UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________

 

FORM 10-Q

(Mark one)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2008

 

OR

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______ to ______

 

Commission file number 333-75899

______________________

 

TRANSOCEAN INC.

(Exact name of registrant as specified in its charter)

______________________

 

Cayman Islands

66-0582307

(State or other jurisdiction

(I.R.S. Employer

of incorporation or organization)

Identification No.)

4 Greenway Plaza, Houston, Texas

(Address of principal executive offices)

70 Harbour Drive, Grand Cayman, Cayman Islands

(Address of principal executive offices)

77046

(Zip Code)

KY1-1003

(Zip Code)

                                                                

Registrant’s telephone number, including area code: (713) 232-7500

______________________

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x     No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

 x

 

 

Accelerated filer

o

Non-accelerated filer

o (do not check if a smaller reporting company)

 

 

Smaller reporting company

o

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o No  x

 

As of July 25, 2008, 319,029,423 ordinary shares, par value $0.01 per share, were outstanding.

 

 


TRANSOCEAN INC.

INDEX TO FORM 10-Q

QUARTER ENDED JUNE 30, 2008

 

                

PART I – FINANCIAL INFORMATION

 

Page

 

 

Item 1.

 

Financial Statements (Unaudited)

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations

 

 

 

Three and six months ended June 30, 2008 and 2007

1

 

 

 

 

 

 

Condensed Consolidated Balance Sheets

 

 

 

June 30, 2008 and December 31, 2007

2

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows

 

 

 

Three and six months ended June 30, 2008 and 2007

3

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

4

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial

 

 

 

Condition and Results of Operations

21

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

42

 

 

 

 

 

Item 4.

Controls and Procedures

42

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

Item 1.

 

Legal Proceedings

 

42

 

 

 

 

 

Item 1A.

Risk Factors

43

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

45

 

 

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

45

 

 

 

 

 

Item 6.

Exhibits

46

 

 

 


PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

TRANSOCEAN INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share data)

(Unaudited)

 

 

 

Three months ended June 30,

 

 

 

Six months ended June 30,

 

 

 

2008

 

 

 

2007

 

 

 

2008

 

 

 

2007

 

Operating revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract drilling revenues

$

2,587

 

 

 

$

1,360

 

 

 

$

5,227

 

 

 

$

2,633

 

Contract drilling intangible revenues

 

190

 

 

 

 

 

 

 

 

414

 

 

 

 

 

Other revenues

 

325

 

 

 

 

74

 

 

 

 

571

 

 

 

 

129

 

 

 

3,102

 

 

 

 

1,434

 

 

 

 

6,212

 

 

 

 

2,762

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating and maintenance

 

1,364

 

 

 

 

627

 

 

 

 

2,521

 

 

 

 

1,195

 

Depreciation, depletion and amortization

 

337

 

 

 

 

101

 

 

 

 

704

 

 

 

 

201

 

General and administrative

 

45

 

 

 

 

29

 

 

 

 

94

 

 

 

 

55

 

 

 

1,746

 

 

 

 

757

 

 

 

 

3,319

 

 

 

 

1,451

 

Gain (loss) from disposal of assets, net

 

(6

)

 

 

 

(1

)

 

 

 

(3

)

 

 

 

22

 

Operating income

 

1,350

 

 

 

 

676

 

 

 

 

2,890

 

 

 

 

1,333

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

10

 

 

 

 

5

 

 

 

 

23

 

 

 

 

10

 

Interest expense, net of amounts capitalized

 

(111

)

 

 

 

(33

)

 

 

 

(248

)

 

 

 

(70

)

Other, net

 

(3

)

 

 

 

(5

)

 

 

 

(11

)

 

 

 

8

 

 

 

(104

)

 

 

 

(33

)

 

 

 

(236

)

 

 

 

(52

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes and minority interest

 

1,246

 

 

 

 

643

 

 

 

 

2,654

 

 

 

 

1,281

 

Income tax expense

 

140

 

 

 

 

93

 

 

 

 

358

 

 

 

 

178

 

Minority interest

 

(1

)

 

 

 

1

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

1,107

 

 

 

$

549

 

 

 

$

2,296

 

 

 

$

1,102

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

3.48

 

 

 

$

2.73

 

 

 

$

7.22

 

 

 

$

5.45

 

Diluted

$

3.45

 

 

 

$

2.63

 

 

 

$

7.15

 

 

 

$

5.24

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

318

 

 

 

 

202

 

 

 

 

318

 

 

 

 

202

 

Diluted

 

321

 

 

 

 

210

 

 

 

 

321

 

 

 

 

211

 

 

 

See accompanying notes.

- 1 -

 

 


TRANSOCEAN INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except share data)

 

 

 

 

 

June 30,

 

 

 

December 31,

 

 

 

2008

 

 

 

2007

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

976

 

 

 

$

1,241

 

Accounts receivable, net of allowance for doubtful accounts of
$62 and $50 at June 30, 2008 and December 31, 2007, respectively

 

 

2,478

 

 

 

 

2,370

 

Materials and supplies, net of allowance for obsolescence of
$23 and $22 at June 30, 2008 and December 31, 2007, respectively

 

 

414

 

 

 

 

333

 

Deferred income taxes, net

 

 

84

 

 

 

 

119

 

Assets held for sale

 

 

567

 

 

 

 

 

Other current assets

 

 

212

 

 

 

 

233

 

Total current assets

 

 

4,731

 

 

 

 

4,296

 

 

 

 

 

 

 

 

 

 

 

Property and equipment

 

 

24,661

 

 

 

 

24,545

 

Less accumulated depreciation

 

 

4,277

 

 

 

 

3,615

 

Property and equipment, net

 

 

20,384

 

 

 

 

20,930

 

Goodwill

 

 

8,351

 

 

 

 

8,219

 

Other assets

 

 

1,011

 

 

 

 

919

 

Total assets

 

$

34,477

 

 

 

$

34,364

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

861

 

 

 

$

805

 

Accrued income taxes

 

 

182

 

 

 

 

99

 

Debt due within one year

 

 

2,145

 

 

 

 

6,172

 

Other current liabilities

 

 

732

 

 

 

 

826

 

Total current liabilities

 

 

3,920

 

 

 

 

7,902

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

13,134

 

 

 

 

11,085

 

Deferred income taxes, net

 

 

734

 

 

 

 

681

 

Other long-term liabilities

 

 

1,719

 

 

 

 

2,125

 

Total long-term liabilities

 

 

15,587

 

 

 

 

13,891

 

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minority interest

 

 

5

 

 

 

 

5

 

 

 

 

 

 

 

 

 

 

 

Preference shares, $0.10 par value; 50,000,000 shares authorized,
none issued and outstanding

 

 

 

 

 

 

 

Ordinary shares, $0.01 par value; 800,000,000 shares authorized,
319,044,814 and 317,222,909 shares issued and outstanding at
June 30, 2008 and December 31, 2007, respectively

 

 

3

 

 

 

 

3

 

Additional paid-in capital

 

 

10,907

 

 

 

 

10,799

 

Accumulated other comprehensive loss

 

 

(47

)

 

 

 

(42

)

Retained earnings

 

 

4,102

 

 

 

 

1,806

 

Total shareholders’ equity

 

 

14,965

 

 

 

 

12,566

 

Total liabilities and shareholders’ equity

 

$

34,477

 

 

 

$

34,364

 

 

See accompanying notes.

- 2 -

 

 


TRANSOCEAN INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

 

 

 

 

Three months ended

June 30,

 

 

 

Six months ended

June 30,

 

 

 

2008

 

 

 

2007

 

 

 

2008

 

 

 

2007

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

1,107

 

 

 

$

549

 

 

 

$

2,296

 

 

 

$

1,102

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of drilling contract intangibles

 

 

(190

)

 

 

 

 

 

 

 

(414

)

 

 

 

 

Depreciation, depletion and amortization

 

 

337

 

 

 

 

101

 

 

 

 

704

 

 

 

 

201

 

Share-based compensation expense

 

 

11

 

 

 

 

9

 

 

 

 

33

 

 

 

 

19

 

(Gain) loss from disposal of assets, net

 

 

6

 

 

 

 

1

 

 

 

 

3

 

 

 

 

(22

)

Deferred revenue, net

 

 

7

 

 

 

 

4

 

 

 

 

25

 

 

 

 

38

 

Deferred expenses, net

 

 

(145

)

 

 

 

(6

)

 

 

 

(129

)

 

 

 

(13

)

Deferred income taxes

 

 

(31

)

 

 

 

(5

)

 

 

 

(56

)

 

 

 

(7

)

Other, net

 

 

(6

)

 

 

 

5

 

 

 

 

(18

)

 

 

 

4

 

Changes in operating assets and liabilities

 

 

(85

)

 

 

 

(51

)

 

 

 

49

 

 

 

 

(61

)

Net cash provided by operating activities

 

 

1,011

 

 

 

 

607

 

 

 

 

2,493

 

 

 

 

1,261

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(420

)

 

 

 

(290

)

 

 

 

(1,189

)

 

 

 

(755

)

Proceeds from disposal of assets, net

 

 

93

 

 

 

 

2

 

 

 

 

347

 

 

 

 

41

 

Joint ventures and other investments, net

 

 

 

 

 

 

 

 

 

 

(3

)

 

 

 

(3

)

Net cash used in investing activities

 

 

(327

)

 

 

 

(288

)

 

 

 

(845

)

 

 

 

(717

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrowings (repayments) under commercial paper program, net

 

 

(171

)

 

 

 

 

 

 

 

1,145

 

 

 

 

 

Repayments under revolving credit facilities, net

 

 

(180

)

 

 

 

(190

)

 

 

 

(1,500

)

 

 

 

 

Proceeds from debt

 

 

75

 

 

 

 

 

 

 

 

2,051

 

 

 

 

 

Repayments of debt

 

 

(1,040

)

 

 

 

(230

)

 

 

 

(3,673

)

 

 

 

(230

)

Payments made upon exercise of warrants, net

 

 

 

 

 

 

 

 

 

 

(4

)

 

 

 

 

Proceeds from issuance of ordinary shares
under share-based compensation plans, net

 

 

34

 

 

 

 

40

 

 

 

 

61

 

 

 

 

55

 

Repurchase of ordinary shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(400

)

Tax benefit from issuance of ordinary shares under
share­-based compensation plans

 

 

8

 

 

 

 

4

 

 

 

 

11

 

 

 

 

9

 

Other, net

 

 

(1

)

 

 

 

 

 

 

 

(4

)

 

 

 

 

Net cash used in financing activities

 

 

(1,275

)

 

 

 

(376

)

 

 

 

(1,913

)

 

 

 

(566

)

Net decrease in cash and cash equivalents

 

 

(591

)

 

 

 

(57

)

 

 

 

(265

)

 

 

 

(22

)

Cash and cash equivalents at beginning of period

 

 

1,567

 

 

 

 

502

 

 

 

 

1,241

 

 

 

 

467

 

Cash and cash equivalents at end of period

 

$

976

 

 

 

$

445

 

 

 

$

976

 

 

 

$

445

 

 

 

 

See accompanying notes.

