PROPERTY AND EQUIPMENT

A summary of property and equipment by classification is as follows:



	September 30,
(In thousands)	2016			2015
Drilling vessels and equipment	$	3,898,686		$	4,003,483
Construction work in progress	857,572			720,852
Drill pipe	52,543			55,248
Office equipment and other	39,213			36,379
Total cost	4,848,014			4,815,962
Less: Accumulated depreciation	(720,318		)	(643,830		)
Property and equipment, net	$	4,127,696		$	4,172,132

Impairments

The Atwood Falcon completed the contract it was working under in early March 2016. Based on the lack of contracting opportunities and the further deterioration of commodity prices, we determined that it was not likely that additional work would be obtained in the foreseeable future. Based on our analysis, we concluded that the Atwood Falcon and its materials and supplies were impaired as of December 31, 2015, and we wrote them down to their approximate salvage value. We recorded a non-cash impairment charge of approximately $64.9 million ($64.9 million net of tax, or $1.00 per diluted share), which is included in Asset Impairment on the Consolidated Statement of Operations for the three months ended December 31, 2015. This impairment charge includes a write-down of property and equipment of $53.2 million and a write-down of our inventory of materials and supplies specific to the Atwood Falcon of $11.7 million. In April 2016, we completed the sale of the Atwood Falcon.

The Atwood Hunter completed the contract it was working under in December 2014. Based on the lack of contracting opportunities and the further deterioration of commodity prices, in January 2015, we determined that it was not likely that additional work would be obtained in the foreseeable future. Based on our analysis, in the three months ended December 31, 2014, we determined that the Atwood Hunter and its materials and supplies were impaired, and we wrote them down to their salvage value. We recorded a non-cash impairment charge of approximately $60.8 million ($56.1 million, net of tax, or $0.86 per diluted share), which is included in Asset Impairment on the Consolidated Statement of Operations for the three months ended December 31, 2014. This impairment charge included write-downs of property and equipment of $48.0 million and write-downs of our inventory of materials and supplies that was specific to the Atwood Hunter of $8.4 million. In August 2015, we completed the sale of the Atwood Hunter.

Consistent with our policy, we evaluate our drilling rigs and related equipment for impairment whenever events or changes in circumstances indicate the carrying value of these assets may exceed the estimated undiscounted future net cash flows. Our evaluation, among other things, includes a review of external market factors and an assessment on the future marketability of a specific drilling unit. Given the current level of oil prices, the decline in drilling activity and the continued delivery of new, more capable rigs, we consider these macro-economic factors to be indicators that some of our drilling rigs and/or related equipment may potentially be impaired.

At September 30, 2016, we performed impairment testing on our fleet of drilling rigs, including our two rigs currently under construction, which have an aggregate net book value of $4.0 billion. We concluded that the net book value of each drilling rig is recoverable through estimated future cash flows. The most significant assumptions used in our undiscounted cash flow model include: timing on awards of future drilling contracts, operating day rates, operating costs, capital expenditures, reactivation costs, drilling rig utilization, estimated remaining economic useful life and net proceeds received upon future sale/disposition. These significant assumptions are classified as Level 3 inputs by ASC Topic 820 Fair Value Measurement and Disclosures as they are based upon unobservable inputs and primarily rely on management assumptions and forecasts. Although we believe the assumptions used in our analysis are reasonable and appropriate, different assumptions and estimates could materially impact the analysis and our resulting conclusion. Our oldest drilling rig may be subject to greater risk of future impairment if the significant assumptions on which we have based our impairment testing at September 30, 2016 do not materialize or if we change those assumptions in future periods as new market conditions may dictate.

We maintain in drilling equipment in warehouse facilities around the world intended to support our current and future offshore drilling operations. As part of our fiscal year end evaluation of the current levels on hand and an assessment as to the expected future demand and likelihood of use, in the three month period ended September 30, 2016, we recorded a non-cash impairment charge of $38.6 million ($38.6 million net of tax or $0.60 per diluted share) in our Consolidated Statements of Operations, included in Asset Impairment to write down these assets to their fair value.

