UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
Commission File Number 001-35704
Seadrill
Partners LLC
(Exact name of Registrant as specified in its Charter)
2
nd
Floor, Building 11
Chiswick Business Park
566 Chiswick High Road London, W4 5YS
United Kingdom
(Address
of principal executive office)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
Form 20-F ☒ Form 40-F ☐
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101 (b)(1).
Yes ☐ No ☒
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101 (b)(7).
Yes ☐ No ☒
Seadrill Partners LLC
Report on Form 6-K For the quarterly period ended March 31, 2017
INDEX
IMPORTANT INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Report on Form 6-K for the quarterly period ended March 31, 2017 contains certain “forward-looking statements” (as such term is defined in
Section 21E of the Securities Exchange Act of 1934, as amended) concerning future events and the operations, performance and financial condition of Seadrill Partners LLC (“Seadrill Partners,” the “Company,” “we,”
“us”), including statements concerning plans and objectives of the Company’s management for future operations or economic performance, or assumptions related thereto. In addition, the Company and the Company’s representatives may
from time to time make other oral or written statements which are also forward-looking statements. Such statements include statements concerning plans, objectives, goals, strategies, future events or performance, and underlying assumptions and other
statements, which are other than statements of historical or present facts or conditions. In some cases, you can identify the forward-looking statements by the use of words such as “believe,” “anticipate,” “intend,”
“estimate,” “forecast,” “project,” “plan,” “potential,” “may,” “should,” “expect” or the negative of these terms or other comparable terminology. These forward-looking
statements reflect management’s current views only as of the date of this report and are not intended to give any assurance as to future results.
Forward-looking statements appear in a number of places in this report and include statements with respect to, among other things:
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offshore drilling market conditions, including supply and demand;
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the Company’s distribution policy and the Company’s ability to make cash distributions on the Company’s units or any increases or decreases in distributions and the amount of such increases or decreases;
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the Company’s ability to borrow under the credit facility between OPCO (as defined herein), as borrower, and Seadrill Limited (“Seadrill”), as lender;
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the future financial condition, liquidity or results of operations of the Company or Seadrill;
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the ability of the Company, OPCO and Seadrill to comply with financing agreements and the effect of restrictive covenants in such agreements;
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the ability of the Company to continue as a going concern;
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the financial condition of Seadrill and its restructuring efforts;
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the ability of the Company’s drilling units to perform satisfactorily or to the Company’s expectations;
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fluctuations in the price of oil;
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discoveries of new sources of oil that do not require deepwater drilling units;
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the development of alternative sources of fuel and energy;
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technological advances, including in production, refining and energy efficiency;
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weather events and natural disasters;
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the Company’s ability to meet any future capital expenditure requirements;
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the Company’s ability to maintain operating expenses at adequate and profitable levels;
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expected costs of maintenance or other work performed on the Company’s drilling units and any estimates of downtime;
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the Company’s ability to leverage Seadrill’s relationship and reputation in the offshore drilling industry;
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the Company’s ability to purchase drilling units in the future, including from Seadrill;
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increasing the Company’s ownership interest in OPCO;
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customer contracts, including contract backlog, contract terminations and contract revenues;
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delay in payments by, or disputes with the Company’s customers under its drilling contracts;
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termination of the Company’s drilling contracts due to force majeure or other events;
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the financial condition of the Company’s customers and their ability and willingness to fund oil exploration, development and production activity;
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the Company’s ability to comply with, maintain, renew or extend its existing drilling contracts;
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the Company’s ability to re-deploy its drilling units upon termination of its existing drilling contracts at profitable dayrates;
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the Company’s ability to respond to new technological requirements in the areas in which the Company operates;
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the occurrence of any accident involving the Company’s drilling units or other drilling units in the industry;
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changes in governmental regulations that affect the Company and the interpretations of those regulations, particularly those that relate to environmental matters, export or import and economic sanctions or trade embargo
matters, regulations applicable to the oil industry and tax and royalty legislation;
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competition in the offshore drilling industry and other actions of competitors, including decisions to deploy or scrap drilling units in the areas in which the Company currently operates;
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the availability on a timely basis of drilling units, supplies, personnel and oil field services in the areas in which the Company operates;
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general economic, political and business conditions globally;
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military operations, terrorist acts, wars or embargoes;
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potential disruption of operations due to accidents, political events, piracy or acts by terrorists;
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the Company’s ability to obtain financing in sufficient amounts and on adequate terms;
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the Company’s ability to successfully remediate the material weakness in its internal control over financial reporting and disclosure controls and procedures;
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workplace safety regulation and employee claims;
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the cost and availability of adequate insurance coverage;
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the Company’s fees and expenses payable under the advisory, technical and administrative services agreements and the management and administrative services agreements;
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the taxation of the Company and distributions to the Company’s unitholders;
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future sales of the Company’s common units in the public market;
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acquisitions and divestitures of assets and businesses by Seadrill; and
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the Company’s business strategy and other plans and objectives for future operations.
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2
Forward-looking statements in this report are made based upon management’s current plans, expectations,
estimates, assumptions and beliefs concerning future events impacting the Company and therefore involve a number of risks and uncertainties. The risks, uncertainties and assumptions involve known and unknown risks and are inherently subject to
significant uncertainties and contingencies, many of which are beyond the Company’s control. The Company cautions that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied
in the forward-looking statements.
The Company undertakes no obligation to update any forward-looking statement or statements to reflect events or
circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for the Company to predict all of these factors. Further, the Company
cannot assess the impact of each such factor on the Company’s business or the extent to which any factor, or combination of factors, may cause actual results to be materially different from those contained in any forward-looking statement. The
Company makes no prediction or statement about the performance of the Company’s common units. The various disclosures included in this Report on Form 6-K and in the Company’s other filings made with the Securities and Exchange Commission,
or the SEC, that attempt to advise interested parties of the risks and factors that may affect the Company’s business, prospects and results of operations should be carefully reviewed and considered.
3
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion of our financial condition and results of operations in conjunction with the interim
financial statements presented in this report on Form 6-K, as well as the historical Consolidated Financial Statements and related notes of Seadrill Partners LLC included in our annual report on Form 20-F filed with the SEC on April 27, 2017
(the “Form 20-F”). Among other things, those financial statements include more detailed information regarding the basis of presentation for the following information. In particular, we draw your attention to the statements regarding going
concern in Note 1 “General information” to the historical Consolidated Financial Statement’s in the Form 20-F and in this report of Form 6-K. The unaudited interim financial statements included in this report on Form 6-K have been
prepared in accordance with United States generally accepted accounting principles (“US GAAP”) and are presented in US Dollars.
Overview
Seadrill Partners is a limited liability company formed by Seadrill Limited (“Seadrill”) to own, operate and acquire offshore drilling
units. Most of our drilling units are under contracts with major oil companies such as BP, ExxonMobil and Chevron. The Company’s contracted drilling units have charters with an average remaining term of 1.5 years as of May 31, 2017.
We own (i) a 58% limited partner interest in Seadrill Operating LP (“Seadrill Operating”), as well as the non-economic general partner interest
in Seadrill Operating through our 100% ownership of its general partner, Seadrill Operating GP LLC, (ii) a 51% limited liability company interest in Seadrill Capricorn Holdings LLC, and (iii) a 100% limited liability company interest in
Seadrill Partners Operating LLC. Please refer to the simplified organizational structure provided on page 37 in Item 4. C—Organizational Structure of the Form 20-F.
Seadrill Operating LP, Seadrill Capricorn Holdings LLC and Seadrill Partners Operating LLC are collectively referred to as “OPCO”.
Seadrill owns the remaining interests in OPCO. As of May 31, 2017, Seadrill owned 46.6% of the outstanding combined common and subordinated units of the
Company, as well as Seadrill Member LLC, which owns a non-economic limited liability interest in the Company and all of our incentive distribution rights.
The Company’s fleet as of May 31, 2017 consisted of four semi-submersible drilling rigs, four drillships and three tender rigs, as follows:
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the semi-submersible
West Aquarius
, which was delivered from the shipyard in 2009, completed a drilling contract with Hibernia Management on April 19, 2017 and has commenced a new contract with Statoil
Canada Ltd in May 2017 as discussed in “Recent Developments” below;
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the semi-submersible
West Capricorn
, which was delivered from the shipyard at the end of 2011 and is contracted with BP until July 2019. The rig has been on extended standby rate since May 2016 and will return to
normal contractual dayrates on July 1, 2017 as discussed in “Recent Developments” below;
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the semi-submersible
West Leo
, which was delivered from the shipyard in 2012 and operated under a drilling contract with Tullow until it was terminated in December 2016. We have disputed the grounds for
termination and litigation proceedings have commenced;
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the semi-submersible
West Sirius
, which was delivered from the shipyard in 2008 and operated under a drilling contract with BP which was terminated in early April 2015. The
West Sirius
will earn early
termination fees until July 2017;
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the drillship
West Auriga
, which was delivered from the shipyard in 2013 and is currently operating under a drilling contract with BP that expires in October 2020;
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the drillship
West Vela
, which was delivered from the shipyard in 2013 and is currently operating under a drilling contract with BP that expires in November 2020;
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the drillship
West Capella
, which was delivered from the shipyard in 2008 and contracted with ExxonMobil until its drilling contract was terminated in May 2016. As a result of the termination, early termination
fees of approximately $125.0 million have been received. The rig is currently preparing to return to operations in the third quarter of 2017 after securing a contract with Total E&P Cyprus in Cyprus and PC Gabon Upstream S.A. (“Petronas
Gabon”) in Gabon as discussed further in “Recent Developments” below;
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the drillship
West Polaris
, which was delivered from the shipyard in 2008 and is currently operating under a drilling contract with ExxonMobil that expires in March 2018;
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the semi-tender rig
West Vencedor
, which was delivered from the shipyard in 2010 and operated under a drilling contract with Petronas which concluded in August 2016. The rig has since been awarded a three-well
contract with multiple well-based options with Conoco Phillips in Indonesia and commenced operations in March 2017;
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the tender rig
T-15
, which was delivered from the shipyard in 2013 and is currently operating under a drilling contract with Chevron that expires in July 2019; and
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the tender rig
T-16
, which was delivered from the shipyard in 2013 and is currently operating under a drilling contract with Chevron that expires in August 2019.
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Recent Developments
West Aquarius
In January 2017, the
West Aquarius
secured a two well contract plus the option for a further two wells from Statoil Canada Ltd in eastern Canada which
commenced in May 2017.
In April 2017, the
West Aquarius
secured a one well contract with BP Canada Energy Group ULC in eastern Canada. The
contract is expected to commence in the second quarter of 2018.
West Capella
In March 2017, the
West Capella
secured a one well contract with Total E&P Cyprus in Cyprus. The contract is expected to commence in the third
quarter of 2017. The
West Capella
has recently been upgraded with a Managed Pressure Drilling (“MPD”) system which is expected to be utilized as part of the upcoming work scope.
In May 2017, the
West Capella
secured a binding Letter of Award for a one well contract plus the option for a further three optional wells with
“Petronas Gabon” in Gabon. Commencement of operations under the contract is expected in the fourth quarter of 2017.
West Capricorn
In April 2017, notification was received from BP to commence preparing the
West Capricorn
for return to operations. The rig will
remain on extended standby rate until returning to normal contractual dayrates on July 1, 2017.
Credit Facility Amendments
On April 4, 2017, Seadrill, on behalf of the Company, and Seadrill’s banking group agreed to extend a series of key dates as part of Seadrill’s
ongoing restructuring efforts. Seadrill has reached agreement to extend the milestone to implement a restructuring plan from April 30, 2017 to July 31, 2017 and also to extend the related covenant amendments and waivers expiring on
June 30, 2017 to September 30, 2017.
