Attached files
| file | filename |
|---|---|
| EX-32.1 - EXHIBIT 32.1 - Valaris Ltd | esv-9302015xexhibit321.htm |
| EX-12.1 - EXHIBIT 12.1 - Valaris Ltd | esv-9x30x2015xexhibit121.htm |
| EX-31.2 - EXHIBIT 31.2 - Valaris Ltd | esv-9302015xexhibit312.htm |
| EX-31.1 - EXHIBIT 31.1 - Valaris Ltd | esv-9302015xexhibit311.htm |
| EX-32.2 - EXHIBIT 32.2 - Valaris Ltd | esv-9302015xexhibit322.htm |
| EX-15.1 - EXHIBIT 15.1 - Valaris Ltd | esv-9302015xexhibit151.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) | |
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2015 |
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to |
Commission File Number 1-8097
Ensco plc
(Exact name of registrant as specified in its charter)
England and Wales (State or other jurisdiction of incorporation or organization) 6 Chesterfield Gardens London, England (Address of principal executive offices) | 98-0635229 (I.R.S. Employer Identification No.) W1J 5BQ (Zip Code) | |
Registrant's telephone number, including area code: 44 (0) 20 7659 4660
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | x | Accelerated filer | o | |||
Non-Accelerated filer | o (Do not check if a smaller reporting company) | Smaller reporting company | o | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of October 23, 2015, there were 235,475,102 Class A ordinary shares of the registrant issued and outstanding.
ENSCO PLC
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2015
FORWARD-LOOKING STATEMENTS
Statements contained in this report that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include words or phrases such as "anticipate," "believe," "estimate," "expect," "intend," "plan," "project," "could," "may," "might," "should," "will" and similar words and specifically include statements regarding expected financial performance; dividends; expected utilization, day rates, revenues, operating expenses, contract terms, contract backlog, capital expenditures, insurance, financing and funding; the availability, delivery, mobilization, contract commencement or relocation or other movement of rigs and the timing thereof; future rig construction (including construction in progress and completion thereof), enhancement, upgrade or repair and timing and cost thereof; the suitability of rigs for future contracts; the offshore drilling market, including supply and demand, utilization rates, day rates, customer drilling programs, stacking of rigs, effects of new rigs on the market and effects of declines in commodity prices; general market, business and industry conditions, trends and outlook; future operations; the impact of increasing regulatory complexity; expected contributions from our rig fleet expansion program and our program to high-grade the rig fleet by investing in new equipment and divesting selected assets and underutilized rigs; expense management; and the likely outcome of litigation, legal proceedings, investigations or insurance or other claims and the timing thereof.
Such statements are subject to numerous risks, uncertainties and assumptions that may cause actual results to vary materially from those indicated, including:
• | downtime and other risks associated with offshore rig operations, including rig or equipment failure, damage and other unplanned repairs, the limited availability of transport vessels, hazards, self-imposed drilling limitations and other delays due to severe storms and hurricanes and the limited availability or high cost of insurance coverage for certain offshore perils, such as hurricanes in the Gulf of Mexico or associated removal of wreckage or debris; |
• | changes in worldwide rig supply and demand, competition or technology, including as a result of delivery of newbuild drilling rigs; |
• | changes in future levels of drilling activity and expenditures, whether as a result of global capital markets and liquidity, prices of oil and natural gas or otherwise, which may cause us to idle or stack additional rigs; |
• | governmental action, terrorism, piracy, military action and political and economic uncertainties, including uncertainty or instability resulting from civil unrest, political demonstrations, mass strikes, or an escalation or additional outbreak of armed hostilities or other crises in oil or natural gas producing areas of the Middle East, North Africa, West Africa or other geographic areas, which may result in expropriation, nationalization, confiscation or deprivation of our assets or suspension and/or termination of contracts based on force majeure events; |
• | risks inherent to shipyard rig construction, repair or enhancement, including risks associated with concentration of our construction contracts with three shipyards, unexpected delays in equipment delivery, engineering, design or commissioning issues following delivery, or changes in the commencement or completion dates; |
• | possible cancellation, suspension, renegotiation or termination (with or without cause) of drilling contracts as a result of economic conditions in the industry, mechanical difficulties, performance, or other reasons; |
• | the outcome of litigation, legal proceedings, investigations or other claims or contract disputes, including any inability to collect receivables or resolve significant contractual or day rate disputes, any renegotiation, nullification, cancellation or breach of contracts with customers or other parties and any failure to execute definitive contracts following announcements of letters of intent; |
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• | governmental regulatory, legislative and permitting requirements affecting drilling operations, including limitations on drilling locations (such as the Gulf of Mexico during hurricane season); |
• | new and future regulatory, legislative or permitting requirements, future lease sales, changes in laws, rules and regulations that have or may impose increased financial responsibility, additional oil spill abatement contingency plan capability requirements and other governmental actions that may increase our costs of doing business, result in claims of force majeure or otherwise adversely affect our existing drilling contracts; |
• | our ability to attract and retain skilled personnel on commercially reasonable terms, whether due to labor regulations, unionization or otherwise; |
• | environmental or other liabilities, risks, damages or losses, whether related to storms or hurricanes (including wreckage or debris removal), collisions, groundings, blowouts, fires, explosions, other accidents or terrorism, for which insurance coverage and contractual indemnities may be insufficient, unenforceable or otherwise unavailable; |
• | our ability to obtain financing and pursue other business opportunities may be limited by our debt levels and debt agreement restrictions; |
• | our ability to realize expected benefits from the 2009 redomestication as a U.K. public limited company and the related reorganization of Ensco’s corporate structure, including the effect of any changes in laws, rules and regulations, or the interpretation thereof, or in the applicable facts, that could adversely affect our status as a non-U.S. corporation for U.S. tax purposes or otherwise adversely affect our anticipated consolidated effective income tax rate; |
• | delays in actual contract commencement dates or the cancellation of drilling programs by operators; |
• | adverse changes in foreign currency exchange rates, including their effect on the fair value measurement of our derivative instruments; and |
• | potential long-lived asset and/or goodwill impairments. |
In addition to the numerous risks, uncertainties and assumptions described above, you should also carefully read and consider "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part I and "Item 1A. Risk Factors" in Part II of this report and "Item 1A. Risk Factors" in Part I and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II of our annual report on Form 10-K for the year ended December 31, 2014, which is available on the U.S. Securities and Exchange Commission website at www.sec.gov. Each forward-looking statement speaks only as of the date of the particular statement, and we undertake no obligation to publicly update or revise any forward looking statements, except as required by law.
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PART I - FINANCIAL INFORMATION
Item 1.Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Ensco plc:
We have reviewed the accompanying condensed consolidated balance sheet of Ensco plc and subsidiaries (the Company) as of September 30, 2015, the related condensed consolidated statements of operations and comprehensive income (loss) for the three-month and nine-month periods ended September 30, 2015 and 2014, and the related condensed consolidated statements of cash flows for the nine-month periods ended September 30, 2015 and 2014. These condensed consolidated financial statements are the responsibility of the Company’s management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Ensco plc and subsidiaries as of December 31, 2014, and the related consolidated statements of operations, comprehensive income (loss), and cash flows for the year then ended (not presented herein); and in our report dated March 2, 2015, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2014, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ KPMG LLP
Houston, Texas
October 29, 2015
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ENSCO PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
(Unaudited)
Three Months Ended September 30, | |||||||
2015 | 2014 | ||||||
OPERATING REVENUES | $ | 1,012.2 | $ | 1,201.4 | |||
OPERATING EXPENSES | |||||||
Contract drilling (exclusive of depreciation) | 433.5 | 500.2 | |||||
Depreciation | 145.2 | 135.2 | |||||
Loss on impairment | 2.4 | — | |||||
General and administrative | 28.4 | 29.3 | |||||
609.5 | 664.7 | ||||||
OPERATING INCOME | 402.7 | 536.7 | |||||
OTHER INCOME (EXPENSE) | |||||||
Interest income | 1.0 | 3.1 | |||||
Interest expense, net | (55.3 | ) | (38.0 | ) | |||
Other, net | 1.9 | (3.5 | ) | ||||
(52.4 | ) | (38.4 | ) | ||||
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | 350.3 | 498.3 | |||||
PROVISION FOR INCOME TAXES | |||||||
Current income tax expense | 6.9 | 142.2 | |||||
Deferred income tax expense (benefit) | 26.3 | (67.6 | ) | ||||
33.2 | 74.6 | ||||||
INCOME FROM CONTINUING OPERATIONS | 317.1 | 423.7 | |||||
(LOSS) INCOME FROM DISCONTINUED OPERATIONS, NET | (23.3 | ) | 9.2 | ||||
NET INCOME | 293.8 | 432.9 | |||||
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | (1.8 | ) | (3.5 | ) | |||
NET INCOME ATTRIBUTABLE TO ENSCO | $ | 292.0 | $ | 429.4 | |||
