UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
| | | | |
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31,September 30, 2020
OR
|
| | | | |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to__________
Commission File Number 1-8097
Valaris plc
(Exact name of registrant as specified in its charter)
| | | | | | | | | | | | | | |
| England and Wales | | 98-0635229 |
(State or other jurisdiction of
incorporation or organization) | | (I.R.S. Employer
Identification No.) |
| | | | |
England and Wales | | 98-0635229 |
(State or other jurisdiction of
incorporation or organization)
| | (I.R.S. Employer
Identification No.)
|
| | | | |
| 110 Cannon Street | | |
| London, | England | | | EC4N6EUEC4N 6EU |
| (Address of principal executive offices) | | (Zip Code) |
Registrant's telephone number, including area code: 44 (0) 207659 4660
Securities registered pursuant to Section 12(b) of the Act:
|
| | | | | | | | | | | | | |
| Title of each class | | Ticker Symbol(s) | | Name of each exchange on which on which registered |
| Class A ordinary shares, U.S. $0.40 par value | | VALVAL* | | New York Stock Exchange |
| 4.70% Senior Notes due 2021 | | VAL21VAL21* | | New York Stock Exchange |
| 4.875% Senior Notes due 2022 | | VAL/22* | | New York Stock Exchange |
| 4.50% Senior Notes due 2024 | | VAL24VAL24* | | New York Stock Exchange |
| 4.75% Senior Notes due 2024 | | VAL/24* | | New York Stock Exchange |
| 8.00% Senior Notes due 2024 | | VAL24AVAL24A* | | New York Stock Exchange |
| 5.20% Senior Notes due 2025 | | VAL25AVAL25A* | | New York Stock Exchange |
| 7.375% Senior Notes due 2025 | | VAL/25* | | New York Stock Exchange |
| 7.75% Senior Notes due 2026 | | VAL26VAL26* | | New York Stock Exchange |
| 5.4% Senior Notes due 2042 | | VAL/42* | | New York Stock Exchange |
| 5.75% Senior Notes due 2044 | | VAL44VAL44* | | New York Stock Exchange |
4.875%5.85% Senior NoteNotes due 20222044 | | VAL/2244* | | New York Stock Exchange |
4.75% Senior Note due 2024 | | VAL/24 | | New York Stock Exchange |
7.375% Senior Note due 2025 | | VAL/25 | | New York Stock Exchange |
5.4% Senior Note due 2042 | | VAL/42 | | New York Stock Exchange |
5.85% Senior Note due 2044 | | VAL/44 | | New York Stock Exchange |
* On September 4, 2020, the New York Stock Exchange (“NYSE”) filed a Form 25 with the Securities and Exchange Commission (the “SEC”) to delist the Class A ordinary shares of Valaris plc. (“Valaris”). The delisting became effective on September 14, 2020, 10 days after the Form 25 was filed with the SEC by the NYSE. The deregistration of Valaris’ Class A ordinary shares under Section 12(b) of the Exchange Act will be effective 90 days, or such shorter period as the SEC may determine, after filing of the Form 25. Upon deregistration of Valaris’ Class A ordinary shares under Section 12(b) of the Exchange Act, they will remain registered under Section 12(g) of the Exchange Act.
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an 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.
| | | | | | | | | | | | | | | | | | | | |
| Large accelerated filer | | ☒ | | Accelerated filer | | ☐ |
| | | | | | |
Large accelerated filer | | ☒ | | Accelerated filer | | ☐ |
| | | | | | |
| Non-Accelerated filer | | ☐ | | Smaller reporting company | | ☐ |
| | | | | | |
| | | | Emerging-growth company | | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of April 27,October 23, 2020, there were 205,941,431199,467,198 Class A ordinary shares of the registrant issued and outstanding.
VALARIS PLC
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED MARCH 31,SEPTEMBER 30, 2020
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; the outcome and effects of the Chapter 11 Cases (as defined below); expected utilization, day rates, revenues, operating expenses, cash flow, contract terms, contract backlog, capital expenditures, insurance, financing and funding; the effect, impact, potential duration and other implications of the COVID-19 global pandemic; the offshore drilling market, including supply and demand, customer drilling programs, stacking of rigs, effects of new rigs on the market and effects of declines in commodity prices; 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 work in progress and completion thereof), enhancement, upgrade or repair and timing and cost thereof; the suitability of rigs for future contracts; performance of our joint venture with Saudi Arabian Oil Company ("Saudi Aramco"); expected divestitures of assets; general market, business and industry conditions, trends and outlook; future operations; the impact of increasing regulatory complexity; the outcome of tax disputes, assessments and settlements; our program to high-grade the rig fleet by investing in new equipment and divesting selected assets and underutilized rigs; synergies and expected additional cost savings; dividends; 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, particularly in light of difficult market conditions, our projected negative cash flows in 2020 and highly leveraged balance sheet, including:
•potential adverse effects of the coronavirusChapter 11 Cases on our liquidity and results of operations;
•objections to the confirmation of our plan of reorganization or other pleadings we file that could protract the Chapter 11 Cases;
•our ability to comply with the restrictions and other covenants imposed by our DIP Credit Agreement (as defined herein) and other financial arrangements;
•the Bankruptcy Court’s rulings in the Chapter 11 Cases, and the outcome of the Chapter 11 Cases generally;
•the length of time that we will operate under Chapter 11 protection and the continued availability of operating capital during the pendency of the proceedings;
•the COVID-19 global pandemic, the related public health measures implemented by governments worldwide and the precipitous decline in oil prices during 2020, including the duration and severity of the outbreak, the duration of the price and demand decline and the extent of disruptions to our operations;
•the dispute over production levels among members of the Organization of Petroleum Exporting Countries and other oil and gas producing nations (“OPEC+”);
•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 or otherwise, which may cause us to idle or stack additional rigs;
•delays in contract commencement dates or cancellation, suspension, renegotiation or termination (with or without cause) of drilling contracts or drilling programs as a result of general and industry-specific economic conditions, mechanical difficulties, performance or other reasons;
•potential additional asset impairments, including the impact of any impairment on our compliance with debt covenants, our ability to continue to borrow under our revolving credit facility and any resulting acceleration of our debt;impairments;
our failure to satisfy the obligations with respect to our indebtedness or recapitalization of the Company (as defined herein), which could result in an event of default that could raise substantial doubt about our ability to continue as a going concern;
the outcome of any discussions with our lenders and bondholders regarding the terms of a potential restructuring of our indebtedness or recapitalization of the Company and any resulting dilution for our shareholders;
our ability to obtain financing, service our indebtedness, fund negative cash flows and capital expenditures and pursue other business opportunities, which may be limited by our significant debt levels, debt agreement restrictions and the credit ratings assigned to our debt by independent credit rating agencies;
•the adequacy of sources of liquidity for us and our customers;
potential•the reaction of our customers, prospective customers, suppliers and service providers to the Chapter 11 Cases and the related increased performance and credit risks associated with our constrained liquidity position and capital structure;
•the impact of the delisting of our Class A ordinary shares from the New York Stock Exchange ("NYSE") if we fail, which took effect on September 14, 2020;
•our ability to satisfy the NYSE's minimum share price requirement, which couldattract and retain skilled personnel on commercially reasonable terms, whether due to labor regulations, unionization, or otherwise, or to retain employees, customers or suppliers as a result in the holders of our 2024financial condition generally or as a result of the Chapter 11 Cases;
•internal control risk due to significant employee reductions;
Convertible Notes having the right to require us to repurchase the notes at a price equal to the principal amount thereof plus accrued interest to the repurchase date;
•our ability to successfully integrate the business, operations and employees of Rowan Companies Limited (formerly Rowan Companies plc) ("Rowan") and the Company to realize synergies and cost savings in connection with the Rowan Transaction (as defined herein);
•changes in worldwide rig supply and demand, competition or technology, including as a result of delivery of newbuild drilling rigs;
•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 ability to successfully recover losses from underwriters under our loss of hire policy in connection with the VALARIS DS-8 non-drilling incident;
•governmental action, terrorism, piracy, military action and political and economic uncertainties, including uncertainty or instability resulting from the U.K.'s withdrawal from the European Union, 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; or suspension and/or termination of contracts based on force majeure events or adverse environmental safety events;
•risks inherent to shipyard rig construction, 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 enter into, and the terms of, future drilling contracts, including contracts for our newbuild units and 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, any renegotiation, nullification, cancellation or breach of contracts with customers or other parties and any failure to execute definitive contracts following announcements of letters of intent;
•governmental regulatory, legislative and permitting requirements affecting drilling operations, including limitations on drilling locations (such as the Gulf of Mexico during hurricane season) and regulatory measures to limit or reduce greenhouse gases;
•potential impacts on our business resulting from climate-change or greenhouse gas 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;
our ability to attract and retain skilled personnel on commercially reasonable terms, whether due to labor regulations, unionization or otherwise;
•environmental or other liabilities, risks, damages or losses, whether related to storms, hurricanes or other weather-related events (including wreckage or debris removal), collisions, groundings, blowouts, fires, explosions, other accidents, terrorism or otherwise, for which insurance coverage and contractual indemnities may be insufficient, unenforceable or otherwise unavailable;
our ability to obtain financing, service our indebtedness, fund negative cash flow and capital expenditures and pursue other business opportunities may be limited by our significant debt levels, debt agreement restrictions and the credit ratings assigned to our debt by independent credit rating agencies;
the adequacy of sources of liquidity for us and our customers;
•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;
•our ability to realize the expected benefits of our joint venture with Saudi Aramco, including our ability to fund any required capital contributions;
delays in contract commencement dates or the cancellation of drilling programs by operators;
•activism by our security holders;
•economic volatility and political, legal and tax uncertainties following the June 23, 2016, vote in the U.K. to exit from the European Union;
•the occurrence of cybersecurity incidents, attacks or other breaches to our information technology systems, including our rig operating systems; and
•adverse changes in foreign currency exchange rates, including their effect on the fair value measurement of our derivative instruments.
In addition to the numerous risks, uncertainties and assumptions described above, you should also carefully read and consider "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part I and "Item 1A. Risk Factors" in Part II of this report and "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 our annual report on Form 10-K for the year ended December 31, 2019, as updated in Item 1A of Part II of our Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2020 and June 30, 2020, which isare available on the U.S. Securities and Exchange Commission website at www.sec.gov. 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.
PART I - FINANCIAL INFORMATION
Item 1.Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TheTo the Board of Directors and Shareholders
Valaris plc:
Results of Review of Interim Financial Information
We have reviewed the condensed consolidated balance sheet of Valaris plc and subsidiaries (the Company, formerly known as Ensco Rowan plc and Ensco plc) as of March 31,September 30, 2020, the related condensed consolidated statements of operations and comprehensive lossincome (loss) for the three-month and nine-month periods ended March 31,September 30, 2020 and 2019, the related condensed consolidated statements of cash flows for the three-monthnine-month periods ended March 31,September 30, 2020 and 2019, and the related notes (collectively, the consolidated interim financial information). Based on our reviews, we are not aware of any material modifications that should be made to the consolidated interim financial information for it to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, 2019, and the related consolidated statements of operations, comprehensive loss, and cash flows for the year then ended (not presented herein); and in our report dated February 21, 2020, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2019, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Inability to Continue as a Going Concern
As indicated in Note 2 of the Company's unaudited condensed consolidated interim financial information as of September 30, 2020 and for the three-month and nine-month periods then ended, certain conditions indicate that the Company may be unable to continue as a going concern. The accompanying unaudited and condensed consolidated interim financial information does not include any adjustments that might result from the outcome of this uncertainty.
Basis for Review Results
This consolidated interim financial information is the responsibility of the Company’s management. 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 reviews in accordance with the standards of the PCAOB. A review of consolidated interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
/s/ KPMG LLP
Houston, Texas
April 30,October 29, 2020
VALARIS PLC AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
(Unaudited)
| | | | Three Months Ended
March 31, | | Three Months Ended
September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| OPERATING REVENUES | $ | 456.6 |
|
| $ | 405.9 |
| OPERATING REVENUES | $ | 285.3 | | | $ | 551.3 | |
| OPERATING EXPENSES | |
| | OPERATING EXPENSES | | |
| Contract drilling (exclusive of depreciation) | 476.0 |
|
| 332.6 |
| Contract drilling (exclusive of depreciation) | 307.2 | | | 496.5 | |
| Loss on impairment | 2,808.2 |
| | — |
| Loss on impairment | 0 | | | 88.2 | |
| Depreciation | 164.5 |
|
| 125.0 |
| Depreciation | 122.4 | | | 163.0 | |
| General and administrative | 53.4 |
|
| 29.6 |
| General and administrative | 72.1 | | | 36.1 | |
| | Total operating expenses | 3,502.1 |
|
| 487.2 |
| Total operating expenses | 501.7 | | | 783.8 | |
| EQUITY IN EARNINGS OF ARO | (6.3 | ) | | — |
| |
| OTHER OPERATING INCOME | | OTHER OPERATING INCOME | 118.1 | | | 0 | |
| EQUITY IN EARNINGS (LOSSES) OF ARO | | EQUITY IN EARNINGS (LOSSES) OF ARO | 3.9 | | | (3.7) | |
| OPERATING LOSS | (3,051.8 | ) |
| (81.3 | ) | OPERATING LOSS | (94.4) | | | (236.2) | |
| OTHER INCOME (EXPENSE) | |
| | |
| OTHER INCOME (EXPENSE) | |
| Interest income | 4.8 |
|
| 3.5 |
| Interest income | 4.7 | | | 6.7 | |
| Interest expense, net | (113.2 | ) |
| (81.0 | ) | |
| Interest expense, net (Unrecognized contractual interest expense for debt subject to compromise was $45.9 million for the three months ended September 30, 2020) | | Interest expense, net (Unrecognized contractual interest expense for debt subject to compromise was $45.9 million for the three months ended September 30, 2020) | (59.8) | | | (113.9) | |
| Reorganization items, net | | Reorganization items, net | (497.5) | | | 0 | |
| Other, net | .5 |
|
| 2.3 |
| Other, net | (3.1) | | | 147.4 | |
| | (107.9 | ) |
| (75.2 | ) | | (555.7) | | | 40.2 | |
| LOSS BEFORE INCOME TAXES | (3,159.7 | ) |
| (156.5 | ) | LOSS BEFORE INCOME TAXES | (650.1) | | | (196.0) | |
| PROVISION (BENEFIT) FOR INCOME TAXES | | | | |
| Current income tax expense (benefit) | (72.5 | ) | | 25.6 |
| |
| PROVISION FOR INCOME TAXES | | PROVISION FOR INCOME TAXES | |
| Current income tax expense | | Current income tax expense | 16.4 | | | 22.6 | |
| Deferred income tax expense (benefit) | (79.5 | ) | | 5.9 |
| Deferred income tax expense (benefit) | 5.5 | | | (21.1) | |
| | (152.0 | ) |
| 31.5 |
| | 21.9 | | | 1.5 | |
| NET LOSS | (3,007.7 | ) |
| (188.0 | ) | NET LOSS | (672.0) | | | (197.5) | |
| NET (INCOME) LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS | 1.4 |
|
| (2.4 | ) | |
| NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS | | NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS | 1.1 | | | .4 | |
| NET LOSS ATTRIBUTABLE TO VALARIS | $ | (3,006.3 | ) |
| $ | (190.4 | ) | NET LOSS ATTRIBUTABLE TO VALARIS | $ | (670.9) | | | $ | (197.1) | |
| LOSS PER SHARE - BASIC AND DILUTED | $ | (15.19 | ) | | $ | (1.75 | ) | LOSS PER SHARE - BASIC AND DILUTED | $ | (3.36) | | | $ | (1.00) | |
| WEIGHTED-AVERAGE SHARES OUTSTANDING | | | | WEIGHTED-AVERAGE SHARES OUTSTANDING | |
| Basic and Diluted | 197.9 |
|
| 108.7 |
| Basic and Diluted | 199.4 | | | 197.6 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
VALARIS PLC AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSSOPERATIONS
(In millions)millions, except per share amounts)
(Unaudited)
|
| | | | | | | |
| | Three Months Ended
March 31, |
| | 2020 | | 2019 |
| NET LOSS | $ | (3,007.7 | ) | | $ | (188.0 | ) |
| OTHER COMPREHENSIVE INCOME (LOSS), NET | | | |
| Net change in derivative fair value | (12.9 | ) | | — |
|
| Reclassification of net (gains) losses on derivative instruments from other comprehensive income (loss) into net loss | (.1 | ) | | 1.6 |
|
| Other | (.4 | ) | | (.1 | ) |
| NET OTHER COMPREHENSIVE INCOME (LOSS) | (13.4 | ) | | 1.5 |
|
| COMPREHENSIVE LOSS | (3,021.1 | ) | | (186.5 | ) |
| COMPREHENSIVE (INCOME) LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS | 1.4 |
| | (2.4 | ) |
| COMPREHENSIVE LOSS ATTRIBUTABLE TO VALARIS | $ | (3,019.7 | ) | | $ | (188.9 | ) |
| | | | | | | | | | | |
| Nine Months Ended
September 30, |
| 2020 | | 2019 |
| OPERATING REVENUES | $ | 1,130.7 | | | $ | 1,541.1 | |
| OPERATING EXPENSES | | | |
| Contract drilling (exclusive of depreciation) | 1,153.9 | | | 1,329.4 | |
| Loss on impairment | 3,646.2 | | | 90.7 | |
| Depreciation | 418.4 | | | 445.9 | |
| General and administrative | 188.1 | | | 146.9 | |
| Total operating expenses | 5,406.6 | | | 2,012.9 | |
| OTHER OPERATING INCOME | 118.1 | | | 0 | |
| EQUITY IN LOSSES OF ARO | (7.6) | | | (3.1) | |
| OPERATING LOSS | (4,165.4) | | | (474.9) | |
| OTHER INCOME (EXPENSE) | | | |
| Interest income | 15.2 | | | 22.1 | |
| Interest expense, net (Unrecognized contractual interest expense for debt subject to compromise was $45.9 million for the nine months ended September 30, 2020) | (289.2) | | | (313.2) | |
| Reorganization items, net | (497.5) | | | 0 | |
| Other, net | 2.5 | | | 853.4 | |
| | (769.0) | | | 562.3 | |
| INCOME (LOSS) BEFORE INCOME TAXES | (4,934.4) | | | 87.4 | |
| PROVISION (BENEFIT) FOR INCOME TAXES | | | |
| Current income tax expense (benefit) | (42.3) | | | 69.4 | |
| Deferred income tax benefit | (103.6) | | | (3.8) | |
| | (145.9) | | | 65.6 | |
| NET INCOME (LOSS) | (4,788.5) | | | 21.8 | |
| NET (INCOME) LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS | 3.9 | | | (3.8) | |
| NET INCOME (LOSS) ATTRIBUTABLE TO VALARIS | $ | (4,784.6) | | | $ | 18.0 | |
| EARNINGS (LOSS) PER SHARE - BASIC AND DILUTED | $ | (24.09) | | | $ | 0.10 | |
| WEIGHTED-AVERAGE SHARES OUTSTANDING | | | |
| Basic and Diluted | 198.6 | | | 165.2 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
VALARIS PLC AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETSSTATEMENTS OF COMPREHENSIVE LOSS
(In millions)
(Unaudited)
| | | | | | | | | | | |
| Three Months Ended
September 30, |
| 2020 | | 2019 |
| NET LOSS | $ | (672.0) | | | $ | (197.5) | |
| OTHER COMPREHENSIVE INCOME (LOSS), NET | | | |
| | | |
| Net change in derivative fair value | 2.7 | | | (5.7) | |
| Reclassification of net (gains) losses on derivative instruments from other comprehensive loss into net loss | (.5) | | | 4.9 | |
| Other | (.1) | | | (.2) | |
| NET OTHER COMPREHENSIVE INCOME (LOSS) | 2.1 | | | (1.0) | |
| COMPREHENSIVE LOSS | (669.9) | | | (198.5) | |
| COMPREHENSIVE LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS | 1.1 | | | .4 | |
| COMPREHENSIVE LOSS ATTRIBUTABLE TO VALARIS | $ | (668.8) | | | $ | (198.1) | |
(In millions, except share and par value amounts)
|
| | | | | | | |
| | March 31,
2020 | | December 31,
2019 |
| | (Unaudited) | | |
| ASSETS |
| CURRENT ASSETS | | | |
| Cash and cash equivalents | $ | 184.9 |
|
| $ | 97.2 |
|
| Accounts receivable, net | 493.2 |
|
| 520.7 |
|
| Other current assets | 427.5 |
|
| 446.5 |
|
| Total current assets | 1,105.6 |
|
| 1,064.4 |
|
| PROPERTY AND EQUIPMENT, AT COST | 14,461.9 |
|
| 18,393.8 |
|
| Less accumulated depreciation | 2,304.7 |
|
| 3,296.9 |
|
| Property and equipment, net | 12,157.2 |
|
| 15,096.9 |
|
| LONG-TERM NOTES RECEIVABLE FROM ARO | 452.9 |
| | 452.9 |
|
| INVESTMENT IN ARO | 122.4 |
| | 128.7 |
|
| OTHER ASSETS | 187.0 |
|
| 188.3 |
|
| | $ | 14,025.1 |
|
| $ | 16,931.2 |
|
| LIABILITIES AND SHAREHOLDERS' EQUITY |
| CURRENT LIABILITIES | | | |
| Accounts payable - trade | $ | 258.4 |
|
| $ | 288.2 |
|
| Accrued liabilities and other | 402.3 |
|
| 417.7 |
|
| Current maturities of long-term debt | 224.5 |
|
| 124.8 |
|
| Total current liabilities | 885.2 |
|
| 830.7 |
|
| LONG-TERM DEBT | 6,148.6 |
|
| 5,923.5 |
|
| OTHER LIABILITIES | 695.7 |
|
| 867.4 |
|
| COMMITMENTS AND CONTINGENCIES |
|
|
|
|
|
| VALARIS SHAREHOLDERS' EQUITY | |
| | |
|
| Class A ordinary shares, U.S. $.40 par value, 205.9 million shares issued as of March 31, 2020 and December 31, 2019 | 82.4 |
|
| 82.4 |
|
| Class B ordinary shares, £1 par value, 50,000 shares issued as of March 31, 2020 and December 31, 2019 | .1 |
|
| .1 |
|
| Additional paid-in capital | 8,634.9 |
|
| 8,627.8 |
|
| Retained (deficit) earnings | (2,334.6 | ) |
| 671.7 |
|
| Accumulated other comprehensive (loss) income | (7.2 | ) |
| 6.2 |
|
| Treasury shares, at cost, 7.5 million and 7.9 million shares as of March 31, 2020 and December 31, 2019 | (77.3 | ) |
| (77.3 | ) |
| Total Valaris shareholders' equity | 6,298.3 |
|
| 9,310.9 |
|
| NONCONTROLLING INTERESTS | (2.7 | ) |
| (1.3 | ) |
| Total equity | 6,295.6 |
|
| 9,309.6 |
|
| | $ | 14,025.1 |
|
| $ | 16,931.2 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
VALARIS PLC AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSCOMPREHENSIVE INCOME (LOSS)
(In millions)
(Unaudited)
| | | | | | | | | | | |
| Nine Months Ended
September 30, |
| 2020 | | 2019 |
| NET INCOME (LOSS) | $ | (4,788.5) | | | $ | 21.8 | |
| OTHER COMPREHENSIVE INCOME (LOSS), NET | | | |
| | | |
| Net change in derivative fair value | (5.4) | | | (7.3) | |
| Reclassification of net (gains) losses on derivative instruments from other comprehensive income (loss) into net income (loss) | (11.5) | | | 8.3 | |
| Other | (.5) | | | (.3) | |
| NET OTHER COMPREHENSIVE INCOME (LOSS) | (17.4) | | | .7 | |
| COMPREHENSIVE INCOME (LOSS) | (4,805.9) | | | 22.5 | |
| COMPREHENSIVE (INCOME) LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS | 3.9 | | | (3.8) | |
| COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO VALARIS | $ | (4,802.0) | | | $ | 18.7 | |
|
| | | | | | | |
| | Three Months Ended
March 31, |
| | 2020 | | 2019 |
| OPERATING ACTIVITIES | |
| | |
|
| Net loss | $ | (3,007.7 | ) |
| $ | (188.0 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | |
| Loss on impairment | 2,808.2 |
| | — |
|
| Depreciation expense | 164.5 |
|
| 125.0 |
|
| Deferred income tax expense (benefit) | (79.5 | ) | | 5.9 |
|
| Debt discounts and other | 14.2 |
| | 2.2 |
|
| Share-based compensation expense | 7.8 |
| | 5.3 |
|
| Adjustment to gain on bargain purchase | 6.3 |
| | — |
|
| Equity in earnings of ARO | 6.3 |
| | — |
|
| Gain on extinguishment of debt | (3.1 | ) | | — |
|
| Amortization, net | 2.8 |
| | (14.5 | ) |
| Other | 9.7 |
|
| (.8 | ) |
| Changes in operating assets and liabilities | (129.9 | ) |
| 40.5 |
|
| Contributions to pension plans and other post-retirement benefits | (4.0 | ) | | — |
|
| Net cash used in operating activities | (204.4 | ) |
| (24.4 | ) |
| INVESTING ACTIVITIES | | | |
| Additions to property and equipment | (36.3 | ) | | (29.0 | ) |
| Net proceeds from disposition of assets | 10.4 |
| | .3 |
|
| Maturities of short-term investments | — |
|
| 204.0 |
|
| Purchases of short-term investments | — |
|
| (120.0 | ) |
| Net cash provided by (used in) investing activities | (25.9 | ) |
| 55.3 |
|
| FINANCING ACTIVITIES | | | |
| Borrowings on credit facility | 343.9 |
| | — |
|
| Repayments of credit facility borrowings | (15.0 | ) | | — |
|
| Reduction of long-term borrowings | (9.7 | ) | | — |
|
| Cash dividends paid | — |
|
| (4.5 | ) |
| Other | (.9 | ) |
| (2.8 | ) |
| Net cash provided by (used in) financing activities | 318.3 |
|
| (7.3 | ) |
| Effect of exchange rate changes on cash and cash equivalents | (.3 | ) |
| (.3 | ) |
| INCREASE IN CASH AND CASH EQUIVALENTS | 87.7 |
|
| 23.3 |
|
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 97.2 |
|
| 275.1 |
|
| CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 184.9 |
|
| $ | 298.4 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
VALARIS PLC AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share and par value amounts)
| | | | | | | | | | | |
| September 30,
2020 | | December 31,
2019 |
| (Unaudited) | | |
| ASSETS |
| CURRENT ASSETS | | | |
| Cash and cash equivalents | $ | 180.4 | | | $ | 97.2 | |
| Accounts receivable, net | 429.7 | | | 520.7 | |
| Other current assets | 454.7 | | | 446.5 | |
| Total current assets | 1,064.8 | | | 1,064.4 | |
| PROPERTY AND EQUIPMENT, AT COST | 13,215.5 | | | 18,393.8 | |
| Less accumulated depreciation | 2,133.1 | | | 3,296.9 | |
| Property and equipment, net | 11,082.4 | | | 15,096.9 | |
| LONG-TERM NOTES RECEIVABLE FROM ARO | 442.7 | | | 452.9 | |
| INVESTMENT IN ARO | 121.1 | | | 128.7 | |
| OTHER ASSETS | 200.2 | | | 188.3 | |
| | $ | 12,911.2 | | | $ | 16,931.2 | |
| LIABILITIES AND SHAREHOLDERS' EQUITY |
| CURRENT LIABILITIES | | | |
| Accounts payable - trade | $ | 180.7 | | | $ | 288.2 | |
| Accrued liabilities and other | 207.3 | | | 417.7 | |
| | | |
| Current maturities of long-term debt | 0 | | | 124.8 | |
| Total current liabilities | 388.0 | | | 830.7 | |
| LONG-TERM DEBT | 0 | | | 5,923.5 | |
| OTHER LIABILITIES | 696.9 | | | 867.4 | |
| Total liabilities not subject to compromise | 1,084.9 | | | 7,621.6 | |
| LIABILITIES SUBJECT TO COMPROMISE | 7,313.7 | | | 0 | |
| COMMITMENTS AND CONTINGENCIES | | | |
| VALARIS SHAREHOLDERS' EQUITY | | | |
| Class A ordinary shares, U.S. $0.40 par value, 206.1 million and 205.9 million shares issued as of September 30, 2020 and December 31, 2019 | 82.5 | | | 82.4 | |
| Class B ordinary shares, £1 par value, 50,000 shares issued as of September 30, 2020 and December 31, 2019 | .1 | | | .1 | |
| Additional paid-in capital | 8,636.5 | | | 8,627.8 | |
| Retained (deficit) earnings | (4,112.9) | | | 671.7 | |
| Accumulated other comprehensive (loss) income | (11.2) | | | 6.2 | |
| Treasury shares, at cost, 6.7 million and 7.9 million shares as of September 30, 2020 and December 31, 2019 | (76.3) | | | (77.3) | |
| Total Valaris shareholders' equity | 4,518.7 | | | 9,310.9 | |
| NONCONTROLLING INTERESTS | (6.1) | | | (1.3) | |
| Total equity | 4,512.6 | | | 9,309.6 | |
| | $ | 12,911.2 | | | $ | 16,931.2 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
VALARIS PLC AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
| | | | | | | | | | | |
| | Nine Months Ended
September 30, |
| | 2020 | | 2019 |
| OPERATING ACTIVITIES | | | |
| Net income (loss) | $ | (4,788.5) | | | $ | 21.8 | |
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | | | |
| Debtor in Possession financing fees and payments on Backstop Agreement | 43.8 | | | 0 | |
| Loss on impairment | 3,646.2 | | | 90.7 | |
| Non cash reorganization items, net | 447.9 | | | 0 | |
| Depreciation expense | 418.4 | | | 445.9 | |
| Deferred income tax benefit | (103.6) | | | (3.8) | |
| Debt discounts and other | 36.8 | | | 18.1 | |
| Share-based compensation expense | 17.8 | | | 28.7 | |
| Amortization, net | 14.4 | | | (18.1) | |
| Equity in earnings of ARO | 7.6 | | | 3.1 | |
| (Gain on) adjustment to bargain purchase | 6.3 | | | (659.8) | |
| Gain on extinguishment of debt | (3.1) | | | (194.1) | |
| Other | 2.4 | | | (4.7) | |
| Changes in operating assets and liabilities | (131.8) | | | (147.3) | |
| Contributions to pension plans and other post-retirement benefits | (11.0) | | | (8.0) | |
| Net cash used in operating activities | (396.4) | | | (427.5) | |
| INVESTING ACTIVITIES | | | |
| Additions to property and equipment | (82.9) | | | (174.2) | |
| Net proceeds from disposition of assets | 44.2 | | | 4.9 | |
| Maturities of short-term investments | 0 | | | 474.0 | |
| Rowan cash acquired | 0 | | | 931.9 | |
| Purchases of short-term investments | 0 | | | (145.0) | |
| | | |
| Net cash provided by (used in) investing activities | (38.7) | | | 1,091.6 | |
| FINANCING ACTIVITIES | | | |
| | | |
| Borrowings on credit facility | 596.0 | | | 175.0 | |
| Debtor in possession financing fees and payments on Backstop Agreement | (43.8) | | | 0 | |
| Repayments of credit facility borrowings | (15.0) | | | (34.4) | |
| Reduction of long-term borrowings | (9.7) | | | (928.1) | |
| Purchase of noncontrolling interests | (7.2) | | | 0 | |
| Debt solicitation fees | 0 | | | (9.4) | |
| Cash dividends paid | 0 | | | (4.5) | |
| Other | (1.9) | | | (7.7) | |
| Net cash provided by (used in) financing activities | 518.4 | | | (809.1) | |
| Effect of exchange rate changes on cash and cash equivalents | (.1) | | | (.6) | |
| INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 83.2 | | | (145.6) | |
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 97.2 | | | 275.1 | |
| CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 180.4 | | | $ | 129.5 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
VALARIS PLC AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 -Unaudited Condensed Consolidated Financial Statements
On April 11, 2019, we completed our combination with Rowan Companies Limited (formerly named Rowan Companies plc) ("Rowan") and effected a four-to-one share consolidation (being a reverse stock split under English law or the "Reverse Stock Split") and changed our name to Ensco Rowan plc. On July 30, 2019, we changed our name to Valaris plc. All share and per-share amounts in these financial statements reflect the Reverse Stock Split.
We prepared the accompanying condensed consolidated financial statements of Valaris plc and subsidiaries (the "Company," "Valaris," "our," "we" or "us") in accordance with accounting principles generally accepted in the United States of America ("GAAP"), pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC") included in the instructions to Form 10-Q and Article 10 of Regulation S-X. The financial information included in this report is unaudited but, in our opinion, includes all adjustments (consisting of normal recurring adjustments) that are necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods presented. The December 31, 2019 condensed consolidated balance sheet data was derived from our 2019 audited consolidated financial statements but does not include all disclosures required by GAAP. The preparation of our condensed consolidated financial statements 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.
The financial data for the three-month periodsthree and nine months ended March 31,September 30, 2020 and 2019 included herein have been subjected to a limited review by KPMG LLP, our independent registered public accounting firm. The accompanying independent registered public accounting firm's review report is not a report within the meaning of Sections 7 and 11 of the Securities Act, and the independent registered public accounting firm's liability under Section 11 does not extend to it.
Results of operations for the three and nine months ended March 31,September 30, 2020 are not necessarily indicative of the results of operations that will be realized for the year ending December 31, 2020. We recommend these condensed consolidated financial statements be read in conjunction with our annual report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 21, 2020.
Chapter 11 Cases and Restructuring Support Agreement
On August 19, 2020 (the "Petition Date"), Valaris plc 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"). On August 18, 2020, the Debtors entered into the Restructuring Support Agreement ("RSA") with certain senior note holders (collectively, the "Consenting Noteholders").
The RSA contemplates that the Company will implement the restructuring through the Chapter 11 Cases pursuant to a plan of reorganization and the various related transactions set forth in or contemplated by the RSA and the related Restructuring Term Sheet. See“Note 2 – Chapter 11 Proceedings and Ability to Continue as a Going Concern” for additional details regarding the Chapter 11 Cases and RSA.
Bankruptcy Accounting
The condensed consolidated financial statements included herein have been prepared as if we were a going concern. See “Note 2 – Chapter 11 Proceedings and Ability to Continue as a Going Concern” for additional details regarding the bankruptcy and circumstances raising substantial doubt over our ability to continue as a going concern. As a result, we have segregated liabilities and obligations whose treatment and satisfaction are dependent on the outcome of the Chapter 11 proceedings and have classified these items as "Liabilities Subject to Compromise” on our Condensed Consolidated Balance Sheets. In addition, we have classified all income, expenses, gains or losses that were incurred or realized as a result of the Chapter 11 proceedings since filing as “Reorganization Items” in our Condensed Consolidated Statements of Operations.
New Accounting Pronouncements
Recently adopted accounting standards
Credit Losses - In June 2016, the FASBFinancial Accounting Standards Board ("FASB") issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("Update 2016-13"), which requires companies to measure credit losses of financial instruments, including customer accounts receivable, utilizing a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Subsequent to the issuance of Update 2016-13, the FASB issued several additional Accounting Standard Updates to clarify implementation guidance, provide narrow-scope improvements and provide additional disclosure guidance. We adopted Update 2016-13 effective January 1, 2020 with no material impact to our financial statements upon adoption as our previously estimated reserves were in line with expected credit losses calculated under Update 2016-13.
Accounting pronouncements to be adopted
Income Taxes - In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("Update 2019-12"), which removes certain exceptions for investments, intraperiod allocations and interim tax calculations and adds guidance to reduce complexity in accounting for income taxes. We will be required to adopt the amended guidance in annual and interim periods beginning after December 15, 2020, with early adoption permitted. The various amendments in Update 2019-12 are applied on a retrospective basis, modified retrospective basis and prospective basis, depending on the amendment. We are in the process of evaluating the impact this amendment will have on our consolidated financial statements.
Defined Benefit Plans - In August 2018, the FASB issued ASU No. 2018-14, Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20): Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans ("Update 2018-14"), which modifies the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans. We will be required to adopt the amended guidance in annual and interim reports beginning January 1, 2021, with early adoption permitted. Adoption is required to be applied on a retrospective basis to all periods presented. We will adopt the new standard effective January 1, 2021 and do not expect the adoption of Update 2018-14 to have a material impact on our consolidated financial statements.
Reference Rate Reform - In March 2020, the FASB issued ASU 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 generally accepted accounting principles (GAAP)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 expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, thatfor which an entity has
elected certain optional expedients for and that are retained through the end of the hedging relationship. The provisions in Update 2020-04 are effective upon issuance and can be applied prospectively through December 31, 2022. We are in the process of evaluating the impact this amendment will have on our consolidated financial statements.
Convertible Instruments - In August 2020, the FASB issued ASU 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815 – 40)” ("Update 2020-06”). ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. The ASU is part of the FASB’s simplification initiative, which aims to reduce unnecessary complexity in U.S. GAAP. The ASU’s amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years, with early adoption permitted no earlier than fiscal years beginning after December 15, 2020. We are in the process of evaluating the impact this amendment may have on our consolidated financial statements.
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.
Note 2 -Chapter 11 Proceedings and Ability to Continue as a Going Concern
Chapter 11 Cases
On August 19, 2020 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).
The Debtors continue to operate their businesses and manage their properties as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. As part of the Chapter 11 Cases, the Debtors filed with the Bankruptcy Court motions seeking a variety of "first-day" relief, all of which were granted and will enable the Company to continue operating without interruption or disruption to its relationships with its customers and vendors or its high-quality service delivery. In particular, employee pay and benefits are expected to continue without interruption.
Restructuring Support Agreement
On August 18, 2020, the Debtors entered into the RSA with the Consenting Noteholders. The RSA contemplates that the Company will implement the restructuring through the Chapter 11 Cases pursuant to a plan of reorganization and the various related transactions set forth in or contemplated by the RSA and its restructuring term sheet (the "Restructuring Term Sheet"). Below is a summary of the treatment that the stakeholders of the Company would receive under a plan of reorganization pursuant to the terms of the RSA and Restructuring Term Sheet:
•Holders of the Company's outstanding senior notes ("Senior Notes") will receive their pro rata share of (i) 34.8% of new common stock issued after consummation of the restructuring (the “New Equity”) and (ii) subscription rights to participate in the rights offering (the "Rights Offering") through which the Company will offer $500.0 million of new first lien secured notes (the "New Secured Notes");
•Holders of the Senior Notes ("Senior Noteholders") who participate in the Rights Offering will receive their pro ratashare of 30.0% of the New Equity, and Senior Noteholders who agreed to backstop the Rights Offering will receive their pro rata share of 2.7% of the New Equity;
•Senior Noteholders, solely with respect to Pride International LLC's ("Pride") 6.875% senior notes due 2020 and 7.875% senior notes due 2040 and the Company's 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, will receive an aggregate cash payment of $25 million in connection with settlement of certain alleged claims against the Company;
•Lenders under the revolving credit facility will receive their pro rata share of 32.5% of New Equity;
•Holders of general unsecured claims will receive payment in full or reinstatement pursuant to the Bankruptcy Code (excluding claims against the entities party to, or guaranteeing, the new build contracts to be rejected by the Company, which shall receive their liquidation value unless otherwise agreed);
•If holders of equity interests vote as a class in support of the restructuring, they will each receive their pro rata share of (i) up to 0.01% of the New Equity and (ii) 7-year warrants to purchase up to 7% of New Equity (subject to dilution), with a strike price set at a price per share equal to the value at which the Senior Noteholders would receive a 100% recovery on their claims including accrued interest up to the Petition Date, as applicable; and
•Lenders under the DIP Facility (as described below) will receive payment in full in cash, unless otherwise agreed.
The RSA provided that for a period of 15 business days after the commencement of the Chapter 11 Cases (the “Joinder Period”), qualified holders of Senior Notes claims, including the Consenting Noteholders, were eligible to become backstop parties (the “Backstop Parties”). All Backstop Parties are required to join the RSA. The RSA was amended on September 10, 2020, which extended the expiration of the of the Joinder Period to September 14, 2020 upon which date we gained support for the RSA from approximately 72% of the Company's noteholders.
The RSA contains certain covenants on the part of Valaris and the Consenting Noteholders, including commitments by the Consenting Noteholders to vote in favor of a plan of reorganization and commitments of Valaris and the Consenting Noteholders to negotiate in good faith to finalize the documents and agreements governing the restructuring. The RSA also provides for certain conditions to the obligations of the parties and for termination upon the occurrence of certain events, including without limitation, the failure to achieve certain milestones and certain breaches by the parties under the RSA.
Subject to certain exceptions, under the Bankruptcy Code, the filing of the Chapter 11 Cases automatically enjoined, or stayed, the continuation of most judicial or administrative proceedings or filing of other actions against the Debtors or their property to recover, collect or secure a claim arising prior to the date of the Chapter 11 Cases. Notwithstanding the general applicability of the automatic stay described above, governmental authorities may determine to continue actions brought under their regulatory powers.
Although Valaris intends to pursue the restructuring in accordance with the terms set forth in the RSA, there can be no assurance that Valaris will be successful in completing a restructuring or any other similar transaction on the terms set forth in the RSA, on different terms or at all. Among other things, the RSA includes an outside date milestone requiring the Company’s emergence from Chapter 11 by no later than June 15, 2021 (subject to a potential 60-day extension pursuant to the terms of the RSA).
Debtor in Possession Facility
On August 11, 2020, prior to the commencement of the Chapter 11 Cases, certain of the Company’s existing noteholders (or their affiliates or designees) provided the Company with a commitment for a senior secured superpriority debtor-in-possession term loan credit facility in an aggregate principal amount of up to $500.0 million (the “DIP Facility”). On September 25, 2020, following approval by the Bankruptcy Court, the Debtors entered into a senior secured superpriority debtor-in-possession term loan credit agreement (the “DIP Credit Agreement”), by
and among the Company, as Lead Borrower, and certain wholly owned subsidiaries of the Company, as borrowers, the lenders party thereto and Wilmington Savings Fund Society, FSB, as administrative agent and security trustee, in an aggregate amount not to exceed $500.0 million. Borrowings on the DIP Facility will be used to finance, among other things, the ongoing general corporate needs of the Debtors during the course of the Chapter 11 Cases and to pay certain fees, costs and expenses associated with the Debtors’ Chapter 11 Cases.
The maturity date of the DIP Credit Agreement is the earliest of (1) August 17, 2021, (2) acceleration of the loans under the DIP Facility and termination of the Lenders commitments under the DIP Facility, (3) the substantial consummation of any plan filed in the Chapter 11 Cases that is confirmed pursuant to an order entered by the Bankruptcy Court and (4) the consummation of a sale of all or substantially all of the assets of the Lead Borrower and the other Debtors under section 363 of the Bankruptcy Code. Loans under the DIP Credit Agreement accrue interest at a rate of 8.00% per annum, if paid in kind, and at a rate of 7.00% per annum, if paid in cash.
The DIP Credit Agreement contains a requirement that the Lead Borrower and any other borrowers provide every four weeks, a rolling 13 week budget to be approved by the required lenders (the “Approved Budget”). The Lead Borrower and any other borrower that becomes party to the DIP Credit Agreement may not vary from the Approved Budget by more than 15% of the forecasted amounts in any forecast period. The Approved Budget is, subject to certain exceptions and is tested at certain times in accordance with the DIP Credit Agreement in order to measure variances between the actual total cash disbursements (excluding professional fees and certain other items consistent with the initial Approved Budget) and the disbursements budgeted for the applicable period.
