NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1—ORGANIZATION, BASIS OF PRESENTATION AND CURRENT EVENTS
Paragon Offshore plc (together with its subsidiaries, “Paragon,” the “Company,” “we,” “us” or “our”) is a global provider of offshore drilling rigs. Our operated fleet includes
34
jackups (including
two
high specification heavy duty/harsh environment jackups),
four
drillships and
two
semisubmersibles. Our primary business is contracting our rigs, related equipment and work crews to conduct oil and gas drilling and workover operations for our exploration and production customers on a dayrate basis around the world.
The Company operates its geographically diverse fleet with well-established customer relationships. We operate in significant hydrocarbon-producing geographies throughout the world, including the North Sea, the Middle East, India, Brazil, Mexico, West Africa and Southeast Asia. As of
March 31, 2016
, our contract backlog was
$0.8 billion
and included contracts with leading national, international and independent oil and gas companies.
We are a public limited company registered under the Companies Act 2006 of England. In July 2014, Noble Corporation plc (“Noble”) transferred to us the assets and liabilities (the “Separation”) constituting most of Noble’s standard specification drilling units and related assets, liabilities and business (our “Predecessor”). On August 1, 2014, Noble made a pro rata distribution to its shareholders of all of our issued and outstanding ordinary shares (the “Distribution” and, collectively with the Separation, the “Spin-Off”).
Basis of Presentation
All financial information presented in this Form 10-Q represents the consolidated results of operations, financial position and cash flows of Paragon. At the Spin-Off, Noble contributed its entire net parent investment in our Predecessor. Concurrent with the Spin-Off and in accordance with the terms of our Separation from Noble, certain assets and liabilities were transferred between us and Noble, which have been recorded as part of the net capital contributed by Noble. During the first quarter of 2015, we recorded an out-of-period adjustment to the opening balance sheet of our Predecessor of approximately
$9 million
to reflect transfers of fixed assets resulting from the Spin-Off between us and our former parent, as well as revisions in estimates of liabilities associated with the Spin-Off. This adjustment did not affect our Condensed Consolidated Statements of Operations.
On November 17, 2014, we initiated the acquisition of the outstanding shares of Prospector Offshore Drilling S.á.r.l (“Prospector”), an offshore drilling company organized in Luxembourg and traded on the Oslo Axess, from certain shareholders and in open market purchases. On February 23, 2015, we acquired all remaining issued and outstanding shares of Prospector. We spent approximately
$2 million
in the first quarter of 2015 to purchase the remaining issued and outstanding shares of Prospector and funded the purchase using proceeds from our Revolving Credit Facility and cash on hand.
Unaudited Interim Information
The interim consolidated financial statements of Paragon Offshore plc and its subsidiaries are unaudited. However, they include all adjustments of a normal recurring nature that, in the opinion of management, are necessary for a fair statement of the Company’s consolidated financial position as of March 31, 2016 and the results of its operations and cash flows for the three months ended March 31, 2016 and 2015. Certain information relating to the Company’s organization and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the SEC regarding interim financial reporting.
The year-end balance sheet data was derived from audited financial statements This interim report does not include all disclosures required by U.S. GAAP for annual periods and should be read in conjunction with the Annual Report on Form 10-K of Paragon Offshore plc for the year ended December 31, 2015. The interim financial results may not be indicative of the results to be expected for the full year. Certain amounts in prior periods have been reclassified to conform to the current year presentation.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern and contemplate the realization of assets and the satisfaction of liabilities in the normal course of business. Our ability to continue as a going concern is contingent upon the Bankruptcy Court’s approval of our plan of reorganization as described
below. This represents a material uncertainty related to events and conditions that may cause significant doubt on our ability to continue as a going concern and, therefore, we may be unable to realize our assets and discharge our liabilities in the normal course of business.
During the period that we are operating as debtors-in-possession under chapter 11 of the Bankruptcy Code, we may sell or otherwise dispose of or liquidate assets or settle liabilities, subject to the approval of the Bankruptcy Court or as otherwise permitted in the ordinary course of business (and subject to restrictions in our debt agreements), for amounts other than those reflected in the accompanying consolidated financial statements. Further, the reorganization plan could materially change the amounts and classifications of assets and liabilities reported in the consolidated financial statements. The accompanying consolidated financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities or any other adjustments that might be necessary should we be unable to continue as a going concern.
Chapter 11 Filing
On February 12, 2016, the Debtors entered into a plan support agreement (the “PSA”) relating to a plan of reorganization (the “Plan”) pursuant to chapter 11 of the Bankruptcy Code with holders (the “Noteholder Group”) representing an aggregate of
77%
of the outstanding
$457 million
of our
6.75%
senior unsecured notes maturing July 2022 (the “2022 Senior Notes”) and the outstanding
$527 million
of our
7.25%
senior unsecured notes maturing August 2024 (the “2024 Senior Notes” and, together with the 2022 Senior Notes, the “Senior Notes”) together with lenders (the “Revolver Group”) representing an aggregate of
96%
of the amounts outstanding (including letters of credit) under our Senior Secured Revolving Credit Agreement, dated June 17, 2014 (the “Revolving Credit Agreement”).
On February 14, 2016, the Debtors filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code in the Bankruptcy Court (the “Bankruptcy cases”).
On April 6, 2016, the Bankruptcy Court approved the Company’s disclosure statement (subject to confirmation), which included an amended Plan with the terms of the transactions as follows:
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•
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Lenders in our Revolving Credit Agreement shall receive a
$165 million
cash payment and corresponding permanent reduction in lending commitments. The Revolving Credit Agreement will be amended and all remaining amounts outstanding will be converted into a term loan with an extension of the maturity to 2021, a rate increase to LIBOR +
4.50%
with a
1.00%
LIBOR floor, a minimum liquidity covenant at all times set at
$110 million
(subject to a grace period if the minimum liquidity falls below
$110 million
but remains above
$95 million
), a suspension of the net leverage ratio and interest coverage covenants until the first quarter of 2018, as well as certain other amendments.
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•
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Holders of our Senior Notes (the “Noteholders”) shall receive: (i) a pro rata share of a cash payment of
$345 million
(the “Noteholder Cash Payment”); (ii) a pro rata share of
35%
of the ordinary shares of reorganized Paragon (the “Noteholder Equity”); and (iii) a deferred cash payment of
$20 million
if our consolidated EBITDA, as adjusted for other items as defined in the PSA (“Adjusted EBITDA”) for 2016 equals or exceeds
$209 million
, and a deferred cash payment of
$15 million
if our consolidated Adjusted EBITDA for 2017 equals or exceeds
$248 million
but is less than
$276 million
or
$30 million
if our consolidated Adjusted EBITDA for 2017 equals or exceeds
$276 million
. The Noteholder Group will also be entitled to designate
one
member to our board of directors.
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•
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Existing shareholders will retain ownership of
65%
of the ordinary shares of reorganized Paragon following emergence from bankruptcy.
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•
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General unsecured claims are unimpaired under the Plan, and the Company’s Senior Secured Term Loan (the “Term Loan Facility”) shall be reinstated.
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•
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The Plan does not contemplate restructuring the financing arrangements created by the Sale-Leaseback Transaction as the Prospector subsidiaries are not Debtors in the chapter 11 filing. On April 5, 2016, the Company
obtained a forbearance of the event of default relating to the filing of the chapter 11 cases under the Sale-Leaseback Transaction agreements. The forbearance will become a permanent waiver of the event of default upon the occurrence of certain conditions, including that the effective date of the Plan occurs by the outside date set forth in the PSA.
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Debtors-in-Possession
Since the petition date, the Debtors have operated their business as “debtors-in-possession.” Under the Bankruptcy cases, the Debtor’s trade creditors and vendors are being paid in full in the ordinary course of business and all of the Company’s contracts have remained in effect in accordance with their terms preserving the rights of all parties. Certain subsidiaries of the Company were not party to the chapter 11 filing (the “Non-Filing entities”). The Non-Filing entities have continued to operate in the ordinary course of business.