Sale of Other Assets

During April 2016, the Atwood Falcon sale and recycling transaction closed and title of the vessel and associated equipment and machinery transferred to a third party buyer. Net proceeds received were immaterial.

During August 2015, we completed the sale of our rig, the Atwood Hunter, for recycling. We received $2.9 million in proceeds and we recorded a loss of approximately $5.5 million ($5.5 million, net of tax, or $0.08 per diluted share), which is included in (Gain) Loss on Sale of Assets on the Consolidated Statement of Operations for fiscal year 2015. We incurred costs of $8.7 million related to the impairment and sale of the Atwood Hunter.

During December 2014, we completed the sale of our rig, the Atwood Southern Cross, for recycling. We received $2.1 million in proceeds and incurred related costs of $2.0 million. We recorded a loss of approximately $8.0 million ($7.1 million, net of tax, or $0.11 per diluted share), which is included in (Gain) Loss on Sale of Assets on the Consolidated Statement of Operations for fiscal year 2015.

During January 2014, we sold our standard jackup drilling unit, the Vicksburg, for a sales price of $55.4 million. The carrying value of the rig and its related inventory was approximately $20.5 million.

During April 2014, we sold a wholly owned subsidiary which owned our semisubmersible tender assist drilling rig, the Seahawk, for a sales price of $4.0 million. The carrying value of the subsidiary after a $2.0 million impairment charge, approximated its sales price.

Depreciation

The amount of depreciation expense we record is dependent upon certain assumptions, including an asset’s estimated useful life, rate of consumption and corresponding salvage value. We periodically review these assumptions and may change one or more of these assumptions. Changes in our assumptions may require us to recognize, on a prospective basis, increased or decreased depreciation expense. As of September 30, 2016, we shortened the estimated useful life of the Atwood Eagle and as a result, relative to its previous deprecation schedule, this will increase the depreciation expense over the next four fiscal years by $5.8 million per fiscal year, and will decrease by $1.9 million fiscal year 2021.

Other Income

For the fiscal year 2016, we recognized approximately $18.0 million ($18.0 million, net of tax, or $0.28 per diluted share) of expected insurance recoveries related to cyclone damage to the Atwood Osprey. This amount is included in Other Income on the Consolidated Statement of Operations. We collected receivables from the insurance company of approximately $18 million during the twelve months ended September 30, 2016.

Construction Projects

As of September 30, 2016, we had expended approximately $845 million towards our two ultra-deepwater drillships under construction at Daewoo Shipbuilding and Marine Engineering Co., ("DSME") yard in South Korea. Remaining expected capital expenditure for these two drillships under construction totaled approximately $425 million at September 30, 2016. On December 17, 2015, we entered into a supplemental agreement (collectively, "Supplemental Agreement No. 4") to the construction contracts with DSME which delay our requirements to take delivery of the Atwood Admiral to September 30, 2017 and the Atwood Archer to June 30, 2018. Supplemental Agreement No. 4 amends all material terms of the previous agreements. In consideration of the agreement, we made a payment of $50 million for each drillship on December 31, 2015. DSME has extended all remaining milestone payments, $93.9 million for the Atwood Admiral and $305.9 million for the Atwood Archer, until their respective delivery dates. We retain the option to take earlier delivery of each vessel, subject to a forty-five-day notice period to DSME. Neither of these drillships have long-term drilling contracts in place and we may seek to delay delivery further to align delivery with anticipated offshore drilling demand.

In May 2016, we entered into an agreement with Hydril USA Distribution, LLC ("GE") to manufacture a complete second Blowout Preventer stack ("BOP") and an Auxiliary Stack Test System ("ASTS") for the Atwood Condor. The addition of the second BOP will increase the marketability and operational efficiency of the vessel. Total consideration for this agreement is approximately $19 million with 20% paid upon placement of the purchase order and the remaining 80% due upon delivery. To accelerate the manufacturing and delivery process, which is targeted for February 2017, we provided certain capital spares we maintained to GE to be used in the manufacturing process. These capital spares will be replenished by GE with similar capital spares upon delivery of the BOP.