The DIP Credit Agreement contains events of default customary to debtor-in-possession financings, including events related to the Chapter 11 Cases, the occurrence of which could result in the acceleration of the Debtors’ obligation to repay the outstanding indebtedness under the DIP Credit Agreement. The Debtors’ obligations under the DIP Credit Agreement are secured by a security interest in, and lien on, substantially all present and after acquired property (subject to certain exceptions) of the Debtors and are guaranteed by certain of the Company’s subsidiaries.
The DIP Credit Agreement also contains customary covenants that limit the ability of the Company and its subsidiaries to, among other things, (1) incur additional indebtedness and permit liens to exist on their assets, (2) pay dividends or make certain other restricted payments, (3) sell assets and (4) make certain investments. These covenants are subject to exceptions and qualifications as set forth in the DIP Credit Agreement.
As of September 30, 2020, we had 0 borrowings outstanding against our DIP Facility.
Backstop Agreement
On August 18, 2020, the Company entered into a Backstop Commitment Agreement (the “BCA”) with the Backstop Parties. Pursuant to the BCA, each of the Backstop Parties will purchase its pro-rata portion (based on an adjusted claims value) of (i) $187.5 million of the New Secured Notes held back for purchase by the Backstop Parties, (ii) all of the New Secured Notes offered to Backstop Parties as part of the $312.5 million New Secured Notes offered to all claim holders (the “General Rights Offering”) and (iii) New Secured Notes not purchased by non-Backstop Parties in the General Rights Offering.
In each instance, 30% of the new shares issued and outstanding immediately after the effective date of the plan of reorganization (subject to dilution by the new warrants and the management incentive plan) will be allocated proportionally to purchasers of the New Secured Notes for no additional consideration. Additionally, in exchange for providing the Backstop Commitments, the Company has agreed to pay the Backstop Parties, subject to approval by the Bankruptcy Court, a backstop premium in an aggregate amount equal to $50.0 million payable in New Secured Notes on the effective date of a plan of reorganization. Further, the Debtors paid a commitment fee of $20.0 million, in cash prior to the Petition Date, which shall be loaned back to the reorganized company upon emergence. Therefore, upon emergence the Debtors will receive $520 million in cash in exchange for a $550 million note, which includes the backstop premium.
The BCA will be terminable by the Company and/or the requisite Backstop Parties upon certain customary events specified therein, including, among others, (i) the termination of the RSA, (ii) the mutual written consent of the Company and the requisite Backstop Parties by written notice to the other such Party(ies) or (iii) either the Company or the requisite Backstop Parties if the effective date of the plan of reorganization has not occurred on or prior to the date that is ten months after the execution date of the BCA (subject to certain extensions as set forth in the BCA).
NYSE Delisting of our Common Stock
As a result of the Chapter 11 Cases and in accordance with Section 802.01D of the NYSE Listed Company Manual, on August 19, 2020, we were notified by the New York Stock Exchange (“NYSE”) of its determination to indefinitely suspend trading of the Company’s Class A ordinary shares and to commence proceedings to delist the Company’s Class A ordinary shares from the NYSE. Our Class A ordinary shares were delisted from the NYSE effective September 14, 2020.
Effective August 19, 2020, the Company’s Class A ordinary shares commenced trading on the OTC Pink Open Market under the symbol “VALPQ.”
Going Concern
The condensed consolidated financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and satisfaction of liabilities and commitments in the normal course of business.
For the duration of the Chapter 11 Cases, our operations and our ability to develop and execute our business plan are subject to a high degree of risk and uncertainty associated with the Chapter 11 Cases. The outcome of the Chapter 11 Cases is dependent upon factors that are outside of our control, including actions of the Bankruptcy Court and our creditors. There can be no assurance that we will confirm and consummate a plan of reorganization as contemplated by the RSA or complete another plan of reorganization with respect to the Chapter 11 Cases. As a result, we have concluded that management’s plans do not alleviate the substantial doubt about our ability to continue as a going concern brought about by the significant risks and uncertainties related to our liquidity and Chapter 11 Cases for a period of one year after the date that the financial statements are issued.
The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty. These adjustments could be material.
Pre-petition Charges
We have reported the backstop commitment fee and legal and other professional advisor fees incurred in relation to the Chapter 11 Cases, but prior to the Petition Date, as General and administrative expenses in our unaudited Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2020 in the amount of $42.6 million and $64.7 million, respectively.
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 unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2020. These costs include legal and other professional advisory service fees pertaining to the Chapter 11 Cases, all adjustments made to the carrying amount of certain pre-petition liabilities reflecting claims expected to be allowed by the Bankruptcy Court and DIP Facility fees.
The following table provides information about reorganization items incurred during the three and nine months ended September 30, 2020, as of or subsequent to the Petition Date (in millions):
| | | | | | | | | | |
| | | | Three and Nine Months Ended September 30, 2020 |
| Write-off of unamortized debt discounts, premiums and issuance costs | | | | $ | 447.9 | |
| | | | |
| Reorganization items (non-cash) | | | | 447.9 | |
| | | | |
| | | | |
| DIP facility fees | | | | 23.8 | |
| Professional fees | | | | 25.8 | |
| Reorganization Items (Fees) | | | | 49.6 | |
| Total reorganization items, net | | | | $ | 497.5 | |
| | | | |
| Reorganization items (fees) unpaid | | | | $ | 25.8 | |
| Reorganization items (fees) paid | | | | $ | 23.8 | |
Liabilities Subject to Compromise
The Debtors' pre-petition unsecured senior notes and related unpaid accrued interest as of the Petition Date have been classified as Liabilities Subject to Compromise on our Condensed Consolidated Balance Sheets. The liabilities are reported at the amounts expected to be allowed as claims by the Bankruptcy Court. Liabilities subject to compromise at September 30, 2020 consist of the following (in millions):
| | | | | | | | |
| | September 30, 2020 |
| 6.875% Senior notes due 2020 | | $ | 122.9 | |
| 4.70% Senior notes due 2021 | | 100.7 | |
| 4.875% Senior notes due 2022 | | 620.8 | |
| 3.00% Exchangeable senior notes due 2024 | | 849.5 | |
| 4.50% Senior notes due 2024 | | 303.4 | |
| 4.75% Senior notes due 2024 | | 318.6 | |
| 8.00% Senior notes due 2024 | | 292.3 | |
| 5.20% Senior notes due 2025 | | 333.7 | |
| 7.375% Senior notes due 2025 | | 360.8 | |
| 7.75% Senior notes due 2026 | | 1,000.0 | |
| 7.20% Debentures due 2027 | | 112.1 | |
| 7.875% Senior notes due 2040 | | 300.0 | |
| 5.40% Senior notes due 2042 | | 400.0 | |
| 5.75% Senior notes due 2044 | | 1,000.5 | |
| 5.85% Senior notes due 2044 | | 400.0 | |
| Amounts drawn under revolving credit facility | | 581.0 | |
| Accrued Interest on Senior Notes, Exchangeable Senior Notes, Debentures and Revolving Credit Facility | | 203.5 | |
Rig holding costs(1) | | 13.9 | |
| Total liabilities subject to compromise | | $ | 7,313.7 | |
(1) Represents the holding costs incurred to maintain VALARIS DS-13 and VALARIS DS-14 in the shipyard until the delivery date.
The principal balance on our unsecured senior notes and the amount of outstanding borrowings on our revolving credit facility have been reclassified from Debt to Liabilities Subject to Compromise as of September 30, 2020. Accrued interest on our unsecured senior notes and revolving credit facility was also reclassified from Other Current Liabilities to Liabilities Subject to Compromise on our Condensed Consolidated Balance Sheet as of September 30, 2020.
The contractual interest expense on our unsecured senior notes and revolving credit facility is in excess of recorded interest expense by $45.9 million for the three and nine months ended September 30, 2020. This excess contractual interest is not included as interest expense on the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2020, because the Company has discontinued accruing interest on the unsecured senior notes and revolving credit facility subsequent to the Petition Date. We discontinued making interest payments on our unsecured senior notes beginning in June 2020. See "Note 11 – Debt” for additional information on interest payments.
Debtor Financial Statements
Unaudited condensed consolidated financial statements of the Debtors are set forth below. These financial statements exclude the financial statements of the non-debtor subsidiaries. Transactions and balances of receivables and payables between the Debtors have been eliminated in consolidation. Amounts payable to or receivable from the non-Debtor subsidiaries are reported in the unaudited condensed consolidated balance sheet of the Debtors.
VALARIS PLC AND CERTAIN SUBSIDIARIES PARTY TO THE BANKRUPTCY CASES
(DEBTOR-IN-POSSESSION)
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
(In millions)
| | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2020 | | 2020 |
| OPERATING REVENUES | | | |
| Operating revenues | $ | 236.0 | | | $ | 944.6 | |
| Operating revenues from non-debtor subsidiaries | 26.3 | | | 113.6 | |
| Total operating revenues | 262.3 | | | 1,058.2 | |
| OPERATING EXPENSES | | | |
| Contract drilling (exclusive of depreciation) | 264.2 | | | 948.9 | |
| Loss on impairment | 0 | | | 3,643.9 | |
| Depreciation | 114.2 | | | 393.4 | |
| General and administrative | 72.9 | | | 187.2 | |
| Operating expenses for non-debtor subsidiaries | 16.0 | | | 81.4 | |
| Total operating expenses | 467.3 | | | 5,254.8 | |
| OTHER OPERATING INCOME | 118.1 | | | 118.1 | |
| EQUITY IN EARNINGS OF ARO | 3.9 | | | (7.6) | |
| OPERATING LOSS | (83.0) | | | (4,086.1) | |
| OTHER INCOME (EXPENSE) | | | |
| Interest income | 4.7 | | | 15.2 | |
| Interest income for non-debtor subsidiaries | 65.2 | | | 193.5 | |
| Interest expense, net | (59.8) | | | (289.2) | |
| Interest Expense for non-debtor subsidiaries | (73.1) | | | (210.5) | |
| Reorganization items, net | (497.5) | | | (497.5) | |
| Other, net | 4.5 | | | 12.5 | |
| | (556.0) | | | (776.0) | |
| LOSS BEFORE INCOME TAXES | (639.0) | | | (4,862.1) | |
| EQUITY IN EARNINGS OF SUBSIDIARIES | 9.2 | | | 27.5 | |
| | | |
| | | |
| | | |
| PROVISION (BENEFIT) FOR INCOME TAXES | 17.3 | | | (159.4) | |
| NET LOSS | (647.1) | | | (4,675.2) | |
| | | |
| | | |
VALARIS PLC AND CERTAIN SUBSIDIARIES PARTY TO THE BANKRUPTCY CASES
(DEBTOR-IN-POSSESSION)
CONDENSED COMBINED BALANCE SHEET
(Unaudited)
(In millions)
| | | | | | | | |
| | September 30, 2020 |
| | (Unaudited) |
| ASSETS |
| CURRENT ASSETS | | |
| Cash and cash equivalents | | $ | 80.9 | |
| Accounts receivable, net | | 376.1 | |
| Accounts receivable from non-debtor subsidiaries | | 2,930.6 | |
| Other current assets | | 427.4 | |
| Total current assets | | 3,815.0 | |
| PROPERTY AND EQUIPMENT, AT COST | | 12,262.4 | |
| Less accumulated depreciation | | 1,866.4 | |
| Property and equipment, net | | 10,396.0 | |
| LONG-TERM NOTES RECEIVABLE FROM ARO | | 442.7 | |
| LONG-TERM NOTES RECEIVABLE FROM NON-DEBTOR SUBSIDIARIES | | 2,103.0 | |
| INVESTMENT IN ARO | | 121.1 | |
| INVESTMENTS IN NON-DEBTOR SUBSIDIARIES | | 654.9 | |
| OTHER ASSETS | | 175.3 | |
| | $ | 17,708.0 | |
| LIABILITIES AND SHAREHOLDERS' EQUITY |
| CURRENT LIABILITIES | | |
| Accounts payable - trade | | $ | 149.3 | |
| Accrued liabilities and other | | 162.1 | |
| Short term notes payable to non-debtors | | 145.9 | |
| | |
| | |
| Total current liabilities | | 457.3 | |
| | |
| LONG-TERM NOTES PAYABLE TO NON-DEBTOR SUBSIDIARIES | | 2,402.7 | |
| OTHER LIABILITIES | | 536.6 | |
| Total liabilities not subject to compromise | | 3,396.6 | |
| Liabilities subject to compromise | | 7,313.7 | |
| Total debtors' equity | | 6,997.7 | |
| Total liabilities and debtors' equity | | $ | 17,708.0 | |
VALARIS PLC AND CERTAIN SUBSIDIARIES PARTY TO THE BANKRUPTCY CASES
(DEBTOR-IN-POSSESSION)
CONDENSED COMBINED STATEMENT OF CASH FLOWS
(Unaudited)
(In millions)
| | | | | | | | |
| | Nine Months Ended
September 30, |
| | 2020 |
| OPERATING ACTIVITIES | | |
| Net loss | | $ | (4,675.2) | |
| Adjustments to reconcile net loss to net cash used in operating activities: | | |
| Non cash reorganization items, net | | 447.9 | |
| Loss on impairment | | 3,643.9 | |
| Depreciation expense | | 393.4 | |
| Equity in earnings of non-debtor subsidiaries | | (27.5) | |
| Gain on extinguishment of debt | | (3.1) | |
| | |
| Debtor in Possession financing fees and payments on Backstop Agreement | | 43.8 | |
| Amortization, net | | 14.4 | |
| Equity in earnings of ARO | | 7.6 | |
| (Gain on) adjustment to bargain purchase | | 6.3 | |
| Other | | (57.7) | |
| Changes in operating assets and liabilities | | (151.1) | |
| | |
| Changes in advances (to)/from non-debtor subsidiaries | | (120.3) | |
| Net cash used in operating activities | | (477.6) | |
| INVESTING ACTIVITIES | | |
| Additions to property and equipment | | (82.9) | |
| Net proceeds from disposition of assets | | 44.2 | |
| | |
| | |
| | |
| | |
| Net cash used in investing activities | | (38.7) | |
| FINANCING ACTIVITIES | | |
| Borrowings on credit facility | | 596.0 | |
| Repayments of credit facility borrowings | | (15.0) | |
| Debtor in Possession financing fees and payments on Backstop Agreement | | (43.8) | |
| Reduction of long-term borrowings | | (9.7) | |
| | |
| Other | | (1.9) | |
| Net cash provided by financing activities | | 525.6 | |
| Effect of exchange rate changes on cash and cash equivalents | | (.1) | |
| INCREASE IN CASH AND CASH EQUIVALENTS | | 9.2 | |
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | | 71.7 | |
| CASH AND CASH EQUIVALENTS, END OF PERIOD | | $ | 80.9 | |
Note 23 -Revenue from Contracts with Customers
Our drilling contracts with customers provide a drilling rig and 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.
Our integrated 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 for 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 UpdateASU 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 March 31,September 30, 2020 was between approximately one month and threetwo 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 drilling unit is operating and lower rates or zero rates for periods when drilling operations are interrupted or restricted. The day rate invoiced to the customer is determined based on the varying rates applicable to specific activities performed on an hourly basis 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 typically range from 30 to 45 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 contractual term. Such compensation is recognized as revenue when our performance obligation is satisfied, the termination fee can be reasonably measured and collection is probable.
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 the 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 mobilization and demobilization of equipment and personnel are included in contract drilling expense.
Mobilization fees received prior to commencement of drilling operations are recorded as a contract liability and amortized on a straight-line basis over the contract term. Demobilization fees expected to be received upon contract completion are estimated at 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 a 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 for requested capital upgrades to our drilling rigs or for other contract preparation work. Fees received for requested capital upgrades and other contract preparation work are recorded as a contract liability and amortized on a straight-line basis over the contract term to operating revenues. Costs incurred for capital upgrades are capitalized and depreciated over the useful life of the asset.
Contract Assets and Liabilities
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 or capital upgrades.
Contract assets and liabilities are presented net on our consolidated balance sheet 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 condensed consolidated balance sheets.
The following table summarizes our contract assets and contract liabilities (in millions):
| | | | March 31, 2020 | | December 31, 2019 | | September 30, 2020 | | December 31, 2019 |
| Current contract assets | $ | 7.2 |
| | $ | 3.5 |
| Current contract assets | $ | 7.0 | | | $ | 3.5 | |
| Noncurrent contract assets | $ | .4 |
| | $ | — |
| Noncurrent contract assets | $ | .1 | | | $ | 0 | |
| Current contract liabilities (deferred revenue) | $ | 24.5 |
| | $ | 30.0 |
| Current contract liabilities (deferred revenue) | $ | 38.9 | | | $ | 30.0 | |
| Noncurrent contract liabilities (deferred revenue) | $ | 8.8 |
| | $ | 9.7 |
| Noncurrent contract liabilities (deferred revenue) | $ | 7.1 | | | $ | 9.7 | |
Changes in contract assets and liabilities during the period are as follows (in millions):
| | | | | | | | | | | |
| | Contract Assets | | Contract Liabilities |
| Balance as of December 31, 2019 | $ | 3.5 | | | $ | 39.7 | |
| Revenue recognized in advance of right to bill customer | 8.3 | | | — | |
| Increase due to cash received | — | | | 40.0 | |
| Decrease due to amortization of deferred revenue that was included in the beginning contract liability balance | — | | | (21.6) | |
| Decrease due to amortization of deferred revenue that was added during the period | — | | | (12.1) | |
| Decrease due to transfer to receivables during the period | (4.7) | | | — | |
| Balance as of September 30, 2020 | $ | 7.1 | | | $ | 46.0 | |
|
| | | | | | | |
| | Contract Assets | | Contract Liabilities |
| Balance as of December 31, 2019 | $ | 3.5 |
| | $ | 39.7 |
|
| Revenue recognized in advance of right to bill customer | 5.1 |
| | — |
|
| Increase due to cash received | — |
| | 6.2 |
|
| Decrease due to amortization of deferred revenue that was included in the beginning contract liability balance | — |
| | (12.0 | ) |
| Decrease due to amortization of deferred revenue that was added during the period | — |
| | (.6 | ) |
| Decrease due to transfer to receivables during the period | (1.0 | ) | | — |
|
| Balance as of March 31, 2020 | $ | 7.6 |
| | $ | 33.3 |
|
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. SuchThese costs are deferred and amortized on a straight-line basis over the contract term. Demobilization costs are recognized as incurred upon contract completion. Costs associated with the mobilization of equipment and personnel to more promising market areas without contracts are expensed as incurred. Deferred contract costs were included in other current assets and other assets on our condensed consolidated balance sheets and totaled $29.2$18.0 million and $19.7 million as of March 31,September 30, 2020 and December 31, 2019, respectively. During the three-month periodsthree and nine months ended March 31,September 30, 2020, amortization of these costs totaled $7.0 million and $35.9 million, respectively. During the three and nine months ended September 30, 2019, amortization of suchthese costs totaled $11.5$12.6 million and $6.4$33.7 million, respectively.
Deferred Certification Costs
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.
Deferred regulatory certification and compliance costs were included in other current assets and other assets on our condensed consolidated balance sheets and totaled $10.7$8.8 million and $10.8 million as of March 31,September 30, 2020 and December 31, 2019, respectively. During the three-month periodsthree and nine months ended March 31,September 30, 2020, amortization of such costs totaled $1.5 million and $7.2 million, respectively. During the three and nine months ended September 30, 2019, amortization of such costs totaled $3.1$2.5 million and $2.8$8.1 million, respectively.
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. Expected future amortization of our contract liabilities and deferred costs recorded as of March 31,September 30, 2020 is set forth in the table below (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Remaining 2020 | | 2021 | | 2022 | | 2023 and Thereafter | | Total |
| Amortization of contract liabilities | $ | 15.1 | | | $ | 26.8 | | | $ | 4.1 | | | $ | 0 | | | $ | 46.0 | |
| Amortization of deferred costs | $ | 7.8 | | | $ | 15.2 | | | $ | 3.3 | | | $ | .5 | | | $ | 26.8 | |
|
| | | | | | | | | | | | | | | | | | | |
| | Remaining 2020 | | 2021 | | 2022 | | 2023 and Thereafter | | Total |
| Amortization of contract liabilities | $ | 21.3 |
| | $ | 9.8 |
| | $ | 2.2 |
| | $ | — |
| | $ | 33.3 |
|
| Amortization of deferred costs | $ | 28.6 |
| | $ | 9.3 |
| | $ | 1.6 |
| | $ | .4 |
| | $ | 39.9 |
|
Note 34 -Rowan Transaction
On April 11, 2019 (the "Transaction Date"), we completed our combination with Rowan pursuant to the Transaction Agreement (the "Rowan Transaction"). Assets acquired and liabilities assumed in the Rowan Transaction were recorded at their estimated fair values as of the Transaction Date under the acquisition method of accounting. When the fair value of the net assets acquired exceeds the consideration transferred in an acquisition, the difference is recorded as a bargain purchase gain in the period in which the transaction occurs. As of March 31, 2020, we completed our fair value assessments of assets acquired and liabilities assumed.
Assets Acquired and Liabilities Assumed
The provisional amounts for assets acquired and liabilities assumed as of the Transaction Date and respective measurement period adjustments were as follows (in millions):
| | | | | | | | | | | |
| Amounts Recognized as of Transaction Date | Measurement Period Adjustments (1) | Estimated Fair Value |
| Assets: | | | |
| Cash and cash equivalents | $ | 931.9 | | $ | 0 | | $ | 931.9 | |
Accounts receivable (2) | 207.1 | | (6.9) | | 200.2 | |
| Other current assets | 101.6 | | (2.6) | | 99.0 | |
| Long-term notes receivable from ARO | 454.5 | | 0 | | 454.5 | |
| Investment in ARO | 138.8 | | 2.5 | | 141.3 | |
| Property and equipment | 2,989.8 | | (26.0) | | 2,963.8 | |
| Other assets | 41.7 | | 1.1 | | 42.8 | |
| Liabilities: | | | |
| Accounts payable and accrued liabilities | 259.4 | | 15.7 | | 275.1 | |
| Current portion of long-term debt | 203.2 | | 0 | | 203.2 | |
| Long-term debt | 1,910.9 | | 0 | | 1,910.9 | |
| Other liabilities | 376.3 | | 34.5 | | 410.8 | |
| Net assets acquired | 2,115.6 | | (82.1) | | 2,033.5 | |
| Less: Merger consideration | (1,402.8) | | 0 | | (1,402.8) | |
| Estimated bargain purchase gain | $ | 712.8 | | $ | (82.1) | | $ | 630.7 | |
|
| | | | | | | | | |
| | Amounts Recognized as of Transaction Date | Measurement Period Adjustments (1) | Estimated Fair Value |
| Assets: | | | |
| Cash and cash equivalents | $ | 931.9 |
| $ | — |
| $ | 931.9 |
|
Accounts receivable (2) | 207.1 |
| (6.9 | ) | 200.2 |
|
| Other current assets | 101.6 |
| (2.6 | ) | 99.0 |
|
| Long-term notes receivable from ARO | 454.5 |
| — |
| 454.5 |
|
| Investment in ARO | 138.8 |
| 2.5 |
| 141.3 |
|
| Property and equipment | 2,989.8 |
| (26.0 | ) | 2,963.8 |
|
| Other assets | 41.7 |
| 1.1 |
| 42.8 |
|
| Liabilities: | | | |
| Accounts payable and accrued liabilities | 259.4 |
| 15.7 |
| 275.1 |
|
| Current portion of long-term debt | 203.2 |
| — |
| 203.2 |
|
| Long-term debt | 1,910.9 |
| — |
| 1,910.9 |
|
| Other liabilities | 376.3 |
| 34.5 |
| 410.8 |
|
| Net assets acquired | 2,115.6 |
| (82.1 | ) | 2,033.5 |
|
| Less: Merger consideration | (1,402.8 | ) | — |
| (1,402.8 | ) |
| Estimated bargain purchase gain | $ | 712.8 |
| $ | (82.1 | ) | $ | 630.7 |
|
(2) Gross contractual amounts receivable totaled $208.3 million as of the Transaction Date.
| |
(1)
| The measurement period adjustments reflect changes in the estimated fair values of certain assets and liabilities, primarily related to long-lived assets, deferred income taxes and uncertain tax positions. The measurement period adjustments were recorded to reflect new information obtained about facts and circumstances existing as of the Transaction Date and did not result from subsequent intervening events. The adjustments recorded resulted in a $6.3 million decline to bargain purchase gain during the three-months ended March 31, 2020 and are included in other, net, in our condensed consolidated statements of operations. |
| |
(2)
| Gross contractual amounts receivable totaled $208.3 million as of the Transaction Date. |
Bargain Purchase Gain
The estimated fair values assigned to assets acquired net of liabilities assumed exceeded the consideration transferred, resulting in a bargain purchase gain primarily driven by the decline in our share price from $33.92 to $15.88 between the last trading day prior to the announcement of the Rowan Transaction and the Transaction Date.
Intangible Assets and Liabilities
We recorded intangible assets and liabilities of $16.2 million and $2.1 million, respectively, representing the estimated fair value of Rowan's firm contracts in place at the Transaction Date with favorable or unfavorable contract terms compared to then-market day rates for comparable drilling rigs.
As a result of a price concession negotiated following the onset of the COVID-19 pandemic, on one of our bare boat charter agreements for a rig leased to our 50/50 joint venture with Saudi Aramco ("ARO"), we recognized a $5.7 million impairment to the related contract intangible during the second quarter of 2020. The impairment was included in loss on impairment in our condensed consolidated statements of operations for the nine months ended September 30, 2020.
Amortization of the intangible assets and liabilities resulted in a net reduction of operating revenues of $1.3$0.5 million and $2.4 million for the three and nine months ended March 31,September 30, 2020. The remaining balance of intangible assets and liabilities of $10.4$3.1 million and $1.2$0.7 million, respectively, was included in other assets and other liabilities, respectively, on our condensed consolidated balance sheet as of March 31,September 30, 2020. These balances will be amortized to operating revenues over the respective remaining contract terms on a straight-line basis. As of March 31,September 30, 2020, the remaining termsterm of the underlying contracts is approximately 1.81.3 years. Amortization of these intangibles is expected to result in a reduction to revenue of $3.8$0.4 million and $5.42.0 millionfor the remainder of 2020 and 2021, respectively.
Uncertain Tax Positions
Uncertain tax positions assumed in a business combination are measured at the largest amount of the 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. As of the Transaction Date, Rowan had previously recognized net liabilities for uncertain tax positions totaling $50.4 million.
During 2019, the Luxembourg tax authorities issued aggregate tax assessments totaling approximately €142.0 million (approximately $156.7$166.5 million converted using the current period-end exchange rate) related to tax years 2014, 2015 and 2016 for several of Rowan's Luxembourg subsidiaries. As a result of our review and analysis of facts and circumstances that existed at the Transaction Date, we recognized liabilities related to the Luxembourg tax assessments totaling €93.0 million (approximately $102.6$109.0 million converted using the current period-end exchange rates). See "Note 13 - Income Taxes" for further information on this matter.
Transaction-related costs
Transaction-related costs were expensed as incurred and consisted of various advisory, legal, accounting, valuation and other professional or consulting fees totaling $5.9$0.2 million duringand $18.0 million for the three and nine months ended March 31,September 30, 2019. These costs were included in general and administrative expense in our condensed consolidated statement of operations.
Revenue and Earnings of Rowan
Our condensed consolidated statements of operations for the three and nine months endedSeptember 30, 2019 include revenues of $138.9 million and $286.2 million, respectively, and net losses of $31.2 million and $95.1 million, respectively, associated with Rowan's operations from the Transaction Date through September 30, 2019.
Unaudited Pro Forma Impact of the Rowan Transaction
The following unaudited supplemental pro forma results present consolidated information as if the Rowan Transaction was completed on January 1, 2019. The pro forma results include, among others, (i) the amortization
associated with acquired intangible assets and liabilities, (ii) a reduction in depreciation expense for adjustments to property and equipment, (iii) the amortization of premiums and discounts recorded on Rowan's debt, (iv) removal of the historical amortization of unrealized gains and losses related to Rowan's pension plans and (v) the amortization of basis differences in assets and liabilities of ARO. The pro forma results do not include any potential synergies or non-recurring charges that may result directly from the Rowan Transaction.
| | | | | | | | | | | | | | |
| (in millions, except per share amounts) | | Three Months Ended September 30, 2019 | | Nine Months Ended September 30, 2019 |
| Revenues | | $ | 552.0 | | | $ | 1,729.5 | |
| Net loss | | $ | (136.0) | | | $ | (788.2) | |
| Loss per share - basic and diluted | | $ | (0.48) | | | $ | (4.02) | |
|
| | | | |
| (in millions, except per share amounts) | | Three Months Ended March 31, 2019 |
| | | |
| Revenues | | $ | 582.0 |
|
| Net loss | | $ | (275.0 | ) |
| Loss per share - basic and diluted | | $ | (1.40 | ) |
| |
(1)
| Pro forma net loss and loss per share were adjusted to exclude an aggregate $9.4 million of transaction - related and integration costs incurred by Ensco and Rowan during three months ended March 31, 2019. |
Note 45 -Equity Method Investment in ARO
Background
ARO, a company that owns and operates offshore drilling rigs in Saudi Arabia, was formed and commenced operations in 2017 pursuant to the terms of an agreement entered into by Rowan and Saudi Aramco to create a 50/50 joint venture ("Shareholder Agreement"). Pursuant to the Rowan Transaction, Valaris acquired Rowan's interest in ARO making Valaris a 50% partner. ARO owns 7 jackup rigs and leases 9 rigs from us through bareboat charter arrangements (the "Lease Agreements") whereby substantially all operating costs are incurred by ARO. As of March 31,September 30, 2020, all 9 of the leased rigs were operating under three-year drilling contracts with Saudi Aramco. The seven rigs owned by ARO, previously purchased from Rowan and Saudi Aramco, are currently operating under contracts with Saudi Aramco for an aggregate 15 years, renewed and re-priced every three years, provided that the rigs meet the technical and operational requirements of Saudi Aramco.
Valaris and Saudi Aramco have agreed to take all steps necessary to ensure that ARO purchases at least 20 newbuild jackup rigs ratably over an approximate 10 -year10-year period. In January 2020, ARO ordered the first two newbuild jackups, each with a shipyard price of $176 million, for delivery scheduled in 2022. The partners intend for the newbuild jackup rigs to be financed out of available cash from ARO's operations and/or funds available from third-party debt financing. In the event ARO has insufficient cash from operations 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. The Company's capital contributions to ARO pursuant to this requirement may require approval of the Bankruptcy Court during the Chapter 11 Cases. Each partner's commitment shall be reduced by the actual cost of each newbuild rig, on a proportionate basis. The partners agreed 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 will be 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.
Upon establishment of ARO, Rowan entered into (1) an agreement to provide certain back-office services for a period of time until ARO develops its own infrastructure (the "Transition Services Agreement"), and (2) an agreement to provide certain Rowan employees through secondment arrangements to assist with various onshore and offshore services for the benefit of ARO (the "Secondment Agreement"). These agreements remainremained in place subsequent to the
Rowan Transaction. Pursuant to these agreements, we or our seconded employees provide various services to ARO, and in return, ARO provides remuneration for those services. From time to time, we may
also sell equipment or supplies to ARO. During the quarter ended June 30, 2020, almost all remaining employees seconded to ARO became employees of ARO.
Summarized Financial Information
The operating revenues of ARO presented below reflect revenues earned under drilling contracts with Saudi Aramco for the 7 ARO-owned jackup rigs andas well as the rigs leased from us that operated during the three months ended us.
March 31, 2020.
The contract drilling expenses, depreciation and general and administrative expenses presented below are also for the three months ended March 31, 2020. Contract drilling expense is inclusive of the bareboat charter fees for the rigs leased from us. Cost incurred under the Secondment Agreement are included in contract drilling expense and general and administrative, depending on the function to which the seconded employee's service relates.related. Substantially all costs incurred under the Transition Services Agreement are included in general and administrative. See additional discussion below regarding these related-party transactions.
Summarized financial information for ARO is as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, | | April 11 - September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Revenues | | $ | 145.6 | | | $ | 138.4 | | | $ | 431.9 | | | $ | 262.2 | |
| Operating expenses | | | | | | | | |
| Contract drilling (exclusive of depreciation) | | 99.0 | | | 92.7 | | | 319.8 | | | 171.7 | |
| Depreciation | | 14.8 | | | 14.6 | | | 41.1 | | | 26.9 | |
| General and administrative | | 5.8 | | | 8.8 | | | 21.2 | | | 13.9 | |
| Operating income | | 26.0 | | | 22.3 | | | 49.8 | | | 49.7 | |
| Other expense, net | | 6.7 | | | 9.9 | | | 20.0 | | | 18.8 | |
| Provision (Benefit) for income taxes | | (6.1) | | | 2.2 | | | (5.4) | | | 3.8 | |
| Net income | | $ | 25.4 | | | $ | 10.2 | | | $ | 35.2 | | | $ | 27.1 | |
|
| | | |
| | Three Months Ended March 31, 2020 |
| Revenues | $ | 140.3 |
|
| Operating expenses | |
| Contract drilling (exclusive of depreciation) | 108.3 |
|
| Depreciation | 13.0 |
|
| General and administrative | 8.3 |
|
| Operating income | 10.7 |
|
| Other expense, net | 6.6 |
|
| Provision for income taxes | .9 |
|
| Net income | $ | 3.2 |
|
| | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
| Current assets | $ | 391.9 | | | $ | 407.2 | |
| Non-current assets | 898.2 | | | 874.8 | |
| Total assets | $ | 1,290.1 | | | $ | 1,282.0 | |
| | | |
| Current liabilities | $ | 230.8 | | | $ | 183.2 | |
| Non-current liabilities | 940.8 | | | 1,015.5 | |
| Total liabilities | $ | 1,171.6 | | | $ | 1,198.7 | |
|
| | | | | | | |
| | March 31, 2020 | | December 31, 2019 |
| Current assets | $ | 351.2 |
| | $ | 407.2 |
|
| Non-current assets | 943.8 |
| | 874.8 |
|
| Total assets | $ | 1,295.0 |
|
| $ | 1,282.0 |
|
| | | | |
| Current liabilities | $ | 215.6 |
| | $ | 183.2 |
|
| Non-current liabilities | 992.9 |
| | 1,015.5 |
|
| Total liabilities | $ | 1,208.5 |
|
| $ | 1,198.7 |
|
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 condensed 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.
As a result of the Rowan Transaction, we recorded our equity method investment in ARO at its estimated fair value on the Transaction Date. Additionally, we computed the difference between the fair value of ARO's net assets and the carrying value of those net assets in ARO's US GAAP financial statements ("basis differences"). The basis differences primarily relate to ARO's long-lived assets and the recognition of intangible assets associated with certain of ARO's drilling contracts that were determined to have favorable terms as of the Transaction Date. The basis differences are amortized over the remaining life of the assets or liabilities to which they relate and are recognized as an adjustment to the equity in earnings of ARO in our condensed consolidated statements of operations. The amortization of those basis differences are combined with our 50% interest in ARO's net income. A reconciliation of those components is presented below (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, | | April 11 - September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| 50% interest in ARO net income | | $ | 12.7 | | | $ | 5.1 | | | $ | 17.6 | | | 13.6 | |
| Amortization of basis differences | | (8.8) | | | (8.8) | | | (25.2) | | | (16.7) | |
| Equity in earnings (losses) of ARO | | $ | 3.9 | | | $ | (3.7) | | | $ | (7.6) | | | $ | (3.1) | |
|
| | | |
| | Three Months Ended March 31, 2020 |
| 50% interest in ARO net income | $ | 1.6 |
|
| Amortization of basis differences | (7.9 | ) |
| Equity in earnings of ARO | $ | (6.3 | ) |
Related-Party Transactions
Revenues recognized by us related to the Lease Agreements, Transition Services Agreement and Secondment Agreement are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, | | April 11 - September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Lease revenue | | $ | 21.0 | | | $ | 19.9 | | | $ | 62.4 | | | $ | 37.0 | |
| Secondment revenue | | .8 | | | 17.9 | | | 20.8 | | | 33.5 | |
| Transition Services revenue | | .2 | | | 5.0 | | | 2.2 | | | 10.2 | |
Total revenue from ARO (1) | | $ | 22.0 | | | $ | 42.8 | | | $ | 85.4 | | | $ | 80.7 | |
| | | | | | | | |
|
| | | |
| | Three Months Ended March 31, 2020 |
| Lease revenue | $ | 21.5 |
|
| Secondment revenue | 18.3 |
|
| Transition Services revenue | 3.5 |
|
Total revenue from ARO (1) | $ | 43.3 |
|
| |
(1)(1) All of the revenues presented above are included in our Other segment in our segment disclosures. See "Note 15- Segment Information" for additional information. | All of the revenues presented above are included in our Other segment in our segment disclosures. See Note 14 - Segment Information for additional information. |
Amounts receivable from ARO related to the items above items totaled $34.0$13.7 million and $21.8 million as of March 31,September 30, 2020 and December 31, 2019, respectively, and are included in accounts receivable, net, on our condensed consolidated balance sheets. Accounts payable to ARO totaled $0.7 million
Additionally, as of March 31, 2020 and December 31, 2019.
We also2019, we had a receivable from ARO of $14.2 million related to an agreement between us and ARO, pursuant to which ARO willwould reimburse us for certain capital expenditures related to the shipyard upgrade projects for the VALARIS JU-147 and VALARIS JU-148. As of December 31, 2019, $14.2 million related to reimbursement of these expenditures were outstanding and included in accounts receivable, net, on our condensed consolidated balance sheet. Such amount was received in the first quarter of 2020.
We had no amounts payable to ARO as of September 30, 2020 and $0.7 million as of December 31, 2019.
During 2017 and 2018, Rowan contributed cash to ARO in exchange for 10-year shareholder notes receivable at a stated interest rate of LIBOR plus two percent. As of March 31,September 30, 2020 and December 31, 2019, the carrying amount of the long-term notes receivable from ARO was $442.7 million and $452.9 million.million, respectively. The Shareholders’ Agreement prohibits the sale or transfer of the shareholder note to a third party, except in certain limited circumstances. The notes receivable may be reduced by future Company obligations to the joint venture. During the nine months ended September 30, 2020, we recorded $10.2 million of employee benefit obligations against our long-term notes receivable from ARO. Interest is recognized as interest income in our condensed consolidated statement of operations and totaled $4.6$4.5 million and $13.7 million for the three and nine
months ended September 30, 2020, respectively, $5.8 million and $10.9 million for the three months ended March 31, 2020.September 30, 2019 and for the period from April 11 through September 30, 2019, respectively. As of March 31,September 30, 2020, we hadour interest receivable from ARO of $4.6was $13.7 million, which is included in Other current assetsAccounts receivables, net on our condensed consolidated balance sheet. There was no interest receivable from ARO as of December 31, 2019.
Maximum Exposure to Loss
The following summarizes the total assets and liabilities as reflected in our condensed consolidated balance sheet 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;ARO, (2) the outstanding balance on our shareholder notes receivable;receivable, and (3) other receivables forand contract assets related to services provided to ARO, partially offset by payables for services received.
| | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 |
| Total assets | | $ | 597.8 | | | $ | 623.5 | |
| Less: total liabilities | | 0 | | | .7 | |
| Maximum exposure to loss | | $ | 597.8 | | | $ | 622.8 | |
|
| | | |
| | March 31, 2020 |
| Total assets | $ | 613.9 |
|
| Less: total liabilities | .7 |
|
| Maximum exposure to loss | $ | 613.2 |
|
Note 56 -Fair Value Measurements
The following fair value hierarchy table categorizes information regarding our financial assets and liabilities measured at fair value on a recurring basis (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Quoted Prices in Active Markets for Identical Assets
(Level 1) | | Significant Other Observable Inputs
(Level 2) | | Significant Unobservable Inputs
(Level 3) | | Total |
| As of September 30, 2020 | | | | | | | |
| Supplemental executive retirement plan assets | $ | 21.9 | | | $ | 0 | | | $ | 0 | | | $ | 21.9 | |
| Total financial assets | 21.9 | | | 0 | | | 0 | | | 21.9 | |
| | | | | | | |
| | | | | | | |
| As of December 31, 2019 | | | | | | | |
| Supplemental executive retirement plan assets | $ | 26.0 | | | $ | 0 | | | $ | 0 | | | $ | 26.0 | |
| Derivatives, net | 0 | | | 5.4 | | | 0 | | | 5.4 | |
| Total financial assets | $ | 26.0 | | | $ | 5.4 | | | $ | 0 | | | $ | 31.4 | |
|
| | | | | | | | | | | | | | | |
| | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
| As of March 31, 2020 | | | |
| | |
| | |
|
| Supplemental executive retirement plan assets | $ | 21.2 |
| | $ | — |
| | $ | — |
| | $ | 21.2 |
|
| Total financial assets | 21.2 |
|
| — |
|
| — |
|
| 21.2 |
|
| Derivatives, net | — |
| | (12.6 | ) | | — |
| | (12.6 | ) |
| Total financial liabilities | $ | — |
|
| $ | (12.6 | ) | | $ | — |
| | $ | (12.6 | ) |
| As of December 31, 2019 | | | |
| | |
| | |
|
| Supplemental executive retirement plan assets | $ | 26.0 |
| | $ | — |
| | $ | — |
| | $ | 26.0 |
|
| Derivatives, net | — |
| | 5.4 |
| | — |
| | 5.4 |
|
| Total financial assets | $ | 26.0 |
| | $ | 5.4 |
| | $ | — |
| | $ | 31.4 |
|
Supplemental Executive Retirement Plan Assets
Our Valaris supplemental executive retirement plans (the "SERP") are non-qualified plans that provideprovided eligible employees an opportunity to defer a portion of their compensation for use after retirement. The SERPs were frozen to the entry of new participants in November 2019 and to future compensation deferrals as of January 1, 2020. Assets held in a rabbi trust maintained for the SERP wereare marketable securities measured at fair value on a recurring basis using Level 1 inputs and were included in other assets, net, on our consolidated balance sheets as of March 31,September 30, 2020 and December 31, 2019. The fair value measurements of assets held in the SERP were based on quoted market prices.
Derivatives
As of September 30, 2020, we had no derivative contracts outstanding See "Note 9 - Derivative Instruments" for additional information on the Chapter 11 Cases impact to our derivatives. Our derivatives were measured at fair value on a recurring basis using Level 2 inputs. See "Note 89 - Derivative Instruments" for additional information on our derivatives, including a description of our foreign currency hedging activities and related methodologies used to manage foreign currency exchange rate risk. The fair value measurements of our prior derivatives were based on market prices that are generally observable for similar assets or liabilities at commonly quoted intervals.
