ | 1,445.6 | $ | 151.8 | $ | 4,063.4 | $ | — | $ | 4,063.4 | |||||||||||
| Operating expenses | |||||||||||||||||||||||
Contract drilling (exclusive of depreciation) | 1,052.8 | 693.5 | 123.3 | 1,869.6 | — | 1,869.6 | |||||||||||||||||
| Loss on impairment | 1,778.4 | 968.0 | 2,746.4 | — | 2,746.4 | ||||||||||||||||||
| Depreciation | 382.4 | 175.7 | — | 558.1 | 14.4 | 572.5 | |||||||||||||||||
| General and administrative | — | — | — | — | 118.4 | 118.4 | |||||||||||||||||
| Operating income (loss) | $ | (747.6 | ) | $ | (391.6 | ) | $ | 28.5 | $ | (1,110.7 | ) | $ | (132.8 | ) | $ | (1,243.5 | ) | ||||||
Floaters
Floater contract drilling expense increased $166.0 million, or 26%, in 2023 as compared to 2022, primarily due to lower average day rates, fewer days under contract across our fleet, additional shipyard days$167.8 million attributable to rigs that have returned to work upon completion of reactivation projects and sale of ENSCO 53 and ENSCO 52.
Floater depreciation expense increased $5.8 million, or 12%, in 2023 as compared to 2022, primarily due to new assets placed in service for certain rigs that underwent reactivation projects and capital upgrades.
Jackups
Jackup revenues declined $84.6 million, or 11%, in 2023 as compared to 2022, primarily due to $162.6 million from decreased operating days primarily due to rigs that completed contracts in the North Sea during the first half of 2023 due to lower activity in the region, certain rigs that were mobilizing or idle between contracts during 2023, and the sale of VALARIS 54 which operated in 2022. These decreases were partially offset by a $75.2 million increase due to higher average daily revenue earned.
Jackup contract drilling expense declined $21.5 million, or 4%, in 2023 as compared to 2022, primarily due to $49.2 million of lower costs for rigs that were idle or between contracts in 2023, and a $16.1 million decrease in operating costs for VALARIS 140 and VALARIS 141, which we started leasing to ARO in 2022. These decreases were partially offset by a $42.1 million increase in repair costs in 2023 primarily associated with maintenance performed during special periodic surveys.
Jackup depreciation expense increased $3.9 million, or 11%, in 2023 as compared to 2022, due to new assets placed in service for certain rigs that underwent capital upgrades, partially offset by VALARIS 54, which was sold in the second quarter of 2023.
ARO
The operating revenues of ARO reflect revenues earned under drilling contracts with Saudi Aramco for the ARO-owned jackup rigs and the rigs leased from us. Contract drilling expenses are inclusive of the bareboat charter fees for the rigs leased from us. See "Note 5 - Equity Method Investment in ARO" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for additional information on impairmentARO and related arrangements.
56
Revenue increased $37.1 million, or 8%, in 2023 as compared to 2022, primarily due to a $29.2 million increase from VALARIS 140 and VALARIS 141, which were leased to ARO starting in 2022, and from Kingdom 1, a newbuild jackup rig, which commenced operations in the fourth quarter of long-lived assets2023. Furthermore, there was a $24.3 million increase from higher average daily revenue earned by certain rigs. These increases were partially offset by $9.0 million decrease due to VALARIS 36 which operated in the prior year until the rig was sold in May 2022 and goodwill, respectively.$7.8 million for certain rigs undergoing maintenance projects in 2023.
Contract drilling expense increased $24.1 million, or 7%, in 2023 as compared to 2022, primarily due to $13.8 million of incremental operating costs related to VALARIS 140, VALARIS 141 and Kingdom 1, $8.7 million from higher personnel cost and a $4.8 million increase in repair and maintenance costs. These increases were partially offset by $7.5 million decrease from VALARIS 36, which operated in prior year until it was sold in May 2022.
Other
Other revenues increased $18.1 million, or 11%, in 2023 as compared to 2022, primarily due to $12.5 million of higher revenues earned from lease agreements with ARO attributable to higher average daily revenue on certain leased rigs and $5.7 million from higher average daily revenue earned for our management services contracts.
Other Income (Expense), Net
The following table summarizes other income (expense), net, for each of the years in the three-year period ended December 31, 2017 (in millions):
| Year Ended December 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Interest income | $ | 101.4 | $ | 65.5 | |||||||
| Interest expense, net | (68.9) | (45.3) | |||||||||
| Loss on debt extinguishment | (29.2) | — | |||||||||
| Net gain on sale of property | 28.6 | 141.2 | |||||||||
| Net foreign currency exchange gains (losses) | (3.5) | 12.2 | |||||||||
| Net periodic pension and retiree medical income | 0.9 | 16.4 | |||||||||
| Other, net | 1.4 | (2.3) | |||||||||
| $ | 30.7 | $ | 187.7 | ||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Interest income | $ | 25.8 | $ | 13.8 | $ | 9.9 | ||||||
Interest expense, net: | ||||||||||||
| Interest expense | (296.7 | ) | (274.5 | ) | (303.7 | ) | ||||||
| Capitalized interest | 72.5 | 45.7 | 87.4 | |||||||||
| (224.2 | ) | (228.8 | ) | (216.3 | ) | |||||||
| Other, net | 134.4 | 283.2 | (21.3 | ) | ||||||||
| $ | (64.0 | ) | $ | 68.2 | $ | (227.7 | ) | |||||
Interest income during 2017 and 2016 increased by $35.9 million, or 55%, in 2023 as compared to 2022, primarily due to an increase of $33.3 million of interest income on cash equivalents due to a higher average balance during 2023 and a $19.2 million increase on interest income earned on our Notes Receivable from ARO attributable to higher interest rates in 2023, partially offset by non-cash interest income of $14.8 million recognized in the respective prior year periodson the partial principal repayment of our Notes Receivable from ARO in September 2022.
Interest expense, net increased by $23.6 million, or 52%, in 2023 as compared to 2022, primarily due to a higher principal debt balance in 2023.
We recognized a $29.2 million loss from the extinguishment of the First Lien Notes in 2023.
Net gains on the sale of property decreased by $112.6 million in 2023 as compared to 2022, primarily due $140.7 million of gains recognized in 2022 on the sales of VALARIS 113, VALARIS 114, VALARIS 36 and VALARIS 67 and additional proceeds received for two rigs sold in prior years as a result of higher average short-term investment balances.
57
Our functional currency is the U.S. dollar, and we predominantly structure our drilling contracts in U.S. dollars, which significantly reduces the portion of our cash flows and assets denominated in foreign currencies. However, we have net assets and liabilities denominated in numerous foreign currencies and a portion of the revenues earned and expenses incurred by certain of our subsidiaries are denominated in currencies other than the U.S. dollar. These transactions are remeasured
in U.S. dollars based on a combination of both current and historical exchange rates.
Net foreign currency exchange losses of $3.5 million for 2023 primarily included losses of $3.0 million, $2.4 million and $1.6 million related to euros, Brazilian reals and Angolan kwanza, respectively, partially offset by a gain of $3.9 million from Nigerian naira. Net foreign currency exchange gains of $12.2 million for 2022 primarily included $7.2 million, $1.9 million and losses, inclusive of offsetting fair value derivatives, were $5.1$1.7 million of losses, $6.0 million of lossesrelated to euros, Egyptian pounds and $5.4 million of gains, and were included in other, net, in our consolidated statements of operations for the years ended December 31, 2017, 2016 and 2015,Norwegian kroner, respectively.
Net unrealized gains of $4.5periodic pension and retiree medical income decreased by $15.5 million $1.8 millionin 2023 as compared to 2022, primarily due to higher interest cost and $700,000 from marketable securities heldlower expected return on plan assets attributed to an increase in our supplemental executive retirement plans ("the SERP") were included in other, net, in our consolidated statements of operations for the years ended December 31, 2017, 2016 and 2015, respectively. The fair value measurement of our marketable securities held in the SERP is presented in Note 3 to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data."discount rate.
Provision for Income Taxes
Income tax rates imposedand taxation systems in the tax jurisdictions in which our subsidiaries conduct operations vary as does the tax baseand our subsidiaries are frequently subjected to which the rates are applied.minimum taxation regimes. In some cases,jurisdictions, tax rates may be applicable toliabilities are based on gross revenues, statutory or negotiated deemed profits or other bases utilized under local tax laws,factors, rather than on net income, and our subsidiaries are frequently unable to net income.realize tax benefits when they operate at a loss. Accordingly, during periods of declining profitability, our income tax expense may not decline proportionally with income, which could result in higher effective income tax rates. Furthermore, we will continue to incur income tax expense in periods in which we operate at a loss.
Our drilling rigs frequently move from one taxing jurisdiction to another to perform contract drilling services. In some instances, the movement of drilling rigs among taxing jurisdictions will involve the transfer of ownership of the drilling rigs among our subsidiaries. As a result of frequent changes in the taxing jurisdictions in which our drilling rigs are operated and/or owned, changes in profitability levels and changes in tax laws, our annual effective income tax rate may vary substantially from one reporting period to another. In periods
Effective Tax Rate
During the years ended December 31, 2023 and 2022, we recorded an income tax benefit of declining profitability, our$782.6 million and an income tax expense may not decline proportionally with income, which could result in higherof $43.1 million, respectively. Our consolidated effective income tax rates. Further, we may continue to incur incomerates during the same periods were (929.5)% and 19.2%, respectively. The tax expensebenefit in periods2023 includes a $799.5 million deferred tax benefit recognized in which we operate at a loss.
58
Our 20172023 consolidated effective income tax rate includes $32.2discrete tax benefit of $42.0 million primarily attributable to changes in liabilities for unrecognized tax benefits associated with tax positions taken in prior years including unrecognized tax benefits described above.
Our 2022 consolidated effective income tax rate includes $10.3 million associated with the impact of various discrete tax items, including $16.5 million of tax expense associated with U.S. tax reform and $15.7 million of tax expense associated with the exchange offers and debt repurchases, rig sales, a restructuring transaction, settlement of a previously disclosed legal contingency, the effective settlement of a liability for unrecognized tax benefits associated with a tax position taken in prior years and other resolutions of prior year tax matters.
Excluding the impact of the aforementioned discrete tax items, our consolidated effective income tax rates for the years ended December 31, 2017, 20162023 and 20152022 were (96.0)(872.3)%, 20.3% and 16.0%73.6%, respectively. The changes in our consolidated effective income tax rate excluding discrete tax items during the three-year period result primarily from changes in the relative components of our earnings from the various taxing jurisdictions in which our drilling rigs are operated and/or owned and differences in tax rates in such taxing jurisdictions.
Divestitures
Our business strategy has been to focus on ultra-deepwater floater and premium jackup operations and de-emphasize other assets and operations that are not part of our long-term strategic plan or that no longer meet our standards for economic returns. Consistent with this strategy, we sold ninefive jackup rigs three dynamically positioned semisubmersible rigs, two moored semisubmersible rigs and two drillships during the three-yeartwo-year period ended December 31, 2017. We are marketing for sale ENSCO 7500, which was classified as held-for-sale in our consolidated financial statements as of December 31, 2017.2023.
We sold the following rigs during the three-year periodyears ended December 31, 20172023 and 2022 (in millions):
| Rig | Date of Sale | Segment(1) | Net Proceeds | Net Book Value | Pre-tax Gain | |||||||||||||||||||||||||||||||||
| Year Ended December 31, 2023 | ||||||||||||||||||||||||||||||||||||||
| VALARIS 54 | April 2023 | Jackups | $ | 28.2 | $ | 0.9 | $ | 27.3 | ||||||||||||||||||||||||||||||
| Year Ended December 31, 2022 | ||||||||||||||||||||||||||||||||||||||
| VALARIS 36 | May 2022 | Jackups | $ | 8.8 | $ | 0.3 | $ | 8.5 | ||||||||||||||||||||||||||||||
| VALARIS 113 | April 2022 | Jackups | 62.0 | 2.0 | 60.0 | |||||||||||||||||||||||||||||||||
| VALARIS 114 | April 2022 | Jackups | 62.0 | 2.0 | 60.0 | |||||||||||||||||||||||||||||||||
| VALARIS 67 | March 2022 | Jackups | 5.0 | 3.0 | 2.0 | |||||||||||||||||||||||||||||||||
| $ | 137.8 | $ | 7.3 | $ | 130.5 | |||||||||||||||||||||||||||||||||
| Rig | Date of Sale | Classification(1) | Segment(1) | Net Proceeds | Net Book Value(2) | Pre-tax Gain/(Loss) | ||||||||||||
| ENSCO 52 | August 2017 | Continuing | Jackups | $ | .8 | $ | .4 | $ | .4 | |||||||||
| ENSCO 86 | June 2017 | Continuing | Jackups | .3 | .3 | — | ||||||||||||
| ENSCO 90 | June 2017 | Discontinued | Jackups | .3 | .3 | — | ||||||||||||
| ENSCO 99 | June 2017 | Continuing | Jackups | .3 | .3 | — | ||||||||||||
| ENSCO 56 | April 2017 | Continuing | Jackups | 1.0 | .3 | .7 | ||||||||||||
| ENSCO 94 | November 2016 | Continuing | Jackups | .9 | .3 | .6 | ||||||||||||
| ENSCO 53 | October 2016 | Continuing | Jackups | .9 | .3 | .6 | ||||||||||||
| ENSCO DS-1 | June 2016 | Continuing | Floaters | 5.0 | 2.3 | 2.7 | ||||||||||||
| ENSCO 6004 | May 2016 | Continuing | Floaters | .9 | .9 | — | ||||||||||||
| ENSCO 6003 | May 2016 | Continuing | Floaters | .9 | .9 | — | ||||||||||||
| ENSCO DS-2 | May 2016 | Discontinued | Floaters | 5.0 | 4.0 | 1.0 | ||||||||||||
| ENSCO 91 | May 2016 | Continuing | Jackups | .8 | .3 | .5 | ||||||||||||
| ENSCO 58 | April 2016 | Discontinued | Jackups | .7 | .3 | .4 | ||||||||||||
| ENSCO 6000 | April 2016 | Discontinued | Floaters | .6 | .8 | (.2 | ) | |||||||||||
| ENSCO 5001 | December 2015 | Discontinued | Floaters | 2.4 | 2.5 | (.1 | ) | |||||||||||
| ENSCO 5002 | June 2015 | Discontinued | Floaters | 1.6 | — | 1.6 | ||||||||||||
| $ | 22.4 | $ | 14.2 | $ | 8.2 | |||||||||||||
| (1)Classification denotes the location of the |
59
| 2017 | 2016 | 2015 | ||||||||||
| Revenues | $ | — | $ | — | $ | 19.5 | ||||||
| Operating expenses | 1.5 | 3.1 | 39.5 | |||||||||
| Operating loss | (1.5 | ) | (3.1 | ) | (20.0 | ) | ||||||
| Income tax benefit | (2.1 | ) | (10.1 | ) | (7.7 | ) | ||||||
| Loss on impairment, net | — | — | (120.6 | ) | ||||||||
| Gain on disposal of discontinued operations, net | .4 | 1.1 | 4.3 | |||||||||
| Income (loss) from discontinued operations | $ | 1.0 | $ | 8.1 | $ | (128.6 | ) | |||||
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
We have historically relied onexpect to fund our cash flow from continuing operations to meetshort-term liquidity needs, including contractual obligations and anticipated capital expenditures, as well as working capital requirements, from cash and cash equivalents, cash flows from operations and borrowings under the Credit Agreement. We expect to fund the majorityour long-term liquidity needs, including contractual obligations and anticipated capital expenditures from cash and cash equivalents, cash flows from operations as well as cash to be received from maturity of our cash requirements.Notes Receivable from ARO and from the distribution of earnings from ARO. We periodicallymay rely on the issuance of debt and/or equity securities in the future to supplement our liquidity needs. A substantial portionHowever, the Indenture, dated as of April 19, 2023 (the "Indenture"), and the Credit Agreement contain covenants that limit our cash has been invested in the expansion and enhancement of our fleet of drilling rigs through newbuild construction, acquisitions and upgrade projects.ability to incur additional indebtedness.
Cash Flows and Capital Expenditures
| 2017 | 2016 | 2015 | ||||||||||
| Cash flows from operating activities of continuing operations | $ | 259.4 | $ | 1,077.4 | $ | 1,697.9 | ||||||
| Capital expenditures on continuing operations: | ||||||||||||
| New rig construction | $ | 429.8 | $ | 209.8 | $ | 1,238.8 | ||||||
| Rig enhancements | 45.1 | 15.9 | 164.5 | |||||||||
| Minor upgrades and improvements | 61.8 | 96.5 | 216.2 | |||||||||
| $ | 536.7 | $ | 322.2 | $ | 1,619.5 | |||||||
| Year Ended December 31, | ||||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||||
| Net cash provided by operating activities | $ | 267.5 | $ | 127.0 | ||||||||||||||||||||||
| Capital expenditures | $ | (696.1) | $ | (207.0) | ||||||||||||||||||||||
During 2017, excluding the impactyear ended December 31, 2023, we generated $267.5 million from operating activities related primarily to higher margins, the collection of ENSCO DS-9$45.9 million for certain tax receivables and ENSCO 8503 lump-sum termination payments totaling $205.0other changes in working capital. Our primary uses of cash were $337.0 million receivedfor the purchase of the Newbuild Drillships and $359.1 million for maintenance and upgrades of our drilling rigs, including reactivations. Our other primary sources and uses of cash during 2016, cash flows from continuing operations declined by $613.0 million, or 70%, as compared to the prior year. The decline primarily2023 resulted from the First Lien Note redemption, the corresponding Second Lien Notes issuance and our share repurchase program, which are each further discussed below.
During the year ended December 31, 2022, our other primary sources of cash were proceeds of $150.3 million for the disposition of assets and $40.0 million from the partial early repayment of the Notes Receivable from ARO. For the same period, our cash provided by operating activities of $127.0 million related primarily to improving margins and the collection of $54.8 million for certain tax receivables.
We continue to take a $823.0 million declinedisciplined approach to reactivations with our stacked rigs, including the Newbuild Drillships, only reactivating them for opportunities that provide meaningful returns. Generally, most of the reactivation cost will be operating expenses, recognized in cash receipts from contract drilling services, partially offset by a $190.4 million decline in cash paymentsthe income statement, related to contract drilling expensesde-preservation activities, including reinstalling key pieces of equipment and a $65.0 million decline in cash paidcrew costs. Capital expenditures during reactivations include rig modifications, equipment overhauls and any customer required capital upgrades. Reactivation costs incurred for interest, netthe Newbuild Drillships would be capitalized as such activities would be required to prepare the rigs for their intended use. We would generally expect to be compensated for any customer-specific enhancements.
60
The costs of amounts capitalized.
Based on our current projections, we expect capital expenditures during 20182024 to includeapproximate $390.0 million to $430.0 million primarily relating to maintenance and upgrade projects, including rig reactivation and associated contract-specific capital expenditures. We expect to receive upfront payments from our customers of approximately $375 million for newbuild construction, approximately $40 million for rig enhancement projects and approximately $60 million for minor upgrades and improvements. Of the $375 million for newbuild construction, $207.4$55.0 million relating to ENSCO 123 was paid in January 2018.these projects. Depending on market conditions, contracting activity and future opportunities, we may reactivate additional rigs or make additional capital expenditures to upgrade rigs for customer requirements and construct or acquire additional rigs.
We review from time to time possible acquisition opportunities relating to our business, which may include the acquisition of rigs or other businesses. The timing, size or success of any acquisition efforts and the associated potential capital commitments are unpredictable and uncertain. We may seek to fund all or part of any such efforts with cash on hand and proceeds from debt and/or equity issuances and may issue equity directly to the sellers. Our Board of Directors declared a $0.01 quarterly cash dividend per Class A ordinary shareability to obtain capital for each quarter during 2017. In October 2017, we amendedadditional projects to implement our revolving credit facility, which prohibits us from paying dividendsgrowth strategy over the longer term will depend on our future operating performance, restrictions to incur additional debt in excess of $0.01 per share per fiscal quarter. Dividends in excess of this amount would require the amendment or waiver of such provision. The declarationIndenture and amount of future dividends is at the discretion of our Board of Directors. In the future, our Board of Directors may, without advance notice, determine to reduce or suspend our dividend in order to improve our financial flexibility and best position us for long-term success. When evaluating dividend payment timing and amounts, our Board of Directors considers several factors, including our profitability, liquidity,Credit Agreement, financial condition market outlook, reinvestment opportunities, capitaland, more broadly, on the availability of equity and debt financing. Capital availability will be affected by prevailing conditions in our industry, the global economy, the global financial markets and other factors, many of which are beyond our control. In addition, any additional debt service requirements we take on could be based on higher interest rates and limitations undershorter maturities and could impose a significant burden on our revolving credit facility.results of operations and financial condition, and the issuance of additional equity securities could result in significant dilution to shareholders.
In connection with our sustainability-related efforts, during 2023, we spent approximately $7.0 million and expect spend during 2024 to be comparable. Our sustainability initiatives will continue to require, among other actions, investment in systems and equipment and coordination with our customers.
Financing and Capital Resources
The First Lien Notes were redeemed on May 3, 2023 for an aggregate redemption price of approximately $571.8 million (excluding accrued and total debt to total capital ratios asunpaid interest) with a portion of December 31, 2017, 2016 and 2015 are summarized below (in millions, except percentages):
Pro Forma 2017(1) | 2017 | 2016 | 2015 | ||||||||||||
| Total debt | $ | 5,057.5 | $ | 4,750.7 | $ | 5,274.5 | $ | 5,868.6 | |||||||
Total capital(2) | 13,774.8 | 13,482.8 | 13,525.1 | 12,381.5 | |||||||||||
| Total debt to total capital | 36.7 | % | 35.2 | % | 39.0 | % | 47.4 | % | |||||||
61
Additionally, on August 21, 2023, the Issuers issued $400.0 million aggregate principal amount of additional Second Lien Notes (the "Additional Notes") in a senior, unsecured basis, by Ensco plcprivate placement conducted pursuant to Rule 144A and are exchangeable into cash, our Class A ordinary shares orRegulation S under the Securities Act. The Additional Notes were issued at 100.75% of par, plus accrued interest from April 19, 2023, for net proceeds of approximately $396.9 million after deducting the initial purchasers’ discount and estimated offering expenses, and excluding accrued interest received of $11.4 million. We used a combination thereof, at our election.portion of the proceeds to finance the purchase of the Newbuild Drillships as described above.
The Initial Second Lien Notes and the Additional Notes were issued under the Indenture and form a single series. The Second Lien Notes mature on April 30, 2030 and bear an interest rate of 8.375% per annum. Interest on the 2024 Convertible Notes is payable semiannuallysemi-annually in arrears on January 31April 30 and July 31October 30 of each year. See “Note 8 - Debt" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for additional information on the Second Lien Notes.
Senior Secured Revolving Credit Agreement
On April 3, 2023, the Company entered into a senior secured revolving credit agreement (the “Credit Agreement”). The 2024 ConvertibleCredit Agreement provides for commitments permitting borrowings of up to $375.0 million (which may be increased, subject to the satisfaction of certain conditions and the agreement of lenders to provide such additional commitments, by an additional $200.0 million pursuant to the terms of the Credit Agreement) and includes a $150.0 million sublimit for the issuance of letters of credit. Valaris Finance and certain other subsidiaries of the Company (together with Valaris Finance, the “Guarantors”) guarantee the Company’s obligations under the Credit Agreement, and the lenders have a first priority lien on the assets securing the Credit Agreement. The commitments under the Credit Agreement became available to be borrowed on April 19, 2023. See “Note 8 - Debt" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for additional information on the Credit Agreement.
Investment in ARO and Notes will mature on January 31, 2024, unless exchanged, redeemed or repurchasedReceivable from ARO
We consider our investment in accordance with their terms priorARO to such date. Holders may exchange their 2024 Convertible Notes at their option any time priorbe a significant component of our investment portfolio and an integral part of our long-term capital resources. We expect to July 31, 2023 only under certain circumstances set forthreceive cash from ARO in the indenture governingfuture both from the 2024 Convertible Notes. On or after July 31, 2023, holders may exchange their 2024 Convertiblematurity of our Notes Receivable from ARO and from the distribution of earnings from ARO.
The Notes Receivable from ARO, which are governed by the laws of Saudi Arabia, mature during 2027 and 2028. In the event that ARO is unable to repay the Notes Receivable from ARO when they become due, we would require the prior consent of our joint venture partner to enforce ARO’s payment obligations.
The distribution of earnings to the joint-venture partners is at any time.the discretion of the ARO board of managers, consisting of 50/50 membership of managers appointed by Saudi Aramco and managers appointed by us, with approval required by both shareholders. The exchange rate is 71.3343shares per $1,000 principaltiming and amount of notes, representing an exchange priceany cash distributions to the joint-venture partners cannot be predicted with certainty and will be influenced by various factors, including the liquidity position and long-term capital requirements of $14.02per share, and is subjectARO. ARO has not made a cash distribution of earnings to adjustment upon certain events. The 2024 Convertible Notes may not be redeemed by us exceptits partners since its formation.
62
| Aggregate Principal Amount Repurchased | Aggregate Repurchase Price(1) | ||||||
| 8.50% Senior notes due 2019 | $ | 54.6 | $ | 60.1 | |||
| 6.875% Senior notes due 2020 | 100.1 | 105.1 | |||||
| 4.70% Senior notes due 2021 | 39.4 | 39.3 | |||||
| Total | $ | 194.1 | $ | 204.5 | |||
| Aggregate Principal Amount Repurchased | Aggregate Repurchase Price (1) | ||||||
| 8.50% Senior notes due 2019 | $ | 62.0 | $ | 55.7 | |||
| 6.875% Senior notes due 2020 | 219.2 | 181.5 | |||||
| 4.70% Senior notes due 2021 | 817.0 | 609.0 | |||||
| 4.50% Senior notes due 2024 | 1.7 | .9 | |||||
| 5.20% Senior notes due 2025 | 30.7 | 16.8 | |||||
| Total | $ | 1,130.6 | $ | 863.9 | |||
| Aggregate Principal Amount Repurchased | 8% Senior Notes Due 2024 Consideration | Cash Consideration | Total Consideration | ||||||||||||
| 8.50% Senior notes due 2019 | $ | 145.8 | $ | 81.6 | $ | 81.7 | $ | 163.3 | |||||||
| 6.875% Senior notes due 2020 | 129.8 | 69.3 | 69.4 | 138.7 | |||||||||||
| 4.70% Senior notes due 2021 | 373.9 | 181.1 | 181.4 | 362.5 | |||||||||||
| Total | $ | 649.5 | $ | 332.0 | $ | 332.5 | $ | 664.5 | |||||||
| Aggregate Principal Amount Repurchased | Aggregate Repurchase Price(1) | ||||||
| 8.50% Senior notes due 2019 | $ | 237.6 | $ | 256.8 | |||
| 6.875% Senior notes due 2020 | 256.6 | 277.1 | |||||
| 4.70% Senior notes due 2021 | 156.2 | 159.3 | |||||
| Total | $ | 650.4 | $ | 693.2 | |||
| Senior Notes | Original Principal | 2016 Tenders, Repurchases and Equity Exchange | 2017 Exchange Offers | 2017 Repurchases | Principal Outstanding at December 31, 2017(1) | 2018 Tender Offers, Redemption and Debt Issuance | Remaining Principal | ||||||||||||||||||||
| 8.50% due 2019 | $ | 500.0 | $ | (62.0 | ) | $ | (145.8 | ) | $ | (54.6 | ) | $ | 237.6 | $ | (237.6 | ) | $ | — | |||||||||
| 6.875% due 2020 | 900.0 | (219.2 | ) | (129.8 | ) | (100.1 | ) | 450.9 | (256.6 | ) | 194.3 | ||||||||||||||||
| 4.70% due 2021 | 1,500.0 | (817.0 | ) | (373.9 | ) | (39.4 | ) | 269.7 | (156.2 | ) | 113.5 | ||||||||||||||||
| 3.00% due 2024 | 849.5 | — | — | — | 849.5 | — | 849.5 | ||||||||||||||||||||
| 4.50% due 2024 | 625.0 | (1.7 | ) | — | — | 623.3 | — | 623.3 | |||||||||||||||||||
| 8.00% due 2024 | — | — | 332.0 | — | 332.0 | — | 332.0 | ||||||||||||||||||||
| 5.20% due 2025 | 700.0 | (30.7 | ) | — | — | 669.3 | — | 669.3 | |||||||||||||||||||
| 7.75% due 2026 | — | — | — | — | — | 1,000.0 | 1,000.0 | ||||||||||||||||||||
| 7.20% due 2027 | 150.0 | — | — | — | 150.0 | — | 150.0 | ||||||||||||||||||||
| 7.875% due 2040 | 300.0 | — | — | — | 300.0 | — | 300.0 | ||||||||||||||||||||
| 5.75% due 2044 | 1,025.0 | (24.5 | ) | — | — | 1,000.5 | — | 1,000.5 | |||||||||||||||||||
| Total | $ | 6,549.5 | $ | (1,155.1 | ) | $ | (317.5 | ) | $ | (194.1 | ) | $ | 4,882.8 | $ | 349.6 | $ | 5,232.4 | ||||||||||
| Maturity Date | Principal Amount | ||||
| October 2027 | $ | 225.0 | |||
| October 2028 | 177.7 | ||||
| Total | $ | 402.7 | |||
Contractual Obligations
| Payments due by period | |||||||||||||||||||||||||||||
| 2024 | 2025 and 2026 | 2027 and 2028 | Thereafter | Total | |||||||||||||||||||||||||
| Principal payments on long-term debt | $ | — | $ | — | $ | — | $ | 1,100.0 | $ | 1,100.0 | |||||||||||||||||||
| Interest payments on long-term debt | 92.1 | 184.3 | 184.3 | 138.1 | 598.8 | ||||||||||||||||||||||||
| Operating leases | 32.4 | 39.6 | 12.4 | 3.7 | 88.1 | ||||||||||||||||||||||||
Total contractual obligations(1) | $ | 124.5 | $ | 223.9 | $ | 196.7 | $ | 1,241.8 | $ | 1,786.9 | |||||||||||||||||||
(1)Contractual obligations do not include $224.0 million of unrecognized tax benefits, inclusive of interest and penalties, included on our Consolidated Balance Sheet as of December 31, 2023. We are unable to specify with certainty whether we would be required to and in which periods we may be obligated to settle such amounts.
In connection with our 50/50 unconsolidated joint venture, we have a potential obligation to fund ARO for newbuild jackup rigs. The Shareholder Agreement specifies that ARO shall purchase 20 newbuild jackup rigs over an approximate 10-year period. In January 2020, ARO ordered the first two newbuild jackups and paid 25% of the purchase price from cash on hand. The first rig, Kingdom 1, was delivered in the fourth quarter 2023, and the second is expected to be delivered in the first half of 2024. In October 2023, ARO entered into a $359.0 million term loan to finance the remaining newbuild payments due upon delivery and for general corporate purposes. The term loan matures in eight years following the related drawdown under the term loan and requires equal quarterly amortization payments during the term, with a 50% balloon payment due at maturity. The term loan bears interest based on the three-month Secured Overnight Financing Rate (SOFR) plus a margin ranging from 1.25% to 1.4%. Our Notes Receivable from ARO are subordinated and junior in right of payment to ARO’s term loan.
ARO is expected to commit to orders for two additional newbuild jackups in the near term and intends for these newly ordered jackup rigs to be financed out of cash on hand or from operations or funds available from third-party financing. In the event ARO has insufficient cash or is unable to obtain third-party financing, each partner may periodically be required to make additional capital contributions to ARO, up to a maximum aggregate contribution of $1.25 billion from each partner to fund the newbuild program. Beginning with the delivery of the second newbuild, each partner's commitment shall be reduced by the lesser of the actual cost of each newbuild rig or $250.0 million, on a proportionate basis. See "Note 5 - Equity Method Investment in ARO" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for additional information on ARO.
63
| Payments due by period | |||||||||||||||||||
| 2018 | 2019 and 2020 | 2021 and 2022 | Thereafter | Total | |||||||||||||||
Principal payments on long-term debt(1) | $ | — | $ | 688.5 | $ | 269.7 | $ | 3,924.6 | $ | 4,882.8 | |||||||||
Interest payments on long-term debt(1) | 270.7 | 511.2 | 420.0 | 1,966.1 | 3,168.0 | ||||||||||||||
New rig construction agreements (2) | 225.7 | 256.5 | — | — | 482.2 | ||||||||||||||
| Operating leases | 22.6 | 27.0 | 21.3 | 24.6 | 95.5 | ||||||||||||||
Total contractual obligations(3) | $ | 519.0 | $ | 1,483.2 | $ | 711.0 | $ | 5,915.3 | $ | 8,628.5 | |||||||||
Other Commitments
We have other commitments that we are contractually obligated to fulfill with cash under certain circumstances. These commitments includeAs of December 31, 2023, we were contingently liable for an aggregate amount of $128.8 million under outstanding letters of credit towhich guarantee our performance as it relates to our drilling contracts, contract bidding, customs duties, tax appeals and other obligations in various jurisdictions. Obligations under these letters of credit are not normally called, as we typically comply with the underlying performance requirement. As of December 31, 2017,2023, we had not been required to make collateral deposits in the amount of $12.6 million with respect to these agreements.
The following table summarizes our other commitments as of December 31, 20172023 (in millions):
| Commitment expiration by period | |||||||||||||||||||||||||||||
| 2024 | 2025 and 2026 | 2027 and 2028 | Thereafter | Total | |||||||||||||||||||||||||
| Letters of credit | $ | 116.8 | $ | — | $ | 12.0 | $ | — | $ | 128.8 | |||||||||||||||||||
| Commitment expiration by period | |||||||||||||||||||
| 2018 | 2019 and 2020 | 2021 and 2022 | Thereafter | Total | |||||||||||||||
| Letters of credit | $ | 56.8 | $ | 12.7 | $ | — | $ | 6.2 | $ | 75.7 | |||||||||
In December 2023, one of our Luxembourg subsidiaries received tax assessments for fiscal years 2019, 2020, 2021 and 2023 and a demand of payment from the Luxembourg tax authorities for an aggregate of approximately €115.0 million (approximately $127.0 million converted at current period-end exchange rates), including interest. In February 2024, we subsequently received notice from the Luxembourg tax authorities reducing the amount attributable to the 2023 payment demand by approximately €55.0 million resulting in a revised aggregate tax demand of approximately €60.0 million. We have recorded a liability for uncertain tax positions of approximately €60.0 million (approximately $66.0 million converted at current period-end exchange rates) in the fourth quarter of 2023 related to the assessments for the 2019-2021 tax years. We are vigorously contesting these assessments, including the validity and amount; however, the outcome of such challenges and related administrative proceedings and appeals cannot be predicted with certainty. An unfavorable outcome could result in a material impact on our financial position, operating results and cash flows.
During 2019, the Australian tax authorities issued aggregate tax assessments totaling approximately A$101.0 million (approximately $69.0 million converted at current period-end exchange rates) plus interest related to the examination of certain of our tax returns for the years 2011 through 2016. During the third quarter of 2019, we made a A$42.0 million payment (approximately $29.0 million at then-current exchange rates) to the Australian tax authorities to litigate the assessment. We have an $18.8 million liability for uncertain tax positions relating to these assessments as of December 31, 2023. We believe our tax returns are materially correct as filed, and we are vigorously contesting these assessments. Although the outcome of such assessments and related administrative proceedings cannot be predicted with certainty, we do not expect these matters to have a material adverse effect on our financial position, operating results and cash flows.
See "Note 12 - Income Taxes" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for additional information on these tax assessments.
64
Share Repurchase Program
In 2022, our board of directors authorized a share repurchase program under which we may purchase up to $100.0 million of our outstanding Common Shares. In April 2023, the board of directors authorized an increase of this amount to $300.0 million and in February 2024, they authorized a further increase to $600.0 million. The share repurchase program does not have a fixed expiration, may be modified, suspended or discontinued at any time and is summarized below (in millions, except ratios):
Pro Forma 2017(1) | 2017 | 2016 | 2015 | ||||||||||||
| Cash and cash equivalents | $ | 721.6 | $ | 445.4 | $ | 1,159.7 | $ | 121.3 | |||||||
| Short-term investments | 440.0 | 440.0 | 1,442.6 | 50.0 | |||||||||||
| Working capital | 1,142.1 | 853.5 | 2,424.9 | 1,509.6 | |||||||||||
| Current ratio | 2.5 | 2.1 | 3.8 | 2.9 | |||||||||||
Effects of Climate Change and Climate Change Regulation
In an effort to reduce GHG emissions, governments have put in placeimplemented or considered legislative and regulatory mechanisms to institute carbon pricing mechanisms, such as the European Union’s Emission Trading System, and to impose technical requirements to reduce carbon emissions. The Companies Act 2006 (StrategicGovernments have also proposed or implemented new or enhanced disclosure requirements related to climate change matters and Directors' Reports) Regulations 2013 now requires all quoted U.K. companies, including Ensco plc, to report their annual GHG emissions inthat may increase compliance and disclosure costs, such as the Company's directors' report.SEC’s 2022 proposed rules for a climate change reporting framework.
65
During 2009, the United States Environmental Protection Agency (the "EPA")EPA officially published its findings that emissions of carbon dioxide, methane and other GHGs present an endangerment to human health and the environment because emissions of such gases are, according to the EPA, contributing to warming of the earth'searth’s atmosphere and other climatic changes. These EPA findings allowed the agency to proceed with the adoption and implementation of regulations to restrict GHG emissions under existing provisions of the Clean Air Act that establish Prevention of Significant Deterioration ("PSD") construction and Title V operating permit reviewspermitting requirements, including emissions control technology requirements, for certain large stationary sources that are potential major sources of GHG emissions. Facilities required to obtain PSD permits for their GHG emissions are required to meet "best available control technology" standards established by the states or, in some cases, the EPA, on a case-by-case basis. The EPA has also adopted rules requiring annual monitoring and reporting of GHG emissions from specified sources in the United States,U.S., including, among others, certain onshore and offshore oil and natural gas production facilities. Although a number of bills related to climate change have been introduced in the U.S. Congress in the past, it appears unlikely that comprehensive federal climate legislation will behas not yet been passed by Congress in the foreseeable future.Congress. If such legislation were to be adopted in the United States,U.S., such legislation could adversely impact many industries. In the absence of federal legislation, almost half of the states have begun to address GHG emissions, primarily through the development or planned development of emission inventories or regional GHG cap and trade programs.programs and commitments to contribute to meeting the goals of the Paris Agreement.
Future legislation or regulation of GHG emissions could occur pursuant to future treaty obligations, statutory or regulatory changes or new climate change legislation in the jurisdictions in which we operate. Depending on the particular program, we, or our customers, could be required to control GHG emissions or to purchase and surrender allowances for GHG emissions resulting from our operations. It is uncertain whether any of these initiatives will be implemented. If such initiatives are implemented we do not believe thatand what the impact of such initiatives would have a direct, material adverse effect on our financial condition, operating results and cash flows in a manner different than our competitors.flows.
MARKET RISK
Interest Rate Risk
Our outstanding debt at December 31, 2023 consisted of our $1.1 billion aggregate principal amount of Second Lien Notes. We use derivativesare subject to reduceinterest rate risk on our exposurefixed-interest rate borrowings. Fixed rate debt, where the interest rate is fixed over the life of the instrument, exposes us to foreign currency exchangechanges in market interest rates impacting the fair value of the debt.
Our Credit Agreement provides for commitments permitting borrowings of up to $375.0 million at December 31, 2023. As the interest rates for such borrowings are at variable rates, we are subject to interest rate risk. However, as of December 31, 2023, we had no outstanding borrowings under the Credit Agreement.
Our Notes Receivable from ARO historically accrued interest based on a one-year LIBOR rate. Effective December 2023, the Notes Receivable from ARO bear interest based on the one-year term SOFR rate, set as of the end of the year prior to the year applicable, plus 2.10%. As the Notes Receivable from ARO bear interest on the applicable SOFR rate determined at the end of the preceding year, the rate governing our interest income in 2024 has already been determined. A hypothetical 1% decrease to SOFR would decrease interest income for the year ended December 31, 2024 by $4.0 million based on the principal amount outstanding at December 31, 2023 of $402.7 million.
Foreign Currency Risk
Our functional currency is the U.S. dollar. As is customary in the oil and gas industry, a majority of our revenues and expenses are denominated in U.S. dollars; however, a portion of the revenues earned and expenses incurred by certain of our subsidiaries are denominated in currencies other than the U.S. dollar. We maintain a foreign currency exchange rate risk management strategy that utilizes derivatives to reduce our exposure to unanticipated fluctuations in earnings and cash flows caused by changes in foreign currency exchange rates.
66
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires us to make estimates, judgments and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Concurrent with our emergence from bankruptcy, we applied fresh start accounting and elected to change our accounting policies related to property and equipment as well as materials and supplies. See "Note 1 - Description of the Business and Summary of Significant Accounting Policies" and "Note 3 - Fresh Start Accounting" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for more information. Our significant accounting policies are included in "Note 1 - Description of the Business and Summary of Significant Accounting Policies" to our consolidated financial statements.statements included in "Item 8. Financial Statements and Supplementary Data". These policies, along with our underlying judgments and assumptions made in their application, have a significant impact on our consolidated financial statements.
We identify our critical accounting policies as those that are the most pervasive and important to the portrayal of our financial position and operating results and that require the most difficult, subjective and/or complex judgments regarding estimates in matters that are inherently uncertain. Our critical accounting policies are those related to property and equipment, impairment of long-lived assetsincome taxes and income taxes.pension and other post-retirement benefits.
Property and Equipment
Concurrent with our emergence from bankruptcy, we applied fresh start accounting and adjusted the carrying value of our drilling rigs to estimated fair value. See "Note 3 - Fresh Start Accounting" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for more information. As of December 31, 2017,2023, the carrying value of our property and equipment totaled $12.9$1.6 billion,, which represented 88%38% of total assets. This carrying value reflects the application of our property and equipment accounting policies, which incorporate our estimates, judgments and assumptions relative to the capitalized costs, useful lives and salvage values of our rigs.
We develop and apply property and equipment accounting policies that are designed to appropriately and consistently capitalize those costs incurred to enhance, improve and extend the useful lives of our assets and expense those costs incurred to repair or maintain the existing condition or useful lives of our assets. The development and application of such policies requires estimates, judgments and assumptions relative to the nature of, and benefits from, expenditures on our assets. We establish property and equipment accounting policies that are designed to depreciate our assets over their estimated useful lives.
Upon emergence, we elected to change our accounting policies and have identified the significant components of our drilling rigs and ascribed useful lives based on the expected time until the next required overhaul or the end of the expected economic lives of the components.
The judgments and assumptions used in determining the usefulnext overhaul or the economic lives of the components of our property and equipment reflect both historical experience and expectations regarding future operations, utilization and performance of our assets. The use of different estimates, judgments and assumptions in the establishment of our property and equipment accounting policies, especially those involving the useful lives of the significant components our rigs, would likely result in materially different asset carrying values and operating results.
The useful lives of our drilling rigsrig components are difficult to estimate due to a variety of factors, including technological advances that impact the methods or cost of oil and natural gas exploration and development, changes in market or economic conditions and changes in laws or regulations affecting the drilling industry. We evaluate the remaining useful lives of our rigsrig components on a periodic basis, considering operating condition, functional capability and market and economic factors.
67
Property and equipment held-for-sale is recorded at the lower of $182.9 million relatednet book value or fair value less cost to certain older, less capable, non-core assets in our fleet. We estimate the aforementioned impairment will cause a decline in depreciation expense of approximately $27 million for the year ended December 31, 2018.sell.
Our fleet of 2418 floater rigs excluding two rigs under construction and one rig held-or-sale, represented 58%62% of both the gross cost and 63% of the net carrying amount of our depreciable property and equipment as of December 31, 2017. Our floater rigs are depreciated over useful lives ranging from ten to 35 years.2023. Our fleet of 3735 jackup rigs excluding one rig under construction, represented 20%34% of the gross cost and 18%33% of the net carrying amount of our depreciable property and equipment as of December 31, 2017. Our jackup rigs are depreciated over useful lives ranging from ten to 30 years. 2023.
Increase (decrease) in useful lives of our drilling rigs | Estimated (decrease) increase in depreciation expense that would have been recognized (in millions) | |
| 10% | $(36.4) | |
| 20% | (66.8) | |
| (10%) | 43.1 | |
| (20%) | 93.1 | |
Income Taxes
We conduct operations and earn income in numerous countries and are subject to the laws of numerous tax jurisdictions. As of December 31, 2017,2023, our consolidated balance sheetConsolidated Balance Sheet included a $20.2$825.2 million net deferred income tax asset,, a $39.4$36.6 million liability for income taxes currently payable and a $178.0$224.0 million liability for unrecognized tax benefits, inclusive of interest and penalties.
The carrying values of deferred income tax assets and liabilities reflect the application of our income tax accounting policies and are based on estimates, judgments and assumptions regarding future operating results and levels of taxable income. Carryforwards and tax credits are assessed for realization as a reduction of future taxable income by using a more-likely-than-not determination. We do not offset deferred tax assets and deferred tax liabilities attributable to different tax paying jurisdictions.
We do not provide deferred taxes on the undistributed earnings of certain subsidiaries because our policy and intention is to reinvest such earnings indefinitely. Should we make a distribution from these subsidiaries in the form of dividends or otherwise, we wouldmay be subject to additional income taxes.
The carrying values of liabilities for income taxes currently payable and unrecognized tax benefits are based on our interpretation of applicable tax laws and incorporate estimates, judgments and assumptions regarding the use of tax planning strategies in various taxing jurisdictions. The use of different estimates, judgments and assumptions in connection with accounting for income taxes, especially those involving the deployment of tax planning strategies, may result in materially different carrying values of income tax assets and liabilities and operating results.
We operate in several jurisdictions where tax laws relating to the offshore drilling industry are not well developed. In jurisdictions where available statutory law and regulations are incomplete or underdeveloped, we obtain professional guidance and consider existing industry practices before utilizing tax planning strategies and meeting our tax obligations. Our tax positions are evaluated for recognition using a more-likely-than-not threshold, and those tax positions requiring recognition are measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon effective settlement with a taxing authority that has full knowledge of all relevant information.
Tax returns are routinely subject to audit in most jurisdictions and tax liabilities occasionally are finalized through a negotiation process. In some jurisdictions, income tax payments may be required before a final income tax obligation is determined in order to avoid significant penalties and/or interest. While we historically have not experienced significant adjustments to previously recognized tax assets and liabilities as a result of finalizing tax returns, there can be no assurance that significant adjustments will not arise in the future. In addition, there are several factors that could cause the future level of uncertainty relating to our tax liabilities to increase, including the following:
•During recent years, the number of tax jurisdictions in which we conduct operations has increased, and we currently anticipate that this trend will continue.increased.
•In order to utilize tax planning strategies and conduct operations efficiently, our subsidiaries frequently enter into transactions with affiliates that are generally subject to complex tax regulations and are frequently reviewed and challenged by tax authorities.
68
•We may conduct future operations in certain tax jurisdictions where tax laws are not well developed, and it may be difficult to secure adequate professional guidance.
•Tax laws, regulations, agreements, treaties and the administrative practices and precedents of tax authorities change frequently, requiring us to modify existing tax strategies to conform to such changes.
Our pension and other postretirement benefit liabilities and costs are based upon actuarial computations that reflect our assumptions about future events, including long-term asset returns, interest rates, annual compensation increases, mortality rates and other factors. Key assumptions at December 31, 2023, included (1) a weighted average discount rate of 4.97% to determine pension benefit obligations, (2) a weighted average discount rate of 5.21% to determine net periodic pension cost and (3) an expected long-term rate of return on pension plan assets of 7.10% to determine net periodic pension cost. The assumed discount rate is based upon the impactaverage yield for either Moody’s or Standard & Poor's Aa-rated corporate bonds, and the rate of return assumption reflects a probability distribution of expected long-term returns that is weighted based upon plan asset allocations.
Using our key assumptions at December 31, 2023, a one-percentage-point decrease in the assumed discount rate would increase our recorded pension and other postretirement benefit liabilities by approximately $60.1 million, while a one-percentage-point decrease (increase) in the expected long-term rate of return on plan assets would increase (decrease) annual net benefits cost by approximately $4.4 million. To develop the expected long-term rate of return on assets assumption, we considered the current level of expected returns on risk-free investments (primarily government bonds), the historical level of the enactmentrisk premium associated with the plans’ other asset classes, and the expectations for future returns of U.S. tax reform duringeach asset class. The expected return for each asset class was then weighted based upon the fourth quartercurrent asset allocation to develop the expected long-term rate of 2017return on a provisional basis. During 2018, we may make adjustmentsassets assumption for the plan, which decreased to the provisional amounts throughout the one-year measurement period as provided by Staff Accounting Bulletin No. 118, as we continue to analyze applicable information6.88% at December 31, 2023 from 7.10% at December 31, 2022. See "Note 11 - Pension and data, and interpret any additional guidance issued by the U.S. Treasury Department, the Internal Revenue Service and others. See Note 10Other Post Retirement Benefits" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for additional information.information on our pension and other postretirement benefit plans.
NEW ACCOUNTING PRONOUNCEMENTS
See "Note 1 - Description of the Business and Summary of Significant Accounting Policies" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for information on new accounting pronouncements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Information required under this Item 7A. has been incorporated intoherein from "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Market Risk."
69
Item 8. Financial Statements and Supplementary Data
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) or 15d-15(f). Our internal control over financial reporting system is designed to provide reasonable assurance as to the reliability of our financial reporting and the preparation and presentation of consolidated financial statements in accordance with accounting principles generally accepted in the United States, as well as to safeguard assets from unauthorized use or disposition. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, we have conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, we have concluded that our internal control over financial reporting is effective as of December 31, 20172023 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
KPMG LLP, the independent registered public accounting firm who audited our consolidated financial statements, has issued an audit report on our internal control over financial reporting. KPMG LLP's audit report on our internal control over financial reporting is included herein.
