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 June 30, 2014
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.)
|
|
10 Chemin de Blandonnet
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 (§232.405 of this chapter) 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 July 29, 2014, 362,189,149 shares were outstanding.
TRANSOCEAN LTD. AND SUBSIDIARIES
INDEX TO FORM 10-Q
QUARTER ENDED JUNE 30, 2014
|
Page
|
||
|
PART I.
|
FINANCIAL INFORMATION
|
|
|
PART II.
|
OTHER INFORMATION
|
|
PART I. FINANCIAL INFORMATION
|
Item 1.
|
Financial Statements
|
TRANSOCEAN LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
(Unaudited)
|
Three months ended
June 30,
|
Six months ended
June 30,
|
||||||||||||||||
|
2014
|
2013
|
2014
|
2013
|
||||||||||||||
|
Operating revenues
|
|||||||||||||||||
|
Contract drilling revenues
|
$
|
2,278
|
$
|
2,321
|
$
|
4,570
|
$
|
4,466
|
|||||||||
|
Other revenues
|
50
|
43
|
97
|
82
|
|||||||||||||
|
2,328
|
2,364
|
4,667
|
4,548
|
||||||||||||||
|
Costs and expenses
|
|||||||||||||||||
|
Operating and maintenance
|
1,213
|
1,357
|
2,482
|
2,716
|
|||||||||||||
|
Depreciation
|
288
|
286
|
561
|
561
|
|||||||||||||
|
General and administrative
|
63
|
77
|
120
|
144
|
|||||||||||||
|
1,564
|
1,720
|
3,163
|
3,421
|
||||||||||||||
|
Loss on impairment
|
—
|
(37
|
)
|
(65
|
)
|
(37
|
)
|
||||||||||
|
Gain (loss) on disposal of assets, net
|
1
|
(2
|
)
|
(2
|
)
|
(9
|
)
|
||||||||||
|
Operating income
|
765
|
605
|
1,437
|
1,081
|
|||||||||||||
|
Other income (expense), net
|
|||||||||||||||||
|
Interest income
|
15
|
11
|
25
|
28
|
|||||||||||||
|
Interest expense, net of amounts capitalized
|
(112
|
)
|
(146
|
)
|
(238
|
)
|
(303
|
)
|
|||||||||
|
Other, net
|
8
|
(16
|
)
|
6
|
(17
|
)
|
|||||||||||
|
(89
|
)
|
(151
|
)
|
(207
|
)
|
(292
|
)
|
||||||||||
|
Income from continuing operations before income tax expense
|
676
|
454
|
1,230
|
789
|
|||||||||||||
|
Income tax expense
|
72
|
132
|
152
|
151
|
|||||||||||||
|
Income from continuing operations
|
604
|
322
|
1,078
|
638
|
|||||||||||||
|
Loss from discontinued operations, net of tax
|
(7
|
)
|
(11
|
)
|
(15
|
)
|
(14
|
)
|
|||||||||
|
Net income
|
597
|
311
|
1,063
|
624
|
|||||||||||||
|
Net income (loss) attributable to noncontrolling interest
|
10
|
4
|
20
|
(4
|
)
|
||||||||||||
|
Net income attributable to controlling interest
|
$
|
587
|
$
|
307
|
$
|
1,043
|
$
|
628
|
|||||||||
|
Earnings (loss) per share-basic
|
|||||||||||||||||
|
Earnings from continuing operations
|
$
|
1.63
|
$
|
0.87
|
$
|
2.90
|
$
|
1.77
|
|||||||||
|
Loss from discontinued operations
|
(0.02
|
)
|
(0.03
|
)
|
(0.04
|
)
|
(0.04
|
)
|
|||||||||
|
Earnings per share
|
$
|
1.61
|
$
|
0.84
|
$
|
2.86
|
$
|
1.73
|
|||||||||
|
Earnings (loss) per share-diluted
|
|||||||||||||||||
|
Earnings from continuing operations
|
$
|
1.63
|
$
|
0.87
|
$
|
2.90
|
$
|
1.77
|
|||||||||
|
Loss from discontinued operations
|
(0.02
|
)
|
(0.03
|
)
|
(0.04
|
)
|
(0.04
|
)
|
|||||||||
|
Earnings per share
|
$
|
1.61
|
$
|
0.84
|
$
|
2.86
|
$
|
1.73
|
|||||||||
|
Weighted-average shares outstanding
|
|||||||||||||||||
|
Basic
|
362
|
360
|
362
|
360
|
|||||||||||||
|
Diluted
|
362
|
360
|
362
|
360
|
|||||||||||||
TRANSOCEAN LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
|
Three months ended
June 30,
|
Six months ended
June 30,
|
||||||||||||||||
|
2014
|
2013
|
2014
|
2013
|
||||||||||||||
|
Net income
|
$
|
597
|
$
|
311
|
$
|
1,063
|
$
|
624
|
|||||||||
|
Net income (loss) attributable to noncontrolling interest
|
10
|
4
|
20
|
(4
|
)
|
||||||||||||