EARNINGS (LOSS) PER SHARE - BASIC AND DILUTED | |||||||
Continuing operations | $ | 1.34 | $ | 1.79 | |||
Discontinued operations | (0.10 | ) | 0.04 | ||||
$ | 1.24 | $ | 1.83 | ||||
NET INCOME ATTRIBUTABLE TO ENSCO SHARES - BASIC AND DILUTED | $ | 287.5 | $ | 424.5 | |||
WEIGHTED-AVERAGE SHARES OUTSTANDING | |||||||
Basic | 232.4 | 231.8 | |||||
Diluted | 232.5 | 232.0 | |||||
CASH DIVIDENDS PER SHARE | $ | 0.15 | $ | 0.75 | |||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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ENSCO PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
(Unaudited)
Nine Months Ended September 30, | |||||||
2015 | 2014 | ||||||
OPERATING REVENUES | $ | 3,235.1 | $ | 3,404.7 | |||
OPERATING EXPENSES | |||||||
Contract drilling (exclusive of depreciation) | 1,454.4 | 1,562.9 | |||||
Depreciation | 422.8 | 398.5 | |||||
Loss on impairment | 2.4 | 703.5 | |||||
General and administrative | 88.2 | 103.6 | |||||
1,967.8 | 2,768.5 | ||||||
OPERATING INCOME | 1,267.3 | 636.2 | |||||
OTHER INCOME (EXPENSE) | |||||||
Interest income | 6.8 | 10.2 | |||||
Interest expense, net | (158.9 | ) | (109.0 | ) | |||
Other, net | (28.3 | ) | .5 | ||||
(180.4 | ) | (98.3 | ) | ||||
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | 1,086.9 | 537.9 | |||||
PROVISION FOR INCOME TAXES | |||||||
Current income tax expense | 113.5 | 244.6 | |||||
Deferred income tax expense (benefit) | 55.4 | (77.9 | ) | ||||
168.9 | 166.7 | ||||||
INCOME FROM CONTINUING OPERATIONS | 918.0 | 371.2 | |||||
LOSS FROM DISCONTINUED OPERATIONS, NET | (33.6 | ) | (811.2 | ) | |||
NET INCOME (LOSS) | 884.4 | (440.0 | ) | ||||
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | (7.4 | ) | (10.8 | ) | |||
NET INCOME (LOSS) ATTRIBUTABLE TO ENSCO | $ | 877.0 | $ | (450.8 | ) | ||
EARNINGS (LOSS) PER SHARE - BASIC AND DILUTED | |||||||
Continuing operations | $ | 3.87 | $ | 1.53 | |||
Discontinued operations | (0.14 | ) | (3.50 | ) | |||
$ | 3.73 | $ | (1.97 | ) | |||
NET INCOME (LOSS) ATTRIBUTABLE TO ENSCO SHARES - BASIC AND DILUTED | $ | 865.2 | $ | (456.7 | ) | ||
WEIGHTED-AVERAGE SHARES OUTSTANDING | |||||||
Basic | 232.2 | 231.5 | |||||
Diluted | 232.2 | 231.7 | |||||
CASH DIVIDENDS PER SHARE | $ | 0.45 | $ | 2.25 | |||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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ENSCO PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
(Unaudited)
Three Months Ended September 30, | |||||||
2015 | 2014 | ||||||
NET INCOME | $ | 293.8 | $ | 432.9 | |||
OTHER COMPREHENSIVE LOSS, NET | |||||||
Net change in fair value of derivatives | (14.8 | ) | (12.7 | ) | |||
Reclassification of net losses (gains) on derivative instruments from other comprehensive income into net income | 5.8 | (1.4 | ) | ||||
Other | 2.9 | 3.7 | |||||
NET OTHER COMPREHENSIVE LOSS | (6.1 | ) | (10.4 | ) | |||
COMPREHENSIVE INCOME | 287.7 | 422.5 | |||||
COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | (1.8 | ) | (3.5 | ) | |||
COMPREHENSIVE INCOME ATTRIBUTABLE TO ENSCO | $ | 285.9 | $ | 419.0 | |||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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ENSCO PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
(Unaudited)
Nine Months Ended September 30, | |||||||
2015 | 2014 | ||||||
NET INCOME (LOSS) | $ | 884.4 | $ | (440.0 | ) | ||
OTHER COMPREHENSIVE LOSS, NET | |||||||
Net change in fair value of derivatives | (23.5 | ) | (2.8 | ) | |||
Reclassification of net losses (gains) on derivative instruments from other comprehensive income into net income | 15.9 | (3.3 | ) | ||||
Other | 4.2 | 4.2 | |||||
NET OTHER COMPREHENSIVE LOSS | (3.4 | ) | (1.9 | ) | |||
COMPREHENSIVE INCOME (LOSS) | 881.0 | (441.9 | ) | ||||
COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | (7.4 | ) | (10.8 | ) | |||
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO ENSCO | $ | 873.6 | $ | (452.7 | ) | ||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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ENSCO PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share and par value amounts)
September 30, 2015 | December 31, 2014 | ||||||
(Unaudited) | |||||||
ASSETS | |||||||
CURRENT ASSETS | |||||||
Cash and cash equivalents | $ | 240.4 | $ | 664.8 | |||
Short-term investments | 850.0 | 757.3 | |||||
Accounts receivable, net | 735.6 | 883.3 | |||||
Other | 586.6 | 629.4 | |||||
Total current assets | 2,412.6 | 2,934.8 | |||||
PROPERTY AND EQUIPMENT, AT COST | 16,389.2 | 14,975.5 | |||||
Less accumulated depreciation | 2,860.3 | 2,440.7 | |||||
Property and equipment, net | 13,528.9 | 12,534.8 | |||||
GOODWILL | 276.1 | 276.1 | |||||
OTHER ASSETS, NET | 223.2 | 314.2 | |||||
$ | 16,440.8 | $ | 16,059.9 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||
CURRENT LIABILITIES | |||||||
Accounts payable - trade | $ | 267.9 | $ | 373.2 | |||
Accrued liabilities and other | 535.2 | 696.6 | |||||
Current maturities of long-term debt | — | 34.8 | |||||
Total current liabilities | 803.1 | 1,104.6 | |||||
LONG-TERM DEBT | 5,903.3 | 5,885.6 | |||||
DEFERRED INCOME TAXES | 208.0 | 179.5 | |||||
OTHER LIABILITIES | 504.6 | 667.3 | |||||
COMMITMENTS AND CONTINGENCIES | |||||||
ENSCO SHAREHOLDERS' EQUITY | |||||||
Class A ordinary shares, U.S. $.10 par value, 450.0 million shares authorized, 243.1 and 240.7 million shares issued as of September 30, 2015 and December 31, 2014 | 24.3 | 24.1 | |||||
Class B ordinary shares, £1 par value, 50,000 shares authorized and issued as of September 30, 2015 and December 31, 2014 | .1 | .1 | |||||
Additional paid-in capital | 5,549.0 | 5,517.5 | |||||
Retained earnings | 3,492.6 | 2,720.4 | |||||
Accumulated other comprehensive income | 8.5 | 11.9 | |||||
Treasury shares, at cost, 7.6 million and 6.5 million shares as of September 30, 2015 and December 31, 2014 | (63.4 | ) | (59.0 | ) | |||
Total Ensco shareholders' equity | 9,011.1 | 8,215.0 | |||||
NONCONTROLLING INTERESTS | 10.7 | 7.9 | |||||
Total equity | 9,021.8 | 8,222.9 | |||||
$ | 16,440.8 | $ | 16,059.9 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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ENSCO PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
Nine Months Ended September 30, | |||||||
2015 | 2014 | ||||||
OPERATING ACTIVITIES | |||||||
Net income (loss) | $ | 884.4 | $ | (440.0 | ) | ||
Adjustments to reconcile net income (loss) to net cash provided by operating activities of continuing operations: | |||||||
Depreciation expense | 422.8 | 398.5 | |||||
Deferred income tax expense (benefit) | 55.4 | (77.9 | ) | ||||
Share-based compensation expense | 33.9 | 35.5 | |||||
Loss from discontinued operations, net | 33.6 | 811.2 | |||||
Loss on extinguishment of debt | 33.5 | — | |||||
Gain on disposal of assets | (19.3 | ) | (6.9 | ) | |||
Amortization of intangibles and other, net | 2.7 | (6.1 | ) | ||||
Loss on impairment | 2.4 | 703.5 | |||||
Other | 4.4 | (.9 | ) | ||||
Changes in operating assets and liabilities | (179.2 | ) | 95.8 | ||||
Net cash provided by operating activities of continuing operations | 1,274.6 | 1,512.7 | |||||
INVESTING ACTIVITIES | |||||||
Additions to property and equipment | (1,445.8 | ) | (1,245.1 | ) | |||
Purchases of short-term investments | (850.0 | ) | (45.3 | ) | |||
Maturities of short-term investments | 757.3 | 50.0 | |||||
Other | 1.4 | 9.8 | |||||
Net cash used in investing activities of continuing operations | (1,537.1 | ) | (1,230.6 | ) | |||
FINANCING ACTIVITIES | |||||||
Proceeds from issuance of senior notes | 1,078.7 | 1,246.4 | |||||
Reduction of long-term borrowings | (1,072.5 | ) | (30.9 | ) | |||
Cash dividends paid | (105.9 | ) | (526.7 | ) | |||
Premium paid on redemption of debt | (30.3 | ) | — | ||||
Debt financing costs | (10.5 | ) | (11.3 | ) | |||
Other | (8.4 | ) | (17.6 | ) | |||
Net cash (used in) provided by financing activities | (148.9 | ) | 659.9 | ||||
DISCONTINUED OPERATIONS | |||||||
Operating activities | (12.7 | ) | 10.6 | ||||
Investing activities | (.3 | ) | 55.5 | ||||
Net cash (used in) provided by discontinued operations | (13.0 | ) | 66.1 | ||||
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (424.4 | ) | 1,008.1 | ||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 664.8 | 165.6 | |||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 240.4 | $ | 1,173.7 | |||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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ENSCO PLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 -Unaudited Condensed Consolidated Financial Statements
We prepared the accompanying condensed consolidated financial statements of Ensco plc and subsidiaries (the "Company," "Ensco," "our," "we" or "us") in accordance with accounting principles generally accepted in the United States of America ("GAAP"), pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC") included in the instructions to Form 10-Q and Article 10 of Regulation S-X. The financial information included in this report is unaudited but, in our opinion, includes all adjustments (consisting of normal recurring adjustments) that are necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods presented. The December 31, 2014 condensed consolidated balance sheet data were derived from our 2014 audited consolidated financial statements, but do not include all disclosures required by GAAP. Certain previously reported amounts have been reclassified to conform to the current year presentation. The preparation of our condensed consolidated financial statements requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the related revenues and expenses and disclosures of gain and loss contingencies as of the date of the financial statements. Actual results could differ from those estimates.
The financial data for the three-month and nine-month periods ended September 30, 2015 and 2014 included herein have been subjected to a limited review by KPMG LLP, our independent registered public accounting firm. The accompanying independent registered public accounting firm's review report is not a report within the meaning of Sections 7 and 11 of the Securities Act of 1933, and the independent registered public accounting firm's liability under Section 11 does not extend to it.
Results of operations for the three-month and nine-month periods ended September 30, 2015 are not necessarily indicative of the results of operations that will be realized for the year ending December 31, 2015. We recommend these condensed consolidated financial statements be read in conjunction with our annual report on Form 10-K for the year ended December 31, 2014 filed with the SEC on March 2, 2015 and our quarterly reports on Form 10-Q filed with the SEC on April 30, 2015 and July 30, 2015.
