United states securities and exchange commission

Note 13—Concentrations of Credit and Market Risk

Financial instruments that potentially subject the Company to credit risk are primarily cash equivalents, restricted cash and accounts receivable. At times, cash equivalents and restricted cash may be in excess of FDIC insurance limits. With regards to accounts receivable, we have an exposure from our concentration of clients within the oil and natural gas industry. This industry concentration has the potential to impact our exposure to credit and market risks as our clients could be affected by similar changes in economic, industry or other conditions. However, we believe that the credit risk posed by this industry concentration has been largely offset by the creditworthiness of our client base. During the years ended December 31, 2016, 2015 and 2014, the percentage of revenues earned from our clients was as follows:

		Years Ended December 31,
		2016			2015			2014
Chevron		77.1	%		81.2	%		67.4	%
Total		22.9	%		17.2	%		17.3	%
Petrobras		—	%		1.6	%		15.3	%

 

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Notes to Consolidated Financial Statements―Continued
Some of our employees in Nigeria are represented by unions. As of December 31, 2016 and 2015, approximately 1% and 20% of our labor force was covered by collective bargaining agreements, all of which are subject to annual salary negotiation.

 

Note 14—Segments and Geographic Areas

Our drillships are part of a single, global market for contract drilling services and can be redeployed globally due to changing demands. We consider the operations of each of our drillships to be an operating segment. We evaluate the financial performance of each of our drillships and our overall fleet based on several factors, including revenues from clients and operating profit. The consolidation of our operating segments into one reportable segment is attributable to how we manage our fleet, including the nature of our services provided, type of clients we serve and the ability of our drillships to operate in a single, global market. The accounting policies of our operating segments are the same as those described in the summary of significant accounting policies (see Note 2).

As of December 31, 2016, the Pacific Bora and the Pacific Scirocco were located offshore Nigeria, and the Pacific Santa Ana and the Pacific Sharav were located offshore the United States. As of December 31, 2016, the Pacific Mistral and the Pacific Meltem were anchored at Aruba, and the Pacific Khamsin was anchored at Cyprus.

During the years ended December 31, 2016, 2015 and 2014, the percentage of revenues earned by geographic area, based on drilling location, is as follows:

		Years Ended December 31,
		2016			2015			2014
Gulf of Mexico		56.9	%		38.1	%		24.5	%
Nigeria		43.1	%		60.3	%		60.2	%
Brazil		—	%		1.6	%		15.3	%

 

 

Note 15—Variable Interest Entities

The carrying amounts associated with our consolidated variable interest entities, after eliminating the effect of intercompany transactions, were as follows:

		December 31,
		2016			2015
		(in thousands)
Assets		$	10,020		$	17,612
Liabilities			(2,247)			(19,250)
Net carrying amount		$	7,773		$	(1,638)

 

PIDWAL is a joint venture formed to provide drilling services in Nigeria and to hold an equity investment in PDNL. PDNL is a company owned by us and PIDWAL, formed to hold the equity investments in certain of our rig-owning entities operating in Nigeria. We determined that each of these companies met the criteria of a variable interest entity for accounting purposes because its equity at risk was insufficient to permit it to carry on its activities without additional subordinated financial support from us. We also determined that we were the primary beneficiary for accounting purposes since (a) for PIDWAL, we had the power to direct the day-to-day management and operations of the entity, and for PDNL we had the power to secure and direct its equity investment, which are the activities that most significantly impact each entity’s economic performance, and (b) we had the obligation to absorb losses or the right to receive a majority of the benefits that could be potentially significant to the variable interest entities. As a result, we consolidate PIDWAL and PDNL in our consolidated financial statements.

During the years ended December 31, 2016 and 2015, we provided financial support to PIDWAL to enable it to operate as a going concern by funding its working capital via intercompany loans and payables. We also issued corporate guarantees in the amount of $145.0 million in customs bonds issued as credit support for temporary import bonds issued in favor of PIDWAL as of December 31, 2016.

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Notes to Consolidated Financial Statements―Continued
During the years ended December 31, 2016 and 2015, we provided financial support to PDNL to fund its equity investment in our rig-owning entities operating in Nigeria via intercompany loans. Both the equity investment and intercompany loans of PDNL are eliminated upon consolidation.

 

Note 16—Retirement Plans

Pacific Drilling sponsors a defined contribution retirement plan covering substantially all U.S. employees and an international savings plan covering international employees. During the years ended December 31, 2016, 2015 and 2014, our total employer contributions to both plans amounted to $4.1 million, $7.0 million and $6.9 million, respectively.

 

Note 17—Supplemental Cash Flow Information

During the years ended December 31, 2016, 2015 and 2014, we paid $169.8 million, $164.5 million and $135.4 million of interest, net of amounts capitalized, respectively. During the years ended December 31, 2016, 2015 and 2014, we paid income taxes of $12.3 million, $27.2 million, and $31.7 million, respectively.

Within our consolidated statements of cash flows, capital expenditures represent expenditures for which cash payments were made during the period. These amounts exclude accrued capital expenditures, which are capital expenditures that were accrued but unpaid. During the years ended December 31, 2016, 2015 and 2014, changes in accrued capital expenditures were $(9.0) million, $9.9 million and $(23.9) million, respectively.

During the years ended December 31, 2016, 2015 and 2014, non-cash amortization of deferred financing costs and accretion of debt discount totaling $0,  $3.5 million and $5.1 million were capitalized to property and equipment, respectively. Accordingly, these amounts are excluded from capital expenditures in our consolidated statements of cash flows for the years ended December 31, 2016, 2015 and 2014.

