Company Quick10K Filing
ENSCO
Price8.39 EPS4
Shares198 P/E2
MCap1,658 P/FCF-6
Net Debt6,038 EBIT827
TEV7,696 TEV/EBIT9
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-04-30
10-K 2019-12-31 Filed 2020-02-21
10-Q 2019-09-30 Filed 2019-10-31
10-Q 2019-06-30 Filed 2019-08-01
10-Q 2019-03-31 Filed 2019-05-02
10-K 2018-12-31 Filed 2019-02-28
10-Q 2018-09-30 Filed 2018-10-30
10-Q 2018-06-30 Filed 2018-07-26
10-Q 2018-03-31 Filed 2018-04-26
10-K 2017-12-31 Filed 2018-02-27
10-Q 2017-09-30 Filed 2017-10-26
10-Q 2017-06-30 Filed 2017-07-27
10-Q 2017-03-31 Filed 2017-04-27
10-K 2016-12-31 Filed 2017-02-28
10-Q 2016-09-30 Filed 2016-10-27
10-Q 2016-06-30 Filed 2016-07-28
10-Q 2016-03-31 Filed 2016-04-28
10-K 2015-12-31 Filed 2016-02-25
10-Q 2015-09-30 Filed 2015-10-29
10-Q 2015-06-30 Filed 2015-07-30
10-Q 2015-03-31 Filed 2015-04-30
10-K 2014-12-31 Filed 2015-03-02
10-Q 2014-09-30 Filed 2014-10-30
10-Q 2014-06-30 Filed 2014-08-01
10-Q 2014-03-31 Filed 2014-04-29
10-K 2013-12-31 Filed 2014-02-26
10-Q 2013-09-30 Filed 2013-10-24
10-Q 2013-06-30 Filed 2013-07-30
10-Q 2013-03-31 Filed 2013-04-30
10-K 2012-12-31 Filed 2013-02-22
10-Q 2012-09-30 Filed 2012-11-01
10-Q 2012-06-30 Filed 2012-07-26
10-Q 2012-03-31 Filed 2012-05-03
10-K 2011-12-31 Filed 2012-02-24
10-Q 2011-09-30 Filed 2011-11-03
10-Q 2011-06-30 Filed 2011-08-09
10-Q 2011-03-31 Filed 2011-04-29
10-K 2010-12-31 Filed 2011-02-24
10-Q 2010-09-30 Filed 2010-10-21
10-Q 2010-06-30 Filed 2010-07-22
10-Q 2010-03-31 Filed 2010-04-22
10-K 2009-12-31 Filed 2010-02-25
8-K 2020-05-07 Officers
8-K 2020-04-30 Officers
8-K 2020-04-29 Earnings, Regulation FD, Exhibits, Earnings, Regulation FD, Exhibits
8-K 2020-03-07 Other Events
8-K 2020-02-26 Officers
8-K 2020-02-20 Earnings, Exhibits
8-K 2020-02-13 Regulation FD, Exhibits
8-K 2020-02-03 Enter Agreement, Exhibits
8-K 2020-01-24 Enter Agreement, Officers, Regulation FD, Exhibits
8-K 2019-12-31 Officers
8-K 2019-11-26 Officers, Regulation FD, Exhibits
8-K 2019-11-12 Officers, Regulation FD, Exhibits
8-K 2019-11-12 Officers
8-K 2019-10-30 Earnings, Exhibits
8-K 2019-10-25 Regulation FD, Exhibits
8-K 2019-09-03 Regulation FD, Exhibits
8-K 2019-08-20 Other Events
8-K 2019-07-31 Other Events
8-K 2019-07-31 Earnings, Exhibits
8-K 2019-07-29 Other Events, Exhibits
8-K 2019-07-25 Regulation FD, Exhibits
8-K 2019-07-24 Officers
8-K 2019-07-12 Enter Agreement, Shareholder Rights, Exhibits
8-K 2019-06-07 Enter Agreement, Shareholder Rights, Exhibits
8-K 2019-05-20 Shareholder Vote
8-K 2019-05-01 Earnings, Exhibits
8-K 2019-04-29 Regulation FD, Exhibits
8-K 2019-04-09 Enter Agreement, M&A, Off-BS Arrangement, Sale of Shares, Officers, Regulation FD, Other Events, Exhibits
8-K 2019-03-06 Officers, Exhibits
8-K 2019-02-27 Earnings, Exhibits
8-K 2019-02-26 Other Events
8-K 2019-02-21 Shareholder Vote, Regulation FD, Exhibits
8-K 2019-02-20 Regulation FD, Exhibits
8-K 2019-01-28 Enter Agreement, Regulation FD, Exhibits
8-K 2019-01-02 Regulation FD, Exhibits
8-K 2018-10-29 Regulation FD, Exhibits
8-K 2018-10-29 Earnings, Other Events, Exhibits
8-K 2018-10-23 Other Events, Exhibits
8-K 2018-10-07 Enter Agreement, Officers, Regulation FD, Other Events, Exhibits
8-K 2018-09-04 Other Events
8-K 2018-07-25 Earnings, Exhibits
8-K 2018-07-19 Regulation FD, Exhibits
8-K 2018-05-21 Officers, Shareholder Vote, Exhibits
8-K 2018-04-25 Earnings, Exhibits
8-K 2018-04-23 Regulation FD, Exhibits
8-K 2018-02-26 Earnings, Regulation FD, Exhibits
8-K 2018-02-22 Other Events
8-K 2018-02-20 Officers, Exhibits
8-K 2018-02-20 Regulation FD, Exhibits
8-K 2018-02-08 Other Events, Exhibits
8-K 2018-01-26 Other Events, Exhibits
8-K 2018-01-25 Other Events, Exhibits
8-K 2018-01-11 Other Events, Exhibits
8-K 2018-01-10 Other Events, Exhibits

