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Chapter 11 Proceedings and Ability to Continue as a Going Concern | 9 Months Ended
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Sep. 30, 2020
Reorganizations [Abstract] |
Chapter 11 Proceedings and Ability to Continue as a Going Concern | Chapter 11 Proceedings and Ability to Continue as a Going Concern Chapter 11 Cases On August 19, 2020 the "Debtors", filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. The Debtors obtained joint administration of the Chapter 11 cases under the caption In re Valaris plc, et al., Case No. 20-34114 (MI). The Debtors continue to operate their businesses and manage their properties as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. As part of the Chapter 11 Cases, the Debtors filed with the Bankruptcy Court motions seeking a variety of "first-day" relief, all of which were granted and will enable the Company to continue operating without interruption or disruption to its relationships with its customers and vendors or its high-quality service delivery. In particular, employee pay and benefits are expected to continue without interruption. Restructuring Support Agreement On August 18, 2020, the Debtors entered into the RSA with the Consenting Noteholders. The RSA contemplates that the Company will implement the restructuring through the Chapter 11 Cases pursuant to a plan of reorganization and the various related transactions set forth in or contemplated by the RSA and its restructuring term sheet (the "Restructuring Term Sheet"). Below is a summary of the treatment that the stakeholders of the Company would receive under a plan of reorganization pursuant to the terms of the RSA and Restructuring Term Sheet: •Holders of the Company's outstanding senior notes ("Senior Notes") will receive their pro rata share of (i) 34.8% of new common stock issued after consummation of the restructuring (the “New Equity”) and (ii) subscription rights to participate in the rights offering (the "Rights Offering") through which the Company will offer $500.0 million of new first lien secured notes (the "New Secured Notes"); •Holders of the Senior Notes ("Senior Noteholders") who participate in the Rights Offering will receive their pro rata share of 30.0% of the New Equity, and Senior Noteholders who agreed to backstop the Rights Offering will receive their pro rata share of 2.7% of the New Equity; •Senior Noteholders, solely with respect to Pride International LLC's ("Pride") 6.875% senior notes due 2020 and 7.875% senior notes due 2040 and the Company's 4.875% senior notes due 2022, 4.75% senior notes due 2024, 7.375% senior notes due 2025, 5.4% senior notes due 2042 and 5.85% senior notes due 2044, will receive an aggregate cash payment of $25 million in connection with settlement of certain alleged claims against the Company; •Lenders under the revolving credit facility will receive their pro rata share of 32.5% of New Equity; •Holders of general unsecured claims will receive payment in full or reinstatement pursuant to the Bankruptcy Code (excluding claims against the entities party to, or guaranteeing, the new build contracts to be rejected by the Company, which shall receive their liquidation value unless otherwise agreed); •If holders of equity interests vote as a class in support of the restructuring, they will each receive their pro rata share of (i) up to 0.01% of the New Equity and (ii) 7-year warrants to purchase up to 7% of New Equity (subject to dilution), with a strike price set at a price per share equal to the value at which the Senior Noteholders would receive a 100% recovery on their claims including accrued interest up to the Petition Date, as applicable; and •Lenders under the DIP Facility (as described below) will receive payment in full in cash, unless otherwise agreed. The RSA provided that for a period of 15 business days after the commencement of the Chapter 11 Cases (the “Joinder Period”), qualified holders of Senior Notes claims, including the Consenting Noteholders, were eligible to become backstop parties (the “Backstop Parties”). All Backstop Parties are required to join the RSA. The RSA was amended on September 10, 2020, which extended the expiration of the of the Joinder Period to September 14, 2020 upon which date we gained support for the RSA from approximately 72% of the Company's noteholders. The RSA contains certain covenants on the part of Valaris and the Consenting Noteholders, including commitments by the Consenting Noteholders to vote in favor of a plan of reorganization and commitments of Valaris and the Consenting Noteholders to