- 3 -

 

 


TRANSOCEAN INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 1—Nature of Business and Principles of Consolidation

Transocean Inc. (together with its subsidiaries and predecessors, unless the context requires otherwise, “Transocean,” the “Company,” “we,” “us” or “our”) is a leading international provider of offshore contract drilling services for oil and gas wells. Our mobile offshore drilling fleet is considered one of the most modern and versatile fleets in the world. We specialize in technically demanding sectors of the offshore drilling business with a particular focus on deepwater and harsh environment drilling services. We contract our drilling rigs, related equipment and work crews primarily on a dayrate basis to drill oil and gas wells. At June 30, 2008, we owned, had partial ownership interests in or operated 137 mobile offshore drilling units. As of this date, our fleet consisted of 39 High-Specification Floaters (Ultra-Deepwater, Deepwater and Harsh Environment semisubmersibles and drillships), 29 Midwater Floaters, 10 High-Specification Jackups, 55 Standard Jackups and four Other Rigs. In addition, as of June 30, 2008, we had ten Ultra-Deepwater Floaters under construction or contracted for construction (see Note 4—Drilling Fleet Expansion and Upgrades).

We also provide oil and gas drilling management services on either a dayrate basis or a completed-project, fixed-price (or “turnkey”) basis, as well as drilling engineering and drilling project management services, and we participate in oil and gas exploration and production activities. Drilling management services are provided through Applied Drilling Technology Inc., our wholly owned subsidiary, and through ADT International, a division of one of our U.K. subsidiaries (together, “ADTI”). Drilling management services are provided primarily on a turnkey basis at a fixed bid amount. Oil and gas properties consist of exploration, development and production activities carried out through Challenger Minerals Inc. and Challenger Minerals (North Sea) Limited (together, “CMI”), our oil and gas subsidiaries.

In November 2007, we completed our merger transaction (the “Merger”) with GlobalSantaFe Corporation (“GlobalSantaFe”). Immediately prior to the effective time of the Merger, each of our outstanding ordinary shares was reclassified by way of a scheme of arrangement under Cayman Islands law into (1) 0.6996 of our ordinary shares and (2) $33.03 in cash (the “Reclassification” and, together with the Merger, the “Transactions”). At the effective time of the Merger, each outstanding ordinary share of GlobalSantaFe (the “GlobalSantaFe Ordinary Shares”) was exchanged for (1) 0.4757 of our ordinary shares (after giving effect to the Reclassification) and (2) $22.46 in cash. We have included the financial results of GlobalSantaFe in our consolidated financial statements beginning November 27, 2007, the date GlobalSantaFe Ordinary Shares were exchanged for our ordinary shares.

For investments in joint ventures and other entities that do not meet the criteria of a variable interest entity or where we are not deemed to be the primary beneficiary for accounting purposes of those entities that meet the variable interest entity criteria, we use the equity method of accounting where we have the ability to exercise significant influence. We use the cost method of accounting for investments in unconsolidated affiliates where we do not have significant influence over the unconsolidated affiliate. We consolidate those investments that meet the criteria of a variable interest entity where we are deemed to be the primary beneficiary for accounting purposes and for entities in which we have a majority voting interest. Intercompany transactions and accounts are eliminated.

Note 2—Summary of Significant Accounting Policies

Basis of Presentation—Our accompanying condensed consolidated financial statements have been prepared without audit in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Pursuant to such rules and regulations, these financial statements do not include all disclosures required by accounting principles generally accepted in the U.S. for complete financial statements. The condensed consolidated financial statements reflect all adjustments, which are, in the opinion of management, necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods. Such adjustments are considered to be of a normal recurring nature unless otherwise identified. Operating results for the three and six months ended June 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008 or for any future period.

 

 

- 4 -

 

 


TRANSOCEAN INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

 

We accounted for the Reclassification as a reverse stock split and a dividend, which required restatement of our historical weighted average shares outstanding, historical earnings per share and other share-based calculations for prior periods. All references in our financial statements to number of shares and per share amounts have been retroactively restated to reflect the decreased number of our ordinary shares issued and outstanding as a result of this accounting treatment, unless otherwise noted.

The accompanying condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2007.

Accounting Estimates—The preparation of financial statements that comply with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to bad debts, materials and supplies obsolescence, investments, intangible assets and goodwill, property and equipment and other long-lived assets, income taxes, workers’ insurance, share-based compensation, pensions and other postretirement benefits, other employment benefits and contingent liabilities. We base our estimates on historical experience and on various other assumptions we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from such estimates.

Total Comprehensive Income—Total comprehensive income for the three and six months ended June 30, 2008 was $1,107 million and $2,296 million, respectively, while total comprehensive income for the three and six months ended June 30, 2007 was $549 million and $1,102 million, respectively. Other comprehensive income did not contain any material items for any of the periods presented.

Capitalized Interest—We capitalize interest costs for qualifying construction and upgrade projects. We capitalized interest costs on construction work in progress of $30 million and $59 million for the three and six months ended June 30, 2008, respectively. Capitalized interest for the three and six months ended June 30, 2007 was $15 million and $28 million, respectively.

Segments—Prior to the Merger, we operated in one business segment. As a result of the Merger, we have established two reportable segments: (1) Contract Drilling and (2) Other. Drilling management services and oil and gas properties do not separately meet the quantitative thresholds for determining reportable segments and are combined for reporting purposes in the Other segment.

Share-Based Compensation—Share-based compensation expense for the three and six months ended June 30, 2008 was $11 million ($10 million, or $0.03 per diluted share, net of tax) and $33 million ($29 million, or $0.09 per diluted share, net of tax), respectively. Share-based compensation expense for the three and six months ended June 30, 2007 was $9 million ($7 million, or $0.03 per diluted share, net of tax) and $19 million ($16 million, or $0.08 per diluted share, net of tax), respectively. Additionally, tax deduction benefits in excess of recognized compensation costs, reported in financing cash flows, were $8 million and $11 million for the three and six months ended June 30, 2008, respectively, and $4 million and $9 million for the three and six months ended June 30, 2007, respectively.

Income Taxes—Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 (“FIN 48”) clarifies the accounting for income taxes recognized in an entity’s financial statements in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109, Accounting for Income Taxes. It prescribes a minimum recognition threshold and measurement attribute for recognizing and measuring the benefit of tax positions taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. See Note 7—Income Taxes.

New Accounting Pronouncements—In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but rather provides guidance for the application of fair value measurements required in other accounting pronouncements and seeks to eliminate inconsistencies in the application of such guidance among those other standards. SFAS 157 is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 157-2, Effective Date of FASB Statement No. 157, which delays the effective date of SFAS 157 to

 

- 5 -

 

 


TRANSOCEAN INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

 

fiscal years beginning after November 15, 2008, for nonfinancial assets and nonfinancial liabilities except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). In the first quarter 2008, we adopted those provisions of SFAS 157 that were unaffected by the delay. Such adoption did not have a material effect on our consolidated statement of financial position, results of operations or cash flows.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for noncontrolling interests, also known as minority interests, in a subsidiary and for the deconsolidation of a subsidiary. It requires that a noncontrolling interest in a subsidiary be reported as equity in the consolidated financial statements and requires that consolidated net income attributable to the parent and to the noncontrolling interests be shown separately on the face of the income statement. SFAS 160 also requires, among other things, that noncontrolling interests in formerly consolidated subsidiaries be measured at fair value upon losing control. SFAS 160 is effective for fiscal years beginning after December 15, 2008. We will be required initially to adopt SFAS 160 in 2009. We are currently evaluating the requirements of SFAS 160 and have not yet determined the impact that the adoption will have on our consolidated statement of financial position, results of operations or cash flows.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R replaces SFAS No. 141, Business Combinations and, among other things, (1) changes previous guidance so as to require that primarily all acquired assets, liabilities, minority interest and certain contingencies be measured at fair value, (2) broadens the scope of business combinations to include all transactions in which one entity gains control over one or more other businesses and (3) requires costs incurred to effect the acquisition (acquisition-related costs) and anticipated restructuring costs of the acquired company to be recognized separately from the acquisition. SFAS 141R applies prospectively to business combinations for which the acquisition date occurs in fiscal years beginning after December 15, 2008. We will be required to adopt the principles of SFAS 141R with respect to business combinations occurring on or after January 1, 2009. Due to the prospective application requirement, we are unable to determine what effect, if any, the adoption of SFAS 141R will have on our consolidated statement of financial position, results of operations or cash flows.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (“SFAS 161”). SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (1) how and why an entity uses derivative instruments, (2) how derivative instruments and related hedged items are accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”), and its related interpretations, and (3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for fiscal years beginning after November 15, 2008. We will be required to adopt SFAS 161 in the first quarter of 2009. We are currently evaluating the requirements of SFAS 161 and have not yet determined what impact the adoption will have on our consolidated statement of financial position, results of operations or cash flows.