ESV 10Q Quarterly Report

Part I - Financial Information
Item 1.Financial Statements
Note 1 - Unaudited Condensed Consolidated Financial Statements
Note 2 - Revenue From Contracts with Customers
Note 3 - Rowan Transaction
Note 4 - Equity Method Investment in Aro
Note 5 - Fair Value Measurements
Note 6 - Property and Equipment
Note 7 - Pension and Other Post - Retirement Benefits
Note 8 - Derivative Instruments
Note 9 - Earnings per Share
Note 10 - Debt
Note 11 - Shareholders' Equity
Note 12 - Income Taxes
Note 13 - Contingencies
Note 14 - Segment Information
Note 15 - Supplemental Financial Information
Note 16 - Guarantee of Registered Securities
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-10.2 val-3312020xexhibit102.htm
EX-10.3 val-3312020xexhibit103.htm
EX-10.4 val-3312020xexhibit104.htm
EX-10.5 val-3312020xexhibit105.htm
EX-15.1 val-3312020xexhibit151.htm
EX-31.1 val-3312020xexhibit311.htm
EX-31.2 val-3312020xexhibit312.htm
EX-32.1 val-3312020xexhibit321.htm
EX-32.2 val-3312020xexhibit322.htm

ENSCO Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
30241812602012201420172020
Assets, Equity
0.70.50.30.1-0.1-0.32016201720182020
Rev, G Profit, Net Income
1.30.6-0.1-0.7-1.4-2.12012201420172020
Ops, Inv, Fin

Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
     Washington, D.C. 20549    
 
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
OR
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
 Valaris plc
(Exact name of registrant as specified in its charter)
England and Wales
 
98-0635229
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
 
 
110 Cannon Street
 
 
London,
England
 
 
EC4N6EU
(Address of principal executive offices)
 
(Zip Code)
 Registrant's telephone number, including area code:  44 (0) 20 7659 4660
  
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Ticker Symbol(s)
 
Name of each exchange on which on which registered
Class A ordinary shares, U.S. $0.40 par value
 
VAL
 
New York Stock Exchange
4.70% Senior Notes due 2021
 
VAL21
 
New York Stock Exchange
4.50% Senior Notes due 2024
 
VAL24
 
New York Stock Exchange
8.00% Senior Notes due 2024
 
VAL24A
 
New York Stock Exchange
5.20% Senior Notes due 2025
 
VAL25A
 
New York Stock Exchange
7.75% Senior Notes due 2026
 
VAL26
 
New York Stock Exchange
5.75% Senior Notes due 2044
 
VAL44
 
New York Stock Exchange
4.875% Senior Note due 2022
 
VAL/22
 
New York Stock Exchange
4.75% Senior Note due 2024
 
VAL/24
 
New York Stock Exchange
7.375% Senior Note due 2025
 
VAL/25
 
New York Stock Exchange
5.4% Senior Note due 2042
 
VAL/42
 
New York Stock Exchange
5.85% Senior Note due 2044
 
VAL/44
 
New York Stock Exchange

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   No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  Yes         No 





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
  
Accelerated filer
 
 
 
 
 
 
 
 
Non-Accelerated filer
 
  
Smaller reporting company
 
 
 
 
 
 
 
 
 
 
 
 
Emerging-growth company
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   No  


As of April 27, 2020, there were 205,941,431 Class A ordinary shares of the registrant issued and outstanding.




VALARIS PLC
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2020

 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




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 (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").  Forward-looking statements include words or phrases such as "anticipate," "believe," "estimate," "expect," "intend," "likely," "plan," "project," "could," "may," "might," "should," "will" and similar words and specifically include statements regarding expected financial performance; expected utilization, day rates, revenues, operating expenses, cash flow, contract terms, contract backlog, capital expenditures, insurance, financing and funding; the offshore drilling market, including supply and demand, customer drilling programs, stacking of rigs, effects of new rigs on the market and effects of declines in commodity prices; expected work commitments, awards and contracts; the timing of availability, delivery, mobilization, contract commencement or relocation or other movement of rigs and the timing thereof; future rig construction (including work in progress and completion thereof), enhancement, upgrade or repair and timing and cost thereof; the suitability of rigs for future contracts; performance of our joint venture with Saudi Arabian Oil Company ("Saudi Aramco"); expected divestitures of assets; general market, business and industry conditions, trends and outlook; future operations; the impact of increasing regulatory complexity; the outcome of tax disputes, assessments and settlements; our program to high-grade the rig fleet by investing in new equipment and divesting selected assets and underutilized rigs; synergies and expected additional cost savings; dividends; expense management; and the likely outcome of litigation, legal proceedings, investigations or insurance or other claims or contract disputes 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, particularly in light of our projected negative cash flows in 2020 and highly leveraged balance sheet, including:
the coronavirus global pandemic, the related public health measures implemented by governments worldwide and the precipitous decline in oil prices during 2020, including the duration and severity of the outbreak, the duration of the price decline and the extent of disruptions to our operations;
decreases in levels of drilling activity and capital expenditures by our customers, whether as a result of the global capital markets and liquidity, prices of oil and natural gas or otherwise, which may cause us to idle or stack additional rigs;
cancellation, suspension, renegotiation or termination (with or without cause) of drilling contracts or drilling programs as a result of general and industry-specific economic conditions, mechanical difficulties, performance or other reasons;
potential additional asset impairments, including the impact of any impairment on our compliance with debt covenants, our ability to continue to borrow under our revolving credit facility and any resulting acceleration of our debt;
our failure to satisfy the obligations with respect to our indebtedness or recapitalization of the Company (as defined herein), which could result in an event of default that could raise substantial doubt about our ability to continue as a going concern;
the outcome of any discussions with our lenders and bondholders regarding the terms of a potential restructuring of our indebtedness or recapitalization of the Company and any resulting dilution for our shareholders;
our ability to obtain financing, service our indebtedness, fund negative cash flows and capital expenditures and pursue other business opportunities, which may be limited by our significant debt levels, debt agreement restrictions and the credit ratings assigned to our debt by independent credit rating agencies;
the adequacy of sources of liquidity for us and our customers;
potential delisting of our Class A ordinary shares from the New York Stock Exchange ("NYSE") if we fail to satisfy the NYSE's minimum share price requirement, which could result in the holders of our 2024

