Valaris Ltd 10-K

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations INTRODUCTION Our Business We are a leading provider of offshore contract drilling services to the international oil and gas industry. We currently own an offshore drilling rig fleet of 61 rigs, with drilling operations in almost every major offshore market across five continents. Our rig fleet includes 11 drillships, four dynamically positioned semisubmersible rigs, one moored semisubmersible rig, 45 jackup rigs and a 50% equity interest in ARO, our 50/50 joint venture with Saudi Aramco, which owns an additional seven rigs. We operate the world's largest fleet amongst competitive rigs, including one of the newest ultra-deepwater fleets in the industry and a leading premium jackup fleet. Our customers include many of the leading national and international oil companies, in addition to many independent operators. We are among the most geographically diverse offshore drilling companies, with current operations spanning nine countries on five continents. The markets in which we operate include the Gulf of Mexico, the North Sea, the Middle East, West Africa, Australia and Southeast Asia. We provide drilling services on a day rate contract basis. Under day rate contracts, we provide an integrated service that includes the provision of a drilling rig and rig crews for which we receive a daily rate that may vary between the full rate and zero rate throughout the duration of the contractual term, depending on the operations of the rig. We also may receive lump-sum fees or similar compensation for the mobilization, demobilization and capital upgrades of our rigs. Our customers bear substantially all of the costs of constructing the well and supporting drilling operations, as well as the economic risk relative to the success of the well. Our Industry Operating results in the offshore contract drilling industry are highly cyclical and are directly related to the demand for and the available supply of drilling rigs. Low demand and excess supply can independently affect day rates and utilization of drilling rigs. Therefore, adverse changes in either of these factors can result in adverse changes in our industry. While the cost of moving a rig may cause the balance of supply and demand to vary somewhat between regions, significant variations between regions are generally of a short-term nature due to rig mobility. Following several years of market volatility beginning with oil price declines in 2014, as we entered 2020, we expected that volatility to continue over the near-term with the expectation that long-term oil prices would remain at levels sufficient to support a continued gradual recovery in the demand for offshore drilling services. We were focused on opportunities to put our rigs to work, manage liquidity, extend our financial runway, and reduce debt as we sought to navigate the extended market downturn and improve our balance sheet. Recognizing our ability to maintain a sufficient level of liquidity to meet our financial obligations depended upon our future performance, which is subject to general economic conditions, industry cycles and financial, business and other factors affecting our operations, many of which are beyond our control, we had significant financial flexibility within our capital structure to support our liability management efforts. However, starting in early 2020, the COVID-19 pandemic and the response thereto negatively impacted the macro-economic environment and global economy. Global oil demand fell sharply at the same time global oil supply increased as a result of certain oil producers competing for market share, leading to a supply glut. As a consequence, the price of Brent crude oil fell 61 from around $60 per barrel at year-end 2019 to around $20 per barrel in mid-April 2020. In response to dramatically reduced oil price expectations for the near term, our customers reviewed, and in most cases lowered significantly, their capital expenditure plans in light of revised pricing expectations. This caused our customers to cancel or shorten the duration of many of our 2020 drilling contracts, cancel future drilling programs and seek pricing and other contract concessions, which led to material operating losses and liquidity constraints for us. While there has been some recent improvement to Brent crude oil prices, to approximately $65 per barrel in February 2021, there is still a significant amount of uncertainty around the sustainability of the improvement in oil prices to support a recovery in demand for offshore drilling services. Additionally, the full impact that the pandemic and the decline in oil prices will have on our results of operations, financial condition, liquidity and cash flows is uncertain due to numerous factors, including the duration and severity of the outbreak, the effectiveness of the ongoing vaccine rollout, the duration of the oil price and demand decline, and the extent of disruptions to our operations. To date, the COVID-19 pandemic has resulted in only limited operational downtime. Our rigs have had to shut down operations while crews are tested and incremental sanitation protocols are implemented and while crew changes have been restricted as replacement crews are quarantined. We continue to incur additional personnel, housing and logistics costs in order to mitigate the potential impacts of COVID-19 to our operations. In limited instances, we have been reimbursed for these costs by our customers. Our operations and business may be subject to further economic disruptions as a result of the spread of COVID-19 among our workforce, the extension or imposition of further public health measures affecting supply chain and logistics, and the impact of the pandemic on key customers, suppliers, and other counterparties. There can be no assurance that these, or other issues caused by the COVID-19 pandemic, will not materially affect our ability to operate our rigs in the future. We expect that these challenges will continue for drilling contractors as customers wait to gain additional clarity on commodity pricing and seek to reduce costs in the near-term by attempting to renegotiate existing contract terms. We believe the current market and macro-economic conditions will create a challenging contracting environment through 2021 and into 2022 and potentially beyond. The combined effects of the global COVID-19 pandemic, the significant decline in the demand for oil and the substantial surplus in the supply of oil have resulted in significantly reduced demand and day rates for offshore drilling provided by the Company and increased uncertainty regarding long-term market conditions. These recent events have had a significant adverse impact on our current and expected liquidity position and financial runway and led to the filing of the Chapter 11 Cases. While we have and are continuing to pursue a variety of cost-cutting measures such as further reductions in corporate overhead and discretionary expenditures, reductions in capital expenditures and an increased focus on operational efficiencies, we determined that based on our significant level of indebtedness and the circumstances described above that a comprehensive restructuring of our indebtedness was needed to improve our financial position. As more fully described in “ Note 2 – Chapter 11 Proceedings and Ability to Continue as a Going Concern” to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data", the Company will undergo a financial restructuring that is intended to reduce debt levels substantially, support continued operations during the current lower demand environment and provide a robust financial platform to take advantage of market recovery over the long-term. For additional information related to drilling rig supply and demand, see "Business Environment" below. 62 Chapter 11 Proceedings and Ability to Continue as a Going Concern On August 19, 2020 (the “Petition Date”), the Debtors filed voluntary petitions for reorganization under chapter 11 of the Bankruptcy Code in the Bankruptcy Court. As part of the chapter 11 cases under the caption In re Valaris plc, et al., Case No. 20-34114 (MI) (the “Chapter 11 Cases”), the Debtors were granted “first-day” relief which enabled the Company to continue operating without interruption or disruption to its relationships with its customers and vendors or its high-quality service delivery. In particular, employee pay and benefits are expected to continue without interruption. On August 18, 2020, the Debtors entered into the Original RSA with the Consenting Noteholders. On February 5, 2021, the Debtors entered into the Amended RSA with the Consenting Lenders and Consenting Noteholders, which contemplates that the Company will implement the restructuring through the Chapter 11 Cases pursuant to a plan of reorganization and the various related transactions set forth in or contemplated by the Amended RSA. Holders of approximately 100% of the total commitments outstanding under our revolving credit facility and holders of approximately 72% of the aggregate amount of our Senior Notes outstanding are party to the Amended RSA. Pursuant to the Amended RSA the holders of the Company's Senior Notes (as defined below) will receive their pro rata share of (1) approximately 39% of new common stock issued after consummation of the restructuring (the “New Equity”) and (2) approximately 97.6% of the subscription rights to participate in the rights offering (the "Rights Offering") through which the Company will offer $550 million of new first lien secured notes (the "New Secured Notes"), which includes the Backstop Premium (as defined below). Additionally, holders of the Senior Notes who participate in the Rights Offering will receive their pro rata share of approximately 29.3% of the New Equity pursuant to the Rights Offering, together with the RCF Lenders (as defined below) who will receive their pro rata share of approximately 0.7% of the New Equity, and senior noteholders who agreed to backstop the Rights Offering will receive their pro rata share of approximately 2.63% of the New Equity, together with 0.07% of the New Equity reserved for RCF Lenders and approximately $48.8 million in New Secured Notes reserved for the holders of the Senior Notes and approximately $1.2 million in New Secured Notes reserved for the RCF Lenders (the "Backstop Premium"). Senior noteholders with respect to certain notes would receive an aggregate cash payment of $26 million in connection with settlement of certain alleged claims against the Company. A reorganization pursuant to the terms of the Amended RSA provided lenders under the revolving credit facility (“RCF Lenders”) with an option to select between two alternative treatments: (1) the ability to participate on a pro rata basis in up to 14% of the Rights Offering plus a recovery of up to 30.8% of the New Equity and up to $45 million in cash, or (2) a pro rata recovery of up to 27.8% of the New Equity and up to $116.2 million in cash. Following the results of that election, the two RCF Lenders who chose to participate in the Rights Offering will receive their pro rata share of (1) approximately 5.3% of the New Equity, (2) approximately 2.4% of the New Secured Notes (and associated New Equity), (3) approximately $7.8 million in cash, and (4) their pro rata share of the Backstop Premium. The RCF Lenders who entered into the Amended RSA and elected not to participate in the Rights Offering will receive their pro rata share of (1) approximately 23.0% of the New Equity, and (2) approximately $96.1 million in cash. The Amended RSA provides that holders of general unsecured claims will receive payment in full or reinstatement pursuant to the Bankruptcy Code (excluding claims against the entities party to, or guaranteeing, the new build contracts to be rejected by the Company, which shall receive their liquidation value unless otherwise agreed). Moreover, if holders of equity interests vote as a class in support of the restructuring, they will each receive their pro rata share of 7-year warrants to purchase up to 7% of New Equity (subject to dilution), with a strike price set at a price per share equal to the value at which the senior noteholders would receive a 100% recovery on their claims including accrued interest up to the Petition Date, as applicable. Lastly, to the extent amounts are borrowed, lenders under the DIP Facility (as defined below) will receive payment in full in cash, unless otherwise agreed and certain other fees owed to the DIP Lenders. 63 The Amended RSA contains certain covenants on the part of Valaris and the Consenting Creditors, including commitments by the Consenting Creditors to vote in favor of a plan of reorganization and commitments of Valaris and the Consenting Creditors to negotiate in good faith to finalize the documents and agreements governing the restructuring. The Amended RSA also provides for certain conditions to the obligations of the parties and for termination upon the occurrence of certain events, including without limitation, the failure to achieve certain milestones and certain breaches by the parties under the Amended RSA. Subject to certain exceptions, under the Bankruptcy Code, the filing of the Chapter 11 Cases automatically enjoined, or stayed, the continuation of most judicial or administrative proceedings or filing of other actions against the Debtors or their property to recover, collect or secure a claim arising prior to the date of the Chapter 11 Cases. Notwithstanding the general applicability of the automatic stay described above, governmental authorities may determine to continue actions brought under their regulatory powers. Although Valaris intends to pursue the restructuring in accordance with the terms set forth in the Amended RSA, there can be no assurance that Valaris will be successful in completing a restructuring or any other similar transaction on the terms set forth in the Amended RSA, on different terms or at all. Among other things, the Amended RSA includes an outside date milestone requiring the Company’s emergence from chapter 11 by no later than June 15, 2021 (subject to a potential 60-day extension pursuant to the terms of the Amended RSA). Other Chapter 11 Financial Disclosures Pre-petition Charges On August 18, 2020, the Company entered into the Backstop Commitment Agreement with certain backstop parties. In connection with this agreement, the Debtors paid a commitment fee of $20.0 million, in cash prior to the Petition Date. We have reported the backstop commitment fee and legal and other professional advisor fees incurred in relation to the Chapter 11 Cases, but prior to the Petition Date, as General and administrative expenses in our Consolidated Statement of Operations for the year ended December 31, 2020 in the amount of $64.7 million. Reorganization Items Expenditures, gains and losses that are realized or incurred by the Debtors as of or subsequent to the Petition Date and as a direct result of the Chapter 11 Cases are reported as Reorganization items, net in our Consolidated Statement of Operations for the year ended December 31, 2020. These costs include legal and other professional advisory service fees pertaining to the Chapter 11 Cases, all adjustments made to the carrying amount of certain pre-petition liabilities reflecting claims expected to be allowed by the Bankruptcy Court, contract items related to rejecting and amending certain operating leases ("Contract items") and DIP Facility fees. 64 The following table provides information about reorganization items incurred during the year ended December 31, 2020 , as of or subsequent to the Petition Date (in millions): Year Ended December 31, 2020 Write-off of unamortized debt discounts, premiums and issuance costs $ 447.9 Contract items (11.5) Reorganization items (non-cash) 436.4 DIP Facility fees 20.0 Professional fees 66.8 Contract items 4.4 Reorganization items (fees) 91.2 Total reorganization items, net $ 527.6 Reorganization items (fees) unpaid $ 61.2 Reorganization items (fees) paid $ 30.0 65 Liabilities Subject to Compromise The Debtors' pre-petition unsecured senior notes and related unpaid accrued interest as of the Petition Date have been classified as Liabilities Subject to Compromise on our Consolidated Balance Sheets. The liabilities are reported at the amounts expected to be allowed as claims by the Bankruptcy Court. Liabilities subject to compromise at December 31, 2020 consist of the following (in millions): December 31, 2020 6.875% Senior notes due 2020 $ 122.9 4.70% Senior notes due 2021 100.7 4.875% Senior notes due 2022 620.8 3.00% Exchangeable senior notes due 2024 849.5 4.50% Senior notes due 2024 303.4 4.75% Senior notes due 2024 318.6 8.00% Senior notes due 2024 292.3 5.20% Senior notes due 2025 333.7 7.375% Senior notes due 2025 360.8 7.75% Senior notes due 2026 1,000.0 7.20% Debentures due 2027 112.1 7.875% Senior notes due 2040 300.0 5.40% Senior notes due 2042 