Other Financial Instruments
The carrying values and estimated fair values of our debt instruments were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Subject to Compromise (1) | | | | |
| September 30,
2020 | | December 31,
2019 |
| Carrying Value | | Estimated Fair Value | | Carrying Value | | Estimated Fair Value |
| 6.875% Senior notes due 2020 | $ | 122.9 | | | $ | 8.7 | | | $ | 124.8 | | | $ | 117.3 | |
| 4.70% Senior notes due 2021 | 100.7 | | | 4.6 | | | 113.2 | | | 95.5 | |
| 4.875% Senior notes due 2022 | 620.8 | | | 37.2 | | | 599.2 | | | 460.5 | |
3.00% Exchangeable senior notes due 2024(2) | 849.5 | | | 110.4 | | | 699.0 | | | 607.4 | |
| 4.50% Senior notes due 2024 | 303.4 | | | 13.1 | | | 302.0 | | | 167.2 | |
| 4.75% Senior notes due 2024 | 318.6 | | | 19.5 | | | 276.5 | | | 201.4 | |
| 8.00% Senior notes due 2024 | 292.3 | | | 14.0 | | | 295.7 | | | 181.7 | |
| 5.20% Senior notes due 2025 | 333.7 | | | 15.4 | | | 331.7 | | | 186.7 | |
| 7.375% Senior notes due 2025 | 360.8 | | | 29.8 | | | 329.2 | | | 218.6 | |
| 7.75% Senior notes due 2026 | 1,000.0 | | | 49.4 | | | 987.1 | | | 575.1 | |
| 7.20% Debentures due 2027 | 112.1 | | | 12.9 | | | 111.7 | | | 70.0 | |
| 7.875% Senior notes due 2040 | 300.0 | | | 17.3 | | | 373.3 | | | 153.5 | |
| 5.40% Senior notes due 2042 | 400.0 | | | 32.0 | | | 262.8 | | | 194.4 | |
| 5.75% Senior notes due 2044 | 1,000.5 | | | 53.0 | | | 973.3 | | | 450.0 | |
| 5.85% Senior notes due 2044 | 400.0 | | | 25.1 | | | 268.8 | | | 194.8 | |
Amounts borrowed under revolving credit facility(3) | 581.0 | | | 581.0 | | | 0 | | | 0 | |
| Total debt | $ | 7,096.3 | | | $ | 1,023.4 | | | $ | 6,048.3 | | | $ | 3,874.1 | |
| | | | | | | |
| | | | | | | |
|
| | | | | | | | | | | | | | | |
| | March 31,
2020 | | December 31,
2019 |
| | Carrying Value | | Estimated Fair Value | | Carrying Value | | Estimated Fair Value |
| 6.875% Senior notes due 2020 | $ | 124.1 |
| | $ | 27.8 |
| | $ | 124.8 |
| | $ | 117.3 |
|
| 4.70% Senior notes due 2021 | 100.4 |
| | 10.4 |
| | 113.2 |
| | 95.5 |
|
| 4.875% Senior notes due 2022 | 601.2 |
| | 125.9 |
| | 599.2 |
| | 460.5 |
|
3.00% Exchangeable senior notes due 2024(1) | 707.7 |
| | 214.3 |
| | 699.0 |
| | 607.4 |
|
| 4.50% Senior notes due 2024 | 302.0 |
| | 28.6 |
| | 302.0 |
| | 167.2 |
|
| 4.75% Senior notes due 2024 | 278.6 |
| | 64.2 |
| | 276.5 |
| | 201.4 |
|
| 8.00% Senior notes due 2024 | 295.5 |
| | 27.6 |
| | 295.7 |
| | 181.7 |
|
| 5.20% Senior notes due 2025 | 331.8 |
| | 33.8 |
| | 331.7 |
| | 186.7 |
|
| 7.375% Senior notes due 2025 | 330.2 |
| | 82.6 |
| | 329.2 |
| | 218.6 |
|
| 7.75% Senior notes due 2026 | 987.7 |
| | 107.7 |
| | 987.1 |
| | 575.1 |
|
| 7.20% Debentures due 2027 | 111.7 |
| | 16.6 |
| | 111.7 |
| | 70.0 |
|
| 7.875% Senior notes due 2040 | 372.8 |
| | 46.9 |
| | 373.3 |
| | 153.5 |
|
| 5.40% Senior notes due 2042 | 263.2 |
| | 78.8 |
| | 262.8 |
| | 194.4 |
|
| 5.75% Senior notes due 2044 | 974.2 |
| | 93.5 |
| | 973.3 |
| | 450.0 |
|
| 5.85% Senior notes due 2044 | 269.1 |
| | 80.6 |
| | 268.8 |
| | 194.8 |
|
Amounts borrowed under credit facility(2) | 322.9 |
| | 328.9 |
| | — |
| | — |
|
| Total debt | $ | 6,373.1 |
| | $ | 1,368.2 |
| | $ | 6,048.3 |
| | $ | 3,874.1 |
|
| Less: current maturities | 224.5 |
| | — |
| | 124.8 |
| | — |
|
| Total long-term debt | $ | 6,148.6 |
|
| $ | 1,368.2 |
|
| $ | 5,923.5 |
|
| $ | 3,874.1 |
|
(1) The Commencement of the Chapter 11 Cases on August 19, 2020, constituted an event of default under our Senior Notes and revolving credit facility. Any efforts to enforce payment obligations under the Senior Notes and revolving credit facility, including any rights to require the repurchase by the Company of the 2024 Convertible Notes (as defined below) upon the NYSE delisting of the Class A ordinary shares, are automatically stayed as a result of the filing of the Chapter 11 Cases. The carrying amounts above represent the aggregate principal amount of Senior Notes outstanding as well as outstanding borrowings under our revolving credit facility as of the Petition Date and are classified as Liabilities Subject to Compromise in our Condensed Consolidated Balance Sheet as of September 30, 2020. We discontinued accruing interest on our indebtedness following the Petition Date and all accrued interest as of the Petition Date is classified as Liabilities Subject to Compromise in our Condensed Consolidated Balance Sheet as of September 30, 2020. Additionally, we incurred a net non-cash charge of $447.9 million to write off any unamortized debt discounts, premiums and issuance costs, including the amounts related to the 2024 Convertible Notes discussed below, which is included in Reorganization Items, net on our Condensed Consolidated Statement
| |
(1)
of Operations for the three and nine months ended September 30, 2020. See "Note 2 - Chapter 11 Proceedings and Ability to Continue as a Going Concern" for additional information.
(2) Our 2024 Convertible Notes are exchangeable into cash, our Class A ordinary shares or a combination thereof. The 2024 Convertible Notes were separated, at issuance, into their liability and equity components on our Condensed Consolidated Balance Sheet. The equity component was initially recorded to additional paid-in capital and as a debt discount and the discount was being amortized to interest expense over the life of the instrument. As discussed above, the carrying amount at September 30, 2020 represents the aggregate principal amount of these notes as of the Petition Date and are classified as Liabilities Subject to Compromise in our Condensed Consolidated Balance Sheet as of September 30, 2020. We discontinued accruing interest on these notes as of the Petition Date. Additionally, we incurred a net non-cash charge of $128.8 million to write off $119.5 million of unamortized debt discount and $9.3 million of unamortized debt issuance costs related to these notes, which is included in Reorganization Items, net on our Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2020. The equity component is $220.0 million at September 30, 2020 and remains in Additional Paid-Capital.
(3) In addition to the amount borrowed above, we had $41.2 million in undrawn letters of credit issued under the revolving credit facility.
While the revolving credit facility has not been terminated, no further borrowings are permitted. As discussed above, the carrying amount at September 30, 2020 represents the outstanding borrowings as of the Petition Date and are classified as Liabilities Subject to Compromise in our Condensed Consolidated Balance Sheet as of September 30, 2020. We discontinued accruing interest on the revolving credit facility as of the Petition Date and wrote off any unamortized debt issuance costs.
| Our 2024 Convertible Notes were issued with a conversion feature. The 2024 Convertible Notes were separated into their liability and equity components on our condensed consolidated balance sheet. The equity component was initially recorded to additional paid-in capital and as a debt discount that will be amortized to interest expense over the life of the instrument. Excluding the unamortized discount, the carrying value of the 2024 Convertible Notes was $839.2 million and $838.3 million as of March 31, 2020 and December 31, 2019, respectively. |
| |
(2)
| Total outstanding borrowings under our credit facility are $328.9 million and are recorded net of $6.0 million of unamortized deferred financing cost on our condensed consolidated balance sheet. In addition, we have $3.2 million in letters of credit issued under our credit facility, leaving $1.3 billion of undrawn borrowing capacity. |
The estimated fair values of our senior notes and debentures were determined using quoted market prices, which are level 1 inputs. The estimated fair values of our cash and cash equivalents, accounts receivable, notes receivable, trade payables and other liabilities approximated their carrying values as of March 31,September 30, 2020 and December 31, 2019.
Note 67 -Property and Equipment
Property and equipment as of March 31,September 30, 2020 and December 31, 2019 consisted of the following (in millions):
| | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 |
| Drilling rigs and equipment | | $ | 12,552.2 | | | $ | 17,714.0 | |
| Work-in-progress | | 473.3 | | | 473.6 | |
| Other | | 190.0 | | | 206.2 | |
| | $ | 13,215.5 | | | $ | 18,393.8 | |
|
| | | | | | | | |
| | | March 31, 2020 | | December 31, 2019 |
| Drilling rigs and equipment | | $ | 13,792.0 |
| | $ | 17,714.0 |
|
| Work-in-progress | | 482.4 |
| | 473.6 |
|
| Other | | 187.5 |
| | 206.2 |
|
| | | $ | 14,461.9 |
| | $ | 18,393.8 |
|
Impairment of Long-Lived Assets
During the first and second quarters of 2020, we recorded an aggregate pre-tax, non-cash impairment with respect to certain floaters, jackups and spare equipment of $3.6 billion which is included in loss on impairment in our Condensed Consolidated Statement of Operations.
During the third quarter of 2019, we decided to retire VALARIS 5006, and classified the rig as held-for-sale. We recognized a pre-tax, non-cash impairment charge of $88.2 million, which represents the difference between the carrying value of the rig and related assets and their estimated fair values, less selling costs.
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.
During the first quarter of 2020, the coronavirusCOVID-19 global pandemic and the response thereto has negatively impacted the macro-economic environment and global economy. Global oil demand has fallenfell sharply at the same time global oil supply has increased as a result of certain oil producers competing for market share leadingwhich lead to a supply glut. As a consequence, Brent crude oil has fallenfell from around $60 per barrel at year-end 2019 to around $20 per barrel as of mid-April 2020. In responseThese adverse changes and impacts to dramatically reduced oil price expectations for the near term, our customers are reviewing and in most cases lowering significantly, theircustomer's capital expenditure plans in light of revised pricing expectations. Customers are expected to continue to operate under reduced budgets until we see a meaningful recovery in commodity prices. The significant supply and demand imbalance will continue to be adversely impacted by future newbuild deliveries, program delays and lower capital spending by operators. These adverse changes in the first quarter resulted in further deterioration in our forecasted day rates and utilization for the remainder of 2020 and beyond. As a result, we concluded that a triggering event had occurred and we performed a fleet-wide recoverability test. We determined that our estimated undiscounted cash flows were not sufficient to recover the carrying values of certain rigs and concluded such were impaired as of March 31, 2020.
Based on the asset impairment analysis performed as of March 31, 2020, we recorded a pre-tax, non-cash loss on impairment in the first quarter with respect to certain floaters, jackups and spare equipment totaling $2.8 billion. The impairment charge was included in loss on impairment in our condensed consolidated statement of operations for the three months ended March 31, 2020. We measured the fair value of these assets to be $72.3 million asat the time of March 31, 2020impairment by applying either an income approach, using projected discounted cash flows or estimated scrap value. 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 taketook into account then current market conditions and our anticipated business outlook at that time, both of which havehad been impacted by the adverse changes in the business environment observed during the first quarter.
Assets held-for-sale
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. We continue to focus on our fleet management strategy in light of the composition of our rig fleet. While taking into account certain restrictions on the sales of assets under our DIP Credit Agreement, as part of our strategy, we may 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 older, lower-specification or non-core rigs. To this end, we continually assess our rig portfolio and actively work with our rig broker to market certain rigs.
On a quarterly basis, we assess whether any rig meets the criteria established for held-for-sale classification on our balance sheet. All rigs classified as held-for-sale are recorded at fair value, less costs to sell. We measure the fair value of our assets held-for-sale by applying a market approach based on unobservable third-party estimated prices that would be received in exchange for the assets in an orderly transaction between market participants or a negotiated sales price. We reassess the fair value of our held-for-sale assets on a quarterly basis and adjust the carrying value, as necessary.
During the second quarter of 2020, we classified the following rigs as held-for-sale: VALARIS 8500, VALARIS 8501, VALARIS 8502, VALARIS DS-3, VALARIS DS-5, VALARIS DS-6 and VALARIS JU-105. The carrying value of these rigs was reduced to fair value, less costs to sell, based on their estimated sales price and we recorded a pre-tax, non-cash loss on impairment totaling $15.0 million, which was included in loss on impairment in our condensed consolidated statement of operations for the nine months ended September 30, 2020. These rigs were subsequently sold during the third quarter.
During the third quarter of 2020, we began marketing VALARIS 8504, VALARIS JU-84 and VALARIS JU-88 for sale. We concluded that these rigs met the held-for-sale criteria during the third quarter of 2020 and the fair value, less costs to sell, based on each rig's estimated sales price, was in excess of the respective carrying value. As a result, we concluded that 0 impairment of these rigs had occurred as of September 30, 2020. In October 2020, we completed the sale of VALARIS JU-84 and VALARIS JU-88.
Our 3 held-for-sale rigs had a remaining aggregate carrying value of $4.6 million and are included in other assets, net, on our Condensed Consolidated Balance Sheet as of September 30, 2020.
Note 78 -Pension and Other Post-retirement Benefits
We have defined-benefit pension plans and a retiree medical plan that provides post-retirement health and life insurance benefits.
The components of net periodic pension and retiree medical cost were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended
September 30, | | Nine Months Ended
September 30, | | April 11 - September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Service cost (1) | | $ | .7 | | | $ | .5 | | | $ | 2.0 | | | $ | 1.0 | |
Interest cost (2) | | 6.6 | | | 7.7 | | | 19.5 | | | 13.9 | |
Expected return on plan assets (2) | | (9.6) | | | (9.4) | | | (28.6) | | | (17.6) | |
| Net periodic pension and retiree medical cost (income) | | $ | (2.3) | | | $ | (1.2) | | | $ | (7.1) | | | $ | (2.7) | |
|
| | | |
| | Three Months Ended March 31, 2020 |
Service cost (1) | $ | .6 |
|
Interest cost (2) | 6.5 |
|
Expected return on plan assets (2) | (9.5 | ) |
| Net periodic pension cost | $ | (2.4 | ) |
(1)Included in contract drilling and general and administrative expense in our Condensed Consolidated Statements of Operations.
| |
(1)(2)Included in other, net, in our condensed consolidated statements of operations.
| Included in contract drilling and general and administrative expense in our condensed consolidated statements of operations. |
| |
(2)
| Included in other, net, in our condensed consolidated statements of operations. |
During the threenine months ended March 31,September 30, 2020, we contributed $4.0$11.0 million to our pension and other post-retirement benefit plans and expectplans. The U. S. Cares Act provides relief for pension payments allowing for deferral of approximately $21.0 million of anticipated payments to make additional contributions to such plans totaling approximately $32.6 million for the remainder of 2020, whichJanuary 1, 2021. 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.
Note 89 -Derivative Instruments
Our functional currency is the U.S. dollar. As is customary in the oil and gas industry, a majority of our revenues 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. We usepreviously used derivatives to reduce our exposure to various market risks, primarily foreign currency exchange rate risk.
The commencement of the Chapter 11 Cases constituted a termination event with respect to the Company’s derivative instruments, which permits the counterparties of our derivative instruments to terminate their outstanding contracts. The exercise of these termination rights are not stayed under the Bankruptcy Code. During September 2020, the counterparties to the Company’s derivative instruments elected to terminate their outstanding derivatives with us for an aggregate settlement of $3.6 million which was recorded as a gain in contract drilling expense in our Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2020 related to this termination.
All derivatives were recorded on our condensed consolidated balance sheets at fair value. Derivatives subject to legally enforceable master netting agreements were not offset on our condensed consolidated balance sheets.Condensed Consolidated Balance Sheets. Accounting for the gains and losses resulting from changes in the fair value of derivatives dependsdepended on the use of the derivative and whether it qualifiesqualified for hedge accounting. As of March 31, 2020 and December 31, 2019, our condensed consolidated balance sheets included net foreign currency derivative liabilities of $12.6 million and assets of $5.4 million, respectively. All of our derivative instruments mature during the next 18 months.million. See "Note 56- Fair Value Measurements" for additional information on the fair value measurement of our derivatives.
Derivatives recorded at fair value on our condensed consolidated balance sheets consisted of the following (in millions):
| | | | Derivative Assets | | Derivative Liabilities | | | Derivative Assets | | | Derivative Liabilities |
| | March 31,
2020 | | December 31,
2019 | | March 31,
2020 | | December 31,
2019 | | | December 31,
2019 | | | December 31,
2019 |
| Derivatives Designated as Hedging Instruments | | | |
| | |
| | |
| Derivatives Designated as Hedging Instruments | | | | | |
Foreign currency forward contracts - current(1) | $ | 1.0 |
| | $ | 4.2 |
| | $ | 10.8 |
| | $ | .7 |
| Foreign currency forward contracts - current(1) | | $ | 4.2 | | | | $ | .7 | |
Foreign currency forward contracts - non-current(2) | .1 |
| | .8 |
| | 1.3 |
| | — |
| Foreign currency forward contracts - non-current(2) | | .8 | | | | 0 | |
| | $ | 1.1 |
| | $ | 5.0 |
| | $ | 12.1 |
| | $ | .7 |
| | | $ | 5.0 | | | | $ | .7 | |
| | | | | | | | | | | | | |
| Derivatives not Designated as Hedging Instruments | | | |
| | |
| | |
| Derivatives not Designated as Hedging Instruments | | | | | |
Foreign currency forward contracts - current(1) | $ | 1.7 |
| | $ | 1.3 |
| | $ | 3.3 |
| | $ | .2 |
| Foreign currency forward contracts - current(1) | | $ | 1.3 | | | | $ | .2 | |
| Total | $ | 2.8 |
| | $ | 6.3 |
| | $ | 15.4 |
| | $ | .9 |
| Total | | $ | 6.3 | | | | $ | .9 | |
| |
(1)(1)Derivative assets and liabilities that had maturity dates equal to or less than 12 months from the respective balance sheet dates were included in other current assets and accrued liabilities and other, respectively, on our condensed consolidated balance sheets. (2)Derivative assets and liabilities that had maturity dates greater than 12 months from the respective balance sheet dates were included in other assets and other liabilities, respectively, on our condensed consolidated balance sheets. | Derivative assets and liabilities that have maturity dates equal to or less than 12 months from the respective balance sheet dates were included in other current assets and accrued liabilities and other, respectively, on our condensed consolidated balance sheets. |
| |
(2)
| Derivative assets and liabilities that have maturity dates greater than 12 months from the respective balance sheet dates were included in other assets and other liabilities, respectively, on our condensed consolidated balance sheets. |
We utilize cash flow hedges to hedge forecasted foreign currency denominated transactions, primarily to reduce our exposure to foreign currency exchange rate risk associated with contract drilling expenses and capital expenditures denominated in various currencies. As of March 31, 2020, we had cash flow hedges outstanding to exchange an aggregate $206.4 million for various foreign currencies, including $119.8 million for British pounds, $55.7 million for Australian dollars, $13.5 million for euros, $8.4 million for Norwegian krone, $5.6 million for Singapore dollars, and $3.4 million for Brazilian reals.
Gains and losses, net of tax, on derivatives designated as cash flow hedges included in our condensed consolidated statements of operations and comprehensive loss for the three-month periods ended March 31, 2020 and 2019income (loss) were as follows (in millions):
|
| | | | | | | | | | | | | | | |
| | Loss Recognized in Other Comprehensive Loss ("OCI") on Derivatives (Effective Portion) | | (Gain) Loss Reclassified from ("AOCI") into Income (Effective Portion)(1) |
| | 2020 | | 2019 | | 2020 | | 2019 |
Interest rate lock contracts(2) | $ | — |
| | $ | — |
| | $ | — |
| | $ | .1 |
|
Foreign currency forward contracts(3) | (12.9 | ) | | — |
| | (.1 | ) | | 1.5 |
|
| Total | $ | (12.9 | ) | | $ | — |
| | $ | (.1 | ) | | $ | 1.6 |
|
| |
(1)
| Changes in the fair value of cash flow hedges are recorded in AOCI. Amounts recorded in AOCI associated with cash flow hedges are subsequently reclassified into contract drilling, depreciation or interest expense as earnings are affected by the underlying hedged forecasted transaction. |
| |
(2)
| Losses on interest rate lock derivatives reclassified from AOCI into income were included in interest expense, net, in our condensed consolidated statements of operations. |
| | | | | | | | | | | | | | | | | | | | | | | |
| Gain (Loss) Recognized in
Other Comprehensive Loss
("OCI") on Derivatives
(Effective Portion) | | (Gain) Loss Reclassified from ("AOCI") into Income (Effective Portion)(1) |
| 2020 | | 2019 | | 2020 | | 2019 |
Interest rate lock contracts(2) | $ | — | | | $ | — | | | $ | — | | | $ | 1.7 | |
Foreign currency forward contracts(3) | $ | 2.7 | | | $ | (5.7) | | | $ | (.5) | | | $ | 3.2 | |
| Total | $ | 2.7 | | | $ | (5.7) | | | $ | (.5) | | | $ | 4.9 | |
| |
(3)
Nine Months Ended September 30, 2020 and 2019 | | | | | | | | | | | | | | | | | | | | | | | | | Loss Recognized in Other Comprehensive Loss ("OCI") on Derivatives (Effective Portion) | | (Gain) Loss Reclassified from ("AOCI") into Income (Effective Portion)(1) | | | 2020 | | 2019 | | 2020 | | 2019 | Interest rate lock contracts(2) | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 1.8 | | Foreign currency forward contracts(4) | (5.4) | | | (7.3) | | | (11.5) | | | 6.5 | | | Total | $ | (5.4) | | | $ | (7.3) | | | $ | (11.5) | | | $ | 8.3 | |
(1)Changes in the fair value of cash flow hedges are recorded in AOCI. Amounts recorded in AOCI associated with cash flow hedges are subsequently reclassified into contract drilling, depreciation or interest expense as earnings are affected by the underlying hedged forecasted transaction.
(2)Losses on interest rate lock derivatives reclassified from AOCI into income were included in interest expense, net, in our condensed consolidated statements of operations.
(3)During the three months ended September 30, 2020, $0.5 million of gains were reclassified from AOCI into contract drilling expense and no gain or loss were reclassified from AOCI into depreciation expense in our condensed consolidated statement of operations. During the three months ended September 30, 2019, $3.4 million of losses were reclassified from AOCI into contract drilling expense and $0.2 million of gains were reclassified from AOCI into depreciation expense in our condensed consolidated statement of operations.
(4)During the nine months ended September 30, 2020, $2.0 million of losses were reclassified from AOCI into contract drilling expense and $13.5 million of gains were reclassified from AOCI into depreciation expense in our condensed consolidated statement of operations. During the nine months ended September 30, 2019, $7.1 million of losses were reclassified from AOCI into contract drilling expense and $0.6 million of gains were reclassified from AOCI into depreciation expense in our condensed consolidated statement of operations.
| During the three months ended March 31, 2020, $0.9 million of losses were reclassified from AOCI into contract drilling expense and $1.0 million of gains were reclassified from AOCI into depreciation expense in our condensed consolidated statement of operations. During the three months ended March 31, 2019, $1.7 million of losses were reclassified from AOCI into contract drilling expense and $0.2 million of gains were reclassified from AOCI into depreciation expense in our condensed consolidated statement of operations. |
We have net assets and liabilities denominated in numerous foreign currencies and use various methods to manage our exposure to foreign currency exchange rate risk. 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. We occasionally enterentered into derivatives that hedge the fair value of recognized foreign currency denominated assets or liabilities but dodid not designate such derivatives as hedging instruments. In these situations, a natural hedging relationship generally existsexisted whereby changes in the fair value of the derivatives offset changes in the fair value of the underlying hedged items. As of March 31,September 30, 2020, we held derivativesdid not designated as hedging instrumentshave open derivative contracts to exchange an aggregate $65.0 million for various foreign currencies, including $21.8 million for Euros, $20.7 million for British pounds, $8.3 million for Norwegian krone, $5.5 million for Nigerian Naira, 5.4 million for Egyptian dollars and $3.3 million for other currencies.hedge against this risk.
Net losses of $0.1$1.5 million and $3.1$2.3 million associated with our derivatives not designated as hedging instruments were included in other, net, in our condensed consolidated statements of operations for the three-month periods three monthsended March 31,September 30, 2020 and 2019. Net losses of $0.2 million and $7.6 million associated with our derivatives not designated as hedging instruments were included in other, net, in our condensed consolidated statements of operations for the nine months ended September 30, 2020 and 2019, respectively.
As of March 31, 2020, the estimated amount of net losses associated with derivatives, net of tax, that will be reclassified to earnings during the next 12 months totaled $7.9 million.
Note 910 - Earnings Per Share
We compute basic and diluted earnings per share ("EPS") in accordance with the two-class method. Net loss attributable to Valaris used in our computations of basic and diluted EPS is adjusted to exclude net income allocated to non-vested shares granted to our employees and non-employee directors. Weighted-average shares outstanding used in our computation of diluted EPS is calculated using the treasury stock method and includes the effect of all potentially dilutive stock options and excludes non-vested shares. In each of the three-month periodsthree and nine months ended March 31,September 30, 2020 and 2019, our potentially dilutive instruments were not included in the computation of diluted EPS as the effect of including these shares in the calculation would have been anti-dilutive.
The following table is a reconciliation of lossincome (loss) from continuing operations attributable to Valaris shares used in our basic and diluted EPS computations for the three-monthperiodsthree and nine months ended March 31,September 30, 2020 and 2019 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| Income (loss) from continuing operations attributable to Valaris | $ | (670.9) | | | $ | (197.1) | | | $ | (4,784.6) | | | $ | 18.0 | |
Income from continuing operations allocated to non-vested share awards(1) | 0 | | | 0 | | | 0 | | | (.6) | |
| Income (loss) from continuing operations attributable to Valaris shares | $ | (670.9) | | | $ | (197.1) | | | $ | (4,784.6) | | | $ | 17.4 | |
|
| | | | | | | |
| | Three Months Ended March 31, |
| | 2020 | | 2019 |
| Loss from continuing operations attributable to Valaris | $ | (3,006.3 | ) | | $ | (190.4 | ) |
Income from continuing operations allocated to non-vested share awards(1) | — |
| | (.1 | ) |
| Loss from continuing operations attributable to Valaris shares | $ | (3,006.3 | ) | | $ | (190.5 | ) |
(1) Losses are not allocated to non-vested share awards. Due to the net loss position, potentially dilutive share awards are excluded from the computation of diluted EPS.
| |
(1)
| Losses are not allocated to non-vested share awards. Therefore, in periods in which we were in a net loss position, only dividends attributable to our non-vested share awards are included. |
Anti-dilutive share awards totaling $400,000 and $200,000 for the three-month periods ended March 31, 2020 and 2019, respectively,400,000 were excluded from the computation of diluted EPS.EPS for the three and nine months ended September 30, 2020, respectively. Anti-dilutive share awards totaling 400,000 and 300,000 were excluded from the computation of diluted EPS for the three and nine months ended September 30, 2019, respectively.
WeUnder the terms of our debt agreement, we have the option to settle our 2024 Convertible Notes in cash, shares or a combination thereof for the aggregate amount due upon conversion. However, the Commencement of the Chapter 11 Cases on August 19, 2020, constituted an event of default under the 2024 Convertible Notes. Any efforts to enforce payment obligations under the 2024 Convertible Notes, including any rights to require the repurchase by the Company of the 2024 Convertible Notes upon the NYSE delisting of the Class A ordinary shares, are automatically stayed as a result of the filing of the Chapter 11 Cases. During each respective reporting period that our average share price exceeds the exchange price, an assumed number of shares required to settle the conversion obligation in excess of the principal amount will be included in our denominator for the computation of diluted EPS using the treasury stock method. Our average share price did not exceed the exchange price during the three-month periodsthree and nine months ended March 31,September 30, 2020 and 2019.
Pursuant to the terms contemplated in the RSA, upon emergence from bankruptcy, our existing Class A ordinary shares will be cancelled. Depending on certain implementation mechanisms in the restructuring related to our Class A ordinary shares and satisfaction of the applicable support requirements set forth in the RSA, the existing Class A ordinary shares may be exchanged for up to 0.01% of the New Equity and 7-year warrants to purchase up to 7% of the New Equity (subject to dilution on account of the management incentive plan contemplated by the RSA). The strike price of such warrants, if granted, will be set at a price per share equal to the value at which the Senior Noteholders would receive a 100% recovery on their claims, including accrued interest up to the Petition Date. See “Note 2 - Chapter 11 Proceedings and Ability to Continue as a Going Concern” for additional information related to our RSA.”
Note 1011 -Debt
Rowan Transaction
The Commencement of the Chapter 11 Cases constituted an event of default under our pre-petition indebtedness. Any efforts to enforce payment obligations under our Debt Instruments and other obligations of the Debtors are automatically stayed as a result of the filing of the Chapter 11 Cases and the holders' rights of enforcement in respect of the Debt Instruments are subject to the applicable provisions of the Bankruptcy Code. See“Note 2 - Chapter 11 Proceedings and Ability to Continue as a Going Concern” for additional details regarding the Chapter 11 Cases.
On September 25, 2020, following approval by the Bankruptcy Court, the Debtors entered into the DIP Credit Agreement, by and among the Company, as Lead Borrower, and certain wholly owned subsidiaries of the Company, as borrowers, the lenders party thereto and Wilmington Savings Fund Society, FSB, as administrative agent and security trustee, in an aggregate amount not to exceed $500.0 million that will be used to finance, among other things, the ongoing general corporate needs of the Debtors during the course of the Chapter 11 Cases and to pay certain fees, costs and expenses associated with the Chapter 11 Cases. For additional information related to the terms, covenants and restrictions under the DIP Credit Agreement, please See“Note 2 - Chapter 11 Proceedings and Ability to Continue as a Going Concern”.
As of September 30, 2020, we had no borrowings outstanding against our DIP Facility.
Senior Notes
The Commencement of the Chapter 11 Cases on August 19, 2020, constituted an event of default under our Senior Notes. Any efforts to enforce payment obligations under the Senior Notes are automatically stayed as a result of the filing of the Chapter 11 Cases. The aggregate principal amount of Senior Notes outstanding as well as associated accrued interest as of the Petition Date are classified as Liabilities Subject to Compromise in our Condensed Consolidated Balance Sheet as of September 30, 2020. See “Note 2 – Chapter 11 Proceedings and Ability to Continue as a Going Concern” for additional details regarding the Chapter 11 Cases.
In December 2016, Ensco Jersey Finance Limited, a wholly-owned subsidiary of Valaris plc, issued $849.5 million aggregate principal amount of 3.00% convertible senior notes due 2024 (the "2024 Convertible Notes") in a private offering. The 2024 Convertible Notes are fully and unconditionally guaranteed, on a senior, unsecured basis, by Valaris plc and are exchangeable into cash, our Class A ordinary shares or a combination thereof, at our election.
The Commencement of the Chapter 11 Cases on August 19, 2020, constituted an event of default under the 2024 Convertible Notes. Any efforts to enforce payment obligations under the 2024 Convertible Notes, including any rights to require the repurchase by the Company of the 2024 Convertible Notes upon the NYSE delisting of the Class A ordinary shares, are automatically stayed as a result of the filing of the Chapter 11 Cases. The aggregate principal amount of 2024 Convertible Notes outstanding as well as associated accrued interest as of the Petition Date are classified as Liabilities Subject to Compromise in our Condensed Consolidated Balance Sheet as of September 30, 2020. See “Note 2 – Chapter 11 Proceedings and Ability to Continue as a Going Concern” for additional details regarding the Chapter 11 Cases. Revolving Credit Facility
As of September 30, 2020, we had $581.0 million of borrowings outstanding under our revolving credit facility and $41.2 million of undrawn letters of credit. The principal and interest under our revolving credit facility became immediately due and payable upon filing of the Chapter 11 Cases, which constituted an event of default under the Credit Agreement. However, the ability of the lenders to exercise remedies was stayed upon commencement of the Chapter 11 Cases. While the revolving credit facility has not been terminated, no further borrowings are permitted. The outstanding borrowings as well as accrued interest as of the Petition Date are classified as Liabilities Subject to Compromise in our Condensed Consolidated Balance Sheet as of September 30, 2020. See“Note 2 – Chapter 11 Proceedings and Ability to Continue as a Going Concern” for additional details regarding the Chapter 11 Cases.
Senior Note Restructuring
As a result of the Rowan Transaction, we acquired the following senior notes issued by Rowan Companies, Inc. ("RCI") and guaranteed by Rowan: (1) $201.4 million in aggregate principal amount of 7.875% unsecured senior notes due 2019, which have been repaid in full, (2) $620.8 million in aggregate principal amount of 4.875% unsecured senior notes due 2022 Notes, (3) $398.1 million in aggregate principal amount of 4.75% unsecured senior notes due 2024 Notes, (4) $500.0 million in aggregate principal amount of 7.375% unsecured senior notes due 2025 Notes, (5) $400.0 million in aggregate principal amount of 5.4% unsecured senior notes due 2042 Notes and (6) $400.0 million in aggregate principal amount of 5.85% unsecured senior notes due 2044 (collectively, the "Rowan Notes").Notes. On February 3, 2020, Rowan and RCI transferred substantially all their assets on a consolidated basis to Valaris plc, Valaris plc became the obligor on the notes and Rowan and RCI were relieved of their obligations under the notes and the related indenture.
Revolving Credit Facility
As of March 31, 2020, we had $332.1 million outstanding under our credit facility, inclusive of $3.2 million in letters of credit, leaving $1.3 billion of undrawn capacity available. As of March 31, 2020, we were in compliance with our debt covenants. We expect to remain in compliance with our credit facility covenants during the next twelve months. However, the full impact that the pandemic and the precipitous decline in oil prices will have on our results of operations, financial condition, liquidity and cash flows is uncertain. If we were to violate the covenants of the revolving credit facility, further borrowings under the credit facility would not be permitted, absent a waiver, and all outstanding borrowings could become immediately due and payable by action of lenders holding a majority of the commitments under the facility. Any such acceleration would trigger a cross-acceleration event of default with respect to approximately $2.1 billion of our outstanding senior notes. The revolving facility generally limits the company to no more than $200.0 million in available cash (including certain liquid investments as defined in the facility documents), and requires consent of all lenders for draws on the facility that would result in the company having more than $200.0 million in available cash and liquid investments.
Furthermore, the agent under the revolving facility has reserved the right to assert that a material adverse effect has occurred based on changes in the oil market and certain company-specific operating incidents, including the drop of the blowout preventer stack off the VALARIS DS-8. See "
Note 13 - Contingencies" for additional information. We do not believe that a material adverse effect has occurred, but there can be no assurance that the lenders will not assert a material adverse effect as a basis to deny further borrowing requests.
2024 Convertible Notes
In December 2016, Ensco Jersey Finance Limited, a wholly-owned subsidiary of Valaris plc, issued $849.5 million aggregate principal amount of unsecured 2024 Convertible Notes in a private offering. The 2024 Convertible Notes are fully and unconditionally guaranteed, on a senior, unsecured basis, by Valaris plc and are exchangeable into cash, our Class A ordinary shares or a combination thereof, at our election. Interest on the 2024 Convertible Notes is payable semiannually on January 31 and July 31 of each year. The 2024 Convertible Notes will mature on January 31, 2024, unless exchanged, redeemed or repurchased in accordance with their terms prior 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 in the indenture governing the 2024 Convertible Notes. On or after July 31, 2023, holders may exchange their 2024 Convertible Notes at any time. The exchange rate is 17.8336 shares per $1,000 principal amount of notes,
representing an exchange price of $56.08 per share, and is subject to adjustment upon certain events. The 2024 Convertible Notes may not be redeemed by us except in the event of certain tax law changes.
On April 15, 2020, we were notified by the NYSE that the average closing price of our Class A ordinary shares was below $1.00 per share over a period of 30 consecutive trading days, which is the minimum average share price required to maintain listing on NYSE. The company has until late December 2020 to regain compliance. If our shares are delisted from the NYSE and not concurrently listed on Nasdaq, the holders of our 2024 Convertible Notes would have the right to require us to repurchase the notes at a price equal to the principal amount thereof plus accrued interest to the repurchase date. Such an accelerated repurchase, if required by the holders, could be in excess of the forecasted availability under the revolving credit facility and new financing facilities could be required, which we may not be able to put in place.
Open Market Repurchases
During the three months endedIn early March 31, 2020, we repurchased $12.8 million of our outstanding 4.70% Senior notes due 2021 on the open market for an aggregate purchase price of $9.7 million, excluding accrued interest, with cash on hand. As a result of the transaction, we recognized a pre-tax gain of $3.1 million, net of discounts in other, net, in the condensed consolidated statement of operations.
Note 1112 - Shareholders' Equity
Activity in our various shareholders' equity accounts for the three-month periodsthree and nine months ended March 31,September 30, 2020 and 2019 were as follows (in millions, except per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares | | Par Value | | Additional
Paid-in
Capital | | Retained
Earnings (Deficit) | | AOCI | | Treasury
Shares | | Non-controlling
Interest |
| BALANCE, December 31, 2019 | 205.9 | | | $ | 82.5 | | | $ | 8,627.8 | | | $ | 671.7 | | | $ | 6.2 | | | $ | (77.3) | | | $ | (1.3) | |
| Net loss | — | | | — | | | — | | | (3,006.3) | | | — | | | — | | | (1.4) | |
| Shares issued under share-based compensation plans, net | — | | | — | | | (.7) | | | — | | | — | | | .9 | | | — | |
| Repurchase of shares | — | | | — | | | — | | | — | | | — | | | (.9) | | | — | |
| Share-based compensation cost | — | | | — | | | 7.8 | | | — | | | — | | | — | | | — | |
| Net other comprehensive loss | — | | | — | | | — | | | — | | | (13.4) | | | — | | | — | |
| BALANCE, March 31, 2020 | 205.9 | | | $ | 82.5 | | | $ | 8,634.9 | | | $ | (2,334.6) | | | $ | (7.2) | | | $ | (77.3) | | | $ | (2.7) | |
| Net loss | — | | | — | | | — | | | (1,107.4) | | | — | | | — | | | (1.4) | |
| Shares issued under share-based compensation plans, net | .2 | | | .1 | | | (.7) | | | — | | | — | | | .6 | | | — | |
| Repurchase of shares | — | | | — | | | — | | | — | | | — | | | (.1) | | | — | |
| Share-based compensation cost | — | | | — | | | 5.7 | | | — | | | — | | | — | | | — | |
| Net other comprehensive loss | — | | | — | | | — | | | — | | | (6.1) | | | — | | | — | |
| Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | (.9) | |
| BALANCE, June 30, 2020 | 206.1 | | | $ | 82.6 | | | $ | 8,639.9 | | | $ | (3,442.0) | | | $ | (13.3) | | | $ | (76.8) | | | $ | (5.0) | |
| Net loss | — | | | — | | | — | | | (670.9) | | | — | | | — | | | (1.1) | |
| Shares issued under share-based compensation plans, net | — | | | — | | | (.5) | | | — | | | — | | | .5 | | | — | |
| | | | | | | | | | | | | |
| Purchase of noncontrolling interests | — | | | — | | | (7.2) | | | — | | | — | | | — | | | — | |
| Share-based compensation cost | — | | | — | | | 4.3 | | | — | | | — | | | — | | | — | |
| Net other comprehensive income | — | | | — | | | — | | | — | | | 2.1 | | | — | | | — | |
| BALANCE, September 30, 2020 | 206.1 | | | $ | 82.6 | | | $ | 8,636.5 | | | $ | (4,112.9) | | | $ | (11.2) | | | $ | (76.3) | | | $ | (6.1) | |
| | | | | | | | | | | | | | | | | Shares | | Par Value | | Additional
Paid-in
Capital | | Retained
Earnings | | AOCI | | Treasury
Shares | | Non-controlling
Interest |
| | Shares | | Par Value | | Additional Paid-in Capital | | Retained Earnings (Deficit) | | AOCI | | Treasury Shares | | Non-controlling Interest | |
| BALANCE, December 31, 2019 | 205.9 |
| | $ | 82.5 |
| | $ | 8,627.8 |
| | $ | 671.7 |
| | $ | 6.2 |
| | $ | (77.3 | ) | | $ | (1.3 | ) | |
| BALANCE, December 31, 2018 | | BALANCE, December 31, 2018 | 115.2 | | | $ | 46.2 | | | $ | 7,225.0 | | | $ | 874.2 | | | $ | 18.2 | | | $ | (72.2) | | | $ | (2.6) | |
| Net loss | — |
| | — |
| | — |
| | (3,006.3 | ) | | — |
| | — |
| | (1.4 | ) | Net loss | — | | | — | | | — | | | (190.4) | | | — | | | — | | | 2.4 | |
| Dividends paid ($0.04 per share) | | Dividends paid ($0.04 per share) | — | | | — | | | — | | | (4.5) | | | — | | | — | | | — | |
| Shares issued under share-based compensation plans, net | — |
| | — |
| | (.7 | ) | | — |
| | — |
| | .9 |
| | — |
| Shares issued under share-based compensation plans, net | — | | | — | | | (.1) | | | — | | | — | | | .1 | | | — | |
| Repurchase of shares | — |
| | — |
| | — |
| | — |
| | — |
| | (.9 | ) | | — |
| Repurchase of shares | — | | | — | | | — | | | — | | | — | | | (2.8) | | | — | |
| Share-based compensation cost | — |
| | — |
| | 7.8 |
| | — |
| | — |
| | — |
| | — |
| Share-based compensation cost | — | | | — | | | 5.3 | | | — | | | — | | | — | | | — | |
| Net other comprehensive income | | Net other comprehensive income | — | | | — | | | — | | | — | | | 1.5 | | | — | | | — | |
| BALANCE, March 31, 2019 | | BALANCE, March 31, 2019 | 115.2 | | | $ | 46.2 | | | $ | 7,230.2 | | | $ | 679.3 | | | $ | 19.7 | | | $ | (74.9) | | | $ | (0.2) | |
| Net income | | Net income | — | | | — | | | — | | | 405.5 | | | — | | | — | | | 1.8 | |
| Equity issuance in connection with the Rowan Transaction | | Equity issuance in connection with the Rowan Transaction | 88.0 | | | 35.2 | | | 1,367.5 | | | — | | | — | | | .1 | | | — | |
| Shares issued under share-based compensation plans, net | | Shares issued under share-based compensation plans, net | 2.6 | | | 1.1 | | | (1.1) | | | — | | | — | | | (.8) | | | — | |
| Repurchase of shares | | Repurchase of shares | — | | | — | | | — | | | — | | | — | | | (1.4) | | | — | |
| Share-based compensation cost | | Share-based compensation cost | — | | | — | | | 13.8 | | | — | | | — | | | — | | | — | |
| Net other comprehensive income | | Net other comprehensive income | — | | | — | | | — | | | — | | | .2 | | | — | | | — | |
| BALANCE, June 30, 2019 | | BALANCE, June 30, 2019 | 205.8 | | | $ | 82.5 | | | $ | 8,610.4 | | | $ | 1,084.8 | | | $ | 19.9 | | | $ | (77.0) | | | $ | 1.6 | |
| Net loss | | Net loss | — | | | — | | | — | | | (197.1) | | | — | | | — | | | (.4) | |
| Equity issuance costs | | Equity issuance costs | — | | | — | | | (.6) | | | — | | | — | | | — | | | — | |
| Share-based compensation cost | | Share-based compensation cost | — | | | — | | | 9.7 | | | — | | | — | | | — | | | — | |
| Distributions to noncontrolling interests | | Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | (2.1) | |
| Repurchase of shares | | Repurchase of shares | — | | | — | | | — | | | — | | | — | | | (.2) | | | — | |
| Net other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (13.4 | ) | | — |
| | — |
| Net other comprehensive loss | — | | | — | | | — | | | — | | | (1.0) | | | — | | | — | |
| BALANCE, March 31, 2020 | 205.9 |
| | $ | 82.5 |
| | $ | 8,634.9 |
| | $ | (2,334.6 | ) | | $ | (7.2 | ) | | $ | (77.3 | ) | | $ | (2.7 | ) | |
| BALANCE, September 30, 2019 | | BALANCE, September 30, 2019 | 205.8 | | | $ | 82.5 | | | $ | 8,619.5 | | | $ | 887.7 | | | $ | 18.9 | | | $ | (77.2) | | | $ | (.9) | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Shares | | Par Value | | Additional
Paid-in
Capital | | Retained
Earnings | | AOCI | | Treasury
Shares | | Non-controlling
Interest |
| BALANCE, December 31, 2018 | 115.2 |
| | $ | 46.2 |
| | $ | 7,225.0 |
| | $ | 874.2 |
| | $ | 18.2 |
| | $ | (72.2 | ) | | $ | (2.6 | ) |
| Net loss | — |
| | — |
| | — |
| | (190.4 | ) | | — |
| | — |
| | 2.4 |
|
| Dividends paid ($0.04 per share) | — |
| | — |
| | — |
| | (4.5 | ) | | — |
| | — |
| | — |
|
| Shares issued under share-based compensation plans, net | — |
| | — |
| | (.1 | ) | | — |
| | — |
| | .1 |
| | — |
|
| Repurchase of shares | — |
| | — |
| | — |
| | — |
| | — |
| | (2.8 | ) | | — |
|
| Share-based compensation cost | — |
| | — |
| | 5.3 |
| | — |
| | — |
| | — |
| | — |
|
| Net other comprehensive income | — |
| | — |
| | — |
| | — |
| | 1.5 |
| | — |
| | — |
|
| BALANCE, March 31, 2019 | 115.2 |
| | $ | 46.2 |
| | $ | 7,230.2 |
| | $ | 679.3 |
| | $ | 19.7 |
| | $ | (74.9 | ) | | $ | (0.2 | ) |
.