5
These covenants relate to the following secured credit facilities:
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$1,450 million Senior Secured Credit Facility;
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$420 million West Polaris Facility; and
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$440 million Rig Financing Agreement.
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This forms part of ongoing negotiations between Seadrill and its banks
and other creditors and investors regarding the terms of a restructuring plan. The amendment and waiver agreements are subject to, among other things, Seadrill’s compliance with the processes and undertakings set forth therein, including a
milestone, which is currently July 31, 2017, by which Seadrill is required to implement a restructuring plan. In the event a consensual restructuring agreement is not concluded or an agreement to a further extension is not reached, Seadrill is
also preparing various contingency plans, including potential schemes of arrangement or Chapter 11 proceedings.
The Company is working to insulate itself
from events of default that may occur on account of Seadrill’s restructuring efforts and to address near-term refinancing requirements. These discussions are well advanced and we are targeting execution of an agreement prior to the
implementation of the broader Seadrill Limited restructuring.
In the event a consensual agreement cannot be reached, the Company is preparing various
contingency plans that may be needed to preserve value and continue operations including seeking waivers of cross default with Seadrill and potential schemes of arrangement and chapter 11 proceedings. Please read “Liquidity and Capital
Resources-Borrowing Activities” and Note 6 “Debt” to the unaudited interim financial statements included herein as well as Note 11 “Debt” to our audited financial statements included in our 20-F.
Deferral of first quarter distribution declaration
The Company deferred its first quarter 2017 distribution decision until an agreement is reached with its lending banks to insulate itself from potential events
of default by Seadrill Limited should Seadrill Limited require the use of in court processes, such as schemes of arrangement or chapter 11 proceedings, to implement its restructuring.
Contract Backlog
The Company’s contract backlog as
of May 31, 2017 totals $2.1 billion. The backlog includes $297,000 per day to be received by the Company until July 24, 2017 in accordance with the termination provisions of the
West Sirius
contract. The backlog figure does not
include any termination payments in relation to the termination of the
West Leo
.
Backlog is calculated as the full operating dayrate multiplied by
the number of days remaining on the contract, assuming full utilization. Backlog excludes revenues for mobilization and demobilization, contract preparation, and customer reimbursables. Backlog also includes, in the case of contracts for which we
have received a notice of termination, an amount equal to the termination fee per day multiplied by the number of days for which the termination fee is payable under the terms of the contract. The actual amounts of revenues earned and the actual
periods during which revenues are earned may differ from the backlog amounts due to various factors, including shipyard and maintenance projects, downtime and other factors. Downtime, caused by unscheduled repairs, maintenance, weather and other
operating factors, may result in lower applicable dayrates than the full contractual operating dayrate.
In addition, the Company’s contracts provide
for termination at the election of the customer with an “early termination payment” to be paid to the Company if a contract is terminated prior to the expiration of the fixed term. However, under certain limited circumstances, such as
destruction of a drilling unit, the Company’s bankruptcy, sustained unacceptable performance by the Company or delivery of a rig beyond certain grace and/or liquidated damages periods, no early termination payment would be paid. Accordingly, if
one of these events were to occur, the actual amount of revenues earned may be substantially lower than the backlog reported.
6
The Company’s contracted drilling units are under charters with an average remaining term of 1.5 years as of
May 31, 2017. The average remaining contract term is calculated as the total days remaining on the contract divided by the number of contracted rigs. Average remaining contract term also includes the total days remaining on the original
contract for units that have been terminated early.
Market Commentary
The offshore drilling market is showing signs of improvement, however is expected to remain challenging in the short to medium term. The majority of customers
continue to be focused on conserving cash and are reluctant to commit significant amounts of capital to offshore projects until oil prices stabilize and demonstrate an upward trend. The significant rig supply overhang remains and a faster return to
a balanced market will require drilling contractors to be more disciplined in retiring older units.
Tendering activity has continued at increased levels
over the past few months, albeit from a low base. Data points increasingly indicate that the market has reached its bottom. An increasing number of recent tenders released by oil companies seek to contract at what we believe are bottom of cycle
dayrates for increased durations, in some instances with multiple fixed price option periods.
We remain committed to keeping our units working in the
short-term and have successfully re-contracted the
West Capella
and
West Aquarius
. We still believe in the long term fundamentals of the offshore drilling industry, driven by years of under-investment in new fields and the
competitiveness of offshore resources on a full cycle basis. Seadrill Partners’ high specification fleet, operational expertise and installed base with high quality customers leaves the Company well positioned to continue to withstand the
current downturn and capitalize on the recovery when it comes.
Basis of Presentation
Investments in companies in which the Company directly or indirectly holds more than 50% of the voting control are consolidated in the financial statements.
All inter-company balances and transactions are eliminated.
7
A. Operating Results
Three Months Ended March 31, 2017 compared to Three Months Ended March 31, 2016
The following table summarizes our operating results for the three months ended March 31, 2017 and 2016:
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(In US$ millions)
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Three months ended
March 31,
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Increase/(Decrease)
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2017
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2016
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$
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%
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Operating revenues
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Contract revenues
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$
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258.6
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$
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401.9
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(143.3
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(35.7
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)%
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Reimbursable revenues
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5.0
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12.5
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(7.5
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(60.0
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)%
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Other revenues
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63.9
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29.6
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34.3
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115.9
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%
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Total operating revenues
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327.5
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444.0
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(116.5
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(26.2
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)%
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Revaluation of contingent consideration
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21.3
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—
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21.3
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%
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Operating expenses
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Vessel and rig operating expenses
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75.8
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109.7
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(33.9
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(30.9
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)%
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Amortization of favorable contracts
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17.5
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17.7
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(0.2
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(1.1
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)%
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Reimbursable expenses
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4.6
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11.5
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(6.9
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(60.0
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)%
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Depreciation and amortization
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67.0
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67.7
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(0.7
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(1.0
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)%
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General and administrative expenses
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10.5
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13.9
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(3.4
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(24.5
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)%
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Total operating expenses
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175.4
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220.5
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(45.1
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(20.5
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)%
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Operating income
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173.4
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223.5
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(50.1
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(22.4
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)%
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Financial and other items
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Interest income
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3.2
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2.3
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0.9
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39.1
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%
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Interest expense
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(42.4
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)
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(45.9
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(3.5
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(7.6
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)%
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Loss on derivative financial instruments
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(6.2
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(69.7
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63.5
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(91.1
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)%
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Foreign currency exchange (loss)/gain
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(0.2
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)
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0.6
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(0.8
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(133.3
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)%
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Other financial items
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(0.5
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)
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—
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0.5
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—
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%
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Total financial and other items
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(46.1
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)
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(112.7
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)
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66.6
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59.1
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%
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Income before taxes
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|
|
127.3
|
|
|
|
110.8
|
|
|
|
16.5
|
|
|
|
14.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax expense
|
|
|
(20.4
|
)
|
|
|
(37.6
|
)
|
|
|
(17.2
|
)
|
|
|
(45.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
106.9
|
|
|
|
73.2
|
|
|
|
33.7
|
|
|
|
46.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Seadrill Partners LLC members
|
|
|
56.8
|
|
|
|
36.1
|
|
|
|
20.7
|
|
|
|
57.3
|
%
|
|
Net income attributable to the non-controlling interest
|
|
|
50.1
|
|
|
|
37.1
|
|
|
|
13.0
|
|
|
|
35.0
|
%
|
Contract Revenues
Contract revenues for the three months ended March 31, 2017 were $258.6 million (March 31, 2016: $401.9 million). The $143.3 million decrease was
primarily due to contract terminations ($115.0 million) and additional idle rigs ($28.3 million).
8
The following table summarizes our fleet’s average daily revenues and economic utilization percentage by
drilling unit type for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
Number of
rigs/ships
on contract
|
|
|
Average
Daily
Revenues
(1) (3)
|
|
|
Economic
Utilization
(2)
|
|
|
Number of
rigs/
ships on
contract
|
|
|
Average
Daily
Revenues
(1) (3)
|
|
|
Economic
Utilization
(2)
|
|
|
Semi-submersible
rigs
|
|
|
2
|
|
|
$
|
488,142
|
|
|
|
99.7
|
%
|
|
|
4
|
|
|
$
|
607,896
|
|
|
|
99.2
|
%
|
|
Drillships
|
|
|
3
|
|
|
$
|
544,943
|
|
|
|
98.3
|
%
|
|
|
4
|
|
|
$
|
560,807
|
|
|
|
98.2
|
%
|
|
Tender rigs
|
|
|
3
|
|
|
$
|
116,028
|
|
|
|
96.3
|
%
|
|
|
3
|
|
|
$
|
116,590
|
|
|
|
99.8
|
%
|
|
(1)
|
Average daily revenues are the average revenues for each type of rig, based on the actual days available for each rig of that type on contract.
|
|
(2)
|
Economic utilization is calculated as the total revenue received, excluding bonuses, divided by the full operating dayrate multiplied by the number of days in the period for rigs that are on contract.
|
|
(3)
|
Average daily revenues exclude the termination payments received as part of the termination of the drilling contract by BP for the
West Sirius
and Exxon Mobil for the
West Capella.
|
Reimbursable Revenues
Reimbursable revenues were
$5.0 million for the three months ended March 31, 2017 (March 31, 2016: $12.5 million). The decrease was primarily due to less equipment purchased on behalf of customers in the three months ended March 31, 2017, for which we have been
reimbursed.
Other Revenues
Other revenues
were $63.9 million for the three months ended March 31, 2017 (March 31, 2016: $29.6 million). The increase is due to termination payments received under the
West Capella
drilling contract which was terminated in May 2016 ($33.9
million).
Revaluation of Contingent Consideration
Included in operating income for the three months ended March 31, 2017 is a $21.3 million gain (March 31, 2016: nil) related to the revaluation of
the fair value of the contingent consideration payable by us to Seadrill in respect of the acquisition of the
West Polaris
. This gain reflects our latest estimates of the relevant assumptions. Included in the fair value gain is an out of
period correction of $20.9 million. Refer to Note 7 - “Risk management and financial instruments” to the unaudited interim financial statements included herein.
Vessel and Rig Operating Expenses
Vessel and rig
operating expenses were $75.8 million for the three months ended March 31, 2017 (March 31, 2016: $109.7 million). The $33.9 million decrease was primarily due to contract terminations ($18.3 million), additional idle rigs ($10.4 million)
and lower operating expenses for rigs in operation ($5.2 million).
Reimbursable Expenses
Reimbursable expenses were $4.6 million for the three months ended March 31, 2017 (March 31, 2016: $11.5 million). The decrease was due to less
equipment purchased on behalf of customers in the three months ended March 31, 2017 compared to the same period in 2016.
9
General and Administrative Expenses
General and administrative expenses were $10.5 million for the three months ended March 31, 2017 (March 31, 2016: $13.9 million). The decrease is
primarily due to a reduction in personnel costs.
Interest Expense
Interest expense was $42.4 million for the three months ended March 31, 2017 (March 31, 2016: $45.9 million). The decrease is due to lower debt
outstanding as a result of maturities and normal amortization payments.
Loss on Derivative Financial Instruments
The loss on derivative financial instruments was $6.2 million for the three months ended March 31, 2017 (March 31, 2016: $69.7 million loss). The
$63.5 million decrease relates to movements in the mark to market valuation of the Company’s interest rate swaps on variable rate debt. Please read “Quantitative and Qualitative Disclosures About Market Risk—Interest Rate Risks”
and Note 7 “Risk management and financial instruments” to the unaudited interim financial statements included herein.
Currency Exchange
Loss/(Gain)
The foreign currency exchange loss of $0.2 million for the three months ended March 31, 2017 (March 31, 2016: $0.6 million
gain) was due to the devaluation of foreign currencies relative to the US Dollar.