negotiate in good faith to finalize the documents and agreements governing the restructuring. The RSA also provides for certain conditions to the obligations of the parties and for termination upon the occurrence of certain events, including without limitation, the failure to achieve certain milestones and certain breaches by the parties under the RSA. Subject to certain exceptions, under the Bankruptcy Code, the filing of the Chapter 11 Cases automatically enjoined, or stayed, the continuation of most judicial or administrative proceedings or filing of other actions against the Debtors or their property to recover, collect or secure a claim arising prior to the date of the Chapter 11 Cases. Notwithstanding the general applicability of the automatic stay described above, governmental authorities may determine to continue actions brought under their regulatory powers. Although Valaris intends to pursue the restructuring in accordance with the terms set forth in the RSA, there can be no assurance that Valaris will be successful in completing a restructuring or any other similar transaction on the terms set forth in the RSA, on different terms or at all. Among other things, the RSA includes an outside date milestone requiring the Company’s emergence from Chapter 11 by no later than June 15, 2021 (subject to a potential 60-day extension pursuant to the terms of the RSA). Debtor in Possession Facility On August 11, 2020, prior to the commencement of the Chapter 11 Cases, certain of the Company’s existing noteholders (or their affiliates or designees) provided the Company with a commitment for a senior secured superpriority debtor-in-possession term loan credit facility in an aggregate principal amount of up to $500.0 million (the “DIP Facility”). On September 25, 2020, following approval by the Bankruptcy Court, the Debtors entered into a senior secured superpriority debtor-in-possession term loan credit agreement (the “DIP Credit Agreement”), by and among the Company, as Lead Borrower, and certain wholly owned subsidiaries of the Company, as borrowers, the lenders party thereto and Wilmington Savings Fund Society, FSB, as administrative agent and security trustee, in an aggregate amount not to exceed $500.0 million. Borrowings on the DIP Facility will be used to finance, among other things, the ongoing general corporate needs of the Debtors during the course of the Chapter 11 Cases and to pay certain fees, costs and expenses associated with the Debtors’ Chapter 11 Cases. The maturity date of the DIP Credit Agreement is the earliest of (1) August 17, 2021, (2) acceleration of the loans under the DIP Facility and termination of the Lenders commitments under the DIP Facility, (3) the substantial consummation of any plan filed in the Chapter 11 Cases that is confirmed pursuant to an order entered by the Bankruptcy Court and (4) the consummation of a sale of all or substantially all of the assets of the Lead Borrower and the other Debtors under section 363 of the Bankruptcy Code. Loans under the DIP Credit Agreement accrue interest at a rate of 8.00% per annum, if paid in kind, and at a rate of 7.00% per annum, if paid in cash. The DIP Credit Agreement contains a requirement that the Lead Borrower and any other borrowers provide every four weeks, a rolling 13 week budget to be approved by the required lenders (the “Approved Budget”). The Lead Borrower and any other borrower that becomes party to the DIP Credit Agreement may not vary from the Approved Budget by more than 15% of the forecasted amounts in any forecast period. The Approved Budget is, subject to certain exceptions and is tested at certain times in accordance with the DIP Credit Agreement in order to measure variances between the actual total cash disbursements (excluding professional fees and certain other items consistent with the initial Approved Budget) and the disbursements budgeted for the applicable period. The DIP Credit Agreement contains events of default customary to debtor-in-possession financings, including events related to the Chapter 11 Cases, the occurrence of which could result in the acceleration of the Debtors’ obligation to repay the outstanding indebtedness under the DIP Credit Agreement. The Debtors’ obligations under the DIP Credit Agreement are secured by a security interest in, and lien on, substantially all present and after acquired property (subject to certain exceptions) of the Debtors and are guaranteed by certain of the Company’s subsidiaries. The DIP Credit Agreement also contains customary covenants that limit the ability of the Company and its subsidiaries to, among other