Note 1213 -Income Taxes
Valaris plc, our parent company, is domiciled and resident in the U.K. Our subsidiaries conduct operations and earn income in numerous countries and are subject to the laws of taxing jurisdictions within those countries. The income of our non-U.K. subsidiaries is generally not subject to U.K. taxation. 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. Therefore, we generally 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.
Income tax rates and taxation systems in the jurisdictions in which our subsidiaries conduct operations vary and our subsidiaries are frequently subjected to minimum taxation regimes. In some jurisdictions, tax liabilities are based on gross revenues, statutory or negotiated deemed profits or other factors, rather than on net income and our subsidiaries are frequently unable to 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.
Historically, we calculated our provision for income taxes during interim reporting periods by applying the estimated annual effective tax rate for the full fiscal year to pre-tax income or loss, excluding discrete items, for the reporting period. We determined that since small changes in estimated pre-tax income or loss would result in significant changes in the estimated annual effective tax rate, the historical method would not provide a reliable estimate of income taxes for the three-month periodsthree and nine months ended March 31,September 30, 2020 and 2019. We used a discrete effective tax rate method to calculate income taxes for the three-monthperiodsthree and nine months ended March 31,September 30, 2020 and 2019. We will continue to evaluate income tax estimates under the historical method in subsequent quarters and employ a discrete effective tax rate method if warranted.
Discrete income tax expense for the three months ended September 30, 2020 was $13.8 million and was primarily attributable to changes in liabilities for unrecognized tax benefits associated with tax positions taken in prior years, rig sales and reorganization items. Discrete income tax benefit for the three-month periodthree months ended March 31, 2020September 30, 2019 was $164.4$18.4 million and was primarily attributable to restructuring transactions, the impairment of a restructuring transaction, implementation of the U.S. Cares Act,drilling rig, changes in liabilities for unrecognized tax benefits associated with tax positions taken in prior years and other resolutions of prior year tax matters. Discrete incomematters, partially offset by discrete tax expense forresulting from gains on the three-month period ended March 31, 2019 was $0.6 million and was attributable to unrecognized tax benefits associated with tax positions taken in prior years.repurchase of debt. Excluding the aforementioned discrete tax items, income tax expense for the three-month periodsthree months ended March 31,September 30, 2020 and 2019 was $12.4$8.1 million and $30.9$19.9 million, respectively.
Discrete income tax benefit for the nine months ended September 30, 2020 was $197.9 million and was primarily attributable to a restructuring transaction, rig impairments, implementation of the U.S. Cares Act, changes in liabilities for unrecognized tax benefits associated with tax positions taken in prior years, rig sales, reorganization items and the resolution of other prior period tax matters. Discrete income tax benefit for the nine months ended September 30, 2019 was $19.0 million and was primarily attributable to restructuring transactions, the impairment of a drilling rig, changes in liabilities for unrecognized tax benefits associated with tax positions taken in prior years and other resolutions of prior year tax matters, partially offset by discrete tax expense resulting from gains on the repurchase of debt. Excluding the aforementioned discrete tax items, income tax expense for the nine months ended September 30, 2020 and 2019 was $52.0 million and $84.6 million, respectively.
Restructuring Transactions
As discussed in "Note 1011 - Debt", on February 3, 2020, Rowan and RCI transferred substantially all their assets and liabilities to Valaris plc, and Valaris plc became the obligor on the Rowan2022 Notes, 2042 Notes, 7.375% 2025 Notes, 4.75% 2024 Notes and 5.85% 2044 Notes. We recognized a tax benefit of $66.0 million during the three-month periodnine months ended March 31,September 30, 2020 in connection with this transaction.
On October 8, 2020, we concluded a pre-filing agreement with the U.S. Internal Revenue Service involving the amount and characterization of a $5.6 billion loss incurred in connection with a restructuring transaction in 2019. As a result of this agreement, we expect to recognize an approximate $120.0 million tax benefit during the quarter ending December 31, 2020. In addition, an approximate $880.0 million deferred tax asset will be recharacterized from a capital loss carryforward at September 30, 2020, to a net operating loss carryforward at December 31, 2020. The approximate $880 million deferred tax asset is expected to remain subject to a valuation allowance.
Unrecognized tax benefits
During 2019, the Luxembourg tax authorities issued aggregate tax assessments totaling approximately €142.0 million (approximately $156.7$166.5 million converted using the current period-end exchange rates) related to tax years 2014, 2015 and 2016 for several of Rowan's Luxembourg subsidiaries. We recorded €93.0 million (approximately $102.6$109.0 million converted using the current period-end exchange rates) in purchase accounting related to these
assessments. During the first quarter of 2020, in connection with the administrative appeals process, the tax authority withdrew assessments of €142.0 million (approximately $156.7$166.5 million converted using the current period-end exchange rates), accepting the associated tax returns as previously filed. Accordingly, we de-recognized previously accrued liabilities for uncertain tax positions and net wealth taxes of €79.0 million (approximately $87.2$92.6 million converted using the current period-end exchange rates) and €2.0 million (approximately $2.2$2.3 million converted using the current period-end exchange rates), respectively. The de-recognition of amounts related to these assessments was recognized as a tax benefit during the three-month period ended March 31, 2020 and is included in changes in operating assets and liabilities on the condensed consolidated statement of cash flows for the three-month periodnine months ended March 31,September 30, 2020.
During 2019, the Australian tax authorities issued aggregate tax assessments totaling approximately A$101 million (approximately $62.0$72.3 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 million payment (approximately $29 million at then-current exchange rates) to the Australian tax authorities to litigate the assessment. We have recorded a $13.6$16.4 million liability for these assessments as of March 31,September 30, 2020. 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.
Several of our rigs are owned by subsidiaries in Switzerland that are subject to a special finance taxation regime under Swiss income tax rules. Swiss federal and cantonal governments have enacted tax legislation (“Swiss tax reform”) effective January 1, 2020. Under Swiss tax reform, the finance taxation regime has been abolished but our Swiss subsidiaries will remain subject to the finance taxation regime through December 31, 2021 and transition to deriving income tax based on net income beginning January 1, 2022. There are various uncertainties relating to the application of Swiss tax reform to finance taxation regime taxpayers, the most prominent of which is the determination of the Swiss tax basis of property and equipment. Based on all information currently available, we do not expect to recognize significant deferred tax assets or liabilities in connection with Swiss tax reform. As the Swiss tax authorities further clarify the application of Swiss tax reform to finance taxation regime taxpayers, we may recognize deferred tax adjustments and they may have a material effect on our consolidated financial statements.
Note 1314 -Contingencies
Angola Non-Drilling Event
In March 2020, VALARIS DS-8 experienced a non-drilling incident while operating offshore Angola, resulting in the blowout preventer (BOP) stack being disconnected from the riser while the rig was moving between well locations. The BOP stack, which we later recovered, dropped to the seabed floor, clear of any subsea structures. No injuries, environmental pollution or third-party damage resulted from the BOP stack being disconnected.
As a resultresult of the incident, the operator terminated the contract. The termination results in a decline in our contracted revenue backlog of approximately $150 million. We have loss of hire insurance for $602,500 per day, after a 45-day deductible waiting period, through the end of the contract in November 2020. The waiting period expired on April 22, 2020. We will seekhave received loss of hire insurance recoveries of $118.1 million, which represents
the total amount owed to recover losses incurredus under the applicable insurance policy. The recovery was recognized and recorded in accordance with the termsOther operating income on our Condensed Consolidated Statements of this insurance policy, which would largely offset the lost backlog noted above. There can be no assurance as to the timing or amount of insurance proceeds ultimately received.Operation.
Indonesian Well-Control Event
In July 2019, a well being drilled offshore Indonesia by one of our jackup rigs experienced a well-control event requiring the cessation of drilling activities. In February 2020, the rig resumed operations. Indonesian authorities initiated an investigation into the event and have contacted the customer, us and other parties involved in drilling the well for additional information. We are cooperating with the Indonesian authorities. We cannot predict the scope or ultimate outcome of this investigation .investigation. If the Indonesian authorities determine that we violated local laws in connection with this matter, we could be subject to penalties including environmental or other liabilities, which may have a material adverse impact on us.
Middle East Dispute
On July 30, 2019, we received notice that a local partner of legacy Ensco plc in the Middle East filed a lawsuit in the U.K. against the Company alleging it induced the breach of a non-compete provision in an agreement between the local partner and a subsidiary of the Company. The lawsuit included a claim for an unspecified amount of damages in excess of £100 million and other relief. We reached an agreement to settle this matter and to acquire the local partner's interest in the subsidiary for an aggregate amount of $27.5 million, which was paid in April 2020. Of this amount, we concluded that $20.3 million was attributable to the settlement of the dispute and was recognized as a loss
included in other, net, in our consolidated statement of operations for the year ended December 31, December 2019. The remaining amount is attributable to the acquisition of the local partner's interest in the subsidiary and will be recordedwas recognized as an adjustment to equity in the second quarterAdditional paid-in-capital on our Condensed Consolidated Balance Sheet as of September 30, 2020.
ARO Funding Obligations
Valaris and Saudi Aramco have agreed to take all steps necessary to ensure that ARO purchases at least 20 newbuild jackup rigs ratably over an approximate 10-year period. In January 2020, ARO ordered the first two newbuild jackups for delivery scheduled in 2022. The partners intend for the newbuild jackup rigs to be financed out of available cash from ARO's operations and/or funds available from third-party debt financing. ARO paid a 25% down payment from cash on hand for each of the newbuilds ordered in January 2020. In the event ARO has insufficient cash from operations 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. The Company's capital contributions to ARO pursuant to this requirement may require approval of the Bankruptcy Court during the Chapter 11 Cases. Each partner's commitment shall be reduced by the actual cost of each newbuild rig, on a proportionate basis. The partners agreed that Saudi Aramco, as a customer, will provide drilling contracts to ARO in connection with the acquisition of the newbuild rigs. The initial contracts for each newbuild rig will be 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.
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.
In the ordinary course of business with customers and others, we have entered into letters of credit to guarantee our performance as it relates to our drilling contracts, contract bidding, customs duties, tax appeals and other obligations in various jurisdictions. Letters of credit outstanding as of March 31,September 30, 2020 totaled $117.9$123.1 million and are issued under facilities provided by various banks and other financial institutions. Obligations under these letters of credit are not normally called, as we typically comply with the underlying performance requirement. As of March 31,September 30, 2020, we had not been required to makeinsignificant collateral deposits with respect to these agreements.
Note 1415 -Segment Information
Prior to the Rowan Transaction, ourOur business consistedconsists of 34 operating segments: (1) Floaters, which includedincludes our drillships and semisubmersible rigs, (2) Jackups, (3) ARO and (3)(4) Other, which consistedconsists of management services on rigs owned by third-parties. Floatersthird-parties and Jackups were also reportable segments.
As a result of the Rowan Transaction, we concluded that we would maintain the aforementioned segment structure while adding ARO as a reportable segment for the new combined company. We also concluded that the activities associated with our arrangements with ARO consisting of ourunder the Transition Services Agreement, Rig Lease Agreements and Secondment Agreement, do not constituteAgreement. Floaters, Jackups and ARO are also reportable segments and are therefore included within Other in the following segment disclosures. Substantially all of the expenses incurred associated with our Transition Services Agreement are included in general and administrative under "Reconciling Items" in the table set forth below.segments.
General and administrative expense and depreciation expense incurred by our corporate office are not allocated to our operating segments for purposes of measuring segment operating income (loss) and are included in "Reconciling Items." Substantially all of the expenses incurred associated with our Transition Services Agreement are included in general and administrative under "Reconciling Items" in the table set forth below. We measure segment assets as property and equipment.
The full operating results included below for ARO (representing only results of ARO from the Transaction Date) are not included within our consolidated results and thus deducted under "Reconciling Items" and replaced with our equity in earnings of ARO. See "Note 45 - Equity Method Investment in ARO" for additional information on ARO and related arrangements.
Segment information for the three-month periodsthree and nine months ended March 31,September 30, 2020 and 2019 is presented below (in millions):
Three Months Ended March 31, 2020 |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Floaters | | Jackups | | ARO | | Other | | Reconciling Items | | Consolidated Total |
| Revenues | $ | 179.6 |
| | $ | 212.8 |
| | $ | 140.3 |
| | $ | 64.2 |
| | $ | (140.3 | ) | | $ | 456.6 |
|
| Operating expenses | | | | | | | | | | |
|
|
| Contract drilling (exclusive of depreciation) | 213.9 |
| | 226.1 |
| | 108.3 |
| | 36.0 |
| | (108.3 | ) | | 476.0 |
|
| Loss on impairment | 2,554.3 |
| | 253.9 |
| | — |
| | — |
| | — |
| | 2,808.2 |
|
| Depreciation | 89.4 |
| | 58.5 |
| | 13.0 |
| | 11.1 |
| | (7.5 | ) | | 164.5 |
|
| General and administrative | — |
| | — |
| | 8.3 |
| | — |
| | 45.1 |
| | 53.4 |
|
| Equity in earnings of ARO | — |
| | — |
| | — |
| | — |
| | (6.3 | ) | | (6.3 | ) |
| Operating income (loss) | $ | (2,678.0 | ) | | $ | (325.7 | ) | | $ | 10.7 |
| | $ | 17.1 |
| | $ | (75.9 | ) | | $ | (3,051.8 | ) |
| Property and equipment, net | $ | 7,442.5 |
| | $ | 4,036.0 |
| | $ | 740.6 |
| | $ | 678.7 |
| | $ | (740.6 | ) | | $ | 12,157.2 |
|
Three Months Ended March 31, 2019September 30, 2020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Floaters | | Jackups | | ARO | | Other | | Reconciling Items | | Consolidated Total |
| Revenues | $ | 57.1 | | | $ | 186.8 | | | $ | 145.6 | | | $ | 41.4 | | | $ | (145.6) | | | $ | 285.3 | |
| Operating expenses | | | | | | | | | | | |
| Contract drilling (exclusive of depreciation) | 128.5 | | | 160.2 | | | 99.0 | | | 18.5 | | | (99.0) | | | 307.2 | |
| Loss on impairment | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Depreciation | 55.8 | | | 52.9 | | | 14.8 | | | 11.3 | | | (12.4) | | | 122.4 | |
| General and administrative | 0 | | | 0 | | | 5.8 | | | 0 | | | 66.3 | | | 72.1 | |
| Other operating income | 118.1 | | | 0 | | | 0 | | | 0 | | | 0 | | | 118.1 | |
| Equity in earnings of ARO | 0 | | | 0 | | | 0 | | | 0 | | | 3.9 | | | 3.9 | |
| Operating income (loss) | $ | (9.1) | | | $ | (26.3) | | | $ | 26.0 | | | $ | 11.6 | | | $ | (96.6) | | | $ | (94.4) | |
| Property and equipment, net | $ | 6,465.9 | | | $ | 3,961.0 | | | $ | 736.3 | | | $ | 655.5 | | | $ | (736.3) | | | $ | 11,082.4 | |
|
| | | | | | | | | | | | | | | | | | | |
| | Floaters | | Jackups | | Other | | Reconciling Items | | Consolidated Total |
| Revenues | $ | 232.7 |
| | $ | 157.0 |
| | $ | 16.2 |
| | $ | — |
| | $ | 405.9 |
|
| Operating expenses | | | | | | | | |
|
|
| Contract drilling (exclusive of depreciation) | 181.8 |
| | 135.4 |
| | 15.4 |
| | — |
| | 332.6 |
|
| Depreciation | 84.8 |
| | 36.9 |
| | — |
| | 3.3 |
| | 125.0 |
|
| General and administrative | — |
| | — |
| | — |
| | 29.6 |
| | 29.6 |
|
| Operating income (loss) | $ | (33.9 | ) | | $ | (15.3 | ) | | $ | .8 |
| | $ | (32.9 | ) | | (81.3 | ) |
| Property and equipment, net | $ | 9,383.6 |
| | $ | 3,091.7 |
| | $ | — |
| | $ | 33.6 |
| | 12,508.9 |
|
Three Months Ended September 30, 2019
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Floaters | | Jackups | | ARO | | Other | | Reconciling Items | | Consolidated Total |
| Revenues | $ | 269.8 | | | $ | 217.8 | | | $ | 138.4 | | | $ | 63.7 | | | $ | (138.4) | | | $ | 551.3 | |
| Operating expenses | | | | | | | | | | | |
| Contract drilling (exclusive of depreciation) | 250.3 | | | 213.5 | | | 92.7 | | | 32.7 | | | (92.7) | | | 496.5 | |
| Loss on impairment | 88.2 | | | 0 | | | 0 | | | 0 | | | 0 | | | 88.2 | |
| Depreciation | 92.7 | | | 55.9 | | | 14.6 | | | 8.5 | | | (8.7) | | | 163.0 | |
| General and administrative | 0 | | | 0 | | | 8.8 | | | 0 | | | 27.3 | | | 36.1 | |
| Equity in losses of ARO | 0 | | | 0 | | | 0 | | | 0 | | | (3.7) | | | (3.7) | |
| Operating income (loss) | $ | (161.4) | | | $ | (51.6) | | | $ | 22.3 | | | $ | 22.5 | | | $ | (68.0) | | | $ | (236.2) | |
| Property and equipment, net | $ | 10,187.5 | | | $ | 5,022.0 | | | $ | 652.5 | | | $ | 0 | | | $ | (611.3) | | | $ | 15,250.7 | |
Nine Months Ended September 30, 2020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Floaters | | Jackups | | ARO | | Other | | Reconciling Items | | Consolidated Total |
| Revenues | $ | 400.3 | | | $ | 585.9 | | | $ | 431.9 | | | $ | 144.5 | | | $ | (431.9) | | | $ | 1,130.7 | |
| Operating expenses | | | | | | | | | | | |
| Contract drilling (exclusive of depreciation) | 513.2 | | | 569.0 | | | 319.8 | | | 71.7 | | | (319.8) | | | 1,153.9 | |
| Loss on impairment | 3,386.2 | | | 254.3 | | | 0 | | | 5.7 | | | 0 | | | 3,646.2 | |
| Depreciation | 207.2 | | | 164.2 | | | 41.1 | | | 33.6 | | | (27.7) | | | 418.4 | |
| General and administrative | 0 | | | 0 | | | 21.2 | | | 0 | | | 166.9 | | | 188.1 | |
| Other operating income | 118.1 | | | 0 | | | 0 | | | 0 | | | 0 | | | 118.1 | |
| Equity in losses of ARO | 0 | | | 0 | | | 0 | | | 0 | | | (7.6) | | | (7.6) | |
| Operating income (loss) | $ | (3,588.2) | | | $ | (401.6) | | | $ | 49.8 | | | $ | 33.5 | | | $ | (258.9) | | | $ | (4,165.4) | |
| Property and equipment, net | $ | 6,465.9 | | | $ | 3,961.0 | | | $ | 736.3 | | | $ | 655.5 | | | $ | (736.3) | | | $ | 11,082.4 | |
Nine Months Ended September 30, 2019
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Floaters | | Jackups | | ARO | | Other | | Reconciling Items | | Consolidated Total |
| Revenues | $ | 798.1 | | | $ | 604.0 | | | 262.2 | | | $ | 139.0 | | | $ | (262.2) | | | $ | 1,541.1 | |
| Operating expenses | | | | | | | | | | | |
| Contract drilling (exclusive of depreciation) | 681.3 | | | 561.1 | | | 171.7 | | | 87.0 | | | (171.7) | | | 1,329.4 | |
| Loss on impairment | 88.2 | | | 0 | | | 0 | | | 0 | | | 2.5 | | | 90.7 | |
| Depreciation | 271.4 | | | 146.0 | | | 26.9 | | | 15.3 | | | (13.7) | | | 445.9 | |
| General and administrative | 0 | | | 0 | | | 13.9 | | | 0 | | | 133.0 | | | 146.9 | |
| Equity in losses of ARO | 0 | | | 0 | | | 0 | | | 0 | | | (3.1) | | | (3.1) | |
| Operating income (loss) | $ | (242.8) | | | $ | (103.1) | | | $ | 49.7 | | | $ | 36.7 | | | $ | (215.4) | | | $ | (474.9) | |
| Property and equipment, net | $ | 10,187.5 | | | $ | 5,022.0 | | | $ | 652.5 | | | $ | 0 | | | $ | (611.3) | | | $ | 15,250.7 | |
Information about Geographic Areas
As of March 31,September 30, 2020, the geographic distribution of our and ARO's drilling rigs was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Floaters | | Jackups | | Other | | Total Valaris | | ARO |
| North & South America | 5 | | 6 | | — | | 11 | | — |
| Europe & the Mediterranean | 7 | | 14 | | — | | 21 | | — |
| Middle East & Africa | 2 | | 10 | | 9 | | 21 | | 7 |
| Asia & Pacific Rim | 2 | | 6 | | — | | 8 | | — |
| Asia & Pacific Rim (under construction) | 2 | | 0 | | — | | 2 | | — |
| Held-for-sale | 1 | | 2 | | 0 | | 3 | | 0 |
| Total | 19 | | 38 | | 9 | | 66 | | 7 |
|
| | | | | | | | | |
| | Floaters | | Jackups | | Other | | Total Valaris | | ARO |
| North & South America | 10 | | 7 | | — | | 17 | | — |
| Europe & the Mediterranean | 7 | | 15 | | — | | 22 | | — |
| Middle East & Africa | 4 | | 12 | | 9 | | 25 | | 7 |
| Asia & Pacific Rim | 3 | | 7 | | — | | 10 | | — |
| Asia & Pacific Rim (under construction) | 2 | | — | | — | | 2 | | — |
| Held-for-sale | — | | 1 | | — | | 1 | | — |
| Total | 26 | | 42 |
| 9 | | 77 |
| 7 |
We provide management services on 2 rigs owned by third-parties not included in the table above.
Note 1516 -Supplemental Financial Information
Condensed Consolidated Balance Sheet Information
Accounts receivable, net, consisted of the following (in millions):
| | | | | | | | | | | |
| September 30,
2020 | | December 31,
2019 |
| Trade | $ | 383.3 | | | $ | 466.4 | |
| Other | 55.9 | | | 60.3 | |
| | 439.2 | | | 526.7 | |
| Allowance for doubtful accounts | (9.5) | | | (6.0) | |
| | $ | 429.7 | | | $ | 520.7 | |
|
| | | | | | | |
| | March 31,
2020 | | December 31,
2019 |
| Trade | $ | 442.4 |
| | $ | 466.4 |
|
| Other | 60.9 |
| | 60.3 |
|
| | 503.3 |
| | 526.7 |
|
| Allowance for doubtful accounts | (10.1 | ) | | (6.0 | ) |
| | $ | 493.2 |
| | $ | 520.7 |
|
Other current assets consisted of the following (in millions):
|
| | | | | | | |
| | March 31,
2020 | | December 31,
2019 |
| Materials and supplies | $ | 308.9 |
| | $ | 340.1 |
|
| Prepaid taxes | 45.5 |
| | 36.2 |
|
| Deferred costs | 32.6 |
| | 23.3 |
|
| Prepaid expenses | 11.4 |
| | 13.5 |
|
| Other | 29.1 |
| | 33.4 |
|
| | $ | 427.5 |
| | $ | 446.5 |
|
| | | | | | | | | | | |
| September 30,
2020 | | December 31,
2019 |
| Materials and supplies | $ | 293.1 | | | $ | 340.1 | |
| Prepaid expenses | 64.3 | | | 13.5 | |
| Prepaid taxes | 49.9 | | | 36.2 | |
| Deferred costs | 21.5 | | | 23.3 | |
| Other | 25.9 | | | 33.4 | |
| | $ | 454.7 | | | $ | 446.5 | |
Other assets consisted of the following (in millions):
|
| | | | | | | |
| | March 31,
2020 | | December 31,
2019 |
| Tax receivables | $ | 61.1 |
| | $ | 36.3 |
|
| Right-of-use assets | 53.9 |
| | 58.1 |
|
| Supplemental executive retirement plan assets | 21.2 |
| | 26.0 |
|
| Deferred tax assets | 19.0 |
| | 26.6 |
|
| Intangible assets | 10.4 |
| | 11.9 |
|
| Deferred costs | 7.3 |
| | 7.1 |
|
| Other | 14.1 |
| | 22.3 |
|
| | $ | 187.0 |
|
| $ | 188.3 |
|
| | | | | | | | | | | |
| September 30,
2020 | | December 31,
2019 |
| Tax receivables | $ | 65.5 | | | $ | 36.3 | |
| Deferred tax assets | 42.9 | | | 26.6 | |
| Right-of-use assets | 41.6 | | | 58.1 | |
| Supplemental executive retirement plan assets | 21.9 | | | 26.0 | |
| Intangible assets | 3.1 | | | 11.9 | |
| Other | 25.2 | | | 29.4 | |
| $ | 200.2 | | | $ | 188.3 | |
Accrued liabilities and other consisted of the following (in millions):
|
| | | | | | | |
| | March 31,
2020 | | December 31,
2019 |
| Personnel costs | $ | 126.4 |
| | $ | 134.4 |
|
| Accrued interest | 100.1 |
| | 115.2 |
|
| Income and other taxes payable | 71.1 |
| | 61.2 |
|
| Deferred revenue | 24.5 |
| | 30.0 |
|
| Settlement of legal dispute | 20.3 |
| | 20.3 |
|
| Lease liabilities | 19.1 |
| | 21.1 |
|
| Derivative liabilities | 14.1 |
| | .9 |
|
| Other | 26.7 |
| | 34.6 |
|
| | $ | 402.3 |
| | $ | 417.7 |
|
| | | | | | | | | | | |
| September 30,
2020 | | December 31,
2019 |
| Personnel costs | $ | 80.9 | | | $ | 134.4 | |
| Income and other taxes payable | 52.7 | | | 61.2 | |
| Deferred revenue | 38.9 | | | 30.0 | |
| Lease liabilities | 15.6 | | | 21.1 | |
| Accrued interest | 0 | | | 115.2 | |
| Settlement of legal dispute | 0 | | | 20.3 | |
| Other | 19.2 | | | 35.5 | |
| | $ | 207.3 | | | $ | 417.7 | |
Other liabilities consisted of the following (in millions):
|
| | | | | | | |
| | March 31,
2020 | | December 31,
2019 |
| Pension and other post-retirement benefits | $ | 243.1 |
| | $ | 246.7 |
|
| Unrecognized tax benefits (inclusive of interest and penalties) | 233.4 |
| | 323.1 |
|
| Intangible liabilities | 51.5 |
| | 52.1 |
|
| Lease liabilities | 48.0 |
| | 51.8 |
|
| Deferred tax liabilities | 35.2 |
| | 99.0 |
|
| Supplemental executive retirement plan liabilities | 21.6 |
| | 26.7 |
|
| Personnel costs | 13.9 |
| | 24.5 |
|
| Deferred revenue | 8.8 |
| | 9.7 |
|
| Other | 40.2 |
| | 33.8 |
|
| | $ | 695.7 |
| | $ | 867.4 |
|
| | | | | | | | | | | |
| September 30,
2020 | | December 31,
2019 |
| Unrecognized tax benefits (inclusive of interest and penalties) | $ | 253.3 | | | $ | 323.1 | |
| Pension and other post-retirement benefits | 227.4 | | | 246.7 | |
| Intangible liabilities | 50.6 | | | 52.1 | |
| Lease liabilities | 40.6 | | | 51.8 | |
| Deferred tax liabilities | 37.3 | | | 99.0 | |
| Supplemental executive retirement plan liabilities | 22.2 | | | 26.7 | |
| Personnel costs | 15.7 | | | 24.5 | |
| Deferred revenue | 7.1 | | | 9.7 | |
| Other | 42.7 | | | 33.8 | |
| | $ | 696.9 | | | $ | 867.4 | |
Accumulated other comprehensive income (loss) consisted of the following (in millions):
| | | | | | | | | | | |
| September 30,
2020 | | December 31,
2019 |
| Pension and other post-retirement benefits | $ | (21.7) | | | $ | (21.7) | |
| Currency translation adjustment | 6.6 | | | 7.1 | |
| Derivative instruments | 5.7 | | | 22.6 | |
| Other | (1.8) | | | (1.8) | |
| $ | (11.2) | | | $ | 6.2 | |
|
| | | | | | | |
| | March 31,
2020 | | December 31,
2019 |
| Pension and other post-retirement benefits | $ | (21.7 | ) | | $ | (21.7 | ) |
| Derivative instruments | 9.6 |
| | 22.6 |
|
| Currency translation adjustment | 6.7 |
| | 7.1 |
|
| Other | (1.8 | ) | | (1.8 | ) |
| | $ | (7.2 | ) | | $ | 6.2 |
|
Condensed Consolidated Statement of Operations Information
Other, net, for the three and nine months ended September 30, 2020 and 2019 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| Currency translation adjustments | $ | (7.5) | | | $ | 4.9 | | | $ | (4.9) | | | $ | 1.8 | |
| Net periodic pension (cost) income, excluding service cost | 3.0 | | | 1.7 | | | 9.1 | | | 3.7 | |
| Gain on bargain purchase and measurement period adjustments | 0 | | | (53.0) | | | (6.3) | | | 659.8 | |
| Gain on extinguishment of debt | 0 | | | 194.1 | | | 3.1 | | | 194.1 | |
| Other income (expense) | 1.4 | | | (.3) | | | 1.5 | | | (6.0) | |
| $ | (3.1) | | | $ | 147.4 | | | $ | 2.5 | | | $ | 853.4 | |
Concentration of Risk
We are exposed to credit risk related to our receivables from customers, our cash and cash equivalents, investments and our use of derivatives in connection with the management of foreign currency exchange rate risk. 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.
We mitigate our credit risk relating to counterparties of our derivatives through a variety of techniques, including transacting with multiple, high-quality financial institutions, thereby limiting our exposure to individual counterparties and by entering into International Swaps and Derivatives Association, Inc. ("ISDA") Master Agreements, which include
provisions for a legally enforceable master netting agreement, with our derivative counterparties. The terms of the ISDA agreements may also include credit support requirements, cross default provisions, termination events or set-off provisions. Legally enforceable master netting agreements reduce credit risk by providing protection in bankruptcy in certain circumstances and generally permitting the closeout and netting of transactions with the same counterparty upon the occurrence of certain events. See "Note 89 - Derivative Instruments" for additional information on our derivative activity.
Consolidated revenues by customer for the three-month periodsthree and nine months ended March 31,September 30, 2020 and 2019 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
BP(1) | 11 | % | | 10 | % | | 9 | % | | 8 | % |
Saudi Aramco(2) | 9 | % | | 16 | % | | 9 | % | | 12 | % |
Total(3) | 5 | % | | 15 | % | | 10 | % | | 15 | % |
| Other | 75 | % | | 59 | % | | 72 | % | | 65 | % |
| 100 | % | | 100 | % | | 100 | % | | 100 | % |
(1)During the three months ended September 30, 2020, 24% of the revenues provided by BP were attributable to our Jackups segment, 14% of the revenues were attributable to our Floaters segment and the remaining were attributable to our managed rigs. During the nine months ended September 30, 2020, 21% of the revenues provided by BP were attributable to our Jackups segment, 23% of the revenues were attributable to our Floaters segment and the remaining were attributable to our managed rigs.
|
| | | | | | |
| | | Three Months Ended March 31, |
| | | 2020 | | 2019 |
Total(1) | | 16 | % | | 18 | % |
Saudi Aramco(2) | | 10 | % | | 13 | % |
| Other | | 74 | % | | 69 | % |
| |
| 100 | % |
| 100 | % |
| |
(1)
| During the three months ended March 31, 2020, 89% of revenues provided by Total were attributable to the Floaters segment and the remainder was attributable to the Jackup segment. During the three months ended March 31, 2019, all revenues were attributable to our Floaters segment. |
| |
(2)
| During the three-month periods ended March 31, 2020 and 2019, all revenues were attributable to our Jackups segment. |
(2)During the three and nine months ended September 30, 2020 and 2019, all revenues were attributable to our Jackups segment.
(3)During the three and nine months ended September 30, 2020, 32% and 75% of revenues provided by Total were attributable to the Floaters segment and the remaining were attributable to the Jackups segment. During the three and nine months ended September 30, 2019, 90% and 93% of revenues provided by Total were attributable to the Floaters segment and the remaining were attributable to the Jackups segment.
Consolidated revenues by region for the three-month periodsthree and nine months ended March 31,September 30, 2020 and 2019 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Norway(1) | $ | 53.5 | | | $ | .2 | | | $ | 141.0 | | | $ | 9.9 | |
Saudi Arabia(2) | 48.5 | | | 90.3 | | | 189.7 | | | 226.9 | |
United Kingdom(1) | 48.0 | | | 59.6 | | | 153.3 | | | 157.2 | |
U.S. Gulf of Mexico(3) | 38.0 | | | 83.1 | | | 183.3 | | | 231.2 | |
Australia(4) | 18.6 | | | 51.6 | | | 117.0 | | | 189.0 | |
Angola(5) | .2 | | | 72.1 | | | 63.4 | | | 210.8 | |
| Other | 78.5 | | | 194.4 | | | 283.0 | | | 516.1 | |
| $ | 285.3 | | | $ | 551.3 | | | $ | 1,130.7 | | | $ | 1,541.1 | |
(1)During the three and nine months ended September 30, 2020 and 2019, all revenues earned in the United Kingdom and Norway were attributable to our Jackups segment.
(2)During the three and nine months ended September 30, 2020, 55% and 56% of the revenues earned in Saudi Arabia, respectively, were attributable to our Jackups segment. The remaining revenues were attributable to our Other segment and related to our rigs leased to ARO and certain revenues related to our Transition Services Agreement and Secondment Agreement.
During the three and nine months ended September 30, 2019, 58% and 69% of the revenues earned in Saudi Arabia, respectively, were attributable to our Jackups segment. The remaining revenues were attributable to our Other segment and related to our rigs leased to ARO and certain revenues related to our Transition Services Agreement and Secondment Agreement.
(3)During the three months ended September 30, 2020, 38% of the revenues earned in the U.S. Gulf of Mexico were attributable to our Floaters segment, 11% were attributable to our Jackups segment and the remaining revenues were attributable to our managed rigs. During the nine months ended September 30, 2020, 56% of the revenues earned in the U.S. Gulf of Mexico were attributable to our Floaters segment, 11% were attributable to our Jackups segment and the remaining revenues were attributable to our managed rigs.
|
| | | | | | | |
| | Three Months Ended March 31, |
| | 2020 | | 2019 |
Saudi Arabia(1) | $ | 83.9 |
| | $ | 53.4 |
|
U.S. Gulf of Mexico(2) | 78.7 |
| | 54.7 |
|
Angola(3) | 61.5 |
| | 70.6 |
|
United Kingdom(4) | 52.5 |
| | 43.4 |
|
Australia(5) | 26.0 |
| | 67.3 |
|
| Other | 154.0 |
| | 116.5 |
|
| | $ | 456.6 |
|
| $ | 405.9 |
|
(4)During the three months ended September 30, 2020 and 2019, 100% and 99% of the revenues earned in Australia, respectively, were attributable to our Floaters segment, and the remaining revenues were attributable to our Jackups segment.
| |
(1)
| During the three months ended March 31, 2020, 53% and 47% of the revenues earned in Saudi Arabia were attributable to our Jackups and Other segments, respectively. During the three months ended March 31, 2019, all revenues earned in Saudi Arabia were attributable to our Jackups segment. |
| |
(2)
| During the three months ended March 31, 2020, 57% of the revenues earned in the U.S. Gulf of Mexico were attributable to our Floaters segment, 16% were attributable to our Jackups segment, and the remaining revenues were attributable to our managed rigs. During the three months ended March 31, 2019, 25% of the revenues earned in the U.S. Gulf of Mexico were attributable to our Floaters segment, 45% were attributable to our Jackups segment and the remaining revenues were attributable to our managed rigs. |
| |
(3)
| During the three-month periods ended March 31, 2020 and 2019, 82% and 86% of the revenue earned in Angola, respectively, were attributable to our Floaters segment, and the remaining revenues were attributable to our Jackups segment. |
| |
(4)
| During the three-month periods ended March 31, 2020 and 2019, all revenues earned in the United Kingdom were attributable to our Jackups segment. |
| |
(5)
| During the three-month periods ended March 31, 2020 and 2019, 59% and 94% of the revenues earned in Australia, respectively, were attributable to our Floaters segment, and remaining revenues were attributable to our Jackups segment. |
During the nine months ended September 30, 2020 and 2019, 91% and 95% of the revenues earned in Australia, respectively, were attributable to our Floaters segment, and the remaining revenues were attributable to our Jackups segment.
(5)During the three months ended September 30, 2020, all of the revenues earned in Angola were attributable to our Jackup segment. During the three months ended September 30, 2019, 86% of the revenues earned in Angola, were attributable to our Floaters segment, and the remaining revenues were attributable to our Jackups segment.
During the nine monthsended September 30, 2020 and 2019, 79% and 87% of the revenues earned in Angola, respectively, were attributable to our Floaters segment, and the remaining revenues were attributable to our Jackups segment.
Note 1617 -Guarantee of Registered Securities
In connection with the Pride acquisition, Valaris and Pride entered into a supplemental indenture to the indenture dated as of July 1, 2004 between Pride and the Bank of New York Mellon, as indenture trustee, providing for, among other matters, the full and unconditional guarantee by Valaris of Pride’s 6.875% senior notes due 2020 Notes and 7.875% senior notes due 2040 Notes, which had an aggregate outstanding principal balance of $422.9 million as of March 31,September 30, 2020. The Valaris guarantee provides for the unconditional and irrevocable guarantee of the prompt payment, when due, of any amount owed to the holders of the notes.
Valaris is also a full and unconditional guarantor of the 7.2% debentures due 2027 issued by Ensco International Incorporated in November 1997, which had an aggregate outstanding principal balance of $112.1 million as of March 31,September 30, 2020.
Pride and Ensco International Incorporated are 100% owned subsidiaries of Valaris. All guarantees are unsecured obligations of Valaris ranking equal in right of payment with all of its existing and future unsecured and unsubordinated indebtedness.
Valaris, Pride and Ensco International Incorporated as well as certain entities included below in non-guarantor subsidiaries of Valaris are the Debtors in the Chapter 11 Cases. The Debtors continue to operate their businesses and manage their properties as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. See "Note 2 -Chapter 11 Proceedings and Ability to Continue as a Going Concern" for additional information.
The following tables present the unaudited condensed consolidating statements of operations for the three-month periodsthree and nine months ended March 31,September 30, 2020 and 2019; the unaudited condensed consolidating statements of comprehensive income (loss) for the three-month periodsthree and nine months ended March 31,September 30, 2020 and 2019; the condensed consolidating balance sheets as of March 31,September 30, 2020 (unaudited) and December 31, 2019; and the unaudited condensed consolidating statements of cash flows for the three-month periodsnine months ended March 31,September 30, 2020 and 2019, in accordance with Rule 3-10 of Regulation S-X.