400.0 5.75% Senior notes due 2044 1,000.5 5.85% Senior notes due 2044 400.0 Amounts drawn under Revolving Credit Facility 581.0 Accrued Interest on Senior Notes, Exchangeable Senior Notes, Debentures and Revolving Credit Facility 203.5 Rig holding costs (1) 13.9 Total liabilities subject to compromise $ 7,313.7 (1) Represents the holding costs incurred to maintain VALARIS DS-13 and VALARIS DS-14 in the shipyard until the delivery date. Liquidity and Debt Maturities As discussed in " Note 2 - Chapter 11 Proceedings and Ability to Continue as a Going Concern" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data", we have filed the Chapter 11 Cases to effect a comprehensive restructuring of our indebtedness. The commencement of the Chapter 11 Cases on August 19, 2020, constituted an event of default under our Senior Notes and revolving credit facility. Any efforts to enforce payment obligations under the Senior Notes, including any rights to require the repurchase by the Company of the 2024 Convertible Notes upon the NYSE delisting of the Class A ordinary shares, and revolving credit facility are automatically stayed as a result of the filing of the Chapter 11 Cases. The $6.5 billion aggregate principal amount of Senior Notes outstanding as well as $581.0 million outstanding borrowings under our revolving credit facility as of the Petition Date are classified as Liabilities Subject to Compromise in our Consolidated Balance Sheet as of December 31, 2020. On September 25, 2020, following approval by the Bankruptcy Court, we entered into a senior secured superpriority debtor-in-possession term loan credit agreement (the “DIP Credit Agreement”), by and among the Company and certain wholly owned subsidiaries of the Company, as borrowers, the lenders party thereto and Wilmington Savings Fund Society, FSB, as administrative agent and security trustee, in an aggregate amount not to exceed $500.0 million (the “DIP Facility”) to provide liquidity during the pendency of the Chapter 11 Cases. On 66 February 5, 2021, we entered into an amendment to the Backstop Commitment Agreement, which we expect to provide exit financing in the form of a fully backstopped rights offering to senior noteholders and the RCF Lenders for $550 million of New Secured Notes. We expect the DIP Facility will provide sufficient liquidity for us during the pendency of the Chapter 11 Cases. Additionally, we expect the exit financing will provide the necessary liquidity to support ongoing operations and working capital needs. As of December 31, 2020, we had $325.8 million in cash and there were no borrowings outstanding under the DIP Credit Agreement. For the duration of the Chapter 11 Cases, our operations and our ability to develop and execute our business plan are subject to a high degree of risk and uncertainty associated with the Chapter 11 Cases. The outcome of the Chapter 11 Cases is dependent upon factors that are outside of our control, including actions of the Bankruptcy Court and our creditors. There can be no assurance that we will confirm and consummate a plan of reorganization as contemplated by the Amended RSA or complete another plan of reorganization with respect to the Chapter 11 Cases and as such, there is substantial doubt about our ability to continue as a going concern. Further, we have concluded that management’s plans do not alleviate the substantial doubt about our ability to continue as a going concern brought about by the significant risks and uncertainties related to our liquidity and Chapter 11 Cases for a period of one year after the date that the financial statements are issued. See "Liquidity and Capital Resources" below and " Note 2 – Chapter 11 Proceedings and Ability to Continue as a Going Concern” to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for additional information. Backlog As of December 31, 2020, our backlog was $1.2 billion as compared to $2.5 billion as of December 31, 2019. Our floater backlog declined $641.6 million and our jackup backlog declined $421.7 million. The decrease in our backlog was due to customer contract cancellations, customer concessions and revenues realized, partially offset by the addition of backlog from new contract awards and contract extensions. Our other segment backlog declined $184.2 million due to contract concessions and revenues realized. Our backlog excludes ARO's backlog, but includes backlog from our rigs leased to ARO at the contractual rates. Contract rates with ARO are subject to adjustment resulting from the shareholder agreement. See " Note 5 - Equity Method Investment in ARO" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for additional information. As revenues are realized and if we experience further customer contract cancellations, we may continue to experience declines in backlog, which would result in a decline in revenues and operating cash flows over the near-term. Contract backlog was adjusted for drilling contracts signed, terminated or concessions granted after each respective balance sheet date but prior to filing each annual report on March 2, 2021 and February 21, 2020, respectively. BUSINESS ENVIRONMENT Floaters The floater contracting environment remains challenging due to limited demand and excess supply. Floater demand has declined significantly following the decline in commodity prices in 2014 which caused our customers to reduce capital expenditures, particularly for capital-intensive, long-lead deepwater projects, resulting in the cancellation and delay of drilling programs. Floater demand declined materially in March and April 2020, as our customers reduced capital expenditures particularly for capital-intensive, long-lead deepwater projects in the wake of oil price declines from around $60 per barrel at year-end 2019 to around $20 per barrel in mid-April 2020. The decline in demand has resulted in the cancellation and delay of drilling programs and the termination of drilling contracts. 67 During 2020, we received notices of termination, requests for concessions, cancellation and/or deferral of drilling programs by operators and we may receive additional requests for concessions, termination and/or deferral notices during the pendency of the current market environment. During the first quarter of 2020, VALARIS DS-12 was awarded a one-well contract that commenced in February 2020. VALARIS MS-1 was awarded a three-well contract that is expected to commence in the second quarter of 2021 and has an estimated duration of 155 days. VALARIS 8505 was awarded a one-well contract that was expected to commence in mid-November 2020, but is now expected to commence in June 2021 with an estimated duration of 80 days. In March 2020, VALARIS DS-8 experienced a non-drilling incident while operating offshore Angola, resulting in the blowout preventer (BOP) stack being disconnected from the riser while the rig was moving between well locations. The BOP stack, which we later recovered, dropped to the seabed floor, clear of any subsea structures. No injuries, environmental pollution or third-party damage resulted from the BOP stack being disconnected. As a result of the incident, the operator terminated the contract. The termination resulted in a decline in our contracted revenue backlog of approximately $150 million. We carried loss of hire insurance covering $602,500 per day, after a 45-day deductible waiting period, through the end of the contract in November 2020. The waiting period expired on April 22, 2020. We received loss of hire insurance recoveries of $118.1 million , which represents the total amount owed to us under the applicable insurance policy. The recovery was recognized and recorded in Other operating income on our Consolidated Statements of Operations. During the second quarter of 2020, the VALARIS DS-7 contract for operations offshore Ghana was terminated. Additionally, contracts awarded in the first quarter of 2020 for VALARIS DS-7 operations offshore Senegal/Mauritania, VALARIS DS-9 operations offshore Brazil and VALARIS MS-1 contract operations offshore Australia were terminated. Further, the VALARIS DPS-1 contract was terminated in June, earlier than the previously scheduled end date of September 2021, and the VALARIS DS-10, VALARIS DS-15 and VALARIS 8505 operated on reduced day rates for various periods during 2020. The VALARIS 5004 operated on a reduced day rate from mid-March to mid-April of 2020, at which point the contract was terminated. During the third quarter of 2020, floater contracting remained challenging and no significant new contracts were executed. In the fourth quarter of 2020, we extended the VALARIS DS-10 and VALARIS DS-18 contracts for an estimated 90 days and 60 days, respectively. In January 2021, we extended the VALARIS DS-12 contract for an estimated 100 days. Our backlog for our floater segment was $205.7 million and $847.3 million as of December 31, 2020 and December 31, 2019, respectively. The decrease in our backlog was due to customer contract cancellations, customer concessions and revenues realized, partially offset by the addition of backlog from new contract awards and contract extensions. The VALARIS 6002 was sold in January 2020 resulting in an insignificant pre-tax gain. Additionally, the VALARIS 5004 was sold in April 2020 resulting in an insignificant pre-tax loss. During the second quarter of 2020, we began marketing VALARIS 8500, VALARIS 8501, VALARIS 8502, VALARIS DS-3, VALARIS DS-5 and VALARIS DS-6 and classified these rigs as held-for-sale, resulting in an impairment of approximately $14.6 million as the net book value exceeded the fair value less costs to sell. During the third quarter of 2020, we sold VALARIS 8500, VALARIS 8501 and VALARIS 8502 for a total pre-tax gain of $7.7 million, we sold the VALARIS DS-3, VALARIS DS-5 and VALARIS DS-6 for an insignificant pre-tax loss and we classified VALARIS 8504 as held-for-sale. The net book value of VALARIS 8504 did not exceed the fair value less costs to sell; therefore, we did not recognize an impairment upon classifying this rig as held-for-sale. The rig was subsequently sold in October 2020. 68 There are approximately 25 newbuild drillships and semisubmersible rigs reported to be under construction, of which approximately 10 are scheduled to be delivered before the end of 2021. Most newbuild floaters are uncontracted. Several newbuild deliveries have been delayed into future years, and we expect that more uncontracted newbuilds will be delayed or cancelled. Drilling contractors have retired approximately 160 floaters since the beginning of 2014. Approximately 15 floaters older than 30 years of age are currently idle, approximately ten additional floaters older than 30 years of age have contracts that will expire by the end of 2021 without follow-on work. Additional rigs are expected to become idle as a result of market conditions. Operating costs associated with keeping these rigs idle as well as expenditures required to re-certify these aging rigs may prove cost prohibitive. Drilling contractors will likely elect to scrap or cold-stack some or all of these rigs. Improvements in demand and/or reductions in supply will be necessary before meaningful increases in utilization and day rates are realized. Jackups During 2020, demand for jackups has declined in light of increased market uncertainty. We have received notices of termination, requests for concessions, cancellation and/or deferral of drilling programs by operators, and we may receive additional requests for concessions, termination and/or deferral notices during the pendency of the current market environment. During the first quarter of 2020, we executed a three-well contract for VALARIS JU-118 that commenced in mid-March 2020 with an estimated duration of 425 days. Additionally, we executed a two-well contract for VALARIS JU-144 that commenced in May 2020 with an estimated duration of 300 days. The previously disclosed contract for the VALARIS JU-144 that was expected to commence in September 2020 was transferred to the VALARIS JU-102 and was subsequently delayed to September 2021, with VALARIS JU-102 being put on a standby rate until the new commencement date. VALARIS JU-87 was awarded a one-well contract that commenced in March 2020 with an estimated duration of 30 days and an extension to May 2020 for another well with an estimated duration of 30 days. During the first quarter of 2020, the VALARIS JU-109 contract was terminated. During the second quarter of 2020, the VALARIS JU-84 contract was terminated and we negotiated a day rate reduction for VALARIS JU-290 to be suspended at a reduced rate from September 2020 to February 2021. In April 2020, there were various negotiated customer contract concessions, including day rate reductions. VALARIS JU-120 was suspended at a reduced day rate from late-April 2020 to September 2020 and VALARIS JU-72 was suspended at a reduced day rate from April 2020 to August 2020. VALARIS JU-92 was previously expected to be suspended at a reduced day rate from mid-May 2020 to late-September 2020, but has continued to operate at full day rate. VALARIS JU-249 ended its contract in April 2020 and VALARIS JU-100 ended its contract in late-April 2020, in both cases, earlier than expected. During the second quarter of 2020, we executed short-term contracts for VALARIS JU-102 and VALARIS JU-87 that commenced in June 2020 and May 2020, respectively. We were also awarded a two-well extension for VALARIS JU-291 with an expected duration of approximately 230 days from January 2021 to August 2021. We executed a four-year contract for VALARIS JU-104 expected to commence in September 2020, which was subsequently terminated during the third quarter of 2020. Additionally, we extended the VALARIS JU-67 contract 210 days from May 2020 to December 2020. During the third quarter of 2020, VALARIS JU-54 and VALARIS JU-76 were put on a reduced standby rate until late 2020. Following the reduced standby rate period, VALARIS JU-54 will be operating at an agreed upon reduced day rate until the end of 2021 and VALARIS JU-76 will be suspended until it resumes operation in March 2021 at an agreed upon reduced day rate until the end of 2021. During the third quarter, we also negotiated reduced rates for VALARIS 108, VALARIS 140 and VALARIS 141. The reduced rates are effective beginning the second quarter of 2020 through the end of their contract terms in November 2021, June 2021 and August 2021, respectively. Additionally, we executed a one year contract extension for VALARIS 110 that commenced in October 2020 and executed a short-term contract for VALARIS 115 that commenced in February 2021. 69 During the fourth quarter of 2020, we executed an eight-well contract extension for VALARIS JU-292 Additionally, we extended the VALARIS JU-67 contract for approximately 190 days from December 2020 to June 2021. In January and February 2021, we executed a two-year contract for VALARIS JU-121, an approximate one-year contract for VALARIS JU-247, and the VALARIS JU-122 contract was extended for approximately 95 days from April 2021 to July 2021. Our backlog for our jackup segment was $859.5 million and $1,281.2 million as of December 31, 2020 and December 31, 2019, respectively. The decrease in our backlog was due to customer contract cancellations, customer concessions and revenues realized, partially offset by the addition of backlog from new contract awards and contract extensions. The VALARIS JU-68 was sold in January 2020, resulting in an insignificant pre-tax gain. Additionally, VALARIS JU-70 and VALARIS JU-71 were sold in June 2020 resulting in insignificant pre-tax losses. During the second quarter of 2020, we classified VALARIS JU-105 as held-for-sale, resulting in an insignificant impairment as the net book value exceeded the fair value less cost to sell. During the third quarter of 2020, we sold VALARIS JU-87 and VALARIS JU-105 for an insignificant pre-tax gain and we classified VALARIS JU-84 and VALARIS JU-88 as held-for-sale. The net book values of VALARIS JU-84 and VALARIS JU-88 did not exceed the fair values less costs to sell, therefore, we did not recognize an impairment upon classifying these rigs as held-for-sale. These rigs were subsequently sold in October 2020. There are approximately 40 newbuild jackup rigs reported to be under construction, of which 20 are scheduled to be delivered before the end of 2021. Most newbuild jackups are uncontracted. Over the past year, some jackup orders have been cancelled, and many newbuild jackups have been delayed. We expect that scheduled jackup deliveries will continue to be delayed until more rigs are contracted. Drilling contractors have retired approximately 120 jackups since the beginning of 2014. Approximately 90 jackups older than 30 years of age are currently idle and 40 jackups that are 30 years of age or older have contracts expiring by the end of 2021 without follow-on work. Expenditures required to re-certify these aging rigs may prove cost prohibitive and drilling contractors may instead elect to scrap or cold-stack these rigs. Improvements in demand and/or reductions in supply will be necessary before meaningful increases in utilization and day rates are realized. 