NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1
—ORGANIZATION, CURRENT EVENTS, AND BASIS OF PRESENTATION
Paragon Offshore plc (together with its subsidiaries, “Paragon,” the “Company,” “we,” “us” or “our”) is a global provider of offshore drilling rigs. Our fleet includes
34
jackups ( including
two
high specification heavy duty/harsh environment jackups),
four
drillships and
one
semisubmersible. 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.
We operate in significant hydrocarbon-producing geographies throughout the world, including the North Sea, the Middle East and India. As of
December 31, 2016
, our contract backlog was
$242 million
and included contracts with 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”).
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 obtaining the requisite vote of creditors and the Bankruptcy Court’s approval of our plan of reorganization as described below. This represents a material uncertainty related to events and conditions that raises substantial doubt on our ability to continue as a going concern and, therefore, we may be unable to utilize 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, any 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 (including all amendments thereto, the “Original Plan”) pursuant to chapter 11 of the Bankruptcy Code with holders representing an aggregate of
77%
of the outstanding
$457 million
of our
6.75%
senior unsecured notes maturing July 2022 and the outstanding
$527 million
of our
7.25%
senior unsecured notes maturing August 2024 together with lenders representing an aggregate of
96%
of the amounts outstanding (including letters of credit) under our Revolving Credit Agreement (the “Noteholder Group”).
On February 14, 2016, the Debtors commenced their chapter 11 cases (the “Bankruptcy cases”) by filing voluntary petitions for relief under chapter 11 of the Bankruptcy Code in the Bankruptcy Court. Upon filing the Bankruptcy cases, we began trading on the OTC Pink.
On April 19, 2016, the Bankruptcy Court approved the Company’s disclosure statement and certain amendments to the Original Plan.
Effective August 5, 2016, the Company entered into an amendment to the PSA (the “PSA Amendment”) with the lenders under our Revolving Credit Agreement (the “Revolver Lenders”) and lenders holding approximately
69%
in principal amount of our Senior Notes. The PSA Amendment supported certain revisions to the Original Plan. On August 15, 2016, the Debtors filed the amended Original Plan and a supplemental disclosure statement with the Bankruptcy Court.
By oral ruling on October 28, 2016, and by written order dated November 15, 2016, the Bankruptcy Court denied confirmation of the Debtors’ amended Original Plan. Consequently, on November 29, 2016, the Noteholder Group terminated the PSA effective as of December 2, 2016.
On January 18, 2017, the Company announced that it reached agreement in principle with a steering committee of lenders under our Revolving Credit Agreement and an ad hoc committee of lenders under our Term Loan Agreement to support a new chapter 11 plan of reorganization for the Debtors (the “New Plan”). On February 7, 2017, the Company filed the New Plan and related disclosure statement with the Bankruptcy Court. The New Plan provides for, among other things, the (i) elimination of approximately
$2.4 billion
of the Company’s existing debt in exchange for a combination of cash, debt and new equity to be issued under the New Plan; (ii) allocation to the Revolver Lenders and lenders under our Term Loan Agreement (collectively, the “Secured Lenders”) of new senior first lien debt in the original aggregate principal amount of
$85 million
maturing in 2022; (iii) projected distribution to the Secured Lenders of approximately
$418 million
in cash, subject to adjustment on account of claims reserves and working capital and other adjustments at the time of the Company’s emergence from the Bankruptcy cases, and an estimated
58%
of the new equity of the reorganized company; (iv) projected distribution to holders of the Company’s Senior Notes (the “Bondholders”) of approximately
$47 million
in cash, subject to adjustment on account of claims reserves and working capital and other adjustments at the time of the Company’s emergence from the Bankruptcy cases, and an estimated
42%
of the new equity of the reorganized company; and (v) commencement of an administration of the Company in the United Kingdom to, among other things, implement a sale of all or substantially all of the assets of the Company to a new holding company to be formed, which administration may be effected on or prior to effectiveness of the New Plan. Existing shareholders of the Company will not receive a recovery under the New Plan. The New Plan will be subject to usual and customary conditions to plan confirmation, including obtaining the requisite vote of creditors and approval of the Bankruptcy Court. The Company has been and remains in discussions with the Bondholders, who have currently not agreed to support the New Plan, and therefore, there is no guarantee that the New Plan will be approved.
Debtors-in-Possession
Since the filing 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. For additional discussion of the risks associated with debtors-in-possession, see Part 1, Item 1A, “
Risk Factors”.
Settlement with Noble Corporation
On February 12, 2016, we entered into a binding term sheet with Noble with respect to the “Noble Settlement Agreement” (as described below), which we executed on April 29, 2016. The Noble Settlement Agreement will become effective upon the effective date of the Debtors’ plan of reorganization if such plan is substantially similar to the Debtors Original Plan. The New Plan contemplates that the Noble Settlement Agreement will become effective upon the effective date of the New Plan. In light of the differences in the Original Plan and the New Plan, we intend to discuss this requirement with Noble. The Noble Settlement Agreement provides that Noble may only unilaterally terminate the Noble Settlement Agreement if: (i) the Debtors’ file a plan of reorganization with the Bankruptcy Court that does not incorporate the terms and conditions of the Noble Settlement Agreement, (ii) the Debtors file a motion before the Bankruptcy Court to terminate their obligations under the Noble Settlement Agreement, or (iii) the release of claims by the Debtors in favor of Noble, as detailed below, is deemed invalid or unenforceable.
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
19
- “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.
In addition, on August 5, 2016, we entered into a binding term sheet with respect to an amendment to the Noble Settlement Agreement (the “Noble Settlement Agreement Amendment”). Upon effectiveness of the Noble Settlement Agreement Amendment, certain provisions of the Tax Sharing Agreement will be further amended to permit us, at our option, to defer up to
$5 million
in amounts owed to Noble under the Tax Sharing Agreement with respect to the Mexican Tax Assessments (the “Deferred Noble Payment Amount”). In consideration for this deferral, we would issue an unsecured promissory note to Noble in the amount of the Deferred Noble Payment Amount (the “Noble Note”) which would be due and payable on the
four
th
anniversary of the effective date of the New Plan. The Noble Note would accrue interest, quarterly, to be paid either: (x) in cash at
12%
per annum, or (y) in kind at
15%
per annum (in our discretion).
As of December 31, 2016, our estimated Mexican Tax Assessments totaled approximately $
165 million
, with assessments for 2009 and 2010 yet to be received. 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 upon effective date of the Noble Settlement Agreement.
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. 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 on the effective date in connection with certain amendments to the Tax Sharing Agreement executed between Noble and Paragon for the Spin-Off. Until such time, the current Tax Sharing Agreement remains in effect.
Basis of Presentation
The financial information contained within this report includes periods prior to the Spin-Off on August 1, 2014. For these periods prior to the Spin-Off, the consolidated financial statements and related discussion of financial condition and results of operations include historical results of our Predecessor, which comprised most of Noble’s standard specification drilling fleet and related operations. We consolidate the historical financial results of our Predecessor in our consolidated financial statements for all periods prior to the Spin-Off. All financial information presented after the Spin-Off represents the consolidated results of operations, financial position and cash flows of Paragon.
Prior to the Spin-Off, our total equity represented the cumulative net parent investment by Noble, including any prior net income attributable to our Predecessor as part of Noble. 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 Consolidated Statement of Operations.
On November 17, 2014, we initiated the acquisition of the outstanding shares of 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.
NOTE 2—NEW ACCOUNTING PRONOUNCEMENTS
In May 2014, the FASB issued ASU No. 2014-09, which creates ASC Topic 606,
Revenue from Contracts with Customers
and supersedes the revenue recognition requirements in Topic 605 and industry-specific standards that currently exist under U.S. GAAP. 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. This ASU can be adopted either retrospectively or as a cumulative-effect adjustment as of the date of adoption. In March, April, May and November 2016, the FASB issued ASU No. 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
, ASU No. 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
, ASU No. 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow Scope Improvements and Practical Expedients,
and
ASU 2016-20,
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
, respectively. These updates clarify important aspects of the guidance and improve its operability and implementation. ASC Topic 606 is effective for financial statements issued for annual reporting periods beginning after December 15, 2017, and interim periods within that reporting period. We are evaluating our revenue streams under these ASUs and are considering the impact of the new guidance on the method and presentation of recognizing revenue for certain drilling contracts which may contain lease components. Our evaluation process includes a review of our contracts and transaction types across our business. We are currently evaluating methods of adoption and what impact 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, which creates ASC Topic 842,
Leases
. This ASU requires an entity to separate lease components from nonlease components in a contract. The lease components would be accounted for under ASU 2016-02, which requires lessees to recognize a right-of-use asset and a lease liability for capital and operating leases with lease terms greater than twelve months. Lessors must align certain requirements with the updates to lessee accounting standards and potentially derecognize a leased asset and recognize a net investment in the lease. This ASU also requires key qualitative and quantitative disclosures by lessees and lessors to help users of financial statements better understand the amount, timing and uncertainty of cash flows arising from leases. We are evaluating the provisions of ASU 2016-02, concurrently with the provisions of ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
since nonlease components would be accounted for under ASU 2014-09. 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. A modified retrospective approach is required. We are evaluating what impact 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. 2016-09,
Improvements to Employee Share-Based Payment Accounting
, which amends ASC Topic 718,
Compensation - Stock Compensation
. The ASU includes provisions intended to simplify the accounting for and presentation of share-based payment transactions, including such areas as income tax effects, minimum statutory tax withholding requirements and classification of awards as either equity or liabilities, forfeitures, and the classification on the statement of cash flows. 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. Transition methods vary for the related amendments. We are evaluating what impact the adoption of this guidance will have on our financial condition, results of operations, cash flows or financial disclosures.
In June 2016, the FASB issued ASU No. 2016-13, which creates ASC Topic 326,
Financial Instruments - Credit Losses
. The new guidance introduces new accounting models for expected credit losses on financial instruments and applies to: (1) loans, accounts receivable, trade receivables and other financial assets measured at amortized cost, (2) loan commitments and certain other off-balance sheet credit exposures, (3) debt securities and other financial assets measured at fair value through other comprehensive income, and (4) beneficial interests in securitized financial assets. The scope of the new guidance is broad and is designed to improve the current accounting models for the impairment of financial assets. The guidance is effective for financial statements issued for annual reporting periods beginning after December 15, 2019, and interim periods within that reporting period. Early adoption is permitted for annual reporting periods beginning after December 15, 2018, and interim periods within that reporting period. A modified retrospective approach is required. We are evaluating what impact the adoption of this guidance will have on our financial condition, results of operations, cash flows or financial disclosures.
In August 2016 the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
, a consensus of the FASB’s Emerging Issues Task Force. The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The ASU addresses how the following cash transactions are presented: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon debt instruments; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies; (6) distributions received from equity method investments; and (7) beneficial interests in securitization transactions. The ASU also addresses how to present cash receipts and cash payments that have aspects of multiple cash flow classifications. The guidance is effective for financial statements issued for annual reporting periods beginning after December 15, 2017, and interim periods within that reporting period. Early adoption is permitted provided that all of the amendments are adopted in the same period. The guidance requires application using a retrospective transition method. We do not expect that our adoption will have a material impact on our cash flows or financial disclosure.
In October 2016 the FASB issued ASU No. 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
. This ASU requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Consequently, the amendments in this ASU eliminate the exception for an intra-entity transfer of an asset other than inventory. The guidance is effective for financial statements issued for annual reporting periods beginning after December 15, 2017, and interim periods within that reporting period. Early adoption is permitted for all entities as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been made available for issuance. This ASU should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. We are considering early adoption of this ASU effective January 1, 2017 and do not expect that our adoption will have a material impact on our financial condition, results of operations, cash flows or financial disclosures.
In November 2016 the FASB issued ASU No. 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
. This ASU requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and restricted cash. The new guidance is intended to reduce diversity in practice on the presentation of restricted cash in the statement of cash flows. The guidance is effective for financial statements issued for annual reporting periods beginning after December 15, 2017, and interim periods within that reporting period. Early adoption is permitted, including adoption in an interim period. This ASU should be applied using a retrospective transition method to each period presented. We are evaluating what impact the adoption of this guidance will have on our financial condition, results of operations, cash flows or financial disclosures.
