PACIFIC DRILLING S.A., 20-F filed on 3/12/2019
Annual and Transition Report (foreign private issuer)
v3.19.1
Document and Entity Information
12 Months Ended
Dec. 31, 2018
shares
Document And Entity Information [Abstract]  
Document Type 20-F
Amendment Flag false
Document Period End Date Dec. 31, 2018
Document Fiscal Year Focus 2018
Document Fiscal Period Focus FY
Entity Registrant Name PACIFIC DRILLING S.A.
Entity Central Index Key 0001517342
Current Fiscal Year End Date --12-31
Entity Well-Known Seasoned Issuer No
Entity Current Reporting Status Yes
Entity Filer Category Non-accelerated Filer
Entity Voluntary Filers No
Entity Common Stock, Shares Outstanding 75,031,380
Entity Emerging Growth Company false
Entity Shell Company false
v3.19.1
Consolidated Statements of Operations - USD ($)
shares in Thousands, $ in Thousands
1 Months Ended 11 Months Ended 12 Months Ended
Dec. 31, 2018
Nov. 19, 2018
Dec. 31, 2017
Dec. 31, 2016
Revenues        
Contract drilling $ 28,489      
Type of Revenue [Extensible List] us-gaap:OilAndGasServiceMember      
Costs and expenses        
Operating expenses $ (19,744)      
General and administrative expenses (4,245)      
Depreciation and amortization expense (27,277)      
Total costs and expenses (51,266)      
Operating income (loss) (22,777)      
Other income (expense)        
Interest expense (10,904)      
Reorganization items (1,300)      
Interest income 1,008      
Equity earnings in unconsolidated subsidiaries 392      
Expenses to unconsolidated subsidiaries, net (1,198)      
Other income (expense) 526      
Loss before income taxes (34,253)      
Income tax (expense) benefit 6,769      
Net loss $ (27,484)      
Loss per common share, basic (in dollars per share) $ (0.37)      
Weighted-average number of common shares, basic 75,010      
Loss per common share, diluted (in dollars per share) $ (0.37)      
Weighted-average number of common shares, diluted 75,010      
Predecessor        
Revenues        
Contract drilling   $ 236,379 $ 319,716 $ 769,472
Type of Revenue [Extensible List]   us-gaap:OilAndGasServiceMember us-gaap:OilAndGasServiceMember us-gaap:OilAndGasServiceMember
Costs and expenses        
Operating expenses   $ (189,606) $ (244,089) $ (290,038)
General and administrative expenses   (50,604) (87,134) (63,379)
Depreciation and amortization expense   (248,302) (278,949) (275,901)
Total costs and expenses   (488,512) (610,172) (629,318)
Operating income (loss)   (252,133) (290,456) 140,154
Other income (expense)        
Interest expense   (106,632) (178,983) (189,044)
Write-off of deferred financing costs     (30,846)  
Gain on debt extinguishment       36,233
Reorganization items   (1,799,664) (6,474)  
Interest income   3,148 2,717 362
Other income (expense)   (1,904) (8,261) (2,755)
Loss before income taxes   (2,157,185) (512,303) (15,050)
Income tax (expense) benefit   2,308 (12,863) (22,107)
Net loss   $ (2,154,877) $ (525,166) $ (37,157)
Loss per common share, basic (in dollars per share)   $ (100.89) $ (24.64) $ (1.76)
Weighted-average number of common shares, basic   21,359 21,315 21,167
Loss per common share, diluted (in dollars per share)   $ (100.89) $ (24.64) $ (1.76)
Weighted-average number of common shares, diluted   21,359 21,315 21,167
v3.19.1
Consolidated Statements of Comprehensive Income (loss) - USD ($)
$ in Thousands
1 Months Ended 11 Months Ended 12 Months Ended
Dec. 31, 2018
Nov. 19, 2018
Dec. 31, 2017
Dec. 31, 2016
Net loss $ (27,484)      
Other comprehensive income (loss):        
Total comprehensive loss $ (27,484)      
Predecessor        
Net loss   $ (2,154,877) $ (525,166) $ (37,157)
Other comprehensive income (loss):        
Unrealized loss on available-for-sale securities     (485)  
Reclassification adjustment for other-than-temporary impairment on available-for-sale securities realized in net income     485  
Unrecognized loss on derivative instruments     (565) (6,290)
Reclassification adjustment for loss on derivative instruments realized in net income   643 5,265 8,798
Reclassification adjustment for loss on derivative instruments realized in property and equipment       1,789
Total other comprehensive income   643 4,700 4,297
Total comprehensive loss   $ (2,154,234) $ (520,466) $ (32,860)
v3.19.1
Consolidated Balance Sheets - USD ($)
$ in Thousands
Dec. 31, 2018
Nov. 20, 2018
Nov. 19, 2018
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Assets:            
Cash and cash equivalents $ 367,577   $ 388,500      
Restricted cash 21,498   58,675      
Accounts receivable, net 40,549   28,879      
Other receivable 28,000   28,000      
Materials and supplies 40,429   40,307      
Deferred costs, current 482          
Prepaid expenses and other current assets 8,667   10,815      
Total current assets 507,202   555,176      
Property and equipment, net 1,915,172   1,920,474      
Receivable from unconsolidated subsidiaries 204,790   204,790      
Intangible asset 85,053   100,000      
Investment in unconsolidated subsidiaries 11,876   5,032      
Other assets 24,120   9,067      
Total assets 2,748,213   2,794,539      
Liabilities and shareholders’ equity:            
Accounts payable 14,941   12,147      
Accrued expenses 25,744   62,094      
Accrued interest 16,576   9,422      
Total current liabilities 57,261   83,663      
Long-term debt, net of current maturities 1,039,335   1,035,641      
Payable to unconsolidated subsidiaries 4,400   1,725      
Other long-term liabilities 28,259   27,541      
Total liabilities not subject to compromise 1,129,255   1,148,570      
Commitments and contingencies          
Shareholders’ equity:            
Common shares, $0.01 par value per share, 82,500 and 5,000,000 shares authorized, 82,500 and 22,551 shares issued and 75,031 and 21,339 shares outstanding as of December 31, 2018 and December 31, 2017, respectively 750   750      
Additional paid-in capital 1,645,692   1,645,219      
Accumulated deficit (27,484)          
Total shareholders’ equity 1,618,958 $ 1,645,969        
Total liabilities and shareholders’ equity $ 2,748,213   2,794,539      
Predecessor            
Assets:            
Cash and cash equivalents     154,238 $ 308,948    
Restricted cash     1,034,470 8,500    
Accounts receivable, net     28,881 40,909    
Other receivable     28,000      
Materials and supplies     83,800 87,332    
Deferred costs, current     11,371 14,892    
Prepaid expenses and other current assets     13,281 14,774    
Total current assets     1,354,041 475,355    
Property and equipment, net     4,422,709 4,652,001    
Long-term receivable     202,575 202,575    
Other assets     27,279 33,030    
Total assets     6,006,604 5,362,961    
Liabilities and shareholders’ equity:            
Accounts payable     14,161 11,959    
Accrued expenses     56,817 36,174    
Accrued interest     45,770 6,088    
Deferred revenue, current     16,246 23,966    
Total current liabilities     182,994 78,187    
Long-term debt, net of current maturities     969,158      
Deferred revenue       12,973    
Other long-term liabilities     30,253 32,323    
Total liabilities not subject to compromise     1,182,405 123,483    
Liabilities subject to compromise     3,084,874 3,087,677    
Commitments and contingencies          
Shareholders’ equity:            
Common shares, $0.01 par value per share, 82,500 and 5,000,000 shares authorized, 82,500 and 22,551 shares issued and 75,031 and 21,339 shares outstanding as of December 31, 2018 and December 31, 2017, respectively     214 213    
Additional paid-in capital     2,368,232 2,366,464    
Accumulated other comprehensive loss     (13,850) (14,493)    
Accumulated deficit     (615,271) (200,383)    
Total shareholders’ equity     106 2,151,801 $ 2,666,200 $ 2,692,055
Total liabilities and shareholders’ equity     $ 6,006,604 $ 5,362,961    
v3.19.1
Consolidated Balance Sheets (Parenthetical) - $ / shares
shares in Thousands
Dec. 31, 2018
Nov. 19, 2018