The reorganization is not expected to have a material impact on our operations. We expect to emerge from bankruptcy late in the second quarter or early in the third quarter of 2016 after confirmation of the Plan by the Bankruptcy Court.
Settlement with Noble Corporation
On February 12, 2016, we entered into a binding term sheet (the “Term Sheet”) with Noble with respect to the “Noble Settlement Agreement” (as described below), which we executed on April 29, 2016 and remains subject to the confirmation of our Plan by the Bankruptcy Court. Upon effectiveness of the Noble Settlement Agreement, certain conditions of the Tax Sharing Agreement executed between Noble and Paragon for the Spin-Off will be modified.
Pursuant to the Noble Settlement Agreement, Noble will provide direct bonding in fulfillment of the requirements necessary to challenge tax assessments in Mexico relating to our business for the tax years 2005 through 2010 (the “Mexican Tax Assessments”). The Mexican Tax Assessments were originally assigned to us by Noble pursuant to the Tax Sharing Agreement which was entered into in connection with the Spin-Off. See Note 16 -
“Commitments and Contingencies
” for additional information. The Company has contested or intends to contest the Mexico Tax Assessments and may be required to post bonds in connection thereto. As of March 31, 2016, our estimated Mexican Tax Assessments totaled approximately
$194 million
, with assessments for 2009 and 2010 yet to be received. Additionally, Noble will be responsible for all of the ultimate tax liability for Noble legal entities and
50%
of the ultimate tax liability for our legal entities relating to the Mexican Tax Assessments.
In consideration for this support, we have agreed to release Noble, fully and unconditionally, from any and all claims in relation to the Spin-Off. The Noble Settlement Agreement remains subject to the approval by the Bankruptcy Court in connection with the confirmation of our Plan. Upon the effectiveness of the Noble Settlement Agreement, a material portion of our Mexican Tax Assessments, and any corresponding ultimate tax liability, will be assumed by Noble. Until such time, the current Tax Sharing Agreement remains in effect.
NOTE 2—NEW ACCOUNTING PRONOUNCEMENTS
In May 2014, the FASB issued ASU No. 2014-09, which amends ASC Topic 606,
Revenue from Contracts with Customers
. The amendments in this ASU are intended to provide a more robust framework for addressing revenue issues, improve comparability of revenue recognition practices and improve disclosure requirements. Based on ASU No. 2015-14,
Revenue from Contracts with Customers: Deferral of the Effective Date,
subsequently issued in August 2015, the amendments in this ASU are effective for financial statements issued for annual reporting periods beginning after December 15, 2017, and interim periods within that reporting period. This ASU can be adopted either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Entities reporting under U.S. GAAP are not permitted to adopt this standard earlier than the original effective date for public entities. We are evaluating what impact, if any, the adoption of this guidance will have on our financial condition, results of operations, cash flows or financial disclosures.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
. This ASU requires that lessees recognize assets and liabilities for both capital and operating leases with lease terms greater than twelve months on the balance sheet and also requires improved disclosures to help users of financial statements better understand the amount, timing and uncertainty of cash flows arising from leases. This update is effective for financial statements issued for annual reporting periods beginning after December 15, 2018, and interim reporting periods within that reporting period. Early adoption is permitted. We are evaluating what impact, if any, the adoption of this guidance will have on our financial condition, results of operations, cash flows or financial disclosures.
In March 2016, the FASB issued ASU No. 2016-12,
Improvements to Employee Share-Based Payment Accounting
, which amends ASC Topic 718,
Compensation - Stock Compensation
. The ASU includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements including such areas as income tax effects, minimum statutory tax withholding requirements, and forfeitures.
The guidance is effective for financial statements issued for annual reporting periods beginning after December 15, 2016, and interim periods within that reporting period. Early
adoption is permitted in any interim or annual period, with any adjustments reflected as of the beginning of the fiscal year of adoption. We are evaluating what impact, if any, the adoption of this guidance will have on our financial condition, results of operations, cash flows or financial disclosures.
NOTE
3
— SIGNIFICANT ACCOUNTING POLICIES
Our unaudited condensed consolidated financial statements are impacted by the accounting policies used and the estimates and assumptions made by management during their preparation. Actual results could differ from those estimates. The significant accounting policies and estimates below update and supplement those described in our Annual Report on Form 10-K for the year ended
December 31, 2015
.
Bankruptcy Accounting and Disclosures
In connection with filing chapter 11 of the Bankruptcy Code on February 14, 2016, the Company was subject to the requirements of FASB ASC 852,
Reorganizations
, which is applicable to companies under bankruptcy protection and requires amendments to the presentation of key financial statement line items. ASC 852 generally does not change the manner in which financial statements are prepared. However, it does require that the financial statements for periods subsequent to the filing of the Bankruptcy cases distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Revenues, expenses, realized gains and losses, and provisions for losses that can be directly associated with the reorganization of the business must be reported separately as reorganization items in the consolidated statements of operations beginning with the three months ended March 31, 2016. The balance sheet must distinguish pre-petition liabilities subject to compromise from both those pre-petition liabilities that are not subject to compromise and from post-petition liabilities. Liabilities that may be affected by the plan of reorganization must be reported at the amounts expected to be allowed by the Bankruptcy Court, even if they may be settled for lesser amounts as a result of the plan of reorganization. See Note 9 -
“Reorganization Items”
for cash paid for reorganization items in the consolidated statements of cash flows.
Allowance for Doubtful Accounts
We utilize the specific identification method for establishing and maintaining allowances for doubtful accounts. We review accounts receivable on a quarterly basis to determine the reasonableness of the allowance. The Company monitors the accounts receivable from its customers for any collectability issues. An allowance for doubtful accounts is established based on reviews of individual customer accounts, recent loss experience, current economic conditions, and other pertinent factors. Our allowance for doubtful accounts was
$44 million
at
March 31, 2016
and
December 31, 2015
, respectively.
No
bad debt expense was recorded for the
three months ended March 31, 2016
compared to
$9 million
recorded for the
three months ended March 31, 2015
. Bad debt expense is reported as a component of “Contract drilling services operating costs and expenses” in our Condensed Consolidated Statements of Operations.
Debt Issuance Costs
We adopted the guidance issued by the FASB in April 2015 in ASU No. 2015-03,
Simplifying the Presentation of Debt Issuance Costs
, in the first quarter of 2016. Debt issuance costs are presented on the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount and are being amortized over the life of the debt. We reclassified
$21 million
of debt issuance costs for our Senior Notes, Term Loan Facility, and Sale-Leaseback Transaction from “Other assets” to “Long-term debt” in our December 31, 2015 Condensed Consolidated Balance Sheet presented in this Form 10-Q to conform to the current period presentation of debt issuance costs. Debt issuance costs related to line of credit arrangements continue to be classified in “Other assets” on the Condensed Consolidated Balance Sheets. For our debt securities that are considered subject to compromise, we ceased to amortize deferred debt issuance costs through interest expense from the date of the Bankruptcy filing.
NOTE 4—PROPERTY AND EQUIPMENT AND OTHER ASSETS
Cash used for our capital expenditures totaled
$23 million
for the
three months ended March 31, 2016
, as compared to
$57 million
for the
three months ended March 31, 2015
.
Gain on Sale of Assets
In January 2015, we completed the sale of the
Paragon M822
for
$24 million
to an unrelated third party. In connection with the sale, we recorded a pre-tax gain of approximately
$17 million
.
NOTE 5—SHARE-BASED COMPENSATION
In conjunction with the Spin-Off, we adopted equity incentive plans for our employees and directors, the Paragon Offshore plc 2014 Employee Omnibus Incentive Plan (the “Employee Plan”) and the Paragon Offshore plc 2014 Director Omnibus Plan (the “Director Plan”). Replacement awards of Paragon time-vested restricted stock units (“TVRSU’s”) and performance-vested restricted stock units (“PVRSU’s”) granted in connection with the Spin-Off, as well as, since the Spin-off, new share-settled and cash-settled awards (“CS-TVRSU’s”) have been granted under the Employee Plan and the Director Plan.
No
awards were granted during
three months ended March 31, 2016
.