70 RESULTS OF OPERATIONS The following table summarizes our consolidated results of operations for each of the years in the three-year period ended December 31, 2020 (in millions): 2020 2019 2018 Revenues $ 1,427.2 $ 2,053.2 $ 1,705.4 Operating expenses Contract drilling (exclusive of depreciation) 1,458.6 1,806.0 1,319.4 Loss on impairment 3,646.2 104.0 40.3 Depreciation 540.8 609.7 478.9 General and administrative 214.6 188.9 102.7 Total operating expenses 5,860.2 2,708.6 1,941.3 Other operating income 118.1 — — Equity in losses of ARO (7.8) (12.6) — Operating loss (4,322.7) (668.0) (235.9) Other income (expense), net (794.3) 604.2 (303.0) Provision (benefit) for income taxes (259.4) 128.4 89.6 Loss from continuing operations (4,857.6) (192.2) (628.5) Loss from discontinued operations, net — — (8.1) Net loss (4,857.6) (192.2) (636.6) Net (income) loss attributable to noncontrolling interests 2.1 (5.8) (3.1) Net loss attributable to Valaris $ (4,855.5) $ (198.0) $ (639.7) Overview Year Ended December 31, 2020 Revenues declined by $626.0 million, or 30%, as compared to the prior year. This decline is primarily attributable to a $287.4 million decline in revenue resulting from the sale of VALARIS 5004, VALARIS 5006, VALARIS 6002, VALARIS JU-68, VALARIS JU-84, VALARIS JU-87, VALARIS JU-88, and VALARIS JU-96, which operated in the prior year comparative period, a $286.7 million decline in revenue as a result of fewer days under contract across our fleet, a $150.0 million decline in revenue due to the termination of the VALARIS DS-8 contract and a $28.3 million and $16.0 million, decline in revenues earned under the Secondment Agreement and Transition Services Agreement with ARO, respectively. Further, the additional revenues earned under Lease Agreements with ARO due to the inclusion of a full year of results in 2020 as compared to the period from April 11, 2019 to December 31, 2019 from the comparable period was offset by a reduction of our rental revenues to reflect an amendment to the Shareholder Agreement that impacted the bareboat charter rate in the lease agreements. See " Note 5 - Equity Method Investment in ARO" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for additional information. The decline in revenue was partially offset by $113.6 million of revenue earned by rigs added from the Rowan Transaction, and $46.3 million of contract termination fees received for certain rigs. Contract drilling expense declined by $347.4 million, or 19%, as compared to the prior year primarily due to a $184.4 million decline as a result of lower costs on idle rigs, $134.5 million lower costs on VALARIS 5004, VALARIS 5006, VALARIS 6002, VALARIS 8500, VALARIS 8501, VALARIS 8502, VALARIS 8504, VALARIS DS-3, VALARIS DS-5, VALARIS DS-6, VALARIS JU-68, VALARIS JU-84, VALARIS JU-87, VALARIS JU-88 and VALARIS JU-96, as these rigs were sold, and reduced costs resulting primarily from spend control efforts. Additionally, there was a decline in expenses due to a decrease in services provided to ARO under the Secondment Agreement as almost all remaining employees seconded to ARO became employees of ARO 71 during the second quarter of 2020. This decrease was partially offset by $140.1 million of contract drilling expenses incurred on rigs added from the Rowan Transaction. During the first and second quarters of 2020, we recorded non-cash losses on impairment totaling $3.6 billion, with respect to assets in our fleet, primarily due to the adverse change in the current and anticipated market for these assets. See " Note 7 - Property and Equipment" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for additional information. Depreciation expense declined by $68.9 million, or 11%, as compared to the prior year period primarily due to lower depreciation expense on certain assets which were impaired during the first and second quarters of 2020, some of which were subsequently sold in the third and fourth quarters of 2020. This decrease was partially offset by depreciation expense recorded for rigs added in the Rowan Transaction as well as for the VALARIS JU-123 which commenced operations in August 2019. General and administrative expenses increased by $25.7 million, or 14%, as compared to the prior year period primarily due to the backstop commitment fee and legal and other professional advisor fees incurred in relation to the Chapter 11 Cases, but prior to the Petition Date. This increase was partially offset by merger related costs incurred in the prior year comparative period. Other operating income of $118.1 million recognized during 2020 was due to loss of hire insurance recoveries collected for the VALARIS DS-8 non-drilling incident. Other expense, net, increased by $1.4 billion as compared to the prior year period, primarily due to the prior period $637.0 million gain on bargain purchase recognized in connection with the Rowan Transaction, pre-tax gain related to the settlement award from the SHI matter of $200.0 million and $194.1 million of pre-tax gain on debt extinguishment related to the repurchase of senior notes in connection with July 2019 tender offers. Additionally, the current year period includes $527.6 million of reorganization items directly related to the Chapter 11 Cases. Partially offsetting these increases, our Interest Expense, net decreased $137.7 million primarily due to $140.7 million as we discontinued accruing interest on our outstanding debt subsequent to the chapter 11 filing. Year Ended December 31, 2019 Revenues increased by $347.8 million, or 20%, as compared to the prior year primarily due to $322.2 million of revenue earned by the Rowan rigs, $125.5 million due to revenues earned from our rigs leased to ARO and revenues earned from the Secondment Agreement and Transition Services Agreement, and $84.1 million due to the commencement of VALARIS DS-9, VALARIS JU-123, VALARIS JU-140 and VALARIS JU-141 drilling operations. This increase was partially offset by the sale of ENSCO 6001, VALARIS 5006 and ENSCO 97, which operated in the prior-year period, and lower average day rates across the remaining fleet. Contract drilling expense increased by $486.6 million, or 37%, as compared to the prior year primarily due to $351.2 million of contract drilling expense incurred by the Rowan rigs, $57.0 million due to expenses incurred under the Secondment Agreement and by our rigs leased to ARO, $38.2 million due to the commencement of VALARIS DS-9, and $31.3 million due to the commencement of drilling operations for VALARIS JU-123, VALARIS JU-140 and VALARIS JU-141. This increase was partially offset by the sale of ENSCO 6001, VALARIS 5006 and ENSCO 97, which operated in the prior-year period. General and administrative expenses increased by $86.2 million, or 84%, as compared to the prior year, primarily due to transaction and integration costs associated with the Rowan Transaction. 72 Rig Counts, Utilization and Average Day Rates The following table summarizes our offshore drilling rigs by reportable segment, rigs under construction, rigs held-for-sale and ARO's offshore drilling rigs as of December 31, 2020, 2019 and 2018. Legacy Rowan and ARO rigs are included from the date the Rowan Transaction closed in April 2019: 2020 2019 2018 Floaters (1) 16 24 22 Jackups (2) 36 41 34 Other (3) 9 9 — Held-for-sale (4) — 3 — Total Valaris 61 77 56 Valaris - Under construction (5) 2 2 3 ARO (6) 7 7 — ARO - Under construction (7) 2 — — (1) During 2020, we sold VALARIS 5004, VALARIS 8500, VALARIS 8501, VALARIS 8502, VALARIS 8504, VALARIS DS-3, VALARIS DS-5 and VALARIS DS-6. During 2019, we added VALARIS DS-15, VALARIS DS-16, VALARIS DS-17 and VALARIS DS-18 from the Rowan Transaction, sold VALARIS 5006 and classified VALARIS 6002 as held-for-sale (2) During 2020, we sold VALARIS JU-71, VALARIS JU-84, VALARIS JU-87, VALARIS JU-88 and VALARIS JU-105. During 2019, we added 10 jackups from the Rowan Transaction, exclusive of rigs leased to ARO that are included in Other, accepted delivery of VALARIS JU-123, classified VALARIS JU-68 and VALARIS JU-70 as held-for-sale and sold VALARIS JU-96 and ENSCO 97. (3) During 2019, we added nine jackups from the Rowan Transaction that are leased to ARO. (4) During 2019, we classified VALARIS JU-68, VALARIS JU-70 and VALARIS 6002 as held-for-sale, all of which were subsequently sold in 2020. (5) During 2019, we accepted the delivery of VALARIS JU-123. (6) This represents the seven rigs owned by ARO. (7) During 2020, ARO ordered two newbuild jackup rigs scheduled for delivery in 2022. 73 The following table summarizes our and ARO's rig utilization and average day rates from continuing operations by reportable segment for each of the years in the three-year period ended December 31, 2020. Rig utilization and average day rates include results of rigs added in the Rowan Transaction or ARO from the date the Rowan Transaction closed in April 2019: 2020 2019 2018 Rig Utilization (1) Floaters 29% 47% 46% Jackups 54% 66% 63% Other (2) 98% 100% 100% Total Valaris 54% 63% 56% ARO 94% 93% —% Average Day Rates (3) Floaters $ 178,372 $ 218,837 $ 248,395 Jackups 83,618 78,133 77,086 Other (2) 31,207 49,236 81,751 Total Valaris $ 83,845 $ 108,313 $ 128,365 ARO $ 100,921 $ 71,170 $ — (1) Rig utilization is derived by dividing the number of days under contract by the number of days in the period. Days under contract equals the total number of days that rigs have earned and recognized day rate revenue, including days associated with early contract terminations, compensated downtime and mobilizations. When revenue is deferred and amortized over a future period, for example when we receive fees while mobilizing to commence a new contract or while being upgraded in a shipyard, the related days are excluded from days under contract. For newly-constructed or acquired rigs, the number of days in the period begins upon commencement of drilling operations for rigs with a contract or when the rig becomes available for drilling operations for rigs without a contract. (2) Includes our two management services contracts and our nine rigs leased to ARO under bareboat charter contracts. (3) Average day rates are derived by dividing contract drilling revenues, adjusted to exclude certain types of non-recurring reimbursable revenues, lump-sum revenues and revenues attributable to amortization of drilling contract intangibles, by the aggregate number of contract days, adjusted to exclude contract days associated with certain mobilizations, demobilizations and shipyard contracts. Detailed explanations of our operating results, including discussions of revenues, contract drilling expense and depreciation expense by segment, are provided below. Operating Income by Segment Our business consists of four operating segments: (1) Floaters, which includes our drillships and semisubmersible rigs, (2) Jackups, (3) ARO and (4) Other, which consists of management services on rigs owned by third-parties and the activities associated with our arrangements with ARO under the Rig Lease Agreements, the Secondment Agreement and the Transition Services Agreement. Floaters, Jackups and ARO are also reportable segments. 74 General and administrative expense and depreciation expense incurred by our corporate office are not allocated to our operating segments for purposes of measuring segment operating income (loss) and are included in "Reconciling Items". Substantially all of the expenses incurred associated with our Transition Services Agreement are included in general and administrative under "Reconciling Items" in the table set forth below. The full operating results included below for ARO (representing only results of ARO from the closing date of the Rowan Transaction) are not included within our consolidated results and thus deducted under "Reconciling Items" and replaced with our equity in earnings of ARO. See " Note 5 - Equity Method Investment in ARO" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for additional information on ARO and related arrangements. Upon establishment of ARO, Rowan entered into (1) an agreement to provide certain back-office services for a period of time until ARO develops its own infrastructure (the "Transition Services Agreement"), and (2) an agreement to provide certain Rowan employees through secondment arrangements to assist with various onshore and offshore services for the benefit of ARO (the "Secondment Agreement"). These agreements remained in place subsequent to the Rowan Transaction. Pursuant to these agreements, we or our seconded employees provide various services to ARO, and in return, ARO provides remuneration for those services. During the quarter ended June 30, 2020, almost all remaining employees seconded to ARO became employees of ARO. Additionally, our services to ARO under the Transition Services Agreement were completed as of December 31, 2020. See " Note 5 - Equity Method Investment in ARO" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for additional information on ARO and related arrangements. Segment information for each of the years in the three-year period ended December 31, 2020 is presented below (in millions). Year Ended December 31, 2020 Floaters Jackups ARO Other Reconciling Items Consolidated Total Revenues $ 505.8 $ 765.3 $ 549.4 $ 156.1 $ (549.4) $ 1,427.2 Operating expenses Contract drilling (exclusive of depreciation) 633.9 733.3 388.2 91.4 (388.2) 1,458.6 Loss on impairment 3,386.2 254.3 — 5.7 — 3,646.2 Depreciation 262.8 217.2 54.8 44.8 (38.8) 540.8 General and administrative — — 24.2 — 190.4 214.6 Other operating income 118.1 — — — — 118.1 Equity in losses of ARO — — — (7.8) (7.8) Operating income (loss) $ (3,659.0) $ (439.5) $ 82.2 $ 14.2 $ (320.6) $ (4,322.7) 75 Year Ended December 31, 2019 Floaters Jackups ARO Other Reconciling Items Consolidated Total Revenues $ 1,014.4 $ 834.6 $ 410.5 $ 204.2 $ (410.5) $ 2,053.2 Operating expenses Contract drilling (exclusive of depreciation) 898.6 788.9 280.2 118.5 (280.2) 1,806.0 Loss on impairment 88.2 10.2 — — 5.6 104.0 Depreciation 362.3 203.3 40.3 25.5 (21.7) 609.7 General and administrative — — 27.1 — 161.8 188.9 Equity in losses of ARO — — — — (12.6) (12.6) Operating income (loss) $ (334.7) $ (167.8) $ 62.9 $ 60.2 $ (288.6) $ (668.0) Year Ended December 31, 2018 Floaters Jackups ARO Other Reconciling Items Consolidated Total Revenues $ 1,013.5 $ 630.9 $ — $ 61.0 $ — $ 1,705.4 Operating expenses Contract drilling (exclusive of depreciation) 737.4 526.5 — 55.5 — 1,319.4 Loss on impairment — 40.3 — — — 40.3 Depreciation 311.8 153.3 — — 13.8 478.9 General and administrative — — — — 102.7 102.7 Operating income (loss) $ (35.7) $ (89.2) $ — $ 5.5 $ (116.5) $ (235.9) Floaters 2020 compared to 2019 During 2020, revenues declined by $508.6 million, or 50%, as compared to the prior year due to $241.0 million from the sale of VALARIS 5004, VALARIS 5006, and VALARIS 6002, which operated in the prior year comparative period, $189.4 million as a result of fewer days under contract across the floater fleet and $150.0 million due to the termination of the VALARIS DS-8 contract. This decline was partially offset by $46.3 million of contract termination fees received for certain rigs and $40.1 million earned by rigs added in the Rowan Transaction. Contract drilling expense declined by $264.7 million, or 29%, as compared to the prior year primarily due to $131.1 million lower cost on idle rigs, $92.3 million lower costs on VALARIS 5004, VALARIS 5006, VALARIS 6002, VALARIS 8500, VALARIS 8501, VALARIS 8502, VALARIS 8504, VALARIS DS-3, VALARIS DS-5 and VALARIS DS-6, as such rigs were sold, and reduced costs resulting primarily from spend control efforts. This decrease was partially offset by $53.8 million of contract drilling expense incurred by rigs added in the Rowan Transaction. During 2020, we recorded a non-cash loss on impairment of $3.4 billion, with respect to assets in our Floater segment due to the adverse change in the current and anticipated market for these assets. See " Note 7 -Property and Equipment" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for additional information. 76 Depreciation expense declined by $99.5 million, or 27%, compared to the prior year primarily due to lower depreciation on certain non-core assets which were impaired during the first and second quarters of 2020 and subsequently sold in the third and fourth quarters of 2020 with the exception of one floater. Other operating income of $118.1 million recognized during 2020 was due to loss of hire insurance recoveries collected for the VALARIS DS-8 non-drilling incident. 