Income Tax Expense
Income tax expense was $20.4 million for the three months ended March 31, 2017 (March 31, 2016: $37.6 million). The decrease is primarily due to the
decrease in operating income compared with the three months ended March 31, 2016.
Please read Item 5 “Operating and Financial Review and
Prospects—Critical Accounting Estimates” and Note 4 “Taxation” of the notes to the audited financial statements included in the Form 20-F and Note 5 “Taxation” of the notes to the unaudited interim financial statements
included herein.
B. Liquidity and Capital Resources
Liquidity Requirements
The Company operates in a
capital-intensive industry, and its primary uses of its liquidity are financing the purchase of additional drilling units, maintenance and ongoing capital expenditures, servicing its debt, funding investments (including the equity portion of
investments in drilling units), funding working capital, maintaining cash reserves against fluctuations in operating cash flows, and paying distributions. The Company expects to fund its short-term liquidity needs through cash generated from
operations.
Financial information in this report has been prepared on the basis that the Company will continue as a going concern, which presumes that it
will be able to realize its assets and discharge its liabilities in the normal course of business as they come due. Financial information in this report does not reflect the adjustments to the carrying values of assets and liabilities and the
reported expenses and balance sheet classifications that would be necessary if the Company were unable to realize its assets and settle its liabilities as a going concern in the normal course of operations. Such adjustments could be material.
10
As of March 31, 2017, our cash and cash equivalents were $862.4 million. We have historically relied on our
cash generated from operations to meet our working capital needs. Assuming we maintain compliance with the covenants under our senior secured credit facilities, we believe our current resources, cash available and cash generated from operations,
provided by our current contract backlog, are sufficient to meet our working capital requirements and other obligations as they fall due for at least the next twelve months.
Our long-term liquidity requirements include the repayment of long-term debt balances, and funding potential purchases of drilling units. Generally, the
Company’s long-term sources of funds will be a combination of borrowings from commercial banks, cash generated from operations and debt and equity financing. The Company expects that it will rely upon financing from external sources, including
bank borrowings and the issuance of debt and equity securities, to fund acquisitions and other expansion expenditures.
The Company deferred its first
quarter 2017 distribution decision until an agreement is reached with its lending banks to insulate itself from potential events of default by Seadrill Limited should Seadrill Limited require the use of in court processes, such as schemes of
arrangement or chapter 11 proceedings, to implement its restructuring. As such, no cash distributions were declared or paid to our common unitholders with respect to the quarter ended March 31, 2017.
Cash Flows
Net Cash Provided by Operating Activities
Net cash provided by operating activities was $159.7 million for the three months ended March 31, 2017 (March 31, 2016: $215.3 million). The
decrease is primarily due to a decline in operating income since the previous period.
Net Cash Provided by Investing Activities
Net cash provided by investing activities was $17.4 million for the three months ended March 31, 2017 (March 31, 2016: $4.7 million). The increase
relates to repayments from Seadrill related to the
West Sirius
bareboat charter financing loan ($26.7 million) offset by higher drilling unit additions ($7.6 million) and an insurance refund in respect of the
West Aquarius
in 2016
($6.4 million).
Net Cash Used in Financing Activities
Net cash used in financing activities was $82.1 million for the three months ended March 31, 2017 (March 31, 2016: $137.5 million). The decrease
related to the timing of settlements of contingent consideration owed to Seadrill related to the
West Polaris
($21.6 million), lower payments made in respect of related party debt owed to Seadrill ($5.3 million) and lower cash distributions
($29.3 million).
Borrowing Activities
Please refer
to Note 6 “Debt” to the unaudited interim financial statements included herein for detailed information on our borrowings and credit facilities.
As of March 31, 2017, we had total outstanding borrowings under our credit facilities of $3,460.7 million (December 31, 2016: $3,487.1 million). In
addition, we had interest bearing debt under loan agreements with related parties of $156.2 million (December 31, 2016: $160.3 million).
On
April 28, 2016, we agreed to certain covenant amendments in relation to our three secured credit facilities where both Seadrill Partners and Seadrill are borrowers or guarantors. On April 4, 2017, Seadrill, on behalf of the Company, and
Seadrill’s banking group agreed to further amendments to these credit facilities to extend a series of key dates as part of Seadrill’s ongoing restructuring efforts. This forms part of ongoing negotiations
11
between Seadrill and its banks and other creditors and investors regarding the terms of a restructuring plan. We have consented to these amendments on the grounds that they are beneficial to
Seadrill Partners. The key terms and conditions related to the amendment and waiver agreements that affect these credit facilities are set forth in Note 11 “Debt” to our audited financial statements included in our Form 20-F.
Seadrill has indicated that the implementation of a restructuring plan will likely involve schemes of arrangement or chapter 11 proceedings. The Company is
working to insulate itself from events of default that may occur on account of Seadrill’s restructuring efforts and to address near-term refinancing requirements. These discussions are well advanced and we are targeting execution of an
agreement prior to the implementation of the broader Seadrill restructuring.
In the event a consensual agreement cannot be reached with our lending
banks, we are preparing various contingency plans that may be needed to preserve value and continue operations including seeking waivers of cross default with Seadrill Limited and potential schemes of arrangement and chapter 11 proceedings.
As of March 31, 2017, the Company and Seadrill were in compliance with all covenants.
Contractual Obligations
The following table sets forth
our contractual obligations for the periods indicated as of March 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In US$ millions)
|
|
Payments due by Period
|
|
|
|
|
Total
|
|
|
Less than
1 year
|
|
|
1-3 years
|
|
|
4-5 years
|
|
|
More than
5 years
|
|
|
Long-term debt obligations
|
|
|
3,616.9
|
|
|
|
474.9
|
|
|
|
420.6
|
|
|
|
2,721.4
|
|
|
|
—
|
|
|
Interest expense commitments on long-term debt obligations (1)
|
|
|
469.9
|
|
|
|
136.6
|
|
|
|
224.9
|
|
|
|
108.4
|
|
|
|
—
|
|
|
Commitment fee on undrawn facilities (2)
|
|
|
1.6
|
|
|
|
1.4
|
|
|
|
0.2
|
|
|
|
—
|
|
|
|
—
|
|
|
Deferred consideration payable (3)
|
|
|
225.5
|
|
|
|
36.2
|
|
|
|
125.6
|
|
|
|
63.7
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,313.9
|
|
|
|
649.1
|
|
|
|
771.3
|
|
|
|
2,893.5
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The Company’s interest commitment on long-term debt is calculated based on the applicable interest rate of the loan agreements as of March 31, 2017 and the associated interest rate swap rates.
|
|
(2)
|
The $100.0 million revolving credit facility with Seadrill and the $100.0 million revolving credit facility under the Amended Senior Secured Credit Facilities incur commitment fees on the undrawn balances of
2.0% per annum and 0.5% per annum respectively. As of March 31, 2017, the outstanding balance on the Amended Senior Secured Credit Facilities revolver was $50.0 million, and the sponsor credit facility was undrawn.
|
|
(3)
|
The Company recognized deferred consideration payable as a result of the purchase of the entities that own and operate the
West Vela
on November 4, 2014 and the
West Polaris
on June 19, 2015 from
Seadrill. The payment of these amounts is contingent on the amount of contract revenues and mobilization revenues received from the customer. For further information on the nature of these payments please see Note 3 “Business acquisitions”
in the notes to the audited financial statements included in the Form 20-F and Note 7 “Risk management and financial instruments” and Note 8 “Related party transactions” in the notes to the unaudited interim financial statements
included herein.
|
12
Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to various market risks, including interest rate, foreign currency exchange and concentration of credit risks. The Company may enter
into a variety of derivative instruments and contracts to maintain the desired level of exposure arising from these risks.
For discussion of our interest
rate, foreign currency exchange and concentration of credit risks as of March 31, 2017, please read Note 7 “Risk management and financial instruments” to the unaudited interim financial statements included herein.
Critical Accounting Estimates
The preparation of the
unaudited interim Consolidated Financial Statements requires the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures about contingent assets and
liabilities. The Company bases these estimates and assumptions on historical experience and on various other information and assumptions that the Company believes to be reasonable. Critical accounting estimates are important to the portrayal of both
the Company’s financial condition and results of operations and require the Company to make subjective or complex assumptions or estimates about matters that are uncertain. The basis of preparation and significant accounting policies are
disclosed in Note 1 “General information” and Note 2 “Accounting policies” to the notes to the Company’s audited financial statements for the year ended December 31, 2016 included in the Form 20-F.
13
Seadrill Partners LLC
Index to Unaudited Consolidated Financial Statements
For the quarter ended March 31, 2017
F-1
SEADRILL PARTNERS LLC
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
for the three months ended March 31, 2017 and 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In US$ millions, except per unit amounts)
|
|
|
|
|
Three months ended
March 31,
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract revenues
|
|
|
|
|
|
|
258.6
|
|
|
|
401.9
|
|
|
Reimbursable revenues
|
|
|
|
|
|
|
5.0
|
|
|
|
12.5
|
|
|
Other revenues
|
|
|
*
|
|
|
|
63.9
|
|
|
|
29.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
|
|
|
|
327.5
|
|
|
|
444.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revaluation of contingent consideration
|
|
|
|
|
|
|
21.3
|
|
|
|
—
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vessel and rig operating expenses
|
|
|
*
|
|
|
|
75.8
|
|
|
|
109.7
|
|
|
Amortization of favorable contracts
|
|
|
|
|
|
|
17.5
|
|
|
|
17.7
|
|
|
Reimbursable expenses
|
|
|
|
|
|
|
4.6
|
|
|
|
11.5
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
67.0
|
|
|
|
67.7
|
|
|
General and administrative expenses
|
|
|
*
|
|
|
|
10.5
|
|
|
|
13.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
|
|
|
|
175.4
|
|
|
|
220.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
173.4
|
|
|
|
223.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial and other items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
|
3.2
|
|
|
|
2.3
|
|
|
Interest expense
|
|
|
*
|
|
|
|
(42.4
|
)
|
|
|
(45.9
|
)
|
|
Loss on derivative financial instruments
|
|
|
*
|
|
|
|
(6.2
|
)
|
|
|
(69.7
|
)
|
|
Foreign currency exchange (loss)/gain
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
0.6
|
|
|
Other financial items
|
|
|
|
|
|
|
(0.5
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial and other items
|
|
|
|
|
|
|
(46.1
|
)
|
|
|
(112.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
127.3
|
|
|
|
110.8
|
|
|
Tax expense
|
|
|
|
|
|
|
(20.4
|
)
|
|
|
(37.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
106.9
|
|
|
|
73.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Seadrill Partners LLC members
|
|
|
|
|
|
|
56.8
|
|
|
|
36.1
|
|
|
Net income attributable to the non-controlling interest
|
|
|
|
|
|
|
50.1
|
|
|
|
37.1
|
|
|
Earnings per unit (basic and diluted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common unitholders
|
|
|
|
|
|
|
0.75
|
|
|
|
0.48
|
|
|
Subordinated unitholders
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
Cash distributions declared and paid in the period per common unit
|
|
|
|
|
|
|
0.10
|
|
|
|
0.25
|
|
|
*
|
Includes transactions with related parties. Refer to Note 8 “Related party transactions”.
|
A
Statement of Comprehensive Income has not been presented as there are no items recognized in other comprehensive income.
See accompanying notes that
are an integral part of these unaudited Consolidated Financial Statements.