In April 2008, the FASB issued FSP No. 142-3, Determination of the Useful Life of Intangible Assets (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. FSP 142-3 is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years, requiring prospective application to intangible assets acquired after the effective date. We will be required to adopt the principles of FSP 142-3 with respect to intangible assets acquired on or after January 1, 2009. Due to the prospective application requirement, we are unable to determine what effect, if any, the adoption of FSP 142-3 will have on our consolidated statement of financial position, results of operations or cash flows.

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”), which identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with accounting principles generally accepted in the U.S. SFAS 162 shall be effective 60 days following the SEC’s approval of certain amendments to auditing standards proposed by the Public Company Accounting Oversight Board. We do not expect the adoption of SFAS 162 to have an effect on our consolidated statement of financial position, results of operations or cash flows.

In May 2008, the FASB also issued FSP No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (“FSP APB 14-1”), which requires the issuer of a convertible debt instrument to separately account for the liability and equity components of the instrument and reflect interest expense at the entity’s market rate of borrowing for non-convertible debt instruments. FSP APB 14-1 requires retrospective restatement of all periods presented with the cumulative effect of the change in accounting principle on prior periods being

 

- 6 -

 

 


TRANSOCEAN INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

 

recognized as of the beginning of the first period presented. The adoption of FSP APB 14-1 will have an effect on the accounting, both retrospectively and prospectively, for our 1.625% Series A Convertible Senior Notes due December 2037, 1.50% Series B Convertible Senior Notes due December 2037 and 1.50% Series C Convertible Senior Notes due December 2037 and, retrospectively, for our previously redeemed 1.5% Convertible Debentures due May 2021. Aside from a reduction of debt balances and an increase to shareholders’ equity on our consolidated balance sheets for each period presented, we expect the retrospective application of FSP APB 14-1 will result in an non-cash increase to our annual historical interest expense, net of amounts capitalized, of approximately $9 million and $176 million for 2007 and 2008, respectively. Additionally, we expect that the adoption will result in a non-cash increase to our projected annual interest expense, net of amounts expected to be capitalized, of approximately $175 million, $205 million and $150 million for 2009, 2010 and 2011, respectively.

In June 2008, the FASB ratified the consensus on Emerging Issues Task Force (“EITF”) Issue No. 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF 07-5”). An instrument or embedded feature that is both indexed to an entity’s own stock and potentially settled in shares may be exempt, if certain other criteria are met, from mark-to-market accounting of derivative financial instruments. EITF 07-5 addresses instruments with contingent and other adjustment features that may change the exercise price or notional amount or otherwise alter the payoff at settlement. For example, instruments with strike prices in a currency other than our functional currency would not be indexed solely to our ordinary shares under EITF 07-5. We have both warrants and convertible notes outstanding that are exercisable or convertible into our ordinary shares. We do not expect EITF 07-5, which is effective for fiscal years beginning after December 15, 2008, to have a material effect on our consolidated statement of financial position, results of operations or cash flows after adoption.

In June 2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 clarifies that all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends participate in undistributed earnings with common shareholders. Awards of this nature are considered participating securities and the two-class method of computing basic and diluted earnings per share must be applied. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008. We are currently assessing the impact of FSP EITF 03-6-1 on our consolidated financial position and results of operations.

Reclassifications—Certain reclassifications have been made to prior period amounts to conform with the current period’s presentation. These reclassifications did not have a material effect on our consolidated statement of financial position, results of operations or cash flows.

Note 3—Merger with GlobalSantaFe Corporation

Completed in November 2007, we believe the Merger adds to and expands upon relationships with significant customers, expands our existing floater and jackup fleet and expands our presence in the major offshore drilling areas.

We issued approximately 107,752,000 of our ordinary shares and paid $5 billion in cash in connection with the Merger. We accounted for the Merger using the purchase method of accounting with Transocean treated as the accounting acquirer. As a result, the assets and liabilities of Transocean remain at historical amounts. The assets and liabilities of GlobalSantaFe were recorded at their estimated fair values as of November 27, 2007, the date the Transactions were completed, with the excess of the purchase price over the sum of these fair values recorded as goodwill.

The purchase price included, at estimated fair value, current assets of $2.1 billion, drilling and other property and equipment of $12.3 billion, intangible assets of $434 million, other assets of $98 million and the assumption of current liabilities of $607 million, long-term debt of $576 million and other long-term liabilities of $2.4 billion. The excess of the purchase price over the estimated fair value of net assets acquired was $6.2 billion, which has been accounted for as goodwill.

During the six months ended June 30, 2008, we made adjustments to the estimated fair value of certain assets and liabilities with a corresponding net adjustment to goodwill amounting to $169 million, which are reflected in the amounts noted above. Certain purchase price allocations have not been finalized and the purchase price allocation is preliminary. Due to the number of assets acquired and the closing of the Merger close to our year-end, we are continuing our review of the valuation of property and equipment, intangible assets, liabilities, evaluation of tax positions and contingencies.

In connection with the Merger, we acquired drilling contracts for future contract drilling services of GlobalSantaFe, some of which extend through 2016. These contracts include fixed dayrates that may be above or below dayrates available in

 

- 7 -

 

 


TRANSOCEAN INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

 

the market as of the date of the Merger for similar contracts. After determining the fair values of these drilling contracts as of the date of the Merger, we recorded the respective market adjustments on our consolidated balance sheet as intangible assets and liabilities that we will amortize into contract intangible revenues using the straight-line method over the respective contract periods. In the three and six months ended June 30, 2008, we recognized $190 million and $414 million in contract intangible revenues. The carrying values were $123 million and $179 million, recorded in other assets, and $914 million and $1.4 billion, recorded in other long-term liabilities, on our consolidated balance sheets at June 30, 2008 and December 31, 2007, respectively.

Additionally, we identified intangible assets associated with the trade name, customer relationships and contract backlog of our drilling management services business. We consider the ADTI trade name to be an indefinite life intangible asset, which will not be amortized and will be subject to an annual impairment test. The customer relationships and contract backlog have definite lifespans and will each be amortized over their estimated useful lives of 15 years and three months, respectively. At December 31, 2007, the carrying values of these intangibles were $76 million, $145 million and $11 million for the trade name, customer relationships and contract backlog, respectively. At June 30, 2008, the carrying values of these intangibles were $76 million and $142 million for the trade name and customer relationships, the contract backlog having been fully amortized during the six months then ended.

Unaudited pro forma combined operating results of Transocean and GlobalSantaFe assuming the Transactions were completed as of January 1, 2007 are as follows (in millions, except per share data):

 

 

 

Six months ended June 30, 2007

Operating revenues

 

$

 

5,183

Operating income

 

 

 

2,189

Income from continuing operations

 

 

 

1,393

Earnings per share

 

 

 

 

Basic

 

$

 

4.48

Diluted

 

$

 

4.34

 

The unaudited pro forma financial information includes adjustments for additional depreciation based on the fair market value of the drilling and other property and equipment acquired, amortization of intangibles arising from the Merger, increased interest expense for debt assumed in the Merger and related adjustments for income taxes. The unaudited pro forma financial information has not been adjusted for additional charges and expenses or for other potential cost savings and operational efficiencies that may be realized as a result of the Transactions. The unaudited pro forma financial information is not necessarily indicative of the result of operations had the Transactions been completed on the assumed date or the results of operations for any future periods.

 

- 8 -

 

 


TRANSOCEAN INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

 

Note 4—Drilling Fleet Expansion and Upgrades

Construction work in progress, recorded in property and equipment, was $4.0 billion and $3.1 billion at June 30, 2008 and December 31, 2007, respectively. The following table summarizes actual capital expenditures, including capitalized interest, for our major construction and conversion projects (in millions):

 


 

Six months
ended
June 30,
2008

   

Through
December 31, 2007

   

Total
costs

 
                         

Discoverer Luanda

 

$

125

   

$

107

   

$

232

 

Enhanced Enterprise-class drillship no. 5

   

114

     

     

114

 

HHI Newbuild Drillship (a)

   

109

     

109

     

218

 

Discoverer Inspiration

   

109

     

248

     

357

 

Dhirubhai Deepwater KG1 (b)

   

95

     

279

     

374

 

Discoverer Americas

   

97

     

301

     

398

 

Discoverer Clear Leader

   

75

     

409

     

484

 

Sedco 700-series upgrades

   

73

     

396

     

469

 

GSF Development Driller III (a)

   

74

     

369

     

443

 

Dhirubhai Deepwater KG2 (b)

   

     

179

     

179

 

Petrobras 10000 (c)

   

     

     

 

Capitalized interest

   

59

     

92

     

151

 

Total

 

$

930

   

$

2,489

   

$

3,419

 


 

______________________

 

(a)

Total costs through December 31, 2007 include our initial investments in the HHI Newbuild Drillship and GSF Development Driller III of $109 million and $356 million, respectively, representing the estimated fair values of the rigs at the time of the Merger.

 

(b)

The costs for Dhirubhai Deepwater KG1 and Dhirubhai Deepwater KG2, formerly named Deepwater Pacific 1 and Deepwater Pacific 2, respectively, represent 100 percent of expenditures incurred ($277 million and $178 million, respectively) prior to our investment in Transocean Pacific Drilling Inc., the joint venture that owns these rigs, which we consolidate under FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, and 100 percent of expenditures incurred since our investment in the joint venture. However, our joint venture partner, Pacific Drilling Limited, is responsible for 50 percent of these costs.