1



Convertible Notes having the right to require us to repurchase the notes at a price equal to the principal amount thereof plus accrued interest to the repurchase date;
our ability to successfully integrate the business, operations and employees of Rowan Companies Limited (formerly Rowan Companies plc) ("Rowan") and the Company to realize synergies and cost savings in connection with the Rowan Transaction (as defined herein);
changes in worldwide rig supply and demand, competition or technology, including as a result of delivery of newbuild drilling rigs;
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;
our ability to successfully recover losses from underwriters under our loss of hire policy in connection with the VALARIS DS-8 non-drilling incident;
governmental action, terrorism, piracy, military action and political and economic uncertainties, including uncertainty or instability resulting from the U.K.'s withdrawal from the European Union, 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 or destruction of our assets; or suspension and/or termination of contracts based on force majeure events or adverse environmental safety events;
risks inherent to shipyard rig construction, repair, modification or upgrades, unexpected delays in equipment delivery, engineering, design or commissioning issues following delivery, or changes in the commencement, completion or service dates;
our ability to enter into, and the terms of, future drilling contracts, including contracts for our newbuild units and acquired rigs, for rigs currently idled and for rigs whose contracts are expiring;
any failure to execute definitive contracts following announcements of letters of intent, letters of award or other expected work commitments;
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;
governmental regulatory, legislative and permitting requirements affecting drilling operations, including limitations on drilling locations (such as the Gulf of Mexico during hurricane season) and regulatory measures to limit or reduce greenhouse gases;
potential impacts on our business resulting from climate-change or greenhouse gas legislation or regulations, and the impact on our business from climate-change related physical changes or changes in weather patterns;
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 result in claims of force majeure or otherwise adversely affect our existing drilling contracts, operations or financial results;
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, hurricanes or other weather-related events (including wreckage or debris removal), collisions, groundings, blowouts, fires, explosions, other accidents, terrorism or otherwise, for which insurance coverage and contractual indemnities may be insufficient, unenforceable or otherwise unavailable;

2



our ability to obtain financing, service our indebtedness, fund negative cash flow and capital expenditures and pursue other business opportunities may be limited by our significant debt levels, debt agreement restrictions and the credit ratings assigned to our debt by independent credit rating agencies;
the adequacy of sources of liquidity for us and our customers;
tax matters, including our effective tax rates, tax positions, results of audits, changes in tax laws, treaties and regulations, tax assessments and liabilities for taxes;
our ability to realize the expected benefits of our joint venture with Saudi Aramco, including our ability to fund any required capital contributions;
delays in contract commencement dates or the cancellation of drilling programs by operators;
activism by our security holders;
economic volatility and political, legal and tax uncertainties following the June 23, 2016, vote in the U.K. to exit from the European Union;
the occurrence of cybersecurity incidents, attacks or other breaches to our information technology systems, including our rig operating systems; and
adverse changes in foreign currency exchange rates, including their effect on the fair value measurement of our derivative instruments.

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, 2019, 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.

3




PART I - FINANCIAL INFORMATION

Item 1.Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
The Board of Directors and Shareholders
Valaris plc:
 
Results of Review of Interim Financial Information
We have reviewed the condensed consolidated balance sheet of Valaris plc and subsidiaries (the Company, formerly known as Ensco Rowan plc and Ensco plc) as of March 31, 2020, the related condensed consolidated statements of operations and comprehensive loss for the three-month periods ended March 31, 2020 and 2019, the related condensed consolidated statements of cash flows for the three-month periods ended March 31, 2020 and 2019, and the related notes (collectively, the consolidated interim financial information). Based on our reviews, we are not aware of any material modifications that should be made to the consolidated interim financial information for it to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, 2019, and the related consolidated statements of operations, comprehensive loss, and cash flows for the year then ended (not presented herein); and in our report dated February 21, 2020, 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, 2019, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
This consolidated interim financial information is the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with the standards of the PCAOB. A review of consolidated 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 PCAOB, 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.
 
/s/ KPMG LLP
 
Houston, Texas
April 30, 2020

4



VALARIS PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
(Unaudited)
 
Three Months Ended
March 31,
 
2020
 
2019
OPERATING REVENUES
$
456.6


$
405.9

OPERATING EXPENSES
 

 
Contract drilling (exclusive of depreciation)
476.0


332.6

Loss on impairment
2,808.2

 

Depreciation
164.5


125.0

General and administrative
53.4


29.6

Total operating expenses
3,502.1


487.2

EQUITY IN EARNINGS OF ARO
(6.3
)
 

OPERATING LOSS
(3,051.8
)

(81.3
)
OTHER INCOME (EXPENSE)
 

 
 

Interest income
4.8


3.5

Interest expense, net
(113.2
)

(81.0
)
Other, net
.5


2.3

 
(107.9
)

(75.2
)
LOSS BEFORE INCOME TAXES
(3,159.7
)

(156.5
)
PROVISION (BENEFIT) FOR INCOME TAXES
 
 
 
Current income tax expense (benefit)
(72.5
)
 
25.6

Deferred income tax expense (benefit)
(79.5
)
 
5.9

 
(152.0
)

31.5

NET LOSS
(3,007.7
)

(188.0
)
NET (INCOME) LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS
1.4


(2.4
)
NET LOSS ATTRIBUTABLE TO VALARIS
$
(3,006.3
)

$
(190.4
)
LOSS PER SHARE - BASIC AND DILUTED
$
(15.19
)
 
$
(1.75
)
WEIGHTED-AVERAGE SHARES OUTSTANDING
 
 
 
Basic and Diluted
197.9


108.7

The accompanying notes are an integral part of these condensed consolidated financial statements.