Significant Accounting Policies - Operating Revenues and Expenses
We may receive termination fees if certain drilling contracts are terminated by the customer prior to the end of the contractual term. Such compensation is recognized as revenue in the period it is realized or realizable and earned, it can be reasonably measured, and collectability is reasonably assured.
During the three-month and nine-month periods ended September 30, 2015, operating revenues included $110.6 million for the ENSCO DS-4 lump sum termination fee, which we collected in October, as well as $58.6 million related to the ENSCO DS-9 termination, which included an $18.4 million lump-sum for mobilization, capital upgrades and day rate revenue earned during initial acceptance testing. Under the terms of the ENSCO DS-9 contract, our customer is obligated to pay us monthly termination fees for a period of two years equal to the operating day rate, which may be partially defrayed should we re-contract the rig and/or mitigate certain costs.
Our significant accounting policies are included in Note 1 to our audited consolidated financial statements for the year ended December 31, 2014 included in our annual report on Form 10-K filed with the SEC on March 2, 2015.
New Accounting Pronouncements
During 2015, the Financial Accounting Standards Board issued Accounting Standards Update 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, as updated by Update 2015-15, Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements - Amendments to SEC Paragraphs Pursuant to Staff
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Announcements at June 18, 2015 EITF Meeting, which require that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts. Debt issuance costs related to line-of-credit arrangements may be presented as an asset regardless of whether there are any outstanding borrowings on the arrangement. These updates are effective for annual and interim periods for fiscal years beginning after December 15, 2015. Early application is permitted. We will adopt these accounting standards on a retrospective basis effective January 1, 2016. There will be no impact to the manner in which debt issuance costs are amortized in our condensed consolidated financial statements.
During 2014, the Financial Accounting Standards Board issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606) ("Update 2014-09"), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. In July 2015, the Financial Accounting Standards Board voted to delay the effective date one year. The Update is now effective for annual and interim periods for fiscal years beginning after December 15, 2017, though companies have an option of adopting the standard for fiscal years beginning after December 15, 2016. The Update will replace most existing revenue recognition guidance in U.S. GAAP and may be adopted using a retrospective, modified retrospective or prospective with cumulative catch-up approach. We are currently evaluating the effect that Update 2014-09 will have on our condensed consolidated financial statements and related disclosures.
Note 2 -Fair Value Measurements
The following fair value hierarchy table categorizes information regarding our net financial assets measured at fair value on a recurring basis (in millions):
Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | ||||||||||||
As of September 30, 2015 | |||||||||||||||
Supplemental executive retirement plan assets | $ | 42.8 | $ | — | $ | — | $ | 42.8 | |||||||
Total financial assets | 42.8 | — | — | 42.8 | |||||||||||
Derivatives, net | — | (32.7 | ) | — | (32.7 | ) | |||||||||
Total financial liabilities | $ | — | $ | (32.7 | ) | $ | — | $ | (32.7 | ) | |||||
As of December 31, 2014 | |||||||||||||||
Supplemental executive retirement plan assets | $ | 43.2 | $ | — | $ | — | $ | 43.2 | |||||||
Total financial assets | 43.2 | — | — | 43.2 | |||||||||||
Derivatives, net | — | (26.3 | ) | — | (26.3 | ) | |||||||||
Total financial liabilities | $ | — | $ | (26.3 | ) | $ | — | $ | (26.3 | ) | |||||
Supplemental Executive Retirement Plan Assets
Our supplemental executive retirement plans (the "SERP") are non-qualified plans that provide eligible employees an opportunity to defer a portion of their compensation for use after retirement. Assets held in the SERP were marketable securities measured at fair value on a recurring basis using Level 1 inputs and were included in other assets, net, on our condensed consolidated balance sheets. The fair value measurement of assets held in the SERP was based on quoted market prices.
Derivatives
Our derivatives were measured at fair value on a recurring basis using Level 2 inputs. See "Note 3 - Derivative Instruments" for additional information on our derivatives, including a description of our foreign currency hedging
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activities and related methodologies used to manage foreign currency exchange rate risk. The fair value measurement of our derivatives was based on market prices that are generally observable for similar assets or liabilities at commonly-quoted intervals.
Other Financial Instruments
The carrying values and estimated fair values of our long-term debt instruments were as follows (in millions):
September 30, 2015 | December 31, 2014 | ||||||||||||||
Carrying Value | Estimated Fair Value | Carrying Value | Estimated Fair Value | ||||||||||||
4.70% Senior notes due 2021 | $ | 1,482.0 | $ | 1,254.7 | $ | 1,479.9 | $ | 1,505.3 | |||||||
5.75% Senior notes due 2044 | 1,004.0 | 706.9 | 622.3 | 615.8 | |||||||||||
6.875% Senior notes due 2020 | 995.4 | 886.5 | 1,008.2 | 1,008.5 | |||||||||||
5.20% Senior notes due 2025 | 697.5 | 572.3 | — | — | |||||||||||
4.50% Senior notes due 2024 | 624.2 | 487.5 | 624.2 | 602.0 | |||||||||||
8.50% Senior notes due 2019 | 570.8 | 517.5 | 583.8 | 611.8 | |||||||||||
7.875% Senior notes due 2040 | 380.2 | 253.0 | 381.2 | 363.8 | |||||||||||
7.20% Debentures due 2027 | 149.2 | 136.7 | 149.2 | 171.4 | |||||||||||
4.33% MARAD bonds, including current maturities, due 2016 | — | — | 46.6 | 46.8 | |||||||||||
4.65% MARAD bonds, including current maturities, due 2020 | — | — | 27.0 | 29.7 | |||||||||||
3.25% Senior notes due 2016 | — | — | 998.0 | 1,018.3 | |||||||||||
Total | $ | 5,903.3 | $ | 4,815.1 | $ | 5,920.4 | $ | 5,973.4 | |||||||
The estimated fair values of our senior notes and debentures were determined using quoted market prices. The estimated fair values of our Maritime Administration ("MARAD") bonds were determined using an income approach valuation model.
The estimated fair values of our cash and cash equivalents, short-term investments, receivables, trade payables and other financial liabilities approximated their carrying values as of September 30, 2015 and December 31, 2014.
Note 3 -Derivative Instruments
Our functional currency is the U.S. dollar. As is customary in the oil and gas industry, a majority of our revenues are denominated in U.S. dollars; however, a portion of the revenues earned and expenses incurred by certain of our subsidiaries are denominated in currencies other than the U.S. dollar ("foreign currencies"). These transactions are remeasured in U.S. dollars based on a combination of both current and historical exchange rates. We use foreign currency forward contracts to reduce our exposure to various market risks, primarily foreign currency exchange rate risk.
All derivatives were recorded on our condensed consolidated balance sheets at fair value. Derivatives subject to legally enforceable master netting agreements were not offset in our condensed consolidated balance sheets. Accounting for the gains and losses resulting from changes in the fair value of derivatives depends on the use of the derivative and whether it qualifies for hedge accounting. Net liabilities of $32.7 million and $26.3 million associated with our foreign currency forward contracts were included on our condensed consolidated balance sheets as of September 30, 2015 and December 31, 2014, respectively. All of our derivatives mature during the next 18 months. See "Note 2 - Fair Value Measurements" for additional information on the fair value measurement of our derivatives.
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Derivatives recorded at fair value on our condensed consolidated balance sheets consisted of the following (in millions):
Derivative Assets | Derivative Liabilities | ||||||||||||||
September 30, 2015 | December 31, 2014 | September 30, 2015 | December 31, 2014 | ||||||||||||
Derivatives Designated as Hedging Instruments | |||||||||||||||
Foreign currency forward contracts - current(1) | $ | .4 | $ | .4 | $ | 28.9 | $ | 17.2 | |||||||
Foreign currency forward contracts - non-current(2) | .1 | .1 | 2.9 | 2.9 | |||||||||||
.5 | .5 | 31.8 | 20.1 | ||||||||||||
Derivatives Not Designated as Hedging Instruments | |||||||||||||||
Foreign currency forward contracts - current(1) | .4 | .2 | 1.8 | 6.9 | |||||||||||
.4 | .2 | 1.8 | 6.9 | ||||||||||||
Total | $ | .9 | $ | .7 | $ | 33.6 | $ | 27.0 | |||||||
(1) | Derivative assets and liabilities that have maturity dates equal to or less than twelve months from the respective balance sheet date were included in other current assets and accrued liabilities and other, respectively, on our condensed consolidated balance sheets. |
(2) | Derivative assets and liabilities that have maturity dates greater than twelve months from the respective balance sheet date were included in other assets, net, and other liabilities, respectively, on our condensed consolidated balance sheets. |
We utilize cash flow hedges to hedge forecasted foreign currency denominated transactions, primarily to reduce our exposure to foreign currency exchange rate risk associated with contract drilling expenses and capital expenditures denominated in various currencies. As of September 30, 2015, we had cash flow hedges outstanding to exchange an aggregate $329.9 million for various foreign currencies, including $158.4 million for British pounds, $72.7 million for Brazilian reais, $39.2 million for euros, $32.0 million for Australian dollars, $18.3 million for Singapore dollars, and $9.3 million for other currencies.