things, (1) incur additional indebtedness and permit liens to exist on their assets, (2) pay dividends or make certain other restricted payments, (3) sell assets and (4) make certain investments. These covenants are subject to exceptions and qualifications as set forth in the DIP Credit Agreement. As of September 30, 2020, we had no borrowings outstanding against our DIP Facility. Backstop Agreement On August 18, 2020, the Company entered into a Backstop Commitment Agreement (the “BCA”) with the Backstop Parties. Pursuant to the BCA, each of the Backstop Parties will purchase its pro-rata portion (based on an adjusted claims value) of (i) $187.5 million of the New Secured Notes held back for purchase by the Backstop Parties, (ii) all of the New Secured Notes offered to Backstop Parties as part of the $312.5 million New Secured Notes offered to all claim holders (the “General Rights Offering”) and (iii) New Secured Notes not purchased by non-Backstop Parties in the General Rights Offering. In each instance, 30% of the new shares issued and outstanding immediately after the effective date of the plan of reorganization (subject to dilution by the new warrants and the management incentive plan) will be allocated proportionally to purchasers of the New Secured Notes for no addition al consideration. Additionally, in exchange for providing the Backstop Commitments, the Company has agreed to pay the Backstop Parties, subject to approval by the Bankruptcy Court, a backstop premium in an aggregate amount equal to $50.0 million payable in New Secured Notes on the effective date of a plan of reorganization. Furth er, the Debtors paid a commitment fee of $20.0 million, in cash prior to the Petition Date, which shall be loaned back to the reorganized company upon emergence. Therefore, upon emergence the Debtors will receive $520 million in cash in exchange for a $550 million note, which includes the backstop premium. The BCA will be terminable by the Company and/or the requisite Backstop Parties upon certain customary events specified therein, including, among others, (i) the termination of the RSA, (ii) the mutual written consent of the Company and the requisite Backstop Parties by written notice to the other such Party(ies) or (iii) either the Company or the requisite Backstop Parties if the effective date of the plan of reorganization has not occurred on or prior to the date that is ten months after the execution date of the BCA (subject to certain extensions as set forth in the BCA). NYSE Delisting of our Common Stock As a result of the Chapter 11 Cases and in accordance with Section 802.01D of the NYSE Listed Company Manual, on August 19, 2020, we were notified by the New York Stock Exchange (“NYSE”) of its determination to indefinitely suspend trading of the Company’s Class A ordinary shares and to commence proceedings to delist the Company’s Class A ordinary shares from the NYSE. Our Class A ordinary shares were delisted from the NYSE effective September 14, 2020. Effective August 19, 2020, the Company’s Class A ordinary shares commenced trading on the OTC Pink Open Market under the symbol “VALPQ.” Going Concern The condensed consolidated financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and satisfaction of liabilities and commitments in the normal course of business. For the duration of the Chapter 11 Cases, our operations and our ability to develop and execute our business plan are subject to a high degree of risk and uncertainty associated with the Chapter 11 Cases. The outcome of the Chapter 11 Cases is dependent upon factors that are outside of our control, including actions of the Bankruptcy Court and our creditors. There can be no assurance that we will confirm and consummate a plan of reorganization as contemplated by the RSA or complete another plan of reorganization with respect to the Chapter 11 Cases. As a result, we have concluded that management’s plans do not alleviate the substantial doubt about our ability to continue as a going concern brought about by the significant risks and uncertainties related to our liquidity and Chapter 11 Cases for a period of one year after the date that the financial statements are issued. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty. These adjustments could be material. Pre-petition Charges We have reported the backstop commitment fee and legal and other professional advisor fees incurred in relation to the Chapter 11 Cases, but prior to the Petition Date, as General and administrative expenses in our unaudited Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2020 in the amount of $42.6 million and $64.7 million, respectively. Reorganization Items Expenditures, gains and losses that are realized or incurred by the Debtors as of or subsequent to the Petition Date and as a direct result of the Chapter 11 Cases are reported as Reorganization items, net in our unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2020. These costs include legal and other professional advisory service fees pertaining to the Chapter 11 Cases, all adjustments made to the carrying amount of certain pre-petition liabilities reflecting claims expected to be allowed by the Bankruptcy Court and DIP Facility fees. The following table provides information about reorganization items incurred during the three and nine months ended September 30, 2020, as of or subsequent to the Petition Date (in millions):
|  |  |  | Three and Nine Months Ended September 30, 2020
Write-off of unamortized debt discounts, premiums and issuance costs |  |  |  | $ | 447.9 |
Reorganization items (non-cash) |  |  |  | 447.9 |
DIP facility fees |  |  |  | 23.8 |
Professional fees |  |  |  | 25.8 |
Reorganization Items (Fees) |  |  |  | 49.6 |
Total reorganization items, net |  |  |  | $ | 497.5 |
Reorganization items (fees) unpaid |  |  |  | $ | 25.8 |
Reorganization items (fees) paid |  |  |  | $ | 23.8 |
Liabilities Subject to Compromise The Debtors' pre-petition unsecured senior notes and related unpaid accrued interest as of the Petition Date have been classified as Liabilities Subject to Compromise on our Condensed Consolidated Balance Sheets. The liabilities are reported at the amounts expected to be allowed as claims by the Bankruptcy Court. Liabilities subject to compromise at September 30, 2020 consist of the following (in millions):
|  | September 30, 2020
6.875% Senior notes due 2020 |  | $ | 122.9 |
4.70% Senior notes due 2021 |  | 100.7 |
4.875% Senior notes due 2022 |  | 620.8 |
3.00% Exchangeable senior notes due 2024 |  | 849.5 |
4.50% Senior notes due 2024 |  | 303.4 |
4.75% Senior notes due 2024 |  | 318.6 |
8.00% Senior notes due 2024 |  | 292.3 |
5.20% Senior notes due 2025 |  | 333.7 |
7.375% Senior notes due 2025 |  | 360.8 |
7.75% Senior notes due 2026 |  | 1,000.0 |
7.20% Debentures due 2027 |  | 112.1 |
7.875% Senior notes due 2040 |  | 300.0 |
5.40% Senior notes due 2042 |  | 400.0 |
5.75% Senior notes due 2044 |  | 1,000.5 |
5.85% Senior notes due 2044 |  | 400.0 |
Amounts drawn under revolving credit facility |  | 581.0 |
Accrued Interest on Senior Notes, Exchangeable Senior Notes, Debentures and Revolving Credit Facility |  | 203.5 |
Rig holding costs(1) |  | 13.9 |
Total liabilities subject to compromise |  | $ | 7,313.7 |
(1) Represents the holding costs incurred to maintain VALARIS DS-13 and VALARIS DS-14 in the shipyard until the delivery date. The principal balance on our unsecured senior notes and the amount of outstanding borrowings on our revolving credit facility have been reclassified from Debt to Liabilities Subject to Compromise as of September 30, 2020. Accrued interest on our unsecured senior notes and revolving credit facility was also reclassified from Other Current Liabilities to Liabilities Subject to Compromise on our Condensed Consolidated Balance Sheet as of September 30, 2020. The contractual interest expense on our unsecured senior notes and revolving credit facility is in excess of recorded interest expense by $45.9 million for the three and nine months ended September 30, 2020. This excess contractual interest is not included as interest expense on the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2020, because the Company has discontinued accruing interest on the unsecured senior notes and revolving credit facility subsequent to the Petition Date. We discontinued making interest payments on our unsecured senior notes beginning in June 2020. See "Note 11 – Debt” for additional information on interest payments. Debtor Financial Statements Unaudited condensed consolidated financial statements of the Debtors are set forth below. These financial statements exclude the financial statements of the non-debtor subsidiaries. Transactions and balances of receivables and payables between the Debtors have been eliminated in consolidation. Amounts payable to or receivable from the non-Debtor subsidiaries are reported in the unaudited condensed consolidated balance sheet of the Debtors. VALARIS PLC AND CERTAIN SUBSIDIARIES PARTY TO THE BANKRUPTCY CASES (DEBTOR-IN-POSSESSION) CONDENSED COMBINED STATEMENTS OF OPERATIONS (Unaudited) (In millions)
| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2020 |  | 2020
OPERATING REVENUES |  |  |