NOTE 3—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include our accounts, those of our wholly-owned subsidiaries and entities in which we hold a controlling financial interest. The financial statements of our Predecessor include our net assets and results of our operations as previously described. All significant intercompany accounts and transactions have been eliminated in consolidation.
Reorganization Accounting
In connection with filing chapter 11 of the Bankruptcy Code on February 14, 2016, the Company is subject to the requirements of FASB ASC 852,
Reorganizations
(“ASC 852”)
.
ASC852 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 for the year ended
December 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 subject to compromise are pre-petition obligations that are not fully secured and that have at least a possibility of not being repaid at the full claim amount by the plan of reorganization. Liabilities subject to compromise 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
10
-
“Reorganization Items”
for cash paid for reorganization items in the consolidated statements of cash flows.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, demand deposits with banks and all highly liquid investments with original maturities of three months or less. Our cash, cash equivalents and short-term investments are subject to potential credit risk, and certain of our cash accounts carry balances greater than federally insured limits. Cash and cash equivalents are primarily held by major banks or investment firms. Our cash management and investment policies restrict investments to lower risk, highly liquid securities and we perform periodic evaluations of the relative credit standing of the financial institutions with which we conduct business.
Restricted Cash
Restricted cash consists of both cash held to satisfy the requirements of our Sale-Leaseback Transaction (as described in Note
8
-
“Debt”
), which was executed in 2015 and cash collateral for an outstanding performance bond.
Under the terms of the lease agreements we are required to maintain
three
cash reserve accounts, a capital expenditure reserve account, an operating reserve account and a rental reserve account.
The capital expenditure reserve is available specifically for special survey costs (
3
-
5
year surveys) provided that we replenish any amount withdrawn within twelve months from the date of the withdrawal. This cash is available to us, for a designated purpose, in the short-term, and therefore the restricted cash balance is included in short-term “Restricted cash” on our Consolidated Balance Sheet. The short-term restricted cash balance also includes funds accumulated in an operating reserve account used for payment of monthly operating expenses under the terms of the lease agreements. Our short-term restricted cash was
$9 million
and
$3 million
as of
December 31, 2016
and
2015
, respectively.
The rental reserve account is the minimum amount established under the lease agreements which we are required to maintain on reserve at all times during the lease period. The balance in the account increases with periodic deposits of operating revenue in excess of allowed operating expenses. Any amount of cash in the account in excess of the minimum balance required on reserve is to be used repay our long-term debt obligation related to the Sale-Leaseback Transaction. In addition to the Sale-Leaseback Transaction rental reserve account, the long-term restricted cash balance as of
December 31, 2016
also includes
$9 million
cash collateral for an outstanding performance bond. Our long-term restricted cash was
$38 million
and
$25 million
as of
December 31, 2016
and
2015
, respectively.
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
$25 million
and
$44 million
as of
December 31, 2016
and
2015
, respectively. We had
$6 million
of recoveries and
$13 million
of write-offs for the year ended
December 31, 2016
compared to bad debt expense of
$38 million
and
$0.1 million
for the years ended
December 31, 2015
and
2014
, respectively. Bad debt expense is reported as a component of “Contract drilling services operating costs and expense” in our Consolidated Statements of Operations.
Long-lived Assets and Impairments
Property and equipment is stated at cost. Major replacements and improvements are capitalized. When assets are sold, retired or otherwise disposed of, the cost and related accumulated depreciation are eliminated from the accounts and the gain or loss is recognized. Property and equipment are depreciated using the straight-line method over their estimated useful lives as of the date placed in service or date of major refurbishment.
Scheduled maintenance of equipment is performed based on the number of hours operated in accordance with our preventative maintenance program. Routine repair and maintenance costs are charged to expense as incurred.
The estimated useful lives of our property and equipment are as follows:
|
|
|
|
Years
|
Drilling rigs
|
7
-
30
|
Drilling machinery and equipment
|
3 - 5
|
Other
|
3 - 10
|
The amount of depreciation expense we record is dependent upon certain assumptions, including an asset’s estimated useful life, rate of consumption and corresponding salvage value. We periodically review these assumptions and may change one or more of these assumptions. Changes in our assumptions may require us to recognize, on a prospective basis, increased or decreased depreciation expense.
We evaluate the impairment of long-lived assets, including specifically identifiable intangibles and property and equipment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss on our long-lived assets exists when the estimated undiscounted cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. Any impairment loss recognized represents the excess of the asset’s carrying value over the estimated fair value. For discussion related to our impairment analysis see Note
5
-
“Property and Equipment and Other Assets.”
Debt Issuance Costs
In the first quarter of 2016, we adopted the guidance issued by the FASB in April 2015 in ASU No. 2015-03,
Simplifying the Presentation of Debt Issuance Costs.
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. In the accompanying December 31, 2015 Consolidated Balance Sheet, 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” to conform to the current period presentation of debt issuance costs. Debt issuance costs related to our Senior Notes and
Term Loan Facility have been classified as liabilities subject to compromise in the Consolidated Balance Sheet as of
December 31, 2016
.
Debt issuance costs related to line of credit arrangements will continue to be classified in “Other assets” on the Consolidated Balance Sheets; however, as a result of the filing of the Bankruptcy cases, debt issuance costs related to our Revolving Credit Facility have been classified as liabilities subject to compromise in the Consolidated Balance Sheet as of
December 31, 2016
. For our debt securities that are considered to be liabilities subject to compromise, we ceased to amortize deferred debt issuance costs through interest expense (see Note
9
-
“Liabilities Subject to Compromise”
).
Fair Value Measurements
We estimate fair value at a price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market for the asset or liability, respectively. Our valuation techniques require inputs that we categorize using a three-level hierarchy, from highest to lowest level of observable inputs, as follows:
|
|
(1)
|
Level 1 - Unadjusted quoted prices for identical assets or liabilities in active markets,
|
|
|
(2)
|
Level 2 - Direct or indirect observable inputs, including quoted prices or other market data, for similar assets or liabilities in active markets or identical assets or liabilities in less active markets, and
|
|
|
(3)
|
Level 3 - Unobservable inputs that require significant judgment for which there is little or no market data.
|
When multiple input levels are required for a valuation, we categorize the entire fair value measurement according to the lowest level of input that is significant to the measurement even though we may have also utilized significant inputs that are more readily observable.
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 Consolidated Balance Sheets approximate fair value.
Certain Significant Estimates and Contingent Liabilities
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Certain accounting policies involve judgments and uncertainties to such an extent that there is reasonable likelihood that materially different amounts could have been reported under different conditions, or if different assumptions had been used.
On an ongoing basis, the Company evaluates its estimates, including those related to allowance for doubtful accounts, long-lived asset impairment, useful lives for depreciation, income taxes, insurance claims, employment benefits and contingent liabilities.
We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and assumptions.
Revenue Recognition
Our typical dayrate drilling contracts require our performance of a variety of services for a specified period of time. We determine progress towards completion of the contract by measuring efforts expended and the cost of services required to perform under a drilling contract, as the basis for our revenue recognition. Revenues generated from our dayrate basis drilling contracts and labor contracts are recognized on a per day basis as services are performed and begin upon the contract commencement, as defined under the specified drilling or labor contract. Dayrate revenues are typically earned, and contract drilling expenses are typically incurred ratably over the term of our drilling contracts. We review and monitor our performance under our drilling contracts to confirm the basis for our revenue recognition. Revenues from bonuses are recognized when earned.
It is typical in our dayrate drilling contracts to receive compensation and incur costs for mobilization, equipment modification, or other activities prior to the commencement of the contract. Any such compensation may be paid through a lump-sum payment or other daily compensation. Pre-contract compensation and costs are deferred until the contract commences. The deferred pre-contract compensation and costs are amortized, using the straight-line method, into income over the term of the initial contract period, regardless of the activity taking place. This approach is consistent with the economics for which the parties have contracted. Once a contract commences, we may conduct various activities, including drilling and well bore related activities, rig maintenance and equipment installation, movement between well locations or other activities.
Deferred revenues from drilling contracts totaled
$9 million
as of both
December 31, 2016
and
December 31, 2015
. Such amounts are included in either “Other current liabilities” or “Other liabilities” in our Consolidated Balance Sheets, based upon
the expected time of recognition of such deferred revenues. Deferred costs associated with deferred revenues from drilling contracts totaled
$3 million
at
December 31, 2016
as compared to
$6 million
as of
December 31, 2015
. Such amounts are included in either “Prepaid and other current assets” or “Other assets” in our Consolidated Balance Sheets, based upon the expected time of recognition of such deferred costs.
We record reimbursements from customers for “out-of-pocket” expenses as revenues and the related direct cost as operating expenses.
Share-Based Compensation Plans
We record the grant date fair value of share-based compensation arrangements as compensation cost using a straight-line method over the service period. Our outstanding share-based payment awards currently consist solely of restricted stock units (see Note
6
-
“Share-Based Compensation”
).
Foreign Currency Translation
We define foreign currency as any non-U.S. denominated currency. In non-U.S. locations where the U.S. dollar has been designated as the functional currency (based on an assessment of the economic circumstances of the foreign operation), local currency transaction gains and losses are included in net income. In non-U.S. locations where the local currency is the functional currency, assets and liabilities are translated at the rates of exchange on the balance sheet date, while income and expense items are translated at average rates of exchange during the year. The resulting gains or losses arising from the translation of accounts from the functional currency to the U.S. dollar are included in AOCL in the accompanying Consolidated Balance Sheets. We did
no
t recognize any material gains or losses on foreign currency transactions or translations during the years ended
December 31, 2016
,
2015
or
2014
.
Income Taxes
The operations of our Predecessor have been included in certain income tax returns of Noble. The income tax provisions and related deferred tax assets and liabilities that have been reflected in our Predecessor’s historical financial statements have been computed as if our Predecessor were a separate taxpayer using the separate return method. As a result, actual tax transactions that would not have occurred had our Predecessor been a separate entity have been eliminated in the preparation of these consolidated financial statements. Income taxes of our Predecessor include results of the operations of the standard specification drilling units. In instances where the operations of the standard specification drilling units of our Predecessor were included in the filing of a return with high specification units, an allocation of income taxes was made.
We operate through various subsidiaries in numerous countries throughout the world. Due to our global presence, we are subject to tax laws, policies, treaties and regulations, as well as the interpretation or enforcement thereof, in the U.K., the U.S., and any other jurisdictions in which we or any of our subsidiaries operate, were incorporated, or otherwise considered to have a tax presence. Our income tax expense is based upon our interpretation of the tax laws in effect in various countries at the time that the expense was incurred. If the taxing authorities do not agree with our assessment of the effects of such laws, policies, treaties and regulations, or the interpretation or enforcement thereof, this could have a material adverse effect on us including the imposition of a higher effective tax rate on our worldwide earnings or a reclassification of the tax impact of our significant corporate restructuring transactions.
In certain jurisdictions, we have recognized deferred tax assets and liabilities. Judgment and assumptions are required in determining whether deferred tax assets will be fully or partially utilized. When we estimate that all or some portion of certain deferred tax assets such as net operating loss carryforwards will not be utilized, we establish a valuation allowance for the amount ascertained to be unrealizable. We continually evaluate strategies that could allow for future utilization of our deferred tax assets. Any change in the ability to utilize such deferred tax assets will be accounted for in the period of the event affecting the valuation allowance. If facts and circumstances cause us to change our expectations regarding future tax consequences, the resulting adjustments could have a material effect on our financial results or cash flow.
In certain circumstances, we expect that, due to changing demands of the offshore drilling markets and the ability to redeploy our offshore drilling units, certain units will not reside in a location long enough to give rise to future tax consequences. As a result, no deferred tax asset or liability has been recognized in these circumstances. Should our expectations change regarding the length of time an offshore drilling unit will be used in a given location, we will adjust deferred taxes accordingly.
Earnings/Loss per Share
Our unvested share-based payment awards, which contain non-forfeitable rights to dividends, are 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. The diluted earnings per share calculation under the “two-class” method would also include the dilutive effect of potential shares issued in connection with stock options. The dilutive effect of stock options would be determined using the treasury stock method. The diluted earnings per share calculation under the two class method is the same as our basic earnings per share calculation since we currently have no stock options or other potentially dilutive securities outstanding.