5



VALARIS PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In millions)
(Unaudited)
 
Three Months Ended
March 31,
 
2020
 
2019
NET LOSS
$
(3,007.7
)
 
$
(188.0
)
OTHER COMPREHENSIVE INCOME (LOSS), NET
 
 
 
Net change in derivative fair value
(12.9
)
 

Reclassification of net (gains) losses on derivative instruments from other comprehensive income (loss) into net loss
(.1
)
 
1.6

Other
(.4
)
 
(.1
)
NET OTHER COMPREHENSIVE INCOME (LOSS)
(13.4
)
 
1.5

COMPREHENSIVE LOSS
(3,021.1
)
 
(186.5
)
COMPREHENSIVE (INCOME) LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS
1.4

 
(2.4
)
COMPREHENSIVE LOSS ATTRIBUTABLE TO VALARIS
$
(3,019.7
)
 
$
(188.9
)

The accompanying notes are an integral part of these condensed consolidated financial statements.


6



VALARIS PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share and par value amounts)
 
March 31,
2020
 
December 31,
2019
 
(Unaudited)
 
 
ASSETS
CURRENT ASSETS
 
 
 
    Cash and cash equivalents
$
184.9


$
97.2

    Accounts receivable, net
493.2


520.7

    Other current assets
427.5


446.5

Total current assets
1,105.6


1,064.4

PROPERTY AND EQUIPMENT, AT COST
14,461.9


18,393.8

    Less accumulated depreciation
2,304.7


3,296.9

       Property and equipment, net
12,157.2


15,096.9

LONG-TERM NOTES RECEIVABLE FROM ARO
452.9

 
452.9

INVESTMENT IN ARO
122.4

 
128.7

OTHER ASSETS
187.0


188.3

 
$
14,025.1


$
16,931.2

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
 
 
 
Accounts payable - trade
$
258.4


$
288.2

Accrued liabilities and other
402.3


417.7

Current maturities of long-term debt
224.5


124.8

Total current liabilities
885.2


830.7

LONG-TERM DEBT
6,148.6


5,923.5

OTHER LIABILITIES
695.7


867.4

COMMITMENTS AND CONTINGENCIES





VALARIS SHAREHOLDERS' EQUITY
 

 
 

Class A ordinary shares, U.S. $.40 par value, 205.9 million shares issued as of March 31, 2020 and December 31, 2019
82.4


82.4

Class B ordinary shares, £1 par value, 50,000 shares issued as of March 31, 2020 and December 31, 2019
.1


.1

Additional paid-in capital
8,634.9


8,627.8

Retained (deficit) earnings
(2,334.6
)

671.7

Accumulated other comprehensive (loss) income
(7.2
)

6.2

Treasury shares, at cost, 7.5 million and 7.9 million shares as of March 31, 2020 and December 31, 2019
(77.3
)

(77.3
)
Total Valaris shareholders' equity
6,298.3


9,310.9

NONCONTROLLING INTERESTS
(2.7
)

(1.3
)
Total equity
6,295.6


9,309.6

 
$
14,025.1


$
16,931.2

The accompanying notes are an integral part of these condensed consolidated financial statements.

7



VALARIS PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
Three Months Ended
March 31,
 
2020
 
2019
OPERATING ACTIVITIES
 

 
 

Net loss
$
(3,007.7
)

$
(188.0
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Loss on impairment
2,808.2

 

Depreciation expense
164.5


125.0

Deferred income tax expense (benefit)
(79.5
)
 
5.9

Debt discounts and other
14.2

 
2.2

Share-based compensation expense
7.8

 
5.3

Adjustment to gain on bargain purchase
6.3

 

Equity in earnings of ARO
6.3

 

Gain on extinguishment of debt
(3.1
)
 

Amortization, net
2.8

 
(14.5
)
Other
9.7


(.8
)
   Changes in operating assets and liabilities
(129.9
)

40.5

   Contributions to pension plans and other post-retirement benefits
(4.0
)
 

Net cash used in operating activities
(204.4
)

(24.4
)
INVESTING ACTIVITIES
 
 
 
Additions to property and equipment
(36.3
)
 
(29.0
)
Net proceeds from disposition of assets
10.4

 
.3

Maturities of short-term investments


204.0

Purchases of short-term investments


(120.0
)
Net cash provided by (used in) investing activities
(25.9
)

55.3

FINANCING ACTIVITIES
 
 
 
Borrowings on credit facility
343.9

 

Repayments of credit facility borrowings
(15.0
)
 

Reduction of long-term borrowings
(9.7
)
 

Cash dividends paid


(4.5
)
Other
(.9
)

(2.8
)
Net cash provided by (used in) financing activities
318.3


(7.3
)
Effect of exchange rate changes on cash and cash equivalents
(.3
)

(.3
)
INCREASE IN CASH AND CASH EQUIVALENTS
87.7


23.3

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
97.2


275.1

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
184.9


$
298.4


The accompanying notes are an integral part of these condensed consolidated financial statements.

8



VALARIS PLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 -Unaudited Condensed Consolidated Financial Statements
 
On April 11, 2019, we completed our combination with Rowan Companies Limited (formerly named Rowan Companies plc) ("Rowan") and effected a four-to-one share consolidation (being a reverse stock split under English law or the "Reverse Stock Split") and changed our name to Ensco Rowan plc. On July 30, 2019, we changed our name to Valaris plc. All share and per-share amounts in these financial statements reflect the Reverse Stock Split.

We prepared the accompanying condensed consolidated financial statements of Valaris plc and subsidiaries (the "Company," "Valaris," "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, 2019 condensed consolidated balance sheet data was derived from our 2019 audited consolidated financial statements, but does not include all disclosures required by GAAP. The preparation of our condensed consolidated financial statements requires us 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 periods ended March 31, 2020 and 2019 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, and the independent registered public accounting firm's liability under Section 11 does not extend to it.
 
Results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results of operations that will be realized for the year ending December 31, 2020. 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, 2019, filed with the SEC on February 21, 2020.

