UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM 10-Q
(Mark one)
|
þ
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended September 30, 2011
OR
¨ 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 000-53533
TRANSOCEAN LTD.
(Exact name of registrant as specified in its charter)
|
Zug, Switzerland
|
98-0599916
|
|
(State or other jurisdiction of incorporation or organization)
|
(I.R.S. Employer Identification No.)
|
|
Chemin de Blandonnet 10
Vernier, Switzerland
|
1214
|
|
(Address of principal executive offices)
|
(Zip Code)
|
|
+41 (22) 930-9000
|
|
|
(Registrant’s telephone number, including area code)
|
|
_________________________
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 þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes þ No ¨
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 þ Accelerated filer ¨ Non-accelerated filer (do not check if a smaller reporting company) ¨ Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
As of October 26, 2011, 319,855,270 shares were outstanding.
TRANSOCEAN LTD. AND SUBSIDIARIES
INDEX TO FORM 10-Q
UARTER ENDED SEPTEMBER 30, 2011
|
Page
|
||
TRANSOCEAN LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
(Unaudited)
|
Three months ended
September 30,
|
Nine months ended
September 30,
|
|||||||||||||||
|
2011
|
2010
|
2011
|
2010
|
|||||||||||||
|
(As adjusted)
|
(As adjusted)
|
|||||||||||||||
|
Operating revenues
|
||||||||||||||||
|
Contract drilling revenues
|
$
|
2,061
|
$
|
2,183
|
$
|
6,097
|
$
|
6,880
|
||||||||
|
Contract drilling intangible revenues
|
12
|
23
|
32
|
85
|
||||||||||||
|
Other revenues
|
169
|
75
|
591
|
374
|
||||||||||||
|
2,242
|
2,281
|
6,720
|
7,339
|
|||||||||||||
|
Costs and expenses
|
||||||||||||||||
|
Operating and maintenance
|
1,540
|
1,202
|
4,391
|
3,735
|
||||||||||||
|
Depreciation and amortization
|
362
|
388
|
1,075
|
1,155
|
||||||||||||
|
General and administrative
|
67
|
59
|
200
|
180
|
||||||||||||
|
1,969
|
1,649
|
5,666
|
5,070
|
|||||||||||||
|
Loss on impairment
|
(3
|
)
|
—
|
(28
|
)
|
—
|
||||||||||
|
Gain (loss) on disposal of assets, net
|
(2
|
)
|
2
|
5
|
256
|
|||||||||||
|
Operating income
|
268
|
634
|
1,031
|
2,525
|
||||||||||||
|
Other income (expense), net
|
||||||||||||||||
|
Interest income
|
7
|
7
|
27
|
17
|
||||||||||||
|
Interest expense, net of amounts capitalized
|
(151
|
)
|
(142
|
)
|
(443
|
)
|
(415
|
)
|
||||||||
|
Other, net
|
(77
|
)
|
(13
|
)
|
(79
|
)
|
(1
|
)
|
||||||||
|
(221
|
)
|
(148
|
)
|
(495
|
)
|
(399
|
)
|
|||||||||
|
Income from continuing operations before income tax expense
|
47
|
486
|
536
|
2,126
|
||||||||||||
|
Income tax expense
|
100
|
123
|
263
|
368
|
||||||||||||
|
Income (loss) from continuing operations
|
(53
|
)
|
363
|
273
|
1,758
|
|||||||||||
|
Income (loss) from discontinued operations, net of tax
|
(7
|
)
|
15
|
171
|
25
|
|||||||||||
|
Net income (loss)
|
(60
|
)
|
378
|
444
|
1,783
|
|||||||||||
|
Net income attributable to noncontrolling interest
|
11
|
10
|
50
|
23
|
||||||||||||
|
Net income (loss) attributable to controlling interest
|
$
|
(71
|
)
|
$
|
368
|
$
|
394
|
$
|
1,760
|
|||||||
|
Earnings (loss) per share-basic
|
||||||||||||||||
|
Earnings (loss) from continuing operations
|
$
|
(0.20
|
)
|
$
|
1.10
|
$
|
0.69
|
$
|
5.39
|
|||||||
|
Earnings (loss) from discontinued operations
|
(0.02
|
)
|
0.05
|
0.53
|
0.08
|
|||||||||||
|
Earnings (loss) per share
|
$
|
(0.22
|
)
|
$
|
1.15
|
$
|
1.22
|
$
|
5.47
|
|||||||
|
Earnings (loss) per share-diluted
|
||||||||||||||||
|
Earnings (loss) from continuing operations
|
$
|
(0.20
|
)
|
$
|
1.10
|
$
|
0.69
|
$
|
5.39
|
|||||||
|
Earnings (loss) from discontinued operations
|
(0.02
|
)
|
0.05
|
0.53
|
0.08
|
|||||||||||
|
Earnings (loss) per share
|
$
|
(0.22
|
)
|
$
|
1.15
|
$
|
1.22
|
$
|
5.47
|
|||||||
|
Weighted-average shares outstanding
|
||||||||||||||||
|
Basic
|
320
|
319
|
320
|
320
|
||||||||||||
|
Diluted
|
320
|
319
|
320
|
320
|
||||||||||||
See accompanying notes.
- 1 -
TRANSOCEAN LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
(Unaudited)
|
Three months ended
September 30,
|
Nine months ended
September 30,
|
|||||||||||||||
|
2011
|
2010
|
2011
|
2010
|
|||||||||||||
|
Net income (loss)
|
$
|
(60
|
)
|
$
|
378
|
$
|
444
|
$
|
1,783
|
|||||||
|
Other comprehensive income (loss) before income taxes
|
||||||||||||||||
|
Unrecognized components of net periodic benefit costs
|
(4
|
)
|
1
|
(10
|
)
|
(9
|
)
|
|||||||||
|
Recognized components of net periodic benefit costs
|
7
|
7
|
19
|
13
|
||||||||||||
|
Unrecognized loss on derivative instruments
|
(7
|
)
|
(12
|
)
|
(14
|
)
|
(35
|
)
|
||||||||
|
Recognized loss on derivative instruments
|
3
|
3
|
8
|
9
|
||||||||||||
|
Unrealized loss on marketable securities
|
(14
|
)
|
—
|
(14
|
)
|
—
|
||||||||||
|
Other comprehensive loss before income taxes
|
(15
|
)
|
(1
|
)
|
(11
|
)
|
(22
|
)
|
||||||||
|
Income taxes related to other comprehensive loss
|
—
|
—
|
(2
|
)
|
(1
|
)
|
||||||||||
|
Other comprehensive loss, net of income taxes
|
(15
|
)
|
(1
|
)
|
(13
|
)
|
(23
|
)
|
||||||||
|
Total comprehensive income (loss)
|
(75
|
)
|
377
|
431
|
1,760
|
|||||||||||
|
Total comprehensive income (loss) attributable to noncontrolling interest
|
6
|
—
|
43
|
(8
|
)
|
|||||||||||
|
Total comprehensive income (loss) attributable to controlling interest
|
$
|
(81
|
)
|
$
|
377
|
$
|
388
|
$
|
1,768
|
|||||||
See accompanying notes.
