Exhibit 99.2
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
On April 11, 2019, (the "Transaction Date"), we completed our combination with Rowan Companies plc ("Rowan") pursuant to the Transaction Agreement (the "Rowan Transaction"). As a result, Rowan shareholders received 2.750 Ensco Class A ordinary shares for each share of Rowan common stock. Upon closing of the Rowan Transaction, we effected a consolidation (being a reverse stock split under English law) where every four existing Class A ordinary shares, each with nominal value of $0.10, were consolidated into one Class A ordinary share, each with nominal value of $0.40 (the "Reverse Stock Split"). All share and per share data included in this report have been retroactively adjusted to reflect the Reverse Stock Split. On the Transaction Date, we changed our name to Ensco Rowan plc and on July 2, 2019 we announced that we will change our name to Valaris plc effective July 31, 2019.
The transaction was accounted for using the acquisition method of accounting with Ensco identified as the acquirer in accordance with U.S. GAAP. Under the acquisition method of accounting, Ensco recorded all assets acquired and liabilities assumed at their respective Transaction-Date fair values.
The following unaudited pro forma condensed combined financial statements and the related notes present the combination of the historical consolidated financial statements of Ensco and Rowan, adjusted to give effect to the Rowan Transaction. See additional information in Note 1 - Basis of Presentation to the unaudited pro forma condensed combined financial statements.
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ENSCO ROWAN PLC AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF MARCH 31, 2019
(In millions)
| Historical | |||||||||||||||||
| Ensco | Rowan | Pro Forma Adjustments | Pro Forma Combined | ||||||||||||||
| ASSETS | |||||||||||||||||
| CURRENT ASSETS | |||||||||||||||||
| Cash and cash equivalents | $ | 298 | $ | 937 | $ | — | $ | 1,235 | |||||||||
| Short-term investments | 245 | — | — | 245 | |||||||||||||
| Accounts receivable, net | 314 | 207 | (2 | ) | (a) | 519 | |||||||||||
| Other | 355 | 24 | 77 | (b) | 456 | ||||||||||||
| Total current assets | 1,212 | 1,168 | 75 | 2,455 | |||||||||||||
| PROPERTY AND EQUIPMENT, NET | 12,509 | 6,161 | (3,172 | ) | (c) | 15,498 | |||||||||||
| LONG-TERM NOTE RECEIVABLES FROM ARO | — | 455 | — | 455 | |||||||||||||
| INVESTMENT IN ARO | — | 47 | 91 | (d) | 138 | ||||||||||||
| OTHER ASSETS | 142 | 129 | (80 | ) | (e) | 191 | |||||||||||
| $ | 13,863 | $ | 7,960 | $ | (3,086 | ) | $ | 18,737 | |||||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||||||||||
| CURRENT LIABILITIES | |||||||||||||||||
| Accounts payable - trade | 214 | 97 | — | 311 | |||||||||||||
| Accrued liabilities and other | $ | 303 | $ | 127 | $ | 47 | (f) | $ | 477 | ||||||||
| Current portion of long-term debt | — | 201 | 2 | (g) | 203 | ||||||||||||
| Total current liabilities | 517 | 425 | 49 | 991 | |||||||||||||
| LONG-TERM DEBT | 5,019 | 2,310 | (399 | ) | (g) | 6,930 | |||||||||||
| OTHER LIABILITIES | 427 | 318 | 63 | (h) | 808 | ||||||||||||
| TOTAL EQUITY | 7,900 | 4,907 | (2,799 | ) | (i) | 10,008 | |||||||||||
| $ | 13,863 | $ | 7,960 | $ | (3,086 | ) | $ | 18,737 | |||||||||
The accompanying notes are an integral part to these unaudited pro forma condensed combined financial statements.