F-2
SEADRILL PARTNERS LLC
UNAUDITED CONSOLIDATED BALANCE SHEETS
as of March 31, 2017 and December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
(In US$ millions, except unit amounts)
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
862.4
|
|
|
|
767.6
|
|
|
Accounts receivables, net
|
|
|
227.2
|
|
|
|
249.0
|
|
|
Amount due from related party
|
|
|
54.2
|
|
|
|
80.6
|
|
|
Other current assets
|
|
|
114.5
|
|
|
|
117.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,258.3
|
|
|
|
1,214.2
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current assets
|
|
|
|
|
|
|
|
|
|
Drilling units
|
|
|
5,300.3
|
|
|
|
5,340.9
|
|
|
Goodwill
|
|
|
3.2
|
|
|
|
3.2
|
|
|
Deferred tax assets
|
|
|
12.1
|
|
|
|
14.1
|
|
|
Other non-current assets
|
|
|
186.7
|
|
|
|
208.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current assets
|
|
|
5,502.3
|
|
|
|
5,566.5
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
6,760.6
|
|
|
|
6,780.7
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
|
327.7
|
|
|
|
93.8
|
|
|
Current portion of long-term related party debt
|
|
|
135.6
|
|
|
|
135.6
|
|
|
Trade accounts payable
|
|
|
33.7
|
|
|
|
31.9
|
|
|
Current portion of deferred and contingent consideration to related party
|
|
|
44.3
|
|
|
|
45.6
|
|
|
Related party payables
|
|
|
147.7
|
|
|
|
189.6
|
|
|
Other current liabilities
|
|
|
149.4
|
|
|
|
168.9
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
838.4
|
|
|
|
665.4
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current liabilities
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
3,089.0
|
|
|
|
3,346.5
|
|
|
Long-term related party debt
|
|
|
20.6
|
|
|
|
24.7
|
|
|
Long-term deferred and contingent consideration to related party
|
|
|
131.6
|
|
|
|
157.6
|
|
|
Deferred tax liability
|
|
|
1.5
|
|
|
|
1.5
|
|
|
Other non-current liabilities
|
|
|
51.8
|
|
|
|
49.2
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current liabilities
|
|
|
3,294.5
|
|
|
|
3,579.5
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
Members’ capital:
|
|
|
|
|
|
|
|
|
|
Common unitholders (issued 75,278,250 units as at March 31, 2017 and as at December 31,
2016)
|
|
|
1,162.3
|
|
|
|
1,123.2
|
|
|
Subordinated unitholders (issued 16,543,350 units as at March 31, 2017 and as at
December 31, 2016)
|
|
|
79.6
|
|
|
|
69.4
|
|
|
Seadrill member interest
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total members’ capital
|
|
|
1,241.9
|
|
|
|
1,192.6
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interest
|
|
|
1,385.8
|
|
|
|
1,343.2
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
2,627.7
|
|
|
|
2,535.8
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
|
6,760.6
|
|
|
|
6,780.7
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes that are an integral part of these unaudited Consolidated Financial Statements.
F-3
SEADRILL PARTNERS LLC
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the three months ended March 31, 2017 and 2016
|
|
|
|
|
|
|
|
|
|
|
(In US$ millions)
|
|
Three months ended
March 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
106.9
|
|
|
|
73.2
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
67.0
|
|
|
|
67.7
|
|
|
Amortization of deferred loan charges
|
|
|
2.9
|
|
|
|
2.9
|
|
|
Amortization of favorable contracts
|
|
|
17.5
|
|
|
|
17.7
|
|
|
Unrealized (gain)/loss on derivative financial instruments
|
|
|
(3.2
|
)
|
|
|
57.5
|
|
|
Unrealized foreign exchange gain
|
|
|
(1.3
|
)
|
|
|
(1.5
|
)
|
|
Payment for long term maintenance
|
|
|
(17.1
|
)
|
|
|
(13.3
|
)
|
|
Net movement in deferred taxes
|
|
|
5.4
|
|
|
|
11.6
|
|
|
Revaluation of contingent consideration
|
|
|
(21.3
|
)
|
|
|
—
|
|
|
Accretion of discount on deferred consideration
|
|
|
4.1
|
|
|
|
4.4
|
|
|
Changes in operating assets and liabilities, net of effect of acquisitions:
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
23.1
|
|
|
|
2.2
|
|
|
Prepaid expenses and accrued income
|
|
|
(3.1
|
)
|
|
|
2.6
|
|
|
Trade accounts payable
|
|
|
1.7
|
|
|
|
20.1
|
|
|
Related party balances
|
|
|
(15.7
|
)
|
|
|
(52.5
|
)
|
|
Other assets
|
|
|
10.1
|
|
|
|
27.3
|
|
|
Other liabilities
|
|
|
(15.9
|
)
|
|
|
(1.2
|
)
|
|
Changes in deferred revenue
|
|
|
(1.4
|
)
|
|
|
(4.0
|
)
|
|
Other, net
|
|
|
—
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
159.7
|
|
|
|
215.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
|
Additions to drilling units
|
|
|
(9.3
|
)
|
|
|
(1.7
|
)
|
|
Insurance refund
|
|
|
—
|
|
|
|
6.4
|
|
|
Payment received from loans granted to related parties
|
|
|
26.7
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
17.4
|
|
|
|
4.7
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
|
Repayments of long term debt
|
|
|
(26.3
|
)
|
|
|
(26.3
|
)
|
|
Repayments of related party debt
|
|
|
(30.8
|
)
|
|
|
(35.3
|
)
|
|
Contingent consideration paid
|
|
|
(10.0
|
)
|
|
|
(31.6
|
)
|
|
Cash distributions
|
|
|
(15.0
|
)
|
|
|
(44.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(82.1
|
)
|
|
|
(137.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
(0.2
|
)
|
|
|
(0.3
|
)
|
|
Net increase in cash and cash equivalents
|
|
|
94.8
|
|
|
|
82.2
|
|
|
Cash and cash equivalents at beginning of the period
|
|
|
767.6
|
|
|
|
319.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of period
|
|
|
862.4
|
|
|
|
401.2
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes that are an integral part of these unaudited Consolidated Financial Statements.
F-4
SEADRILL PARTNERS LLC
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ CAPITAL
for the three months ended March 31, 2017 and 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In US$ millions)
|
|
Common
units
|
|
|
Members’ capital
Subordinated
units
|
|
|
Seadrill
member
interest
|
|
|
Total
members’
capital
|
|
|
Non-
controlling
interest
|
|
|
Total equity
|
|
|
Balance at December 31, 2015
|
|
|
945.5
|
|
|
|
18.8
|
|
|
|
—
|
|
|
|
964.3
|
|
|
|
1,133.1
|
|
|
|
2,097.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
29.6
|
|
|
|
6.5
|
|
|
|
—
|
|
|
|
36.1
|
|
|
|
37.1
|
|
|
|
73.2
|
|
|
Cash distribution
|
|
|
(18.8
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(18.8
|
)
|
|
|
(25.5
|
)
|
|
|
(44.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2016
|
|
|
956.3
|
|
|
|
25.3
|
|
|
|
—
|
|
|
|
981.6
|
|
|
|
1,144.7
|
|
|
|
2,126.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
|
1,123.2
|
|
|
|
69.4
|
|
|
|
—
|
|
|
|
1,192.6
|
|
|
|
1,343.2
|
|
|
|
2,535.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
46.6
|
|
|
|
10.2
|
|
|
|
—
|
|
|
|
56.8
|
|
|
|
50.1
|
|
|
|
106.9
|
|
|
Cash distribution
|
|
|
(7.5
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(7.5
|
)
|
|
|
(7.5
|
)
|
|
|
(15.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2017
|
|
|
1,162.3
|
|
|
|
79.6
|
|
|
|
—
|
|
|
|
1,241.9
|
|
|
|
1,385.8
|
|
|
|
2,627.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes that are an integral part of these unaudited Consolidated Financial Statements.
F-5
SEADRILL PARTNERS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - General
information
Basis of presentation
The unaudited
interim Consolidated Financial Statements of Seadrill Partners LLC (the “Company” or “Seadrill Partners”) are presented in accordance with accounting principles generally accepted in the United States of America (US GAAP). The
amounts are presented in United States dollars (US dollar) rounded to the nearest hundred thousand, unless stated otherwise.
The unaudited interim
Consolidated Financial Statements do not include all of the disclosures required in complete Annual Financial Statements. These unaudited interim Consolidated Financial Statements should be read in conjunction with the Company’s Annual
Consolidated Financial Statements as of December 31, 2016 filed on Form 20-F (the “audited 2016 Financial Statements”). The year-end balance sheet data was derived from the audited 2016 Financial Statements, but does not include all
disclosures required by US GAAP. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement have been included. Preparation of Financial Statements in accordance with
US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from those estimates.
The Company’s unaudited interim Consolidated
Financial Statements have been prepared on a going concern basis and contemplate the realization of assets and the satisfaction of liabilities in the normal course of business. However, the Company’s going concern assumption is based on
management’s ability to insulate the Company from events of default that may occur on account of the restructuring efforts and of Seadrill Limited (“Seadrill”) and to address near-term refinancing requirements.
Our short-term liquidity requirements relate to servicing our debt amortizations, interest payments, funding working capital requirements, and making
distributions. We believe our current resources, including available cash and cash generated from operations, provided by our current contract backlog, are sufficient to meet our working capital requirements and other obligations as they fall due
for at least the next twelve months after the date the financial statements are issued in circumstances other than in the event of a cross default and acceleration as described below.
There are cross default clauses with Seadrill in three Seadrill Partners facilities. An event of a default by Seadrill under its financing agreements could
cause amounts outstanding under our loan agreements to be accelerated and become due and payable.
Seadrill Limited has indicated that the implementation
of a restructuring plan will likely involve schemes of arrangement or chapter 11 proceedings. The Company is working to insulate itself from events of default that may occur on account of Seadrill’s restructuring efforts and to address
near-term refinancing requirements. These discussions are well advanced and we are targeting execution of an agreement prior to the implementation of the broader Seadrill Limited restructuring.
Until such time as an agreement with lenders is reached, uncertainty remains and therefore substantial doubt exists over the Company’s ability to
continue as a going concern for twelve months after the date the financial statements are issued.
The Company’s business operations remain
unaffected by the broader Seadrill restructuring and the Company expects to continue to meet its ongoing customer and business counterparty obligations as they become due.
For further information, please read Note 6 “Debt”.
F-6
SEADRILL PARTNERS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Significant accounting policies
The accounting policies adopted in the preparation of the unaudited interim Consolidated Financial Statements are consistent with those followed in the
preparation of the annual audited 2016 Financial Statements, unless otherwise included in these unaudited interim Consolidated Financial Statements as separate disclosures.
Out of Period Adjustments
The unaudited interim
Consolidated Financial Statements for the quarter ended March 31, 2017 include a pre-tax gain of $20.9 million for out-of-period adjustments relating to 2016. These adjustments relate to the valuation of contingent consideration recognized on
acquisition of the
West Polaris
from Seadrill. Refer to Note 7 “Risk management and financial instruments” for further information.
Management has evaluated the impact of this out-of-period adjustment in 2017 and concluded that this was not material to the financial statements for the
quarter ended March 31, 2017 or the estimated results for the year ending December 31, 2017 or to any previously reported quarterly or annual financial statements.
Note 2 - Recent Accounting Pronouncements
Recently
Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update
(“ASU”) 2014-09,
Revenue from Contracts with Customers
, which provides new authoritative guidance on the methods of revenue recognition and related disclosure requirements. This new standard supersedes all existing revenue
recognition requirements, including most industry-specific guidance. The new standard requires a company to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to
receive for those goods or services. The new standard also requires additional qualitative and quantitative disclosures. In April 2015, the FASB proposed to defer the effective date of the guidance by one year. Based on this proposal, public
entities would need to apply the new guidance for annual and interim periods beginning after December 15, 2017, and shall be applied, at the Company’s option, retrospectively to each period presented or as a cumulative-effect adjustment as
of the date of adoption. Early adoption is not permitted until periods beginning after December 15, 2016.