- 2 -
TRANSOCEAN LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
(Unaudited)
|
September 30,
2011
|
December 31,
2010
|
|||||||
|
(As adjusted)
|
||||||||
|
Assets
|
||||||||
|
Cash and cash equivalents
|
$
|
3,286
|
$
|
3,394
|
||||
|
Accounts receivable, net of allowance for doubtful accounts
of $28 and $38 at September 30, 2011 and December 31, 2010, respectively
|
2,046
|
1,843
|
||||||
|
Materials and supplies, net of allowance for obsolescence
of $76 and $70 at September 30, 2011 and December 31, 2010, respectively
|
578
|
514
|
||||||
|
Deferred income taxes, net
|
120
|
115
|
||||||
|
Assets held for sale
|
118
|
—
|
||||||
|
Other current assets
|
421
|
329
|
||||||
|
Total current assets
|
6,569
|
6,195
|
||||||
|
Property and equipment
|
26,886
|
26,721
|
||||||
|
Property and equipment of consolidated variable interest entities
|
2,248
|
2,214
|
||||||
|
Less accumulated depreciation
|
8,413
|
7,616
|
||||||
|
Property and equipment, net
|
20,721
|
21,319
|
||||||
|
Goodwill
|
8,132
|
8,132
|
||||||
|
Other assets
|
1,223
|
1,165
|
||||||
|
Total assets
|
$
|
36,645
|
$
|
36,811
|
||||
|
Liabilities and equity
|
||||||||
|
Accounts payable
|
$
|
755
|
$
|
832
|
||||
|
Accrued income taxes
|
23
|
109
|
||||||
|
Debt due within one year
|
1,830
|
1,917
|
||||||
|
Debt of consolidated variable interest entities due within one year
|
96
|
95
|
||||||
|
Other current liabilities
|
1,566
|
883
|
||||||
|
Total current liabilities
|
4,270
|
3,836
|
||||||
|
Long-term debt
|
8,402
|
8,354
|
||||||
|
Long-term debt of consolidated variable interest entities
|
772
|
855
|
||||||
|
Deferred income taxes, net
|
588
|
575
|
||||||
|
Other long-term liabilities
|
1,730
|
1,791
|
||||||
|
Total long-term liabilities
|
11,492
|
11,575
|
||||||
|
Commitments and contingencies
|
||||||||
|
Redeemable noncontrolling interest
|
71
|
25
|
||||||
|
Shares, CHF 15.00 par value, 335,235,298 authorized, 167,617,649 conditionally authorized,
335,235,298 issued at September 30, 2011 and December 31, 2010;
319,853,371 and 319,080,678 outstanding at September 30, 2011 and December 31, 2010, respectively
|
4,493
|
4,482
|
||||||
|
Additional paid-in capital
|
6,545
|
7,504
|
||||||
|
Treasury shares, at cost, 2,863,267 held at September 30, 2011 and December 31, 2010
|
(240
|
)
|
(240
|
)
|
||||
|
Retained earnings
|
10,363
|
9,969
|
||||||
|
Accumulated other comprehensive loss
|
(338
|
)
|
(332
|
)
|
||||
|
Total controlling interest shareholders’ equity
|
20,823
|
21,383
|
||||||
|
Noncontrolling interest
|
(11
|
)
|
(8
|
)
|
||||
|
Total equity
|
20,812
|
21,375
|
||||||
|
Total liabilities and equity
|
$
|
36,645
|
$
|
36,811
|
||||
See accompanying notes.
- 3 -
TRANSOCEAN LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(In millions)
(Unaudited)
|
Nine months ended
September 30,
|
||||||||
|
2011
|
2010
|
|||||||
|
(As adjusted)
|
||||||||
|
Shares outstanding
|
||||||||
|
Balance, beginning of period
|
319
|
321
|
||||||
|
Issuance of shares under share-based compensation plans
|
1
|
1
|
||||||
|
Purchases of shares held in treasury
|
—
|
(3
|
)
|
|||||
|
Balance, end of period
|
320
|
319
|
||||||
|
Shares
|
||||||||
|
Balance, beginning of period
|
$
|
4,482
|
$
|
4,472
|
||||
|
Issuance of shares under share-based compensation plans
|
11
|
9
|
||||||
|
Balance, end of period
|
$
|
4,493
|
$
|
4,481
|
||||
|
Additional paid-in capital
|
||||||||
|
Balance, beginning of period
|
$
|
7,504
|
$
|
7,407
|
||||
|
Share-based compensation
|
74
|
79
|
||||||
|
Issuance of shares under share-based compensation plans
|
(17
|
)
|
(13
|
)
|
||||
|
Obligation for distribution of qualifying additional paid-in capital
|
(1,017
|
)
|
—
|
|||||
|
Other, net
|
1
|
4
|
||||||
|
Balance, end of period
|
$
|
6,545
|
$
|
7,477
|
||||
|
Treasury shares, at cost
|
||||||||
|
Balance, beginning of period
|
$
|
(240
|
)
|
$
|
—
|
|||
|
Purchases of shares held in treasury
|
—
|
(240
|
)
|
|||||
|
Balance, end of period
|
$
|
(240
|
)
|
$
|
(240
|
)
|
||
|
Retained earnings
|
||||||||
|
Balance, beginning of period
|
$
|
9,969
|
$
|
9,008
|
||||
|
Net income attributable to controlling interest
|
394
|
1,760
|
||||||
|
Balance, end of period
|
$
|
10,363
|
$
|
10,768
|
||||
|
Accumulated other comprehensive loss
|
||||||||
|
Balance, beginning of period
|
$
|
(332
|
)
|
$
|
(335
|
)
|
||
|
Other comprehensive income (loss) attributable to controlling interest
|
(6
|
)
|
8
|
|||||
|
Balance, end of period
|
$
|
(338
|
)
|
$
|
(327
|
)
|
||
|
Total controlling interest shareholders’ equity
|
||||||||
|
Balance, beginning of period
|
$
|
21,383
|
$
|
20,552
|
||||
|
Total comprehensive income attributable to controlling interest
|
388
|
1,768
|
||||||
|
Share-based compensation
|
74
|
79
|
||||||
|
Issuance of shares under share-based compensation plans
|
(6
|
)
|
(4
|
)
|
||||
|
Purchases of shares held in treasury
|
—
|
(240
|
)
|
|||||
|
Obligation for distribution of qualifying additional paid-in capital
|
(1,017
|
)
|
—
|
|||||
|
Other, net
|
1
|
4
|
||||||
|
Balance, end of period
|
$
|
20,823
|
$
|
22,159
|
||||
|
Noncontrolling interest
|
||||||||
|
Balance, beginning of period
|
$
|
(8
|
)
|
$
|
7
|
|||
|
Total comprehensive loss attributable to noncontrolling interest
|
(3
|
)
|
(8
|
)
|
||||
|
Other, net
|
—
|
4
|
||||||
|
Balance, end of period
|
$
|
(11
|
)
|
$
|
3
|
|||
|
Total equity
|
||||||||
|
Balance, beginning of period
|
$
|
21,375
|
$
|
20,559
|
||||
|
Total comprehensive income
|
385
|
1,760
|
||||||
|
Share-based compensation
|
74
|
79
|
||||||
|
Issuance of shares under share-based compensation plans
|
(6
|
)
|
(4
|
)
|
||||
|
Purchases of shares held in treasury
|
—
|
(240
|
)
|
|||||
|
Obligation for distribution of qualifying additional paid-in capital
|
(1,017
|
)
|
—
|
|||||
|
Other, net
|
1
|
8
|
||||||
|
Balance, end of period
|
$
|
20,812
|
$
|
22,162
|
||||
See accompanying notes.