February 27, 2018
22, 2024
70
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Ensco plcValaris Limited and subsidiaries (the Company) as of December 31, 20172023 and 2016,2022, the related consolidated statements of operations, comprehensive income (loss), and cash flows for each of the years in the three‑yeartwo-year period ended December 31, 2017,2023 and for the period from May 1, 2021 to December 31, 2021 (Successor periods) and for the period from January 1, 2021 to April 30, 2021 (Predecessor period), and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20172023 and 2016,2022, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2017,Successor and Predecessor periods, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017,2023, based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 27, 201822, 2024 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis of Presentation
As discussed in Note 1 to the consolidated financial statements, on March 3, 2021, the Bankruptcy Court for the Southern District of Texas entered an order confirming the Company’s plan for reorganization under Chapter 11, which became effective on April 30, 2021. Accordingly, the accompanying consolidated financial statements as of December 31, 2023 and 2022 and for the Successor periods have been prepared in conformity with Accounting Standards Codification 852, Reorganization, with the Company’s assets, liabilities, and capital structure having carrying amounts not comparable to prior years.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
71
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Income tax positions pertaining to certain tax transactions
As discussed in Notes 1 and 12 to the consolidated financial statements, the Company evaluated the income tax effect of certain transactions which often requires local country tax expertise and judgment. This requires the Company to interpret complex tax laws in multiple jurisdictions to assess whether its tax positions have a more than 50 percent likelihood of being sustained with the taxing authorities.
We identified the assessment of income tax positions pertaining to certain tax transactions as a critical audit matter. Complex auditor judgment was required to evaluate the Company’s assessment that certain tax positions have a more than 50 percent likelihood of being sustained with the taxing authorities. In addition, specialized skills and knowledge were required to evaluate the Company’s interpretation of tax laws in the applicable jurisdictions.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s income tax process. This included controls related to the interpretation of tax laws applicable to certain transactions and the assessment that tax positions pertaining to those transactions have a more than 50 percent likelihood of being sustained with taxing authorities. We involved tax professionals with specialized skills and knowledge, who assisted on evaluating the Company’s interpretation of local tax laws and assessment of whether tax positions had a greater than 50 percent likelihood of being sustained with taxing authorities.
Realizability of certain deferred tax assets
As discussed in Notes 1 and 12 to the consolidated financial statements, the Company recognizes a valuation allowance for deferred tax assets if, based on the weight of all available evidence, it is more-likely-than-not that the benefit from the deferred tax asset will not be realized. The realization of deferred tax assets is dependent upon generating sufficient taxable income during future periods in the jurisdictions it operates. As of December 31, 2023, the Company had recorded a valuation allowance of $4.2 billion on deferred tax assets. During the year ended December 31, 2023, the Company released $799.5 million of the valuation allowance recognized related to deferred tax assets.
We identified the evaluation of the realizability of certain deferred tax assets as a critical audit matter. A high degree of subjective auditor judgment was required due to (1) the significant judgment made by the Company in assessing the ability to realize the deferred tax assets and whether a valuation allowance was necessary considering the availability of forecasted income and (2) the subjective nature of the sources of possible future income used in the Company's assessment and the key assumptions used in the estimation of such future income, specifically forecasted revenue, contract drilling expenses and shore-based expenses.
72
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company's process to assess the realizability of certain deferred tax assets, including controls over the key assumptions used in the determination of forecasted income. We evaluated available positive and negative evidence used in the Company's assessment of whether certain deferred tax assets were more like than not to be realized in the future. We evaluated the reasonableness of the revenue, contract drilling expenses and shore-based expenses assumptions used in determining forecasted income for consistency with historical amounts, economic trends and industry data. We involved tax professionals with specialized skills and knowledge, who assisted in the application of tax laws in the performance of these procedures.
/s/ KPMG LLP
We have served as the Company’s auditor since 2002.
Houston, Texas
February 22, 2024
73
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Opinion on Internal Control Over Financial Reporting
We have audited Ensco plcValaris Limited and subsidiaries’ (the “Company”)Company) internal control over financial reporting as of December 31, 2017,2023, based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2023, based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”)(PCAOB), the consolidated balance sheets of the Company as of December 31, 20172023 and 2016,2022, the related consolidated statements of operations, comprehensive income (loss), and cash flows for each of the years in the three-yeartwo-year period ended December 31, 2017,2023 and for the period from May 1, 2021 to December 31, 2021 (Successor periods) and for the period from January 1, 2021 to April 30, 2021 (Predecessor period), and the related notes (collectively, the “consolidatedconsolidated financial statements”)statements), and our report dated February 27, 201822, 2024 expressed an unqualified opinion on those consolidated financial statements.statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report Onon Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
74
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Houston, Texas
February 27, 2018
22, 2024
75
VALARIS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
| Successor | Predecessor | |||||||||||||||||||||||||
| Year Ended December 31, 2023 | Year Ended December 31, 2022 | Eight Months Ended December 31, 2021 | Four Months Ended April 30, 2021 | |||||||||||||||||||||||
| OPERATING REVENUES | $ | 1,784.2 | $ | 1,602.5 | $ | 835.0 | $ | 397.4 | ||||||||||||||||||
| OPERATING EXPENSES | ||||||||||||||||||||||||||
| Contract drilling (exclusive of depreciation) | 1,543.6 | 1,383.2 | 724.1 | 343.8 | ||||||||||||||||||||||
| Loss on impairment | — | 34.5 | — | 756.5 | ||||||||||||||||||||||
| Depreciation | 101.1 | 91.2 | 66.1 | 159.6 | ||||||||||||||||||||||
| General and administrative | 99.3 | 80.9 | 58.2 | 30.7 | ||||||||||||||||||||||
| Total operating expenses | 1,744.0 | 1,589.8 | 848.4 | 1,290.6 | ||||||||||||||||||||||
| EQUITY IN EARNINGS OF ARO | 13.3 | 24.5 | 6.1 | 3.1 | ||||||||||||||||||||||
| OPERATING INCOME (LOSS) | 53.5 | 37.2 | (7.3) | (890.1) | ||||||||||||||||||||||
| OTHER INCOME (EXPENSE) | ||||||||||||||||||||||||||
| Interest income | 101.4 | 65.5 | 28.5 | 3.6 | ||||||||||||||||||||||
| Interest expense, net (Unrecognized contractual interest expense for debt subject to compromise was $132.9 million for the four months ended April 30, 2021) | (68.9) | (45.3) | (31.0) | (2.4) | ||||||||||||||||||||||
| Reorganization items, net | — | (2.4) | (15.5) | (3,584.6) | ||||||||||||||||||||||
| Other, net | (1.8) | 169.9 | 38.1 | 25.9 | ||||||||||||||||||||||
| 30.7 | 187.7 | 20.1 | (3,557.5) | |||||||||||||||||||||||
| INCOME (LOSS) BEFORE INCOME TAXES | 84.2 | 224.9 | 12.8 | (4,447.6) | ||||||||||||||||||||||
| PROVISION (BENEFIT) FOR INCOME TAXES | ||||||||||||||||||||||||||
| Current income tax expense | 3.8 | 35.2 | 57.7 | 34.4 | ||||||||||||||||||||||
| Deferred income tax expense (benefit) | (786.4) | 7.9 | (21.3) | (18.2) | ||||||||||||||||||||||
| (782.6) | 43.1 | 36.4 | 16.2 | |||||||||||||||||||||||
| NET INCOME (LOSS) | 866.8 | 181.8 | (23.6) | (4,463.8) | ||||||||||||||||||||||
| NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | (1.4) | (5.3) | (3.8) | (3.2) | ||||||||||||||||||||||
| NET INCOME (LOSS) ATTRIBUTABLE TO VALARIS | $ | 865.4 | $ | 176.5 | $ | (27.4) | $ | (4,467.0) | ||||||||||||||||||
| EARNINGS (LOSS) PER SHARE | ||||||||||||||||||||||||||
| Basic | $ | 11.68 | $ | 2.35 | $ | (0.37) | $ | (22.38) | ||||||||||||||||||
| Diluted | $ | 11.51 | $ | 2.33 | $ | (0.37) | $ | (22.38) | ||||||||||||||||||
| WEIGHTED-AVERAGE SHARES OUTSTANDING | ||||||||||||||||||||||||||
| Basic | 74.1 | 75.1 | 75.0 | 199.6 | ||||||||||||||||||||||
| Diluted | 75.2 | 75.6 | 75.0 | 199.6 | ||||||||||||||||||||||
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| OPERATING REVENUES | $ | 1,843.0 | $ | 2,776.4 | $ | 4,063.4 | |||||
| OPERATING EXPENSES | |||||||||||
| Contract drilling (exclusive of depreciation) | 1,189.5 | 1,301.0 | 1,869.6 | ||||||||
| Loss on impairment | 182.9 | — | 2,746.4 | ||||||||
| Depreciation | 444.8 | 445.3 | 572.5 | ||||||||
| General and administrative | 157.8 | 100.8 | 118.4 | ||||||||
| 1,975.0 | 1,847.1 | 5,306.9 | |||||||||
| OPERATING INCOME (LOSS) | (132.0 | ) | 929.3 | (1,243.5 | ) | ||||||
| OTHER INCOME (EXPENSE) | |||||||||||
| Interest income | 25.8 | 13.8 | 9.9 | ||||||||
| Interest expense, net | (224.2 | ) | (228.8 | ) | (216.3 | ) | |||||
| Other, net | 134.4 | 283.2 | (21.3 | ) | |||||||
| (64.0 | ) | 68.2 | (227.7 | ) | |||||||
| INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | (196.0 | ) | 997.5 | (1,471.2 | ) | ||||||
| PROVISION FOR INCOME TAXES | |||||||||||
| Current income tax expense | 54.2 | 79.8 | 144.1 | ||||||||
| Deferred income tax expense (benefit) | 55.0 | 28.7 | (158.0 | ) | |||||||
| 109.2 | 108.5 | (13.9 | ) | ||||||||
| INCOME (LOSS) FROM CONTINUING OPERATIONS | (305.2 | ) | 889.0 | (1,457.3 | ) | ||||||
| INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET | 1.0 | 8.1 | (128.6 | ) | |||||||
| NET INCOME (LOSS) | (304.2 | ) | 897.1 | (1,585.9 | ) | ||||||
| NET (INCOME) LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS | .5 | (6.9 | ) | (8.9 | ) | ||||||
| NET INCOME (LOSS) ATTRIBUTABLE TO ENSCO | $ | (303.7 | ) | $ | 890.2 | $ | (1,594.8 | ) | |||
| EARNINGS (LOSS) PER SHARE - BASIC AND DILUTED | |||||||||||
| Continuing operations | $ | (.91 | ) | $ | 3.10 | $ | (6.33 | ) | |||
| Discontinued operations | — | .03 | (.55 | ) | |||||||
| $ | (.91 | ) | $ | 3.13 | $ | (6.88 | ) | ||||
| NET INCOME (LOSS) ATTRIBUTABLE TO ENSCO SHARES - BASIC AND DILUTED | $ | (304.1 | ) | $ | 873.6 | $ | (1,596.8 | ) | |||
| WEIGHTED-AVERAGE SHARES OUTSTANDING | |||||||||||
| Basic and Diluted | 332.5 | 279.1 | 232.2 | ||||||||
| CASH DIVIDENDS PER SHARE | $ | .04 | $ | .04 | $ | .60 | |||||
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| NET INCOME (LOSS) | $ | (304.2 | ) | $ | 897.1 | $ | (1,585.9 | ) | |||
| OTHER COMPREHENSIVE INCOME (LOSS), NET | |||||||||||
| Net change in fair value of derivatives | 8.5 | (5.4 | ) | (23.6 | ) | ||||||
| Reclassification of net losses on derivative instruments from other comprehensive income into net income (loss) | .4 | 12.4 | 22.2 | ||||||||
| Other | .7 | (.5 | ) | 2.0 | |||||||
| NET OTHER COMPREHENSIVE INCOME | 9.6 | 6.5 | .6 | ||||||||
| COMPREHENSIVE INCOME (LOSS) | (294.6 | ) | 903.6 | (1,585.3 | ) | ||||||
| COMPREHENSIVE (INCOME) LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS | .5 | (6.9 | ) | (8.9 | ) | ||||||
| COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO ENSCO | $ | (294.1 | ) | $ | 896.7 | $ | (1,594.2 | ) | |||
The accompanying notes are an integral part of these consolidated financial statements.
76
VALARIS LIMITED AND SUBSIDIARIES
(in millions)
| Successor | Predecessor | |||||||||||||||||||||||||
| Year Ended December 31, 2023 | Year Ended December 31, 2022 | Eight Months Ended December 31, 2021 | Four Months Ended April 30, 2021 | |||||||||||||||||||||||
| NET INCOME (LOSS) | $ | 866.8 | $ | 181.8 | $ | (23.6) | $ | (4,463.8) | ||||||||||||||||||
| OTHER COMPREHENSIVE INCOME (LOSS), NET | ||||||||||||||||||||||||||
| Net changes in pension and other postretirement plan assets and benefit obligations recognized in other comprehensive income (loss) | 10.8 | 23.8 | (9.1) | 0.1 | ||||||||||||||||||||||
| Reclassification of net gains on derivative instruments from other comprehensive loss into net loss | — | — | — | (5.6) | ||||||||||||||||||||||
| Other | (0.3) | — | — | — | ||||||||||||||||||||||
| NET OTHER COMPREHENSIVE INCOME (LOSS) | 10.5 | 23.8 | (9.1) | (5.5) | ||||||||||||||||||||||
| COMPREHENSIVE INCOME (LOSS) | 877.3 | 205.6 | (32.7) | (4,469.3) | ||||||||||||||||||||||
| COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | (1.4) | (5.3) | (3.8) | (3.2) | ||||||||||||||||||||||
| COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO VALARIS | $ | 875.9 | $ | 200.3 | $ | (36.5) | $ | (4,472.5) | ||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
77
VALARIS LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except share and par value amounts)
| December 31, | December 31, 2023 | December 31, 2022 | |||||||||||||||||||||||||
| ASSETS | 2017 | 2016 | |||||||||||||||||||||||||
| CURRENT ASSETS | |||||||||||||||||||||||||||
| CURRENT ASSETS | |||||||||||||||||||||||||||
| CURRENT ASSETS | |||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 445.4 | $ | 1,159.7 | |||||||||||||||||||||||
| Short-term investments | 440.0 | 1,442.6 | |||||||||||||||||||||||||
| Restricted cash | |||||||||||||||||||||||||||
| Accounts receivable, net | 345.4 | 361.0 | |||||||||||||||||||||||||
| Other | 381.2 | 316.0 | |||||||||||||||||||||||||
| Accounts receivable, net | |||||||||||||||||||||||||||
| Accounts receivable, net | |||||||||||||||||||||||||||
| Other current assets | |||||||||||||||||||||||||||
| Total current assets | 1,612.0 | 3,279.3 | |||||||||||||||||||||||||
| PROPERTY AND EQUIPMENT, AT COST | 15,332.1 | 12,992.5 | |||||||||||||||||||||||||
| Less accumulated depreciation | 2,458.4 | 2,073.2 | |||||||||||||||||||||||||
| Property and equipment, net | 12,873.7 | 10,919.3 | |||||||||||||||||||||||||
| OTHER ASSETS, NET | 140.2 | 175.9 | |||||||||||||||||||||||||
| LONG-TERM NOTES RECEIVABLE FROM ARO | |||||||||||||||||||||||||||
| INVESTMENT IN ARO | |||||||||||||||||||||||||||
| DEFERRED TAX ASSETS | |||||||||||||||||||||||||||
| OTHER ASSETS | |||||||||||||||||||||||||||
| $ | 14,625.9 | $ | 14,374.5 | ||||||||||||||||||||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||||||||||||||||||||
| CURRENT LIABILITIES | CURRENT LIABILITIES | ||||||||||||||||||||||||||
| Accounts payable - trade | $ | 432.6 | $ | 145.9 | |||||||||||||||||||||||
| Accrued liabilities and other | 325.9 | 376.6 | |||||||||||||||||||||||||
| Current maturities of long-term debt | — | 331.9 | |||||||||||||||||||||||||
| Total current liabilities | |||||||||||||||||||||||||||
| Total current liabilities | |||||||||||||||||||||||||||
| Total current liabilities | 758.5 | 854.4 | |||||||||||||||||||||||||
| LONG-TERM DEBT | 4,750.7 | 4,942.6 | |||||||||||||||||||||||||
| DEFERRED TAX LIABILITIES | |||||||||||||||||||||||||||
| OTHER LIABILITIES | 386.7 | 322.5 | |||||||||||||||||||||||||
| Total liabilities | |||||||||||||||||||||||||||
| COMMITMENTS AND CONTINGENCIES | |||||||||||||||||||||||||||
| ENSCO SHAREHOLDERS' EQUITY | |||||||||||||||||||||||||||
Class A ordinary shares, U.S. $.10 par value, 447.0 million and 310.3 million shares issued as of December 31, 2017 and 2016 | 44.7 | 31.0 | |||||||||||||||||||||||||
Class B ordinary shares, £1 par value, 50,000 shares issued as of December 31, 2017 and 2016 | .1 | .1 | |||||||||||||||||||||||||
| COMMITMENTS AND CONTINGENCIES | |||||||||||||||||||||||||||
| COMMITMENTS AND CONTINGENCIES | |||||||||||||||||||||||||||
| VALARIS SHAREHOLDERS' EQUITY | VALARIS SHAREHOLDERS' EQUITY | ||||||||||||||||||||||||||
| Common shares, $0.01 par value, 700.0 shares authorized, 75.4 and 75.2 shares issued, 72.4 and 75.2 shares outstanding as of December 31, 2023 and 2022, respectively | |||||||||||||||||||||||||||
| Common shares, $0.01 par value, 700.0 shares authorized, 75.4 and 75.2 shares issued, 72.4 and 75.2 shares outstanding as of December 31, 2023 and 2022, respectively | |||||||||||||||||||||||||||
| Common shares, $0.01 par value, 700.0 shares authorized, 75.4 and 75.2 shares issued, 72.4 and 75.2 shares outstanding as of December 31, 2023 and 2022, respectively | |||||||||||||||||||||||||||
| Preference shares, $0.01 par value, 150.0 shares authorized, no shares issued as of December 31, 2023 and 2022 | |||||||||||||||||||||||||||
| Stock warrants | |||||||||||||||||||||||||||
| Additional paid-in capital | 7,195.0 | 6,402.2 | |||||||||||||||||||||||||
| Retained earnings | 1,532.7 | 1,864.1 | |||||||||||||||||||||||||
| Accumulated other comprehensive income | 28.6 | 19.0 | |||||||||||||||||||||||||
Treasury shares, at cost, 11.1 million and 7.3 million shares as of December 31, 2017 and 2016 | (69.0 | ) | (65.8 | ) | |||||||||||||||||||||||
| Total Ensco shareholders' equity | 8,732.1 | 8,250.6 | |||||||||||||||||||||||||
| Treasury shares, at cost, 3.0 million shares as of December 31, 2023 | |||||||||||||||||||||||||||
| Total Valaris shareholders' equity | |||||||||||||||||||||||||||
| NONCONTROLLING INTERESTS | (2.1 | ) | 4.4 | ||||||||||||||||||||||||
| Total equity | 8,730.0 | 8,255.0 | |||||||||||||||||||||||||
| $ | 14,625.9 | $ | 14,374.5 | ||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
78
ENSCO PLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions) | |||||||||||
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| OPERATING ACTIVITIES | |||||||||||
| Net income (loss) | $ | (304.2 | ) | $ | 897.1 | $ | (1,585.9 | ) | |||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities of continuing operations: | |||||||||||
| Depreciation expense | 444.8 | 445.3 | 572.5 | ||||||||
| Loss on impairment | 182.9 | — | 2,746.4 | ||||||||
| Bargain purchase gain | (140.2 | ) | — | — | |||||||
| Amortization, net | (61.6 | ) | (139.7 | ) | (165.0 | ) | |||||
| Deferred income tax expense (benefit) | 55.0 | 28.7 | (158.0 | ) | |||||||
| Share-based compensation expense | 41.2 | 39.6 | 40.2 | ||||||||
| (Gain) loss on debt extinguishment | 2.6 | (287.8 | ) | 33.5 | |||||||
| Discontinued operations, net | (1.0 | ) | (8.1 | ) | 128.6 | ||||||
| Other | (25.5 | ) | (38.3 | ) | (27.9 | ) | |||||
| Changes in operating assets and liabilities, net of acquisition | 65.4 | 140.6 | 113.5 | ||||||||
| Net cash provided by operating activities of continuing operations | 259.4 | 1,077.4 | 1,697.9 | ||||||||
| INVESTING ACTIVITIES | |||||||||||
| Maturities of short-term investments | 2,042.5 | 2,212.0 | 1,357.3 | ||||||||
| Purchases of short-term investments | (1,040.0 | ) | (2,474.6 | ) | (1,780.0 | ) | |||||
| Acquisition of Atwood, net of cash acquired | (871.6 | ) | — | — | |||||||
| Additions to property and equipment | (536.7 | ) | (322.2 | ) | (1,619.5 | ) | |||||
| Net proceeds from disposition of assets | 2.8 | 9.8 | 1.6 | ||||||||
| Net cash used in investing activities of continuing operations | (403.0 | ) | (575.0 | ) | (2,040.6 | ) | |||||
| FINANCING ACTIVITIES | |||||||||||
| Reduction of long-term borrowings | (537.0 | ) | (863.9 | ) | (1,072.5 | ) | |||||
| Cash dividends paid | (13.8 | ) | (11.6 | ) | (141.2 | ) | |||||
| Debt financing costs | (12.0 | ) | (23.4 | ) | (10.5 | ) | |||||
| Proceeds from issuance of senior notes | — | 849.5 | 1,078.7 | ||||||||
| Proceeds from equity issuance | — | 585.5 | — | ||||||||
| Premium paid on redemption of debt | — | — | (30.3 | ) | |||||||
| Other | (7.7 | ) | (7.1 | ) | (16.0 | ) | |||||
| Net cash provided by (used in) financing activities | (570.5 | ) | 529.0 | (191.8 | ) | ||||||
| Net cash provided by (used in) discontinued operations | (.8 | ) | 8.4 | (8.7 | ) | ||||||
| Effect of exchange rate changes on cash and cash equivalents | .6 | (1.4 | ) | (.3 | ) | ||||||
| INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (714.3 | ) | 1,038.4 | (543.5 | ) | ||||||
| CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR | 1,159.7 | 121.3 | 664.8 | ||||||||
| CASH AND CASH EQUIVALENTS, END OF YEAR | $ | 445.4 | $ | 1,159.7 | $ | 121.3 | |||||
VALARIS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
| Successor | Predecessor | |||||||||||||||||||||||||
| Year Ended December 31, 2023 | Year Ended December 31, 2022 | Eight Months Ended December 31, 2021 | Four Months Ended April 30, 2021 | |||||||||||||||||||||||
| OPERATING ACTIVITIES | ||||||||||||||||||||||||||
| Net income (loss) | $ | 866.8 | $ | 181.8 | $ | (23.6) | $ | (4,463.8) | ||||||||||||||||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||||||||||||||||||||
| Deferred income tax expense (benefit) | (786.4) | 7.9 | (21.3) | (18.2) | ||||||||||||||||||||||
| Depreciation expense | 101.1 | 91.2 | 66.1 | 159.6 | ||||||||||||||||||||||
| Loss on extinguishment of debt | 29.2 | — | — | — | ||||||||||||||||||||||
| Net gain on sale of property | (28.6) | (141.2) | (21.2) | (6.0) | ||||||||||||||||||||||
| Accretion of discount on notes receivable from ARO | (28.3) | (44.9) | (20.8) | — | ||||||||||||||||||||||
| Share-based compensation expense | 27.3 | 17.4 | 4.3 | 4.8 | ||||||||||||||||||||||
| Equity in earnings of ARO | (13.3) | (24.5) | (6.1) | (3.1) | ||||||||||||||||||||||
| Net periodic pension and retiree medical income | (0.9) | (16.4) | (8.7) | (5.4) | ||||||||||||||||||||||
| Loss on impairment | — | 34.5 | — | 756.5 | ||||||||||||||||||||||
| Non-cash reorganization items, net | — | — | — | 3,487.3 | ||||||||||||||||||||||
| Changes in deferred costs | (26.1) | (38.8) | (34.7) | 22.2 | ||||||||||||||||||||||
| Changes in contract liabilities | 4.9 | 62.4 | 20.8 | (36.2) | ||||||||||||||||||||||
| Other | 6.7 | 8.3 | 1.6 | 7.8 | ||||||||||||||||||||||
| Changes in operating assets and liabilities | 121.8 | (6.6) | 20.0 | 77.1 | ||||||||||||||||||||||
| Contributions to pension plans and other post-retirement benefits | (6.7) | (4.1) | (2.7) | (22.5) | ||||||||||||||||||||||
| Net cash provided by (used in) operating activities | 267.5 | 127.0 | (26.3) | (39.9) | ||||||||||||||||||||||
| INVESTING ACTIVITIES | ||||||||||||||||||||||||||
| Additions to property and equipment | (696.1) | (207.0) | (50.2) | (8.7) | ||||||||||||||||||||||
| Net proceeds from disposition of assets | 30.3 | 150.3 | 25.1 | 30.1 | ||||||||||||||||||||||
| Purchases of short-term investments | — | (220.0) | — | — | ||||||||||||||||||||||
| Maturities of short-term investments | — | 220.0 | — | — | ||||||||||||||||||||||
| Repayment of note receivable from ARO | — | 40.0 | — | — | ||||||||||||||||||||||
| Net cash provided by (used in) investing activities | (665.8) | (16.7) | (25.1) | 21.4 | ||||||||||||||||||||||
| FINANCING ACTIVITIES | ||||||||||||||||||||||||||
| Issuance of Second Lien Notes | 1,103.0 | — | — | — | ||||||||||||||||||||||
| Redemption of First Lien Notes | (571.8) | — | — | — | ||||||||||||||||||||||
| Payments for share repurchases | (198.6) | — | — | — | ||||||||||||||||||||||
| Debt issuance costs | (38.6) | — | — | (1.4) | ||||||||||||||||||||||
| Payments for tax withholdings for share-based awards | (5.4) | (2.5) | — | — | ||||||||||||||||||||||
| Consent solicitation fees | — | (3.9) | — | — | ||||||||||||||||||||||
| Issuance of First Lien Notes | — | — | — | 520.0 | ||||||||||||||||||||||
| Payments to Predecessor creditors | — | — | — | (129.9) | ||||||||||||||||||||||
| Other | (3.1) | — | — | — | ||||||||||||||||||||||
| Net cash provided by (used in) financing activities | 285.5 | (6.4) | — | 388.7 | ||||||||||||||||||||||
| INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH | (112.8) | 103.9 | (51.4) | 370.2 | ||||||||||||||||||||||
| CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD | 748.5 | 644.6 | 696.0 | 325.8 | ||||||||||||||||||||||
| CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD | $ | 635.7 | $ | 748.5 | $ | 644.6 | $ | 696.0 | ||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
We are one of thea leading providersprovider of offshore contract drilling services to the international oil and gas industry.industry with operations in almost every major offshore market across six continents. We own and operate anthe world's largest offshore drilling rig fleet, of 62 rigs spanning most of the strategic markets around the globe. Our rig fleet includes 12 drillships, 11 dynamically positioned semisubmersible rigs, four moored semisubmersible rigs and 38 jackup rigs, including three rigs under construction. We operate the world's largest fleet amongst competitive rigs, including one of the newest ultra-deepwater fleets in the industry and a leading premium jackup fleet. We currently own 53 rigs, including 13 drillships, four dynamically positioned semisubmersible rigs, one moored semisubmersible rig, 35 jackup rigs and a 50% equity interest in Saudi Aramco Rowan Offshore Drilling Company ("ARO"), our 50/50 unconsolidated joint venture with Saudi Aramco, which owns an additional eight rigs.
Our customers include many of the leading nationalinternational and internationalgovernment-owned oil and gas companies, in addition to many independent operators. We are among the most geographically diverse offshore drilling companies with current operations spanning 14 countries on six continents.global operations. The markets in which we operate include the U.S. Gulf of Mexico, Brazil, the Mediterranean,South America, the North Sea, the Middle East, West Africa Australia and Southeast Asia.Asia Pacific.
We provide drilling services on a day rate contract basis. Under day rate contracts, we provide an integrated service that includes the provision of a drilling rig and rig crews for which we receive a daily rate that may vary between the full rate and zero rate throughout the duration of the contractual term. The day rate we earn can vary between the full day rate and zero rate,term, depending on the operations of the rig. We also may receive lump-sum fees or similar compensation for the mobilization, demobilization and capital upgrades of our rigs. Our customers bear substantially all of the costs of constructing the well and supporting drilling operations as well as the economic risk relative to the success of the well. In addition, our customers may pay all
Chapter 11 Cases
On August 19, 2020 (the “Petition Date”), Valaris plc (“Legacy Valaris” or a portion“Predecessor”) and certain of its direct and indirect subsidiaries (collectively, the “Debtors”) filed voluntary petitions for reorganization under chapter 11 of the costUnited States Bankruptcy Code ("Bankruptcy Code") in the Bankruptcy Court for the Southern District of moving our equipmentTexas (the "Bankruptcy Court") The Debtors obtained joint administration of their chapter 11 cases under the caption In re Valaris plc, et al., Case No. 20-34114 (MI) (the “Chapter 11 Cases”).
In connection with the Chapter 11 Cases, on and personnelprior to April 30, 2021 (the "Effective Date"), Legacy Valaris effectuated certain restructuring transactions, pursuant to which the successor company, Valaris, was formed and, through a series of transactions, Legacy Valaris transferred to a subsidiary of Valaris substantially all of the subsidiaries, and other assets, of Legacy Valaris.
References to the financial position and results of operations of the "Successor" or "Successor Company" relate to the financial position and results of operations of the Company after the Effective Date. References to the financial position and results of operations of the "Predecessor" or "Predecessor Company" refer to the financial position and results of operations of Legacy Valaris on and prior to the Effective Date. References to the “Company,” “we,” “us” or “our” in this Annual Report are to Valaris Limited, together with its consolidated subsidiaries, when referring to periods following the Effective Date, and to Legacy Valaris, together with its consolidated subsidiaries, when referring to periods prior to and including Effective Date.
80
Fresh Start Accounting
On the Effective Date, the Debtors emerged from the well site.
See “Note 2 – Chapter 11 Proceedings” and “Note 3 - Fresh Start Accounting” for additional details regarding the U.K. Companies Act 2006 ("Companies Act"), which will be prepared in accordance with Financial Reporting Standard 102, The Financial Reporting Standard applicable in the UKChapter 11 Cases and Republic of Ireland (“FRS 102”) and delivered to the Registrar of Companies in the U.K. following the annual general meeting of shareholders. The U.K. statutory accounts are expected to include an unqualified auditor’s report, which is not expected to contain any references to matters on which the auditors drew attention by way of emphasis without qualifying the report or any statements under Sections 498(2) or 498(3) of the Companies Act.fresh start accounting.
Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Ensco plc,Valaris Limited, those of our wholly-owned subsidiaries and entities in which we hold a controlling financial interest. All intercompany accounts and transactions have been eliminated. Investments in operating entities in which we have the ability to exercise significant influence, but where we do not control operating and financial policies are accounted for using the equity method. Significant influence generally exists if we have an ownership interest representing between 20% and 50% of the voting stock of the investee. We account for our interest in ARO using the equity method of accounting and only recognize our portion of equity in earnings in our consolidated financial statements. ARO is a variable interest entity; however, we are not the primary beneficiary and therefore do not consolidate ARO.
Reclassification
Certain previously reported amounts have been reclassified to conform to the current year presentation.
Pervasiveness of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires us to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the related revenues and expenses and disclosures of gain and loss contingencies as of the date of the financial statements. Actual results could differ from those estimates.
Foreign Currency Remeasurement and Translation
Our functional currency is the U.S. dollar. As is customary in the oil and gas industry, a majority of our revenues and expenses are denominated in U.S. dollars; however, a portion of the revenues earned and expenses incurred by certain of our subsidiaries are denominated in currencies other than the U.S. dollar. These transactions are remeasured in U.S. dollars based on a combination of both current and historical exchange rates. Most transaction gains and losses including certain gains and losses on our derivative instruments, are included in other,Other, net, in our consolidated statementConsolidated Statements of operations.Operations. Certain gains and losses from the translation of foreign currency balances of our non-U.S. dollar functional currency subsidiaries are included in accumulatedAccumulated other comprehensive income on our consolidated balance sheet.Consolidated Balance Sheet. Net foreign currency exchange loss was $3.5 million, and gains were $12.2 million, $8.1 million and losses, inclusive of offsetting fair value derivatives, were $5.1$13.4 million, of losses, $6.0 million of losses and $5.4 million of gains, and were included in other,Other, net, in our consolidated statementsConsolidated Statements of operationsOperations for the years ended December 31, 2017, 20162023 and 20152022, eight months ended December 31, 2021 (Successor), and four months ended April 30, 2021 (Predecessor), respectively.
81
Cash Equivalents and Short-Term Investments
Highly liquid investments with maturities of three months or less at the date of purchase are considered cash equivalents. Highly liquid investments with maturities of greater than three months but less than one year at the date of purchase are classified as short-term investments.
Property and Equipment
All costs incurred in connection with the acquisition, construction, major enhancement and improvement of assets are capitalized, including allocations of interest incurred during periods that our drilling rigs are under construction or undergoing major enhancements and improvements. Costs incurred to place an asset into service are capitalized, including costs related to the initial mobilization of a newbuild drilling rig that are not reimbursed by the customer.rig. Repair and maintenance costs are charged to contract drilling expense in the period in which they are incurred. Upon the sale or retirement of assets, the related cost and accumulated depreciation are removed from the balance sheet, and the resulting gain or loss is included in contractOther, net in our Consolidated Statements of Operations.
Upon emergence, we elected to change our accounting policies and have identified the significant components of our drilling expense, unless reclassified to discontinued operations.rigs and ascribed useful lives based on the expected time until the next required overhaul or the end of the expected economic lives of the components.
Our property and equipment is depreciated on a straight-line basis, after allowing for salvage values, over the estimated useful lives of our assets. Drilling rigs and related equipment are depreciated over estimated useful lives ranging from fourfive to 35 years. Buildings and improvements are depreciated over estimated useful lives ranging from
We evaluate the carrying value of our property and equipment, for impairment whenprimarily our drilling rigs, on a quarterly basis to identify events or changes in circumstances ("triggering events") that indicate that the carrying value of such assetsrigs may not be recoverable. For property and equipment used in our operations, recoverability generally is determined by comparing the carrying value of an asset to the expected undiscounted future cash flows of the asset. If the carrying value of an asset is not recoverable, the amount of impairment loss is measured as the difference between the carrying value of the asset and its estimated fair value. Property and equipment held-for-sale is recorded at the lower of net book value or fair value less cost to sell.
Operating Revenues and Expenses
82
Income Taxes
We conduct operations and earn income in numerous countries. Current income taxes are recognized for the amount of taxes payable or refundable based on the laws and income tax rates in the taxing jurisdictions in which operations are conducted and income is earned.
Deferred tax assets and liabilities are recognized for the anticipated future tax effects of temporary differences between the financial statement basis and the tax basis of our assets and liabilities using the enacted tax rates in effect at year-end. A valuation allowance for deferred tax assets is recorded when it is more-likely-than-not that the benefit from the deferred tax asset will not be realized. We do not offset deferred tax assets and deferred tax liabilities attributable to different tax paying jurisdictions.
We operate in certain jurisdictions where tax laws relating to the offshore drilling industry are not well developed and change frequently. Furthermore, we may enter into transactions with affiliates or employ other tax planning strategies that generally are subject to complex tax regulations. As a result of the foregoing, the tax liabilities and assets we recognize in our financial statements may differ from the tax positions taken, or expected to be taken, in our tax returns. Our tax positions are evaluated for recognition as unrecognized tax benefits using a more-likely-than-not threshold, and those tax positions requiring recognition are measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon effective settlement with a taxing authority that has full knowledge of all relevant information. Interest and penalties relating to income taxes are included in currentCurrent income tax expense in our consolidated statementConsolidated Statements of operations.Operations.
Our drilling rigs frequently move from one taxing jurisdiction to another based on where they are contracted to perform drilling services. The movement of drilling rigs among taxing jurisdictions may involve a transfer of drilling rig ownership among our subsidiaries (“through an intercompany rig sale”).sale. The pre-tax profit resulting from an intercompany rig sale is eliminated from our consolidated financial statements, and the carrying value of a rig sold in an intercompany transaction remains at historical net depreciated cost prior to the transaction. Our consolidated financial statements do not reflect the asset disposition transaction of the selling subsidiary or the asset acquisition transaction of the acquiring subsidiary. Prior to our adoption of Accounting Standards Update 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (“Update 2016-16”) on January 1, 2017, income taxes resulting from an intercompany rig sale, as well as the tax effect of any reversing temporary differences resulting from the sale, were deferred and amortized on a straight-line basis over the remaining useful life of the rig. Subsequent to our adoption of Update 2016-16, theThe income tax effects resulting from intercompany rig sales are recognized in earnings in the period in which the sale occurs.
In some instances, we may determine that certain temporary differences will not result in a taxable or deductible amount in future years, as it is more-likely-than-not we will commence operations and depart from a given taxing jurisdiction without such temporary differences being recovered or settled. Under these circumstances, no future tax consequences are expected and no deferred taxes are recognized in connection with such operations. We evaluate these determinations on a periodic basis and, in the event our expectations relative to future tax consequences change, the applicable deferred taxes are recognized or derecognized.
We do not provide deferred taxes on the undistributed earnings of certain subsidiaries because our policy and intention is to reinvest such earnings indefinitely. The U.S. Tax Cuts and Jobs Act (“U.S. tax reform”) was enacted on December 22, 2017 and introduced significant changes to U.S. income tax law, includingShould we make a reductiondistribution from these subsidiaries in the statutoryform of dividends or otherwise, we may be subject to additional income tax rate from 35% to 21% effective January 1, 2018, a base erosion anti-abuse tax that effectively imposes a minimum tax on certain payments to non-U.S. affiliates and new and revised rules relating to the current taxation of certain income of foreign subsidiaries. See "Note 10 - Income Taxes" for additional information.taxes.
Share-Based Compensation
We sponsor share-based compensation plans that provide equity compensation to our key employees, officers and non-employee directors. Our Long-Term2021 Management Incentive Plan (the “2012 LTIP”“MIP”) allows our Boardboard of Directorsdirectors to authorize shareequity-based grants to be settled in cash, shares or shares.a combination of shares and cash. Compensation expense for sharetime-based equity awards to be settled in shares is measured at fair value on the date of grant and recognized on a straight-line basis over the requisite service period (usually the vesting period). Compensation expense for shareperformance awards is recognized over the requisite service period using the accelerated method and is reduced for forfeited awards in the period in which the forfeitures occur. For our performance awards that cliff vest and require the employee to render service through the vesting date, even though attainment of performance objectives might be earlier, our expense under the accelerated method would be a ratable expense over
83
the vesting period. Equity settled performance awards generally vest at the end of a three-year measurement period based on attainment of performance goals. The estimated probable outcome of attainment of the specified performance goals is based primarily on relative performance over the requisite performance period. Any subsequent changes in cash is remeasured each quarter withthis estimate as it relates to performance objectives are recognized as a cumulative adjustment to compensation cost duringin the period in which the change in estimate occurs, except in the case of objectives based on changes ina market condition, such as our sharestock price. Compensation cost for awards based on a market performance objective is recognized as long as the requisite service period is completed and will not be reversed even if the market-based objective is never satisfied. Any adjustments to the compensation cost recognized in our consolidated statementConsolidated Statements of operationsOperations for awards that are forfeited are recognized in the period in which the forfeitures occur. See "Note 8"Note 10 - Benefit Plans"Share Based Compensation" for additional information on our share-based compensation.
Pension and Other Post-retirement Benefit Plans
We measure our actuarially determined obligations and related costs for our defined benefit pension and other post-retirement plans, retiree life and medical supplemental plan benefits by applying assumptions, the most significant of which include long-term rate of return on plan assets, discount rates and mortality rates. For the long-term rate of return, we develop our assumptions regarding the expected rate of return on plan assets based on historical experience and projected long-term investment returns, and we weight the assumptions based on each plan's asset allocation. For the discount rate, we base our assumptions on a yield curve approach. Actual results may differ from the assumptions included in these calculations. If gains or losses exceed 10% of the greater of the plan assets or plan liabilities, we amortize such gains or losses into income over either the period of expected future service of active participants, or over the expected average remaining lifetime of all participants. We recognize gains or losses related to plan curtailments at the date the plan amendment or termination is adopted which may precede the effective date.
Fair Value Measurements
We measure certain of our assets and liabilities based on a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy assigns the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities ("Level 1") and the lowest priority to unobservable inputs ("Level 3"). Level 2 measurements represent inputs that are observable for similar assets or liabilities, either directly or indirectly, other than quoted prices included within Level 1. See "Note 3"Note 6 - Fair Value Measurements" for additional information on the fair value measurement of certain of our assets and liabilities.
Noncontrolling Interests
Third parties hold a noncontrolling ownership interest in certain of our non-U.S. subsidiaries. Noncontrolling interests are classified as equity on our consolidated balance sheetConsolidated Balance Sheet, and net income attributable to noncontrolling interests is presented separately in our consolidated statementConsolidated Statements of operations.
Cancellation of Predecessor Equity and Issuance of Warrants
On the Effective Date and pursuant to Enscothe plan of reorganization, the Legacy Valaris Class A ordinary shares were cancelled and all agreements, instruments and other documents evidencing, relating or otherwise connected with any of Legacy Valaris' equity interests outstanding prior to the Effective Date, including all equity-based awards, were also cancelled. Also, in accordance with the plan of reorganization, the Company issued 5.6 million warrants (the "Warrants") to the former holders of Legacy Valaris' equity to purchase common shares of Valaris Limited with a nominal value of $0.01 per share (the "Common Shares"). The Warrants are exercisable for one Common Share per Warrant at an initial exercise price of $131.88 per Warrant, in each case as may be adjusted from time to time pursuant to the applicable warrant agreement. The Warrants are exercisable for a period of theseven years in the three-year period ended December 31, 2017 was as follows (in millions):
and will expire on April 29, 2028.
84
| 2017 | 2016 | 2015 | |||||||||
| Income (loss) from continuing operations | $ | (305.2 | ) | $ | 889.0 | $ | (1,457.3 | ) | |||
| (Income) loss from continuing operations attributable to noncontrolling interests | .5 | (6.9 | ) | (8.8 | ) | ||||||
| Income (loss) from continuing operations attributable to Ensco | $ | (304.7 | ) | $ | 882.1 | $ | (1,466.1 | ) | |||
| 2017 | 2016 | 2015 | |||||||||
| Income (loss) from discontinued operations | $ | 1.0 | $ | 8.1 | $ | (128.6 | ) | ||||
| Income from discontinued operations attributable to noncontrolling interests | — | — | (.1 | ) | |||||||
| Income (loss) from discontinued operations attributable to Ensco | $ | 1.0 | $ | 8.1 | $ | (128.7 | ) | ||||
Earnings Per Share
outstanding used in our computation of diluted EPS is calculated using the treasury stock method and for the Successor includes the effect of all potentially dilutive performancestock equivalents, including warrants, restricted stock unit awards and excludes non-vested shares. In each ofperformance stock unit awards and for the years in the three-year period ended December 31, 2017, our potentially dilutive instruments were notPredecessor included in the computation of diluted EPS as the effect of including these shares in the calculation would have been anti-dilutive.all potentially dilutive stock options and excluded non-vested shares.
The following table is a reconciliation of income (loss) from continuing operations attributable to Enscothe weighted-average shares used in our basic and diluted EPS computations for each of the years in the three-year period ended December 31, 20172023 and 2022, eight months ended December 31, 2021 (Successor), and four months ended April 30, 2021 (Predecessor) (in millions):
| Successor | Predecessor | |||||||||||||||||||||||||
| Year Ended December 31, 2023 | Year Ended December 31, 2022 | Eight Months Ended December 31, 2021 | Four Months Ended April 30, 2021 | |||||||||||||||||||||||
| Income (loss) attributable to our shares | $ | 865.4 | $ | 176.5 | $ | (27.4) | $ | (4,467.0) | ||||||||||||||||||
| Weighted average shares outstanding: | ||||||||||||||||||||||||||
| Basic | 74.1 | 75.1 | 75.0 | 199.6 | ||||||||||||||||||||||
| Effect of stock equivalents | 1.1 | 0.5 | — | — | ||||||||||||||||||||||
| Diluted | 75.2 | 75.6 | 75.0 | 199.6 | ||||||||||||||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Income (loss) from continuing operations attributable to Ensco | $ | (304.7 | ) | $ | 882.1 | $ | (1,466.1 | ) | |||
| Income from continuing operations allocated to non-vested share awards | (.4 | ) | (16.6 | ) | (2.0 | ) | |||||
| Income (loss) from continuing operations attributable to Ensco shares | $ | (305.1 | ) | $ | 865.5 | $ | (1,468.1 | ) | |||
Anti-dilutive share awards totaling 2.0 million, 500,000147,000 and 800,000192,000 were excluded from the computation of diluted EPS for the yearsyear ended December 31, 2017, 20162023 and 2015,2022 (Successor), respectively.
Due to the net loss position, anti-dilutive shares totaling 600,000 and 300,000, for the eight months ended December 31, 2021 (Successor) and the four months ended April 30, 2021 (Predecessor), respectively, were excluded from the computation of diluted EPS.
The Predecessor previously had convertible senior notes due 2024 (the "2024 Convertible Notes"). See "Note 5 - Debt" for additional information on this issuance. We havewhich we had the option to settle the notes in cash, shares or a combination thereof for the aggregate amount due upon conversion. Our intent isOn the Effective Date, pursuant to settle the principal amountplan of reorganization, all outstanding obligations under the 2024 Convertible Notes were cancelled and the holders thereunder received the treatment as set forth in cash upon conversion. If the conversion value exceedsplan of reorganization. However, if the principal amount (i.e., ourLegacy Valaris average share price exceedshad exceeded the exchange price on the date of conversion), we expect to deliver shares equal to the remainder of our conversion obligation in excess of the principal amount.
85
Upon emergence, we elected to change our accounting policies and have identified the significant components of our drilling rigs and ascribed useful lives based on the expected time until the next required overhaul or the end of the expected economic lives of the components.
The judgments and assumptions used in determining the next overhaul or the economic lives of the components of our property and equipment reflect both historical experience and expectations regarding future operations, utilization and performance of our assets. The use of different estimates, judgments and assumptions in the establishment of our property and equipment accounting policies, especially those involving the useful lives of the significant components our rigs, would likely result in materially different asset carrying values and operating results.
The useful lives of our drilling rig components are difficult to estimate due to a variety of factors, including technological advances that impact the methods or cost of oil and natural gas exploration and development, changes in market or economic conditions and changes in laws or regulations affecting the drilling industry. We evaluate the remaining useful lives of our rig components on a periodic basis, considering operating condition, functional capability and market and economic factors.
67
Property and equipment held-for-sale is recorded at the lower of net book value or fair value less cost to sell.
Our fleet of 18 floater rigs represented 62% of the gross cost and 63% of the net carrying amount of our depreciable property and equipment as of December 31, 2023. Our fleet of 35 jackup rigs represented 34% of the gross cost and 33% of the net carrying amount of our depreciable property and equipment as of December 31, 2023.
Income Taxes (Topic 740): Intra-Entity Transfers
We conduct operations and earn income in numerous countries and are subject to the laws of Assets Other Than Inventory (“Update 2016-16”), which requires entities to recognize thenumerous tax jurisdictions. As of December 31, 2023, our Consolidated Balance Sheet included a $825.2 million net deferred income tax consequencesasset, a $36.6 million liability for income taxes currently payable and a $224.0 million liability for unrecognized tax benefits, inclusive of an intra-entity transferinterest and penalties.
The carrying values of an asset other than inventory whendeferred income tax assets and liabilities reflect the transaction occursapplication of our income tax accounting policies and are based on estimates, judgments and assumptions regarding future operating results and levels of taxable income. Carryforwards and tax credits are assessed for realization as opposed to deferringa reduction of future taxable income by using a more-likely-than-not determination. We do not offset deferred tax consequencesassets and amortizing them into future periods. We adopted Update 2016-16 on a modified retrospective basis effective January 1, 2017. As a result of modified retrospective application, we reduced prepaid taxes on intercompany transfers of property and related deferred tax liabilities resulting in the recognition of a cumulative-effect reduction in retained earnings of $14.1 million on our consolidated balance sheet as of January 1, 2017.attributable to different tax paying jurisdictions.
The carrying values of liabilities for income taxes currently payable and unrecognized tax benefits are based on our interpretation of applicable tax laws and incorporate estimates, judgments and assumptions regarding the use of tax planning strategies in various taxing jurisdictions. The use of different estimates, judgments and assumptions in connection with accounting for income taxes, especially those involving the deployment of tax planning strategies, may result in materially different carrying values of income tax assets and liabilities and operating results.
We operate in several jurisdictions where tax laws relating to the offshore drilling industry are not well developed. In jurisdictions where available statutory law and regulations are incomplete or underdeveloped, we doobtain professional guidance and consider existing industry practices before utilizing tax planning strategies and meeting our tax obligations. Our tax positions are evaluated for recognition using a more-likely-than-not threshold, and those tax positions requiring recognition are measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon effective settlement with a taxing authority that has full knowledge of all relevant information.
Tax returns are routinely subject to audit in most jurisdictions and tax liabilities occasionally are finalized through a negotiation process. In some jurisdictions, income tax payments may be required before a final income tax obligation is determined in order to avoid significant penalties and/or interest. While we historically have not expect aexperienced significant changeadjustments to our pattern of revenue recognition as compared to current GAAP. However,previously recognized tax assets and liabilities as a result of finalizing tax returns, there can be no assurance that significant adjustments will not arise in the adoptionfuture. In addition, there are several factors that could cause the future level of Update 2016-12,uncertainty relating to our tax liabilities to increase, including the following:
•During recent years, the number of tax jurisdictions in which we willconduct operations has increased.