Dec. 31, 2017
Common shares, par value (in dollars per share) $ 0.01   $ 0.01
Common shares, shares authorized 82,500    
Common shares, shares issued 82,500    
Common shares, shares outstanding 75,031 75,000  
Predecessor      
Common shares, shares authorized     5,000,000
Common shares, shares issued     22,551
Common shares, shares outstanding     21,339
v3.19.1
Consolidated Statements of Shareholders' Equity - USD ($)
shares in Thousands, $ in Thousands
Common Shares
Additional Paid-In Capital
Treasury Shares
Accumulated Other Comprehensive Loss
Retained Earnings
Total
Beginning Balance (in shares) (Predecessor) at Dec. 31, 2015 21,121   2,156      
Beginning Balance (Predecessor) at Dec. 31, 2015 $ 218 $ 2,383,387 $ (30,000) $ (23,490) $ 361,940 $ 2,692,055
Increase (Decrease) in Stockholders' Equity [Roll Forward]            
Shares issued under share-based compensation plan (in shares) | Predecessor 63   (63)      
Shares issued under share-based compensation plan | Predecessor $ 1 (90)       (89)
Cancellation of treasury shares (in shares) | Predecessor     (726)      
Cancellation of treasury shares | Predecessor $ (7) (29,993) $ 30,000      
Share-based compensation | Predecessor   7,094       7,094
Other comprehensive income | Predecessor       4,297   4,297
Net loss | Predecessor         (37,157) (37,157)
Ending Balance (in shares) (Predecessor) at Dec. 31, 2016 21,184   1,367      
Ending Balance (Predecessor) at Dec. 31, 2016 $ 212 2,360,398 $ 0 (19,193) 324,783 2,666,200
Increase (Decrease) in Stockholders' Equity [Roll Forward]            
Shares issued under share-based compensation plan (in shares) | Predecessor 155   (155)      
Shares issued under share-based compensation plan | Predecessor $ 1 (200)       (199)
Modification of unvested awards from equity to liability | Predecessor   (553)       (553)
Share-based compensation | Predecessor   6,819       6,819
Other comprehensive income | Predecessor       4,700   4,700
Net loss | Predecessor         (525,166) $ (525,166)
Ending Balance (in shares) (Predecessor) at Dec. 31, 2017 21,339   1,212     21,339
Ending Balance (Predecessor) at Dec. 31, 2017 $ 213 2,366,464   (14,493) (200,383) $ 2,151,801
Increase (Decrease) in Stockholders' Equity [Roll Forward]            
Shares issued under share-based compensation plan (in shares) | Predecessor 29   (29)      
Shares issued under share-based compensation plan | Predecessor $ 1 (5)       (4)
Share-based compensation | Predecessor   2,543       2,543
Other comprehensive income | Predecessor       643   643
Net loss | Predecessor         (2,154,877) $ (2,154,877)
Ending Balance (in shares) (Predecessor) at Nov. 19, 2018 21,368   1,183      
Ending Balance (in shares) at Nov. 19, 2018           75,000
Ending Balance (Predecessor) at Nov. 19, 2018 $ 214 2,369,002   (13,850) (2,355,260) $ 106
Increase (Decrease) in Stockholders' Equity [Roll Forward]            
Reverse stock split $ (214) 214        
Reverse stock split (in shares) (21,366)   (1,183)      
Elimination of predecessor equity balances   (2,369,110)   13,850 2,355,260  
Equity conversion (in shares) 24,416          
Equity conversion $ 244 1,152,199       1,152,443
Equity offerings (in shares) 50,582          
Equity offerings $ 506 492,914       493,420
Issuance of shares reserved for share-based compensation plan (in shares)     7,500      
Ending Balance (in shares) at Nov. 20, 2018 75,000   7,500      
Ending Balance at Nov. 20, 2018 $ 750 1,645,219       $ 1,645,969
Beginning Balance (in shares) (Predecessor) at Nov. 19, 2018 21,368   1,183      
Beginning Balance (in shares) at Nov. 19, 2018           75,000
Beginning Balance (Predecessor) at Nov. 19, 2018 $ 214 2,369,002   $ (13,850) (2,355,260) $ 106
Increase (Decrease) in Stockholders' Equity [Roll Forward]            
Shares issued under share-based compensation plan (in shares) 31   (31)      
Shares issued under share-based compensation plan   (126)       (126)
Share-based compensation   599       599
Net loss         (27,484) $ (27,484)
Ending Balance (in shares) at Dec. 31, 2018 75,031   7,469     75,031
Ending Balance at Dec. 31, 2018 $ 750 $ 1,645,692     $ (27,484) $ 1,618,958
v3.19.1
Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
1 Months Ended 11 Months Ended 12 Months Ended
Dec. 31, 2018
Nov. 19, 2018
Dec. 31, 2017
Dec. 31, 2016
Cash flow from operating activities:        
Net loss $ (27,484)      
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:        
Depreciation and amortization expense 27,277      
Amortization of deferred costs 128      
Amortization of debt premium, net (38)      
Interest paid-in-kind 3,732      
Deferred income taxes (6,507)      
Share-based compensation expense 599      
Changes in operating assets and liabilities:        
Accounts receivable (11,670)      
Materials and supplies (122)      
Prepaid expenses and other assets (11,177)      
Accounts payable and accrued expenses (16,490)      
Net cash provided by (used in) operating activities (41,752)      
Cash flow from investing activities:        
Capital expenditures (2,697)      
Net cash used in investing activities (2,697)      
Cash flow from financing activities:        
Payments for shares issued under share-based compensation plan (126)      
Payments for financing costs (13,525)      
Net cash provided by (used in) financing activities (13,651)      
Increase (decrease) in cash and cash equivalents (58,100)      
Cash, cash equivalents and restricted cash, beginning of period 447,175      
Cash, cash equivalents and restricted cash, end of period 389,075 $ 447,175    
Predecessor        
Cash flow from operating activities:        
Net loss   (2,154,877) $ (525,166) $ (37,157)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:        
Depreciation and amortization expense   248,302 278,949 275,901
Amortization of deferred revenue   (20,212) (46,829) (67,053)
Amortization of deferred costs   13,882 11,689 13,945
Amortization of deferred financing costs   1,639 24,889 18,786
Amortization of debt premium, net     940 1,279
Interest paid-in-kind   4,933    
Write-off of deferred financing costs     30,846  
Deferred income taxes   4,103 7,409 15,494
Share-based compensation expense   2,543 6,819 7,094
Gain on debt extinguishment       (36,233)
Other-than-temporary impairment of available-for-sale securities     6,829  
Reorganization items   1,746,764 5,315  
Changes in operating assets and liabilities:        
Accounts receivable   12,028 53,713 73,428
Materials and supplies   3,532 6,187 2,564
Prepaid expenses and other assets   (32,962) (20,457) (29,276)
Accounts payable and accrued expenses   (10,096) 38,214 (24,843)
Deferred revenue   (481) 5,780 35,175
Net cash provided by (used in) operating activities   (180,902) (114,873) 249,104
Cash flow from investing activities:        
Capital expenditures   (18,624) (36,645) (52,625)
Deconsolidation of Zonda Debtors   (4,910)    
Purchase of available-for-sale securities     (6,000)  
Net cash used in investing activities   (23,534) (42,645) (52,625)
Cash flow from financing activities:        
Payments for shares issued under share-based compensation plan   (4) (199) (89)
Proceeds from debtor-in-possession financing   50,000    
Payments for debtor-in-possession financing   (50,000)    
Proceeds from long-term debt   1,000,000   450,000
Payments on long-term debt   (1,136,478) (146,473) (110,832)
Proceeds from equity offerings   500,000    
Payments for financing costs   (29,355) (4,530) (25,423)
Net cash provided by (used in) financing activities   334,163 (151,202) 313,656
Increase (decrease) in cash and cash equivalents   129,727 (308,720) 510,135
Cash, cash equivalents and restricted cash, beginning of period $ 447,175 317,448 626,168 116,033
Cash, cash equivalents and restricted cash, end of period   $ 447,175 $ 317,448 $ 626,168
v3.19.1
Nature of Business
12 Months Ended
Dec. 31, 2018
Nature of Business  
Nature of Business