Operating revenues | $ | 236.0 |  |  | $ | 944.6 |
Operating revenues from non-debtor subsidiaries | 26.3 |  |  | 113.6 |
Total operating revenues | 262.3 |  |  | 1,058.2 |
OPERATING EXPENSES |  |  |
Contract drilling (exclusive of depreciation) | 264.2 |  |  | 948.9 |
Loss on impairment | — |  |  | 3,643.9 |
Depreciation | 114.2 |  |  | 393.4 |
General and administrative | 72.9 |  |  | 187.2 |
Operating expenses for non-debtor subsidiaries | 16.0 |  |  | 81.4 |
Total operating expenses | 467.3 |  |  | 5,254.8 |
OTHER OPERATING INCOME | 118.1 |  |  | 118.1 |
EQUITY IN EARNINGS OF ARO | 3.9 |  |  | (7.6) |
OPERATING LOSS | (83.0) |  |  | (4,086.1) |
OTHER INCOME (EXPENSE) |  |  |
Interest income | 4.7 |  |  | 15.2 |
Interest income for non-debtor subsidiaries | 65.2 |  |  | 193.5 |
Interest expense, net | (59.8) |  |  | (289.2) |
Interest Expense for non-debtor subsidiaries | (73.1) |  |  | (210.5) |
Reorganization items, net | (497.5) |  |  | (497.5) |
Other, net | 4.5 |  |  | 12.5 |
| (556.0) |  |  | (776.0) |
LOSS BEFORE INCOME TAXES | (639.0) |  |  | (4,862.1) |
EQUITY IN EARNINGS OF SUBSIDIARIES | 9.2 |  |  | 27.5 |
PROVISION (BENEFIT) FOR INCOME TAXES | 17.3 |  |  | (159.4) |
NET LOSS | (647.1) |  |  | (4,675.2) |
VALARIS PLC AND CERTAIN SUBSIDIARIES PARTY TO THE BANKRUPTCY CASES (DEBTOR-IN-POSSESSION) CONDENSED COMBINED BALANCE SHEET (Unaudited) (In millions)
|  | September 30, 2020
|  | (Unaudited)
ASSETS
CURRENT ASSETS |  |
Cash and cash equivalents |  | $ | 80.9 |
Accounts receivable, net |  | 376.1 |
Accounts receivable from non-debtor subsidiaries |  | 2,930.6 |
Other current assets |  | 427.4 |
Total current assets |  | 3,815.0 |
PROPERTY AND EQUIPMENT, AT COST |  | 12,262.4 |
Less accumulated depreciation |  | 1,866.4 |
Property and equipment, net |  | 10,396.0 |
LONG-TERM NOTES RECEIVABLE FROM ARO |  | 442.7 |
LONG-TERM NOTES RECEIVABLE FROM NON-DEBTOR SUBSIDIARIES |  | 2,103.0 |
INVESTMENT IN ARO |  | 121.1 |
INVESTMENTS IN NON-DEBTOR SUBSIDIARIES |  | 654.9 |
OTHER ASSETS |  | 175.3 |
|  | $ | 17,708.0 |
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES |  |
Accounts payable - trade |  | $ | 149.3 |
Accrued liabilities and other |  | 162.1 |
Short term notes payable to non-debtors |  | 145.9 |
Total current liabilities |  | 457.3 |
LONG-TERM NOTES PAYABLE TO NON-DEBTOR SUBSIDIARIES |  | 2,402.7 |
OTHER LIABILITIES |  | 536.6 |
Total liabilities not subject to compromise |  | 3,396.6 |
Liabilities subject to compromise |  | 7,313.7 |
Total debtors' equity |  | 6,997.7 |
Total liabilities and debtors' equity |  | $ | 17,708.0 |
VALARIS PLC AND CERTAIN SUBSIDIARIES PARTY TO THE BANKRUPTCY CASES (DEBTOR-IN-POSSESSION) CONDENSED COMBINED STATEMENT OF CASH FLOWS (Unaudited) (In millions)
|  | Nine Months Ended September 30,
|  | 2020
OPERATING ACTIVITIES |  |
Net loss |  | $ | (4,675.2) |
Adjustments to reconcile net loss to net cash used in operating activities: |  |
Non cash reorganization items, net |  | 447.9 |
Loss on impairment |  | 3,643.9 |
Depreciation expense |  | 393.4 |
Equity in earnings of non-debtor subsidiaries |  | (27.5) |
Gain on extinguishment of debt |  | (3.1) |
Debtor in Possession financing fees and payments on Backstop Agreement |  | 43.8 |
Amortization, net |  | 14.4 |
Equity in earnings of ARO |  | 7.6 |
(Gain on) adjustment to bargain purchase |  | 6.3 |
Other |  | (57.7) |
Changes in operating assets and liabilities |  | (151.1) |
Changes in advances (to)/from non-debtor subsidiaries |  | (120.3) |
Net cash used in operating activities |  | (477.6) |
INVESTING ACTIVITIES |  |
Additions to property and equipment |  | (82.9) |
Net proceeds from disposition of assets |  | 44.2 |
Net cash used in investing activities |  | (38.7) |
FINANCING ACTIVITIES |  |
Borrowings on credit facility |  | 596.0 |
Repayments of credit facility borrowings |  | (15.0) |
Debtor in Possession financing fees and payments on Backstop Agreement |  | (43.8) |
Reduction of long-term borrowings |  | (9.7) |
Other |  | (1.9) |
Net cash provided by financing activities |  | 525.6 |
Effect of exchange rate changes on cash and cash equivalents |  | (.1) |
INCREASE IN CASH AND CASH EQUIVALENTS |  | 9.2 |
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |  | 71.7 |
CASH AND CASH EQUIVALENTS, END OF PERIOD |  | $ | 80.9 |

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- Definition The entire disclosure for the description and amounts of reorganization under Chapter 11 of the US Bankruptcy Code. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 852 -URI http://asc.fasb.org/topic&trid=2209115 + Details
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