Shares available for issuance and outstanding restricted stock units under our
two
equity incentive plans as of
March 31, 2016
are as follows (excluding the impact of cash-settled awards):
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(In shares)
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Employee Plan
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Director Plan
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Shares available for future awards or grants
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4,526,847
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434,048
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Outstanding unvested restricted stock units
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4,216,512
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606,935
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We have awarded both TVRSU’s and PVRSU’s under our Employee Plan and TVRSU’s under our Director Plan. The TVRSU’s under our Employee Plan generally vest pro-rata over a
three
-year period. The number of PVRSU’s which vest will depend on the degree of achievement of specified company-based and market-based performance criteria over the service period. Under the Employee Plan, we have awarded CS-TVRSU’s that are accounted for as liability-based awards. The CS-TVRSU’s vest pro-rata over a
three
-year period.
A summary of restricted stock activity for the
three months ended March 31, 2016
is as follows:
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TVRSU’s Outstanding
(1)
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Weighted
Average
Grant-Date
Fair Value
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CS-TVRSU’s Outstanding
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Share
Price
(2)
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PVRSU’s
Outstanding
(3)
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Weighted
Average
Grant-Date
Fair Value
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Outstanding at December 31, 2015
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5,824,857
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$
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5.34
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2,647,565
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849,484
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$
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5.31
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Awarded
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—
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—
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—
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—
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—
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Vested
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(1,763,595
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)
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6.06
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(846,816
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)
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—
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—
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Forfeited
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(17,027
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)
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11.16
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(135,072
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)
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(70,272
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)
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11.00
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Outstanding at March 31, 2016
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4,044,235
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1,665,677
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$
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0.23
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|
779,212
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(1)
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This column includes
606,935
shares outstanding at
March 31, 2016
that were granted under our Director Plan and are recorded as a liability valued at the end of each reporting period at our underlying share price recognized over the service period.
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(2)
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The share price represents the closing price of our shares on
March 31, 2016
at which both our CS-TVRSU’s and TVRSU’s granted under our Director Plan are measured.
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(3)
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Includes
191,474
PVRSU’s outstanding at
March 31, 2016
for which vesting depends on the degree of achievement of a company-based performance criteria, the Company’s ROCE. The share amount of these PVRSU’s equals the units that would vest if the “maximum” level of performance is achieved based on ROCE. The minimum number of units is
zero
and the “target” level of performance is
50%
of the maximum. During the
three months ended March 31, 2016
,
70,272
PVRSU’s were forfeited as a result of the Company not achieving the thresholds for vesting based on annualized ROCE performance over the term of the awards. For the remaining
587,738
PVRSU’s outstanding, the share amount equals the units that would vest if the “target” level of performance is achieved based on the Company’s achievement of a market-based objective, the Company’s total shareholder return (“TSR”). The minimum number of units is
zero
and the “maximum” level of performance is
200%
of the target amount.
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Share and liability-based award amortization recognized during the
three months ended March 31, 2016
and
March 31, 2015
totaled
$2 million
and
$5 million
, respectively. At
March 31, 2016
, we had
$14 million
of total unrecognized compensation cost related to our TVRSU’s, which is expected to be recognized over a remaining weighted-average period of
1.4
years. At
March 31, 2016
, we had
$0.4 million
of total unrecognized compensation cost related to our CS-TVRSU’s, which is expected to be recognized over a remaining weighted-average period of
1.9
years. At
March 31, 2016
, we had
$1 million
of total unrecognized compensation cost related to our PVRSU’s, which is expected to be recognized over a remaining weighted-average period of
1.5
years. The total potential compensation for the
191,474
PVRSU’s based on ROCE is recognized over the service period based on an estimate of the likelihood that our ROCE will achieve the targeted threshold. We currently estimate that these PVRSU’s will be completely forfeited. The total potential compensation for the
587,738
PVRSU’s based on TSR is recognized over the service period regardless of whether the TSR performance thresholds are ultimately achieved.
NOTE 6—EARNINGS/LOSS PER SHARE
Our outstanding share-based payment awards currently consist solely of restricted stock units. These unvested restricted stock units, which contain non-forfeitable rights to dividends, are deemed to be participating securities and are included in the computation of earnings per share pursuant to the “two-class” method. The “two-class” method allocates undistributed earnings between ordinary shares and participating securities; however, in a period of net loss, losses are not allocated to our participating securities. No earnings were allocated to unvested share-based payment awards in our earnings per share calculation for the three months ended March 31, 2016 due to our net loss in the current period.
Weighted average shares outstanding, basic and diluted, has been computed based on the weighted average number of ordinary shares outstanding during the applicable periods. Restricted stock units do not represent ordinary shares outstanding until they are vested and converted into ordinary shares. The diluted earnings per share calculation under the
two
class method is the same as our basic earnings per share calculation as we currently have no stock options or other potentially dilutive securities outstanding.
The following table sets forth the computation of basic and diluted earnings (loss) per share:
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Three Months Ended
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March 31,
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(In thousands, except per share amounts)
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2016
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2015
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Allocation of income (loss) - basic and diluted
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Net income (loss)
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$
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(5,210
|
)
|
|
$
|
61,127
|
|
|
Earnings allocated to unvested share-based payment awards
|
|
—
|
|
|
(2,854
|
)
|
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Net income (loss) attributable to ordinary shareholders - basic and diluted
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|
$
|
(5,210
|
)
|
|
$
|
58,273
|
|
|
|
|
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|
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Weighted average shares outstanding
|
|
|
|
|
|
Basic and diluted
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|
86,598
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|
|
85,055
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Weighted average unvested share-based payment awards
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|
5,944
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|
|
4,166
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|
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|
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Earning (loss) per share
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|
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Basic and diluted
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$
|
(0.06
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)
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$
|
0.69
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NOTE 7—DEBT
A summary of long-term debt at
March 31, 2016
and
December 31, 2015
is as follows:
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March 31,
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December 31,
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(In thousands)
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2016
|
|
2015
|
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Revolving Credit Facility
(1)
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|
$
|
—
|
|
|
$
|
708,500
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Term Loan Facility, bearing interest at 3.75%, net of unamortized discount and debt issuance costs
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633,852
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|
|
633,470
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|
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Senior Notes due 2022, bearing fixed interest at 6.75% per annum, net of debt issuance costs
(1)
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|
—
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|
|
450,136
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|
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Senior Notes due 2024, bearing fixed interest at 7.25% per annum, net of debt issuance costs
(1)
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|
—
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|
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519,198
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|
|
Sale-Leaseback Transaction
|
|
251,006
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|
267,769
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Total debt
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884,858
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|
2,579,073
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Less: Current maturities of long-term debt
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(667,138
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)
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|
(40,629
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)
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Long-term debt
|
|
$
|
217,720
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|
|
$
|
2,538,444
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(1) See Note 8 -
“Liabilities Subject to Compromise”
for each of the respective March 31, 2016 balances identified above.
Revolving Credit Facility, Term Loan Facility and Senior Notes
On June 17, 2014, we entered into the Revolving Credit Agreement with lenders that provided commitments in the amount of
$800 million
. The Revolving Credit Agreement, which is secured by substantially all of our rigs, has a term of
five years
and matures in July 2019. Borrowings under the Revolving Credit Facility bear interest, at our option, at either (i) an adjusted
LIBOR
, plus an applicable margin ranging between
1.50%
to
2.50%
, depending on our leverage ratio, or (ii) a base rate plus an applicable margin ranging between
1.50%
to
2.50%
. Under the Revolving Credit Agreement, we may also obtain letters of credit, the issuance of which would reduce a corresponding amount available for borrowing. As of
March 31, 2016
, we had
$709 million
in borrowings outstanding at a weighted-average interest rate of
2.73%
, and an aggregate amount of
$87 million
of letters of credit issued under the Revolving Credit Facility. The balance of our Revolving Credit Facility and unamortized deferred debt issuance costs are classified as liabilities subject to compromise (See Note 8 -
“Liabilities Subject to Compromise”
) but we continue to pay interest on the Revolving Credit Facility in the ordinary course of business based on Bankruptcy Court approval. Accordingly, interest payable on this facility is not classified as a liability subject to compromise.