|
Net income attributable to controlling interest
|
587
|
307
|
1,043
|
628
|
|||||||||||||
|
Other comprehensive income (loss) before reclassifications
|
|||||||||||||||||
|
Components of net periodic benefit costs
|
78
|
83
|
73
|
48
|
|||||||||||||
|
Loss on derivative instruments
|
—
|
—
|
—
|
(5
|
)
|
||||||||||||
|
Reclassifications to net income
|
|||||||||||||||||
|
Components of net periodic benefit costs
|
—
|
13
|
6
|
27
|
|||||||||||||
|
(Gain) loss on derivative instruments
|
—
|
11
|
(2
|
)
|
18
|
||||||||||||
|
Other comprehensive income before income taxes
|
78
|
107
|
77
|
88
|
|||||||||||||
|
Income taxes related to other comprehensive loss
|
(3
|
)
|
(1
|
)
|
(3
|
)
|
—
|
||||||||||
|
Other comprehensive income
|
75
|
106
|
74
|
88
|
|||||||||||||
|
Other comprehensive income attributable to noncontrolling interest
|
—
|
—
|
—
|
1
|
|||||||||||||
|
Other comprehensive income attributable to controlling interest
|
75
|
106
|
74
|
87
|
|||||||||||||
|
Total comprehensive income
|
672
|
417
|
1,137
|
712
|
|||||||||||||
|
Total comprehensive income (loss) attributable to noncontrolling interest
|
10
|
4
|
20
|
(3
|
)
|
||||||||||||
|
Total comprehensive income attributable to controlling interest
|
$
|
662
|
$
|
413
|
$
|
1,117
|
$
|
715
|
|||||||||
TRANSOCEAN LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
(Unaudited)
|
June 30,
2014
|
December 31,
2013
|
|||||||
|
Assets
|
||||||||
|
Cash and cash equivalents
|
$
|
2,117
|
$
|
3,243
|
||||
|
Accounts receivable, net of allowance for doubtful accounts
of $14 at June 30, 2014 and December 31, 2013
|
2,214
|
2,162
|
||||||
|
Materials and supplies, net of allowance for obsolescence
of $91 and $80 at June 30, 2014 and December 31, 2013, respectively
|
818
|
737
|
||||||
|
Assets held for sale
|
150
|
148
|
||||||
|
Deferred income taxes, net
|
162
|
151
|
||||||
|
Other current assets
|
299
|
331
|
||||||
|
Total current assets
|
5,760
|
6,772
|
||||||
|
Property and equipment
|
30,550
|
29,518
|
||||||
|
Less accumulated depreciation
|
(8,169
|
)
|
(7,811
|
)
|
||||
|
Property and equipment, net
|
22,381
|
21,707
|
||||||
|
Goodwill
|
2,987
|
2,987
|
||||||
|
Other assets
|
939
|
1,080
|
||||||
|
Total assets
|
$
|
32,067
|
$
|
32,546
|
||||
|
Liabilities and equity
|
||||||||
|
Accounts payable
|
$
|
764
|
$
|
1,106
|
||||
|
Accrued income taxes
|
83
|
53
|
||||||
|
Debt due within one year
|
159
|
323
|
||||||
|
Other current liabilities
|
2,391
|
2,072
|
||||||
|
Total current liabilities
|
3,397
|
3,554
|
||||||
|
Long-term debt
|
10,298
|
10,379
|
||||||
|
Deferred income taxes, net
|
357
|
374
|
||||||
|
Other long-term liabilities
|
1,236
|
1,554
|
||||||
|
Total long-term liabilities
|
11,891
|
12,307
|
||||||
|
Commitments and contingencies
|
||||||||
|
Redeemable noncontrolling interest
|
4
|
—
|
||||||
|
Shares, CHF 15.00 par value, 396,260,487 authorized, 167,617,649 conditionally authorized, 373,830,649 issued and 362,144,405 outstanding at June 30, 2014 and 373,830,649 authorized, 167,617,649 conditionally authorized, 373,830,649 issued and 360,764,100 outstanding at December 31, 2013
|
5,167
|
5,147
|
||||||
|
Additional paid-in capital
|
5,720
|
6,784
|
||||||
|
Treasury shares, at cost, 2,863,267 held at June 30, 2014 and December 31, 2013
|
(240
|
)
|
(240
|
)
|
||||
|
Retained earnings
|
6,305
|
5,262
|
||||||
|
Accumulated other comprehensive loss
|
(188
|
)
|
(262
|
)
|
||||
|
Total controlling interest shareholders’ equity
|
16,764
|
16,691
|
||||||
|
Noncontrolling interest
|
11
|
(6
|
)
|
|||||
|
Total equity