2019 compared to 2018 During 2019, revenues were consistent with the prior year. The $109.3 million of revenue earned by the Rowan rigs and $41.0 million due to the commencement of VALARIS DS-9 drilling operations were offset by the sale of VALARIS 5006 and ENSCO 6001, fewer days under contract and lower average day rates across the remaining floater fleet. Contract drilling expense increased by $161.2 million, or 22%, as compared to the prior year primarily due to $142.4 million of contract drilling expense incurred by the Rowan rigs and $38.2 million due to the commencement of VALARIS DS-9 drilling operations. The increase was partially offset by the sale of VALARIS 5006 and ENSCO 6001 and lower costs on idle rigs. Depreciation expense increased by $50.5 million, or 16%, compared to the prior year primarily due to the addition of the Rowan rigs to the fleet and commencement of VALARIS DS-9 drilling operations. Jackups 2020 compared to 2019 During 2020, revenues declined by $69.3 million, or 8%, as compared to the prior year primarily due to $97.3 million as a result of fewer days under contract across the jackup fleet and $46.4 million due to the sale of VALARIS JU-68, VALARIS JU-84, VALARIS JU-87, VALARIS JU-88, and VALARIS JU-96, which operated in the prior year period. This decrease was partially offset by $73.5 million of revenue earned by rigs added in the Rowan Transaction. Contract drilling expense declined by $55.6 million, or 7%, as compared to the prior year primarily due to $53.3 million lower cost on idle rigs, $42.2 million from the sale of VALARIS JU-68, VALARIS JU-84, VALARIS JU-87, VALARIS JU-88 and VALARIS JU-96 which operated in the prior year period, and reduced costs resulting from spend control efforts. This decrease was partially offset by $86.3 million of contract drilling expense incurred by rigs added in the Rowan Transaction. During 2020, we recorded a non-cash loss on impairment of $254.3 million with respect to assets in our Jackup segment primarily due to the adverse change in the current and anticipated market for these assets. See " Note 7 - Property and Equipment" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for additional information. Depreciation expense increased by $13.9 million, or 7%, as compared to the prior year primarily due to the addition of rigs in the Rowan Transaction as well as the commencement of the VALARIS JU-123 in August 2019. This increase was partially offset by lower depreciation on certain non-core assets which were impaired during 2020 of which three of these jackups were sold in 2020. 2019 compared to 2018 During 2019, revenues increased by $203.7 million, or 32%, as compared to the prior year primarily due to $212.9 million of revenue earned by the Rowan rigs and $43.1 million due to the commencement of VALARIS 77 JU-123, VALARIS JU-140 and VALARIS JU-141 drilling operations. This increase was partially offset by the sale of ENSCO 97 and ENSCO 80, which operated in the prior-year period. Contract drilling expense increased by $262.4 million, or 50%, as compared to the prior year primarily due to $208.8 million of contract drilling expense incurred by the Rowan rigs and $31.3 million due to the commencement of drilling operations for VALARIS JU-123, VALARIS JU-140 and VALARIS JU-141. This increase was partially offset by the sale of ENSCO 97 and ENSCO 80. Depreciation expense increased by $50.0 million, or 33%, as compared to the prior year primarily due to the addition of rigs in the Rowan Transaction and the commencement of VALARIS JU-123 in August 2019. ARO ARO currently owns a fleet of seven jackup rigs, leases another nine jackup rigs from us and has plans to purchase 20 newbuild jackup rigs over an approximate 10 year period. In January 2020, ARO ordered the first two newbuild jackups with delivery scheduled in 2022. The joint venture partners intend for the newbuild jackup rigs to be financed out of available cash from ARO's operations and/or funds available from third-party debt financing. ARO paid a 25% down payment from cash on hand for each of the newbuilds ordered in January 2020. In the event ARO has insufficient cash from operations or is unable to obtain third-party financing, each partner may periodically be required to make additional capital contributions to ARO, up to a maximum aggregate contribution of $1.25 billion from each partner to fund the newbuild program. The Company's capital contributions to ARO pursuant to this requirement may require approval of the Bankruptcy Court during the Chapter 11 Cases. Each partner's commitment shall be reduced by the actual cost of each newbuild rig, on a proportionate basis. The joint venture partners agreed that Saudi Aramco, as a customer, will provide drilling contracts to ARO in connection with the acquisition of the newbuild rigs. The initial contracts for each newbuild rig will be determined using a pricing mechanism that targets a six-year payback period for construction costs on an EBITDA basis. The initial eight-year contracts will be followed by a minimum of another eight years of term, re-priced in three-year intervals based on a market pricing mechanism. We lease rigs to ARO through bareboat charter agreements whereby substantially all operating costs are incurred by ARO. All nine jackup rigs leased to ARO are under three-year contracts with Saudi Aramco. All seven ARO-owned jackup rigs are under long-term contracts with Saudi Aramco. The operating revenues of ARO reflect revenues earned under drilling contracts with Saudi Aramco for the seven ARO-own jackup rigs that operated during the period from the date of the Rowan Transaction in April 2019 through December 31, 2020. The contract drilling, depreciation and general and administrative expenses are also for the period from the date of the Rowan Transaction in April 2019 through December 31, 2020. Contract drilling expenses are inclusive of the bareboat charter fees for the rigs leased from us. Costs incurred under the Secondment Agreement are included in contract drilling expense and general and administrative, depending on the function to which the seconded employees' services related. General and administrative expenses include costs incurred under the Transition Services Agreement and other administrative costs. 2020 compared to 2019 During 2020, revenues increased by $138.9 million, or 34%, as compared to the prior year period from the date of the Rowan Transaction in April 2019 through December 31, 2019 primarily due to a full year of ARO results in 2020 compared to a partial year in 2019. Contract drilling expense increased by $108.0 million, or 39%, in 2020 as compared to the prior year period from the date of the Rowan Transaction in April 2019 through December 31, 2019 primarily due to a full year of ARO results in 2020 compared to a partial year in 2019. 78 Depreciation expense increased by $14.5 million, or 36%, in 2020 as compared to the prior year period from the date of the Rowan Transaction in April 2019 through December 31, 2019 primarily due to a full year of ARO results in 2020 compared to a partial year in 2019. General and administrative expenses decreased by $2.9 million, or 11%, in 2020 as compared to the prior year period from the date of the Rowan Transaction in April 2019 through December 31, 2019 primarily due to a decrease in services received under the Transition Services Agreement. See " Note 5 - Equity Method Investment in ARO" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for additional information on ARO. Other 2020 compared to 2019 Other revenues declined $48.1 million, or 24%, for the year ended December 31, 2020, as compared to the prior year period, primarily due to due to lower revenues earned under the Secondment Agreement and Transition Services Agreement with ARO of $28.3 million and $16.0 million, respectively. Further, the additional revenues earned under Lease Agreements due to the inclusion of a full year of results in 2020 as compared to the period from April 11, 2019 to December 31, 2019 from the comparable period was offset by a reduction of our rental revenues to reflect an amendment to the Shareholder Agreement that impacted the bareboat charter rate in the lease agreements. See " Note 5 - Equity Method Investment in ARO" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for additional information. Other contract drilling expenses declined $27.1 million, or 23%, for the year ended December 31, 2020, as compared to the prior year period, primarily due to a decrease in services provided to ARO under the Secondment Agreement as almost all remaining employees seconded to ARO became employees of ARO during the second quarter of 2020. During 2020, we recorded a non-cash loss on impairment of $5.7 million, with respect to a certain contract intangible due to current market conditions. See " Note 4 - Rowan Transaction" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for additional information. Depreciation expense increased $19.3 million, or 76%, as compared to the prior year primarily due to the impact of full year results for 2020 as compared to the prior year period from the date of the Rowan Transaction in April 2019 through December 31, 2019 as well as additional depreciation due to capital expenditures and the commencement of the Bess Brants and Ernest Dees which were in the shipyard most of the comparative period. 2019 compared to 2018 Other revenues increased $143.2 million, or 235%, for the year ended December 31, 2019, as compared to the prior year period, primarily due to revenues earned from our rigs leased to ARO, revenues earned under the Secondment Agreement and Transition Services Agreement of $58.2 million, $49.9 million and $17.3 million, respectively. Other contract drilling expenses increased $63.0 million, or 114%, for the year ended December 31, 2019, respectively, as compared to the prior year period, primarily due to costs incurred for services provided to ARO under the Secondment Agreement and other costs for ARO rigs. 79 Impairment of Long-Lived Assets See " Note 4 - Rowan Transaction", " Note 7 - Property and Equipment" and " Note 15 - Leases" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for information on impairment of long-lived assets. Other Income (Expense), Net The following table summarizes other income (expense), net, for each of the years in the three-year period ended December 31, 2020 (in millions): 2020 2019 2018 Interest income $ 19.7 $ 28.1 $ 14.5 Interest expense, net: Interest expense (291.9) (449.2) (345.3) Capitalized interest 1.3 20.9 62.6 (290.6) (428.3) (282.7) Reorganization items, net (527.6) — — Other, net 4.2 1,004.4 (34.8) $ (794.3) $ 604.2 $ (303.0) Interest income decreased during 2020 as compared to the respective prior-year period primarily due to fewer investments in the current year as compared to the prior year comparable period. Interest income increased during 2019 as compared to the respective prior-year period primarily due to interest income of $16.8 million earned on the shareholder note from ARO (see " Note 5 - Equity Method Investment in ARO" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for information on ARO) acquired in the Rowan Transaction. Interest expense decreased during 2020 by $157.3 million, or 35%, as compared to the prior year as we did not accrue interest on our outstanding debt or amortize discounts, premiums and debt issuance costs subsequent to the chapter 11 filing totaling $140.7 million and $29.8 million, respectively. Further, debt repurchases resulted in interest savings of $19.2 million. These declines were partially offset by increased interest on debt acquired from Rowan totaling $35.7 million. Interest expense increased during 2019 by $103.9 million, or 30%, as compared to the prior year due to interest expense incurred on senior notes acquired in the Rowan Transaction. Interest expense capitalized declined during 2020 and 2019 by $19.6 million, or 94%, and $41.7 million, or 67%, as compared to the prior year periods, due to a decline in the amount of capital invested in newbuild construction resulting from newbuild rigs being placed into service. Reorganization items, net of $527.6 million recognized during 2020 was related to other net losses and expenses directly related to Chapter 11 Cases, consisting of the write off of unamortized debt discounts, premiums and issuance costs of $447.9 million, professional fees of $66.8 million and financing costs of $20.0 million, partially offset by $7.1 million of contract items relating to rejection and amendment of certain operating leases. Other, net, during 2020 included $14.6 million of net periodic income, excluding service cost, for our pension and retiree medical plans as well as a $3.1 million pre-tax gain on extinguishment of debt. We also incurred a $6.3 million reduction to gain on bargain purchase as a result of measurement adjustments made in the first quarter 2020 related to the Rowan Transaction. Other, net, during 2019 included a gain on bargain purchase recognized in connection with the Rowan Transaction of $630.7 million, a pre-tax gain related to the award related to settlement with Samsung Heavy 80 Industries of $200.0 million and a pre-tax gain from debt extinguishment of $194.1 million related to the senior notes repurchased in connection with our July 2019 tender offers. This increase was partially offset by settlement of a Middle East dispute discussed in " Note 14 - Commitments and Contingencies" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" as well as foreign currency losses as discussed below. Our functional currency is the U.S. dollar, and a portion of the revenues earned and expenses incurred by certain of our subsidiaries are denominated in currencies other than the U.S. dollar. These transactions are remeasured in U.S. dollars based on a combination of both current and historical exchange rates. Net foreign currency exchange losses, inclusive of offsetting fair value derivatives, were $11.0 million, $7.4 million and $17.2 million, and were included in other, net, in our consolidated statements of operations for the years ended December 31, 2020, 2019 and 2018, respectively. Net foreign currency exchange losses incurred during 2020 included $7.3 million and $1.4 million related to euros and Angolan kwanza, respectively. Net foreign currency exchange losses incurred during 2019 included $3.3 million and $2.8 million, related to euros and Angolan kwanza, respectively. During 2018, the net foreign currency exchange losses incurred included $5.8 million, $3.6 million and $2.0 million, related to Angolan kwanza, euros and Brazilian reals, respectively. Net unrealized gains of $3.2 million and $5.0 million and unrealized losses of $0.7 million from marketable securities held in our supplemental executive retirement plans ("the SERP") were included in other, net, in our consolidated statements of operations for the years ended December 31, 2020, 2019 and 2018, respectively. Information on the fair value measurement of our marketable securities held in the SERP is presented in " Note 6 - Fair Value Measurements" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data." Provision for Income Taxes Valaris plc, our parent company, is domiciled and resident in the U.K. Our subsidiaries conduct operations and earn income in numerous countries and are subject to the laws of taxing jurisdictions within those countries. The income of our non-U.K. subsidiaries is generally not subject to U.K. taxation. Income tax rates imposed in the tax jurisdictions in which our subsidiaries conduct operations vary, as does the tax base to which the rates are applied. In some cases, tax rates may be applicable to gross revenues, statutory or negotiated deemed profits or other bases utilized under local tax laws, rather than to net income. Our drilling rigs frequently move from one taxing jurisdiction to another to perform contract drilling services. In some instances, the movement of drilling rigs among taxing jurisdictions will involve the transfer of ownership of the drilling rigs among our subsidiaries. As a result of frequent changes in the taxing jurisdictions in which our drilling rigs are operated and/or owned, changes in profitability levels and changes in tax laws, our annual effective income tax rate may vary substantially from one reporting period to another. In periods of declining profitability, our income tax expense may not decline proportionally with income, which could result in higher effective income tax rates. Further, we may continue to incur income tax expense in periods in which we operate at a loss. U.S. Tax Reform and CARES Act The U.S. Tax Cuts and Jobs Act (“U.S. tax reform”) was enacted on December 22, 2017 and introduced significant changes to U.S. income tax law, effective January 1, 2018. Due to the timing of the enactment of U.S. tax reform and the complexity involved in applying its provisions, the U.S. Treasury Department continued finalizing rules associated with U.S. tax reform during 2018 and 2019. During 2019, we recognized a tax expense of $13.8 million associated with final rules issued related to U.S. tax reform. During 2018, we recognized a tax benefit of $11.7 million associated with the one-time transition tax on deemed repatriation of the deferred foreign income of our U.S. subsidiaries. 