Gains and losses, net of tax, on derivatives designated as cash flow hedges included in our condensed consolidated statements of operations and comprehensive income (loss) were as follows (in millions):
Three Months Ended September 30, 2015 and 2014
Loss Recognized in Other Comprehensive Income (Effective Portion) | (Loss) Gain Reclassified from Accumulated Other Comprehensive Income ("AOCI") into Income (Effective Portion)(1) | Loss Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing)(2) | |||||||||||||||||||||
2015 | 2014 | 2015 | 2014 | 2015 | 2014 | ||||||||||||||||||
Interest rate lock contracts(3) | $ | — | $ | — | $ | (.1 | ) | $ | — | $ | — | $ | — | ||||||||||
Foreign currency forward contracts(4) | (14.8 | ) | (12.7 | ) | (5.7 | ) | 1.4 | (.3 | ) | (1.9 | ) | ||||||||||||
Total | $ | (14.8 | ) | $ | (12.7 | ) | $ | (5.8 | ) | $ | 1.4 | $ | (.3 | ) | $ | (1.9 | ) | ||||||
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Nine Months Ended September 30, 2015 and 2014
Loss Recognized in Other Comprehensive Income (Effective Portion) | (Loss) Gain Reclassified from AOCI into Income (Effective Portion)(1) | Loss Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing)(2) | |||||||||||||||||||||
2015 | 2014 | 2015 | 2014 | 2015 | 2014 | ||||||||||||||||||
Interest rate lock contracts(3) | $ | — | $ | — | $ | (.6 | ) | $ | (.2 | ) | $ | — | $ | — | |||||||||
Foreign currency forward contracts(5) | (23.5 | ) | (2.8 | ) | (15.3 | ) | 3.5 | (.1 | ) | — | |||||||||||||
Total | $ | (23.5 | ) | $ | (2.8 | ) | $ | (15.9 | ) | $ | 3.3 | $ | (.1 | ) | $ | — | |||||||
(1) | Changes in the fair value of cash flow hedges are recorded in AOCI. Amounts recorded in AOCI associated with cash flow hedges are subsequently reclassified into contract drilling, depreciation or interest expense as earnings are affected by the underlying hedged forecasted transaction. |
(2) | Losses recognized in income for ineffectiveness and amounts excluded from effectiveness testing were included in other, net, in our condensed consolidated statements of operations. |
(3) | Losses on interest rate lock derivatives reclassified from AOCI into income (effective portion) were included in interest expense, net in our condensed consolidated statements of operations. |
(4) | During the three-month period ended September 30, 2015, $5.9 million of losses were reclassified from AOCI into contract drilling expense and $200,000 of gains were reclassified from AOCI into depreciation expense in our condensed consolidated statement of operations. During the three-month period ended September 30, 2014, $1.2 million of gains were reclassified from AOCI into contract drilling expense and $200,000 of gains were reclassified from AOCI into depreciation expense in our condensed consolidated statement of operations. |
(5) | During the nine-month period ended September 30, 2015, $15.9 million of losses were reclassified from AOCI into contract drilling expense and $600,000 of gains were reclassified from AOCI into depreciation expense in our condensed consolidated statement of operations. During the nine-month period ended September 30, 2014, $2.9 million of gains were reclassified from AOCI into contract drilling expense and $600,000 of gains were reclassified from AOCI into depreciation expense in our condensed consolidated statement of operations. |
We have net assets and liabilities denominated in numerous foreign currencies and use various methods to manage our exposure to foreign currency exchange rate risk. We predominantly structure our drilling contracts in U.S. dollars, which significantly reduces the portion of our cash flows and assets denominated in foreign currencies. We occasionally enter into derivatives that hedge the fair value of recognized foreign currency denominated assets or liabilities but do not designate such derivatives as hedging instruments. In these situations, a natural hedging relationship generally exists whereby changes in the fair value of the derivatives offset changes in the fair value of the underlying hedged items. As of September 30, 2015, we held derivatives not designated as hedging instruments to exchange an aggregate $155.5 million for various foreign currencies, including $85.1 million for euros, $13.8 million for Swiss francs, $13.3 million for Mexican pesos, $11.8 million for British pounds, $9.5 million for Indonesian rupiah, and $22.0 million for other currencies.
Net losses of $4.2 million and $15.4 million associated with our derivatives not designated as hedging instruments were included in other, net, in our condensed consolidated statements of operations for the three-month periods ended September 30, 2015 and 2014, respectively. Net losses of $13.2 million and $15.1 million associated with our derivatives not designated as hedging instruments were included in other, net in our condensed consolidated statements of operations for the nine-month periods ended September 30, 2015 and 2014, respectively. These losses were largely offset by net foreign currency exchange gains and losses during the respective periods.
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As of September 30, 2015, the estimated amount of net losses associated with derivative instruments, net of tax, that would be reclassified into earnings during the next twelve months totaled $16.6 million.
Note 4 - Noncontrolling Interests
Third parties hold a noncontrolling ownership interest in certain of our non-U.S. subsidiaries. Noncontrolling interests are classified as equity on our condensed consolidated balance sheets, and net income attributable to noncontrolling interests is presented separately in our condensed consolidated statements of operations.
Income from continuing operations attributable to Ensco for the three-month and nine-month periods ended September 30, 2015 and 2014 was as follows (in millions):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
Income from continuing operations | $ | 317.1 | $ | 423.7 | $ | 918.0 | $ | 371.2 | |||||||
Income from continuing operations attributable to noncontrolling interests | (1.7 | ) | (3.4 | ) | (7.3 | ) | (10.5 | ) | |||||||
Income from continuing operations attributable to Ensco | $ | 315.4 | $ | 420.3 | $ | 910.7 | $ | 360.7 | |||||||
(Loss) income from discontinued operations attributable to Ensco for the three-month and nine-month periods ended September 30, 2015 and 2014 was as follows (in millions):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
(Loss) income from discontinued operations, net | $ | (23.3 | ) | $ | 9.2 | $ | (33.6 | ) | $ | (811.2 | ) | ||||
Income from discontinued operations attributable to noncontrolling interests | (.1 | ) | (.1 | ) | (.1 | ) | (.3 | ) | |||||||
(Loss) income from discontinued operations attributable to Ensco | $ | (23.4 | ) | $ | 9.1 | $ | (33.7 | ) | $ | (811.5 | ) | ||||
Note 5 - Earnings Per Share
We compute basic and diluted earnings per share ("EPS") in accordance with the two-class method. Net income (loss) attributable to Ensco used in our computations of basic and diluted EPS is adjusted to exclude net income allocated to non-vested shares granted to our employees and non-employee directors. Weighted-average shares outstanding used in our computation of diluted EPS is calculated using the treasury stock method and excludes non-vested shares.
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The following table is a reconciliation of income from continuing operations attributable to Ensco shares used in our basic and diluted EPS computations for the three-month and nine-month periods ended September 30, 2015 and 2014 (in millions):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
Income from continuing operations attributable to Ensco | $ | 315.4 | $ | 420.3 | $ | 910.7 | $ | 360.7 | |||||||
Income from continuing operations allocated to non-vested share awards | (4.8 | ) | (4.8 | ) | (12.2 | ) | (5.9 | ) | |||||||
Income from continuing operations attributable to Ensco shares | $ | 310.6 | $ | 415.5 | $ | 898.5 | $ | 354.8 | |||||||
The following table is a reconciliation of the weighted-average shares used in our basic and diluted EPS computations for the three-month and nine-month periods ended September 30, 2015 and 2014 (in millions):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||
Weighted-average shares - basic | 232.4 | 231.8 | 232.2 | 231.5 | |||||||
Potentially dilutive shares | .1 | .2 | — | .2 | |||||||
Weighted-average shares - diluted | 232.5 | 232.0 | 232.2 | 231.7 | |||||||
Antidilutive shares totaling 900,000 were excluded from the computation of diluted EPS for the three-month and nine-month periods ended September 30, 2015. Antidilutive shares totaling 100,000 and 200,000 were excluded from the computation of diluted EPS for the three-month and nine-month periods ended September 30, 2014.
Note 6 -Debt
Senior Notes
During the first quarter, we issued $700.0 million aggregate principal amount of unsecured 5.20% senior notes due 2025 (the “2025 Notes”) at a discount of $2.6 million and $400.0 million aggregate principal amount of unsecured 5.75% senior notes due 2044 (the “New 2044 Notes”) at a discount of $18.7 million in a public offering. Interest on the 2025 Notes is payable semiannually on March 15 and September 15 of each year commencing September 15, 2015. Interest on the New 2044 Notes is payable semiannually on April 1 and October 1 of each year commencing on April 1, 2015.
The 2025 Notes were issued pursuant to the Indenture between us and Deutsche Bank Trust Company Americas, as trustee (the “Trustee”), dated March 17, 2011 (the “Base Indenture”), as supplemented by the Third Supplemental Indenture between us and the Trustee, dated March 12, 2015 (the “Third Supplemental Indenture”). The New 2044 Notes were issued as additional notes under the Base Indenture, as supplemented by the Second Supplemental Indenture between us and the Trustee, dated September 29, 2014 (the “Second Supplemental Indenture”), pursuant to which we previously issued $625.0 million aggregate principal amount of 5.75% senior notes due 2044 (the “Existing 2044 Notes”) in September 2014 (the Base Indenture, as amended and supplemented by the Second Supplemental Indenture and the Third Supplement Indenture, the “Indenture”). The New 2044 Notes and Existing 2044 Notes are treated as a single series of debt securities under the Indenture (collectively, the “2044 Notes”).
We may redeem the 2025 Notes and 2044 Notes, in whole at any time or in part from time to time, prior to maturity. If we elect to redeem the 2025 Notes before the date that is three months prior to the maturity date or the 2044 Notes before the date that is six months prior to the maturity date, we will pay an amount equal to 100% of the principal amount of the notes redeemed plus accrued and unpaid interest and a “make-whole” premium. If we elect to
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redeem the 2025 Notes or 2044 Notes on or after the aforementioned dates, we will pay an amount equal to 100% of the principal amount of the notes redeemed plus accrued and unpaid interest, but are not required to pay a "make-whole" premium.
The 2025 Notes, 2044 Notes and Indenture also contain customary events of default, including failure to pay principal or interest on the 2025 Notes or 2044 Notes when due, among others. The Indenture contains certain restrictions, including, among others, restrictions on our ability and the ability of our subsidiaries to create liens on certain assets, enter into certain sale-leaseback transactions, enter into certain merger or consolidation transactions or transfers of all or substantially all of our assets.