Note 1—Nature of Business

Pacific Drilling S.A. and its subsidiaries (“Pacific Drilling,” the “Company,” “we,” “us” or “our”) is an international offshore drilling contractor committed to being the preferred provider of offshore drilling services to the oil and natural gas industry through the use of high-specification floating rigs. Our primary business is to contract our fleet to drill wells for our clients.

v3.19.1
Emergence from Bankruptcy Proceedings
12 Months Ended
Dec. 31, 2018
Emergence from Bankruptcy Proceedings  
Emergence from Bankruptcy Proceedings

Note 2—Emergence from Bankruptcy Proceedings

By order entered on November 2, 2018, the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) confirmed the Company’s Modified Fourth Amended Joint Plan of  Reorganization, dated October 31, 2018 (the “Plan”) that had been filed with the Bankruptcy Court in connection with the filing by the Company and certain of its subsidiaries (the “Initial Debtors”) of petitions (the “Bankruptcy Petitions”) on November 12, 2017 (the “Petition Date”) with the Bankruptcy Court seeking relief under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”). On November 19, 2018 (the “Plan Effective Date”), the Company and the Initial Debtors other than the Zonda Debtors (described below) (the “Debtors”) emerged from bankruptcy after successfully completing their reorganization pursuant to the Plan. The Company’s two subsidiaries involved in the arbitration with Samsung Heavy Industries Co. Ltd. (“SHI”) related to the Pacific Zonda, Pacific Drilling VIII Limited and Pacific Drilling Services, Inc. (together, the “Zonda Debtors”), filed a separate plan of reorganization that was confirmed by order of the Bankruptcy Court on January 30, 2019 and are not Debtors under the Plan.

During the bankruptcy proceedings, the Debtors operated as “debtors-in-possession” in accordance with applicable provisions of the Bankruptcy Code.

Upon emergence of the Company from bankruptcy on November 19, 2018 in accordance with the Plan:

·

The Company’s pre-petition 2013 Revolving Credit Facility and SSCF (both as defined below in Note 8), and post-petition debtor-in-possession financing were repaid in full;

·

Holders of the Company’s Term Loan B, 2017 Notes and 2020 Notes (each term as defined below in Note 8) received an aggregate of 24,416,442 common shares (or, approximately 32.6% of the outstanding shares) in exchange for their claims;

·

The Company issued an aggregate of 44,174,136 common shares (or, approximately 58.9% of the outstanding shares) to holders of Term Loan B, 2017 Notes and 2020 Notes who subscribed in the Company’s $460.0 million equity rights offering;

·

The Company issued 3,841,229 common shares (or, approximately 5.1% of the outstanding shares) to Quantum Pacific Gibraltar Limited (“QP”) in a $40.0 million private placement;

·

The Company issued 2,566,056 common shares (or, approximately 3.4% of the outstanding shares) to members of an ad hoc group of holders of the Term Loan B, 2017 Notes and 2020 Notes (the “Ad Hoc Group”) in payment of their fee for backstopping the equity rights offering;

·

The Company issued approximately 7.5 million common shares to Pacific Drilling Administrator Limited, a wholly owned subsidiary of the Company that serves as administrator of the Company’s 2018 Omnibus Stock Incentive Plan (the “2018 Stock Plan”), adopted by the board of directors, and which shares were reserved for issuance under the 2018 Stock Plan;

·

Existing holders of the Company’s common shares received no recovery and were diluted by the issuances of common shares under the Plan such that they held in the aggregate less than 0.003% of the Company’s common shares outstanding upon emergence from bankruptcy; and

·

The undisputed claims of other unsecured creditors such as clients, employees and vendors, will be paid in full in the ordinary course of business.

On the Plan Effective Date, as a result of the issuances of common shares described above, the Company had issued and outstanding 75.0 million common shares, and 7.5 million shares reserved for issuance pursuant to the 2018 Stock Plan.

 

In addition, pursuant to the Plan, on September 26, 2018 bankruptcy-remote subsidiaries of the Company issued, and on November 19, 2018 such subsidiaries merged with the Company and the Company assumed (the “Notes Assumption”):

·

$750.0 million in aggregate principal amount of 8.375% First Lien Notes due 2023, secured by first-priority liens on substantially all assets of the Debtors (the “First Lien Notes”); and

·

$273.6 million in aggregate principal amount of 11.0% / 12.0% Second Lien PIK Notes due 2024, secured by second-priority liens on substantially all assets of the Debtors (the “Second Lien PIK Notes”). Approximately $23.6 million aggregate principal amount was issued as a commitment fee to the Ad Hoc Group for their agreement to backstop the issuance of the Second Lien PIK Notes.

Concurrent with the Notes Assumption, all of the Company’s subsidiaries other than the Zonda Debtors, certain immaterial subsidiaries and Pacific International Drilling West Africa Limited (“PIDWAL,” a Nigerian limited liability company indirectly 49% owned by the Company) guaranteed on a senior secured basis the First Lien Notes and Second Lien PIK Notes. It is expected that the Zonda Debtors will guarantee the First Lien Notes and Second Lien PIK Notes upon their emergence from bankruptcy pursuant to their separate plan of reorganization after the successful resolution of the arbitration proceeding involving the Pacific Zonda. See Note 17 for further discussion. If the Company is unsuccessful in the arbitration, the Company expects to liquidate the Zonda Debtors and the Zonda Debtors would not guarantee the First Lien Notes and Second Lien PIK Notes.

We have segregated liabilities and obligations whose treatment and satisfaction were dependent on the outcome of the Chapter 11 proceedings and have classified these items as liabilities subject to compromise on our consolidated balance sheets. The components of liabilities subject to compromise are as follows:

 

 

 

 

 

 

 

 

Successor

 

 

Predecessor

 

December 31, 2018

 

 

December 31, 2017

(in thousands)

 

 

 

 

 

 

2017 Senior Secured Notes

$

 —

 

 

$

439,364

2018 Senior Secured Term Loan B

 

 —

 

 

 

718,125

2013 Revolving Credit Facility

 

 —

 

 

 

475,000

Senior Secured Credit Facility

 

 —

 

 

 

661,478

2020 Senior Secured Notes

 

 —

 

 

 

750,000

Accrued interest

 

 —

 

 

 

39,618

Accounts payable and other estimated allowed claims

 

 —

 

 

 

4,092

Total liabilities subject to compromise

$

 —

 

 

$

3,087,677

See Note 8 for further discussion.

In addition, we have classified all income, expenses, gains or losses that were incurred or realized as a result of the Chapter 11 proceedings as reorganization items in our consolidated statements of operations. The components of reorganization items are as follows:

 

 

 

 

 

 

 

 

 

 

 

Successor

 

 

Predecessor

 

Period From

 

 

Period From

 

 

 

 

November 20, 2018

 

 

January 1, 2018

 

 

 

 

through

 

 

through

 

Year Ended

 

December 31, 2018

 

 

November 19, 2018

 

December 31, 2017

(in thousands)

 

 

 

 

 

 

 

 

 

Professional fees

$

1,300

 

 

$

82,787

 

$

6,447

Gain on the settlement of liabilities subject to compromise

 

 —

 

 

 

(794,218)

 

 

 —

Discharge of claims upon emergence from bankruptcy

 

 —

 

 

 

(80)

 

 

 —

Revision of estimated claims

 

 —

 

 

 

 —

 

 

27

Escrow interest income

 

 —

 

 

 

(2,940)

 

 

 —

Fresh start accounting adjustments

 

 —

 

 

 

2,514,115

 

 

 —

Total reorganization items

$

1,300

 

 

$

1,799,664

 

$

6,474

 

v3.19.1
Fresh Start Accounting
12 Months Ended
Dec. 31, 2018
Fresh Start Accounting  
Fresh Start Accounting

Note 3—Fresh Start Accounting

Fresh Start Accounting

 

Upon the Company’s emergence from Chapter 11 bankruptcy, we adopted fresh start accounting (“Fresh Start Accounting”) in accordance with the provisions of Accounting Standards Codification (“ASC”) 852, Reorganizations, (“ASC 852”) issued by the Financial Accounting Standards Board (“FASB”), which resulted in the Company becoming a new entity for financial reporting purposes. In accordance with ASC 852, the Company was required to adopt Fresh Start Accounting upon its emergence from Chapter 11 because (i) the holders of the then existing common shares of the Predecessor received less than 50% of the new common shares of the Successor outstanding upon emergence and (ii) the reorganization value of the Company’s assets immediately prior to confirmation of the Plan was less than the total of all postpetition liabilities and allowed claims.

