NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 currently operate in significant hydrocarbon-producing geographies throughout the world, including the North Sea, the Middle East and India. As of
March 31, 2017
, our contract backlog was
$183 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. 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”).
All financial information presented in this Form 10-Q represents the consolidated results of operations, financial position and cash flows of Paragon.
Unaudited Interim Information
The interim consolidated financial statements of Paragon and its subsidiaries are unaudited. However, they include all adjustments of a normal recurring nature that, in the opinion of management, are necessary for a fair statement of the Company’s consolidated financial position as of
March 31, 2017
and the results of its operations and cash flows for the
three months ended
March 31, 2017
and
2016
. Certain information relating to the Company’s organization and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the SEC regarding interim financial reporting.
The
2016
year-end balance sheet data was derived from audited financial statements. This interim report does not include all disclosures required by U.S. GAAP for annual periods and should be read in conjunction with the Annual Report on Form 10-K of Paragon for the year ended December 31,
2016
. The interim financial results may not be indicative of the results to be expected for the full year. Certain amounts in prior periods have been reclassified to conform to the current year presentation.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern and contemplate the realization of assets and the satisfaction of liabilities in the normal course of business. Our ability to continue as a going concern is contingent upon 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. As required by FASB ASC 852,
Reorganizations
(“ASC 852”), we intend to adopt fresh start accounting upon emergence from chapter 11 of the Bankruptcy Code.
Chapter 11 Filing
On February 12, 2016, the Company and certain of its subsidiaries (collectively, 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.
On April 21, 2017, following further discussions with the Secured Lenders, the Company filed an amendment to the New Plan and a related disclosure statement with the Bankruptcy Court. This amendment makes certain modifications to the New Plan, among other changes, to: (i) no longer seek approval of the Noble Settlement Agreement (as defined below); (ii) provide for a combined class of general unsecured creditors, including the Company’s
6.75%
senior unsecured notes maturing July 2022 and
7.25%
senior unsecured notes maturing August 2024; and (iii) provide for the post-emergence wind-down of certain of the Debtors’ dormant subsidiaries and discontinued businesses.
On May 2, 2017, as a result of a successful court-ordered mediation process with representatives of the Secured Lenders and the Bondholders, the Company filed additional amendments to the New Plan (as amended, the “Consensual Plan”) and a related disclosure statement with the Bankruptcy Court. The Consensual Plan resolves the objections previously raised by the Bondholders to the New Plan.
Under the Consensual Plan, approximately
$2.4 billion
of previously existing debt will be eliminated in exchange for a combination of cash and to-be-issued new equity. If confirmed, the Secured Lenders will receive their pro rata share of
$410 million
in cash and
50%
of the new, to-be-issued common equity, subject to dilution. The Bondholders will receive
$105 million
in cash and an estimated
50%
of the new, to-be-issued common equity, subject to dilution. The Secured Lenders and Bondholders will each appoint three members of a new board of directors to be constituted upon emergence of the Company from bankruptcy and will agree on a candidate for Chief Executive Officer who will serve as the seventh member of the board of directors of the Company. Certain other elements of the New Plan remain unchanged in the Consensual Plan, including that: (i) the Secured Lenders shall be allocated new senior secured first lien debt in the original aggregate principal amount of
$85 million
maturing
in 2022, (ii) the Company shall commence an administration proceeding in the United Kingdom, and (iii) the Company’s current shareholders are not expected to have any recovery under the Consensual Plan. Both the U.S. Trustee and the Bankruptcy Court have declined to appoint an equity committee in the Bankruptcy cases. The Consensual 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.
Debtors-in-Possession
Since filing the Bankruptcy cases, 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. 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.
Litigation 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 would have become effective upon the consummation of the Original Plan, or a plan of reorganization substantially similar thereto, and the satisfaction of certain other conditions precedent as set forth in the Noble Settlement Agreement. Pursuant to the Noble Settlement Agreement, Noble would have provided 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”). Additionally, pursuant to the Noble Settlement Agreement, Noble would have been responsible for all of the ultimate tax liability for Noble legal entities and
50%
of the ultimate tax liability for our legal entities following the defense of the Mexican Tax Assessments. In consideration for this support, we had agreed to release Noble, fully and unconditionally, from any and all claims in relation to the Spin-Off.
On April 21, 2017, we filed our amendment to the New Plan with the Bankruptcy Court. Under the New Plan, we do not intend to seek approval of the Noble Settlement Agreement with the Bankruptcy Court. As a result, on April 21, 2017, Noble terminated the Noble Settlement Agreement.
On May 2, 2017, the Company filed further amendments to the New Plan (the Consensual Plan) and a related disclosure statement with the Bankruptcy Court. Pursuant to the Consensual Plan, the Company’s creditors will pursue litigation against Noble through the establishment of a litigation trust (the “Litigation Trust”), which the Company will fund with a loan of up to
$10 million
(the “Litigation Loan Amount”). Under the Consensual Plan, the first
$10 million
of proceeds from the litigation against Noble will be applied to repay the Litigation Loan Amount, and any balance of the first
$10 million
of proceeds will be shared
50%
/
50%
between the Bondholders and Secured Creditors. Any amounts above the first
$10 million
of proceeds will be split in a ratio of
75%
/
25%
in favor of the Bondholders.