Redemption of 2016 Senior Notes and MARAD Obligations
During 2011, we issued $1.0 billion of 3.25% senior notes with a 2016 maturity (the “2016 Notes”). In March 2015, we commenced a cash tender offer (the “Tender Offer”) for the $1.0 billion outstanding aggregate principal amount of our 2016 Notes. Senior notes totaling $854.6 million were settled on March 12, 2015 for $878.0 million (excluding accrued interest) using a portion of the net proceeds from the 2025 Notes and New 2044 Notes public offering. Under the terms of the Tender Offer, we paid a premium totaling approximately $23.4 million, which approximates the “make-whole” premium that would have been required had we elected to redeem the debt. The premium was recorded as a loss on debt extinguishment and included in other, net in our condensed consolidated statement of operations for the nine-month period ended September 30, 2015. Additionally, we wrote-off $1.7 million of unamortized debt discount and $1.5 million of unamortized debt issuance costs associated with the $854.6 million of notes tendered, resulting in a total pre-tax loss on debt extinguishment of $26.6 million for the nine-month period ended September 30, 2015.
Concurrent with the settlement of the Tender Offer, we exercised our right to redeem the remaining 2016 Notes. In April 2015, we completed the redemption of the remaining $145.4 million of 2016 Notes using a portion of the net proceeds from the 2025 Notes and New 2044 Notes. The redemption payment included a "make-whole" premium of $3.8 million which was recorded as a loss on debt extinguishment and included in other, net in our condensed consolidated statement of operations for the nine-month period ended September 30, 2015.
In April 2015, we used the remaining net proceeds from our March 2015 public offering, together with cash on hand, to redeem $51.0 million of our 4.33% MARAD notes due 2016 and our 4.65% MARAD bonds due 2020 (the “MARAD Obligations”). We incurred additional losses on debt extinguishment of $3.1 million, which were included in other, net in our condensed consolidated statement of operations for the nine-month period ended September 30, 2015. These losses primarily consisted of a "make-whole" premium.
In July 2015, we redeemed the remaining $14.3 million aggregate principal amount of the MARAD Obligations.
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Revolving Credit
We have a $2.25 billion senior unsecured revolving credit facility with a syndicate of banks to be used for general corporate purposes with a term expiring on September 30, 2019 (the "Credit Facility"). Advances under the Credit Facility bear interest at Base Rate or LIBOR plus an applicable margin rate (currently 0.125% per annum for Base Rate advances and 1.125% per annum for LIBOR advances) depending on our credit ratings. Amounts repaid may be re-borrowed during the term of the Credit Facility. We are required to pay a quarterly commitment fee (currently 0.125% per annum) on the undrawn portion of the $2.25 billion commitment which is also based on our credit ratings.
In October 2015, Moody's downgraded our senior unsecured rating one notch to Baa2 from Baa1. The applicable margin rate for advances under our Credit Facility and the quarterly commitment fee percentage did not change as a result of this downgrade. A further reduction in our credit rating of one notch by Moody's or a reduction in our credit rating of one notch by Standard & Poor's would increase our applicable margin rate by 0.125% per annum and our quarterly commitment fee by 0.025% per annum under our Credit Facility.
In addition to other customary restrictive covenants, the Credit Facility requires us to maintain a total debt to total capitalization ratio that is less than or equal to a specified percentage. In March 2015, we amended the Credit Facility to increase the percentage from 50% to 60%.
We have the right, subject to receipt of commitments from new or existing lenders, to increase the commitments under the Credit Facility to an aggregate amount of up to $2.75 billion. We had no amounts outstanding under the Credit Facility as of September 30, 2015 and December 31, 2014.
Note 7 -Impairment
Impairment of Long-Lived Assets
Fiscal Year 2015 - We continually assess our rig portfolio and actively work with our rig broker to market certain rigs that no longer meet our standards for economic returns or are not part of our long-term strategic plan. On a quarterly basis, we assess whether any rig meets the criteria established by Financial Accounting Standards Board ASC 360-10-45 for “held for sale” classification on our balance sheet. We measure the fair value of our assets held for sale by applying a market approach based on third-party estimated prices that would be received in exchange for the assets in an orderly transaction between market participants. We reassess the fair value of our held for sale assets on a quarterly basis and adjust the carrying value, as necessary.
During 2015, we adopted the Financial Accounting Standards Board’s Accounting Standards Update 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity ("Update 2014-08"). Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. As a result, individual assets that we classify as held for sale during 2015 are not reported as discontinued operations. Rigs that were classified as held for sale prior to 2015 continue to be reported as discontinued operations.
During the third quarter of 2015, management received approval from our Board of Directors to market for sale ENSCO 91, an older, less capable jackup rig that we cold stacked during the second quarter. We concluded that the rig met the held for sale criteria as of September 30, 2015, and its carrying value was written-down to fair value based on its estimated sales price. We recorded a pre-tax, non-cash loss on impairment totaling $2.4 million, which was included in income from continuing operations in our condensed consolidated statement of operations for the three-month and nine-month periods ended September 30, 2015.
In performing our quarterly assessment of the remaining held for sale rigs (ENSCO 5001, ENSCO 6000, ENSCO 7500, ENSCO DS-2, ENSCO 58 and ENSCO 90), we concluded that impairments were required as a result of declines in fair values observed during the third quarter. We recognized a pre-tax, non-cash loss on impairment of $25.6 million, which was included in (loss) income from discontinued operations, net in our condensed consolidated
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statement of operations for the three-month and nine-month periods ended September 30, 2015. See “Note 9 - Discontinued Operations” for additional information on rigs classified as held for sale and presented in discontinued operations.
Our condensed consolidated balance sheet as of September 30, 2015 included seven held for sale rigs with an aggregate carrying value of $127.5 million. We believe the asset carrying values are supported by current market prices. If there is continued deterioration in the general business environment for offshore drilling rigs and/or further declines in the estimated sales price for drilling rigs, the estimated fair values of these assets will likely decline below their current carrying values, resulting in additional impairments.
On a quarterly basis, we evaluate the carrying value of our property and equipment to identify events or changes in circumstances ("triggering events") that indicate the carrying value may not be recoverable. If the global economy, our overall business outlook, or our expectations regarding the marketability of one or more of our drilling rigs deteriorates further, we may conclude that a triggering event has occurred and perform a recoverability test that could lead to a material impairment charge in future periods.
During 2015, customers exercised their termination rights for certain drilling contracts, and we agreed to amended contract terms in some cases. In each instance, we concluded that a triggering event had occurred and performed an asset impairment analysis. Based on the analysis performed, we concluded there were no impairments as the carrying values of these rigs were recoverable. We continue to have ongoing discussions with certain customers requesting contract concessions. The outcome of these negotiations remains uncertain; however, deterioration of existing contract terms and/or change in our long-term operating assumptions could lead to a material impairment charge in future periods.
Fiscal Year 2014 - During the second quarter of 2014, demand for floaters deteriorated as a result of continued reduction in capital spending by customers in addition to delays in customers’ drilling programs. The reduction in demand, combined with the increasing supply from newbuild floater deliveries, led to a very competitive market. In general, contracting activity for floaters declined significantly, and new day rate fixtures were substantially lower than rates previously realized. In response to the adverse change in the floaters business climate, management evaluated our older, less capable floaters and committed to a plan to sell five rigs. ENSCO 5000, ENSCO 5001, ENSCO 5002, ENSCO 6000 and ENSCO 7500 were removed from our portfolio of rigs marketed for contract drilling services and actively marketed for sale. These rigs were written down to fair value, less costs to sell, as of May 31, 2014 and classified as "held for sale." We completed the sale of ENSCO 5000 during the fourth quarter of 2014 and ENSCO 5002 during the second quarter of 2015. The remaining three floaters were classified as "held for sale" on our September 30, 2015 condensed consolidated balance sheet.
We measured the fair value of the "held for sale" rigs by applying a market approach, which was based on unobservable third-party estimated prices that would be received in exchange for the assets in an orderly transaction between market participants. We recorded a pre-tax, non-cash loss on impairment totaling $546.4 million during the nine-month period ended September 30, 2014. The impairment charge was included in loss from discontinued operations, net in our condensed consolidated statement of operations for the nine-month period ended September 30, 2014. See "Note 9 - Discontinued Operations" for additional information on our "held for sale" rigs.
As a result of the adverse change in the floater business climate observed during the second quarter of 2014, management's commitment to a plan to sell five floaters during the second quarter of 2014 and the impairment charge incurred on the "held for sale" floaters, management concluded that a triggering event had occurred during the second quarter of 2014 and performed an asset impairment analysis on our remaining older, less capable floaters.
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Based on the analysis performed as of May 31, 2014, we recorded an additional non-cash loss on impairment with respect to four other floaters totaling $991.5 million, of which $288.0 million related to ENSCO DS-2 which was removed from our portfolio of rigs marketed for contract drilling services during the fourth quarter. As a result, the ENSCO DS-2 impairment charge was reclassified to loss from discontinued operations, net in our condensed consolidated statement of operations for the nine-month period ended September 30, 2014. The remaining $703.5 million impairment charge was included in loss on impairment in our condensed consolidated statement of operations for the nine-month period ended September 30, 2014. We measured the fair value of these rigs by applying an income approach, using projected discounted cash flows. These valuations were based on unobservable inputs that require significant judgments for which there is limited information, including assumptions regarding future day rates, utilization, operating costs and capital requirements.
Note 8 -Shareholders' Equity
Consistent with prior years' practice, during the nine-month period ended September 30, 2015, we granted 2.0 million non-vested share awards to our employees, officers and non-employee directors for annual equity awards and for equity awards granted to new or recently promoted employees, pursuant to our 2012 Long-Term Incentive Plan. Grants of non-vested share awards generally vest at rates of 20% or 33% per year, as determined by a committee or subcommittee of the Board of Directors at the time of the grant. Our non-vested share awards have dividend rights effective on the date of grant and are measured at fair value using the market value of our shares on the date of grant. The weighted-average grant-date fair value of non-vested share awards granted during the nine-month period ended September 30, 2015 was $24.22 per share.
Note 9 -Discontinued Operations
During 2014, management committed to a plan to sell six floaters and two jackups. ENSCO 5000, ENSCO 5001, ENSCO 5002, ENSCO 6000, ENSCO 7500, ENSCO DS-2, ENSCO 58 and ENSCO 90 were removed from our portfolio of rigs marketed for contract drilling services. The operating results from these rigs were included in (loss) income from discontinued operations, net in our condensed consolidated statements of operations for the three-month and nine-month periods ended September 30, 2015 and 2014.