VALARIS PLC AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS Three Months Ended March 31, 2020 (In millions) (Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Valaris plc | | ENSCO International Incorporated | | Pride International LLC | | Other Non-Guarantor Subsidiaries of Valaris | | Consolidating Adjustments | | Total |
| OPERATING REVENUES | $ | 17.3 |
| | $ | 47.0 |
| | $ | — |
| | $ | 493.3 |
| | $ | (101.0 | ) | | $ | 456.6 |
|
| OPERATING EXPENSES | | | | | | | | | | | |
| Contract drilling (exclusive of depreciation) | 20.6 |
| | 43.1 |
| | — |
| | 513.3 |
| | (101.0 | ) | | 476.0 |
|
| Loss on impairment | — |
| | — |
| | — |
| | 2,808.2 |
| | — |
| | 2,808.2 |
|
| Depreciation | — |
| | 4.6 |
| | — |
| | 159.9 |
| | — |
| | 164.5 |
|
| General and administrative | 20.2 |
| | 11.5 |
| | — |
| | 21.7 |
| | — |
| | 53.4 |
|
| Total operating expenses | 40.8 |
| | 59.2 |
| | — |
| | 3,503.1 |
| | (101.0 | ) | | 3,502.1 |
|
| EQUITY IN EARNINGS OF ARO | — |
| | — |
| | — |
| | (6.3 | ) | | — |
| | (6.3 | ) |
| OPERATING LOSS | (23.5 | ) | | (12.2 | ) | | — |
| | (3,016.1 | ) | | — |
| | (3,051.8 | ) |
| OTHER INCOME (EXPENSE), NET | 345.1 |
| | .2 |
| | (19.5 | ) | | (438.1 | ) | | 4.4 |
| | (107.9 | ) |
| INCOME (LOSS) BEFORE INCOME TAXES | 321.6 |
| | (12.0 | ) | | (19.5 | ) | | (3,454.2 | ) | | 4.4 |
| | (3,159.7 | ) |
| INCOME TAX BENEFIT | — |
| | (11.6 | ) | | — |
| | (140.4 | ) | | — |
| | (152.0 | ) |
| EQUITY EARNINGS (LOSSES) IN AFFILIATES, NET OF TAX | (3,327.9 | ) | | (84.6 | ) | | 5.6 |
| | — |
| | 3,406.9 |
| | — |
|
| NET LOSS | (3,006.3 | ) | | (85.0 | ) | | (13.9 | ) | | (3,313.8 | ) | | 3,411.3 |
| | (3,007.7 | ) |
| NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS | — |
| | — |
| | — |
| | 1.4 |
| | — |
| | 1.4 |
|
| NET LOSS ATTRIBUTABLE TO VALARIS | $ | (3,006.3 | ) | | $ | (85.0 | ) | | $ | (13.9 | ) | | $ | (3,312.4 | ) | | $ | 3,411.3 |
| | $ | (3,006.3 | ) |
Three Months Ended September 30, 2020
(In millions)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Valaris plc | | ENSCO International Incorporated | | Pride International LLC | | Other Non-Guarantor Subsidiaries of Valaris | | Consolidating Adjustments | | Total |
| OPERATING REVENUES | $ | 12.4 | | | $ | 85.3 | | | $ | 0 | | | $ | 372.4 | | | $ | (184.8) | | | $ | 285.3 | |
| OPERATING EXPENSES | | | | | | | | | | | |
| Contract drilling (exclusive of depreciation) | 72.4 | | | 84.7 | | | 0 | | | 334.9 | | | (184.8) | | | 307.2 | |
| Depreciation | 0 | | | 1.8 | | | 0 | | | 120.6 | | | 0 | | | 122.4 | |
| General and administrative | 26.7 | | | 8.8 | | | 0 | | | 36.6 | | | 0 | | | 72.1 | |
| Total operating expenses | 99.1 | | | 95.3 | | | 0 | | | 492.1 | | | (184.8) | | | 501.7 | |
| OTHER OPERATING INCOME | — | | | — | | | — | | | 118.1 | | | — | | | 118.1 | |
| EQUITY IN EARNINGS OF ARO | — | | | — | | | — | | | 3.9 | | | — | | | 3.9 | |
| OPERATING INCOME (LOSS) | (86.7) | | | (10.0) | | | 0 | | | 2.3 | | | 0 | | | (94.4) | |
| OTHER INCOME (EXPENSE), NET | (499.1) | | | (0.8) | | | 64.8 | | | (123.1) | | | 2.5 | | | (555.7) | |
| INCOME (LOSS) BEFORE INCOME TAXES | (585.8) | | | (10.8) | | | 64.8 | | | (120.8) | | | 2.5 | | | (650.1) | |
| PROVISION FOR INCOME TAXES | 0 | | | 7.3 | | | 0 | | | 14.6 | | | 0 | | | 21.9 | |
| EQUITY EARNINGS (LOSSES) IN AFFILIATES, NET OF TAX | (85.1) | | | 43.2 | | | 3.0 | | | 0 | | | 38.9 | | | 0 | |
| NET INCOME (LOSS) | (670.9) | | | 25.1 | | | 67.8 | | | (135.4) | | | 41.4 | | | (672.0) | |
| NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS | 0 | | | 0 | | | 0 | | | 1.1 | | | 0 | | | 1.1 | |
| NET INCOME (LOSS) ATTRIBUTABLE TO VALARIS | $ | (670.9) | | | $ | 25.1 | | | $ | 67.8 | | | $ | (134.3) | | | $ | 41.4 | | | $ | (670.9) | |
VALARIS PLC AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS Three Months Ended March 31, 2019 (In millions) (Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Valaris plc | | ENSCO International Incorporated | | Pride International LLC | | Other Non-Guarantor Subsidiaries of Valaris | | Consolidating Adjustments | | Total |
| OPERATING REVENUES | $ | 11.4 |
| | $ | 39.5 |
| | $ | — |
| | $ | 430.4 |
| | $ | (75.4 | ) | | $ | 405.9 |
|
| OPERATING EXPENSES | |
| | |
| | |
| | |
| | |
| | |
|
| Contract drilling (exclusive of depreciation) | 11.7 |
| | 35.7 |
| | — |
| | 360.6 |
| | (75.4 | ) | | 332.6 |
|
| Depreciation | — |
| | 3.7 |
| | — |
| | 121.3 |
| | — |
| | 125.0 |
|
| General and administrative | 14.9 |
| | .1 |
| | — |
| | 14.6 |
| | — |
| | 29.6 |
|
| OPERATING LOSS | (15.2 | ) |
| — |
|
| — |
|
| (66.1 | ) |
| — |
|
| (81.3 | ) |
| OTHER EXPENSE, NET | (16.1 | ) | | (15.4 | ) | | (20.5 | ) | | (27.3 | ) | | 4.1 |
| | (75.2 | ) |
| LOSS BEFORE INCOME TAXES | (31.3 | ) |
| (15.4 | ) |
| (20.5 | ) |
| (93.4 | ) |
| 4.1 |
|
| (156.5 | ) |
| INCOME TAX PROVISION | — |
| | 16.6 |
| | — |
| | 14.9 |
| | — |
| | 31.5 |
|
| EQUITY EARNINGS (LOSSES) IN AFFILIATES, NET OF TAX | (159.1 | ) | | 32.1 |
| | 26.1 |
| | — |
| | 100.9 |
| | — |
|
| NET INCOME (LOSS) | (190.4 | ) |
| .1 |
|
| 5.6 |
|
| (108.3 | ) |
| 105.0 |
|
| (188.0 | ) |
| NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | — |
| | — |
| | — |
| | (2.4 | ) | | — |
| | (2.4 | ) |
| NET INCOME (LOSS) ATTRIBUTABLE TO VALARIS | $ | (190.4 | ) |
| $ | .1 |
|
| $ | 5.6 |
|
| $ | (110.7 | ) |
| $ | 105.0 |
|
| $ | (190.4 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Valaris plc | | ENSCO International Incorporated | | Pride International LLC | | Other Non-Guarantor Subsidiaries of Valaris | | Consolidating Adjustments | | Total |
| OPERATING REVENUES | $ | 15.7 | | | $ | 53.0 | | | $ | 0 | | | $ | 588.8 | | | $ | (106.2) | | | $ | 551.3 | |
| OPERATING EXPENSES | | | | | | | | | | | |
| Contract drilling (exclusive of depreciation) | 19.3 | | | 45.3 | | | 0 | | | 538.1 | | | (106.2) | | | 496.5 | |
| Loss on impairment | — | | | — | | | — | | | 88.2 | | | — | | | 88.2 | |
| Depreciation | 0 | | | 7.7 | | | 0 | | | 155.3 | | | 0 | | | 163.0 | |
| General and administrative | 9.7 | | | .1 | | | 0 | | | 26.3 | | | 0 | | | 36.1 | |
| Total operating expenses | 29.0 | | | 53.1 | | | 0 | | | 807.9 | | | (106.2) | | | 783.8 | |
| EQUITY IN EARNINGS OF ARO | — | | | — | | | — | | | (3.7) | | | — | | | (3.7) | |
| OPERATING LOSS | (13.3) | | | (.1) | | | 0 | | | (222.8) | | | 0 | | | (236.2) | |
| OTHER INCOME (EXPENSE), NET | 94.7 | | | (5.6) | | | (20.2) | | | (33.0) | | | 4.3 | | | 40.2 | |
| INCOME (LOSS) BEFORE INCOME TAXES | 81.4 | | | (5.7) | | | (20.2) | | | (255.8) | | | 4.3 | | | (196.0) | |
| PROVISION (BENEFIT) FOR INCOME TAXES | 0 | | | (18.4) | | | 0 | | | 19.9 | | | 0 | | | 1.5 | |
| EQUITY LOSSES IN AFFILIATES, NET OF TAX | (278.5) | | | (40.2) | | | (68.0) | | | 0 | | | 386.7 | | | 0 | |
| NET LOSS | (197.1) | | | (27.5) | | | (88.2) | | | (275.7) | | | 391.0 | | | (197.5) | |
| NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS | 0 | | | 0 | | | 0 | | | .4 | | | 0 | | | .4 | |
| NET LOSS ATTRIBUTABLE TO VALARIS | $ | (197.1) | | | $ | (27.5) | | | $ | (88.2) | | | $ | (275.3) | | | $ | 391.0 | | | $ | (197.1) | |
VALARIS PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Nine Months Ended September 30, 2020
(In millions)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Valaris plc | | ENSCO International Incorporated | | Pride International LLC | | Other Non-Guarantor Subsidiaries of Valaris | | Consolidating Adjustments | | Total |
| OPERATING REVENUES | $ | 47.3 | | | $ | 182.0 | | | $ | 0 | | | $ | 1,311.4 | | | $ | (410.0) | | | $ | 1,130.7 | |
| OPERATING EXPENSES | | | | | | | | | | | |
| Contract drilling (exclusive of depreciation) | 128.6 | | | 180.4 | | | 0 | | | 1,254.9 | | | (410.0) | | | 1,153.9 | |
| Loss on impairment | — | | | — | | | — | | | 3,646.2 | | | — | | | 3,646.2 | |
| Depreciation | 0 | | | 11.1 | | | 0 | | | 407.3 | | | 0 | | | 418.4 | |
| General and administrative | 60.4 | | | 33.6 | | | 0 | | | 94.1 | | | 0 | | | 188.1 | |
| | | | | | | | | | | |
| Total operating expenses | 189.0 | | | 225.1 | | | 0 | | | 5,402.5 | | | (410.0) | | | 5,406.6 | |
| OTHER OPERATING INCOME | — | | | — | | | — | | | 118.1 | | | | | 118.1 | |
| EQUITY IN LOSSES OF ARO | — | | | — | | | — | | | (7.6) | | | — | | | (7.6) | |
| OPERATING LOSS | (141.7) | | | (43.1) | | | 0 | | | (3,980.6) | | | 0 | | | (4,165.4) | |
| OTHER INCOME (EXPENSE), NET | (283.6) | | | (1.0) | | | 27.0 | | | (522.8) | | | 11.4 | | | (769.0) | |
| INCOME (LOSS) BEFORE INCOME TAXES | (425.3) | | | (44.1) | | | 27.0 | | | (4,503.4) | | | 11.4 | | | (4,934.4) | |
| BENEFIT FOR INCOME TAXES | 0 | | | (92.7) | | | 0 | | | (53.2) | | | 0 | | | (145.9) | |
| EQUITY EARNINGS (LOSSES) IN AFFILIATES, NET OF TAX | (4,359.3) | | | (91.4) | | | 17.9 | | | 0 | | | 4,432.8 | | | 0 | |
| NET INCOME (LOSS) | (4,784.6) | | | (42.8) | | | 44.9 | | | (4,450.2) | | | 4,444.2 | | | (4,788.5) | |
| NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS | 0 | | | 0 | | | 0 | | | 3.9 | | | 0 | | | 3.9 | |
| NET INCOME (LOSS) ATTRIBUTABLE TO VALARIS | $ | (4,784.6) | | | $ | (42.8) | | | $ | 44.9 | | | $ | (4,446.3) | | | $ | 4,444.2 | | | $ | (4,784.6) | |
VALARIS PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Nine Months Ended September 30, 2019
(In millions)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Valaris plc | | ENSCO International Incorporated | | Pride International LLC | | Other Non-Guarantor Subsidiaries of Valaris | | Consolidating Adjustments | | Total |
| OPERATING REVENUES | $ | 47.0 | | | $ | 128.6 | | | $ | 0 | | | $ | 1,627.1 | | | $ | (261.6) | | | $ | 1,541.1 | |
| OPERATING EXPENSES | | | | | | | | | | | |
| Contract drilling (exclusive of depreciation) | 49.3 | | | 112.8 | | | 0 | | | 1,428.9 | | | (261.6) | | | 1,329.4 | |
| Loss on impairment | — | | | — | | | — | | | 90.7 | | | — | | | 90.7 | |
| Depreciation | 0 | | | 15.4 | | | 0 | | | 430.5 | | | 0 | | | 445.9 | |
| General and administrative | 71.0 | | | .3 | | | 0 | | | 75.6 | | | 0 | | | 146.9 | |
| Total operating expenses | 120.3 | | | 128.5 | | | 0 | | | 2,025.7 | | | (261.6) | | | 2,012.9 | |
| EQUITY IN EARNINGS OF ARO | — | | | — | | | — | | | (3.1) | | | — | | | (3.1) | |
| OPERATING INCOME (LOSS) | (73.3) | | | .1 | | | 0 | | | (401.7) | | | 0 | | | (474.9) | |
| OTHER INCOME (EXPENSE), NET | 773.5 | | | (36.6) | | | (61.0) | | | (126.3) | | | 12.7 | | | 562.3 | |
| INCOME (LOSS) BEFORE INCOME TAXES | 700.2 | | | (36.5) | | | (61.0) | | | (528.0) | | | 12.7 | | | 87.4 | |
| PROVISION FOR INCOME TAXES | 0 | | | 10.6 | | | 0 | | | 55.0 | | | 0 | | | 65.6 | |
| EQUITY EARNINGS (LOSSES) IN AFFILIATES, NET OF TAX | (682.2) | | | 35.1 | | | (14.9) | | | 0 | | | 662.0 | | | 0 | |
| NET INCOME (LOSS) | 18.0 | | | (12.0) | | | (75.9) | | | (583.0) | | | 674.7 | | | 21.8 | |
| NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | 0 | | | 0 | | | 0 | | | (3.8) | | | 0 | | | (3.8) | |
| NET INCOME (LOSS) ATTRIBUTABLE TO VALARIS | $ | 18.0 | | | $ | (12.0) | | | $ | (75.9) | | | $ | (586.8) | | | $ | 674.7 | | | $ | 18.0 | |
VALARIS PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE LOSS
Three Months Ended March 31,September 30, 2020
(In millions)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Valaris plc | | ENSCO International Incorporated | | Pride International LLC | | Other Non-Guarantor Subsidiaries of Valaris | | Consolidating Adjustments | | Total |
| NET INCOME (LOSS) | $ | (670.9) | | | $ | 25.1 | | | $ | 67.8 | | | $ | (135.4) | | | $ | 41.4 | | | $ | (672) | |
| OTHER COMPREHENSIVE INCOME (LOSS), NET | | | | | | | | | | | |
| Net change in derivative fair value | 0 | | | 2.7 | | | 0 | | | 0 | | | 0 | | | 2.7 | |
| Reclassification of net gains on derivative instruments from other comprehensive income (loss) to net income (loss) | 0 | | | (.5) | | | 0 | | | 0 | | | 0 | | | (.5) | |
| Other | | | | | | | (.1) | | | | | (.1) | |
| NET OTHER COMPREHENSIVE INCOME (LOSS) | 0 | | | 2.2 | | | 0 | | | (.1) | | | 0 | | | 2.1 | |
| COMPREHENSIVE INCOME (LOSS) | (670.9) | | | 27.3 | | | 67.8 | | | (135.5) | | | 41.4 | | | (669.9) | |
| COMPREHENSIVE LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS | 0 | | | 0 | | | 0 | | | 1.1 | | | 0 | | | 1.1 | |
| COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO VALARIS | $ | (670.9) | | | $ | 27.3 | | | $ | 67.8 | | | $ | (134.4) | | | $ | 41.4 | | | $ | (668.8) | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Valaris plc | | ENSCO International Incorporated | | Pride International LLC | | Other Non-Guarantor Subsidiaries of Valaris | | Consolidating Adjustments | | Total |
| NET LOSS | $ | (3,006.3 | ) | | $ | (85.0 | ) | | $ | (13.9 | ) | | $ | (3,313.8 | ) | | $ | 3,411.3 |
| | $ | (3,007.7 | ) |
| OTHER COMPREHENSIVE LOSS, NET | | | | | | | | | | |
|
| Net change in derivative fair value | — |
| | (12.9 | ) | | — |
| | — |
| | — |
| | (12.9 | ) |
| Reclassification of net gains on derivative instruments from other comprehensive loss to net loss | — |
| | (.1 | ) | | — |
| | — |
| | — |
| | (.1 | ) |
| Other | — |
| | — |
| | — |
| | (.4 | ) | | — |
| | (.4 | ) |
| NET OTHER COMPREHENSIVE LOSS | — |
|
| (13.0 | ) |
| — |
|
| (.4 | ) |
| — |
| | (13.4 | ) |
| COMPREHENSIVE LOSS | (3,006.3 | ) |
| (98.0 | ) |
| (13.9 | ) |
| (3,314.2 | ) |
| 3,411.3 |
| | (3,021.1 | ) |
| COMPREHENSIVE LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS | — |
| | — |
| | — |
| | 1.4 |
| | — |
| | 1.4 |
|
| COMPREHENSIVE LOSS ATTRIBUTABLE TO VALARIS | $ | (3,006.3 | ) |
| $ | (98.0 | ) |
| $ | (13.9 | ) |
| $ | (3,312.8 | ) |
| $ | 3,411.3 |
|
| $ | (3,019.7 | ) |
Three Months Ended September 30, 2019
(In millions)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Valaris plc | | ENSCO International Incorporated | | Pride International LLC | | Other Non-Guarantor Subsidiaries of Valaris | | Consolidating Adjustments | | Total |
| NET LOSS | $ | (197.1) | | | $ | (27.5) | | | $ | (88.2) | | | $ | (275.7) | | | $ | 391.0 | | | $ | (197.5) | |
| OTHER COMPREHENSIVE LOSS, NET | | | | | | | | | | | |
| Net change in derivative fair value | 0 | | | (5.7) | | | 0 | | | 0 | | | 0 | | | (5.7) | |
| Reclassification of net losses on derivative instruments from other comprehensive loss to net loss | 0 | | | 4.9 | | | 0 | | | 0 | | | 0 | | | 4.9 | |
| Other | — | | | — | | | — | | | (.2) | | | — | | | (.2) | |
| NET OTHER COMPREHENSIVE LOSS | 0 | | | (.8) | | | 0 | | | (.2) | | | 0 | | | (1.0) | |
| COMPREHENSIVE LOSS | (197.1) | | | (28.3) | | | (88.2) | | | (275.9) | | | 391.0 | | | (198.5) | |
| COMPREHENSIVE LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS | 0 | | | 0 | | | 0 | | | .4 | | | 0 | | | .4 | |
| COMPREHENSIVE LOSS ATTRIBUTABLE TO VALARIS | $ | (197.1) | | | $ | (28.3) | | | $ | (88.2) | | | $ | (275.5) | | | $ | 391.0 | | | $ | (198.1) | |
VALARIS PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE LOSS
Nine Months Ended September 30, 2020
(In millions)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Valaris plc | | ENSCO International Incorporated | | Pride International LLC | | Other Non-Guarantor Subsidiaries of Valaris | | Consolidating Adjustments | | Total |
| NET INCOME (LOSS) | $ | (4,784.6) | | | $ | (42.8) | | | $ | 44.9 | | | $ | (4,450.2) | | | $ | 4,444.2 | | | $ | (4,788.5) | |
| OTHER COMPREHENSIVE LOSS, NET | | | | | | | | | | | |
| Net change in derivative fair value | 0 | | | (5.4) | | | 0 | | | 0 | | | 0 | | | (5.4) | |
| Reclassification of net gains on derivative instruments from other comprehensive loss to net income (loss) | 0 | | | (11.5) | | | 0 | | | 0 | | | 0 | | | (11.5) | |
| Other | 0 | | | 0 | | | 0 | | | (.5) | | | 0 | | | (.5) | |
| NET OTHER COMPREHENSIVE LOSS | 0 | | | (16.9) | | | 0 | | | (.5) | | | 0 | | | (17.4) | |
| COMPREHENSIVE INCOME (LOSS) | (4,784.6) | | | (59.7) | | | 44.9 | | | (4,450.7) | | | 4,444.2 | | | (4,805.9) | |
| COMPREHENSIVE LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS | 0 | | | 0 | | | 0 | | | 3.9 | | | 0 | | | 3.9 | |
| COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO VALARIS | $ | (4,784.6) | | | $ | (59.7) | | | $ | 44.9 | | | $ | (4,446.8) | | | $ | 4,444.2 | | | $ | (4,802.0) | |
VALARIS PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
ThreeNine Months Ended MarchSeptember 30, 2019
(In millions)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Valaris plc | | ENSCO International Incorporated | | Pride International LLC | | Other Non-Guarantor Subsidiaries of Valaris | | Consolidating Adjustments | | Total |
| NET INCOME (LOSS) | $ | 18.0 | | | $ | (12.0) | | | $ | (75.9) | | | $ | (583.0) | | | $ | 674.7 | | | $ | 21.8 | |
| OTHER COMPREHENSIVE INCOME (LOSS), NET | | | | | | | | | | | |
| Net change in derivative fair value | 0 | | | (7.3) | | | 0 | | | 0 | | | 0 | | | (7.3) | |
| Reclassification of net losses on derivative instruments from other comprehensive income (loss) to net income (loss) | 0 | | | 8.3 | | | 0 | | | 0 | | | 0 | | | 8.3 | |
| Other | 0 | | | 0 | | | 0 | | | (.3) | | | 0 | | | (.3) | |
| NET OTHER COMPREHENSIVE INCOME (LOSS) | 0 | | | 1.0 | | | 0 | | | (.3) | | | 0 | | | .7 | |
| COMPREHENSIVE INCOME (LOSS) | 18.0 | | | (11.0) | | | (75.9) | | | (583.3) | | | 674.7 | | | 22.5 | |
| COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | 0 | | | 0 | | | 0 | | | (3.8) | | | 0 | | | (3.8) | |
| COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO VALARIS | $ | 18.0 | | | $ | (11.0) | | | $ | (75.9) | | | $ | (587.1) | | | $ | 674.7 | | | $ | 18.7 | |
VALARIS PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
September 30, 2020
(In millions)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Valaris plc | | ENSCO International Incorporated | | Pride International LLC | | Other Non-Guarantor Subsidiaries of Valaris | | Consolidating Adjustments | | Total |
ASSETS | | | | | | | | | | | |
| CURRENT ASSETS | | | | | | | | | | | |
| Cash and cash equivalents | $ | 62.9 | | | $ | 0 | | | $ | 0 | | | $ | 117.5 | | | $ | 0 | | | $ | 180.4 | |
| Accounts receivable, net | 0 | | | 27.5 | | | 0 | | | 402.2 | | | 0 | | | 429.7 | |
| Accounts receivable from affiliates | 4,368.8 | | | 201.7 | | | 2.0 | | | 1,249.0 | | | (5,821.5) | | | 0 | |
| Other current assets | 5.5 | | | 42.7 | | | 0 | | | 406.5 | | | 0 | | | 454.7 | |
| Total current assets | 4,437.2 | | | 271.9 | | | 2.0 | | | 2,175.2 | | | (5,821.5) | | | 1,064.8 | |
| PROPERTY AND EQUIPMENT, AT COST | 1.3 | | | 116.2 | | | 0 | | | 13,098.0 | | | 0 | | | 13,215.5 | |
| Less accumulated depreciation | 1.3 | | | 95.2 | | | 0 | | | 2,036.6 | | | 0 | | | 2,133.1 | |
| Property and equipment, net | 0 | | | 21.0 | | | 0 | | | 11,061.4 | | | 0 | | | 11,082.4 | |
| LONG - TERM NOTES RECEIVABLE FROM ARO | — | | | — | | | — | | | 442.7 | | | — | | | 442.7 | |
| INVESTMENT IN ARO | — | | | | | — | | | 121.1 | | | — | | | 121.1 | |
| DUE FROM AFFILIATES | 1,592.7 | | | 216.8 | | | 38.9 | | | 4,760.9 | | | (6,609.3) | | | 0 | |
| INVESTMENTS IN AFFILIATES | 9,079.3 | | | 697.4 | | | 1,242.8 | | | 0 | | | (11,019.5) | | | 0 | |
| OTHER ASSETS | .9 | | | 14.5 | | | 0 | | | 184.8 | | | 0 | | | 200.2 | |
| | $ | 15,110.1 | | | $ | 1,221.6 | | | $ | 1,283.7 | | | $ | 18,746.1 | | | $ | (23,450.3) | | | $ | 12,911.2 | |
| LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | |
| CURRENT LIABILITIES | | | | | | | | | | | |
| Accounts payable and accrued liabilities | $ | 5.7 | | | $ | 2.1 | | | $ | 0 | | | $ | 380.2 | | | $ | 0 | | | $ | 388.0 | |
| Accounts payable to affiliates | 1,183.3 | | | 171.4 | | | 809.1 | | | 3,657.7 | | | (5,821.5) | | | 0 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Total current liabilities | 1,189.0 | | | 173.5 | | | 809.1 | | | 4,037.9 | | | (5,821.5) | | | 388.0 | |
| DUE TO AFFILIATES | 3,538.0 | | | 584.1 | | | 638.8 | | | 1,848.4 | | | (6,609.3) | | | 0 | |
| | | | | | | | | | | |
| OTHER LIABILITIES | | | 241.5 | | | | | 455.4 | | | 0 | | | 696.9 | |
| Total liabilities not subject to compromise | 4,727.0 | | | 999.1 | | | 1,447.9 | | | 6,341.7 | | | (12,430.8) | | | 1,084.9 | |
| LIABILITIES SUBJECT TO COMPROMISE | 5,870.5 | | | 115.2 | | | 439.1 | | | 888.9 | | | 0 | | | 7,313.7 | |
| VALARIS SHAREHOLDERS' EQUITY (DEFICIT) | 4,512.6 | | | 107.3 | | | (603.3) | | | 11,521.6 | | | (11,019.5) | | | 4,518.7 | |
| NONCONTROLLING INTERESTS | 0 | | | | | 0 | | | (6.1) | | | 0 | | | (6.1) | |
| Total equity (deficit) | 4,512.6 | | | 107.3 | | | (603.3) | | | 11,515.5 | | | (11,019.5) | | | 4,512.6 | |
| | $ | 15,110.1 | | | $ | 1,221.6 | | | $ | 1,283.7 | | | $ | 18,746.1 | | | $ | (23,450.3) | | | $ | 12,911.2 | |
VALARIS PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
December 31, 2019
(In millions)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Valaris plc | | ENSCO International Incorporated | | Pride International LLC | | Other Non-Guarantor Subsidiaries of Valaris | | Consolidating Adjustments | | Total |
ASSETS | | | | | | | | | | | |
| CURRENT ASSETS | | | | | | | | | | | |
| Cash and cash equivalents | $ | 21.5 | | | $ | 0 | | | $ | 0 | | | $ | 75.7 | | | $ | 0 | | | $ | 97.2 | |
| | | | | | | | | | | |
| Accounts receivable, net | .2 | | | 19.7 | | | 0 | | | 500.8 | | | 0 | | | 520.7 | |
| Accounts receivable from affiliates | 4,031.4 | | | 386.0 | | | 0 | | | 897.2 | | | (5,314.6) | | | 0 | |
| Other current assets | .6 | | | 11.6 | | | 0 | | | 434.3 | | | 0 | | | 446.5 | |
| Total current assets | 4,053.7 | | | 417.3 | | | 0 | | | 1,908.0 | | | (5,314.6) | | | 1,064.4 | |
| PROPERTY AND EQUIPMENT, AT COST | 1.9 | | | 108.8 | | | 0 | | | 18,283.1 | | | 0 | | | 18,393.8 | |
| Less accumulated depreciation | 1.9 | | | 84.7 | | | 0 | | | 3,210.3 | | | 0 | | | 3,296.9 | |
| Property and equipment, net | 0 | | | 24.1 | | | 0 | | | 15,072.8 | | | 0 | | | 15,096.9 | |
| LONG-TERM NOTES RECEIVABLE FROM ARO | 0 | | | 0 | | | 0 | | | 452.9 | | | 0 | | | 452.9 | |
| INVESTMENT IN ARO | 0 | | | 0 | | | 0 | | | 128.7 | | | 0 | | | 128.7 | |
| DUE FROM AFFILIATES | 73.8 | | | 0 | | | 38.9 | | | 1,775.7 | | | (1,888.4) | | | 0 | |
| INVESTMENTS IN AFFILIATES | 9,778.5 | | | 788.8 | | | 1,224.9 | | | 0 | | | (11,792.2) | | | 0 | |
| OTHER ASSETS | 7.9 | | | 3.8 | | | 0 | | | 182.6 | | | (6.0) | | | 188.3 | |
| | $ | 13,913.9 | | | $ | 1,234.0 | | | $ | 1,263.8 | | | $ | 19,520.7 | | | $ | (19,001.2) | | | $ | 16,931.2 | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | |
| CURRENT LIABILITIES | | | | | | | | | | | |
| Accounts payable and accrued liabilities | $ | 99.2 | | | $ | 29.3 | | | $ | 12.2 | | | $ | 565.2 | | | $ | 0 | | | $ | 705.9 | |
| Accounts payable to affiliates | 818.8 | | | 147.8 | | | 815.1 | | | 3,532.9 | | | (5,314.6) | | | 0 | |
| Current maturities of long - term debt | 0 | | | 0 | | | 124.8 | | | 0 | | | 0 | | | 124.8 | |
| Total current liabilities | 918.0 | | | 177.1 | | | 952.1 | | | 4,098.1 | | | (5,314.6) | | | 830.7 | |
| DUE TO AFFILIATES | 710.3 | | | 478.8 | | | 586.6 | | | 112.7 | | | (1,888.4) | | | 0 | |
| LONG-TERM DEBT | 2,990.6 | | | 111.7 | | | 373.3 | | | 2,447.9 | | | 0 | | | 5,923.5 | |
| OTHER LIABILITIES | (14.6) | | | 90.6 | | | 0 | | | 797.4 | | | (6.0) | | | 867.4 | |
| VALARIS SHAREHOLDERS' EQUITY (DEFICIT) | 9,309.6 | | | 375.8 | | | (648.2) | | | 12,065.9 | | | (11,792.2) | | | 9,310.9 | |
| NONCONTROLLING INTERESTS | 0 | | | 0 | | | 0 | | | (1.3) | | | 0 | | | (1.3) | |
| Total equity (deficit) | 9,309.6 | | | 375.8 | | | (648.2) | | | 12,064.6 | | | (11,792.2) | | | 9,309.6 | |
| | $ | 13,913.9 | | | $ | 1,234.0 | | | $ | 1,263.8 | | | $ | 19,520.7 | | | $ | (19,001.2) | | | $ | 16,931.2 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Valaris plc | | ENSCO International Incorporated | | Pride International LLC | | Other Non-Guarantor Subsidiaries of Valaris | | Consolidating Adjustments | | Total |
| NET INCOME (LOSS) | $ | (190.4 | ) | | $ | .1 |
| | $ | 5.6 |
| | $ | (108.3 | ) | | $ | 105.0 |
| | $ | (188.0 | ) |
| OTHER COMPREHENSIVE INCOME (LOSS), NET | | | | | | | | | | |
|
|
| Reclassification of net losses on derivative instruments from other comprehensive income into net loss | — |
| | 1.6 |
| | — |
| | — |
| | — |
| | 1.6 |
|
| Other | — |
| | — |
| | — |
| | (.1 | ) | | — |
| | (.1 | ) |
| NET OTHER COMPREHENSIVE INCOME (LOSS) | — |
|
| 1.6 |
|
| — |
|
| (.1 | ) |
| — |
|
| 1.5 |
|
| COMPREHENSIVE INCOME (LOSS) | (190.4 | ) |
| 1.7 |
|
| 5.6 |
|
| (108.4 | ) |
| 105.0 |
|
| (186.5 | ) |
| COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | — |
| | — |
| | — |
| | (2.4 | ) | | — |
| | (2.4 | ) |
| COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO VALARIS | $ | (190.4 | ) |
| $ | 1.7 |
|
| $ | 5.6 |
|
| $ | (110.8 | ) |
| $ | 105.0 |
|
| $ | (188.9 | ) |
60
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
VALARIS PLC AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS Nine Months Ended September 30, 2020 (In millions) (Unaudited) |
| Valaris plc | | ENSCO International Incorporated | | Pride International LLC | | Other Non-guarantor Subsidiaries of Valaris | | Consolidating Adjustments | | Total |
| OPERATING ACTIVITIES | | | | | | | | | | | |
| Net cash provided by (used in) operating activities | $ | (323.9) | | | $ | 133.3 | | | $ | (44.2) | | | $ | (161.6) | | | $ | 0 | | | $ | (396.4) | |
| INVESTING ACTIVITIES | | | | | | | | | | | |
| Additions to property and equipment | 0 | | | 0 | | | 0 | | | (82.9) | | | 0 | | | (82.9) | |
| Proceeds from disposition of assets | 0 | | | 0 | | | 0 | | | 44.2 | | | 0 | | | 44.2 | |
| Net cash used in investing activities | 0 | | | 0 | | | 0 | | | (38.7) | | | 0 | | | (38.7) | |
| FINANCING ACTIVITIES | | | | | | | | | | | |
| Debtor in possession financing fees and payments on Backstop Agreement | (43.8) | | | 0 | | | 0 | | | 0 | | | 0 | | | (43.8) | |
| Borrowings on credit facility | 343.9 | | | 0 | | | 0 | | | 252.1 | | | 0 | | | 596.0 | |
| Advances from (to) affiliates | 89.9 | | | (133.3) | | | 44.2 | | | (0.8) | | | 0 | | | 0 | |
| Repayments of credit facility borrowings | (15.0) | | | 0 | | | 0 | | | 0 | | | 0 | | | (15.0) | |
| Reduction of long -term borrowings | (9.7) | | | 0 | | | 0 | | | 0 | | | 0 | | | (9.7) | |
| Other | 0 | | | 0 | | | 0 | | | (9.1) | | | 0 | | | (9.1) | |
| Net cash provided by (used in) financing activities | 365.3 | | | (133.3) | | | 44.2 | | | 242.2 | | | 0 | | | 518.4 | |
| Effect of exchange rate changes on cash and cash equivalents | 0 | | | 0 | | | 0 | | | (.1) | | | | | (.1) | |
| NET INCREASE IN CASH AND CASH EQUIVALENTS | 41.4 | | | 0 | | | 0 | | | 41.8 | | | 0 | | | 83.2 | |
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 21.5 | | | 0 | | | 0 | | | 75.7 | | | 0 | | | 97.2 | |
| CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 62.9 | | | $ | 0 | | | $ | 0 | | | $ | 117.5 | | | $ | 0 | | | $ | 180.4 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
VALARIS PLC AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS Nine Months Ended September 30, 2019 (In millions) (Unaudited) |
| | Valaris plc | | ENSCO International Incorporated | | Pride International LLC | | Other Non-guarantor Subsidiaries of Valaris | | Consolidating Adjustments | | Total |
| OPERATING ACTIVITIES | | | | | | | | | | | |
| Net cash used in operating activities | $ | (125.2) | | $ | (82.3) | | $ | (98.0) | | $ | (122.0) | | $ | 0 | | $ | (427.5) |
| INVESTING ACTIVITIES | | | | | | | | | | |
|
| Rowan cash acquired | — | | | — | | | — | | | 931.9 | | | — | | | 931.9 | |
| Maturities of short-term investments | 474.0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 474.0 | |
| Purchases of short-term investments | (145.0) | | | 0 | | | 0 | | | 0 | | | 0 | | | (145.0) | |
| Additions to property and equipment | 0 | | | 0 | | | 0 | | | (174.2) | | | 0 | | | (174.2) | |
| Net proceeds from disposition of assets | 0 | | | 0 | | | 0 | | | 4.9 | | | 0 | | | 4.9 | |
| Net cash provided by investing activities | 329.0 | | | 0 | | | 0 | | | 762.6 | | | 0 | | | 1,091.6 | |
| FINANCING ACTIVITIES | | | | | | | | | | | |
| Reduction of long-term borrowings | (536.6) | | | (30.4) | | | 0 | | | (361.1) | | | 0 | | | (928.1) | |
| Borrowings on credit facility | 175.0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 175.0 | |
| Repayments of credit facility borrowings | (34.4) | | | 0 | | | 0 | | | 0 | | | 0 | | | (34.4) | |
| Debt solicitation fees | 0 | | | 0 | | | 0 | | | (9.4) | | | 0 | | | (9.4) | |
| Cash dividends paid | (4.5) | | | 0 | | | 0 | | | 0 | | | 0 | | | (4.5) | |
| Advances from (to) affiliates | 74.7 | | | 112.7 | | | 95.3 | | | (282.7) | | | 0 | | | 0 | |
| Other | (5.3) | | | 0 | | | 0 | | | (2.4) | | | 0 | | | (7.7) | |
| Net cash provided by (used in) financing activities | (331.1) | | | 82.3 | | | 95.3 | | | (655.6) | | | 0 | | | (809.1) | |
| Effect of exchange rate changes on cash and cash equivalents | 0 | | | 0 | | | 0 | | | (.6) | | | 0 | | | (.6) | |
| DECREASE IN CASH AND CASH EQUIVALENTS | (127.3) | | | 0 | | | (2.7) | | | (15.6) | | | 0 | | | (145.6) | |
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 199.8 | | | 0 | | | 2.7 | | | 72.6 | | | 0 | | | 275.1 | |
| CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 72.5 | | | $ | 0 | | | $ | 0 | | | $ | 57.0 | | | $ | 0 | | | $ | 129.5 | |
VALARIS PLC AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEETS March 31, 2020 (In millions) (Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Valaris plc | | ENSCO International Incorporated | | Pride International LLC | | Other Non-Guarantor Subsidiaries of Valaris | | Consolidating Adjustments | | Total |
ASSETS | | | | | | | | | | | |
| CURRENT ASSETS | | | | | | | | | | | |
| Cash and cash equivalents | $ | 137.8 |
| | $ | — |
| | $ | — |
| | $ | 47.1 |
| | $ | — |
| | $ | 184.9 |
|
| Accounts receivable, net | .2 |
| | 25.5 |
| | — |
| | 467.5 |
| | — |
| | 493.2 |
|
| Accounts receivable from affiliates | 4,148.4 |
| | 213.6 |
| | .7 |
| | 1,123.4 |
| | (5,486.1 | ) | | — |
|
| Other | 1.5 |
| | 4.1 |
| | — |
| | 421.9 |
| | — |
| | 427.5 |
|
| Total current assets | 4,287.9 |
| | 243.2 |
|
| .7 |
|
| 2,059.9 |
|
| (5,486.1 | ) |
| 1,105.6 |
|
| PROPERTY AND EQUIPMENT, AT COST | 1.9 |
| | 109.5 |
| | — |
| | 14,350.5 |
| | — |
| | 14,461.9 |
|
| Less accumulated depreciation | 1.9 |
| | 89.3 |
| | — |
| | 2,213.5 |
| | — |
| | 2,304.7 |
|
| Property and equipment, net | — |
| | 20.2 |
|
| — |
|
| 12,137.0 |
|
| — |
|
| 12,157.2 |
|
| SHAREHOLDER NOTE FROM ARO | — |
| | — |
| | — |
| | 452.9 |
| | — |
| | 452.9 |
|
| INVESTMENT IN ARO | — |
| | — |
| | — |
| | 122.4 |
| | — |
| | 122.4 |
|
| DUE FROM AFFILIATES | 1,599.5 |
| | 217.3 |
| | 39.0 |
| | 4,660.1 |
| | (6,515.9 | ) | | — |
|
| INVESTMENTS IN AFFILIATES | 10,115.2 |
| | 704.2 |
| | 1,230.5 |
| | — |
| | (12,049.9 | ) | | — |
|
| OTHER ASSETS | 1.2 |
| | 3.0 |
| | — |
| | 182.8 |
| | — |
| | 187.0 |
|
| | $ | 16,003.8 |
| | $ | 1,187.9 |
|
| $ | 1,270.2 |
|
| $ | 19,615.1 |
|
| $ | (24,051.9 | ) |
| $ | 14,025.1 |
|
| LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | |
| CURRENT LIABILITIES | | | | | | | | | | | |
| Accounts payable and accrued liabilities | $ | 95.9 |
| | $ | 25.2 |
| | $ | 4.2 |
| | $ | 535.4 |
| | $ | — |
| | $ | 660.7 |
|
| Accounts payable to affiliates | 1,041.1 |
| | 190.4 |
| | 785.3 |
| | 3,469.3 |
| | (5,486.1 | ) | | $ | — |
|
| Current maturities of long-term debt | $ | 100.5 |
| | $ | — |
| | $ | 124.0 |
| | $ | — |
| | $ | — |
| | $ | 224.5 |
|
| Total current liabilities | 1,237.5 |
| | 215.6 |
|
| 913.5 |
|
| 4,004.7 |
|
| (5,486.1 | ) |
| 885.2 |
|
| DUE TO AFFILIATES | 3,526.0 |
| | 488.2 |
| | 645.9 |
| | 1,855.8 |
| | (6,515.9 | ) | | — |
|
| LONG-TERM DEBT | 4,944.7 |
| | 111.7 |
| | 372.9 |
| | 719.3 |
| | — |
| | 6,148.6 |
|
| OTHER LIABILITIES | — |
| | 326.2 |
| | — |
| | 369.5 |
| | — |
| | 695.7 |
|
| VALARIS SHAREHOLDERS' EQUITY (DEFICIT) | 6,295.6 |
| | 46.2 |
| | (662.1 | ) | | 12,668.5 |
| | (12,049.9 | ) | | 6,298.3 |
|
| NONCONTROLLING INTERESTS | — |
| | — |
| | — |
| | (2.7 | ) | | — |
| | (2.7 | ) |
| Total equity (deficit) | 6,295.6 |
| | 46.2 |
|
| (662.1 | ) |
| 12,665.8 |
|
| (12,049.9 | ) |
| 6,295.6 |
|
| | $ | 16,003.8 |
| | $ | 1,187.9 |
|
| $ | 1,270.2 |
|
| $ | 19,615.1 |
|
| $ | (24,051.9 | ) |
| $ | 14,025.1 |
|
VALARIS PLC AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEETS December 31, 2019 (In millions)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Valaris plc | | ENSCO International Incorporated | | Pride International LLC | | Other Non-Guarantor Subsidiaries of Valaris | | Consolidating Adjustments | | Total |
ASSETS | | | | | | | | | | | |
| CURRENT ASSETS | | | | | | | | | | | |
| Cash and cash equivalents | $ | 21.5 |
| | $ | — |
| | $ | — |
| | $ | 75.7 |
| | $ | — |
| | $ | 97.2 |
|
| Accounts receivable, net | 0.2 |
| | 19.7 |
| | — |
| | 500.8 |
| | — |
| | 520.7 |
|
| Accounts receivable from affiliates | 4,031.4 |
| | 386.0 |
| | — |
| | 897.2 |
| | (5,314.6 | ) | | — |
|
| Other | .6 |
| | 11.6 |
| | — |
| | 434.3 |
| | — |
| | 446.5 |
|
| Total current assets | 4,053.7 |
|
| 417.3 |
|
| — |
|
| 1,908.0 |
|
| (5,314.6 | ) |
| 1,064.4 |
|
| PROPERTY AND EQUIPMENT, AT COST | 1.9 |
| | 108.8 |
| | — |
| | 18,283.1 |
| | — |
| | 18,393.8 |
|
| Less accumulated depreciation | 1.9 |
| | 84.7 |
| | — |
| | 3,210.3 |
| | — |
| | 3,296.9 |
|
| Property and equipment, net | — |
|
| 24.1 |
|
| — |
|
| 15,072.8 |
|
| — |
|
| 15,096.9 |
|
| SHAREHOLDER NOTE FROM ARO | — |
| | — |
| | — |
| | 452.9 |
| | — |
| | 452.9 |
|
| INVESTMENT IN ARO | — |
| | — |
| | — |
| | 128.7 |
| | — |
| | 128.7 |
|
| DUE FROM AFFILIATES | 73.8 |
| | — |
| | 38.9 |
| | 1,775.7 |
| | (1,888.4 | ) | | — |
|
| INVESTMENTS IN AFFILIATES | 9,778.5 |
| | 788.8 |
| | 1,224.9 |
| | — |
| | (11,792.2 | ) | | — |
|
| OTHER ASSETS | 7.9 |
| | 3.8 |
| | — |
| | 182.6 |
| | (6.0 | ) | | 188.3 |
|
| | $ | 13,913.9 |
|
| $ | 1,234.0 |
|
| $ | 1,263.8 |
|
| $ | 19,520.7 |
|
| $ | (19,001.2 | ) |
| $ | 16,931.2 |
|
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | |
| CURRENT LIABILITIES | | | | | | | | | | | |
| Accounts payable and accrued liabilities | $ | 99.2 |
| | $ | 29.3 |
| | $ | 12.2 |
| | $ | 565.2 |
| | $ | — |
| | $ | 705.9 |
|
| Accounts payable to affiliates | 818.8 |
| | 147.8 |
| | 815.1 |
| | 3,532.9 |
| | (5,314.6 | ) | | — |
|
| Current maturities of long - term debt | — |
| | — |
| | 124.8 |
| | — |
| | — |
| | 124.8 |
|
| Total current liabilities | 918.0 |
|
| 177.1 |
|
| 952.1 |
|
| 4,098.1 |
|
| (5,314.6 | ) |
| 830.7 |
|
| DUE TO AFFILIATES | 710.3 |
| | 478.8 |
| | 586.6 |
| | 112.7 |
| | (1,888.4 | ) | | — |
|
| LONG-TERM DEBT | 2,990.6 |
| | 111.7 |
| | 373.3 |
| | 2,447.9 |
| | — |
| | 5,923.5 |
|
| OTHER LIABILITIES | (14.6 | ) | | 90.6 |
| | — |
| | 797.4 |
| | (6.0 | ) | | 867.4 |
|
| VALARIS SHAREHOLDERS' EQUITY (DEFICIT) | 9,309.6 |
| | 375.8 |
| | (648.2 | ) | | 12,065.9 |
| | (11,792.2 | ) | | 9,310.9 |
|
| NONCONTROLLING INTERESTS | — |
| | — |
| | — |
| | (1.3 | ) | | — |
| | (1.3 | ) |
| Total equity (deficit) | 9,309.6 |
| | 375.8 |
|
| (648.2 | ) |
| 12,064.6 |
|
| (11,792.2 | ) |
| 9,309.6 |
|
| | $ | 13,913.9 |
| | $ | 1,234.0 |
|
| $ | 1,263.8 |
|
| $ | 19,520.7 |
|
| $ | (19,001.2 | ) |
| $ | 16,931.2 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
VALARIS PLC AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS Three Months Ended March 31, 2020 (In millions) (Unaudited) |
| | Valaris plc | | ENSCO International Incorporated | | Pride International LLC | | Other Non-guarantor Subsidiaries of Valaris | | Consolidating Adjustments | | Total |
| OPERATING ACTIVITIES | |
| | |
| | |
| | |
| | |
| | |
|
| Net cash provided by (used in) operating activities | $ | (88.3 | ) | | $ | 226.2 |
| | $ | (28.7 | ) | | $ | (313.6 | ) | | $ | — |
| | $ | (204.4 | ) |
| INVESTING ACTIVITIES | | | | | | | | | | | |
| Additions to property and equipment | — |
| | — |
| | — |
| | (36.3 | ) | | — |
| | (36.3 | ) |
| Proceeds from disposition of assets | — |
| | — |
| | — |
| | 10.4 |
| | — |
| | 10.4 |
|
| Net cash used in investing activities | — |
| | — |
|
| — |
|
| (25.9 | ) |
| — |
|
| (25.9 | ) |
| FINANCING ACTIVITIES | |
| | |
| | |
| | |
| | |
| | |
| Borrowings on credit facility | 343.9 |
| | — |
| | — |
| | — |
| | — |
| | 343.9 |
|
| Advances from (to) affiliates | (113.7 | ) | | (226.2 | ) | | 28.7 |
| | 311.2 |
| | — |
| | — |
|
| Repayments of credit facility borrowings | (15.0 | ) | | — |
| | — |
| | — |
| | — |
| | (15.0 | ) |
| Reduction of long -term borrowings | (9.7 | ) | | — |
| | — |
| | — |
| | — |
| | (9.7 | ) |
| Other | (.9 | ) | | — |
| | — |
| |
|
| | — |
| | (.9 | ) |
| Net cash provided by (used in) financing activities | 204.6 |
| | (226.2 | ) |
| 28.7 |
|
| 311.2 |
|
| — |
|
| 318.3 |
|
| Effect of exchange rate changes on cash and cash equivalents | — |
| | — |
| | — |
| | (.3 | ) | |
|
| | (.3 | ) |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 116.3 |
|
| — |
|
| — |
|
| (28.6 | ) |
| — |
|
| 87.7 |
|
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 21.5 |
| | — |
| | — |
| | 75.7 |
| | — |
| | 97.2 |
|
| CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 137.8 |
| | $ | — |
| | $ | — |
| | $ | 47.1 |
| | $ | — |
| | $ | 184.9 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
VALARIS PLC AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS Three Months Ended March 31, 2019 (In millions) (Unaudited) |
| | Valaris plc | | ENSCO International Incorporated | | Pride International LLC | | Other Non-guarantor Subsidiaries of Valaris | | Consolidating Adjustments | | Total |
| OPERATING ACTIVITIES | |
| | |
| | |
| | |
| | |
| | |
|
| Net cash provided by (used in) operating activities | $ | (45.9 | ) | | $ | (43.0 | ) | | $ | (55.2 | ) | | $ | 119.7 |
| | $ | — |
| | $ | (24.4 | ) |
| INVESTING ACTIVITIES | |
| | |
| | |
| | |
| | |
| |
|
|
| Maturities of short-term investments | 204.0 |
| | — |
| | — |
| | — |
| | — |
| | 204.0 |
|
| Purchases of short-term investments | (120.0 | ) | | — |
| | — |
| | — |
| | — |
| | (120.0 | ) |
| Additions to property and equipment | — |
| | — |
| | — |
| | (29.0 | ) | | — |
| | (29.0 | ) |
| Other | — |
| | — |
| | — |
| | .3 |
| | — |
| | .3 |
|
| Net cash provided by (used in) investing activities | 84.0 |
| | — |
| | — |
| | (28.7 | ) | | — |
| | 55.3 |
|
| FINANCING ACTIVITIES | |
| | |
| | |
| | |
| | |
| |
|
|
| Cash dividends paid | (4.5 | ) | | — |
| | — |
| | — |
| | — |
| | (4.5 | ) |
| Advances from (to) affiliates | 15.3 |
| | 43.0 |
| | 54.8 |
| | (113.1 | ) | | — |
| | — |
|
| Other | (2.8 | ) | | — |
| | — |
| | — |
| | — |
| | (2.8 | ) |
| Net cash provided by (used in) financing activities | 8.0 |
| | 43.0 |
| | 54.8 |
| | (113.1 | ) | | — |
| | (7.3 | ) |
| Effect of exchange rate changes on cash and cash equivalents | — |
| | — |
| | — |
| | (.3 | ) | | — |
| | (.3 | ) |
| INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 46.1 |
| | — |
| | (.4 | ) | | (22.4 | ) | | — |
| | 23.3 |
|
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 199.8 |
| | — |
| | 2.7 |
| | 72.6 |
| | — |
| | 275.1 |
|
| CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 245.9 |
| | $ | — |
| | $ | 2.3 |
| | $ | 50.2 |
| | $ | — |
| | $ | 298.4 |
|
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the accompanying unaudited condensed consolidated financial statements as of March 31,September 30, 2020 and for the three-month periodsthree and nine months ended March 31,September 30, 2020 and 2019 included elsewhere herein and with our annual report on Form 10-K for the year ended December 31, 2019. The following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under “Risk Factors” in Item 1A of our annual report and elsewhere in this quarterly report. See “Forward-Looking Statements.”