|
16,775
|
16,685
|
||||||
|
Total liabilities and equity
|
$
|
32,067
|
$
|
32,546
|
||||
TRANSOCEAN LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(In millions)
(Unaudited)
|
Six months ended
June 30,
|
Six months ended
June 30,
|
|||||||||||||||
|
2014
|
2013
|
2014
|
2013
|
|||||||||||||
|
Shares
|
Amount
|
|||||||||||||||
|
Shares
|
||||||||||||||||
|
Balance, beginning of period
|
361
|
360
|
$
|
5,147
|
$
|
5,130
|
||||||||||
|
Issuance of shares under share-based compensation plans
|
1
|
—
|
20
|
12
|
||||||||||||
|
Balance, end of period
|
362
|
360
|
$
|
5,167
|
$
|
5,142
|
||||||||||
|
Additional paid-in capital
|
||||||||||||||||
|
Balance, beginning of period
|
$
|
6,784
|
$
|
7,521
|
||||||||||||
|
Share-based compensation
|
51
|
49
|
||||||||||||||
|
Issuance of shares under share-based compensation plans
|
(19
|
)
|
(25
|
)
|
||||||||||||
|
Reclassification of obligation for distribution of qualifying additional paid-in capital
|
(1,088
|
)
|
(808
|
)
|
||||||||||||
|
Other, net
|
(8
|
)
|
(6
|
)
|
||||||||||||
|
Balance, end of period
|
$
|
5,720
|
$
|
6,731
|
||||||||||||
|
Treasury shares, at cost
|
||||||||||||||||
|
Balance, beginning of period
|
$
|
(240
|
)
|
$
|
(240
|
)
|
||||||||||
|
Balance, end of period
|
$
|
(240
|
)
|
$
|
(240
|
)
|
||||||||||
|
Retained earnings
|
||||||||||||||||
|
Balance, beginning of period
|
$
|
5,262
|
$
|
3,855
|
||||||||||||
|
Net income attributable to controlling interest
|
1,043
|
628
|
||||||||||||||
|
Balance, end of period
|
$
|
6,305
|
$
|
4,483
|
||||||||||||
|
Accumulated other comprehensive loss
|
||||||||||||||||
|
Balance, beginning of period
|
$
|
(262
|
)
|
$
|
(521
|
)
|
||||||||||
|
Other comprehensive income attributable to controlling interest
|
74
|
87
|
||||||||||||||
|
Balance, end of period
|
$
|
(188
|
)
|
$
|
(434
|
)
|
||||||||||
|
Total controlling interest shareholders’ equity
|
||||||||||||||||
|
Balance, beginning of period
|
$
|
16,691
|
$
|
15,745
|
||||||||||||
|
Total comprehensive income attributable to controlling interest
|
1,117
|
715
|
||||||||||||||
|
Share-based compensation
|
51
|
49
|
||||||||||||||
|
Issuance of shares under share-based compensation plans
|
1
|
(13
|
)
|
|||||||||||||
|
Reclassification of obligation for distribution of qualifying additional paid-in capital
|
(1,088
|
)
|
(808
|
)
|
||||||||||||
|
Other, net
|
(8
|
)
|
(6
|
)
|
||||||||||||
|
Balance, end of period
|
$
|
16,764
|
$
|
15,682
|
||||||||||||
|
Noncontrolling interest
|
||||||||||||||||
|
Balance, beginning of period
|
$
|
(6
|
)
|
$
|
(15
|
)
|
||||||||||
|
Total comprehensive income (loss) attributable to noncontrolling interest
|
17
|
(3
|
)
|
|||||||||||||
|
Balance, end of period
|
$
|
11
|
$
|
(18
|
)
|
|||||||||||
|
Total equity
|
||||||||||||||||
|
Balance, beginning of period
|
$
|
16,685
|
$
|
15,730
|
||||||||||||
|
Total comprehensive income
|
1,134
|
712
|
||||||||||||||
|
Share-based compensation
|
51
|
49
|
||||||||||||||
|
Issuance of shares under share-based compensation plans
|
1
|
(13
|
)
|
|||||||||||||
|
Reclassification of obligation for distribution of qualifying additional paid-in capital
|
(1,088
|
)
|
(808
|
)
|
||||||||||||
|
Other, net
|
(8
|
)
|
(6
|
)
|
||||||||||||
|
Balance, end of period
|
$
|
16,775
|
$
|
15,664
|
||||||||||||
TRANSOCEAN LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
|
Three months ended
June 30,
|
Six months ended
June 30,
|
||||||||||||||||
|
2014
|
2013
|
2014
|
2013
|
||||||||||||||
|
Cash flows from operating activities
|
|||||||||||||||||
|
Net income
|
$
|
597