New Accounting Pronouncements

Recently adopted accounting standards
    
Credit Losses - In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("Update 2016-13"), which requires companies to measure credit losses of financial instruments, including customer accounts receivable, utilizing a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Subsequent to the issuance of Update 2016-13, the FASB issued several additional Accounting Standard Updates to clarify implementation guidance, provide narrow-scope improvements and provide additional disclosure guidance. We adopted Update 2016-13 effective January 1, 2020 with no material impact to our financial statements upon adoption as our previously estimated reserves were in line with expected credit losses calculated under Update 2016-13.



9



Accounting pronouncements to be adopted

Income Taxes - In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("Update 2019-12"), which removes certain exceptions for investments, intraperiod allocations and interim tax calculations and adds guidance to reduce complexity in accounting for income taxes. We will be required to adopt the amended guidance in annual and interim periods beginning after December 15, 2020, with early adoption permitted. The various amendments in Update 2019-12 are applied on a retrospective basis, modified retrospective basis and prospective basis, depending on the amendment. We are in the process of evaluating the impact this amendment will have on our consolidated financial statements.

Defined Benefit Plans - In August 2018, the FASB issued ASU No. 2018-14, Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20): Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans ("Update 2018-14"), which modifies the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans. We will be required to adopt the amended guidance in annual and interim reports beginning January 1, 2021, with early adoption permitted. Adoption is required to be applied on a retrospective basis to all periods presented. We will adopt the new standard effective January 1, 2021 and do not expect the adoption of Update 2018-14 to have a material impact on our consolidated financial statements.

Reference Rate Reform - In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("Update 2020-04"), which provides optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in Update 2020-04 apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The provisions in Update 2020-04 are effective upon issuance and can be applied prospectively through December 31, 2022. We are in the process of evaluating the impact this amendment will have on our consolidated financial statements.

With the exception of the updated standards discussed above, there have been no accounting pronouncements issued and not yet effective that have significance, or potential significance, to our consolidated financial statements.

Note 2 -Revenue from Contracts with Customers
 
Our drilling contracts with customers provide a drilling rig and drilling services on a day rate contract basis. Under day rate contracts, we provide an integrated service that includes the provision of a drilling rig and rig crews for which we receive a daily rate that may vary between the full rate and zero rate throughout the duration of the contractual term, depending on the operations of the rig.

We also may receive lump-sum fees or similar compensation for the mobilization, demobilization and capital upgrades of our rigs. Our customers bear substantially all of the costs of constructing the well and supporting drilling operations, as well as the economic risk relative to the success of the well.

Our integrated drilling service provided under each drilling contract is a single performance obligation satisfied over time and comprised of a series of distinct time increments, or service periods. Total revenue is determined for each individual drilling contract by estimating both fixed and variable consideration expected to be earned over the contract term. Fixed consideration generally relates to activities such as mobilization, demobilization and capital upgrades of our rigs that are not distinct performance obligations within the context of our contracts and is recognized on a straight-line basis over the contract term. Variable consideration generally relates to distinct service periods during the contract term and is recognized in the period when the services are performed.


10



The amount estimated for variable consideration is only recognized as revenue to the extent that it is probable that a significant reversal will not occur during the contract term. We have applied the optional exemption afforded in Update 2014-09, Revenue from Contracts with Customers (Topic 606), and have not disclosed the variable consideration related to our estimated future day rate revenues. The remaining duration of our drilling contracts based on those in place as of March 31, 2020 was between approximately one month and three years.

Day Rate Drilling Revenue

Our drilling contracts provide for payment on a day rate basis and include a rate schedule with higher rates for periods when the drilling unit is operating and lower rates or zero rates for periods when drilling operations are interrupted or restricted. The day rate invoiced to the customer is determined based on the varying rates applicable to specific activities performed on an hourly basis or other time increment basis. Day rate consideration is allocated to the distinct hourly or other time increment to which it relates within the contract term and is generally recognized consistent with the contractual rate invoiced for the services provided during the respective period. Invoices are typically issued to our customers on a monthly basis and payment terms on customer invoices typically range from 30 to 45 days.

Certain of our contracts contain performance incentives whereby we may earn a bonus based on pre-established performance criteria. Such incentives are generally based on our performance over individual monthly time periods or individual wells. Consideration related to performance bonus is generally recognized in the specific time period to which the performance criteria was attributed.

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 when our performance obligation is satisfied, the termination fee can be reasonably measured and collection is probable.
 
Mobilization / Demobilization Revenue

In connection with certain contracts, we receive lump-sum fees or similar compensation for the mobilization of equipment and personnel prior to the commencement of drilling services or the demobilization of equipment and personnel upon contract completion. Fees received for the mobilization or demobilization of equipment and personnel are included in operating revenues. The costs incurred in connection with the mobilization and demobilization of equipment and personnel are included in contract drilling expense.

Mobilization fees received prior to commencement of drilling operations are recorded as a contract liability and amortized on a straight-line basis over the contract term. Demobilization fees expected to be received upon contract completion are estimated at contract inception and recognized on a straight-line basis over the contract term. In some cases, demobilization fees may be contingent upon the occurrence or non-occurrence of a future event. In such cases, this may result in cumulative-effect adjustments to demobilization revenues upon changes in our estimates of future events during the contract term.
 
Capital Upgrade / Contract Preparation Revenue

In connection with certain contracts, we receive lump-sum fees or similar compensation for requested capital upgrades to our drilling rigs or for other contract preparation work. Fees received for requested capital upgrades and other contract preparation work are recorded as a contract liability and amortized on a straight-line basis over the contract term to operating revenues. Costs incurred for capital upgrades are capitalized and depreciated over the useful life of the asset.


11



Contract Assets and Liabilities

Contract assets represent amounts recognized as revenue but for which the right to invoice the customer is dependent upon our future performance. Once the previously recognized revenue is invoiced, the corresponding contract asset, or a portion thereof, is transferred to accounts receivable. Contract liabilities generally represent fees received for mobilization or capital upgrades.

Contract assets and liabilities are presented net on our consolidated balance sheet on a contract-by-contract basis. Current contract assets and liabilities are included in other current assets and accrued liabilities and other, respectively, and noncurrent contract assets and liabilities are included in other assets and other liabilities, respectively, on our condensed consolidated balance sheets.