- 4 -
TRANSOCEAN LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
|
Three months ended
September 30,
|
Nine months ended
September 30,
|
||||||||||||||||
|
2011
|
2010
|
2011
|
2010
|
||||||||||||||
|
Cash flows from operating activities
|
|||||||||||||||||
|
Net income (loss)
|
$
|
(60
|
)
|
$
|
378
|
$
|
444
|
$
|
1,783
|
||||||||
|
Adjustments to reconcile to net cash provided by operating activities
|
|||||||||||||||||
|
Amortization of drilling contract intangibles
|
(12
|
)
|
(23
|
)
|
(32
|
)
|
(85
|
)
|
|||||||||
|
Depreciation and amortization
|
362
|
388
|
1,075
|
1,155
|
|||||||||||||
|
Share-based compensation expense
|
20
|
26
|
74
|
79
|
|||||||||||||
|
Loss on impairment
|
3
|
—
|
28
|
—
|
|||||||||||||
|
(Gain) loss on disposal of discontinued operations, net
|
4
|
—
|
(169
|
)
|
—
|
||||||||||||
|
(Gain) loss on disposal of assets, net
|
2
|
(2
|
)
|
(5
|
)
|
(256
|
)
|
||||||||||
|
Amortization of debt issue costs, discounts and premiums, net
|
33
|
48
|
95
|
148
|
|||||||||||||
|
Deferred income taxes
|
(14
|
)
|
(40
|
)
|
2
|
(74
|
)
|
||||||||||
|
Other, net
|
82
|
30
|
93
|
62
|
|||||||||||||
|
Changes in deferred revenue, net
|
(36
|
)
|
47
|
7
|
205
|
||||||||||||
|
Changes in deferred expenses, net
|
18
|
(18
|
)
|
(66
|
)
|
(55
|
)
|
||||||||||
|
Changes in operating assets and liabilities
|
90
|
(125
|
)
|
(324
|
)
|
188
|
|||||||||||
|
Net cash provided by operating activities
|
492
|
709
|
1,222
|
3,150
|
|||||||||||||
|
Cash flows from investing activities
|
|||||||||||||||||
|
Capital expenditures
|
(137
|
)
|
(300
|
)
|
(670
|
)
|
(969
|
)
|
|||||||||
|
Investment in marketable security
|
(199
|
)
|
—
|
(199
|
)
|
—
|
|||||||||||
|
Proceeds from disposal of assets, net
|
88
|
—
|
106
|
51
|
|||||||||||||
|
Proceeds from disposal of discontinued operations, net
|
—
|
—
|
259
|
—
|
|||||||||||||
|
Proceeds from insurance recoveries for loss of drilling unit
|
—
|
—
|
—
|
560
|
|||||||||||||
|
Payment for settlement of forward exchange contract, net
|
(78
|
)
|
—
|
(78
|
)
|
—
|
|||||||||||
|
Other, net
|
6
|
2
|
(27
|
)
|
17
|
||||||||||||
|
Net cash used in investing activities
|
(320
|
)
|
(298
|
)
|
(609
|
)
|
(341
|
)
|
|||||||||
|
Cash flows from financing activities
|
|||||||||||||||||
|
Change in short-term borrowings, net
|
2
|
46
|
58
|
(131
|
)
|
||||||||||||
|
Proceeds from debt
|
—
|
2,000
|
5
|
2,054
|
|||||||||||||
|
Repayments of debt
|
(23
|
)
|
(691
|
)
|
(272
|
)
|
(966
|
)
|
|||||||||
|
Distribution of qualifying additional paid-in capital
|
(254
|
)
|
—
|
(508
|
)
|
—
|
|||||||||||
|
Purchases of shares held in treasury
|
—
|
—
|
—
|
(240
|
)
|
||||||||||||
|
Other, net
|
—
|
(18
|
)
|
(4
|
)
|
(20
|
)
|
||||||||||
|
Net cash provided by (used in) financing activities
|
(275
|
)
|
1,337
|
(721
|
)
|
697
|
|||||||||||
|
Net increase (decrease) in cash and cash equivalents
|
(103
|
)
|
1,748
|
(108
|
)
|
3,506
|
|||||||||||
|
Cash and cash equivalents at beginning of period
|
3,389
|
2,888
|
3,394
|
1,130
|
|||||||||||||
|
Cash and cash equivalents at end of period
|
$
|
3,286
|
$
|
4,636
|
$
|
3,286
|
$
|
4,636
|
|||||||||
See accompanying notes.
- 5 -
Note 1—Nature of Business
Transocean Ltd. (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. Specializing 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 predominantly on a dayrate basis to drill oil and
gas wells. At September 30, 2011, we owned or had partial ownership interests in and operated 133 mobile offshore drilling units. As of this date, our fleet consisted of 48 High-Specification Floaters (Ultra-Deepwater, Deepwater and Harsh Environment semisubmersibles and drillships), 25 Midwater Floaters, nine High-Specification Jackups, 50 Standard Jackups and one Other Rig. We also have four High-Specification Jackups under construction. See Note 10—Drilling Fleet.
On August 26, 2011, we commenced an all cash voluntary offer (the “Offer”) for 100 percent of the shares of Aker Drilling ASA (“Aker Drilling”), a Norwegian company listed on the Oslo Stock Exchange, for NOK 26.50 per share. Aker Drilling operates
two Harsh Environment, Ultra-Deepwater semi-submersibles currently on long-term contracts to Statoil ASA and Det norske oljeselskap ASA in Norway. In 2014, we expect to take delivery of two Ultra-Deepwater drillships currently under construction at the Daewoo Shipbuilding & Marine Engineering Co. Ltd. shipyard in Korea. The Offer price represented an equity market capitalization of approximately NOK 7.93 billion, or $1.43 billion based on an exchange rate of NOK 5.53 to USD 1.00. See Note 4—Marketable Security and Note 18—Subsequent
Events.
We also provide oil and gas drilling management services, drilling engineering and drilling project management services through Applied Drilling Technology Inc., our wholly owned subsidiary, and through ADT International, a division of one of our U.K. subsidiaries (together, “ADTI”). ADTI conducts drilling management services primarily on either a dayrate or a completed-project, fixed-price (or “turnkey”) basis. We also participated in oil and gas exploration, development and production activities through our oil and gas subsidiaries, Challenger Minerals Inc. and Challenger Minerals (North Sea) Limited (together, “CMI”), which were classified as
discontinued operations as of September 30, 2011. See Note 8—Discontinued Operations and Note 18—Subsequent Events.
Note 2—Significant Accounting Policies
Basis of presentation—We have prepared our accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States (“U.S.”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the U.S. 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 noted. Operating results for the three and nine months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011 or for any future period. The accompanying condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto as of December 31, 2010 and 2009 and for
each of the three years in the period ended December 31, 2010 included in our annual report on Form 10-K filed on February 28, 2011.
Accounting estimates—To prepare financial statements in accordance with accounting principles generally accepted in the U.S., we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and assumptions, including those related to our allowance for doubtful accounts, materials and supplies obsolescence, property and equipment, investments, notes receivable, goodwill and other intangible assets, income taxes, defined benefit pension plans and other postretirement benefits,
contingencies and share-based compensation. We base our estimates and assumptions on historical experience and on various other factors we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amounts of assets and liabilities that are not readily apparent from other sources. Actual results could differ from such estimates.
Fair value measurements—We estimate fair value at a price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market for the asset or liability. Our valuation techniques require inputs that we categorize using a three-level hierarchy, from highest to lowest level of observable inputs, as follows: (1) unadjusted quoted prices for identical assets or liabilities in active markets (“Level 1”), (2) direct or indirect observable inputs, including quoted prices or other market data, for similar assets or liabilities in active markets
or identical assets or liabilities in less active markets (“Level 2”) and (3) unobservable inputs that require significant judgment for which there is little or no market data (“Level 3”). When multiple input levels are required for a valuation, we categorize the entire fair value measurement according to the lowest level of input that is significant to the measurement even though we may have also utilized significant inputs that are more readily observable.
- 6 -
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Principles of consolidation—We consolidate entities in which we have a majority voting interest and entities that meet the criteria for variable interest entities for which we are deemed to be the primary beneficiary for accounting purposes. We eliminate intercompany transactions and accounts in consolidation. We apply the equity method of accounting for investments in entities if we have the ability to exercise significant influence over the entity, which either (a) does not meet the variable interest entity criteria or (b) meets the variable interest entity criteria, but for which we are not deemed to be the primary
beneficiary. We apply the cost method of accounting for investments in other entities if we do not have the ability to exercise significant influence over the entity. See Note 5—Variable Interest Entities.
Share-based compensation—Share-based compensation expense was $20 million and $74 million for the three and nine months ended September 30, 2011, respectively. Share-based compensation expense was $26 million and $79 million for the
three and nine months ended September 30, 2010, respectively.
Capitalized interest—We capitalize interest costs for qualifying construction and upgrade projects. We capitalized interest costs on construction work in progress of $5 million and $30 million for the three and nine months ended September 30, 2011, respectively. We capitalized interest costs for construction work in progress of
$20 million and $67 million for the three and nine months ended September 30, 2010, respectively.
Reclassifications—We have made certain reclassifications, which did not have an effect on net income, to prior period amounts to conform with the current period’s presentation, including certain reclassifications to our condensed consolidated statement of financial position, results of operations and cash flows to present our oil and gas properties operating segment and our Caspian Sea operations as discontinued operations (see Note 8—Discontinued Operations). Other reclassifications did not have a material effect on our condensed consolidated statement of
financial position, results of operations or cash flows.
Subsequent events—We evaluate subsequent events through the time of our filing on the date we issue our financial statements. See Note 18—Subsequent Events.
Note 3—New Accounting Pronouncements
Comprehensive income—Effective January 1, 2012, we will adopt the accounting standards update that amends the presentation requirements for comprehensive income and requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Additionally, the update requires presentation of reclassification adjustments from other comprehensive income to net income on the face of the financial
statements where the components of net income and the components of other comprehensive income are presented regardless of whether an entity chooses to present total comprehensive income in a single continuous statement or in two separate but consecutive statements. The update is effective for interim and annual periods beginning after December 15, 2011. We do not expect that our adoption will have a material effect on our consolidated financial statements.
Fair value measurements—Effective January 1, 2012, we will adopt the accounting standards update that changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Some of the amendments included in this update are intended to clarify the application of existing fair value measurement requirements. The update is effective for annual periods beginning after December 15, 2011. We do not expect that our adoption will have a material effect on the
disclosures contained in our notes to consolidated financial statements.