81 The U.S. Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was enacted on March 27, 2020 and introduced various corporate tax relief measures into law. Among other things, the CARES Act allows net operating losses ("NOLs") generated in 2018, 2019 and 2020 to be carried back to each of the five preceding years. During 2020, we recognized a tax benefit of $122.1 million associated with the carryback of NOLs to recover taxes paid in prior years. Effective Tax Rate During the year ended December 31, 2020, we recorded an income tax benefit of $259.4 million and during the years ended December 31, 2019 and 2018 we recorded income tax expense of $128.4 million and $89.6 million, respectively. Our consolidated effective income tax rates during the same periods were 5.1%, (201.3)% and (16.6)%, respectively. Our 2020 consolidated effective income tax rate includes a $322.4 million tax benefit associated with the impact of various discrete tax items, including restructuring transactions, impairments of rigs and other assets, implementation of the U.S. CARES Act, changes in liabilities for unrecognized tax benefits associated with tax positions taken in prior years, rig sales, reorganization items and the resolution of other prior period tax matters. Our 2019 consolidated effective income tax rate included $2.3 million associated with the impact of various discrete tax items, including $28.3 million of tax expense associated with final rules relating to U.S. tax reform, gains on repurchase of debt and settlement proceeds, partially offset by $26.0 million of tax benefit related to restructuring transactions, changes in liabilities for unrecognized tax benefits associated with tax positions taken in prior years and other resolutions of prior year tax matters and rig sales. Our 2018 consolidated effective income tax rate includes the impact of various discrete tax items, including $46.0 million of tax benefit associated with the utilization of foreign tax credits subject to a valuation allowance, the transition tax on deemed repatriation of the deferred foreign income of our U.S. subsidiaries, and a restructuring transaction, partially offset by $21.0 million of tax expense related to recovery of certain costs associated with an ongoing legal matter, repurchase and redemption of senior notes, unrecognized tax benefits associated with tax positions taken in prior years and rig sales. Excluding the impact of the aforementioned discrete tax items, our consolidated effective income tax rates for the years ended December 31, 2020, 2019 and 2018 were (7.6)%, (14.6)% and (24.8)%, respectively. The changes in our consolidated effective income tax rate excluding discrete tax items during the three-year period result primarily from changes in the relative components of our earnings from the various taxing jurisdictions in which our drilling rigs are operated and/or owned and differences in tax rates in such taxing jurisdictions. Divestitures Our business strategy has been to focus on ultra-deepwater floater and premium jackup operations and de-emphasize other assets and operations that are not part of our long-term strategic plan or that no longer meet our standards for economic returns. Consistent with this strategy, we sold 14 jackup rigs, seven dynamically positioned semisubmersible rigs, three moored semisubmersible rigs and three drillships during the three-year period ended December 31, 2020. We continue to focus on our fleet management strategy in light of the composition of our rig fleet. While taking into account certain restrictions on the sales of assets under our DIP Credit Agreement, as part of our strategy, we may act opportunistically from time to time to monetize assets to enhance stakeholder value and improve our liquidity profile, in addition to reducing holding costs by selling or disposing of older, lower-specification or non-core rigs. 82 We sold the following rigs during the three-year period ended December 31, 2020 (in millions): Rig Date of Sale Classification (1) Segment (1) Net Proceeds Net Book Value (2) Pre-tax Gain/(Loss) VALARIS 8504 October 2020 Continuing Floater $ 4.7 $ 4.0 $ .7 VALARIS JU-88 October 2020 Continuing Jackups 1.4 .3 1.1 VALARIS JU-84 October 2020 Continuing Jackups 1.2 .3 .9 VALARIS JU-105 September 2020 Continuing Jackups 2.1 .8 1.3 VALARIS DS-6 August 2020 Continuing Floaters 5.7 6.1 (.4) VALARIS JU-87 August 2020 Continuing Jackups .3 .2 .1 VALARIS 8500 July 2020 Continuing Floaters 4.0 .7 3.3 VALARIS 8501 July 2020 Continuing Floaters 4.0 .7 3.3 VALARIS 8502 July 2020 Continuing Floaters 1.8 .7 1.1 VALARIS DS-3 July 2020 Continuing Floaters 6.1 6.1 — VALARIS DS-5 July 2020 Continuing Floaters 6.1 6.1 — VALARIS JU-71 June 2020 Continuing Jackups .2 .8 (.6) VALARIS JU-70 June 2020 Continuing Jackups .6 1.0 (.4) VALARIS 5004 April 2020 Continuing Floaters 1.9 2.0 (.1) VALARIS JU-68 January 2020 Continuing Jackups .3 .3 — VALARIS 6002 January 2020 Continuing Floaters 2.1 .9 1.2 VALARIS JU-96 December 2019 Continuing Jackups 1.9 .3 1.6 VALARIS 5006 November 2019 Continuing Floaters 7.0 6.0 1.0 VALARIS JU-42 October 2019 Continuing Jackups 2.9 2.5 .4 Gorilla IV May 2019 Continuing Jackups 2.5 2.5 — ENSCO 97 April 2019 Continuing Jackups 1.7 1.0 .7 ENSCO 80 August 2018 Continuing Jackups 1.0 .5 .5 ENSCO 5005 August 2018 Continuing Floaters 4.0 2.0 2.0 ENSCO 6001 July 2018 Continuing Floaters 2.0 .9 1.1 ENSCO 7500 April 2018 Discontinued Floaters 2.6 1.5 1.1 ENSCO 81 April 2018 Continuing Jackups 1.0 .3 .7 ENSCO 82 April 2018 Continuing Jackups 1.0 .3 .7 $ 70.1 $ 48.8 $ 21.3 (1) Classification denotes the location of the operating results and gain (loss) on sale for each rig in our consolidated statements of operations. For rigs' operating results that were reclassified to discontinued operations in our consolidated statements of operations, these results were previously included within the specified operating segment. (2) Includes the rig's net book value as well as materials and supplies and other assets on the date of the sale. LIQUIDITY AND CAPITAL RESOURCES Chapter 11 Cases and Effect of Automatic Stay On August 19, 2020, the Debtors filed voluntary petitions for reorganization under chapter 11 of the Bankruptcy Code in the Bankruptcy Court and subsequently obtained joint administration of the Chapter 11 Cases under the caption In re Valaris plc, et al. , Case No. 20-34114 (MI). Any efforts to enforce payment obligations 83 related to the acceleration of our debt have been automatically stayed as a result of the filing of the Chapter 11 Cases, and the creditors’ rights of enforcement are subject to the applicable provisions of the Bankruptcy Code. On August 18, 2020, the Debtors entered into the Original RSA with the Consenting Noteholders. On February 5, 2021, the Debtors entered into the Amended RSA with the Consenting Noteholders and the Consenting Lenders. The Amended RSA contemplates that the Company will implement the restructuring through the Chapter 11 Cases pursuant to a plan of reorganization and the various related transactions set forth in or contemplated by the Amended RSA. The Amended RSA also provides for certain conditions to the obligations of the parties and for termination upon the occurrence of certain events, including without limitation, the failure to achieve certain milestones and certain breaches by the parties under the Amended RSA. Subject to certain exceptions, under the Bankruptcy Code, the filing of the Chapter 11 Cases automatically enjoined, or stayed, the continuation of most judicial or administrative proceedings or filing of other actions against the Debtors or their property to recover, collect or secure a claim arising prior to the date of the Chapter 11 Cases. Notwithstanding the general applicability of the automatic stay described above, governmental authorities may determine to continue actions brought under their regulatory powers. Although Valaris intends to pursue the restructuring in accordance with the terms set forth in the Amended RSA, there can be no assurance that Valaris will be successful in completing a restructuring or any other similar transaction on the terms set forth in the Amended RSA, on different terms or at all. Among other things, the Amended RSA includes an outside date milestone requiring the Company’s emergence from chapter 11 by no later than June 15, 2021 (subject to a potential 60-day extension pursuant to the terms of the Amended RSA). The Debtors continue to operate their businesses and manage their properties as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. As part of the Chapter 11 Cases, the Debtors were granted “first-day” relief which enabled the Company to continue operating without interruption or disruption to its relationships with its customers and vendors or its high-quality service delivery. In particular, employee pay and benefits are expected to continue without interruption. In addition, we have obtained a DIP Facility to fund operations during the bankruptcy proceedings. However, for the duration of the Chapter 11 Cases, our operations and our ability to develop and execute our business plan are subject to a high degree of risk and uncertainty associated with the Chapter 11 Cases. The outcome of the Chapter 11 Cases is dependent upon factors that are outside of our control, including actions of the Bankruptcy Court and our creditors. There can be no assurance that we will confirm and consummate a plan of reorganization as contemplated by the Amended RSA or complete another plan of reorganization with respect to the Chapter 11 Cases and as such, there is substantial doubt about our ability to continue as a going concern. Further, we have concluded that management’s plans do not alleviate the substantial doubt about our ability to continue as a going concern brought about by the significant risks and uncertainties related to our liquidity and Chapter 11 Cases for a period of one year after the date that the financial statements are issued. 84 Liquidity Our liquidity position as of December 31, 2020, 2019 and 2018 is summarized below (in millions, except ratios): 2020 2019 2018 Cash and cash equivalents $ 325.8 $ 97.2 $ 275.1 Short-term investments — — 329.0 Available DIP Facility capacity 500.0 — — Available credit facility borrowing capacity — 1,622.2 2,000.0 Total liquidity $ 825.8 $ 1,719.4 $ 2,604.1 Working capital $ 746.1 $ 233.7 $ 781.2 Current ratio (1) 2.7 1.3 2.5 (1) As a result of our chapter 11 filing, we reclassified $7.3 billion representing the principal balance on our unsecured Senior Notes (as defined below), the amount of outstanding borrowings on our revolving credit facility, the accrued interest on our senior notes and revolving credit facility, and rig holding costs for DS-13 and DS-14 to “Liabilities Subject to Compromise” as of December 31, 2020. The current ratio calculated above does not reflect our debt and related interest that would otherwise be current but is stayed under our Chapter 11 Cases, nor does it include rig holding costs for VALARIS DS-13 and VALARIS DS-14. Cash and Debt As discussed in " Note 2 - Chapter 11 Proceedings and Ability to Continue as a Going Concern" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for information on Chapter 11 Cases and above, we have filed the Chapter 11 Cases to effect a comprehensive restructuring of our indebtedness. The commencement of the Chapter 11 Cases on August 19, 2020, constituted an event of default under our Senior Notes and revolving credit facility. Any efforts to enforce payment obligations under the Senior Notes, including any rights to require the repurchase by the Company of the 2024 Convertible Notes upon the NYSE delisting of the Class A ordinary shares, and revolving credit facility are automatically stayed as a result of the filing of the Chapter 11 Cases. The $6.5 billion aggregate principal amount of Senior Notes outstanding as well as $581.0 million outstanding borrowings under our revolving credit facility as of the Petition Date are classified as Liabilities Subject to Compromise in our Consolidated Balance Sheet as of December 31, 2020. On September 2 5, 2020, we entered into the $500.0 million DIP Facility to provide liquidity during the pendency of the Chapter 11 Cases and expect exit financing in the form of a fully backstopped rights offering to noteholders for $550 million of New Secured Notes. We expect the DIP Facility will provide sufficient liquidity for us during the pendency of the Chapter 11 Cases. Additionally, we expect the exit financing to include the backstopped New Secured Notes and that these notes will provide the necessary liquidity to support ongoing operations and working capital needs. The maturity date of the DIP Credit Agreement is the earliest of (1) August 17, 2021, (2) acceleration of the loans under the DIP Facility and termination of the lenders' commitments under the DIP Facility, (3) the substantial consummation of any plan filed in the Chapter 11 Cases that is confirmed pursuant to an order entered by the Bankruptcy Court and (4) the consummation of a sale of all or substantially all of the assets of the Company and the other Debtors under section 363 of the Bankruptcy Code. Loans under the DIP Credit Agreement accrue interest at a rate of 8.00% per annum, if paid in kind, and at a rate of 7.00% per annum, if paid in cash. 85 The DIP Credit Agreement contains a requirement that the Company and any other borrowers provide every four weeks, a rolling 13 week budget to be approved by the required lenders (the “Approved Budget”). The Company and any other borrower that becomes party to the DIP Credit Agreement may not vary from the Approved Budget by more than 15% of the forecasted amounts in any forecast period. The Approved Budget is, subject to certain exceptions and is tested at certain times in accordance with the DIP Credit Agreement in order to measure variances between the actual total cash disbursements (excluding professional fees and certain other items consistent with the initial Approved Budget) and the disbursements budgeted for the applicable period. As of December 31, 2020, there were no borrowings outstanding under the DIP Credit Agreement. The DIP Credit Agreement does not provide for the issuance of letters of credit but permits occurrence of letters of credit in certain circumstances. Any proceeds of the loans under the DIP Credit Agreement may be used (1) to provide working capital to the borrowers and their subsidiaries and for other general corporate purposes in accordance with the rolling 13 week budget to be approved by the required lenders every four weeks (subject to the Permitted Variance), (2) to pay interest, fees, costs and expenses related to the DIP Facility, (3) to pay fees, costs and expenses of the estate professionals retained for the Chapter 11 Cases as approved by the Bankruptcy Court and as provided for in the Approved Budget (subject to the Permitted Variance), (4) make all permitted payments of costs of administration of the Chapter 11 Cases, (5) pay pre-petition expenses as are consistent with the Approved Budget (subject to the Permitted Variance) and approved by the Bankruptcy Court, (6) to fund the reasonable activities, costs and fees in respect of any insolvency proceedings in the United Kingdom and (7) make other payments permitted by the applicable Approved Budget. The DIP Credit Agreement contains events of default customary to debtor-in-possession financings, including events related to the Chapter 11 Cases, the occurrence of which could result in the acceleration of the Debtors’ obligation to repay the outstanding indebtedness under the DIP Credit Agreement. The Debtors’ obligations under the DIP Credit Agreement are secured by a security interest in, and lien on, substantially all present and after acquired property (subject to certain exceptions) of the Debtors and are guaranteed by certain of the Company’s subsidiaries, including other Debtors. The DIP Credit Agreement also contains customary covenants that limit the ability of the Company and its subsidiaries to, among other things, (1) incur additional indebtedness and permit liens to exist on their assets, (2) pay dividends or make certain other restricted payments, (3) sell assets and (4) make certain investments. These covenants are subject to exceptions and qualifications as set forth in the DIP Credit Agreement. During the three-year period ended December 31, 2020, our primary sources of cash were $1.0 billion in proceeds from issuance of senior notes, Rowan cash acquired of $931.9 million, $581.0 million in net borrowings under our revolving credit facility and $440.0 million from short-term investments, net. While the revolving credit facility has not been terminated, no further borrowings are permitted. Our primary uses of cash for the same period were $1.7 billion for the repurchase and redemption of outstanding debt, $747.5 million for the construction, enhancement and other improvements of our drilling rigs and $584.3 million used in operating activities. Cash Flows and Capital Expenditures Our cash flows from operating activities of continuing operations and capital expenditures on continuing operations for each of the years in the three-year period ended December 31, 2020 were as follows (in millions): 2020 2019 2018 Net cash used in operating activities of continuing operations $ (251.7) $ (276.9) $ (55.7) Capital expenditures $ 93.8 $ 227.0 $ 426.7 During 2020, cash flows used in operating activities decreased by $25.2 million as compared to the prior year due to lower interest costs, partially offset by declining margins. 