On a quarterly basis, we reassess the fair values of our "held for sale" rigs to determine whether any adjustments to the carrying values are necessary. We recorded pre-tax, non-cash losses on impairment of $25.6 million and $32.8 million for the three-month and nine-month periods ended September 30, 2015, respectively, as a result of declines in the estimated fair values of several "held for sale" rigs. The loss on impairment is included in (loss) income from discontinued operations, net in our condensed consolidated statement of operations for the three-month and nine-month periods ended September 30, 2015. We measured the fair value of "held for sale" rigs by applying a market approach, which was based on an unobservable third-party estimated price that would be received in exchange for the assets in an orderly transaction between market participants.
During the nine-month period ended September 30, 2015, we sold ENSCO 5002 for net proceeds of $1.6 million. The proceeds from the sale were included in investing activities of discontinued operations in our condensed consolidated statement of cash flows for the nine-month period ended September 30, 2015. We recognized a pre-tax gain of $1.6 million in connection with the disposal. The gain on sale was included in (loss) income from discontinued operations, net in our condensed consolidated statement of operations for the nine-month period ended September 30, 2015.
During the fourth quarter of 2014, we completed the sale of ENSCO 5000 for net proceeds of $1.3 million. The remaining six rigs (ENSCO 5001, ENSCO 6000, ENSCO 7500, ENSCO DS-2, ENSCO 58 and ENSCO 90) are being actively marketed and were classified as "held for sale" on our September 30, 2015 condensed consolidated balance sheet.
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During the three-month period ended September 30, 2014, we sold ENSCO 93, a jackup contracted to Petroleos Mexicanos (“Pemex”). In connection with the sale, we executed a charter agreement with the purchaser to continue operating the rig for the remainder of the Pemex contract, which ended in July 2015, less than one year from the date of sale. Our management services following the sale did not constitute significant ongoing involvement and therefore, the $1.2 million loss on sale was included in (loss) income from discontinued operations, net in our condensed consolidated statement of operations for the three-month and nine-month periods ended September 30, 2014. ENSCO 93 operating results were included in (loss) income from discontinued operations, net in our condensed consolidated statement of operations for the three-month and nine-month periods ended September 30, 2015 and 2014. Net proceeds from the sale of $51.7 million were included in investing activities of discontinued operations in our consolidated statement of cash flows during the fourth quarter of 2014.
During the nine-month period ended September 30, 2014, we sold jackup rig ENSCO 85 for net proceeds of $64.4 million. The proceeds from the sale were included in investing activities of discontinued operations in our condensed consolidated statement of cash flows for the nine-month period ended September 30, 2014. We recognized a pre-tax gain of $10.3 million in connection with the disposal. The gain on sale and operating results were included in (loss) income from discontinued operations, net in our condensed consolidated statement of operations for the nine-month period ended September 30, 2014.
During the nine-month period ended September 30, 2014, we sold ENSCO 69 and Pride Wisconsin for net proceeds of $32.2 million and recorded a pre-tax gain of $23.6 million. The gain on sale and operating results were included in (loss) income from discontinued operations, net in our condensed consolidated statement of operations for the nine-month period ended September 30, 2014. The net proceeds from the sale were received in December 2013 and included in investing activities of discontinued operations in our condensed consolidated statement of cash flows for the year ended December 31, 2013.
The following table summarizes (loss) income from discontinued operations, net for the three-month and nine-month periods ended September 30, 2015 and 2014 (in millions):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
Revenues | $ | 1.7 | $ | 79.0 | $ | 19.4 | $ | 298.4 | |||||||
Operating expenses | 5.6 | 72.4 | 38.8 | 324.0 | |||||||||||
Operating (loss) income | (3.9 | ) | 6.6 | (19.4 | ) | (25.6 | ) | ||||||||
Income tax (expense) benefit | (2.1 | ) | (11.7 | ) | 7.1 | (23.2 | ) | ||||||||
Loss on impairment, net | (17.3 | ) | — | (24.5 | ) | (796.8 | ) | ||||||||
Gain on disposal of discontinued operations, net | — | 14.3 | 3.2 | 34.4 | |||||||||||
(Loss) income from discontinued operations, net | $ | (23.3 | ) | $ | 9.2 | $ | (33.6 | ) | $ | (811.2 | ) | ||||
Income tax benefit from discontinued operations for the nine-month period ended September 30, 2015 included $11.9 million of discrete tax benefits.
Debt and interest expense are not allocated to our discontinued operations.
Note 10 -Income Taxes
Our consolidated effective income tax rate for the three-month and nine-month periods ended September 30, 2015 was 9.5% and 15.5%, respectively. Excluding the impact of discrete income tax items for the three-month and nine-month periods ended September 30, 2015, our consolidated effective income tax rate was 12.6% and 16.4%, respectively. These discrete tax items were primarily attributable to the early termination of the ENSCO DS-4 drilling contract and the recognition of liabilities for unrecognized tax benefits associated with tax positions taken in prior years.
Excluding the impact of the discrete income tax items, our consolidated effective income tax rate for the three-month period ended September 30, 2014 was 13.9%. Excluding the impact of the $703.5 million loss on impairment and discrete income tax expense, our consolidated effective income tax rate for the nine-month period ended September 30, 2014 was 11.8%.
The change in our effective tax rate for the three-month and nine-month periods is primarily attributable to the change in the estimated relative components of our earnings, excluding discrete items, generated in tax jurisdictions with higher tax rates and tax legislation enacted by the U.K. government that became effective on April 1,2014.
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Note 11 -Contingencies
Brazil Internal Investigation
Pride International, Inc. (“Pride”), a company we acquired in 2011, commenced drilling operations in Brazil during 2001 and, in 2008, entered into a drilling contract with Petrobras for DS-5, a rig Pride had ordered from a shipyard in South Korea.
Beginning in 2006, Pride conducted periodic compliance reviews of its business with Petrobras, and, after the acquisition, Ensco conducted similar compliance reviews, the most recent of which commenced in early 2015 after media reports were released regarding ongoing investigations of various kickback and bribery schemes in Brazil involving Petrobras.
While conducting our compliance review, we became aware of an internal audit report by Petrobras alleging irregularities in relation to DS-5 - specifically, that Petrobras overpaid under the drilling contract. We believe this allegation is inaccurate, as publicly available data show that the contract’s compensation terms were in line with other contracts signed by Petrobras and other customers with our competitors during the same timeframe (late 2007 and early 2008). We provided this information to Petrobras in June 2015. We continue to operate DS-5 under its existing contract. In addition, all our other rigs contracted to Petrobras - ENSCO 6001, 6002, 6003 and 6004 - continue to work under their contracts.
Upon learning of the Petrobras internal audit report, our Audit Committee appointed independent counsel to lead an investigation into the alleged irregularities. Subsequently, the internal audit report and the alleged irregularities were referenced in Brazilian court documents connected to the prosecution of former Petrobras directors and employees as well as certain other third parties, including a former marketing consultant who provided services to Pride in connection with DS-5. The former marketing consultant entered into a plea agreement with the Brazil authorities. This plea agreement was referenced in a Brazilian court proceeding relating to a project for a competitor having no connection to us. This court proceeding document states that another court action would be made public in due course with respect to DS-5; to date no further proceedings relating to DS-5 have been released.
Independent counsel, under the direction of our Audit Committee, has substantially completed the investigation of these allegations by reviewing and analyzing available documents and correspondence and interviewing current and former employees involved in the contracting of DS-5 as well as the former marketing consultant. To date, our Audit Committee has found no evidence that Pride or Ensco or any of their current or former employees were aware of or involved in any wrongdoing, and our Audit Committee has found no evidence linking Ensco or Pride to any illegal acts committed by our former marketing consultant. Although the investigation is substantially complete, we cannot predict whether any new or additional allegations will be made and what impact those allegations will have on the timing or conclusions of the investigation. Our Audit Committee will examine any new or additional allegations and the facts and circumstances surrounding them.
To date, we have not been contacted by Brazil authorities, and no authority has alleged wrongdoing by Pride or Ensco or any of their current or former employees. In June and July 2015, we voluntarily contacted the SEC and the U.S. Department of Justice (“DOJ”), respectively, to advise them of this matter and our Audit Committee’s independent investigation, and we provided them an update on the investigation in September 2015. We cannot predict whether any governmental authority will seek to investigate this matter, or if a proceeding were opened, the scope or ultimate outcome of any such investigation. If the SEC or DOJ determines that violations of the U.S. Foreign Corrupt Practices Act of 1977 (the "FCPA") have occurred, or if any governmental authority determines that we have violated applicable anti-bribery laws, they could seek civil and criminal sanctions, including monetary penalties, against us, as well as changes to our business practices and compliance programs, any of which could have a material adverse effect on our business and financial condition.
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ENSCO 74 Loss
During 2008, ENSCO 74 was lost as a result of Hurricane Ike in the U.S. Gulf of Mexico. The ENSCO 74 sunken rig hull was located approximately 95 miles from the original drilling location when it was struck by an oil tanker during 2009. We filed a petition for exoneration or limitation of liability under U.S. admiralty and maritime law during 2009. Wreck removal operations on the sunken rig hull of ENSCO 74 were completed during 2010.
The owner of the oil tanker that struck the hull of ENSCO 74 filed claims seeking monetary damages in excess of $5.0 million for losses incurred when the tanker struck the ENSCO 74 hull. This matter went to trial in June 2014, and we won a directed verdict on all claims. During the third quarter of 2015, the United States Court of Appeals for the Fifth Circuit affirmed the trial court's directed verdict. The deadline for further appeals has now passed, thereby closing this matter.
ENSCO 29 Wreck Removal
During 2005, a portion of the ENSCO 29 platform drilling rig was lost over the side of a customer's platform as a result of Hurricane Katrina. During 2014, we received a letter from an operator demanding that Ensco retrieve the derrick and drawworks from the seabed.
Our property insurance policies include coverage for ENSCO 29 wreckage and debris removal costs up to $3.8 million. We also maintain liability insurance policies that provide coverage under certain circumstances for wreckage and debris removal costs in excess of the $3.8 million coverage provided under the property insurance policies. We believe that it is not probable a liability exists with respect to this matter, and no liability has been recorded on our condensed consolidated balance sheet as of September 30, 2015. While we cannot reasonably estimate a range of possible loss at this time, it is possible that removal costs may be in excess of our insurance coverage. Although we do not expect costs associated with the ENSCO 29 wreck removal to have a material adverse effect upon our financial position, operating results or cash flows, there can be no assurances as to the ultimate outcome.