During 2016, the FASB issued ASU 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
, ASU 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and
Licensing
, ASU 2016- 12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
, which do not change the core principle of the Standard Update, but instead clarify the implementation guidance
and provide narrow-scope improvements. In December 2016, the FASB issued ASU 2016-20,
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
, which includes additional guidance for disclosures related to
remaining performance obligations. Based on the analysis to date, the Company has assessed there is significant interaction between ASC 606 and ASC 842 relating to leases; therefore, the Company expects to adopt the updates concurrently, effective
January 1, 2018. The Company continues to make significant progress on its review of the standard to determine the effect the requirements may have on its consolidated financial statements, according to its contract-specific facts and
circumstances.
The Company is consulting with other drilling companies to fully determine recognition and disclosure under the new standard. At present,
the Company does not expect the pattern of revenue recognition under the new guidance to materially differ from its current revenue recognition pattern and expects to transition using a modified retrospective approach whereby it will record the
cumulative effect of applying the new standard to all outstanding contracts as of January 1, 2018 as an adjustment to opening retained earnings. The Company’s initial assessment may change as it continues to refine these assumptions.
F-7
SEADRILL PARTNERS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments—Overall (Subtopic 825-10):
Recognition and Measurement of Financial Assets and Financial Liabilities,
which made targeted improvements to the recognition and measurement of financial assets and financial liabilities. The update changes how entities measure equity
investments that do not result in consolidation and are not accounted for under the equity method and how they present changes in the fair value of financial liabilities measured under the fair value option that are attributable to their own credit.
The new guidance also changes certain disclosure requirements and other aspects of current GAAP. The guidance will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years and early
adoption is permitted in some cases. The Company is in the process of evaluating the impact of this standard update on its consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02,
Leases
(Topic 842). The update requires an entity to recognize right-of-use assets and lease liabilities
on its balance sheet and disclose key information about leasing arrangements. It also offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and
quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. The guidance will be effective for fiscal years beginning after
December 15, 2018, including interim periods within those fiscal years and early adoption is permitted, using a modified retrospective application. The Company has started assessing the impact of this standard update on its consolidated
financial statements and related disclosures and has determined that its drilling contracts contain a lease component. The adoption of this standard will result in increased disclosure of the Company’s leasing arrangements and may affect the
way the Company recognizes revenues associated with the lease and revenue components, according to its contract-specific facts and circumstances. The standard update could also introduce variability to the timing of the Company’s revenue
recognition compared to current accounting standards. Based on the analysis to date, the Company has assessed there is significant interaction between ASC 606 relating to revenue recognition from contracts with customers and ASC 842; therefore, the
Company expects to adopt the updates concurrently, effective January 1, 2018, using the modified retrospective approach.
The Company is consulting
with other drilling companies to fully determine recognition and disclosure under the new standard. The Company continues to make significant progress on its review of the standard to determine the effect the requirements could have on its
consolidated financial statements and may change its initial assessment as it completes this process.
In June 2016, the FASB issued ASU
No. 2016-13,
Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
, which revises guidance for the accounting for credit losses on financial instruments within its scope. The new
standard introduces an approach, based on expected losses, to estimate credit losses on certain types of financial instruments and modifies the impairment model for available-for-sale debt securities. The guidance will be effective January 1,
2020, with early adoption permitted. Entities are required to apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company
is in the process of evaluating the impact of this standard update on its consolidated financial statements and related disclosures.
In August 2016, the
FASB issued ASU No. 2016-15,
Statement of Cash Flows
(Topic 230): Classification of Certain Cash Receipts and Cash Payments based on a consensus of the Emerging Issues Task Force (EITF), to address the classification of certain cash
receipts and cash payments on the statement of cash flows. The new guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The guidance will be
effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted. Entities are generally required to apply the guidance retrospectively. The Company is in the process of evaluating the impact of this
standard upon its consolidated financial statements and related disclosures.
F-8
SEADRILL PARTNERS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In October 2016, the FASB issued ASU 2016-16,
Income Taxes (Topic 740): Income Taxes Intra-Entity
Transfers of Assets other than Inventory,
which requires companies to recognize the income tax effects of intercompany sales or transfers of assets, other than inventory, in the consolidated statement of operations as income tax expense (or
benefit) in the period of sale or transfer occurs. The exception to recognizing the income tax effects of intercompany sales or transfers of assets remains in place for intercompany inventory sales and transfers, i.e. companies will still be
required to defer the income tax effects of intercompany inventory transactions. The standard will be effective for annual periods beginning after December 15, 2017, with early adoption permitted. Entities are required to apply the guidance on
a modified retrospective basis, with the cumulative effect adjustment to retained earnings at the beginning of the period of adoption. The Company is not early adopting this standard and expects to implement in the first quarter of 2018.
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows
(Topic 230): Restricted Cash, to address classification of activity related to
restricted cash and restricted cash equivalents in the cash flows. The standard eliminates the presentation of transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. When cash,
cash equivalents and restricted cash equivalents are presented in more than one line item on the balance sheet, a reconciliation of the totals in the cash flows to the related captions in the balance sheet are required, either on the face of the
cash flow or in the notes to the financial statements. Additional disclosures are required for the nature of the restricted cash and restricted cash equivalents. The standard will be effective for fiscal years beginning after December 15, 2017,
and interim periods within those years. Early adoption is permitted. The Company is in the process of evaluating the impact of this standard update on its consolidated financial statements and related disclosures.
Note 3 - Segment information
Operating segment
The Company’s fleet is regarded as one single global segment, and is reviewed by the Chief Operating Decision Maker as an aggregated sum of
assets, liabilities and activities generating distributable cash to meet minimum quarterly distributions.
A breakdown of the Company’s revenues by
customer for the three months ended March 31, 2017 and 2016 are follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
BP
|
|
|
50.7
|
%
|
|
|
41.5
|
%
|
|
ExxonMobil
|
|
|
24.2
|
%
|
|
|
23.6
|
%
|
|
Hibernia
|
|
|
17.5
|
%
|
|
|
13.8
|
%
|
|
Chevron
|
|
|
6.4
|
%
|
|
|
4.9
|
%
|
|
ConocoPhillips
|
|
|
0.9
|
%
|
|
|
0.0
|
%
|
|
Other
|
|
|
0.3
|
%
|
|
|
3.2
|
%
|
|
Tullow
|
|
|
0.0
|
%
|
|
|
13.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
F-9
SEADRILL PARTNERS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Geographic Data
Revenues are attributed to geographical areas based on the country of operations for drilling activities, i.e. the country where the revenues are generated.
The following presents the revenues and fixed assets by geographic area:
Revenues
|
|
|
|
|
|
|
|
|
|
|
(In US$ millions)
|
|
Three months ended
March 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
United States
|
|
|
165.9
|
|
|
|
184.3
|
|
|
Canada
|
|
|
57.2
|
|
|
|
61.3
|
|
|
Angola
|
|
|
46.0
|
|
|
|
46.0
|
|
|
Nigeria
|
|
|
35.1
|
|
|
|
61.6
|
|
|
Thailand
|
|
|
22.3
|
|
|
|
21.9
|
|
|
Other
|
|
|
1.0
|
|
|
|
11.3
|
|
|
Ghana
|
|
|
—
|
|
|
|
57.6
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
327.5
|
|
|
|
444.0
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2017 and December 31, 2016 the drilling units were located as follows:
Fixed Assets – Drilling units
(1)
|
|
|
|
|
|
|
|
|
|
|
(In US$ millions)
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
|
United States
|
|
|
2,783.2
|
|
|
|
2,815.5
|
|
|
Spain
|
|
|
1,081.7
|
|
|
|
496.2
|
|
|
Angola
|
|
|
547.4
|
|
|
|
554.0
|
|
|
Canada
|
|
|
479.4
|
|
|
|
488.0
|
|
|
Thailand
|
|
|
238.7
|
|
|
|
241.0
|
|
|
Singapore
|
|
|
169.9
|
|
|
|
171.2
|
|
|
Ghana
|
|
|
—
|
|
|
|
575.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5,300.3
|
|
|
|
5,340.9
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The fixed assets referred to in the table above include eleven drilling units at March 31, 2017 and December 31, 2016. Asset location at the end of the
period is not necessarily indicative of the geographic distribution of the revenues or operating profits generated by such assets during the period.
|
F-10
SEADRILL PARTNERS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4 - Taxation
The Company’s corporation, deferred and other tax balances at March 31, 2017 and December 31, 2016 are as follows:
|
|
|
|
|
|
|
|
|
|
|
(In US$ millions)
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
|
Corporation tax liability
|
|
|
40.5
|
|
|
|
47.7
|
|
|
Deferred tax asset
|
|
|
12.1
|
|
|
|
14.1
|
|
|
Deferred tax liability
|
|
|
(1.5
|
)
|
|
|
(1.5
|
)
|
|
Uncertain tax positions
|
|
|
45.2
|
|
|
|
41.7
|
|
The effective tax rate for the three months ended March 31, 2017 is 16.0% (three months ended March 31, 2016:
33.9%).
The provision for income taxes during the three months ended March 31, 2017 is calculated by applying an estimate of the annual effective
tax rate for the full year to “ordinary” income or loss for this reporting period. The reported figure for income tax reflects the relative proportion of group results earned in this period out of the currently estimated projected results
for the full year.
Seadrill Partners LLC is tax resident in the United Kingdom. The Company’s controlled affiliates operate and earn income in
several countries and are subject to the laws of taxation within those countries. Currently some of the Company’s controlled affiliates formed in the Marshall Islands along with all those incorporated in the United Kingdom (none of whom
presently own or operate rigs) are resident in the United Kingdom and are subject to U.K. tax. Subject to changes in the jurisdictions in which the Company’s drilling units operate and/or are owned, differences in levels of income and changes
in tax laws, the Company’s effective income tax rate may vary substantially from one reporting period to another.
Note 5 - Drilling units
|
|
|
|
|
|
|
|
|
|
|
(In US$ millions)
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
|
Cost
|
|
|
6,520.5
|
|
|
|
6,494.1
|
|
|
Accumulated depreciation
|
|
|
(1,220.2
|
)
|
|
|
(1,153.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net book value
|
|
|
5,300.3
|
|
|
|
5,340.9
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $67.0 million and $67.7 million for the three months ended March 31, 2017 and 2016,
respectively.