EXECUTIVE SUMMARY
Our Business
We are a leading provider of offshore contract drilling services to the international oil and gas industry. Exclusive of two rigs under construction and one rig marked for retirement and classified as held-for-sale, we currently own and operate an offshore drilling rig fleet of 7361 rigs, with drilling operations in almost every major offshore market across six continents. Inclusive of rigs under construction, our fleet includes 1613 drillships, eightfour dynamically positioned semisubmersible rigs, one moored semisubmersible rigsrig and 5045 jackup rigs, nine of which are leased to our 50/50 joint venture with Saudi Aramco. 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.
Chapter 11 Proceedings and Ability to Continue as a Going Concern
On August 19, 2020 (the “Petition Date”), the Debtors filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. As part of the Chapter 11 cases under the caption In re Valaris plc, et al., Case No. 20-34114 (MI) (the “Chapter 11 Cases”), the Debtors were granted “first-day” relief which enabled the Company to continue operating without interruption or disruption to its relationships with its customers and vendors or its high-quality service delivery. In particular, employee pay and benefits are expected to continue without interruption.
On August 18, 2020, the Debtors entered into the RSA with certain senior note holders (collectively, the "Consenting Noteholders"), which contemplates that the Company will implement the restructuring through the Chapter 11 Cases pursuant to a plan of reorganization and the various related transactions set forth in or contemplated by the RSA and its restructuring term sheet (the “Restructuring Term Sheet”).
See“Note 2 – Chapter 11 Proceedings and Ability to Continue as a Going Concern” for additional details regarding the Chapter 11 Cases and related items, the RSA and our ability to continue as a going concern.
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 may cause the balance of supply and demand to vary somewhat between regions, significant variations between regions are generally of a short-term nature due to rig mobility.
DuringFollowing several years of market volatility beginning with oil price declines in 2014, as we entered 2020, we expected that volatility to continue over the near-term with the expectation that long-term oil prices would remain at levels sufficient to support a continued gradual recovery in the demand for offshore drilling services. We were focused on opportunities to put our rigs to work, manage liquidity, extend our financial runway, and reduce debt as we sought to navigate the extended market downturn and improve our balance sheet. Recognizing our ability to maintain a sufficient level of liquidity to meet our financial obligations depended upon our future performance, which is subject to general economic conditions, industry cycles and financial, business and other factors affecting our operations, many of which are beyond our control, we had significant financial flexibility within our capital structure to support our liability management efforts. However, during the first quarter,nine months of 2020, the coronavirusCOVID-19 global pandemic and the response thereto hashave negatively impacted the macro-economic environment and global economy. Global oil demand has fallenfell sharply at the same time global oil supply has increased as a result of certain oil producers competing for market share, leading to a supply glut. As a consequence, the price of Brent crude oil has fallenfell from around $60 per barrel at year-end 2019 to around $20 per barrel as of mid-April 2020.in mid-April. In response to dramatically reduced oil price expectations for the near term, our customers are reviewing,have reviewed, and in most cases loweringlowered significantly, their capital expenditure plans in light of revised pricing expectations. This caused our customers to cancel or shorten the duration of many of our 2020 drilling contracts, cancel future drilling programs and seek pricing and other contract concessions. While there has been some recent improvement to Brent crude oil prices, to approximately $40 per barrel as of mid-October 2020, there is still a significant amount of uncertainty around the sustainability of the improvement in oil prices to support a recovery in demand for offshore drilling services.
TheAdditionally, the full impact that the pandemic and the precipitous decline in oil prices will have on our results of operations, financial condition, liquidity and cash flows is uncertain due to numerous factors, including the duration and severity of the outbreak, the duration of the price and demand decline, and the extent of disruptions to our operations. To date, therethe COVID-19 pandemic has resulted in only limited operational downtime. Our rigs have had to shut down operations while crews are tested and incremental sanitation protocols are implemented and while crew changes have been variousrestricted as replacement crews are quarantined. We continue to incur additional personnel, housing and logistics costs in order to mitigate the potential impacts from the pandemic and drop in oil prices, including contract cancellations or the cancellation of drilling programsCOVID-19 to our operations. In limited instances, we have been reimbursed for these costs by operators, contract concessions, stacking rigs, inability to change crews due to travel restrictions, and workforce reductions.our customers. Our operations and business may be subject to further economic disruptions as a result of the spread of coronavirusCOVID-19 among our workforce, the extension or imposition of further public health measures affecting supply chain and logistics, and the impact of the pandemic on key customers, suppliers, and other counterparties. There can be no assurance that these, or other issues caused by the COVID -19 pandemic, will not materially affect our ability to operate our rigs in the future.
We expect that the remainder of 2020these challenges will be a challenging yearcontinue for drilling contractors as customers wait to gain additional clarity on commodity pricing and seek to reduce costs in the near-term by attempting to renegotiate existing contract terms. We believe the current market and macro-economic conditions will create a challenging contracting environment through at least 2021.
Other Chapter 11 Financial Disclosures
Pre-petition Charges
We have reported the backstop commitment fee and legal and other professional advisor fees incurred in relation to the Chapter 11 Cases, but prior to the Petition Date, as General and administrative expenses in our unaudited Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2020 in the amount of $42.6 million and $64.7 million, respectively.
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 unaudited Condensed Consolidated Statements of Operations. These costs include legal and other professional advisory service fees pertaining to the Chapter 11 Cases, all adjustments made to the carrying amount of certain pre-petition liabilities reflecting claims expected to be allowed by the Bankruptcy Court and DIP Facility fees.
The following table provides information about reorganization items incurred during three and nine months ended September 30, 2020, as of or subsequent to the Petition Date (in millions):
| | | | | | | | | | |
| | Three and Nine Months Ended September 30, 2020 | | |
| Write-off of unamortized debt discounts, premiums and issuance costs | | $ | 447.9 | | | |
| Reorganization items (non-cash) | | 447.9 | | | |
| | | | |
| | | | |
| DIP Facility fees | | 23.8 | | | |
| Professional fees | | 25.8 | | | |
| Reorganization Items (Fees) | | 49.6 | | | |
| Total reorganization items, net | | $ | 497.5 | | | |
| | | | |
| Reorganization items (fees) unpaid | | $ | 25.8 | | | |
| Reorganization items (fees) paid | | $ | 23.8 | | | |
Liabilities Subject to Compromise
The Debtors' pre-petition unsecured senior notes and related unpaid accrued interest as of the Petition Date have been classified as Liabilities subject to compromise on our Condensed Consolidated Balance Sheets. The liabilities are reported at the amounts expected to be allowed as claims by the Bankruptcy Court. Liabilities subject to compromise at September 30, 2020 consist of the following (in millions):
| | | | | | | | |
| | September 30, 2020 |
| 6.875% Senior notes due 2020 | | $ | 122.9 | |
| 4.70% Senior notes due 2021 | | 100.7 | |
| 4.875% Senior notes due 2022 | | 620.8 | |
| 3.00% Exchangeable senior notes due 2024 | | 849.5 | |
| 4.50% Senior notes due 2024 | | 303.4 | |
| 4.75% Senior notes due 2024 | | 318.6 | |
| 8.00% Senior notes due 2024 | | 292.3 | |
| 5.20% Senior notes due 2025 | | 333.7 | |
| 7.375% Senior notes due 2025 | | 360.8 | |
| 7.75% Senior notes due 2026 | | 1,000.0 | |
| 7.20% Debentures due 2027 | | 112.1 | |
| 7.875% Senior notes due 2040 | | 300.0 | |
| 5.40% Senior notes due 2042 | | 400.0 | |
| 5.75% Senior notes due 2044 | | 1,000.5 | |
| 5.85% Senior notes due 2044 | | 400.0 | |
| Amounts drawn under revolving credit facility | | 581.0 | |
| Accrued Interest on Senior Notes, Exchangeable Senior Notes, Debentures and Revolving Credit Facility | | 203.5 | |
Rig holding costs(1) | | 13.9 | |
| Total liabilities subject to compromise | | $ | 7,313.7 | |
(1) Represents the holding costs incurred to maintain VALARIS DS-13 and VALARIS DS-14 in the shipyard until the delivery date.
Backlog
Our backlog was $1.9$1.2 billion and $2.5 billion as of MarchSeptember 30, 2020 and December 31, 2019, respectively. This is inclusive of backlog from our rigs leased to ARO and managed rigs of $178.7 million and $324.3 million as of September 30, 2020 and December 31, 2019, respectively. The decrease in our backlog was due to customer contract cancellations, customer concessions and revenues realized, partially offset by the addition of backlog from new contract awards and contract extensions.
As we finalize negotiations of contract concessions with our customers, above-market rate contracts expire and revenues are realized, we may experience further declines in backlog, which would result in a decline in revenues and operating cash flows over the near-term. Contract backlog was adjusted for drilling contracts signed, terminated or concessions granted after each respective balance sheet date but prior to filing each annual and quarterly report on February 21, 2020 and April 30,October 29, 2020, respectively.
BUSINESS ENVIRONMENT
Floaters
The floater contracting environment remains challenging due to limited demand, excess newbuild supply and the recent precipitous fall in oil prices.prices earlier in the year. Floater demand has declined materially in March and April 2020, as our customers have reduced capital expenditures particularly for capital-intensive, long-lead deepwater projects in the wake of oil price declines from around $60 per barrel at year-end 2019 to around $20 per barrel in mid-April 2020. The decline in demand has resulted in the cancellation and delay of drilling programs and the termination of drilling contracts.
During 2020, we have received notices of termination, requests for concessions, cancellation and/or deferral of drilling programs by operators and we expect tomay receive additional requests for concessions, termination and/or deferral notices during the pendency of the current market environment. To date,
During the coronavirus pandemic has not resulted in any forced shutdownsthird quarter of 2020, floater contracting remained challenging and no significant new contracts were executed. In October 2020, we extended our rigs due to quarantines orcurrent contract for VALARIS DS-18 for an inability to staff our rigs due to travel restrictions or stay-at-home orders, however, we are incurring additional costs in order to mitigate these impacts to our operations. There can be no assurance, however, that these, or other issues caused byestimated 60 days.
During the coronavirus pandemic, will not materially affect our ability to operate our rigs in the future.
In Aprilsecond quarter of 2020, the VALARIS DS-7 contract for operations offshore Ghana and the contract awarded in the first quarter of 2020 for operations offshore Senegal/Mauritania, the VALARIS DS-9 contract awarded in the first quarter of 2020 for operations offshore Brazil and the VALARIS MS-1 contract awarded in the first quarter of 2020 for operations offshore Australia were terminated. Additionally, the VALARIS DPS-1 contract was terminated.terminated in June, earlier than the previously scheduled end date of September 2021, and the VALARIS DS-10, VALARIS DS-15 and VALARIS 8505 are operating on reduced day rates for various periods during 2020 and 2021. During the first quarter, the VALARIS 5004 operated on a reduced day rate from mid-March to mid-April, at which point the contract was terminated. Additionally,terminated, and the VALARIS DS-8 contract was terminated in March 2020 as described below.
In March 2020, VALARIS DS-8 experienced a non-drilling incident while operating offshore Angola, resulting in the blowout preventer (BOP) stack being disconnected from the riser while the rig was moving between well locations. The BOP stack, which we later recovered, dropped to the seabed floor, clear of any subsea structures. No injuries, environmental pollution or third-party damage resulted from the BOP stack being disconnected.
As a result of the incident, the operator terminated the contract. The termination resultsresulted in a decline in our contracted revenue backlog of approximately $150 million. We have loss of hire insurance for $602,500 per day, after a 45-day deductible waiting period, through the end of the contract in November 2020. The waiting period expired on April 22, 2020. We will seekreceived loss of hire insurance recoveries of $118.1 million, which represents the total amount owed to recover losses incurredus under the applicable insurance policy. The recovery was recognized and recorded in accordance with the termsOther operating income on our Condensed Consolidated Statements of this insurance policy, which would largely offset the lost backlog noted above. There can be no assurance as to the timing or amount of insurance proceeds ultimately received.Operation.
During the first quarter of 2020, VALARIS DS-7 was awarded a five-well contract that is expected to commence in September 2020 and has an estimated duration of 320 days. VALARIS DS-12 was awarded a one-well contract that commenced in February 2020. VALARIS DS-9 was awarded a one-well contract that is expected to commence in July 2020. VALARIS MS-1 was awarded two contracts, a one-well contract that is expected to commence in July 2020 with an estimated duration of 120 days, and a three-well contract that is expected to commence in the firstsecond quarter of 2021 and has an estimated duration of 155 days. VALARIS 8505 was awarded a one-well contract that iswas expected to commence in mid-November 2020, but is now expected to commence in June 2021 with an estimated duration of 80 days.
The VALARIS 6002 was sold in January 2020 resulting in an insignificant pre-tax gain. Additionally, the VALARIS 5004 was sold in April 2020 resulting in an insignificant pre-tax loss. During the second quarter of 2020, we began marketing VALARIS 8500, VALARIS 8501, VALARIS 8502, VALARIS DS-3, VALARIS DS-5 and VALARIS DS-6 and classified these rigs as held-for-sale, resulting in an impairment of approximately $14.6 million as the net book value exceeded the fair value less costs to sell. During the third quarter of 2020, we sold VALARIS 8500, VALARIS 8501 and VALARIS 8502 for a total pre-tax gain of $7.7 million, we sold the VALARIS DS-3, VALARIS DS-5 and VALARIS DS-6 for an insignificant pre-tax loss and we classified VALARIS 8504 as held-for-sale. The net book value of VALARIS 8504 did not exceed the fair value less costs to sell, therefore, we did not recognize an impairment upon classifying this rig as held-for-sale.
Our backlog for our floater segment was $222.6 million and $856.6 million as of September 30, 2020 and December 31, 2019, respectively. The decrease in our backlog was due to customer contract cancellations, customer concessions and revenues realized, partially offset by the addition of backlog from new contract awards and contract extensions.
There are approximately 3026 newbuild drillships and semisubmersible rigs reported to be under construction, of which ninethree are scheduled to be delivered before the end of 2020. Most newbuild floaters are uncontracted. Several newbuild deliveries have been delayed into future years, and we expect that more uncontracted newbuilds will be delayed or cancelled.
Drilling contractors have retired approximately 140154 floaters since the beginning of 2014. Approximately 1017 floaters older than 30 years of age are currently idle, approximately 10 additional floaters older than 30 years have contracts that will expire by end of 2020 without follow-on work. Additional rigs are expected to become idle as a result of recent market events. Operating costs associated with keeping these rigs idle as well as expenditures required to re-certify these aging rigs may prove cost prohibitive. Drilling contractors will likely elect to scrap or cold-stack some or all of these rigs. Improvements in demand and/or reductions in supply will be necessary before meaningful increases in utilization and day rates are realized.
Jackups
Despite recent gains in the jackup market,During 2020, demand for jackups has declined in light of increased market uncertainty. During 2020, weWe have received notices of termination, requests for concessions, cancellation and/or deferral of drilling programs by operators, and we expect tomay receive additional requests for concessions, termination and/or deferral notices during the pendency of the current market environment. To date,
During the coronavirus pandemic has not resultedthird quarter of 2020, the VALARIS JU-76 and VALARIS JU-54 were put on a reduced standby rate until December 2020. Following the reduced standby rate period, the rigs will be operating at an agreed upon reduced day rate until the end of 2021. During the third quarter, we also negotiated reduced rates for the VALARIS 108, VALARIS 140 and VALARIS 141, the reduced rates are effective beginning the second quarter of 2020 through November 2021, June 2021 and August 2021, respectively. Additionally, we executed a one year contract extension for VALARIS 110 and executed a short-term contract for VALARIS 115 that is expected to commence in any forced shutdownsFebruary 2021. In October 2020, we executed an eight-well contract extension for VALARIS JU-292.
During the second quarter of our rigs due to quarantines or an inability to staff our rigs due to travel restrictions or stay-at-home orders, however,2020, the VALARIS JU-84 contract was terminated and we are incurring additional costs in order to mitigate these impacts to our operations. There can be no assurance, however, that these, or other issues caused by the coronavirus pandemic, will not materially affect our abilitynegotiated a day rate reduction for VALARIS JU-290 to operate our rigs in the future.at a standby rate from September 2020 to March 2021.
During the first quarter of 2020, the VALARIS JU-109 contract was terminated. In April 2020, there were also various negotiated customer contract concessions, including day rate reductions:reductions. VALARIS JU-120 is expected to operate onoperated at a reduced day rate from late-April 2020 to late-September 2020,September 2020. VALARIS JU-92 iswas previously expected to operate on a reduced day rate from mid-May 2020 to late-September 2020, but has continued to operate at full day rate and VALARIS JU-72 is expected to operateoperated on a reduced day rate from April 2020 to JulyAugust 2020. Additionally, VALARIS JU-249 ended its contract in April 2020 and VALARIS JU-100 is expected to endended its contract in late-April 2020, in both cases, earlier than expected.
During the second quarter of 2020, we executed short-term contracts for VALARIS JU-102 and VALARIS JU-87 that commenced in June 2020 and May 2020, respectively. We were also awarded a two-well extension for VALARIS JU-291 with an expected duration of approximately 180 days from January 2021 to June 2021. We executed a four year contract for VALARIS JU-104 expected to commence in September 2020, which was subsequently terminated during the third quarter of 2020, and we extended the VALARIS JU-67 contract 210 days from May 2020 to December 2020.
During the first quarter of 2020, we executed a three-well contract for VALARIS JU-118 that commenced in mid-March 2020 with an estimated duration of 425 days. Additionally, we executed a two-well contract for
VALARIS JU-144 that is expected to commencecommenced in May 2020 with an estimated duration of 200300 days. The previously disclosed contract for the VALARIS JU-144 that was expected to commence in September 2020 was transferred to the VALARIS JU-102.JU-102 and was subsequently delayed to September 2021 during the third quarter of 2020, with VALARIS JU-102 being put on a standby rate until the new commencement date. VALARIS JU-87 was awarded a one-well contract that commenced in March 2020 with an estimated duration of 30 days and an extension to May 2020 for another well with an estimated duration of 30 days.
The VALARIS JU-68 was sold in January 2020, resulting in an insignificant pre-tax gain. Additionally, VALARIS JU-70 and VALARIS JU-71 were sold in June 2020 resulting in insignificant pre-tax losses. During the second quarter of 2020, we classified VALARIS 105 as held-for-sale, resulting in an impairment of approximately $0.4 million as the net book value exceeded the fair value less cost to sell. During the third quarter of 2020, we sold VALARIS JU-87 and VALARIS JU-105 for an insignificant pre-tax gain and we classified VALARIS 84 and VALARIS 88 as held-for-sale. The net book values of VALARIS 84 and VALARIS 88 did not exceed the fair values less costs to sell, therefore, we did not recognize an impairment upon classifying these rigs as held-for-sale. These rigs were subsequently sold in October 2020.
Our backlog for our jackup segment was $841.5 million and $1,281.2 million as of September 30, 2020 and December 31, 2019, respectively. The decrease in our backlog was due to customer contract cancellations, customer concessions and revenues realized, partially offset by the addition of backlog from new contract awards and contract extensions.
There are approximately 5041 newbuild jackup rigs reported to be under construction, of which 305 are scheduled to be delivered before the end of 2020. Most newbuild jackups are uncontracted. Over the past year, some jackup orders have been cancelled, and many newbuild jackups have been delayed. We expect that scheduled jackup deliveries will continue to be delayed until more rigs are contracted.
Drilling contractors have retired approximately 100114 jackups since the beginning of the downturn. Approximately 9091 jackups older than 30 years are idle and 4032 jackups that are 30 years or older have contracts expiring by the end of 2020 without follow-on work. Expenditures required to re-certify these aging rigs may prove cost prohibitive and drilling contractors may instead elect to scrap or cold-stack these rigs. We expect jackup scrapping and cold-stacking to continue for the remainder of 2020. Improvements in demand and/or reductions in supply will be necessary before meaningful increases in utilization and day rates are realized.
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. In the fourth quarter of 2019, we began marketing the VALARIS 6002, VALARIS JU-68 and VALARIS JU-70, and classified the rigs as held-for-sale on our December 31, 2019 condensed consolidated balance sheet. Consistent with this strategy, we soldWe began marketing VALARIS JU-6884, VALARIS 88 and VALARIS 60028504 in the firstthird quarter which were older, less capable rigs. The VALARIS JU-70 remainsof 2020 and classified the rigs as held-for-sale on our March 31,September 30, 2020 condensed consolidated balance sheet. Additionally, weThese rigs, with the exception of VALARIS 8504, were subsequently sold VALARIS 5004 in AprilOctober 2020.
We sold the following rigs during the nine months ended September 30, 2020 resulting in an insignificant pre-tax loss.:
| | | | | | | | | | | |
| Rig | Date of Sale | Segment |
| | | |
| VALARIS JU-68 | January 2020 | | Jackups |
| VALARIS 6002 | January 2020 | | Floaters |
| VALARIS 5004 | April 2020 | | Floaters |
| VALARIS JU-71 | June 2020 | | Jackups |
| VALARIS JU-70 | June 2020 | | Jackups |
| VALARIS 8500 | July 2020 | | Floaters |
| VALARIS 8501 | July 2020 | | Floaters |
| VALARIS 8502 | July 2020 | | Floaters |
| VALARIS DS-3 | July 2020 | | Floaters |
| VALARIS DS-5 | July 2020 | | Floaters |
| VALARIS DS-6 | August 2020 | | Floaters |
| VALARIS JU-87 | August 2020 | | Jackups |
| VALARIS JU-105 | September 2020 | | Jackups |
We continue to focus on our fleet management strategy in light of the composition of our rig fleet. AsWhile taking into account certain restrictions on the sales of assets under our DIP Credit Agreement, as part of thisour strategy, we may act opportunistically from time to time to monetize assets to enhance shareholderstakeholder value and improve our liquidity profile, in addition to reducing holding costs by selling or disposing of older, lower-specification or non-core rigs.
RESULTS OF OPERATIONS
The following table summarizes our condensed consolidated results of operations for the three-month periodsthree and nine months ended March 31,September 30, 2020 and 2019 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2020 | | 2019 | | 2020 | | 2019(1) |
| Revenues | $ | 285.3 | | | $ | 551.3 | | | $ | 1,130.7 | | | $ | 1,541.1 | |
| Operating expenses | | | | | | | |
| Contract drilling (exclusive of depreciation) | 307.2 | | | 496.5 | | | 1,153.9 | | | 1,329.4 | |
| Loss on impairment | — | | | 88.2 | | | 3,646.2 | | | 90.7 | |
| Depreciation | 122.4 | | | 163.0 | | | 418.4 | | | 445.9 | |
| General and administrative | 72.1 | | | 36.1 | | | 188.1 | | | 146.9 | |
| Total operating expenses | 501.7 | | | 783.8 | | | 5,406.6 | | | 2,012.9 | |
| Other operating income | 118.1 | | | — | | | 118.1 | | | — | |
| Equity in earnings of ARO | 3.9 | | | (3.7) | | | (7.6) | | | (3.1) | |
| Operating loss | (94.4) | | | (236.2) | | | (4,165.4) | | | (474.9) | |
| Other income (expense), net | (555.7) | | | 40.2 | | | (769.0) | | | 562.3 | |
| Provision (benefit) for income taxes | 21.9 | | | 1.5 | | | (145.9) | | | 65.6 | |
| Net income (loss) | (672.0) | | | (197.5) | | | (4,788.5) | | | 21.8 | |
| Net (income) loss attributable to noncontrolling interests | 1.1 | | | .4 | | | 3.9 | | | (3.8) | |
| Net income (loss) attributable to Valaris | $ | (670.9) | | | $ | (197.1) | | | $ | (4,784.6) | | | $ | 18.0 | |
|
| | | | | | | | |
| | | Three Months Ended March 31, |
| | | 2020 | | 2019(1) |
| Revenues | | $ | 456.6 |
| | $ | 405.9 |
|
| Operating expenses | | |
| | |
|
| Contract drilling (exclusive of depreciation) | | 476.0 |
| | 332.6 |
|
| Loss on impairment | | 2,808.2 |
| | — |
|
| Depreciation | | 164.5 |
| | 125.0 |
|
| General and administrative | | 53.4 |
| | 29.6 |
|
| Total operating expenses | | 3,502.1 |
| | 487.2 |
|
| Equity in earnings of ARO | | (6.3 | ) | | — |
|
| Operating loss |
| (3,051.8 | ) |
| (81.3 | ) |
| Other income (expense), net | | (107.9 | ) | | (75.2 | ) |
| Provision (benefit) for income taxes | | (152.0 | ) | | 31.5 |
|
| Net loss |
| (3,007.7 | ) |
| (188.0 | ) |
| Net (income) loss attributable to noncontrolling interests | | 1.4 |
| | (2.4 | ) |
| Net loss attributable to Valaris | | $ | (3,006.3 | ) | | $ | (190.4 | ) |
| |
(1)
| The 2019 period does not include the results of the Rowan transaction as it closed in April 2019. |
Overview
Revenues increased $50.7decreased $266.0 million, or 12%48%, for the three months ended March 31,September 30, 2020, as compared to the prior year quarter primarily due to $103.6$85.2 million from fewer days under contract across our fleet, $76.2 million from the sale of VALARIS 5006, VALARIS 6002, VALARIS 5004, VALARIS JU-68 and VALARIS JU-96, which operated in the prior year quarter, $62.2 million due to the termination of the VALARIS DS-8 contract, and $21.9 million due to lower revenues earned under the Secondment Agreement and Transition Services Agreement with ARO.
Revenues decreased $410.4 million, or 27%, for the nine months ended September 30, 2020, as compared to the prior year period primarily due to $237.4 million from the sale of VALARIS 5006, VALARIS 6002, VALARIS 5004, VALARIS JU-68 and VALARIS JU-96, which operated in the prior comparative period, $187.4 million as a result of fewer days under contract across our fleet and $133.9 million due to the termination of the VALARIS DS-8 contract. The decline in revenue was partially offset by $113.6 million of revenue earned by rigs added from the Rowan Transaction, and $43.3$46.3 million due to revenues earned from our rigs leased to ARO, revenues earned from the Secondment Agreement and Transition Services Agreement. This increase was partially offset by $74.5 million from the sale of VALARIS 6002, VALARIS 5006, VALARIS JU-68, VALARIS JU-96 and ENSCO 97, which operated in the prior year quarter. In addition, we experienced a decline in revenue as a result of fewer days under contract across our fleet and the interruption of operations experienced on the VALARIS DS-8.termination fees received for certain rigs.
Contract drilling expense increased $143.4decreased $189.3 million, or 43%38%, for the three months ended March 31,September 30, 2020, as compared to the prior year quarter, primarily due to $63.6 million of lower cost on idle rigs, $39.4 million from the sale of VALARIS 5006, VALARIS 6002, VALARIS 5004,VALARIS JU-68 and VALARIS JU-96, which operated in the prior year quarter, and $17.1 million due to lower costs incurred for services provided to ARO under the Secondment Agreement.
Contract drilling expense decreased $175.5 million, or 13%, for the nine months ended September 30, 2020, as compared to the prior year period, primarily due to $120.6 million due to lower cost on idle rigs and $99.8 million from the sale of VALARIS 5006, VALARIS 6002, VALARIS 5004, VALARIS JU-68 and VALARIS JU-96, which operated in the prior-year period. This decrease was partially offset by $140.1 million of contract drilling expenses incurred on rigs added from the Rowan Transaction, $19.2 million due to expenses incurred under the Secondment Agreement and by our rigs leased to ARO and $5.7 million due to the commencement of drilling operations of VALARIS 123. This increase was partially offset by $30.9 million from the sale of VALARIS 5006, VALARIS 6002, VALARIS JU-68, VALARIS JU-96 and ENSCO 97, which operated in the prior-year period.Transaction.
During the first quarterand second quarters of 2020, we recorded a non-cash losslosses on impairment of $2.8totaling $3.6 billion, with respect to assets in our fleet, primarily due to the adverse change in the current and anticipated market for these assets. See "Note 6"Note 4 - Rowan Transaction" and "Note 7 - Property and Equipment" for additional information.
Depreciation expense increased $39.5decreased $40.6 million, or 32%,25% for the three months ended March 31,September 30, 2020, as compared to the prior year quarter, primarily due to lower depreciation expense on certain non-core assets which were impaired during the first and second quarters of 2020.
Depreciation expense decreased $27.5 million, or 6%, for the nine months ended September 30, 2020, as compared to the prior year period, primarily due to lower depreciation expense on certain assets which were impaired during the first and second quarters of 2020. This decrease was partially offset by depreciation expense recorded for rigs added in the Rowan Transaction.Transaction as well as for the VALARIS JU-123 which commenced operations in August 2019.
General and administrative expenses increased by $23.8$36.0 million or 80%100%, and $41.2 million or 28%, for three and nine months ended September 30, 2020, respectively, as compared to the prior year comparative period, primarily due to restructuring costs and the backstop commitment fee. This increase was partially offset by merger related costs incurred in the respective prior year comparative periods.
Other operating income of $118.1 million recognized during the third quarter of 2020 was due to loss of hire insurance recoveries collected for the VALARIS DS-8 non-drilling incident.
Other expense, net, increased $595.9 million for the three months ended March 31,September 30, 2020 as compared to the prior year quarter,period, primarily due to higher professional fees.reorganization costs incurred in the third quarter of 2020 directly related to the Chapter 11 Cases. Additionally, the prior year quarter included $194.1 million of pre-tax gain on debt extinguishment related to the repurchase of senior notes in connection with the July 2019 tender offers, partially offset by a reduction to the estimated gain on bargain purchase of $53.0 million. These increases were partially offset by a reduction in interest expense as we discontinued accruing interest after the Petition Date.
Other expense, net, increased $32.7by $1,331.3 million, or 43%, for the threenine months ended March 31,September 30, 2020 as compared to the respective prior year quarter,comparative period, primarily due to the increaseprior period $659.8 million gain on bargain purchase recognized in connection with the Rowan Transaction and $194.1 million of interest expense incurredpre-tax gain on debt extinguishment related to the repurchase of senior notes acquiredin connection with July 2019 tender offers. Additionally, the current year period includes $497.5 million of reorganization costs incurred in the Rowan Transaction. third quarter of 2020 directly related to the Chapter 11 Cases.
Rig Counts, Utilization and Average Day Rates
The following table summarizes our and ARO's offshore drilling rigs as of March 31,September 30, 2020 and 2019:
| | | | | | | | | | | |
| | 2020 | | 2019 |
Floaters(1) | 16 | | 25 |
Jackups(2) | 36 | | 43 |
Other(3) | 9 | | 9 |
| Under construction | 2 | | 2 |
Held-for-sale(1)(2)(4) | 3 | | 2 |
| Total Valaris | 66 | | 81 |
ARO(5) | 7 | | 7 |
(1)During the first and second quarter of 2020, we sold VALARIS 6002 and VALARIS 5004, respectively. During the third quarter of 2020, we sold VALARIS 8500, VALARIS 8501, VALARIS 8502, VALARIS DS-3, VALARIS DS-5 and VALARIS DS-6. During the third quarter of 2020, VALARIS 8504 was classified as held-for-sale.
(2)During the fourth quarter of 2019, we sold VALARIS JU-96. During the second quarter of 2020, we sold VALARIS JU-70 and VALARIS JU-71. In the third quarter of 2020, we sold VALARIS JU-87 and VALARIS JU-105 and classified VALARIS JU-84 and VALARIS JU-88 as held-for-sale.
(3) This represents the nine rigs leased to ARO.
(4)During the fourth quarter of 2019, we sold VALARIS 5006. During the first quarter of 2020, we sold VALARIS JU-68.
(5)This represents the seven rigs owned by ARO.
|
| | | |
| | 2020 | | 2019 |
Floaters(1) | 24 | | 22 |
Jackups(2) | 41 | | 33 |
Other(3) | 9 | | — |
Under construction(4) | 2 | | 3 |
| Held-for-sale | 1 | | 1 |
| Total Valaris | 77 |
| 59 |
ARO(5) | 7 | | — |
| |
(1)
| During 2019, we added four drillships from the Rowan Transaction and sold VALARIS 5006. During the first quarter of 2020, we sold VALARIS 6002. |
| |
(2)
| During 2019, we added 10 jackups from the Rowan Transaction, exclusive of rigs leased to ARO that are included in Other, accepted delivery of VALARIS JU-123, classified VALARIS-JU 70 as held-for-sale and sold VALARIS JU-96. In the first quarter of 2020, we sold VALARIS JU-68. |
| |
(3)
| During 2019, we added nine jackups from the Rowan Transaction that are leased to ARO. |
| |
(4)
| During 2019, we accepted the delivery of VALARIS JU-123. |
| |
(5)
| This represents the seven rigs owned by ARO. |
The following table summarizes our and ARO's rig utilization and average day rates by reportable segment for the three-month periodsthree and nine months ended March 31,September 30, 2020 and 2019. Rig utilization and average day rates for the nine months ended September 30, 2019 period do not include results of rigs added in the Rowan Transaction or ARO asfrom the date the Rowan Transaction closed in April 2019:
| | | | | Three Months Ended
March 31, | | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
Rig Utilization(1) | | |
| | |
| Rig Utilization(1) | | | | | | | | |
| Floaters | | 38 | % | | 43 | % | Floaters | | 18 | % | | 48 | % | | 30 | % | | 48 | % |
| Jackups | | 61 | % | | 68 | % | Jackups | | 52 | % | | 65 | % | | 55 | % | | 67 | % |
Other (2) | | 100 | % | | 100 | % | Other (2) | | 97 | % | | 100 | % | | 99 | % | | 100 | % |
| Total Valaris | | 59 | % | | 60 | % | Total Valaris | | 50 | % | | 64 | % | | 54 | % | | 64 | % |
| ARO | | 90 | % | | — |
| ARO | | 97 | % | | 89 | % | | 95 | % | | 93 | % |
Average Day Rates(3) | | |
| | |
| Average Day Rates(3) | | | | | | | | |
| Floaters | | $ | 195,541 |
| | $ | 240,440 |
| Floaters | | $ | 148,968 | | | $ | 215,157 | | | $ | 171,681 | | | $ | 223,041 | |
| Jackups | | 81,492 |
| | 72,146 |
| Jackups | | 88,554 | | | 77,888 | | | 84,326 | | | 76,418 | |
Other (2) | | 42,343 |
| | 82,712 |
| Other (2) | | 37,017 | | | 47,553 | | | 38,903 | | | 52,271 | |
| Total Valaris | | $ | 94,784 |
| | $ | 118,733 |
| Total Valaris | | $ | 78,050 | | | $ | 106,157 | | | $ | 86,318 | | | $ | 110,765 | |
| ARO | | $ | 108,873 |
| | $ | — |
| ARO | | $ | 102,914 | | | $ | 109,862 | | | $ | 105,275 | | | $ | 111,717 | |
| |
(1)(1)Rig utilization is derived by dividing the number of days under contract by the number of days in the period. Days under contract equals the total number of days that rigs have earned and recognized day rate revenue, including days associated with early contract terminations, compensated downtime and mobilizations. When revenue is deferred and amortized over a future period, for example, when we receive fees while mobilizing to commence a new contract or while being upgraded in a shipyard, the related days are excluded from days under contract.
| Rig utilization is derived by dividing the number of days under contract by the number of days in the period. Days under contract equals the total number of days that rigs have earned and recognized day rate revenue, including days associated with early contract terminations, compensated downtime and mobilizations. When revenue is deferred and amortized over a future period, for example, when we receive fees while mobilizing to commence a new contract or while being upgraded in a shipyard, the related days are excluded from days under contract. |
For newly-constructed or acquired rigs, the number of days in the period begins upon commencement of drilling operations for rigs with a contract or when the rig becomes available for drilling operations for rigs without a contract.
| |
(2)
| Includes our two management services contracts and our nine rigs leased to ARO under bareboat charter contracts. |
| |
(3)
| Average day rates are derived by dividing contract drilling revenues, adjusted to exclude certain types of non-recurring reimbursable revenues, lump-sum revenues and revenues attributable to amortization of drilling contract intangibles, by the aggregate number of contract days, adjusted to exclude contract days associated with certain mobilizations, demobilizations and shipyard contracts.
|
(2)Includes our two management services contracts and our nine rigs leased to ARO under bareboat charter contracts.
(3)Average day rates are derived by dividing contract drilling revenues, adjusted to exclude certain types of non-recurring reimbursable revenues, lump-sum revenues and revenues attributable to amortization of drilling contract intangibles, by the aggregate number of contract days, adjusted to exclude contract days associated with certain mobilizations, demobilizations and shipyard contracts.
Detailed explanations of our operating results, including discussions of revenues, contract drilling expense and depreciation expense by segment, are provided below.
Operating Income by Segment
Prior to the Rowan Transaction, ourOur business consistedconsists of threefour operating segments: (1) Floaters, which includedincludes our drillships and semisubmersible rigs, (2) Jackups, (3) ARO and (3)(4) Other, which consisted onlyconsists of our management services provided on rigs owned by third-parties. Our Floatersthird-parties and Jackups segments were also reportable segments.
As a result of the Rowan Transaction, we concluded that we would maintain the aforementioned segment structure while adding ARO as a reportable segment for the new combined company. We also concluded that the activities associated with our arrangements with ARO consisting of ourunder the Transition Services Agreement, Rig Lease Agreements and Secondment Agreement, do not constituteAgreement. Floaters, Jackups and ARO are also reportable segments and are therefore included within Other in the following segment disclosures. Substantially all of the expenses incurred associated with our Transition Services Agreement are included in general and administrative under "Reconciling Items" in the table set forth below.segments.