On July 18, 2014, we issued
$1.08 billion
of Senior Notes and also borrowed
$650 million
under the Term Loan Facility. The Term Loan Facility is secured by substantially all of our rigs. The proceeds from the Term Loan Facility and the Senior Notes were used to repay
$1.7 billion
of intercompany indebtedness to Noble incurred as partial consideration for the Separation.
The Senior Notes consisted of
$500 million
of
6.75%
senior notes and
$580 million
of
7.25%
senior notes, which mature on
July 15, 2022
and
August 15, 2024
, respectively. The Senior Notes were issued without an original issue discount. Contractual interest on the
6.75%
senior notes is payable semi-annually, in January and July, and contractual interest on the
7.25%
senior notes is payable semi-annually, in February and August. The
$1 billion
balance of our Senior Notes, accrued pre-petition interest, and unamortized deferred debt issuance costs are classified as liabilities subject to compromise (See Note 8 -
“Liabilities Subject to Compromise”
). As interest on the Company’s unsecured Senior Notes subsequent to February 14, 2016 was not expected to be an allowed claim, the Company ceased accruing interest on its Senior Notes on this date. During the three months ended March 31, 2016, contractual interest expense of
$9 million
, including
$0.2 million
of amortization of debt issuance costs, which would have been incurred had the unsecured Senior Notes not been compromised by the Plan, was not recorded.
Borrowings under the Term Loan Facility bear interest at an adjusted
LIBOR
rate plus
2.75%
, subject to a minimum LIBOR rate of
1%
or a base rate plus
1.75%
, at our option. We are required to make quarterly principal payments of
$1.6 million
plus interest and may prepay all or a portion of the Term Loan Facility at any time. The Term Loan Facility matures in July 2021. The loans under the Term Loan Facility were issued with
0.50%
original issue discount. The Term Loan Facility balance is presented net of unamortized debt issuance cost of
$6 million
which continues to be amortized to interest expense through the life of the debt. Under the terms of the Plan, the Company’s senior secured Term Loan Facility is unimpaired and will be reinstated. Paragon continues to make principal and interest payments on its Term Loan Facility in the ordinary course of business and based on Bankruptcy Court approval. As a result, we have not classified the outstanding Term Loan Facility balance
and any related accrued interest and unamortized deferred debt issuance costs as liabilities subject to compromise in the Condensed Consolidated Balance Sheet as of
March 31, 2016
.
During the first quarter of 2015, we repurchased and canceled an aggregate principal amount of
$11 million
of our Senior Notes at an aggregate cost of
$7 million
, including accrued interest. The repurchases consisted of
$1 million
aggregate principal amount of our
6.75%
senior notes due July 2022 and
$10 million
aggregate principal amount of our
7.25%
senior notes due August 2024. As a result of the repurchases, we recognized a total gain on debt retirement, net of the write-off of issuance costs, of approximately
$4 million
in “Gain on repurchase of long-term debt.” All Senior Note repurchases were made using available cash balances.
The agreements related to our Debt Facilities contain covenants that place restrictions on certain merger and consolidation transactions; our ability to sell or transfer certain assets; payment of dividends; making distributions; redemption of stock; incurrence or guarantee of debt; issuance of loans; prepayment; redemption of certain debt; as well as incurrence or assumption of certain liens. The covenants and events of default under our Revolving Credit Agreement, Senior Notes, and Term Loan Facility are substantially similar.
The amendments to our Revolving Credit Agreement contemplated by our proposed Plan as outlined by our PSA contain additional restrictive covenants that, among other things, (a) restrict us from issuing dividends and (b) require us to maintain a minimum liquidity of
$110 million
at all times (subject to a grace period if our minimum liquidity remains above
$95 million
) and, beginning in 2018, will require us to maintain (i) a certain net leverage ratio (defined as total debt, net of cash and cash equivalents, divided by earnings excluding interest, taxes, depreciation and amortization charges) and (ii) a certain minimum interest coverage ratio (defined as earnings excluding interest, taxes, depreciation and amortization charges divided by interest expense).
The commencement of the Bankruptcy cases in February 2016 constituted an event of default that accelerated our obligations under the Term Loan Agreement, Revolving Credit Agreement and Senior Notes. Accordingly, our Term Loan Facility balance, which is not subject to compromise, has been reclassified to short term debt in the Condensed Consolidated Balance Sheet as of
March 31, 2016
. Pursuant to the Bankruptcy Code, the filing of the voluntary petitions automatically stayed most actions against the Debtors, including most actions to collect indebtedness incurred prior to the filing of the petitions or to exercise control over the Debtors’ property.
Sale-Leaseback Transaction
On July 24, 2015, we executed a combined
$300 million
Sale-Leaseback Transaction with the Lessors for our
two
high specification jackup units,
Prospector 1
and
Prospector 5
(collectively, the “Prospector Rigs”). We sold the Prospector Rigs to the Lessors and immediately leased the Prospector Rigs from the Lessors for a period of
five years
pursuant to a lease agreement for each Prospector Rig (collectively, the “Lease Agreements”). Net of fees and expenses and certain lease prepayments, we received net proceeds of approximately
$292 million
, including amounts used to fund certain required reserve accounts. The
Prospector 1
and the
Prospector 5
are each currently operating under drilling contracts with Total S.A. until mid-September 2016 and November 2017, respectively.
On April 5, 2016, the Company obtained a forbearance from the Lessors of the event of default relating to the filing of the chapter 11 cases under the Lease Agreements. The forbearance will become a permanent waiver of the event of default upon the occurrence of certain conditions, including that the effective date of the Plan occurs by the outside date set forth in the PSA.
While it has been determined that the Lessors are variable interest entities (“VIEs”), we are not the primary beneficiary of the VIEs for accounting purposes since we do not have the power to direct the operation of the VIEs and we do not have the obligation to absorb losses nor the right to receive benefits that could potentially be significant to the VIEs. As a result, we did not consolidate the Lessors in our consolidated financial statements. We have accounted for the Sale-Leaseback Transaction as a capital lease.
The following table includes our minimum annual rental payments using weighted-average effective interest rates of
5.2%
for the
Prospector 1
and
7.5%
for the
Prospector 5
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2016
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
Thereafter
|
|
Total
|
|
Minimum annual rental payments
|
|
$
|
38
|
|
|
$
|
41
|
|
|
$
|
33
|
|
|
$
|
31
|
|
|
$
|
164
|
|
|
$
|
—
|
|
|
$
|
307
|
|
We made rental payments, including interest, of approximately
$21 million
during the three months ended
March 31, 2016
. This includes pre-payments or Excess Cash Amounts (as defined below) of
$3 million
and
$5 million
for the
Prospector 1
and
Prospector 5
, respectively.
Following the third and fourth anniversaries of the closing dates of the Lease Agreements, we have the option to repurchase each Prospector Rig for an amount as defined in the Lease Agreements. At the end of the lease term, we have an obligation to repurchase each Prospector Rig for a maximum amount of
$88 million
per Prospector Rig, less any pre-payments made by us during the term of the Lease Agreements.
The Lease Agreements obligate us to make certain termination payments upon the occurrence of certain events of default, including payment defaults, breaches of representations and warranties, termination of the underlying drilling contract for each Rig, covenant defaults, cross-payment defaults, certain events of bankruptcy, material judgments and actual or asserted failure of any credit document to be in force and effect. The Lease Agreements contain certain representations, warranties, obligations, conditions, indemnification provisions and termination provisions customary for sale and leaseback financing transactions. The Lease Agreements contain certain affirmative and negative covenants that, subject to exceptions, limit our ability to, among other things, incur additional indebtedness and guarantee indebtedness, pay inter-company dividends or make other inter-company distributions or repurchase or redeem capital stock, prepay, redeem or repurchase certain debt, make loans and investments, sell, transfer or otherwise dispose of certain assets, create or incur liens, enter into certain types of transactions with affiliates, consolidate, merge or sell all or substantially all of our assets, and enter into new lines of business. In addition, we are required to maintain a cash reserve of
$11.5 million
for each Prospector Rig throughout the term of the Lease Agreements. During the term of the current drilling contract for each Prospector Rig, we are also required to pay to the Lessors any excess cash amounts earned under such contract, after payment of bareboat charter fees and operating expenses for such Prospector Rig and maintenance of any mandatory reserve cash amounts (the “Excess Cash Amounts”), as prepayment for the remaining rental payments under the applicable Lease Agreement (the “Cash Sweep”). We had restricted cash balances of
$29 million
and
$25 million
related to the Lease Agreements in “Other assets” on our Condensed Consolidated Balance Sheet as of
March 31, 2016
and
December 31, 2015
, respectively. Following the conclusion of the current drilling contract for each Rig, the Cash Sweep will be reduced, requiring us to make prepayments to the Lessors of up to
25%
of the Excess Cash Amounts.