F-11
SEADRILL PARTNERS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6 - Debt
As of March 31, 2017 and December 31, 2016, the Company had the following principal amounts of debt outstanding:
|
|
|
|
|
|
|
|
|
|
|
(In US$ millions)
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
|
External debt agreements
|
|
|
|
|
|
|
|
|
|
Amended Senior Secured Credit Facilities
|
|
|
2,858.4
|
|
|
|
2,865.7
|
|
|
$1,450 Senior Secured Credit Facility
|
|
|
332.3
|
|
|
|
342.4
|
|
|
$420 West Polaris Facility
|
|
|
270.0
|
|
|
|
279.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total external debt
|
|
|
3,460.7
|
|
|
|
3,487.1
|
|
|
Less current portion of long-term external debt
|
|
|
(339.3
|
)
|
|
|
(105.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Long-term external debt
|
|
|
3,121.4
|
|
|
|
3,381.8
|
|
|
|
|
|
|
|
|
|
|
|
|
Related party debt agreements
|
|
|
|
|
|
|
|
|
|
Rig Financing and Loan Agreements
|
|
|
|
|
|
|
|
|
|
West Vencedor Loan Agreement
|
|
|
37.0
|
|
|
|
41.2
|
|
|
$440 Rig Financing Agreement
|
|
|
119.2
|
|
|
|
119.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total Rig Financing and Loan Agreements
|
|
|
156.2
|
|
|
|
160.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Total related party debt
|
|
|
156.2
|
|
|
|
160.3
|
|
|
Less current portion of related party debt
|
|
|
(135.6
|
)
|
|
|
(135.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Long-term related party debt
|
|
|
20.6
|
|
|
|
24.7
|
|
|
|
|
|
|
|
|
|
|
|
|
Total external and related party debt
|
|
|
3,616.9
|
|
|
|
3,647.4
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding external debt as of March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In US$ millions)
|
|
Principal
outstanding
|
|
|
Debt
issuance
costs
|
|
|
Total
external
debt
|
|
|
Current portion of long-term external debt
|
|
|
339.3
|
|
|
|
(11.6
|
)
|
|
|
327.7
|
|
|
Long-term external debt
|
|
|
3,121.4
|
|
|
|
(32.4
|
)
|
|
|
3,089.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total external debt
|
|
|
3,460.7
|
|
|
|
(44.0
|
)
|
|
|
3,416.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding external debt as of December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In US$ millions)
|
|
Principal
outstanding
|
|
|
Debt
issuance
costs
|
|
|
Total
external
debt
|
|
|
Current portion of long-term external debt
|
|
|
105.3
|
|
|
|
(11.5
|
)
|
|
|
93.8
|
|
|
Long-term external debt
|
|
|
3,381.8
|
|
|
|
(35.3
|
)
|
|
|
3,346.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total external debt
|
|
|
3,487.1
|
|
|
|
(46.8
|
)
|
|
|
3,440.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-12
SEADRILL PARTNERS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The outstanding external and related party debt as of March 31, 2017 is repayable as follows:
|
|
|
|
|
|
|
(In US$ millions)
|
|
March 31, 2017
|
|
|
2018
|
|
|
474.9
|
|
|
2019
|
|
|
391.6
|
|
|
2020
|
|
|
29.0
|
|
|
2021
|
|
|
2,721.4
|
|
|
2022
|
|
|
—
|
|
|
2023 and thereafter
|
|
|
—
|
|
|
|
|
|
|
|
|
Total outstanding debt
|
|
$
|
3,616.9
|
|
|
|
|
|
|
|
The Company’s facilities and related party loan agreements include financial and non-financial covenants applicable to
the Company and Seadrill. A description of the Company’s borrowings including a list of these covenants are contained in Note 11 “Debt” to the notes to the 2016 audited financial statements.
The significant developments relating to the Company’s debt after December 31, 2016 are explained below.
April 2017 Amendments to Certain Credit Facilities
On
April 4, 2017, Seadrill on behalf of the Company, and Seadrill’s banking group agreed to extend a series of key dates as part of Seadrill’s ongoing restructuring efforts. Seadrill has reached agreement to extend the milestone to
implement a restructuring plan from April 30, 2017 to July 31, 2017 and also to extend the related covenant amendments and waivers that were set forth in Note 11 “Debt” to the notes to the 2016 audited financial statements under
“April 2016 Amendments to Certain Credit Facilities” that were scheduled to expire on June 30, 2017 to September 30, 2017.
These
covenants relate to the following secured credit facilities where both parties are borrowers or guarantors:
|
|
•
|
|
$1,450 million Senior Secured Credit Facility
|
|
|
•
|
|
$420 million West Polaris Facility
|
|
|
•
|
|
$440 million Rig Financing Agreements
|
As of March 31, 2017, the Company and Seadrill were in compliance
with all covenants.
Note 7 - Risk management and financial instruments
The Company is exposed to various market risks, including interest rate, foreign currency exchange and concentration of credit risks. The Company may enter
into a variety of derivative instruments and contracts to maintain the desired level of exposure arising from these risks.
F-13
SEADRILL PARTNERS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Interest rate risk management
The Company’s exposure to interest rate risk relates mainly to its floating interest rate debt and balances of surplus funds placed with financial
institutions. This exposure is managed through the use of interest rate swaps. The Company’s objective is to obtain the most favorable interest rate borrowings available without increasing its exposure to fluctuating interest rates. Surplus
funds are used to repay revolving credit tranches, or placed in accounts and deposits with reputable financial institutions in order to maximize returns, while providing the Company with flexibility to meet all requirements for working capital and
capital investments. The extent to which the Company utilizes interest rate swaps derivatives to manage its interest rate risk is determined by the net debt exposure and its views on future interest rates.
Interest rate swap agreements
At March 31, 2017 the
Company was party to interest rate swap agreements with Seadrill and external parties with a combined outstanding principal of $3,432.3 million (December 31, 2016: $3,443.2 million), representing 94.9% of the total interest bearing debt
obligations of the Company (December 31, 2016: 94.4%). These agreements do not qualify for hedge accounting and accordingly any changes in the fair values of the swap agreements are included in the Consolidated Statement of Operations under
“Loss on derivative financial instruments”.
The total fair value of the related party interest rate swaps, with Seadrill as counterparty, was a
net asset of $4.2 million and gross asset of $4.4 million at March 31, 2017 (December 31, 2016: a net asset of $2.4 million and gross asset of $2.6 million). The fair value of the related party interest rate swaps are classified within
amounts due from related party in the Consolidated Balance Sheet.
The total fair value of the external party interest rate swaps outstanding at
March 31, 2017 was a net liability of $52 million and gross liability of $60.6 million (December 31, 2016: a net liability of $55.2 million and gross liability of $70.2 million). The fair value of the external party interest rate swaps are
classified within “Other current liabilities” in the Consolidated Balance Sheet.
These interest rate swaps are reflected net on the
Company’s balance sheets to the extent netting is as allowed under its International Swaps and Derivatives Association, Inc. (“ISDA”) Master Agreements. This is classified within other current liabilities in the Company’s balance
sheet as of March 31, 2017 and December 31, 2016.
The total realized and unrealized loss recognized for the three months ended March 31,
2017 was $6.2 million (March 31, 2016: loss of $69.7 million), consisting of an unrealized gain of $5.1 million and a realized loss of $11.3 million (March 31, 2016: unrealized loss of $57.5 million and a realized loss of $12.2 million).
The Company’s interest rate swap agreements as of March 31, 2017, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity of contract
|
|
Outstanding
principal
|
|
|
Receive rate
|
|
|
Pay rate
|
|
|
(In US$ millions)
|
|
|
July 2, 2018
|
|
|
397.5
|
|
|
|
3 month LIBOR
|
|
|
|
1.10
|
%
(1)(2)
|
|
October 29, 2019
|
|
|
100.0
|
|
|
|
3 month LIBOR
|
|
|
|
1.36
|
%
(2)
|
|
June 19, 2020
|
|
|
60.3
|
|
|
|
3 month LIBOR
|
|
|
|
1.11
|
%
(1)(2)
|
|
December 21, 2020
|
|
|
58.8
|
|
|
|
3 month LIBOR
|
|
|
|
1.93
|
%
(1)(2)
|
|
February 21, 2021
|
|
|
2,815.7
|
|
|
|
3 month LIBOR
|
|
|
|
2.45 - 2.52
|
%
(1)(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total outstanding principal
|
|
|
3,432.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The outstanding principal of these amortizing swaps falls with each capital repayment of the underlying loans.
|
|
(2)
|
Related party interest rate swap agreements.
|
|
(3)
|
The Company has a LIBOR floor of 1% whereby the Company receives 1% when LIBOR is below 1%.
|
F-14
SEADRILL PARTNERS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As at March 31, 2017, $184.6 million of the Company’s total debt was exposed to interest rate
fluctuations, compared to $204.2 million as of December 31, 2016. An increase or decrease in short-term interest rates of 100 bps would thus increase or decrease, respectively, the Company’s interest expense by approximately $1.8 million
on an annual basis as of March 31, 2017, as compared to $2.0 million as of December 31, 2016.
The credit exposure of interest rate swap
agreements is represented by the fair value of contracts with a positive fair value at the end of each period, reduced by the effects of master netting agreements, adjusted for counterparty non-performance credit risk assumptions. It is the
Company’s policy to enter into ISDA Master Agreements, with the counterparties to derivative financial instrument contracts, which give the Company the legal right to discharge all or a portion of amounts owed to a counterparty by offsetting
them against amounts that the counterparty owes to the Company.
The fair values of the Company’s interest rate swaps as at March 31, 2017 and
December 31, 2016 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
(In US$ millions)
|
|
Outstanding
Principal
|
|
|
Fair Value
|
|
|
Outstanding
Principal
|
|
|
Fair Value
|
|
|
Related party assets/(liabilities) - interest rate swap agreements
|
|
|
616.6
|
|
|
|
4.2
|
|
|
|
620.3
|
|
|
|
2.4
|
|
|
Other current assets/(liabilities) - interest rate swap agreements
|
|
|
2,815.7
|
|
|
|
(52.0
|
)
|
|
|
2,822.9
|
|
|
|
(55.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency risk
The Company and all of its subsidiaries use the US Dollar as their functional currency because the majority of their revenues and expenses are denominated in
US Dollars. The Company’s reporting currency is also US Dollars. The Company does, however, earn revenue and incur expenses in Canadian Dollars due to the operations of the
West Aquarius
in Canada and as such, there is a risk that
currency fluctuations could have an adverse effect on the value of the Company’s cash flows. The impact of a 10% appreciation or depreciation in the exchange rate of the Canadian Dollar against the US Dollar would not have a material impact on
the Company.
The Company’s foreign currency risk arises from:
|
|
•
|
|
the measurement of monetary assets and liabilities denominated in foreign currencies converted to US Dollars, with the resulting gain or loss recorded as “Foreign exchange gain/(loss)”; and
|
|
|
•
|
|
the impact of fluctuations in exchange rates on the reported amounts of the Company’s revenues and expenses which are denominated in foreign currencies.
|
The Company does not use foreign currency forward contracts or other derivative instruments related to foreign currency exchange risk.
F-15
SEADRILL PARTNERS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Fair values of financial instruments
GAAP emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and should be determined based on the assumptions that
market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, GAAP establishes a fair value hierarchy that distinguishes between market participant assumptions
based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within levels one and two of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions
(unobservable inputs classified within level three of the hierarchy).
Level one input utilizes unadjusted quoted prices in active markets for identical
assets or liabilities that the Company has the ability to access. Level two inputs are inputs other than quoted prices included in level one that are observable for the asset or liability, either directly or indirectly. Level two inputs may include
quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability, other than quoted prices, such as interest rates, foreign exchange rates and yield curves that are observable at
commonly quoted intervals. Level three inputs are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the
determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is
significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or
liability.
The carrying value and estimated fair value of the Company’s financial instruments at March 31, 2017 and December 31, 2016 were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
(In US$ millions)
|
|
Fair
value
|
|
|
Carrying
value
|
|
|
Fair
value
|
|
|
Carrying
value
|
|
|
Cash and cash equivalents
|
|
|
862.4
|
|
|
|
862.4
|
|
|
|
767.6
|
|
|
|
767.6
|
|
|
Amended senior secured credit facility
|
|
|
1,954.4
|
|
|
|
2,858.4
|
|
|
|
1,925.2
|
|
|
|
2,865.7
|
|
|
Other external debt facilities
|
|
|
556.9
|
|
|
|
602.3
|
|
|
|
581.8
|
|
|
|
621.4
|
|
|
Long term debt to related party
|
|
|
147.8
|
|
|
|
156.1
|
|
|
|
153.3
|
|
|
|
160.3
|
|
The carrying value of cash and cash equivalents, which are highly liquid, is a reasonable estimate of fair value and
categorized at level 1 on the fair value measurement hierarchy.
The loans under the Amended Senior Secured Credit Facilities are freely tradable and
their fair value has been set equal to the price at which they were traded on March 31, 2017 and December 31, 2016. This has been categorized at level 1 on the fair value measurement hierarchy.
Loans under other external debt facilities being the $1,450 million Senior Secured Credit Facility, $420 million West Polaris Facility and long term debt with
Seadrill are not freely tradable. As of March 31, 2017 and December 31, 2016 the fair value of the current and long term portion of these debt facilities was derived using the Discounted Cash Flow (DCF) model. A cost of debt of 8.49% was
used to estimate the present value of the future cash flows. This is categorized at level 2 on the fair value measurement hierarchy.