|
$
|
311
|
$
|
1,063
|
$
|
624
|
|||||||||
|
Adjustments to reconcile to net cash provided by operating activities
|
|||||||||||||||||
|
Amortization of drilling contract intangibles
|
(4
|
)
|
(7
|
)
|
(8
|
)
|
(16
|
)
|
|||||||||
|
Depreciation
|
288
|
286
|
561
|
561
|
|||||||||||||
|
Share-based compensation expense
|
23
|
28
|
51
|
49
|
|||||||||||||
|
Loss on impairment
|
—
|
37
|
65
|
37
|
|||||||||||||
|
(Gain) loss on disposal of assets, net
|
(1
|
)
|
2
|
2
|
9
|
||||||||||||
|
(Gain) loss on disposal of assets in discontinued operations, net
|
—
|
(3
|
)
|
10
|
(18
|
)
|
|||||||||||
|
Deferred income taxes
|
(25
|
)
|
(8
|
)
|
(40
|
)
|
(36
|
)
|
|||||||||
|
Other, net
|
5
|
35
|
17
|
50
|
|||||||||||||
|
Changes in deferred revenue, net
|
96
|
(29
|
)
|
70
|
(35
|
)
|
|||||||||||
|
Changes in deferred costs, net
|
(18
|
)
|
(9
|
)
|
20
|
8
|
|||||||||||
|
Changes in operating assets and liabilities
|
(325
|
)
|
(227
|
)
|
(1,039
|
)
|
(711
|
)
|
|||||||||
|
Net cash provided by operating activities
|
636
|
416
|
772
|
522
|
|||||||||||||
|
Cash flows from investing activities
|
|||||||||||||||||
|
Capital expenditures
|
(351
|
)
|
(352
|
)
|
(1,482
|
)
|
(840
|
)
|
|||||||||
|
Proceeds from disposal of assets, net
|
10
|
3
|
101
|
4
|
|||||||||||||
|
Proceeds from disposal of assets in discontinued operations, net
|
22
|
—
|
36
|
63
|
|||||||||||||
|
Proceeds from repayment of notes receivable
|
98
|
3
|
101
|
11
|
|||||||||||||
|
Proceeds from sale of preference shares
|
—
|
185
|
—
|
185
|
|||||||||||||
|
Other, net
|
—
|
—
|
(15
|
)
|
1
|
||||||||||||
|
Net cash used in investing activities
|
(221
|
)
|
(161
|
)
|
(1,259
|
)
|
(576
|
)
|
|||||||||
|
Cash flows from financing activities
|
|||||||||||||||||
|
Repayments of debt
|
(6
|
)
|
(406
|
)
|
(243
|
)
|
(1,596
|
)
|
|||||||||
|
Proceeds from restricted cash investments
|
—
|
78
|
107
|
206
|
|||||||||||||
|
Deposits to restricted cash investments
|
—
|
(45
|
)
|
(20
|
)
|
(104
|
)
|
||||||||||
|
Distribution of qualifying additional paid-in capital
|
(272
|
)
|
(202
|
)
|
(474
|
)
|
(202
|
)
|
|||||||||
|
Other, net
|
(7
|
)
|
(12
|
)
|
(9
|
)
|
(27
|
)
|
|||||||||
|
Net cash used in financing activities
|
(285
|
)
|
(587
|
)
|
(639
|
)
|
(1,723
|
)
|
|||||||||
|
Net increase (decrease) in cash and cash equivalents
|
130
|
(332
|
)
|
(1,126
|
)
|
(1,777
|
)
|
||||||||||
|
Cash and cash equivalents at beginning of period
|
1,987
|
3,689
|
3,243
|
5,134
|
|||||||||||||
|
Cash and cash equivalents at end of period
|
$
|
2,117
|
$
|
3,357
|
$
|
2,117
|
$
|
3,357
|
|||||||||
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. We specialize in technically demanding sectors of the offshore drilling business with a particular focus on deepwater and harsh environment drilling services. Our mobile offshore drilling fleet is considered one of the most versatile fleets in the world. We contract our drilling rigs, related equipment and work crews predominantly on a dayrate basis to drill oil and gas wells. At June 30, 2014, we owned or had partial ownership interests in and operated 77 mobile offshore drilling units associated with our continuing operations. At June 30, 2014, our fleet consisted of 46 High-Specification Floaters (Ultra-Deepwater, Deepwater and Harsh Environment semisubmersibles and drillships), 21 Midwater Floaters, and 10 High-Specification Jackups. At June 30, 2014, we also had nine Ultra-Deepwater drillships and five High-Specification Jackups under construction or under contract to be constructed. See Note 9—Drilling Fleet.