Intangibles-goodwill and other—Effective January 1, 2012, we will adopt the accounting standards update that amends the goodwill impairment testing requirements by giving an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount and whether the two-step impairment test is required. The update is effective for goodwill impairment tests performed for annual and interim periods beginning after December 15, 2011. Early adoption is
permitted. We do not expect that our adoption will have a material effect on our consolidated financial statements.
- 7 -
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 4—Marketable Security
On August 14, 2011, we entered into an irrevocable agreement with Aker Capital AS to acquire its 41 percent interest in Aker Drilling through (a) the purchase of 15 million shares, representing approximately 5.0 percent of the
outstanding shares of Aker Drilling, and (b) a pre-commitment agreement for the remaining 108 million shares, representing 36.0 percent of the outstanding shares, to be purchased by us pursuant to the Offer. In addition, we received irrevocable pre-commitments from other shareholders to purchase 19.5 percent of the outstanding shares of Aker Drilling, bringing the total irrevocable commitments to 60.5 percent of the Aker Drilling outstanding
shares.
After receiving clearance by the Oslo Stock Exchange on August 26, 2011, we launched an all cash offer for 100 percent of the shares of Aker Drilling for NOK 26.50 per share. The Offer commenced on August 26, 2011 and ended on September 23, 2011.
At September 30, 2011, we held a 13.7 percent interest in Aker Drilling, a marketable security recorded in other assets with an aggregate carrying amount of $185 million. During the three months ended September 30, 2011, we incurred acquisition costs of $5 million related to the offer, recognized in general and administrative expense. See Note 18—Subsequent Events.
Note 5—Variable Interest Entities
Consolidated variable interest entities—We consolidate the assets and liabilities of Transocean Pacific Drilling Inc. (“TPDI”), a consolidated British Virgin Islands joint venture company, and Angola Deepwater Drilling Company Limited (“ADDCL”), a consolidated Cayman Islands joint venture company, which are two variable interest entities for which we are the primary beneficiary. The carrying amounts associated with our consolidated variable interest entities, after eliminating the effect of intercompany transactions, were as follows (in millions):
|
September 30, 2011
|
December 31, 2010
|
||||||||||||||||||||||
|
Assets
|
Liabilities
|
Net carrying amount
|
Assets
|
Liabilities
|
Net carrying amount
|
||||||||||||||||||
|
Variable interest entity
|
|||||||||||||||||||||||
|
TPDI
|
$
|
1,575
|
$
|
692
|
$
|
883
|
$
|
1,598
|
$
|
763
|
$
|
835
|
|||||||||||
|
ADDCL
|
889
|
330
|
559
|
864
|
345
|
519
|
|||||||||||||||||
|
Total
|
$
|
2,464
|
$
|
1,022
|
$
|
1,442
|
$
|
2,462
|
$
|
1,108
|
$
|
1,354
|
|||||||||||
Unconsolidated variable interest entity—As holder of two notes receivable and a lender under a working capital loan, we hold a variable interest in Awilco Drilling plc (“Awilco”), a U.K. company (see Note 10—Drilling Fleet). The notes receivable, originally issued in exchange for and secured by two drilling units, have stated interest rates of nine percent and are payable in scheduled quarterly installments of principal and interest through maturity in January 2015. Additionally, we provide Awilco with a working capital loan, also secured by the drilling units, that has a stated interest
rate of 10 percent and a maximum borrowing amount of $35 million. We evaluate the credit quality and financial condition of Awilco quarterly. The aggregate carrying amount of the notes receivable was $109 million at both September 30, 2011 and December 31, 2010. The aggregate carrying amount of the working capital loan receivable was $35 million and $6 million at September 30, 2011 and December 31, 2010, respectively.
In the three months ended September 30, 2011, we determined that Awilco no longer met the definition of a variable interest entity following its private placement and list of shares on the Oslo Stock Exchange and the successful marketing of its two drilling units.
Note 6—Impairments
Assets held for sale—In the three and nine months ended September 30, 2011, we recognized aggregate losses of $3 million ($0.01 per diluted share from continuing operations), which had no tax effect, and $28 million ($0.09 per diluted share from continuing operations),which had a tax effect of less than $1 million, respectively, associated with the impairment of GSF Britannia, George H. Galloway, GSF Labrador and
Searex IV, which were each classified as an asset held for sale at the time of impairment. We measured the impairment as the amount by which the carrying amounts of these rigs and related assets exceeded the estimated fair values less costs to sell the rigs and related assets. We estimated the fair values of the rigs and related assets using significant observable inputs, including binding sale and purchase agreements for the assets.
- 8 -
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 7—Income Taxes
Tax rate—Transocean Ltd., a holding company and Swiss resident, is exempt from cantonal and communal income tax in Switzerland, but is subject to Swiss federal income tax. At the federal level, qualifying net dividend income and net capital gains on the sale of qualifying investments in subsidiaries are exempt from Swiss federal income tax. Consequently, Transocean Ltd. expects dividends from its subsidiaries and capital gains from sales of investments in its subsidiaries to be exempt from Swiss federal income tax.
Our provision for income taxes is based on the tax laws and rates applicable in the jurisdictions in which we operate and earn income. There is little to no expected relationship between the provision for or benefit from income taxes and income or loss before income taxes considering, among other factors, (a) changes in the blend of income that is taxed based on gross revenues rather than income before taxes, (b) rig movements between taxing jurisdictions and (c) our rig operating structures.
Our estimated annual effective tax rates were 34.1 percent and 17.6 percent for the nine months ended September 30, 2011 and September 30, 2010, respectively. These rates were based on estimated annual income before income taxes for each period after adjusting for various discrete items, including certain immaterial adjustments to prior period tax
expense.
Deferred taxes—The valuation allowance for our non-current deferred tax assets was as follows (in millions):
|
September 30,
2011
|
December 31,
2010
|
|||||||
|
Valuation allowance for non-current deferred tax assets
|
$
|
170
|
$
|
164
|
||||
Unrecognized tax benefits—The liabilities related to our unrecognized tax benefits, including related interest and penalties that we recognize as a component of income tax expense, were as follows (in millions):
|
September 30,
2011
|
December 31,
2010
|
|||||||
|
Unrecognized tax benefits, excluding interest and penalties
|
$
|
507
|
$
|
485
|
||||
|
Interest and penalties
|
259
|
235
|
||||||
|
Unrecognized tax benefits, including interest and penalties
|
$
|
766
|
$
|
720
|
||||
Tax returns—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 2000. For the nine months ended September 30, 2011 and September 30, 2010, the amount of current tax benefit recognized from the settlement of disputes with tax authorities and from the expiration of statutes of
limitations was insignificant.
Our tax returns in the major jurisdictions in which we operate, other than the U.S., Norway and Brazil which are mentioned below, are generally subject to examination for periods ranging from three to six years. We have agreed to extensions beyond the statute of limitations in four major jurisdictions for up to 16 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 statement of financial position or results of operations, although it may have a material adverse effect on our consolidated cash flows.
U.S. tax investigations—With respect to our 2004 and 2005 U.S. federal income tax returns, the U.S. tax authorities have withdrawn all of their previously proposed tax adjustments, except a claim regarding transfer pricing for certain charters of drilling rigs between our subsidiaries, resulting in a total proposed adjustment of approximately $79 million, exclusive of interest. We believe an unfavorable outcome on this assessment with respect to 2004 and 2005 activities would not result in a material adverse effect on our consolidated statement of financial position, results of operations or cash flows. Although we believe the
transfer pricing for these charters is materially correct, we have been unable to reach a resolution with the tax authorities. This matter is scheduled to be heard in U.S. Tax Court in February 2012.
In May 2010, we received an assessment from the U.S. tax authorities related to our 2006 and 2007 U.S. federal income tax returns. In July 2010, we filed a protest letter with the U.S. tax authorities responding to this assessment. The significant issues raised in the assessment relate to transfer pricing for certain charters of drilling rigs between our subsidiaries and the creation of intangible assets resulting from the performance of engineering services between our subsidiaries. These two items would result in net adjustments of approximately $278 million of additional taxes, excluding interest. An unfavorable outcome on these adjustments could
result in a material adverse effect on our consolidated statement of financial position, results of operations or cash flows. We believe our returns are materially correct as filed, and we intend to continue to vigorously defend against all such claims.