Reclassifications
Certain amounts in prior periods have been reclassified to conform to the current year presentation.
NOTE 4—ACQUISITION
On November 17, 2014, we initiated the acquisition of the outstanding shares of Prospector, an offshore drilling company organized in Luxembourg and traded on the Oslo Axess, from certain shareholders and in open market purchases. As of December 31, 2014, we owned approximately
93.4 million
shares, or
98.7%
, of the outstanding shares of Prospector. In addition, we assumed aggregate debt of
$367 million
, which comprised the 2019 Second Lien Callable Bond of
$100 million
(“Prospector Bonds”) and the 2018 Senior Secured Credit Facility of
$270 million
(“Prospector Senior Credit Facility”) which at the time of acquisition had
$266 million
in borrowings outstanding. Prospector’s results of operations were included in our results effective November 17, 2014.
On January 22, 2015, we settled a mandatory tender offer for additional outstanding shares, increasing our ownership to approximately
99.6%
of the outstanding shares of Prospector. On February 23, 2015, we acquired all remaining issued and outstanding shares in Prospector pursuant to the laws of Luxembourg. We spent approximately
$202 million
in aggregate to purchase
100%
of the shares of Prospector and funded the purchase using proceeds from our Revolving Credit Facility and cash on hand.
During the first quarter of 2015, we repurchased
$100 million
par value of the Prospector Bonds at a price of
101%
of par, plus accrued interest, pursuant to change of control provisions of the bonds. On March 16, 2015, we repaid the principal balance outstanding under the Prospector Senior Credit Facility, which totaled approximately
$261 million
, including accrued interest, through the use of cash on hand and borrowings under our senior secured Revolving Credit Facility.
The Prospector acquisition expanded and enhanced our global fleet by adding
two
high specification jackups at the date of acquisition for use in the U.K. sector of the North Sea.
Accounting for business combinations requires that the various assets acquired and liabilities assumed in a business combination be recorded at their respective fair values. The most significant estimates to us typically relate to acquired property and equipment. Deferred taxes are recorded for any differences between the fair value and tax basis of assets acquired and liabilities assumed. To the extent the purchase price plus the liabilities assumed (including deferred income taxes recorded in connection with the transaction) exceeds the fair value of the net assets acquired, we are required to record the excess as goodwill. We recorded
$13 million
of goodwill in 2014 as a result of the Prospector acquisition. See Note
5
-
“Property and Equipment and Other Assets”
related to our goodwill impairment in the third quarter of 2015 which resulted in impairment of the entire Prospector goodwill balance.
As the fair value of assets acquired and liabilities assumed is subject to significant estimates and subjective judgments, the accuracy of this assessment is inherently uncertain. The following table summarizes our final allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed on the acquisition date of November 17, 2014:
|
|
|
|
|
|
(In thousands)
|
|
Fair Value
|
ASSETS
|
|
|
Current assets
|
|
|
Accounts receivable
|
|
$
|
26,169
|
|
Restricted cash
|
|
5,023
|
|
Prepaid and other current assets
|
|
17,967
|
|
Total current assets
|
|
49,159
|
|
Property and equipment
|
|
516,979
|
|
Goodwill
|
|
13,290
|
|
Other assets
|
|
25,520
|
|
Total assets acquired
|
|
$
|
604,948
|
|
LIABILITIES
|
|
|
Current liabilities
|
|
|
Current maturities of long-term debt
|
|
$
|
32,970
|
|
Accounts payable
|
|
16,227
|
|
Accrued payroll and related costs
|
|
3,754
|
|
Taxes payable
|
|
4,378
|
|
Interest payable
|
|
6,466
|
|
Other current liabilities
|
|
19,120
|
|
Total current liabilities
|
|
82,915
|
|
Long-term debt
|
|
333,697
|
|
Other liabilities
|
|
456
|
|
Total liabilities assumed
|
|
$
|
417,068
|
|
Accumulated other comprehensive loss
|
|
(40
|
)
|
Non-controlling interest
|
|
11,351
|
|
Purchase price, net of cash acquired
|
|
$
|
176,569
|
|
The fair value of cash and cash equivalents, accounts receivable, other current assets, accounts payable and other current liabilities was generally determined using historical carrying values given the short-term nature of these items. The fair values of drilling equipment and in-place contracts were determined using management’s estimates of future net cash flows. Such estimated future cash flows were discounted at an appropriate risk-adjusted rate of return. The fair values of the consolidated derivatives were determined based on a discounted cash flow model utilizing an appropriate market or risk-adjusted yield. The fair value of other assets and other liabilities, related to long-term tax items, was derived using estimates made by management. Fair value estimates for in-place contracts are recorded in “Prepaid and other current assets” and “Other assets” in our Consolidated Balance Sheet and will be amortized over the life of the respective contract. The average life of these contracts was approximately
2.5 years
as of the date of the acquisition.
We incurred
$4 million
in acquisition costs for the year ended December 31, 2014 related to the Prospector acquisition. These costs have been expensed and are included in “Contract drilling services expense” in our Consolidated Statement of Operations.
The following unaudited pro forma financial information for the years ended December 31, 2014, gives effect to the Prospector acquisition as if it had occurred at the beginning of the periods presented. The pro forma financial information for the year ended December 31, 2014 includes pro forma results for the period prior to the closing date of November 17, 2014 and actual results for the period from November 17, 2014 through December 31, 2014. The pro forma results are based on historical data and were not intended to be indicative of the results of future operations.
|
|
|
|
|
|
(In thousands, except per share amounts)
|
|
2014
|
Total operating revenues
|
|
$
|
2,036,218
|
|
Net loss
|
|
(702,607
|
)
|
Net loss to Paragon Offshore
|
|
(701,800
|
)
|
Loss per share (basic and diluted)
|
|
$
|
(8.28
|
)
|
Revenues from the Prospector rigs totaled
$8 million
from the closing date of November 17, 2014 through December 31, 2014. Operating expenses for this same period totaled
$8 million
for the Prospector rigs. Revenues for the year ended
December 31, 2016
and 2015, which are included in our Consolidated Statement of Operations, were
$126 million
and
$143 million
, respectively. Operating expenses for the year ended December 31, 2016 and 2015 totaled
$65 million
and
$143 million
, which includes
no
impairment charges for the year ended December 31, 2016 and
$43 million
for the year ended December 31, 2015.
NOTE
5
—PROPERTY AND EQUIPMENT AND OTHER ASSETS
Property and equipment consists of drilling rigs, drilling machinery and equipment and other property and equipment.
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(In thousands)
|
|
2016
|
|
2015
|
Drilling rigs
|
|
$
|
1,463,199
|
|
|
$
|
1,751,095
|
|
Drilling rigs under Sale-Leaseback Transaction
|
|
469,018
|
|
|
467,012
|
|
Drilling machinery and equipment
|
|
345,172
|
|
|
392,095
|
|
Other
|
|
59,115
|
|
|
42,335
|
|
Property and equipment, at cost
|
|
2,336,504
|
|
|
2,652,537
|
|
Less: Accumulated depreciation
|
|
(1,496,006
|
)
|
|
(1,533,043
|
)
|
Less: Accumulated amortization under Sale-Leaseback Transaction
|
|
$
|
(27,726
|
)
|
|
$
|
(8,396
|
)
|
Property and equipment, net
|
|
$
|
812,772
|
|
|
$
|
1,111,098
|
|
Depreciation expense was
$220 million
,
$339 million
and
$422 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively, including depreciation expense of
$9 million
,
$11 million
and
$8 million
for underwater inspection in lieu of drydocking costs (“UWILD”) for the years ended
December 31, 2016
,
2015
and
2014
respectively. UWILD costs are capitalized in “Other assets” on the Consolidated Balance Sheet. Amortization of our leased drilling rigs under the Sale-Leaseback Transaction is recorded in depreciation expense for the years ended December 31, 2016 and 2015.
Our capital expenditures totaled
$43 million
and
$218 million
for the years ended
December 31, 2016
and 2015, respectively. Included in accounts payable were
$2 million
and
$10 million
of capital accruals as of December 31, 2016 and 2015, respectively.
Loss on Impairment
We assess the recoverability of our long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable (such as, but not limited to, cold stacking a rig, the expectation of cold stacking a rig in the near term, a decision to retire or scrap a rig, or excess spending over budget on a newbuild, construction project or major rig upgrade). An impairment loss on our property and equipment exists when the estimated fair value, which is based on estimated undiscounted cash flows expected to result from the use of the asset and its eventual disposition, is less than its carrying amount. Estimates of undiscounted future cash flows typically include (i) discrete financial forecasts, which rely on management’s estimates of revenue and operating expenses, (ii) long-term growth rates, and (iii) estimates of useful lives of the assets. Such estimates of future undiscounted cash flows are highly subjective and are based on numerous assumptions about future operations and market conditions.
During the year ended December 31, 2016, we identified indicators of impairment in the fourth quarter of 2016, including the possibility for the continued reduction in contracting activity from the delay in our emergence from bankruptcy after the
Bankruptcy Court denied confirmation of our Original Plan; no significant improvement in the drilling market in 2016 coupled with our decision to exit our operations in Brazil; and a change in the Company’s strategy to focus on fewer markets and utilize a smaller fleet. Because of these indicators, we concluded that triggering events existed, which required us to perform an impairment assessment of our fleet of drilling rigs. We determined the fair value of our fleet using a market approach (for scrap or stacked rigs) and an income approach (for operating rigs) utilizing a weighted average cost of capital of approximately
14%
and significant unobservable inputs, representative of a Level 3 fair value measurement, including the following assumptions and estimates:
|
|
•
|
dayrate revenues by rig;
|
|
|
•
|
utilization rate by rig if active, warm stacked or cold stacked (expressed as the actual percentage of time per year that the rig would be used at certain dayrates);
|
|
|
•
|
revenue escalation rates and factors;
|
|
|
•
|
operating costs and related days and downtime percentages for each rig if active, warm stacked or cold stacked;
|
|
|
•
|
estimated annual capital expenditures and costs for rig replacements and/or enhancement programs;
|
|
|
•
|
estimated maintenance, inspection or other costs associated with a rig returning to work;
|
|
|
•
|
remaining useful life and salvage value for each rig; and
|
|
|
•
|
estimated proceeds that may be received on disposition of a rig.
|
The underlying assumptions for utilization and dayrate scenarios were developed using a methodology that examines historical data for each rig, which considers the rig’s age, rated water depth and other attributes and then assesses its future marketability in light of the current and projected market environment at the time of assessment. Other assumptions, such as operating, maintenance and inspection costs, are estimated using historical data adjusted for known developments and future events that are anticipated by management at the time of the assessment. Management’s assumptions are necessarily subjective and are an inherent part of our asset impairment evaluation, and the use of different assumptions could produce results that differ from those reported. Management’s assumptions involve uncertainties about future demand for our services, dayrates, expenses and other future events, and management’s expectations may not be indicative of future outcomes. Significant unanticipated changes to these assumptions could materially alter our analysis in testing an asset for potential impairment. For example, changes in market conditions that exist at the measurement date or that are projected by management could affect our key assumptions. Other events or circumstances that could affect our assumptions may include, but are not limited to, a further sustained decline in oil and gas prices, cancellations of our drilling contracts or contracts of our competitors, contract modifications, costs to comply with new governmental regulations, growth in the global oversupply of oil and geopolitical events, such as lifting sanctions on oil-producing nations.
We compared the carrying value of each rig to its relative recoverable value determined using undiscounted cash flow projections for each rig. For each rig with a carrying value in excess of its undiscounted cash flows, we computed its impairment based on the difference between the carrying value and fair value of the rig. Based on this analysis and other operational analyses, we determined that
two
floaters,
six
jackups, and certain capital spares were impaired. In aggregate, we recognized non-cash impairment losses of approximately
$130 million
during the year ended December 31, 2016, which is included in “Loss on impairments” in our Consolidated Statements of Operations.