The following table summarizes our contract assets and contract liabilities (in millions):
 
March 31, 2020
 
December 31, 2019
Current contract assets
$
7.2

 
$
3.5

Noncurrent contract assets
$
.4

 
$

Current contract liabilities (deferred revenue)
$
24.5

 
$
30.0

Noncurrent contract liabilities (deferred revenue)
$
8.8

 
$
9.7

Changes in contract assets and liabilities during the period are as follows (in millions):
 
Contract Assets
 
Contract Liabilities
Balance as of December 31, 2019
$
3.5

 
$
39.7

Revenue recognized in advance of right to bill customer
5.1

 

Increase due to cash received

 
6.2

Decrease due to amortization of deferred revenue that was included in the beginning contract liability balance

 
(12.0
)
Decrease due to amortization of deferred revenue that was added during the period

 
(.6
)
Decrease due to transfer to receivables during the period
(1.0
)
 

Balance as of March 31, 2020
$
7.6

 
$
33.3


Deferred Contract Costs

Costs incurred for upfront rig mobilizations and certain contract preparations are attributable to our future performance obligation under each respective drilling contract. Such costs are deferred and amortized on a straight-line basis over the contract term. Demobilization costs are recognized as incurred upon contract completion. Costs associated with the mobilization of equipment and personnel to more promising market areas without contracts are expensed as incurred. Deferred contract costs were included in other current assets and other assets on our condensed consolidated balance sheets and totaled $29.2 million and $19.7 million as of March 31, 2020 and December 31, 2019, respectively. During the three-month periods ended March 31, 2020 and 2019, amortization of such costs totaled $11.5 million and $6.4 million, respectively.

Deferred Certification Costs

We must obtain certifications from various regulatory bodies in order to operate our drilling rigs and must maintain such certifications through periodic inspections and surveys. The costs incurred in connection with maintaining such certifications, including inspections, tests, surveys and drydock, as well as remedial structural work and other compliance costs, are deferred and amortized on a straight-line basis over the corresponding certification periods.

12



Deferred regulatory certification and compliance costs were included in other current assets and other assets on our condensed consolidated balance sheets and totaled $10.7 million and $10.8 million as of March 31, 2020 and December 31, 2019, respectively. During the three-month periods ended March 31, 2020 and 2019, amortization of such costs totaled $3.1 million and $2.8 million, respectively.    

Future Amortization of Contract Liabilities and Deferred Costs

Our contract liabilities and deferred costs are amortized on a straight-line basis over the contract term or corresponding certification period to operating revenues and contract drilling expense, respectively. Expected future amortization of our contract liabilities and deferred costs recorded as of March 31, 2020 is set forth in the table below (in millions):
 
Remaining 2020
 
2021
 
2022
 
2023 and Thereafter
 
 Total
Amortization of contract liabilities
$
21.3

 
$
9.8

 
$
2.2

 
$

 
$
33.3

Amortization of deferred costs
$
28.6

 
$
9.3

 
$
1.6

 
$
.4

 
$
39.9


Note 3 -Rowan Transaction

On April 11, 2019 (the "Transaction Date"), we completed our combination with Rowan pursuant to the Transaction Agreement (the "Rowan Transaction"). Assets acquired and liabilities assumed in the Rowan Transaction were recorded at their estimated fair values as of the Transaction Date under the acquisition method of accounting. When the fair value of the net assets acquired exceeds the consideration transferred in an acquisition, the difference is recorded as a bargain purchase gain in the period in which the transaction occurs. As of March 31, 2020, we completed our fair value assessments of assets acquired and liabilities assumed.

Assets Acquired and Liabilities Assumed

The provisional amounts for assets acquired and liabilities assumed as of the Transaction Date and respective measurement period adjustments were as follows (in millions):
 
Amounts Recognized as of Transaction Date
Measurement Period Adjustments (1)
Estimated Fair Value
Assets:
 
 
 
Cash and cash equivalents
$
931.9

$

$
931.9

Accounts receivable (2)
207.1

(6.9
)
200.2

Other current assets
101.6

(2.6
)
99.0

Long-term notes receivable from ARO
454.5


454.5

Investment in ARO
138.8

2.5

141.3

Property and equipment
2,989.8

(26.0
)
2,963.8

Other assets
41.7

1.1

42.8

Liabilities:
 
 
 
Accounts payable and accrued liabilities
259.4

15.7

275.1

Current portion of long-term debt
203.2


203.2

Long-term debt
1,910.9


1,910.9

Other liabilities
376.3

34.5

410.8

Net assets acquired
2,115.6

(82.1
)
2,033.5

Less: Merger consideration
(1,402.8
)

(1,402.8
)
Estimated bargain purchase gain
$
712.8

$
(82.1
)
$
630.7




13



(1) 
The measurement period adjustments reflect changes in the estimated fair values of certain assets and liabilities, primarily related to long-lived assets, deferred income taxes and uncertain tax positions. The measurement period adjustments were recorded to reflect new information obtained about facts and circumstances existing as of the Transaction Date and did not result from subsequent intervening events. The adjustments recorded resulted in a $6.3 million decline to bargain purchase gain during the three-months ended March 31, 2020 and are included in other, net, in our condensed consolidated statements of operations.

(2) 
Gross contractual amounts receivable totaled $208.3 million as of the Transaction Date.

Bargain Purchase Gain

The estimated fair values assigned to assets acquired net of liabilities assumed exceeded the consideration transferred, resulting in a bargain purchase gain primarily driven by the decline in our share price from $33.92 to $15.88 between the last trading day prior to the announcement of the Rowan Transaction and the Transaction Date.