In addition, the May 2010 assessment included adjustments related to a series of restructuring transactions that occurred between 2001 and 2004. These restructuring transactions impacted our basis in our former subsidiary, TODCO, which we disposed of in 2004 and 2005. The authorities are disputing the amount of capital losses that resulted from the disposition of TODCO. We utilized a portion of the capital losses to offset capital gains on our 2006, 2007, 2008 and 2009 tax returns. The majority of the capital losses were unutilized and expired on December 31, 2009. The adjustments would
also impact the amount of certain net operating losses and other carryovers into 2006 and later years. The authorities are also contesting the characterization of certain amounts of income received in 2006 and 2007 as capital gain and thus the availability of the capital gain for offset by the capital loss. These claims with respect to our U.S. federal income tax returns for 2006 through 2009 could result in net tax adjustments of approximately $295 million. An unfavorable outcome on these potential adjustments could result in a material adverse effect on our consolidated statement of financial position, results of operations or cash flows. We believe that our tax returns are materially correct as filed, and we intend to vigorously defend against any potential claims.
- 9 -
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The May 2010 assessment also included certain claims with respect to withholding taxes and certain other items resulting in net tax adjustments of approximately $160 million, exclusive of interest. In addition, the tax authorities assessed penalties associated with the various tax adjustments for the 2006 and 2007 audits in the aggregate amount of approximately $88 million, exclusive of interest. We believe that our tax returns are materially correct as filed, and we intend to vigorously defend against any potential claims.
Norway tax investigations—Norwegian civil tax and criminal authorities are investigating various transactions undertaken by our subsidiaries in 2001 and 2002 as well as the actions of certain employees of our former external tax advisors on these transactions. The authorities issued tax assessments of (a) approximately $268 million plus interest, related to certain restructuring transactions, (b) approximately $117 million plus interest, related to the migration of a subsidiary that was previously subject to tax in Norway, (c) approximately
$71 million plus interest, related to a 2001 dividend payment and (d) approximately $7 million plus interest, related to certain foreign exchange deductions and dividend withholding tax. We have filed or expect to file appeals to these tax assessments. With respect to the tax assessment related to the migration of a subsidiary, we intend to provide a guarantee in the amount of approximately $120 million, plus interest, while this dispute is addressed by the Norwegian courts. Furthermore, we may be required to provide some form of additional financial security, in an amount up to $794 million, including interest and penalties, for these other
assessed amounts while these disputes are appealed and addressed by the Norwegian courts. The authorities have indicated that they plan to seek penalties of 60 percent on most but not all matters. For these matters, we believe our returns are materially correct as filed, and we have and will continue to respond to all information requests from the Norwegian authorities. In June 2011, the Norwegian authorities issued criminal indictments against two of our subsidiaries alleging misleading or incomplete disclosures in Norwegian tax returns for the years 1999 through 2002, as well as inaccuracies in Norwegian statutory financial statements for the years ended December 31, 1996 through 2001. Two employees of our former external tax advisors were also issued indictments with respect to the disclosures in our tax
returns. We believe these charges are without merit and plan to vigorously defend our subsidiaries to the fullest extent. We intend to vigorously contest any assertions by the Norwegian civil and criminal authorities in connection with the various transactions being investigated. An unfavorable outcome on these Norwegian civil and criminal tax matters could result in a material adverse effect on our consolidated statement of financial position, results of operations or cash flows. However, 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. See
Note 18—Subsequent Events.
Brazil tax investigations—Certain of our Brazilian income tax returns for the years 2000 through 2004 are currently under examination. The Brazilian tax authorities have issued tax assessments totaling $125 million, plus a 75 percent penalty of $93 million and $165 million of interest through September 30, 2011. An unfavorable outcome on these proposed assessments could result in a material adverse effect on our
consolidated statement of financial position, results of operations or cash flows. We believe our returns are materially correct as filed, and we are vigorously contesting these assessments. On January 25, 2008, we filed a protest letter with the Brazilian tax authorities, and we are currently engaged in the appeals process.
Other tax matters—We conduct operations through our various subsidiaries in a number of countries throughout the world. Each country has its own tax regimes with varying nominal rates, deductions and tax attributes. From time to time, we may identify changes to previously evaluated tax positions that could result in adjustments to our recorded assets and liabilities. Although we are unable to predict the outcome of these changes, we do not expect the effect, if any, resulting from these assessments to have a material adverse effect on our consolidated statement of financial position, results of operations or cash
flows.
Note 8—Discontinued Operations
Oil and gas properties—In March 2011, in connection with our efforts to dispose of non-strategic assets, we engaged an unaffiliated advisor to coordinate the sale of the assets of our oil and gas properties reporting unit, a component of our other operations segment, which comprises the exploration, development and production activities performed by Challenger Minerals Inc. and Challenger Minerals (North Sea) Limited, our wholly owned oil and gas subsidiaries. At September 30, 2011, the oil and gas properties and related assets of this reporting unit were classified as assets held for sale. See Note 18—Subsequent
Events.
- 10 -
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Caspian Sea operations—In February 2011, in connection with our efforts to dispose of non-strategic assets, we sold the subsidiary that owns the High-Specification Jackup Trident 20, located in the Caspian Sea. The disposal of this subsidiary, a component of our contract drilling services segment, reflects our decision to discontinue operations in the Caspian Sea. As a result of the sale, we received net cash proceeds of $259 million and recognized a gain on the disposal of the discontinued operations of
$169 million ($0.53 per diluted share from discontinued operations), which had no tax effect. Through June 2011, we continued to operate Trident 20 under a bareboat charter to perform services for the customer and the buyer reimbursed us for the approximate cost of providing these services. Additionally, we provided certain transition services to the buyer through September 2011.
Summarized results of discontinued operations—The summarized results of operations included in income from discontinued operations, were as follows (in millions):
|
Three months ended
September 30,
|
Nine months ended
September 30,
|
|||||||||||||||
|
2011
|
2010
|
2011
|
2010
|
|||||||||||||
|
Operating revenues
|
$
|
11
|
$
|
28
|
$
|
59
|
$
|
77
|
||||||||
|
Costs and expenses
|
5
|
18
|
46
|
73
|
||||||||||||
|
Loss on impairment (a)
|
4
|
—
|
4
|
2
|
||||||||||||
|
Income from discontinued operations before income tax expense
|
2
|
10
|
9
|
2
|
||||||||||||
|
Gain (loss) on disposal of discontinued operations, net
|
(4
|
)
|
—
|
169
|
—
|
|||||||||||
|
Income tax benefit (expense)
|
(5
|
)
|
5
|
(7
|
)
|
23
|
||||||||||
|
Income (loss) from discontinued operations, net of tax
|
$
|
(7
|
)
|
$
|
15
|
$
|
171
|
$
|
25
|
|||||||
|
|
_________________________
|
|
(a)
|
In the three and nine months ended September 30, 2011, we recognized a loss on impairment of the oil and gas properties since the carrying amount of the properties exceeded the estimated fair value less costs to sell the properties. We estimated fair value based on unobservable inputs that require significant judgment for which there is little or no market data, including non-binding price quotes from unaffiliated parties. In the nine months ended September 30, 2010, we recognized a loss on impairment of goodwill associated with the oil and gas properties reporting unit.