NOTE 8—LIABILITIES SUBJECT TO COMPROMISE
As a result of the filing of the Bankruptcy cases on February 14, 2016, the payment of pre-petition indebtedness is subject to compromise or other treatment under the Plan. The Company’s liabilities subject to compromise represent the Company’s current estimate of claims expected to be allowed under the Plan. Pre-petition liabilities that are subject to compromise are required to be reported at the amounts expected to be allowed, even if they may be settled for lesser amounts. The amounts currently classified as liabilities subject to compromise may be subject to future adjustments depending on the Bankruptcy Court actions, further development with respect to disputed claims, or other events. Liabilities subject to compromise reflect estimates of the allowed claims based upon negotiations with creditors that have resulted in amended claims and/or stipulations that have received or are expected to receive Bankruptcy Court approval.
The Revolving Credit Facility and the Senior Notes are impaired under the terms of the Plan, which is subject to confirmation by the Bankruptcy Court. As such, the outstanding balances of both debt instruments and related accrued pre-petition interest (for the Senior Notes only) and unamortized debt issuance costs have been classified as liabilities subject to compromise in the Condensed Consolidated Balance Sheet as of
March 31, 2016
.
Generally, actions to enforce or otherwise effect payment of pre-bankruptcy filing liabilities are stayed. Although payment of pre-petition claims is generally not permitted, the Bankruptcy Court approved the Debtors’ “first day” motions allowing, among other things, the payment of obligations related to human capital, supplier relations, customer relations, business operations, tax matters, cash management, utilities, case management and retention of professionals. As a result of this approval, the Company continues to pay certain pre-petition claims in designated categories and subject to certain terms and conditions in the ordinary course of business, and we have not classified these liabilities as subject to compromise in the Condensed Consolidated Balance Sheet as of
March 31, 2016
. This is designed to preserve the value of the Company’s businesses and assets. With respect to pre-petition claims, the Company has notified all known claimants of the deadline to file a proof of claim with the Court.
The Company has been paying and intends to continue to pay undisputed post-petition claims in the ordinary course of business.
The following table reflects pre-petition liabilities that are subject to compromise included in our Condensed Consolidated Balance Sheets as of March 31, 2016. See Note 7 -
“Debt”
for a specific discussion on the debt instruments and related balances subject to compromise:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
(In thousands)
|
|
2016
|
|
Revolving Credit Facility
|
|
$
|
708,500
|
|
|
Senior Notes due 2022, bearing fixed interest at 6.75% per annum
|
|
456,572
|
|
|
Senior Notes due 2024, bearing fixed interest at 7.25% per annum
|
|
527,010
|
|
|
Interest payable on Senior Notes
|
|
37,168
|
|
|
Debt issuance costs on Revolving Credit Facility
|
|
(5,891
|
)
|
|
Debt issuance costs on Senior Notes
|
|
(14,012
|
)
|
|
Liabilities subject to compromise
|
|
$
|
1,709,347
|
|
NOTE 9—REORGANIZATION ITEMS
ASC 852 requires that transactions and events directly associated with the reorganization be distinguished from the ongoing operations of the business. The Company uses “Reorganization items, net” on its Condensed Consolidated Statements of Operations to reflect the net revenues, expenses, gains and losses that are the direct result of the reorganization of the business. The following table summarized the components included in “Reorganization items, net”:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
(In thousands)
|
|
2016
|
|
Professional fees
|
|
$
|
18,616
|
|
|
Other
|
|
3,226
|
|
|
Total Reorganization items, net
|
|
$
|
21,842
|
|
During the three months ended March 31, 2016, the Company paid cash of approximately
$13 million
for Reorganization items.
NOTE 10—CONDENSED COMBINED DEBTOR-IN-POSSESSION FINANCIAL INFORMATION
The financial statements below represent the condensed combined financial statements of the Debtors. Effective January 1, 2016, the Non-Filing entities are accounted for as non-consolidated subsidiaries in these financial statements and, as such, their net earnings are included as “Equity in earnings of Non-Filing entities, net of tax” in the Condensed Combined Debtors’ Statement of Operations and their net assets are included as “Investment in Non-Filing entities” in the Debtors’ Condensed Combined Balance Sheet.
Intercompany transactions among the Debtors have been eliminated in the financial statements contained herein. Intercompany transactions among the Debtors and the Non-Filing entities have not been eliminated in the Debtors’ financial statements.
DEBTORS’ CONDENSED COMBINED STATEMENT OF OPERATIONS
(
Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2016
|
|
Operating revenues
|
|
|
|
Contract drilling services
|
|
$
|
200,322
|
|
|
Reimbursables and other
|
|
17,098
|
|
|
|
|
217,420
|
|
|
Operating costs and expenses
|
|
|
|
Contract drilling services
|
|
104,428
|
|
|
Reimbursables
|
|
12,568
|
|
|
Depreciation and amortization
|
|
66,075
|
|
|
General and administrative
|
|
10,472
|
|
|
|
|
193,543
|
|
|
Operating income before interest, reorganization items and income taxes
|
|
23,877
|
|
|
Interest expense (contractual interest of $31,207 for the three months ended March 31, 2016)
|
|
(22,118
|
)
|
|
Other, net
|
|
794
|
|
|
Reorganization items, net
|
|
(19,454
|
)
|
|
Loss before income taxes
|
|
(16,901
|
)
|
|
Income tax provision
|
|
(1,183
|
)
|
|
Net loss
|
|
(18,084
|
)
|
|
Equity in earnings of Non-Filing entities, net of tax
|
|
12,874
|
|
|
Net loss attributable to Paragon Offfshore plc
|
|
$
|
(5,210
|
)
|
DEBTORS’ CONDENSED COMBINED BALANCE SHEET
(
Unaudited)
(In thousands
)
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2016
|
|
ASSETS
|
|
|
|
Current assets
|
|
|
|
Cash and cash equivalents
|
|
$
|
520,901
|
|
|
Accounts receivable, net of allowance for doubtful accounts of $42 million
|
|
212,626
|
|
|
Accounts receivable from Non-Filing entities
|
|
255,938
|
|
|
Prepaid and other current assets
|
|
58,399
|
|
|
Total current assets
|
|
1,047,864
|
|
|
Investment in Non-Filing entities
|
|
1,053,178
|
|
|
Notes receivable from Non-Filing entities
|
|
36,447
|
|
|
Property and equipment, at cost
|
|
2,136,520
|
|
|
Accumulated depreciation
|
|
(1,583,768
|
)
|
|
Property and equipment, net
|
|
552,752
|
|
|
Other assets
|
|
47,931
|
|
|
Total assets
|
|
$
|
2,738,172
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
Current liabilities
|
|
|
|
Current maturities of long-term debt
|
|
$
|
633,852
|
|
|
Current maturities of debt due to Non-Filing entities
|
|
3,617
|
|
|
Accounts payable
|
|
63,494
|
|
|
Accounts payable due to Non-Filing entities
|
|
522,789
|
|
|
Accrued payroll and related costs
|
|
31,965
|
|
|
Taxes payable
|
|
19,033
|
|
|
Interest payable
|
|
1,822
|
|
|
Other current liabilities
|
|
30,775
|
|
|
Total current liabilities
|
|
1,307,347
|
|
|
Long-term debt due to Non-Filing entities
|
|
5,563
|
|
|
Deferred income taxes
|
|
1,373
|
|
|
Other liabilities
|
|
29,744
|
|
|
Liabilities subject to compromise
|
|
1,709,347
|
|
|
Total liabilities
|
|
3,053,374
|
|
|
Equity
|
|
|
|
Total deficit
|
|
(315,202
|
)
|
|
Total liabilities and equity
|
|
$
|
2,738,172
|
|
DEBTORS’ CONDENSED COMBINED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2016
|
|
Net cash provided by operating activities
|
|
$
|
74,940
|
|
|
|
|
|
|
Capital expenditures
|
|
(15,884
|
)
|
|
Change in accrued capital expenditures
|
|
(5,072
|
)
|
|
Net cash used in investing activities
|
|
(20,956
|
)
|
|
|
|
|
|
Net cash used in financing activities
|
|
—
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
53,984
|
|
|
Cash and cash equivalents, beginning of period
|
|
466,917
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
520,901
|
|
NOTE 11 —INCOME TAXES
We operate through various subsidiaries in numerous countries throughout the world. Consequently, income taxes have been based on the laws and rates in effect in the countries in which operations are conducted, and in which we and our subsidiaries or our Predecessor and its subsidiaries were incorporated or otherwise considered to have a taxable presence. The change in the effective tax rate from period to period is primarily attributable to changes in the profitability or loss mix of our operations in various jurisdictions. As our operations continually change among numerous jurisdictions, and methods of taxation in these jurisdictions vary greatly, there is little direct correlation between the income tax provision or benefit and income or loss before taxes.