In February 2014, in connection with our efforts to discontinue non-strategic operations, we completed the sale of Applied Drilling Technology International Limited (“ADTI”), a United Kingdom (“U.K.”) company, which performs drilling management services in the North Sea. See Note 7—Discontinued Operations.
Note 2—Significant Accounting Policies
Presentation—We have prepared our accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the 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 six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014 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, 2013 and 2012 and for each of the three years in the period ended December 31, 2013 included in our annual report on Form 10-K filed on February 27, 2014.
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 discontinued operations, allowance for doubtful accounts, materials and supplies obsolescence, assets held for sale, property and equipment, investments, notes receivable, goodwill, income taxes, contingencies, share-based compensation, defined benefit pension plans and other postretirement benefits. 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) significant observable inputs, including unadjusted quoted prices for identical assets or liabilities in active markets (“Level 1”), (2) significant other observable inputs, including direct or indirect market data for similar assets or liabilities in active markets or identical assets or liabilities in less active markets (“Level 2”) and (3) significant unobservable inputs, including those that require considerable 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.
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 an investment in an entity if we have the ability to exercise significant influence over the entity that (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 an investment in an entity if we do not have the ability to exercise significant influence over the unconsolidated entity. See Note 4—Variable Interest Entities.
Share-based compensation—In the three and six months ended June 30, 2014, we recognized share-based compensation expense of $23 million and $51 million, respectively. In the three and six months ended June 30, 2013, we recognized share-based compensation expense of $28 million and $49 million, respectively.
Capitalized interest—We capitalize interest costs for qualifying construction and upgrade projects. In the three and six months ended June 30, 2014, we capitalized interest costs on construction work in progress of $42 million and $76 million, respectively. In the three and six months ended June 30, 2013, we capitalized interest costs on construction work in progress of $16 million and $37 million, respectively.
- 6 -
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—continued
(Unaudited)
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 consolidated statements of operations and cash flows to present discontinued operations (see Note 7—Discontinued Operations) and reclassification of an intracompany note (see Note 16—Condensed Consolidating Financial Information). 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 17—Subsequent Events.
Note 3—New Accounting Pronouncements
Recently adopted accounting standards
Income taxes—Effective January 1, 2014, we adopted the accounting standards update that requires an unrecognized tax benefit to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward if net settlement is required or expected. The update is effective for interim and annual periods beginning on or after December 15, 2013. Our adoption did not have a material effect on our condensed consolidated balance sheets or the disclosures contained in our notes to condensed consolidated financial statements.
Recently issued accounting standards
Presentation of financial statements—Effective January 1, 2015, we will adopt the accounting standards update that changes the criteria for reporting discontinued operations. The update expands the disclosures for discontinued operations and requires new disclosures related to the disposal of individually significant components of an entity that do not qualify for discontinued operations. The update is effective for interim and annual periods beginning on or after December 15, 2014. We do not expect that our adoption will have a material effect on our condensed consolidated balance sheets or the disclosures contained in our notes to condensed consolidated financial statements.
Revenue from contracts with customers—Effective January 1, 2017, we will adopt the new accounting standards update that requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The update is effective for interim and annual periods beginning on or after December 15, 2016. We are evaluating the requirements to determine the effect such requirements may have on our revenue recognition policies.
Note 4—Variable Interest Entities
Consolidated variable interest entities— Angola Deepwater Drilling Company Limited (“ADDCL”), a consolidated Cayman Islands company, and Transocean Drilling Services Offshore Inc. (“TDSOI”), a consolidated British Virgin Islands company, are variable interest entities for which we are the primary beneficiary. Accordingly, we consolidate the operating results, assets and liabilities of ADDCL and TDSOI.
The carrying amounts associated with our consolidated variable interest entities, after eliminating the effect of intercompany transactions, were as follows (in millions):
|
June 30,
2014
|
December 31, 2013
|
||||||
|
Assets
|
$
|
1,254
|
$
|
1,280
|
|||
|
Liabilities
|
88
|
261
|
|||||
|
Net carrying amount
|
$
|
1,166
|
$
|
1,019
|
|||
- 7 -
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—continued
(Unaudited)
Note 5—Impairments
Assets held for sale—In the six months ended June 30, 2014, we recognized an aggregate loss of $65 million ($0.19 per diluted share), which had no tax effect, associated with the impairment of the Midwater Floater Sedneth 701 and the High-Specification Jackup GSF Magellan, along with related equipment, which were classified as assets held for sale at the time of impairment. We measured the impairments of the drilling units and related equipment as the amount by which the carrying amount exceeded the estimated fair value less costs to sell. We estimated the fair value of the assets using significant other observable inputs, representative of Level 2 fair value measurements, including a binding sale and purchase agreement for the drilling unit and related equipment or indicative market values for the drilling unit and related equipment to be sold for scrap value.