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ENSCO ROWAN PLC AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 2019
(In millions, except per share amounts)
| Historical | |||||||||||||||||
| Ensco | Rowan | Pro Forma Adjustments | Pro Forma Combined | ||||||||||||||
| OPERATING REVENUES | $ | 406 | $ | 177 | $ | (1 | ) | (j) | $ | 582 | |||||||
| OPERATING EXPENSES | |||||||||||||||||
| Contract drilling (exclusive of depreciation) | 333 | 162 | — | 495 | |||||||||||||
| Depreciation | 125 | 93 | (55 | ) | (k) | 163 | |||||||||||
| General and administrative | 29 | 25 | (9 | ) | (l) | 45 | |||||||||||
| 487 | 280 | (64 | ) | 703 | |||||||||||||
| EQUITY IN EARNINGS OF UNCONSOLIDATED SUBSIDIARY | — | 7 | (10 | ) | (m) | (3 | ) | ||||||||||
| OPERATING INCOME (LOSS) | (81 | ) | (96 | ) | 53 | (124 | ) | ||||||||||
| OTHER EXPENSE, NET | (75 | ) | (25 | ) | (8 | ) | (n) | (108 | ) | ||||||||
| INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAX | (156 | ) | (121 | ) | 45 | (232 | ) | ||||||||||
| PROVISION FOR INCOME TAX | 32 | 8 | 2 | (o) | 42 | ||||||||||||
| INCOME (LOSS) FROM CONTINUING OPERATIONS | $ | (188 | ) | $ | (129 | ) | $ | 43 | $ | (274 | ) | ||||||
| NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST AND NON-VESTED SHARES | (3 | ) | — | — | $ | (3 | ) | ||||||||||
| INCOME (LOSS) FROM CONTINUING OPERATIONS ATTRIBUTABLE TO THE APPLICABLE COMPANY | $ | (191 | ) | $ | (129 | ) | $ | 43 | $ | (277 | ) | ||||||
| LOSS PER SHARE FROM CONTINUING OPERATIONS | |||||||||||||||||
| Basic and diluted | $ | (1.75 | ) | $ | (1.41 | ) | |||||||||||
| WEIGHTED-AVERAGE SHARES OUTSTANDING | |||||||||||||||||
| Basic and diluted | 109 | 88 | (p) | 197 | |||||||||||||
The accompanying notes are an integral part to these unaudited pro forma condensed combined financial statements.
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ENSCO ROWAN PLC AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
Upon closing of the Rowan Transaction, we effected a consolidation (being a reverse stock split under English law) where every four existing Class A ordinary shares, each with nominal value of $0.10, were consolidated into one Class A ordinary share, each with nominal value of $0.40 (the "Reverse Stock Split"). All share and per share data included in this report have been retroactively adjusted to reflect the Reverse Stock Split. On the Transaction Date, we changed our name to Ensco Rowan plc and on July 2, 2019 we announced that we will change our name to Valaris plc effective July 31, 2019.
The unaudited pro forma condensed combined financial statements were prepared in accordance with Article 11 of SEC Regulation S-X using the acquisition method of accounting in accordance with U.S. GAAP and are based on the historical consolidated financial statements of Ensco and Rowan, after giving effect to the transaction.
The unaudited pro forma condensed combined balance sheet combines the unaudited historical condensed consolidated balance sheets of Ensco and Rowan as of March 31, 2019, giving effect to the Transaction as if it had occurred on March 31, 2019.
The unaudited pro forma condensed combined statement of operations for the three months ended March 31, 2019 assumes the transaction took place on January 1, 2018, the beginning of Ensco's most recently completed fiscal year. The unaudited pro forma condensed combined statement of operations for the three months ended March 31, 2019 combines the unaudited consolidated statements of operations of Ensco and Rowan for the three months ended March 31, 2019.
The unaudited pro forma condensed combined financial statements are provided for illustrative purposes only and are not intended to represent the consolidated results of operations or financial position of the combined company that would have been recorded had the transaction been completed as of the dates indicated and should not be taken as representative of future results of operations or financial position of the combined company. The unaudited pro forma condensed combined financial statements do not reflect the impacts of any potential operational efficiencies, cost savings or economies of scale that may be achieved with respect to the combined operations of Ensco and Rowan. Additionally, the pro forma statement of operations does not include non-recurring charges or credits and the related tax effects that result directly from the transaction.
Under the terms of the Transaction Agreement, Rowan stockholders received 2.750 Ensco Class A ordinary shares for each share of Rowan common stock for a total value of $43.67 per share of Rowan common stock based on the closing share price of $15.88 per Ensco Class A ordinary share on April 10, 2019, the last trading day before the Transaction Date. Total consideration delivered in the Rowan Transaction consisted of 88.3 million Ensco shares with an aggregate value of $1.4 billion, inclusive of $2.6 million for the estimated fair value of replacement employee equity awards.