•In order to utilize tax planning strategies and conduct operations efficiently, our subsidiaries frequently enter into transactions with affiliates that are generally subject to complex tax regulations and are frequently reviewed and challenged by tax authorities.
68
•We may conduct future operations in certain tax jurisdictions where tax laws are not well developed, and it may be requireddifficult to present increased disclosuressecure adequate professional guidance.
•Tax laws, regulations, agreements, treaties and the administrative practices and precedents of tax authorities change frequently, requiring us to modify existing tax strategies to conform to such changes.
Pension and Other Postretirement Benefits
Our pension and other postretirement benefit liabilities and costs are based upon actuarial computations that reflect our assumptions about future events, including long-term asset returns, interest rates, annual compensation increases, mortality rates and other factors. Key assumptions at December 31, 2023, included (1) a weighted average discount rate of 4.97% to determine pension benefit obligations, (2) a weighted average discount rate of 5.21% to determine net periodic pension cost and (3) an expected long-term rate of return on pension plan assets of 7.10% to determine net periodic pension cost. The assumed discount rate is based upon the average yield for either Moody’s or Standard & Poor's Aa-rated corporate bonds, and the rate of return assumption reflects a probability distribution of expected long-term returns that is weighted based upon plan asset allocations.
Using our key assumptions at December 31, 2023, a one-percentage-point decrease in the assumed discount rate would increase our recorded pension and other postretirement benefit liabilities by approximately $60.1 million, while a one-percentage-point decrease (increase) in the expected long-term rate of return on plan assets would increase (decrease) annual net benefits cost by approximately $4.4 million. To develop the expected long-term rate of return on assets assumption, we considered the current level of expected returns on risk-free investments (primarily government bonds), the historical level of the naturerisk premium associated with the plans’ other asset classes, and the expectations for future returns of our leasing arrangements as well as certain other qualitativeeach asset class. The expected return for each asset class was then weighted based upon the current asset allocation to develop the expected long-term rate of return on assets assumption for the plan, which decreased to 6.88% at December 31, 2023 from 7.10% at December 31, 2022. See "Note 11 - Pension and quantitative disclosures. With respect to leases whereby we are the lessee, we expect to recognize lease liabilities and offsetting "right of use" assets ranging from approximately $70 million to $90 million.
NEW ACCOUNTING PRONOUNCEMENTS
See "Note 1 - Description of the Business and Summary of Significant Accounting Policies" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for information on new accounting pronouncements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Information required under this Item 7A. has been incorporated herein from "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Market Risk."
69
Item 8. Financial Statements and Supplementary Data
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) or 15d-15(f). Our internal control over financial reporting system is designed to provide reasonable assurance as to the reliability of our financial reporting and the preparation and presentation of consolidated financial statements in accordance with accounting principles generally accepted in the United States, as well as to safeguard assets from unauthorized use or disposition. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, we have conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, we have concluded that our internal control over financial reporting is effective as of December 31, 2023 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
KPMG LLP, the independent registered public accounting firm who audited our consolidated financial statements, has issued an audit report on our internal control over financial reporting. KPMG LLP's audit report on our internal control over financial reporting is included herein.
70
REPORT OF ATWOODINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Plan of Merger (the “Merger Agreement”) with Atwood and Echo Merger Sub, LLC, our wholly-owned subsidiary, and on October 6, 2017 (the "Merger Date"), we completed our acquisition of Atwood pursuant to the Merger Agreement (the “Merger”). Atwood’s financial results are included in our consolidated results beginningShareholders
Valaris Limited:
Opinion on the Merger Date.Consolidated Financial Statements
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 22, 2024 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis of Presentation
As discussed in Note 1 to the consolidated financial statements, on March 3, 2021, the Bankruptcy Court for the Southern District of Texas entered an order confirming the Company’s plan for reorganization under Chapter 11, which became effective on April 30, 2021. Accordingly, the accompanying consolidated financial statements as of December 31, 2023 and 2022 and for the Successor periods have been prepared in conformity with Accounting Standards Codification 852, Reorganization, with the Company’s assets, liabilities, and capital structure having carrying amounts not comparable to prior years.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
71
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were $23.3communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Income tax positions pertaining to certain tax transactions
As discussed in Notes 1 and 12 to the consolidated financial statements, the Company evaluated the income tax effect of certain transactions which often requires local country tax expertise and judgment. This requires the Company to interpret complex tax laws in multiple jurisdictions to assess whether its tax positions have a more than 50 percent likelihood of being sustained with the taxing authorities.
We identified the assessment of income tax positions pertaining to certain tax transactions as a critical audit matter. Complex auditor judgment was required to evaluate the Company’s assessment that certain tax positions have a more than 50 percent likelihood of being sustained with the taxing authorities. In addition, specialized skills and knowledge were required to evaluate the Company’s interpretation of tax laws in the applicable jurisdictions.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s income tax process. This included controls related to the interpretation of tax laws applicable to certain transactions and the assessment that tax positions pertaining to those transactions have a more than 50 percent likelihood of being sustained with taxing authorities. We involved tax professionals with specialized skills and knowledge, who assisted on evaluating the Company’s interpretation of local tax laws and assessment of whether tax positions had a greater than 50 percent likelihood of being sustained with taxing authorities.
Realizability of certain deferred tax assets
As discussed in Notes 1 and 12 to the consolidated financial statements, the Company recognizes a valuation allowance for deferred tax assets if, based on the weight of all available evidence, it is more-likely-than-not that the benefit from the deferred tax asset will not be realized. The realization of deferred tax assets is dependent upon generating sufficient taxable income during future periods in the jurisdictions it operates. As of December 31, 2023, the Company had recorded a valuation allowance of $4.2 billion on deferred tax assets. During the year ended December 31, 2023, the Company released $799.5 million of the valuation allowance recognized related to deferred tax assets.
We identified the evaluation of the realizability of certain deferred tax assets as a critical audit matter. A high degree of subjective auditor judgment was required due to (1) the significant judgment made by the Company in assessing the ability to realize the deferred tax assets and whether a valuation allowance was necessary considering the availability of forecasted income and (2) the subjective nature of the sources of possible future income used in the Company's assessment and the key assumptions used in the estimation of such future income, specifically forecasted revenue, contract drilling expenses and shore-based expenses.
72
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company's process to assess the realizability of certain deferred tax assets, including controls over the key assumptions used in the determination of forecasted income. We evaluated available positive and negative evidence used in the Company's assessment of whether certain deferred tax assets were more like than not to be realized in the future. We evaluated the reasonableness of the revenue, contract drilling expenses and shore-based expenses assumptions used in determining forecasted income for consistency with historical amounts, economic trends and industry data. We involved tax professionals with specialized skills and knowledge, who assisted in the application of tax laws in the performance of these procedures.
/s/ KPMG LLP
We have served as the Company’s auditor since 2002.
Houston, Texas
February 22, 2024
73
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Valaris Limited:
Opinion on Internal Control Over Financial Reporting
We have audited Valaris Limited and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income (loss), and cash flows for each of the years in the two-year period ended December 31, 2023 and for the period from May 1, 2021 to December 31, 2021 (Successor periods) and for the period from January 1, 2021 to April 30, 2021 (Predecessor period), and the related notes (collectively, the consolidated financial statements), and our report dated February 22, 2024 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
74
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Houston, Texas
February 22, 2024
75
VALARIS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
| Successor | Predecessor | |||||||||||||||||||||||||
| Year Ended December 31, 2023 | Year Ended December 31, 2022 | Eight Months Ended December 31, 2021 | Four Months Ended April 30, 2021 | |||||||||||||||||||||||
| OPERATING REVENUES | $ | 1,784.2 | $ | 1,602.5 | $ | 835.0 | $ | 397.4 | ||||||||||||||||||
| OPERATING EXPENSES | ||||||||||||||||||||||||||
| Contract drilling (exclusive of depreciation) | 1,543.6 | 1,383.2 | 724.1 | 343.8 | ||||||||||||||||||||||
| Loss on impairment | — | 34.5 | — | 756.5 | ||||||||||||||||||||||
| Depreciation | 101.1 | 91.2 | 66.1 | 159.6 | ||||||||||||||||||||||
| General and administrative | 99.3 | 80.9 | 58.2 | 30.7 | ||||||||||||||||||||||
| Total operating expenses | 1,744.0 | 1,589.8 | 848.4 | 1,290.6 | ||||||||||||||||||||||
| EQUITY IN EARNINGS OF ARO | 13.3 | 24.5 | 6.1 | 3.1 | ||||||||||||||||||||||
| OPERATING INCOME (LOSS) | 53.5 | 37.2 | (7.3) | (890.1) | ||||||||||||||||||||||
| OTHER INCOME (EXPENSE) | ||||||||||||||||||||||||||
| Interest income | 101.4 | 65.5 | 28.5 | 3.6 | ||||||||||||||||||||||
| Interest expense, net (Unrecognized contractual interest expense for debt subject to compromise was $132.9 million for the four months ended April 30, 2021) | (68.9) | (45.3) | (31.0) | (2.4) | ||||||||||||||||||||||
| Reorganization items, net | — | (2.4) | (15.5) | (3,584.6) | ||||||||||||||||||||||
| Other, net | (1.8) | 169.9 | 38.1 | 25.9 | ||||||||||||||||||||||
| 30.7 | 187.7 | 20.1 | (3,557.5) | |||||||||||||||||||||||
| INCOME (LOSS) BEFORE INCOME TAXES | 84.2 | 224.9 | 12.8 | (4,447.6) | ||||||||||||||||||||||
| PROVISION (BENEFIT) FOR INCOME TAXES | ||||||||||||||||||||||||||
| Current income tax expense | 3.8 | 35.2 | 57.7 | 34.4 | ||||||||||||||||||||||
| Deferred income tax expense (benefit) | (786.4) | 7.9 | (21.3) | (18.2) | ||||||||||||||||||||||
| (782.6) | 43.1 | 36.4 | 16.2 | |||||||||||||||||||||||
| NET INCOME (LOSS) | 866.8 | 181.8 | (23.6) | (4,463.8) | ||||||||||||||||||||||
| NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | (1.4) | (5.3) | (3.8) | (3.2) | ||||||||||||||||||||||
| NET INCOME (LOSS) ATTRIBUTABLE TO VALARIS | $ | 865.4 | $ | 176.5 | $ | (27.4) | $ | (4,467.0) | ||||||||||||||||||
| EARNINGS (LOSS) PER SHARE | ||||||||||||||||||||||||||
| Basic | $ | 11.68 | $ | 2.35 | $ | (0.37) | $ | (22.38) | ||||||||||||||||||
| Diluted | $ | 11.51 | $ | 2.33 | $ | (0.37) | $ | (22.38) | ||||||||||||||||||
| WEIGHTED-AVERAGE SHARES OUTSTANDING | ||||||||||||||||||||||||||
| Basic | 74.1 | 75.1 | 75.0 | 199.6 | ||||||||||||||||||||||
| Diluted | 75.2 | 75.6 | 75.0 | 199.6 | ||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
76
VALARIS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
| Successor | Predecessor | |||||||||||||||||||||||||
| Year Ended December 31, 2023 | Year Ended December 31, 2022 | Eight Months Ended December 31, 2021 | Four Months Ended April 30, 2021 | |||||||||||||||||||||||
| NET INCOME (LOSS) | $ | 866.8 | $ | 181.8 | $ | (23.6) | $ | (4,463.8) | ||||||||||||||||||
| OTHER COMPREHENSIVE INCOME (LOSS), NET | ||||||||||||||||||||||||||
| Net changes in pension and other postretirement plan assets and benefit obligations recognized in other comprehensive income (loss) | 10.8 | 23.8 | (9.1) | 0.1 | ||||||||||||||||||||||
| Reclassification of net gains on derivative instruments from other comprehensive loss into net loss | — | — | — | (5.6) | ||||||||||||||||||||||
| Other | (0.3) | — | — | — | ||||||||||||||||||||||
| NET OTHER COMPREHENSIVE INCOME (LOSS) | 10.5 | 23.8 | (9.1) | (5.5) | ||||||||||||||||||||||
| COMPREHENSIVE INCOME (LOSS) | 877.3 | 205.6 | (32.7) | (4,469.3) | ||||||||||||||||||||||
| COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | (1.4) | (5.3) | (3.8) | (3.2) | ||||||||||||||||||||||
| COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO VALARIS | $ | 875.9 | $ | 200.3 | $ | (36.5) | $ | (4,472.5) | ||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
77
VALARIS LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except par value amounts)
| December 31, 2023 | December 31, 2022 | |||||||||||||
| ASSETS | ||||||||||||||
| CURRENT ASSETS | ||||||||||||||
| Cash and cash equivalents | $ | 620.5 | $ | 724.1 | ||||||||||
| Restricted cash | 15.2 | 24.4 | ||||||||||||
| Accounts receivable, net | 459.3 | 449.1 | ||||||||||||
| Other current assets | 177.2 | 148.6 | ||||||||||||
| Total current assets | 1,272.2 | 1,346.2 | ||||||||||||
| PROPERTY AND EQUIPMENT, AT COST | 1,889.0 | 1,134.5 | ||||||||||||
| Less accumulated depreciation | 255.2 | 157.3 | ||||||||||||
| Property and equipment, net | 1,633.8 | 977.2 | ||||||||||||
| LONG-TERM NOTES RECEIVABLE FROM ARO | 282.3 | 254.0 | ||||||||||||
| INVESTMENT IN ARO | 124.4 | 111.1 | ||||||||||||
| DEFERRED TAX ASSETS | 855.1 | 55.1 | ||||||||||||
| OTHER ASSETS | 154.4 | 116.7 | ||||||||||||
| $ | 4,322.2 | $ | 2,860.3 | |||||||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||||||||
| CURRENT LIABILITIES | ||||||||||||||
| Accounts payable - trade | $ | 400.1 | $ | 256.5 | ||||||||||
| Accrued liabilities and other | 344.2 | 247.9 | ||||||||||||
| Total current liabilities | 744.3 | 504.4 | ||||||||||||
| LONG-TERM DEBT | 1,079.3 | 542.4 | ||||||||||||
| DEFERRED TAX LIABILITIES | 29.9 | 16.1 | ||||||||||||
| OTHER LIABILITIES | 471.7 | 499.5 | ||||||||||||
| Total liabilities | 2,325.2 | 1,562.4 | ||||||||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||||||||
| VALARIS SHAREHOLDERS' EQUITY | ||||||||||||||
| Common shares, $0.01 par value, 700.0 shares authorized, 75.4 and 75.2 shares issued, 72.4 and 75.2 shares outstanding as of December 31, 2023 and 2022, respectively | 0.8 | 0.8 | ||||||||||||
| Preference shares, $0.01 par value, 150.0 shares authorized, no shares issued as of December 31, 2023 and 2022 | — | — | ||||||||||||
| Stock warrants | 16.4 | 16.4 | ||||||||||||
| Additional paid-in capital | 1,119.8 | 1,097.9 | ||||||||||||
| Retained earnings | 1,025.5 | 160.1 | ||||||||||||
| Accumulated other comprehensive income | 25.2 | 14.7 | ||||||||||||
| Treasury shares, at cost, 3.0 million shares as of December 31, 2023 | (200.1) | — | ||||||||||||
| Total Valaris shareholders' equity | 1,987.6 | 1,289.9 | ||||||||||||
| NONCONTROLLING INTERESTS | 9.4 | 8.0 | ||||||||||||
| Total equity | 1,997.0 | 1,297.9 | ||||||||||||
| $ | 4,322.2 | $ | 2,860.3 | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
78
VALARIS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
| Successor | Predecessor | |||||||||||||||||||||||||
| Year Ended December 31, 2023 | Year Ended December 31, 2022 | Eight Months Ended December 31, 2021 | Four Months Ended April 30, 2021 | |||||||||||||||||||||||
| OPERATING ACTIVITIES | ||||||||||||||||||||||||||
| Net income (loss) | $ | 866.8 | $ | 181.8 | $ | (23.6) | $ | (4,463.8) | ||||||||||||||||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||||||||||||||||||||
| Deferred income tax expense (benefit) | (786.4) | 7.9 | (21.3) | (18.2) | ||||||||||||||||||||||
| Depreciation expense | 101.1 | 91.2 | 66.1 | 159.6 | ||||||||||||||||||||||
| Loss on extinguishment of debt | 29.2 | — | — | — | ||||||||||||||||||||||
| Net gain on sale of property | (28.6) | (141.2) | (21.2) | (6.0) | ||||||||||||||||||||||
| Accretion of discount on notes receivable from ARO | (28.3) | (44.9) | (20.8) | — | ||||||||||||||||||||||
| Share-based compensation expense | 27.3 | 17.4 | 4.3 | 4.8 | ||||||||||||||||||||||
| Equity in earnings of ARO | (13.3) | (24.5) | (6.1) | (3.1) | ||||||||||||||||||||||
| Net periodic pension and retiree medical income | (0.9) | (16.4) | (8.7) | (5.4) | ||||||||||||||||||||||
| Loss on impairment | — | 34.5 | — | 756.5 | ||||||||||||||||||||||
| Non-cash reorganization items, net | — | — | — | 3,487.3 | ||||||||||||||||||||||
| Changes in deferred costs | (26.1) | (38.8) | (34.7) | 22.2 | ||||||||||||||||||||||
| Changes in contract liabilities | 4.9 | 62.4 | 20.8 | (36.2) | ||||||||||||||||||||||
| Other | 6.7 | 8.3 | 1.6 | 7.8 | ||||||||||||||||||||||
| Changes in operating assets and liabilities | 121.8 | (6.6) | 20.0 | 77.1 | ||||||||||||||||||||||
| Contributions to pension plans and other post-retirement benefits | (6.7) | (4.1) | (2.7) | (22.5) | ||||||||||||||||||||||
| Net cash provided by (used in) operating activities | 267.5 | 127.0 | (26.3) | (39.9) | ||||||||||||||||||||||
| INVESTING ACTIVITIES | ||||||||||||||||||||||||||
| Additions to property and equipment | (696.1) | (207.0) | (50.2) | (8.7) | ||||||||||||||||||||||
| Net proceeds from disposition of assets | 30.3 | 150.3 | 25.1 | 30.1 | ||||||||||||||||||||||
| Purchases of short-term investments | — | (220.0) | — | — | ||||||||||||||||||||||
| Maturities of short-term investments | — | 220.0 | — | — | ||||||||||||||||||||||
| Repayment of note receivable from ARO | — | 40.0 | — | — | ||||||||||||||||||||||
| Net cash provided by (used in) investing activities | (665.8) | (16.7) | (25.1) | 21.4 | ||||||||||||||||||||||
| FINANCING ACTIVITIES | ||||||||||||||||||||||||||
| Issuance of Second Lien Notes | 1,103.0 | — | — | — | ||||||||||||||||||||||
| Redemption of First Lien Notes | (571.8) | — | — | — | ||||||||||||||||||||||
| Payments for share repurchases | (198.6) | — | — | — | ||||||||||||||||||||||
| Debt issuance costs | (38.6) | — | — | (1.4) | ||||||||||||||||||||||
| Payments for tax withholdings for share-based awards | (5.4) | (2.5) | — | — | ||||||||||||||||||||||
| Consent solicitation fees | — | (3.9) | — | — | ||||||||||||||||||||||
| Issuance of First Lien Notes | — | — | — | 520.0 | ||||||||||||||||||||||
| Payments to Predecessor creditors | — | — | — | (129.9) | ||||||||||||||||||||||
| Other | (3.1) | — | — | — | ||||||||||||||||||||||
| Net cash provided by (used in) financing activities | 285.5 | (6.4) | — | 388.7 | ||||||||||||||||||||||
| INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH | (112.8) | 103.9 | (51.4) | 370.2 | ||||||||||||||||||||||
| CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD | 748.5 | 644.6 | 696.0 | 325.8 | ||||||||||||||||||||||
| CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD | $ | 635.7 | $ | 748.5 | $ | 644.6 | $ | 696.0 | ||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
79
VALARIS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
We are a leading provider of offshore contract drilling services to the international oil and gas industry with operations in almost every major offshore market across six continents. We own the world's largest offshore drilling rig fleet, including one of the newest ultra-deepwater fleets in the industry and a leading premium jackup fleet. We currently own 53 rigs, including 13 drillships, four dynamically positioned semisubmersible rigs, one moored semisubmersible rig, 35 jackup rigs and a 50% equity interest in Saudi Aramco Rowan Offshore Drilling Company ("ARO"), our 50/50 unconsolidated joint venture with Saudi Aramco, which owns an additional eight rigs.
Our customers include many of the leading international and government-owned oil and gas companies, in addition to many independent operators. We are among the most geographically diverse offshore drilling companies with global operations. The markets in which we operate include the Gulf of Mexico, South America, the North Sea, the Middle East, Africa and Asia Pacific.
We provide drilling services on a day rate contract basis. Under day rate contracts, we provide an integrated service that includes the provision of a drilling rig and rig crews for which we receive a daily rate that may vary between the full rate and zero rate throughout the duration of the contractual term, depending on the operations of the rig. We also may receive lump-sum fees or similar compensation for the mobilization, demobilization and capital upgrades of our rigs. Our customers bear substantially all of the costs of constructing the well and supporting drilling operations as well as the economic risk relative to the success of the well.
Chapter 11 Cases
On August 19, 2020 (the “Petition Date”), Valaris plc (“Legacy Valaris” or “Predecessor”) and certain of its direct and indirect subsidiaries (collectively, the “Debtors”) filed voluntary petitions for reorganization under chapter 11 of the United States Bankruptcy Code ("Bankruptcy Code") in the Bankruptcy Court for the Southern District of Texas (the "Bankruptcy Court") The Debtors obtained joint administration of their chapter 11 cases under the caption In re Valaris plc, et al., Case No. 20-34114 (MI) (the “Chapter 11 Cases”).
In connection with the Chapter 11 Cases, on and prior to April 30, 2021 (the "Effective Date"), Legacy Valaris effectuated certain restructuring transactions, pursuant to which the successor company, Valaris, was formed and, through a series of transactions, Legacy Valaris transferred to a subsidiary of Valaris substantially all of the subsidiaries, and other assets, of Legacy Valaris.
References to the financial position and results of operations of the "Successor" or "Successor Company" relate to the financial position and results of operations of the Company after the Effective Date. References to the financial position and results of operations of the "Predecessor" or "Predecessor Company" refer to the financial position and results of operations of Legacy Valaris on and prior to the Effective Date. References to the “Company,” “we,” “us” or “our” in this Annual Report are to Valaris Limited, together with its consolidated subsidiaries, when referring to periods following the Effective Date, and to Legacy Valaris, together with its consolidated subsidiaries, when referring to periods prior to and including Effective Date.
80
Fresh Start Accounting
On the Effective Date, the Debtors emerged from the Chapter 11 Cases. Upon emergence from the Chapter 11 Cases, we qualified for and adopted fresh start accounting. The application of fresh start accounting resulted in a new basis of accounting, and the Company became a new entity for financial reporting purposes. Accordingly, our financial statements and notes after the Effective Date are not comparable to our financial statements and notes on and prior to that date. Furthermore, the consolidated financial statements and notes have been presented with a black line division to delineate the lack of comparability between the Predecessor and Successor.
See “Note 2 – Chapter 11 Proceedings” and “Note 3 - Fresh Start Accounting” for additional details regarding the Chapter 11 Cases and fresh start accounting.
Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Valaris Limited, those of our wholly-owned subsidiaries and entities in which we hold a controlling financial interest. All intercompany accounts and transactions have been eliminated. Investments in operating entities in which we have the ability to exercise significant influence, but where we do not control operating and financial policies are accounted for using the equity method. Significant influence generally exists if we have an ownership interest representing between 20% and 50% of the voting stock of the investee. We account for our interest in ARO using the equity method of accounting and only recognize our portion of equity in earnings in our consolidated financial statements. ARO is a variable interest entity; however, we are not the primary beneficiary and therefore do not consolidate ARO.
Reclassification
Certain previously reported amounts have been reclassified to conform to the current year presentation.
Pervasiveness of Estimates
The preparation of financial statements in conformity with GAAP requires us to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the related revenues and expenses and disclosures of gain and loss contingencies as of the date of the financial statements. Actual results could differ from those estimates.
Foreign Currency Remeasurement and Translation
Our functional currency is the U.S. dollar. As is customary in the oil and gas industry, a majority of our revenues and expenses are denominated in U.S. dollars; however, a portion of the revenues earned and expenses incurred by certain of our subsidiaries are denominated in currencies other than the U.S. dollar. These transactions are remeasured in U.S. dollars based on a combination of both current and historical exchange rates. Most transaction gains and losses are included in Other, net, in our Consolidated Statements of Operations. Certain gains and losses from the translation of foreign currency balances of our non-U.S. dollar functional currency subsidiaries are included in Accumulated other comprehensive income on our Consolidated Balance Sheet. Net foreign currency exchange loss was $3.5 million, and gains were $12.2 million, $8.1 million and $13.4 million, and were included in Other, net, in our Consolidated Statements of Operations for the years ended December 31, 2023 and 2022, eight months ended December 31, 2021 (Successor), and four months ended April 30, 2021 (Predecessor), respectively.
81
Cash Equivalents and Short-Term Investments
Highly liquid investments with maturities of three months or less at the date of purchase are considered cash equivalents. Highly liquid investments with maturities of greater than three months but less than one year at the date of purchase are classified as short-term investments.
There were no short-term investments as of December 31, 2023 and 2022. Cash flows from purchases and maturities of short-term investments were classified as investing activities in our Consolidated Statements of Cash Flows for the year ended December 31, 2017. Net loss2022. To mitigate our credit risk, our investments in time deposits have historically been diversified across multiple, high-quality financial institutions.
Property and Equipment
All costs incurred in connection with the acquisition, construction, major enhancement and improvement of Atwoodassets are capitalized, including allocations of interest incurred during periods that our drilling rigs are under construction or undergoing major enhancements and improvements. Costs incurred to place an asset into service are capitalized, including costs related to the initial mobilization of a newbuild drilling rig. Repair and maintenance costs are charged to contract drilling expense in the period in which they are incurred. Upon the sale or retirement of assets, the related cost and accumulated depreciation are removed from the Merger Datebalance sheet, and the resulting gain or loss is included in Other, net in our Consolidated Statements of Operations.
Upon emergence, we elected to change our accounting policies and have identified the significant components of our drilling rigs and ascribed useful lives based on the expected time until the next required overhaul or the end of the expected economic lives of the components.
Our property and equipment is depreciated on a straight-line basis, after allowing for salvage values, over the estimated useful lives of our assets. Drilling rigs and related equipment are depreciated over estimated useful lives ranging from five to 35 years. Buildings and improvements are depreciated over estimated useful lives ranging from 10 to 30 years. Other equipment, including computer and communications hardware and software, is depreciated over estimated useful lives ranging from two to six years.
We evaluate the carrying value of our property and equipment, primarily our drilling rigs, on a quarterly basis to identify events or changes in circumstances ("triggering events") that indicate that the carrying value of such rigs may not be recoverable. For property and equipment used in our operations, recoverability generally is determined by comparing the carrying value of an asset to the expected undiscounted future cash flows of the asset. If the carrying value of an asset is not recoverable, the amount of impairment loss is measured as the difference between the carrying value of the asset and its estimated fair value. Property and equipment held-for-sale is recorded at the lower of net book value or fair value less cost to sell.
We recorded pre-tax, non-cash impairment losses related to long-lived assets of $34.5 million and $756.5 million, in the year ended December 31, 2022 (Successor) and the four months ended April 30, 2021 (Predecessor), respectively. See "Note 7 - Property and Equipment" for additional information on our impairment charges.
Operating Revenues and Expenses
See "Note 4 - Revenue from Contracts with Customers" for information on our accounting policies for revenue recognition and certain operating costs that are deferred and amortized over future periods.
82
Income Taxes
We conduct operations and earn income in numerous countries. Current income taxes are recognized for the amount of taxes payable or refundable based on the laws and income tax rates in the taxing jurisdictions in which operations are conducted and income is earned.
Deferred tax assets and liabilities are recognized for the anticipated future tax effects of temporary differences between the financial statement basis and the tax basis of our assets and liabilities using the enacted tax rates in effect at year-end. A valuation allowance for deferred tax assets is recorded when it is more-likely-than-not that the benefit from the deferred tax asset will not be realized. We do not offset deferred tax assets and deferred tax liabilities attributable to different tax paying jurisdictions.
We operate in certain jurisdictions where tax laws relating to the offshore drilling industry are not well developed and change frequently. Furthermore, we may enter into transactions with affiliates or employ other tax planning strategies that generally are subject to complex tax regulations. As a result of the foregoing, the tax liabilities and assets we recognize in our financial statements may differ from the tax positions taken, or expected to be taken, in our tax returns. Our tax positions are evaluated for recognition as unrecognized tax benefits using a more-likely-than-not threshold, and those requiring recognition are measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon effective settlement with a taxing authority that has full knowledge of all relevant information. Interest and penalties relating to income taxes are included in Current income tax expense in our Consolidated Statements of Operations.
Our drilling rigs frequently move from one taxing jurisdiction to another based on where they are contracted to perform drilling services. The movement of drilling rigs among taxing jurisdictions may involve a transfer of drilling rig ownership among our subsidiaries through an intercompany rig sale. The pre-tax profit resulting from an intercompany rig sale is eliminated from our consolidated financial statements, and the carrying value of a rig sold in an intercompany transaction remains at historical net depreciated cost prior to the transaction. Our consolidated financial statements do not reflect the asset disposition transaction of the selling subsidiary or the asset acquisition transaction of the acquiring subsidiary. The income tax effects resulting from intercompany rig sales are recognized in earnings in the period in which the sale occurs.
In some instances, we may determine that certain temporary differences will not result in a taxable or deductible amount in future years, as it is more-likely-than-not we will commence operations and depart from a given taxing jurisdiction without such temporary differences being recovered or settled. Under these circumstances, no future tax consequences are expected and no deferred taxes are recognized in connection with such operations. We evaluate these determinations on a periodic basis and, in the event our expectations relative to future tax consequences change, the applicable deferred taxes are recognized or derecognized.
We do not provide deferred taxes on the undistributed earnings of certain subsidiaries because our policy and intention is to reinvest such earnings indefinitely. Should we make a distribution from these subsidiaries in the form of dividends or otherwise, we may be subject to additional income taxes.
Share-Based Compensation
We sponsor share-based compensation plans that provide equity compensation to our key employees, officers and non-employee directors. Our 2021 Management Incentive Plan (the “MIP”) allows our board of directors to authorize equity-based grants to be settled in cash, shares or a combination of shares and cash. Compensation expense for time-based equity awards to be settled in shares is measured at fair value on the date of grant and recognized on a straight-line basis over the requisite service period (usually the vesting period). Compensation expense for performance awards is recognized over the requisite service period using the accelerated method and is reduced for forfeited awards in the period in which the forfeitures occur. For our performance awards that cliff vest and require the employee to render service through the vesting date, even though attainment of performance objectives might be earlier, our expense under the accelerated method would be a ratable expense over
83
the vesting period. Equity settled performance awards generally vest at the end of a three-year measurement period based on attainment of performance goals. The estimated probable outcome of attainment of the specified performance goals is based primarily on relative performance over the requisite performance period. Any subsequent changes in this estimate as it relates to performance objectives are recognized as a cumulative adjustment to compensation cost in the period in which the change in estimate occurs, except in the case of objectives based on a market condition, such as our stock price. Compensation cost for awards based on a market performance objective is recognized as long as the requisite service period is completed and will not be reversed even if the market-based objective is never satisfied. Any adjustments to the compensation cost recognized in our Consolidated Statements of Operations for awards that are forfeited are recognized in the period in which the forfeitures occur. See "Note 10 - Share Based Compensation" for additional information on our share-based compensation.
Pension and Other Post-retirement Benefit Plans
We measure our actuarially determined obligations and related costs for our defined benefit pension and other post-retirement plans, retiree life and medical supplemental plan benefits by applying assumptions, the most significant of which include long-term rate of return on plan assets, discount rates and mortality rates. For the long-term rate of return, we develop our assumptions regarding the expected rate of return on plan assets based on historical experience and projected long-term investment returns, and we weight the assumptions based on each plan's asset allocation. For the discount rate, we base our assumptions on a yield curve approach. Actual results may differ from the assumptions included in these calculations. If gains or losses exceed 10% of the greater of the plan assets or plan liabilities, we amortize such gains or losses into income over either the period of expected future service of active participants, or over the expected average remaining lifetime of all participants. We recognize gains or losses related to plan curtailments at the date the plan amendment or termination is adopted which may precede the effective date.
Fair Value Measurements
We measure certain of our assets and liabilities based on a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy assigns the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities ("Level 1") and the lowest priority to unobservable inputs ("Level 3"). Level 2 measurements represent inputs that are observable for similar assets or liabilities, either directly or indirectly, other than quoted prices included within Level 1. See "Note 6 - Fair Value Measurements" for additional information on the fair value measurement of certain of our assets and liabilities.
Noncontrolling Interests
Third parties hold a noncontrolling ownership interest in certain of our non-U.S. subsidiaries. Noncontrolling interests are classified as equity on our Consolidated Balance Sheet, and net income attributable to noncontrolling interests is presented separately in our Consolidated Statements of Operations. All income attributable to noncontrolling interest was $70.1from continuing operations.
Cancellation of Predecessor Equity and Issuance of Warrants
On the Effective Date and pursuant to the plan of reorganization, the Legacy Valaris Class A ordinary shares were cancelled and all agreements, instruments and other documents evidencing, relating or otherwise connected with any of Legacy Valaris' equity interests outstanding prior to the Effective Date, including all equity-based awards, were also cancelled. Also, in accordance with the plan of reorganization, the Company issued 5.6 million inclusivewarrants (the "Warrants") to the former holders of integration costsLegacy Valaris' equity to purchase common shares of $27.9 million,Valaris Limited with a nominal value of $0.01 per share (the "Common Shares"). The Warrants are exercisable for one Common Share per Warrant at an initial exercise price of $131.88 per Warrant, in each case as may be adjusted from time to time pursuant to the applicable warrant agreement. The Warrants are exercisable for a period of seven years and will expire on April 29, 2028.
84
Earnings Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted-average number of common shares outstanding during the period. Basic and diluted earnings per share ("EPS") for the Predecessor was calculated in accordance with the two-class method. Weighted-average shares outstanding used in our computation of diluted EPS is calculated using the treasury stock method and for the Successor includes the effect of all potentially dilutive stock equivalents, including warrants, restricted stock unit awards and performance stock unit awards and for the Predecessor included the effect of all potentially dilutive stock options and excluded non-vested shares.
The following table is a reconciliation of the weighted-average shares used in our basic and diluted EPS computations for the years ended December 31, 2023 and 2022, eight months ended December 31, 2021 (Successor), and four months ended April 30, 2021 (Predecessor) (in millions):
| Successor | Predecessor | |||||||||||||||||||||||||
| Year Ended December 31, 2023 | Year Ended December 31, 2022 | Eight Months Ended December 31, 2021 | Four Months Ended April 30, 2021 | |||||||||||||||||||||||
| Income (loss) attributable to our shares | $ | 865.4 | $ | 176.5 | $ | (27.4) | $ | (4,467.0) | ||||||||||||||||||
| Weighted average shares outstanding: | ||||||||||||||||||||||||||
| Basic | 74.1 | 75.1 | 75.0 | 199.6 | ||||||||||||||||||||||
| Effect of stock equivalents | 1.1 | 0.5 | — | — | ||||||||||||||||||||||
| Diluted | 75.2 | 75.6 | 75.0 | 199.6 | ||||||||||||||||||||||
Anti-dilutive share awards totaling 147,000 and 192,000 were excluded from the computation of diluted EPS for the year ended December 31, 2017.2023 and 2022 (Successor), respectively.
| Estimated Fair Value | |||
| Assets: | |||
Cash and cash equivalents(1) | $ | 445.4 | |
Accounts receivable(2) | 62.3 | ||
| Other current assets | 118.1 | ||
| Property and equipment | 1,762.0 | ||
| Other assets | 23.7 | ||
| Liabilities: | |||
| Accounts payable and accrued liabilities | 64.9 | ||
| Other liabilities | 118.7 | ||
| Net assets acquired | 2,227.9 | ||
| Less: | |||
| Merger consideration | (781.8 | ) | |
| Repayment of Atwood debt | (1,305.9 | ) | |
| Bargain purchase gain | $ | 140.2 | |
The Predecessor previously had convertible senior notes due 2024 (the "2024 Convertible Notes") for which we had the option to settle in cash, shares or a combination thereof for the aggregate amount due upon conversion. On the Effective Date, pursuant to the plan of reorganization, all outstanding obligations under the 2024 Convertible Notes were cancelled and the holders thereunder received the treatment as set forth in the plan of reorganization. However, if the Legacy Valaris average share price had exceeded the exchange price during a respective predecessor reporting period, an assumed number of shares required to settle the conversion obligation in excess of the principal amount would have been included in general and administrative expense in our consolidated statementsdenominator for the computation of operations.diluted EPS using the treasury stock method. The Legacy Valaris average share price did not exceed the exchange price during the four months ended April 30, 2021 (Predecessor).
85
Property and Equipment
Concurrent with our emergence from bankruptcy, we applied fresh start accounting and adjusted the carrying value of our drilling rigs to estimated fair value. See "Note 3 - Fresh Start Accounting" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for more information. As of December 31, 2023, the carrying value of our property and equipment totaled $1.6 billion, which represented 38% of total assets. This carrying value reflects the application of our property and equipment accounting policies, which incorporate our estimates, judgments and assumptions relative to the capitalized costs, useful lives and salvage values of our rigs.
We develop and apply property and equipment accounting policies that are designed to appropriately and consistently capitalize those costs incurred to enhance, improve and extend the useful lives of our assets and expense those costs incurred to repair or maintain the existing condition or useful lives of our assets. The development and application of such policies requires estimates, judgments and assumptions relative to the nature of, and benefits from, expenditures on our assets. We establish property and equipment accounting policies that are designed to depreciate our assets over their estimated useful lives.
Upon emergence, we elected to change our accounting policies and have identified the significant components of our drilling rigs and ascribed useful lives based on the expected time until the next required overhaul or the end of the expected economic lives of the components.
The judgments and assumptions used in determining the next overhaul or the economic lives of the components of our property and equipment reflect both historical experience and expectations regarding future operations, utilization and performance of our assets. The use of different estimates, judgments and assumptions in the establishment of our property and equipment accounting policies, especially those involving the useful lives of the significant components our rigs, would likely result in materially different asset carrying values and operating results.
The useful lives of our drilling rig components are difficult to estimate due to a variety of factors, including technological advances that impact the methods or cost of oil and natural gas exploration and development, changes in market or economic conditions and changes in laws or regulations affecting the drilling industry. We evaluate the remaining useful lives of our rig components on a periodic basis, considering operating condition, functional capability and market and economic factors.
67
Property and equipment acquiredheld-for-sale is recorded at the lower of net book value or fair value less cost to sell.
Our fleet of 18 floater rigs represented 62% of the gross cost and 63% of the net carrying amount of our depreciable property and equipment as of December 31, 2023. Our fleet of 35 jackup rigs represented 34% of the gross cost and 33% of the net carrying amount of our depreciable property and equipment as of December 31, 2023.
Income Taxes
We conduct operations and earn income in numerous countries and are subject to the laws of numerous tax jurisdictions. As of December 31, 2023, our Consolidated Balance Sheet included a $825.2 million net deferred income tax asset, a $36.6 million liability for income taxes currently payable and a $224.0 million liability for unrecognized tax benefits, inclusive of interest and penalties.
The carrying values of deferred income tax assets and liabilities reflect the application of our income tax accounting policies and are based on estimates, judgments and assumptions regarding future operating results and levels of taxable income. Carryforwards and tax credits are assessed for realization as a reduction of future taxable income by using a more-likely-than-not determination. We do not offset deferred tax assets and deferred tax liabilities attributable to different tax paying jurisdictions.
We do not provide deferred taxes on the undistributed earnings of certain subsidiaries because our policy and intention is to reinvest such earnings indefinitely. Should we make a distribution from these subsidiaries in the form of dividends or otherwise, we may be subject to additional income taxes.
The carrying values of liabilities for income taxes currently payable and unrecognized tax benefits are based on our interpretation of applicable tax laws and incorporate estimates, judgments and assumptions regarding the use of tax planning strategies in various taxing jurisdictions. The use of different estimates, judgments and assumptions in connection with accounting for income taxes, especially those involving the deployment of tax planning strategies, may result in materially different carrying values of income tax assets and liabilities and operating results.
We operate in several jurisdictions where tax laws relating to the offshore drilling industry are not well developed. In jurisdictions where available statutory law and regulations are incomplete or underdeveloped, we obtain professional guidance and consider existing industry practices before utilizing tax planning strategies and meeting our tax obligations. Our tax positions are evaluated for recognition using a more-likely-than-not threshold, and those tax positions requiring recognition are measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon effective settlement with a taxing authority that has full knowledge of all relevant information.
Tax returns are routinely subject to audit in most jurisdictions and tax liabilities occasionally are finalized through a negotiation process. In some jurisdictions, income tax payments may be required before a final income tax obligation is determined in order to avoid significant penalties and/or interest. While we historically have not experienced significant adjustments to previously recognized tax assets and liabilities as a result of finalizing tax returns, there can be no assurance that significant adjustments will not arise in the future. In addition, there are several factors that could cause the future level of uncertainty relating to our tax liabilities to increase, including the following:
•During recent years, the number of tax jurisdictions in which we conduct operations has increased.
•In order to utilize tax planning strategies and conduct operations efficiently, our subsidiaries frequently enter into transactions with affiliates that are generally subject to complex tax regulations and are frequently reviewed and challenged by tax authorities.
68
•We may conduct future operations in certain tax jurisdictions where tax laws are not well developed, and it may be difficult to secure adequate professional guidance.
•Tax laws, regulations, agreements, treaties and the administrative practices and precedents of tax authorities change frequently, requiring us to modify existing tax strategies to conform to such changes.
Pension and Other Postretirement Benefits
Our pension and other postretirement benefit liabilities and costs are based upon actuarial computations that reflect our assumptions about future events, including long-term asset returns, interest rates, annual compensation increases, mortality rates and other factors. Key assumptions at December 31, 2023, included (1) a weighted average discount rate of 4.97% to determine pension benefit obligations, (2) a weighted average discount rate of 5.21% to determine net periodic pension cost and (3) an expected long-term rate of return on pension plan assets of 7.10% to determine net periodic pension cost. The assumed discount rate is based upon the average yield for either Moody’s or Standard & Poor's Aa-rated corporate bonds, and the rate of return assumption reflects a probability distribution of expected long-term returns that is weighted based upon plan asset allocations.
Using our key assumptions at December 31, 2023, a one-percentage-point decrease in the assumed discount rate would increase our recorded pension and other postretirement benefit liabilities by approximately $60.1 million, while a one-percentage-point decrease (increase) in the expected long-term rate of return on plan assets would increase (decrease) annual net benefits cost by approximately $4.4 million. To develop the expected long-term rate of return on assets assumption, we considered the current level of expected returns on risk-free investments (primarily government bonds), the historical level of the risk premium associated with the plans’ other asset classes, and the expectations for future returns of each asset class. The expected return for each asset class was then weighted based upon the current asset allocation to develop the expected long-term rate of return on assets assumption for the plan, which decreased to 6.88% at December 31, 2023 from 7.10% at December 31, 2022. See "Note 11 - Pension and Other Post Retirement Benefits" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for information on our pension and other postretirement benefit plans.
NEW ACCOUNTING PRONOUNCEMENTS
See "Note 1 - Description of the Business and Summary of Significant Accounting Policies" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for information on new accounting pronouncements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Information required under this Item 7A. has been incorporated herein from "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Market Risk."
69
Item 8. Financial Statements and Supplementary Data
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) or 15d-15(f). Our internal control over financial reporting system is designed to provide reasonable assurance as to the reliability of our financial reporting and the preparation and presentation of consolidated financial statements in accordance with accounting principles generally accepted in the United States, as well as to safeguard assets from unauthorized use or disposition. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, we have conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, we have concluded that our internal control over financial reporting is effective as of December 31, 2023 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
KPMG LLP, the independent registered public accounting firm who audited our consolidated financial statements, has issued an audit report on our internal control over financial reporting. KPMG LLP's audit report on our internal control over financial reporting is included herein.
February 22, 2024
70
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Valaris Limited:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Valaris Limited and subsidiaries (the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income (loss), and cash flows for each of the years in the two-year period ended December 31, 2023 and for the period from May 1, 2021 to December 31, 2021 (Successor periods) and for the period from January 1, 2021 to April 30, 2021 (Predecessor period), and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for Successor and Predecessor periods, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 22, 2024 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis of Presentation
As discussed in Note 1 to the consolidated financial statements, on March 3, 2021, the Bankruptcy Court for the Southern District of Texas entered an order confirming the Company’s plan for reorganization under Chapter 11, which became effective on April 30, 2021. Accordingly, the accompanying consolidated financial statements as of December 31, 2023 and 2022 and for the Successor periods have been prepared in conformity with Accounting Standards Codification 852, Reorganization, with the Company’s assets, liabilities, and capital structure having carrying amounts not comparable to prior years.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
71
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Income tax positions pertaining to certain tax transactions
As discussed in Notes 1 and 12 to the consolidated financial statements, the Company evaluated the income tax effect of certain transactions which often requires local country tax expertise and judgment. This requires the Company to interpret complex tax laws in multiple jurisdictions to assess whether its tax positions have a more than 50 percent likelihood of being sustained with the taxing authorities.
We identified the assessment of income tax positions pertaining to certain tax transactions as a critical audit matter. Complex auditor judgment was required to evaluate the Company’s assessment that certain tax positions have a more than 50 percent likelihood of being sustained with the taxing authorities. In addition, specialized skills and knowledge were required to evaluate the Company’s interpretation of tax laws in the applicable jurisdictions.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s income tax process. This included controls related to the interpretation of tax laws applicable to certain transactions and the assessment that tax positions pertaining to those transactions have a more than 50 percent likelihood of being sustained with taxing authorities. We involved tax professionals with specialized skills and knowledge, who assisted on evaluating the Company’s interpretation of local tax laws and assessment of whether tax positions had a greater than 50 percent likelihood of being sustained with taxing authorities.
Realizability of certain deferred tax assets
As discussed in Notes 1 and 12 to the consolidated financial statements, the Company recognizes a valuation allowance for deferred tax assets if, based on the weight of all available evidence, it is more-likely-than-not that the benefit from the deferred tax asset will not be realized. The realization of deferred tax assets is dependent upon generating sufficient taxable income during future periods in the jurisdictions it operates. As of December 31, 2023, the Company had recorded a valuation allowance of $4.2 billion on deferred tax assets. During the year ended December 31, 2023, the Company released $799.5 million of the valuation allowance recognized related to deferred tax assets.
We identified the evaluation of the realizability of certain deferred tax assets as a critical audit matter. A high degree of subjective auditor judgment was required due to (1) the significant judgment made by the Company in assessing the ability to realize the deferred tax assets and whether a valuation allowance was necessary considering the availability of forecasted income and (2) the subjective nature of the sources of possible future income used in the Company's assessment and the key assumptions used in the estimation of such future income, specifically forecasted revenue, contract drilling expenses and shore-based expenses.
72
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company's process to assess the realizability of certain deferred tax assets, including controls over the key assumptions used in the determination of forecasted income. We evaluated available positive and negative evidence used in the Company's assessment of whether certain deferred tax assets were more like than not to be realized in the future. We evaluated the reasonableness of the revenue, contract drilling expenses and shore-based expenses assumptions used in determining forecasted income for consistency with historical amounts, economic trends and industry data. We involved tax professionals with specialized skills and knowledge, who assisted in the application of tax laws in the performance of these procedures.
/s/ KPMG LLP
We have served as the Company’s auditor since 2002.