|
Assets and liabilities of discontinued operations—As of September 30, 2011, our oil and gas properties and related assets were classified as assets held for sale. As a result of our decision to discontinue these operations and the operations of our Caspian Sea subsidiary, we also reclassified the assets and liabilities associated with our discontinued operations to other current assets, other assets, other current liabilities and other long-term liabilities as of December 31, 2010. The carrying amounts of the major classes of assets and liabilities associated
with these operations were classified as follows (in millions):
|
September 30,
2011
|
December 31,
2010
|
|||||||
|
Assets
|
||||||||
|
Oil and gas properties, net
|
$
|
54
|
$
|
—
|
||||
|
Other related assets
|
9
|
—
|
||||||
|
Assets held for sale
|
$
|
63
|
$
|
—
|
||||
|
Accounts receivable
|
$
|
13
|
$
|
22
|
||||
|
Other assets
|
1
|
17
|
||||||
|
Other current assets
|
$
|
14
|
$
|
39
|
||||
|
Rig and related equipment, net
|
$
|
—
|
$
|
86
|
||||
|
Oil and gas properties, net
|
—
|
53
|
||||||
|
Other assets
|
$
|
—
|
$
|
139
|
||||
|
Liabilities
|
||||||||
|
Accounts payable
|
$
|
13
|
$
|
15
|
||||
|
Other liabilities
|
31
|
13
|
||||||
|
Other current liabilities
|
$
|
44
|
$
|
28
|
||||
|
Asset retirement obligation
|
$
|
—
|
$
|
9
|
||||
|
Deferred taxes
|
—
|
19
|
||||||
|
Other long-term liabilities
|
$
|
—
|
$
|
28
|
||||
- 11 -
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 9—Earnings (Loss) Per Share
The reconciliation of the numerator and denominator used for the computation of basic and diluted per share earnings (losses) from continuing operations was as follows (in millions, except per share data):
|
Three months ended September 30,
|
Nine months ended September 30,
|
|||||||||||||||||||||||||||||||
|
2011
|
2010
|
2011
|
2010
|
|||||||||||||||||||||||||||||
|
Basic
|
Diluted
|
Basic
|
Diluted
|
Basic
|
Diluted
|
Basic
|
Diluted
|
|||||||||||||||||||||||||
|
Numerator for earnings (loss) per share
|
(As adjusted)
|
(As adjusted)
|
||||||||||||||||||||||||||||||
|
Income (loss) from continuing operations attributable to controlling interest
|
$
|
(64
|
)
|
$
|
(64
|
)
|
$
|
353
|
$
|
353
|
$
|
223
|
$
|
223
|
$
|
1,735
|
$
|
1,735
|
||||||||||||||
|
Undistributed earnings allocable to participating securities
|
—
|
—
|
(1
|
)
|
(1
|
)
|
(1
|
)
|
(1
|
)
|
(9
|
)
|
(9
|
)
|
||||||||||||||||||
|
Income (loss) from continuing operations available to shareholders
|
$
|
(64
|
)
|
$
|
(64
|
)
|
$
|
352
|
$
|
352
|
$
|
222
|
$
|
222
|
$
|
1,726
|
$
|
1,726
|
||||||||||||||
|
Denominator for earnings (loss) per share
|
||||||||||||||||||||||||||||||||
|
Weighted-average shares outstanding
|
320
|
320
|
319
|
319
|
320
|
320
|
320
|
320
|
||||||||||||||||||||||||
|
Effect of stock options and other share-based awards
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||||||||
|
Weighted-average shares for per share calculation
|
320
|
320
|
319
|
319
|
320
|
320
|
320
|
320
|
||||||||||||||||||||||||
|
Per share earnings (loss) from continuing operations
|
$
|
(0.20
|
)
|
(0.20
|
)
|
$
|
1.10
|
$
|
1.10
|
$
|
0.69
|
$
|
0.69
|
$
|
5.39
|
$
|
5.39
|
|||||||||||||||
For the three and nine months ended September 30, 2011, respectively, 2.9 million and 1.8 million share-based awards were excluded from the calculation since the effect would have been anti-dilutive. For the three and nine months ended September 30, 2010, respectively,
2.3 million and 2.1 million share-based awards were excluded from the calculation since the effect would have been anti-dilutive.
The 1.625% Series A Convertible Senior Notes, 1.50% Series B Convertible Senior Notes and 1.50% Series C Convertible Senior Notes did not have an effect on the calculation for the periods presented. See Note 11—Debt.
- 12 -
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 10—Drilling Fleet
Expansion—Construction work in progress, recorded in property and equipment, was $899 million and $1.5 billion at September 30, 2011 and December 31, 2010, respectively. Capital expenditures and other capital additions, including capitalized interest, for our major construction projects that were ongoing during the nine months ended September 30, 2011 or during
the year ended December 31, 2010 were as follows (in millions):
|
Nine months
ended
September 30,
2011
|
Through
December 31,
2010
|
Total
costs
|
||||||||||
|
Transocean Honor (a)
|
$
|
76
|
$
|
97
|
$
|
173
|
||||||
|
High-Specification Jackup TBN1 (b)
|
70
|
9
|
79
|
|||||||||
|
High-Specification Jackup TBN2 (b)
|
70
|
9
|
79
|
|||||||||
|
Deepwater Champion (c)(d)
|
43
|
733
|
776
|
|||||||||
|
Discoverer Luanda (d)(e)
|
11
|
709
|
720
|
|||||||||
|
High-Specification Jackup TBN3 (f)
|
10
|
—
|
10
|
|||||||||
|
Discoverer India (d)
|
6
|
744
|
750
|
|||||||||
|
Discoverer Inspiration (d)
|
—
|
679
|
679
|
|||||||||
|
Dhirubhai Deepwater KG2 (d)(g)
|
—
|
677
|
677
|
|||||||||
|
Capitalized interest
|
30
|
273
|
303
|
|||||||||
|
Mobilization costs
|
20
|
100
|
120
|
|||||||||
|
Total
|
$
|
336
|
$
|
4,030
|
$
|
4,366
|
||||||
|
|
__________________________
|
|
(a)
|
In November 2010, we purchased a PPL Pacific Class 400 design jackup, to be named Transocean Honor. The High-Specification Jackup is under construction at PPL Shipyard Pte Ltd. in Singapore and is expected for delivery in the fourth quarter of 2011.
|
|
(b)
|
In December 2010, we purchased two Keppel FELS Super B class design jackups. The two High-Specification Jackups TBN1 and TBN2 are under construction at Keppel FELS’ yard in Singapore and are expected for delivery in the first quarter of 2013.
|
|
(c)
|
The costs for Deepwater Champion include our initial investment of $109 million, representing the estimated fair value of the rig at the time of our merger with GlobalSantaFe Corporation (“GlobalSantaFe”) in November 2007.
|
|
(d)
|
The accumulated construction costs of these rigs are no longer included in construction work in progress, as their construction projects had been completed as of September 30, 2011.
|
|
(e)
|
The costs for Discoverer Luanda represent 100 percent of expenditures incurred since inception. ADDCL is responsible for all of these costs. We hold a 65 percent interest in the ADDCL joint venture, and Angco Cayman Limited holds the remaining 35 percent interest.
|
|
(f)
|
In June 2011, we purchased a Keppel FELS Super B class design jackup. The High-Specification Jackup TBN3 is under construction at Keppel FELS’ yard in Singapore and is expected for delivery in the third quarter of 2013.
|
|
(g)
|
The costs for Dhirubhai Deepwater KG2 represent 100 percent of TPDI’s expenditures, including those incurred prior to our investment in the joint venture. TPDI is responsible for all of these costs. We hold a 50 percent interest in the TPDI joint venture, and Quantum Pacific Management Limited, a Cypriot company and successor in interest to Pacific Drilling Limited (“Quantum”), holds the remaining 50 percent interest.
|
Repair and maintenance costs—As a result of enhanced requirements for third-party inspections and certification of well control equipment, we updated our guidelines under our existing periodic survey and drydock cost policy to include these new inspections and certification costs. During the three months ended September 30, 2011, in accordance with our updated guidelines, we recognized $59 million of expense related to prior periods, approximately $50 million of which was related to costs capitalized in prior quarters of 2011.
Dispositions—During the nine months ended September 30, 2011, in connection with our efforts to dispose of non-strategic assets, we sold the High-Specification Jackup Trident 20. The sale of Trident 20 reflected our decision to discontinue operations in the Caspian Sea (see Note 8—Discontinued Operations). In addition, during the nine months ended
September 30, 2011, we completed the sales of the swamp barge Searex IV and the Standard Jackups Transocean Mercury, GSF Britannia, George H. Galloway and GSF Labrador, along with related equipment, and we received net aggregate proceeds of $94 million and recognized a net gain on the disposal of these drilling units of $8 million ($0.03 per diluted share from
continuing operations), which had no tax effect. For the three and nine months ended September 30, 2011, we recognized a net loss on disposal of unrelated assets in the amounts of $1 million and $3 million, respectively.
During the nine months ended September 30, 2010, we completed the sale of two Midwater Floaters, GSF Arctic II and GSF Arctic IV. In connection with the sale, we received net cash proceeds of $38 million and non-cash proceeds in the form of two notes receivable in the aggregate amount of $165 million. We operated
GSF Arctic IV under a short-term bareboat charter with the new owner of the vessel until November 2010. As a result of the sales, we recognized a net loss on disposal of assets in the amount of $15 million ($0.05 per diluted share from continuing operations), which had no tax effect for the nine months ended September 30, 2010. For the three and nine months ended September 30, 2010, we recognized gains on disposal of other unrelated assets in the amounts of $2 million and $4 million, respectively.