 

Upon adoption of Fresh Start Accounting, the reorganization value derived from the enterprise value as disclosed in the Plan was allocated to the Company’s assets and liabilities based on their fair values (except for deferred income taxes) in accordance with ASC 805, Business Combinations. The amount of deferred income taxes recorded was determined in accordance with ASC 740, Income Taxes.  

 

The Plan Effective Date fair values of the Company’s assets and liabilities differed materially from their recorded values as reflected on the historical balance sheet. The effects of the Plan and the application of Fresh Start Accounting were reflected on the consolidated balance sheet as of November 19, 2018 and the related adjustments thereto were recorded in the consolidated statements of operations for the period January 1, 2018 through November 19, 2018.

 

As a result of the adoption of Fresh Start Accounting and the effects of the implementation of the Plan, the Company’s consolidated financial statements subsequent to November 19, 2018, are not comparable to its consolidated financial statements on and prior to November 19, 2018. References to “Successor” relate to the financial position and results of operations of the reorganized Company as of and subsequent to November 19, 2018. References to “Predecessor” relate to the financial position of the Company prior to, and results of operations through and including, November 19, 2018.

 

The Company’s consolidated financial statements and related footnotes are presented with a “black line” division, which delineates the lack of comparability between amounts presented after November 19, 2018 and amounts presented on or prior to November 19, 2018. The Company’s financial results for future periods following the application of Fresh Start Accounting will be different from historical trends and the differences may be material.

 

Reorganization Value

 

Under ASC 852, the Successor determined a value to be assigned to the equity of the emerging entity as of the date of adoption of Fresh Start Accounting. The Plan confirmed by the Bankruptcy Court estimated a range of enterprise values between $1,650 million and $2,500 million, with a midpoint of $2,075 million plus the fair value of assets associated with the arbitration with SHI related to the Pacific Zonda. The Company deemed it appropriate to use the midpoint between the low end and high end of the range to determine the final enterprise value of $2,075 million plus the estimated fair value of the assets associated with the arbitration with SHI of $204.7 million for Fresh Start Accounting.

 

The following table reconciles the enterprise value to the estimated fair value of our Successor common shares as of the Plan Effective Date (in thousands):

 

 

 

 

Enterprise value

$

2,075,000

Plus: Cash and cash equivalents (excludes funds held in professional fee escrow of $50.2 million)

 

401,910

Plus: Estimated fair value of the assets associated with the Zonda Arbitration

 

204,700

Less: Fair value of debt

 

(1,035,641)

Fair value of Successor common shares

$

1,645,969

 

The following table reconciles the enterprise value to the reorganization value of the Successor’s assets to be allocated to the Company’s individual assets as of the Plan Effective Date (in thousands):

 

 

 

 

Enterprise value

$

2,075,000

Plus: Cash and cash equivalents (excludes funds held in professional fee escrow of $50.2 million)

 

401,910

Plus: Estimated fair value of the assets associated with the Zonda Arbitration

 

204,700

Plus: Current liabilities

 

83,663

Plus: Non-current liabilities excluding long-term debt

 

29,266

Reorganization value of Successor’s assets to be allocated

$

2,794,539

 

 

With the assistance of financial advisors, we determined the enterprise and corresponding equity value of the Successor using various valuation methods, including: (i) a calculation of the present value of future cash flows based on our financial projections, and (ii) a peer group trading analysis with peer values evaluated on a dollar value per drillship basis. The enterprise value and corresponding equity value are dependent upon achieving the future financial results set forth in our valuations, as well as the realization of certain other assumptions. All estimates, assumptions, valuations and financial projections, including the fair value adjustments, the financial projections, the enterprise value and equity value projections, are inherently subject to significant uncertainties and the resolution of contingencies beyond our control. Accordingly, we cannot assure you that the estimates, assumptions, valuations or financial projections will be realized, and actual results could vary materially.

 

Valuation Process

 

The fair values of the Company’s principal assets, drillships and related equipment, were estimated with the assistance of third party valuation advisors.  The reorganization value was allocated to the Company’s individual assets and liabilities based on their fair values as described further as follows:

 

Drillships and related equipment

 

The fair value of the drillships and related equipment was determined using a combination of the discounted cash flow method (income approach), that we discounted at a rate of approximately 14%, and the cost approach. The income approach was utilized to estimate the fair value of drillships that generated positive returns on projected cash flows over the remaining economic useful life of the drillships and compared to the fair value utilizing the cost approach, adjusted as needed for asset type, age, physical deterioration and obsolescence.

 

Materials and Supplies

 

The fair value of the materials and supplies were determined by the direct and indirect cost approaches. They were analyzed on a line-by-line basis and each asset was adjusted for age, physical depreciation and obsolescence.

 

Intangible Asset

 

We applied the income approach to estimate the value of the client-related intangible asset of our drilling contracts. We determined the value by comparing the contractual day rates to the estimated comparable market day rates, and applying a discount rate of 2.9% to the amounts by which contractual revenue exceeded market. The discount rate reflects the corresponding credit rating of the customer related to the contract and the remaining term.

 

Assets associated with the Zonda Arbitration

 

We applied a probability weighted approach to estimate the value of assets associated with the Zonda Arbitration, which was presented within receivable from unconsolidated subsidiaries upon the deconsolidation of the Zonda Debtors. The analysis included estimating probabilities of success for the various outcomes and expected cash flows associated with each outcome. The probability weighted cash flows were discounted to the balance sheet date using market data. The analysis utilized certain unobservable inputs that require significant judgment for which there is little or no market data, which represent Level 3 fair value measurements. These included, but were not limited to, probability and timing of successfully recovering the advance payments and purchased equipment. See Note 7.

 

Long-term Debt

 

The fair value of the debt was estimated using quoted market prices to the extent available and significant other observable inputs, which represent Level 2 fair value measurements.

 

See below under “Fresh Start Adjustments” for additional information regarding assumptions used in the valuation of the Company’s various other significant assets and liabilities.

 

Consolidated Balance Sheet

 

The adjustments included in the following fresh start consolidated balance sheet reflect the effects of the transactions contemplated by the Plan and executed by the Company on the Plan Effective Date (reflected in the column “Reorganization Adjustments”), the deconsolidation of Zonda Debtors (reflected in the column “Deconsolidation of Zonda Debtors”) and fair value and other required accounting adjustments resulting from the adoption of Fresh Start Accounting (reflected in the column “Fresh Start Adjustments”). The explanatory notes provide additional information with regard to the adjustments recorded, the methods used to determine the fair values and significant assumptions.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of November 19, 2018

 

 

Predecessor

 

Reorganization Adjustments (1)

 

Deconsolidation of Zonda Debtors (14)

 

Fresh Start Accounting Adjustments

 

Successor

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

154,238

 

$

239,172

(2)

$

(4,910)

 

$

 —

 

$

388,500

Restricted cash

 

 

1,034,470

 

 

(975,795)

(3)

 

 —

 

 

 —

 

 

58,675

Accounts receivable, net

 

 

28,881

 

 

 —

 

 

(2)

 

 

 —

 

 

28,879

Other receivable

 

 

28,000

 

 

 —

 

 

 —

 

 

 —

 

 

28,000

Materials and supplies

 

 

83,800

 

 

 —

 

 

 —

 

 

(43,493)

(15)

 

40,307

Deferred costs, current

 

 