NOTE 2—NEW ACCOUNTING PRONOUNCEMENTS
In May 2014, the FASB issued ASU No. 2014-09 (“ASU 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 the provisions of ASU 2014-09, concurrently with the provisions of ASU 2016-02 (defined below) since we have determined that our drilling contracts contain a lease component, and our adoption of ASU 2016-02, therefore, will require that we separately recognize revenues associated with lease and nonlease components. Nonlease components or the provision of contract drilling services will be accounted for under ASU 2014-09. We are in the process of reviewing our revenue streams under these ASUs and have identified a subset of contracts that we believe are representative of our operations and have initiated an analysis of the related performance obligations and pricing arrangements in such contracts. We are still 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 which will be based on contract-specific facts and circumstances that could introduce variability to the timing of our revenue recognition relative to current accounting standards.
In February 2016, the FASB issued ASU No. 2016-02, which creates ASC Topic 842,
Leases (
“ASU 2016-02”). 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. 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. Under this ASU, we have determined that our drilling contracts contain a lease component, and our adoption, therefore, will require that we separately recognize revenues associated with the lease and service components. We are evaluating the provisions of ASU 2016-02, concurrently with the provisions of ASU 2014-09 and expect to adopt both updates concurrently with an effective date of January 1, 2018. We are still 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 disclosures.
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. The Company has elected early adoption of this guidance on a modified retrospective basis. Early adoption had no impact on prior periods as reported in our financial statements for the quarter ended March 31, 2017.
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.
In January 2017 the FASB issued ASU No. 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
. The amendments in this update provide a more robust framework to use in determining when a set of assets and activities is a business. The objective of this ASU is to add guidance that will assist entities in evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses and may affect many areas of accounting including acquisitions, disposals, goodwill and consolidations. The guidance is effective for financial statements issued for annual reporting periods beginning after December 15, 2017, and interim periods within that reporting period. The amendments in this update should be applied prospectively on or after the effective date. No disclosures are required at transition. We do not expect that our adoption will have a material impact on our financial condition, results of operations, cash flows or financial disclosures and the impact will be based on whether it is necessary for us to determine if we have acquired or sold a business in any period after the effective date.
In February 2017, the FASB issued ASU No. 2017-05, O
ther Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecogntion Guidance and Accounting for Partial Sales of Nonfinancial Assets
which will be effective at the same time as ASC Topic 606. ASU No. 2017-05 clarifies the scope, definition and accounting of a financial asset that meets the definition of an “in-substance nonfinancial asset” and adds guidance for partial sales of nonfinancial assets. 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 2017 the FASB issued ASU No. 2017-07,
Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
. The amendments in this update require that an employer disaggregate the service cost component from the other components of net benefit cost and provide guidance on how to present the service cost component and the other components of net benefit cost in the income statement. The guidance is effective for financial statements issued for annual reporting periods beginning after December 15, 2017, and interim periods within that reporting period. The amendment for the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost should be applied retrospectively. We do not expect that our adoption will have a material impact on our financial condition, results of operations, cash flows or financial disclosures.
NOTE
3
— SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The unaudited condensed consolidated financial statements include our accounts, those of our wholly-owned subsidiaries and entities in which we hold a controlling financial interest. 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 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
three months ended March 31, 2017
. 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
9
-
“Reorganization Items”
for cash paid for reorganization items in the consolidated statements of cash flows.
As required by ASC 852 we intend to adopt fresh start accounting upon emergence from chapter 11 of the Bankruptcy Code.
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
$7 million
and
$9 million
as of
March 31, 2017
and
December 31, 2016
, respectively. Such amounts are included in either “Other current liabilities” or “Other liabilities” in our Condensed Consolidated Balance Sheets, based upon the expected time of recognition of such deferred revenues. Deferred costs associated with deferred revenues from drilling contracts totaled
$2 million
at
March 31, 2017
as compared to
$3 million
as of
December 31, 2016
. Such amounts are included in either “Prepaid and other current assets” or “Other assets” in our Condensed 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.
Restricted Cash
Restricted cash consists of both cash held to satisfy the requirements of our Sale-Leaseback Transaction (as described in Note
7
-
“Debt”
), which was executed in 2015 and cash collateral for an outstanding performance bond.
Under the terms of the Lease Agreements (as defined in Note
7
-
“Debt”
) 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 Condensed 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
$11 million
and
$9 million
as of
March 31, 2017
and
December 31, 2016
, 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
March 31, 2017
and
December 31, 2016
also includes
$9 million
cash collateral for an outstanding performance bond. Our long-term restricted cash was
$36 million
and
$38 million
as of
March 31, 2017
and
December 31, 2016
, 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
$26 million
and
$25 million
as of
March 31, 2017
and
December 31, 2016
, respectively. We had
$0.2 million
of bad debt expense and
no
recoveries for the
three months ended March 31, 2017
. We had
no
bad debt expense or recoveries for the
three months ended March 31, 2016
. Bad debt expense and recoveries are reported as a component of “Contract drilling services operating costs and expenses” in our Condensed 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 whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For assets classified as held and used, we determine recoverability by evaluating the estimated undiscounted future net cash flows based on projected dayrates and utilization. For property and equipment whose carrying values are determined not to be recoverable, we calculate an impairment loss as a difference between the fair value and carrying amount. We estimate the fair values by applying either an income approach, using projected discounted cash flows, or a market approach. For discussion related to our impairment analysis see Note
4
-
“Property and Equipment and Other Assets.”
NOTE
4
—PROPERTY AND EQUIPMENT AND OTHER ASSETS
Property and equipment consists of drilling rigs, drilling machinery and equipment and other property and equipment.