During the year ended December 31, 2015, we identified triggering events, including the downward movement of crude oil prices, the release of the
Paragon DPDS2
, the increased probability of lower activity in Brazil and Mexico and the resultant projected declines in dayrates and utilization. These indicators required us to perform an impairment assessment of our fleet of drilling rigs. Based on that analysis and other operational analysis, we recognized an impairment loss of
$1.1 billion
on
five
floaters,
sixteen
jackups, certain capital spares and the deposits related to the
three
high specification jackups for the year ended December 31, 2015.
During the year ended December 31, 2014, we also identified triggering events, including a drop in crude oil prices, a decrease in contractual activities particularly for floating rigs and resultant projected declines in dayrates and utilization which required us to perform an impairment assessment of our fleet of drilling rigs, especially our floaters in Brazil.
Based on that analysis, we recognized an impairment loss of
$1.1 billion
on our
three
drillships in Brazil and our
one
cold-stacked floating production storage and offloading unit in the U.S. Gulf of Mexico for the year ended December 31, 2014.
Goodwill Impairment
Goodwill related to the Company’s previous acquisitions was included on the balance sheet as of December 31, 2014 and therefore required assessment during the year ended December 31, 2015. As of
December 31, 2016
and
2015
, we had
no
goodwill.
For purposes of evaluating goodwill, we have a single reporting unit, which represents our Contract Drilling Services provided by our fleet of mobile offshore drilling units. Given the events that impacted the Company during the year ended December 31, 2015, including the decrease in contractual activities, a sustained decline in the Company’s market capitalization and credit rating downgrades, the Company concluded that there were sufficient indicators to require a goodwill impairment analysis during the fourth quarter of 2015 in conjunction with our annual goodwill assessment. In accordance with the applicable accounting guidance, the Company performed a two-step impairment test.
In the first step of the impairment test, we determined the Company had a negative carrying value resulting from our long-lived asset impairment (discussed above), therefore the second step was performed to measure the amount of impairment by comparing the implied fair value of our reporting unit’s goodwill (estimated using the income approach performed for the fixed assets impairment assessment) to the carrying amount of that goodwill. Based on this analysis, the Company determined goodwill was impaired and recognized a non-cash impairment charge of approximately
$37 million
for the year ended December 31, 2015, which is included in “Loss on impairments” in our Consolidated Statements of Operations. We had
no
goodwill impairment during 2014.
Sales of Assets, net
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
.
In June 2015, we identified drill pipe that we would no longer utilize in our operations. We sold these items for
$2 million
and recorded a pre-tax loss of approximately
$4 million
.
NOTE
6
—SHARE-BASED COMPENSATION
In conjunction with the Spin-Off, we adopted new 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”). The Employee Plan and Director Plan include 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, new share-settled and cash-settled awards (“CS-TVRSU’s”) which have been granted since Spin-Off.
No
awards were granted during the year ended December 31, 2016.
Prior to the Spin-Off and to the extent that Company employees participated in the share-based compensation plans provided by Noble, the results of our Predecessor in the consolidated financial statements for the year ended December 31, 2014 includes an allocation of the costs of such share-based compensation plans (see Note
20
- “
Predecessor Allocations
” for total costs allocated to us by Noble).
Shares available for issuance and outstanding restricted stock units under our
two
equity incentive plans as of
December 31, 2016
are as follows (excluding the impact of cash-settled awards):
|
|
|
|
|
|
|
|
(In shares)
|
|
Employee Plan
|
|
Director Plan
|
Shares available for future awards or grants
|
|
5,370,748
|
|
|
434,048
|
|
Outstanding unvested restricted stock units
|
|
2,513,112
|
|
|
—
|
|
We have awarded TVRSU’s, CS-TVRSU’s and PVRSU’s under our Employee Plan and TVRSU’s under our Director Plan.
The TVRSU’s under our Employee Plan are valued on the date of award at our underlying share price. The total compensation for TVRSU’s that ultimately vest is recognized using a straight-line method over a
three
-year service period. The
shares and related nominal value are recorded when the restricted stock unit vests and additional paid-in capital is adjusted as the share-based compensation cost is recognized for financial reporting purposes.
The number of PVRSU’s which vest under our Employee Plan will depend on the degree of achievement of specified company-based and market-based performance criteria over the service period. Our company-based PVRSU’s are valued on the date of award at our underlying share price. Total compensation cost recognized for the company-based PVRSU’s depends on a performance measure, return on capital employed (“ROCE”), over specified performance periods. Estimated compensation cost is determined based on numerous assumptions, including an estimate of the likelihood that our ROCE will achieve the targeted thresholds and forfeiture of the PVRSU’s based on annualized ROCE performance over the terms of the awards. Our market-based PVRSU’s are valued on the date of the grant based on an estimated fair value. These PVRSU’s are based on the Company’s achievement of a market-based objective, total shareholder return (“TSR”), relative to a peer group of companies as defined in the award agreement. Estimated fair value is determined based on numerous assumptions, including an estimate of the likelihood that our share price performance will achieve the targeted thresholds and the expected forfeiture rate. The fair value is calculated using a Monte Carlo simulation model. The assumptions used to value these market-based PVRSU’s include risk-free interest rates and historical volatility of the trading price of the Company’s common shares over a time period commensurate with the remaining term prior to vesting, as follows:
|
|
|
|
|
Valuation assumptions:
|
|
2015
|
Expected volatility
|
|
34.0
|
%
|
Risk-free interest rate
|
|
1.07
|
%
|
Similar valuation assumptions were made for each of the companies included in the defined peer group of companies in order to simulate the future outcomes using the Monte Carlo Simulation Model.
The CS-TVRSU’s under our Employee Plan are accounted for as liability-based awards and are valued at the end of each reporting period at our underlying share price. The total compensation for CS-TVRSU’s that ultimately vests is recognized using a straight-line method over
three
-year service period.
A summary of restricted stock activity for the years ended
December 31, 2016
and
2015
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TVRSU’s Outstanding
|
|
Weighted
Average
Award-Date
Fair Value
|
|
CS-TVRSU’s Outstanding
|
|
Share
Price
(1)
|
|
PVRSU’s
Outstanding
(2)
|
|
Weighted
Average
Award-Date
Fair Value
|
Outstanding as of December 31, 2015
|
|
5,824,857
|
|
|
$
|
5.34
|
|
|
2,647,565
|
|
|
|
|
849,484
|
|
|
$
|
5.31
|
|
Vested
|
|
(3,230,029
|
)
|
|
5.29
|
|
|
(858,459
|
)
|
|
|
|
—
|
|
|
—
|
|
Forfeited
|
|
(683,935
|
)
|
|
5.67
|
|
|
(496,505
|
)
|
|
|
|
(247,265
|
)
|
|
5.12
|
|
Outstanding as of December 31, 2016
|
|
1,910,893
|
|
|
|
|
1,292,601
|
|
|
$
|
0.23
|
|
|
602,219
|
|
|
|
|
|
(1)
|
The share price represents the closing price of our shares on
December 31, 2016
at which our CS-TVRSU’s are measured.
|
|
|
(2)
|
Includes
191,474
PVRSU’s outstanding as of
December 31, 2016
for which vesting depends on the degree of achievement of 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 “maximum” level of performance is
200%
of the target amount. Also, during the year ended
December 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
410,745
PVRSU’s outstanding, the share amount equals the units that would vest if the “target” level of performance is achieved based on the degree of achievement of the Company’s TSR, relative to a peer group of companies. The minimum number of units is
zero
and the “maximum” level of performance is
200%
of the target amount.
|
Equity and liability-based award amortization recognized during the year ended
December 31, 2016
and 2015 totaled
$9 million
and
$16 million
, respectively. Equity-based amortization recognized during the five months ended December 31, 2014, not including amounts allocated to our Predecessor, totaled
$8 million
. As of
December 31, 2016
, we had
$3 million
of total unrecognized compensation cost related to our TVRSU’s. The Company expects to recognize this cost over a remaining weighted-average period of
0.9
years or expensed immediately on the effective date of the New Plan. As of
December 31, 2016
, we had
$0.1 million
of total unrecognized compensation cost related to our CS-TVRSU’s. The Company expects to recognize this cost over a remaining weighted-average period of
1.1
years or expensed immediately on the effective date of the New Plan.
As of
December 31, 2016
, we had
$0.2 million
of total unrecognized compensation cost related to our PVRSU’s. The Company expects to recognize this cost over a remaining weighted-average period of
0.7
years or expensed immediately on the effective date of the New Plan, if approved. 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 a
100%
forfeiture rate related to these PVRSU’s. The total potential compensation for the
410,745
PVRSU’s based on TSR is recognized over the service period regardless of whether the TSR performance thresholds are ultimately achieved since vesting is based on market conditions.
NOTE 7—LOSS PER SHARE
On August 1, 2014, approximately
85 million
of our ordinary shares were distributed to Noble’s shareholders in conjunction with the Spin-Off. Weighted average shares outstanding, basic and diluted, has been computed based on the weighted average number of ordinary shares outstanding during the applicable period. Restricted stock units do not represent ordinary shares outstanding until they are vested and converted into ordinary shares. Our outstanding share-based payment awards currently consist solely of restricted stock units. 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.
Our 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 years ended
December 31, 2016
,
2015
, and
2014
due to our net losses in each respective period.
The following table includes the computation of basic and diluted net loss and loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In thousands, except per share amounts)
|
|
2016
|
|
2015
|
|
2014
|
Allocation of loss - basic and diluted
|
|
|
|
|
|
|
Net loss attributable to Paragon
|
|
$
|
(338,356
|
)
|
|
$
|
(999,643
|
)
|
|
$
|
(646,746
|
)
|
Earnings allocated to unvested share-based payment awards
|
|
—
|
|
|
—
|
|
|
—
|
|
Net loss to ordinary shareholders - basic and diluted
|
|
$
|
(338,356
|
)
|
|
$
|
(999,643
|
)
|
|
$
|
(646,746
|
)
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
Basic and diluted
|
|
87,534
|
|
|
85,785
|
|
|
84,753
|
|
|
|
|
|
|
|
|
Weighted average unvested share-based payment awards
|
|
4,418
|
|
|
6,197
|
|
|
1,761
|
|
|
|
|
|
|
|
|
Loss per share
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(3.87
|
)
|
|
$
|
(11.65
|
)
|
|
$
|
(7.63
|
)
|
NOTE
8
—DEBT
A summary of long-term debt at
December 31, 2016
and
2015
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(In thousands)
|
|
2016
|
|
2015
|
Revolving Credit Facility
(1)
|
|
$
|
—
|
|
|
$
|
708,500
|
|
Term Loan Facility, bearing interest 5.5% and 3.75% as of December 31, 2016 and 2015, respectively
(1)
|
|
—
|
|
|
641,875
|
|
Senior Notes due 2022, bearing fixed interest at 6.75% per annum
(1)
|
|
—
|
|
|
456,572
|
|
Senior Notes due 2024, bearing fixed interest at 7.25% per annum
(1)
|
|
—
|
|
|
527,010
|
|
Sale-Leaseback Transaction
|
|
196,418
|
|
|
268,688
|
|
Unamortized debt issuance costs
|
|
(718
|
)
|
|
(23,572
|
)
|
Total debt
|
|
195,700
|
|
|
2,579,073
|
|
Less: Current maturities of long-term debt
|
|
(29,737
|
)
|
|
(40,629
|
)
|
Long-term debt
|
|
$
|
165,963
|
|
|
$
|
2,538,444
|
|
(1) See Note
9
-
“Liabilities Subject to Compromise”
for each of the respective December 31, 2016 balances identified above. The commencement of the Bankruptcy cases on February 14, 2016 constituted an event of default that accelerated our obligations under the Term Loan Agreement, Revolving Credit Agreement, and Senior Notes. Any efforts to enforce payments related to these obligations are automatically stayed as a result of the filing of the petitions and are subject to the applicable provisions of the Bankruptcy Code.
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
December 31, 2016
, we had
$709 million
in borrowings outstanding at a weighted average interest rate of
3.21%
and an aggregate amount of
$69 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
9
-
“Liabilities Subject to Compromise”
). 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 the Revolving Credit 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. Contractual interest on the
7.25%
senior notes is payable semi-annually, in February and August. The approximately
$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
9
-
“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. Results for the year ended December 31, 2016 would have included contractual interest expense of
$62 million
. These costs would have been incurred had the unsecured Senior Notes not been classified as subject to compromise.