 

(c)

In June 2008, we reached an agreement with subsidiaries of Petrobras and Mitsui to acquire a newbuild Ultra-Deepwater Floater, Petrobras 10000, under a capital lease contract. The capital lease contract, which is expected to commence in the third quarter of 2009, has a 20-year term, after which we will have the right and obligation to acquire the drillship for one dollar. Total capital costs to be incurred by Petrobras and Mitsui for the construction of the drillship are estimated to be $750 million, including $65 million of capitalized interest. Upon delivery of the rig, we will record a liability for the capital lease obligation and a corresponding addition to property and equipment.

Note 5—Asset Dispositions

During the six months ended June 30, 2008, we completed the sale of three of our Standard Jackups (GSF High Island VIII, GSF Adriatic III and GSF High Island I). We received cash proceeds of $320 million associated with the sales, which had no effect on earnings.

In May 2008, we entered into a definitive agreement to sell our Standard Jackup Transocean Nordic for cash proceeds of $169 million. We expect to complete the transaction during the third quarter of 2008 upon completion of the drilling contract under which Transocean Nordic currently operates.

In February 2008, we announced our intent to proceed with divestitures of two Midwater Floaters (GSF Arctic II and GSF Arctic IV) in connection with our previously announced undertakings to the Office of Fair Trading in the U.K. At June 30, 2008, GSF Arctic II and GSF Arctic IV were classified as assets held for sale in the amounts of $280 million and $286 million, respectively, on our consolidated balance sheet. See Note 14—Subsequent Events.

 

- 9 -

 

 


TRANSOCEAN INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

 

During the six months ended June 30, 2007, we completed the sale of the tender rig Charley Graves for net proceeds of $33 million and recognized a gain on the sale of $23 million ($20 million, or $0.09 per diluted share, net of tax).

Note 6—Repurchase of Ordinary Shares

During the six months ended June 30, 2007, we repurchased and retired 5.2 million aggregate ordinary shares for $400 million at an average purchase price of $77.39 per share. The number of shares purchased and average purchase price have not been restated to reflect the effects of the Reclassification in connection with the Merger. There were no repurchases during the three months ended June 30, 2007 or the three and six months ended June 30, 2008.

Total consideration paid to repurchase the shares was recorded in shareholders’ equity as a reduction in ordinary shares and additional paid-in capital. Such consideration was funded with existing cash balances and borrowings under a pre-existing credit facility. At June 30, 2008, we had authority to repurchase $600 million of our ordinary shares under our share repurchase program.

Note 7—Income Taxes

We are a Cayman Islands company. Our earnings are not subject to income tax in the Cayman Islands because the country does not levy tax on corporate income. We operate through our various subsidiaries in a number of countries throughout the world. Income taxes have been provided based upon the tax laws and rates in the countries in which operations are conducted and income is earned. Due to the fact that the countries in which we operate have taxation regimes with varying nominal rates, deductions, credits and other tax attributes, there is no expected relationship between the provision for or benefit from income taxes and income or loss before income taxes.

The estimated annual effective tax rate for the six months ended June 30, 2008 and June 30, 2007 was 12.5 percent and 14.9 percent, respectively. This rate was based on estimated annual income before income taxes for each period after adjusting for certain items such as net gains on rig sales and various other discrete items.

During the six months ended June 30, 2008, our liability for unrecognized tax benefits increased by $58 million to a total of $482 million, including interest and penalties. We accrue interest and penalties related to our liabilities for unrecognized tax benefits as a component of income tax expense. For the six months ended June 30, 2008, we increased the liability related to interest and penalties on our unrecognized tax benefits by $20 million.

We file federal and local tax returns in several jurisdictions throughout the world. With few exceptions, we are no longer subject to examinations of our U.S. and non-U.S. tax matters for years prior to 1999. The amount of current tax benefit recognized in the six months ended June 30, 2008 from the settlement of disputes with tax authorities and the expiration of statute of limitations was insignificant.

With respect to our 2004 and 2005 U.S. federal income tax returns, U.S. taxing authorities previously proposed certain adjustments that, if sustained, would have resulted in a cash tax liability of approximately $413 million, exclusive of interest. The tax authorities have now withdrawn one of these proposed adjustments, which will significantly reduce the proposed assessment. The authorities continue to contend that one of our key subsidiaries maintains a permanent establishment in the U.S. and is therefore subject to U.S. taxation on certain earnings effectively connected to such U.S. business. Such tax treatment would not result in a material adverse effect on our consolidated statement of financial position, results of operations or cash flows with respect to 2004 and 2005 activities. We believe our returns are materially correct as filed, and we will continue to vigorously defend against all proposed changes. The tax authorities’ audit of GlobalSantaFe’s 2004 and 2005 U.S. federal income tax returns was closed during the quarter without giving rise to a material tax liability.

Certain of our Brazilian income tax returns for the years 2000 through 2004 are currently under examination. The Brazil tax authorities have issued tax assessments totaling $112 million, plus a 75 percent penalty and $77 million of interest through June 30, 2008. We believe our returns are materially correct as filed, and we are vigorously contesting these assessments. We filed a protest letter with the Brazilian tax authorities on January 25, 2008.

A valuation allowance for deferred tax assets is recorded when it is more likely than not that some or all of the benefit from the deferred tax asset will not be realized. We provide a valuation allowance to offset deferred tax assets for net operating losses incurred during the year in certain jurisdictions and for other deferred tax assets where, in the opinion of management, it is more likely than not that the financial statement benefit of these losses will not be realized. As of June 30, 2008, the valuation allowance for non-current deferred tax assets was $29 million.

 

- 10 -

 

 


TRANSOCEAN INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

 

 

Norwegian civil tax and criminal authorities are investigating various transactions undertaken by our subsidiaries in 2001 and 2002. The authorities have issued notifications of their intent to issue tax assessments of approximately $310 million, plus interest, related to certain restructuring transactions, approximately $83 million, plus interest, related to a 2001 dividend payment and approximately $8 million related to certain foreign exchange deductions. The authorities have indicated that they plan to seek penalties of 60 percent on all matters. In the course of its investigations, the Norwegian authorities secured certain records located in the United Kingdom related to a Norwegian subsidiary that was previously subject to tax in Norway. The authorities are evaluating whether to impose additional taxes on this Norwegian subsidiary. We have and will continue to respond to all information requests from the Norwegian authorities. We plan to vigorously contest any assertions by the Norwegian authorities in connection with the various transactions being investigated.

During the six months ended June 30, 2008, our long-term liability for unrecognized tax benefits related to these Norwegian tax issues increased by $17 million to $185 million due to the accrual of interest and exchange rate fluctuations. While we cannot predict or provide assurance as to the final outcome of these proceedings, we do not expect the ultimate resolution of these matters to have a material adverse effect on our consolidated statement of financial position or results of operations, although it may have a material adverse effect on our consolidated cash flows.

Our tax returns in the other major jurisdictions in which we operate are generally subject to examination for periods ranging from three to six years. We have agreed to extensions beyond the statute of limitations in two jurisdictions for up to 12 years. Tax authorities in certain jurisdictions are examining our tax returns and in some cases have issued assessments. We are defending our tax positions in those jurisdictions. While we cannot predict or provide assurance as to the final outcome of these proceedings, we do not expect the ultimate liability to have a material adverse effect on our consolidated financial position, results of operations or cash flows.

In 2004, we entered into a tax sharing agreement (the “TSA”) with TODCO, formerly one of our subsidiaries, in connection with the initial public offering of TODCO (the “TODCO IPO”). Under the TSA, most U.S. federal, state, local and foreign income taxes and income tax benefits (including income taxes and income tax benefits attributable to the TODCO business) that accrued on or before the closing of the TODCO IPO will be for our account. Accordingly, we are generally liable for any income taxes that accrued on or before the closing of the TODCO IPO, but TODCO generally must pay us for the amount of any income tax benefits created on or before the closing of the TODCO IPO (“pre-closing tax benefits”) that it uses or absorbs on a return with respect to a period after the closing of the TODCO IPO. Under this agreement, we are entitled to receive from TODCO payment for most of the tax benefits TODCO generated prior to the TODCO IPO that it utilizes, subsequent to the TODCO IPO.

In July 2007, Hercules Offshore, Inc. (“Hercules”) completed the acquisition of TODCO (the “TODCO Acquisition”). The TSA required Hercules to make an accelerated change of control payment to us due to a deemed utilization of TODCO’s pre-IPO tax benefits. The amount of the accelerated payment owed to us was calculated by multiplying the remaining pre-IPO tax benefits as of July 11, 2007 by 80 percent. In August 2007, we received a $118 million change of control payment from Hercules. We believe that Hercules owes us an additional $11 million related to the change of control of TODCO. Hercules disputed our claim for the additional amounts. On June 27, 2008, we made a formal demand for arbitration with respect to this dispute.

The TSA also requires Hercules to make additional payments to us based on a portion of the tax benefit from the exercise of certain options to acquire our ordinary shares by TODCO’s current and former employees and directors, when and if those options are exercised. We estimate that the total amount of payments related to options that remain outstanding at June 30, 2008 would be approximately $25 million, assuming a price of $152.39 per ordinary share at the time of exercise of the options (the actual price of our ordinary shares at the close of trading on June 30, 2008). However, there can be no assurance as to the amount and timing of any payment which we may receive. In addition, any future reduction of the pre-IPO tax benefits by the U.S. taxing authorities upon examination of the TODCO tax returns may require us to reimburse TODCO for some of the amounts previously paid.