Under U.S. GAAP, merger-related transaction costs (i.e., advisory, legal, valuation and other professional fees) are not included as a component of consideration transferred but are accounted for as expenses in the periods in which the costs are incurred. Ensco's advisory, legal, valuation and other professional fees and expenses were $23 million, of which $14 million was incurred upon closing of the transaction. Costs incurred by Rowan related to the Transaction are $27.2 million, of which $17.0 million was incurred upon closing of the transaction. Following the completion of the transaction, we expect to incur additional charges and expenses relating to restructuring and integrating the operations of Ensco and Rowan.
The unaudited pro forma condensed combined financial statements illustrate the assets and liabilities of Rowan recorded at their preliminary estimated fair values at the closing date. The preliminary fair value estimates are subject to change based on the final valuations. Actual results will differ from this unaudited pro forma condensed combined financial information once we have completed the valuation analysis and computations necessary to finalize the required purchase price allocations. Accordingly, the final purchase price allocations and their effects on financial position and results of operations may differ materially from the preliminary allocations and unaudited pro forma combined amounts included herein. Many of these fair value measurements can be highly subjective, and it is possible that other professionals, applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts.
The unaudited pro forma condensed combined financial statements do not constitute Ensco's statutory accounts required by the Companies Act 2006, which for the year ended December 31, 2018, were prepared in accordance with generally accepted accounting principles in the U.K. and were delivered to the Registrar of Companies in the United Kingdom. The U.K. statutory accounts included an unqualified auditor's report, which did not contain any reference to matters to which the auditors drew attention by way of emphasis without qualifying the report or any statements under Section 498(2) or 498(3) of the Companies Act 2006.
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The unaudited consolidated statement of operations included within the unaudited pro forma condensed combined financial information included herein do not constitute Rowan’s statutory accounts. Rowan's UK statutory financial statements for 2018 were prepared in accordance with International Financial Reporting Standards as adopted by the European Union and as issued by the IASB and were delivered to the Registrar of Companies in the United Kingdom. The U.K. statutory accounts included an unqualified auditor's report, which did not contain statements under Section 498(2) or (3) of the Companies Act 2006.
The unaudited pro forma condensed combined financial statements should be read in conjunction with the historical consolidated financial statements and accompanying notes contained in the 2018 Annual Reports on Form 10-K of Ensco and Rowan, respectively, and the financial statement as of and for the three-month period ended March 31, 2019 included in the Quarterly Report on Form 10-Q and Exhibit 99.1 of this Current Report on Form 8-K for Ensco and Rowan, respectively.
Note 2 - Accounting Policies
The unaudited pro forma financial information has been compiled in a manner consistent with the accounting policies of Ensco Rowan plc.
Note 3 - Consideration and Allocation
Under the terms of the Transaction Agreement, Rowan stockholders received 2.750 Ensco Class A ordinary shares for each share of Rowan common stock for a total value of $43.67 per share of Rowan common stock based on the closing share price of $15.88 per Ensco Class A ordinary share on April 10, 2019. Total consideration delivered in the Rowan Transaction consisted of 88.3 million Ensco shares and $2.6 million for the fair value of replacement employee equity awards for an aggregate value of $1.4 billion. All share and per share data included in this report have been retroactively adjusted to reflect the reverse stock split discussed in the introductory paragraph.
Under GAAP, when the fair value assigned to net assets exceeds the consideration transferred in a business combination, the difference is reflected as a bargain purchase gain. The following table summarizes the estimated bargain purchase gain calculation as of March 31, 2019 (in millions):
| Current assets | $ | 1,243 | |
| Noncurrent assets | 3,631 | ||
| Total assets | 4,874 | ||
| Liabilities | (2,752 | ) | |
| Net assets | 2,122 | ||
| Less: Consideration transferred | 1,403 | ||
| Estimated gain on bargain purchase | $ | 719 | |
The estimated fair values assigned to assets acquired net of liabilities assumed exceeded the consideration transferred, resulting in an estimated bargain purchase gain. The estimated bargain purchase gain primarily resulted from the decline in Ensco's share price from $33.92 to $15.88 between the last trading day prior to the announcement of the the Rowan Transaction and the Transaction Date.
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Note 4 - Pro Forma Adjustments
(a) Accounts Receivable, net
Reflects the pro forma adjustments to historical amounts to record the estimated fair value of accounts receivable.