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
(In thousands)
|
|
2017
|
|
2016
|
Drilling rigs
|
|
$
|
1,457,907
|
|
|
$
|
1,463,199
|
|
Drilling rigs under Sale-Leaseback Transaction
|
|
469,747
|
|
|
469,018
|
|
Drilling machinery and equipment
|
|
348,164
|
|
|
345,172
|
|
Other
|
|
59,016
|
|
|
59,115
|
|
Property and equipment, at cost
|
|
2,334,834
|
|
|
2,336,504
|
|
Less: Accumulated depreciation
|
|
(1,516,497
|
)
|
|
(1,496,006
|
)
|
Less: Accumulated amortization under Sale-Leaseback Transaction
|
|
(32,531
|
)
|
|
(27,726
|
)
|
Property and equipment, net
|
|
$
|
785,806
|
|
|
$
|
812,772
|
|
Depreciation expense was
$31 million
and
$72 million
for the
three months ended March 31, 2017
and
2016
, respectively, including depreciation expense of
$1 million
and
$4 million
for underwater inspection in lieu of drydocking costs (“UWILD”) for the
three months ended March 31, 2017
and
2016
, respectively. UWILD costs are capitalized in “Other assets” on the Condensed Consolidated Balance Sheet. Amortization of our leased drilling rigs under the Sale-Leaseback Transaction is recorded in depreciation expense for the
three months ended March 31, 2017
and
2016
.
Our capital expenditures totaled
$3 million
and
$18 million
for the
three months ended March 31, 2017
and
2016
, respectively. Included in accounts payable were
$1 million
and
$5 million
of capital accruals as of
March 31, 2017
and
2016
, 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). For assets classified as held and used, we determine recoverability by evaluating the estimated undiscounted future net cash flows based on projected dayrates and utilization. For property and equipment whose carrying values are determined not to be recoverable, we calculate an impairment loss as a difference between the fair value and carrying amount. We estimate the fair values by applying either an income approach, using projected discounted cash flows, or a market approach. Estimates of discounted 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 discounted cash flows are highly subjective and are based on numerous assumptions about future operations and market conditions. In a market approach, the fair value would be based on unobservable third-party estimated prices that would be received in exchange for the assets in an orderly transaction between market participants.
For the
three months ended March 31, 2017
, we recognized an impairment loss of
$0.4 million
in our Condensed Consolidated Statements of Operations.
No
impairment loss was recognized for the three months ended March 31, 2016.
NOTE 5—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
three months ended March 31, 2017
.
Shares available for issuance and outstanding restricted stock units under our
two
equity incentive plans as of
March 31, 2017
are as follows (excluding the impact of cash-settled awards):
|
|
|
|
|
|
|
|
(In shares)
|
|
Employee Plan
|
|
Director Plan
|
Shares available for future awards or grants
|
|
5,580,201
|
|
|
434,048
|
|
Outstanding unvested restricted stock units
|
|
1,461,377
|
|
|
—
|
|
In prior years, we have awarded both TVRSU’s and PVRSU’s under our Employee Plan and TVRSU’s under our Director Plan. The total compensation for TVRSU’s that ultimately vests is recognized using a straight-line method over a
three
-year service period. 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. The number of PVRSU’s which vest under our Employee Plan will depend on the degree of achievement of specified company-based, return on capital employed (“ROCE”), and market-based, total shareholder return (“TSR”), performance criteria over the service period.
A summary of restricted stock activity for the
three months ended March 31, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TVRSU’s Outstanding
|
|
TVRSU Weighted
Average
Grant-Date
Fair Value
|
|
CS-TVRSU’s Outstanding
|
|
Share
Price
(1)
|
|
PVRSU’s
Outstanding
(2)
|
|
PVRSU Weighted
Average
Grant-Date
Fair Value
|
Outstanding as of December 31, 2016
|
|
1,910,893
|
|
|
$
|
5.31
|
|
|
1,292,601
|
|
|
|
|
602,219
|
|
|
$
|
5.39
|
|
Vested
|
|
(842,282
|
)
|
|
5.18
|
|
|
(530,604
|
)
|
|
|
|
—
|
|
|
—
|
|
Forfeited
(3)
|
|
(17,979
|
)
|
|
11.00
|
|
|
(250,190
|
)
|
|
|
|
(191,474
|
)
|
|
11.00
|
|
Outstanding as of March 31, 2017
|
|
1,050,632
|
|
|
$
|
5.33
|
|
|
511,807
|
|
|
$
|
0.05
|
|
|
410,745
|
|
|
$
|
2.78
|
|
|
|
(1)
|
The share price represents the closing price of our shares on
March 31, 2017
at which our CS-TVRSU’s are measured.
|
|
|
(2)
|
In the
three months ended March 31, 2017
,
191,474
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.
|
|
|
(3)
|
In accordance with ASU No. 2016-09,
Improvements to Employee Share-Based Payment Accounting
, the Company has elected to account for forfeitures when they occur. This election had no impact on our financial statements for the three months ended March 31, 2017.
|
Equity and liability-based award amortization recognized during the
three months ended March 31, 2017
totaled
$0.6 million
. As of
March 31, 2017
, we had
$2 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
0.7 years
or expense immediately on the effective date of the Consensual Plan. As of
March 31, 2017
, we had
$21 thousand
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
0.9 years
or expense immediately on the effective date of the Consensual Plan.