Through June 30, 2008, we received $15 million in estimated payments pertaining to TODCO’s 2007 federal and state income tax returns that is deferred in other current liabilities in our consolidated balance sheet. We will recognize these estimated payments as other income when TODCO finalizes and files its 2007 federal and state income tax returns.

 

- 11 -

 

 


TRANSOCEAN INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

 

Note 8—Debt

Debt, net of unamortized discounts, premiums and fair value adjustments, is comprised of the following (in millions):

 

 

 

 

 

June 30,

 

 

 

December 31,

 

 

 

 

 

2008

 

 

 

2007

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper program (a)

 

 

 

$

1,145

 

 

 

$

 

Floating Rate Notes due September 2008 (a)

 

 

 

 

1,000

 

 

 

 

1,000

 

Bridge Loan Facility due November 2008 (a)

 

 

 

 

 

 

 

 

3,670

 

364-Day Revolving Credit Facility due December 2008 (a)

 

 

 

 

 

 

 

 

1,500

 

Term Loan A due March 2010

 

 

 

 

2,000

 

 

 

 

 

6.625% Notes due April 2011

 

 

 

 

175

 

 

 

 

177

 

Five-Year Revolving Credit Facility due November 2012

 

 

 

 

 

 

 

 

 

5% Notes due February 2013

 

 

 

 

248

 

 

 

 

246

 

5.25% Senior Notes due March 2013

 

 

 

 

499

 

 

 

 

499

 

6.00% Senior Notes due March 2018

 

 

 

 

997

 

 

 

 

997

 

7.375% Senior Notes due April 2018

 

 

 

 

247

 

 

 

 

247

 

Capital lease obligation due July 2026 (b)

 

 

 

 

16

 

 

 

 

17

 

8% Debentures due April 2027

 

 

 

 

57

 

 

 

 

57

 

7.45% Notes due April 2027

 

 

 

 

96

 

 

 

 

95

 

7% Senior Notes due June 2028

 

 

 

 

313

 

 

 

 

314

 

7.5% Notes due April 2031

 

 

 

 

598

 

 

 

 

598

 

1.625% Series A Convertible Senior Notes due December 2037

 

 

 

 

2,200

 

 

 

 

2,200

 

1.50% Series B Convertible Senior Notes due December 2037

 

 

 

 

2,200

 

 

 

 

2,200

 

1.50% Series C Convertible Senior Notes due December 2037

 

 

 

 

2,200

 

 

 

 

2,200

 

6.80% Senior Notes due March 2038

 

 

 

 

999

 

 

 

 

999

 

Debt to affiliates

 

 

 

 

289

 

 

 

 

241

 

Total debt

 

 

 

 

15,279

 

 

 

 

17,257

 

Less debt due within one year (a)(b)

 

 

 

 

2,145

 

 

 

 

6,172

 

Total long-term debt

 

 

 

$

13,134

 

 

 

$

11,085

 

______________

 

(a)

The Floating Rate Notes, 364-Day Revolving Credit Facility and commercial paper program are classified as debt due within one year. The Bridge Loan Facility was classified as debt due within one year at December 31, 2007.

 

(b)

The capital lease obligation had less than $1 million and $2 million classified as debt due within one year at June 30, 2008 and December 31, 2007, respectively.

 

The scheduled maturity of our debt assumes the bondholders exercise their options to require us to repurchase the 1.625% Series A, 1.50% Series B and 1.50% Series C Convertible Senior Notes in December 2010, 2011 and 2012, respectively. The scheduled maturities, presented using the face value of our debt, are as follows (in millions):

 

Twelve months ending June 30,

 

 

 

2009

 

$

2,145

 

2010

 

 

2,000

 

2011

 

 

2,200

 

2012

 

 

2,366

 

2013

 

 

2,951

 

Thereafter

 

 

3,607

 

Total

 

$

15,269

 

 

 

- 12 -

 

 


TRANSOCEAN INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

 

Commercial Paper Program—In December 2007, we entered into a commercial paper program (the “Program”) on a private placement basis under which we may issue unsecured commercial paper notes up to a maximum aggregate amount outstanding at any time of $1.5 billion. Under the Program, we may issue commercial paper from time to time, and amounts available under the Program may be reborrowed. The proceeds of the commercial paper issuance may be used for general corporate purposes. At June 30, 2008, $1.1 billion in commercial paper was outstanding at a weighted-average interest rate of 3.0 percent.

Bridge Loan Facility—In September 2007, we entered into a $15.0 billion, one-year senior unsecured bridge loan facility (“Bridge Loan Facility”). In connection with the Transactions, we borrowed $15.0 billion under the Bridge Loan Facility at the reserve-adjusted London Interbank Offered Rate (“LIBOR”) plus the applicable margin, which was based upon our non-credit enhanced senior unsecured long-term debt rating (“Debt Rating”). In June 2008, we repaid the then outstanding balance and terminated this facility.

364-Day Revolving Credit Facility—In December 2007, we entered into a credit agreement for a 364-day, $1.5 billion revolving credit facility (“364-Day Revolving Credit Facility”). The 364-Day Revolving Credit Facility bears interest, at our option, at either (1) a base rate, determined as the greater of (a) the prime loan rate or (b) the federal funds effective rate plus 0.50 percent, or (2) the reserve-adjusted LIBOR plus the applicable margin, which is based upon our Debt Rating. A facility fee, varying from 0.05 percent to 0.15 percent depending on our Debt Rating, is incurred on the daily amount of the underlying commitment, whether used or unused, throughout the term of the facility. A utilization fee, varying from 0.05 percent to 0.10 percent depending on our Debt Rating, is payable if amounts outstanding under the 364-Day Revolving Credit Facility are greater than or equal to 50 percent of the total underlying commitment. The 364-Day Revolving Credit Facility may be prepaid in whole or in part without premium or penalty. At June 30, 2008, no amounts were outstanding under this facility.

Term Loan A—In March 2008, we entered into a term credit facility (“Term Loan”) and borrowed $1.925 billion under the facility. In April 2008, we borrowed an additional $75 million, increasing the borrowings under this facility to $2.0 billion, the maximum allowed under the Term Loan. Borrowings may be made under the facility (1) at the base rate, determined as the greater of (A) the fluctuating commercial loan rate announced by Citibank, N.A. in New York and (B) the sum of the weighted average overnight federal funds rate published by the Federal Reserve Bank of New York plus 50 basis points, and (2) at LIBOR plus 45 basis points, based on current credit ratings. The facility may be prepaid in whole or in part without premium or penalty. The facility contains certain covenants, including a leverage ratio covenant that applies from June 30, 2008 through September 30, 2009 and a debt to total tangible capitalization covenant that applies thereafter. Borrowings under the facility are subject to acceleration upon the occurrence of events of default. The credit facility terminates on March 13, 2010. At June 30, 2008, we had $2.0 billion outstanding under this credit facility at a weighted average interest rate of 3.15 percent.

Five-Year Revolving Credit Facility—In November 2007, we entered into a $2.0 billion, five-year revolving credit facility under the Five-Year Revolving Credit Facility Agreement dated November 27, 2007 (“Five-Year Revolving Credit Facility”). Under the terms of the Five-Year Revolving Credit Facility, we may make borrowings at either (1) a base rate, determined as the greater of (a) the prime loan rate or (b) the federal funds effective rate plus 0.5 percent, or (2) the reserve-adjusted LIBOR plus the applicable margin, which is based upon our Debt Rating. A facility fee, varying from 0.07 percent to 0.17 percent depending on our Debt Rating, is incurred on the daily amount of the underlying commitment, whether used or unused, throughout the term of the facility. A utilization fee, varying from 0.05 percent to 0.10 percent depending on our Debt Rating, is payable if amounts outstanding under the Five-Year Revolving Credit Facility are greater than or equal to 50 percent of the total underlying commitment. At June 30, 2008, the applicable margin, facility fee and utilization fee were 0.26 percent, 0.09 percent and 0.10 percent, respectively. The Five-Year Revolving Credit Facility may be prepaid in whole or in part without premium or penalty. The facility contains certain covenants, including a leverage ratio covenant that applies from June 30, 2008 through September 30, 2009 and a debt to total tangible capitalization covenant that applies thereafter. At June 30, 2008, no borrowings were outstanding under this facility.

 

- 13 -

 

 


TRANSOCEAN INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

 

Note 9—Earnings per Share

The reconciliation of the numerator and denominator used for the computation of basic and diluted earnings per share is as follows (in millions, except per share data):

 

 

 

Three months ended
June 30,

 

 

 

Six months ended
June 30,

 

 

 

2008

 

 

 

2007

 

 

 

2008

 

 

 

2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator for earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income for basic earnings per share

 

$

1,107

 

 

 

$

549

 

 

 

$

2,296

 

 

 

$

1,102

 

Add back interest expense on the 1.5% convertible debentures

 

 

 

 

 

 

2

 

 

 

 

 

 

 

 

4

 

Net income for diluted earnings per share

 

$

1,107

 

 

 

$

551

 

 

 

$

2,296

 

 

 

$

1,106

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding for basic earnings per share

 

 

318

 

 

 

 

202

 

 

 

 

318

 

 

 

 

202

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options, appreciation rights and unvested stock grants

 

 

2

 

 

 

 

2

 

 

 

 

2

 

 

 

 

3

 

Warrants to purchase ordinary shares

 

 

1

 

 

 

 

2

 

 

 

 

1

 

 

 

 

2

 

1.5% convertible debentures

 

 

 

 

 

 

4

 

 

 

 

 

 

 

 

4

 

Adjusted weighted-average shares and assumed conversions for diluted earnings per share

 

 

321

 

 

 

 

210

 

 

 

 

321

 

 

 

 

211

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

3.48

 

 

 

$

2.73

 

 

 

$

7.22

 

 

 

$

5.45

 

Diluted

 

$

3.45

 

 

 

$

2.63

 

 

 

$

7.15

 

 

 

$

5.24

 

 

Ordinary shares subject to issuance pursuant to the conversion features of the 1.625% Series A, 1.50% Series B and 1.50% Series C Convertible Senior Notes did not have an effect on the calculation for the three and six months ended June 30, 2008.