 

During the year ended December 31, 2016, we cancelled 0.7 million treasury shares that we repurchased under our share repurchase program. We accounted for this non-cash transaction by netting the treasury shares at total cost of $30.0 million against the statutory share capital of the cancelled shares and additional paid-in capital.

 

Note 18—Liquidity

 

Our liquidity fluctuates depending on a number of factors, including, among others, our revenue efficiency and the timing of accounts receivable collection as well as payments for operating costs and debt repayments. Primary sources of funds for our short-term liquidity needs are expected to be our cash flow generated from operating activities and existing cash, cash equivalents and restricted cash balances. At December 31, 2016, we had $586.0 million of cash and cash equivalents and $40.2 million of restricted cash.  On January 20, 2017, in connection with the Sixth Amendments, we paid a total of $133.7 million to our lenders.  We do not have additional borrowing capacity under our 2013 Revolving Credit Facility or SSCF, and the RCF Sixth Amendment restricts our ability to incur additional secured debt.

 

Market conditions in the offshore drilling industry in recent years have led to materially lower levels of spending for offshore exploration and development by our current and potential customers on a global basis while at the same time supply of available high specification drillships has increased, which in turn has negatively affected our revenue, profitability and cash flows. As a result, we are engaged in discussions with all of our stakeholders, including our bank lenders under the 2013 Revolving Credit Facility and the SSCF (the “Lenders”) and an ad hoc group of holders of our capital markets indebtedness (the “Ad Hoc Group”), regarding a restructuring of the Company’s existing capital structure to be sustainable in the longer term.

 

As discussed in Note 5, the Sixth Amendments modify or waive application of certain financial covenants for the fiscal quarters ending on March 31, 2017 and June 30, 2017. However, if current market conditions persist, we expect that we will be in violation of the maximum leverage ratio covenant in our 2013 Revolving Credit Facility and our SSCF for the fiscal quarter ending on September 30, 2017. If we are unable to obtain waivers of such covenants or amendments to the debt agreements, such covenant default would entitle the Lenders to declare all outstanding amounts

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Notes to Consolidated Financial Statements―Continued

under such debt agreements to be immediately due and payable. Such acceleration would also trigger the cross-default provisions of our 2017 Senior Secured Notes, the Senior Secured Term Loan B and the 2020 Senior Secured Notes.

 

If we are unable to refinance our 2017 Senior Secured Notes prior to their maturity in December 2017 or complete a restructuring and current market conditions persist, the Company may not have sufficient liquidity to meet its debt obligations over the next year following the date of the issuance of these financial statements.  As such, this condition gives rise to substantial doubt about the Company’s ability to continue as a going concern.

 

As a result, we, with the assistance of our advisors, are evaluating various alternatives to address our liquidity and capital structure, which may include a private restructuring or a negotiated restructuring of our debt under the protection of Chapter 11 of the U.S. Bankruptcy Code. We are currently negotiating with the Lenders and the Ad Hoc Group in order to reach terms acceptable to all stakeholders for a restructuring. If such negotiations do not result in completion of the restructuring, we may be forced to seek a reorganization under Chapter 11 of the U.S. Bankruptcy Code.

 

As there can be no assurance given that these negotiations will be successfully concluded, there exists substantial doubt about the Company’s ability to continue as a going concern over the next year following the date of the issuance of these financial statements.

 

Note 19—Subsequent Events

On January 20, 2017, we entered into the SSCF Sixth Amendment for the SSCF and the RCF Sixth Amendment for the 2013 Revolving Credit Facility (see Note 5).

 

 

 

F-29

Exhibit 1.1

Pacific Drilling S.A. 

Société Anonyme

Siège social: 8-10 avenue de la Gare, L-1610 Luxembourg

R.C.S. Luxembourg B 159.658.

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La société a été constituée suivant acte reçu par Maître Joseph Elvinger  alors notaire de résidence à Luxembourg, le 11 mars 2011, publié au Mémorial C, Recueil des Sociétés et Associations le 17 mai 2011 ;

et dont les statuts ont été modifiés, en dernier lieu, suivant acte reçu par Maître Danielle KOLBACH , notaire de résidence à Redange/Attert (Grand-Duché de Luxembourg), agissant en remplacement de son confrère empêché Maître Jean SECKLER , notaire de résidence à Junglinster, en date 24 juin 2016,  non encore publié au Recueil électronique des Sociétés et Associations.

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STATUTS COORDONNES

A LA DATE DU 24 JUIN 2016

 

	I. NAME-REGISTERED OFFICE-OBJECT-DURATION
	Art.1. Name

The name of the company is “ Pacific Drilling S.A. ” (the Company ). The Company is a public company limited by shares ( société anonyme ) governed by the laws of the Grand Duchy of Luxembourg, in particular the law of August 10, 1915, on commercial companies, as amended (the Law ), and these articles of incorporation (the Articles ).

	Art.2. Registered office
	2.1. The Company’s registered office is established in Luxembourg, Grand Duchy of Luxembourg. It may be transferred within that municipality by a resolution of the board of directors (the Board ). It may be transferred to any other location in the Grand Duchy of Luxembourg by a resolution of the general meeting of shareholders (the General Meeting ), acting in accordance with the conditions prescribed for the amendment of the Articles.
	2.2. Branches, subsidiaries or other offices may be established in the Grand Duchy of Luxembourg or abroad by a resolution of the Board. If the Board determines that extraordinary political or military developments or events have occurred or are imminent, and that those developments or events may interfere with the normal activities of the Company at its registered office, or with ease of communication between that office and persons abroad, the registered office may be temporarily transferred abroad until the developments or events in question have completely ceased. Any such temporary measures do not  affect the nationality of the Company, which, notwithstanding the