As of
March 31, 2017
, we had
$0.1 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
0.8 years
or expense immediately on the effective date of the Consensual Plan. 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 6—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, have 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
three months ended March 31, 2017
and
2016
due to our net losses in each respective period.
Existing shareholders of the Company will not receive a recovery under the Consensual Plan.
The following table includes the computation of basic and diluted net loss and loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
(In thousands, except per share amounts)
|
|
2017
|
|
2016
|
Allocation of loss - basic and diluted
|
|
|
|
|
Net loss
|
|
$
|
(70,416
|
)
|
|
$
|
(5,210
|
)
|
Earnings allocated to unvested share-based payment awards
|
|
—
|
|
|
—
|
|
Net loss attributable to ordinary shareholders - basic and diluted
|
|
$
|
(70,416
|
)
|
|
$
|
(5,210
|
)
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
|
Basic and diluted
|
|
88,747
|
|
|
86,598
|
|
|
|
|
|
|
Weighted average unvested share-based payment awards
|
|
1,885
|
|
|
5,944
|
|
|
|
|
|
|
Loss per share
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.79
|
)
|
|
$
|
(0.06
|
)
|
NOTE
7
—DEBT
A summary of long-term debt as of
March 31, 2017
and
December 31, 2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
(In thousands)
|
|
2017
|
|
2016
|
Revolving Credit Facility
(1)
|
|
$
|
—
|
|
|
$
|
—
|
|
Term Loan Facility, bearing interest of 5.75% and 5.5% as of March 31, 2017 and December 31, 2016, respectively
(1)
|
|
—
|
|
|
—
|
|
Senior Notes due 2022, bearing fixed interest at 6.75% per annum
(1)
|
|
—
|
|
|
—
|
|
Senior Notes due 2024, bearing fixed interest at 7.25% per annum
(1)
|
|
—
|
|
|
—
|
|
Sale-Leaseback Transaction
|
|
185,691
|
|
|
196,418
|
|
Unamortized debt issuance costs
|
|
(667
|
)
|
|
(718
|
)
|
Total debt
|
|
185,024
|
|
|
195,700
|
|
Less: Current maturities of long-term debt
|
|
(29,694
|
)
|
|
(29,737
|
)
|
Long-term debt
|
|
$
|
155,330
|
|
|
$
|
165,963
|
|
(1) See Note 8 -
“Liabilities Subject to Compromise”
for each of the respective
March 31, 2017
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
March 31, 2017
, we had
$709 million
in borrowings outstanding at a weighted-average interest rate of
3.48%
, 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. 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 approximate
$1 billion
balance of our Senior Notes, accrued pre-petition interest, and unamortized deferred debt issuance costs are classified as 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
three months ended March 31, 2017
and 2016 would have included contractual interest expense of
$18 million
and
$9 million
, respectively. 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
0.50%
original issue discount. As of
March 31, 2017
, the approximate
$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
8
-
“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 Condensed Consolidated Balance Sheet as of
March 31, 2017
.
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. We are currently in discussions with the Lessor to ensure 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 Consensual 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 total 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
|
|
$
|
34
|
|
|
$
|
32
|
|
|
$
|
31
|
|
|
$
|
119
|
|
|
$
|
—
|
|
|
$
|
216
|
|
We made rental payments, including interest, of approximately
$13 million
and
$21 million
during the
three months ended
March 31, 2017
and 2016, respectively. This includes pre-payments or Excess Cash Amounts (as defined below) of
$3 million
for the
Prospector 1
for both the
three months ended March 31, 2017
and 2016 and
$3 million
and
$5 million
for the
Prospector 5
for the
three months ended March 31, 2017
and 2016, 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 rig, covenant defaults, cross-payment defaults, certain events of bankruptcy, material judgments and actual or asserted failure of any credit document to be in force and effect. The Lease Agreements contain certain representations, warranties, obligations, conditions, indemnification provisions and termination provisions customary for sale and leaseback financing transactions. The Lease Agreements contain certain affirmative and negative covenants that, subject to exceptions, limit our ability to, among other things, incur additional indebtedness and guarantee indebtedness, pay inter-company dividends or make other inter-company distributions or repurchase or redeem capital stock, prepay, redeem or repurchase certain debt, make loans and investments, sell, transfer or otherwise dispose of certain assets, create or incur liens, enter into certain types of transactions with affiliates, consolidate, merge or sell all or substantially all of our assets, and enter into new lines of business.
In addition, we are required to maintain a cash reserve of
$11.5 million
for each Prospector Rig throughout the term of the Lease Agreements. During the term of the current drilling contract for each Prospector Rig, we are also required to pay to the Lessors any excess cash amounts earned under such contract, after payment of bareboat charter fees and operating expenses for such Prospector Rig and maintenance of any mandatory reserve cash amounts (the “Excess Cash Amounts”). These excess cash payments represent prepayment for the remaining rental payments under the applicable Lease Agreement (the “Cash Sweep”). As of
March 31, 2017
and
December 31, 2016
, we had short-term restricted cash balances of
$11 million
and
$9 million
, respectively, and long-term restricted cash balances of
$27 million
and
$29 million
, respectively, related to the Lease Agreements in “Restricted cash” on our Condensed 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.