Note 10—Contingencies

Legal Proceedings—In 2004, several of our subsidiaries were named, along with numerous unaffiliated defendants, in 21 complaints that were filed in the Circuit Courts of the State of Mississippi involving approximately 750 plaintiffs that alleged personal injury arising out of asbestos exposure in the course of their employment by some of these defendants between 1965 and 1986. The complaints also named as defendants certain subsidiaries of TODCO and certain subsidiaries of Sedco, Inc. to whom we may owe indemnity. Further, the complaints named other unaffiliated defendant companies, including companies that allegedly manufactured drilling related products containing asbestos. The complaints alleged that the defendants used asbestos-containing products in connection with drilling operations and included allegations of negligence, strict liability, and claims allowed under the Jones Act and general maritime law. The plaintiffs generally sought awards of unspecified compensatory and punitive damages. The Special Master who was appointed to oversee these cases required that each plaintiff file a separate amended complaint and then he dismissed the original 21 complaints. We believe that we may have a direct or indirect interest in 44 of the resulting complaints. We have not been provided with sufficient information in all claims to determine the period of the claimants’ exposure to asbestos, their medical condition or the vessels potentially involved in the claims. We historically have maintained broad liability insurance, but we are not certain whether our insurance will cover all liabilities arising out of the 44 claims. We intend to defend these lawsuits vigorously, but there can be no assurance as to their ultimate outcome.

One of our subsidiaries is involved in an action with respect to a customs matter relating to the Sedco 710 semisubmersible drilling rig. Prior to our merger with Sedco Forex, this drilling rig, which was working for Petrobras in Brazil at the time, had been admitted into the country on a temporary basis under authority granted to a Schlumberger entity. Prior to

 

- 14 -

 

 


TRANSOCEAN INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

 

the Sedco Forex merger, the drilling contract with Petrobras was transferred from the Schlumberger entity to an entity that would become one of our subsidiaries, but Schlumberger did not transfer the temporary import permit to any of our subsidiaries. In early 2000, the drilling contract was extended for another year. On January 10, 2000, the temporary import permit granted to the Schlumberger entity expired, and renewal filings were not made until later that January. In April 2000, the Brazilian customs authorities cancelled the temporary import permit. The Schlumberger entity filed an action in the Brazilian federal court of Campos for the purpose of extending the temporary admission. Other proceedings were also initiated in order to secure the transfer of the temporary admission to our subsidiary. Ultimately, the court permitted the transfer of the temporary admission from Schlumberger to our subsidiary but did not rule on whether the temporary admission could be extended without the payment of a financial penalty. During the first quarter of 2004, the Brazilian customs authorities issued an assessment totaling approximately $155 million against our subsidiary.

The first level Brazilian court ruled in April 2007 that the temporary admission granted to our subsidiary had expired which allowed the Brazilian customs authorities to execute on their assessment. Following this ruling, the Brazilian customs authorities issued a revised assessment against our subsidiary. As of June 30, 2008, the U.S. dollar equivalent of this assessment was approximately $251 million in aggregate. We are not certain as to the basis for the increase in the amount of the assessment, and in September 2007, we received a temporary ruling in our favor from a Brazilian federal court that the valuation method used by the Brazilian customs authorities was incorrect. This temporary ruling was confirmed in January 2008 by a local court, but it is still subject to review at the appellate levels in Brazil. We intend to continue to aggressively contest this matter. We have appealed the first level Brazilian court’s ruling to a higher level court in Brazil where we have also filed for a renewed stay, which was granted and we expect will prevent enforcement of the whole amount in dispute. There may be further judicial or administrative proceedings that result from this matter. While the court has granted us the right to continue our appeal without the posting of a bond, it is possible that we may be required to post a bond for up to the full amount of the assessment in connection with these proceedings. We have also put Schlumberger on notice that we consider any assessment to be solely the responsibility of Schlumberger, not our subsidiary, and we have initiated proceedings in the State of New York against Schlumberger seeking a declaratory judgment in this respect. Nevertheless, we expect that the Brazilian customs authorities will continue to seek to recover the assessment solely from our subsidiary, not Schlumberger. Schlumberger has denied any responsibility for this matter, but remains a party to the proceedings. We do not expect the liability, if any, resulting from this matter to have a material adverse effect on our consolidated statement of financial position, results of operations or cash flows.

In the third quarter of 2006, we received tax assessments of approximately $153 million from the state tax authorities of Rio de Janeiro in Brazil against one of our Brazilian subsidiaries for customs taxes on equipment imported into the state in connection with our operations. The assessments resulted from a preliminary finding by these authorities that our subsidiary’s record keeping practices were deficient. We currently believe that the substantial majority of these assessments are without merit. We filed an initial response with the Rio de Janeiro tax authorities on September 9, 2006 refuting these additional tax assessments. In September 2007, we received confirmation from the state tax authorities that they believe the additional tax assessments are valid, and as a result, we filed an appeal on September 27, 2007 to the state Taxpayer’s Council contesting these assessments. While we cannot predict or provide assurance as to the final outcome of these proceedings, we do not expect it to have a material adverse effect on our consolidated statement of financial position, results of operations or cash flows.

One of our subsidiaries is involved in lawsuits arising out of the subsidiary’s involvement in the design, construction and refurbishment of major industrial complexes. The operating assets of the subsidiary were sold and its operations discontinued in 1989, and the subsidiary has no remaining assets other than the insurance policies involved in its litigation, fundings from settlements with the primary insurers and funds received from the cancellation of certain insurance policies. The subsidiary has been named as a defendant, along with numerous other companies, in lawsuits alleging personal injury as a result of exposure to asbestos. As of June 30, 2008, the subsidiary was a defendant in approximately 976 lawsuits, of which 102 were filed during 2007. Some of these lawsuits include multiple plaintiffs and we estimate that there are approximately 3,219 plaintiffs in these lawsuits. For many of these lawsuits, we have not been provided with sufficient information from the plaintiffs to determine whether all or some of the plaintiffs have claims against the subsidiary, the basis of any such claims, or the nature of their alleged injuries. The first of the asbestos-related lawsuits was filed against this subsidiary in 1990. Through June 30, 2008, the amounts expended to resolve claims (including both attorneys’ fees and expenses, and settlement costs) have not been material, and all deductibles with respect to the primary insurance have been satisfied. The subsidiary continues to be named as a defendant in additional lawsuits and we cannot predict the number of additional cases in which it may be named a defendant nor can we predict the potential costs to resolve such additional cases or to resolve the pending cases. However, the subsidiary has in excess of $1 billion in insurance limits. Although not all of the policies may be fully

 

- 15 -

 

 


TRANSOCEAN INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

 

available due to the insolvency of certain insurers, we believe that the subsidiary will have sufficient insurance and funds from the settlements of litigation with insurance carriers available to respond to these claims. While we cannot predict or provide assurance as to the final outcome of these matters, we do not believe that the current value of the claims where we have been identified will have a material impact on our consolidated statement of financial position, results of operations or cash flows.

We are involved in various tax matters (see Note 7—Income Taxes). We are also involved in a number of lawsuits which have arisen in the ordinary course of our business and for which we do not expect the liability, if any, resulting from these lawsuits to have a material adverse effect on our consolidated statement of financial position, results of operations or cash flows. We cannot predict with certainty the outcome or effect of any of the litigation matters specifically described above or of any such other pending or threatened litigation. There can be no assurance that our beliefs or expectations as to the outcome or effect of any lawsuit or other litigation matter will prove correct and the eventual outcome of these matters could materially differ from management’s current estimates.

Environmental Matters—We have certain potential liabilities under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) and similar state acts regulating cleanup of various hazardous waste disposal sites, including those described below. CERCLA is intended to expedite the remediation of hazardous substances without regard to fault. Potentially responsible parties (“PRPs”) for each site include present and former owners and operators of, transporters to and generators of the substances at the site. Liability is strict and can be joint and several.

We have been named as a PRP in connection with a site located in Santa Fe Springs, California, known as the Waste Disposal, Inc. site. We and other PRPs have agreed with the U.S. Environmental Protection Agency (“EPA”) and the U.S. Department of Justice (“DOJ”) to settle our potential liabilities for this site by agreeing to perform the remaining remediation required by the EPA. The form of the agreement is a consent decree, which has now been entered by the court. The parties to the settlement have entered into a participation agreement, which makes us liable for approximately eight percent of the remediation and related costs. The remediation is complete, and we believe our share of the future operation and maintenance costs of the site is not material. There are additional potential liabilities related to the site, but these cannot be quantified, and we have no reason at this time to believe that they will be material.

We have also been named as a PRP in connection with a site in California known as the Casmalia Resources Site. We and other PRPs have entered into an agreement with the EPA and the DOJ to resolve potential liabilities. Under the settlement, we are not likely to owe any substantial additional amounts for this site beyond what we have already paid. There are additional potential liabilities related to this site, but these cannot be quantified at this time, and we have no reason at this time to believe that they will be material.

We have been named as one of many PRPs in connection with a site located in Carson, California, formerly maintained by Cal Compact Landfill. On February 15, 2002, we were served with a required 90-day notification that eight California cities, on behalf of themselves and other PRPs, intend to commence an action against us under the Resource Conservation and Recovery Act (“RCRA”). On April 1, 2002, a complaint was filed by the cities against us and others alleging that we have liabilities in connection with the site. However, the complaint has not been served. The site was closed in or around 1965, and we do not have sufficient information to enable us to assess our potential liability, if any, for this site.