Intangible Assets and Liabilities

We recorded intangible assets and liabilities of $16.2 million and $2.1 million, respectively, representing the estimated fair value of Rowan's firm contracts in place at the Transaction Date with favorable or unfavorable contract terms compared to then-market day rates for comparable drilling rigs. Amortization of the intangible assets and liabilities resulted in a net reduction of operating revenues of $1.3 million for the three months ended March 31, 2020. The remaining balance of intangible assets and liabilities of $10.4 million and $1.2 million, respectively, was included in other assets and other liabilities, respectively, on our condensed consolidated balance sheet as of March 31, 2020. These balances will be amortized to operating revenues over the respective remaining contract terms on a straight-line basis. As of March 31, 2020, the remaining terms of the underlying contracts is approximately 1.8 years. Amortization of these intangibles is expected to result in a reduction to revenue of $3.8 million and $5.4 million for 2020 and 2021, respectively.

Uncertain Tax Positions

Uncertain tax positions assumed in a business combination are measured at the largest amount of the tax benefit that is greater than 50% likely of being realized upon effective settlement with a taxing authority that has full knowledge of all relevant information. As of the Transaction Date, Rowan had previously recognized net liabilities for uncertain tax positions totaling $50.4 million.

During 2019, the Luxembourg tax authorities issued aggregate tax assessments totaling approximately 142.0 million (approximately $156.7 million converted using the current period-end exchange rate) related to tax years 2014, 2015 and 2016 for several of Rowan's Luxembourg subsidiaries. As a result of our review and analysis of facts and circumstances that existed at the Transaction Date, we recognized liabilities related to the Luxembourg tax assessments totaling 93.0 million (approximately $102.6 million converted using the current period-end exchange rates).

Transaction-related costs

Transaction-related costs were expensed as incurred and consisted of various advisory, legal, accounting, valuation and other professional or consulting fees totaling $5.9 million during the three months ended March 31, 2019. These costs were included in general and administrative expense in our condensed consolidated statement of operations.


14



Unaudited Pro Forma Impact of the Rowan Transaction

The following unaudited supplemental pro forma results present consolidated information as if the Rowan Transaction was completed on January 1, 2019. The pro forma results include, among others, (i) the amortization associated with acquired intangible assets and liabilities (ii) a reduction in depreciation expense for adjustments to property and equipment (iii) the amortization of premiums and discounts recorded on Rowan's debt (iv) removal of the historical amortization of unrealized gains and losses related to Rowan's pension plans and (v) the amortization of basis differences in assets and liabilities of ARO. The pro forma results do not include any potential synergies or non-recurring charges that may result directly from the Rowan Transaction.
(in millions, except per share amounts)
 
Three Months Ended March 31, 2019
 
 
 
Revenues
 
$
582.0

Net loss
 
$
(275.0
)
Loss per share - basic and diluted
 
$
(1.40
)

(1) 
Pro forma net loss and loss per share were adjusted to exclude an aggregate $9.4 million of transaction - related and integration costs incurred by Ensco and Rowan during three months ended March 31, 2019.

Note 4 - Equity Method Investment in ARO

Background
    
ARO, a company that owns and operates offshore drilling rigs in Saudi Arabia, was formed and commenced operations in 2017 pursuant to the terms of an agreement entered into by Rowan and Saudi Aramco to create a 50/50 joint venture ("Shareholder Agreement"). Pursuant to the Rowan Transaction, Valaris acquired Rowan's interest in ARO making Valaris a 50% partner. ARO owns seven jackup rigs and leases nine rigs from us through bareboat charter arrangements (the "Lease Agreements") whereby substantially all operating costs are incurred by ARO. As of March 31, 2020, all nine of the leased rigs were operating under three-year drilling contracts with Saudi Aramco. The seven rigs owned by ARO, previously purchased from Rowan and Saudi Aramco, are currently operating under contracts with Saudi Aramco for an aggregate 15 years, renewed and re-priced every three years, provided that the rigs meet the technical and operational requirements of Saudi Aramco.
Valaris and Saudi Aramco have agreed to take all steps necessary to ensure that ARO purchases at least 20 newbuild jackup rigs ratably over an approximate 10 -year period. In January 2020, ARO ordered the first two newbuild jackups, each with a price of $176 million, for delivery scheduled in 2022. The partners intend for the newbuild jackup rigs to be financed out of available cash from ARO's operations and/or funds available from third-party debt financing. In the event ARO has insufficient cash from operations or is unable to obtain third-party financing, each partner may periodically be required to make additional capital contributions to ARO, up to a maximum aggregate contribution of $1.25 billion from each partner to fund the newbuild program. Each partner's commitment shall be reduced by the actual cost of each newbuild rig, on a proportionate basis. The partners agreed that Saudi Aramco, as a customer, will provide drilling contracts to ARO in connection with the acquisition of the newbuild rigs. The initial contracts provided by Saudi Aramco for each of the newbuild rigs will be for an eight-year term. The day rate for the initial contracts for each newbuild rig will be determined using a pricing mechanism that targets a six-year payback period for construction costs on an EBITDA basis. The initial eight-year contracts will be followed by a minimum of another eight years of term, re-priced in three-year intervals based on a market pricing mechanism.

Upon establishment of ARO, Rowan entered into (1) an agreement to provide certain back-office services for a period of time until ARO develops its own infrastructure (the "Transition Services Agreement"), and (2) an agreement to provide certain Rowan employees through secondment arrangements to assist with various onshore and offshore services for the benefit of ARO (the "Secondment Agreement"). These agreements remain in place subsequent to the

15



Rowan Transaction. Pursuant to these agreements, we or our seconded employees provide various services to ARO, and in return, ARO provides remuneration for those services. From time to time, we may also sell equipment or supplies to ARO.

Summarized Financial Information

The operating revenues of ARO presented below reflect revenues earned under drilling contracts with Saudi Aramco for the seven ARO-owned jackup rigs and the rigs leased from us that operated during the three months ended March 31, 2020.

The contract drilling expenses, depreciation and general and administrative expenses presented below are also for the three months ended March 31, 2020. Contract drilling expense is inclusive of the bareboat charter fees for the rigs leased from us. Cost incurred under the Secondment Agreement are included in contract drilling expense and general and administrative, depending on the function to which the seconded employee's service relates. Substantially all costs incurred under the Transition Services Agreement are included in general and administrative. See additional discussion below regarding these related-party transactions.