NOTE
8
—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 Consensual Plan as liabilities subject to compromise in our condensed 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 Consensual 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 Consensual 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 Consensual 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 Condensed Consolidated Balance Sheets as of
March 31, 2017
and 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 Condensed Consolidated Balance Sheets as of
March 31, 2017
and 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 Condensed Consolidated Balance Sheets as of
March 31, 2017
and December 31, 2016. See Note 7 -
“Debt”
for a specific discussion on the debt instruments and related balances subject to compromise:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
(In thousands)
|
|
2017
|
|
2016
|
Revolving Credit Facility
|
|
$
|
709,100
|
|
|
$
|
709,100
|
|
Term Loan Facility
|
|
641,875
|
|
|
641,875
|
|
Senior Notes due 2022, bearing fixed interest at 6.75% per annum
|
|
456,572
|
|
|
456,572
|
|
Senior Notes due 2024, bearing fixed interest at 7.25% per annum
|
|
527,010
|
|
|
527,010
|
|
Interest payable on Senior Notes
|
|
37,168
|
|
|
37,168
|
|
Debt issuance costs on Revolving Credit Facility
|
|
(5,891
|
)
|
|
(5,891
|
)
|
Discount and debt issuance costs on Term Loan Facility
|
|
(7,259
|
)
|
|
(7,259
|
)
|
Debt issuance costs on Senior Notes
|
|
(14,012
|
)
|
|
(14,012
|
)
|
Liabilities subject to compromise
|
|
$
|
2,344,563
|
|
|
$
|
2,344,563
|
|
NOTE
9
—REORGANIZATION ITEMS
ASC 852 requires that transactions and events directly associated with the reorganization be distinguished from the ongoing operations of the business. The Company uses “Reorganization items, net” on its Condensed Consolidated Statements of Operations to reflect the net revenues, expenses, gains and losses that are the direct result of the reorganization of the business. The following table summarizes the components included in “Reorganization items, net”:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
(In thousands)
|
|
2017
|
|
2016
|
Professional fees
|
|
$
|
16,448
|
|
|
$
|
18,616
|
|
Other
|
|
2,026
|
|
|
3,226
|
|
Total Reorganization items, net
|
|
$
|
18,474
|
|
|
$
|
21,842
|
|
Included in Reorganization items, net for the
three months ended March 31, 2017
is approximately
$10 million
of cash paid for professional fees and
$8 million
of accrued expenses.
Included in Reorganization items, net for the
three months ended March 31, 2016
is approximately
$13 million
of cash paid for professional fees,
$6 million
of accrued expenses and
$3 million
of non-cash amortization associated with the reorganization.
NOTE 10—CONDENSED COMBINED DEBTOR-IN-POSSESSION FINANCIAL INFORMATION
The financial statements below represent the condensed combined financial statements of the Debtors. Effective January 1, 2016, the Non-Filing entities are accounted for as non-consolidated subsidiaries in these financial statements and, as such, their net earnings are included as “Equity in earnings of Non-Filing entities, net of tax” in the 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
(
Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2017
|
|
2016
|
Operating revenues
|
|
|
|
|
Contract drilling services
|
|
$
|
27,910
|
|
|
$
|
200,322
|
|
Reimbursables and other
|
|
3,039
|
|
|
17,098
|
|
|
|
30,949
|
|
|
217,420
|
|
Operating costs and expenses
|
|
|
|
|
Contract drilling services
|
|
42,687
|
|
|
104,428
|
|
Reimbursables
|
|
810
|
|
|
12,568
|
|
Depreciation and amortization
|
|
24,792
|
|
|
66,075
|
|
General and administrative
|
|
8,099
|
|
|
10,472
|
|
Loss on impairments
|
|
391
|
|
|
—
|
|
|
|
76,779
|
|
|
193,543
|
|
Operating loss before interest, reorganization items and income taxes
|
|
(45,830
|
)
|
|
23,877
|
|
Interest expense, net (contractual interest of $33,131 and $31,207 for the three months ended March 31, 2017 and 2016)
|
|
(14,966
|
)
|
|
(22,118
|
)
|
Other, net
|
|
1,251
|
|
|
794
|
|
Reorganization items, net
|
|
(18,474
|
)
|
|
(19,454
|
)
|
Loss before income taxes
|
|
(78,019
|
)
|
|
(16,901
|
)
|
Income tax provision
|
|
(2,222
|
)
|
|
(1,183
|
)
|
Net loss
|
|
(80,241
|
)
|
|
(18,084
|
)
|
Equity in earnings of Non-Filing entities, net of tax
|
|
9,825
|
|
|
12,874
|
|
Net loss attributable to Paragon
|
|
$
|
(70,416
|
)
|
|
$
|
(5,210
|
)
|
DEBTORS’ CONDENSED COMBINED BALANCE SHEET
(
Unaudited)
(In thousands
)
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2017
|
|
2016
|
ASSETS
|
|
|
|
|
Current assets
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
497,488
|
|
|
$
|
553,238
|
|
Accounts receivable, net of allowance for doubtful accounts of $25 million at March 31, 2017 and December 31, 2016, respectively
|
|
32,942
|
|
|
48,861
|
|
Accounts receivable from Non-Filing entities
|
|
723,010
|
|
|
647,657
|
|
Prepaid and other current assets
|
|
37,808
|
|
|
33,228
|
|
Total current assets
|
|
1,291,248
|
|
|
1,282,984
|
|
Investment in Non-Filing entities
|
|
1,057,476
|
|
|
1,074,335
|
|
Notes receivable from Non-Filing entities
|
|
63,671
|
|
|
58,759
|
|
Property and equipment, at cost
|
|
1,798,997
|
|
|
1,809,120
|
|
Accumulated depreciation
|
|
(1,499,594
|
)
|
|
(1,481,209
|
)
|
Property and equipment, net
|
|
299,403
|
|
|
327,911
|
|
Other assets
|
|
24,283
|
|
|
25,974
|
|
Total assets
|
|
$
|
2,736,081
|
|
|
$
|
2,769,963
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