The provision for income taxes for the
three months ended March 31, 2016
and
2015
was
$1 million
and
$7 million
, respectively.
At
March 31, 2016
, the liabilities related to our unrecognized tax benefits, including estimated accrued interest and penalties, totaled
$19 million
, and if recognized, would reduce our income tax provision by
$19 million
. At
December 31, 2015
, the liabilities related to our unrecognized tax benefits totaled
$19 million
. It is reasonably possible that our existing liabilities related to our unrecognized tax benefits may increase or decrease in the next twelve months primarily due to the progression of open audits or the expiration of statutes of limitation. However, we cannot reasonably estimate a range of potential changes in our existing liabilities for unrecognized tax benefits due to various uncertainties, such as the unresolved nature of various audits.
NOTE 12—EMPLOYEE BENEFIT PLANS
Defined Benefit Plans
We sponsor
two
non-U.S. noncontributory defined benefit pension plans, the Paragon Offshore Enterprise Ltd and the Paragon Offshore Nederland B.V. pension plans, which cover certain Europe-based salaried, non-union employees.
For the
three months ended March 31, 2016
and
2015
pension benefit expense related to our defined benefit pension plans, based on actuary estimates, are presented in the table below.
Pension cost includes the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
(In thousands)
|
|
2016
|
|
2015
|
|
Service cost
|
|
$
|
1,174
|
|
|
$
|
1,375
|
|
|
Interest cost
|
|
580
|
|
|
498
|
|
|
Expected return on plan assets
|
|
(465
|
)
|
|
(454
|
)
|
|
Amortization of prior service cost
|
|
(5
|
)
|
|
(5
|
)
|
|
Amortization of net actuarial loss
|
|
195
|
|
|
193
|
|
|
Net pension expense
|
|
$
|
1,479
|
|
|
$
|
1,607
|
|
During the
three months ended March 31, 2016
and
2015
, respectively, we made
no
contributions to our pension plans.
Other Benefit Plans
We sponsor a 401(k) defined contribution plan and a profit sharing plan, which cover our employees who are not otherwise enrolled in the above defined benefit plans. Other post-retirement benefit expense related to these other benefit plans included in the accompanying Condensed Consolidated Statements of Operations was
$0.3 million
for both the
three months ended March 31, 2016
and 2015.
NOTE 13—DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
We have historically entered into derivative instruments to manage our exposure to fluctuations in foreign currency exchange rates, and we may conduct hedging activities in future periods to mitigate such exposure. We have documented policies and procedures to monitor and control the use of derivative instruments. We do not engage in derivative transactions for speculative or trading purposes, nor are we a party to leveraged derivatives.
Cash Flow Hedges
We have not entered into any hedging activity during
2016
. Depending on market conditions, we may elect to utilize short-term forward currency contracts in the future.
Prospector Interest Rate Swaps
At the time of our acquisition of Prospector, Prospector had outstanding a 2018 senior secured credit facility of
$270 million
(the “Prospector Senior Credit Facility”) which exposed Prospector to short-term changes in market interest rates as interest obligations on these instruments were periodically redetermined based on the prevailing LIBOR rate. Prior to our acquisition, a subsidiary of Prospector had entered into interest rate swaps with an aggregate maximum notional amount of
$135 million
. The interest rate swaps were entered into to reduce the variability of the cash interest payments under the Prospector Senior Credit Facility and to fix the interest on
50%
of the outstanding borrowings under the facility. Prospector received interest at three-month LIBOR and paid interest at a fixed rate of
1.512%
over the expected term of the Prospector Senior Credit Facility.
In the first quarter of 2015, we had repaid in full the remaining principal balance outstanding under the Prospector Senior Credit Facility; therefore, the related interest rate swaps were terminated. The termination resulted in a settlement at fair market value plus accrued interest of approximately
$1 million
recorded in “Interest expense net of amount capitalized.” We did not apply hedge accounting with respect to these interest rate swaps and therefore, changes in fair values were recognized as either income or loss in our Consolidated Statements of Operations. For the three months ended March 31, 2015, a gain of approximately
$1 million
resulting from the change in fair value of the interest rate swaps was recorded in “Interest expense, net of amount capitalized.”
NOTE 14—FAIR VALUE OF FINANCIAL INSTRUMENTS
Our cash and cash equivalents, accounts receivable and accounts payable are by their nature short-term. As a result, the carrying values included in the accompanying Condensed Consolidated Balance Sheets approximate fair value.
Fair Value of Debt
The estimated fair values of our Senior Notes and Term Loan Facility were based on the quoted market prices for similar issues (Level 2 measurement).
The estimated fair value of our Senior Notes due July 15, 2022, excluding debt issuance costs of
$6 million
and
$6 million
for
March 31, 2016
and
December 31, 2015
, respectively, and our Senior Notes due August 15, 2024, excluding debt issuance costs of
$8 million
and
$8 million
for
March 31, 2016
and
December 31, 2015
, respectively, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subject to Compromise
|
|
Not Subject to Compromise
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
(In thousands)
|
|
Carrying Value
|
|
Estimated Fair Value
|
|
Carrying Value
|
|
Estimated Fair Value
|
|
6.75% Senior Notes due July 15, 2022
|
|
$
|
456,572
|
|
|
$
|
120,991
|
|
|
$
|
456,572
|
|
|
$
|
65,062
|
|
|
7.25% Senior Notes due August 15, 2024
|
|
527,010
|
|
|
142,293
|
|
|
527,010
|
|
|
75,099
|
|
|
Total senior unsecured notes
|
|
$
|
983,582
|
|
|
$
|
263,284
|
|
|
$
|
983,582
|
|
|
$
|
140,161
|
|
The estimated fair value of our Term Loan Facility, bearing interest at
3.75%
, excluding unamortized discount and debt issuance costs of
$8 million
and
$8 million
for March 31, 2016 and December 31, 2015, respectively, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not Subject to Compromise
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
(In thousands)
|
|
Carrying Value
|
|
Estimated Fair Value
|
|
Carrying Value
|
|
Estimated Fair Value
|
|
Term Loan Facility
|
|
$
|
641,875
|
|
|
$
|
140,009
|
|
|
$
|
641,875
|
|
|
$
|
235,889
|
|
The carrying amount of our variable-rate debt, the Revolving Credit Facility, which is subject to compromise as of
March 31, 2016
, approximates fair value as such debt bears short-term, market-based interest rates. We have classified this instrument as Level 2 as valuation inputs used for purposes of determining our fair value disclosure are readily available published LIBOR rates.