-13 -
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Unconsolidated affiliates—During the nine months ended September 30, 2011, we completed the sale of our 50 percent ownership interest in Overseas Drilling Limited (“ODL”), a Cayman Islands company, which owns the drillship Joides Resolution, which was adapted for scientific research. In connection with the sale, we received net proceeds of $22 million
and recognized a net gain of $13 million ($0.04 per diluted share from continuing operations), recorded in other, net, which had no tax effect.
Loss of drilling unit—On April 22, 2010, the Ultra-Deepwater Floater Deepwater Horizon sank after a blowout of the Macondo well caused a fire and explosion on the rig. During the nine months ended September 30, 2010, we received $560 million in cash proceeds from insurance recoveries related to the loss of the drilling unit and, for the nine months ended September 30, 2010, we recognized a gain on the loss of the rig in the amount of $267 million ($0.83 per diluted share), which had no
tax effect. See Note 14—Contingencies.
Assets held for sale—During the three months ended September 30, 2011, we committed to a plan to sell our Standard Jackup GSF Adriatic XI and related equipment. As a result, we classified these assets as held for sale along with the assets of our oil and gas properties operating segment
(see Note 8—Discontinued Operations). At September 30, 2011, GSF Adriatic XI and its related assets had an aggregate net carrying amount of $54 million.
At December 31, 2010, Transocean Mercury was classified as held for sale with a net carrying amount of less than $1 million.
- 14 -
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 11—Debt
Debt, net of unamortized discounts, premiums and fair value adjustments, was comprised of the following (in millions):
|
September 30, 2011
|
December 31, 2010
|
||||||||||||||||||||||
|
Transocean
Ltd.
and
subsidiaries
|
Consolidated
variable
interest
entities
|
Consolidated
total
|
Transocean
Ltd.
and
subsidiaries
|
Consolidated
variable
interest
entities
|
Consolidated
total
|
||||||||||||||||||
|
ODL Loan Facility
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
10
|
$
|
—
|
$
|
10
|
|||||||||||
|
Commercial paper program (a)
|
146
|
—
|
146
|
88
|
—
|
88
|
|||||||||||||||||
|
6.625% Notes due April 2011 (a)
|
—
|
—
|
—
|
167
|
—
|
167
|
|||||||||||||||||
|
5% Notes due February 2013
|
254
|
—
|
254
|
255
|
—
|
255
|
|||||||||||||||||
|
5.25% Senior Notes due March 2013 (a)
|
510
|
—
|
510
|
511
|
—
|
511
|
|||||||||||||||||
|
TPDI Credit Facilities due March 2015
|
—
|
490
|
490
|
—
|
560
|
560
|
|||||||||||||||||
|
4.95% Senior Notes due November 2015 (a)
|
1,121
|
—
|
1,121
|
1,099
|
—
|
1,099
|
|||||||||||||||||
|
ADDCL Credit Facilities due December 2017
|
—
|
230
|
230
|
—
|
242
|
242
|
|||||||||||||||||
|
6.00% Senior Notes due March 2018 (a)
|
997
|
—
|
997
|
997
|
—
|
997
|
|||||||||||||||||
|
7.375% Senior Notes due April 2018 (a)
|
247
|
—
|
247
|
247
|
—
|
247
|
|||||||||||||||||
|
TPDI Notes due October 2019
|
—
|
148
|
148
|
—
|
148
|
148
|
|||||||||||||||||
|
6.50% Senior Notes due November 2020 (a)
|
899
|
—
|
899
|
899
|
—
|
899
|
|||||||||||||||||
|
8% Debentures due April 2027 (a)
|
57
|
—
|
57
|
57
|
—
|
57
|
|||||||||||||||||
|
7.45% Notes due April 2027 (a)
|
96
|
—
|
96
|
96
|
—
|
96
|
|||||||||||||||||
|
7% Notes due June 2028
|
312
|
—
|
312
|
313
|
—
|
313
|
|||||||||||||||||
|
Capital lease contract due August 2029
|
681
|
—
|
681
|
694
|
—
|
694
|
|||||||||||||||||
|
7.5% Notes due April 2031 (a)
|
598
|
—
|
598
|
598
|
—
|
598
|
|||||||||||||||||
|
1.625% Series A Convertible Senior Notes due December 2037 (a)
|
—
|
—
|
—
|
11
|
—
|
11
|
|||||||||||||||||
|
1.50% Series B Convertible Senior Notes due December 2037 (a)
|
1,667
|
—
|
1,667
|
1,625
|
—
|
1,625
|
|||||||||||||||||
|
1.50% Series C Convertible Senior Notes due December 2037 (a)
|
1,648
|
—
|
1,648
|
1,605
|
—
|
1,605
|
|||||||||||||||||
|
6.80% Senior Notes due March 2038 (a)
|
999
|
—
|
999
|
999
|
—
|
999
|
|||||||||||||||||
|
Total debt
|
10,232
|
868
|
11,100
|
10,271
|
950
|
11,221
|
|||||||||||||||||
|
Less debt due within one year
|
|||||||||||||||||||||||
|
ODL Loan Facility
|
—
|
—
|
—
|
10
|
—
|
10
|
|||||||||||||||||
|
Commercial paper program (a)
|
146
|
—
|
146
|
88
|
—
|
88
|
|||||||||||||||||
|
6.625% Notes due April 2011 (a)
|
—
|
—
|
—
|
167
|
—
|
167
|
|||||||||||||||||
|
TPDI Credit Facilities due March 2015
|
—
|
70
|
70
|
—
|
70
|
70
|
|||||||||||||||||
|
ADDCL Credit Facilities due December 2017
|
—
|
26
|
26
|
—
|
25
|
25
|
|||||||||||||||||
|
Capital lease contract due August 2029
|
17
|
—
|
17
|
16
|
—
|
16
|
|||||||||||||||||
|
1.625% Series A Convertible Senior Notes due December 2037 (a)
|
—
|
—
|
—
|
11
|
—
|
11
|
|||||||||||||||||
|
1.50% Series B Convertible Senior Notes due December 2037 (a)
|
1,667
|
—
|
1,667
|
1,625
|
—
|
1,625
|
|||||||||||||||||
|
Total debt due within one year
|
1,830
|
96
|
1,926
|
1,917
|
95
|
2,012
|
|||||||||||||||||
|
Total long-term debt
|
$
|
8,402
|
$
|
772
|
$
|
9,174
|
$
|
8,354
|
$
|
855
|
$
|
9,209
|
|||||||||||
__________________________
|
(a)
|
Transocean Inc., a 100 percent owned subsidiary of Transocean Ltd., is the issuer of the notes and debentures, which have been guaranteed by Transocean Ltd. Transocean Ltd. has also guaranteed borrowings under the commercial paper program and the Five-Year Revolving Credit Facility. Transocean Ltd. has no independent assets or operations, its guarantee of debt securities of Transocean Inc. is full and unconditional and, at September 30, 2011, its only other subsidiary not owned indirectly through Transocean Inc. was minor. Transocean Inc.’s only operating assets are its investments in its operating subsidiaries. At September 30, 2011, Transocean Inc.’s independent assets and
operations, other than those related to investments in its subsidiaries and balances primarily pertaining to its cash and cash equivalents and debt are less than one percent of the total consolidated assets and operations of Transocean Ltd., and thus, substantially all of the assets and operations exist within these non-guarantor operating companies. Furthermore, Transocean Ltd. and Transocean Inc. are not subject to any significant restrictions on their ability to obtain funds from their consolidated subsidiaries or entities accounted for under the equity method by dividends, loans or return of capital distributions.
|
- 15 -
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Scheduled maturities—In preparing the scheduled maturities of our debt, we assume the noteholders will exercise their options to require us to repurchase the 1.50% Series B Convertible Senior Notes and 1.50% Series C Convertible Senior Notes in December 2011 and 2012, respectively. At September 30, 2011, the scheduled maturities of our debt were as follows (in millions):
|
Transocean
Ltd.
and subsidiaries
|
Consolidated
variable
interest
entities
|
Consolidated
total
|
||||||||||
|
Twelve months ending September 30,
|
||||||||||||
|
2012
|
$
|
1,842
|
$
|
96
|
$
|
1,938
|
||||||
|
2013
|
2,492
|
98
|
2,590
|
|||||||||
|
2014
|
21
|
99
|
120
|
|||||||||
|
2015
|
23
|
311
|
334
|
|||||||||
|
2016
|
1,125
|
61
|
1,186
|
|||||||||
|
Thereafter
|
4,779
|
203
|
4,982
|
|||||||||
|
Total debt, excluding unamortized discounts, premiums and fair value adjustments
|
10,282
|
868
|
11,150
|
|||||||||
|
Total unamortized discounts, premiums and fair value adjustments
|
(50
|
)
|
—
|
(50
|
)
|
|||||||
|
Total debt
|
$
|
10,232
|
$
|
868
|
$
|
11,100
|
||||||
Commercial paper program—We maintain a commercial paper program (the “Program”), which is supported by the Five-Year Revolving Credit Facility, under which we may issue privately placed, unsecured commercial paper notes for general corporate purposes up to a maximum aggregate outstanding amount of $1.5 billion. Proceeds from commercial paper issuance under the Program may be used for general corporate purposes. At September 30, 2011, $146 million in commercial paper was outstanding
at a weighted-average interest rate of 0.9 percent, including commissions.