In the three and six months ended June 30, 2013, we recognized an aggregate loss of $37 million ($0.10 per diluted share from continuing operations), which had no tax effect, associated with the impairment of the Deepwater Floater Sedco 709 and the Midwater Floaters C. Kirk Rhein, Jr. and Sedco 703, all of which were classified as assets held for sale at the time of impairment. We measured the impairments of the drilling units and related equipment as the amount by which the carrying amounts exceeded the estimated fair values less costs to sell. We estimated the fair values of the assets using significant other observable inputs, representative of Level 2 fair value measurements, including nonbinding sale and purchase agreements for the drilling units and related equipment to be sold for scrap value.
Note 6—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. The relationship between our provision for or benefit from income taxes and our income or loss before income taxes can vary significantly from period to period considering, among other factors, (a) the overall level of income before income taxes, (b) changes in the blend of income that is taxed based on gross revenues rather than income before taxes, (c) rig movements between taxing jurisdictions and (d) our rig operating structures. Generally, our annual marginal tax rate is lower than our annual effective tax rate.
In the six months ended June 30, 2014 and 2013, our estimated annual effective tax rates were 13.8 percent and 21.7 percent, 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. See Note 17—Subsequent Events.
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):
|
June 30,
2014
|
December 31,
2013
|
|||||||
|
Unrecognized tax benefits, excluding interest and penalties
|
$
|
330
|
$
|
326
|
||||
|
Interest and penalties
|
169
|
176
|
||||||
|
Unrecognized tax benefits, including interest and penalties
|
$
|
499
|
$
|
502
|
In the year ending December 31, 2014, it is reasonably possible that our existing liabilities for unrecognized tax benefits may increase or decrease primarily due to the progression of open audits or the expiration of statutes of limitation. However, we cannot reasonably estimate a range of potential changes in our existing liabilities for unrecognized tax benefits due to various uncertainties, such as the unresolved nature of various audits.
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 2010.
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 two major jurisdictions for up to 19 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 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 statement of cash flows.
- 8 -
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—continued
(Unaudited)
U.S. tax investigations—During the six months ended June 30, 2014, we received an assessment from the U.S. tax authorities related to our 2010 and 2011 U.S. federal income tax returns. The significant issue raised in the assessment relates to transfer pricing for certain charters of drilling rigs between our subsidiaries. This issue, if successfully challenged, would result in net adjustments of approximately $290 million of additional taxes, excluding interest and penalties. 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. Furthermore, if the authorities were to continue to pursue these positions with respect to subsequent years and were successful in such assertions, our effective tax rate on worldwide earnings with respect to years following 2011 could increase substantially, and could have a material adverse effect on our consolidated results of operations or cash flows. We believe our U.S. federal income tax returns are materially correct as filed, and we intend to continue to vigorously defend against all such claims to the contrary.
Norway tax investigations and trial—Norwegian civil tax and criminal authorities are investigating various transactions undertaken by our subsidiaries in 1999, 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 as follows: (a) NOK 684 million, equivalent to approximately $114 million, plus interest, related to the migration of our subsidiary that was previously subject to tax in Norway, (b) NOK 412 million, equivalent to approximately $69 million, plus interest, related to a 2001 dividend payment and (c) NOK 43 million, equivalent to approximately $7 million, plus interest, related to certain foreign exchange deductions and dividend withholding tax. We provided a parent company guarantee in the amount of NOK 699 million, equivalent to approximately $117 million with respect to one of these tax disputes. In November 2012, the Norwegian district court in Oslo heard the civil tax case regarding the disputed tax assessment of NOK 684 million related to the migration of our subsidiary. On March 1, 2013, the Norwegian district court in Oslo overturned the initial civil tax assessment and ruled in our favor, and the tax authorities filed an appeal. On June 26, 2014, the Norwegian district court in Oslo ruled that our subsidiary was liable for the civil tax assessment of NOK 412 million, equivalent to approximately $69 million, but waived all penalties and interest. We intend to file an appeal and to take other appropriate action to continue to support our position that our Norwegian tax returns are materially correct as filed.