One of our subsidiaries has recently been ordered by the California Regional Water Quality Control Board to develop a testing plan for a site known as Campus 1000 Fremont in Alhambra, California. This site was formerly owned and operated by certain of our subsidiaries. It is presently owned by an unrelated party, which has received an order to test the property, the cost of which is expected to be in the range of $200,000. We have also been advised that one or more of our subsidiaries is likely to be named by the EPA as a PRP for the San Gabriel Valley, Area 3, Superfund site, which includes this property. We have no knowledge at this time of the potential cost of any remediation, who else will be named as PRPs, and whether in fact any of our subsidiaries is a responsible party. The subsidiaries in question do not own any operating assets and have limited ability to respond to any liabilities.

One of our subsidiaries was previously requested to contribute approximately $140,000 toward remediation costs of the Environmental Protection Corporation (“EPC”) Eastside Disposal Facility near Bakersfield, California, by a company that has taken responsibility for site remediation from the California Department of Toxic Substances Control. In July 2008, we settled our interest in the dispute for approximately $130,000.

 

- 16 -

 

 


TRANSOCEAN INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

 

Resolutions of other claims by the EPA, the involved state agency or PRPs are at various stages of investigation. These investigations involve determinations of:

 

the actual responsibility attributed to us and the other PRPs at the site;

 

appropriate investigatory and/or remedial actions; and

 

allocation of the costs of such activities among the PRPs and other site users.

 

Our ultimate financial responsibility in connection with those sites may depend on many factors, including:

 

the volume and nature of material, if any, contributed to the site for which we are responsible;

 

the numbers of other PRPs and their financial viability; and

 

the remediation methods and technology to be used.

 

It is difficult to quantify with certainty the potential cost of these environmental matters, particularly in respect of remediation obligations. Nevertheless, based upon the information currently available, we believe that our ultimate liability arising from all environmental matters, including the liability for all other related pending legal proceedings, asserted legal claims and known potential legal claims which are likely to be asserted, is adequately accrued and should not have a material effect on our financial position or ongoing results of operations. Estimated costs of future expenditures for environmental remediation obligations are not discounted to their present value.

Contamination Litigation—On July 11, 2005, one of our subsidiaries was served with a lawsuit filed on behalf of three landowners in Louisiana in the 12th Judicial District Court for the Parish of Avoyelles, State of Louisiana. The lawsuit named nineteen other defendants, all of which were alleged to have contaminated the plaintiffs’ property with naturally occurring radioactive material, produced water, drilling fluids, chlorides, hydrocarbons, heavy metals and other contaminants as a result of oil and gas exploration activities. Experts retained by the plaintiffs issued a report suggesting significant contamination in the area operated by the subsidiary and another codefendant, and claimed that over $300 million would be required to properly remediate the contamination. The experts retained by the defendants conducted their own investigation and concluded that the remediation costs would amount to no more than $2.5 million.

The plaintiffs and the codefendant threatened to add GlobalSantaFe as a defendant in the lawsuit under the “single business enterprise” doctrine contained in Louisiana law. The single business enterprise doctrine is similar to corporate veil piercing doctrines. On August 16, 2006, our subsidiary and its immediate parent company, which is also an entity that no longer conducts operations or holds assets, filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. Later that day, the plaintiffs dismissed our subsidiary from the lawsuit. Subsequently, the codefendant filed various motions in the lawsuit and in the Delaware bankruptcies attempting to assert alter ego and single business enterprise claims against GlobalSantaFe and two other subsidiaries in the lawsuit. We believe that these legal theories should not be applied against GlobalSantaFe or these other two subsidiaries, and that in any event the manner in which the parent and its subsidiaries conducted their businesses does not meet the requirements of these theories for imposition of liability. The codefendant also seeks to dismiss the bankruptcies. The efforts to assert alter ego and single business enterprise theory claims against GlobalSantaFe were rejected by the Court in Avoyelles Parish and the lawsuit against the other defendant went to trial on February 19, 2007. The action was resolved at trial with a settlement by the codefendant that included a $20 million payment and certain cleanup activities to be conducted by the codefendant. The settlement also purported to assign the plaintiffs’ claims in the lawsuit against our subsidiary and other parties, including GlobalSantaFe and the other two subsidiaries, to the codefendant.

In the bankruptcy case, our subsidiary filed suit to obtain declaratory and injunctive relief against the codefendant concerning the matters described above and GlobalSantaFe intervened in the matter. The codefendant is seeking to dismiss the bankruptcy case and a modification of the automatic stay afforded under the Bankruptcy Code to our subsidiary and its parent so that the codefendant may pursue the entities and GlobalSantaFe for contribution and indemnity and the purported assigned rights from the plaintiffs in the lawsuit including the alter ego and single business enterprise claims and potential insurance rights. On February 15, 2008, the Bankruptcy Court denied the codefendant’s request to dismiss the bankruptcy case but modified the automatic stay to allow the codefendant to proceed on its claims against the debtors, our subsidiary and its parent, and their insurance companies. Subsequently, the Bankruptcy Court ruled that these claims should proceed in Louisiana, but that the subsidiary’s parent should be excluded. The Bankruptcy Court did not address the codefendant’s pending claims against GlobalSantaFe and the other two subsidiaries, which will also be the subject of a future hearing. The Bankruptcy Court also denied the debtors’ requests for preliminary declaratory and injunctive relief. The codefendant has filed a Notice of Appeal of the rulings of the Bankruptcy Court.

 

- 17 -

 

 


TRANSOCEAN INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

 

 

In addition, the codefendant has filed proofs of claim against both our subsidiary and its parent with regard to its claims arising out of the settlement agreement, including recovery of the settlement funds and remediation costs and damages for the purported assigned claims. A Motion for Partial Summary Judgment seeking annulment and dismissal of the codefendant’s proofs of claim has also been filed by the debtors and remains pending. Our subsidiary, its parent and GlobalSantaFe intend to continue to vigorously defend against any action taken in an attempt to impose liability against them under the theories discussed above or otherwise and believe they have good and valid defenses thereto. Although, it is difficult to quantify with certainty the potential cost of these matters, based on the information currently available, we do not believe the ultimate outcome of these matters will have a material impact on our consolidated statement of financial position, results of operations or cash flows.

Retained Risk—We renewed our insurance coverages for the 12-month policy period beginning May 1, 2008. Under the program, we generally maintain a $125 million per occurrence deductible on our hull and machinery, which is subject to an aggregate deductible of $250 million. However, in the event of a total loss or a constructive total loss of a drilling unit, such loss is fully covered by our insurance with no deductible. Additionally, we maintain a $10 million per occurrence deductible on crew personal injury liability and $5 million per occurrence deductible on third-party property claims, which together are subject to an aggregate deductible of $50 million that is applied to any occurrence in excess of the per occurrence deductible until the aggregate deductible is exhausted. We also carry $950 million of third-party liability coverage exclusive of the personal injury liability deductibles, third-party property liability deductibles and retention amounts described above. We retain the risk for any liability losses in excess of the $950 million limit. We have elected to self-insure operators extra expense coverage for our subsidiaries ADTI and CMI. This coverage provides protection against expenses related to well control and redrill liability associated with blowouts. Generally, ADTI’s clients assume, and indemnify ADTI for, liability associated with blowouts in excess of $50 million.

At present, the insured value of our drilling rig fleet is approximately $34 billion in aggregate. We do not generally have commercial market insurance coverage for physical damage losses to our fleet due to hurricanes in the U.S. Gulf of Mexico and war perils worldwide. We do not carry insurance for loss of revenue. In the opinion of management, adequate accruals have been made based on known and estimated losses related to such exposures.

Letters of Credit and Surety Bonds—We had letters of credit outstanding totaling $655 million and $532 million at June 30, 2008 and December 31, 2007, respectively. These letters of credit guarantee various contract bidding and performance activities under various uncommitted lines provided by several banks.

As is customary in the contract drilling business, we also have various surety bonds in place that secure customs obligations relating to the importation of our rigs and certain performance and other obligations. Surety bonds outstanding totaled $21 million and $24 million at June 30, 2008 and December 31, 2007, respectively.

Note 11—Stock Warrants

In connection with our merger with R&B Falcon, we assumed the R&B Falcon stock warrants, which expire on May 1, 2009. Under the amended warrant agreement each holder of a warrant may elect to receive 12.243 ordinary shares and $578.025 in cash at an exercise price of $332.50 upon exercise. The cash payment feature represents a liability of $38 million and $48 million at June 30, 2008 and December 31, 2007, respectively, which is recorded in other current liabilities in our consolidated balance sheets.

In February 2008, we issued 217,801 ordinary shares upon the exercise of 17,790 warrants. As a result, we paid $4 million, net of a $6 million aggregate exercise price. At June 30, 2008, 65,120 warrants remained outstanding to purchase 797,264 of our ordinary shares.

 

- 18 -

 

 


TRANSOCEAN INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

 

Note 12—Retirement Plans and Other Postemployment Benefits

Defined Benefit Pension Plans—We have several defined benefit pension plans, both funded and unfunded, covering substantially all of our U.S. employees. We also have various defined benefit plans in the U.K., Norway, Nigeria, Egypt and Indonesia that cover our employees, a frozen plan acquired in connection with the Merger that cover former members of the board of directors of GlobalSantaFe and certain frozen plans acquired in connection with the R&B Falcon merger that cover certain current and former employees. Net periodic benefit cost for these defined benefit pension plans includes the following components (in millions):

 

 

 

Three months ended
June 30,

 

 

 

Six months ended
June 30,

 

 

 

2008

 

 

 

2007

 

 

 

2008

 

 

 

2007

 

Components of net periodic benefit cost (a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

11

 

 

 

$

6

 

 

 

$

23

 

 

 

$

11

 

Interest cost

 

 

17

 

 

 

 

5

 

 

 

 

33

 

 

 

 

10

 

Expected return on plan assets

 

 

(18)

 

 

 

 

(6

)

 

 

 

(37)

 

 

 

 

(11

)

Amortization of prior period service cost

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

1

 

Recognized net actuarial losses

 

 

1

 

 

 

 

1

 

 

 

 

2

 

 

 

 

2

 

Net periodic benefit cost

 

$

11

 

 

 

$

7

 

 

 

$

21

 

 

 

$

13

 

______________

 

(a)

Amounts are before income tax effect.