Current liabilities
|
|
|
|
|
Current maturities of debt due to Non-Filing entities
|
|
$
|
3,606
|
|
|
$
|
3,606
|
|
Accounts payable
|
|
24,456
|
|
|
32,261
|
|
Accounts payable due to Non-Filing entities
|
|
1,019,635
|
|
|
941,644
|
|
Accrued payroll and related costs
|
|
22,002
|
|
|
24,591
|
|
Taxes payable
|
|
12,734
|
|
|
13,418
|
|
Interest payable
|
|
284
|
|
|
591
|
|
Other current liabilities
|
|
15,088
|
|
|
15,993
|
|
Total current liabilities
|
|
1,097,805
|
|
|
1,032,104
|
|
Long-term debt due to Non-Filing entities
|
|
2,112
|
|
|
2,112
|
|
Deferred income taxes
|
|
1,331
|
|
|
2,505
|
|
Other liabilities
|
|
23,579
|
|
|
24,758
|
|
Liabilities subject to compromise
|
|
2,344,563
|
|
|
2,344,563
|
|
Total liabilities
|
|
3,469,390
|
|
|
3,406,042
|
|
Equity
|
|
|
|
|
Total deficit
|
|
(733,309
|
)
|
|
(636,079
|
)
|
Total liabilities and equity
|
|
$
|
2,736,081
|
|
|
$
|
2,769,963
|
|
DEBTORS’ CONDENSED COMBINED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2017
|
|
2016
|
Net cash provided by (used in) operating activities
|
|
$
|
(53,539
|
)
|
|
$
|
74,940
|
|
|
|
|
|
|
Capital expenditures
|
|
(1,780
|
)
|
|
(15,884
|
)
|
Change in accrued capital expenditures
|
|
(406
|
)
|
|
(5,072
|
)
|
Net cash used in investing activities
|
|
(2,186
|
)
|
|
(20,956
|
)
|
|
|
|
|
|
Net cash used in financing activities
|
|
(25
|
)
|
|
—
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
(55,750
|
)
|
|
53,984
|
|
Cash and cash equivalents, beginning of period
|
|
553,238
|
|
|
466,917
|
|
Cash and cash equivalents, end of period
|
|
$
|
497,488
|
|
|
$
|
520,901
|
|
NOTE 11 —INCOME TAXES
We operate through various subsidiaries in numerous countries throughout the world. Consequently, income taxes have been based on the laws and rates in effect in the countries in which operations are conducted and in which we and our subsidiaries or our Predecessor and its subsidiaries were incorporated or otherwise considered to have a taxable presence. The change in the effective tax rate from period to period is primarily attributable to changes in the profitability or loss mix of our operations in various jurisdictions. As our operations continually change among numerous jurisdictions, and methods of taxation in these jurisdictions vary greatly, there is little direct correlation between the income tax provision or benefit and income or loss before taxes.
The income tax provision was
$2 million
and
$1 million
for the
three months ended March 31, 2017
and
2016
, respectively.
At
March 31, 2017
, the liabilities related to our unrecognized tax benefits, including estimated accrued interest and penalties, totaled
$20 million
, and if recognized, would reduce our income tax provision by
$20 million
. At
December 31, 2016
, the liabilities related to our unrecognized tax benefits totaled
$19 million
. It is reasonably possible that our existing liabilities related to our unrecognized tax benefits may increase or decrease in the next twelve months primarily due to the progression of open audits or the expiration of statutes of limitation. However, we cannot reasonably estimate a range of potential changes in our existing liabilities for unrecognized tax benefits due to various uncertainties, such as the unresolved nature of various audits.
NOTE 12—RESTRUCTURING CHARGES
During 2016 and 2017, 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 March 31, 2017, appropriate communications to impacted personnel had been completed. As a result, we recorded restructuring expense of
$3 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 three months ended March 31, 2017. We paid approximately
$4 million
in restructuring and employee separation related costs during 2017. We had
$6
million
and
$10 million
of accrued restructuring expense consisting of employee severance and other termination benefits in “Accrued payroll and related costs” on our Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016, respectively. We expect
$2 million
of restructuring expense related to the workforce reduction program to be recognized in “Contract drilling services”, “Labor contract drilling services” and “General and ad
ministrative” operating costs and expenses during the remainder of 2017.
NOTE
13
—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.
As of January 1, 2017, all active employees under our current defined benefit pension plans were transferred to a defined contribution pension plan as related to their future service. The accrued benefits under the defined benefit plan were frozen and all employees of those plans became deferred members. The transfer to a defined contribution pension plan was accounted for as a curtailment during the year ended December 31, 2016.
For the
three months ended March 31, 2017
pension benefit expense related to our frozen defined benefit pension plans, based on actuary estimates, are presented in the table below.
Pension cost includes the following components:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
(In thousands)
|
|
2017
|
|
2016
|
Service cost
|
|
$
|
18
|
|
|
$
|
1,174
|
|
Interest cost
|
|
471
|
|
|
580
|
|
Expected return on plan assets
|
|
(367
|
)
|
|
(465
|
)
|
Amortization of prior service cost
|
|
—
|
|
|
(5
|
)
|
Amortization of net actuarial loss
|
|
10
|
|
|
195
|
|
Net pension expense
|
|
$
|
132
|
|
|
$
|
1,479
|
|
During the
three months ended March 31, 2017
and
2016
, we made
no
contribution to our frozen defined benefit pension plans.