Houston, Texas
February 22, 2024
73
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Valaris Limited:
Opinion on Internal Control Over Financial Reporting
We have audited Valaris Limited and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income (loss), and cash flows for each of the years in the two-year period ended December 31, 2023 and for the period from May 1, 2021 to December 31, 2021 (Successor periods) and for the period from January 1, 2021 to April 30, 2021 (Predecessor period), and the related notes (collectively, the consolidated financial statements), and our report dated February 22, 2024 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
74
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Houston, Texas
February 22, 2024
75
VALARIS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
| Successor | Predecessor | |||||||||||||||||||||||||
| Year Ended December 31, 2023 | Year Ended December 31, 2022 | Eight Months Ended December 31, 2021 | Four Months Ended April 30, 2021 | |||||||||||||||||||||||
| OPERATING REVENUES | $ | 1,784.2 | $ | 1,602.5 | $ | 835.0 | $ | 397.4 | ||||||||||||||||||
| OPERATING EXPENSES | ||||||||||||||||||||||||||
| Contract drilling (exclusive of depreciation) | 1,543.6 | 1,383.2 | 724.1 | 343.8 | ||||||||||||||||||||||
| Loss on impairment | — | 34.5 | — | 756.5 | ||||||||||||||||||||||
| Depreciation | 101.1 | 91.2 | 66.1 | 159.6 | ||||||||||||||||||||||
| General and administrative | 99.3 | 80.9 | 58.2 | 30.7 | ||||||||||||||||||||||
| Total operating expenses | 1,744.0 | 1,589.8 | 848.4 | 1,290.6 | ||||||||||||||||||||||
| EQUITY IN EARNINGS OF ARO | 13.3 | 24.5 | 6.1 | 3.1 | ||||||||||||||||||||||
| OPERATING INCOME (LOSS) | 53.5 | 37.2 | (7.3) | (890.1) | ||||||||||||||||||||||
| OTHER INCOME (EXPENSE) | ||||||||||||||||||||||||||
| Interest income | 101.4 | 65.5 | 28.5 | 3.6 | ||||||||||||||||||||||
| Interest expense, net (Unrecognized contractual interest expense for debt subject to compromise was $132.9 million for the four months ended April 30, 2021) | (68.9) | (45.3) | (31.0) | (2.4) | ||||||||||||||||||||||
| Reorganization items, net | — | (2.4) | (15.5) | (3,584.6) | ||||||||||||||||||||||
| Other, net | (1.8) | 169.9 | 38.1 | 25.9 | ||||||||||||||||||||||
| 30.7 | 187.7 | 20.1 | (3,557.5) | |||||||||||||||||||||||
| INCOME (LOSS) BEFORE INCOME TAXES | 84.2 | 224.9 | 12.8 | (4,447.6) | ||||||||||||||||||||||
| PROVISION (BENEFIT) FOR INCOME TAXES | ||||||||||||||||||||||||||
| Current income tax expense | 3.8 | 35.2 | 57.7 | 34.4 | ||||||||||||||||||||||
| Deferred income tax expense (benefit) | (786.4) | 7.9 | (21.3) | (18.2) | ||||||||||||||||||||||
| (782.6) | 43.1 | 36.4 | 16.2 | |||||||||||||||||||||||
| NET INCOME (LOSS) | 866.8 | 181.8 | (23.6) | (4,463.8) | ||||||||||||||||||||||
| NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | (1.4) | (5.3) | (3.8) | (3.2) | ||||||||||||||||||||||
| NET INCOME (LOSS) ATTRIBUTABLE TO VALARIS | $ | 865.4 | $ | 176.5 | $ | (27.4) | $ | (4,467.0) | ||||||||||||||||||
| EARNINGS (LOSS) PER SHARE | ||||||||||||||||||||||||||
| Basic | $ | 11.68 | $ | 2.35 | $ | (0.37) | $ | (22.38) | ||||||||||||||||||
| Diluted | $ | 11.51 | $ | 2.33 | $ | (0.37) | $ | (22.38) | ||||||||||||||||||
| WEIGHTED-AVERAGE SHARES OUTSTANDING | ||||||||||||||||||||||||||
| Basic | 74.1 | 75.1 | 75.0 | 199.6 | ||||||||||||||||||||||
| Diluted | 75.2 | 75.6 | 75.0 | 199.6 | ||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
76
VALARIS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
| Successor | Predecessor | |||||||||||||||||||||||||
| Year Ended December 31, 2023 | Year Ended December 31, 2022 | Eight Months Ended December 31, 2021 | Four Months Ended April 30, 2021 | |||||||||||||||||||||||
| NET INCOME (LOSS) | $ | 866.8 | $ | 181.8 | $ | (23.6) | $ | (4,463.8) | ||||||||||||||||||
| OTHER COMPREHENSIVE INCOME (LOSS), NET | ||||||||||||||||||||||||||
| Net changes in pension and other postretirement plan assets and benefit obligations recognized in other comprehensive income (loss) | 10.8 | 23.8 | (9.1) | 0.1 | ||||||||||||||||||||||
| Reclassification of net gains on derivative instruments from other comprehensive loss into net loss | — | — | — | (5.6) | ||||||||||||||||||||||
| Other | (0.3) | — | — | — | ||||||||||||||||||||||
| NET OTHER COMPREHENSIVE INCOME (LOSS) | 10.5 | 23.8 | (9.1) | (5.5) | ||||||||||||||||||||||
| COMPREHENSIVE INCOME (LOSS) | 877.3 | 205.6 | (32.7) | (4,469.3) | ||||||||||||||||||||||
| COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | (1.4) | (5.3) | (3.8) | (3.2) | ||||||||||||||||||||||
| COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO VALARIS | $ | 875.9 | $ | 200.3 | $ | (36.5) | $ | (4,472.5) | ||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
77
VALARIS LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except par value amounts)
| December 31, 2023 | December 31, 2022 | |||||||||||||
| ASSETS | ||||||||||||||
| CURRENT ASSETS | ||||||||||||||
| Cash and cash equivalents | $ | 620.5 | $ | 724.1 | ||||||||||
| Restricted cash | 15.2 | 24.4 | ||||||||||||
| Accounts receivable, net | 459.3 | 449.1 | ||||||||||||
| Other current assets | 177.2 | 148.6 | ||||||||||||
| Total current assets | 1,272.2 | 1,346.2 | ||||||||||||
| PROPERTY AND EQUIPMENT, AT COST | 1,889.0 | 1,134.5 | ||||||||||||
| Less accumulated depreciation | 255.2 | 157.3 | ||||||||||||
| Property and equipment, net | 1,633.8 | 977.2 | ||||||||||||
| LONG-TERM NOTES RECEIVABLE FROM ARO | 282.3 | 254.0 | ||||||||||||
| INVESTMENT IN ARO | 124.4 | 111.1 | ||||||||||||
| DEFERRED TAX ASSETS | 855.1 | 55.1 | ||||||||||||
| OTHER ASSETS | 154.4 | 116.7 | ||||||||||||
| $ | 4,322.2 | $ | 2,860.3 | |||||||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||||||||
| CURRENT LIABILITIES | ||||||||||||||
| Accounts payable - trade | $ | 400.1 | $ | 256.5 | ||||||||||
| Accrued liabilities and other | 344.2 | 247.9 | ||||||||||||
| Total current liabilities | 744.3 | 504.4 | ||||||||||||
| LONG-TERM DEBT | 1,079.3 | 542.4 | ||||||||||||
| DEFERRED TAX LIABILITIES | 29.9 | 16.1 | ||||||||||||
| OTHER LIABILITIES | 471.7 | 499.5 | ||||||||||||
| Total liabilities | 2,325.2 | 1,562.4 | ||||||||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||||||||
| VALARIS SHAREHOLDERS' EQUITY | ||||||||||||||
| Common shares, $0.01 par value, 700.0 shares authorized, 75.4 and 75.2 shares issued, 72.4 and 75.2 shares outstanding as of December 31, 2023 and 2022, respectively | 0.8 | 0.8 | ||||||||||||
| Preference shares, $0.01 par value, 150.0 shares authorized, no shares issued as of December 31, 2023 and 2022 | — | — | ||||||||||||
| Stock warrants | 16.4 | 16.4 | ||||||||||||
| Additional paid-in capital | 1,119.8 | 1,097.9 | ||||||||||||
| Retained earnings | 1,025.5 | 160.1 | ||||||||||||
| Accumulated other comprehensive income | 25.2 | 14.7 | ||||||||||||
| Treasury shares, at cost, 3.0 million shares as of December 31, 2023 | (200.1) | — | ||||||||||||
| Total Valaris shareholders' equity | 1,987.6 | 1,289.9 | ||||||||||||
| NONCONTROLLING INTERESTS | 9.4 | 8.0 | ||||||||||||
| Total equity | 1,997.0 | 1,297.9 | ||||||||||||
| $ | 4,322.2 | $ | 2,860.3 | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
78
VALARIS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
| Successor | Predecessor | |||||||||||||||||||||||||
| Year Ended December 31, 2023 | Year Ended December 31, 2022 | Eight Months Ended December 31, 2021 | Four Months Ended April 30, 2021 | |||||||||||||||||||||||
| OPERATING ACTIVITIES | ||||||||||||||||||||||||||
| Net income (loss) | $ | 866.8 | $ | 181.8 | $ | (23.6) | $ | (4,463.8) | ||||||||||||||||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||||||||||||||||||||
| Deferred income tax expense (benefit) | (786.4) | 7.9 | (21.3) | (18.2) | ||||||||||||||||||||||
| Depreciation expense | 101.1 | 91.2 | 66.1 | 159.6 | ||||||||||||||||||||||
| Loss on extinguishment of debt | 29.2 | — | — | — | ||||||||||||||||||||||
| Net gain on sale of property | (28.6) | (141.2) | (21.2) | (6.0) | ||||||||||||||||||||||
| Accretion of discount on notes receivable from ARO | (28.3) | (44.9) | (20.8) | — | ||||||||||||||||||||||
| Share-based compensation expense | 27.3 | 17.4 | 4.3 | 4.8 | ||||||||||||||||||||||
| Equity in earnings of ARO | (13.3) | (24.5) | (6.1) | (3.1) | ||||||||||||||||||||||
| Net periodic pension and retiree medical income | (0.9) | (16.4) | (8.7) | (5.4) | ||||||||||||||||||||||
| Loss on impairment | — | 34.5 | — | 756.5 | ||||||||||||||||||||||
| Non-cash reorganization items, net | — | — | — | 3,487.3 | ||||||||||||||||||||||
| Changes in deferred costs | (26.1) | (38.8) | (34.7) | 22.2 | ||||||||||||||||||||||
| Changes in contract liabilities | 4.9 | 62.4 | 20.8 | (36.2) | ||||||||||||||||||||||
| Other | 6.7 | 8.3 | 1.6 | 7.8 | ||||||||||||||||||||||
| Changes in operating assets and liabilities | 121.8 | (6.6) | 20.0 | 77.1 | ||||||||||||||||||||||
| Contributions to pension plans and other post-retirement benefits | (6.7) | (4.1) | (2.7) | (22.5) | ||||||||||||||||||||||
| Net cash provided by (used in) operating activities | 267.5 | 127.0 | (26.3) | (39.9) | ||||||||||||||||||||||
| INVESTING ACTIVITIES | ||||||||||||||||||||||||||
| Additions to property and equipment | (696.1) | (207.0) | (50.2) | (8.7) | ||||||||||||||||||||||
| Net proceeds from disposition of assets | 30.3 | 150.3 | 25.1 | 30.1 | ||||||||||||||||||||||
| Purchases of short-term investments | — | (220.0) | — | — | ||||||||||||||||||||||
| Maturities of short-term investments | — | 220.0 | — | — | ||||||||||||||||||||||
| Repayment of note receivable from ARO | — | 40.0 | — | — | ||||||||||||||||||||||
| Net cash provided by (used in) investing activities | (665.8) | (16.7) | (25.1) | 21.4 | ||||||||||||||||||||||
| FINANCING ACTIVITIES | ||||||||||||||||||||||||||
| Issuance of Second Lien Notes | 1,103.0 | — | — | — | ||||||||||||||||||||||
| Redemption of First Lien Notes | (571.8) | — | — | — | ||||||||||||||||||||||
| Payments for share repurchases | (198.6) | — | — | — | ||||||||||||||||||||||
| Debt issuance costs | (38.6) | — | — | (1.4) | ||||||||||||||||||||||
| Payments for tax withholdings for share-based awards | (5.4) | (2.5) | — | — | ||||||||||||||||||||||
| Consent solicitation fees | — | (3.9) | — | — | ||||||||||||||||||||||
| Issuance of First Lien Notes | — | — | — | 520.0 | ||||||||||||||||||||||
| Payments to Predecessor creditors | — | — | — | (129.9) | ||||||||||||||||||||||
| Other | (3.1) | — | — | — | ||||||||||||||||||||||
| Net cash provided by (used in) financing activities | 285.5 | (6.4) | — | 388.7 | ||||||||||||||||||||||
| INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH | (112.8) | 103.9 | (51.4) | 370.2 | ||||||||||||||||||||||
| CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD | 748.5 | 644.6 | 696.0 | 325.8 | ||||||||||||||||||||||
| CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD | $ | 635.7 | $ | 748.5 | $ | 644.6 | $ | 696.0 | ||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
79
VALARIS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
We are a leading provider of offshore contract drilling services to the international oil and gas industry with operations in almost every major offshore market across six continents. We own the world's largest offshore drilling rig fleet, including one of the newest ultra-deepwater fleets in the industry and a leading premium jackup fleet. We currently own 53 rigs, including 13 drillships, four dynamically positioned semisubmersible rigs, one moored semisubmersible rig, 35 jackup rigs and a 50% equity interest in Saudi Aramco Rowan Offshore Drilling Company ("ARO"), our 50/50 unconsolidated joint venture with Saudi Aramco, which owns an additional eight rigs.
Our customers include many of the leading international and government-owned oil and gas companies, in addition to many independent operators. We are among the most geographically diverse offshore drilling companies with global operations. The markets in which we operate include the Gulf of Mexico, South America, the North Sea, the Middle East, Africa and Asia Pacific.
We provide drilling services on a day rate contract basis. Under day rate contracts, we provide an integrated service that includes the provision of a drilling rig and rig crews for which we receive a daily rate that may vary between the full rate and zero rate throughout the duration of the contractual term, depending on the operations of the rig. We also may receive lump-sum fees or similar compensation for the mobilization, demobilization and capital upgrades of our rigs. Our customers bear substantially all of the costs of constructing the well and supporting drilling operations as well as the economic risk relative to the success of the well.
Chapter 11 Cases
On August 19, 2020 (the “Petition Date”), Valaris plc (“Legacy Valaris” or “Predecessor”) and certain of its direct and indirect subsidiaries (collectively, the “Debtors”) filed voluntary petitions for reorganization under chapter 11 of the United States Bankruptcy Code ("Bankruptcy Code") in the Bankruptcy Court for the Southern District of Texas (the "Bankruptcy Court") The Debtors obtained joint administration of their chapter 11 cases under the caption In re Valaris plc, et al., Case No. 20-34114 (MI) (the “Chapter 11 Cases”).
In connection with the Chapter 11 Cases, on and prior to April 30, 2021 (the "Effective Date"), Legacy Valaris effectuated certain restructuring transactions, pursuant to which the successor company, Valaris, was formed and, through a series of transactions, Legacy Valaris transferred to a subsidiary of Valaris substantially all of the subsidiaries, and other assets, of Legacy Valaris.
References to the financial position and results of operations of the "Successor" or "Successor Company" relate to the financial position and results of operations of the Company after the Effective Date. References to the financial position and results of operations of the "Predecessor" or "Predecessor Company" refer to the financial position and results of operations of Legacy Valaris on and prior to the Effective Date. References to the “Company,” “we,” “us” or “our” in this Annual Report are to Valaris Limited, together with its consolidated subsidiaries, when referring to periods following the Effective Date, and to Legacy Valaris, together with its consolidated subsidiaries, when referring to periods prior to and including Effective Date.
80
Fresh Start Accounting
On the Effective Date, the Debtors emerged from the Chapter 11 Cases. Upon emergence from the Chapter 11 Cases, we qualified for and adopted fresh start accounting. The application of fresh start accounting resulted in a new basis of accounting, and the Company became a new entity for financial reporting purposes. Accordingly, our financial statements and notes after the Effective Date are not comparable to our financial statements and notes on and prior to that date. Furthermore, the consolidated financial statements and notes have been presented with a black line division to delineate the lack of comparability between the Predecessor and Successor.
See “Note 2 – Chapter 11 Proceedings” and “Note 3 - Fresh Start Accounting” for additional details regarding the Chapter 11 Cases and fresh start accounting.
Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Valaris Limited, those of our wholly-owned subsidiaries and entities in which we hold a controlling financial interest. All intercompany accounts and transactions have been eliminated. Investments in operating entities in which we have the ability to exercise significant influence, but where we do not control operating and financial policies are accounted for using the equity method. Significant influence generally exists if we have an ownership interest representing between 20% and 50% of the voting stock of the investee. We account for our interest in ARO using the equity method of accounting and only recognize our portion of equity in earnings in our consolidated financial statements. ARO is a variable interest entity; however, we are not the primary beneficiary and therefore do not consolidate ARO.
Reclassification
Certain previously reported amounts have been reclassified to conform to the current year presentation.
Pervasiveness of Estimates
The preparation of financial statements in conformity with GAAP requires us to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the related revenues and expenses and disclosures of gain and loss contingencies as of the date of the financial statements. Actual results could differ from those estimates.
Foreign Currency Remeasurement and Translation
Our functional currency is the U.S. dollar. As is customary in the oil and gas industry, a majority of our revenues and expenses are denominated in U.S. dollars; however, a portion of the revenues earned and expenses incurred by certain of our subsidiaries are denominated in currencies other than the U.S. dollar. These transactions are remeasured in U.S. dollars based on a combination of both current and historical exchange rates. Most transaction gains and losses are included in Other, net, in our Consolidated Statements of Operations. Certain gains and losses from the translation of foreign currency balances of our non-U.S. dollar functional currency subsidiaries are included in Accumulated other comprehensive income on our Consolidated Balance Sheet. Net foreign currency exchange loss was $3.5 million, and gains were $12.2 million, $8.1 million and $13.4 million, and were included in Other, net, in our Consolidated Statements of Operations for the years ended December 31, 2023 and 2022, eight months ended December 31, 2021 (Successor), and four months ended April 30, 2021 (Predecessor), respectively.
81
Cash Equivalents and Short-Term Investments
Highly liquid investments with maturities of three months or less at the date of purchase are considered cash equivalents. Highly liquid investments with maturities of greater than three months but less than one year at the date of purchase are classified as short-term investments.
There were no short-term investments as of December 31, 2023 and 2022. Cash flows from purchases and maturities of short-term investments were classified as investing activities in our Consolidated Statements of Cash Flows for the year ended December 31, 2022. To mitigate our credit risk, our investments in time deposits have historically been diversified across multiple, high-quality financial institutions.
Property and Equipment
All costs incurred in connection with the Merger consisted primarilyacquisition, construction, major enhancement and improvement of assets are capitalized, including allocations of interest incurred during periods that our drilling rigs are under construction or undergoing major enhancements and improvements. Costs incurred to place an asset into service are capitalized, including costs related to the initial mobilization of a newbuild drilling rig. Repair and maintenance costs are charged to contract drilling expense in the period in which they are incurred. Upon the sale or retirement of assets, the related cost and accumulated depreciation are removed from the balance sheet, and the resulting gain or loss is included in Other, net in our Consolidated Statements of Operations.
Upon emergence, we elected to change our accounting policies and have identified the significant components of our drilling rigs and ascribed useful lives based on the expected time until the next required overhaul or the end of the expected economic lives of the components.
Our property and equipment is depreciated on a straight-line basis, after allowing for salvage values, over the estimated useful lives of our assets. Drilling rigs and related equipment are depreciated over estimated useful lives ranging from five to 35 years. Buildings and improvements are depreciated over estimated useful lives ranging from 10 to 30 years. Other equipment, including four drillships (twocomputer and communications hardware and software, is depreciated over estimated useful lives ranging from two to six years.
We evaluate the carrying value of which are under construction), two semisubmersible rigs and five jackup rigs. We recordedour property and equipment, primarily our drilling rigs, on a quarterly basis to identify events or changes in circumstances ("triggering events") that indicate that the carrying value of such rigs may not be recoverable. For property and equipment used in our operations, recoverability generally is determined by comparing the carrying value of an asset to the expected undiscounted future cash flows of the asset. If the carrying value of an asset is not recoverable, the amount of impairment loss is measured as the difference between the carrying value of the asset and its estimated fair value. Property and equipment held-for-sale is recorded at the lower of net book value or fair value less cost to sell.
We recorded pre-tax, non-cash impairment losses related to long-lived assets of $34.5 million and $756.5 million, in the year ended December 31, 2022 (Successor) and the four months ended April 30, 2021 (Predecessor), respectively. See "Note 7 - Property and Equipment" for additional information on our impairment charges.
Operating Revenues and Expenses
See "Note 4 - Revenue from Contracts with Customers" for information on our accounting policies for revenue recognition and certain operating costs that are deferred and amortized over future periods.
82
Income Taxes
We conduct operations and earn income in numerous countries. Current income taxes are recognized for the amount of taxes payable or refundable based on the laws and income tax rates in the taxing jurisdictions in which operations are conducted and income is earned.
Deferred tax assets and liabilities are recognized for the anticipated future tax effects of temporary differences between the financial statement basis and the tax basis of our assets and liabilities using the enacted tax rates in effect at year-end. A valuation allowance for deferred tax assets is recorded when it is more-likely-than-not that the benefit from the deferred tax asset will not be realized. We do not offset deferred tax assets and deferred tax liabilities attributable to different tax paying jurisdictions.
We operate in certain jurisdictions where tax laws relating to the offshore drilling industry are not well developed and change frequently. Furthermore, we may enter into transactions with affiliates or employ other tax planning strategies that generally are subject to complex tax regulations. As a result of the foregoing, the tax liabilities and assets we recognize in our financial statements may differ from the tax positions taken, or expected to be taken, in our tax returns. Our tax positions are evaluated for recognition as unrecognized tax benefits using a more-likely-than-not threshold, and those requiring recognition are measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon effective settlement with a taxing authority that has full knowledge of all relevant information. Interest and penalties relating to income taxes are included in Current income tax expense in our Consolidated Statements of Operations.
Our drilling rigs frequently move from one taxing jurisdiction to another based on where they are contracted to perform drilling services. The movement of drilling rigs among taxing jurisdictions may involve a transfer of drilling rig ownership among our subsidiaries through an intercompany rig sale. The pre-tax profit resulting from an intercompany rig sale is eliminated from our consolidated financial statements, and the carrying value of a rig sold in an intercompany transaction remains at historical net depreciated cost prior to the transaction. Our consolidated financial statements do not reflect the asset disposition transaction of the selling subsidiary or the asset acquisition transaction of the acquiring subsidiary. The income tax effects resulting from intercompany rig sales are recognized in earnings in the period in which the sale occurs.
In some instances, we may determine that certain temporary differences will not result in a taxable or deductible amount in future years, as it is more-likely-than-not we will commence operations and depart from a given taxing jurisdiction without such temporary differences being recovered or settled. Under these circumstances, no future tax consequences are expected and no deferred taxes are recognized in connection with such operations. We evaluate these determinations on a periodic basis and, in the event our expectations relative to future tax consequences change, the applicable deferred taxes are recognized or derecognized.
We do not provide deferred taxes on the undistributed earnings of certain subsidiaries because our policy and intention is to reinvest such earnings indefinitely. Should we make a distribution from these subsidiaries in the form of dividends or otherwise, we may be subject to additional income taxes.
Share-Based Compensation
We sponsor share-based compensation plans that provide equity compensation to our key employees, officers and non-employee directors. Our 2021 Management Incentive Plan (the “MIP”) allows our board of directors to authorize equity-based grants to be settled in cash, shares or a combination of shares and cash. Compensation expense for time-based equity awards to be settled in shares is measured at fair value on the date of grant and recognized on a straight-line basis over the requisite service period (usually the vesting period). Compensation expense for performance awards is recognized over the requisite service period using the accelerated method and is reduced for forfeited awards in the period in which the forfeitures occur. For our performance awards that cliff vest and require the employee to render service through the vesting date, even though attainment of performance objectives might be earlier, our expense under the accelerated method would be a ratable expense over
83
the vesting period. Equity settled performance awards generally vest at the end of a three-year measurement period based on attainment of performance goals. The estimated probable outcome of attainment of the specified performance goals is based primarily on relative performance over the requisite performance period. Any subsequent changes in this estimate as it relates to performance objectives are recognized as a cumulative adjustment to compensation cost in the period in which the change in estimate occurs, except in the case of objectives based on a market condition, such as our stock price. Compensation cost for awards based on a market performance objective is recognized as long as the requisite service period is completed and will not be reversed even if the market-based objective is never satisfied. Any adjustments to the compensation cost recognized in our Consolidated Statements of Operations for awards that are forfeited are recognized in the period in which the forfeitures occur. See "Note 10 - Share Based Compensation" for additional information on our share-based compensation.
Pension and Other Post-retirement Benefit Plans
We measure our actuarially determined obligations and related costs for our defined benefit pension and other post-retirement plans, retiree life and medical supplemental plan benefits by applying assumptions, the most significant of which include long-term rate of return on plan assets, discount rates and mortality rates. For the long-term rate of return, we develop our assumptions regarding the expected rate of return on plan assets based on historical experience and projected long-term investment returns, and we weight the assumptions based on each plan's asset allocation. For the discount rate, we base our assumptions on a yield curve approach. Actual results may differ from the assumptions included in these calculations. If gains or losses exceed 10% of the greater of the plan assets or plan liabilities, we amortize such gains or losses into income over either the period of expected future service of active participants, or over the expected average remaining lifetime of all participants. We recognize gains or losses related to plan curtailments at the date the plan amendment or termination is adopted which may precede the effective date.
Fair Value Measurements
We measure certain of our assets and liabilities based on a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy assigns the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities ("Level 1") and the lowest priority to unobservable inputs ("Level 3"). Level 2 measurements represent inputs that are observable for similar assets or liabilities, either directly or indirectly, other than quoted prices included within Level 1. See "Note 6 - Fair Value Measurements" for additional information on the fair value measurement of certain of our assets and liabilities.
Noncontrolling Interests
Third parties hold a noncontrolling ownership interest in certain of our non-U.S. subsidiaries. Noncontrolling interests are classified as equity on our Consolidated Balance Sheet, and net income attributable to noncontrolling interests is presented separately in our Consolidated Statements of Operations. All income attributable to noncontrolling interest was from continuing operations.
Cancellation of Predecessor Equity and Issuance of Warrants
On the Effective Date and pursuant to the plan of reorganization, the Legacy Valaris Class A ordinary shares were cancelled and all agreements, instruments and other documents evidencing, relating or otherwise connected with any of Legacy Valaris' equity interests outstanding prior to the Effective Date, including all equity-based awards, were also cancelled. Also, in accordance with the plan of reorganization, the Company issued 5.6 million warrants (the "Warrants") to the former holders of Legacy Valaris' equity to purchase common shares of Valaris Limited with a nominal value of $0.01 per share (the "Common Shares"). The Warrants are exercisable for one Common Share per Warrant at an initial exercise price of $131.88 per Warrant, in each case as may be adjusted from time to time pursuant to the applicable warrant agreement. The Warrants are exercisable for a period of seven years and will expire on April 29, 2028.
84
Earnings Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted-average number of common shares outstanding during the period. Basic and diluted earnings per share ("EPS") for the Predecessor was calculated in accordance with the two-class method. Weighted-average shares outstanding used in our computation of diluted EPS is calculated using the treasury stock method and for the Successor includes the effect of all potentially dilutive stock equivalents, including warrants, restricted stock unit awards and performance stock unit awards and for the Predecessor included the effect of all potentially dilutive stock options and excluded non-vested shares.
The following table is a reconciliation of the weighted-average shares used in our basic and diluted EPS computations for the years ended December 31, 2023 and 2022, eight months ended December 31, 2021 (Successor), and four months ended April 30, 2021 (Predecessor) (in millions):
| Successor | Predecessor | |||||||||||||||||||||||||
| Year Ended December 31, 2023 | Year Ended December 31, 2022 | Eight Months Ended December 31, 2021 | Four Months Ended April 30, 2021 | |||||||||||||||||||||||
| Income (loss) attributable to our shares | $ | 865.4 | $ | 176.5 | $ | (27.4) | $ | (4,467.0) | ||||||||||||||||||
| Weighted average shares outstanding: | ||||||||||||||||||||||||||
| Basic | 74.1 | 75.1 | 75.0 | 199.6 | ||||||||||||||||||||||
| Effect of stock equivalents | 1.1 | 0.5 | — | — | ||||||||||||||||||||||
| Diluted | 75.2 | 75.6 | 75.0 | 199.6 | ||||||||||||||||||||||
Anti-dilutive share awards totaling 147,000 and 192,000 were excluded from the computation of diluted EPS for the year ended December 31, 2023 and 2022 (Successor), respectively.
Due to the net loss position, anti-dilutive shares totaling 600,000 and 300,000, for the eight months ended December 31, 2021 (Successor) and the four months ended April 30, 2021 (Predecessor), respectively, were excluded from the computation of diluted EPS.
We have 5,470,950 Warrants outstanding as of December 31, 2023 which are exercisable for one Common Share per Warrant at an initial exercise price of $131.88 per Warrant. The exercise of these Warrants into Common Shares would have a dilutive effect to the holdings of Valaris Limited's existing shareholders. These Warrants are anti-dilutive for all periods presented for the Successor.
The Predecessor previously had convertible senior notes due 2024 (the "2024 Convertible Notes") for which we had the option to settle in cash, shares or a combination thereof for the aggregate amount due upon conversion. On the Effective Date, pursuant to the plan of reorganization, all outstanding obligations under the 2024 Convertible Notes were cancelled and the holders thereunder received the treatment as set forth in the plan of reorganization. However, if the Legacy Valaris average share price had exceeded the exchange price during a respective predecessor reporting period, an assumed number of shares required to settle the conversion obligation in excess of the principal amount would have been included in our denominator for the computation of diluted EPS using the treasury stock method. The Legacy Valaris average share price did not exceed the exchange price during the four months ended April 30, 2021 (Predecessor).
85
New Accounting Pronouncements
Recently adopted accounting pronouncements
Business Combinations - In October 2021, the FASB issued ASU No. 2021-08, “Accounting for Contract Assets and Contract Liabilities from Contracts with Customers” (“Update 2021-08”). ASU No. 2021-08 requires an entity (acquirer) to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606 and provides practical expedients for acquirers when recognizing and measuring acquired contract assets and contract liabilities from revenue contracts in a business combination. The amendments also apply to contract assets and contract liabilities from other contracts to which the provisions of Topic 606 apply, such as contract liabilities for the sale of nonfinancial assets within the scope of Subtopic 610-20, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets. The FASB issued the update to improve the accounting for acquired revenue contracts with customers in a business combination. Update 2021-08 is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years, with early adoption permitted. We adopted Update 2021-08 effective January 1, 2023 with no material impact to our financial statements upon adoption.
Reference Rate Reform - In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("Update 2020-04"), which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in Update 2020-04 apply only to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The provisions in Update 2020-04 were effective upon issuance and could be applied prospectively to contract modifications made through December 31, 2022. In December 2022, the FASB issued ASU No. 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, to extend the temporary accounting rules under Topic 848 from December 31, 2022, to December 31, 2024. Our long-term notes receivable from ARO (the "Notes Receivable from ARO"), has generated interest income on a LIBOR-based rate since inception of the note. In 2023, we amended the terms of the Notes Receivable from ARO whereby beginning in 2024, interest income is calculated on a Secured Overnight Financing Rate ("SOFR") based rate. The application of Update 2020-04 and ASU No. 2022-06 on this contract modification and the change in reference rates did not have a material impact on our consolidated financial statements.
Accounting pronouncements to be adopted
Improvements to Reportable Segment Disclosures - In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures ("Update 2023-07"), which expands reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The amendments in Update 2023-07 require that a public entity disclose, on an annual and interim basis, significant segment expenses that are regularly provided to an entity's chief operating decision maker ("CODM"), a description of other segment items by reportable segment, and any additional measures of a segment's profit or loss used by the CODM when deciding how to allocate resources. Annual disclosures are required for fiscal years beginning after December 15, 2023 and interim disclosures are required for periods within fiscal years beginning after December 15, 2024. Retrospective application is required for all prior periods presented, and early adoption is permitted. We are currently assessing the impact of the requirements on our consolidated financial statements and disclosures.
86
Improvements to Income Tax Disclosures - In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures ("Update 2023-09"), which expands income tax disclosure requirements to include additional information related to the rate reconciliation of our effective tax rates to statutory rates as well as additional disaggregation of taxes paid. The amendments in Update 2023-09 also remove disclosures related to certain unrecognized tax benefits and deferred taxes. Update 2023-09 is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The amendments are required to be applied on a prospective basis, with an option to apply the guidance retrospectively. We are currently assessing the impact of the requirements on our consolidated financial statements and disclosures.
With the exception of the updated standards discussed above, there have been no accounting pronouncements issued and not yet effective that have significance, or potential significance, to our consolidated financial statements.
2. CHAPTER 11 PROCEEDINGS
Chapter 11 Cases and Emergence from Chapter 11
On the Petition Date, the Debtors filed voluntary petitions for reorganization under chapter 11 of the Bankruptcy Code in the Bankruptcy Court. The Debtors obtained joint administration of the Chapter 11 Cases under the caption In re Valaris plc, et al., Case No. 20-34114 (MI). On March 3, 2021, the Bankruptcy Court confirmed the Debtors' chapter 11 plan of reorganization.
On the Effective Date, we successfully completed our financial restructuring and together with the Debtors emerged from the Chapter 11 Cases. Upon emergence from the Chapter 11 Cases, we eliminated $7.1 billion of debt and obtained a $520.0 million capital injection by issuing the first lien secured notes (the "First Lien Notes"). See “Note 8 - Debt" for additional information on the First Lien Notes. On the Effective Date, the Legacy Valaris Class A ordinary shares were cancelled and the Common Shares were issued. Also, former holders of Legacy Valaris' equity were issued Warrants to purchase Common Shares.
Below is a summary of the terms of the plan of reorganization:
•Appointed six new members to the Company's board of directors to replace all of the directors of Legacy Valaris, other than the director also serving as President and Chief Executive Officer at itsthe Effective Date, who was re-appointed pursuant to the plan of reorganization. All but one of the seven directors became directors as of the Effective Date and one became a director on July 1, 2021.
•Obligations under Legacy Valaris' outstanding senior notes (the "Senior Notes") were cancelled and the related indentures were cancelled, except to the limited extent expressly set forth in the plan of reorganization and the holders thereunder received the treatment as set forth in the plan of reorganization;
•The Legacy Valaris revolving credit facility (the "Revolving Credit Facility") was terminated and the holders thereunder received the treatment as set forth in the plan of reorganization;
•Holders of the Senior Notes received their pro rata share of (1) 38.48%, or 28.9 million, of Common Shares and (2) approximately 97.6% of the subscription rights to participate in the rights offering (the "Rights Offering") through which the Company offered $550.0 million of the First Lien Notes, which includes the backstop premium;
•Holders of the Senior Notes who participated in the Rights Offering received their pro ratashare of approximately 29.3%, or 22.0 million, of Common Shares, and senior noteholders who agreed to backstop the Rights Offering received their pro rata share of approximately 2.63%, or 2.0 million of Common Shares and approximately $48.8 million in First Lien Notes as a backstop premium;
87
•Certain Revolving Credit Facility lenders ("RCF Lenders") who participated in the Rights Offering received their pro rata share of approximately 0.7%, or 0.5 million Common Shares, RCF Lenders who agreed to backstop the Rights Offering received their pro rata share of 0.07%, or 49,500 of Common Shares and approximately $1.2 million in First Lien Notes as a backstop premium;
•Senior noteholders, solely with respect to Pride International LLC's 6.875% senior notes due 2020 and 7.875% senior notes due 2040, Ensco International 7.20% Debentures due 2027, and the 4.875% senior notes due 2022, 4.75% senior notes due 2024, 7.375% senior notes due 2025, 5.4% senior notes due 2042 and 5.85% senior notes due 2044, received an aggregate cash payment of $26.0 million in connection with settlement of certain alleged claims against the Company;
•The two RCF Lenders who chose to participate in the Rights Offering received their pro rata share of (1) 5.3%, or 4.0 million Common Shares (2) approximately 2.427% of the First Lien Notes (and associated Common Shares), (3) $7.8 million in cash, and (4) their pro rata share of the backstop premium. The RCF Lenders who entered into the amended restructuring support agreement and elected not to participate in the Rights Offering received their pro rata share of (1) 22.980%, or 17.2 million of Common Shares and (2) $96.1 million in cash;
•Holders of general unsecured claims are entitled to receive payment in full within ninety days after the later of (a) the Effective Date and (b) the date such claim comes due;
•0.4 million Common Shares were issued and $5.0 million was paid to Daewoo Shipbuilding & Marine Engineering Co., Ltd (the "Shipyard");
•Legacy Valaris Class A ordinary shares were cancelled and holders received 5.6 million in Warrants exercisable for one Common Share per Warrant at initial exercise price of $131.88 per Warrant, in each case as may be adjusted from time to time pursuant to the applicable warrant agreement. The Warrants are exercisable for a period of seven years and will expire on April 29, 2028;
•All equity-based awards of Legacy Valaris that were outstanding were cancelled;
•On the Effective Date, Valaris Limited entered into a registration rights agreement with certain parties who received Common Shares;
•On the Effective Date, Valaris Limited entered into a registration rights agreement with certain parties who received First Lien Notes; and
•There were no borrowings outstanding against our debtor-in-possession ("DIP") facility and there were no DIP claims that were not due and payable on, or that otherwise survived, the Effective Date. The DIP Credit Agreement terminated on the Effective Date.
Management Incentive Plan
In accordance with the plan of reorganization, Valaris Limited adopted the 2021 Management Incentive Plan (the “MIP”) as of the Effective Date and authorized and reserved 9.0 million Common Shares for issuance pursuant to equity incentive awards to be granted under the MIP, which may be in the form of incentive stock options, nonstatutory stock options, restricted stock, restricted stock units, stock appreciation rights, dividend equivalents and cash awards or any combination thereof. See "Note 10 - Share Based Compensation" for more information on awards granted under the MIP after the Effective date.
88
Liabilities Subject to Compromise
Prior to the Effective Date, liabilities subject to compromise were comprised primarily of the aggregate balance of our pre-petition Senior Notes of $6.5 billion, amounts drawn under the Revolving Credit Facility as of the Petition Date of $581.0 million and the corresponding unpaid accrued interest as of the Petition Date of $203.5 million.
The contractual interest expense on the outstanding Senior Notes and the Revolving Credit Facility was in excess of recorded interest expense by $132.9 million for the four months ended April 30, 2021 (Predecessor). This excess contractual interest was not included as interest expense on our Consolidated Statements of Operations as we had discontinued accruing interest on the Predecessor's Senior Notes and Revolving Credit Facility subsequent to the Petition Date. The Predecessor discontinued making interest payments on the Senior Notes beginning in June 2020.
Reorganization Items
Expenditures, gains and losses that are realized or incurred by the Debtors as of or subsequent to the Petition Date and as a direct result of the Chapter 11 Cases are reported as Reorganization items, net in our Consolidated Statements of Operations for the year ended December 31, 2022, eight months ended December 31, 2021 (Successor) and four months ended April 30, 2021 (Predecessor). These costs include legal and other professional advisory service fees pertaining to the Chapter 11 Cases and the effects of the emergence from bankruptcy, including the application of fresh start accounting.
The components of reorganization items, net were as follows (in millions):
| Successor | Predecessor | ||||||||||||||||||||||
| Year Ended December 31, 2022 | Eight Months Ended December 31, 2021 | Four Months Ended April 30, 2021 | |||||||||||||||||||||
| Professional fees | $ | 2.4 | $ | 17.2 | $ | 93.4 | |||||||||||||||||
| Contract items | — | (1.7) | 3.9 | ||||||||||||||||||||
| Reorganization items (fees) | 2.4 | 15.5 | 97.3 | ||||||||||||||||||||
| Contract items | — | — | 0.5 | ||||||||||||||||||||
| Backstop premium | — | — | 30.0 | ||||||||||||||||||||
| Gain on settlement of liabilities subject to compromise | — | — | (6,139.0) | ||||||||||||||||||||
| Issuance of Common Shares for backstop premium | — | — | 29.1 | ||||||||||||||||||||
| Issuance of Common Shares to the Shipyard | — | — | 5.4 | ||||||||||||||||||||
| Write-off of unrecognized share-based compensation expense | — | — | 16.0 | ||||||||||||||||||||
| Impact of newbuild contract amendments | — | — | 350.7 | ||||||||||||||||||||
| Loss on fresh start adjustments | — | — | 9,194.6 | ||||||||||||||||||||
| Reorganization items (non-cash) | — | — | 3,487.3 | ||||||||||||||||||||
| Total reorganization items, net | $ | 2.4 | $ | 15.5 | $ | 3,584.6 | |||||||||||||||||
| Reorganization items (fees) paid | $ | 2.4 | $ | 14.7 | $ | 59.0 | |||||||||||||||||
| Reorganization items (fees) unpaid | $ | — | $ | 0.8 | $ | 38.3 | |||||||||||||||||
89
3. FRESH START ACCOUNTING
Applicability of Fresh Start Accounting
Upon emergence from bankruptcy, we qualified for and applied fresh start accounting, which resulted in the Company becoming a new entity for financial reporting purposes because (1) the holders of the then existing Class A ordinary shares of the Predecessor received less than 50 percent of the Common Shares of the Successor outstanding upon emergence and (2) the reorganization value of the Company’s assets immediately prior to confirmation of the plan of reorganization was less than the total of all post-petition liabilities and allowed claims.
The reorganization value derived from the range of enterprise values associated with the plan of reorganization was allocated to the Company’s identifiable tangible and intangible assets and liabilities based on their fair values (except for deferred income taxes). The amount of deferred income taxes recorded was determined in accordance with the applicable income tax accounting standard. The April 30, 2021 fair values of the Company’s assets and liabilities differ materially from their recorded values as reflected on the historical balance sheets.
Reorganization Value
The reorganization value represents the fair value of the Successor's total assets and was derived from the enterprise value associated with the plan of reorganization, which represents the estimated fair value of $1.8 billion. an entity's long-term debt and equity less unrestricted cash upon emergence from chapter 11. As set forth in the disclosure statement and approved by the Bankruptcy Court, third-party valuation advisors estimated the enterprise value to be between $1,860.0 million and $3,145.0 million. The enterprise value range of the reorganized Debtors was determined primarily by using a discounted cash flow analysis. The value agreed in the plan of reorganization is indicative of an enterprise value at the low end of this range, or $1,860.0 million.
The following table reconciles the enterprise value to the estimated fair value of Successor Common Shares as of the Effective Date (in millions, except per share value):
| April 30, 2021 | |||||
| Enterprise Value | $ | 1,860.0 | |||
| Plus: Cash and cash equivalents | 607.6 | ||||
| Less: Fair value of debt | (544.8) | ||||
| Less: Warrants | (16.4) | ||||
| Less: Noncontrolling interest | 1.1 | ||||
| Less: Pension and other post-retirement benefits liabilities | (189.0) | ||||
| Less: Adjustments not contemplated in Enterprise Value | (639.0) | ||||
| Fair value of Successor Common Shares | $ | 1,079.5 | |||
| Shares issued upon emergence | 75.0 | ||||
| Per share value | $ | 14.39 | |||
The following table reconciles the enterprise value to the reorganization value as of the Effective Date (in millions):
| April 30, 2021 | |||||
| Enterprise Value | $ | 1,860.0 | |||
| Plus: Cash and cash equivalents | 607.6 | ||||
| Plus: Non-interest bearing current liabilities | 346.0 | ||||
| Less: Adjustments not contemplated in Enterprise Value | (218.0) | ||||
| Reorganization value of Successor assets | $ | 2,595.6 | |||
90
Adjustments not contemplated in Enterprise Value represent certain obligations of the Successor that were either not contemplated or contemplated in a different amount in the forecasted cash flows of the enterprise valuation performed by third-party valuation advisors that, had they incorporated those anticipated cash flows into their analysis, the resulting valuation would have been different. For the reconciliation of Reorganization value of Successor assets, this item includes certain tax balances, contract liabilities, as well as an adjustment for the fair value of pension obligations. The reconciliation to Successor Common Share value includes these same reconciling items as well as other current and non-current liabilities of the Successor at the emergence.
The enterprise value and corresponding implied equity value are dependent upon achieving the future financial results set forth in the valuation utilizing assumptions regarding future day rates, utilization, operating costs and capital requirements as of the emergence date. All estimates, assumptions, valuations and financial projections, including the fair value adjustments, the enterprise value and equity value projections, are inherently subject to significant uncertainties and the resolution of contingencies beyond our control. Accordingly, there is no assurance that the estimates, assumptions, valuations or financial projections will be realized, and actual results could vary materially.
Valuation Process
The fair values of the Company's principal assets and liabilities including property, plant and equipment as well as our 50% equity interest in ARO and our Notes Receivable from ARO, options to purchase VALARIS DS-13 and VALARIS DS-14 (the "Newbuild Drillships"), the First Lien Notes, pensions and Warrants were estimated with the assistance of third-party valuation advisors.
Property, Plant and Equipment
The valuation of the Company’s drilling rigs was estimated by using an income approach or estimated sales price. These valuations were based on unobservable inputs that require significant judgments for which there is limited information, including, in the case of an income approach, assumptions regarding future day rates, utilization, operating costs, reactivation costs and capital requirements. In developing these assumptions, forecasted day rates and utilization took into account current market conditions and our anticipated business outlook. The cash flows were discounted at our weighted average cost of capital, which was derived from a blend of our after-tax cost of debt and our cost of equity and computed using public share price information for similar offshore drilling market participants, certain U.S. Treasury rates and certain risk premiums specific to the Company.
Our remaining property and equipment, including owned real estate and other equipment, was valued using a cost approach, in which the estimated replacement cost of the assets was adjusted for physical depreciation and obsolescence, where applicable, to arrive at estimated fair value.
The estimated fair value of our property and equipment includes an adjustment to reconcile to our reorganization value.
Notes Receivable from ARO
The fair value of the Notes Receivable from ARO was estimated using an income approach to value the forecasted cash flows attributed to the Notes Receivable from ARO using a discount rate based on a comparable yield with a country-specific risk premium.
91
Investment in ARO
We estimated the fair value of the rigs and equipmentequity investment in ARO primarily by applying an income approach, using projected discounted cash flows orof the underlying assets, a market approach. Werisk-adjusted discount rate and an estimated remaining useful lives for Atwood's drilling rigs, which ranged from 16effective income tax rate.
Options to 35 years based on original estimated useful lives of 30 to 35 years.Purchase Newbuild Drillships
The Merger was executed through the acquisition of Atwood's outstanding common stock and, therefore, the historical tax basesfair value of the acquired assets and assumed liabilities, net operating losses and other tax attributes of Atwood were assumed as of the Merger Date. However, adjustments were recordedoptions to recognize deferred tax assets and liabilities for the tax effects of differences between acquisition date fair values and tax bases of assets acquired and liabilities assumed. Additionally, the interaction of our and Atwood's tax attributes that impacted the deferred taxes of the combined entity were also recognized as part of acquisition accounting. As of the Merger Date,purchase Newbuild Drillships was estimated using an increase of $2.5 million to Atwood’s net deferred tax liability was recognized.
First Lien Notes
The fair value of the First Lien Notes was determined to approximate the par value based on third-party valuation advisors’ analysis of the Company’s collateral coverage, financial metrics, and interest rate for the First Lien Notes relative to market rates of recent placements of a similar term for industry participants with similar credit risk.
Pensions
Our pension and other postretirement benefit liabilities and costs are based upon actuarial computations that reflect our assumptions about future events, including long-term asset returns, interest rates, annual compensation increases, mortality rates and other factors. Upon emergence, our pension and other postretirement plans were remeasured as of the Effective Date. Key assumptions at the Effective Date included (1) a weighted average discount rate of 2.81% to determine pension benefit obligations and (2) an expected long-term rate of return on pension plan assets of 6.03% to determine net periodic pension cost.
Warrants
The fair value of the Warrants was determined using an option pricing model considering the contractual terms of the Warrant issuance. The key market data assumptions for the option pricing model are the estimated volatility and the risk-free rate. The volatility assumption was estimated using market data for offshore drilling market participants with consideration for differences in leverage. The risk-free rate assumption was based on U.S. Treasury Constant Maturity rates with a comparable term.
Condensed Consolidated Balance Sheet
The adjustments included in the following Condensed Consolidated Balance Sheet reflect the effects of the transactions contemplated by the plan of reorganization and executed by the Company on the Effective Date (reflected in the column “Reorganization Adjustments”), and fair value and other required accounting adjustments resulting from the adoption of fresh start accounting (reflected in the column “Fresh Start Accounting Adjustments”). The explanatory notes provide additional information with regard to the adjustments recorded.
92
| As of April 30, 2021 | |||||||||||||||||||||||
| Predecessor | Reorganization Adjustments | Fresh Start Accounting Adjustments | Successor | ||||||||||||||||||||
| ASSETS | |||||||||||||||||||||||
| CURRENT ASSETS | |||||||||||||||||||||||
| Cash and cash equivalents | $ | 280.2 | $ | 327.4 | (a) | $ | — | $ | 607.6 | ||||||||||||||
| Restricted cash | 45.7 | 42.7 | (b) | — | 88.4 | ||||||||||||||||||
| Accounts receivable, net | 425.9 | — | — | 425.9 | |||||||||||||||||||
| Other current assets | 370.1 | 1.5 | (c) | (281.1) | (o) | 90.5 | |||||||||||||||||
| Total current assets | 1,121.9 | 371.6 | (281.1) | 1,212.4 | |||||||||||||||||||
| PROPERTY AND EQUIPMENT, NET | 10,026.4 | (417.6) | (d) | (8,699.7) | (p) | 909.1 | |||||||||||||||||
| LONG-TERM NOTES RECEIVABLE FROM ARO | 442.7 | — | (214.4) | (q) | 228.3 | ||||||||||||||||||
| INVESTMENT IN ARO | 123.9 | — | (43.4) | (r) | 80.5 | ||||||||||||||||||
| OTHER ASSETS | 166.4 | (10.0) | (e) | 8.9 | (s) | 165.3 | |||||||||||||||||
| $ | 11,881.3 | $ | (56.0) | $ | (9,229.7) | $ | 2,595.6 | ||||||||||||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||||||||||||||||
| CURRENT LIABILITIES | |||||||||||||||||||||||
| Accounts payable - trade | $ | 161.5 | $ | 13.1 | (f) | $ | (0.5) | (t) | $ | 174.1 | |||||||||||||
| Accrued liabilities and other | 290.7 | (12.4) | (g) | (61.8) | (u) | 216.5 | |||||||||||||||||
| Total current liabilities | 452.2 | 0.7 | (62.3) | 390.6 | |||||||||||||||||||
| LONG-TERM DEBT | — | 544.8 | (h) | — | 544.8 | ||||||||||||||||||
| OTHER LIABILITIES | 706.2 | (55.2) | (i) | (85.6) | (v) | 565.4 | |||||||||||||||||
| Total liabilities not subject to compromise | 1,158.4 | 490.3 | (147.9) | 1,500.8 | |||||||||||||||||||
| LIABILITIES SUBJECT TO COMPROMISE | 7,313.7 | (7,313.7) | (j) | — | — | ||||||||||||||||||
| COMMITMENTS AND CONTINGENCIES | |||||||||||||||||||||||
| VALARIS SHAREHOLDERS' EQUITY | |||||||||||||||||||||||
| Predecessor Class A ordinary shares | 82.5 | (82.5) | (k) | — | — | ||||||||||||||||||
| Predecessor Class B ordinary shares | 0.1 | (0.1) | (k) | — | — | ||||||||||||||||||
| Successor common shares | — | 0.8 | (l) | — | 0.8 | ||||||||||||||||||
| Successor stock warrants | — | 16.4 | (m) | — | 16.4 | ||||||||||||||||||
| Predecessor additional paid-in capital | 8,644.0 | (8,644.0) | (k) | — | — | ||||||||||||||||||
| Successor additional paid-in capital | — | 1,078.7 | (l) | — | 1,078.7 | ||||||||||||||||||
| Retained deficit | (5,147.4) | 14,322.6 | (n) | (9,175.2) | (w) | — | |||||||||||||||||
| Accumulated other comprehensive loss | (93.4) | — | 93.4 | (x) | — | ||||||||||||||||||
| Predecessor treasury shares | (75.5) | 75.5 | (k) | — | — | ||||||||||||||||||
| Total Valaris shareholders' equity | 3,410.3 | 6,767.4 | (9,081.8) | 1,095.9 | |||||||||||||||||||
| NONCONTROLLING INTERESTS | (1.1) | — | — | (1.1) | |||||||||||||||||||
| Total equity | 3,409.2 | 6,767.4 | (9,081.8) | 1,094.8 | |||||||||||||||||||
| $ | 11,881.3 | $ | (56.0) | $ | (9,229.7) | $ | 2,595.6 | ||||||||||||||||
93
Reorganization Adjustments
(a) Cash
Represents the reorganization adjustments (in millions):
| Receipt of cash for First Lien Notes | $ | 500.0 | |||
| Loan proceeds from backstop lenders | 20.0 | ||||
| Funds received for liquidation of rabbi trust related to certain employee benefits | 17.6 | ||||
| Payments to Predecessor creditors | (129.9) | ||||
| Transfer of funds for payment of certain professional fees to escrow account | (42.7) | ||||
| Payment for certain professional services fees | (29.0) | ||||
| Various other | (8.6) | ||||
| $ | 327.4 | ||||
(b) Restricted cash
Reflects the reorganization adjustment to record the transfer of cash for payment of certain professional fees to restricted cash, which were held in escrow until billings from professionals were received and reconciled at which time the funds in the account were released.