Summarized financial information for ARO is as follows (in millions):
 
Three Months Ended March 31, 2020
Revenues
$
140.3

Operating expenses
 
Contract drilling (exclusive of depreciation)
108.3

Depreciation
13.0

General and administrative
8.3

Operating income
10.7

Other expense, net
6.6

Provision for income taxes
.9

Net income
$
3.2

 
March 31, 2020
 
December 31, 2019
Current assets
$
351.2

 
$
407.2

Non-current assets
943.8

 
874.8

Total assets
$
1,295.0


$
1,282.0

 
 
 
 
Current liabilities
$
215.6

 
$
183.2

Non-current liabilities
992.9

 
1,015.5

Total liabilities
$
1,208.5


$
1,198.7


Equity in Earnings of ARO

We account for our interest in ARO using the equity method of accounting and only recognize our portion of ARO's net income, adjusted for basis differences as discussed below, which is included in equity in earnings of ARO in our condensed consolidated statements of operations. ARO is a variable interest entity; however, we are not the primary beneficiary and therefore do not consolidate ARO. Judgments regarding our level of influence over ARO included considering key factors such as each partner's ownership interest, representation on the board of managers of ARO and ability to direct activities that most significantly impact ARO's economic performance, including the ability to influence policy-making decisions.

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As a result of the Rowan Transaction, we recorded our equity method investment in ARO at its estimated fair value on the Transaction Date. Additionally, we computed the difference between the fair value of ARO's net assets and the carrying value of those net assets in ARO's US GAAP financial statements ("basis differences"). The basis differences primarily relate to ARO's long-lived assets and the recognition of intangible assets associated with certain of ARO's drilling contracts that were determined to have favorable terms as of the Transaction Date. The basis differences are amortized over the remaining life of the assets or liabilities to which they relate and are recognized as an adjustment to the equity in earnings of ARO in our condensed consolidated statements of operations. The amortization of those basis differences are combined with our 50% interest in ARO's net income. A reconciliation of those components is presented below (in millions):
 
Three Months Ended March 31, 2020
50% interest in ARO net income
$
1.6

Amortization of basis differences
(7.9
)
Equity in earnings of ARO
$
(6.3
)


Related-Party Transactions

Revenues recognized by us related to the Lease Agreements, Transition Services Agreement and Secondment Agreement are as follows (in millions):
 
Three Months Ended March 31, 2020
Lease revenue
$
21.5

Secondment revenue
18.3

Transition Services revenue
3.5

Total revenue from ARO (1)
$
43.3

(1) 
All of the revenues presented above are included in our Other segment in our segment disclosures. See Note 14 - Segment Information for additional information.
Amounts receivable from ARO related to the above items totaled $34.0 million and $21.8 million as of March 31, 2020 and December 31, 2019, respectively, and are included in accounts receivable, net, on our condensed consolidated balance sheets. Accounts payable to ARO totaled $0.7 million as of March 31, 2020 and December 31, 2019.
We also had an agreement between us and ARO, pursuant to which ARO will reimburse us for certain capital expenditures related to the shipyard upgrade projects for the VALARIS JU-147 and VALARIS JU-148. As of December 31, 2019, $14.2 million related to reimbursement of these expenditures were outstanding and included in accounts receivable, net, on our condensed consolidated balance sheet. Such amount was received in the first quarter of 2020.
During 2017 and 2018, Rowan contributed cash to ARO in exchange for 10-year shareholder notes receivable at a stated interest rate of LIBOR plus two percent. As of March 31, 2020 and December 31, 2019, the carrying amount of the long-term notes receivable from ARO was $452.9 million. The Shareholders’ Agreement prohibits the sale or transfer of the shareholder note to a third party, except in certain limited circumstances. Interest is recognized as interest income in our condensed consolidated statement of operations and totaled $4.6 million for the three months ended March 31, 2020. As of March 31, 2020, we had interest receivable from ARO of $4.6 million, which is included in Other current assets on our condensed consolidated balance sheet. There was no interest receivable from ARO as of December 31, 2019.

17



Maximum Exposure to Loss

The following summarizes the total assets and liabilities as reflected in our condensed consolidated balance sheet as well as our maximum exposure to loss related to ARO (in millions). Our maximum exposure to loss is limited to (1) our equity investment in ARO; (2) the outstanding balance on our shareholder notes receivable; and (3) other receivables for services provided to ARO, partially offset by payables for services received.
 
March 31, 2020
Total assets
$
613.9

Less: total liabilities
.7

Maximum exposure to loss
$
613.2


Note 5 -Fair Value Measurements
 
The following fair value hierarchy table categorizes information regarding our financial assets and liabilities 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 March 31, 2020
 
 
 

 
 

 
 

Supplemental executive retirement plan assets 
$
21.2

 
$

 
$

 
$
21.2

Total financial assets
21.2






21.2

Derivatives, net

 
(12.6
)
 

 
(12.6
)
Total financial liabilities
$


$
(12.6
)
 
$

 
$
(12.6
)
As of December 31, 2019
 
 
 

 
 

 
 

Supplemental executive retirement plan assets
$
26.0

 
$

 
$

 
$
26.0

Derivatives, net

 
5.4

 

 
5.4

Total financial assets
$
26.0

 
$
5.4

 
$

 
$
31.4



Supplemental Executive Retirement Plan Assets
 
Our Valaris 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. The SERPs were frozen to the entry of new participants in November 2019 and to future compensation deferrals as of January 1, 2020. 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 consolidated balance sheets as of March 31, 2020 and 2019. The fair value measurements of assets held in the SERP were based on quoted market prices.

Derivatives
 
Our derivatives were measured at fair value on a recurring basis using Level 2 inputs. See "Note 8 - Derivative Instruments" for additional information on our derivatives, including a description of our foreign currency hedging activities and related methodologies used to manage foreign currency exchange rate risk. The fair value measurements of our derivatives were based on market prices that are generally observable for similar assets or liabilities at commonly quoted intervals.
 

18



Other Financial Instruments