F-16
SEADRILL PARTNERS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Other financial instruments that are measured at fair value on a recurring basis are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value
|
|
|
Fair value measurements
at reporting date using
|
|
|
(In US$
millions)
|
|
March 31, 2017
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments – Interest rate swap contracts (Related party)
|
|
|
4.2
|
|
|
|
—
|
|
|
|
4.2
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
4.2
|
|
|
|
—
|
|
|
|
4.2
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments – Interest rate swap contracts (Related party)
|
|
|
(52.0
|
)
|
|
|
—
|
|
|
|
(52.0
|
)
|
|
|
—
|
|
|
Related party deferred and contingent consideration
|
|
|
(175.9
|
)
|
|
|
—
|
|
|
|
(175.9
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
(227.9
|
)
|
|
|
—
|
|
|
|
(227.9
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value
|
|
|
Fair value measurements
at reporting date using
|
|
|
(In US$ millions)
|
|
December 31,
2016
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments – Interest rate swap contracts (related party)
|
|
|
2.4
|
|
|
|
—
|
|
|
|
2.4
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
2.4
|
|
|
|
—
|
|
|
|
2.4
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments – Interest rate swap contracts
|
|
|
(55.2
|
)
|
|
|
—
|
|
|
|
(55.2
|
)
|
|
|
—
|
|
|
Related party deferred and contingent consideration
|
|
|
(248.8
|
)
|
|
|
—
|
|
|
|
(248.8
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
(304.0
|
)
|
|
|
—
|
|
|
|
(304.0
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair values of interest rate swap contracts are calculated using well-established independent valuation techniques,
applied to contracted cash flows and expected future LIBOR interest rates, and counterparty non-performance credit risk assumptions as of March 31, 2017 and December 31, 2016. The calculation of the credit risk in the swap values is
subject to a number of assumptions including an assumed Credit Default Swap rate based on the Company’s traded debt, plus a curve profile and recovery rate.
The fair value of the related party deferred and contingent consideration payable to Seadrill relating to the purchase of the
West Vela
and the
West
Polaris
are estimated based on future cash outflows discounted back to the present value. The contingent consideration has been discounted to present value using a weighted average cost of capital of 9.5%. These liabilities are considered to be
at estimated market rates. These are categorized at level 2 on the fair value measurement hierarchy.
F-17
SEADRILL PARTNERS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Based on the Company’s latest estimates of the relevant fair value assumption, it recognized a fair
value gain of $21.3 million on the contingent consideration in respect of the acquisition of the
West Polaris
for the quarter ended March 31, 2017. Included in the fair value gain is an out of period gain of $20.9 million. Management has
evaluated the impact of this out-of-period adjustment in 2017 and concluded that this was not material to the financial statements for the quarter ended March 31, 2017 or the estimated results for the year ending December 31, 2017 or to
any previously reported quarterly or estimated annual financial statements.
Credit risk
The Company has financial assets which expose the Company to credit risk arising from possible default by a counterparty. The Company performs ongoing credit
evaluations and maintains reserves for potential credit losses where necessary. The Company in the normal course of business does not demand collateral from its counterparties.
Concentration of Credit Risk
There is a
concentration of credit risk with respect to revenue as the Company has customers that represent more than 10% of total revenues. Refer to Note 3 “Segment information” for an analysis of the Company’s revenue by customer. The market
for the Company’s services is the offshore oil and gas industry, and the customers consist primarily of major oil and gas companies, independent oil and gas producers and government-owned oil companies. Ongoing credit evaluations of the
Company’s customers are performed and generally do not require collateral in the Company’s business agreements. Reserves for potential credit losses are maintained when necessary.
There is a concentration of credit risk with respect to cash and cash equivalents as most of the amounts are deposited with Nordea Bank Finland Plc and Danske
Bank A/S. The Company considers these risks to be remote given the strong credit rating of these banks.
Retained risk
Physical Damage Insurance
Seadrill has purchased hull and
machinery insurance to cover for physical damage to its drilling units and those of the Company and charges the Company for the associated cost for its respective drilling units. The Company retains the risk for the deductibles relating to physical
damage insurance on the Company’s fleet. The deductible is currently a maximum of $5.0 million per occurrence.
The Company has elected to place an
insurance policy for physical damage to rigs and equipment caused by named windstorms in the U.S. Gulf of Mexico (
West Sirius
,
West Capricorn
,
West Vela
and
West Auriga
) with a Combined Single Limit of $100.0 million in
the annual aggregate, which includes loss of hire. The policy expires April 30, 2018.
Loss of Hire Insurance
Seadrill purchases insurance to cover for loss of revenue for their operational rigs in the event of extensive downtime caused by physical damage to its
drilling units and those of the Company, where such damage is covered under Seadrill’s physical damage insurance, and charges the Company for the cost related to the Company’s fleet.
The loss of hire insurance has a deductible period of 60 days after the occurrence of physical damage. Thereafter, insurance policies according to which the
Company is compensated for loss of revenue are limited to 290 days per event and aggregated per year. The daily indemnity is 75% of the contracted dayrate. The Company retains the risk related to loss of hire during the initial 60 day period, as
well as any loss of hire exceeding the number of days permitted under insurance policy. If the repair period for any physical damage exceeds the number of days permitted under the Company’s loss of hire policy, it will be responsible for the
costs in such period. The Company does not purchase loss of hire insurance on the
T-15
and
T-16
.
F-18
SEADRILL PARTNERS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Protection and Indemnity Insurance
Seadrill purchases protection and indemnity insurance and excess liability insurance for personal injury liability for crew claims, non-crew claims and
third-party property damage including oil pollution from the drilling units to cover claims up to $250.0 million per event and in the aggregate for the
West Vencedor, T-15
and
T-16,
up to $300.0 million per event and in the aggregate
for the
West Leo
and
West Capella
, $400.0 million per event and in the aggregate for the
West Aquarius
and
West Polaris,
up to $500.0 million per event and in the aggregate for the
West Capricorn
and
West
Sirius;
and up to $750.0 million per event and in the aggregate for the
West Auriga
and the
West Vela
.
The Company retains the risk for
the deductible of up to $0.5 million per occurrence relating to protection and indemnity insurance.
F-19
SEADRILL PARTNERS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8 – Related party transactions
The Company has entered into certain agreements with affiliates of Seadrill to provide certain management and administrative services, as well as technical and
commercial management services. Seadrill has also provided financing arrangements as described within this note below.
Net expenses/(income) from
Seadrill:
|
|
|
|
|
|
|
|
|
|
|
(In US$ millions)
|
|
Three months ended
March 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Management and administrative fees (a) and (b)
|
|
|
17.5
|
|
|
|
19.0
|
|
|
Rig operating costs (c)
|
|
|
6.5
|
|
|
|
7.3
|
|
|
Insurance premiums (d)
|
|
|
2.9
|
|
|
|
5.1
|
|
|
Interest expense (e)
|
|
|
1.7
|
|
|
|
3.4
|
|
|
Derivative (gain)/ losses (e)
|
|
|
(1.4
|
)
|
|
|
8.4
|
|
|
Commitment fee on revolving credit facility (f)
|
|
|
0.5
|
|
|
|
0.5
|
|
|
Bareboat charters expense (g)
|
|
|
2.3
|
|
|
|
2.0
|
|
|
Other revenues - Nigerian operations (h)
|
|
|
(1.3
|
)
|
|
|
(2.0
|
)
|
|
Accretion of discount on deferred consideration (k)
|
|
|
4.1
|
|
|
|
4.4
|
|
|
Other revenues- Inventory sales
|
|
|
(1.4
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net related party expenses
|
|
|
31.4
|
|
|
|
48.1
|
|
|
|
|
|
|
|
|
|
|
|
Receivables/(payables) from related parties:
|
|
|
|
|
|
|
|
|
|
|
(In US$ millions)
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
|
Trading balances due from Seadrill and subsidiaries (i)
|
|
|
49.9
|
|
|
|
80.6
|
|
|
Trading balances due to Seadrill and subsidiaries (i)
|
|
|
(147.6
|
)
|
|
|
(192.0
|
)
|
|
$440 million rig financing agreement with Seadrill (T-15 and T-16) (j)
|
|
|
(119.2
|
)
|
|
|
(119.1
|
)
|
|
West Vencedor loan agreement with Seadrill (j)
|
|
|
(37.0
|
)
|
|
|
(41.2
|
)
|
|
Deferred and contingent consideration to related party - short term portion (k)
|
|
|
(44.3
|
)
|
|
|
(45.6
|
)
|
|
Deferred and contingent consideration to related party - long term portion (k)
|
|
|
(131.6
|
)
|
|
|
(157.6
|
)
|
|
Derivatives with Seadrill - interest rate swaps (l)
|
|
|
4.2
|
|
|
|
2.4
|
|
(a)
Management and administrative services agreements
–
In connection with the
initial public offering (“IPO”), the Company entered into a management and administrative services agreement with Seadrill Management, a wholly owned subsidiary of Seadrill, pursuant to which Seadrill Management provides the Company
certain management and administrative services. The services provided by Seadrill Management are charged at cost plus management fee to be agreed upon from time to time by the parties. In April 2016, the agreement was extended for an indefinite term
and can be terminated by the Company by providing 90 days written notice. During the three months ended March 31, 2017 and March 31, 2016 this fee ranged from 4.85% to 8% of costs and expenses incurred in connection with providing these
services.
(b)
Technical and administrative service agreements
– In connection with the IPO, subsidiaries of the
Company entered into certain advisory, technical and/or administrative services agreement with subsidiaries of Seadrill. The services provided by Seadrill’s subsidiaries are charged at cost plus service fee equal of approximately 5% of
Seadrill’s costs and expenses incurred in connection with providing these services.
F-20
SEADRILL PARTNERS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(c)
Rig operating costs
–
relates to rig operating costs
charged by the Angolan service company for the
West Polaris
for the three months ended March 31, 2017 and for the
West Vencedor
for the three months ended March 31, 2016
.
These
costs are charged by Seadrill at a markup of approximately 5%.
(d)
Insurance premiums
– the Company’s
drilling units are insured by a subsidiary of Seadrill and the insurance premiums incurred are recharged to the Company.
(e)
Interest
expense and loss on derivatives
-
relates to interest charged on related party loan arrangements outlined in (j) and the recharge on interest rate swaps with Seadrill. See section (l) for further details on
derivative arrangements.
(f)
$100 million revolving credit facility –
In October 2012 OPCO entered into a $300.0
million revolving credit facility with Seadrill. The facility is for a term of 5 years and bears interest at a rate of LIBOR plus 5% per annum on the drawn balance, with an annual 2% commitment fee on the undrawn balance. On March 1, 2014,
the revolving credit facility was amended to reduce the maximum borrowing limit from $300.0 million to $100.0 million. This facility remains undrawn.
(g)
Bareboat charters
- In connection with the transfer of the
West Aquarius
operations to Canada, the
West Aquarius
drilling contract was assigned to Seadrill Canada Ltd., a wholly owned subsidiary of Seadrill Operating LP, necessitating certain changes to the related party contractual arrangements relating to the
West
Aquarius
. Seadrill China Operations Ltd, the owner of the
West Aquarius
, had previously entered into a bareboat charter arrangement with Seadrill Offshore AS, a wholly-owned subsidiary of Seadrill, providing Seadrill
Offshore AS with the right to use the
West Aquarius
. In October 2012, this bareboat charter arrangement was replaced with a new bareboat charter between Seadrill China Operations Ltd and Seadrill Offshore AS, and at the same
time, Seadrill Offshore AS entered into a bareboat charter arrangement providing Seadrill Canada Ltd. with the right to use the
West Aquarius
in order to perform its obligations under the drilling contract. The contract was
terminated effective April 19, 2017 on completion of the rig’s contract with Hibernia Management. The net effect to the Company of these bareboat charter arrangements was a cost of $25,500 per day, for the period.