 

We expect to contribute approximately $30 million to our defined benefit pension plans in 2008, which we expect will be funded from cash flow from operations. We contributed approximately $9 million to the defined benefit pension plans during the six months ended June 30, 2008.

Postretirement Benefits Other than Pensions (“OPEB”)—We have several unfunded contributory and noncontributory OPEB plans covering substantially all of our U.S. employees. Net periodic benefit costs for these postretirement plans and their components, including service cost, interest cost, amortization of prior service cost and recognized net actuarial losses, were less than $1 million for each of the three months ended June 30, 2008 and 2007, and less than $2 million for each of the six months ended June 30, 2008 and 2007.

We expect to contribute approximately $3 million to the other postretirement benefit plans in 2008, which we expect will be funded from cash flow from operations. We contributed approximately $2 million to the other postretirement benefit plans during the six months ended June 30, 2008.

Severance Plans—In connection with the Merger, we established a plan to consolidate operations and administrative functions post-Merger. As of June 30, 2008, we have identified 218 employees who have been or will be involuntarily terminated pursuant to this plan. The estimated severance-related costs for the affected employees of the legacy GlobalSantaFe companies of $25 million was recorded as a liability as part of the accounting for the Merger. The estimated severance-related costs for the affected employees of the legacy Transocean companies of $8 million is being recognized as operating and maintenance expense or general and administrative expense over the service period of the affected employees. We recognized $3 million of such expense during the six months ended June 30, 2008. The termination benefits are being paid as salary continuation over a period of between six and 24 months. Through June 30, 2008, we have paid $20 million in termination benefits under the plan, including $19 million during the six months ended June 30, 2008. We expect to accrue substantially all of the remaining amounts by the end of the first quarter of 2009.

Note 13—Supplementary Cash Flow Information

Non-cash investing activities for the six months ended June 30, 2008 and 2007 included $116 million and $70 million, respectively, related to accruals of capital expenditures. The accruals have been reflected in the consolidated balance sheet as an increase in property and equipment, net and a corresponding increase in accounts payable.

 

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TRANSOCEAN INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

 

Note 14—Subsequent Events

Asset Dispositions—In July 2008, we entered into definitive agreements to sell two Midwater Floaters (GSF Arctic II and GSF Arctic IV) for net proceeds of approximately $750 million. The sale of the GSF Arctic IV is expected to close late in the third quarter of 2008, and the sale of the GSF Arctic II is expected to close in the fourth quarter of 2008 following completion of existing contract commitments. We have agreed to provide non-recourse seller financing until December 31, 2010 for $745 million of the purchase price for the rigs.

 

- 20 -

 

 


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Information

The statements included in this quarterly report regarding future financial performance and results of operations and other statements that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements in this quarterly report include, but are not limited to, statements about the following subjects:

contract commencements,

 

issuance of new debt,

 

contract option exercises,

 

debt reduction,

 

revenues,

 

debt credit ratings,

 

expenses,

 

planned asset sales,

 

results of operations,

 

timing of asset sales,

 

commodity prices,

 

proceeds from asset sales,

 

customer drilling programs,

 

our effective tax rate,

 

supply and demand,

 

changes in tax laws, treaties and

 

utilization rates,

 

 

regulations,

 

dayrates,

 

tax assessments,

 

contract backlog,

 

operations in international markets,

 

effects and results of the GlobalSantaFe

 

investments in joint ventures,

 

 

merger and related transactions,

 

investments in recruitment, retention

 

planned shipyard projects and rig

 

 

and personnel development initiatives,

 

 

mobilizations and their effects,

 

the level of expected capital

 

newbuild projects and opportunities,

 

 

expenditures,

 

the upgrade project for the Sedco

 

results and effects of legal proceedings

 

 

700-series semisubmersible rig,

 

 

and governmental audits and

 

other major upgrades,

 

 

assessments,

 

contract awards,

 

outcome and effects of internal and

 

newbuild completion delivery and

 

 

governmental investigations,

 

 

commencement of operations dates,

 

adequacy of insurance,

 

expected downtime and lost revenue,

 

liabilities for tax issues, including those

 

insurance proceeds,

 

 

associated with our activities in Brazil,

 

cash investments of our wholly-owned

 

 

Norway and the United States,

 

 

captive insurance company,

 

liabilities for customs and

 

future activity in the deepwater, mid-

 

 

environmental matters,

 

 

water and the jackup market sectors,

 

liquidity,

 

market outlook for our various

 

cash flow from operations,

 

 

geographical operating sectors and

 

adequacy of cash flow for our

 

 

classes of rigs,

 

 

obligations,

 

capacity constraints for ultra-deepwater

 

effects of accounting changes,

 

 

rigs and other rig classes,

 

adoption of accounting policies,

 

effects of new rigs on the market,

 

pension plan and other postretirement

 

income related to and any payments to

 

 

benefit plan contributions,

 

 

be received under the TODCO tax

 

the timing of severance payments,

 

 

sharing agreement,

 

benefit payments, and

 

uses of excess cash,

 

the timing and cost of completion of

 

share repurchases under our share

 

 

capital projects.

 

 

repurchase program,

 

 

 

 

 

 

- 21 -

 

 


 

Forward-looking statements in this quarterly report are identifiable by use of the following words and other similar expressions among others:

 

     “anticipates”

     “may”

     “believes”

     “might”

     “budgets”

     “plans”

     “could”

     “predicts”

     “estimates”

     “projects”

     “expects”

     “scheduled”

     “forecasts”

     “should”

     “intends”

 

 

Such statements are subject to numerous risks, uncertainties and assumptions, including, but not limited to:

 

those described under “Item 1A. Risk Factors” included herein and in our Annual Report on Form 10-K for the year ended December 31, 2007 and our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2008,

 

the adequacy of sources of liquidity,

 

our inability to obtain contracts for our rigs that do not have contracts,

 

the effect and results of litigation, tax audits and contingencies, and

 

other factors discussed in this quarterly report and in our other filings with the SEC, which are available free of charge on the SEC’s website at www.sec.gov.

Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those indicated.

All subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by reference to these risks and uncertainties. You should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement, and we undertake no obligation to publicly update or revise any forward-looking statements, except as required by law.

The following information should be read in conjunction with the unaudited condensed consolidated financial statements included under “Item 1. Financial Statements” herein and the audited consolidated financial statements and the notes thereto and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2007.

Overview

Transocean Inc. (together with its subsidiaries and predecessors, unless the context requires otherwise, “Transocean,” the “Company,” “we,” “us” or “our”) is a leading international provider of offshore contract drilling services for oil and gas wells. As of July 31, 2008, we owned, had partial ownership interests in or operated 137 mobile offshore drilling units. As of this date, our fleet included 39 High-Specification Floaters (Ultra-Deepwater, Deepwater and Harsh Environment semisubmersibles and drillships), 29 Midwater Floaters, 10 High-Specification Jackups, 55 Standard Jackups and four Other Rigs. In addition, we had ten Ultra-Deepwater Floaters under construction or contracted for construction.

We believe our mobile offshore drilling fleet is one of the most modern and versatile fleets in the world. Our primary business is to contract these drilling rigs, related equipment and work crews primarily on a dayrate basis to drill oil and gas wells. We specialize in technically demanding segments of the offshore drilling business with a particular focus on deepwater and harsh environment drilling services. We also provide oil and gas drilling management services on either a dayrate basis or a completed-project, fixed-price (or “turnkey”) basis, as well as drilling engineering and drilling project management services, and we participate in oil and gas exploration and production activities.

In November 2007, we completed our merger transaction (the “Merger”) with GlobalSantaFe Corporation (“GlobalSantaFe”). Immediately prior to the effective time of the Merger, each of our outstanding ordinary shares was reclassified by way of a scheme of arrangement under Cayman Islands law into (1) 0.6996 of our ordinary shares and (2) $33.03 in cash (the “Reclassification” and, together with the Merger, the “Transactions”). The Merger was accounted for as

 

- 22 -

 

 


 

a purchase, with the Company as the acquirer for accounting purposes. We accounted for the Reclassification as a reverse stock split and a dividend, which require the restatement of our historical weighted average shares outstanding, historical earnings per share and other share-based calculations for prior periods. All references to number of shares, per share amounts and market prices of our ordinary shares have been retroactively restated to reflect the decreased number of our ordinary shares issued and outstanding as a result of this accounting treatment. At the time of the Merger, GlobalSantaFe owned, had partial ownership interests in, operated, had under construction or contracted for construction, 61 mobile offshore drilling units and other units utilized in the support of offshore drilling activities. The balance sheet data as of December 31, 2007 represents the consolidated statement of financial position of the combined company.

Key measures of our total company results of operations and financial condition are as follows (in millions, except average daily revenue and percentages):

 

 

 

Three months ended
June 30,

 

 

 

 

 

 

 

Six months ended

June 30,

 

 

 

 

 

 

 

2008

 

 

 

2007

 

 

 

Change

 

 

 

2008

 

 

 

2007

 

 

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average daily revenue (a)(b)

 

$

238,600

 

 

 

$

202,400