6.625% Notes—In April 2001, we issued $700 million aggregate principal amount of 6.625% Notes due April 2011. On April 15, 2011, we repaid the 6.625% Notes at maturity.
Five-Year Revolving Credit Facility—We have a $2.0 billion, five-year revolving credit facility under the Five-Year Revolving Credit Facility Agreement dated November 27, 2007, as amended (the “Five-Year Revolving Credit Facility”). Throughout the term of the Five-Year Revolving Credit Facility, we pay a facility fee on the daily amount of the underlying commitment, whether used or unused, which ranges from 0.10 percent to 0.30 percent, based on our debt rating, and was 0.175 percent at
September 30, 2011. At September 30, 2011, we had $41 million in letters of credit issued and outstanding, we had $1.8 billion available borrowing capacity and we had no borrowings outstanding under the Five-Year Revolving Credit Facility. See Note 18—Subsequent Events.
TPDI Credit Facilities—TPDI has a bank credit agreement for a $1.265 billion secured credit facility (the “TPDI Credit Facilities”) comprised of a $1.0 billion senior term loan, a $190 million junior term loan and a $75 million revolving credit facility, which was established to finance the construction of and is secured by Dhirubhai Deepwater KG1 and Dhirubhai Deepwater KG2. One of our subsidiaries participates in the term loans with an aggregate commitment of
$595 million. At September 30, 2011, $980 million was outstanding under the TPDI Credit Facilities, of which $490 million was due to one of our subsidiaries and was eliminated in consolidation. The weighted-average interest rate on September 30, 2011 was 2.0 percent. See Note 12—Derivatives and Hedging and Note 14—Contingencies.
ADDCL Credit Facilities—ADDCL has a senior secured bank credit agreement for a credit facility (the “ADDCL Primary Loan Facility”) comprised of Tranche A and Tranche C for $215 million and $399 million, respectively, which was established to finance the construction of and is secured by Discoverer Luanda. Unaffiliated financial institutions provide the commitment for and the borrowings under Tranche A. One of our subsidiaries provides the commitment for and the borrowings under Tranche C. At
September 30, 2011, $203 million was outstanding under Tranche A at a weighted-average interest rate of 1.12 percent. At September 30, 2011, $399 million was outstanding under Tranche C, which was eliminated in consolidation.
Additionally, ADDCL has a secondary bank credit agreement for a $90 million credit facility (the “ADDCL Secondary Loan Facility”), for which one of our subsidiaries provides 65 percent of the total commitment. At September 30, 2011, $78 million was outstanding under the ADDCL Secondary Loan Facility, of which $51 million was provided by one of our subsidiaries and has been eliminated in consolidation. The weighted-average interest rate on
September 30, 2011 was 3.5 percent.
TPDI Notes—TPDI has issued promissory notes (the “TPDI Notes”) payable to its shareholders, including Quantum and one of our subsidiaries, which have maturities through October 2019. At September 30, 2011, the aggregate outstanding principal amount was $296 million, of which $148 million was due to one of our subsidiaries and has been eliminated in consolidation. The weighted-average interest rate on
September 30, 2011 was 2.4 percent.
- 16 -
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
1.625% Series A, 1.50% Series B and 1.50% Series C Convertible Senior Notes—The carrying amounts of the liability components of the Convertible Senior Notes were as follows (in millions):
|
September 30, 2011
|
December 31, 2010
|
||||||||||||||||||||||
|
Principal amount
|
Unamortized discount
|
Carrying amount
|
Principal amount
|
Unamortized discount
|
Carrying amount
|
||||||||||||||||||
|
Carrying amount of liability component
|
|||||||||||||||||||||||
|
Series A Convertible Senior Notes due 2037
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
11
|
$
|
—
|
$
|
11
|
|||||||||||
|
Series B Convertible Senior Notes due 2037
|
1,680
|
(13
|
)
|
1,667
|
1,680
|
(55
|
)
|
1,625
|
|||||||||||||||
|
Series C Convertible Senior Notes due 2037
|
1,722
|
(74
|
)
|
1,648
|
1,722
|
(117
|
)
|
1,605
|
|||||||||||||||
The carrying amounts of the equity components of the Convertible Senior Notes were as follows (in millions):
|
September 30,
2011
|
December 31,
2010
|
|||||||
|
Carrying amount of equity component
|
||||||||
|
Series A Convertible Senior Notes due 2037
|
$
|
—
|
$
|
1
|
||||
|
Series B Convertible Senior Notes due 2037
|
210
|
210
|
||||||
|
Series C Convertible Senior Notes due 2037
|
276
|
276
|
||||||
As a result of our payment of the first two of the four installments of our distribution of qualifying additional paid-in capital, the conversion rate of our Convertible Senior Notes was adjusted to a rate of 6.0944 shares per $1,000 note, equivalent to a conversion price of $164.08 per share.
Including the amortization of the unamortized discount, the effective interest rates were 5.08 percent for the Series B Convertible Senior Notes and 5.28 percent for the Series C Convertible Senior Notes. At September 30, 2011, the remaining period over which the discount will be amortized was less than one year for the Series B Convertible Senior Notes and 1.2 years for the Series C Convertible Senior Notes. Interest expense, excluding amortization of debt
issue costs, was as follows (in millions):
|
Three months ended
September 30,
|
Nine months ended
September 30,
|
|||||||||||||||
|
2011
|
2010
|
2011
|
2010
|
|||||||||||||
|
Interest expense
|
||||||||||||||||
|
Series A Convertible Senior Notes due 2037
|
$
|
—
|
$
|
15
|
$
|
—
|
$
|
46
|
||||||||
|
Series B Convertible Senior Notes due 2037
|
21
|
25
|
61
|
77
|
||||||||||||
|
Series C Convertible Senior Notes due 2037
|
21
|
25
|
62
|
77
|
||||||||||||
During the nine months ended September 30, 2011, we redeemed the remaining aggregate principal amount of $11 million of the Series A Convertible Senior Notes.
- 17 -
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 12—Derivatives and Hedging
Derivatives designated as hedging instruments—Two of our wholly owned subsidiaries have entered into interest rate swaps, which are designated and have qualified as fair value hedges, to reduce our exposure to changes in the fair values of the 4.95% Senior Notes, 5.25% Senior Notes and the 5.00% Notes. The interest rate swaps have aggregate notional amounts equal to the corresponding face values of the hedged instruments and have stated maturities that coincide with those of the hedged instruments. We have determined that the hedging relationships qualify for, and we have applied, the shortcut method of
accounting, under which the interest rate swaps are considered to have no ineffectiveness and no ongoing assessment of effectiveness is required. Accordingly, changes in the fair value of the interest rate swaps recognized in interest expense perfectly offset changes in the fair value of the hedged fixed-rate notes. Through the stated maturities of the interest rate swaps, we receive semi-annual interest at a fixed rate equal to that of the underlying debt instrument and pay variable interest semi-annually at three-month London Interbank Offered Rate plus a margin.
Additionally, TPDI has entered into interest rate swaps, which have been designated and have qualified as a cash flow hedge, to reduce the variability of cash interest payments associated with the variable rate borrowings under the TPDI Credit Facilities. The aggregate notional amount corresponds with the aggregate outstanding amount of the borrowings under the TPDI Credit Facilities.
At September 30, 2011, the aggregate notional amounts and the weighted average interest rates associated with our derivatives designated as hedging instruments were as follows (in millions, except weighted average interest rates):
|
Aggregate notional amount
|
Weighted average variable rate
|
Weighted average
fixed rate
|
||||||||||
|
Interest rate swaps, fair value hedges
|
$
|
1,400
|
3.5
|
%
|
5.1
|
%
|
||||||
|
Interest rate swaps, cash flow hedges
|
473
|
0.4
|
%
|
|||||||||