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
.50%
original issue discount. As of December 31, 2016, the approximately
$635 million
balance of our Term Loan Facility, unamortized deferred debt issuance costs and unamortized discount are classified as liabilities subject to compromise (See Note
9
-
“Liabilities Subject to Compromise”
). Paragon continues to make interest payments on its Term Loan Facility in the ordinary course of business, based on Bankruptcy Court approval. Accordingly, interest payable on the Term Loan Facility is not classified as liabilities subject to compromise in the Consolidated Balance Sheet as of December 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. We had no debt repurchases subsequent to the first quarter of 2015.
During the year ended December 31, 2014, we repurchased and canceled an aggregate principal amount of
$85 million
of our Senior Notes at an aggregate cost of
$67 million
including accrued interest. The repurchases consisted of
$42 million
aggregate principal amount of our
6.75%
senior notes due July 2022 and
$43 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
$19 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.
Sale-Leaseback Transaction
On July 24, 2015, we executed a combined
$300 million
Sale-Leaseback Transaction with subsidiaries of SinoEnergy (collectively, 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 5
is currently operating under drilling contracts with Total S.A. until November 2017. The
Prospector 1
is currently operating under drilling contracts with Oranje-Nassau Energie B.V. until June 2018.
The Company has 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 this event of default upon the occurrence of certain conditions, including that the effective date of the Plan occurs by August 1, 2017. If we are unable to satisfy the conditions of this waiver, we intend to file petitions for relief under chapter 11 of the Bankruptcy Code for the parties to the Lease Agreements and certain of their affiliates.
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 did 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)
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
Thereafter
|
|
Total
|
Minimum annual rental payments
|
|
$
|
41
|
|
|
$
|
32
|
|
|
$
|
31
|
|
|
$
|
127
|
|
|
$
|
—
|
|
|
$
|
231
|
|
We made rental payments, including interest, of approximately
$89 million
and
$26 million
during the year ended
December 31, 2016
and 2015, respectively. This includes pre-payments or Excess Cash Amounts (as defined below) of
$12 million
and
$5 million
for the
Prospector 1
for the years ended December 31, 2016 and 2015, respectively, and
$26 million
and
$7 million
for the
Prospector 5
for the years ended December 31, 2016 and 2015, 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 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 tig, 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-comany 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”). These excess cash payments represent prepayment for the remaining rental payments under the applicable Lease Agreement (the “Cash Sweep”). As of
December 31, 2016
and
December 31, 2015
, we had short-term restricted cash balances of
$9 million
and
$3 million
, respectively, and long-term restricted cash balances of
$29 million
and
$25 million
, respectively, related to the Lease Agreements in “Restricted cash” on our Consolidated Balance Sheet. 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.
Extinguished Obligations
At the time of our acquisition of Prospector, Prospector had the following outstanding debt instruments: (i) the Prospector Bonds and (ii) the Prospector Senior Credit Facility.
The Prospector Bonds were originally entered into by a subsidiary of Prospector on May 19, 2014 in the Oslo Alternative Bond Market. The Prospector Bonds had a fixed interest rate of
7.75%
per annum, payable semi-annually on December 19 and June 19 each year and maturity of June 19, 2019. In January 2015, the bondholders put $
99.6 million
par value of their bonds back to us at the put price of
101%
of par plus accrued interest pursuant to change of control provisions of the bonds. The remaining
$0.4 million
par value of the Prospector bonds outstanding was called and retired on March 26, 2015. We funded the repayment of the debt using borrowings from our Revolving Credit Facility and available cash.
The Prospector Senior Credit Facility was originally entered into by a subsidiary of Prospector on June 12, 2014 with a group of lenders. The Prospector Senior Credit Facility comprised a
$140 million
Prospector 5
tranche and a
$130 million
Prospector 1
tranche, which were both fully drawn at the time of acquisition. The Prospector Senior Credit Facility had an interest rate of LIBOR plus a margin of
3.5%
. Prospector was required to hedge at least
50%
of the Prospector Senior Credit Facility against fluctuations in the interest rate. Under the swaps, Prospector paid a fixed interest rate of
1.512%
and received the three-month LIBOR rate (see Note
15
-
“Derivative Instruments and Hedging Activity”
). On March 16, 2015, the remaining principal balance outstanding under the Prospector Senior Credit Facility in the amount of approximately
$261 million
, including accrued interest, was paid in full through the use of cash on hand and borrowings under our Revolving Credit Facility, and all associated interest rate swaps were terminated. The related requirement for a fully funded debt service reserve account, classified as restricted cash on our Consolidated Balance Sheet as of December 31, 2014, was also released as a result of the payment in full on the Prospector Senior Credit Facility.
NOTE
9
—LIABILITIES SUBJECT TO COMPROMISE
As a result of the filing of the Bankruptcy cases on February 14, 2016, we have classified pre-petition liabilities that are not fully secured and that have at least a possibility of not being repaid at the full claim amount by the New Plan as liabilities subject to compromise in our consolidated financial statements. 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. If there is uncertainty about whether a secured claim is under-secured, or would be impaired under the New Plan, the entire amount of the claim is included in liabilities subject to compromise. The amounts currently classified as liabilities subject to compromise represent Paragon’s current estimate of claims expected to be allowed under the New Plan, if approved. We will continue to evaluate these liabilities during the pendency of the Bankruptcy cases and they may be subject to future adjustments depending on the Bankruptcy Court actions, further development with respect to disputed claims, or other events. Such adjustments may be material.
The Revolving Credit Facility, Senior Notes, and Term Loan Facility will be affected by the New Plan which is subject to confirmation by the Bankruptcy Court. As such, the outstanding balances of these debt instruments and related accrued pre-petition interest (for the Senior Notes only), unamortized debt issuance costs and unamortized discount (for Term Loan Facility only) have been classified as liabilities subject to compromise in the Consolidated Balance Sheet as of
December 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 Consolidated Balance Sheet as of
December 31, 2016
. This is designed to preserve the value of the Company’s businesses and assets. With respect to pre-petition claims, the Company 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 Consolidated Balance Sheets as of
December 31, 2016
. See Note
8
-
“Debt”
for a specific discussion on the debt instruments and related balances subject to compromise:
|
|
|
|
|
|
|
|
December 31,
|
(In thousands)
|
|
2016
|
Revolving Credit Facility
|
|
$
|
709,100
|
|
Term Loan Facility
|
|
641,875
|
|
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
|
)
|
Discount and debt issuance costs on Term Loan Facility
|
|
(7,259
|
)
|
Debt issuance costs on Senior Notes
|
|
(14,012
|
)
|
Liabilities subject to compromise
|
|
$
|
2,344,563
|
|
NOTE
10
—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 Consolidated Statement of Operations for the year ended December 31, 2016 to reflect the net revenues, expenses, gains and losses that are the direct result of the reorganization of the business. The following table summarizes the components included in “Reorganization items, net”:
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In thousands)
|
|
2016
|
Professional fees
|
|
$
|
59,364
|
|
Other
|
|
11,306
|
|
Total Reorganization items, net
|
|
$
|
70,670
|
|
Included in Reorganization items, net for the year ended
December 31, 2016
, is approximately
$45 million
of cash paid for professional fees,
$17 million
of accrued expenses and
$9 million
of non-cash amortization associated with the reorganization.
NOTE 11—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 Debtors’ Condensed Combined 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
(In thousands)
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
Operating revenues
|
|
|
Contract drilling services
|
|
$
|
455,749
|
|
Reimbursables and other
|
|
48,209
|
|
|
|
503,958
|
|
Operating costs and expenses
|
|
|
Contract drilling services
|
|
335,569
|
|
Reimbursables
|
|
26,659
|
|
Depreciation and amortization
|
|
196,898
|
|
General and administrative
|
|
41,570
|
|
Loss on impairments
|
|
122,957
|
|
|
|
723,653
|
|
Operating loss before interest, reorganization items and income taxes
|
|
(219,695
|
)
|
Interest expense, net (contractual interest of $129,604)
|
|
(64,931
|
)
|
Other, net
|
|
530
|
|
Reorganization items, net
|
|
(62,169
|
)
|
Loss before income taxes
|
|
(346,265
|
)
|
Income tax provision
|
|
(19,649
|
)
|
Debtors’ net loss
|
|
(365,914
|
)
|
Equity in earnings of Non-Filing entities, net of tax
|
|
27,558
|
|
Net loss attributable to Paragon
|
|
$
|
(338,356
|
)
|
DEBTORS’ CONDENSED COMBINED BALANCE SHEET
(In thousands
)
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
ASSETS
|
|
|
Current assets
|
|
|
Cash and cash equivalents
|
|
$
|
553,238
|
|
Accounts receivable, net of allowance for doubtful accounts of $25 million
|
|
48,861
|
|
Accounts receivable from Non-Filing entities
|
|
647,657
|
|
Prepaid and other current assets
|
|
33,228
|
|
Total current assets
|
|
1,282,984
|
|
Investment in Non-Filing entities
|
|
1,074,335
|
|
Notes receivable from Non-Filing entities
|
|
58,759
|
|
Property and equipment, at cost
|
|
1,809,120
|
|
Accumulated depreciation
|
|
(1,481,209
|
)
|
Property and equipment, net
|
|
327,911
|
|
Other assets
|
|
25,974
|
|
Total assets
|
|
$
|
2,769,963
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
Current liabilities
|
|
|
Current maturities of debt due to Non-Filing entities
|
|
$
|
3,606
|
|
Accounts payable
|
|
32,261
|
|
Accounts payable due to Non-Filing entities
|
|
941,644
|
|
Accrued payroll and related costs
|
|
24,591
|
|
Taxes payable
|
|
13,418
|
|
Interest payable
|
|
591
|
|
Other current liabilities
|
|
15,993
|
|
Total current liabilities
|
|
1,032,104
|
|
Long-term debt due to Non-Filing entities
|
|
2,112
|
|
Deferred income taxes
|
|
2,505
|
|
Other liabilities
|
|
24,758
|
|
Liabilities subject to compromise
|
|
2,344,563
|
|
Total liabilities
|
|
3,406,042
|
|
Equity
|
|
|
Total deficit
|
|
(636,079
|
)
|
Total liabilities and equity
|
|
$
|
2,769,963
|
|
DEBTORS’ CONDENSED COMBINED STATEMENT OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
|
|
Net cash provided by operating activities
|
|
$
|
140,895
|
|
|
|
|
Capital expenditures
|
|
(37,424
|
)
|
Change in accrued capital expenditures
|
|
(7,955
|
)
|
Change in restricted cash
|
|
(9,262
|
)
|
Net cash used in investing activities
|
|
(54,641
|
)
|
|
|
|
Net cash used in financing activities
|
|
—
|
|
|
|
|
Net change in cash and cash equivalents
|
|
86,254
|
|
Cash and cash equivalents, beginning of period
|
|
466,984
|
|
Cash and cash equivalents, end of period
|
|
$
|
553,238
|
|
NOTE
12
—INCOME TAXES
Income before income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In thousands)
|
|
2016
|
|
2015
|
|
2014
|
United States
|
|
$
|
2,106
|
|
|
$
|
(456,093
|
)
|
|
$
|
70,949
|
|
Non-U.S.
|
|
(319,976
|
)
|
|
(615,627
|
)
|
|
(648,360
|
)
|
Total
|
|
$
|
(317,870
|
)
|
|
$
|
(1,071,720
|
)
|
|
$
|
(577,411
|
)
|
The income tax provision/benefit consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In thousands)
|
|
2016
|
|
2015
|
|
2014
|
Current - United States
|
|
$
|
(13,835
|
)
|
|
$
|
(17,354
|
)
|
|
$
|
45,754
|
|
Current - Non-U.S.
|
|
10,311
|
|
|
7,116
|
|
|
43,115
|
|
Deferred - United States
|
|
14,751
|
|
|
(66,583
|
)
|
|
(30,391
|
)
|
Deferred - Non-U.S.
|
|
9,259
|
|
|
4,713
|
|
|
10,916
|
|
Total
|
|
$
|
20,486
|
|
|
$
|
(72,108
|
)
|
|
$
|
69,394
|
|
Our annual effective tax rate for the year ended December 31, 2016 was approximately (
6.4%
), on a pre-tax loss of
$318 million
. Changes in our effective tax rate from period to period are 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/benefit and income/loss before taxes. The Company is based in the U.K., which had a statutory income tax rate of
20.0%
for
2016
.