NOTE 15—ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table sets forth the changes in the accumulated balances for each component of “Accumulated other comprehensive loss” (“AOCL”) for the
three months ended March 31, 2016
and
2015
. All amounts within the tables are shown net of tax.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Defined
Benefit
Pension
Items (1)
|
|
Foreign
Currency
Items
|
|
Total
|
|
December 31, 2014
|
|
$
|
(22,911
|
)
|
|
$
|
(14,233
|
)
|
|
$
|
(37,144
|
)
|
|
Activity during period:
|
|
|
|
|
|
|
|
Other comprehensive loss before reclassification
|
|
—
|
|
|
(2,198
|
)
|
|
(2,198
|
)
|
|
Amounts reclassified from AOCL
|
|
192
|
|
|
—
|
|
|
192
|
|
|
Net other comprehensive income (loss)
|
|
192
|
|
|
(2,198
|
)
|
|
(2,006
|
)
|
|
March 31, 2015
|
|
$
|
(22,719
|
)
|
|
$
|
(16,431
|
)
|
|
$
|
(39,150
|
)
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
$
|
(20,351
|
)
|
|
$
|
(21,663
|
)
|
|
$
|
(42,014
|
)
|
|
Activity during period:
|
|
|
|
|
|
|
|
Other comprehensive income before reclassification
|
|
—
|
|
|
2,068
|
|
|
2,068
|
|
|
Amounts reclassified from AOCL
|
|
187
|
|
|
—
|
|
|
187
|
|
|
Net other comprehensive income
|
|
187
|
|
|
2,068
|
|
|
2,255
|
|
|
March 31, 2016
|
|
$
|
(20,164
|
)
|
|
$
|
(19,595
|
)
|
|
$
|
(39,759
|
)
|
|
|
|
|
(1)
|
Defined benefit pension items relate to actuarial losses, prior service credits, and the amortization of actuarial losses and prior service credits. Reclassifications from AOCL are recognized as expense on our Condensed Consolidated Statements of Operations through either “Contract drilling services” or “General and administrative.” See Note 12,
“Employee Benefit Plans”
for additional information.
|
NOTE 16—COMMITMENTS AND CONTINGENCIES
Purchase Commitments
In connection with our capital expenditure program, we have outstanding commitments, including shipyard and purchase commitments of approximately
$600 million
at
March 31, 2016
. Our purchase commitments consist of obligations outstanding to external vendors primarily related to future capital purchases and include
$578 million
, of which
$192 million
is due in 2016 and
$386 million
is due in 2017, related to the construction of three high-specification jackup rigs, the
Prospector 6, Prospector 7
and
Prospector 8
(collectively, the “
Three
High-Spec Jackups Under Construction”) by Shanghai Waigaoqiao Ship Co. Ltd. (“SWS”) in China. The delivery of these newbuild rigs has been rescheduled to the second quarter of 2017, the fourth quarter of 2016 and the fourth quarter of 2017, respectively. Each newbuild has been built pursuant to a contract between one of these subsidiaries and SWS, without our parent company guarantee or other direct recourse to any of our subsidiaries other than the applicable subsidiary. The Prospector subsidiaries are not included in the Bankruptcy cases.
Litigation
We are a defendant in certain claims and litigation arising out of operations in the ordinary course of business, the resolution of which, in the opinion of management, will not have a material adverse effect on our financial position, results of operations or cash flows. There is inherent risk in any litigation or dispute and no assurance can be given as to the outcome of these claims.
Other Contingencies
We operate in a number of countries throughout the world and our tax returns filed in those jurisdictions are subject to review and examination by tax authorities within those jurisdictions. As of
March 31, 2016
, we have received tax audit claims of approximately
$364 million
, of which
$89 million
is subject to indemnity by Noble, primarily in Mexico and Brazil, attributable to our income, customs and other business taxes. In addition, as of
March 31, 2016
, approximately
$35 million
of tax audit claims in Mexico assessed against Noble are subject to indemnity by us as a result of the Spin-Off. We have contested, or intend to contest, these assessments, including through litigation if necessary. Tax authorities may issue additional assessments or pursue legal actions as a result of tax audits, and we cannot predict or provide assurance as to the ultimate outcome of such assessments and legal actions. In some cases, we will be required to post cash deposit as collateral while we defend these claims. We could be required to post such collateral in the near future, and such amounts could be substantial and could have a material adverse effect on our liquidity, financial condition, results of operations and cash flows. We have
no
surety bonds or letters of credit associated with tax audit claims outstanding as of
March 31, 2016
.
In January 2015, a subsidiary of Noble received an unfavorable ruling from the Mexican Supreme Court on a tax depreciation position claimed in periods prior to the Spin-Off. Although the ruling does not constitute mandatory jurisprudence in Mexico, it does create potential indemnification exposure for us under the Tax Sharing Agreement with Noble if Noble is ultimately determined to be liable for any amounts. We are presently unable to determine a timeline on this matter, nor are we able to determine the extent of our liability. We have considered this matter under ASC 460,
Guarantees
, and concluded that our liability under this matter is reasonably possible. Due to these current uncertainties, we are not able to reasonably estimate the magnitude of any liability at this time.
On February 12, 2016, as part of the PSA, we entered into the Term Sheet with Noble with respect to the Noble Settlement Agreement, which we executed on April 29, 2016 and remains subject to the confirmation of our Plan by the Bankruptcy Court. Upon effectiveness of the Noble Settlement Agreement, certain conditions of the Tax Sharing Agreement executed between Noble and Paragon for the Spin-Off will be modified.
Pursuant to the Noble Settlement Agreement, Noble will provide direct bonding in fulfillment of the requirements necessary to challenge tax assessments in Mexico relating to our business for the tax years 2005 through 2010. The Mexican Tax Assessments were originally assigned to us by Noble pursuant to the Tax Sharing Agreement which was entered into in connection with the Spin-Off. The Company has contested or intends to contest the Mexico Tax Assessments and may be required to post bonds in connection thereto. As of March 31, 2016, our estimated Mexican Tax Assessments totaled approximately
$194 million
, with assessments for 2009 and 2010 yet to be received. Additionally, Noble will be responsible
for all of the ultimate tax liability for Noble legal entities and
50%
of the ultimate tax liability for our legal entities relating to the Mexican Tax Assessments.
In consideration for this support, we have agreed to release Noble, fully and unconditionally, from any and all claims in relation to the Spin-Off. The Noble Settlement Agreement remains subject to approval by the Bankruptcy Court in our Bankruptcy cases in connection with the confirmation of our Plan. Upon the effectiveness of the Noble Settlement Agreement, a material portion of our Mexican Tax Assessments, and any corresponding ultimate tax liability, will be assumed by Noble. Until such time, the current Tax Sharing Agreement remains in effect.
Petrobras has notified us, along with other industry participants, that it is currently challenging assessments by Brazilian tax authorities of withholding taxes associated with the provision of drilling rigs for its operations in Brazil during the years 2008 and 2009 totaling
$78 million
, of which
$22 million
is subject to indemnity by Noble. Petrobras has also notified us that if they must pay such withholding taxes, they will seek reimbursement from us. We believe that we are contractually indemnified by Petrobras for these amounts and dispute the validity of the assessment. We have notified Petrobras of our position. We will, if necessary, vigorously defend our rights. If we were required to pay such reimbursement, however, the amount of such reimbursement could be substantial and could have a material adverse effect on our financial condition, results of operations and cash flows.
In addition, a tax law was enacted in Brazil, effective January 1, 2015, that under certain circumstances would impose a
15%
to
25%
withholding tax on charter hire payments made to a non-Brazilian related party exceeding certain thresholds of total contract value. Although we believe that our operations are not subject to this law, the tax is being withheld at the source by our customer and we have recorded
$7 million
withholding tax expense since inception of the law. Discussions with our customer over the applicability of this legislation are ongoing.