General and administrative expense and depreciation expense incurred by our corporate office are not allocated to our operating segments for purposes of measuring segment operating income (loss) and are included in "Reconciling Items." Substantially all of the expenses incurred associated with our Transition Services Agreement are included in general and administrative under "Reconciling Items" in the table set forth below. We measure segment assets as property and equipment.
The full operating results included below for ARO (representing only results of ARO from the Transaction Date) are not included within our consolidated results and thus deducted under "Reconciling Items" and replaced with our equity in earnings of ARO. See "Note 45 - Equity Method Investment in ARO" for additional information on ARO and related arrangements. Segment information for the three-month periodsthree and nine months ended March 31,September 30, 2020 and 2019 is presented below (in millions):
Three Months Ended March 31,September 30, 2020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Floaters | | Jackups | | ARO | | Other | | Reconciling Items | | Consolidated Total |
| Revenues | $ | 57.1 | | | $ | 186.8 | | | $ | 145.6 | | | $ | 41.4 | | | $ | (145.6) | | | $ | 285.3 | |
| Operating expenses | | | | | | | | | | | |
| Contract drilling (exclusive of depreciation) | 128.5 | | | 160.2 | | | 99.0 | | | 18.5 | | | (99.0) | | | 307.2 | |
| Loss on impairment | — | | | — | | | — | | | — | | | — | | | — | |
| Depreciation | 55.8 | | | 52.9 | | | 14.8 | | | 11.3 | | | (12.4) | | | 122.4 | |
| General and administrative | — | | | — | | | 5.8 | | | — | | | 66.3 | | | 72.1 | |
| Other operating income | 118.1 | | | — | | | — | | | — | | | — | | | 118.1 | |
| Equity in earnings of ARO | — | | | — | | | — | | | — | | | 3.9 | | | 3.9 | |
| Operating income (loss) | $ | (9.1) | | | $ | (26.3) | | | $ | 26.0 | | | $ | 11.6 | | | $ | (96.6) | | | $ | (94.4) | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Floaters | | Jackups | | ARO | | Other | | Reconciling Items | | Consolidated Total |
| Revenues | $ | 179.6 |
| | $ | 212.8 |
| | $ | 140.3 |
| | $ | 64.2 |
| | $ | (140.3 | ) | | $ | 456.6 |
|
| Operating expenses | | | | | | | | | | | |
| Contract drilling (exclusive of depreciation) | 213.9 |
| | 226.1 |
| | 108.3 |
| | 36.0 |
| | (108.3 | ) | | 476.0 |
|
| Loss on impairment | 2,554.3 |
| | 253.9 |
| | — |
| | — |
| | — |
| | 2,808.2 |
|
| Depreciation | 89.4 |
| | 58.5 |
| | 13.0 |
| | 11.1 |
| | (7.5 | ) | | 164.5 |
|
| General and administrative | — |
| | — |
| | 8.3 |
| | — |
| | 45.1 |
| | 53.4 |
|
| Equity in earnings of ARO | — |
| | — |
| | — |
| | — |
| | (6.3 | ) | | (6.3 | ) |
| Operating income (loss) | $ | (2,678.0 | ) | | $ | (325.7 | ) | | $ | 10.7 |
| | $ | 17.1 |
| | $ | (75.9 | ) | | $ | (3,051.8 | ) |
Three Months Ended March 31,September 30, 2019
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Floaters | | Jackups | | ARO | | Other | | Reconciling Items | | Consolidated Total |
| Revenues | $ | 269.8 | | | $ | 217.8 | | | $ | 138.4 | | | $ | 63.7 | | | $ | (138.4) | | | $ | 551.3 | |
| Operating expenses | | | | | | | | | | | |
| Contract drilling (exclusive of depreciation) | 250.3 | | | 213.5 | | | 92.7 | | | 32.7 | | | (92.7) | | | 496.5 | |
| Loss on impairment | 88.2 | | | — | | | — | | | — | | | — | | | 88.2 | |
| Depreciation | 92.7 | | | 55.9 | | | 14.6 | | | 8.5 | | | (8.7) | | | 163 | |
| General and administrative | — | | | — | | | 8.8 | | | — | | | 27.3 | | | 36.1 | |
| Equity in earnings of ARO | — | | | — | | | — | | | — | | | (3.7) | | | (3.7) | |
| Operating income (loss) | $ | (161.4) | | | $ | (51.6) | | | $ | 22.3 | | | $ | 22.5 | | | $ | (68.0) | | | $ | (236.2) | |
|
| | | | | | | | | | | | | | | | | | | |
| | Floaters | | Jackups | | Other | | Reconciling Items | | Consolidated Total |
| Revenues | $ | 232.7 |
| | $ | 157.0 |
| | $ | 16.2 |
| | $ | — |
| | $ | 405.9 |
|
| Operating expenses | | | | | | | | | |
| Contract drilling (exclusive of depreciation) | 181.8 |
| | 135.4 |
| | 15.4 |
| | — |
| | 332.6 |
|
| Depreciation | 84.8 |
| | 36.9 |
| | — |
| | 3.3 |
| | 125.0 |
|
| General and administrative | — |
| | — |
| | — |
| | 29.6 |
| | 29.6 |
|
| Operating income (loss) | $ | (33.9 | ) | | $ | (15.3 | ) | | $ | .8 |
| | $ | (32.9 | ) | | $ | (81.3 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Floaters | | Jackups | | ARO | | Other | | Reconciling Items | | Consolidated Total |
| | | | | | | | | | | |
| Revenues | $ | 400.3 | | | $ | 585.9 | | | $ | 431.9 | | | $ | 144.5 | | | $ | (431.9) | | | $ | 1,130.7 | |
| Operating expenses | | | | | | | | | | | |
| Contract drilling (exclusive of depreciation) | 513.2 | | | 569.0 | | | 319.8 | | | 71.7 | | | (319.8) | | | 1,153.9 | |
| Loss on impairment | 3,386.2 | | | 254.3 | | | — | | | 5.7 | | | — | | | 3,646.2 | |
| Depreciation | 207.2 | | | 164.2 | | | 41.1 | | | 33.6 | | | (27.7) | | | 418.4 | |
| General and administrative | — | | | — | | | 21.2 | | | — | | | 166.9 | | | 188.1 | |
| Other operating income | 118.1 | | | — | | | — | | | — | | | — | | | 118.1 | |
| Equity in earnings of ARO | — | | | — | | | — | | | — | | | (7.6) | | | (7.6) | |
| Operating income (loss) | $ | (3,588.2) | | | $ | (401.6) | | | $ | 49.8 | | | $ | 33.5 | | | $ | (258.9) | | | $ | (4,165.4) | |
Nine Months Ended September 30, 2019
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Floaters | | Jackups | | ARO | | Other | | Reconciling Items | | Consolidated Total |
| Revenues | $ | 798.1 | | | $ | 604.0 | | | $ | 262.2 | | | $ | 139.0 | | | $ | (262.2) | | | $ | 1,541.1 | |
| Operating expenses | | | | | | | | | | | |
| Contract drilling (exclusive of depreciation) | 681.3 | | | 561.1 | | | 171.7 | | | 87.0 | | | (171.7) | | | 1,329.4 | |
| Loss on impairment | 88.2 | | | — | | | — | | | — | | | 2.5 | | | 90.7 | |
| Depreciation | 271.4 | | | 146.0 | | | 26.9 | | | 15.3 | | | (13.7) | | | 445.9 | |
| General and administrative | — | | | — | | | 13.9 | | | — | | | 133.0 | | | 146.9 | |
| Equity in earnings of ARO | — | | | — | | | — | | | — | | | (3.1) | | | (3.1) | |
| Operating income (loss) | $ | (242.8) | | | $ | (103.1) | | | $ | 49.7 | | | $ | 36.7 | | | $ | (215.4) | | | $ | (474.9) | |
Floaters
Floater revenue declined $53.1$212.7 million, or 23%79%, for the three months ended March 31,September 30, 2020, as compared to the prior year quarter due to $62.1$69.3 million from the sale of VALARIS 5006, VALARIS 6002 and VALARIS 6002,5004, which operated in the prior year quarter, $14.7$63.5 million due toas a result of fewer days under contract across the floater fleet and $14.2$62.2 million due to the termination of the VALARIS DS-8 contract.
Floater revenue declined $397.8 million, or 50%, for the nine months ended September 30, 2020, as compared to the prior year period due to $206.6 million from the sale of VALARIS 5006, VALARIS 6002 and VALARIS 5004, which operated in the prior year comparative period, $133.9 million due to the termination of the VALARIS DS-8 contract, and $121.0 million as a result of fewer days under contract across the interruption of operations on VALARIS DS-8.floater fleet. This decline was partially offset by $34.6$46.3 million of contract termination fees received for certain rigs and $40.1 million earned by rigs added in the Rowan Transaction.
Floater contract drilling expense increased $32.1declined $121.8 million, or 18%49%, for the three months ended March 31,September 30, 2020, as compared to the prior year quarter, primarily due to $44.9 million lower cost on idle rigs, $29.0 million due to the sale of VALARIS 5006, VALARIS 6002 and VALARIS 5004, which operated in the prior year quarter, and reduced costs resulting from spend control efforts.
Floater contract drilling expense declined $168.1 million, or 25%, for the nine months ended September 30, 2020, as compared to the prior year period, primarily due to $90.8 million lower cost on idle rigs, $70.4 million from the sale of VALARIS 5006, VALARIS 6002 and VALARIS 5004, which operated in the prior year comparative period, and reduced costs resulting from spend control efforts. This decrease was partially offset by $53.8 million of contract drilling expense incurred by rigs added in the Rowan Transaction. The increase was partially offset by $20.3 million from the sale of VALARIS 5006 and VALARIS 6002, which operated in the prior year quarter.
During the first quarterand second quarters of 2020, we recorded a non-cash loss on impairment of $2.6$3.4 billion, with respect to assets in our Floater segment due to the adverse change in the current and anticipated market for these assets. See "Note 67 - Property and Equipment" for additional information.
Floater depreciation expense increaseddeclined for the three months ended March 31,September 30, 2020, as compared to the respective prior year quarter, primarily due to lower depreciation on certain non-core assets which were impaired during the first and second quarters of 2020.
Floater depreciation expense declined for the nine months ended September 30, 2020, as compared to the respective prior year period, primarily due to lower depreciation on certain non-core assets which were impaired during the first and second quarters of 2020.
Other operating income of $118.1 million recognized during the third quarter of 2020 was due to loss of hire insurance recoveries collected for the VALARIS DS-8 non-drilling incident.
Jackups
Jackup revenues declined $31.0 million, or 14%, for the three months ended September 30, 2020, as compared to the prior year quarter, primarily due to $21.7 million as a result of fewer days under contract across the additionjackup fleet and $6.9 million due to the sale of rigsVALARIS JU-96 and VALARIS JU-68 which operated in the Rowan Transaction.prior year quarter.
Jackups
Jackup revenues increased $55.8declined $18.1 million, or 36%3%, for the threenine months ended March 31,September 30, 2020, as compared to the prior year quarter, primarilyperiod due to $69.0$66.4 million as a result of fewer days under contract across the jackup fleet and $30.8 million due to the sale of VALARIS JU-96 and VALARIS JU-68, which operated in the prior year period. This decrease was partially offset by $73.5 million of revenue earned by rigs added in the Rowan Transaction. This increase was partially offset by $12.4 million from the sale of VALARIS JU-68, VALARIS JU-96 and ENSCO 97, which operated in the prior year quarter.
Jackup contract drilling expense increased $90.7declined $53.3 million, or 67%25%, for the three months ended March 31,September 30, 2020, as compared to the prior year quarter, primarily due to $18.7 million of lower cost on idle rigs and $10.4 million due to the sale of VALARIS JU-96 and VALARIS JU-68, which operated in the prior year quarter, and reduced costs resulting from spend control efforts.
Jackup contract drilling expense increased $7.9 million, or 1%, for the nine months ended September 30, 2020, as compared to the prior year period, primarily due to $86.3 million of contract drilling expense incurred by rigs added in the Rowan Transaction. This increase was partially offset by $10.6$29.8 million fromdue to lower cost on idle rigs, $29.4 million due to the sale of VALARIS JU-68, VALARIS JU-96 and ENSCO 97,VALARIS JU-68, which operated in the prior year quarter.period, and reduced costs resulting from spend control efforts.
During the first quarterand second quarters of 2020, we recorded a non-cash loss on impairment of $253.9$254.3 million with respect to assets in our Jackup segment primarily due to the adverse change in the current and anticipated market for these assets. See "Note 67 - Property and Equipment" for additional information.
Jackup depreciation expense declined $3.0 million, or 5%, for the three months ended March 31,September 30, 2020 increased $21.6 million, or 59%, as compared to the prior year quarter, primarily due to lower depreciation on certain non-core assets which were impaired during the first and second quarters of 2020. This decrease was partially offset by depreciation on the VALARIS JU-123 which commenced operations in August 2019.
Jackup depreciation expense increased $18.2 million, or 12%, for the nine months ended September 30, 2020 as compared to the prior year period, primarily due to the addition of rigs in the Rowan Transaction.Transaction as well as the commencement of the VALARIS JU-123 in August 2019. This increase was partially offset by lower depreciation on certain non-core assets which were impaired during the first and second quarters of 2020.
ARO
ARO currently owns a fleet of seven jackup rigs, leases another nine jackup rigs from us and has plans to purchase at least 20 newbuild jackup rigs over an approximate 10 year period. In January 2020, ARO ordered the first two newbuild jackups with delivery scheduled in 2022. The rigs we lease to ARO are done so through bareboat charter agreements whereby substantially all operating costs are incurred by ARO. All nine jackup rigs leased to ARO are under three-year contracts with Saudi Aramco. All seven ARO-owned jackup rigs are under long-term contracts with Saudi Aramco.
The operating revenues of ARO reflect revenues earned under drilling contracts with Saudi Aramco for the seven ARO-ownARO-owned jackup rigs and the nine rigs leased from us that operated during the three month periodmonths and nine months ended March 31,September 30, 2020.
Contract drilling expenses for the three month periodmonths and nine months ended March 31,September 30, 2020, are inclusive of the bareboat charter fees for the rigs leased from us and costsus. Cost incurred under the Secondment Agreement.Agreement are included in contract drilling expense and general and administrative, depending on the function to which the seconded employees' services related. General and administrative expenses for the three month periodmonths and nine months ended March 31,September 30, 2020, include costs incurred under the Transition Services Agreement and other administrative costs.
Other
Other revenues increased $48.0 million for the three months ended March 31, 2020, as compared to the prior year quarter, primarily due to $43.3 million of revenues earned from our rigs leased to ARO and revenues earned under the Secondment Agreement and Transition Services Agreement.
Other contract drilling expenses increased $20.6 million for the three months ended March 31, 2020, as compared to the prior year quarter, primarily due to costs incurred for services provided to ARO under the Secondment Agreement and other costs for ARO rigs.
See "Note 45 - Equity Method Investment in ARO" for additional information on ARO.
Other
Other Income (Expense)
The following table summarizes other income (expense) for the three-month periods ended March 31, 2020 and 2019 (in millions):
|
| | | | | | | | |
| | | Three Months Ended
March 31, |
| | | 2020 | | 2019 |
| Interest income | | $ | 4.8 |
| | $ | 3.5 |
|
| Interest expense, net: | | | | |
| Interest expense | | (113.9 | ) | | (87.2 | ) |
| Capitalized interest | | .7 |
| | 6.2 |
|
| | | (113.2 | ) | | (81.0 | ) |
| Other, net | | .5 |
| | 2.3 |
|
| | | $ | (107.9 | ) | | $ | (75.2 | ) |
Interest incomerevenues declined $22.3 million for the three months ended March 31,September 30, 2020, increased as compared to the prior year quarter, primarily due to interest income$21.9 million of $4.6 millionlower revenues earned onunder the shareholder note from ARO (see "Secondment Agreement and Transition Services Agreement.Note 4 - Equity Method Investment in ARO") acquired in the Rowan Transaction. This increase was partially offset by fewer investments in time deposits.
Interest expenseOther revenues increased $5.5 million for the threenine months ended March 31,September 30, 2020, increased by $26.7 million as compared to the prior year quarter,period, primarily due to the additional revenue earned from our rigs leased to ARO as the prior year included ARO from the date of the Rowan transaction. This is partially offset by a decrease in revenue earned from ARO under the Secondment Agreement and Transition Services Agreement.
Other contract drilling expenses declined $14.2 million and $15.3 million for the three and nine months ended September 30, 2020, as compared to the respective prior year period, primarily due to lower costs incurred for services provided to ARO under the Secondment Agreement.
During the second quarter of 2020, we recorded a non-cash loss on impairment of $5.7 million, with respect to a certain contract intangible due to current market conditions. See "Note 4 - Rowan Transaction" for additional information.
Other Income (Expense)
The following table summarizes other income (expense) for the three and nine months ended September 30, 2020 and 2019 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Interest income | $ | 4.7 | | | $ | 6.7 | | | $ | 15.2 | | | $ | 22.1 | |
| Interest expense, net: | | | | | | | |
| Interest expense | (59.9) | | | (119.4) | | | (290.6) | | | (333.0) | |
| Capitalized interest | .1 | | | 5.5 | | | 1.4 | | | 19.8 | |
| | (59.8) | | | (113.9) | | | (289.2) | | | (313.2) | |
| Reorganization items, net | (497.5) | | | — | | | (497.5) | | | — | |
| Other, net | (3.1) | | | 147.4 | | | 2.5 | | | 853.4 | |
| | $ | (555.7) | | | $ | 40.2 | | | $ | (769.0) | | | $ | 562.3 | |
Interest income for the three and nine months ended September 30, 2020 decreased as compared to the respective prior year period primarily due lower interest on the Long-term notes receivable from ARO as well as fewer investments in time deposits in the current year as compared to the prior year comparable period.
Interest expense decreased $54.1 million and $24.0 million for the three and nine months ended September 30, 2020, respectively, as compared to the prior year periods, primarily due to $45.9 million decrease in interest expense incurredas we discontinued accruing interest subsequent to the Chapter 11 filing. This decrease was partially offset by lower interest capitalization for the three and nine months ended September 30, 2020, respectively, as compared to the prior year periods.
Reorganization items, net of $497.5 million recognized during the third quarter of 2020 was related to other net losses and expenses directly related to Chapter 11 cases, primarily consisting of the write off of unamortized debt discounts, premiums and issuance costs of $447.9 million, financing costs of $23.8 million and professional fees of $25.8 million.
Other, net, for the three months ended September 30, 2019 included $194.1 million of pre-tax gain on debt extinguishment related to the repurchase of senior notes acquired in connection with the July 2019 tender offers, partially offset by a reduction to the estimated gain on bargain purchase of $53.0 million.
Other, net, for the nine months ended September 30, 2019 included $659.8 million of gain on bargain purchase recognized in connection with the Rowan Transaction.Transaction and $194.1 million of pre-tax gain on debt extinguishment related to the repurchase of senior notes in connection with July 2019 tender offers.
Our functional currency is the U.S. dollar, 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 $7.5 million and $4.9 million, were included in other, net, for the three and nine months endedSeptember 30, 2020, respectively. During the three months ended September 30, 2020, the net foreign currency exchange losses were primarily attributable to the Euro and the net foreign currency exchange losses during the nine months ended September 30, 2020, were primarily attributable to the Euro, Australian Dollar and Angolan Kwanza.
Net foreign currency exchange gains of $3.8$4.9 million and losses of $0.3$1.8 million, inclusive of offsetting fair value derivatives, were included in other, net, for the three-month periodsthree and nine months ended March 31, 2020 andSeptember 30, 2019, respectively. During the three-months ended March 31, 2020, the net foreign currency exchangeThese gains were primarily attributable to the Brazilian Real, Angolan Kwanza, Euro Norwegian krone and Nigerian naira.Venezuelan Bolivar.
Provision for Income Taxes
Valaris plc, our parent company, is domiciled and resident in the U.K. Our subsidiaries conduct operations and earn income in numerous countries and are subject to the laws of taxing jurisdictions within those countries. The income of our non-U.K. subsidiaries is generally not subject to U.K. taxation. 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.
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 the profitability levels 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 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.
Income tax rates and taxation systems in the jurisdictions in which our subsidiaries conduct operations vary and our subsidiaries are frequently subjected to minimum taxation regimes. In some jurisdictions, tax liabilities are based on gross revenues, statutory or negotiated deemed profits or other factors, rather than on net income and our subsidiaries are frequently unable to realize tax benefits when they operate at a loss. Accordingly, during periods of declining profitability, our consolidated income tax expense generally does not decline proportionally with consolidated income, which results in higher effective income tax rates. Furthermore, we generally continue to incur income tax expense in periods in which we operate at a loss on a consolidated basis.
Discrete income tax expense for the three months ended September 30, 2020 was $13.8 million and was primarily attributable to changes in liabilities for unrecognized tax benefits associated with tax positions taken in prior years, rig sales and reorganization items. Discrete income tax benefit for the three months ended March 31, 2020September 30, 2019 was $164.4$18.4 million and was primarily attributable to restructuring transactions, the impairment of a restructuring transaction, implementation of the U.S. Cares Act,drilling rig, changes in liabilities for unrecognized tax benefits associated with tax positions taken in prior years and other resolutions of prior year tax matters. Discrete incomematters, partially offset by discrete tax expense forresulting from gains on the three months ended March 31, 2019 was $0.6 million and was attributable to unrecognized tax benefits associated with tax positions taken in prior years.repurchase of debt. Excluding the aforementioned discrete tax items, income tax expense for the three-month periodsthree months ended March 31,September 30, 2020 and 2019 was $12.4$8.1 million and $30.9$19.9 million, respectively.
Discrete income tax benefit for the nine months ended September 30, 2020 was $197.9 million and was primarily attributable to a restructuring transaction, rig impairments, implementation of the U.S. Cares Act, changes in liabilities for unrecognized tax benefits associated with tax positions taken in prior years, rig sales, reorganization items and the resolution of other prior period tax matters. Discrete income tax benefit for the nine months ended September 30, 2019 was $19.0 million and was primarily attributable to restructuring transactions, the impairment of a drilling rig, changes in liabilities for unrecognized tax benefits associated with tax positions taken in prior years and other resolutions of prior year tax matters, partially offset by discrete tax expense resulting from gains on the repurchase of debt. Excluding the aforementioned discrete tax items, income tax expense for the nine monthsended September 30, 2020 and 2019 was $52.0 million and $84.6 million, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Chapter 11 Cases and Effect of Automatic Stay
Our focus on liquidity and capital resources includes our cash position, debt levels and maturity profile and cost of capital. Based on our balance sheet, our contractual backlog and $1.3 billion available under our credit facility, we expect to fund our near term liquidity needs, including negative operating cash flows, debt service and other contractual obligations, anticipated capital expenditures, as well as working capital requirements, from cash, funds borrowed under our credit facility or other future financing arrangements. We currently expect that cash and cash equivalents and available funds under our credit facility are adequate to cover our liquidity requirements for at least the next twelve months.
Our credit facility is an integral partrelated to the acceleration of our financial flexibility and liquidity. Our revolving credit facility requires compliance with covenants to maintain specified financial and guarantee coverage ratios, including a total debt to total capitalization ratio that is less than or equal to 60%. In the first quarter of 2020, we incurred impairments of $2.8 billion, which contributed to an increase in the total debt to total capitalization ratio to 52.1% as of March 31, 2020. We may incur additional material impairmentshave been automatically stayed as a result of declinesthe filing of the Chapter 11 Cases, and the creditors’ rights of enforcement are subject to the applicable provisions of the Bankruptcy Code.
On August 18, 2020, the Debtors entered into the RSA with the Consenting Noteholders which contemplates that the Company will implement the restructuring through the Chapter 11 Cases pursuant to a plan of reorganization and the various related transactions set forth in demandor contemplated by the RSA and the Restructuring Term Sheet. See“Note 2 – Chapter 11 Proceedings and Ability to Continue as a Going Concern” for offshore drilling rigs. As of March 31, 2020, if we incur additional impairments or experience additional losses in excess of approximately $1.7 billion indetails regarding the near future, we would no longer be in compliance with such covenant. If we exceed the total debtChapter 11 Cases and RSA.
The Debtors continue to total capitalization covenant in our credit facility, further borrowingsoperate their businesses and manage their properties as “debtors-in-possession” under the credit facility would not be permitted, absent a waiver, and all outstanding borrowings would become immediately due and payable by action of lenders holding a majorityjurisdiction of the commitments underBankruptcy Court and in accordance with applicable provisions of the credit facility. Any such acceleration would triggerBankruptcy Code and orders of the Bankruptcy Court. As part of the Chapter 11 Cases, the Debtors were granted “first-day” relief which enabled the Company to continue operating without interruption or disruption to its relationships with its customers and vendors or its high-quality service delivery. In particular, employee pay and benefits are expected to continue without interruption.
In addition, we have obtained a cross-acceleration eventDIP Facility to fund operations during the bankruptcy proceedings. However, for the duration of defaultthe Chapter 11 Cases, our operations and our ability to develop and execute our business plan are subject to a high degree of risk and uncertainty associated with respect to approximately $2.1 billionthe Chapter 11 Cases. The outcome of the Chapter 11 Cases is dependent upon factors that are outside of our outstanding senior notes.
The credit facility generally limits us to no more than $200 million in available cash (including certain liquid investments as defined in the credit facility documents), and requires consent of all lenders for draws on the credit facility that would result in us having more than $200 million in available cash and liquid investments. There can be no assurances that the lenders would approve borrowing requests that would result in us having more than $200 million in available cash and liquid investments.
Furthermore, the agent under the credit facility has reserved the right to assert that a material adverse effect has occurred based on changes in the oil market and certain company-specific operating incidents,control, including the dropactions of the blowout preventer stack off the VALARIS DS-8, disclosed above. We do not believe thatBankruptcy Court and our creditors. The significant risks and uncertainties related to our liquidity and Chapter 11 Cases described above raise substantial doubt about our ability to continue as a material adverse effect has occurred, but theregoing concern. There can be no assurance that we will confirm and consummate a plan of reorganization as contemplated by the revolving lenders will not assertRSA or complete another plan of reorganization with respect to the Chapter 11 Cases. As a material adverse effect as a basis to deny further borrowing requests.
We may rely on the issuance of debt in the future to supplement our liquidity needs. In the current market environment, however,result, we have concluded that management’s plans do not expect to have access to the capital markets on terms we would find favorable, if at all. We have engaged financial and legal advisors to assist us in, among other things, analyzing various alternatives to address our liquidity and capital structure. We may seek to extend our maturities and/or reduce the overall principal amount of our debt through exchange offers, other liability management, recapitalization and/or restructuring transactions. As part of the evaluation of alternatives, we also are engaged in discussions with our lenders and bondholders regarding the terms of a potential comprehensive restructuring of our indebtedness. Any comprehensive restructuring of our indebtedness and capital structure may require aalleviate substantial impairment or conversion of our indebtedness to equity, as well as impairment, losses or substantial dilution for our shareholders and other stakeholders. . We have the ability to issue debt that would be structurally senior to our currently outstanding debt, on both an unsecured and secured basis, subject to restrictions contained in our existing debt arrangements. Our liability management, recapitalization and/or restructuring efforts, if undertaken, may be unsuccessful or may not improve our financial position to the extent anticipated.
Our ability to maintain a sufficient level of liquidity to meet our financial obligations will also be dependent upon our future performance, which will be subject to general economic conditions, industry cycles and financial, business and other factors affecting our operations, many of which are beyond our control. For example, if demand for offshore drilling remains at current depressed levels or deteriorates further, our longer term ability to maintain a sufficient level of liquidity could be materially and adversely impacted, which could have a material adverse impact on our business, financial condition, results of operations, cash flows anddoubt about our ability to repay or refinance our debt. For additional discussion of the risks associated with our indebtedness and current liquidity issues, please the discussion under “Risk Factors” in Item 1A of Part II of this Form 10-Q.continue as a going concern.
Liquidity
Our liquidity position is summarized in the table below (in millions, except ratios):
| | | | | | | | | | | | | | |
| | September 30,
2020 | | December 31,
2019 |
| | |
| Cash and cash equivalents | | $ | 180.4 | | | $ | 97.2 | |
| Available DIP Facility capacity | | 500.0 | | | — | |
| Available revolving credit facility borrowing capacity | | — | | | 1,622.2 | |
| Total liquidity | | $ | 680.4 | | | $ | 1,719.4 | |
| Working capital | | $ | 676.8 | | | $ | 233.7 | |
Current ratio(1) | | 2.7 | | | 1.3 | |
|
| | | | | | | | |
| | | March 31,
2020 | | December 31,
2019 |
| | | |
| Cash and cash equivalents | | $ | 184.9 |
| | $ | 97.2 |
|
| Available credit facility borrowing capacity | | 1,290.0 |
| | 1,622.2 |
|
| Total liquidity | | $ | 1,474.9 |
| | $ | 1,719.4 |
|
| Working capital | | $ | 220.4 |
| | $ | 233.7 |
|
| Current ratio | | 1.2 |
| | 1.3 |
|
(1) As a result of our Chapter 11 filing, we reclassified $7.3 billion representing the principal balance on our unsecured senior notes, the amount of outstanding borrowings on our revolving credit facility, the accrued interest on our unsecured senior notes and revolving credit facility, and rig holding costs for DS-13 and DS-14 to “Liabilities Subject to Compromise” as of September 30, 2020. The current ratio calculated above does not reflect our debt and related interest that would otherwise be current but is stayed under our Chapter 11 Cases, nor does it include rig holding costs for DS-13 and DS-14.
Cash and Debt
As discussed in "Note 2 - Chapter 11 Proceedings and Ability to Continue as a Going Concern" and above in "Item 2, Management's Discussion and Analysis of March 31,Financial Condition and Results of Operations", we have filed the Chapter 11 Cases to effect a comprehensive restructuring of our indebtedness.
The Commencement of the Chapter 11 Cases on August 19, 2020, constituted an event of default under our Senior Notes and revolving credit facility. Any efforts to enforce payment obligations under the Senior Notes, including any rights to require the repurchase by the Company of the 2024 Convertible Notes upon the NYSE delisting of the Class A ordinary shares, and revolving credit facility are automatically stayed as a result of the filing of the Chapter 11 Cases. The $6.5 billion aggregate principal amount of Senior Notes outstanding as well as $581.0 million outstanding borrowings under our revolving credit facility as of the Petition Date are classified as Liabilities Subject to Compromise in our Condensed Consolidated Balance Sheet as of September 30, 2020.
On September 25, 2020, we had $6.8 billionentered into the $500.0 million DIP facility to provide liquidity during the pendency of total debt principal outstanding, representing 52.1%the Chapter 11 Cases and expect exit financing in the form of our total capitalization.a fully backstopped rights offering to noteholders for $500 million of new secured notes. We also had $184.9 millionexpect the DIP Facility will provide sufficient liquidity for us during the pendency of the Chapter 11 Cases. Additionally, we expect the exit financing to include the backstopped New Secured Notes and that these notes will provide the necessary liquidity to support ongoing operations and working capital needs.
The maturity date of the DIP Credit Agreement is the earliest of (1) August 17, 2021, (2) acceleration of the loans under the DIP Facility and termination of the Lenders commitments under the DIP Facility, (3) the substantial consummation of any plan filed in cash and $1.3 billion of undrawn capacity under our credit facility, which expires in September 2022. The credit agreement governing the credit facility includes an accordion feature allowing us to increase future commitments upChapter 11 Cases that is confirmed pursuant to an aggregate amountorder entered by the Bankruptcy Court and (4) the consummation of a sale of all or substantially all of the assets of the Lead Borrower and the other Debtors under section 363 of the Bankruptcy Code. Loans under the DIP Credit Agreement accrue interest at a rate of 8.00% per annum, if paid in kind, and at a rate of 7.00% per annum, if paid in cash.
The DIP Credit Agreement contains a requirement that the Lead Borrower and any other borrowers provide every four weeks, a rolling 13 week budget to be approved by the required Lenders (the “Approved Budget”). The Lead Borrower and any other borrower that becomes party to the DIP Credit Agreement may not to exceed $250.0 million,vary from the Approved Budget by more than 15% of the forecasted amounts in any forecast period. The Approved Budget is, subject to certain exceptions and is tested at certain times in accordance with the approvalDIP Credit Agreement in order to measure variances between the actual total cash disbursements (excluding professional fees and certain other items consistent with the initial Approved Budget) and the disbursements budgeted for the applicable period.
The DIP Credit Agreement contains events of default customary to debtor-in-possession financings, including events related to the Chapter 11 Cases, the occurrence of which could result in the acceleration of the lenders agreeingDebtors’ obligation to increaserepay the outstanding indebtedness under the DIP Credit Agreement. The Debtors’ obligations under the DIP Credit Agreement are secured by a security interest in, and lien on, substantially all present and after acquired property (subject to certain exceptions) of the Debtors and are guaranteed by certain of the Company’s subsidiaries, including other Debtors.
The DIP Credit Agreement also contains customary covenants that limit the ability of the Company and its subsidiaries to, among other things, (1) incur additional indebtedness and permit liens to exist on their commitments. assets, (2) pay dividends or make certain other restricted payments, (3) sell assets and (4) make certain investments. These covenants are subject to exceptions and qualifications as set forth in the DIP Credit Agreement.
As of March 31, 2020, our principal debt maturities through 2024 include $122.9 million in 2020, $100.7 million in 2021, $620.8 million in 2022 and $1.8 billion in 2024.
During the threenine months ended March 31,September 30, 2020, our primary source of cash was $328.9$581.0 million in net borrowings under our revolving credit facility. While the revolving credit facility has not been terminated, no further borrowings are permitted. Our primary uses of cash for the same period were $396.4 million used in operating activities and $82.9 million for the construction, enhancement and other improvements of our drilling rigs.
During the nine months ended September 30, 2019, our primary source of cash was cash acquired in the Rowan Transaction of $931.9 million, $329.0 million from net maturities of short-term investments and $140.6 million of net borrowings under our credit facility. Our primary uses of cash for the same period were $204.4$928.1 million usedfor the repayment of senior notes in operating activities, $36.3connection with the maturity of $201.4 million principal amount of senior notes in August 2019 and our July tender offers, $174.2 million for the construction, enhancement and other improvements of our drilling rigs and $9.7$427.5 million for the repurchase of outstanding debt on the open market.operating activities.
During the three months ended March 31, 2019, our primary source of cash was $84.0 million from net maturities of short-term investments. Our primary uses of cash for the same period were $29.0 million for the construction, enhancement and other improvements of our drilling rigs and $24.4 million used in operating activities of continuing operations.
Cash Flow and Capital Expenditures
Our cash flow from operating activities and capital expenditures for the three-month periodsnine months ended March 31,September 30, 2020 and 2019 were as follows (in millions):
| | | | 2020 | | 2019 | | 2020 | | 2019 |
| Net cash used in operating activities | $ | (204.4 | ) | | $ | (24.4 | ) | Net cash used in operating activities | $ | (396.4) | | | $ | (427.5) | |
| Capital expenditures | |
| | |
| Capital expenditures | | | |
| New rig construction | $ | 2.2 |
| | $ | 16.2 |
| New rig construction | $ | 2.8 | | | $ | 46.0 | |
| Rig enhancements | 21.0 |
| | 3.0 |
| Rig enhancements | 41.2 | | | 84.4 | |
| Minor upgrades and improvements | 13.1 |
| | 9.8 |
| Minor upgrades and improvements | 38.9 | | | 43.8 | |
| | $ | 36.3 |
| | $ | 29.0 |
| | $ | 82.9 | | | $ | 174.2 | |
Cash flows used in operating activities increased $180.0declined $31.1 million as compared to the prior year quarterperiod primarily due to lower interest costs, partially offset by declining margins and interest on the debt assumed in the Rowan Transaction.margins. As our remaining above-market contracts expire and we renegotiate contracts with customers, we expect our operating cash flows will remain negative in the near term.
Based on our current projections, we expect capital expenditures for the remainder of 2020 to approximate $85$22 million for newbuild construction, rig enhancement projects and minor upgrades and improvements. Approximately $11$12 million of our projected capital expenditures isare reimbursable by our customers. Depending on market conditions and opportunities, we may reduce our planned expenditures or make additional capital expenditures to upgrade rigs for customer requirements.
We have two ultra-deepwater drillships under construction, VALARIS DS-13 and VALARIS DS-14, which are scheduled for delivery in September 2021 and June 2022, respectively.respectively. The terms of the RSA contemplate the rejection of the construction and delivery contracts for these rigs unless otherwise agreed between us and the shipyard with the consent of the Consenting Noteholders. If rejected, it is contemplated that we would have to pay an amount equal to the liquidation recovery, which is the amount the contract counterparty would be entitled to receive or retain if the applicable Company entity was liquidated under chapter 7 of the Bankruptcy Code.
The following table summarizes the estimated timing of our remaining contractual paymentscommitments for our rigs under construction as of March 31,September 30, 2020 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2020 | | 2021 | | 2022 | | Thereafter | | Total(1) |
VALARIS DS-13(2) | | $ | — | | | $ | 83.9 | | | $ | — | | | $ | — | | | $ | 83.9 | |
VALARIS DS-14(2) | | — | | | — | | | 165.0 | | | — | | | 165.0 | |
| | $ | — | | | $ | 83.9 | | | $ | 165.0 | | | $ | — | | | $ | 248.9 | |
(1)Total commitments are based on fixed-price shipyard construction contracts, exclusive of our internal costs associated with project management, commissioning and systems integration testing. Total commitments also exclude holding costs and interest.
(2)The current contractual delivery dates for the VALARIS DS-13 and VALARIS DS-14 are September 30, 2021 and June 30, 2022, respectively. We can elect to request earlier delivery in certain circumstances. The interest rate on the final milestone payments are 7% per annum from October 1, 2019, for the VALARIS DS-13, and from July 1, 2020, for the VALARIS DS-14, until the actual delivery dates. The final milestone payments and applicable interest are due at the delivery dates (or, if accelerated, the actual delivery dates) and are estimated to be approximately $313.3 million in aggregate for both rigs, inclusive of interest, assuming we take delivery on the delivery dates. In lieu of making the final milestone payments,
|
| | | | | | | | | | | | | | | | | | | | |
| | | 2020 | | 2021 | | 2022 | | Thereafter | | Total(1) |
VALARIS DS-13(2) | | $ | — |
| | $ | 83.9 |
| | $ | — |
| | $ | — |
| | $ | 83.9 |
|
VALARIS DS-14(2) | | — |
| | — |
| | 165.0 |
| | — |
| | 165.0 |
|
| | | $ | — |
|
| $ | 83.9 |
|
| $ | 165.0 |
|
| $ | — |
|
| $ | 248.9 |
|
| |
(1)
| Total commitments are based on fixed-price shipyard construction contracts, exclusive of our internal costs associated with project management, commissioning and systems integration testing. Total commitments also exclude holding costs and interest. |
| |
(2)
| The delivery dates for the VALARIS DS-13 and VALARIS DS-14 are September 30, 2021 and June 30, 2022, respectively. We can elect to request earlier delivery in certain circumstances. The interest rate on the final milestone payments are 7% per annum from October 1, 2019, for the VALARIS DS-13, and from July 1, 2020, for the VALARIS DS-14, until the actual delivery dates. The final milestone payments and applicable interest are due at the delivery dates (or, if accelerated, the actual delivery dates) and are estimated to be approximately $313.3 million in aggregate for both rigs, inclusive of interest, assuming we take delivery on the delivery dates. In lieu of making the final milestone payments, we have the option to take delivery of the rigs and issue a promissory note for each rig to the shipyard owner for the amount due. The promissory notes will bear interest at a rate of 9% per annum with a maturity date of December 30, 2022 and will be secured by a mortgage on each respective rig. The remaining milestone payments for VALARIS DS-13 and VALARIS DS-14 are included in the table above in the period in which we expect to take delivery of the rig. However, we may elect to execute the promissory notes and defer payment until December 2022. If we issue the promissory note to the shipyard owner, we would also be required to provide a guarantee from Valaris plc. |
Financing and Capital Resources
Debt to Capital
Our total debt, total capital and total debt to total capital ratios are summarized below (in millions, except percentages):ratio as of December 31, 2019, was $6.5 billion, $15.8 billion and 41.2%, respectively. Total debt consisted of the principal amount outstanding and total capital consisted of total debt and Valaris shareholders' equity.
|
| | | | | | | | |
| | | March 31, 2020 | | December 31, 2019 |
| | | |
Total debt (1) | | $ | 6,844.2 |
| | $ | 6,528.1 |
|
Total capital (2) | | $ | 13,142.5 |
| | $ | 15,839.0 |
|
| Total debt to total capital | | 52.1 | % | | 41.2 | % |
| |
(1)
| Total debt consists of the principal amount outstanding and borrowings on our credit facility. |
| |
(2)
| Total capital consists of total debt and Valaris shareholders' equity. |
During the first quarter ofnine months ended September 30, 2020, our total debt principal increased by $316.1$568.2 million and total capital declined by $2.7 billion primarily as a result of borrowings on our revolving credit facility and total capital declined by $4.2 billion due to operating losses, inclusive of impairment of assets, respectively.assets.
As of September 30, 2020, there were no borrowings outstanding under the DIP Credit Agreement. The DIP Credit Agreement does not provide for the issuance of letters of credit but permits incurrence of letters of credit in certain circumstances. Any proceeds of the loans under the DIP Credit Agreement may be used (i) to provide working capital to the borrowers and their subsidiaries and for other general corporate purposes in accordance with the rolling 13 week budget to be approved by the required Lenders every four weeks (subject to the Permitted Variance), (ii) to pay interest, fees, costs and expenses related to the DIP Facility, (iii) to pay fees, costs and expenses of the estate professionals retained for the Chapter 11 Cases as approved by the Bankruptcy Court and as provided for in the Approved Budget (subject to the Permitted Variance), (iv) make all permitted payments of costs of administration of the Chapter 11 Cases, (v) pay pre-petition expenses as are consistent with the Approved Budget (subject to the Permitted Variance) and approved by the Bankruptcy Court, (vi) to fund the reasonable activities, costs and fees in respect of any insolvency proceedings in the United Kingdom and (vii) make other payments permitted by the applicable Approved Budget. For the applicable Approved Budget period, the actual total cash disbursements may not exceed the sum of the aggregate amount forecasted in the Approved Budget by more than 15% of the forecasted amount.
During the three months ended September 30, 2020, we incurred $23.8 million of fees and expenses related to the establishment of the DIP Credit Agreement, which are in included in Reorganization items, net on the Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2020.
As of September 30, 2020, we were in compliance with our covenants under the DIP Credit Agreement.
Open Market Repurchases
In early March 2020, we repurchased $12.8 million of our outstanding 4.70% Senior notes due 2021 on the open market for an aggregate purchase price of $9.7 million, excluding accrued interest, with cash on hand. As a result of the transaction, we recognized a pre-tax gain of $3.1 million net of discounts and debt issuance costs in other, net, in the consolidated statementstatements of operations.
Senior Notes
On February 3, 2020, Rowan and Rowan Companies, Inc. ("RCI") transferred substantially all their assets on a consolidated basis to Valaris plc, Valaris plc became the obligor on the outstanding notes acquired in the
Rowan Transaction and Rowan and RCI were relieved of their obligations under the notes and the related indenture. See "Note 1011 - Debt" for additional information.