Defined Contribution and Other Benefit Plans
We sponsor a 401(k) defined contribution plan and a profit sharing plan. Other post-retirement benefit expense related to these other benefit plans included in the accompanying Condensed Consolidated Statements of Operations was
$0.7 million
and
$0.3 million
for the
three months ended March 31, 2017
and
2016
, respectively.
NOTE 14—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.
We have not entered into any hedging activity during
2017
. Depending on market conditions and availability of counterparties, we may elect to utilize short-term forward currency contracts in the future.
NOTE 15—FAIR VALUE OF FINANCIAL INSTRUMENTS
Our cash and cash equivalents, accounts receivable and accounts payable are by their nature short-term. As a result, the carrying values included in the accompanying Condensed Consolidated Balance Sheets approximate fair value.
Fair Value of Debt
The estimated fair values of our Senior Notes and Term Loan Facility were based on the quoted market prices for similar issues (Level 2 measurement).
The estimated fair value of our Senior Notes due July 15, 2022, excluding debt issuance costs of
$6 million
for
March 31, 2017
and
December 31, 2016
, respectively, and our Senior Notes due August 15, 2024, excluding debt issuance costs of
$8 million
for
March 31, 2017
and
December 31, 2016
, respectively, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subject to Compromise
|
|
|
March 31, 2017
|
|
December 31, 2016
|
(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
|
|
|
$
|
83,324
|
|
7.25% Senior Notes due August 15, 2024
|
|
527,010
|
|
|
99,146
|
|
|
527,010
|
|
|
93,544
|
|
Total senior unsecured notes
|
|
$
|
983,582
|
|
|
$
|
182,470
|
|
|
$
|
983,582
|
|
|
$
|
176,868
|
|
The estimated fair value of our Term Loan Facility, bearing interest at
5.75%
and
5.50%
, excluding unamortized discount and debt issuance costs of
$7 million
for both
March 31, 2017
and
December 31, 2016
, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subject to Compromise
|
|
|
March 31, 2017
|
|
December 31, 2016
|
(In thousands)
|
|
Carrying Value
|
|
Estimated Fair Value
|
|
Carrying Value
|
|
Estimated Fair Value
|
Term Loan Facility
|
|
$
|
641,875
|
|
|
$
|
251,336
|
|
|
$
|
641,875
|
|
|
$
|
244,113
|
|
The carrying amount of our variable-rate debt, the Revolving Credit Facility, which is subject to compromise as of
March 31, 2017
and 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 16—ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table sets forth the changes in the accumulated balances for each component of “Accumulated other comprehensive loss” (“AOCL”) for the
three months ended March 31, 2017
and
2016
. All amounts within the tables are shown net of tax.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Defined
Benefit
Pension
Items (1)
|
|
Foreign
Currency
Items
|
|
Total
|
Balance as of December 31, 2015
|
|
$
|
(20,351
|
)
|
|
$
|
(21,663
|
)
|
|
$
|
(42,014
|
)
|
Activity during period:
|
|
|
|
|
|
|
Other comprehensive loss before reclassification
|
|
—
|
|
|
2,068
|
|
|
2,068
|
|
Amounts reclassified from AOCL
|
|
187
|
|
|
—
|
|
|
187
|
|
Net other comprehensive income
|
|
187
|
|
|
2,068
|
|
|
2,255
|
|
Balance as of March 31, 2016
|
|
$
|
(20,164
|
)
|
|
$
|
(19,595
|
)
|
|
$
|
(39,759
|
)
|
|
|
|
|
|
|
|
Balance as of December 31, 2016
|
|
$
|
(14,329
|
)
|
|
$
|
(24,329
|
)
|
|
$
|
(38,658
|
)
|
Activity during period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income before reclassification
|
|
—
|
|
|
876
|
|
|
876
|
|
Amounts reclassified from AOCL
|
|
(98
|
)
|
|
—
|
|
|
(98
|
)
|
Net other comprehensive income
|
|
(98
|
)
|
|
876
|
|
|
778
|
|
Balance as of March 31, 2017
|
|
$
|
(14,427
|
)
|
|
$
|
(23,453
|
)
|
|
$
|
(37,880
|
)
|
|
|
(1)
|
Defined benefit pension items relate to actuarial losses, prior service credits, and the amortization of actuarial losses and prior service credits. Reclassifications from AOCL are recognized as expense on our Condensed Consolidated Statements of Operations through either “Contract drilling services” or “General and administrative.” See Note
13
,
“Employee Benefit Plans”
for additional information.
|
NOTE
17
—COMMITMENTS AND CONTINGENCIES
Purchase Commitments
We have outstanding commitments, including shipyard and purchase commitments of approximately
$582 million
at
March 31, 2017
. Our purchase commitments consist of obligations outstanding to external vendors primarily related to future capital purchases and
$579 million
due from certain of our Non-Filing entities to Shanghai Waigaoqiao Ship Co. Ltd. (“SWS”) for the construction of
three
high specification jackups in China. These units are technically complete, however, we have reached agreements with SWS to defer delivery of these units until October 2017 as there are no opportunities to secure acceptable contracts for the assets in the current business environment. Each newbuild has been built pursuant to a contract between one of these Non-Filing entities and SWS, without our parent company guarantee or other direct recourse to any of our other subsidiaries other than the applicable non-filing entity. For us to take delivery of these assets, we would require an acceptable contract to justify the purchase price and suitable financing. In 2017 and 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
March 31, 2017
, we have received tax audit claims of approximately
$382 million
, of which
$95 million
is subject to indemnity by Noble, primarily in Mexico and Brazil, attributable to our income, customs and other business taxes. In addition, as of
March 31, 2017
, approximately
$34 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. We may also address certain of these claims as part of the resolution of our Bankruptcy cases and subsequent winding up of certain subsidiaries. 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
March 31, 2017
.