86 During 2019, cash flows from continuing operations declined by $221.2 million as compared to the prior year due primarily to costs incurred related to the Rowan Transaction, interest on the debt assumed in the Rowan Transaction and declining margins. Based on our current projections, we expect capital expenditures during 2021 to approximate $42.5 million for rig enhancement projects and minor upgrades and improvements. Depending on market conditions and opportunities, we may reduce our planned expenditures or make additional capital expenditures to upgrade rigs for customer requirements. Financing and Capital Resources Debt to Capital Our total debt, total capital and total debt to total capital ratio as of December 31, 2019 were $6.5 billion, $15.8 billion and 41.2%, respectively. Our total debt, total capital and total debt to total capital ratio as of December 31, 2018 were $5.2 billion, $13.3 billion and 38.9%, respectively. Total debt consisted of the principal amount outstanding and total capital consisted of total debt and Valaris shareholders' equity. During 2020, our total debt principal increased by $568.2 million primarily as a result of borrowings on our revolving credit facility and total capital declined by $4.4 billion primarily due to operating losses, inclusive of impairment of long-lived assets. During 2019, our total debt principal increased by $1.4 billion and total capital increased by $2.6 billion as a result of the debt acquired and equity issued in connection with the Rowan Transactions. See " No te 4 - Rowan Transaction" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data". During 2020, we paid $23.8 million of fees related to the establishment of the DIP Credit Agreement, with $20.0 million of these fees included in Reorganization items, net on the Consolidated Statement of Operations for the year ended December 31, 2020. As of December 31, 2020, we were in compliance with our covenants under the DIP Credit Agreement. The commencement of the Chapter 11 Cases resulted in an event of default under each series of our Senior Notes and all obligations thereunder were accelerated. However, any efforts to enforce payment obligations related to the acceleration of our debt have been automatically stayed as a result of the filing of the Chapter 11 Cases. Pursuant to the plan of reorganization contemplated by the Amended RSA, each series of our Senior Notes will be cancelled and the holders thereunder will receive the treatment as set forth in the plan of reorganization. Accordingly, the $6.5 billion in aggregate principal amount under the Senior Notes are Liabilities Subject to Compromise in our Consolidated Balance Sheet as of December 31, 2020. Senior Notes As a result of the Rowan Transaction, we acquired the following senior notes issued by Rowan Companies, LLC (formerly Rowan Companies, Inc.) ("RCI") and guaranteed by Rowan: (1) $201.4 million in aggregate principal amount of 7.875% unsecured senior notes due 2019, which have been repaid in full, (2) $620.8 million in aggregate principal amount of 4.875% 2022 Notes (the "4.875% 2022 Notes"), (3) $398.1 million in aggregate principal amount of 4.75% 2024 Notes (the "4.75% 2024 Notes"), (4) $500.0 million in aggregate principal amount of 7.375% 2025 Notes (the "7.375% 2025 Notes"), (5) $400.0 million in aggregate principal amount of 2042 Notes (the "2042 Notes") and (6) $400.0 million in aggregate principal amount of 5.85% 2044 Notes (the "5.85% 2044 Notes"). On February 3, 2020, Rowan and RCI transferred substantially all their assets on a consolidated basis to Valaris plc, Valaris plc became the obligor on the notes and Rowan and RCI were relieved of their obligations under the notes and the related indenture. 87 On January 26, 2018, we issued $1.0 billion aggregate principal amount of unsecured 7.75% senior notes due 2026 (the "2026 Notes") at par, net of $16.5 million in debt issuance costs. Interest on the 2026 Notes is payable semiannually on February 1 and August 1 of each year. During 2017, we exchanged $332.0 million aggregate principal amount of unsecured 8.00% senior notes due 2024 (the “8% 2024 Notes”) for certain amounts of our outstanding senior notes due 2019, 2020 and 2021. Interest on the 8% 2024 Notes is payable semiannually on January 31 and July 31 of each year. During 2015, we issued $700.0 million aggregate principal amount of unsecured 5.20% senior notes due 2025 (the “2025 Notes”) at a discount of $2.6 million and $400.0 million aggregate principal amount of unsecured 5.75% senior notes due 2044 (the “New 2044 Notes”) at a discount of $18.7 million in a public offering. Interest on the 2025 Notes is payable semiannually on March 15 and September 15 of each year. Interest on the New 2044 Notes is payable semiannually on April 1 and October 1 of each year. During 2014, we issued $625.0 million aggregate principal amount of unsecured 4.50% senior notes due 2024 (the "2024 Notes") at a discount of $0.9 million and $625.0 million aggregate principal amount of unsecured 5.75% senior notes due 2044 (the "Existing 2044 Notes") at a discount of $2.8 million. Interest on the 2024 Notes and the Existing 2044 Notes is payable semiannually on April 1 and October 1 of each year. The Existing 2044 Notes together with the New 2044 Notes, the "2044 Notes", are treated as a single series of debt securities under the indenture governing the notes. During 2011, we issued $1.5 billion aggregate principal amount of unsecured 4.70% senior notes due 2021 (the “2021 Notes”) at a discount of $29.6 million in a public offering. Interest on the 2021 Notes is payable semiannually on March 15 and September 15 of each year. Upon consummation of our acquisition of Pride International LLC ("Pride") during 2011, we assumed outstanding debt comprised of $900.0 million aggregate principal amount of unsecured 6.875% senior notes due 2020, $300.0 million aggregate principal amount of unsecured 7.875% senior notes due 2040 (collectively, the "Pride Notes"), and $500.0 million aggregate principal amount of unsecured 8.5% senior notes due 2019 (collectively, with the Pride Notes, the "Acquired Notes"). Valaris plc has fully and unconditionally guaranteed the performance of all Pride obligations with respect to the Acquired Notes. Certain of these senior notes allow us to redeem these senior notes, either in whole in part, subject to the payment of certain “make whole” premiums. However, due to the commencement of the Chapter 11 Cases, we do not expect to make any such redemptions. The indentures governing these senior notes contain customary events of default, including failure to pay principal or interest on such notes when due, among others. The indenture also contains certain restrictions, including, among others, restrictions on our ability and the ability of our subsidiaries to create or incur secured indebtedness, enter into certain sale/leaseback transactions and enter into certain merger or consolidation transactions. Debentures Due 2027 During 1997, Ensco International Incorporated issued $150.0 million of unsecured 7.20% Debentures due 2027 (the "Debentures"). Interest on the Debentures is payable semiannually on May 15 and November 15 of each year. We may redeem the Debentures, in whole or in part, at any time prior to maturity, at a price equal to 100% of their principal amount, plus accrued and unpaid interest and a "make-whole" premium. During 2009, Valaris plc entered into a supplemental indenture to unconditionally guarantee the principal and interest payments on the Debentures. The Debentures and the indenture pursuant to which the Debentures were issued also contain customary events of default, including failure to pay principal or interest on the Debentures when due, among others. The 88 indenture also contains certain restrictions, including, among others, restrictions on our ability and the ability of our subsidiaries to create or incur secured indebtedness, enter into certain sale/leaseback transactions and enter into certain merger or consolidation transactions. 2024 Convertible Notes I n December 2016, Ensco Jersey Finance Limited, a wholly-owned subsidiary of Valaris plc, issued $849.5 million aggregate principal amount of 3.00% convertible senior notes due 2024 (the "2024 Convertible Notes") in a private offering. The 2024 Convertible Notes are fully and unconditionally guaranteed, on a senior, unsecured basis, by Valaris plc. Under the terms of our debt agreement, we have the option to settle our 2024 Convertible Notes in cash, shares or a combination thereof for the aggregate amount due upon conversion. However, the commencement of the Chapter 11 Cases on August 19, 2020, constituted an event of default under the 2024 Convertible Notes. Any efforts to enforce payment obligations under the 2024 Convertible Notes, including any rights to require the repurchase by the Company of the 2024 Convertible Notes upon the NYSE delisting of the Class A ordinary shares, are automatically stayed as a result of the filing of the Chapter 11 Cases. Interest on the 2024 Convertible Notes is payable semiannually on January 31 and July 31 of each year. The 2024 Convertible Notes will mature on January 31, 2024, unless exchanged, redeemed or repurchased in accordance with their terms prior to such date. Holders may exchange their 2024 Convertible Notes at their option any time prior to July 31, 2023 only under certain circumstances set forth in the indenture governing the 2024 Convertible Notes. On or after July 31, 2023, holders may exchange their 2024 Convertible Notes at any time. The exchange rate is 17.8336 shares per $1,000 principal amount of notes, representing an exchange price of $56.08 per share, and is subject to adjustment upon certain events. The 2024 Convertible Notes may not be redeemed by us except in the event of certain tax law changes. The indenture governing the 2024 Convertible Notes contains customary events of default, including failure to pay principal or interest on such notes when due, among others. The indenture also contains certain restrictions, including, among others, restrictions on our ability and the ability of our subsidiaries to create or incur secured indebtedness, enter into certain sale/leaseback transactions and enter into certain merger or consolidation transactions. See " Note 8 - Debt" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for additional information on our 2024 Convertible Notes. The 2021 Notes, 4.875% 2022 Notes, 4.75% 2024 Notes, 8% 2024 Notes, 2024 Notes, 2025 Notes, 7.375% 2025 Notes, 2026 Notes, 2042 Notes, 5.85% 2044 Notes, Existing 2044 Notes, the Pride Notes, the Debentures and 2024 Convertible Notes" together are the "Senior Notes". The commencement of the Chapter 11 Cases on August 19, 2020, constituted an event of default under our Senior Notes. See " Note 2 - Chapter 11 Proceedings and Ability to Continue as a Going Concern" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for more information related to our Chapter 11 Cases to effect a comprehensive restructuring of our indebtedness. Tender Offers and Open Market Repurchases In early March 2020, we repurchased $12.8 million of our outstanding 4.70% senior notes due 2021 on the open market for an aggregate purchase price of $9.7 million, excluding accrued interest, with cash on hand. As a result of the transaction, we recognized a pre-tax gain of $3.1 million net of discounts in other, net, in the consolidated statements of operations. On June 25, 2019, we commenced cash tender offers for certain series of senior notes issued by us and Ensco International Incorporated and RCI, our wholly-owned subsidiaries. The tender offers expired on July 23, 2019, and we repurchased $951.8 million of our outstanding senior notes for an aggregate purchase price of $724.1 million. As a result of the transaction, we recognized a pre-tax gain from debt extinguishment of $194.1 million, net of discounts, premiums and debt issuance costs. 89 Concurrent with the issuance of the 2026 Notes in January 2018, we launched cash tender offers for up to $985.0 million aggregate principal amount of certain series of senior notes issued by us and Pride, our wholly-owned subsidiary, and as a result we repurchased $595.4 million of our senior notes. Subsequently, we issued a redemption notice for the remaining principal amount of the $55.0 million principal amount of the 8.50% senior notes due 2019 and repurchased $71.4 million principal amount of our senior notes due 2020. As a result of these transactions, we recognized a pre-tax loss from debt extinguishment of $19.0 million, net of discounts, premiums, debt issuance costs and commissions. Our tender offers and open market repurchases during the three-year period ended December 31, 2020 are summarized in the following table (in millions): Aggregate Principal Amount Repurchased Aggregate Repurchase Price (1) Year Ended December 31, 2020 4.70% Senior notes due 2021 $ 12.8 $ 9.7 Year Ended December 31, 2019 4.50% Senior notes due 2024 $ 320.0 $ 240.0 4.75% Senior notes due 2024 79.5 61.2 8.00% Senior notes due 2024 39.7 33.8 5.20% Senior notes due 2025 335.5 250.0 7.375% Senior notes due 2025 139.2 109.2 7.20% Senior notes due 2027 37.9 29.9 $ 951.8 $ 724.1 Year Ended December 31, 2018 8.50% Senior notes due 2019 $ 237.6 $ 256.8 6.875% Senior notes due 2020 328.0 354.7 4.70% Senior notes due 2021 156.2 159.7 $ 721.8 $ 771.2 (1) Excludes accrued interest paid to holders of the repurchased senior notes. Revolving Credit Facility and DIP Facility Effective upon closing of the Rowan Transaction, our revolving credit facility was $1.6 billion. As previously disclosed, prior to the commencement of the Chapter 11 Cases, we entered into a series of waiver agreements (the “Waivers”) between the dates of June 1, 2020 and August 3, 2020 in respect of the revolving credit facility. The Waivers did not address any event of default resulting under the revolving credit facility attributed to the filing of Chapter 11 Cases. Consequently, the principal and interest under our revolving credit facility became immediately due and payable upon filing of such Chapter 11 Cases, which constituted an event of default under the revolving credit facility. However, the ability of the lenders under the revolving credit facility to exercise remedies in respect of the revolving credit facility was stayed upon commencement of the Chapter 11 Cases. While the revolving credit facility has not been terminated, notwithstanding the $1.6 billion borrowing capacity under the revolving credit facility, no further borrowings under the revolving credit facility are permitted. 