Until December 31, 2016 Seadrill T-15 Ltd. and Seadrill International Ltd. were each party to a bareboat charter agreement with Seadrill UK Limited, a
wholly owned subsidiary of Seadrill Limited. Under this arrangement, the difference in the charter hire rate between the two charters was retained by Seadrill UK Ltd., in the amount of approximately $820 per day. Similarly, until
December 31, 2016 Seadrill T-16 Ltd. and Seadrill International Ltd. were each party to a bareboat charter agreement with Seadrill UK Limited. Under this arrangement, the difference in the charter hire rate between the two charters was retained
by Seadrill UK Ltd., in the amount of approximately $770 per day. All of these agreements were terminated effective December 31, 2016.
(h)
Other revenues - Nigeria -
The Company incurs certain operating costs on behalf of Seadrill drilling units and recharges them
at a markup of approximately 5%. Other revenues are earned within the Company’s Nigerian service company from Seadrill for certain services, including the provision of onshore and offshore personnel, which the Company provided to
Seadrill’s
West Jupiter
and
West Saturn
drilling rigs.
(i)
Trading
balances
–
Receivables and payables with Seadrill and its subsidiaries are comprised primarily of management fees, advisory and administrative services, as well as, accrued interest. In addition, certain receivables
and payables arise when the Company pays an invoice on behalf of a related party and vice versa. Receivables and payables are generally settled quarterly in arrears. Trading balances to Seadrill and its subsidiaries are unsecured, interest free, and
are intended to be settled in the ordinary course of business.
(j)
Rig financing agreements and loan agreements
–
See Note 11 “Debt” of the Company’s audited 2016 financial statements for details of the $440 million Rig Financing Agreement and
West Vencedor
Loan Agreement.
F-21
SEADRILL PARTNERS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(k)
Deferred consideration to related party -
On the acquisition of the
West Vela
in 2014 the Company recognized a long term deferred consideration balance of $61.7 million and a long term contingent consideration balance of $49.5 million. The short term deferred and contingent consideration balance
was $25.8 million.
On the acquisition of the
West Polaris
in 2015 the Company recognized a Seller’s Credit balance of $44.6 million,
a long term contingent consideration balance of $63.7 million and a short term consideration balance of $31.6 million.
As of March 31, 2017 and
December 31, 2016 the outstanding amounts of these balances which are presented on the Consolidated Balance Sheet, are as follows:
|
|
|
|
|
|
|
|
|
|
|
(In US$ millions)
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
|
Current deferred and contingent consideration
|
|
|
|
|
|
|
|
|
|
West Vela
|
|
|
(37.3
|
)
|
|
|
(37.3
|
)
|
|
West Polaris
|
|
|
(7.0
|
)
|
|
|
(8.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total current deferred and contingent consideration
|
|
|
(44.3
|
)
|
|
|
(45.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Non current deferred and contingent consideration
|
|
|
|
|
|
|
|
|
|
West Vela
|
|
|
(62.2
|
)
|
|
|
(67.8
|
)
|
|
West Polaris
|
|
|
(69.4
|
)
|
|
|
(89.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total non current deferred and contingent consideration
|
|
|
(131.6
|
)
|
|
|
(157.6
|
)
|
|
|
|
|
|
|
|
|
|
|
(l)
Derivatives with Seadrill - Interest rate swaps -
As of March 31, 2017, the Company was
party to interest rate swap agreements with Seadrill for a combined outstanding principal amount of approximately $616.6 million at rates between 1.10% per annum and 1.93% per annum. The swap agreements mature between July 2018 and
December 2020. Refer to Note 7 “Risk management and financial instruments “ for further information.
Other agreements and
transactions with Seadrill
$143 million Loan Agreement
Effective December 17, 2015, an operating subsidiary of the Company borrowed from a subsidiary of Seadrill $143 million (the “
West Sirius
loan”) in order to provide sufficient immediate liquidity to meet the terms of its bareboat charter termination payment in connection with the
West Sirius
contract termination. Concurrently, Seadrill borrowed $143.0 million (the
“Seadrill loan”) from a rig owning subsidiary of the Company in order to restore its liquidity with respect to the
West Sirius
loan.
Each loan bears interest at a rate of LIBOR plus a margin of 0.56% and matures in August 2017. Each of the loan parties understand and agree that the loan
agreements act in parallel with each other. The outstanding balance of each loan as at March 31, 2017 was $12.6 million (December 31, 2016: $39.4 million).
These transactions have been classified within current and long-term portions of “Amount due from related party” and “Related party
payable” in the Consolidated Balance Sheet.
Spare parts agreement with Seadrill
During 2015, a subsidiary of Seadrill entered into an agreement with the Company to store spare parts of the Company’s
West Sirius
rig while it is
stacked. Seadrill is responsible at its own cost for the moving and storing of the spare parts during the stacking period. Seadrill may use the spare parts of the
West Sirius
during the stacking period, but must replace them as required by
the Company at its own cost.
F-22
SEADRILL PARTNERS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Indemnifications and guarantees
Tax indemnifications
Under the Omnibus Agreement with
Seadrill, and purchase and sale agreements relating to acquisitions from Seadrill subsequent to the IPO, Seadrill has agreed to indemnify the Company against any tax liabilities arising from the operation of the assets contributed or sold to the
Company prior to the time they were contributed or sold.
Performance guarantees
Seadrill provides performance guarantees in connection with the Company’s drilling contracts in favor of customers of the Company, amounting to a total of
$575.1 million as at March 31, 2017 (December 31, 2016: $184.5 million).
Environmental and other indemnifications
Under the Omnibus Agreement, and purchase and sale agreements relating to acquisitions from Seadrill subsequent to the IPO, Seadrill has agreed to indemnify
the Company against certain environmental and toxic tort liabilities with respect to the assets that Seadrill contributed or sold to the Company to the extent arising prior to the time they were contributed or sold.
Loan Guarantees
Seadrill is a guarantor under the
(i) the $420 million
West Polaris
Facility and (ii) the $1,450 million Senior Secured Credit Facility.
Note 9 – Commitments and
contingencies
Legal proceedings
From time
to time the Company is a party, as plaintiff or defendant, to lawsuits in various jurisdictions in the ordinary course of business or in connection with its acquisition or disposal activities. The Company’s best estimate of the outcome of the
various disputes has been reflected in these financial statements as of March 31, 2017.
West Leo
The Company received notification of a force majeure occurrence on October 1, 2016 in respect of the
West Leo
which was operating for Tullow Ghana
Limited (“Tullow”) in Ghana. The Company filed a claim in the English High Court formally disputing the occurrence of force majeure and seeking declaratory relief from the High Court. Tullow subsequently terminated the drilling contract on
December 1, 2016 for (a) 60-days claimed force majeure, or (b) in the alternative, frustration of contract, or (c) in the further alternative, for convenience. The Company does not accept that the contract has been terminated by
the occurrence of force majeure under the terms of the drilling contract and/or that the contract has been discharged by frustration. Accordingly, the Company’s claim in the English High Court was amended to reflect this. In the event of
termination for convenience, the Company is entitled to an early termination fee of 60% of the remaining contract backlog, subject to an upward or downward adjustment depending on the work secured for the
West Leo
over the remainder of the
contract term, plus other direct costs incurred as a result of the early termination. The total amount we are seeking to recover is $277.0 million plus interest.
Patent infringement
In January 2015, a subsidiary of
Transocean Ltd. filed suit against certain of our subsidiaries for patent infringement. The suit alleges that two of our drilling rigs that operate in the U.S. Gulf of Mexico violated Transocean patents relating to dual activity drilling. In the
same year, we challenged the validity of the patents via the Inter Parties Review process within the U.S. Patent and Trademark Office which ultimately stayed the litigation. The IPR board held in March 2017 that the patents were valid. Despite this
finding, we do not believe that our rigs infringe the Transocean patents, which have now expired, and we continue to defend ourselves
F-23
SEADRILL PARTNERS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
vigorously against this suit. We do not believe that the ultimate liability, if any, resulting from this litigation will have a material effect on our financial position. We have not previously
recognized any related loss contingency in our Consolidated Financial Statements as of March 31, 2017 as we do not believe the loss to be probable.
The Company is not aware of any other legal proceedings or claims that the Company believes will have, individually or in the aggregate, a material adverse
effect on the Company.
Pledged Assets
The
book value of assets pledged under financing arrangements at March 31, 2017 was $5,299.7 million (December 31, 2016: $5,340.2 million).
Purchase commitments
At March 31, 2017 and
December 31, 2016 the Company had no contractual purchase commitments.
Note 10 - Earnings per unit and cash distributions
The calculations of basic and diluted earnings per unit are presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
(In US$ millions)
|
|
|
|
|
|
|
|
Net income allocated to:
|
|
|
|
|
|
|
|
|
|
Common unitholders
|
|
|
56.8
|
|
|
|
36.1
|
|
|
Subordinated unitholders
|
|
|
—
|
|
|
|
—
|
|
|
Seadrill Member Interest
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Seadrill Partners LLC owners
|
|
|
56.8
|
|
|
|
36.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average units outstanding (basic and diluted)
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
Common unitholders
|
|
|
75,278
|
|
|
|
75,278
|
|
|
Subordinated unitholders
|
|
|
16,543
|
|
|
|
16,543
|
|
|
Earnings per unit (basic and diluted):
|
|
|
|
|
|
|
|
|
|
Common unitholders
|
|
|
0.75
|
|
|
|
0.48
|
|
|
Subordinated unitholders
|
|
|
0.00
|
|
|
|
0.00
|
|
|
Cash distributions declared and paid in the period per common unit
(1) (2)
|
|
|
0.10
|
|
|
|
0.25
|
|
|
(1)
|
Distributions were declared and paid only with respect to the common units in 2017 and 2016.
|
|
(2)
|
The 2017 cash distribution relates to distributions declared for the three months ended December 31, 2016 which was paid on February 14, 2017.
|
Earnings per unit is calculated as described in Note 16 “Earnings per unit and cash distributions” to the 2016 audited financial
statements.
The distribution paid in 2017 and 2016 were less than the Minimum Quarterly Distribution (as defined in the Company’s First Amended and
Restated Operating Agreement). Arrearages in the payment of the minimum quarterly distribution on the common units must be paid before any distributions of available cash from operating surplus may be paid in the future on the subordinated units.
F-24
SEADRILL PARTNERS LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 11 – Subsequent Events
Amendments to certain credit facilities
In April
2017, Seadrill, on behalf of the Company, and Seadrill’s banking group agreed to extend a series of key dates as part of Seadrill’s ongoing restructuring efforts. Seadrill has reached agreements to extend the milestone to implement a
restructuring plan from April 30, 2017 to July 31, 2017 and also to extend the related covenant amendments and waivers expiring on June 30, 2017 to September 30, 2017.
These covenants relate to the following secured credit facilities:
|
|
•
|
|
$1,450 million Senior Secured Credit Facility;
|
|
|
•
|
|
$420 million West Polaris Facility; and
|
|
|
•
|
|
$440 million Rig Financing Agreement.
|
See Note 11 “Debt” to the notes to the Company’s 2016
audited financial statements and Note 6 “Debt” herein for further information.
F-25
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
|
|
|
|
|
|
|
|
|
|
|
SEADRILL PARTNERS LLC
|
|
Date: June 27, 2017
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Mark Morris
|
|
|
|
|
|
|
|
Name: Mark Morris
Title: Chief Executive
Officer
|
Seadrill Partners (NYSE:SDLP)
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