11,371

 

 

 —

 

 

 —

 

 

(11,371)

(16)

 

 —

Prepaid expenses and other current assets

 

 

13,281

 

 

(958)

(4)

 

(815)

 

 

(693)

(17)

 

10,815

Total current assets

 

 

1,354,041

 

 

(737,581)

 

 

(5,727)

 

 

(55,557)

 

 

555,176

Property and equipment, net

 

 

4,422,709

 

 

 —

 

 

(68,102)

 

 

(2,434,133)

(18)

 

1,920,474

Long-term receivable

 

 

202,575

 

 

 —

 

 

(202,575)

 

 

 

 

 —

Receivable from unconsolidated subsidiaries

 

 

 —

 

 

 —

 

 

262,925

 

 

(58,135)

(19)

 

204,790

Intangible asset

 

 

 —

 

 

 —

 

 

 —

 

 

100,000

(20)

 

100,000

Investment in unconsolidated subsidiaries

 

 

 —

 

 

 —

 

 

5,774

 

 

(742)

(19)

 

5,032

Other assets

 

 

27,279

 

 

(1,356)

(5)

 

(1,845)

 

 

(15,011)

(21)

 

9,067

Total assets

 

$

6,006,604

 

$

(738,937)

 

$

(9,550)

 

$

(2,463,578)

 

$

2,794,539

Liabilities and shareholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

14,161

 

$

1,247

(6)

$

(3,261)

 

$

 —

 

$

12,147

Accrued expenses

 

 

56,817

 

 

11,264

(7)

 

(5,987)

 

 

 —

 

 

62,094

Debtor-in-possession financing

 

 

50,000

 

 

(50,000)

(2)

 

 —

 

 

 —

 

 

 —

Accrued interest

 

 

45,770

 

 

(36,348)

(8)

 

 —

 

 

 —

 

 

9,422

Deferred revenue, current

 

 

16,246

 

 

 —

 

 

 —

 

 

(16,246)

(22)

 

 —

Total current liabilities

 

 

182,994

 

 

(73,837)

 

 

(9,248)

 

 

(16,246)

 

 

83,663

Long-term debt

 

 

969,158

 

 

 —

 

 

 —

 

 

66,483

(23)

 

1,035,641

Payable to unconsolidated subsidiaries

 

 

 —

 

 

 —

 

 

1,725

 

 

 —

 

 

1,725

Other long-term liabilities

 

 

30,253

 

 

1,782

(9)

 

(1,539)

 

 

(2,955)

(24)

 

27,541

Total liabilities not subject to compromise

 

 

1,182,405

 

 

(72,055)

 

 

(9,062)

 

 

47,282

 

 

1,148,570

Liabilities subject to compromise

 

 

3,084,874

 

 

(3,084,386)

(10)

 

(488)

 

 

 —

 

 

 —

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common shares

 

 

214

 

 

536

(11)

 

 —

 

 

 —

 

 

750

Additional paid-in capital

 

 

2,368,232

 

 

1,646,097

(12)

 

 —

 

 

(2,369,110)

(25)

 

1,645,219

Accumulated other comprehensive loss

 

 

(13,850)

 

 

 —

 

 

 —

 

 

13,850

(25)

 

 —

Accumulated deficit

 

 

(615,271)

 

 

770,871

(13)

 

 —

 

 

(155,600)

(25)

 

 —

Total shareholders’ equity

 

 

1,739,325

 

 

2,417,504

 

 

 —

 

 

(2,510,860)

 

 

1,645,969

Total liabilities and shareholders’ equity

 

$

6,006,604

 

$

(738,937)

 

$

(9,550)

 

$

(2,463,578)

 

$

2,794,539

 

 

Reorganization Adjustments

 

(1)

Represent amounts recorded as of the Plan Effective Date for the implementation of the Plan, including, among other items, settlement of the Predecessor’s liabilities subject to compromise, repayment of certain of the Predecessor’s debt, issuances of the Successor’s common shares, proceeds received from the Successor’s equity offerings and transfer of restricted cash for the issuance of the Successor’s debt.

 

(2)

Changes in cash and cash equivalents include the following (in thousands):

 

 

 

 

 

Transfer of restricted cash - escrow funds from the issuance of the First Lien Notes

$

767,578

Transfer of restricted cash - escrow funds from the issuance of the Second Lien PIK Notes

 

258,160

Proceeds from the equity offerings

 

500,000

Payment of 2013 Revolving Credit Facility

 

(475,000)

Payment of SSCF

 

(661,478)

Payment of debtor-in-possession financing (including $354 of accrued interest)

 

(50,354)

Payment of accrued interest on 2013 Revolving Credit Facility and SSCF

 

(35,994)

Funding of professional fee escrow

 

(50,175)

Payment of professional fees

 

(13,557)

Payment of bank fees

 

(8)

Net change in cash and cash equivalents

$

239,172

 

(3)

Changes in restricted cash includes the following (in thousands):

 

 

 

 

Transfer of restricted cash - escrow funds from the issuance of the First Lien Notes

$

(767,578)

Transfer of restricted cash - escrow funds from the issuance of the Second Lien PIK Notes

 

(258,160)

Funding of professional fee escrow

 

50,175

Payment of bank fees

 

(232)

Net change in restricted cash

$

(975,795)

 

 

(4)

Reflects the elimination of prepaid directors and officers insurance policies related to the Predecessor.

 

(5)

Reflects the elimination of deferred tax asset related to the implementation of the Plan.

 

(6)

Reflects the reinstatement of liabilities subject to compromise to be paid.

 

(7)

Changes in accrued expenses includes the following (in thousands):

 

 

 

 

Accrual of professional fees

$

9,450

Accrual of equity issuance costs

 

6,580

Accrual of other fees

 

1,593

Payment of professional fees

 

(6,342)

Reduction in income taxes related to the implementation of the Plan

 

(17)

Net change in accrued expenses

$

11,264

 

 

(8)

Reflects the payment of accrued interest (in thousands):

 

 

 

 

Payment of accrued interest on 2013 Revolving Credit Facility and SSCF

$

(35,994)

Payment of accrued interest on debtor-in-possession financing

 

(354)

Net change in accrued interest

$

(36,348)

 

 

(9)

Reflects the recognition of a deferred tax liability related to the implementation of the Plan.

 

(10)

Liabilities subject to compromise settled in accordance with the Plan and the resulting gain were determined as follows (in thousands):

 

 

 

 

Liabilities subject to compromise

$

3,084,874

Less liabilities subject to compromise related to unconsolidated subsidiaries remaining in bankruptcy

 

(488)

Payment of 2013 Revolving Credit Facility

 

(475,000)

Payment of SSCF

 

(661,478)

Reinstatement of claims that are expected to be paid

 

(1,247)

Issuance of Successor common shares to the holders of the 2017 Notes, Term Loan B and the 2020 Notes

 

(1,152,443)

Gain on settlement of liabilities subject to compromise

$

794,218

 

 

(11)

The increase in common shares reflects (in thousands):

 

 

 

 

Issuance of Successor common shares to the holders of the 2017 Notes, Term Loan B and the 2020 Notes at par

 

$

244

Equity offerings at par

 

506

Reduction of share capital for reverse stock split

 

(214)

Net change in common shares

$

536

 

 

(12)

The increase in additional paid-in capital reflects (in thousands):

 

 

 

 

Issuance of Successor common shares to the holders of the 2017 Notes, Term Loan B and the 2020 Notes

 

$

1,152,199

Equity offerings - additional paid-in capital

 

499,494

Reduction of share capital for reverse stock split

 

214

Cancellation of Predecessor share based compensation awards

 

770

Accrual of equity issuance costs

 

(6,580)

Net change in additional paid-in-capital

$

1,646,097

 

 

(13)

The decrease in accumulated deficit reflects (in thousands):

 

 

 

 

Gain on settlement of liabilities subject to compromise

$

794,218

Accrued professional fees

 

(9,450)

Accrued other fees

 

(1,593)

Elimination of prepaid directors and officers insurance policies related to the Predecessor

 

(958)

Cancellation of predecessor share based compensation awards

 

(770)

Professional and success fees paid on Plan Effective Date

 

(7,215)

Payment of bank fees

 

(240)

Elimination of deferred tax asset related to the implementation of the Plan

 

(1,356)

Recognition of a deferred tax liability related to the implementation of the Plan

 

(1,782)

Reduction in income tax related to the implementation of the Plan

 

17

Net change in accumulated deficit

$

770,871

 

Deconsolidation of Zonda Debtors

 

(14)

Represents the deconsolidation of Zonda Debtors as of November 19, 2018.  The Zonda Debtors filed a separate plan of reorganization and did not emerge from bankruptcy on the Plan Effective Date. Therefore, the Zonda Debtors were deconsolidated as of November 19, 2018.