90 As of December 31, 2020 , we had $581.0 million of borrowings outstanding under our revolving credit facility and $27.0 million of undrawn letters of cred it. The outstanding borrowings as well as accrued interest as of the Petition Date are classified as Liabilities Subject to Compromise in our Consolidated Balance Sheet as of December 31, 2020. See " Note 2 - Chapter 11 Proceedings and Ability to Continue as a Going Concern" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for more information related to our Chapter 11 Cases to effect a comprehensive restructuring of our indebtedness. We expect cash on hand and the DIP Facility will provide sufficient liquidity for us during the pendency of the Chapter 11 Cases based on current projections of cash flows. Should we experience material variations from our projected cash flows, this could result in us having insufficient liquidity from the DIP Facility and in turn could have a material adverse impact on our financial position, operating results or cash flows. Maturities The original principal amounts issued under our senior notes have subsequently changed as a result of our tenders, repurchases, exchanges, redemptions and new debt issuances such that the balance outstanding at December 31, 2020 were as follows (in millions): Subject to Compromise (2) Senior Notes (2) Original Principal 2016 Tenders, Repurchases and Equity Exchange 2017 Exchange Offers and Repurchases 2018 Tender Offers, Redemption and Debt Issuance 2019 Tender Offers and Acquired Debt 2020 Open Market Repurchase Remaining Principal 6.875% Senior notes due 2020 $ 900.0 $ (219.2) $ (229.9) $ (328.0) $ — $ — $ 122.9 4.70% Senior notes due 2021 1,500.0 (817.0) (413.3) (156.2) — (12.8) 100.7 4.875% Senior notes due 2022 (1) — — — — 620.8 — 620.8 3.00% Exchangeable senior notes due 2024 849.5 — — — — — 849.5 4.50% Senior notes due 2024 625.0 (1.6) — — (320.0) — 303.4 4.75% Senior notes due 2024 (1) — — — — 318.6 — 318.6 8.00% Senior notes due 2024 — — 332.0 — (39.7) — 292.3 5.20% Senior notes due 2025 700.0 (30.8) — — (335.5) — 333.7 7.375% Senior notes due 2025 (1) — — — — 360.8 — 360.8 7.75% Senior notes due 2026 — — — 1,000.0 — — 1,000.0 7.20% Debentures due 2027 150.0 — — — (37.9) — 112.1 7.875% Senior notes due 2040 300.0 — — — — 300.0 5.40% Senior notes due 2042 (1) — — — — 400.0 — 400.0 5.75% Senior notes due 2044 1,025.0 (24.5) — — — — 1,000.5 5.85% Senior notes due 2044 (1) — — — — 400.0 — 400.0 Total $ 6,049.5 $ (1,093.1) $ (311.2) $ 515.8 $ 1,367.1 $ (12.8) $ 6,515.3 91 (1) These senior notes were acquired in the Rowan Transaction. (2) The $6.5 billion aggregate principal amount of Senior Notes outstanding as well as associated $201.9 million in accrued interest as of the Petition Date are classified as Liabilities Subject to Compromise in our Consolidated Balance Sheet as of December 31, 2020. The maturity dates represent the maturity dates per the debt agreements; however, we are in default on these senior notes and are currently in chapter 11 proceedings. See "Senior Notes" above and “ Note 2 – Chapter 11 Proceedings and Ability to Continue as a Going Concern” included in "Item 8. Financial Statements and Supplementary Data" for additional information for additional details regarding Chapter 11 Cases. Other Financing Arrangements During 2018, our shareholders approved our current share repurchase program. Subject to certain provisions under English law, including the requirement of the Company to have sufficient distributable reserves and the Board to conclude that a repurchase is in the best interests of Valaris plc taking into account the interests of relevant stakeholders, we may repurchase shares up to a maximum of $500 million in the aggregate from one or more financial intermediaries under the program, but in no case more than 16.3 million shares. The program terminates in May 2023. As of December 31, 2020, there had been no share repurchases under this program. Our DIP Credit Agreement only permits the repurchase of our shares in certain limited circumstances and the repurchase of shares would likely require approval of the bankruptcy court. We do not currently expect to make repurchases under the program whilst Valaris plc remains subject to Chapter 11 bankruptcy proceedings. Investment in ARO and Notes Receivable from ARO We consider our investment in ARO to be a significant component of our investment portfolio and an integral part of our long-term capital resources. We expect to receive cash from ARO in the future both from the maturity of our long-term notes receivable and from the distribution of earnings from ARO. The long-term notes receivable, which are governed by the laws of Saudi Arabia, earn interest at LIBOR plus two percent and mature during 2027 and 2028. In the event that ARO is unable to repay these notes when they become due, we would require the prior consent of our joint venture partner to enforce ARO’s payment obligations. The notes receivable may be reduced by future Company obligations to the joint venture. The distribution of earnings to the joint-venture partners is at the discretion of the ARO Board of Managers, consisting of 50/50 membership of managers appointed by Saudi Aramco and managers appointed by us, with approval required by both shareholders. The timing and amount of any cash distributions to the joint-venture partners cannot be predicted with certainty and will be influenced by various factors, including the liquidity position and long-term capital requirements of ARO. ARO has not made a cash distribution of earnings to its partners since its formation. See " Note 5 - Equity Method Investment in ARO" included in "Item 8. Financial Statements and Supplementary Data" for additional information on our investment in ARO and notes receivable from ARO. The following table summarizes the maturity schedule of our notes receivable from ARO as of December 31, 2020 (in millions): Maturity Date Principal amount October 2027 $ 265.0 October 2028 177.7 Total $ 442.7 92 Contractual Obligations We have various contractual commitments related to our rig construction agreements, long-term debt and operating leases. In light of our ongoing Chapter 11 Cases, our expectations with regards to settling these obligations may change. Generally, we expect to fund our commitments from existing cash and funds borrowed under our DIP Facility or other future financing arrangements unless otherwise stipulated in the Amended RSA. The following table summarizes our significant contractual obligations as of December 31, 2020 and the periods in which such obligations are due (in millions): Payments due by period 2021 2022 and 2023 2024 and 2025 Thereafter Total Principal payments on long-term debt (1) $ — $ — $ — $ — $ — New rig construction agreements (2)(3) 83.9 165.0 — — 248.9 Operating leases 17.8 15.0 4.2 9.0 46.0 Total contractual obligations (4) $ 101.7 $ 180.0 $ 4.2 $ 9.0 $ 294.9 (1) As a result of our chapter 11 filing, we reclassified $7.1 billion representing the principal balance on our unsecured senior notes and the amount of outstanding borrowings on our revolving credit facility to Liabilities Subject to Compromise on our Consolidated Balance Sheet as of December 31, 2020 . (2) As of December 31, 2020, the contractual delivery dates for the VALARIS DS-13 and VALARIS DS-14 were September 30, 2021 and June 30, 2022, respectively. The remaining milestone payments for VALARIS DS-13 and VALARIS DS-14 are included in the table above in the period in which they were contractually owed . The Amended RSA provides that on or before the effective date of the reorganization, the construction contracts for these rigs shall be rejected under Section 365 of the Bankruptcy Code, unless otherwise agreed between the shipyard and the Company with the consent of required consenting noteholders. If rejected, it is contemplated that we would have to pay an amount equal to the liquidation recovery, which is the amount the contract counterparty would be entitled to receive or retain if the applicable Company entity was liquidated under chapter 7 of the Bankruptcy Code. Prior to December 31, 2020, a Stipulation was filed with the Bankruptcy Court which included an Assumption Term Sheet stating amended terms of these construction agreements. Following further negotiations, we entered into amended agreements with the shipyard on February 26, 2021 that become effective upon our emergence from bankruptcy. The amendments provide for, among other things, an option construct whereby the Company has the right, but not the obligation, to take delivery of either or both rigs on or before December 31, 2023. Under the amended agreements, the purchase price for the rigs are estimated to be approximately $119.1 million for the VALARIS DS-13 and $218.3 million for the VALARIS DS-14, assuming a December 31, 2023 delivery date. Delivery can be requested any time prior to December 31, 2023 with a downward purchase price adjustment based on predetermined terms. If the Company elects not to purchase the rigs, the Company has no further obligations to the shipyard. The amended agreements remove any Company guarantee. (3) Total commitments are based on fixed-price shipyard construction contracts, exclusive of our internal costs associated with project management, commissioning and systems integration testing. Total commitments also exclude holding costs and interest. (4) Contractual obligations do not include $286.1 million of unrecognized tax benefits, inclusive of interest and penalties, included on our consolidated balance sheet as of December 31, 2020. We are unable to specify with certainty the future periods in which we may be obligated to settle such amounts. In addition, we have a potential obligation to fund ARO for newbuild jackup rigs. In the event ARO has insufficient cash from 93 operations or is unable to obtain third-party financing, each partner may periodically be required to make additional capital contributions to ARO, up to a maximum aggregate contribution of $1.25 billion from each partner to fund the newbuild program. The Company's capital contributions to ARO pursuant to this requirement may require approval of the Bankruptcy Court during the Chapter 11 Cases. Each partner's commitment shall be reduced by the actual cost of each newbuild rig, on a proportionate basis. "See Note 5 - Equity Method Investment in ARO" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data." for additional information on our joint venture with ARO. Other Commitments We have other commitments that we are contractually obligated to fulfill with cash under certain circumstances. These commitments include letters of credit to guarantee our performance as it relates to our drilling contracts, contract bidding, customs duties, tax appeals and other obligations in various jurisdictions. Obligations under these letters of credit are not normally called, as we typically comply with the underlying performance requirement. As of December 31, 2020, we had insignificant collateral deposits with respect to these agreements. The following table summarizes our other commitments as of December 31, 2020 (in millions): Commitment expiration by period 2021 2022 and 2023 2024 and 2025 Thereafter Total Letters of credit $ 88.5 $ 15.9 $ 7.2 $ 3.5 $ 115.1 Recent Tax Assessments During 2019, the Australian tax authorities issued aggregate tax assessments totaling approximately A$101 million (approximately $77.7 million converted at current period-end exchange rates) plus interest related to the examination of certain of our tax returns for the years 2011 through 2016. During the third quarter of 2019, we made a A$42 million payment (approximately $29 million at then-current exchange rates) to the Australian tax authorities to litigate the assessment. We have a $17.9 million liability for unrecognized tax benefits relating to these assessments as of December 31, 2020. We believe our tax returns are materially correct as filed, and we are vigorously contesting these assessments. Although the outcome of such assessments and related administrative proceedings cannot be predicted with certainty, we do not expect these matters to have a material adverse effect on our financial position, operating results and cash flows. See " Note 13 - Income Taxes" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for additional information on recent tax assessments. Effects of Climate Change and Climate Change Regulation Greenhouse gas (“GHG”) emissions have increasingly become the subject of international, national, regional, state and local attention. At the December 2015 Conference of the Parties to the United Nations Framework Convention on Climate Change held in Paris, an agreement was reached that requires countries to review and “represent a progression” in their intended nationally determined contributions to the reduction of GHG emissions, setting GHG emission reduction goals every five years beginning in 2020. This agreement, known as the Paris Agreement, entered into force on November 4, 2016 and, as of February 2019, had been ratified by 187 of the 197 parties to the United Nations Framework Convention on Climate Change, including the United Kingdom, the United States and the majority of the other countries in which we operate. The United Nations Climate Change Conference held in Katowice, Poland in December 2018 adopted further rules regarding the implementation of the Paris Agreement and, in connection with this conference, numerous countries issued commitments to increase their GHG emission reduction targets. Although the United States had withdrawn from the Paris Agreement in November 2020, the current Presidential Administration officially reentered the United States into the agreement in February 2021. It is expected that new executive orders, regulatory action, and/or legislation targeting greenhouse gas emissions, or prohibiting, restricting, or delaying oil and gas development activities in certain areas, will be proposed and/or promulgated. For example, the acting Secretary of the Department of the Interior recently issued 94 an order preventing staff from producing any new federal fossil fuel leases or permits without sign-off from a top political appointee. In addition, the current Presidential Administration has issued multiple executive orders pertaining to environmental regulations and climate change, including the (1) Executive Order on Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis and (2) Executive Order on Tackling the Climate Crisis at Home and Abroad. The latter executive order announced a moratorium on new oil and gas leasing on federal lands and offshore waters pending completion of a comprehensive review and reconsideration of Federal oil and gas permitting and leasing practices, established climate change as a primary foreign policy and national security consideration and affirmed that achieving net-zero greenhouse gas emissions by or before mid-century is a critical priority. In an effort to reduce GHG emissions, governments have implemented or considered legislative and regulatory mechanisms to institute carbon pricing mechanisms, such as the European Union’s Emission Trading System, and to impose technical requirements to reduce carbon emissions. The Companies Act 2006 (Strategic and Directors' Reports) Regulations 2013 now requires all quoted U.K. companies, including Valaris plc, to report their annual GHG emissions in the Company's directors' report. During 2009, the United States Environmental Protection Agency (the “EPA”) officially published its findings that emissions of carbon dioxide, methane and other GHGs present an endangerment to human health and the environment because emissions of such gases are, according to the EPA, contributing to warming of the earth’s atmosphere and other climatic changes. These findings allowed the agency to proceed with the adoption and implementation of regulations to restrict GHG emissions under existing provisions of the Clean Air Act that establish permitting requirements, including emissions control technology requirements, for certain large stationary sources that are potential major sources of GHG emissions. These requirements for stationary sources took effect on January 2, 2011; however, in June 2014 the U.S. Supreme Court reversed a D.C. Circuit Court of Appeals decision upholding these rules and struck down the EPA’s greenhouse gas permitting rules to the extent they impose a requirement to obtain a federal air permit based solely on emissions of greenhouse gases. Large sources of other air pollutants, such as VOC or nitrogen oxides, could still be required to implement process or technology controls and obtain permits regarding emissions of greenhouse gases. The EPA has also adopted rules requiring annual monitoring and reporting of GHG emissions from specified sources in the U.S., including, among others, certain onshore and offshore oil and natural gas production facilities. Although a number of bills related to climate change have been introduced in the U.S. Congress in the past, comprehensive federal climate legislation has not yet been passed by Congress. If such legislation were to be adopted in the U.S., such legislation could adversely impact many industries. In the absence of federal legislation, almost half of the states have begun to address GHG emissions, primarily through the development or planned development of emission inventories or regional GHG cap and trade programs and commitments to contribute to meeting the goals of the Paris Agreement. Future regulation of GHG emissions could occur pursuant to future treaty obligations, statutory or regulatory changes or new climate change legislation in the jurisdictions in which we operate. Depending on the particular program, we, or our customers, could be required to control GHG emissions or to purchase and surrender allowances for GHG emissions resulting from our operations. It is uncertain whether any of these initiatives will be implemented. If such initiatives are implemented, we do not believe that such initiatives would have a direct, material adverse effect on our financial condition, operating results and cash flows in a manner different than our competitors. Restrictions on GHG emissions or other related legislative or regulatory enactments could have an indirect effect in those industries that use significant amounts of petroleum products, which could potentially result in a reduction in demand for petroleum products and, consequently, our offshore contract drilling services. We are currently unable to predict the manner or extent of any such effect. Furthermore, one of the long-term physical effects of climate change may be an increase in the severity and frequency of adverse weather conditions, such as hurricanes, which may increase our insurance costs or risk retention, limit insurance availability or reduce the areas in which, or the number of days during which, our customers would contract for our drilling rigs in general and in the Gulf of Mexico in particular. We are currently unable to predict the manner or extent of any such effect. 