Our subsidiary used a commercial agent in Brazil in connection with Petrobras drilling contracts. The agent pleaded guilty in Brazil in connection with the award by Petrobras of a drilling contract to one of our competitors as part of a wider investigation of Petrobras’ business practices. The agent has represented a number of different companies in Brazil over many years, including several offshore drilling contractors. Following the news reports relating to the agent’s involvement in the Brazil investigation in connection with his activities with other companies, we have been conducting an independent review of our relationship with the agent and with Petrobras. The SEC and the U.S. Department of Justice are aware of our review.
Insurance
We maintain certain insurance coverage against specified marine perils, which include physical damage and loss of hire for certain units.
We maintain insurance in the geographic areas in which we operate, although pollution, reservoir damage and environmental risks generally are not fully insurable. Our insurance policies and contractual rights to indemnity may not adequately cover our losses or may have exclusions of coverage for some losses. We do not have insurance coverage or rights to indemnity for all risks, including loss of hire insurance on most of the rigs in our fleet or named windstorm perils with respect to our rigs cold-stacked in the U.S. Gulf of Mexico. Uninsured exposures may include expatriate activities prohibited by U.S. laws and regulations, radiation hazards, certain loss or damage to property on board our rigs and losses relating to shore-based terrorist acts or strikes. If a significant accident or other event occurs and is not fully covered by insurance or contractual indemnity, it could materially adversely affect our financial position, results of operations or cash flows. Additionally, there can be no assurance that those parties with contractual obligations to indemnify us will necessarily be financially able to indemnify us against all these risks
Other
At
March 31, 2016
, we had letters of credit of
$87 million
and performance bonds totaling
$115 million
supported by surety bonds outstanding and backed by
$75 million
in letters of credit and a
$9 million
cash deposit. Certain of our subsidiaries issued guarantees to the temporary import status of rigs or equipment imported into certain countries in which we operated. These guarantees are issued in lieu of payment of custom, value added or similar taxes in those countries.
Separation Agreements
In connection with the Spin-Off, we entered into several definitive agreements with Noble or its subsidiaries that, among other things, set forth the terms and conditions of the Spin-Off and provide a framework for our relationship with Noble after the Spin-Off, including the following agreements:
|
|
|
|
•
|
Master Separation Agreement;
|
|
|
|
|
•
|
Employee Matters Agreement;
|
|
|
|
|
•
|
Transition Services Agreement relating to services Noble and Paragon will provide to each other on an interim basis; and
|
|
|
|
|
•
|
Transition Services Agreement relating to Noble’s Brazil operations.
|
Pursuant to these agreements with Noble, our Condensed Consolidated Balance Sheets include the following balances due from and to Noble as of
March 31, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
(In thousands)
|
|
2016
|
|
2015
|
|
Accounts receivable
|
|
$
|
24,620
|
|
|
$
|
22,695
|
|
|
Other current assets
|
|
1,930
|
|
|
3,032
|
|
|
Other assets
|
|
6,804
|
|
|
6,686
|
|
|
Due from Noble
|
|
$
|
33,354
|
|
|
$
|
32,413
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
91
|
|
|
$
|
211
|
|
|
Other current liabilities
|
|
6,484
|
|
|
6,067
|
|
|
Other liabilities
|
|
3,268
|
|
|
3,268
|
|
|
Due to Noble
|
|
$
|
9,843
|
|
|
$
|
9,546
|
|
These receivables and payables primarily relate to rights and obligations under the Master Separation Agreement, Tax Sharing Agreement and the Transition Services Agreement (Brazil).
Master Separation Agreement
We entered into the Master Separation Agreement with Noble Corporation, Noble-Cayman, which provided for, among other things, the Distribution of our ordinary shares to Noble shareholders and the transfer to us of the assets and the assumption by us of the liabilities relating to our business and the responsibility of Noble for liabilities related to Noble’s, and in certain limited cases, our business. The Master Separation Agreement identified which assets and liabilities constitute our business and which assets and liabilities constitute Noble’s business
Tax Sharing Agreement
We entered into the Tax Sharing Agreement with Noble, which governs the parties’ respective rights, responsibilities and obligations with respect to tax liabilities and benefits, tax attributes, the preparation and filing of tax returns, the control of audits and other tax proceedings and certain other matters regarding taxes following the Distribution.
See the discussion above regarding the Term Sheet entered into with Noble with respect to the Noble Settlement Agreement. Upon the effectiveness of the Noble Settlement Agreement, a material portion of our Mexican Tax Assessments, and any corresponding ultimate tax liability, will be assumed by Noble. Until such time, the current Tax Sharing Agreement remains in effect.
Employee Matters Agreement
We entered into an Employee Matters Agreement with Noble-Cayman to allocate liabilities and responsibilities relating to our employees and their participation in certain compensation and benefit plans maintained by Noble or a subsidiary of Noble. The Employee Matters Agreement provides that, following the Distribution, most of our employee benefits are provided under compensation and benefit plans adopted or assumed by us. In general, our plans are substantially similar to the plans of Noble or its subsidiaries that covered our employees prior to the completion of the Distribution.
Transition Services Agreement
We entered into a Transition Services Agreement with Noble-Cayman pursuant to which Noble-Cayman provides, on a transitional basis, certain administrative and other assistance, generally consistent with the services that Noble provided to us before the Separation, and we provide certain transition services to Noble and its subsidiaries. The charges for the transition services are generally intended to allow the party providing the services to fully recover the costs directly associated with providing the services, plus all out-of-pocket costs and expenses, generally without profit. The charges for each of the transition services generally are based on either a pre-determined flat fee or an allocation of the costs incurred, including certain fees and expenses of third-party service providers.
Transition Services Agreement (Brazil)
We and Noble-Cayman and certain other subsidiaries of Noble entered into a Transition Services Agreement (and a related rig charter) pursuant to which we provide certain transition services to Noble and its subsidiaries in connection with Noble’s Brazil operations. We continue to provide both rig-based and shore-based support services in respect of Noble’s remaining business through the term of Noble’s existing rig contracts. Noble-Cayman compensates us on a cost-plus basis for providing such services and also indemnifies us for liabilities arising out of the services agreement. This agreement will terminate when the current Noble semisubmersible working in Brazil finishes its existing contract in 2016.
NOTE 17—SUPPLEMENTAL CASH FLOW INFORMATION
The net effect of changes in other assets and liabilities on cash flows from operating activities is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
(In thousands)
|
|
2016
|
|
2015
|
|
Accounts receivable
|
|
$
|
23,471
|
|
|
$
|
181,160
|
|
|
Other current assets
|
|
4,218
|
|
|
20,376
|
|
|
Other assets
|
|
5,285
|
|
|
(4,643
|
)
|
|
Accounts payable
|
|
(3,966
|
)
|
|
(14,506
|
)
|
|
Other current liabilities
|
|
2,862
|
|
|
(96,887
|
)
|
|
Other liabilities
|
|
1,081
|
|
|
(20,462
|
)
|
|
Net change in other assets and liabilities
|
|
$
|
32,951
|
|
|
$
|
65,038
|
|
|
|
|
|
|
|
|
Supplemental information for non-cash activities:
|
|
|
|
|
|
Adjustments to distributions by former parent
|
|
$
|
—
|
|
|
$
|
9,493
|
|
|
Accrued capital expenditures
|
|
4,883
|
|
|
17,831
|
|
|
Reclassification of Liabilities subject to compromise
|
|
1,709,347
|
|
|
—
|
|
We made income tax payments of approximately
$5 million
and
$21 million
during the
three months ended March 31, 2016
and
2015
, respectively.
NOTE 18—SEGMENT AND RELATED INFORMATION
At
March 31, 2016
, our contract drilling operations were reported as a single reportable segment, Contract Drilling Services, which reflects how our business is managed, and the fact that all of our drilling fleet is dependent upon the worldwide oil industry. The mobile offshore drilling units that comprise our offshore rig fleet operated in a single, global market for contract drilling services and are often redeployed globally due to changing demands of our customers, which consisted largely of major non-U.S. and government owned/controlled oil and gas companies throughout the world. Our Contract Drilling Services segment conducts contract drilling operations in the North Sea, the Middle East, India, Brazil, Mexico, West Africa and Southeast Asia.