(b) Other current assets
Reflects the pro forma adjustments to record the estimated fair value of other current assets as follows (in millions):
| Adjustment to record Rowan materials and supplies at estimated fair value | $ | 83 | |
| Elimination of Rowan historical deferred contract drilling expenses | (6 | ) | |
| $ | 77 | ||
The pro forma adjustment to record the estimated fair value of materials and supplies results from a difference in Ensco’s and Rowan’s respective accounting policies. Materials and supplies consists of consumable parts and supplies maintained on drilling rigs and in shore-based warehouse locations for use in operations and is generally comprised of items of low per unit cost and high reorder frequency. The pro forma adjustment to record the estimated fair value of materials and supplies reflects the estimated fair value of materials and supplies maintained on Rowan's drilling rigs and shore-based locations. Ensco recognizes materials and supplies on the balance sheet when purchased and subsequently expenses the items when consumed. Rowan historically recognized expense for materials and supplies as a period cost when received for use and, therefore, Rowan’s historical financial statements do not include a materials and supplies balance.
The pro forma adjustment for the elimination of Rowan's historical deferred contract drilling expenses primarily relates to deferred mobilization costs. Costs incurred for mobilization of equipment and personnel prior to the commencement of drilling services are deferred and subsequently amortized by Rowan over the term of the related drilling contract. These deferred costs have no future economic benefit to EnscoRowan and are eliminated from the pro forma financial statements.
(c) Property and equipment, net
Reflects the pro forma adjustments to historical amounts to record the estimated fair value of property and equipment. We estimated the fair value of the rigs and equipment primarily by applying an income approach, using projected discounted cash flows, a risk-adjusted discount rate and an estimated effective income tax rate.
(d) Investment in unconsolidated subsidiary
Reflects the pro forma adjustment to record the estimated fair value of the equity investment in the Saudi Aramco Rowan Offshore Drilling Company ("ARO"), Rowan's 50/50 joint venture with Saudi Aramco. We estimated the fair value of the equity investment in ARO primarily by applying an income approach, using projected discounted cash flows of the underlying assets of ARO, a risk-adjusted discount rate and an estimated effective income tax rate.
(e) Other assets
Reflects the pro forma adjustments to record the estimated fair value of other assets as follows (in millions):
| Deferred tax impacts of certain pro forma adjustments | $ | (93 | ) |
| Elimination of Rowan historical debt issuance costs | (6 | ) | |
| Estimated fair value of Rowan contracts with customers | $ | 16 | |
| Other | 3 | ||
| $ | (80 | ) | |
The pro forma adjustment for deferred income tax assets represents the estimated deferred income taxes, which reflects the tax effect of the difference between the estimated fair value of Rowan's assets and liabilities recorded under the acquisition method of accounting and the carryover tax basis of those assets and liabilities and certain other adjustments that were a direct result of the business combination.
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The pro forma adjustment to record the estimated fair value of Rowan's contracts with customers represents the intangible assets recognized for firm customer contracts in place at the pro forma balance sheet date that have favorable contract terms as compared to current market day rates for comparable drilling rigs. The various factors considered in the pro forma adjustment are (1) the contracted day rate for each contract, (2) the remaining term of each contract, (3) the rig class and (4) the market conditions for each respective rig class at the pro forma balance sheet date. The intangible assets are computed based on the present value of the difference in cash inflows over the remaining contract term as compared to a hypothetical contract with the same remaining term at an estimated current market day rate using a risk-adjusted discount rate and an estimated effective income tax rate. This balance will be amortized to operating revenues on a straight-line basis.
(f) Accrued liabilities and other
Reflects the pro forma adjustments to record the estimated fair value of current liabilities as follows (in millions):
| Rowan transaction costs not reflected in historical financial statements | $ | 17 | |
| Ensco transaction costs not reflected in historical financial statements | 14 | ||
| Change in control provisions on Rowan benefit plans | 12 | ||
| Elimination of Rowan historical deferred revenues | (11 | ) | |
| Other | 15 | ||
| $ | 47 | ||
The pro forma adjustment for change-in-control provisions on Rowan benefit plans relates to the additional liability that was incurred for cash payments triggered upon a change in control for benefits payable to executives and other key Rowan employees as a result of pre-existing employee arrangements.
The pro forma adjustment to eliminate Rowan's historical deferred revenues is primarily related to amounts received or receivable for mobilization and the reimbursement for capital upgrades that were previously paid or expected to be paid by a customer as compensation to mobilize a rig to the drilling location or perform requested upgrades or modifications to a rig. Such amounts are deferred and subsequently amortized by Rowan over the term of the related drilling contract. The deferred revenue does not represent future obligations of EnscoRowan and are eliminated from the pro forma financial statements.