95 In addition, in recent years the investment community, including investment advisors and certain sovereign wealth, pension and endowment funds, has promoted divestment of fossil fuel equities and pressured lenders to cease or limit funding to companies engaged in the extraction of fossil fuel reserves. Such environmental initiatives aimed at limiting climate change and reducing air pollution could ultimately interfere with our business activities and operations. Finally, increasing attention to the risks of climate change has resulted in an increased possibility of lawsuits brought by public and private entities against oil and gas companies in connection with their greenhouse gas emissions. Should we be targeted by any such litigation, we may incur liability, which, to the extent that societal pressures or political or other factors are involved, could be imposed without regard to the company’s causation of or contribution to the asserted damage, or to other mitigating factors. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires us to make estimates, judgments and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Our significant accounting policies are included in " Note 1 - Description of Business and Summary of Significant Accounting Policies to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data". These policies, along with our underlying judgments and assumptions made in their application, have a significant impact on our consolidated financial statements. We identify our critical accounting policies as those that are the most pervasive and important to the portrayal of our financial position and operating results and that require the most difficult, subjective and/or complex judgments regarding estimates in matters that are inherently uncertain. Our critical accounting policies are those related to property and equipment, impairment of long-lived assets, income taxes and pensions. Property and Equipment As of December 31, 2020, the carrying value of our property and equipment totaled $11.0 billion, which represented 85% of total assets. This carrying value reflects the application of our property and equipment accounting policies, which incorporate our estimates, judgments and assumptions relative to the capitalized costs, useful lives and salvage values of our rigs. We develop and apply property and equipment accounting policies that are designed to appropriately and consistently capitalize those costs incurred to enhance, improve and extend the useful lives of our assets and expense those costs incurred to repair or maintain the existing condition or useful lives of our assets. The development and application of such policies requires estimates, judgments and assumptions relative to the nature of, and benefits from, expenditures on our assets. We establish property and equipment accounting policies that are designed to depreciate our assets over their estimated useful lives. The judgments and assumptions used in determining the useful lives of our property and equipment reflect both historical experience and expectations regarding future operations, utilization and performance of our assets. The use of different estimates, judgments and assumptions in the establishment of our property and equipment accounting policies, especially those involving the useful lives of our rigs, would likely result in materially different asset carrying values and operating results. The useful lives of our drilling rigs are difficult to estimate due to a variety of factors, including technological advances that impact the methods or cost of oil and natural gas exploration and development, changes in market or economic conditions and changes in laws or regulations affecting the drilling industry. We evaluate the remaining useful lives of our rigs on a periodic basis, considering operating condition, functional capability and market and economic factors. Property and equipment held-for-sale is recorded at the lower of net book value or fair value less cost to sell. During 2020, we recorded an aggregate pre-tax, non-cash impairment of $3.6 billion with respect to certain floaters, jackups and spare equipment. We estimate the portion of the aforementioned impairment related to 96 impaired rigs that remain in our fleet as of December 31, 2020 will cause a decline in depreciation expense of approximately $35.4 million for the year ended December 31, 2021. Our fleet of 16 floater rigs, excluding two rigs under construction, represented 54% of the gross cost and 55% of the net carrying amount of our depreciable property and equipment as of December 31, 2020. Our fleet of 36 jackup rigs, represented 37% of the gross cost and 36% of the net carrying amount of our depreciable property and equipment as of December 31, 2020. Our floater rigs and jackup rigs are depreciated over 35 and 30 years, respectively, for newly constructed assets and over their estimated remaining useful lives for rigs obtained in a business combination. The following table provides an analysis of estimated increases and decreases in depreciation expense from continuing operations that would have been recognized for the year ended December 31, 2020 for various assumed changes in the useful lives of our drilling rigs effective January 1, 2020: Increase (decrease) in useful lives of our drilling rigs Estimated (decrease) increase in depreciation expense that would have been recognized (in millions) 10% $(41.5) 20% (76.1) (10%) 50.4 (20%) 101.5 Impairment of Property and Equipment We recorded pre-tax, non-cash losses on impairment of long-lived assets of $3.6 billion, $98.4 million and $40.3 million during 2020, 2019 and 2018, respectively. See " Note 7 - Property and Equipment" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for additional information on our impairments of property and equipment. We evaluate the carrying value of our property and equipment, primarily our drilling rigs, on a quarterly basis to identify events or changes in circumstances ("triggering events") that indicate that the carrying value of such rigs may not be recoverable. Generally, extended periods of idle time and/or inability to contract rigs at economical rates are an indication that a rig may be impaired. Impairment situations may arise with respect to specific individual rigs, groups of rigs, such as a specific type of drilling rig, or rigs in a certain geographic location. For property and equipment used in our operations, recoverability generally is determined by comparing the carrying value of an asset to the expected undiscounted future cash flows of the asset. If the carrying value of an asset is not recoverable, the amount of impairment loss is measured as the difference between the carrying value of the asset and its estimated fair value. The determination of expected undiscounted cash flow amounts requires significant estimates, judgments and assumptions, including utilization levels, day rates, expense levels and capital requirements, as well as cash flows generated upon disposition, for each of our drilling rigs. Due to the inherent uncertainties associated with these estimates, we perform sensitivity analysis on key assumptions as part of our recoverability test. 97 Our judgments and assumptions about future cash flows to be generated by our drilling rigs are highly subjective and based on consideration of the following: • global macroeconomic and political environment, • historical utilization, day rate and operating expense trends by asset class, • regulatory requirements such as surveys, inspections and recertification of our rigs, • remaining useful lives of our rigs, • expectations on the use and eventual disposition of our rigs, • weighted-average cost of capital, • oil price projections, • sanctioned and unsanctioned offshore project data, • offshore economic project break-even data, • global rig supply and construction orders, • global rig fleet capabilities and relative rankings, and • expectations of global rig fleet attrition. We collect and analyze the above information to develop a range of estimated utilization levels, day rates, expense levels and capital requirements, as well as estimated cash flows generated upon disposition. The drivers of these assumptions that impact our impairment analyses include projections of future oil prices and timing of global rig fleet attrition, which, in large part, impact our estimates on timing and magnitude of recovery from the current industry downturn. However, there are numerous judgments and assumptions unique to the projected future cash flows of each rig that individually, and in the aggregate, can significantly impact the recoverability of its carrying value. The highly cyclical nature of our industry cannot be reasonably predicted with a high level of accuracy and, therefore, differences between our historical judgments and assumptions and actual results will occur. We reassess our judgments and assumptions in the period in which significant differences are observed and may conclude that a triggering event has occurred and perform a recoverability test. We recognized impairment charges in recent periods upon observation of significant unexpected changes in our business climate and estimated useful lives of certain assets. There are numerous factors underlying the highly cyclical nature of our industry that are reasonably likely to impact our judgments and assumptions including, but not limited to, the following: • changes in global economic conditions and demand, • production levels of the Organization of Petroleum Exporting Countries (“OPEC”), • production levels of non-OPEC countries, • advances in exploration and development technology, • offshore and onshore project break-even economics, • development and exploitation of alternative fuels, • natural disasters or other operational hazards, • changes in relevant law and governmental regulations, • political instability and/or escalation of military actions in the areas we operate, • changes in the timing and rate of global newbuild rig construction, and • changes in the timing and rate of global rig fleet attrition. There is a wide range of interrelated changes in our judgments and assumptions that could reasonably occur as a result of unexpected developments in the aforementioned factors, which could result in materially different carrying values for an individual rig, group of rigs or our entire rig fleet, materially impacting our operating results. 98 Income Taxes We conduct operations and earn income in numerous countries and are subject to the laws of numerous tax jurisdictions. As of December 31, 2020, our consolidated balance sheet included an $8.2 million net deferred income tax asset, a $33.9 million liability for income taxes currently payable and a $286.1 million liability for unrecognized tax benefits, inclusive of interest and penalties. The carrying values of deferred income tax assets and liabilities reflect the application of our income tax accounting policies and are based on estimates, judgments and assumptions regarding future operating results and levels of taxable income. Carryforwards and tax credits are assessed for realization as a reduction of future taxable income by using a more-likely-than-not determination. We do not offset deferred tax assets and deferred tax liabilities attributable to different tax paying jurisdictions. We do not provide deferred taxes on the undistributed earnings of certain subsidiaries because our policy and intention is to reinvest such earnings indefinitely. Should we make a distribution from these subsidiaries in the form of dividends or otherwise, we may be subject to additional income taxes. The carrying values of liabilities for income taxes currently payable and unrecognized tax benefits are based on our interpretation of applicable tax laws and incorporate estimates, judgments and assumptions regarding the use of tax planning strategies in various taxing jurisdictions. The use of different estimates, judgments and assumptions in connection with accounting for income taxes, especially those involving the deployment of tax planning strategies, may result in materially different carrying values of income tax assets and liabilities and operating results. We operate in several jurisdictions where tax laws relating to the offshore drilling industry are not well developed. In jurisdictions where available statutory law and regulations are incomplete or underdeveloped, we obtain professional guidance and consider existing industry practices before utilizing tax planning strategies and meeting our tax obligations. Tax returns are routinely subject to audit in most jurisdictions and tax liabilities occasionally are finalized through a negotiation process. In some jurisdictions, income tax payments may be required before a final income tax obligation is determined in order to avoid significant penalties and/or interest. While we historically have not experienced significant adjustments to previously recognized tax assets and liabilities as a result of finalizing tax returns, there can be no assurance that significant adjustments will not arise in the future. In addition, there are several factors that could cause the future level of uncertainty relating to our tax liabilities to increase, including the following: • During recent years, the number of tax jurisdictions in which we conduct operations has increased. • In order to utilize tax planning strategies and conduct operations efficiently, our subsidiaries frequently enter into transactions with affiliates that are generally subject to complex tax regulations and are frequently reviewed and challenged by tax authorities. • We may conduct future operations in certain tax jurisdictions where tax laws are not well developed, and it may be difficult to secure adequate professional guidance. • Tax laws, regulations, agreements, treaties and the administrative practices and precedents of tax authorities change frequently, requiring us to modify existing tax strategies to conform to such changes. 99 Pension and Other Postretirement Benefits Our pension and other postretirement benefit liabilities and costs are based upon actuarial computations that reflect our assumptions about future events, including long-term asset returns, interest rates, annual compensation increases, mortality rates and other factors. Key assumptions at December 31, 2020, included (1) a weighted average discount rate of 2.30% to determine pension benefit obligations, (2) a weighted average discount rate of 3.16% to determine net periodic pension cost and (3), an expected long-term rate of return on pension plan assets of 6.48% to determine net periodic pension cost. The assumed discount rate is based upon the average yield for Moody’s Aa-rated corporate bonds, and the rate of return assumption reflects a probability distribution of expected long-term returns that is weighted based upon plan asset allocations. A one-percentage-point decrease in the assumed discount rate would increase our recorded pension and other postretirement benefit liabilities by approximately $125.6 million, while a one-percentage-point decrease (increase) in the expected long-term rate of return on plan assets would increase (decrease) annual net benefits cost by approximately $5.6 million. To develop the expected long-term rate of return on assets assumption, we considered the current level of expected returns on risk-free investments (primarily government bonds), the historical level of the risk premium associated with the plans’ other asset classes, and the expectations for future returns of each asset class. The expected return for each asset class was then weighted based upon the current asset allocation to develop the expected long-term rate of return on assets assumption for the plan, which decreased to 6.03% at December 31, 2020 from 6.48% at December 31, 2019. See " Note 12 - Pension and Other Post Retirement Benefits" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for information on our pension and other postretirement benefit plans. NEW ACCOUNTING PRONOUNCEMENTS See " Note 1 - Description of the Business and Summary of Significant Accounting Policies" to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" for information on new accounting pronouncements. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Not applicable. 100