A reconciliation of the U.K. statutory tax rate to our effective rate is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
U.K. statutory income tax rate
|
|
20.0
|
%
|
|
20.3
|
%
|
|
21.5
|
%
|
Tax rates which are different from the U.K. rate
|
|
(17.9
|
)%
|
|
(4.8
|
)%
|
|
(36.8
|
)%
|
Tax effect of asset impairment
|
|
—
|
%
|
|
1.8
|
%
|
|
4.3
|
%
|
Change in valuation allowance
|
|
(8.8
|
)%
|
|
(11.1
|
)%
|
|
—
|
%
|
Adjustments to uncertain tax positions
|
|
0.3
|
%
|
|
0.5
|
%
|
|
(1.0
|
)%
|
Total
|
|
(6.4
|
)%
|
|
6.7
|
%
|
|
(12.0
|
)%
|
The components of the net deferred taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(In thousands)
|
|
2016
|
|
2015
|
Deferred tax assets
|
|
|
|
|
Deferred loss on asset dispositions
|
|
$
|
81,571
|
|
|
$
|
102,382
|
|
Accrued expenses not currently deductible
|
|
24,454
|
|
|
18,922
|
|
Net operating losses
|
|
25,071
|
|
|
17,901
|
|
Excess of tax basis over book basis of Property and Equipment
|
|
17,314
|
|
|
7,575
|
|
Bad debt
|
|
2,836
|
|
|
6,118
|
|
Other
|
|
8,367
|
|
|
7,152
|
|
Deferred tax assets
|
|
159,613
|
|
|
160,050
|
|
Less: Valuation allowance
|
|
(146,731
|
)
|
|
(118,768
|
)
|
Net deferred tax assets
|
|
12,882
|
|
|
41,282
|
|
Deferred tax liabilities
|
|
|
|
|
Excess of net book basis over remaining tax basis of Property and equipment
|
|
(7,842
|
)
|
|
(11,385
|
)
|
Deferred taxes on unremitted earnings
|
|
(6,043
|
)
|
|
(6,043
|
)
|
Contract market valuation
|
|
(1,708
|
)
|
|
(3,567
|
)
|
Deferred foreign exchange gain
|
|
(1,176
|
)
|
|
—
|
|
Other
|
|
(2,395
|
)
|
|
(2,421
|
)
|
Deferred tax liabilities
|
|
(19,164
|
)
|
|
(23,416
|
)
|
Net deferred tax asset (liabilities)
|
|
$
|
(6,282
|
)
|
|
$
|
17,866
|
|
The deferred tax assets related to our net operating losses were generated in various tax jurisdictions worldwide, that will expire, if not utilized, between 2021 and 2036. We recognize a valuation allowance for deferred tax assets when it is more-likely-than-not that the benefit from the deferred tax asset will not be realized. The amount of deferred tax assets considered realizable could increase or decrease in the near-term if estimates of future taxable income change.
We conduct business globally and, as a result, we file numerous income tax returns, or are subject to withholding taxes, in various jurisdictions. In the normal course of business we are generally subject to examination by taxing authorities throughout the world, including major jurisdictions we operate, such as Brazil, Denmark, Egypt, Equatorial Guinea, India, Israel, Luxembourg, Malaysia, Mexico, the Netherlands, Nigeria, Norway, Saudi Arabia, Singapore, Switzerland, the United Kingdom, the United States, and Tanzania. We are no longer subject to examinations of tax matters for years prior to 1999.
The following is a reconciliation of the liabilities related to our unrecognized tax benefits, excluding interest and penalties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2016
|
|
2015
|
|
2014
|
Gross balance at January 1,
|
|
$
|
10,426
|
|
|
$
|
29,679
|
|
|
$
|
32,336
|
|
Additions based on tax positions related to the current year
|
|
—
|
|
|
—
|
|
|
4,442
|
|
Additions for tax positions of prior years
|
|
1,176
|
|
|
1,056
|
|
|
1,424
|
|
Reductions for tax positions of prior years
|
|
(738
|
)
|
|
(4,966
|
)
|
|
(7,298
|
)
|
Expiration of statutes
|
|
(230
|
)
|
|
(221
|
)
|
|
(1,225
|
)
|
Tax settlements
|
|
—
|
|
|
(15,122
|
)
|
|
—
|
|
Gross balance at December 31,
|
|
10,634
|
|
|
10,426
|
|
|
29,679
|
|
Related tax benefits
|
|
—
|
|
|
—
|
|
|
—
|
|
Net balance at December 31,
|
|
$
|
10,634
|
|
|
$
|
10,426
|
|
|
$
|
29,679
|
|
The liabilities related to our unrecognized tax benefits comprise the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(In thousands)
|
|
2016
|
|
2015
|
Unrecognized tax benefits, excluding interest and penalties
|
|
$
|
10,634
|
|
|
$
|
10,426
|
|
Interest and penalties included in
“
Other liabilities
”
|
|
7,872
|
|
|
8,079
|
|
Unrecognized tax benefits, including interest and penalties
|
|
$
|
18,506
|
|
|
$
|
18,505
|
|
We include, as a component of our income tax provision, potential interest and penalties related to liabilities for our unrecognized tax benefits within our global operations. Interest and penalties resulted in an income tax expense of
$1 million
,
$1 million
and
$2 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively.
At
December 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 13—RESTRUCTURING CHARGES
During 2016, the Company initiated a workforce reduction program to align the size and composition of Paragon’s workforce with the Company’s expected future operating and capital plans and the Company’s strategy to focus on fewer markets and utilize a smaller fleet. The workforce reduction program was in response to the lack of significant improvement in the drilling market coupled with the Company’s decision to exit operations in certain markets, such as Brazil and Canada. Our management and board of directors approved a workforce reduction across our offshore crews, onshore bases and corporate office.
As related to the workforce reduction for the period ending December 31, 2016, appropriate communications to impacted personnel had been completed. As a result, we recorded restructuring expense of
$12 million
consisting of employee severance and other termination benefits which were included in “Contract drilling services”, “Labor contract drilling services” and “General and administrative” operating costs and expenses on our Consolidated Statement of Operations for the year ended December 31, 2016. We paid
$7 million
in restructuring and employee separation related costs during 2016. As of December 31, 2016, we had
$10 million
of accrued restructuring expense consisting of employee severance and other terminati
on benefits in “Accrued payroll and related costs” on our Consolidated Balance Sheet. We expe
ct
$5 million
of
restructuring expense related to the workforce reduction program to be recognized in
“Contract drilling services”, “Labor contract drilling services” and
“General and administrative” operating costs and expenses in 2017.
NOTE
14
—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.
These
two
defined benefit pension plans were carried over by us from Noble at the time of the Spin-Off as part of our Master Separation Agreement. During the periods prior to Spin-Off, most of our employees were eligible to participate in various Noble benefit programs; therefore, the results of our Predecessor in the consolidated financial statements for the year ended December 31, 2014 includes an allocation of the costs of such employee benefit plans, which is consistent with the accounting for multi-employer plans. These costs were allocated based on our employee population. We consider the expense allocation methodology and results to be reasonable.
As of January 1, 2017, all active employees under our current defined benefit pension plans will be transferred to a defined contribution pension plan as related to their future service. The accrued benefits under the defined benefit plan will be frozen and all employees will become deferred members. The transfer to a defined contribution pension plan has been accounted for as a curtailment.
For the years ended
December 31, 2016
,
2015
, and
2014
pension benefit expense related to our defined benefit pension plans totaled
$6 million
for all three years, respectively. Information on on these plans, based on actuary estimates, is presented in the tables below.
A reconciliation of the changes in projected benefit obligations (
“
PBO
”
) for our pension plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In thousands)
|
|
2016
|
|
2015
|
Benefit obligation at beginning of year
|
|
$
|
116,068
|
|
|
$
|
124,362
|
|
Service cost
|
|
4,562
|
|
|
5,375
|
|
Interest cost
|
|
2,254
|
|
|
1,946
|
|
Actuarial loss (gain)
|
|
24,393
|
|
|
(2,163
|
)
|
Benefits and expenses paid
|
|
(1,349
|
)
|
|
(1,184
|
)
|
Plan participants’ contribution
|
|
563
|
|
|
641
|
|
Foreign exchange rate changes
|
|
(5,068
|
)
|
|
(12,909
|
)
|
Other: curtailment gain
|
|
(9,209
|
)
|
|
—
|
|
Benefit obligation at end of year
|
|
$
|
132,214
|
|
|
$
|
116,068
|
|
A reconciliation of the changes in fair value of plan assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In thousands)
|
|
2016
|
|
2015
|
Fair value of plan assets at beginning of year
|
|
$
|
115,165
|
|
|
$
|
125,591
|
|
Actual return on plan assets
|
|
20,588
|
|
|
(1,790
|
)
|
Employer contribution
|
|
5,639
|
|
|
4,868
|
|
Benefits paid
|
|
(938
|
)
|
|
(813
|
)
|
Plan participants’ contributions
|
|
563
|
|
|
635
|
|
Expenses paid
|
|
(411
|
)
|
|
(371
|
)
|
Foreign exchange rate changes
|
|
(3,937
|
)
|
|
(12,955
|
)
|
Fair value of plan assets at end of year
|
|
$
|
136,669
|
|
|
$
|
115,165
|
|
The funded status of the plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In thousands)
|
|
2016
|
|
2015
|
Funded status
|
|
$
|
4,455
|
|
|
$
|
(903
|
)
|
Amounts recognized in the Consolidated Balance Sheets consist of:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In thousands)
|
|
2016
|
|
2015
|
Other assets - noncurrent
|
|
$
|
4,455
|
|
|
$
|
938
|
|
Other liabilities - noncurrent
|
|
—
|
|
|
(1,841
|
)
|
Net pension asset (liability)
|
|
4,455
|
|
|
(903
|
)
|
Accumulated other comprehensive loss recognized in financial statements
|
|
14,329
|
|
|
20,351
|
|
Net amount recognized
|
|
$
|
18,784
|
|
|
$
|
19,448
|
|
Amounts recognized in AOCL consist of:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In thousands)
|
|
2016
|
|
2015
|
Net loss
|
|
$
|
(14,329
|
)
|
|
$
|
(20,572
|
)
|
Prior service credit
|
|
—
|
|
|
221
|
|
Accumulated other comprehensive income (loss)
|
|
$
|
(14,329
|
)
|
|
$
|
(20,351
|
)
|
The pension gains or losses and prior service costs or credits are recognized on a net-of-tax basis in AOCL and are amortized from AOCL to net periodic benefit cost over the expected average remaining working lives of the employees participating in the plan.
Pension cost includes the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In thousands)
|
|
2016
|
|
2015
|
|
2014
|
Service cost
|
|
$
|
4,562
|
|
|
$
|
5,375
|
|
|
$
|
4,819
|
|
Interest cost
|
|
2,254
|
|
|
1,946
|
|
|
2,601
|
|
Expected return on plan assets
|
|
(1,806
|
)
|
|
(1,773
|
)
|
|
(2,625
|
)
|
Amortization of prior service credit
|
|
(18
|
)
|
|
(18
|
)
|
|
(16
|
)
|
Amortization net actuarial loss
|
|
757
|
|
|
755
|
|
|
1,077
|
|
Net curtailment gain
|
|
(201
|
)
|
|
—
|
|
|
(66
|
)
|
Net pension expense
|
|
$
|
5,548
|
|
|
$
|
6,285
|
|
|
$
|
5,790
|
|
As a result of the curtailment, the prior service credit included in AOCL associated with years of service no longer expected to be rendered is recorded as a gain for the year ended December 31, 2016. There will be
no
amortization related to prior service cost in 2017. The projected net periodic benefit cost for the year ended December 31, 2017 is approximately
$0.5 million
which includes less than
$0.1 million
amortization of net actuarial loss in 2017. The amortization period for the unrecognized loss is set at the average life expectancy of all deferred members and retirees together.