 

Fresh Start Adjustments

 

(15)

Reflects the fair value adjustment of $43.5 million to the Company's materials and supplies due to the adoption of Fresh Start Accounting.

 

(16)

Reflects the elimination of current deferred costs of $11.4 million due to the adoption of Fresh Start Accounting.

 

(17)

Reflects the fair value adjustment to the Company's prepaid fuel due to the adoption of Fresh Start Accounting.

 

(18)

Reflects the fair value adjustment to the Company's property and equipment, net due to the adoption of Fresh Start Accounting (in thousands):

 

 

 

 

 

 

 

 

Successor

 

Predecessor

Drillships and related equipment

$

1,919,791

 

$

5,928,887

Other property and equipment

 

683

 

 

20,737

Total property and equipment

 

1,920,474

 

 

5,949,624

Accumulated depreciation

 

 —

 

 

(1,526,915)

Property and equipment, net

$

1,920,474

 

$

4,422,709

 

(19)

Reflects fair value adjustment to receivable from unconsolidated subsidiaries due to asset revaluation of the Zonda Debtors.

 

(20)

Reflects the recognition of an asset for the fair value of the client-related intangible asset of our drilling contracts, where contract rates are in excess of current market rates.

 

(21)

Reflects the elimination of deferred costs of $15.1 million, offset by an increase in deferred tax balances of $0.1 million due to the adoption of Fresh Start Accounting.

 

(22)

Reflects the elimination of deferred revenue due to the adoption of Fresh Start Accounting.

 

(23)

Reflects the elimination of unamortized deferred financing costs $59.4 million and fair value adjustment of $7.1 million to the Company's debt due to the adoption of Fresh Start Accounting.

 

(24)

Represents the adjustment to deferred tax balances of $3.0 million as a result of adopting Fresh Start Accounting.

 

(25)

Reflects the cumulative impact of Fresh Start Accounting adjustments discussed above and the elimination of Predecessor accumulated other comprehensive loss and accumulated deficit.

v3.19.1
Significant Accounting Policies
12 Months Ended
Dec. 31, 2018
Significant Accounting Policies  
Significant Accounting Policies

Note 4—Significant Accounting Policies

 Principles of Consolidation—Our consolidated financial statements include the accounts of Pacific Drilling S.A. and consolidated subsidiaries that we control by ownership of a majority voting interest and entities that meet the criteria for variable interest entities for which we are deemed to be the primary beneficiary for accounting purposes. We eliminate all intercompany transactions and balances in consolidation.

We are party to a Nigerian joint venture, Pacific International Drilling West Africa Limited (“PIDWAL”), with Derotech Offshore Services Limited (“Derotech”), a privately-held Nigerian registered limited liability company. Derotech owns 51% of PIDWAL and we own 49% of PIDWAL. Pacific Scirocco Ltd. (“PSL”) and Pacific Bora Ltd. (“PBL”), which own the Pacific Scirocco and Pacific Bora, respectively, are owned 49.9% by our wholly-owned subsidiary Pacific Drilling Limited (“PDL”) and 50.1% by Pacific Drillship Nigeria Limited (“PDNL”). PDNL is owned 0.1% by PDL and 99.9% by PIDWAL. Derotech will not accrue the economic benefits of its interest in PIDWAL unless and until it satisfies certain outstanding obligations to us and a certain pledge is cancelled by us. Likewise, PIDWAL will not accrue the economic benefits of its interest in PDNL unless and until it satisfies certain outstanding obligations to us and a certain pledge is cancelled by us. PIDWAL and PDNL are variable interest entities for which we are the primary beneficiary. Accordingly, we consolidate all interests of PIDWAL and PDNL in our consolidated financial statements and no portion of their operating results is allocated to the noncontrolling interest. See Note 20.

Our consolidated financial statements as of December 31, 2018 and for the Successor period in 2018 exclude the Zonda Debtors, our wholly-owned subsidiaries, which filed a separate plan of reorganization. We account for our investment in the Zonda Debtors using the equity method of accounting.

Accounting Estimates—The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”) requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the balance sheet date and the amounts of revenues and expenses recognized during the reporting period. On an ongoing basis, we evaluate our estimates and assumptions, including those related to allowance for doubtful accounts, financial instruments, depreciation of property and equipment, impairment of long-lived assets, long-term receivable, income taxes, share-based compensation and contingencies. We base our estimates and assumptions on historical experience and on various other factors we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from such estimates.

Revenue from Contracts with Clients—We earn revenue primarily by (i) providing our drillship, work crews, related equipment, services and supplies necessary to operate the rig, (ii) delivering the rig by mobilizing to and demobilizing from the drill location and (iii) performing certain pre-operating activities, including rig preparation activities or equipment modifications required for the contract.

Dayrate Drilling Revenue. Our drilling contracts provide for payment on a dayrate basis, with higher rates for periods when the drillship is operating and lower rates or zero rates for periods when drilling operations are interrupted or restricted. The dayrate invoices billed to the client are determined based on the varying rates applicable to the specific activities performed on an hourly basis. Such dayrate consideration is attributed to the distinct hourly increment to which it relates within the contract term. Therefore, we record dayrate drilling revenue consistent with the contractual rate invoiced for the services provided during the respective period.

Mobilization/Demobilization Revenue. We may receive fees for the mobilization and demobilization of our rigs. These activities are not considered to be distinct within the context of the contract and therefore, the associated revenue is allocated to the overall performance obligation and recognized ratably over the initial term of the related drilling contract. We record a contract liability for mobilization fees received, which is amortized ratably to contract drilling revenue as services are rendered over the initial term of the related drilling contract. Demobilization revenue expected to be received upon contract completion is estimated as part of the overall transaction price at contract inception. We record demobilization revenue in earnings ratably over the initial term of the contract with an offset to an accretive contract asset.

Contract Preparation Revenue. Some of our drilling contracts require downtime before the start of the contract to prepare the rig to meet client requirements. At times, we may be compensated by the client for such work. These activities are not considered to be distinct within the context of the contract. We record a contract liability for contract preparation fees received, which is amortized ratably to contract drilling revenue over the initial term of the related drilling contract.

Capital Upgrade Revenue. From time to time, we may receive fees from our clients for capital improvements or upgrades to our rigs to meet contractual requirements. These activities are not considered to be distinct within the context of our contracts. We record a contract liability for such fees and recognize them ratably as contract drilling revenue over the initial term of the related drilling contract.

Revenues Related to Reimbursable Expenses. We generally receive reimbursements from our clients for the purchase of supplies, equipment, personnel services and other services provided at their request in accordance with a drilling contract or other agreement. Such reimbursable revenue is variable and subject to uncertainty, as the amounts received and timing thereof are highly dependent on factors outside of our control. Accordingly, reimbursable revenue is not included in the total transaction price until the uncertainty is resolved, which typically occurs when the related costs are incurred on behalf of a client. We are generally considered a principal in such transactions.  Therefore, we record the associated revenue at the gross amount billed to the client in the period the corresponding goods and services are to be provided.

Cash and Cash Equivalents—Cash equivalents are highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash.

Restricted Cash—As of December 31, 2018 and 2017, our consolidated balance sheets included $8.5 million in restricted cash used as cash collateral under our treasury management services agreement with a financial institution. In addition, as of December 31, 2018, $13.0 million of our restricted cash balance were escrow funds remaining to settle professional fees incurred upon or prior to our emergence from our Chapter 11 proceedings.