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 criminal indictments with respect to the disclosures in our tax returns, and our former external Norwegian tax attorney was issued criminal indictments related to certain of our restructuring transactions and the 2001 dividend payment. In January 2012, the Norwegian authorities supplemented the previously issued criminal indictments by issuing a financial claim of NOK 1.8 billion, equivalent to approximately $300 million, jointly and severally, against our two subsidiaries, the two external tax advisors and the external tax attorney. In February 2012, the authorities dropped the previously existing civil tax claim related to a certain restructuring transaction. In April 2012, the Norwegian tax authorities supplemented the previously issued criminal indictments against our two subsidiaries by extending a criminal indictment against a third subsidiary, alleging misleading or incomplete disclosures in Norwegian tax returns for the years 2001 and 2002. The criminal trial commenced in December 2012. In May 2013, the Norwegian authorities dropped the financial claim of NOK 1.8 billion against one of our subsidiaries and the criminal case related to the migration case of another subsidiary. The criminal trial proceedings ended in September 2013. The Norwegian authorities subsequently suggested, if we were found guilty, that the court assess criminal penalties of NOK 230 million, equivalent to approximately $38 million, against three of our subsidiaries in addition to any civil tax penalties and the financial claim. We believe our Norwegian tax returns are materially correct as filed, and we intend to continue to vigorously contest any assertions to the contrary by the Norwegian civil and criminal authorities in connection with the various transactions being investigated. An unfavorable outcome on the Norwegian civil or criminal tax matters could result in a material adverse effect on our consolidated statement of financial position, results of operations or cash flows. See Note 17—Subsequent Events.
Brazil tax investigations—Certain of our Brazilian income tax returns for the years 2000 through 2004 are currently under examination. In December 2005, the Brazilian tax authorities issued an aggregate tax assessment of BRL 694 million, equivalent to approximately $315 million, including a 75 percent penalty and interest. On January 25, 2008, we filed a protest letter with the Brazilian tax authorities, and we are currently engaged in the appeals process. On May 19, 2014, with respect to our Brazilian income tax returns for the years 2009 and 2010, the Brazilian tax authorities issued an aggregate tax assessment of BRL 121 million, equivalent to approximately $55 million, including a 75 percent penalty and interest. On June 18, 2014, we filed a protest letter with the Brazilian tax authorities. We believe our returns are materially correct as filed, and we are vigorously contesting these assessments. 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.
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 adjustments to have a material adverse effect on our consolidated statement of financial position, results of operations or cash flows.
- 9 -
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—continued
(Unaudited)
Note 7—Discontinued Operations
Summarized results of discontinued operations
The summarized results of operations included in income from discontinued operations were as follows (in millions):
|
Three months ended
June 30,
|
Six months ended
June 30,
|
|||||||||||||||
|
2014
|
2013
|
2014
|
2013
|
|||||||||||||
|
Operating revenues
|
$
|
25
|
$
|
262
|
$
|
133
|
$
|
515
|
||||||||
|
Operating and maintenance expense
|
(27
|
)
|
(269
|
)
|
(131
|
)
|
(534
|
)
|
||||||||
|
Gain (loss) on disposal of assets in discontinued operations, net
|
—
|
3
|
(10
|
)
|
18
|
|||||||||||
|
Loss from discontinued operations before income tax expense
|
(2
|
)
|
(4
|
)
|
(8
|
)
|
(1
|
)
|
||||||||
|
Income tax expense
|
(5
|
)
|
(7
|
)
|
(7
|
)
|
(13
|
)
|
||||||||
|
Loss from discontinued operations, net of tax
|
$
|
(7
|
)
|
$
|
(11
|
)
|
$
|
(15
|
)
|
$
|
(14
|
)
|
||||
Assets and liabilities of discontinued operations
The carrying amounts of the major classes of assets and liabilities associated with our discontinued operations were classified as follows (in millions):
|
June 30,
|
December 31,
|
|||||||
|
2014
|
2013
|
|||||||
|
Assets
|
||||||||
|
Materials and supplies, net
|
$
|
2
|
$
|
18
|
||||
|
Other related assets
|
—
|
1
|
||||||
|
Assets held for sale
|
2
|
19
|
||||||
|
Other current assets
|
—
|
6
|
||||||
|
Total current assets
|
$
|
2
|
$
|
25
|
||||
|
Liabilities
|
||||||||
|
Deferred revenues
|
$
|
—
|
$
|
8
|
||||
|
Other current liabilities
|
$
|
—
|
$
|
8
|
||||
Standard jackup and swamp barge contract drilling services
Overview—In September 2012, in connection with our efforts to dispose of non-strategic assets and to reduce our exposure to low-specification drilling units, we committed to a plan to discontinue operations associated with the standard jackup and swamp barge asset groups, components of our contract drilling services operating segment.
Sale transactions with Shelf Drilling—In November 2012, we completed the sale of 38 drilling units to Shelf Drilling Holdings, Ltd. (“Shelf Drilling”). For a transition period following the completion of the sale transactions, we agreed to continue to operate a substantial portion of the standard jackups under operating agreements with Shelf Drilling and to provide certain other transition services to Shelf Drilling. Under the operating agreements, we have agreed to remit the collections from our customers under the associated drilling contracts to Shelf Drilling, and Shelf Drilling has agreed to reimburse us for our direct costs and expenses incurred while operating the standard jackups on behalf of Shelf Drilling with certain exceptions. Amounts due to Shelf Drilling under the operating agreements and transition services agreement may be contractually offset against amounts due from Shelf Drilling. The costs to us for providing such operating and transition services, including allocated indirect costs, have exceeded the amounts we have received from Shelf Drilling for providing such services.