Defined Benefit Plans - Disaggregated Plan Information
Disaggregated information regarding our pension plans is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In thousands)
|
|
2016
|
|
2015
|
Projected benefit obligation
|
|
$
|
132,214
|
|
|
$
|
116,068
|
|
Accumulated benefit obligation
|
|
132,214
|
|
|
111,366
|
|
Fair value of plan assets
|
|
136,669
|
|
|
115,165
|
|
Defined Benefit Plans - Key Assumptions
The key assumptions for the plans are summarized below:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Weighted Average Assumptions Used to Determine Benefit Obligations
|
|
2016
|
|
2015
|
Discount rate
|
|
1.15% to 1.42%
|
|
|
2.6% to 2.9%
|
|
Rate of compensation increase
|
|
3.6
|
%
|
|
3.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Weighted Average Assumptions Used to Determine Net Periodic Benefit Cost
|
|
2016
|
|
2015
|
|
2014
|
Discount rate
|
|
1.15% to 1.42%
|
|
|
2.6% to 2.9%
|
|
|
2.7% to 3.9%
|
|
Expected long-term return on plan assets
|
|
1.03% to 1.06%
|
|
|
1.3
|
%
|
|
2.7% to 2.8%
|
|
Rate of compensation increase
|
|
3.6
|
%
|
|
3.6
|
%
|
|
3.6
|
%
|
The discount rates used to calculate the net present value of future benefit obligations are determined by using a yield curve of high quality bond portfolios with an average maturity approximating that of the liabilities.
We employ third-party consultants who use a portfolio return model to assess the initial reasonableness of the expected long-term rate of return on plan assets. To develop the expected long-term rate of return on assets, we considered the current level of expected returns on risk free investments (primarily government bonds), the historical level of risk premium associated with the other asset classes in which the portfolio is invested and the expectations for future returns of each asset class. The expected return for each asset class was then weighted based on the target asset allocation to develop the expected long-term rate of return on assets for the portfolio.
Defined Benefit Plans - Plan Assets
Both the Paragon Offshore Enterprise Ltd and the Paragon Offshore Nederland B.V. pension plans have a targeted asset allocation of
100%
debt securities. The investment objective for Paragon Offshore Enterprise Ltd and Paragon Offshore Nederland B.V. Non-US plans are to earn a favorable return against the Barclays Capital Euro - Treasury AAA 1 - 3 year benchmark. We evaluate the performance of these plans on an annual basis.
The actual fair value of our pension plans as of
December 31, 2016
and
2015
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair Value Measurements
|
(In thousands)
|
|
Carrying
Amount
|
|
Quoted
Prices in Active
Markets
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable
Inputs
(Level 3)
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Fixed Income securities:
|
|
|
|
|
|
|
|
|
Corporate Bonds
|
|
$
|
36,089
|
|
|
$
|
—
|
|
|
$
|
36,089
|
|
|
$
|
—
|
|
Other
|
|
100,580
|
|
|
—
|
|
|
—
|
|
|
100,580
|
|
Total
|
|
$
|
136,669
|
|
|
$
|
—
|
|
|
$
|
36,089
|
|
|
$
|
100,580
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Fixed Income securities:
|
|
|
|
|
|
|
|
|
Corporate Bonds
|
|
$
|
28,228
|
|
|
$
|
—
|
|
|
$
|
28,228
|
|
|
$
|
—
|
|
Other
|
|
86,937
|
|
|
—
|
|
|
—
|
|
|
86,937
|
|
Total
|
|
$
|
115,165
|
|
|
$
|
—
|
|
|
$
|
28,228
|
|
|
$
|
86,937
|
|
At
December 31, 2016
, assets of Paragon Offshore Enterprise Ltd and Paragon Offshore Nederland B.V. were invested in instruments that are similar in form to a guaranteed insurance contract. There are no observable market values for the assets (Level 3); however, the amounts listed as plan assets were materially similar to the anticipated benefit obligations that were anticipated under the plans. The following table details the activity related to these investments during the year.
|
|
|
|
|
|
|
|
Market Value
|
Balance as of December 31, 2014
|
|
$
|
93,115
|
|
Assets sold/benefits paid
|
|
(791
|
)
|
Return on plan assets
|
|
(5,387
|
)
|
Balance as of December 31, 2015
|
|
86,937
|
|
Assets sold/benefits paid
|
|
$
|
(938
|
)
|
Return on plan assets
|
|
14,581
|
|
Balance at December 31, 2016
|
|
$
|
100,580
|
|
Defined Benefit Plans - Cash Flows
In
2016
and
2015
, we made total contributions of
$6 million
and
$5 million
to our pension plans. We expect our aggregate minimum contributions to our plans in 2017, subject to applicable law, to be
$2 million
. We continue to monitor and evaluate funding options based upon market conditions and may increase contributions at our discretion.
The following table summarizes our benefit payments at
December 31, 2016
estimated to be paid within the next ten years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments by Period
|
|
Total
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
Five Years Thereafter
|
Estimated benefit payments
|
$
|
20,561
|
|
|
1,022
|
|
|
1,205
|
|
|
1,395
|
|
|
1,570
|
|
|
1,766
|
|
|
13,603
|
|
Other Benefit Plans
We sponsor a 401(k) defined contribution plan and a profit sharing plan, which covers 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 Consolidated Statements of Operations for the years ended
December 31, 2016
,
2015
, and
2014
were
$1 million
,
$1 million
and
$2 million
, respectively.
NOTE
15
—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 and availability of counterparties, 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 year ended December 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
16
—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 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
for
December 31, 2016
and
2015
, respectively, and our Senior Notes due August 15, 2024, excluding debt issuance costs of
$8 million
for
December 31, 2016
and
2015
, respectively, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subject to Compromise
|
|
Not Subject to Compromise
|
|
|
December 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
|
|
|
$
|
83,324
|
|
|
$
|
456,572
|
|
|
$
|
65,062
|
|
7.25% Senior Notes due August 15, 2024
|
|
527,010
|
|
|
93,544
|
|
|
527,010
|
|
|
75,099
|
|
Total senior unsecured notes
|
|
$
|
983,582
|
|
|
$
|
176,868
|
|
|
$
|
983,582
|
|
|
$
|
140,161
|
|
The estimated fair value of our Term Loan Facility, bearing interest at
5.5%
and
3.75%
as of
December 31, 2016
and
2015
, respectively, excluding unamortized discount and debt issuance costs of
$7 million
and
$8 million
for
December 31, 2016
and
2015
, respectively, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subject to Compromise
|
|
Not Subject to Compromise
|
|
|
December 31, 2016
|
|
December 31, 2015
|
(In thousands)
|
|
Carrying Value
|
|
Estimated Fair Value
|
|
Carrying Value
|
|
Estimated Fair Value
|
Term Loan Facility
|
|
$
|
641,875
|
|
|
$
|
244,113
|
|
|
$
|
641,875
|
|
|
$
|
235,889
|
|
The carrying amount of our variable-rate debt, the Revolving Credit Facility, which is subject to compromise as of December 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
17
—CONCENTRATION OF MARKET AND CREDIT RISK
The market for our services is the offshore oil and gas industry, and our customers consist primarily of government-owned oil companies, major integrated oil companies and independent oil and gas producers. We perform ongoing credit evaluations of our customers and do not require material collateral. We maintain reserves for potential credit losses when necessary. Our results of operations and financial condition should be considered in light of the fluctuations in demand experienced by drilling contractors as changes in oil and gas producers’ expenditures and budgets occur. These fluctuations can impact our results of operations and financial condition as supply and demand factors directly affect utilization and dayrates, which are the primary determinants of our net cash provided by operating activities.
Revenues from Total S.A. accounted for approximately
24%
,
16%
, and
3%
of our total operating revenues in
2016
,
2015
and
2014
, respectively. Receivables from Total S.A. accounted for approximately
18%
and
12%
of our accounts receivable balance at
December 31, 2016
and
2015
, respectively. Revenues from National Drilling Company accounted for approximately
17%
,
9%
, and
6%
of our total operating revenues in
2016
,
2015
and
2014
, respectively. Receivables from National Drilling Company accounted for approximately
21%
and
10%
of our accounts receivable balance at
December 31, 2016
and
2015
, respectively. Revenues from Petrobras accounted for approximately
17%
,
21%
, and
23%
of our operating revenues in
2016
,
2015
and
2014
, respectively. Receivables from Petrobras accounted for approximately
1%
and
5%
of our accounts receivable balance at
December 31, 2016
and 2015, respectively. Revenues from Pemex accounted for approximately
3%
,
9%
, and
16%
of our operating revenues in
2016
,
2015
and
2014
respectively. Receivables from Pemex accounted for approximately
19%
and
26%
of our accounts receivables balance at
December 31, 2016
and
2015
, respectively. No other customer accounted for more than 10% of our operating revenues in
2016
,
2015
or
2014
.
NOTE
18
—ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table includes the components of AOCL
for the years ended
December 31, 2016
,
2015
and
2014
and changes in AOCL by component for the years ended
December 31, 2016
and
2015
. All accounts within the tables are shown net of tax.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Defined
Benefit
Pension Items (1)
|
|
Foreign
Currency
Items
|
|
Total
|
Balance as of December 31, 2014
|
|
$
|
(22,911
|
)
|
|
$
|
(14,233
|
)
|
|
$
|
(37,144
|
)
|
Activity during period:
|
|
|
|
|
|
|
Other comprehensive loss before reclassification
|
|
1,823
|
|
|
(7,430
|
)
|
|
(5,607
|
)
|
Amounts reclassified from AOCL
|
|
737
|
|
|
—
|
|
|
737
|
|
Net other comprehensive income (loss)
|
|
2,560
|
|
|
(7,430
|
)
|
|
(4,870
|
)
|
Balance as of December 31, 2015
|
|
$
|
(20,351
|
)
|
|
$
|
(21,663
|
)
|
|
$
|
(42,014
|
)
|
Activity during period:
|
|
|
|
|
|
|
Other comprehensive loss before reclassification
|
|
5,509
|
|
|
(2,666
|
)
|
|
2,843
|
|
Amounts reclassified from AOCL
|
|
513
|
|
|
—
|
|
|
513
|
|
Net other comprehensive income (loss)
|
|
6,022
|
|
|
(2,666
|
)
|
|
3,356
|
|
Balance as of December 31, 2016
|
|
$
|
(14,329
|
)
|
|
$
|
(24,329
|
)
|
|
$
|
(38,658
|
)
|
|
|
(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 Consolidated Statements of Operations through either “Contract drilling services” or “General and administrative for the year ended
December 31, 2016
, see Note
14
-
“Employee Benefit Plans”
for additional information.
|
NOTE
19
—COMMITMENTS AND CONTINGENCIES
Operating Leases
Future minimum lease payments for operating leases for years ending December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
Thereafter
|
|
Total
|
Minimum lease payments
|
|
$
|
5,724
|
|
|
$
|
3,061
|
|
|
$
|
2,304
|
|
|
$
|
2,001
|
|
|
$
|
1,598
|
|
|
$
|
1,864
|
|
|
$
|
16,552
|
|
Total rent expense under operating leases was approximately
$13 million
and
$17 million
for the years ended
December 31, 2016
and
2015
, respectively.
Purchase Commitments
In connection with the Prospector acquisition, we have outstanding commitments, including shipyard and purchase commitments of approximately
$585 million
at
December 31, 2016
. Our purchase commitments consist of obligations outstanding to external vendors primarily related to future capital purchases and includes
$579 million
due in 2017 related to the
three
high specification jackups. In 2016, we did not make any payments on the commitments related to the
three
high specification jackups.
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.
Tax 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
December 31, 2016
, we have received tax audit claims of approximately
$345 million
, of which
$88 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
December 31, 2016
, approximately
$30 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 a 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
December 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.
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
$87 million
, of which
$24 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 has been withheld at the source by our customer and we have recorded
$8 million
withholding tax expense since inception of the law. Discussions with our customer over the applicability of this legislation are ongoing.