Asbestos Litigation
We and certain subsidiaries have been named as defendants, along with numerous third-party companies as co-defendants, in multi-party lawsuits filed in Mississippi and Louisiana by approximately 60 plaintiffs. The lawsuits seek an unspecified amount of monetary damages on behalf of individuals alleging personal injury or death, primarily under the Jones Act, purportedly resulting from exposure to asbestos on drilling rigs and associated facilities during the 1960s through the 1980s.
During 2013, we reached an agreement in principle with 58 plaintiffs to settle lawsuits filed in Mississippi for a nominal amount. A special master reviewed all 58 cases and made an allocation of settlement funds among the parties. The District Court Judge reviewed the allocations and accepted the special master’s recommendations and approved the settlements. The settlement documents for most of the individual plaintiffs have been processed and the cases have been dismissed. The settlement documents for approximately 18 individual plaintiffs are continuing to be processed.
We intend to vigorously defend against the remaining claims and have filed responsive pleadings preserving all defenses and challenges to jurisdiction and venue. However, discovery is still ongoing and, therefore, available information regarding the nature of all pending claims is limited. At present, we cannot reasonably determine how many of the claimants may have valid claims under the Jones Act or estimate a range of potential liability exposure, if any.
In addition to the pending cases in Mississippi and Louisiana, we have other asbestos or lung injury claims pending against us in litigation from time to time in other jurisdictions. Although we do not expect final disposition of these asbestos or lung injury lawsuits to have a material adverse effect upon our financial position, operating results or cash flows, there can be no assurances as to the ultimate outcome of the lawsuits.
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Other Matters
In addition to the foregoing, we are named defendants or parties in certain other lawsuits, claims or proceedings incidental to our business and are involved from time to time as parties to governmental investigations or proceedings, including matters related to taxation, arising in the ordinary course of business. Although the outcome of such lawsuits or other proceedings cannot be predicted with certainty and the amount of any liability that could arise with respect to such lawsuits or other proceedings cannot be predicted accurately, we do not expect these matters to have a material adverse effect on our financial position, operating results or cash flows.
In the ordinary course of business with customers and others, we have entered into letters of credit and surety bonds to guarantee our performance as it relates to our drilling contracts, contract bidding, customs duties, tax appeals and other obligations in various jurisdictions. Letters of credit and surety bonds outstanding as of September 30, 2015 totaled $95.8 million and were issued under facilities provided by various banks and other financial institutions. Obligations under these letters of credit and surety bonds are not normally called as we typically comply with the underlying performance requirement. As of September 30, 2015, we had not been required to make collateral deposits with respect to these agreements.
Note 12 -Sale-leaseback
During the third quarter of 2014, we sold jackup rigs ENSCO 83, ENSCO 89, ENSCO 93 and ENSCO 98, all of which were contracted to Pemex. In connection with this sale, we executed charter agreements with the purchaser to continue operating the rigs for the remainder of the Pemex contracts, which had anticipated completion dates in either 2015 or 2016. We accounted for the transaction as a sale-leaseback, whereby we retain a significant portion of the remaining use of the rigs as a result of the charter agreements.
We recorded an aggregate gain on sale of $7.5 million at the time of disposal, which represented the portion of the gain that exceeded the present value of payments due under the charter agreements. The remaining $29.4 million gain was deferred and amortized to contract drilling expense within the Jackup segment over the remaining charter term of each rig. Of the $29.4 million deferred gain, $5.7 million and $19.7 million were recognized in contract drilling expense in our condensed consolidated statements of operations for the three-month and nine-month periods ended September 30, 2015, and $2.7 million was included in accrued liabilities and other on our condensed consolidated balance sheet as of September 30, 2015.
Due to our long-term charter agreements with the purchaser, ENSCO 83, ENSCO 89 and ENSCO 98 operating results for periods beginning after the date of sale (September 30, 2014) were included in income from continuing operations within the Other segment. Operating results for these rigs prior to September 30, 2014 were included in income from continuing operations within the Jackup segment.
The ENSCO 93 contract with Pemex ended in July 2015, less than one year from the date of sale. Therefore, our rig management operations following the sale did not constitute significant ongoing involvement. As a result, ENSCO 93 operating results were included in (loss) income from discontinued operations, net in our condensed consolidated statements of operations for the three-month and nine-month periods ended September 30, 2015 and 2014. See "Note 9 - Discontinued Operations" for additional information.
Note 13 -Segment Information
Our business consists of three operating segments: (1) Floaters, which includes our drillships and semisubmersible rigs, (2) Jackups and (3) Other, which consists of management services on rigs owned by third-parties. Our two reportable segments, Floaters and Jackups, provide one service, contract drilling.
Segment information for the three-month and nine-month periods ended 2015 and 2014 is presented below (in millions). General and administrative expense and depreciation expense incurred by our corporate office are not allocated to our operating segments for purposes of measuring segment operating income and were included in "Reconciling Items." We measure segment assets as property and equipment. Prior year information has been reclassified to conform to the current year presentation.
Three Months Ended September 30, 2015
Floaters | Jackups | Other | Operating Segments Total | Reconciling Items | Consolidated Total | ||||||||||||||||||
Revenues | $ | 646.4 | $ | 325.8 | $ | 40.0 | $ | 1,012.2 | $ | — | $ | 1,012.2 | |||||||||||
Operating expenses | |||||||||||||||||||||||
Contract drilling (exclusive of depreciation) | 242.4 | 160.0 | 31.1 | 433.5 | — | 433.5 | |||||||||||||||||
Depreciation | 95.7 | 44.8 | — | 140.5 | 4.7 | 145.2 | |||||||||||||||||
Loss on impairment | — | 2.4 | — | 2.4 | — | 2.4 | |||||||||||||||||
General and administrative | — | — | — | — | 28.4 | 28.4 | |||||||||||||||||
Operating income (loss) | $ | 308.3 | $ | 118.6 | $ | 8.9 | $ | 435.8 | $ | (33.1 | ) | $ | 402.7 | ||||||||||
Property and equipment, net | $ | 10,260.5 | $ | 3,194.6 | $ | — | $ | 13,455.1 | $ | 73.8 | $ | 13,528.9 | |||||||||||
Three Months Ended September 30, 2014
Floaters | Jackups | Other | Operating Segments Total | Reconciling Items | Consolidated Total | ||||||||||||||||||
Revenues | $ | 703.5 | $ | 481.0 | $ | 16.9 | $ | 1,201.4 | $ | — | $ | 1,201.4 | |||||||||||
Operating expenses | |||||||||||||||||||||||
Contract drilling (exclusive of depreciation) | 291.3 | 197.9 | 11.0 | 500.2 | — | 500.2 | |||||||||||||||||
Depreciation | 87.9 | 45.3 | — | 133.2 | 2.0 | 135.2 | |||||||||||||||||
General and administrative | — | — | — | — | 29.3 | 29.3 | |||||||||||||||||
Operating income (loss) | $ | 324.3 | $ | 237.8 | $ | 5.9 | $ | 568.0 | $ | (31.3 | ) | $ | 536.7 | ||||||||||
Property and equipment, net | $ | 9,836.2 | $ | 3,215.3 | $ | — | $ | 13,051.5 | $ | 76.1 | $ | 13,127.6 | |||||||||||
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Nine Months Ended September 30, 2015
Floaters | Jackups | Other | Operating Segments Total | Reconciling Items | Consolidated Total | ||||||||||||||||||
Revenues | $ | 1,975.7 | $ | 1,138.2 | $ | 121.2 | $ | 3,235.1 | $ | — | $ | 3,235.1 | |||||||||||
Operating expenses | |||||||||||||||||||||||
Contract drilling (exclusive of depreciation) | 813.6 | 544.2 | 96.6 | 1,454.4 | — | 1,454.4 | |||||||||||||||||
Depreciation | 283.1 | 129.9 | — | 413.0 | 9.8 | 422.8 | |||||||||||||||||
Loss on impairment | — | 2.4 | — | 2.4 | — | 2.4 | |||||||||||||||||
General and administrative | — | — | 88.2 | 88.2 | |||||||||||||||||||
Operating income (loss) | $ | 879.0 | $ | 461.7 | $ | 24.6 | $ | 1,365.3 | $ | (98.0 | ) | $ | 1,267.3 | ||||||||||
Property and equipment, net | $ | 10,260.5 | $ | 3,194.6 | $ | — | $ | 13,455.1 | $ | 73.8 | $ | 13,528.9 | |||||||||||
Nine Months Ended September 30, 2014
Floaters | Jackups | Other | Operating Segments Total | Reconciling Items | Consolidated Total | ||||||||||||||||||
Revenues | $ | 2,034.6 | $ | 1,320.1 | $ | 50.0 | $ | 3,404.7 | $ | — | $ | 3,404.7 | |||||||||||
Operating expenses | |||||||||||||||||||||||
Contract drilling (exclusive of depreciation) | 907.8 | 621.1 | 34.0 | 1,562.9 | — | 1,562.9 | |||||||||||||||||
Depreciation | 266.9 | 125.6 | — | 392.5 | 6.0 | 398.5 | |||||||||||||||||
Loss on impairment | 703.5 | — | — | 703.5 | — | 703.5 | |||||||||||||||||
General and administrative | — | — | — | — | 103.6 | 103.6 | |||||||||||||||||
Operating income (loss) | $ | 156.4 | $ | 573.4 | $ | 16.0 | $ | 745.8 | $ | (109.6 | ) | $ | 636.2 | ||||||||||
Property and equipment, net | $ | 9,836.2 | $ | 3,215.3 | $ | — | $ | 13,051.5 | $ | 76.1 | $ | 13,127.6 | |||||||||||
Information about Geographic Areas
As of September 30, 2015, the geographic distribution of our drilling rigs by reportable segment was as follows:
Floaters | Jackups | Total(1) | |||
North & South America (excluding Brazil) | 9 | 7 | 16 | ||
Middle East & Africa | 3 | 11 | 14 | ||
Europe & Mediterranean | 2 | 11 | 13 | ||