Accounts Receivable—We record trade accounts receivable at the amount we invoice our clients. We provide an allowance for doubtful accounts, as necessary, based on a review of outstanding receivables, historical collection information and existing economic conditions. We do not generally require collateral or other security for receivables.

Other Receivable—As of December 31, 2018, other receivable on our consolidated balance sheets was $28.0 million of cash collateral held in the name of a financial institution as credit support for customs bonds issued in favor of a subsidiary of the Company.

Materials and Supplies—Materials and supplies held for consumption are carried at average cost if acquired after the adoption of Fresh Start Accounting or at fair value if already outstanding upon the adoption of Fresh Start Accounting. Materials and supplies balances were presented net of allowances for excess or obsolete materials and supplies of $0 and $11.1 million as of December 31, 2018 and 2017, respectively.

Property and Equipment—Upon the adoption of Fresh Start Accounting, high-specification drillships and other property and equipment consisting of purchased software systems, furniture, fixtures and other equipment are recorded at fair value. Capital expenditures made subsequent to the adoption of Fresh Start Accounting, including any major capital improvements, are recorded at cost. Ongoing maintenance, routine repairs and minor replacements are expensed as incurred.

Property and equipment are depreciated to their salvage value on a straight-line basis over the estimated useful lives of each class of assets. Our estimated useful lives of property and equipment are as follows:

 

 

 

 

    

Years

Drillships and related equipment (Successor)

 

8-32

Other property and equipment (Successor)

 

1-6

Drillships and related equipment (Predecessor)

 

15-35

Other property and equipment (Predecessor)

 

2-7

 

We review property and equipment for impairment when events or changes in circumstances indicate that the carrying amounts of our assets held and used may not be recoverable. Potential impairment indicators include steep declines in commodity prices and related market conditions, cold stacking of rigs or significant damage to the property and equipment that adversely affects the extent and manner of its use. We assess impairment using estimated undiscounted cash flows for the property and equipment being evaluated by applying assumptions regarding future operations, market conditions, dayrates, utilization and idle time. An impairment loss is recorded in the period if the carrying amount of the asset is not recoverable. During the Successor period in 2018 and the Predecessor periods in 2018, 2017 and 2016, there were no long-lived asset impairments.

Intangible Asset—We amortize our client-related intangible asset to depreciation and amortization expense within our consolidated statements of operations over its remaining drilling contract term on a straight-line basis.

Deferred Financing Costs—Deferred financing costs associated with long-term debt are carried at cost and are amortized to interest expense using the effective interest rate method over the term of the applicable long-term debt.

Foreign Currency Transactions—The consolidated financial statements are stated in U.S. dollars. We have designated the U.S. dollar as the functional currency for our foreign subsidiaries in international locations because we contract with clients, purchase equipment and finance capital using the U.S. dollar. Transactions in other currencies have been translated into U.S. dollars at the rate of exchange on the transaction date. Any gain or loss arising from a change in exchange rates subsequent to the transaction date is included as an exchange gain or loss. Monetary assets and liabilities denominated in currencies other than U.S. dollars are reported at the rates of exchange prevailing at the end of the reporting period. During the Successor period in 2018, foreign exchange losses were $0.1 million and recorded in other expense in our consolidated statements of operations. During the Predecessor periods in 2018, 2017 and 2016, foreign exchange losses were $0.1 million, $0.7 million and $0.5 million, respectively, and recorded in other expense within our consolidated statements of operations.

Earnings per Share—Basic earnings per common share (“EPS”) is computed by dividing the net income by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution from securities that could share in the earnings of the Company. Anti-dilutive securities are excluded from diluted EPS.

Fair Value Measurements—We estimate fair value at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market for the asset or liability. Our valuation techniques require inputs that are categorized using a three-level hierarchy as follows: (1) unadjusted quoted prices for identical assets or liabilities in active markets (“Level 1”), (2) direct or indirect observable inputs, including quoted prices or other market data, for similar assets or liabilities in active markets or identical assets or liabilities in less active markets (“Level 2”) and (3) unobservable inputs that require significant judgment for which there is little or no market data (“Level 3”). When multiple input levels are required for a valuation, we categorize the entire fair value measurement according to the lowest level input that is significant to the measurement even though we may have also utilized significant inputs that are more readily observable.

Share-Based Compensation—The grant date fair value of share-based awards granted to employees is recognized as an employee compensation expense over the requisite service period on a straight-line basis. For share-based awards to be settled in cash, compensation expense is remeasured each period with a cumulative adjustment to compensation cost based on changes in our share price. The amount of compensation expense ultimately recognized is based on the number of awards that do meet the vesting conditions at the vesting date. For the Successor, any adjustments to the compensation cost recognized in our consolidated statement of operations for awards that are forfeited are recognized in the period in which the forfeitures occur. For the Predecessor, the amount of compensation expense recognized is adjusted to reflect the number of awards for which the related vesting conditions are expected to be met using estimated forfeitures.

Derivatives—We apply cash flow hedge accounting to interest rate swaps that are designated as hedges of the variability of future cash flows. The derivative financial instruments are recorded on our consolidated balance sheets at fair value as either assets or liabilities. Changes in the fair value of derivatives designated as cash flow hedges, to the extent the hedge is effective, are recognized in accumulated other comprehensive income until the hedged item is recognized in earnings.

Hedge effectiveness is measured on an ongoing basis to ensure the validity of the hedges based on the relative cumulative changes in fair value between the derivative contract and the hedged item over time. Hedge accounting is discontinued prospectively if it is determined that the derivative is no longer effective in offsetting changes in the cash flows of the hedged item.

For the Predecessor, other comprehensive income was released to earnings as the asset was depreciated over its useful life for interest rate hedges related to interest capitalized in the construction of fixed assets. For all other interest rate hedges, other comprehensive income was released to earnings as interest expense was accrued on the underlying debt.

Contingencies—We record liabilities for estimated loss contingencies when we believe a loss is probable and the amount of the probable loss can be reasonably estimated. Once established, we adjust the estimated contingency loss accrual for changes in facts and circumstances that alter our previous assumptions with respect to the likelihood or amount of loss. We recognize legal fees related to loss contingencies as incurred.

Income Taxes—Income taxes are provided based upon the tax laws and rates in the countries in which our subsidiaries are registered and where their operations are conducted and income and expenses are earned and incurred, respectively. We recognize deferred tax assets and liabilities for the anticipated future tax effects of temporary differences between the financial statement basis and the tax basis of our assets and liabilities using the applicable enacted tax rates in effect the year in which the asset is realized or the liability is settled. A valuation allowance for deferred tax assets is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized.

We recognize tax benefits from an uncertain tax position only if it is more likely than not that the position will be sustained upon examination by taxing authorities based on the technical merits of the position. The amount recognized is the largest benefit that we believe has greater than a 50% likelihood of being realized upon settlement. Actual income taxes paid may vary from estimates depending upon changes in income tax laws, actual results of operations and the final audit of tax returns by taxing authorities. We recognize interest and penalties related to uncertain tax positions in income tax expense.

Reclassifications—Certain reclassifications of previously reported information have been made to conform to the current year presentation.

Recently Adopted Accounting Standards

Revenue from Contracts with Customers — In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASU Topic 605, Revenue Recognition. Under the new guidance, revenue is recognized when a client obtains control of promised goods or services and in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. We adopted ASU 2014-09 and its related amendments, or collectively, Topic 606, effective January 1, 2018 using the modified retrospective approach. Accordingly, we have applied the five-step method outlined in Topic 606 for determining when and how revenue is recognized for all contracts that were not completed as of the date of adoption. Revenues for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts have not been adjusted and continue to be reported under the previous revenue recognition guidance. For contracts that were modified before the effective date, we have considered the modification guidance within the new standard and determined that the revenue recognized and contract balances recorded prior to adoption for such contracts were not impacted. While Topic 606 requires additional disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with clients, its adoption did not have a material effect on our financial position, results of operations and cash flows. See Note 10.