(g) Current portion of long-term debt and Long-Term Debt
Reflects the pro forma adjustment to adjust Rowan's debt to its estimated fair value. The adjustment was based on quoted market prices for Rowan's publicly traded debt as of April 10, 2019.
(h) Other liabilities
Reflects the pro forma adjustments to record the estimated fair value of other liabilities as follows (in millions):
| Adjustments to unrecognized tax benefits | $ | 52 | |
| Deferred tax impacts of certain pro forma adjustments | 16 | ||
| Adjustment to net pension plan liabilities | 3 | ||
| Estimated fair value of Rowan drilling contracts | 2 | ||
| Elimination of Rowan historical deferred revenues | (18 | ) | |
| Reclassification of employee benefits that become payable on the Transaction Date | (3 | ) | |
| Other | 11 | ||
| $ | 63 | ||
The pro forma adjustment to Rowan's unrecognized tax benefits results from the receipt of tax assessments during April and May 2019 related to certain tax positions taken by Rowan in prior years. The assessments received totaled approximately $160 million. The pro forma adjustment reflects the amount of those assessments for which we have preliminarily concluded we will not more-likely-than-not sustain the original filing positions. We are continuing to evaluate the relevant facts and circumstances which may result in revisions to this estimate which may be material.
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The pro forma adjustment for deferred income tax liabilities represents the estimated deferred income taxes, which reflects the tax effect of the difference between the estimated fair value of Rowan's assets and liabilities recorded under the acquisition method of accounting and the carryover tax basis of those assets and liabilities.
The pro forma adjustment to record the estimated fair value of Rowan's contracts with customers reflects the intangible liabilities recognized for firm customer contracts that have unfavorable contract terms as compared to current market day rates for comparable assets. The various factors considered in the pro forma adjustment are (1) the contracted day rate for each contract, (2) the remaining term of each contract, (3) the rig class and (4) the market conditions for each respective rig class at the pro forma balance sheet date. The intangible liabilities are computed based on the present value of the difference in cash inflows over the remaining contract term as compared to a hypothetical contract with the same remaining term at an estimated current market day rate using a risk-adjusted discount rate and an estimated effective income tax rate. This balance will be amortized to operating revenues over the respective remaining contract terms on a straight-line basis.
The pro forma adjustment to eliminate deferred revenues reflects the noncurrent portion of deferred revenues described in (e) above.
(i) Total equity
Represents the pro forma adjustments to total equity as follows (in millions):
| Elimination of Rowan's historical stockholders' equity | $ | (4,907 | ) |
| Ensco share consideration recorded as capital in excess of par value | 1,368 | ||
| Estimated bargain purchase gain | 719 | ||
| Ensco shares issued as Transaction consideration, par value | 35 | ||
| Estimated Ensco transaction costs | (14 | ) | |
| $ | (2,799 | ) | |
(j) Operating revenues
Reflects the pro forma adjustments for the amortization of intangible assets and liabilities associated with the estimated fair value of Rowan's contracts with customers.
(k) Depreciation
Reflects the pro forma adjustments for depreciation of Rowan's property and equipment. Rowan's property and equipment consists primarily of drilling rigs and related equipment. The pro forma depreciation adjustments relate to the pro forma adjustment to record the estimated fair value of Rowan's drilling rigs and related equipment after conforming depreciable lives and salvage values and computing depreciation using the straight-line method. Ensco estimated remaining useful lives for Rowan's drilling rigs ranging from 10 to 32 years.
(l) General and Administrative
Reflects the elimination of merger-related costs included in the historical financial statements of Rowan and Ensco.
(m) Equity in earnings of unconsolidated subsidiary
Reflects the pro forma adjustments to equity in earnings of ARO. The pro forma adjustment reflects the amortization of the estimated fair value basis difference between the equity investment and the carrying values of the underlying net assets of ARO as of the pro forma balance sheet date.
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(n) Other expense, net
Reflects the pro forma adjustment to other income (expense), net as follows (in millions):
| Three Months Ended March 31, 2019 | |||
| Amortization of the fair value adjustments to Rowan's long-term debt | $ | (7 | ) |
| Elimination of amounts reclassifed to earnings from accumulated other comprehensive income related to Rowan's defined benefit plans | (1 | ) | |
| $ | (8 | ) | |
(o) Provision for income taxes
Reflects the recognition of the pro forma adjustment to deferred taxes.
(p) Weighted-average shares outstanding
Reflects the pro forma adjustment for Ensco shares issued to Rowan shareholders.
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