(c) Other current asset
Reflects certain prepayments incurred upon emergence.
(d) Property and Equipment, net
Reflects the reorganization adjustment to remove $417.6 million of work-in-process related to the Newbuild Drillships. These values were removed from property and equipment, net, based on the terms of the amended agreements with the Shipyard. As a result of the option to take delivery, we removed the historical work-in-process balances from the balance sheet.
(e) Other assets
Represents the reorganization adjustments (in millions):
| Liquidation of rabbi trust related to certain employee benefits | $ | (17.6) | |||
| Elimination of right-of-use asset associated with Newbuild Drillships | (5.5) | ||||
| Fair value of options to purchase Newbuild Drillships | 13.1 | ||||
| $ | (10.0) | ||||
Our supplemental executive retirement plans are non-qualified plans that provided eligible employees an opportunity to defer a portion of their compensation for use after retirement. The plans were frozen to the entry of new participants in 2019 and to future compensation deferrals as of January 1, 2020. Upon emergence, assets previously held in a rabbi trust maintained for the plan were liquidated and the plan was amended.
In accordance with the amended agreement with the Shipyard, our leases were terminated and we have eliminated the historical right-of-use asset associated with the berthing locations of Newbuild Drillships.
94
Additionally, upon effectiveness of the plan of reorganization, the amended agreement with the Shipyard provides the Company with the option to purchase the Newbuild Drillships. The reorganization adjustments include an asset that reflects the fair value of the option to purchase the Newbuild Drillships and embedded feature related to the ability, under the amended agreements with the Shipyard, for the equity issued pursuant to this arrangement to be put to the Company for $8.0 million of consideration for each rig, should we choose to take delivery.
(f) Accounts payable - trade
Reflects the following reorganization adjustments (in millions):
| Professional fees incurred upon emergence | $ | 26.1 | |||
| Payment of professional fees incurred prior to emergence | (12.6) | ||||
| Payment of certain accounts payable incurred prior to emergence | (0.4) | ||||
| $ | 13.1 | ||||
(g) Accrued liabilities and other
Reflects the following reorganization adjustments (in millions):
| Elimination of lease liabilities associated with Newbuild Drillships | $ | (5.0) | |||
| Elimination of accrued post-petition holding costs associated with Newbuild Drillships | (4.1) | ||||
| Payment of certain accrued liabilities incurred prior to emergence | (3.3) | ||||
| $ | (12.4) | ||||
In accordance with the amended agreement with the Shipyard, our leases were terminated and we eliminated the historical lease liability associated with the berthing locations of Newbuild Drillships. Accrued post-petition holding costs were also eliminated as a result of the amendments made effective upon emergence. Additionally, reorganization adjustments to accrued liabilities and other includes an amount primarily related to payment of professional fees incurred prior to emergence.
(h) Long-term debt
Reflects the reorganization adjustment to record the issuance of the $550.0 million aggregate principal amount of First Lien Notes and debt issuance costs of $5.2 million.
(i) Other liabilities
Reflects the following reorganization adjustments (in millions):
| Elimination of construction contract intangible liabilities associated with Newbuild Drillships | $ | (49.9) | |||
| Elimination of accrued post-petition holding costs associated with Newbuild Drillships | (4.7) | ||||
| Elimination of lease liabilities associated with Newbuild Drillships | (0.6) | ||||
| $ | (55.2) | ||||
The reorganization adjustments to other liabilities primarily relate to the elimination of construction contract intangible liabilities associated with the Newbuild Drillships. These construction contract intangible liabilities were recorded in purchase accounting for the original contracting entity. As the amended contract was structured as an option whereby we had the right, not the obligation to take delivery of the rigs, there was no longer an intangible liability associated with the contracts.
95
We have eliminated the historical lease liability associated with the berthing locations of Newbuild Drillships and accrued post-petition holding costs as described in (g) above.
(j) Liabilities subject to compromise
Reflects the following reorganization adjustments (in millions):
| Settlement of liabilities subject to compromise | $ | 7,313.7 | |||
| Issuance of common stock to Predecessor creditors | (721.0) | ||||
| Issuance of common stock to backstop parties | (323.8) | ||||
| Payments to Predecessor creditors | (129.9) | ||||
| Gain on settlement of liabilities subject to compromise | $ | 6,139.0 | |||
(k) Predecessor ordinary shares, additional paid-in capital and treasury shares
Represents the cancellation of the Predecessor's ordinary shares of $82.6 million, additional paid-in capital of $8,644.0 million and treasury stock of $75.5 million.
(l) Successor common shares and additional paid-in capital
Represents par value of 75.0 million new Common Shares of $0.8 million and capital in excess of par value of $1,078.7 million.
(m) Successor stock warrants
On the Effective Date and pursuant to the plan of reorganization, Valaris Limited issued an aggregate of 5.6 million Warrants exercisable for up to an aggregate of 5.6 million Common Shares to former holders of Legacy Valaris' equity interests. The fair value of the Warrants as of the Effective Date was $16.4 million.
96
(n) Retained deficit
Represents the reorganization adjustments to total equity as follows (in millions):
| Gain on settlement of liabilities subject to compromise | $ | (6,139.0) | |||
| Issuance of Common Shares for backstop premium | 29.1 | ||||
| Issuance of Common Shares to the Shipyard | 5.4 | ||||
| Write-off of unrecognized share-based compensation expense | 16.0 | ||||
| Professional fees and success fees | 35.9 | ||||
| Backstop premium | 30.0 | ||||
| Impact of newbuild contract amendments | 350.7 | ||||
| Reorganization items, net | (5,671.9) | ||||
| Cancellation of Predecessor common shares | (82.6) | ||||
| Cancellation of Predecessor treasury shares | 75.5 | ||||
| Cancellation of Predecessor additional paid in capital | (7,856.4) | ||||
| Cancellation of equity component of Predecessor convertible notes | (220.0) | ||||
| Cancellation of Predecessor cash and equity compensation plans | (583.6) | ||||
| Fair value of Warrants | 16.4 | ||||
| $ | (14,322.6) | ||||
Fresh Start Adjustments
(o) Other current assets
Reflects the fresh start adjustments to record the estimated fair value of other current assets as follows (in millions):
| Elimination of materials and supplies | $ | (260.8) | |||
| Elimination of historical deferred contract drilling expenses | (20.3) | ||||
| $ | (281.1) | ||||
Primarily reflects the fresh start adjustment to eliminate the historical balance for materials and supplies as the result of a change in accounting policies upon emergence. Historically, we recognized materials and supplies on the balance sheet when purchased and subsequently expensed items when consumed. Upon emergence from bankruptcy, we elected to change our accounting policies related to materials and supplies whereby materials and supplies will be expensed as a period cost when received. Additionally, a customer arrangement provides that we take title to their materials and supplies for the duration of the contract and return or pay cash for them at the termination of the contract. Together with our policy change on materials and supplies, we elected to record these assets and the obligation to our customer on a net basis as opposed to a gross basis.
The fresh start adjustment for the elimination of historical deferred contract drilling expenses primarily relates to deferred mobilization costs, deferred contract preparation costs and deferred certification costs. Costs incurred for mobilization and contract preparation prior to the commencement of drilling services are deferred and subsequently amortized over the term of the related drilling contract. Additionally, we must obtain certifications from various regulatory bodies in order to operate our drilling rigs and must maintain such certifications through periodic inspections and surveys. The costs incurred in connection with maintaining such certifications, including inspections, tests, surveys and drydock, as well as remedial structural work and other compliance costs, are deferred and amortized on a straight-line basis over the corresponding certification periods. These deferred costs had no future economic benefit and were eliminated from the fresh start financial statements.
97
(p) Property and equipment, net
Reflects the fresh start adjustments to historical amounts to record the estimated fair value of property and equipment.
Furthermore, upon emergence from bankruptcy, we elected to change our accounting policies and have identified the significant components of our drilling rigs and ascribed useful lives based on the expected time until the next required overhaul or the end of the expected economic lives of the components. Prior to emergence, we recorded our drilling rigs as a single asset with a useful life ascribed by the expected useful life of that asset.
(q) Notes Receivable from ARO
Reflects the fresh start adjustment to record the estimated fair value of the Notes Receivable from ARO.
(r) Investment in ARO
Reflects the fresh start adjustment to record the estimated fair value of the equity investment in ARO.
(s) Other assets
Reflects the fresh start adjustments to record the estimated fair value of other assets as follows (in millions):
| Deferred tax impacts of certain fresh start adjustments | $ | 21.1 | |||
| Fair value of contracts with customers | 8.5 | ||||
| Fair value adjustments to right-of-use assets | 0.4 | ||||
| Elimination of historical deferred contract drilling expenses | (16.5) | ||||
| Elimination of other deferred costs | (4.6) | ||||
| $ | 8.9 | ||||
The fresh start adjustment for deferred income tax assets represents the estimated incremental deferred income taxes, which reflects the tax effect of the differences between the estimated fair value of certain assets and liabilities recorded under fresh start accounting and the carryover tax basis of those assets and liabilities.
The fresh start adjustment to record the estimated fair value of contracts with customers represents the intangible assets recognized for firm drillingcustomer contracts in place at the MergerEffective Date withthat have favorable contract terms as compared to then-marketcurrent market day rates for comparable drilling rigs.The various factors considered in the determination of these fair valuesadjustment were (1) the contracted day rate for each contract, (2) the remaining term of each contract, (3) the rig class and (4) the market conditions for each respective rig class at the Merger Date.emergence date. The intangible assets were calculatedare computed based on the present value of the difference in cash flowsinflows over the remaining contract term as compared to a hypothetical contract with the same remaining term at an estimated then-currentcurrent market day rate using a risk-adjusted discount rate and an estimated effective income tax rate.
The fresh start adjustment to right-of-use assets reflects the remeasuring of our operating leases as of the emergence date. Certain operating leases had unfavorable terms as of the emergence date, and as a result the right-of-use asset for these intangible assets is estimatedsuch leases did not equal the lease liability upon emergence.
The fresh start adjustment to be $11.4 millioneliminate historical deferred contract drilling expenses reflects the noncurrent portion of historical deferred contract drilling expenses described in (o) above as well as the elimination of customer contract intangibles previously recorded in purchase accounting for a 2019 transaction.
98
The fresh start adjustments to eliminate other deferred costs reflect non-operational deferred costs that had no future economic benefit.
(t) Accounts payable - trade
The fresh start adjustment to accounts payable trade reflects the write off of certain deferred amounts related to our operating leases. This value was eliminated through the remeasurement of our leases as of the emergence date.
(u) Accrued liabilities and $5.8 million for 2018 and 2019, respectively.other
| Elimination of customer payable balance | $ | (36.8) | |||
| Elimination of historical deferred revenues | (25.9) | ||||
| Fair value of contracts with customers | 0.5 | ||||
| Fair value adjustment to lease liabilities | 0.4 | ||||
| $ | (61.8) | ||||
The fresh start adjustment to eliminate the firm obligationscustomer payable balance is related to the change in accounting policy to present the balance on a net basis.
The fresh start adjustment to eliminate historical deferred revenues is primarily related to amounts previously received for the reimbursement for capital upgrades, upfront contract deferral fees and mobilization. Such amounts are deferred and subsequently amortized over the term of the related drilling contract. The deferred revenue did not represent any future performance obligations and was therefore eliminated as a fresh start accounting adjustment.
The fresh start adjustment to record the estimated fair value of contracts with customers reflects the intangible liabilities recognized for firm customer contracts in place at the Effective Date that have unfavorable contract terms as compared to current market day rates for comparable drilling rigs. The various factors considered in the adjustment and computation of the intangible liabilities are described in (s) above. This balance was amortized to operating revenues over the respective remaining constructioncontract terms on a straight-line basis.
The fresh start adjustment to lease liabilities reflects the remeasuring of ENSCO DS-13our operating leases as of the Effective Date.
(v) Other liabilities
Reflects the fresh start adjustments to record the estimated fair value of other liabilities as follows (in millions):
| Adjustment to fair value of pension and other post-retirement plan liabilities | $ | (82.7) | |||
| Elimination of historical deferred revenue | (5.9) | ||||
| Deferred tax impacts of certain fresh start adjustments | 1.7 | ||||
| Fair value adjustments to lease liabilities | 1.1 | ||||
| Fair value adjustments to other liabilities | 0.2 | ||||
| $ | (85.6) | ||||
99
The fresh start adjustment to fair value pension and ENSCO DS-14other post-retirement plan liabilities results from the remeasurement of the pension and other post-retirement benefit plans at the emergence date.
The fresh start adjustment to eliminate deferred revenues reflects the noncurrent portion of deferred revenues described in (u) above.
The fresh start adjustment for deferred income tax liabilities represents the estimated incremental deferred taxes, which reflects the tax effect of the differences between the estimated fair value certain assets and liabilities recorded under fresh start accounting and the carryover tax basis of those assets and liabilities.
The fresh start adjustment to lease liabilities reflects the remeasuring of our operating leases as of the Effective Date.
(w) Retained Deficit
Reflects the fresh start adjustments to retained deficit as follows (in millions):
| Fair value adjustments to prepaid and other current assets | $ | (281.1) | |||
| Fair value adjustments to property | (8,699.7) | ||||
| Fair value of intangible assets | 8.5 | ||||
| Fair value adjustment to investment in ARO | (43.4) | ||||
| Fair value adjustment to note receivable from ARO | (214.4) | ||||
| Fair value adjustments to other assets | (20.7) | ||||
| Fair value adjustments to other current liability | 62.8 | ||||
| Fair value of intangible liabilities | (0.5) | ||||
| Fair value adjustment to other liabilities | 87.3 | ||||
| Elimination of Predecessor accumulated other comprehensive loss | (93.4) | ||||
| Total fresh start adjustments included in reorganization items, net | $ | (9,194.6) | |||
| Tax impact of fresh start adjustments | 19.4 | ||||
| $ | (9,175.2) | ||||
(x) Accumulated other comprehensive loss
Reflects the fresh start adjustments for the elimination of Predecessor accumulated other comprehensive loss through Reorganization items, net.
4. REVENUE FROM CONTRACTS WITH CUSTOMERS
Under our drilling contracts with customers, we provide a drilling rig and drilling services, including rig crews, on a day rate basis. We receive a daily rate that may vary between the full rate and zero rate throughout the duration of the contractual term, depending on the operations of the rig. We also may receive lump-sum fees or similar compensation generally for the mobilization, demobilization and capital upgrades of our rigs. Our customers bear substantially all of the costs of constructing the well and supporting drilling operations, as well as the economic risk relative to the success of the well.
100
Our drilling contracts contain a lease component and we have elected to apply the practical expedient provided under Accounting Standards Codification ("ASC") 842 to not separate the lease and non-lease components and apply the revenue recognition guidance in ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)." Our drilling service provided under each drilling contract is a single performance obligation satisfied over time and comprised of a series of distinct time increments, or service periods. Total revenue is determined for each individual drilling contract by estimating both fixed and variable consideration expected to be earned over the contract term. Fixed consideration generally relates to activities such as mobilization, demobilization and capital upgrades of our rigs that are not distinct performance obligations within the context of our contracts and is recognized on a straight-line basis over the contract term. Variable consideration generally relates to distinct service periods during the contract term and is recognized in the period when the services are performed.
The amount estimated current marketfor variable consideration is only recognized as revenue to the extent that it is probable that a significant reversal will not occur during the contract term. We have applied the optional exemption afforded in ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)," and have not disclosed the variable consideration related to our estimated future day rate revenues. The remaining duration of our drilling contracts based on those in place as of December 31, 2023 was between approximately 1 month and 5 years.
Day Rate Drilling Revenue
Our drilling contracts provide for payment on a day rate basis and include a rate schedule with higher rates for periods when the construction of a comparable drilling rig.rig is operating and lower rates or zero rates for periods when drilling operations are interrupted or restricted. The unfavorable construction liability was calculatedday rate invoiced to the customer is determined based on the present valuevarying rates applicable to specific activities performed on an hourly or other time increment basis. Day rate consideration is allocated to the distinct hourly or other time increment to which it relates within the contract term and is generally recognized consistent with the contractual rate invoiced for the services provided during the respective period. Invoices are typically issued to our customers on a monthly basis and payment terms on customer invoices are typically 30 days.
Certain of our contracts contain performance incentives whereby we may earn a bonus based on pre-established performance criteria. Such incentives are generally based on our performance over individual monthly time periods or individual wells. Consideration related to performance bonus is generally recognized in the specific time period to which the performance criteria was attributed.
We may receive termination fees if certain drilling contracts are terminated by the customer prior to the end of the differencecontractual term. Such compensation is recognized as revenue when our performance obligation is satisfied, the termination fee can be reasonably measured and collection is probable.
Contract Termination - VALARIS DS-11
In 2021, a contract was awarded to VALARIS DS-11 for a project in cash outflowsthe U.S. Gulf of Mexico that was expected to commence in mid-2024. In June 2022, the customer terminated the contract. As a result of the contract termination, we received an early termination fee of $51.0 million which is included in revenues on our Consolidated Statements of Operations for the remaining contractual payments as comparedyear ended December 31, 2022 (Successor).
Mobilization / Demobilization Revenue
In connection with certain contracts, we receive lump-sum fees or similar compensation for the mobilization of equipment and personnel prior to a hypotheticalthe commencement of drilling services or the demobilization of equipment and personnel upon contract completion. Fees received for the mobilization or demobilization of equipment and personnel are included in Operating revenues. The costs incurred in connection with the same remaining contractual payments at estimated then-current market rates usingmobilization and demobilization of equipment and personnel are included in Contract drilling expense.
101
Mobilization fees received prior to commencement of drilling operations are recorded as a risk-adjusted discount ratecontract liability and an estimated effective income tax rate. The liabilities will be amortized on a straight-line basis over the contract term. Demobilization fees expected to be received upon contract completion are estimated lifeat contract inception and recognized on a straight-line basis over the contract term. In some cases, demobilization fees may be contingent upon the occurrence or non-occurrence of ENSCO DS-13a future event. In such cases, this may result in cumulative-effect adjustments to demobilization revenues upon changes in our estimates of future events during the contract term.
Capital Upgrade / Contract Preparation Revenue
In connection with certain contracts, we receive lump-sum fees or similar compensation generally for requested capital upgrades to our drilling rigs or for other contract preparation work. Fees received for requested capital upgrades and ENSCO DS-14other contract preparation work are recorded as a reductioncontract liability and amortized on a straight-line basis over the contract term to Operating revenues.
Revenues Related to Reimbursable Expenses
We generally receive reimbursements from our customers for purchases of depreciation expense beginningsupplies, equipment, personnel services and other services provided at their request. Such reimbursable revenue is variable and subject to uncertainty, as the amounts received and timing thereof are highly dependent on factors outside of our influence. Accordingly, reimbursable revenue is recognized during the dateperiod in which the rigcorresponding goods and services are consumed once the uncertainty is placed into service.resolved, which typically occurs when the related costs are incurred on behalf of a customer. We are generally considered a principal in such transactions and record the associated revenue at the gross amount billed to the customer within Operating revenues.
Contract assets represent amounts recognized as revenue but for which the right to invoice the customer is dependent upon our future performance. Once the previously recognized revenue is invoiced, the corresponding contract asset, or a portion thereof, is transferred to accounts receivable.
Contract liabilities generally represent fees received for mobilization, capital upgrades or in the case of our 50/50 unconsolidated joint venture with Saudi Aramco, represent the Mergerdifference between the amounts billed under the bareboat charter arrangements and lease revenues earned. See “Note 5 – Equity Method Investment in ARO" for additional details regarding our balances with ARO.
Contract assets and liabilities are presented net on our Consolidated Balance Sheets on a contract-by-contract basis. Current contract assets and liabilities are included in Other current assets and Accrued liabilities and other, respectively, and noncurrent contract assets and liabilities are included in Other assets and Other liabilities, respectively, on our Consolidated Balance Sheets.
The following unaudited supplemental pro forma results present consolidated information as if the Merger was completed on January 1, 2016. The pro forma results include, among others, (i) the amortization associated with acquired intangibletable summarizes our contract assets and contract liabilities (in millions):
| December 31, 2023 | December 31, 2022 | ||||||||||
| Current contract assets | $ | 1.5 | $ | 4.6 | |||||||
| Noncurrent contract assets | $ | 4.5 | $ | 0.7 | |||||||
| Current contract liabilities (deferred revenue) | $ | 116.2 | $ | 78.0 | |||||||
| Noncurrent contract liabilities (deferred revenue) | $ | 37.6 | $ | 41.0 | |||||||
102
Changes in contract assets and liabilities (ii)during the period are as follows (in millions):
| Contract Assets | Contract Liabilities | ||||||||||
| Balance as of December 31, 2021 | $ | 0.3 | $ | 56.6 | |||||||
| Revenue recognized in advance of right to bill customer | 9.2 | — | |||||||||
| Increase due to revenue deferred during the period | — | 156.7 | |||||||||
| Decrease due to amortization of deferred revenue that was included in the beginning contract liability balance | — | (41.1) | |||||||||
| Decrease due to amortization of deferred revenue that was added during the period | — | (47.1) | |||||||||
| Decrease due to transfer to receivables and payables during the period | (4.2) | (6.1) | |||||||||
| Balance as of December 31, 2022 | 5.3 | 119.0 | |||||||||
| Revenue recognized in advance of right to bill customer | 8.4 | — | |||||||||
| Increase due to revenue deferred during the period | — | 162.9 | |||||||||
| Decrease due to amortization of deferred revenue that was included in the beginning contract liability balance | — | (73.1) | |||||||||
| Decrease due to amortization of deferred revenue that was added during the period | — | (46.5) | |||||||||
| Decrease due to transfer to receivables and payables during the period | (7.7) | (8.5) | |||||||||
| Balance as of December 31, 2023 | $ | 6.0 | $ | 153.8 | |||||||
Deferred Contract Costs
Costs incurred for upfront rig mobilizations and certain contract preparations are attributable to our future performance obligation under each respective drilling contract. These costs are deferred and amortized on a reduction in depreciation expense for adjustments to property andstraight-line basis over the contract term. Demobilization costs are recognized as incurred upon contract completion. Costs associated with the mobilization of equipment and (iii) a reductionpersonnel to interest expense resulting from the retirement of Atwood's revolving credit facilitymore promising market areas without contracts are expensed as incurred. Deferred contract costs are included in Other current assets and 6.50% senior notes due 2020. The pro forma results do not include any potential synergies or non-recurring charges that may result directly from the Merger.
| (in millions, except per share amounts) | Twelve Months Ended (Unaudited) | ||||||
2017(1) | 2016 | ||||||
| Revenues | $ | 2,243.0 | $ | 3,622.1 | |||
| Net income (loss) | (168.7 | ) | 1,284.9 | ||||
| Earnings (loss) per share - basic and diluted | (.39 | ) | 3.18 | ||||
Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | ||||||||||||
| As of December 31, 2017 | |||||||||||||||
| Supplemental executive retirement plan assets | $ | 30.9 | $ | — | $ | — | $ | 30.9 | |||||||
| Derivatives, net | — | 6.8 | — | 6.8 | |||||||||||
| Total financial assets | 30.9 | 6.8 | — | 37.7 | |||||||||||
| Total financial liabilities | — | — | — | — | |||||||||||
| As of December 31, 2016 | |||||||||||||||
| Supplemental executive retirement plan assets | $ | 27.7 | $ | — | $ | — | $ | 27.7 | |||||||
| Total financial assets | 27.7 | — | — | 27.7 | |||||||||||
| Derivatives, net | — | (8.8 | ) | — | (8.8 | ) | |||||||||
| Total financial liabilities | $ | — | $ | (8.8 | ) | $ | — | $ | (8.8 | ) | |||||
103
Future Amortization of Contract Liabilities and Deferred Costs
Our contract liabilities and deferred costs are amortized on a straight-line basis over the contract term or corresponding certification period to Operating revenues and Contract drilling expense, respectively, with the exception of the contract liabilities related to our bareboat charter arrangements with ARO which would not be contractually payable until the end of the lease term or termination, if sooner. See "Note 6"Note 5 - Derivative Instruments"Equity Method Investment in ARO" for additional information on our derivatives, including a descriptionARO and related arrangements. The table below reflects the expected future amortization of our foreign currency hedgingcontract liabilities and deferred costs recorded as of December 31, 2023. In the case of our contract liabilities related to our bareboat charter arrangements with ARO, the contract liability is not amortized and as such, the amount is reflected in the table below at the end of the current lease term.
| (In millions) | ||||||||||||||||||||||||||||||||
| 2024 | 2025 | 2026 | 2027 & Thereafter | Total | ||||||||||||||||||||||||||||
| Amortization of contract liabilities | $ | 116.2 | $ | 24.7 | $ | 12.1 | $ | 0.8 | $ | 153.8 | ||||||||||||||||||||||
| Amortization of deferred costs | $ | 75.3 | $ | 15.9 | $ | 8.1 | $ | 0.3 | $ | 99.6 | ||||||||||||||||||||||
5. EQUITY METHOD INVESTMENT IN ARO
Background
ARO is a 50/50 unconsolidated joint venture between the Company and Saudi Aramco that owns and operates offshore drilling rigs in Saudi Arabia. As of December 31, 2023, ARO owned eight jackup rigs, had ordered one newbuild jackup rigs and leased eight rigs from us through bareboat charter arrangements (the "Lease Agreements") whereby substantially all operating costs are incurred by ARO. At December 31, 2023, the leased rigs were operating under three-year drilling contracts, or related extensions, with Saudi Aramco. The eight rigs owned by ARO are currently operating under contracts with Saudi Aramco, each with a minimum aggregate contract term of 15 years, provided that the rigs meet the technical and operational requirements of Saudi Aramco.
The shareholder agreement governing the joint venture (the "Shareholder Agreement") specifies that ARO shall purchase 20 newbuild jackup rigs over an approximate 10-year period. The first two newbuild jackups were ordered in January 2020, the first of which, Kingdom 1, was delivered and commenced operations in the fourth quarter of 2023, and the second is expected to be delivered in the first half of 2024. ARO is expected to commit to orders for two additional newbuild jackups in the near term. In connection with these plans, we have a potential obligation to fund ARO for newbuild jackup rigs. See “Note 13 Commitments and Contingencies" for additional information.
The joint venture partners agreed in the Shareholder Agreement that Saudi Aramco, as a customer, will provide drilling contracts to ARO in connection with the acquisition of the newbuild rigs. The initial contracts provided by Saudi Aramco for each of the newbuild rigs will be for an eight-year term. The day rate for the initial contracts for each newbuild rig is determined using a pricing mechanism that targets a six-year payback period for construction costs on an EBITDA basis. The initial eight-year contracts will be followed by a minimum of another eight years of term, re-priced in three-year intervals based on a market pricing mechanism.
Summarized Financial Information
The operating revenues of ARO presented below reflect revenues earned under drilling contracts with Saudi Aramco for the ARO-owned jackup rigs as well as the rigs leased from us. Contract drilling expense is inclusive of the bareboat charter fees for the rigs leased from us. See additional discussion below regarding these related-party transactions.
104
Summarized financial information for ARO is as follows (in millions):
| Year Ended December 31, 2023 | Year Ended December 31, 2022 | Year Ended December 31, 2021 | |||||||||||||||
| Revenues | $ | 496.6 | $ | 459.5 | $ | 470.6 | |||||||||||
| Operating expenses | |||||||||||||||||
| Contract drilling (exclusive of depreciation) | 365.9 | 341.8 | 362.3 | ||||||||||||||
| Depreciation | 65.9 | 63.4 | 65.2 | ||||||||||||||
| General and administrative | 22.2 | 18.7 | 17.8 | ||||||||||||||
| Operating income | 42.6 | 35.6 | 25.3 | ||||||||||||||
| Other expense, net | 31.8 | 11.1 | 13.4 | ||||||||||||||
| Provision for income taxes | 8.3 | 3.8 | 7.9 | ||||||||||||||
| Net income | $ | 2.5 | $ | 20.7 | $ | 4.0 | |||||||||||
| December 31, 2023 | December 31, 2022 | ||||||||||
| Cash and cash equivalents | $ | 92.9 | $ | 176.2 | |||||||
| Other current assets | 184.0 | 140.6 | |||||||||
| Non-current assets | 1,081.0 | 818.1 | |||||||||
| Total assets | $ | 1,357.9 | $ | 1,134.9 | |||||||
| Current liabilities | $ | 136.0 | $ | 86.3 | |||||||
| Non-current liabilities | 1,056.8 | 884.6 | |||||||||
| Total liabilities | $ | 1,192.8 | $ | 970.9 | |||||||
Equity in Earnings of ARO
We account for our interest in ARO using the equity method of accounting and only recognize our portion of ARO's net income, adjusted for basis differences as discussed below, which is included in Equity in earnings of ARO in our Consolidated Statements of Operations. ARO is a variable interest entity; however, we are not the primary beneficiary and therefore do not consolidate ARO. Judgments regarding our level of influence over ARO included considering key factors such as each partner's ownership interest, representation on the board of managers of ARO and ability to direct activities that most significantly impact ARO's economic performance, including the ability to influence policy-making decisions. Our investment in ARO would be assessed for impairment if there are changes in facts and related methodologies usedcircumstances that indicate a loss in value may have occurred. If a loss were deemed to manage foreign currency exchange rate risk. Thehave occurred and this loss was determined to be other than temporary, the carrying value of our investment would be written down to fair value measurementsand an impairment recorded.
We have an equity method investment in ARO that was recorded at its estimated fair value at both the Effective Date and also on the date of our derivatives2019 transaction where we acquired the subsidiary that held the joint venture interest. We computed the difference between the fair value of ARO's net assets and the carrying value of those net assets in ARO's U.S. GAAP financial statements ("basis differences") on each of these dates. These basis differences primarily related to ARO's long-lived assets and the recognition of intangible assets associated with certain of ARO's drilling contracts that were based ondetermined to have favorable terms relative to market prices thatterms as of the measurement dates.
105
Basis differences are generally observable for similaramortized over the remaining life of the assets or liabilities at commonly quoted intervals.to which they relate and are recognized as an adjustment to the Equity in earnings of ARO in our Consolidated Statements of Operations. The amortization of those basis differences is combined with our 50% interest in ARO's net income. A reconciliation of those components is presented below (in millions):
| Successor | Predecessor | |||||||||||||||||||||||||
| Year Ended December 31, 2023 | Year Ended December 31, 2022 | Eight Months Ended December 31, 2021 | Four Months Ended April 30, 2021 | |||||||||||||||||||||||
| 50% interest in ARO net income (loss) | $ | 1.3 | $ | 10.4 | $ | (4.0) | $ | 6.0 | ||||||||||||||||||
| Amortization of basis differences | 12.0 | 14.1 | 10.1 | (2.9) | ||||||||||||||||||||||
| Equity in earnings of ARO | $ | 13.3 | $ | 24.5 | $ | 6.1 | $ | 3.1 | ||||||||||||||||||
Related-Party Transactions
During the years ended December 31, 2023 and 2022, and eight months ended December 31, 2021 (Successor) and four months ended April 30, 2021 (Predecessor), revenues recognized by us related to the Lease Agreements were $69.2 million, $56.7 million, $35.4 million and $21.7 million, respectively.
Our balances related to the Lease Agreements were as follows (in millions):
| December 31, 2023 | December 31, 2022 | |||||||||||||||||||
Amounts receivable (1) | $ | 10.2 | $ | 12.0 | ||||||||||||||||
Contract liabilities(2) | $ | 15.9 | $ | 16.7 | ||||||||||||||||
Accounts payable(2) | $ | 57.7 | $ | 43.2 | ||||||||||||||||
(1)Amounts receivable from ARO is included in Accounts receivable, net in our Condensed Consolidated Balance Sheets.
(2)The per day bareboat charter amount in the Lease Agreements is subject to adjustment based on actual performance of the respective rig and therefore, the corresponding contract liabilities are subject to adjustment during the lease term. Upon completion of the lease term, such amounts become a payable to or a receivable from ARO.
During 2017 and 2018, the Company contributed assets to ARO in exchange for the 10-year Notes Receivable from ARO, and as amended in December 2023, bear interest based on a one-year term SOFR, set as of the end of the year prior to the year applicable, plus 2.10%. The Notes Receivable from ARO were adjusted to the estimated fair value as of the Effective Date and the resulting discount to the principal amount is being amortized using the effective interest method to interest income over the remaining terms of the notes.
The principal amount and discount of the Notes Receivable from ARO were as follows (in millions):
| December 31, 2023 | December 31, 2022 | |||||||||||||||||||
| Principal amount | $ | 402.7 | $ | 402.7 | ||||||||||||||||
| Discount | (120.4) | (148.7) | ||||||||||||||||||
| Carrying value | $ | 282.3 | $ | 254.0 | ||||||||||||||||
106
We collected our 2023 and 2022 interest on the Notes Receivable from ARO from ARO in cash prior to December 31, 2023 and 2022, respectively, and as such, there was no interest receivable for the Notes Receivable from ARO as of December 31, 2023 and 2022.
Interest income earned on the Notes Receivable from ARO was as follows (in millions):
| Successor | Predecessor | |||||||||||||||||||||||||
| Year Ended December 31, 2023 | Year Ended December 31, 2022 | Eight Months Ended December 31, 2021 | Four Months Ended April 30, 2021 | |||||||||||||||||||||||
| Interest income | $ | 30.5 | $ | 11.3 | $ | 7.0 | $ | 3.5 | ||||||||||||||||||
Non-cash amortization (1) | 28.3 | 44.9 | 20.8 | — | ||||||||||||||||||||||
| Total interest income on the Notes Receivable from ARO | $ | 58.8 | $ | 56.2 | $ | 27.8 | $ | 3.5 | ||||||||||||||||||
(1)Represents the amortization of the discount on the Notes Receivable from ARO using the effective interest method to interest income over the term of the notes. In 2022, we recognized non-cash interest income of $14.8 million attributable to a $40.0 million early principal repayment of the Notes Receivable from ARO received in September 2022.
Maximum Exposure to Loss
The following table summarizes the total assets and liabilities as reflected in our Consolidated Balance Sheets as well as our maximum exposure to loss related to ARO (in millions). Our maximum exposure to loss is limited to (1) our equity investment in ARO; (2) the carrying amount of our Notes Receivable from ARO; and (3) other receivables and contract assets from ARO, partially offset by contract liabilities as well as payables to ARO.
| December 31, 2023 | December 31, 2022 | |||||||||||||
| Total assets | $ | 417.1 | $ | 377.8 | ||||||||||
| Less: total liabilities | 73.6 | 59.9 | ||||||||||||
| Maximum exposure to loss | $ | 343.5 | $ | 317.9 | ||||||||||
107
6. FAIR VALUE MEASUREMENTS
The carrying values and estimated fair values of certain of our debtfinancial instruments as of December 31, 2017 and 2016 were as follows (in millions):
| December 31, 2023 | December 31, 2022 | |||||||||||||||||||||||||
| Carrying Value | Estimated Fair Value | Carrying Value | Estimated Fair Value | |||||||||||||||||||||||
Second Lien Notes (1) | $ | 1,079.3 | $ | 1,126.1 | $ | — | $ | — | ||||||||||||||||||
First Lien Notes (1) | — | — | 542.4 | 545.9 | ||||||||||||||||||||||
| Long-term debt | $ | 1,079.3 | $ | 1,126.1 | $ | 542.4 | $ | 545.9 | ||||||||||||||||||
Long-term notes receivable from ARO (2) | $ | 282.3 | $ | 423.5 | $ | 254.0 | $ | 336.7 | ||||||||||||||||||
| December 31, 2017 | December 31, 2016 | |||||||||||||||
Carrying Value | Estimated Fair Value | Carrying Value | Estimated Fair Value | |||||||||||||
| 8.50% Senior notes due 2019 | $ | 251.4 | $ | 252.9 | $ | 480.2 | $ | 485.0 | ||||||||
| 6.875% Senior notes due 2020 | 477.9 | 473.1 | 735.9 | 727.5 | ||||||||||||
| 4.70% Senior notes due 2021 | 267.1 | 265.3 | 674.4 | 658.9 | ||||||||||||
3.00% Exchangeable senior notes due 2024 (1) | 635.7 | 757.1 | 604.3 | 874.7 | ||||||||||||
| 4.50% Senior notes due 2024 | 619.3 | 527.1 | 618.6 | 536.0 | ||||||||||||
| 8.00% Senior notes due 2024 | 337.9 | 333.8 | — | — | ||||||||||||
| 5.20% Senior notes due 2025 | 663.6 | 571.4 | 662.8 | 582.3 | ||||||||||||
| 7.20% Debentures due 2027 | 149.3 | 141.9 | 149.2 | 138.7 | ||||||||||||
| 7.875% Senior notes due 2040 | 376.7 | 258.8 | 378.3 | 270.6 | ||||||||||||
| 5.75% Senior notes due 2044 | 971.8 | 690.4 | 970.8 | 728.0 | ||||||||||||
| Total | $ | 4,750.7 | $ | 4,271.8 | $ | 5,274.5 | $ | 5,001.7 | ||||||||
(1)The estimated fair valuesvalue of our senior notesthe 8.375% Senior Secured Second Lien Notes due 2030 (the "Second Lien Notes") and debenturesSenior Secured First Lien Notes due 2028 (the "First Lien Notes"), which were discharged in full on April 3, 2023, were determined using quoted market prices. prices, which are level 1 inputs.
(2)The decline in the carryingestimated fair value of long-term debt instrumentsour Notes Receivable from December 31, 2016ARO was estimated using an income approach to December 31, 2017 is primarily duevalue the forecasted cash flows attributed to debt repurchases as discussed in "Note 5 - Debt". the Notes Receivable from ARO using a discount rate based on a comparable yield with a country-specific risk premium, which are considered to be level 2 inputs.
The estimated fair values of our cash and cash equivalents, short-term investments, receivables,restricted cash, accounts receivable and trade payables and other liabilities approximated their carrying values as of December 31, 20172023 and 2016.2022.
Property and equipment as of December 31, 2017 and 2016 consisted of the following (in millions):
| December 31, 2023 | December 31, 2023 | December 31, 2022 | |||||||||||||||||||||||||||||||||
| Drilling rigs and equipment | |||||||||||||||||||||||||||||||||||
Work-in-progress (1) | |||||||||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||||||||
| 2017 | 2016 | ||||||||||||||||||||||||||||||||||
| Drilling rigs and equipment | $ | 12,272.4 | $ | 11,067.4 | |||||||||||||||||||||||||||||||
| Other | 183.4 | 180.8 | |||||||||||||||||||||||||||||||||
| Work in progress | 2,876.3 | 1,744.3 | |||||||||||||||||||||||||||||||||
| $ | 15,332.1 | $ | 12,992.5 | ||||||||||||||||||||||||||||||||
Assets held-for-use
On a quarterly basis, we evaluate the carrying value of our property and equipment to identify events or changes in circumstances ("triggering events") that indicate the carrying value may not be recoverable.
For rigs whose carrying values wereare determined not to be recoverable, during 2017 and 2015, we recordedrecord an impairment for the difference between their fair values and carrying values.
108
Successor
In June 2022, the drilling contract previously awarded to VALARIS DS-11 was terminated. As of the date of termination, we had incurred costs to upgrade the rig pursuant to the requirements of the contract. Costs incurred related to these capital upgrades were included in work-in-progress and upon termination were determined to be impaired. We recorded a pre-tax, non-cash loss on impairment in the second quarter of 2022 of $34.5 million. See "Note 4 - Revenue from Contracts with Customers" for additional information regarding the termination.
Predecessor
During the first quarter of 2021, as a result of challenging market conditions for certain of our floaters, we revised our near-term operating assumptions which resulted in a triggering event for purposes of evaluating impairment. We determined that the estimated undiscounted cash flows were not sufficient to recover the carrying values for certain rigs and concluded they were impaired as of March 31, 2021.
Based on the asset impairment analysis performed as of March 31, 2021, we recorded a pre-tax, non-cash loss on impairment in the first quarter of 2021 for certain floaters totaling $756.5 million, inclusive of $5.6 million of gains reclassified from accumulated other comprehensive income into loss on impairment associated with related cash flow hedges. We measured the fair valuesvalue of these rigsassets to be $26.0 million at the time of impairment by applying either an income approach, using projected discounted cash flows, or a market approach.estimated sales price. These valuations were based on unobservable inputs that require significant judgments for which there is limited information, including, in the case of an income approach, assumptions regarding future day rates, utilization, operating costs and capital requirements.
In instances where we applied an income approach, forecasted day rates and utilization took into account then current market conditions and our anticipated business outlook. In instances where
Assets sold
While taking into account certain restrictions on the sales of assets under our Indenture dated as of April 19, 2023 (the "Indenture”), as part of our strategy, we appliedmay act opportunistically from time to time to monetize assets to enhance stakeholder value and improve our liquidity profile, in addition to reducing holding costs by selling or disposing of lower-specification or non-core rigs. Gains recognized on sales of assets are included in Other, net on the Consolidated Statements of Operations.
Successor
During the year ended December 31, 2023 (Successor), we recognized a market approach, the fair value was based on unobservable third-party estimated prices that would be received in exchangepre-tax gain of $27.3 million for the assetssale of VALARIS 54.
During the year ended December 31, 2022 (Successor), we recognized an aggregate pre-tax gain of $130.5 million for the sales of VALARIS 113, VALARIS 114, VALARIS 36 and VALARIS 67. Additionally, we recognized pre-tax gains of $3.2 million and $7.0 million related to additional proceeds received for our 2021 sale of VALARIS 100 and 2020 sale of VALARIS 68, respectively, resulting from post-sale conditions of those sale agreements.
During the eight months ended December 31, 2021, we sold VALARIS 22, VALARIS 37, VALARIS 100 and VALARIS 142, resulting in a pre-tax gain of $20.7 million.
Predecessor
In April 2021, we sold VALARIS 101 resulting in a pre-tax gain of $5.3 million. In March 2021, we sold our Australia office building resulting in an orderly transaction between market participants. We validated all third-party estimated prices using our forecastsinsignificant pre-tax gain.
109
8. DEBT
First Lien Notes
On the Effective Date, in accordance with the plan of economic returns forreorganization and Backstop Commitment Agreement, dated August 18, 2020, the respective rigs or other market data.
| 2017 | 2016 | |||||||
| 8.50% Senior notes due 2019 | $ | 251.4 | $ | 480.2 | ||||
| 6.875% Senior notes due 2020 | 477.9 | 735.9 | ||||||
| 4.70% Senior notes due 2021 | 267.1 | 674.4 | ||||||
| 3.00% Exchangeable senior notes due 2024 | 635.7 | 604.3 | ||||||
| 4.50% Senior notes due 2024 | 619.3 | 618.6 | ||||||
| 8.00% Senior notes due 2024 | 337.9 | — | ||||||
| 5.20% Senior notes due 2025 | 663.6 | 662.8 | ||||||
| 7.20% Debentures due 2027 | 149.3 | 149.2 | ||||||
| 7.875% Senior notes due 2040 | 376.7 | 378.3 | ||||||
| 5.75% Senior notes due 2044 | 971.8 | 970.8 | ||||||
| Total debt | 4,750.7 | 5,274.5 | ||||||
Less current maturities(1) | — | (331.9 | ) | |||||
| Total long-term debt | $ | 4,750.7 | $ | 4,942.6 | ||||
The First Lien Notes in a private offering. The 2024 Convertible Notes are fullywere scheduled to mature on April 30, 2028 and unconditionally guaranteed, on a senior, unsecured basis, by Ensco plc and are exchangeable into cash, our Class A ordinary shares or a combination thereof,accrued interest, at our election.option, at a rate of: (1) 8.25% per annum, payable in cash; (2) 10.25% per annum, with 50% of such interest to be payable in cash and 50% of such interest to be paid in kind; or (3) 12% per annum, with the entirety of such interest to be paid in kind. Interest was due semi-annually in arrears on May 1 and November 1 of each year and was computed on the 2024 Convertible Notes is payable semiannually on January 31 and July 31basis of each year. a 360-day year of twelve 30-day months.
The 2024 Convertible Notes will mature on January 31, 2024, unless exchanged, redeemed or repurchasedCompany incurred $5.2 million in accordanceissuance costs in 2021 associated with their terms priorthe First Lien Notes. In August 2022, the Company completed a consent solicitation pursuant to such date. Holders may exchange their 2024 Convertible Notes at their option any time prior to July 31, 2023 only under certain circumstances set forth inwhich the Company amended the indenture governingthat governed the 2024 Convertible Notes. On or after July 31, 2023, holders may exchange their 2024 ConvertibleFirst Lien Notes at any time.to (1) implement a consolidated net income builder basket for restricted payments, increase the general basket for restricted payments from $100.0 million to $175.0 million and make other incremental changes to the Company’s restricted payments capacity and (2) increase the general basket for investments from the greater of $100.0 million and 4.0% of total assets to the greater of $175.0 million and 6.5% of total assets. The exchange rate is 71.3343shares per $1,000 principal amountCompany incurred $3.9 million of notes, representing an exchange price of $14.02per share, and is subject to adjustment upon certain events. The 2024 Convertible Notes may not be redeemed by us exceptcosts in connection with the event of certain tax law changes.
On April 3, 2023, the Company issued a notice of conditional redemption to the holders of the First Lien Notes at a redemption price equal to 104.0% of the aggregate $550.0 million principal amount of the First Lien Notes plus accrued and unpaid interest to, but not including, the redemption date (the “Redemption Price”). On April 19, 2023, in connection with the coupon interest, resulting inissuance of our Second Lien Notes, as discussed below, the Company discharged its obligations under the indenture governing the First Lien Notes and deposited the Redemption Price with Wilmington Savings Fund Society, as trustee under such indenture. The First Lien Notes were redeemed on May 3, 2023 for an effective interest rateaggregate redemption price of approximately 8% per annum. The equity component is not remeasured if we continue to meet certain conditions for equity classification.
| Liability component: | 2017 | 2016 | ||||||
| Principal | $ | 849.5 | $ | 849.5 | ||||
| Less: Unamortized debt discount and issuance costs | (213.8 | ) | (245.2 | ) | ||||
| Net carrying amount | 635.7 | 604.3 | ||||||
| Equity component, net | $ | 220.0 | $ | 220.0 | ||||
On January 26, 2018, weApril 19, 2023, the Company and Valaris Finance Company LLC (“Valaris Finance”), a wholly-owned subsidiary, issued $1.0 billion aggregate principal amount of unsecured 7.75% senior notes due 2026 at par. Interest on the 2026 Notes is payable semiannually on February 1 and August 1 of each year commencing August 1, 2018.
On August 21, 2023, the Company and Valaris Finance issued $400.0 million aggregate principal amount of unsecured 5.75% senior notes due 2044additional Second Lien Notes (the “New 2044 Notes”"Additional Notes") at a discount of $18.7 million in a public offering.private placement conducted pursuant to Rule 144A and Regulation S under the Securities Act. The Additional Notes were issued at 100.75% of par, plus accrued interest from April 19, 2023. The net proceeds were approximately $396.9 million after deducting the initial purchasers’ discount and estimated offering expenses, and excluding accrued interest received of $11.4 million.
110
The Initial Second Lien Notes and the Additional Notes (together, the "Second Lien Notes") were issued under the Indenture, and mature on April 30, 2030. The Second Lien Notes bear an interest rate of 8.375% per annum with an effective interest rate of 8.76%. Interest on the 2025 Notes is payable semiannuallysemi-annually in arrears on March 15April 30 and September 15October 30 of each year. Interestyear, beginning on October 30, 2023. The Second Lien Notes are fully and unconditionally guaranteed, jointly and severally, on a senior secured basis by the New 2044Guarantors and by each of the Company’s future restricted subsidiaries (other than Valaris Finance) that guarantees any debt of the Issuers or any guarantor under certain future debt in an aggregate principal amount in excess of a certain amount. The Second Lien Notes is payable semiannuallyand the related guarantees are secured on a second-priority basis by the Collateral (as defined below).
On or after April 30, 2026, the Issuers may, at their option, redeem all or any portion of the Second Lien Notes, at once or over time, at the redemption prices set forth below, plus accrued and unpaid interest, if any, to, but not including, the redemption date. The following prices are for Second Lien Notes redeemed during the 12-month period commencing on April 130 of the years set forth below, and October 1are expressed as percentages of each year.principal amount:
| Redemption Year | Price | ||||
| 2026 | 104.188% | ||||
| 2027 | 102.094% | ||||
| 2028 and thereafter | 100.000% | ||||
At any time prior to April 30, 2026, the Issuers may, on any one or more occasions, redeem up to 40.0% of the aggregate principal amount of unsecured 4.50% senior notes due 2024 (the "2024 Notes")the Second Lien Notes issued under the Indenture (including any additional Second Lien Notes issued in the future) with an amount equal to or less than the net cash proceeds of certain equity offerings, at a discountredemption price equal to 108.375% of $850,000the principal amount thereof, plus accrued and $625.0 millionunpaid interest thereon, if any, to but not including, the redemption date. In addition, at any time prior to April 30, 2026, the Issuers may redeem up to 10.0% of the aggregate principal amount of unsecured 5.75% senior notes due 2044 (the "Existing 2044 Notes" and together with the New 2044Second Lien Notes the "2044 Notes")during any twelve-month period at a discountredemption price equal to 103.0% of $2.8 million. Interest on the 2024 Notes and the Existing 2044 Notes is payable semiannually on April 1 and October 1 of each year. The Existing 2044 Notes and the New 2044 Notes are treated as a single series of debt securities under the indenture governing the notes.