Asia & Pacific Rim | 4 | 7 | 11 | ||
Brazil | 4 | — | 4 | ||
Asia & Pacific Rim (under construction) | 1 | 1 | 2 | ||
Middle East & Africa (under construction) | — | 2 | 2 | ||
Held for sale | 4 | 3 | 7 | ||
Total | 27 | 42 | 69 | ||
(1) | We provide management services on five rigs owned by third-parties not included in the table above. |
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Note 14 -Supplemental Financial Information
Consolidated Balance Sheet Information
Accounts receivable, net, consisted of the following (in millions):
September 30, 2015 | December 31, 2014 | ||||||
Trade | $ | 730.6 | $ | 878.8 | |||
Other | 14.4 | 15.9 | |||||
745.0 | 894.7 | ||||||
Allowance for doubtful accounts | (9.4 | ) | (11.4 | ) | |||
$ | 735.6 | $ | 883.3 | ||||
Other current assets consisted of the following (in millions):
September 30, 2015 | December 31, 2014 | ||||||
Inventory | $ | 256.4 | $ | 240.3 | |||
Assets held for sale | 127.5 | 152.4 | |||||
Prepaid taxes | 70.7 | 90.6 | |||||
Deferred costs | 54.8 | 61.9 | |||||
Deferred tax assets | 33.9 | 43.8 | |||||
Prepaid expenses | 30.0 | 33.8 | |||||
Other | 13.3 | 6.6 | |||||
$ | 586.6 | $ | 629.4 | ||||
Other assets, net consisted of the following (in millions):
September 30, 2015 | December 31, 2014 | ||||||
Deferred costs | $ | 86.5 | $ | 82.3 | |||
Supplemental executive retirement plan assets | 42.8 | 43.2 | |||||
Prepaid taxes on intercompany transfers of property | 37.7 | 39.7 | |||||
Deferred tax assets | 36.2 | 38.4 | |||||
Intangible assets | 8.5 | 49.0 | |||||
Unbilled receivables | 1.7 | 18.6 | |||||
Warranty and other claim receivables | — | 30.6 | |||||
Other | 9.8 | 12.4 | |||||
$ | 223.2 | $ | 314.2 | ||||
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Accrued liabilities and other consisted of the following (in millions):
September 30, 2015 | December 31, 2014 | ||||||
Deferred revenue | $ | 198.0 | $ | 241.3 | |||
Personnel costs | 158.6 | 214.0 | |||||
Accrued interest | 75.4 | 83.8 | |||||
Taxes | 60.8 | 97.0 | |||||
Derivative liabilities | 30.7 | 24.1 | |||||
Other | 11.7 | 36.4 | |||||
$ | 535.2 | $ | 696.6 | ||||
Other liabilities consisted of the following (in millions):
September 30, 2015 | December 31, 2014 | ||||||
Deferred revenue | $ | 240.6 | $ | 373.2 | |||
Unrecognized tax benefits (inclusive of interest and penalties) | 151.6 | 142.4 | |||||
Supplemental executive retirement plan liabilities | 43.9 | 45.1 | |||||
Intangible liabilities | 16.9 | 40.7 | |||||
Personnel costs | 16.2 | 26.1 | |||||
Other | 35.4 | 39.8 | |||||
$ | 504.6 | $ | 667.3 | ||||
Accumulated other comprehensive income consisted of the following (in millions):
September 30, 2015 | December 31, 2014 | ||||||
Cumulative Translation Adjustment | $ | 10.2 | $ | 5.1 | |||
Derivative Instruments | .4 | 8.0 | |||||
Other | (2.1 | ) | (1.2 | ) | |||
$ | 8.5 | $ | 11.9 | ||||
The increase in the cumulative translation adjustment is due to changes in the Brazilian reai exchange rate relative to the U.S. dollar during the nine-month period ended September 30, 2015.
Concentration of Risk
We are exposed to credit risk relating to our receivables from customers, our cash and cash equivalents, our short-term investments and our use of derivatives in connection with the management of foreign currency exchange rate risk. We mitigate our credit risk relating to receivables from customers, which consist primarily of major international, government-owned and independent oil and gas companies, by performing ongoing credit evaluations. We also maintain reserves for potential credit losses, which generally have been within management's expectations. We mitigate our credit risk relating to cash and cash equivalents and short-term investments by focusing on diversification and quality of instruments. Cash equivalents and short-term investments consist of a portfolio of high-grade instruments. Custody of cash and cash equivalents and short-term investments is maintained at several well-capitalized financial institutions, and we monitor the financial condition of those financial institutions.
We mitigate our credit risk relating to derivative counterparties through a variety of techniques, including transacting with multiple, high-quality financial institutions, thereby limiting our exposure to individual counterparties
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and by entering into International Swaps and Derivatives Association, Inc. (“ISDA”) Master Agreements, which include provisions for a legally enforceable master netting agreement, with almost all of our derivative counterparties. The terms of the ISDA agreements may also include credit support requirements, cross default provisions, termination events or set-off provisions. Legally enforceable master netting agreements reduce credit risk by providing protection in bankruptcy in certain circumstances and generally permitting the closeout and netting of transactions with the same counterparty upon the occurrence of certain events. See "Note 3 - Derivative Instruments" for additional information on our derivatives.
Consolidated revenues by customer for the three-month and nine-month periods ended September 30, 2015 and 2014 were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||
BP (1) | 27 | % | 15 | % | 18 | % | 16 | % | |||
Petrobras(2) | 16 | % | 10 | % | 14 | % | 10 | % | |||
Total(2) | 6 | % | 8 | % | 8 | % | 10 | % | |||
Anadarko(2) | 1 | % | 8 | % | 4 | % | 10 | % | |||
Other | 50 | % | 59 | % | 56 | % | 54 | % | |||
100 | % | 100 | % | 100 | % | 100 | % | ||||
(1) | During the three-month periods ended September 30, 2015 and 2014, 86% and 79% of the revenues provided by BP, respectively, were attributable to our Floaters segment. During the nine-month periods ended September 30, 2015 and 2014, 84% and 80% of the revenues provided by BP, respectively, were attributable to our Floaters segment. |
During the three-month and nine-month periods ended September 30, 2015, revenues provided by BP included $110.6 million for the ENSCO DS-4 lump sum termination fee.
(2) | During the three-month and nine-month periods ended September 30, 2015 and 2014, all revenues were provided by our Floaters segment. |
Consolidated revenues by region for the three-month and nine-month periods ended September 30, 2015 and 2014 were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
U.S. Gulf of Mexico(1) | $ | 363.0 | $ | 447.1 | $ | 972.8 | $ | 1,320.6 | |||||||
Angola(2) | 136.6 | 150.1 | 488.3 | 458.5 | |||||||||||
Brazil(3) | 112.9 | 115.8 | 351.3 | 361.5 | |||||||||||
United Kingdom(4) | 91.5 | 117.8 | 316.4 | 268.7 | |||||||||||
Other | 308.2 | 370.6 | 1,106.3 | 995.4 | |||||||||||
$ | 1,012.2 | $ | 1,201.4 | $ | 3,235.1 | $ | 3,404.7 | ||||||||
(1) | During the three-month periods ended September 30, 2015 and 2014, 90% and 80% of the revenues earned in the U.S. Gulf of Mexico, respectively, were attributable to our Floaters segment. During the nine-month periods ended September 30, 2015 and 2014, 86% and 78% of the revenues earned in the U.S. Gulf of Mexico, respectively, were attributable to our Floaters segment. |
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(2) | During the three-month periods ended September 30, 2015 and 2014, 87% and 100% of the revenues earned in Angola, respectively, were attributable to our Floaters segment. During the nine-month periods ended September 30, 2015 and 2014, 90% and 100% of the revenues earned in Angola, respectively, were attributable to our Floaters segment. |
(3) | During the three-month and nine-month periods ended September 30, 2015 and 2014, all revenues were provided by our Floaters segment. |
(4) | During the three-month and nine-month periods ended September 30, 2015 and 2014, all revenues were provided by our Jackups segment. |
Note 15 -Guarantee of Registered Securities
During 2011, Ensco plc completed a merger transaction (the "Merger") with Pride. In connection with the Merger, Ensco plc and Pride entered into a supplemental indenture to the indenture dated as of July 1, 2004 between Pride and the Bank of New York Mellon, as indenture trustee, providing for, among other matters, the full and unconditional guarantee by Ensco plc of Pride’s 8.5% unsecured senior notes due 2019, 6.875% unsecured senior notes due 2020 and 7.875% unsecured senior notes due 2040, which had an aggregate outstanding principal balance of $1.7 billion as of September 30, 2015. The Ensco plc guarantee provides for the unconditional and irrevocable guarantee of the prompt payment, when due, of any amount owed to the holders of the notes.
Ensco plc is also a full and unconditional guarantor of the 7.2% debentures due 2027 issued by ENSCO International Incorporated during 1997, which had an aggregate outstanding principal balance of $150.0 million as of September 30, 2015.
All guarantees are unsecured obligations of Ensco plc ranking equal in right of payment with all of its existing and future unsecured and unsubordinated indebtedness.
The following tables present the unaudited condensed consolidating statements of operations for the three-month and nine-month periods ended September 30, 2015 and 2014; the unaudited condensed consolidating statements of comprehensive income (loss) for the three-month and nine-month periods ended September 30, 2015 and 2014; the condensed consolidating balance sheets as of September 30, 2015 (unaudited) and December 31, 2014; and the unaudited condensed consolidating statements of cash flows for the nine-month periods ended September 30, 2015 and 2014, in accordance with Rule 3-10 of Regulation S-X.
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ENSCO PLC AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS Three Months Ended September 30, 2015 (in millions) (Unaudited) | |||||||||||||||||||||||
Ensco plc | ENSCO International Incorporated | Pride International, Inc. | Other Non-Guarantor Subsidiaries of Ensco | Consolidating Adjustments | Total | ||||||||||||||||||
OPERATING REVENUES | $ | 9.8 | $ | 34.8 | $ | — | $ | 1,039.4 | $ | (71.8 | ) | $ | 1,012.2 | ||||||||||
OPERATING EXPENSES | |||||||||||||||||||||||