Classification and Measurement of Financial Instruments — On January 25, 2016, the FASB issued ASU 2016-01, Financial Instruments — Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, which requires all equity investments that do not result in consolidation and are not accounted for under the equity method to be measured at fair value through earnings, and eliminates the available-for-sale classification for equity securities with readily determinable fair values. The standard requires entities to record a cumulative-effect adjustment on their balance sheets as of the beginning of the fiscal year of adoption. We adopted the standard effective January 1, 2018 with no impact to our consolidated financial statements.

Tax Accounting for Intra-Entity Asset Transfers — On October 24, 2016, the FASB issued ASU 2016-16, Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory, which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transaction occurs as opposed to deferring tax consequences and amortizing them into future periods. The standard requires a modified retrospective approach with a cumulative-effect adjustment directly to retained earnings at the beginning of the period of adoption. We adopted the standard effective January 1, 2018 with no impact to our consolidated financial statements.

Scope of Modification Accounting for Stock Compensation — On May 10, 2017, the FASB issued ASU 2017-09, Compensation — Stock Compensation (Topic 718) — Scope of Modification Accounting, which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. We adopted the standard effective January 1, 2018 with no impact to our consolidated financial statements.

Modification of Accounting for Hedging Activities — On August 28, 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815) — Targeted Improvements to Accounting for Hedging Activities, which eliminates the requirement to separately measure and report hedge ineffectiveness and requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The new guidance also eases certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness. We adopted the standard effective January 1, 2018 with no impact to our consolidated financial statements.

Recently Issued Accounting Standards

Leases — On February 25, 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize a right-of-use asset and liability for virtually all leases and updates previous accounting standards for lessors to align certain requirements with the updates to lessee accounting standards and the revenue recognition accounting standards. The update, which permits early adoption, is effective for annual and interim periods beginning after December 15, 2018. We expect to adopt the standard using the modified retrospective approach. For transactions in which we are considered a lessee, we expect to recognize a lease liability and a right-of-use asset of approximately $7.0 million based on our portfolio of leases upon adoption. Additionally, we believe that our drilling contracts contain a lease component. On July 30, 2018, the FASB issued ASU 2018-11 to provide certain practical expedients, which allow a new transition method to apply the new lease requirements at the effective date using a cumulative catch-up approach and allow lessors to not separate lease and non-lease components when the non-lease component is the predominant element of the combined component. The lessor practical expedient is limited to circumstances in which the lease, if accounted for separately, would be classified as an operating lease under Topic 842. We believe the non-lease component of our drilling contracts is the predominant element and that the lease component, if accounted for separately, would be classified as an operating lease. Accordingly, we expect that all of our drilling contracts will qualify for, and we expect to elect, the practical expedient in ASU 2018-11 to account for the combined component as a single component under Topic 606. We do not expect our adoption to have a material impact on revenue recognition of current or prior periods as compared to previous guidance nor do we expect a material impact to our pattern of revenue recognition in future periods.

Measurement of Credit Losses on Financial Instruments — On June 16, 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), which introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. The new model will apply to: (i) loans, accounts receivable, trade receivables, and other financial assets measured at amortized cost, (ii) loan commitments and certain other off-balance sheet credit exposures, (iii) debt securities and other financial assets measured at fair value through other comprehensive income and (iv) beneficial interests in securitized financial assets. This update is effective for annual and interim periods beginning after January 1, 2020. We are currently evaluating the effect the standard may have on our consolidated financial statements and related disclosures.

Changes to Fair Value Disclosure Requirements — On August 28, 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. Entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but public companies will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The guidance is effective for annual and interim periods beginning after January 1, 2020, with early adoption permitted. We are currently evaluating the effect the standard may have on our consolidated financial statement disclosures.

 

v3.19.1
Property and Equipment
12 Months Ended
Dec. 31, 2018
Property and Equipment  
Property and Equipment

Note 5—Property and Equipment

Property and equipment consists of the following:

 

 

 

 

 

 

 

 

 

 

Successor

 

 

Predecessor

 

    

December 31, 2018

    

    

December 31, 2017

(in thousands)

 

 

 

 

 

 

 

Drillships and related equipment

 

$

1,926,773

 

 

$

5,911,792

Other property and equipment

 

 

682

 

 

 

20,566

Property and equipment, cost

 

 

1,927,455

 

 

 

5,932,358

Accumulated depreciation

 

 

(12,283)

 

 

 

(1,280,357)

Property and equipment, net

 

$

1,915,172

 

 

$

4,652,001

 

 

 

 

 

 

 

During the Successor period in 2018 and the Predecessor periods in 2018, 2017 and 2016, depreciation expense was $12.3 million, $247.7 million, $278.2 million and $275.1 million, respectively.

v3.19.1
Intangible Asset
12 Months Ended
Dec. 31, 2018
Intangible Asset  
Intangible Asset

Note 6—Intangible Asset

Intangible asset consists of the following:

 

 

 

 

 

 

 

 

 

 

 

Successor

 

 

Predecessor

 

    

December 31, 2018

    

    

December 31, 2017

(in thousands)

 

 

 

 

 

 

 

Client-related intangible asset

 

$

100,000

 

 

$

 —

Accumulated amortization

 

 

(14,947)

 

 

 

 —

Intangible asset, net

 

$

85,053

 

 

$

 —

 

During the Successor period in 2018, amortization expense of intangible asset was $14.9 million, based on an amortization period of 0.8 year. As of December 31, 2018, the estimated 2019 amortization expense is $85.1 million.

v3.19.1
Receivable related to Zonda Arbitration
12 Months Ended
Dec. 31, 2018
Receivable related to Zonda Arbitration  
Receivable related to Zonda Arbitration

Note 7—Receivable related to Zonda Arbitration

On January 25, 2013, we entered into a contract with Samsung Heavy Industries Co., Ltd. (“SHI”) for the construction of an eighth drillship, the Pacific Zonda, which provided for a purchase price of approximately $517.5 million and an original delivery date of March 31, 2015 (the “Construction Contract”). On October 29, 2015, we exercised our right to rescind the Construction Contract due to SHI’s failure to timely deliver the drillship in accordance with the contractual specifications. The carrying value of the newbuild at the date of rescission was $315.7 million, consisting of (i) advance payments in the aggregate of $181.1 million paid by us to SHI, (ii) purchased equipment, (iii) internally capitalized construction costs and (iv) capitalized interest.

On November 25, 2015, SHI formally commenced an arbitration proceeding against us in accordance with the Construction Contract. On November 30, 2015, we made demand under the third party refund guarantee accompanying the Construction Contract for the amount of our advance payments made under the Construction Contract, plus interest. Any payment under the refund guarantee is suspended until an award under the arbitration is obtained.

The Zonda Debtors owned $75.0 million in purchased equipment for the Pacific Zonda, a majority of which remains on board the Pacific Zonda subject to return to us by SHI.

On November 19, 2018, the Debtors emerged from bankruptcy after successfully completing their reorganization pursuant to the Plan. As of that date, we deconsolidated the Zonda Debtors, which filed a separate plan of reorganization and are not Debtors under the Plan. See Note 3.

As a result of adopting Fresh Start Accounting, we estimated the receivable related to the Zonda Arbitration at $204.7 million, included within receivable from unconsolidated subsidiaries on our consolidated balance sheet. As of December 31, 2017, the carrying amount of the receivable related to the advance payments and accrued interest was $202.6 million, presented as a long-term receivable, while the purchased equipment was included in our property and equipment, net on our consolidated balance sheet. See Note 17.

v3.19.1
Debt
12 Months Ended
Dec. 31, 2018
Debt  
Debt

Note 8—Debt

Debt, net of debt premium (discount), consists of the following:

 

 

 

 

 

 

 

 

 

 

Successor

 

 

Predecessor

 

    

December 31, 2018

    

    

December 31, 2017

(in thousands)

 

 

 

 

 

 

 

Debt Obligations:

 

 

 

 

 

 

 

2017 Senior Secured Notes(b)(c)

 

$

 —

 

 

$

439,364

2018 Senior Secured Term Loan B(b)(c)

 

 

 —

 

 

 

718,125

2013 Revolving Credit Facility(a)(b)