Upon the occurrence of certain Change of Control Triggering Event (as defined in the Indenture), the Issuers may be required to redeemmake an offer to repurchase all of the 8% 2024Second Lien Notes 2024 Notes, 2025 Notes, 2026 Notes or 2044 Notes on or after the aforementioned dates, we will pay an amountthen outstanding at a price equal to 100%101.0% of the principal amount of the notes redeemedthereof, plus accrued and unpaid interest, if any, to, but we are not required to pay a "make-whole" premium.including, the repurchase date.
The indentures governingIndenture contains covenants that, among other things, restrict the Senior Notes contain customary events of default, including failure to pay principal or interest on such notes when due, among others. The indentures governing the Senior Notes also contain certain restrictions, including, among others, restrictions on ourCompany’s ability and the ability of ourcertain of its subsidiaries to: (i) incur additional debt and issue certain preferred stock; (ii) incur or create liens; (iii) make certain distributions, investments and other restricted payments; (iv) sell or otherwise dispose of certain assets; (v) engage in certain transactions with affiliates; and (vi) merge, consolidate, amalgamate or sell, transfer, lease or otherwise dispose of all or substantially all of the Company’s assets. These covenants are subject to create or incur secured indebtedness, enter into certain sale/leaseback transactionsimportant exceptions and enter into certain merger or consolidation transactions.
111
Senior Secured Revolving Credit Facility
On April 3, 2023, the Company entered into a supplemental indenturesenior secured revolving credit agreement (the “Credit Agreement”). The Credit Agreement provides for commitments permitting borrowings of up to unconditionally guarantee$375.0 million (which may be increased, subject to the principalsatisfaction of certain conditions and interest payments on the Debentures. See "Note 15 - Guaranteeagreement of Registered Securities" forlenders to provide such additional information oncommitments, by an additional $200.0 million pursuant to the guaranteeterms of the Debentures.
| Aggregate Principal Amount Repurchased | Aggregate Repurchase Price(1) | ||||||
| 8.50% Senior notes due 2019 | $ | 54.6 | $ | 60.1 | |||
| 6.875% Senior notes due 2020 | 100.1 | 105.1 | |||||
| 4.70% Senior notes due 2021 | 39.4 | 39.3 | |||||
| Total | $ | 194.1 | $ | 204.5 | |||
| Aggregate Principal Amount Repurchased | Aggregate Repurchase Price (1) | ||||||
| 8.50% Senior notes due 2019 | $ | 62.0 | $ | 55.7 | |||
| 6.875% Senior notes due 2020 | 219.2 | 181.5 | |||||
| 4.70% Senior notes due 2021 | 817.0 | 609.0 | |||||
| 4.50% Senior notes due 2024 | 1.7 | .9 | |||||
| 5.20% Senior notes due 2025 | 30.7 | 16.8 | |||||
| Total | $ | 1,130.6 | $ | 863.9 | |||
| Aggregate Principal Amount Repurchased | 8% Senior Notes Due 2024 Consideration | Cash Consideration | Total Consideration | ||||||||||||
| 8.50% Senior notes due 2019 | $ | 145.8 | $ | 81.6 | $ | 81.7 | $ | 163.3 | |||||||
| 6.875% Senior notes due 2020 | 129.8 | 69.3 | 69.4 | 138.7 | |||||||||||
| 4.70% Senior notes due 2021 | 373.9 | 181.1 | 181.4 | 362.5 | |||||||||||
| Total | $ | 649.5 | $ | 332.0 | $ | 332.5 | $ | 664.5 | |||||||
The Credit Agreement and the related guarantees are secured on a first-priority basis, subject to permitted liens, by (a) first preferred ship mortgages over each vessel owned by us and Pride International LLC, our wholly-owned subsidiary. The tender offers expired February 7, 2018 and we repurchased $182.6 millionthe Guarantors as of the 8.50% senior notes due 2019, $256.6 millionAvailability Date, with certain exceptions (the “Collateral Vessels”); (b) first priority assignments of certain insurances and requisition compensation in respect of the 6.875% senior notes due 2020Collateral Vessels; (c) first priority pledges of all equity interests in our subsidiaries that own Collateral Vessels and $156.2 millioncertain subsidiaries that hold equity interests in entities that own vessels (the “Collateral Rig Owners”); (d) first priority assignments of earnings of the 4.70% senior notes due 2021. We subsequently issued a redemption notice forCollateral Vessels from the remaining outstanding $55.0 million principal amountCollateral Rig Owners; (e) any vessels and other assets of ours and the 8.50% senior notes due 2019. The following table sets forthGuarantors that are pledged, at our option, to secure the total principal amounts repurchased as a result of the tender offersCredit Agreement; and redemption (in millions):(f) all proceeds thereof (the "Collateral").
| Aggregate Principal Amount Repurchased | Aggregate Repurchase Price(1) | ||||||
| 8.50% Senior notes due 2019 | $ | 237.6 | $ | 256.8 | |||
| 6.875% Senior notes due 2020 | 256.6 | 277.1 | |||||
| 4.70% Senior notes due 2021 | 156.2 | 159.3 | |||||
| Total | $ | 650.4 | $ | 693.2 | |||
In addition to paying interest on outstanding borrowings under the Credit Agreement, we are required to pay a quarterly commitment fee to the lenders under the Credit Agreement with respect to the average daily unutilized commitments thereunder at a rate ranging from 0.375% to 0.75% depending on the undrawn portioncredit ratings that are one notch higher than the corporate family ratings provided by S&P and Moody’s with respect to Valaris Limited. With respect to each letter of credit issued pursuant to the Credit Agreement, we are required to pay a letter of credit fee equal to the applicable margin in effect for Term SOFR loans and a fronting fee in an amount to be mutually agreed between us and the issuer of such letter of credit. We are also required to pay customary agency fees in respect of the $2.0 billion commitment, which is also based on our credit ratings.Credit Agreement.
The Credit Facility requiresAgreement contains various covenants that limit, among other things, our and our restricted subsidiaries’ ability to: incur indebtedness; grant liens; dispose of certain assets; make certain acquisitions and investments; redeem or prepay other debt or make other restricted payments such as distributions to shareholders; enter into transactions with affiliates; enter into sale-leaseback transactions; and enter into a merger, amalgamation, consolidation or sale of assets. Further, the Credit Agreement contains financial covenants that require us to maintain (i) a total debtminimum book value of equity to total capitalizationassets ratio, that is less than or equal to 60%(ii) a minimum interest coverage ratio and to provide guarantees from certain of our rig-owning subsidiaries sufficient to meet certain guarantee coverage ratios. The Credit Facility also contains customary restrictive covenants, including, among others, prohibitions on creating, incurring or assuming certain debt and liens (subject to customary exceptions, including(iii) a permitted lien basket that permits us to raise secured debt up to the lesser of $750 million or 10% of consolidated tangible net worth (as defined in the Credit Facility)); entering into certain merger arrangements; selling, leasing, transferring or otherwise disposing of all or substantially all of our assets; making a material change in the nature of the business; paying or distributing dividends on our ordinary shares (subject to certain exceptions, including the ability to continue paying a quarterly dividend of $0.01 per share); borrowings, if after giving effect to any such borrowings and the application of the proceeds thereof, the aggregateminimum amount of available cash (as defined in the Credit Facility) would exceed $150 million; and entering into certain transactions with affiliates.liquidity.
As of December 31, 2017,2023, we were in compliance in all material respects with our covenants under the Credit Facility. We expect to remain in compliance with our Credit Facility covenants during 2017.Agreement. We had no amounts outstanding under the Credit FacilityAgreement as of December 31, 2017and 2016.
112
| Senior Notes | Original Principal | 2016 Tenders, Repurchases and Equity Exchange | 2017 Exchange Offers | 2017 Repurchases | Principal Outstanding at December 31, 2017(1) | 2018 Tender Offers, Redemption and Debt Issuance | Remaining Principal | ||||||||||||||||||||
| 8.50% due 2019 | $ | 500.0 | $ | (62.0 | ) | $ | (145.8 | ) | $ | (54.6 | ) | $ | 237.6 | $ | (237.6 | ) | $ | — | |||||||||
| 6.875% due 2020 | 900.0 | (219.2 | ) | (129.8 | ) | (100.1 | ) | 450.9 | (256.6 | ) | 194.3 | ||||||||||||||||
| 4.70% due 2021 | 1,500.0 | (817.0 | ) | (373.9 | ) | (39.4 | ) | 269.7 | (156.2 | ) | 113.5 | ||||||||||||||||
| 3.00% due 2024 | 849.5 | — | — | — | 849.5 | — | 849.5 | ||||||||||||||||||||
| 4.50% due 2024 | 625.0 | (1.7 | ) | — | — | 623.3 | — | 623.3 | |||||||||||||||||||
| 8.00% due 2024 | — | — | 332.0 | — | 332.0 | — | 332.0 | ||||||||||||||||||||
| 5.20% due 2025 | 700.0 | (30.7 | ) | — | — | 669.3 | — | 669.3 | |||||||||||||||||||
| 7.75% due 2026 | — | — | — | — | — | 1,000.0 | 1,000.0 | ||||||||||||||||||||
| 7.20% due 2027 | 150.0 | — | — | — | 150.0 | — | 150.0 | ||||||||||||||||||||
| 7.875% due 2040 | 300.0 | — | — | — | 300.0 | — | 300.0 | ||||||||||||||||||||
| 5.75% due 2044 | 1,025.0 | (24.5 | ) | — | — | 1,000.5 | — | 1,000.5 | |||||||||||||||||||
| Total | $ | 6,549.5 | $ | (1,155.1 | ) | $ | (317.5 | ) | $ | (194.1 | ) | $ | 4,882.8 | $ | 349.6 | $ | 5,232.4 | ||||||||||
Interest Expense
Interest expense totaled $224.2$68.9 million, $228.8 for the year ended December 31, 2023 (Successor) which was net of capitalized interest of $5.6 million for capital projects. Interest expense totaled $45.3 million for the year ended December 31, 2022 (Successor) which was net of capitalized interest of $1.2 million for capital projects. Interest expense totaled $31.0 million and $216.3$2.4 million for the eight months ended December 31, 2021 (Successor) and the four months ended April 30, 2021 (Predecessor), respectively.
Amortization of debt premium and issuance costs was $5.0 million, $1.0 million and $0.5 million for the years ended December 31, 2017, 20162023 and 2015, respectively, which was net of interest amounts capitalized of $72.5 million, $45.7 million2022, and $87.4 million in connection with newbuild rig construction and other capital projects.
| Derivative Assets | Derivative Liabilities | ||||||||||||||
| 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Derivatives Designated as Hedging Instruments | |||||||||||||||
Foreign currency forward contracts - current(1) | $ | 5.9 | $ | 4.1 | $ | .2 | $ | 11.4 | |||||||
Foreign currency forward contracts - non-current(2) | .5 | .2 | .1 | .8 | |||||||||||
| 6.4 | 4.3 | .3 | 12.2 | ||||||||||||
| Derivatives not Designated as Hedging Instruments | |||||||||||||||
Foreign currency forward contracts - current(1) | .9 | .4 | .2 | 1.3 | |||||||||||
| .9 | .4 | .2 | 1.3 | ||||||||||||
| Total | $ | 7.3 | $ | 4.7 | $ | .5 | $ | 13.5 | |||||||
Gain (Loss) Recognized in Other Comprehensive Income ("OCI") on Derivatives (Effective Portion) | Loss Reclassified from AOCI into Income (Effective Portion)(1) | Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing)(2) | |||||||||||||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | |||||||||||||||||||||||||||
Interest rate lock contracts(3) | $ | — | $ | — | $ | — | $ | (.2 | ) | $ | (.2 | ) | $ | (.6 | ) | $ | — | $ | — | $ | — | ||||||||||||||
Foreign currency forward contracts(4) | 8.5 | (5.4 | ) | (23.6 | ) | (.2 | ) | (12.2 | ) | (21.6 | ) | (.7 | ) | 1.9 | (.1 | ) | |||||||||||||||||||
| Total | $ | 8.5 | $ | (5.4 | ) | $ | (23.6 | ) | $ | (.4 | ) | $ | (12.4 | ) | $ | (22.2 | ) | $ | (.7 | ) | $ | 1.9 | $ | (.1 | ) | ||||||||||
113
| Net unrealized gains to be reclassified to contract drilling expense | $ | 3.1 | ||
| Net realized gains to be reclassified to depreciation expense | .9 | |||
| Net realized losses to be reclassified to interest expense | (.4 | ) | ||
| Net gains to be reclassified to earnings | $ | 3.6 | ||
Activity in our various shareholders' equity accounts for each of the years in the three-year period ended December 31, 2017 was2023 and 2022, eight months ended December 31, 2021 (Successor), and four months ended April 30, 2021 (Predecessor) were as follows (in millions):
Shares Issued | Par Value | Additional Paid-in Capital | Warrants | Retained Earnings (Deficit) | AOCI | Treasury Shares | Non-controlling Interest | ||||||||||||||||||||||||||||||||||||||||
| BALANCE, December 31, 2020 (Predecessor) | 206.1 | $ | 82.6 | $ | 8,639.9 | $ | — | $ | (4,183.8) | $ | (87.9) | $ | (76.2) | $ | (4.3) | ||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | (4,467.0) | — | — | 3.2 | |||||||||||||||||||||||||||||||||||||||
| Shares issued under share-based compensation plans, net | — | — | (0.7) | — | — | — | 0.7 | — | |||||||||||||||||||||||||||||||||||||||
| Net changes in pension and other postretirement benefits | — | — | — | — | — | 0.1 | — | — | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation cost | — | — | 4.8 | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Net other comprehensive loss | — | — | — | — | — | (5.6) | — | — | |||||||||||||||||||||||||||||||||||||||
| Cancellation of Predecessor equity | (206.1) | (82.6) | (8,644.0) | — | 8,650.8 | 93.4 | 75.5 | — | |||||||||||||||||||||||||||||||||||||||
| Issuance of Successor Common Shares and Warrants | 75.0 | 0.8 | 1,078.7 | 16.4 | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| BALANCE, April 30, 2021 (Predecessor) | 75.0 | $ | 0.8 | $ | 1,078.7 | $ | 16.4 | $ | — | $ | — | $ | — | $ | (1.1) | ||||||||||||||||||||||||||||||||
| BALANCE, May 1, 2021 (Successor) | 75.0 | $ | 0.8 | $ | 1,078.7 | $ | 16.4 | $ | — | $ | — | $ | — | $ | (1.1) | ||||||||||||||||||||||||||||||||
| Adjustment to unrecognized tax benefits | — | — | — | — | 11.0 | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | (27.4) | — | — | 3.8 | |||||||||||||||||||||||||||||||||||||||
| Net changes in pension and other postretirement benefits | — | — | — | — | — | (9.1) | — | — | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation cost | — | — | 4.3 | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| BALANCE, December 31, 2021 (Successor) | 75.0 | $ | 0.8 | $ | 1,083.0 | $ | 16.4 | $ | (16.4) | $ | (9.1) | $ | — | $ | 2.7 | ||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 176.5 | — | — | 5.3 | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation cost | — | — | 17.4 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Shares issued under share-based compensation plans, net | 0.2 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Net changes in pension and other postretirement benefits | — | — | — | — | — | 23.8 | — | — | |||||||||||||||||||||||||||||||||||||||
| Shares withheld for taxes on vesting of share-based awards | — | — | (2.5) | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| BALANCE, December 31, 2022 (Successor) | 75.2 | $ | 0.8 | $ | 1,097.9 | $ | 16.4 | $ | 160.1 | $ | 14.7 | $ | — | $ | 8.0 | ||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 865.4 | — | — | 1.4 | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation cost | — | — | 27.3 | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Shares issued under share-based compensation plans, net | 0.2 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Repurchase of Common Shares | — | — | — | — | — | — | (200.1) | — | |||||||||||||||||||||||||||||||||||||||
| Net changes in pension and other postretirement benefits | — | — | — | — | — | 10.8 | — | — | |||||||||||||||||||||||||||||||||||||||
| Shares withheld for taxes on vesting of share-based awards | — | — | (5.4) | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Net other comprehensive loss | — | — | — | — | — | (0.3) | — | — | |||||||||||||||||||||||||||||||||||||||
| BALANCE, December 31, 2023 (Successor) | 75.4 | $ | 0.8 | $ | 1,119.8 | $ | 16.4 | $ | 1,025.5 | $ | 25.2 | $ | (200.1) | $ | 9.4 | ||||||||||||||||||||||||||||||||
114
| Shares | Par Value | Additional Paid-in Capital | Retained Earnings | AOCI | Treasury Shares | Noncontrolling Interest | ||||||||||||||||||||
| BALANCE, December 31, 2014 | 240.6 | $ | 24.2 | $ | 5,517.5 | $ | 2,720.4 | $ | 11.9 | $ | (59.0 | ) | $ | 7.9 | ||||||||||||
| Net loss | — | — | — | (1,594.8 | ) | — | — | 8.9 | ||||||||||||||||||
| Dividends paid | — | — | — | (140.3 | ) | — | — | — | ||||||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | — | — | (12.5 | ) | ||||||||||||||||||
| Shares issued under share-based compensation plans, net | 2.3 | .2 | — | — | — | (.2 | ) | — | ||||||||||||||||||
| Tax expense from share-based compensation | — | — | (2.4 | ) | — | — | — | — | ||||||||||||||||||
| Repurchase of shares | — | — | — | — | — | (4.6 | ) | — | ||||||||||||||||||
| Share-based compensation cost | — | — | 39.4 | — | — | — | — | |||||||||||||||||||
| Net other comprehensive loss | — | — | — | — | .6 | — | — | |||||||||||||||||||
| BALANCE, December 31, 2015 | 242.9 | 24.4 | 5,554.5 | 985.3 | 12.5 | (63.8 | ) | 4.3 | ||||||||||||||||||
| Net income | — | — | — | 890.2 | — | — | 6.9 | |||||||||||||||||||
| Dividends paid | — | — | — | (11.4 | ) | — | — | — | ||||||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | — | — | (7.8 | ) | ||||||||||||||||||
| Equity Issuance | 65.6 | 6.5 | 579.0 | — | — | — | — | |||||||||||||||||||
| Equity for debt exchange | 1.8 | .2 | 14.8 | — | — | — | — | |||||||||||||||||||
| Equity Component of convertible senior notes issuance, net | — | — | 220.0 | — | — | — | — | |||||||||||||||||||
| Contributions from noncontrolling interests | — | — | — | — | — | — | 1.0 | |||||||||||||||||||
| Tax expense on share-based compensation | — | — | (3.4 | ) | — | — | — | — | ||||||||||||||||||
| Repurchase of shares | — | — | — | — | — | (2.0 | ) | — | ||||||||||||||||||
| Share-based compensation cost | — | — | 37.3 | — | — | — | — | |||||||||||||||||||
| Net other comprehensive income | — | — | — | — | 6.5 | — | — | |||||||||||||||||||
| BALANCE, December 31, 2016 | 310.3 | 31.1 | 6,402.2 | 1,864.1 | 19.0 | (65.8 | ) | 4.4 | ||||||||||||||||||
| Net loss | — | — | — | (303.7 | ) | — | — | (.5 | ) | |||||||||||||||||
| Dividends paid | — | — | — | (13.6 | ) | — | — | — | ||||||||||||||||||
| Cumulative-effect adjustment due to ASU 2016-16 | — | — | — | (14.1 | ) | — | — | — | ||||||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | — | — | (6.0 | ) | ||||||||||||||||||
| Equity issuance in connection with the Atwood Merger | 132.2 | 13.2 | 757.5 | — | — | — | — | |||||||||||||||||||
| Shares issued under share-based compensation plans, net | 4.5 | .5 | (.4 | ) | — | — | (1.3 | ) | — | |||||||||||||||||
| Repurchase of shares | — | — | — | — | — | (1.9 | ) | — | ||||||||||||||||||
| Share-based compensation cost | — | — | 35.7 | — | — | — | — | |||||||||||||||||||
| Net other comprehensive income | — | — | — | — | 9.6 | — | — | |||||||||||||||||||
| BALANCE, December 31, 2017 | 447.0 | $ | 44.8 | $ | 7,195.0 | $ | 1,532.7 | $ | 28.6 | $ | (69.0 | ) | $ | (2.1 | ) | |||||||||||
Issuance of Common Shares
On the Effective Date, pursuant to the plan of reorganization, we issued 132.275.0 million Common Shares.
Cancellation of our Class A Ordinary shares, representing total equity considerationPredecessor Equity and Issuance of $770.7 million based on a closing priceWarrants
On the Effective Date and pursuant to the plan of $5.83 per Class A ordinary share on October 5, 2017,reorganization, the last trading day before the Merger Date.
Management Incentive Plan
In accordance with the plan of reorganization, Valaris Limited adopted the MIP as of the Effective Date and authorized and reserved 9.0 million Common Shares for issuance pursuant to equity incentive awards to be granted under the MIP. See "Note 10 - Share Based Compensation" for information on equity awards granted under the MIP subsequent to the Effective Date.
Share Repurchase Program
In October 2016,2022, our board of directors authorized a share repurchase program under which we entered into a privately-negotiated exchange agreement whereby we issued 1,822,432 Class A ordinary shares, representing less than one percentmay purchase up to $100.0 million of our outstanding Class A ordinary shares, in exchange for $24.5 million principal amountCommon Shares. In April 2023, the board of our 2044 Notes, resulting in a pre-tax gain from debt extinguishment of $8.8 million.
Valaris Limited adopted the MIP as of the Effective Date and authorized and reserved 9.0 million Common Shares for issuance aspursuant to equity incentive awards to officers, non-employee directorsbe granted under the MIP, which may be in the form of incentive stock options, nonstatutory stock options, restricted stock, restricted stock units, stock appreciation rights, dividend equivalents and key employees who are in a position to contribute materially to our growth, development and long-term success.cash awards or any combination thereof. As of December 31, 2017,2023, there were 18.26.8 million shares available for issuance as awards under the 2012 LTIP.MIP.
115
Successor Awards may be satisfied by newly issued shares, including shares held by a subsidiary or affiliated entity, or by delivery of shares held in an affiliated employee benefit trust at
Time-Based Share Awards
Under the Company's discretion.
Non-employee directors received a one-time grant of time-based restricted awards upon our emergence from the Chapter 11 Cases which vest ratably over a three-year period from the date of grant. Additionally, non-employee directors receive an annual grant of time-based restricted awards which vest in full on the earlier of the first anniversary of the grant date or the next annual meeting of shareholders following the grant. Non-employee directors are permitted to elect to receive deferred share awards which can be settled and delivered on the six-month anniversary following the termination of the director's service or a specific pre-determined date.
Our time-based share awards do not have voting or participating rights as the dividend equivalent provided for in the award agreement is forfeitable (except in certain limited circumstances) and further our debt agreements limit our ability to pay dividends and none have been declared. Compensation expense for share awards is measured at fair value on the date of grant and recognized on a straight-line basis over the requisite service period (usually the vesting period). Compensation expense for cash-settled awards is remeasured each quarter with a cumulative adjustment to compensation cost during the period based on changes in our share price. Our compensation cost is reduced for forfeited awards in the period in which the forfeitures occur.
The following table summarizes Successor time-based share award and cash-settled award compensation expense recognized (in millions):
| Year Ended December 31, 2023 | Year Ended December 31, 2022 | Eight Months Ended December 31, 2021 | ||||||||||||||||||||||||
| Contract drilling | $ | 6.8 | $ | 3.9 | $ | 1.6 | ||||||||||||||||||||
| General and administrative | 9.0 | 6.8 | 2.0 | |||||||||||||||||||||||
| 15.8 | 10.7 | 3.6 | ||||||||||||||||||||||||
| Tax benefit | (1.6) | (0.9) | (0.2) | |||||||||||||||||||||||
| Total | $ | 14.2 | $ | 9.8 | $ | 3.4 | ||||||||||||||||||||
As of December 31, 2023, there was $23.2 million of total estimated unrecognized compensation cost related to time-based share awards, which has a weighted-average remaining vesting period of 1.3 years.
The following tables summarizes the value of Successor time-based share awards granted and vested:
| Year Ended December 31, 2023 | Year Ended December 31, 2022 | Eight Months Ended December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||
| Weighted-average grant date fair value of share awards granted (per share) | $ | 63.22 | $ | 45.39 | $ | 26.07 | ||||||||||||||||||||||||||||||||||||||
Total fair value of share awards vested during the period (in millions) (1) | $ | 25.2 | $ | 12.8 | $ | — | ||||||||||||||||||||||||||||||||||||||
(1)No share awards vested during each of the years in the three-year periodeight months ended December 31, 2017 (in millions):2021 (Successor).
116
| 2017 | 2016 | 2015 | |||||||||
| Contract drilling | $ | 18.3 | $ | 19.9 | $ | 19.5 | |||||
| General and administrative | 14.5 | 16.6 | 17.8 | ||||||||
| 32.8 | 36.5 | 37.3 | |||||||||
| Tax benefit | (4.8 | ) | (5.9 | ) | (4.8 | ) | |||||
| Total | $ | 28.0 | $ | 30.6 | $ | 32.5 | |||||
The following table summarizes the value oftime-based share awards and cash-settled awards granted and vested during each of the years in the three-year period ended December 31, 2017:
| Share Awards | Cash-Settled Awards | ||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | ||||||||||||||||||
| Weighted-average grant-date fair value of share awards granted (per share) | $ | 7.90 | $ | 10.42 | $ | 23.95 | $ | 6.27 | $ | 9.64 | $ | — | |||||||||||
| Total fair value of share awards vested during the period (in millions) | $ | 8.6 | $ | 8.8 | $ | 18.0 | $ | 3.9 | $ | — | $ | — | |||||||||||
| Share Awards | |||||||||||
| Awards | Weighted-Average Grant Date Fair Value | ||||||||||
| Share awards as of December 31, 2022 | 861 | $ | 33.54 | ||||||||
| Granted | 295 | $ | 63.22 | ||||||||
Vested(1) | (366) | $ | 32.89 | ||||||||
| Forfeited | (32) | $ | 36.68 | ||||||||
| Share awards as of December 31, 2023 | 758 | $ | 45.29 | ||||||||
| Share Awards | Cash-settled Awards | ||||||||||||
| Awards | Weighted-Average Grant-Date Fair Value | Awards | Weighted-Average Grant-Date Fair Value | ||||||||||
| Share awards and cash-settled awards as of December 31, 2016 | 3,073 | $ | 26.02 | 3,060 | $ | 9.64 | |||||||
| Granted | 1,433 | 7.90 | 4,968 | 6.27 | |||||||||
| Vested | (1,123 | ) | 32.75 | (614 | ) | 9.64 | |||||||
| Forfeited | (78 | ) | 31.52 | (325 | ) | 7.77 | |||||||
| Share awards and cash-settled awards as of December 31, 2017 | 3,305 | $ | 16.06 | 7,089 | $ | 7.37 | |||||||
Performance Awards
Under the 2012 LTIP,Company's MIP, performance awards may be issued to our senior executive officers. Performance awards generally vest at the end of a three-year measurement period based on attainment of performance goals.
The performance awards granted in 2021 and 2022 are based on three performance goals and subject to achievement of specifiedthose performance goals based on relative total shareholder return ("TSR"(a) designated share price hurdles whereby our closing stock price must equal or exceed certain market price targets for ninety consecutive trading days (the "Share Price Objective") and; (b) relative return on capital employed ("ROCE"). The performance as compared to a specified peer group, all as defined in the award agreements (the "ROCE Objective"), and (c) specified strategic goals are determinedas established by a committee or subcommitteethe Compensation Committee of the Boardboard of Directors. Awardsdirectors (the "Strategic Goal Objective" and together with the ROCE Objective, the "Performance-Based Objectives"). These awards are payable in either Ensco shares or cash uponequity following a three-year performance period and subject to attainment of relative TSR and ROCEsuch objectives ranging from 0% to 150% of target performance goals. Performance awards granted during 2017 are payable in cash whileunder such objectives.
The performance awards granted in 20152023 include awards which are subject to the achievement of goals based on our absolute total shareholder return and 2016our total shareholder return relative to a specified peer group (the "TSR Objectives" and together with the Share Price Objective, the "Market-Based Objectives"). These awards are payable in Ensco shares.
The estimated probable outcome of attainment of the specified performance goals is based primarily on historical experience, and anyrelative performance over the requisite performance period. Any subsequent changes in this estimate as it relates to the Performance-Based Objectives are recognized as a cumulative adjustment to compensation cost in the period in which the change in estimate occurs.
117
The aggregatefair value of the performance awards granted during the years ended December 31, 2023 and 2022, and eight months ended December 31, 2021 (Successor) are measured on the date of grant. The grant-date fair value per unit for the portion of the performance awards related to Performance-Based Objectives was equal to the closing price of the Company's stock on the grant date. The portion of these awards that were based on the Company's achievement of Market-based Objectives were valued at the date of grant using a Monte Carlo simulation with the following weighted average assumptions for the grants made over the years ended December 31, 2023 and 2022, and eight months ended December 31, 2021 (Successor):
| Year Ended December 31, 2023 | Year Ended December 31, 2022 | Eight Months Ended December 31, 2021 | |||||||||||||||
| Expected price volatility | 60 | % | 61 | % | 61 | % | |||||||||||
| Expected dividend yield | — | — | — | ||||||||||||||
| Risk-free interest rate | 4.32 | % | 3.49 | % | 0.73 | % | |||||||||||
The expected price volatility assumption is estimated using market data for certain peer companies during periods in which our own trading history is limited. As our trading history increases, it will bear greater weight in determining our expected price volatility assumption.
The weighted average grant-date fair value of performance awards granted during 2017, 2016the years ended December 31, 2023 and 2015 totaled $6.7 million, $6.1 million2022, and $8.3 million,eight months ended December 31, 2021 (Successor) was $62.09, $38.08 and $15.93, respectively.
The aggregate fair valuefollowing table summarizes the performance award activity for the year ended December 31, 2023 (Successor) (shares in thousands):
Awards(2) | Weighted Average Grant Date Fair Value Price(2) | ||||||||||
| Balance as of December 31, 2022 | 767 | $ | 21.77 | ||||||||
Granted - Market-Based Objectives(1) | 98 | $ | 59.28 | ||||||||
Granted - Performance-Based Objectives(1) | 29 | $ | 71.63 | ||||||||
| Total Granted | 127 | $ | 62.09 | ||||||||
| Balance as of December 31, 2023 | 894 | $ | 27.49 | ||||||||
(1)The number of awards granted reflects the shares that would be granted if the target level of performance awardswere to be achieved. The number of shares actually issued after considering forfeitures may range from zero to 239,000.
(2)There were no forfeited or vested during 2017, 2016 and 2015 totaled $2.9 million, $2.8 million and $4.6 million, respectively.shares for the year ended December 31, 2023 (Successor).
During the years ended December 31, 2017, 20162023 and 2015,2022, and eight months ended December 31, 2021 (Successor), we recognized $8.4of $11.7 million, $3.1$6.7 million and $2.9$0.7 million of compensation expense for performance awards, respectively, which was included in generalGeneral and administrative expense in our consolidated statementsConsolidated Statements of operations. Operations.
As of December 31, 2017,2023, there was $8.2$10.1 million of total estimated unrecognized compensation cost related to unvested performance awards, which is expectedhas a weighted-average remaining vesting period of 1.2 years.
118
Predecessor Awards
Time-Based Share Awards and Cash-Settled Awards
The Predecessor granted share awards and share units (collectively "share awards") and share units to be settled in cash ("cash-settled awards"), which generally vested at a rate of 33% per year. Additionally, non-employee directors were permitted to elect to receive deferred share awards. Deferred share awards vested at the earlier of the first anniversary of the grant date or the next annual meeting of shareholders following the grant but were not to be settled until the director terminated service from the board of directors. Deferred share awards were to be settled in cash, shares or a combination thereof at the discretion of the compensation committee.
The Predecessor's non-vested share awards had voting and dividend rights effective on the date of grant, and the non-vested share units had dividend rights effective on the date of grant. Compensation expense for share awards was measured at fair value on the date of grant and recognized on a straight-line basis over the requisite service period (usually the vesting period). Compensation expense for cash-settled awards was remeasured each quarter with a cumulative adjustment to compensation cost during the period based on changes in the Legacy Valaris share price. Compensation cost was also reduced for forfeited awards in the period in which the forfeitures occurred.
During the four months ended April 30, 2021 (Predecessor) we recognized $4.8 million of compensation expense for these awards, of which $2.4 million was included in Contract drilling expense and $2.4 million was included in General and administrative expense in our Consolidated Statements of Operations. As discussed above, in accordance with the plan of reorganization, the unvested awards of employees, senior executive officers and non-employee directors remaining on the Effective Date were cancelled for no consideration.
Share Appreciation Rights
Share Appreciation Rights ("SARs") granted to employees under our Predecessor incentive plans were accounted for as equity awards. As of April 30, 2021, there were 319,641 SARs outstanding, all of which were fully vested. In accordance with the plan of reorganization, these remaining outstanding SARs were cancelled.
Share Option Awards
As of April 30, 2021, there were fully vested options outstanding to purchase 313,377 shares under our Predecessor incentive plans. In accordance with the plan of reorganization, these outstanding options were cancelled.
11. PENSION AND OTHER POST-RETIREMENT BENEFITS
We have defined-benefit pension plans and post-retirement health and life insurance plans that provide benefits upon retirement for certain full-time employees. The defined-benefit pension plans include: (1) a pension plan which was amended in 2018 to freeze any future benefit accrual whereby eligible employees no longer receive pay credits in the plan and newly hired employees are not eligible to participate; and (2) supplemental executive retirement plans, which are also frozen, that provided eligible employees an opportunity to defer a portion of their compensation for use after retirement. Additionally, we have frozen retiree life and medical supplemental plans which provide post-retirement health and life insurance benefits.
119
The following table presents the changes in benefit obligations and plan assets for the years ended December 31, 2023 and 2022 and the funded status and weighted-average periodassumptions used to determine the benefit obligation at the measurement date (dollars in millions):
| Year Ended December 31, | ||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||||||||||||||||
| Pension Benefits | Other Benefits | Total | Pension Benefits | Other Benefits | Total | |||||||||||||||||||||||||||||||||
| Projected benefit obligation: | ||||||||||||||||||||||||||||||||||||||
| BALANCE at the beginning of the period | $ | 611.5 | $ | 11.6 | $ | 623.1 | $ | 827.9 | $ | 15.6 | $ | 843.5 | ||||||||||||||||||||||||||
| Interest cost | 30.6 | 0.6 | 31.2 | 22.0 | 0.4 | 22.4 | ||||||||||||||||||||||||||||||||
| Actuarial loss (gain) | 6.1 | (0.4) | 5.7 | (191.0) | (3.8) | (194.8) | ||||||||||||||||||||||||||||||||
| Plan settlements | — | — | — | (1.4) | — | (1.4) | ||||||||||||||||||||||||||||||||
| Benefits paid | (41.7) | (0.8) | (42.5) | (46.0) | (0.6) | (46.6) | ||||||||||||||||||||||||||||||||
| BALANCE at the end of the period | $ | 606.5 | $ | 11.0 | $ | 617.5 | $ | 611.5 | $ | 11.6 | $ | 623.1 | ||||||||||||||||||||||||||
| Plan assets | ||||||||||||||||||||||||||||||||||||||
| Fair value, at the beginning of the period | $ | 458.5 | $ | — | $ | 458.5 | $ | 634.6 | $ | — | $ | 634.6 | ||||||||||||||||||||||||||
| Actual return | 48.5 | — | 48.5 | (132.2) | — | (132.2) | ||||||||||||||||||||||||||||||||
| Employer contributions | 5.9 | — | 5.9 | 3.5 | — | 3.5 | ||||||||||||||||||||||||||||||||
| Plan settlements | — | — | — | (1.4) | — | (1.4) | ||||||||||||||||||||||||||||||||
| Benefits paid | (41.7) | — | (41.7) | (46.0) | — | (46.0) | ||||||||||||||||||||||||||||||||
| Fair value, at the end of the period | $ | 471.2 | $ | — | $ | 471.2 | $ | 458.5 | $ | — | $ | 458.5 | ||||||||||||||||||||||||||
| Net benefit liabilities | $ | 135.3 | $ | 11.0 | $ | 146.3 | $ | 153.0 | $ | 11.6 | $ | 164.6 | ||||||||||||||||||||||||||
| Amounts recognized in Consolidated Balance Sheet: | ||||||||||||||||||||||||||||||||||||||
| Accrued liabilities | $ | (3.6) | $ | (1.1) | $ | (4.7) | $ | (3.7) | $ | (1.1) | $ | (4.8) | ||||||||||||||||||||||||||
| Other liabilities (long-term) | (131.7) | (9.9) | (141.6) | (149.3) | (10.5) | (159.8) | ||||||||||||||||||||||||||||||||
| Net benefit liabilities | $ | (135.3) | $ | (11.0) | $ | (146.3) | $ | (153.0) | $ | (11.6) | $ | (164.6) | ||||||||||||||||||||||||||
| Accumulated contributions less than net periodic benefit cost | $ | (152.9) | $ | (18.9) | $ | (171.8) | $ | (159.8) | $ | (19.5) | $ | (179.3) | ||||||||||||||||||||||||||
| Amounts not yet reflected in net periodic benefit cost: | ||||||||||||||||||||||||||||||||||||||
| Actuarial loss | 17.8 | 7.9 | 25.7 | 7.0 | 7.9 | 14.9 | ||||||||||||||||||||||||||||||||
| Prior service cost | (0.2) | — | (0.2) | (0.2) | — | (0.2) | ||||||||||||||||||||||||||||||||
| Total accumulated other comprehensive income | $ | 17.6 | $ | 7.9 | $ | 25.5 | $ | 6.8 | $ | 7.9 | $ | 14.7 | ||||||||||||||||||||||||||
| Net benefit liabilities | $ | (135.3) | $ | (11.0) | $ | (146.3) | $ | (153.0) | $ | (11.6) | $ | (164.6) | ||||||||||||||||||||||||||
| Weighted-average assumptions: | ||||||||||||||||||||||||||||||||||||||
| Discount rate | 4.97 | % | 5.00 | % | 5.21 | % | 5.30 | % | ||||||||||||||||||||||||||||||
| Cash balance interest credit rate | 3.26 | % | N/A | 3.23 | % | N/A | ||||||||||||||||||||||||||||||||
The projected benefit obligations for pension benefits in the preceding table reflect the actuarial present value of 1.8 years.benefits accrued based on services rendered to date assuming the actual or assumed expected date of separation for retirement.
The accumulated benefit obligation, which is presented below for all plans in the aggregate at December 31, 2023 and 2022, is based on services rendered to date, but exclude the effect of future salary increases (in millions):
| 2023 | 2022 | |||||||||||||
| Accumulated benefit obligation | $ | 617.5 | $ | 623.1 | ||||||||||
120
The components of net periodic pension, retiree medical income and the weighted-average assumptions used to determine net periodic pension and retiree medical income were as follows (dollars in millions):
| Successor | Predecessor | ||||||||||||||||||||||||||||
| Year Ended December 31, 2023 | Year Ended December 31, 2022 | Eight Months Ended December 31, 2021 | Four Months Ended April 30, 2021 | ||||||||||||||||||||||||||
| Interest cost | $ | 31.2 | $ | 22.4 | $ | 15.6 | $ | 6.6 | |||||||||||||||||||||
| Expected return on plan assets | (31.4) | (38.3) | (24.7) | (12.1) | |||||||||||||||||||||||||
| Amortization of net (gain) loss | (0.7) | (0.1) | — | 0.1 | |||||||||||||||||||||||||
Settlement (gain) loss recognized (1) | — | (0.4) | 0.4 | — | |||||||||||||||||||||||||
Net periodic pension and retiree medical income (2) | $ | (0.9) | $ | (16.4) | $ | (8.7) | $ | (5.4) | |||||||||||||||||||||
| Discount rate | 5.21 | % | 2.73 | % | 2.84 | % | 2.30 | % | |||||||||||||||||||||
| Expected return on assets | 7.10 | % | 6.26 | % | 6.03 | % | 6.03 | % | |||||||||||||||||||||
| Cash balance interest credit rate | 3.23 | % | 3.05 | % | 2.94 | % | 2.94 | % | |||||||||||||||||||||
(1) Settlement accounting is necessary when actual lump sums paid during a fiscal year exceed the sum of the service cost and interest cost for the year. During the year ended December 31, 2022 and eight months ended December 31, 2021 (Successor), the settlement threshold was reached for certain of our pension plans and we recognized a corresponding settlement (gain) loss in our Consolidated Statements of Operations.
(2) All components of Net periodic pension and retiree medical income are included in Other, net, in our Consolidated Statements of Operations.
The American Rescue Plan Act of 2021, which was passed in March 2021, provided funding relief for U.S. qualified pension plans which lowered our pension contribution requirements for the years ended December 31, 2023 and 2022. We currently expect to contribute approximately $23.7 million to our pension plans and to directly pay other post-retirement benefits of approximately $1.2 million in 2024. These amounts represent the minimum contributions we are required to make under relevant statutes. We do not expect to make contributions in excess of the minimum required amounts.
The pension plans' investment objectives for fund assets are to: achieve a rate of return such that contributions are minimized and future assets are available to fund liabilities, maintain liquidity sufficient to pay benefits when due, diversify among asset classes so that assets earn a reasonable return with an acceptable level of risk and gradually de-risk the plan by increasing the allocation of investments which track the overall liabilities of the plan as the ratio of assets to liabilities improves and economic conditions warrant. The plans employ several active managers with proven long-term records in their specific investment discipline.
121
Target allocations among asset categories and the fair value of each category of plan assets as of December 31, 2023 and 2022, are presented below. The plans will reallocate assets in accordance with the allocation targets, after giving consideration to the expected level of cash required to pay current benefits and plan expenses (dollars in millions):
| December 31, 2023 | December 31, 2022 | ||||||||||||||||
Target range (1) | Total | Total | |||||||||||||||
| Equities: | |||||||||||||||||
| U.S. equity: | 23.9% to 33.9% | ||||||||||||||||
| U.S. large cap | $ | 105.5 | $ | 99.4 | |||||||||||||
| U.S. small/mid cap | 28.7 | 25.4 | |||||||||||||||
| Global Low Volatility Equity | 3.4% to 13.4% | 38.5 | 38.0 | ||||||||||||||
| Non-U.S. equity: | 19.7% to 29.7% | ||||||||||||||||
| International all cap | 51.3 | 50.7 | |||||||||||||||
| International small cap | 23.1 | 22.4 | |||||||||||||||
| Emerging markets | 39.3 | 39.7 | |||||||||||||||
| Real estate equities | 3% to 13% | 40.4 | 49.0 | ||||||||||||||
| Fixed income: | 25% to 35% | ||||||||||||||||
| Long-term corporate bonds | 46.6 | 45.3 | |||||||||||||||
| U.S. Treasury STRIPS | 93.0 | 83.7 | |||||||||||||||
| Cash and equivalents | $0 - $5.0 | 4.8 | 4.9 | ||||||||||||||
| Total | $ | 471.2 | $ | 458.5 | |||||||||||||
(1)Our investment policy only sets allocation target ranges for general asset classes and not specific investment types.
All of our investments, other than cash and cash equivalents, are measured at fair value using the net asset value per share (or its equivalent) practical expedient and therefore are not categorized in the fair value hierarchy. Cash and cash equivalents are considered Level 1 as they were valued at cost, which approximates fair value.
Assets in the U.S. equities category include investments in common and preferred stocks (and equivalents such as American Depository Receipts and convertible bonds) and may be held through separate accounts, commingled funds or an institutional mutual fund. Assets in the global low volatility equities include investments in a broad range of developed market global equity securities and may be held through a commingled or institutional mutual fund. Assets in the international equities category include investments in a broad range of international equity securities, including both developed and emerging markets, and may be held through a commingled or institutional mutual fund. The real estate category includes investments in pooled and commingled funds whose objectives are diversified equity investments in income-producing properties. Each real estate fund is intended to provide broad exposure to the real estate market by property type, geographic location and size and may invest internationally. Securities in the fixed income categories include U.S. government, corporate, mortgage- and asset-backed securities and Yankee bonds and should be rated investment grade or above. Investments in this category should have an average investment rating of “A” or better.
To develop the expected long-term rate of return on assets assumption, we considered the current level of expected returns on risk-free investments (primarily government bonds), the historical level of the risk premium associated with the plan's other asset classes and the expectations for future returns of each asset class. The expected return for each asset class was then weighted based upon the current asset allocation to develop the expected long-term rate of return on assets assumption for the plan, which decreased to 6.88% at December 31, 2023 from 7.10% at December 31, 2022.
122
Estimated future annual benefit payments from plan assets are presented below. Such amounts are based on existing benefit formulas and include the effect of future service (in millions):
| Pension Benefits | Other Post-Retirement Benefits | |||||||||||||
| Year ended December 31, | ||||||||||||||
| 2024 | $ | 42.4 | $ | 1.2 | ||||||||||
| 2025 | 41.2 | 1.0 | ||||||||||||
| 2026 | 40.7 | 0.9 | ||||||||||||
| 2027 | 40.4 | 0.9 | ||||||||||||
| 2028 | 40.1 | 0.8 | ||||||||||||
| 2029 through 2033 | 193.0 | 3.7 | ||||||||||||
Savings Plans
We have profit sharingsavings plans, (the "Ensco"Savings Plan", the "Multinational Savings Plan,"Plan", the "Ensco Multinational Savings Plan" and the "Ensco Limited"Limited Retirement Plan"), which cover eligible employees as defined within each plan. The Ensco Savings Plan includes a 401(k) savings plan feature, which allows eligible employees to make tax-deferred contributions to the plan. The Ensco Limited Retirement Plan also allows eligible employees to make tax-deferred contributions to the plan.plans. Contributions made to the Ensco Multinational Savings Plan may or may not qualify for tax deferral based on each plan participant's local tax requirements. The Limited Retirement Plan allows eligible employees in the U.K. to make tax-deferred contributions to the plan.
We generated profits of the Board of Directors and are generally paid in cash. We recorded additional discretionary contribution provisions of $19.2$30.7 million $39.7 million, $253.4 million and $27.5$373.1 million before income taxes in the U.S. for the years ended December 31, 20162023 and 2015, respectively. Matching contributions and additional discretionary contributions become vested in 33% increments upon completion of each initial year of service with all contributions becoming fully vested subsequent to achievement of three or more years of service. We have 1.0 million shares reserved for issuance as matching contributions under the Ensco Savings Plan.
four months ended April 30, 2021 (Predecessor), respectively. We generated profits of $6.3$53.5 million and $185.2 million, and losses of$151.6 $240.6 million and $578.2 million from continuing operations before income taxes in the U.S. and a loss of $202.3 million, profits of $1.1$4.8 billion and a loss of $893.0 million from continuing operations before income taxes in non-U.S. jurisdictions for the years ended December 31, 2017, 20162023 and 2015,2022, eight months ended December 31, 2021 (Successor), and four months ended April 30, 2021 (Predecessor), respectively.
123
The following table summarizes components of our provision for income taxes from continuing operations for each of the years in the three-year period ended December 31, 2017are summarized as follows (in millions):
| 2017 | 2016 | 2015 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Current income tax (benefit) expense: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Successor | Successor | Predecessor | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Year Ended December 31, 2023 | Year Ended December 31, 2023 | Year Ended December 31, 2022 | Eight Months Ended December 31, 2021 | Four Months Ended April 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Current income tax expense (benefit): | Current income tax expense (benefit): | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. | $ | (2.2 | ) | $ | (6.6 | ) | $ | 18.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Non-U.S. | 56.4 | 86.4 | 125.4 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 54.2 | 79.8 | 144.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Deferred income tax expense (benefit): | Deferred income tax expense (benefit): | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. | 36.0 | 15.9 | (180.4 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Non-U.S. | 19.0 | 12.8 | 22.4 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 55.0 | 28.7 | (158.0 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total income tax expense (benefit) | $ | 109.2 | $ | 108.5 | $ | (13.9 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Deferred Taxes
The following table summarizes significant components of deferred income tax assets (liabilities)and liabilities are summarized as of December 31, 2017 and 2016follows (in millions):
| December 31, 2023 | December 31, 2023 | December 31, 2022 | |||||||||||||||||||||||||||||||||
Deferred tax assets: | Deferred tax assets: | ||||||||||||||||||||||||||||||||||
| Net operating loss carryforwards | |||||||||||||||||||||||||||||||||||
| Property and equipment | |||||||||||||||||||||||||||||||||||
| Interest limitation carryforwards | |||||||||||||||||||||||||||||||||||
| Foreign tax credits | |||||||||||||||||||||||||||||||||||
| Employee benefits, including share-based compensation | |||||||||||||||||||||||||||||||||||
| Premiums on long-term debt | |||||||||||||||||||||||||||||||||||
| Premiums on long-term debt | |||||||||||||||||||||||||||||||||||
| Premiums on long-term debt | |||||||||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||||||||
| Valuation allowance | |||||||||||||||||||||||||||||||||||
| Total deferred tax assets | |||||||||||||||||||||||||||||||||||
| 2017 | 2016 | ||||||||||||||||||||||||||||||||||
Deferred tax assets: | |||||||||||||||||||||||||||||||||||
| Net operating loss carryforwards | $ | 187.1 | $ | 197.9 | |||||||||||||||||||||||||||||||
| Foreign tax credits | 132.3 | 91.7 | |||||||||||||||||||||||||||||||||
| Premiums on long-term debt | 36.1 | 72.7 | |||||||||||||||||||||||||||||||||
| Deferred revenue | 26.0 | 55.7 | |||||||||||||||||||||||||||||||||
| Employee benefits, including share-based compensation | 20.7 | 30.6 | |||||||||||||||||||||||||||||||||
| Other | 12.8 | 17.2 | |||||||||||||||||||||||||||||||||
| Total deferred tax assets | 415.0 | 465.8 | |||||||||||||||||||||||||||||||||
| Valuation allowance | (278.8 | ) | (238.8 | ) | |||||||||||||||||||||||||||||||
| Net deferred tax assets | 136.2 | 227.0 | |||||||||||||||||||||||||||||||||
Deferred tax liabilities: | |||||||||||||||||||||||||||||||||||
| Property and equipment | (51.5 | ) | (103.3 | ) | |||||||||||||||||||||||||||||||
| Deferred U.S. tax on foreign income | (24.8 | ) | (15.2 | ) | |||||||||||||||||||||||||||||||
| Deferred transition tax | (13.7 | ) | — | ||||||||||||||||||||||||||||||||
| Deferred costs | (9.1 | ) | (11.4 | ) | |||||||||||||||||||||||||||||||
| Intercompany transfers of property | — | (18.9 | ) | ||||||||||||||||||||||||||||||||
| Other | (8.7 | ) | (8.4 | ) | |||||||||||||||||||||||||||||||
| Total deferred tax liabilities | (107.8 | ) | (157.2 | ) | |||||||||||||||||||||||||||||||
| Deferred tax liabilities | |||||||||||||||||||||||||||||||||||
| Deferred tax liabilities | |||||||||||||||||||||||||||||||||||
| Deferred tax liabilities | |||||||||||||||||||||||||||||||||||
| Net deferred tax asset | $ | 28.4 | $ | 69.8 | |||||||||||||||||||||||||||||||
The realization of substantially all of our deferred tax assets is dependent onupon generating sufficient taxable income during future periods in various jurisdictions in which we operate. We rely on projected taxable income from both current and future drilling contracts for the recognition of deferred tax assets. Realization of certain of our deferred tax assets is not assured. We recognize a valuation allowance for deferred tax assets when it is more-likely-than-not that the benefit from the deferred tax asset will not be realized. The amount of deferred tax assets considered realizable could increase or decrease in the near termnear-term if our estimates of future taxable income change.