Settlement with Noble Corporation
On February 12, 2016, we entered into a binding term sheet with Noble with respect to the “Noble Settlement Agreement” (as described below), which we executed on April 29, 2016. The Noble Settlement Agreement will become effective upon the effective date of the Debtors’ plan of reorganization if such plan is substantially similar to the Debtors’ Original Plan. The New Plan contemplates that the Noble Settlement Agreement will become effective upon the effective date of the New Plan. In light of the differences in the Original Plan and the New Plan, we intend to discuss this requirement with Noble. The Noble Settlement Agreement provides that Noble may only unilaterally terminate the Noble Settlement Agreement if: (i) the Debtors’ file a plan of reorganization with the Bankruptcy Court that does not incorporate the terms and conditions of the Noble Settlement Agreement, (ii) the Debtors file a motion before the Bankruptcy Court to terminate their obligations under the Noble Settlement Agreement, or (iii) the release of claims by the Debtors in favor of Noble, as detailed below, is deemed invalid or unenforceable.
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. The Company has contested or intends to contest the Mexico Tax Assessments and may be required to post bonds in connection thereto.
In addition, on August 5, 2016, we entered into a binding term sheet with respect to an amendment to the Noble Settlement Agreement (the “Noble Settlement Agreement Amendment”). Upon effectiveness of the Noble Settlement Agreement Amendment, certain provisions of the Tax Sharing Agreement will be further amended to permit us, at our option, to defer up to
$5 million
in amounts owed to Noble under the Tax Sharing Agreement with respect to the Mexican Tax Assessments (the “Deferred Noble Payment Amount”). In consideration for this deferral, we would issue an unsecured promissory note to Noble in the amount of the Deferred Noble Payment Amount (the “Noble Note”) which would be due and payable on the
four
th anniversary of the effective date of the Amended Plan. The Noble Note would accrue interest, quarterly, to be paid either: (x) in cash at
12%
per annum, or (y) in kind at
15%
per annum (in our discretion).
As of December 31, 2016, our estimated Mexican Tax Assessments totaled approximately
$165 million
, with assessments for 2009 and 2010 yet to be received. 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 upon effective date of the Noble Settlement Agreement.
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. 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 on the Effective Date in connection with certain amendments to the Tax Sharing Agreement executed between Noble and Paragon for the Spin-Off. Until such time, the current Tax Sharing Agreement remains in effect.
Other Contingencies
As previously reported, 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. Since mid-2015, we have been conducting an independent review of our relationships with the agent and with Petrobras. Our review to date has found no evidence of wrongdoing by our employees or the commercial agent on our behalf. The SEC and U.S. Department of Justice are aware of our review.
We are currently party to several commercial disputes with a former customer relating to service we performed under our contracts with them. We believe we have a reasonable possibility of loss in these disputes but do not believe our exposure exceeds approximately
$15 million
.
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
As of
December 31, 2016
, we had letters of credit of
$69 million
and performance bonds totaling
$97 million
supported by surety bonds outstanding and backed by
$57 million
in letters of credit and
$9 million
held in restricted cash. 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 Consolidated Balance Sheets include the following balances due from and to Noble as of
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(In thousands)
|
|
2016
|
|
2015
|
Accounts receivable
|
|
$
|
1,149
|
|
|
$
|
22,695
|
|
Other current assets
|
|
461
|
|
|
3,032
|
|
Other assets
|
|
7,157
|
|
|
6,686
|
|
Due from Noble
|
|
$
|
8,767
|
|
|
$
|
32,413
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
211
|
|
|
$
|
211
|
|
Other current liabilities
|
|
2,594
|
|
|
6,067
|
|
Other liabilities
|
|
3,268
|
|
|
3,268
|
|
Due to Noble
|
|
$
|
6,073
|
|
|
$
|
9,546
|
|
These receivables and payables primarily relate to rights and obligations under the Master Separation, Tax Sharing Agreement and the Transition Services Agreement (Brazil).
Master Separation Agreement
We entered into the Master Separation Agreement with Noble Corporation, a Cayman Islands company and an indirect, wholly-owned subsidiary of Noble (“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.
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. We concluded providing services to Noble, and Noble concluded providing services to us, in the third quarter of 2016.
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. The provision of these rig-based and shore-based support services concluded in the second quarter of 2016 in conjunction with the termination of Noble’s business in Brazil.
NOTE
20
—PREDECESSOR ALLOCATIONS
For the period prior to the Spin-Off, our Predecessor was managed in the normal course of business by Noble and its subsidiaries. Revenues and costs directly related to our Predecessor have been included in the consolidated financial statements for the year ended December 31, 2014. Additionally, certain shared costs have been allocated to our Predecessor and are reflected as expenses in these consolidated financial statements for the year ended December 31, 2014. Our management considers the allocation methodologies used to be reasonable and appropriate reflections of the related expenses attributable to us for purposes of the carve-out financial statements; however, the expenses reflected in the results of our Predecessor and included in the consolidated financial statements for the year ended December 31, 2014 may not be indicative of the actual expenses that would have been incurred during the periods presented if our Predecessor had operated as a separate standalone entity.
Allocated costs include, but are not limited to: corporate accounting, human resources, information technology, treasury, legal, employee benefits and incentives (excluding allocated post-retirement benefits described in Note
14
- “
Employee Benefit Plans
”) and stock-based compensation. Our Predecessor’s allocated costs included in contract drilling services in the accompanying Consolidated Statements of Operations totaled
$70 million
for the year ended December 31, 2014. Our Predecessor’s allocated costs included in general, and administrative expenses in the accompanying Consolidated Statements of Operations totaled
$25 million
for the year ended December 31, 2014. The costs were allocated to our Predecessor using various inputs, such as head count, services rendered, and assets assigned to our Predecessor. All financial information presented
after the Spin-Off represents the results of operations, financial position and cash flows of Paragon, accordingly,
no
Predecessor allocated costs are included in the accompanying Consolidated Statements of Operations for the years ended
December 31, 2016
and 2015.
NOTE 21—SUPPLEMENTAL CASH FLOW INFORMATION
The net effect of changes in other assets and liabilities on cash flows from operating activities is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In thousands)
|
|
2016
|
|
2015
|
|
2014
|
Accounts receivable
|
|
$
|
204,446
|
|
|
$
|
233,812
|
|
|
$
|
(178,108
|
)
|
Other current assets
|
|
32,859
|
|
|
(5,383
|
)
|
|
42,922
|
|
Other assets
|
|
9,656
|
|
|
(479
|
)
|
|
(33,637
|
)
|
Accounts payable
|
|
(36,615
|
)
|
|
(57,246
|
)
|
|
25,890
|
|
Other current liabilities
|
|
(14,969
|
)
|
|
(132,195
|
)
|
|
14,273
|
|
Other liabilities
|
|
(8,571
|
)
|
|
(51,790
|
)
|
|
(29,514
|
)
|
Prepaid and accrued reorganization items
|
|
26,116
|
|
|
—
|
|
|
—
|
|
Net change in other assets and liabilities
|
|
$
|
212,922
|
|
|
$
|
(13,281
|
)
|
|
$
|
(158,174
|
)
|
Additional cash flow information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In thousands)
|
|
2016
|
|
2015
|
|
2014
|
Cash paid (refunded) during the period for:
|
|
|
|
|
|
|
Interest
|
|
$
|
75,487
|
|
|
$
|
124,763
|
|
|
$
|
21,109
|
|
U.S. and Non-U.S. income taxes
|
|
(9,506
|
)
|
|
66,657
|
|
|
85,248
|
|
Supplemental information for non-cash activities:
|
|
|
|
|
|
|
Assets related to Sale-Leaseback Transaction
|
|
$
|
—
|
|
|
$
|
465,043
|
|
|
$
|
—
|
|
Adjustments to distributions by former parent
|
|
—
|
|
|
9,493
|
|
|
—
|
|
Accrued capital expenditures
|
|
1,928
|
|
|
10,305
|
|
|
24,003
|
|
Transfer from parent of property and equipment
|
|
—
|
|
|
—
|
|
|
18,124
|
|
NOTE
22
—SEGMENT AND RELATED INFORMATION
At
December 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 operate 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 is able to conduct contract drilling operations in the North Sea, the Middle East, India, Brazil, Mexico, West Africa and Southeast Asia. Under the New Plan, if approved, we will focus on the North Sea, the Middle East and India.
Operations by Geographic Area
The following table presents revenues and identifiable assets by country based on the location of the service provided:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
Identifiable Assets
|
|
|
Year Ended December 31,
|
|
December 31,
|
(In thousands)
|
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
Country:
|
|
|
|
|
|
|
|
|
|
|
Brazil
|
|
$
|
131,192
|
|
|
$
|
368,502
|
|
|
$
|
488,884
|
|
|
$
|
35,017
|
|
|
$
|
169,626
|
|
United Kingdom
|
|
181,512
|
|
|
305,499
|
|
|
193,908
|
|
|
666,823
|
|
|
1,122,653
|
|
The Netherlands
|
|
90,764
|
|
|
242,128
|
|
|
284,651
|
|
|
574,243
|
|
|
252,686
|
|
United Arab Emirates
|
|
109,886
|
|
|
135,747
|
|
|
139,318
|
|
|
193,596
|
|
|
229,351
|
|
Mexico
|
|
16,230
|
|
|
133,970
|
|
|
326,352
|
|
|
46,620
|
|
|
183,944
|
|
India
|
|
55,882
|
|
|
71,743
|
|
|
79,201
|
|
|
85,673
|
|
|
102,054
|
|
Cameroon
|
|
16,102
|
|
|
70,901
|
|
|
35,224
|
|
|
13,822
|
|
|
100,828
|
|
Qatar
|
|
—
|
|
|
36,234
|
|
|
94,320
|
|
|
16,544
|
|
|
25,844
|
|
Denmark
|
|
—
|
|
|
8,382
|
|
|
28,645
|
|
|
76,304
|
|
|
—
|
|
USA
|
|
—
|
|
|
340
|
|
|
85,060
|
|
|
177,317
|
|
|
137,128
|
|
Other
|
|
34,608
|
|
|
118,982
|
|
|
238,199
|
|
|
17,772
|
|
|
38,733
|
|
|
|
$
|
636,176
|
|
|
$
|
1,492,428
|
|
|
$
|
1,993,762
|
|
|
$
|
1,903,731
|
|
|
$
|
2,362,847
|
|
NOTE 23—UNAUDITED INTERIM FINANCIAL DATA
Summarized quarterly results for years ended
December 31, 2016
and
2015
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
(In thousands, except per share amounts)
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
2016
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
265,120
|
|
|
$
|
184,935
|
|
|
$
|
125,078
|
|
|
$
|
61,043
|
|
|
Operating income (loss)
|
|
43,491
|
|
|
6,426
|
|
|
(29,509
|
)
|
|
(189,784
|
)
|
|
Net loss attributable to Paragon Offshore
|
|
(5,210
|
)
|
|
(25,109
|
)
|
|
(63,618
|
)
|
|
(244,419
|
)
|
|
Loss per share - basic and diluted (1)
|
|
(0.06
|
)
|
|
(0.29
|
)
|
|
(0.72
|
)
|
|
(2.78
|
)
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
430,648
|
|
|
$
|
393,244
|
|
|
$
|
368,973
|
|
|
$
|
299,563
|
|
|
Operating income (loss)
|
|
95,653
|
|
|
57,727
|
|
|
(1,105,344
|
)
|
|
10,590
|
|
|
Net income (loss) attributable to Paragon Offshore
|
|
61,127
|
|
|
47,331
|
|
|
(1,084,838
|
)
|
|
(23,263
|
)
|
(2)
|
Earnings (loss) per share - basic and diluted (1)
|
|
$
|
0.69
|
|
|
$
|
0.51
|
|
|
$
|
(12.46
|
)
|
|
$
|
(0.27
|
)
|
(2)
|
|
|
(1)
|
Earnings (loss) per share is computed independently for each of the quarters presented. Therefore, the sum of the quarters’ net income (loss) per share may not equal the total computed for the year.
|
|
|
(2)
|
Certain corrections of errors related to overaccrual of expenses for prior periods, and having net positive impacts of approximately
$10.2 million
to net income, were recorded during the three months ended December 31, 2015. We consider these errors to be immaterial to 2015 and all prior periods.
|