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
$89 million
, of which
$25 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.
Litigation with Noble Corporation
On February 12, 2016, we entered into a binding term sheet with Noble with respect to the Noble Settlement Agreement, which we executed on April 29, 2016. The Noble Settlement Agreement would have become effective upon the consummation of the Original Plan, or a plan of reorganization substantially similar thereto, and the satisfaction of certain other conditions precedent as set forth in the Noble Settlement Agreement. Pursuant to the Noble Settlement Agreement, Noble would have provided 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”). Additionally, pursuant to the Noble Settlement Agreement, Noble would have been responsible for all of the ultimate tax liability for Noble legal entities and
50%
of the ultimate tax liability for our legal entities following the defense of the Mexican Tax Assessments. In consideration for this support, we had agreed to release Noble, fully and unconditionally, from any and all claims in relation to the Spin-Off.
On April 21, 2017, we filed our amendment to the New Plan with the Bankruptcy Court. Under the New Plan, we do not intend to seek approval of the Noble Settlement Agreement with the Bankruptcy Court. As a result, on April 21, 2017, Noble terminated the Noble Settlement Agreement.
On May 2, 2017, the Company filed further amendments to the New Plan (the Consensual Plan) and a related disclosure statement with the Bankruptcy Court. Pursuant to the Consensual Plan, the Company’s creditors will pursue litigation against Noble through the establishment of the Litigation Trust, which the Company will fund with the Litigation Loan Amount of up to
$10 million
. Under the Consensual Plan, the first
$10 million
of proceeds from the litigation against Noble will be applied to repay the Litigation Loan Amount, and any balance of the first
$10 million
of proceeds will be shared
50%
/
50%
between the Bondholders and Secured Creditors. Any amounts above the first
$10 million
of proceeds will be split in a ratio of
75%
/
25%
in favor of the Bondholders.
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
March 31, 2017
, 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
$9 million
held in restricted cash. Certain of our subsidiaries issued guarantees to the temporary import status of rigs or equipment imported into certain countries in which we operated. These guarantees are issued in lieu of payment of custom, value added or similar taxes in those countries.
Separation Agreements
In connection with the Spin-Off, we entered into several definitive agreements with Noble or its subsidiaries that, among other things, set forth the terms and conditions of the Spin-Off and provide a framework for our relationship with Noble after the Spin-Off, including the following agreements:
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•
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Master Separation Agreement;
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•
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Employee Matters Agreement;
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•
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Transition Services Agreement relating to services Noble and Paragon will provide to each other on an interim basis; and
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•
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Transition Services Agreement relating to Noble’s Brazil operations.
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Pursuant to these agreements with Noble, our Condensed Consolidated Balance Sheets include the following balances due from and to Noble as of
March 31, 2017
and
December 31, 2016
:
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March 31,
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December 31,
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(In thousands)
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2017
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|
2016
|
Accounts receivable
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$
|
1,007
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|
|
$
|
1,149
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Other current assets
|
|
461
|
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|
461
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|
Other assets
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7,274
|
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|
7,157
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Due from Noble
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$
|
8,742
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|
$
|
8,767
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Accounts payable
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$
|
13
|
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|
$
|
211
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Other current liabilities
|
|
2,403
|
|
|
2,594
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|
Other liabilities
|
|
2,527
|
|
|
3,268
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|
Due to Noble
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|
$
|
4,943
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|
|
$
|
6,073
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These receivables and payables primarily relate to rights and obligations under the 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 18—SUPPLEMENTAL CASH FLOW INFORMATION
The net effect of changes in other assets and liabilities on cash flows from operating activities is as follows:
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Three Months Ended
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March 31,
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(In thousands)
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2017
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2016
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Accounts receivable
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$
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18,643
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$
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23,471
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Other current assets
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(4,237
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)
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4,218
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Other assets
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862
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5,285
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Accounts payable and accrued payroll
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(17,787
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)
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(3,966
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)
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Other current liabilities
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(1,981
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)
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|
2,960
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Other liabilities
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|
(1,232
|
)
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|
1,081
|
|
Prepaid and accrued reorganization items
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8,449
|
|
|
9,122
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|
Net change in other assets and liabilities
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$
|
2,717
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|
|
$
|
42,171
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|
|
|
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Supplemental information for non-cash activities:
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Accrued capital expenditures
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|
$
|
1,447
|
|
|
$
|
4,883
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|
Reclassification of Liabilities subject to compromise
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|
—
|
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1,709,347
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|
Netting of VAT receivables and payables
|
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12,307
|
|
|
—
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We made income tax payments, of approximately
$2 million
and
$5 million
during the
three months ended March 31, 2017
and
2016
, respectively.
NOTE 19—SEGMENT AND RELATED INFORMATION
As of
March 31, 2017
, 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 Consensual Plan, if approved, we will focus on the markets of the North Sea, the Middle East and India.