The Commencement of the Chapter 11 Cases on August 19, 2020, constituted an event of default under our Senior Notes. Any efforts to enforce payment obligations under the Senior Notes are automatically stayed as a result of the filing of the Chapter 11 Cases. The $6.5 billion aggregate principal amount of Senior Notes outstanding as well as $201.9 million in associated accrued interest as of the Petition Date are classified as Liabilities Subject to Compromise in our Condensed Consolidated Balance Sheet as of September 30, 2020. See“Note 2 – Chapter 11 Proceedings and Ability to Continue as a Going Concern” for additional details regarding the Chapter 11 Cases.
In December 2016, Ensco Jersey Finance Limited, a wholly-owned subsidiary of Valaris plc, issued $849.5 aggregate principal amount of 3.00% convertible senior notes due 2024 (the “2024 Convertible Notes”) in a private offering. The 2024 Convertible Notes are fully and unconditionally guaranteed, on a senior, unsecured basis, by Valaris plc and are exchangeable into cash, our Class A ordinary shares or a combination thereof, at our election.
The Commencement of the Chapter 11 Cases on August 19, 2020, constituted an event of default under the 2024 Convertible Notes. Any efforts to enforce payment obligations under the 2024 Convertible Notes, including any rights to require the repurchase by the Company of the 2024 Convertible Notes upon the NYSE delisting of the Class A ordinary shares, are automatically stayed as a result of the filing of the Chapter 11 Cases. The aggregate principal amount of 2024 Convertible Notes outstanding as well as associated accrued interest as of the Petition Date are classified as Liabilities Subject to Compromise in our Condensed Consolidated Balance Sheet as of September 30, 2020. See“Note 2 – Chapter 11 Proceedings and Ability to Continue as a Going Concern” for additional details regarding the Chapter 11 Cases.
Revolving Credit Facility and DIP Facility
Our borrowing capacityAs of September 30, 2020, we had $581.0 million of borrowings outstanding under our revolving credit facility is $1.6 billion through September 2022and $41.2 million of which $1.3 billion is available asundrawn letters of March 31, 2020.credit. The credit agreement governing theprincipal and interest under our revolving credit facility includesbecame immediately due and payable upon filing of the Chapter 11 Cases, which constituted an accordion feature allowing us to increaseevent of default under the future commitments by up to an aggregate amount not to exceed $250.0 million, subject toCredit Agreement. However, the approvalability of the lenders agreeing to increase their commitments.
Advances underexercise remedies was stayed upon commencement of the
Chapter 11 Cases. While the revolving credit facility
bearhas not been terminated, no further borrowings are permitted. The outstanding borrowings as well as accrued interest
at Base Rate or LIBOR plus an applicable margin rate, depending on our credit ratings. We are required to pay a quarterly commitment fee on the undrawn portionas of the
$1.6 billion commitment, which is alsoPetition Date are classified as Liabilities Subject to Compromise in our Condensed Consolidated Balance Sheet as of September 30, 2020. See“Note 2 – Chapter 11 Proceedings and Ability to Continue as a Going Concern” for additional details regarding the Chapter 11 Cases.We expect cash on hand and the DIP Facility will provide sufficient liquidity for us during the pendency of the Chapter 11 Cases based on current projections of cash flows. Should we experience material variations from our credit ratings.
The credit facility requires us to maintain a total debt to total capitalization ratio that is less than or equal to 60% 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 a permitted lien basket that permits us to raise secured debt up to the lesser of $1 billion 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 pay 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 aggregate amount of availableprojected cash (as defined in the credit facility) would exceed $200 million; and entering into certain transactions with affiliates.
The credit facility also includes a covenant restricting our ability to repay indebtedness maturing after September 2022, which is the final maturity date of the credit facility. This covenant is subject to certain exceptions that permit us to manage our balance sheet, including the ability to make repayments of indebtedness (i) of acquired companies within 90 days of the completion of the acquisition or (ii) if, after giving effect to such repayments, available cash is greater than $250.0 million and there are no amounts outstanding under the credit facility.
As of March 31, 2020, 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 the next twelve months. We had $332.1 million outstanding under the credit facility, inclusive of $3.2 million in letters of credit, leaving a remaining $1.3 billion of undrawn capacity under our credit facility as of March 31, 2020.
Our access to credit and capital markets is limited because of current market conditions and our credit rating among other reasons. Our current credit ratings, and any additional actual or anticipated downgrades in our corporate credit ratings, or the credit ratings of our senior notes will restrict our ability to access credit and capital markets, or to restructure or refinance our indebtedness. In addition, future financings or refinancings willflows, this could result in higher borrowing costsus having insufficient liquidity from the DIP Facility and may require collateral and/or more restrictive terms and covenants, which may further restrict our operations. Limitations on our ability to access credit and capital marketsin turn could have a material adverse impact on our financial position, operating results or cash flows.
Investment in ARO and Notes Receivable from ARO
We consider our investment in ARO to be a significant component of our investment portfolio and an integral part of our long-term capital resources. We expect to receive cash from ARO in the future both from the maturity of our long-term notes receivable and from the distribution of earnings from ARO. The long-term notes receivable, which are governed by the laws of Saudi Arabia, earn interest at LIBOR plus two percent and mature during 2027 and 2028.
The distribution of earnings to the joint-venture partners is at 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 timing and amount of any 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 ARO. ARO has not made a cash distribution of earnings to its partners since its formation. See "Note 45 - Equity Method Investment in ARO" for additional information on our investment in ARO and notes receivable from ARO.
The following table summarizes the maturity schedule of our notes receivable from ARO as of March 31,September 30, 2020 (in millions):
| | | | | |
| Maturity Date | Principal Amount |
| October 2027 | $ | 265.0 | |
| October 2028 | 177.7 | |
| Total | $ | 442.7 | |
|
| | | |
| Maturity Date | Principal Amount |
| October 2027 | $ | 275.2 |
|
| October 2028 | 177.7 |
|
| Total | $ | 452.9 |
|
Other Financing Arrangements
We filed an automatically effective shelf registration statement on Form S-3 with the SEC on November 21, 2017, which provides us the ability to issue debt securities, equity securities, guarantees and/or units of securities in one or more offerings. The registration statement expires in November 2020.
During 2018, our shareholders approved our current share repurchase program. Subject to certain provisions under English law, including the requirement of the Company to have sufficient distributable reserves, we may repurchase shares up to a maximum of $500.0 million in the aggregate from one or more financial intermediaries under the program, but in no case more than 16.3 million shares. The program terminates in May 2023. As of March 31,September 30, 2020, there had been no share repurchases under this program. Our credit facilityDIP Credit Agreement prohibits us from repurchasing our shares, except in certain limited circumstances. Any share repurchases, outside of such limited circumstances, would require the amendment or waiver of such provision.
From time to time, we and our affiliates may repurchase our outstanding senior notes in the open market, in privately negotiated transactions, through tender offers, exchange offers or otherwise, or we may redeem senior notes, pursuant to their terms. In connection with any exchange, we may issue equity, issue new debt (including debt that is structurally senior to our existing senior notes) and/or pay cash consideration. Any future repurchases, exchanges, redemptions or refinancings will depend on various factors existing at that time. There can be no assurance as to which, if any, of these alternatives (or combinations thereof) we may choose to pursue in the future or, if any such alternatives are pursued, that they will be successful. There can be no assurance that an active trading market will exist for our outstanding senior notes following any such transaction.
Other Commitments
We have other commitments that we are contractually obligated to fulfill with cash under certain circumstances. As of March 31,September 30, 2020, we were contingently liable for an aggregate amount of $117.9$123.1 million under outstanding letters of credit which 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 March 31,September 30, 2020, we had not been required to make anyinsignificant collateral deposits with respect to these agreements.
In connection with our 50/50 joint venture with ARO, we have a potential obligation to fund ARO for newbuild jackup rigs. In the event ARO has insufficient cash from operations 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. The Company's capital contributions to ARO pursuant to this requirement may require approval of the Bankruptcy Court during the Chapter 11 Cases. Each partner's commitment shall be reduced by the actual cost of each newbuild rig, on a proportionate basis. See "Note 45 - Equity Method Investment in ARO" for additional information on our joint venture with ARO.
Recent Tax Assessments
During 2019, the Australian tax authorities issued aggregate tax assessments totaling approximately A$101 million (approximately $62.0$72.3 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 million payment (approximately $29 million at then-current exchange rates) to the Australian tax authorities to litigate the assessment. We have recorded a $13.6$16.4 million liability for these assessments as of March 31,September 30, 2020. 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 1213 - Income Taxes" for additional information on recent tax assessments.
MARKET RISK
We usehave historically used derivatives to reduce our exposure to foreign currency exchange rate 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 maintainpreviously maintained a foreign currency exchange rate risk management strategy that utilizesutilized derivatives to reduce our exposure to unanticipated fluctuations in earnings and cash flows caused by changes in foreign currency exchange rates.
We utilize cash flow hedgesThe commencement of the Chapter 11 Cases constituted a termination event with respect to hedge forecasted foreign currency denominated transactions, primarily to reduce our exposure to foreign currency exchange rate risk on future expected contract drilling expenses and capital expenditures denominated in various foreign currencies. We predominantly structure our drilling contracts in U.S. dollars,the Company’s derivative instruments, which significantly reducespermits the portioncounterparties of our cash flows and assets denominated in foreign currencies.derivative instruments to terminate their outstanding contracts. The exercise of these termination rights are not stayed under the Bankruptcy Code. During September 2020, the counterparties to the Company’s derivative instruments elected to terminate their outstanding derivatives. As of March 31,September 30, 2020, we had cash flow hedges outstanding to exchange an aggregate $206.4 million for various foreign currencies.
We have net assets and liabilities denominated in numerous foreign currencies and use various strategies to manage our exposure to changes in foreign currency exchange rates. We occasionally enter into derivatives that hedge the fair value of recognized foreign currency denominated assets or liabilities, thereby reducing exposure to earnings fluctuations caused by changes in foreign currency exchange rates. We do not designate such derivatives as hedging instruments. In these situations, a natural hedging relationship generally exists whereby changes in the fair value of the derivatives offset changes in the fair value of the underlying hedged items. As of March 31, 2020, we held derivatives not designated as hedging instruments to exchange an aggregate $65.0 million for various foreign currencies.
If we were to incur a hypothetical 10% adverse change in foreign currency exchange rates, net unrealized losses associated with our foreign currency denominated assets and liabilities as of March 31, 2020 would approximate $20.9 million. Approximately $5.1 million of these unrealized losses would be offset by corresponding gains on the derivatives utilized to offset changes in the fair value of net assets and liabilities denominated in foreign currencies.no derivative contracts outstanding.
We utilize derivatives and undertake foreign currency exchange rate hedging activities in accordance with our established policies for the management of market risk. We mitigate our credit risk related to counterparties of our derivatives through a variety of techniques, including transacting with multiple, high-quality financial institutions, thereby limiting our exposure to individual counterparties and by entering into ISDA Master Agreements, which include provisions for a legally enforceable master netting agreement, with our derivative counterparties. The terms of the ISDA agreements may also include credit support requirements, cross default provisions, termination events or set-off provisions. Legally enforceable master netting agreements reduce credit risk by providing protection in bankruptcy in certain circumstances and generally permitting the closeout and netting of transactions with the same counterparty upon the occurrence of certain events.
We do not enter into derivatives for trading or other speculative purposes. We believe that our use of derivatives and related hedging activities reduces our exposure to foreign currency exchange rate risk and does not expose us to material credit risk or any other material market risk. All of our derivatives mature during the next 18 months. See "Note 8 - Derivative Instruments" for additional information on our derivative instruments.CRITICAL ACCOUNTING POLICIES
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 condensed consolidated financial statements and accompanying notes. Our significant accounting policies are included in Note 1 to our audited consolidated financial statements for the year ended December 31, 2019, included in our annual report on Form 10-K filed with the SEC on February 21, 2020. These policies, along with our underlying judgments and assumptions made in their application, have a significant impact on our condensed 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 property and equipment, income taxes and pension and other post-retirement benefits. For a discussion of the critical accounting policies and estimates that we use in the preparation of our condensed consolidated financial statements, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates" in Part II of our annual report on Form 10-K for the year ended December 31, 2019. During the three and nine months ended March 31,September 30, 2020, there were no material changes to the judgments, assumptions or policies upon which our critical accounting estimates are based.
New Accounting Pronouncements
See Note 1 - Unaudited Condensed Consolidated Financial Statements to our condensed consolidated financial statements included in "Item 1. Financial Information" for information on new accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Information required under Item 3. has been incorporated into "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Market Risk."
Item 4. 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 Securities Exchange Act of 1934 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.
We have appropriately implemented Financial Accounting Standards Board Accounting Standard Codification Topic No. 852 – Reorganizations (“ASC 852”), during the quarter and have prepared the interim Condensed Consolidated Financial Statements and disclosures in accordance with ASC 852.
Based on their evaluation as of March 31,September 30, 2020, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934)Act) are effective.
Changes in Internal Controls – There have been no changes in our internal controls over financial reporting during the fiscal quarter ended March 31,September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except as noted below.reporting.
In 2019, we completed our merger with Rowan (See "
Note 3 - Rowan Transaction" for more information). We are currently integrating Rowan into our operations and internal control processes and, pursuant to the SEC's guidance that a recently acquired business may be excluded from the scope of an assessment of internal control over financial reporting in the year of acquisition, the scope of our assessment of the effectiveness of our internal controls over financial reporting at December 31, 2019 excludes Rowan to the extent not integrated into our control environment.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
UMB Bank Lawsuit
On March 19, 2020, UMB Bank, National Association (“UMB”), the purported indenture trustee for four series of Valaris notes, filed a lawsuit in Harris County District Court in Houston, Texas. The lawsuit was filed against Valaris plc, two legacy Rowan entities, two legacy Ensco entities and the individual directors of the two legacy Rowan entities. The complaint alleges, among other things, breach of fiduciary duty, aiding and abetting breach of fiduciary duty and fraudulent transfer in connection with certain intercompany transactions occurring after completion of the Rowan merger and the Rowan entities’ guarantee of Valaris’ revolving credit facility. In addition to an unspecified amount of damages, the lawsuit seeks to void and undo all historical transfers of cash or other assets from legacy Rowan entities to Valaris and its other subsidiaries and the internal reorganization transaction. WeOn August 18, 2020, Valaris and certain of its affiliates entered into the RSA, including the noteholders that directed UMB to file the lawsuit. Under the RSA, the lawsuit is stayed by agreement throughout the pendency of the bankruptcy proceeding unless the RSA terminates at which point each party reserves its rights to argue whether the case should proceed while in bankruptcy. If the Bankruptcy Court confirms a plan based on the transactions set forth in the RSA, the lawsuit will be dismissed with prejudice. On August 24, 2020, the parties filed a joint notice staying the case. If the RSA terminates and the other defendants intend to vigorously defend ourselvescase in the proceeding. On April 13, 2020, certain defendants that had been served by that date filed a plea to the jurisdiction, which seeks dismissal of the lawsuit on the grounds that the prior trustee was not properly removed and UMB was not properly appointed as trustee prior to filing the lawsuit. At this time,fact proceeds, we are unable to predict the outcome of this matter or estimate the extent to which we may be exposed to any resulting liability. Although we do not expect final disposition of this matter 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 the proceedings.
Shareholder Derivative Lawsuit
On August 20, 2019, plaintiff Xiaoyuan Zhang, a purported Valaris shareholder, filed a class action lawsuit on behalf of Valaris shareholders against Valaris plc and certain of our executive officers, alleging violations of federal securities laws. The complaint cites general statements in press releases and SEC filings and alleges that the defendants made false or misleading statements or failed to disclose material information regarding the performance of our ultra-deepwater segment, among other things.
The complaint asserts claims on behalf of a class of investors who purchased Valaris plc shares between April 11, 2019 and July 31, 2019. Under applicable law, theThe court appointed a lead plaintiff and lead counsel. We anticipateThe case has now been stayed in light of the Valaris plc bankruptcy filing, with the exception that lead plaintiff may continue efforts to serve certain defendants and may file an amended complaint will be filed in the second quarter of 2020. We strongly disagree and intend to vigorously defend against these claims.complaint. At this time, we are unable to predict the outcome of these matters or the extent of any resulting liability.
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, 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 $112,000$444,000 liability related to these matters was included in accrued liabilities and other on our condensed consolidated balance sheet as of March 31,September 30, 2020.
We currently are subject to a pending administrative proceeding initiated during 2009 by a Spanish government authority seeking payment in an aggregate amount of approximately $3.0 million, for an alleged environmental spill originating from VALARIS 5006 while it was operating offshore Spain. Our customer has posted guarantees with the Spanish government to cover potential penalties. Additionally, we expect to be indemnified for any payments resulting from this incident by our customer under the terms of the drilling contract. A criminal investigation of the incident was initiated during 2010 by a prosecutor in Tarragona, Spain, and the administrative proceedings have been suspended pending the outcome of this investigation. In May 2019, we were informed that the criminal investigation has been
completed. The six-month period for the Spanish government to resume administrative proceedings ended in November 2019, and such proceedings did not resume.
We intend to vigorously defend ourselves in the administrative proceeding and any criminal investigation. At this time, we are unable to predict the outcome of these matters or estimate the extent to which we may be exposed to any resulting liability. Although we do not expect final disposition of this matter 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 the proceedings.
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 or cash flows.
Item 1A. Risk Factors
There are numerous factors that affect our business and results of operations, many of which are beyond our control. In addition to information set forth in this quarterly report, including “Item 2. Management’syou should 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 I, you should 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”Operations" in Part II of our annual report on Form 10-K for the year ended December 31, 2019, as updated in Item 1A of Part II of our Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2020 and June 30, 2020, which contains descriptions of significant factorsrisks that may cause our actual results of operations in future operating resultsperiods to differ materially from those currently anticipated or expected.
We may not be able to regain compliance with the continued listing requirements of the NYSE.
On April 15, 2020, we were notified by the NYSE that the average closing price of our Class A ordinary shares was below $1.00 per share over a period of 30 consecutive trading days, which is the minimum average share price required to maintain listing on NYSE. We have until late December 2020 to regain compliance with the NYSE’s minimum share price requirement, during which time our shares would continue to be listed and traded on the NYSE, subject to our compliance with other continued listing standards. In order to regain compliance, on the last trading day of any calendar month during the cure period, our shares must have: (i) a closing price of at least $1.00 per share and (ii) an average closing price of at least $1.00 per share over the 30-trading day period ending on the last trading day of such month. If we fail to regain compliance with Section 802.01C of the NYSE Listed Company Manual by the end of the cure period, the shares will beare subject to the NYSE’s suspensionrisks and delisting procedures. A delistinguncertainties associated with the Chapter 11 Cases.
On August 19, 2020, the Debtors filed the Chapter 11 Cases in the United States Bankruptcy Court for the Southern District of Texas. For the duration of the Chapter 11 Cases, our shares from the NYSE could negatively impact us by, among other things, reducing the liquidityoperations and market price of our shares, reducing the number of investors willing to hold or acquire our shares and limiting our ability to issue securities or obtain financing indevelop and execute the future. If our shares are delisted from the NYSE and not concurrently listed on Nasdaq, the holders of our 2024 Convertible Notes would have the right to require us to repurchase the notes at a price equal to the principal amount thereof plus accrued interest to the repurchase date.
We have engaged financial and legal advisers to assist us in, among other things, analyzing various alternatives to address our liquidity and capital structure.
We have engaged financial and legal advisors to assist us in, among other things, analyzing various alternatives to address our liquidity and capital structure. We may seek to extend our maturities and/or reduce the overall principal amount of our debt through exchange offers, other liability management, recapitalization and/or restructuring transactions. As part of the evaluation of alternatives, we also are engaged in discussions with our lenders and bondholders regarding the terms of a potential comprehensive restructuring of our indebtedness. Any comprehensive restructuring of our indebtedness and capital structure may require a substantial impairment or conversion of our
indebtedness to equity,business plan, as well as impairment, losses or substantial dilution for our shareholderscontinuation as a going concern, are subject to risks and uncertainties associated with bankruptcy. These risks include the following:
•our ability to execute, confirm and consummate a plan of reorganization as contemplated by the RSA with respect to the Chapter 11 Cases;
•the high costs of bankruptcy proceedings and related fees;
•our ability to obtain sufficient financing to allow us to emerge from bankruptcy and execute our business plan post-emergence;
•our ability to maintain our relationships with our suppliers, service providers, customers, employees and other stakeholders, which may resultthird parties;
•our ability to maintain contracts that are critical to our operations;
•our ability to execute our business plan in the current depressed commodity price environment;
•our shareholders receiving minimal, if any, recovery for their existing sharesability to attract, motivate and may place our shareholders at significant riskretain key employees;
•the ability of losing some or allthird parties to seek and obtain court approval to terminate contracts and other agreements with us;
•the ability of their investment.third parties to seek and obtain court approval to convert the Chapter 11 Cases to a chapter 7 proceeding; and
The outcome
•the actions and decisions of our restructuring discussionscreditors and other effortsthird parties who have interests in the Chapter 11 Cases that may be inconsistent with our plans.
Delays in the Chapter 11 Cases increase the risks of us being unable to addressreorganize our liquiditybusiness and capital structure is uncertainemerge from bankruptcy and increase our costs associated with the bankruptcy process.
These risks and uncertainties could affect our business and operations in various ways. For example, negative events or publicity associated with the Chapter 11 Cases could adversely affect our relationships with customers, suppliers, service providers, employees and other third parties, which in turn could adversely affect our operations and financial condition. Also, pursuant to the Bankruptcy Code, we need the prior approval of the Bankruptcy Court for transactions outside the ordinary course of business, which may limit our ability to respond timely to certain events or take advantage of certain opportunities. We also need Bankruptcy Court confirmation of a plan of reorganization as contemplated by the RSA. Because of the risks and uncertainties associated with the Chapter 11 Cases, we cannot accurately predict or quantify the ultimate impact that events that occur during the Chapter 11 Cases will have on our business, financial condition, and results of operations and may impaircash flows.
Even if a plan of reorganization is consummated, we will continue to face a number of risks, including our ability to reduce expenses, implement any strategic initiatives and generally maintain favorable relationships with and secure the confidence of our counterparties. Accordingly, we cannot guarantee that the proposed financial restructuring will achieve our stated goals nor can we give any assurance of our ability to continue as a going concern.
Our inability
Operating under the Bankruptcy Court protection for a long period of time may harm our business.
A long period of operations under the Bankruptcy Court protection could have a material adverse effect on our business, financial condition, results of operations and liquidity. A prolonged period of operating under Bankruptcy Court protection may also make it more difficult to complyretain management and other key personnel necessary to the success and growth of our business. In addition, the longer the Chapter 11 Cases continue, the more likely it is that our customers and suppliers will lose confidence in our ability to reorganize our business successfully and will seek to establish alternative commercial relationships. So long as the Chapter 11 Cases continue, we will be required to incur substantial costs for professional fees and other expenses associated with the financial covenantsadministration of the Chapter 11 Cases.
Furthermore, we cannot predict the ultimate amount of all settlement terms for the liabilities that will be subject to a plan of reorganization. Even once a plan of reorganization is approved and implemented, our operating results may be adversely affected by the possible reluctance of prospective lenders and other counterparties to do business with a company that recently emerged from Chapter 11 bankruptcy.
We may not be able to obtain confirmation of a plan of reorganization.
To emerge successfully from Bankruptcy Court protection as a viable entity, we must meet certain statutory requirements with respect to adequacy of disclosure with respect to a Chapter 11 plan of reorganization, solicit and obtain the requisite acceptances of such a reorganization plan and fulfill other statutory conditions for confirmation of such a plan. However, even if a plan of reorganization as contemplated by the RSA meets other requirements under the Bankruptcy Code, certain parties in interest may file objections to the plan in an effort to persuade the Bankruptcy Court that we have not satisfied the confirmation requirements under section 1129 of the Bankruptcy Code. Lenders under our revolving credit facility would result inhave already objected to our entry into the DIP Facility and it is possible that they will also object to a default underproposed plan of reorganization. Even if no objections are filed and the facility, which could result in an acceleration of allrequisite acceptances of our outstanding borrowings underplan are received from creditors entitled to vote on the facilityplan, the Bankruptcy Court, which can exercise substantial discretion, may not confirm the plan of reorganization. The precise requirements and certain seriesevidentiary showing for confirming a plan, notwithstanding its rejection by one or more impaired classes of ourclaims or equity interests, depends upon a number of factors including, without limitation, the status and seniority of the claims or equity interests in the rejecting class (i.e., secured claims or unsecured claims, subordinated or senior notes.claims).
Our revolving credit facility requires compliance with covenants to maintain specified financial and guarantee coverage ratios, including
If a total debt to total capitalization ratio thatplan of reorganization is less than or equal to 60%. Fornot confirmed by the first quarter of 2020,Bankruptcy Court, it is unclear whether we incurred impairments of $2.8 billion, and as of March 31, 2020, the total debt to total capitalization ratio was 52.1%. If activity levels of our customers remain at significantly depressed levels or further deteriorate, we could incur additional material impairments in future periods, which likely would result in our not beingbe able to comply with such financial covenant. If we incur impairments or experience additional losses in the near future in excessreorganize our business and what, if anything, holders of approximately $1.7 billion weclaims against us would no longer be in compliance with such covenant.
If we exceed the total debt to total capitalization covenant in our credit facility, further borrowings under the credit facility would not be permitted, absent a waiver, and all outstanding borrowings would become immediately due and payable by actions of lenders holding a majority of the commitments under the credit facility. Any such acceleration would trigger a cross-acceleration event of defaultultimately receive with respect to approximately $2.1 billiontheir claims.
We have substantial liquidity needs and may not be able to obtain sufficient liquidity for the duration of the Chapter 11 Cases or to confirm a plan of reorganization or liquidation.
Although we have lowered our capital budget and reduced the scale of our outstanding senior notes. The credit facility generally limits usoperations significantly, our business remains capital intensive. In addition to no more than $200the cash requirements necessary to fund ongoing operations, we have incurred, and expect to continue to incur, significant professional fees and other costs in connection with the Chapter 11 Cases. As of September 30, 2020, our total available liquidity was $680.4 million, inwhich included $180.4 million of cash on hand and $500.0 million available under our DIP Facility. We expect to continue using cash (including certain liquid investments as defined inon hand that will further reduce this liquidity. With the credit facility documents), and requires consent of all lenders for draws on the credit facility that would result in our having more than $200 million in availableBankruptcy Court’s authorization to use cash and liquid investments. There can be no assurances that the lenders would approve borrowing requests that would result in our having more than $200 million in available cash and liquid investments.
Furthermore, the agentcollateral under the revolving facility has reserved the right to assert that a material adverse effect has occurred based on changes in the oil market and certain company-specific operating incidents, including the drop of the blowout preventer stack off the VALARIS DS-8, discussed above. We do notDIP Credit Agreement, we believe that we will have sufficient liquidity, including cash on hand and funds generated from ongoing operations, to fund anticipated cash requirements through the Chapter 11 Cases. As such, we expect to pay vendor obligations on a material adverse effect has occurred, butgo-forward basis according to the terms of our current contracts and consistent with applicable court orders, if any, approving such payments. However, there can be no assurance that the revolving lenders will not assert a material adverse effect as a basis to deny further borrowing requests.
While we may seek to take certain corrective measures to maintain compliance with the total debt to total capitalization ratio covenant, there is no assurance that these measuresour current liquidity will be effective or availablesufficient to us. Any corrective measures that we do implement may prove inadequate and could have negative long-term consequences for our business.
If we are unableallow us to satisfy our obligations with respectrelated to our indebtedness, we may be unablethe Chapter 11 Cases or to continue aspursue confirmation of a going concern.
If we fail to satisfy our obligations with respect to our indebtedness or fail to comply with the financial and other restrictive covenants contained in our revolving credit facility, an eventplan of default could result, which would permit acceleration of our debt. In the event our debt is accelerated, the outstanding borrowings under our revolving credit facility and approximately $2.1 billion of our outstanding senior notes would become due immediately. Such event could raise substantial doubt about our ability to continue as a going concern. There isreorganization. We can provide no assurance that any particular actions with respectwe will be able to refinancingsecure additional interim financing or exit financing sufficient to meet our liquidity needs or, if sufficient funds are available, offered to us on acceptable terms.
As a result of the Chapter 11 Cases, our financial results may be volatile and may not reflect historical trends.
During the Chapter 11 Cases, we expect our financial results to continue to be volatile as restructuring activities and expenses, contract terminations and rejections and claims assessments significantly impact our indebtedness or curing potential defaults underfinancial results. As a result, our revolving credit facilityhistorical financial performance is likely not indicative of financial performance after the date of the bankruptcy filing. In addition, if we emerge from Chapter 11, the amounts reported in subsequent periods may materially change relative to historical results, including due to revisions to our operating plans pursuant to a plan of reorganization. We also may be required to adopt fresh start accounting, in which case our assets and liabilities will be recorded at fair value as of the fresh start reporting date, which may differ materially from the recorded values of assets and liabilities prior to seeking bankruptcy protection. Our financial results after the application of fresh start accounting also may be different from historical trends.
We may be subject to claims that will not be discharged in the Chapter 11 Cases, which could be completed or would be sufficient. Any such actions may have a material adverse effect on the value of our Class A ordinary shares.
The coronavirus pandemic and recent developments in the oil and gas industry could adversely impact our financial condition and results of operations.
In March 2020,
The Bankruptcy Code provides that the World Health Organization classifiedconfirmation of a plan of reorganization may discharge a debtor from substantially all debts arising prior to the coronavirus outbreakPetition Date. Although the Company intends to pay pre-petition trade claims in full, with few exceptions, all claims that arose before the Petition Date (i) are subject to compromise and/or treatment under a plan of reorganization and/or (ii) could be discharged in accordance with the terms of a plan of reorganization. Any claims not ultimately discharged through a plan of reorganization could be asserted against the reorganized entities and may have an adverse effect on their financial condition and results of operations on a post-reorganization basis.
The pursuit of the Chapter 11 Cases has consumed and will continue to consume a substantial portion of the time and attention of our management, which may have an adverse effect on our business and results of operations, and we may face increased levels of employee attrition.
While the Chapter 11 Cases continue, our management will be required to spend a significant amount of time and effort focusing on the Chapter 11 Cases instead of focusing exclusively on our business operations. This diversion of attention may materially adversely affect the conduct of our business, and, as a pandemic. To date,result, our financial condition and results of operations, particularly if the pandemicChapter 11 Cases are protracted.
During the duration of the Chapter 11 Cases, our employees will face considerable distraction and uncertainty and we may experience increased levels of employee attrition. A loss of key personnel or material erosion of employee morale could have a material adverse effect on our ability to meet customer expectations, thereby adversely affecting our business and results of operations. The failure to retain or attract members of our management team and other key personnel could impair our ability to execute our strategy and implement operational initiatives, thereby having a material adverse effect on our financial condition and results of operations.
Trading in our securities during the pendency of the Chapter 11 Cases is highly speculative and poses substantial risks. It is impossible to predict at this time whether our Class A ordinary shares will be cancelled or if holders of such ordinary shares will receive any distribution with respect to, or be able to recover any portion of, their investments.
A significant amount of our indebtedness is senior to the Class A ordinary shares in our capital structure. It is unclear at this stage of the Chapter 11 Cases if any plan of reorganization would allow for distributions with respect to our Class A ordinary shares and other outstanding equity interests. It is possible that these equity interests may be cancelled and extinguished upon the approval of the Bankruptcy Court and the holders thereof would not be entitled to receive, and would not receive or retain, any property or interest in property on account of such equity interests. In the event of a cancellation of these equity interests, amounts invested by such holders in our outstanding equity securities will not be recoverable. Consequently, our currently outstanding Class A ordinary shares would have no value. Trading prices for our Class A ordinary shares are very volatile and may bear little or no relationship to the actual recovery, if any, by the holders of such securities in the Chapter 11 Cases. Accordingly, we urge that extreme caution be exercised with respect to existing and future investments in our equity securities and any of our other securities.
Our Class A ordinary shares have been delisted from the New York Stock Exchange (“NYSE”).
Effective September 14, 2020, our Class A ordinary shares were delisted from the NYSE. Since that time, the shares have been quoted on the OTC Pink Open Market under the symbol “VALPQ.” We can provide no assurance that our ordinary shares will continue to trade on this market, whether broker-dealers will continue to provide public quotes of our ordinary shares on this market, whether the trading volume of our ordinary shares will be sufficient to provide for an efficient trading market or whether quotes for our ordinary shares will continue on this market in the future. These recent developments could result in significantly lower trading volumes and reduced liquidity for investors seeking to buy or sell shares of our ordinary shares.
In certain instances, a Chapter 11 case may be converted to a case under chapter 7 of the Bankruptcy Code.
Upon a showing of cause, the Bankruptcy Court may convert the Chapter 11 Cases to cases under chapter 7 of the Bankruptcy Code. In such event, a chapter 7 trustee would be appointed or elected to liquidate our assets and the assets of our subsidiaries for distribution in accordance with the priorities established by the Bankruptcy Code. We believe that liquidation under chapter 7 would result in significantly smaller distributions being made to our creditors than those provided for in a plan of reorganization because of (i) the likelihood that the assets would have to be sold or otherwise disposed of in a distressed fashion over a short period of time rather than in a controlled manner and as a going concern, (ii) additional administrative expenses involved in the appointment of a chapter 7 trustee, and (iii) additional expenses and claims, some of which would be entitled to priority, that would be generated during the liquidation and from the rejection of leases and other executory contracts in connection with a cessation of operations.
Any plan of reorganization that we may implement will be based in large part upon assumptions and analyses developed by us. If these assumptions and analyses prove to be incorrect, our plan may be unsuccessful in its execution.
Any plan of reorganization that we may implement could affect both our capital structure and the ownership, structure and operation of our businesses and will reflect assumptions and analyses based on our experience and perception of historical trends, current conditions and expected future developments, as well as other factors that we consider appropriate under the circumstances. In addition, any plan of reorganization will rely upon financial projections, including with respect to revenues, capital expenditures, debt service and cash flow. Financial forecasts are necessarily speculative, and it is likely that one or more of the assumptions and estimates that are the basis of these financial forecasts will not be accurate. Whether actual future results and developments will be consistent with our expectations and assumptions depends on a number of factors, including but not limited to (i) our ability to substantially change our capital structure, (ii) our ability to obtain adequate liquidity and financing sources, (iii) our ability to maintain customers’ confidence in our viability as a continuing entity and to attract and retain sufficient business from them, (iv) our ability to retain key employees and (v) the overall strength and stability of general economic conditions of the financial and oil and gas industries, both in the U.S. and in global markets. The failure of any of these factors could materially adversely affect the successful reorganization of our businesses. Consequently, there can be no assurance that the results or developments contemplated by any plan of reorganization we may implement will occur or, even if they do occur, that they will have the anticipated effects on us and our subsidiaries or our businesses or operations. The failure of any such results or developments to materialize as anticipated could materially adversely affect the successful execution of any plan of reorganization.
Even if a plan of reorganization is consummated, we may not be able to achieve our stated goals and continue as a going concern.
Even if a plan of reorganization is consummated, we will continue to face a number of risks, including further deterioration in commodity prices or other changes in economic conditions, changes in our industry, changes in market demand and increasing expenses. Accordingly, we cannot guarantee that a plan of reorganization will achieve our stated goals.
Furthermore, even if our debts are reduced or discharged through such plan, we may need to raise additional funds through public or private debt or equity financing or other various means to fund our business after the completion of the Chapter 11 Cases. Our access to additional financing is, and for the foreseeable future will likely continue to be, extremely limited, if it is available at all. Therefore, adequate funds may not be available when needed or may not be available on favorable terms, if they are available at all.
Our ability to continue as a going concern is dependent upon our ability to raise additional capital. As a result, we cannot give any assurance of our ability to continue as a going concern, even if a Chapter 11 plan of reorganization is confirmed.
Our ability to use our net operating loss carryforwards (“NOLs”) may be limited by changes in ownership due to the Chapter 11 Cases.
As of December 31, 2019, we had deferred tax assets of $142.9 million for U.S. foreign tax credits (“FTCs”), $1.5 billion related public health measures implemented by governmentsto $6.4 billion of net operating loss (“NOL”) carryforwards and $41.5 million for U.S. interest limitation carryforwards, which can be used to reduce our income taxes payable in future years. The FTCs expire between 2022 and 2029. NOL carryforwards, which were generated in various jurisdictions worldwide, include $5.6 billion that do not expire and $773.0 million that will expire, if not utilized, between 2020 and 2037. Deferred tax assets for NOL carryforwards at December 31, 2019 include $1.3 billion acquired in the Rowan Transaction, substantially all of which pertains to NOL in Luxembourg. U.S. interest limitation carryforwards do not expire. Due to the uncertainty of realization, we have negatively impacteda $1.5 billion valuation allowance on FTC, NOL carryforwards and U.S. interest limitation carryforwards.
Under the macroeconomic environmentprovisions of the Internal Revenue Code (“IRC”), changes in our ownership, in certain circumstances, will limit the amount of U.S. federal NOLs that can be utilized annually in the future to offset taxable income. In particular, Section 382 of the IRC imposes limitations on a company’s ability to use NOLs upon certain changes in such ownership. Calculations pursuant to Section 382 of the IRC can be very complicated and no assurance can be given that upon further analysis, our ability to take advantage of our NOLs may be limited to a greater extent than we currently anticipate. If we are limited in our ability to use our NOLs in future years in which we have resultedtaxable income, we will pay more taxes than if we were able to utilize our NOLs fully. We may experience ownership changes in significant financial market volatility. Global oil demand has fallen sharply at the same time global oil supply has increasedfuture as a result of certain oil producers competing for market share, leading to a supply glut. As a consequence, Brent crude oil has fallen from around $60 per barrel at year-end 2019 to around $20 per barrel as of mid-April 2020. In response to dramatically reduced oil price expectations for the near term,subsequent shifts in our customers are reviewing andstock ownership that we cannot predict or control that could result in most cases lowering significantly, their capital expenditure plans in light of revised pricing expectations.
The full impact that the pandemic and the precipitous decline in oil prices will havefurther limitations being placed on our results of operations, financial condition, liquidity and cash flows is uncertain dueability to numerous factors, including the duration and severity of the outbreak, the duration of the price decline, and the extent of disruptions toutilize our operations. To date, there have been various impacts from the pandemic and drop in oil prices, including contract cancellations or the cancellation of drilling programs by operators, contract concessions, stacking rigs, inability to change crews due to travel restrictions, and workforce reductions. Our operations and business may be subject to further disruptions as a result of the spread of coronavirus among our workforce, the extension or imposition of further public health measures affecting supply chain and logistics, and the impact of the pandemic on key customers, suppliers, and other counterparties.federal NOLs.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides a summary of our repurchases of equity securities during the quarter ended March 31,September 30, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issuer Purchases of Equity Securities |
Period | | Total Number of Securities Repurchased(1) | | Average Price Paid per Security | | Total Number of Securities Repurchased as Part of Publicly Announced Plans or Programs (2) | | Approximate Dollar Value of Securities that May Yet Be Repurchased Under Plans or Programs |
| | | | | | | | |
| July 1 - July 31 | | 37,210 | | | $ | 0.71 | | | — | | | $ | 500,000,000 | |
| August 1 - August 31 | | 11,645 | | | $ | 0.31 | | | — | | | $ | 500,000,000 | |
| September 1 - September 30 | | — | | | $ | — | | | — | | | $ | 500,000,000 | |
| Total | | 48,855 | | | $ | 0.61 | | | — | | | |
(1)During the three months ended September 30, 2020, equity securities were repurchased from employees and non-employee directors by an affiliated employee benefit trust in connection with the settlement of income tax withholding obligations arising from the vesting of share awards. Such securities remain available for re-issuance in connection with employee share awards.
(2)Our shareholders approved a repurchase program at our annual shareholder meeting held in May 2018. Subject to certain provisions under English law, including the requirement of Valaris plc to have sufficient distributable reserves, we may repurchase up to a maximum of $500.0 million in the aggregate from one or more financial intermediaries under the program, but in no case more than 16.3 million shares. The program terminates in May 2023. As of September 30, 2020, there had been no share repurchases under the repurchase program. Our DIP Credit Agreement prohibits the repurchase of shares for cash, except in certain limited circumstances.
Item 3. Defaults Upon Senior Securities
See "Part I, Item 1. Notes to Condensed Consolidated Financial Statements" – "Note 2, Chapter 11 Proceedings and Ability to Continue as a Going Concern" and "Note 11, Debt", which are incorporated in this item by reference.
|
| | | | | | | | | | | | | | |
| Issuer Purchases of Equity Securities |
Period | | Total Number of Securities Repurchased(1) | | Average Price Paid per Security | | Total Number of Securities Repurchased as Part of Publicly Announced Plans or Programs (2) | | Approximate Dollar Value of Securities that May Yet Be Repurchased Under Plans or Programs |
| | | | | | | | | |
| January 1 - January 31 | | 10,844 |
| | $ | 6.36 |
| | — |
| | $ | 500,000,000 |
|
| February 1 - February 29 | | 169,613 |
| | $ | 3.38 |
| | — |
| | $ | 500,000,000 |
|
| March 1 - March 31 | | 83,283 |
| | $ | 2.64 |
| | — |
| | $ | 500,000,000 |
|
| Total | | 263,740 |
| | $ | 3.27 |
| | — |
| | |
|
| |
(1)
| During the three months ended March 31, 2020, equity securities were repurchased from employees and non-employee directors by an affiliated employee benefit trust in connection with the settlement of income tax withholding obligations arising from the vesting of share awards. Such securities remain available for re-issuance in connection with employee share awards. |
| |
(2)
| Our shareholders approved a repurchase program at our annual shareholder meeting held in May 2018. Subject to certain provisions under English law, including the requirement of Valaris plc to have sufficient distributable reserves, we may repurchase up to a maximum of $500.0 million in the aggregate from one or more financial intermediaries under the program, but in no case more than 16.3 million shares. The program terminates in May 2023. As of March 31, 2020, there had been no share repurchases under the repurchase program. The program terminates in May 2023. Our revolving credit facility prohibits the repurchase of shares for cash, except in certain limited circumstances. |
Item 6. Exhibits
|
| | | | | | | |
| Exhibit Number | | Exhibit |
** 4.1 | | Tenth Supplemental Indenture, dated February 3, 2020, between Rowan Companies LLC, Rowan Companies Limited, Valaris plcInterim Order (I) Approving Notification and U.S. Bank National Association, as Trustee, under the indenture dated July 21, 2009Hearing Procedures for Certain Transfers of and Declarations of Worthlessness with Respect to Common Stock, and (II) Granting Related Relief Docket No. 110 (incorporated by reference to Exhibit 4.1 to the Registrant'sRegistrant’s Current Report on Form 8-K filed on February 3,August 25, 2020, File No. 1-8097). |
** 10.14.2 | | |
Cooperation*10.1 | | |
| *10.2 | | |
| *10.3 | | |
| 10.4 | | |
* 10.2†10.5 | | |
* 10.310.6 | | |
* 10.410.7 | | |
* 10.5†10.8 | | |
| *15.1 | | |
| *31.1 | | |
| *31.2 | | |
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* Filed herewith.
** Furnished herewith.
† Certain schedules and similar attachments have been omitted pursuant to Item 601(a)(5) of Regulation S-K and will be provided to the SEC upon request.
SIGNATURES
Pursuant to the requirements 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.
| | | | | | | | | | | |
| | | Valaris plc |
| | | |
| | | |
| Date: | October 29, 2020 | | /s/ JONATHAN H. BAKSHT |
| | | Jonathan H. Baksht
Executive Vice President and
Chief Financial Officer
(principal financial officer) |
| | | |
| | | Valaris plc/s/ COLLEEN W. GRABLE |
| | | |
| | | |
Date: | April 30, 2020 | | /s/ JONATHAN H. BAKSHT |
| | | Jonathan H. Baksht
Executive Vice President and
Chief Financial Officer
Colleen W. Grable
Controller
(duly authorizedprincipal accounting officer) |