124
As of December 31, 2017,2023, we had gross deferred tax assets of $132.3$3.3 billion relating to $14.2 billion of net operating loss ("NOL") carryforwards, $44.7 million forof U.S. foreign tax credits (“FTC”FTCs”), and $187.1$123.4 million related to $844.1 millionof net operating loss (“NOL”)U.S., Luxembourg and U.K. interest limitation carryforwards, which can be used to reduce our income taxes payable in future years. The FTCs expire between 2022 and 2038. NOL carryforwards, which were generated in various jurisdictions worldwide, include $429.2 million$13.2 billion that do not expire and $414.9 million$1.0 billion that will expire, if not utilized, beginningbetween 2024 and 2040. Deferred tax assets for NOL carryforwards as of December 31, 2023 include $2.4 billion, $607.5 million, $88.6 million, and $78.0 million pertaining to NOL carryforwards in 2018 through 2037. DueLuxembourg, the United States, Switzerland, and the U.K., respectively. The U.S. FTCs expire between 2024 and 2026. Interest limitation carryforwards generally do not expire. Additionally, as a result of our emergence from bankruptcy, the utilization of certain U.S. deferred tax assets including, but not limited to, NOL carryforwards, FTCs, and interest limitation carryforwards is limited to $0.5 million annually.
We had a $4.2 billion and a $4.7 billion valuation allowance as of December 31, 2023 and 2022, respectively, on deferred tax assets relating to those assets for which we are not more likely than not to realize due to the uncertaintyinability to generate sufficient taxable income in the period prior to expiration and/or of the character necessary to use the benefit of the deferred tax assets. During the years ended December 31, 2023 and 2022, and eight months ended December 31, 2021 (Successor), we recognized a deferred tax benefit of $802.9 million, a deferred tax expense of $1.5 million and a deferred tax benefit of $9.8 million, respectively, associated with changes in deferred tax asset valuation allowances. The deferred tax benefit in 2023 primarily relates to a $799.5 million reduction of our valuation allowance recognized in the fourth quarter of 2023 due changes in the balance of relevant positive and negative evidence considered when assessing the realization of our deferred tax assets in certain operating jurisdictions. After considering the balance of evidence, which included historical financial results, projected earnings, contract backlog, day rates and market outlook, we have a $250.3 milliondetermined that sufficient positive evidence exists to conclude that this portion of the valuation allowance on FTCdeferred tax assets is no longer needed. This reduction in our valuation allowance was partially offset by a net increase of $275.0 million in 2023, primarily relating to deferred tax asset activity during the year attributable to NOLs and NOL carryforwards.future deductible temporary differences for which we are not more than likely not to realize. We intend to continue maintaining a valuation allowance on a substantial portion of our deferred tax assets until there is sufficient evidence to support a reversal of such allowances. The timing and amount of future valuation allowance reductions are subject to future levels of contracting and profitability achieved.
Effective Tax Rate
Income tax rates imposedand taxation systems in the tax jurisdictions in which our subsidiaries conduct operations vary as does the tax baseand our subsidiaries are frequently subjected to which the rates are applied.minimum taxation regimes. In some cases,jurisdictions, tax rates may be applicable toliabilities are based on gross revenues, statutory or negotiated deemed profits or other bases utilized under local tax laws,factors, rather than on net income, and our subsidiaries are frequently unable to net income.realize tax benefits when they operate at a loss. Accordingly, during periods of declining profitability, our income tax expense may not decline proportionally with income, which could result in higher effective income tax rates. Furthermore, we will continue to incur income tax expense in periods in which we operate at a loss.
Our drilling rigs frequently move from one taxing jurisdiction to another to perform contract drilling services. In some instances, the movement of drilling rigs among taxing jurisdictions will involve the transfer of ownership of the drilling rigs among our subsidiaries. As a result of frequent changes in the taxing jurisdictions in which our drilling rigs are operated and/or owned, changes in profitability levels and changes in tax laws, our annual effective income tax rate may vary substantially from one reporting period to another. In periods of declining profitability, our income tax expense may not decline proportionally with income, which could result in higher effective income tax rates. Further, we may continue to incur income tax expense in periods in which we operate at a loss.
125
Our consolidated effective income tax rate on continuing operations for each of the years in the three-year period ended December 31, 2017,2023 and 2022, eight months ended December 31, 2021 (Successor), and four months ended April 30, 2021 (Predecessor), respectively, differs from the Bermuda and U.K. statutory income tax raterates as follows:
| Successor | Predecessor | |||||||||||||||||||||||||
| Year Ended December 31, 2023 | Year Ended December 31, 2022 | Eight Months Ended December 31, 2021 | Four Months Ended April 30, 2021 | |||||||||||||||||||||||
| Bermuda (Successor)/ U.K. (Predecessor) statutory income tax rate | — | % | — | % | — | % | 19.0 | % | ||||||||||||||||||
| Non-Bermuda (Successor) taxes | 74.0 | 22.8 | 376.0 | — | ||||||||||||||||||||||
| Valuation allowance | (953.6) | 0.6 | (119.5) | (1.8) | ||||||||||||||||||||||
| Resolution of prior year items | (49.9) | (7.0) | 216.2 | (0.4) | ||||||||||||||||||||||
| Switzerland Tax Reform | — | — | (188.3) | — | ||||||||||||||||||||||
| Asset impairments | — | — | — | (3.2) | ||||||||||||||||||||||
| Other | — | 2.8 | — | (14.0) | ||||||||||||||||||||||
| Effective income tax rate | (929.5) | % | 19.2 | % | 284.4 | % | (0.4) | % | ||||||||||||||||||
| 2017 | 2016 | 2015 | ||||||
| U.K. statutory income tax rate | 19.2 | % | 20.0 | % | 20.2 | % | ||
| Non-U.K. taxes | (40.4 | ) | (7.9 | ) | (12.3 | ) | ||
| Valuation allowance | (18.0 | ) | 2.6 | (1.5 | ) | |||
| Goodwill and asset impairments | (17.1 | ) | — | (4.0 | ) | |||
| Bargain purchase gain | 13.8 | — | — | |||||
| U.S. tax reform | (8.4 | ) | — | — | ||||
| Debt repurchases | (2.8 | ) | (4.1 | ) | — | |||
| Other | (2.0 | ) | .3 | (1.5 | ) | |||
| Effective income tax rate | (55.7 | )% | 10.9 | % | .9 | % | ||
Our 20172023 consolidated effective income tax rate includes $32.2discrete tax benefit of $42.0 million primarily attributable to changes in liabilities for unrecognized tax benefits associated with tax positions taken in prior years.
Our 2022 consolidated effective income tax rate includes $10.3 million associated with the impact of various discrete tax items, including $16.5$17.2 million ofincome tax expensebenefit associated with U.S. tax reform and $15.7 million of tax expense associated with the exchange offers and debt repurchases, rig sales, a restructuring transaction, settlement of a previously disclosed legal contingency, the effective settlement of a liabilitychanges in liabilities for unrecognized tax benefits and resolution of other prior period tax matters, offset primarily by tax expense attributable to income associated with a tax position taken in prior years and other resolutions of prior year tax matters.contract termination.
Our 2016eight months ended December 31, 2021 (Successor) consolidated effective income tax rate includes $14.3 million associated with the impact of various discrete tax items, including a $16.9$29.7 million income tax expense resulting from net gains on the repurchase of various debt during the year, the recognition of an $8.4 million net tax benefit relating to the sale of various rigs, a $5.5 million tax benefit resulting from a net reduction in the valuation allowance on U.S. foreign tax credits and a net $5.3 million tax benefit associated with changes in liabilities for unrecognized tax benefits and resolution of other adjustments relatingprior period tax matters, offset by $15.4 million of tax benefit related to prior years.deferred taxes associated with Switzerland tax reform.
Our four months ended April 30, 2021 (Predecessor) consolidated effective income tax rate for 2015 includesincluded $2.2 million associated with the impact of various discrete items, including $21.5 million of income tax items, primarilyexpense associated with changes in liabilities for unrecognized tax benefits and resolution of other prior period tax matters, offset by $19.3 million of tax benefit related to a $192.5 million tax benefit associated with rig impairments and an $11.0 million tax benefit resulting from the reduction of a valuation allowance on U.S. foreign tax credits.fresh start accounting adjustments.
Excluding the impact of the aforementioned discrete tax items, our consolidated effective income tax rates for the years ended December 31, 2017, 20162023 and 20152022, eight months ended December 31, 2021 (Successor), and four months ended April 30, 2021 (Predecessor) were (96.0)(872.3)%, 20.3%73.6%, 213.9% and 16.0%(12.9)%, respectively. The changes in our consolidated effective income tax rate excluding discrete tax items during the three-year period result primarily from changes in the relative components of our earnings from the various taxing jurisdictions in which our drilling rigs are operated and/or owned and differences in tax rates in such taxing jurisdictions.
Unrecognized Tax Benefits
Our tax positions are evaluated for recognition using a more-likely-than-not threshold, and those tax positions requiring recognition are measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon effective settlement with a taxing authority that has full knowledge of all relevant information.
126
As of December 31, 2017,2023, we had $147.6$201.4 million of unrecognized tax benefits, of which $139.4$171.7 million was included in otherOther liabilities on our consolidated balance sheetConsolidated Balance Sheet, and the remaining $8.2$29.7 million, which is associated with a tax positionpositions taken in tax years with NOL carryforwards, was presented as a reduction of deferred tax assets.
As of December 31, 2016,2022, we had $122.0$217.6 million of unrecognized tax benefits, of which $116.3$187.2 million was included in otherOther liabilities on our consolidated balance sheet and the remaining $5.7Consolidated Balance Sheet, $30.2 million,, which is associated with a tax positionpositions taken in tax years with NOL carryforwards, was presented as a reduction of deferred tax assets. assets and $0.2 million was presented as a reduction of long-term income tax receivable.
If recognized, $130.3$171.2 million of the $147.6$201.4 million unrecognized tax benefits as of December 31, 20172023 would impact our consolidated effective income tax rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 20172023 and 2016 is2022, eight months ended December 31, 2021 (Successor), and four months ended April 30, 2021 (Predecessor) (in millions) were as follows (in millions):follows:
| 2017 | 2016 | |||||||
| Balance, beginning of year | $ | 122.0 | $ | 140.6 | ||||
| Increases in unrecognized tax benefits as a result of the Merger | 22.2 | — | ||||||
Increases in unrecognized tax benefits as a result of tax positions taken during the current year | 5.4 | 7.6 | ||||||
Increases in unrecognized tax benefits as a result of tax positions taken during prior years | .7 | 4.9 | ||||||
| Settlements with taxing authorities | (10.2 | ) | (27.6 | ) | ||||
| Lapse of applicable statutes of limitations | (.4 | ) | (.2 | ) | ||||
| Decreases in unrecognized tax benefits as a result of tax positions taken during prior years | (.2 | ) | (.5 | ) | ||||
| Impact of foreign currency exchange rates | 8.1 | (2.8 | ) | |||||
| Balance, end of year | $ | 147.6 | $ | 122.0 | ||||
| Successor | Predecessor | ||||||||||||||||||||||||||||
| Year Ended December 31, 2023 | Year Ended December 31, 2022 | Eight Months Ended December 31, 2021 | Four Months Ended April 30, 2021 | ||||||||||||||||||||||||||
| Balance, beginning of period | $ | 217.6 | $ | 235.1 | $ | 235.4 | $ | 237.7 | |||||||||||||||||||||
| Increase as a result of tax positions taken during prior years | 88.6 | 3.0 | 34.6 | 2.9 | |||||||||||||||||||||||||
| Lapse of applicable statutes of limitations | (73.6) | (4.5) | (20.2) | (0.2) | |||||||||||||||||||||||||
| Settlements with taxing authorities | (41.8) | (16.5) | (6.6) | — | |||||||||||||||||||||||||
| Increases as a result of tax positions taken during the current year | 13.4 | 11.2 | 6.9 | 12.6 | |||||||||||||||||||||||||
| Impact of foreign currency exchange rates | 0.6 | (9.7) | (10.5) | (17.6) | |||||||||||||||||||||||||
| Decreases as a result of tax positions taken during prior years | (3.4) | (1.0) | (4.5) | — | |||||||||||||||||||||||||
| Balance, end of period | $ | 201.4 | $ | 217.6 | $ | 235.1 | $ | 235.4 | |||||||||||||||||||||
Accrued interest and penalties totaled $38.6$52.3 million and $26.6$87.8 million as of December 31, 20172023 and 2016,2022, respectively, and were included in otherOther liabilities on our consolidated balance sheets. Accrued interest and penalties included $7.7 million as a result of the Merger as of December 31, 2017.Consolidated Balance Sheets. We recognized a net expense of $4.4 million, a net benefit of $3.8$35.4 million and a$12.5 million, and net expense of $3.9$20.3 million and $13.5 million associated with interest and penalties during the years ended December 31, 2017, 20162023 and 20152022, eight months ended December 31, 2021 (Successor), and four months ended April 30, 2021 (Predecessor), respectively. Interest and penalties are included in currentCurrent income tax expense in our consolidated statementsConsolidated Statements of operations.Operations.
Statutes of limitations applicable to certain of our tax positions lapsed during 2017, 2016the years ended December 31, 2023 and 20152022, eight months ended December 31, 2021 (Successor), and four months ended April 30, 2021 (Predecessor), resulting in net income tax benefits, inclusive of interest and penalties, of $1.1$77.3 million,, $0.6 $4.5 million, $17.9 million and $7.6$0.2 million,, respectively.
Absent the commencement of examinations by tax authorities, statutes of limitations applicable to certain of our tax positions will lapse during 2018. Therefore, it is reasonably possible that2024, but we do not expect these to have a material impact to our unrecognized tax benefits will decline during the next 12 months by $3.6 million, inclusive of $1.0 million of accrued interest and penalties, all of which would impact our consolidatedor effective income tax rate if recognized.
127
Tax Assessments
In October 2016,December 2023, one of our Luxembourg subsidiaries received tax assessments for fiscal years 2019, 2020, 2021 and 2023 and a demand of payment from the FASB issued Accounting Standards Update 2016-16, Income Taxes (Topic 740): Intra-Entity TransfersLuxembourg tax authorities for an aggregate of Assets Other Than Inventory (“Update 2016-16”)approximately €115.0 million (approximately $127.0 million converted at current period-end exchange rates), which requires entitiesincluding interest. In February 2024, we subsequently received notice from the Luxembourg tax authorities reducing the amount attributable to recognize the income2023 payment demand by approximately €55.0 million resulting in a revised aggregate tax consequencesdemand of an intra-entity transferapproximately €60.0 million. We have recorded a liability for uncertain tax positions of an asset other than inventory whenapproximately €60.0 million (approximately $66.0 million converted at current period-end exchange rates) in the transaction occurs as opposed
fourth quarter of 2023 related to deferringthe assessments for the 2019-2021 tax consequencesyears. We are vigorously contesting these assessments, including the validity and amortizing them into future periods. We adopted Update 2016-16 on a modified retrospective basis effective January 1, 2017. As a resultamount; however, the outcome of modified retrospective application, we reduced prepaid taxes on intercompany transfers of propertysuch challenges and related deferred tax liabilities resultingadministrative proceedings and appeals cannot be predicted with certainty. An unfavorable outcome could result in the recognition of a cumulative-effect reduction in retained earnings of $14.1 millionmaterial impact on our consolidated balance sheetfinancial position, operating results and cash flows.
During 2019, the Australian tax authorities issued aggregate tax assessments totaling approximately A$101.0 million (approximately $69.0 million converted at the current period-end exchange rate) plus interest related to the examination of certain of our tax returns for the years 2011 through 2016. During the third quarter of 2019, we made a A$42.0 million payment (approximately $29.0 million at then-current exchange rates) to the Australian tax authorities to litigate the assessment. We have an $18.8 million liability for uncertain tax positions relating to these assessments as of January 1, 2017.
Undistributed Earnings
Dividend income received by Ensco plcValaris Limited from its subsidiaries is exempt from U.K.Bermuda taxation. We do not provide deferred taxes on undistributed earnings of certain subsidiaries because our policy and intention is to reinvest such earnings indefinitely. EachAs of December 31, 2023, the aggregate undistributed earnings of the subsidiaries for which we maintain sucha policy has sufficient net assets, liquidity, contract backlog and/and intention to reinvest earnings indefinitely totaled $298.2 million. Should we make a distribution from these subsidiaries in the form of dividends or other financial resources availableotherwise, we would be subject to meet operational and capital investment requirements, which allows us to continue to maintain our policy of reinvesting the undistributed earnings indefinitely.
The Organization for Economic Co-operation and Development has issued Pillar Two model rules introducing a new global minimum tax of 15% applied on a country-by-country basis intended to be effective on January 1, 2024. Numerous jurisdictions are actively considering changes to existing tax laws or have proposed or enacted new laws to align with the Merger,recommendations and guidelines under Pillar Two. There remains uncertainty as to the final Pillar Two model rules and we will continue to focusmonitor global legislative action related to this initiative. Additionally, Bermuda recently enacted the Corporate Income Tax Act 2023 on December 27, 2023 (the “CIT Act”) which stipulates a tax on 15% of the net income of certain Bermuda constituent entities (as determined in accordance with the CIT Act, including after adjusting for any relevant foreign tax credits applicable to the Bermuda constituent entities). No tax is chargeable under the CIT Act until tax years starting on or after January 1, 2025. While we are still closely monitoring developments of these rules and evaluating the potential impact on future periods, we do not expect they will have a significant impact on our fleet management strategy in light of the new composition of our rig fleet and are reviewing our fleet composition as we continue positioning Ensco for the future. As part of this strategy, we may act opportunistically from time to time to monetize assets to enhance shareholder value and improve our liquidity profile, in addition to selling or disposing of older, lower-specification or non-core rigs.
128
13. COMMITMENTS AND CONTINGENCIES
ARO Newbuild Funding Obligations
In connection with this sale,our 50/50 unconsolidated joint venture, we executedhave a charter agreement with the purchaserpotential obligation to continue operating the rigfund ARO for newbuild jackup rigs. The Shareholder Agreement specifies that ARO shall purchase 20 newbuild jackup rigs over an approximate 10-year period. The joint venture partners intend for the remaindernewbuild jackup rigs to be financed out of available cash on hand and from ARO's operations and/or funds available from third-party financing. In January 2020, ARO paid 25% of the Pemex contract, which ended in July 2015, less than one yearpurchase price from the date of sale. Our management services following the sale did not constitute significant ongoing involvement and therefore, the rig's operating results through the term of the contract and losscash on sale were included in results from discontinued operations, net, in our consolidated statements of operations.
| Rig | Date of Sale | Segment(1) | Net Proceeds | Net Book Value(2) | Pre-tax Gain/(Loss) | |||||||||||
| ENSCO 90 | June 2017 | Jackups | $ | .3 | $ | .3 | $ | — | ||||||||
| ENSCO DS-2 | May 2016 | Floaters | 5.0 | 4.0 | 1.0 | |||||||||||
| ENSCO 58 | April 2016 | Jackups | .7 | .3 | .4 | |||||||||||
| ENSCO 6000 | April 2016 | Floaters | .6 | .8 | (.2 | ) | ||||||||||
| ENSCO 5001 | December 2015 | Floaters | 2.4 | 2.5 | (.1 | ) | ||||||||||
| ENSCO 5002 | June 2015 | Floaters | 1.6 | — | 1.6 | |||||||||||
| $ | 10.6 | $ | 7.9 | $ | 2.7 | |||||||||||
Letters of Credit
In the ordinary course of business with customers and were previously included within the specified operating segment.
| 2017 | 2016 | 2015 | |||||||||
| Revenues | $ | — | $ | — | $ | 19.5 | |||||
| Operating expenses | 1.5 | 3.1 | 39.5 | ||||||||
| Operating loss | (1.5 | ) | (3.1 | ) | (20.0 | ) | |||||
| Income tax benefit | (2.1 | ) | (10.1 | ) | (7.7 | ) | |||||
| Loss on impairment, net | — | — | (120.6 | ) | |||||||
| Gain on disposal of discontinued operations, net | .4 | 1.1 | 4.3 | ||||||||
| Income (loss) from discontinued operations | $ | 1.0 | $ | 8.1 | $ | (128.6 | ) | ||||
Patent Litigation
In December 2022, a subsidiary of Transocean Ltd. commenced an arbitration proceeding against us alleging breach of a license agreement related to certain dual-activity drilling patents. We are unable to estimate our rigs under constructionpotential exposure, if any, to the proceeding at this time but do not believe that our ultimate liability, if any, resulting from this proceeding will have a material effect on our consolidated financial condition, results of operations or cash flows. We do not believe that we have breached the license agreement and estimated timing of our remaining contractual payments (in millions): intend to defend ourselves vigorously against this claim.
Cumulative Paid(1) | 2018 and 2019 | 2020 and 2021 | Thereafter | Total(2) | ||||||||||||||||
ENSCO 123(3) | $ | 67.1 | $ | 218.3 | $ | — | $ | — | $ | 285.4 | ||||||||||
ENSCO DS-14(4) | — | 15.0 | 165.0 | — | 180.0 | |||||||||||||||
ENSCO DS-13(4) | — | 83.9 | — | — | 83.9 | |||||||||||||||
| $ | 67.1 | $ | 317.2 | $ | 165.0 | $ | — | $ | 549.3 | |||||||||||
Brazil Internal InvestigationAdministrative Proceeding
129
Other Matters
In addition to the foregoing, we are named defendants or parties in certain other lawsuits, claims or proceedings incidental to our business and are involved from time to time as parties to governmental investigations or proceedings, including matters related to taxation, arising in the ordinary course of business. Although the outcome of such lawsuits or other proceedings cannot be predicted with certainty and the amount of any liability that could arise with respect to such lawsuits or other proceedings cannot be predicted accurately, we do not expect these matters to have a material adverse effect on our financial position, operating results and cash flows.
14. LEASES
We have operating leases for office space, facilities, equipment, employee housing and certain rig berthing facilities. For all asset classes, except office space, we account for the ordinary courselease component and the non-lease component as a single lease component. Short-term leases with a term of business with customersone year or less are not recorded on the Consolidated Balance Sheet. Our leases have remaining lease terms of less than one month to eight years, some of which include options to extend. The lease term used for calculating our right-of-use assets and others,lease liabilities is determined by considering the non-cancelable lease term, as well as any extension options that we have entered into lettersare reasonably certain to exercise.
We evaluate the carrying value of creditour right-of-use assets on a periodic basis to guarantee our performanceidentify events or changes in circumstances, such as it relateslease abandonment, which indicate that the carrying value of such right-of-use assets may be impaired.
The components of lease expense are as follows (in millions):
| Successor | Predecessor | |||||||||||||||||||||||||
| Year Ended December 31, 2023 | Year Ended December 31, 2022 | Eight Months Ended December 31, 2021 | Four Months Ended April 30, 2021 | |||||||||||||||||||||||
| Long-term operating lease cost | $ | 24.6 | $ | 13.4 | $ | 12.9 | $ | 9.1 | ||||||||||||||||||
| Short-term operating lease cost | 13.2 | 15.2 | 14.3 | 6.3 | ||||||||||||||||||||||
Variable lease cost (1) | 11.3 | 1.0 | 1.0 | 0.7 | ||||||||||||||||||||||
| Total operating lease cost | $ | 49.1 | $ | 29.6 | $ | 28.2 | $ | 16.1 | ||||||||||||||||||
(1)Variable lease costs are excluded from the measurement of right-of-use assets and lease liabilities and consist primarily of variable fees related to offshore equipment rentals.
130
Supplemental balance sheet information related to our drilling contracts, contract bidding, customs duties, tax appealsoperating leases is as follows (in millions, except lease term and other obligations in various jurisdictions. Lettersdiscount rate):
| December 31, 2023 | December 31, 2022 | ||||||||||
| Operating lease right-of-use assets | $ | 74.6 | $ | 21.0 | |||||||
| Current lease liability | $ | 27.2 | $ | 9.4 | |||||||
| Long-term lease liability | 48.9 | 13.8 | |||||||||
| Total operating lease liabilities | $ | 76.1 | $ | 23.2 | |||||||
| Weighted-average remaining lease term (in years) | 3.6 | 5.0 | |||||||||
Weighted-average discount rate (1) | 8.21 | % | 7.48 | % | |||||||
(1)Represents our estimated incremental borrowing cost on a secured basis for similar terms as the underlying leases.
Supplemental cash flow information related to our operating leases is as follows (in millions):
| Successor | Predecessor | |||||||||||||||||||||||||
| Year Ended December 31, 2023 | Year Ended December 31, 2022 | Eight Months Ended December 31, 2021 | Four Months Ended April 30, 2021 | |||||||||||||||||||||||
| ROU assets obtained in exchange for operating lease liabilities | $ | 80.3 | $ | 14.7 | $ | 0.9 | $ | 5.5 | ||||||||||||||||||
| Cash paid for amounts included in the measurement of our operating lease liabilities | $ | 26.2 | $ | 14.0 | $ | 11.7 | $ | 7.1 | ||||||||||||||||||
Maturities of credit outstandinglease liabilities as of December 31, 2017 totaled $75.7 million and are issued under facilities provided by various banks and other financial institutions. Obligations under these letters of credit and surety bonds are not normally called,2023 were as we typically comply with the underlying performance requirement. As of December 31, 2017, we had not been required to make collateral deposits with respect to these agreements.follows (in millions):
| 2024 | $ | 32.4 | |||
| 2025 | 20.5 | ||||
| 2026 | 19.1 | ||||
| 2027 | 10.0 | ||||
| 2028 | 2.4 | ||||
| Thereafter | 3.7 | ||||
| Total lease payments | $ | 88.1 | |||
| Less imputed interest | (12.0) | ||||
| Total | $ | 76.1 | |||
131
15. SEGMENT INFORMATION
Our business consists of threefour operating segments: (1) Floaters, which includes our drillships and semisubmersible rigs, (2) Jackups, (3) ARO and (3)(4) Other, which consists of management services on rigs owned by third-parties. third parties and the activities associated with our arrangements with ARO under the Lease Agreements. Floaters, Jackups and ARO are also reportable segments.
Our two reportableonshore support costs included within Contract drilling expenses are not allocated to our operating segments Floatersfor purposes of measuring segment operating income (loss) and Jackups, provide one service, contract drilling.
The full operating results included below for ARO are not included within our consolidated results and thus deducted under "Reconciling Items" and replaced with our equity in earnings of ARO. See "Note 5 - Equity Method Investment in ARO" for additional information on ARO and related arrangements.
Segment information for the years ended December 31, 2023 and 2022, eight months ended December 31, 2021 (Successor), and four months ended April 30, 2021 (Predecessor) are presented below (in millions).
Year Ended December 31, 20172023 (Successor)
| Floaters | Jackups | ARO | Other | Reconciling Items | Consolidated Total | ||||||||||||||||||||||||||||||
| Revenues | $ | 948.7 | $ | 659.6 | $ | 496.6 | $ | 175.9 | $ | (496.6) | $ | 1,784.2 | |||||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||||||||||||||
| Contract drilling (exclusive of depreciation) | 812.0 | 517.4 | 365.9 | 75.2 | (226.9) | 1,543.6 | |||||||||||||||||||||||||||||
| Depreciation | 55.8 | 40.0 | 65.9 | 5.0 | (65.6) | 101.1 | |||||||||||||||||||||||||||||
| General and administrative | — | — | 22.2 | — | 77.1 | 99.3 | |||||||||||||||||||||||||||||
| Equity in earnings of ARO | — | — | — | — | 13.3 | 13.3 | |||||||||||||||||||||||||||||
| Operating income | $ | 80.9 | $ | 102.2 | $ | 42.6 | $ | 95.7 | $ | (267.9) | $ | 53.5 | |||||||||||||||||||||||
| Property and equipment, net | $ | 1,035.5 | $ | 480.8 | $ | 1,036.6 | $ | 52.1 | $ | (971.2) | $ | 1,633.8 | |||||||||||||||||||||||
| Capital expenditures | $ | 562.0 | $ | 132.3 | $ | 300.8 | $ | — | $ | (299.0) | $ | 696.1 | |||||||||||||||||||||||
| Floaters | Jackups | Other | Operating Segments Total | Reconciling Items | Consolidated Total | ||||||||||||||||||
| Revenues | $ | 1,143.5 | $ | 640.3 | $ | 59.2 | $ | 1,843.0 | $ | — | $ | 1,843.0 | |||||||||||
| Operating expenses | |||||||||||||||||||||||
Contract drilling (exclusive of depreciation) | 624.2 | 512.1 | 53.2 | 1,189.5 | — | 1,189.5 | |||||||||||||||||
| Loss on impairment | 174.7 | 8.2 | — | 182.9 | — | 182.9 | |||||||||||||||||
| Depreciation | 297.4 | 131.5 | — | 428.9 | 15.9 | 444.8 | |||||||||||||||||
| General and administrative | — | — | — | — | 157.8 | 157.8 | |||||||||||||||||
| Operating income | $ | 47.2 | $ | (11.5 | ) | $ | 6.0 | $ | 41.7 | $ | (173.7 | ) | $ | (132.0 | ) | ||||||||
| Property and equipment, net | $ | 9,650.9 | $ | 3,177.6 | $ | — | $ | 12,828.5 | $ | 45.2 | $ | 12,873.7 | |||||||||||
| Capital expenditures | $ | 470.3 | $ | 62.1 | $ | — | $ | 532.4 | $ | 4.3 | $ | 536.7 | |||||||||||
Year Ended December 31, 20162022 (Successor)
| Floaters | Jackups | ARO | Other | Reconciling Items | Consolidated Total | ||||||||||||||||||||||||||||||
| Revenues | $ | 700.5 | $ | 744.2 | $ | 459.5 | $ | 157.8 | $ | (459.5) | $ | 1,602.5 | |||||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||||||||||||||
| Contract drilling (exclusive of depreciation) | 646.0 | 538.9 | 341.8 | 76.4 | (219.9) | 1,383.2 | |||||||||||||||||||||||||||||
| Loss on impairment | 34.5 | — | — | — | — | 34.5 | |||||||||||||||||||||||||||||
| Depreciation | 50.0 | 36.1 | 63.4 | 4.6 | (62.9) | 91.2 | |||||||||||||||||||||||||||||
| General and administrative | — | — | 18.7 | — | 62.2 | 80.9 | |||||||||||||||||||||||||||||
| Equity in earnings of ARO | — | — | — | — | 24.5 | 24.5 | |||||||||||||||||||||||||||||
| Operating income (loss) | $ | (30.0) | $ | 169.2 | $ | 35.6 | $ | 76.8 | $ | (214.4) | $ | 37.2 | |||||||||||||||||||||||
| Property and equipment, net | $ | 487.5 | $ | 391.7 | $ | 775.6 | $ | 56.8 | $ | (734.4) | $ | 977.2 | |||||||||||||||||||||||
| Capital expenditures | $ | 152.9 | $ | 53.5 | $ | 103.7 | $ | — | $ | (103.1) | $ | 207.0 | |||||||||||||||||||||||
132
| Floaters | Jackups | Other | Operating Segments Total | Reconciling Items | Consolidated Total | ||||||||||||||||||
| Revenues | $ | 1,771.1 | $ | 929.5 | $ | 75.8 | $ | 2,776.4 | $ | — | $ | 2,776.4 | |||||||||||
| Operating expenses | |||||||||||||||||||||||
Contract drilling (exclusive of depreciation) | 725.0 | 516.8 | 59.2 | 1,301.0 | — | 1,301.0 | |||||||||||||||||
| Depreciation | 304.1 | 123.7 | — | 427.8 | 17.5 | 445.3 | |||||||||||||||||
| General and administrative | — | — | — | — | 100.8 | 100.8 | |||||||||||||||||
| Operating income (loss) | $ | 742.0 | $ | 289.0 | $ | 16.6 | $ | 1,047.6 | $ | (118.3 | ) | $ | 929.3 | ||||||||||
| Property and equipment, net | $ | 8,300.4 | $ | 2,561.0 | $ | — | $ | 10,861.4 | $ | 57.9 | $ | 10,919.3 | |||||||||||
| Capital expenditures | $ | 110.3 | $ | 206.2 | $ | — | $ | 316.5 | $ | 5.7 | $ | 322.2 | |||||||||||
| Floaters | Jackups | ARO | Other | Reconciling Items | Consolidated Total | ||||||||||||||||||||||||||||||
| Revenues | $ | 254.5 | $ | 487.1 | $ | 307.1 | $ | 93.4 | $ | (307.1) | $ | 835.0 | |||||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||||||||||||||
| Contract drilling (exclusive of depreciation) | 250.7 | 365.2 | 246.2 | 38.9 | (176.9) | 724.1 | |||||||||||||||||||||||||||||
| Depreciation | 31.0 | 32.0 | 44.2 | 2.8 | (43.9) | 66.1 | |||||||||||||||||||||||||||||
| General and administrative | — | — | 13.6 | — | 44.6 | 58.2 | |||||||||||||||||||||||||||||
| Equity in earnings of ARO | — | — | — | — | 6.1 | 6.1 | |||||||||||||||||||||||||||||
| Operating income (loss) | $ | (27.2) | $ | 89.9 | $ | 3.1 | $ | 51.7 | $ | (124.8) | $ | (7.3) | |||||||||||||||||||||||
| Property and equipment, net | $ | 408.2 | $ | 401.9 | $ | 730.6 | $ | 46.0 | $ | (695.8) | $ | 890.9 | |||||||||||||||||||||||
| Capital expenditures | $ | 26.0 | $ | 23.7 | $ | 41.8 | $ | — | $ | (41.3) | $ | 50.2 | |||||||||||||||||||||||
| Floaters | Jackups | Other | Operating Segments Total | Reconciling Items | Consolidated Total | ||||||||||||||||||
| Revenues | $ | 2,466.0 | $ | 1,445.6 | $ | 151.8 | $ | 4,063.4 | $ | — | $ | 4,063.4 | |||||||||||
| Operating expenses | |||||||||||||||||||||||
Contract drilling (exclusive of depreciation) | 1,052.8 | 693.5 | 123.3 | 1,869.6 | — | 1,869.6 | |||||||||||||||||
| Loss on impairment | 1,778.4 | 968.0 | 2,746.4 | — | 2,746.4 | ||||||||||||||||||
| Depreciation | 382.4 | 175.7 | — | 558.1 | 14.4 | 572.5 | |||||||||||||||||
| General and administrative | — | — | — | — | 118.4 | 118.4 | |||||||||||||||||
| Operating income (loss) | $ | (747.6 | ) | $ | (391.6 | ) | $ | 28.5 | $ | (1,110.7 | ) | $ | (132.8 | ) | $ | (1,243.5 | ) | ||||||
| Property and equipment, net | $ | 8,535.6 | $ | 2,481.2 | $ | — | $ | 11,016.8 | $ | 71.0 | $ | 11,087.8 | |||||||||||
| Capital expenditures | $ | 1,176.6 | $ | 434.7 | $ | — | $ | 1,611.3 | $ | 8.2 | $ | 1,619.5 | |||||||||||
Four Months Ended April 30, 2021 (Predecessor)
| Floaters | Jackups | ARO | Other | Reconciling Items | Consolidated Total | ||||||||||||||||||||||||||||||
| Revenues | $ | 115.7 | $ | 232.4 | $ | 163.5 | $ | 49.3 | $ | (163.5) | $ | 397.4 | |||||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||||||||||||||
| Contract drilling (exclusive of depreciation) | 106.5 | 175.0 | 116.1 | 19.9 | (73.7) | 343.8 | |||||||||||||||||||||||||||||
| Loss on impairment | 756.5 | — | — | — | — | 756.5 | |||||||||||||||||||||||||||||
| Depreciation | 72.1 | 69.7 | 21.0 | 14.8 | (18.0) | 159.6 | |||||||||||||||||||||||||||||
| General and administrative | — | — | 4.2 | — | 26.5 | 30.7 | |||||||||||||||||||||||||||||
| Equity in earnings of ARO | — | — | — | — | 3.1 | 3.1 | |||||||||||||||||||||||||||||
| Operating income (loss) | $ | (819.4) | $ | (12.3) | $ | 22.2 | $ | 14.6 | $ | (95.2) | $ | (890.1) | |||||||||||||||||||||||
| Property and equipment, net | $ | 419.3 | $ | 401.4 | $ | 730.7 | $ | 50.5 | $ | (692.8) | $ | 909.1 | |||||||||||||||||||||||
| Capital expenditures | $ | 3.3 | $ | 5.4 | $ | 14.9 | $ | — | $ | (14.9) | $ | 8.7 | |||||||||||||||||||||||
Information about Geographic Areas
As of December 31, 2017,2023, our Floaters segment consisted of ten13 drillships, tenfour dynamically positioned semisubmersible rigs and fourone moored semisubmersible rigsrig deployed in various locations. Additionally, our Floaters segment included two ultra-deepwater drillships under construction in South Korea and one semisubmersible rig held-for-sale. Our Jackups segment consisted of 3827 jackup rigs of which 37 were deployed in various locations and one was under construction in Singapore. our Other segment consisted of eight jackup rigs which are leased to our 50/50 unconsolidated joint venture with Saudi Aramco.
As of December 31, 2017,2023, the geographic distribution of our and ARO's drilling rigs by operating segment was as follows:
| Floaters | Jackups | Other | Total Valaris | ARO | |||||||||||||||||||||||||
| Middle East & Africa | 3 | 5 | 8 | 16 | 8 | ||||||||||||||||||||||||
| North & South America | 9 | 7 | — | 16 | — | ||||||||||||||||||||||||
| Europe | 4 | 12 | — | 16 | — | ||||||||||||||||||||||||
| Asia & Pacific Rim | 2 | 3 | — | 5 | — | ||||||||||||||||||||||||
| Total | 18 | 27 | 8 | 53 | 8 | ||||||||||||||||||||||||
Floaters | Jackups | Total | |||
| North & South America | 8 | 6 | 14 | ||
| Europe & the Mediterranean | 6 | 12 | 18 | ||
| Middle East & Africa | 4 | 11 | 15 | ||
| Asia & Pacific Rim | 6 | 8 | 14 | ||
| Asia & Pacific Rim (under construction) | 2 | 1 | 3 | ||
| Held-For-Sale | 1 | — | 1 | ||
| Total | 27 | 38 | 65 | ||
We provide management services in the U.S. Gulf of Mexico on two rigs owned by third-partiesa third party not included in the table above.
133
ARO has ordered one newbuild jackup which is under construction in the Middle East and expected to be delivered in first half of 2024. This rig is not included in the table above.
Information by country for those countries that account for more than 10% of our long-lived assets, was as follows (in millions):
| Long-lived Assets | |||||||||||
| December 31, 2023 | December 31, 2022 | ||||||||||
| Spain | $ | 438.9 | $ | 117.7 | |||||||
| Brazil | 374.5 | 102.0 | |||||||||
| United Kingdom | 277.8 | 185.2 | |||||||||
| United States | 206.5 | 166.3 | |||||||||
Other countries(1) | 410.7 | 427.0 | |||||||||
| Total | $ | 1,708.4 | $ | 998.2 | |||||||
(1)Other countries includes countries where individually we had long-lived assets representing less than 10% of total long-lived assets.
For purposes of our long-lived asset geographic disclosure,disclosures above, we attribute assets to the geographic location of the drilling rig or operating lease, in the case of our right-of-use assets, as of the end of the applicable year. For new construction projects, assetsAny rigs in transit as of the end of the year are attributed toincluded in the location of future operation if known or to the location of construction if the ultimate location of operation is undetermined.which they are mobilizing.
| Long-lived Assets | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Singapore | $ | 2,859.3 | $ | 1,388.4 | $ | 832.9 | |||||
| United States | 2,764.9 | 2,898.3 | 4,731.8 | ||||||||
| Spain | 2,004.2 | 2,334.5 | 757.0 | ||||||||
| Angola | 795.9 | 821.7 | 1,471.1 | ||||||||
| United Kingdom | 609.4 | 409.0 | 462.4 | ||||||||
| Other countries | 3,840.0 | 3,067.4 | 2,832.6 | ||||||||
| Total | $ | 12,873.7 | $ | 10,919.3 | $ | 11,087.8 | |||||
Consolidated Balance Sheet Information
Accounts receivable, net, as of December 31, 2017 and 2016 consisted of the following (in millions):
| December 31, 2023 | December 31, 2022 | ||||||||||
| Trade | $ | 375.2 | $ | 345.7 | |||||||
| Income tax receivables | 83.2 | 93.6 | |||||||||
| Other | 16.2 | 24.6 | |||||||||
| 474.6 | 463.9 | ||||||||||
| Allowance for doubtful accounts | (15.3) | (14.8) | |||||||||
| $ | 459.3 | $ | 449.1 | ||||||||
| 2017 | 2016 | |||||||
| Trade | $ | 335.4 | $ | 358.4 | ||||
| Other | 33.6 | 24.5 | ||||||
| 369.0 | 382.9 | |||||||
| Allowance for doubtful accounts | (23.6 | ) | (21.9 | ) | ||||
| $ | 345.4 | $ | 361.0 | |||||
Other current assets as of December 31, 2017 and 2016 consisted of the following (in millions):
| December 31, 2023 | December 31, 2023 | December 31, 2022 | |||||||||||||||||||||||||
| Deferred costs | |||||||||||||||||||||||||||
| Prepaid taxes | |||||||||||||||||||||||||||
| Prepaid expenses | |||||||||||||||||||||||||||
| 2017 | 2016 | ||||||||||||||||||||||||||
| Inventory | $ | 278.8 | $ | 225.2 | |||||||||||||||||||||||
| Prepaid taxes | 43.5 | 30.7 | |||||||||||||||||||||||||
| Deferred costs | 29.7 | 32.4 | |||||||||||||||||||||||||
| Prepaid expenses | 14.2 | 7.9 | |||||||||||||||||||||||||
| Other | 15.0 | 19.8 | |||||||||||||||||||||||||
| $ | 381.2 | $ | 316.0 | ||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||
| $ | |||||||||||||||||||||||||||
134
Accrued liabilities and 2016other consisted of the following (in millions):
| December 31, 2023 | December 31, 2022 | ||||||||||
| Current contract liabilities (deferred revenues) | $ | 116.2 | $ | 78.0 | |||||||
| Personnel costs | 76.6 | 55.8 | |||||||||
| Income and other taxes payable | 52.9 | 41.4 | |||||||||
| Lease liabilities | 27.2 | 9.4 | |||||||||
| Accrued claims | 20.4 | 27.2 | |||||||||
| Accrued interest | 15.4 | 7.6 | |||||||||
| Other | 35.5 | 28.5 | |||||||||
| $ | 344.2 | $ | 247.9 | ||||||||
| 2017 | 2016 | |||||||
| Deferred tax assets | $ | 38.8 | $ | 69.3 | ||||
| Deferred costs | 37.4 | 35.7 | ||||||
| Supplemental executive retirement plan assets | 30.9 | 27.7 | ||||||
| Intangible assets | 15.7 | 0.3 | ||||||
| Prepaid taxes on intercompany transfers of property | — | 33.0 | ||||||
| Other | 17.4 | 9.9 | ||||||
| $ | 140.2 | $ | 175.9 | |||||
| December 31, 2023 | December 31, 2022 | ||||||||||
| Unrecognized tax benefits (inclusive of interest and penalties) | $ | 224.0 | $ | 275.0 | |||||||
| Pension and other post-retirement benefits | 141.6 | 159.8 | |||||||||
| Lease liabilities | 48.9 | 13.8 | |||||||||
| Noncurrent contract liabilities (deferred revenues) | 37.6 | 41.0 | |||||||||
| Other | 19.6 | 9.9 | |||||||||
| $ | 471.7 | $ | 499.5 | ||||||||
| 2017 | 2016 | |||||||
| Personnel costs | $ | 112.0 | $ | 124.0 | ||||
| Accrued interest | 83.1 | 71.7 | ||||||
| Deferred revenue | 73.0 | 116.7 | ||||||
| Taxes | 46.4 | 40.7 | ||||||
| Derivative liabilities | .4 | 12.7 | ||||||
| Other | 11.0 | 10.8 | ||||||
| $ | 325.9 | $ | 376.6 | |||||
| 2017 | 2016 | |||||||
| Unrecognized tax benefits (inclusive of interest and penalties) | $ | 178.0 | $ | 142.9 | ||||
| Intangible liabilities | 59.6 | — | ||||||
| Deferred revenue | 51.2 | 120.9 | ||||||
| Supplemental executive retirement plan liabilities | 32.0 | 28.9 | ||||||
| Deferred tax liabilities | 18.5 | 5.2 | ||||||
| Personnel costs | 18.1 | 13.5 | ||||||
| Deferred rent | 17.1 | 9.4 | ||||||
| Other | 12.2 | 1.7 | ||||||
| $ | 386.7 | $ | 322.5 | |||||
| 2017 | 2016 | |||||||
| Derivative instruments | $ | 22.5 | $ | 13.6 | ||||
| Currency translation adjustment | 7.8 | 7.6 | ||||||
| Other | (1.7 | ) | (2.2 | ) | ||||
| $ | 28.6 | $ | 19.0 | |||||
Consolidated StatementStatements of Operations Information
Repair and maintenance expense related to continuing operations for each of the years in the three-year period ended December 31, 2017was as follows (in millions):
| Successor | Predecessor | |||||||||||||||||||||||||
| Year Ended December 31, 2023 | Year Ended December 31, 2022 | Eight Months Ended December 31, 2021 | Four Months Ended April 30, 2021 | |||||||||||||||||||||||
| Repair and maintenance expense | $ | 203.3 | $ | 175.2 | $ | 76.3 | $ | 48.4 | ||||||||||||||||||
Other, net, consisted of the following (in millions):
| Successor | Predecessor | |||||||||||||||||||||||||
| Year Ended December 31, 2023 | Year Ended December 31, 2022 | Eight Months Ended December 31, 2021 | Four Months Ended April 30, 2021 | |||||||||||||||||||||||
| Loss on extinguishment of debt | $ | (29.2) | $ | — | $ | — | $ | — | ||||||||||||||||||
| Net gain on sale of property | 28.6 | 141.2 | 21.2 | 6.0 | ||||||||||||||||||||||
| Net foreign currency exchange gains (losses) | (3.5) | 12.2 | 8.1 | 13.4 | ||||||||||||||||||||||
| Net periodic pension and retiree medical income | 0.9 | 16.4 | 8.7 | 5.4 | ||||||||||||||||||||||
| Other income | 1.4 | 0.1 | 0.1 | 1.1 | ||||||||||||||||||||||
| $ | (1.8) | $ | 169.9 | $ | 38.1 | $ | 25.9 | |||||||||||||||||||
135
| 2017 | 2016 | 2015 | ||||||||||
| Repair and maintenance expense | $ | 188.7 | $ | 151.1 | $ | 270.1 | ||||||
Consolidated StatementStatements of Cash Flows Information
Our restricted cash consists primarily of $12.6 million and $24.4 million of collateral on letters of credit as of December 31, 2023 and 2022, respectively. See "Note 13 - Commitments and Contingencies" for more information regarding our letters of credit.
Net cash provided byused in operating activities of continuing operations attributable to the net change in operating assets and liabilities for each of the years in the three-year period ended December 31, 2017was as follows (in millions):
| Successor | Predecessor | |||||||||||||||||||||||||
| Year Ended December 31, 2023 | Year Ended December 31, 2022 | Eight Months Ended December 31, 2021 | Four Months Ended April 30, 2021 | |||||||||||||||||||||||
| (Increase) decrease in accounts receivable | $ | 44.9 | $ | (6.9) | $ | (18.3) | $ | 23.2 | ||||||||||||||||||
| (Increase) decrease in other assets | (5.9) | 0.5 | 9.0 | 15.7 | ||||||||||||||||||||||
| Increase (decrease) in liabilities | 82.8 | (0.2) | 29.3 | 38.2 | ||||||||||||||||||||||
| $ | 121.8 | $ | (6.6) | $ | 20.0 | $ | 77.1 | |||||||||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Decrease in accounts receivable | $ | 83.2 | $ | 222.4 | $ | 246.1 | ||||||
| (Increase) decrease in other assets | (14.0 | ) | 44.0 | 25.7 | ||||||||
| Decrease in liabilities | (3.8 | ) | (125.8 | ) | (158.3 | ) | ||||||
| $ | 65.4 | $ | 140.6 | $ | 113.5 | |||||||
| Successor | Predecessor | |||||||||||||||||||||||||
| Year Ended December 31, 2023 | Year Ended December 31, 2022 | Eight Months Ended December 31, 2021 | Four Months Ended April 30, 2021 | |||||||||||||||||||||||
| Cash paid for interest and taxes | ||||||||||||||||||||||||||
| Interest paid, net of amounts capitalized | $ | 32.3 | $ | 44.2 | $ | 22.8 | $ | — | ||||||||||||||||||
| Income taxes paid (refunded), net | $ | (8.3) | $ | 5.6 | $ | 23.5 | $ | (16.9) | ||||||||||||||||||
| Non-cash investing activities | ||||||||||||||||||||||||||
Accruals for capital expenditures as of period end (1) | $ | 71.5 | $ | 22.1 | $ | 9.3 | $ | 6.5 | ||||||||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Interest, net of amounts capitalized | $ | 199.8 | $ | 264.8 | $ | 249.3 | ||||||
| Income taxes | 62.8 | 56.4 | 97.3 | |||||||||
We received an income tax refund of $45.9 million during the first quarter of 2023 related to the $218.3U.S. Coronavirus Aid, Relief, and Economic Security Act.
Capitalized interest totaled $5.6 million unpaid balance for ENSCO 123. The $207.4and $1.2 million milestone payment was invoiced and included in accounts payable - trade as ofduring the year ended December 31, 2017 on our consolidated balance sheet.2023 and 2022 (Successor), respectively. During the eight months ended December 31, 2021 (Successor) and during the four months ended April 30, 2021 (Predecessor), there was no capitalized interest.
136
Concentration of Risk
Credit Risk -We are exposed to credit risk relating to our receivables from customers, our cash and cash equivalents and investmentsreceivables from customers. Our cash and our usecash equivalents are primarily held by various well-capitalized and credit-worthy financial institutions. We monitor the credit ratings of derivatives in connection withthese institutions and limit the managementamount of foreign currency exchange rate risk.exposure to any one institution and therefore, do not believe a significant credit risk exists for these balances. We mitigate our credit risk relating to receivables from customers, which consist primarily of major international, government-owned and independent oil and gas companies, by performing ongoing credit evaluations. We also maintain reserves for potential credit losses, which generally have been within our expectations. We mitigate our credit risk relating to cash and investments by focusing on diversification and quality of instruments. Cash equivalents and short-term investments consist of a portfolio of high-grade instruments. Custody of cash and cash equivalents and short-term investments is maintained at several well-capitalized financial institutions, and we monitor the financial condition of those financial institutions.
Consolidated revenues by customer forwith customers that individually contributed 10% or more of revenue in the years ended December 31, 20172023 and 2022, eight months ended December 31, 2021 (Successor), 2016 and 2015four months ended April 30, 2021 (Predecessor) were as follows:
| Successor | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Year Ended December 31, 2023 | Year Ended December 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Floaters | Jackups | Other | Total | Floaters | Jackups | Other | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| BP plc ("BP") | — | % | 5 | % | 6 | % | 11 | % | 6 | % | 3 | % | 6 | % | 15 | % | ||||||||||||||||||||||||||||||||||||||||||||||
| Other customers | 53 | % | 32 | % | 4 | % | 89 | % | 38 | % | 43 | % | 4 | % | 85 | % | ||||||||||||||||||||||||||||||||||||||||||||||
| 53 | % | 37 | % | 10 | % | 100 | % | 44 | % | 46 | % | 10 | % | 100 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Successor | Predecessor | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Eight Months Ended December 31, 2021 | Four Months Ended April 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Floaters | Jackups | Other | Total | Floaters | Jackups | Other | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| BP | 2 | % | 2 | % | 7 | % | 11 | % | 5 | % | 2 | % | 7 | % | 14 | % | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other customers | 29 | % | 56 | % | 4 | % | 89 | % | 24 | % | 57 | % | 5 | % | 86 | % | |||||||||||||||||||||||||||||||||||||||||||||||||
| 31 | % | 58 | % | 11 | % | 100 | % | 29 | % | 59 | % | 12 | % | 100 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||
137
| 2017 | 2016 | 2015 | |||||||
Total(1) | 22 | % | 13 | % | 9 | % | |||
BP (2) | 15 | % | 12 | % | 18 | % | |||
Petrobras(3) | 11 | % | 9 | % | 14 | % | |||
| Other | 52 | % | 66 | % | 59 | % | |||
| 100 | % | 100 | % | 100 | % | ||||
Geographic Concentration - For purposes of our geographic disclosure, we attribute revenues to the geographic location where such revenues are earned. Consolidated revenues by region, including the United Kingdom, our countryfor locations that individually had 10% or more of domicile, for the years ended December 31, 2017, 2016 and 2015revenue were as follows (in millions):
| Successor | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Year Ended December 31, 2023 | Year Ended December 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Floaters | Jackups | Other | Total | Floaters | Jackups | Other | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. Gulf of Mexico | $ | 220.9 | $ | 27.2 | $ | 104.7 | $ | 352.8 | $ | 230.9 | $ | 21.3 | $ | 99.0 | $ | 351.2 | ||||||||||||||||||||||||||||||||||||||||||||||
| United Kingdom | — | 267.2 | — | 267.2 | — | 264.5 | — | 264.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Angola | 210.9 | — | — | 210.9 | 78.5 | — | — | 78.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Brazil | 195.0 | — | — | 195.0 | 111.5 | — | — | 111.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Australia | 157.0 | 29.9 | — | 186.9 | 113.0 | 30.0 | — | 143.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Saudi Arabia | — | 41.2 | 71.2 | 112.4 | — | 78.3 | 58.8 | 137.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Mexico | 65.9 | 38.7 | — | 104.6 | 13.9 | 58.1 | — | 72.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Norway | — | 2.4 | — | 2.4 | — | 114.6 | — | 114.6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other countries | 99.0 | 253.0 | — | 352.0 | 152.7 | 177.4 | — | 330.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| $ | 948.7 | $ | 659.6 | $ | 175.9 | $ | 1,784.2 | $ | 700.5 | $ | 744.2 | $ | 157.8 | $ | 1,602.5 | |||||||||||||||||||||||||||||||||||||||||||||||
| Successor | Predecessor | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Eight Months Ended December 31, 2021 | Four Months Ended April 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Floaters | Jackups | Other | Total | Floaters | Jackups | Other | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. Gulf of Mexico | $ | 52.8 | $ | 0.7 | $ | 56.4 | $ | 109.9 | $ | 47.9 | $ | 0.2 | $ | 26.3 | $ | 74.4 | ||||||||||||||||||||||||||||||||||||||||||||||
| United Kingdom | — | 185.2 | — | 185.2 | — | 75.7 | — | 75.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Angola | 19.4 | — | — | 19.4 | 20.5 | — | — | 20.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Brazil | 38.6 | — | — | 38.6 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Australia | 46.2 | 29.3 | — | 75.5 | 0.8 | 0.2 | — | 1.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Saudi Arabia | — | 55.3 | 37.0 | 92.3 | — | 30.5 | 23.0 | 53.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Mexico | 37.0 | 40.8 | — | 77.8 | 21.6 | 22.7 | — | 44.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Norway | — | 123.9 | — | 123.9 | — | 73.3 | — | 73.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other countries | 60.5 | 51.9 | — | 112.4 | 24.9 | 29.8 | — | 54.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| $ | 254.5 | $ | 487.1 | $ | 93.4 | $ | 835.0 | $ | 115.7 | $ | 232.4 | $ | 49.3 | $ | 397.4 | |||||||||||||||||||||||||||||||||||||||||||||||
(1)Other countries includes locations that individually contributed to less than 10% of total revenues.
138
| 2017 | 2016 | 2015 | ||||||||||
Angola(1) | $ | 445.7 | $ | 552.1 | $ | 586.5 | ||||||
Egypt(2) | 214.8 | 141.2 | — | |||||||||
Australia(3) | 206.7 | 222.8 | 223.2 | |||||||||
Brazil(2) | 196.2 | 298.0 | 468.5 | |||||||||
Saudi Arabia(4) | 171.8 | 210.6 | 255.2 | |||||||||
United Kingdom(4) | 164.6 | 246.2 | 400.7 | |||||||||
U.S. Gulf of Mexico(5) | 149.8 | 531.7 | 1,151.5 | |||||||||
| Other | 293.4 | 573.8 | 977.8 | |||||||||
| $ | 1,843.0 | $ | 2,776.4 | $ | 4,063.4 | |||||||
ENSCO PLC AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS Year Ended December 31, 2017 (in millions) | |||||||||||||||||||||||
| Ensco plc | ENSCO International Incorporated | Pride International LLC | Other Non-guarantor Subsidiaries of Ensco | Consolidating Adjustments | Total | ||||||||||||||||||
| OPERATING REVENUES | $ | 52.9 | $ | 163.3 | $ | — | $ | 1,941.2 | $ | (314.4 | ) | $ | 1,843.0 | ||||||||||
| OPERATING EXPENSES | |||||||||||||||||||||||
| Contract drilling (exclusive of depreciation) | 50.0 | 149.9 | — | 1,304.0 | (314.4 | ) | 1,189.5 | ||||||||||||||||
| Loss on impairment | — | — | — | 182.9 | — | 182.9 | |||||||||||||||||
| Depreciation | — | 15.9 | — | 428.9 | — | 444.8 | |||||||||||||||||
| General and administrative | 45.4 | 50.8 | — | 61.6 | — | 157.8 | |||||||||||||||||
| OPERATING LOSS | (42.5 | ) | (53.3 | ) | — | (36.2 | ) | — | (132.0 | ) | |||||||||||||
| OTHER INCOME (EXPENSE), NET | (6.8 | ) | (110.5 | ) | (71.7 | ) | 110.5 | 14.5 | (64.0 | ) | |||||||||||||
| INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | (49.3 | ) | (163.8 | ) | (71.7 | ) | 74.3 | 14.5 | (196.0 | ) | |||||||||||||
| INCOME TAX EXPENSE | — | 45.0 | — | 64.2 | — | 109.2 | |||||||||||||||||
| DISCONTINUED OPERATIONS, NET | — | — | — | 1.0 | — | 1.0 | |||||||||||||||||
| EQUITY EARNINGS IN AFFILIATES, NET OF TAX | (254.4 | ) | 129.6 | 84.2 | — | 40.6 | — | ||||||||||||||||
| NET INCOME (LOSS) | (303.7 | ) | (79.2 | ) | 12.5 | 11.1 | 55.1 | (304.2 | ) | ||||||||||||||
| NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS | — | — | — | .5 | — | .5 | |||||||||||||||||
| NET INCOME (LOSS) ATTRIBUTABLE TO ENSCO | $ | (303.7 | ) | $ | (79.2 | ) | $ | 12.5 | $ | 11.6 | $ | 55.1 | $ | (303.7 | ) | ||||||||
ENSCO PLC AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS Year Ended December 31, 2016 (in millions) | |||||||||||||||||||||||
| Ensco plc | ENSCO International Incorporated | Pride International LLC | Other Non-guarantor Subsidiaries of Ensco | Consolidating Adjustments | Total | ||||||||||||||||||
| OPERATING REVENUES | $ | 27.9 | $ | 144.4 | $ | — | $ | 2,897.4 | $ | (293.3 | ) | $ | 2,776.4 | ||||||||||
| OPERATING EXPENSES | |||||||||||||||||||||||
| Contract drilling (exclusive of depreciation) | 27.3 | 144.8 | .1 | 1,422.1 | (293.3 | ) | 1,301.0 | ||||||||||||||||
| Depreciation | — | 17.2 | .4 | 427.7 | — | 445.3 | |||||||||||||||||
| General and administrative | 36.2 | .2 | — | 64.4 | — | 100.8 | |||||||||||||||||
| OPERATING INCOME (LOSS) | (35.6 | ) | (17.8 | ) | (0.5 | ) | 983.2 | — | 929.3 | ||||||||||||||
| OTHER INCOME (EXPENSE), NET | 152.9 | (79.0 | ) | (76.6 | ) | 7.8 | 63.1 | 68.2 | |||||||||||||||
| INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | 117.3 | (96.8 | ) | (77.1 | ) | 991.0 | 63.1 | 997.5 | |||||||||||||||
| INCOME TAX EXPENSE (BENEFIT) | — | .7 | (.6 | ) | 108.4 | — | 108.5 | ||||||||||||||||
| DISCONTINUED OPERATIONS, NET | — | — | — | 8.1 | — | 8.1 | |||||||||||||||||
| EQUITY EARNINGS IN AFFILIATES, NET OF TAX | 772.9 | 205.7 | 125.7 | — | (1,104.3 | ) | — | ||||||||||||||||
| NET INCOME | 890.2 | 108.2 | 49.2 | 890.7 | (1,041.2 | ) | 897.1 | ||||||||||||||||
| NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | — | — | — | (6.9 | ) | — | (6.9 | ) | |||||||||||||||
| NET INCOME ATTRIBUTABLE TO ENSCO | $ | 890.2 | $ | 108.2 | $ | 49.2 | $ | 883.8 | $ | (1,041.2 | ) | $ | 890.2 | ||||||||||
ENSCO PLC AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS Year Ended December 31, 2015 (in millions) | ||||||||||||||||||||||||
| Ensco plc | ENSCO International Incorporated | Pride International LLC | Other Non-guarantor Subsidiaries of Ensco | Consolidating Adjustments | Total | |||||||||||||||||||
| OPERATING REVENUES | $ | 31.7 | $ | 163.5 | $ | — | $ | 4,199.4 | $ | (331.2 | ) | $ | 4,063.4 | |||||||||||
| OPERATING EXPENSES | ||||||||||||||||||||||||
| Contract drilling (exclusive of depreciation) | 29.2 | 163.5 | — | 2,008.1 | (331.2 | ) | 1,869.6 | |||||||||||||||||
| Loss on impairment | — | — | — | 2,746.4 | — | 2,746.4 | ||||||||||||||||||
| Depreciation | .1 | 13.8 | — | 558.6 | — | 572.5 | ||||||||||||||||||
| General and administrative | 51.5 | .2 | — | 66.7 | — | 118.4 | ||||||||||||||||||
| OPERATING LOSS | (49.1 | ) | (14.0 | ) | — | (1,180.4 | ) | — | (1,243.5 | ) | ||||||||||||||
| OTHER INCOME (EXPENSE), NET | (169.5 | ) | (28.6 | ) | (71.5 | ) | 41.9 | — | (227.7 | ) | ||||||||||||||
| LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | (218.6 | ) | (42.6 | ) | (71.5 | ) | (1,138.5 | ) | — | (1,471.2 | ) | |||||||||||||
| INCOME TAX EXPENSE (BENEFIT) | — | (190.6 | ) | — | 176.7 | 185.4 | — | (13.9 | ) | |||||||||||||||
| DISCONTINUED OPERATIONS, NET | — | — | — | (128.6 | ) | — | (128.6 | ) | ||||||||||||||||
| EQUITY LOSS IN AFFILIATES, NET OF TAX | (1,376.2 | ) | (1,672.8 | ) | (1,771.5 | ) | — | 4,820.5 | — | |||||||||||||||
| NET LOSS | (1,594.8 | ) | (1,524.8 | ) | (1,843.0 | ) | (1,443.8 | ) | 4,820.5 | (1,585.9 | ) | |||||||||||||
| NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | — | — | — | (8.9 | ) | — | (8.9 | ) | ||||||||||||||||
| NET LOSS ATTRIBUTABLE TO ENSCO | $ | (1,594.8 | ) | $ | (1,524.8 | ) | $ | (1,843.0 | ) | $ | (1,452.7 | ) | $ | 4,820.5 | $ | (1,594.8 | ) | |||||||
| Ensco plc | ENSCO International Incorporated | Pride International LLC | Other Non-Guarantor Subsidiaries of Ensco | Consolidating Adjustments | Total | ||||||||||||||||||
| NET INCOME (LOSS) | $ | (303.7 | ) | $ | (79.2 | ) | $ | 12.5 | $ | 11.1 | $ | 55.1 | $ | (304.2 | ) | ||||||||
| OTHER COMPREHENSIVE INCOME (LOSS), NET | |||||||||||||||||||||||
| Net change in fair value of derivatives | — | 8.5 | — | — | — | 8.5 | |||||||||||||||||
| Reclassification of net losses on derivative instruments from other comprehensive income into net income (loss) | — | .4 | — | — | — | .4 | |||||||||||||||||
| Other | — | — | — | .7 | — | .7 | |||||||||||||||||
| NET OTHER COMPREHENSIVE INCOME | — | 8.9 | — | .7 | — | 9.6 | |||||||||||||||||
| COMPREHENSIVE INCOME (LOSS) | (303.7 | ) | (70.3 | ) | 12.5 | 11.8 | 55.1 | (294.6 | ) | ||||||||||||||
| COMPREHENSIVE LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS | — | — | — | .5 | — | .5 | |||||||||||||||||
| COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO ENSCO | $ | (303.7 | ) | $ | (70.3 | ) | $ | 12.5 | $ | 12.3 | $ | 55.1 | $ | (294.1 | ) | ||||||||
Ensco plc | ENSCO International Incorporated | Pride International LLC | Other Non-Guarantor Subsidiaries of Ensco | Consolidating Adjustments | Total | ||||||||||||||||||
| NET INCOME | $ | 890.2 | $ | 108.2 | $ | 49.2 | $ | 890.7 | $ | (1,041.2 | ) | $ | 897.1 | ||||||||||
| OTHER COMPREHENSIVE INCOME (LOSS), NET | |||||||||||||||||||||||
| Net change in fair value of derivatives | — | (5.4 | ) | — | — | — | (5.4 | ) | |||||||||||||||
| Reclassification of net losses on derivative instruments from other comprehensive income into net income | — | 12.4 | — | — | — | 12.4 | |||||||||||||||||
| Other | — | — | — | (.5 | ) | — | (.5 | ) | |||||||||||||||
| NET OTHER COMPREHENSIVE INCOME (LOSS) | — | 7.0 | — | (.5 | ) | — | 6.5 | ||||||||||||||||
| COMPREHENSIVE INCOME | 890.2 | 115.2 | 49.2 | 890.2 | (1,041.2 | ) | 903.6 | ||||||||||||||||
| COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | — | — | — | (6.9 | ) | — | (6.9 | ) | |||||||||||||||
| COMPREHENSIVE INCOME ATTRIBUTABLE TO ENSCO | $ | 890.2 | $ | 115.2 | $ | 49.2 | $ | 883.3 | $ | (1,041.2 | ) | $ | 896.7 | ||||||||||
Ensco plc | ENSCO International Incorporated | Pride International LLC | Other Non-Guarantor Subsidiaries of Ensco | Consolidating Adjustments | Total | ||||||||||||||||||
| NET LOSS | $ | (1,594.8 | ) | $ | (1,524.8 | ) | $ | (1,843.0 | ) | $ | (1,443.8 | ) | $ | 4,820.5 | $ | (1,585.9 | ) | ||||||
| OTHER COMPREHENSIVE INCOME (LOSS), NET | |||||||||||||||||||||||
| Net change in fair value of derivatives | — | (23.6 | ) | — | — | — | (23.6 | ) | |||||||||||||||
| Reclassification of net gains on derivative instruments from other comprehensive income into net loss | — | 22.2 | — | — | — | 22.2 | |||||||||||||||||
| Other | — | — | — | 2.0 | — | 2.0 | |||||||||||||||||
| NET OTHER COMPREHENSIVE INCOME (LOSS) | — | (1.4 | ) | — | 2.0 | — | .6 | ||||||||||||||||
| COMPREHENSIVE LOSS | (1,594.8 | ) | (1,526.2 | ) | (1,843.0 | ) | (1,441.8 | ) | 4,820.5 | (1,585.3 | ) | ||||||||||||
| COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | — | — | — | (8.9 | ) | — | (8.9 | ) | |||||||||||||||
| COMPREHENSIVE LOSS ATTRIBUTABLE TO ENSCO | $ | (1,594.8 | ) | $ | (1,526.2 | ) | $ | (1,843.0 | ) | $ | (1,450.7 | ) | $ | 4,820.5 | $ | (1,594.2 | ) | ||||||
ENSCO PLC AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEETS December 31, 2017 (in millions) | |||||||||||||||||||||||
| Ensco plc | ENSCO International Incorporated | Pride International LLC | Other Non-guarantor Subsidiaries of Ensco | Consolidating Adjustments | Total | ||||||||||||||||||
ASSETS | |||||||||||||||||||||||
| CURRENT ASSETS | |||||||||||||||||||||||
| Cash and cash equivalents | $ | 185.2 | $ | — | $ | 25.6 | $ | 234.6 | $ | — | $ | 445.4 | |||||||||||
| Short-term investments | 440.0 | — | — | — | — | 440.0 | |||||||||||||||||
| Accounts receivable, net | 6.9 | .4 | — | 338.1 | — | 345.4 | |||||||||||||||||
Accounts receivable from affiliates | 351.8 | 492.7 | — | 424.3 | (1,268.8 | ) | — | ||||||||||||||||
| Other | — | 8.8 | — | 372.4 | — | 381.2 | |||||||||||||||||
| Total current assets | 983.9 | 501.9 | 25.6 | 1,369.4 | (1,268.8 | ) | 1,612.0 | ||||||||||||||||
| PROPERTY AND EQUIPMENT, AT COST | 1.8 | 120.8 | — | 15,209.5 | — | 15,332.1 | |||||||||||||||||
| Less accumulated depreciation | 1.8 | 77.1 | — | 2,379.5 | — | 2,458.4 | |||||||||||||||||
| Property and equipment, net | — | 43.7 | — | 12,830.0 | — | 12,873.7 | |||||||||||||||||
| DUE FROM AFFILIATES | 3,002.1 | 2,618.0 | 165.1 | 3,736.1 | (9,521.3 | ) | — | ||||||||||||||||
| INVESTMENTS IN AFFILIATES | 9,098.5 | 3,591.9 | 1,106.6 | — | (13,797.0 | ) | — | ||||||||||||||||
| OTHER ASSETS, NET | 12.9 | 5.0 | — | 226.5 | (104.2 | ) | 140.2 | ||||||||||||||||
| $ | 13,097.4 | $ | 6,760.5 | $ | 1,297.3 | $ | 18,162.0 | $ | (24,691.3 | ) | $ | 14,625.9 | |||||||||||
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||||||||||||||||
| CURRENT LIABILITIES | |||||||||||||||||||||||
Accounts payable and accrued liabilities | $ | 55.4 | $ | 39.0 | $ | 21.7 | $ | 642.4 | $ | — | $ | 758.5 | |||||||||||
| Accounts payable to affiliates | 67.3 | 458.3 | 12.4 | 730.8 | (1,268.8 | ) | — | ||||||||||||||||
Current maturities of long-term debt | — | — | — | — | — | — | |||||||||||||||||
| Total current liabilities | 122.7 | 497.3 | 34.1 | 1,373.2 | (1,268.8 | ) | 758.5 | ||||||||||||||||
| DUE TO AFFILIATES | 1,402.9 | 3,559.2 | 753.9 | 3,805.3 | (9,521.3 | ) | — | ||||||||||||||||
| LONG-TERM DEBT | 2,841.8 | 149.2 | 1,106.0 | 653.7 | — | 4,750.7 | |||||||||||||||||
| OTHER LIABILITIES | — | 3.1 | — | 487.8 | (104.2 | ) | 386.7 | ||||||||||||||||
| ENSCO SHAREHOLDERS' EQUITY (DEFICIT) | 8,730.0 | 2,551.7 | (596.7 | ) | 11,844.1 | (13,797.0 | ) | 8,732.1 | |||||||||||||||
| NONCONTROLLING INTERESTS | — | — | — | (2.1 | ) | — | (2.1 | ) | |||||||||||||||
| Total equity (deficit) | 8,730.0 | 2,551.7 | (596.7 | ) | 11,842.0 | (13,797.0 | ) | 8,730.0 | |||||||||||||||
| $ | 13,097.4 | $ | 6,760.5 | $ | 1,297.3 | $ | 18,162.0 | $ | (24,691.3 | ) | $ | 14,625.9 | |||||||||||
ENSCO PLC AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEETS December 31, 2016 (in millions) | |||||||||||||||||||||||
| Ensco plc | ENSCO International Incorporated | Pride International LLC | Other Non-guarantor Subsidiaries of Ensco | Consolidating Adjustments | Total | ||||||||||||||||||
ASSETS | |||||||||||||||||||||||
| CURRENT ASSETS | |||||||||||||||||||||||
| Cash and cash equivalents | $ | 892.6 | $ | — | $ | 19.8 | $ | 247.3 | $ | — | $ | 1,159.7 | |||||||||||
| Short-term investments | 1,165.1 | 5.5 | — | 272.0 | — | 1,442.6 | |||||||||||||||||
| Accounts receivable, net | 6.8 | — | — | 354.2 | — | 361.0 | |||||||||||||||||
Accounts receivable from affiliates | 486.5 | 251.2 | — | 152.3 | (890.0 | ) | — | ||||||||||||||||
| Other | .1 | 6.8 | — | 309.1 | — | 316.0 | |||||||||||||||||
| Total current assets | 2,551.1 | 263.5 | 19.8 | 1,334.9 | (890.0 | ) | 3,279.3 | ||||||||||||||||
| PROPERTY AND EQUIPMENT, AT COST | 1.8 | 121.0 | — | 12,869.7 | — | 12,992.5 | |||||||||||||||||
| Less accumulated depreciation | 1.8 | 63.8 | — | 2,007.6 | — | 2,073.2 | |||||||||||||||||
| Property and equipment, net | — | 57.2 | — | 10,862.1 | — | 10,919.3 | |||||||||||||||||
| DUE FROM AFFILIATES | 1,512.2 | 4,513.8 | 1,978.8 | 7,234.3 | (15,239.1 | ) | — | ||||||||||||||||
| INVESTMENTS IN AFFILIATES | 8,557.7 | 3,462.3 | 1,061.3 | — | (13,081.3 | ) | — | ||||||||||||||||
| OTHER ASSETS, NET | — | 81.5 | — | 181.1 | (86.7 | ) | 175.9 | ||||||||||||||||
| $ | 12,621.0 | $ | 8,378.3 | $ | 3,059.9 | $ | 19,612.4 | $ | (29,297.1 | ) | $ | 14,374.5 | |||||||||||
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||||||||||||||||
| CURRENT LIABILITIES | |||||||||||||||||||||||
Accounts payable and accrued liabilities | $ | 44.1 | $ | 45.2 | $ | 28.3 | $ | 404.9 | $ | — | $ | 522.5 | |||||||||||
| Accounts payable to affiliates | 38.8 | 208.4 | 5.9 | 636.9 | (890.0 | ) | — | ||||||||||||||||
Current maturities of long-term debt | 187.1 | — | 144.8 | — | 331.9 | ||||||||||||||||||
| Total current liabilities | 270.0 | 253.6 | 179.0 | 1,041.8 | (890.0 | ) | 854.4 | ||||||||||||||||
| DUE TO AFFILIATES | 1,375.8 | 5,367.6 | 2,040.7 | 6,455.0 | (15,239.1 | ) | — | ||||||||||||||||
| LONG-TERM DEBT | 2,720.2 | 149.2 | 1,449.5 | 623.7 | — | 4,942.6 | |||||||||||||||||
| OTHER LIABILITIES | — | 2.9 | 406.3 | (86.7 | ) | 322.5 | |||||||||||||||||
| ENSCO SHAREHOLDERS' EQUITY | 8,255.0 | 2,605.0 | (609.3 | ) | 11,081.2 | (13,081.3 | ) | 8,250.6 | |||||||||||||||
| NONCONTROLLING INTERESTS | — | — | — | 4.4 | — | 4.4 | |||||||||||||||||
| Total equity (deficit) | 8,255.0 | 2,605.0 | (609.3 | ) | 11,085.6 | (13,081.3 | ) | 8,255.0 | |||||||||||||||
| $ | 12,621.0 | $ | 8,378.3 | $ | 3,059.9 | $ | 19,612.4 | $ | (29,297.1 | ) | $ | 14,374.5 | |||||||||||
ENSCO PLC AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS Year Ended December 31, 2017 (in millions) | |||||||||||||||||||||||
| Ensco plc | ENSCO International Incorporated | Pride International LLC | Other Non-guarantor Subsidiaries of Ensco | Consolidating Adjustments | Total | ||||||||||||||||||
| OPERATING ACTIVITIES | |||||||||||||||||||||||
Net cash (used in) provided by operating activities of continuing operations | $ | (18.2 | ) | $ | (117.6 | ) | $ | (100.1 | ) | $ | 495.3 | $ | — | $ | 259.4 | ||||||||
| INVESTING ACTIVITIES | |||||||||||||||||||||||
| Maturities of short-term investments | 1,748.0 | 5.5 | — | 289.0 | — | 2,042.5 | |||||||||||||||||
| Purchases of short-term investments | (1,022.9 | ) | — | — | (17.1 | ) | — | (1,040.0 | ) | ||||||||||||||
| Purchase of affiliate debt | (316.3 | ) | — | — | — | 316.3 | — | ||||||||||||||||
| Acquisition of Atwood Oceanics, Inc. | — | — | — | (871.6 | ) | — | (871.6 | ) | |||||||||||||||
| Additions to property and equipment | — | — | — | (536.7 | ) | — | (536.7 | ) | |||||||||||||||
| Net proceeds from disposition of assets | — | — | — | 2.8 | — | 2.8 | |||||||||||||||||
| Net cash (used in) provided by investing activities of continuing operations | 408.8 | 5.5 | — | (1,133.6 | ) | 316.3 | (403.0 | ) | |||||||||||||||
| FINANCING ACTIVITIES | |||||||||||||||||||||||
| Advances from (to) affiliates | (848.9 | ) | 112.1 | 105.9 | 630.9 | — | — | ||||||||||||||||
Reduction of long-term borrowings | (220.7 | ) | — | — | — | (316.3 | ) | (537.0 | ) | ||||||||||||||
| Cash dividends paid | (13.8 | ) | — | — | — | — | (13.8 | ) | |||||||||||||||
| Debt financing costs | (12.0 | ) | — | — | — | — | (12.0 | ) | |||||||||||||||
| Other | (2.6 | ) | — | — | (5.1 | ) | — | (7.7 | ) | ||||||||||||||
| Net cash provided by (used in) financing activities | (1,098.0 | ) | 112.1 | 105.9 | 625.8 | (316.3 | ) | (570.5 | ) | ||||||||||||||
| Net cash used in discontinued operations | — | — | — | (.8 | ) | — | (.8 | ) | |||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | — | — | — | .6 | — | 0.6 | |||||||||||||||||
| INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (707.4 | ) | — | 5.8 | (12.7 | ) | — | (714.3 | ) | ||||||||||||||
| CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR | 892.6 | — | 19.8 | 247.3 | — | 1,159.7 | |||||||||||||||||
| CASH AND CASH EQUIVALENTS, END OF YEAR | $ | 185.2 | $ | — | $ | 25.6 | $ | 234.6 | $ | — | $ | 445.4 | |||||||||||
ENSCO PLC AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS Year Ended December 31, 2016 (in millions) | |||||||||||||||||||||||
| Ensco plc | ENSCO International Incorporated | Pride International LLC | Other Non-guarantor Subsidiaries of Ensco | Consolidating Adjustments | Total | ||||||||||||||||||
| OPERATING ACTIVITIES | |||||||||||||||||||||||
Net cash (used in) provided by operating activities of continuing operations | $ | (101.3 | ) | $ | (46.5 | ) | $ | (116.9 | ) | $ | 1,342.1 | $ | — | $ | 1,077.4 | ||||||||
| INVESTING ACTIVITIES | |||||||||||||||||||||||
| Purchases of short-term investments | (2,047.1 | ) | (5.5 | ) | — | (422.0 | ) | — | (2,474.6 | ) | |||||||||||||
| Maturities of short-term investments | 2,062.0 | — | — | 150.0 | — | 2,212.0 | |||||||||||||||||
Additions to property and equipment | — | — | — | (322.2 | ) | — | (322.2 | ) | |||||||||||||||
| Net proceeds from disposition of assets | — | — | — | 9.8 | — | 9.8 | |||||||||||||||||
| Purchase of affiliate debt | (237.9 | ) | — | — | — | 237.9 | — | ||||||||||||||||
| Net cash used in investing activities of continuing operations | (223 | ) | (5.5 | ) | — | (584.4 | ) | 237.9 | (575.0 | ) | |||||||||||||
| FINANCING ACTIVITIES | |||||||||||||||||||||||
Reduction of long-term borrowings | (626.0 | ) | — | — | — | (237.9 | ) | (863.9 | ) | ||||||||||||||
| Proceeds from debt issuance | — | — | — | 849.5 | — | 849.5 | |||||||||||||||||
| Proceeds from equity issuance | 585.5 | — | — | — | — | 585.5 | |||||||||||||||||
| Debt financing costs | (23.4 | ) | — | — | — | — | (23.4 | ) | |||||||||||||||
| Cash dividends paid | (11.6 | ) | — | — | — | — | (11.6 | ) | |||||||||||||||
| Advances from (to) affiliates | 1,200.6 | 52.0 | 134.7 | (1,387.3 | ) | — | — | ||||||||||||||||
| Other | (2.2 | ) | — | — | (4.9 | ) | — | (7.1 | ) | ||||||||||||||
Net cash provided by (used in) financing activities | 1,122.9 | 52.0 | 134.7 | (542.7 | ) | (237.9 | ) | 529.0 | |||||||||||||||
| Net cash provided by discontinued operations | — | — | — | 8.4 | — | 8.4 | |||||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | — | — | — | (1.4 | ) | — | (1.4 | ) | |||||||||||||||
| INCREASE IN CASH AND CASH EQUIVALENTS | 798.6 | — | 17.8 | 222.0 | — | 1,038.4 | |||||||||||||||||
| CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR | 94.0 | — | 2.0 | 25.3 | — | 121.3 | |||||||||||||||||
| CASH AND CASH EQUIVALENTS, END OF YEAR | $ | 892.6 | $ | — | $ | 19.8 | $ | 247.3 | $ | — | $ | 1,159.7 | |||||||||||
ENSCO PLC AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS Year Ended December 31, 2015 (in millions) | |||||||||||||||||||||||
| Ensco plc | ENSCO International Incorporated | Pride International LLC | Other Non-guarantor Subsidiaries of Ensco | Consolidating Adjustments | Total | ||||||||||||||||||
| OPERATING ACTIVITIES | |||||||||||||||||||||||
Net cash (used in) provided by operating activities of continuing operations | $ | (71.1 | ) | $ | 2.0 | $ | (114.0 | ) | $ | 1,881.0 | $ | — | $ | 1,697.9 | |||||||||
| INVESTING ACTIVITIES | |||||||||||||||||||||||
| Purchases of short-term investments | (1,780.0 | ) | — | — | — | — | (1,780.0 | ) | |||||||||||||||
| Additions to property and equipment | — | — | — | (1,619.5 | ) | — | (1,619.5 | ) | |||||||||||||||
| Maturities of short-term investments | 1,312.0 | — | 45.3 | — | 1,357.3 | ||||||||||||||||||
| Net proceeds from disposition of assets | .3 | — | — | 1.3 | — | 1.6 | |||||||||||||||||
Net cash used in investing activities of continuing operations | (467.7 | ) | — | — | (1,572.9 | ) | — | (2,040.6 | ) | ||||||||||||||
| FINANCING ACTIVITIES | |||||||||||||||||||||||
| Proceeds from debt issuance | 1,078.7 | — | — | — | — | 1,078.7 | |||||||||||||||||
| Reduction of long-term borrowing | (1,072.5 | ) | — | — | — | — | (1,072.5 | ) | |||||||||||||||
| Cash dividends paid | (141.2 | ) | — | — | — | — | (141.2 | ) | |||||||||||||||
| Premium paid on redemption of debt | (30.3 | ) | — | — | — | — | (30.3 | ) | |||||||||||||||
| Debt financing costs | (10.5 | ) | — | — | — | — | (10.5 | ) | |||||||||||||||
| Advances from (to) affiliates | 526.2 | (2.0 | ) | 25.2 | (549.4 | ) | — | — | |||||||||||||||
| Other | (5.0 | ) | — | — | (11.0 | ) | — | (16.0 | ) | ||||||||||||||
| Net cash provided by (used in) financing activities | 345.4 | (2.0 | ) | 25.2 | (560.4 | ) | — | (191.8 | ) | ||||||||||||||
| Net cash used in discontinued operations | — | — | — | (8.7 | ) | — | (8.7 | ) | |||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | — | — | — | (.3 | ) | — | (.3 | ) | |||||||||||||||
| DECREASE IN CASH AND CASH EQUIVALENTS | (193.4 | ) | — | (88.8 | ) | (261.3 | ) | — | (543.5 | ) | |||||||||||||
| CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR | 287.4 | — | 90.8 | 286.6 | — | 664.8 | |||||||||||||||||
CASH AND CASH EQUIVALENTS, END OF YEAR | $ | 94.0 | $ | — | $ | 2.0 | $ | 25.3 | $ | — | $ | 121.3 | |||||||||||
| 2017 | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Year | |||||||||||||||
| Operating revenues | $ | 471.1 | $ | 457.5 | $ | 460.2 | $ | 454.2 | $ | 1,843.0 | ||||||||||
| Operating expenses | ||||||||||||||||||||
Contract drilling (exclusive of depreciation)(1) | 278.1 | 291.3 | 285.8 | 334.3 | 1,189.5 | |||||||||||||||
Loss on impairment(2) | — | — | — | 182.9 | 182.9 | |||||||||||||||
| Depreciation | 109.2 | 107.9 | 108.2 | 119.5 | 444.8 | |||||||||||||||
General and administrative(3) | 26.0 | 30.5 | 30.4 | 70.9 | 157.8 | |||||||||||||||
| Operating income (loss) | 57.8 | 27.8 | 35.8 | (253.4 | ) | (132.0 | ) | |||||||||||||
Other income (expense), net(4) | (57.7 | ) | (53.2 | ) | (40.4 | ) | 87.3 | (64.0 | ) | |||||||||||
| Income (loss) from continuing operations before income taxes | .1 | (25.4 | ) | (4.6 | ) | (166.1 | ) | (196.0 | ) | |||||||||||
Income tax expense(5) | 24.1 | 19.3 | 23.4 | 42.4 | 109.2 | |||||||||||||||
| Loss from continuing operations | (24.0 | ) | (44.7 | ) | (28.0 | ) | (208.5 | ) | (305.2 | ) | ||||||||||
| Income (loss) from discontinued operations, net | (.6 | ) | .4 | (.2 | ) | 1.4 | 1.0 | |||||||||||||
| Net loss | (24.6 | ) | (44.3 | ) | (28.2 | ) | (207.1 | ) | (304.2 | ) | ||||||||||
| Net (income) loss attributable to noncontrolling interests | (1.1 | ) | (1.2 | ) | 2.8 | — | .5 | |||||||||||||
| Net loss attributable to Ensco | $ | (25.7 | ) | $ | (45.5 | ) | $ | (25.4 | ) | $ | (207.1 | ) | $ | (303.7 | ) | |||||
| Loss per share – basic and diluted | ||||||||||||||||||||
| Continuing operations | $ | (.09 | ) | $ | (.15 | ) | $ | (.08 | ) | $ | (.49 | ) | $ | (.91 | ) | |||||
| Discontinued operations | — | — | — | — | — | |||||||||||||||
| $ | (.09 | ) | $ | (.15 | ) | $ | (.08 | ) | $ | (.49 | ) | $ | (.91 | ) | ||||||
| 2016 | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Year | |||||||||||||||
Operating revenues(1) | $ | 814.0 | $ | 909.6 | $ | 548.2 | $ | 504.6 | $ | 2,776.4 | ||||||||||
| Operating expenses | ||||||||||||||||||||
| Contract drilling (exclusive of depreciation) | 363.7 | 350.2 | 298.1 | 289.0 | 1,301.0 | |||||||||||||||
| Depreciation | 113.3 | 112.4 | 109.4 | 110.2 | 445.3 | |||||||||||||||
| General and administrative | 23.4 | 27.4 | 25.3 | 24.7 | 100.8 | |||||||||||||||
| Operating income | 313.6 | 419.6 | 115.4 | 80.7 | 929.3 | |||||||||||||||
Other income (expense), net(2) | (64.6 | ) | 209.9 | (30.9 | ) | (46.2 | ) | 68.2 | ||||||||||||
| Income from continuing operations before income taxes | 249.0 | 629.5 | 84.5 | 34.5 | 997.5 | |||||||||||||||
| Income tax expense (benefit) | 71.4 | 36.7 | (3.5 | ) | 3.9 | 108.5 | ||||||||||||||
| Income from continuing operations | 177.6 | 592.8 | 88.0 | 30.6 | 889.0 | |||||||||||||||
| Income (loss) from discontinued operations, net | (.9 | ) | (.2 | ) | (.7 | ) | 9.9 | 8.1 | ||||||||||||
| Net income | 176.7 | 592.6 | 87.3 | 40.5 | 897.1 | |||||||||||||||
| Net income attributable to noncontrolling interests | (1.4 | ) | (2.0 | ) | (2.0 | ) | (1.5 | ) | (6.9 | ) | ||||||||||
| Net income attributable to Ensco | $ | 175.3 | $ | 590.6 | $ | 85.3 | $ | 39.0 | $ | 890.2 | ||||||||||
| Earnings per share – basic and diluted | ||||||||||||||||||||
| Continuing operations | $ | .74 | $ | 2.04 | $ | .28 | $ | .10 | $ | 3.10 | ||||||||||
| Discontinued operations | — | — | — | .03 | .03 | |||||||||||||||
| $ | .74 | $ | 2.04 | $ | .28 | $ | .13 | $ | 3.13 | |||||||||||
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
CONCLUSION REGARDING THE EFFECTIVENESS OF DISCLOSURE CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures – We have established disclosure controls and procedures to ensure that the information required to be disclosed by us in the reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and made known to the officers who certify the Company’s financial reports and to other members of senior management and the board of directors as appropriate to allow timely decisions regarding required disclosure.
Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has concluded that our disclosure controls and procedures, as defined in Rule 13a-1513a-15(e) and 15d-15(e) under the Exchange Act, are effective.
See "Item 8. Financial Statements and Supplementary Data" for Management's Report on Internal Control Over Financial Reporting.
Item 9B. Other Information
Not applicable.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
139
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item with respect to our directors, corporate governance matters, committees of the Boardboard of Directorsdirectors and Section 16(a) of the Exchange Act is contained in our Proxy Statement for the Annual General Meeting of Shareholders ("Proxy Statement") to be filed with the SEC not later than 120 days after the end of our fiscal year ended December 31, 20172023 and incorporated herein by reference.
The information required by this item with respect to our executive officers is set forth in "Executive Officers" in Part I of this Annual Report on Form 10-K.
The guidelines and procedures of the Boardboard of Directorsdirectors are outlined in our Corporate Governance Policy. The committees of the Boardboard of Directorsdirectors operate under written charters adopted by the Boardboard of Directors.directors. The Corporate Governance Policy and committee charters are available on our website at www.enscoplc.comwww.valaris.com in the Corporate Governance Documents section and are available in print without charge by contacting our Investor Relations Department at 713-430-4607.Department.
We have a Code of Business Conduct Policy that applies to all directors and employees, including our principal executive officer, principal financial officer and principal accounting officer. The Code of Business Conduct Policy is available on our website at www.enscoplc.comwww.valaris.com in the Corporate Governance Documents section and is available in print without charge by contacting our Investor Relations Department. We intend to disclose any amendments to or waivers from our Code of Business Conduct Policy by posting such information on our website. Our Proxy Statement contains governance disclosures, including information on our Code of Business Conduct, Policy, the Enscoour Corporate Governance Policy, the director nomination process, shareholder director nominations, shareholder communications to the Boardboard of Directorsdirectors and director attendance at the Annual General Meeting of Shareholders.
Item 11. Executive Compensation
The information required by this item is contained in our Proxy Statement and incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
Equity Compensation Plan Information
The following table summarizes certain information related to our compensation plans under which our shares are authorized for issuance as of December 31, 2017:2023:
| Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))(1) | |||||||||||||||||
| (a) | (b)(1) | (c) | ||||||||||||||||||
| Equity compensation plans approved by security holders | — | $ | — | — | ||||||||||||||||
Equity compensation plans not approved by security holders (2) | 1,763,534 | — | 6,795,907 | |||||||||||||||||
| Total | 1,763,534 | $ | — | 6,795,907 | ||||||||||||||||
| Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))(1) | |||||||
| (a) | (b) | (c) | ||||||||
Equity compensation plans approved by security holders | 84,933 | $ | 54.93 | 18,248,276 | ||||||
Equity compensation plans not approved by security holders(2) | 811,346 | 22.94 | 1,556,056 | |||||||
| Total | 896,279 | $ | 25.97 | 19,804,332 | ||||||
(1)Restricted share units do not have an exercise price and, thus, are not reflected in this column.
(2)The number of awards granted for performance awards reflect the shares that would be granted if the target level of performance were to be achieved.
Additional information required by this item is included in our Proxy Statement and incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is contained in our Proxy Statement and incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The information required by this item is contained in our Proxy Statement and incorporated herein by reference.
141
PART IV
Item 15. Exhibits, Financial Statement Schedules
| (a) | ||||||||
| The following documents are filed as part of this report: | ||||||||
| 1. Financial Statements | ||||||||
| Reports of Independent Registered Public Accounting Firm (KPMG LLP, Houston, Texas, Auditor Firm ID: 185) | ||||||||
| Consolidated Statements of Operations | ||||||||
| Consolidated Statements of Comprehensive Income | ||||||||
| Consolidated Balance Sheets | ||||||||
| Consolidated Statements of Cash Flows | ||||||||
| Notes to Consolidated Financial Statements | ||||||||
| 2. Exhibits | ||||||
| 4.4 | |||||||||||
| 10.1 | |||||||||||
142
| 10.4 | |||||||||||
| 10.5 | |||||||||||
| 10.6 | |||||||||||
| +10.8 | |||||||||||
| + | |||||||||||
| + | |||||||||||
| + | |||||||||||
| + | |||||||||||
| + | |||||||||||
| + | |||||||||||
| + | |||||||||||
| + | |||||||||||
| + | |||||||||||
143
| + | |||||||||||
| + | |||||||||||
| + | |||||||||||
| + | |||||||||||
| +10.22 | |||||||||||
| +10.23 | |||||||||||
| + | |||||||||||
| +10.25 | |||||||||||
| +10.26 | |||||||||||
| +10.27 | |||||||||||
| +10.28 | |||||||||||
| + | |||||||||||
| + | |||||||||||
| + | |||||||||||
| + | |||||||||||
| + | |||||||||||
| + | |||||||||||
144
| + | |||||||||||
| + | |||||||||||
| 10.38 | |||||||||||
| 10.39 | |||||||||||
| +10.40 | |||||||||||
| +10.41 | |||||||||||
| +10.42 | |||||||||||
| +10.43 | |||||||||||
| +10.44 | |||||||||||
| +10.45 | |||||||||||
| +10.46 | |||||||||||
| +10.47 | |||||||||||
| +10.48 | |||||||||||
| 10.49 | Credit Agreement, dated April 3, 2023, among Valaris Limited, Citibank, N.A., as administrative agent, Wilmington Savings Fund Society, FSB, as collateral trustee, the issuing banks party thereto and Citibank, N.A., Deutsche Bank Securities Inc. and DNB Markets, Inc., as joint lead arrangers and lead bookrunners (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q filed on May 2, 2023, File No. 001-8097). | ||||||||||
| 10.50 | |||||||||||
| *21.1 | |||||||||||
| *23.1 | |||||||||||
145
| *31.1 | |||||||||||
| *31.2 | |||||||||||
| **32.1 | |||||||||||
| **32.2 | |||||||||||
| * | |||||||||||
| *101.INS | XBRL Instance Document - The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | ||||||||||
| *101.SCH | Inline XBRL Taxonomy Extension Schema Document | ||||||||||
| *101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | ||||||||||
| *101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | ||||||||||
| *101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | ||||||||||
| *101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | ||||||||||
| *104 | The cover page of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, formatted in Inline XBRL (included with Exhibit 101 attachments). | ||||||||||
| * ** + | Filed herewith. Furnished herewith. Management contracts or compensatory plans and arrangements required to be filed as exhibits pursuant to Item 15(b) of this report. |
Certain agreements relating to our long-term debt have not been filed as exhibits as permitted by paragraph (b)(4)(iii)(A) of Item 601 of Regulation S-K since the total amount of securities authorized under any such agreements do not exceed 10% of our total assets on a consolidated basis. Upon request, we will furnish to the SEC all constituent agreements defining the rights of holders of our long-term debt not filed herewith.
Item 16. Form 10-K Summary
None.
146
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, on February 27, 2018.
22, 2024.
| Valaris Limited (Registrant) | ||
Director, President and Chief Executive Officer | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
Signatures | Title | Date | |||||||||||||
/s/ CHRISTOPHER T. WEBER Christopher T. Weber | Senior Vice President and Chief Financial Officer (principal financial officer) | February 22, 2024 | |||||||||||||
/s/ | Director | February | |||||||||||||
/s/ | Director | February | |||||||||||||
/s/ CATHERINE HUGHES Catherine Hughes | Director | February 22, 2024 | |||||||||||||
/s/ KRISTIAN JOHANSEN Kristian Johansen | Director | February 22, 2024 | |||||||||||||
/s/ ELIZABETH D. LEYKUM Elizabeth D. Leykum | Chair of the Board | February 22, 2024 | |||||||||||||
/s/ DEEPAK MUNGANAHALLI Deepak Munganahalli | Director | February 22, 2024 | |||||||||||||
/s/ | Director | February | |||||||||||||
/s/ | |||||||||||||||
| February | |||||||||||||||