Under the operating agreements, we agreed to continue to operate these standard jackups on behalf of Shelf Drilling until the earlier of expiration or novation of the underlying drilling contracts by Shelf Drilling. As of June 30, 2014, we operated two standard jackups under operating agreements with Shelf Drilling, and we expect to complete performing services under such operating agreements before December 31, 2014. Until the expiration or novation of such drilling contracts, we retain possession of the materials and supplies associated with the standard jackups that we operate under the operating agreements. In the three and six months ended June 30, 2014, we received cash proceeds of $22 million and $25 million, respectively, and recognized net gains of $1 million and $2 million, respectively, which had no tax effect, associated with the sale of equipment and materials and supplies to Shelf Drilling upon expiration or novation of the drilling contracts. In the three and six months ended June 30, 2013, we recognized a net gain of $3 million ($0.01 per diluted share), which had no tax effect, associated with the disposal of assets unrelated to rig sales. At June 30, 2014 and December 31, 2013, the materials and supplies associated with the drilling units that we operated under operating agreements with Shelf Drilling had an aggregate carrying amount of $2 million and $19 million, respectively. Under a transition services agreement, we provided certain transition services through May 2014.
- 10 -
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—continued
(Unaudited)
For a period through November 2015, we agreed to provide to Shelf Drilling up to $125 million of financial support by maintaining letters of credit, surety bonds and guarantees for various contract bidding and performance activities associated with the drilling units sold to Shelf Drilling and in effect at the closing of the sale transactions. At the time of the sale transactions, we had $113 million of outstanding letters of credit, issued under our committed and uncommitted credit lines, in support of rigs sold to Shelf Drilling. Included within the $125 million maximum amount, we agreed to provide up to $65 million of additional financial support in connection with any new drilling contracts related to such drilling units. Shelf Drilling is required to reimburse us in the event that any of these instruments are called. At June 30, 2014 and December 31, 2013, we had $105 million and $104 million, respectively, of outstanding letters of credit, issued under our committed and uncommitted credit lines, in support of drilling units sold to Shelf Drilling. See Note 13—Commitments and Contingencies.
Other dispositions—During the six months ended June 30, 2013, we completed the sale of the Standard Jackups D.R. Stewart, Interocean III and GSF Adriatic VIII along with related equipment. In the six months ended June 30, 2013, in connection with the disposal of these assets, we received aggregate net cash proceeds of $63 million, and we recognized an aggregate net gain of $15 million ($0.04 per diluted share), which had no tax effect.
Drilling management services
Overview—In February 2014, in connection with our efforts to discontinue non-strategic operations, we completed the sale of ADTI, which performs drilling management services in the North Sea. As a result of the sale, we reclassified the results of operations of our drilling management services operating segment to discontinued operations for all periods presented. At December 31, 2013, the carrying amount of assets of the drilling management services operating segment was $6 million.
Disposition—In the six months ended June 30, 2014, we received net cash proceeds of $11 million associated with the sale of the drilling management services business. In the three and six months ended June 30, 2014, in connection with the sale, we recognized a net loss of $1 million and $12 million ($0.03 per diluted share), respectively, which had no tax effect. Following the completion of the sale transaction, we agreed to provide a limited guarantee in favor of one customer through completion of the current drilling project, which is expected to occur in the fourth quarter of 2014. We also agreed to provide a $15 million working capital line of credit to the buyer through March 2016. We earn interest on the outstanding borrowings at a fixed rate of 8.3 percent per annum, payable quarterly. At June 30, 2014, ADTI had borrowings of $15 million outstanding under the working capital line of credit, recorded in other assets.
Note 8—Earnings Per Share
The numerator and denominator used for the computation of basic and diluted per share earnings from continuing operations were as follows (in millions, except per share data):
|
Three months ended June 30,
|
Six months ended June 30,
|
|||||||||||||||||||||||||||||||
|
2014
|
2013
|
2014
|
2013
|
|||||||||||||||||||||||||||||
|
Basic
|
Diluted
|
Basic
|
Diluted
|
Basic
|
Diluted
|
Basic
|
Diluted
|
|||||||||||||||||||||||||
|
Numerator for earnings per share
|
||||||||||||||||||||||||||||||||
|
Income from continuing operations attributable to controlling interest
|
$
|
594
|
$
|
594
|
$
|
318
|
$
|
318
|
$
|
1,058
|
$
|
1,058
|
$
|
642
|
$
|
642
|
||||||||||||||||
|
Undistributed earnings allocable to participating securities
|
(4
|
)
|
(4
|
)
|
(3
|
)
|
(3
|
)
|
(9
|
)
|
(9
|
)
|
(6
|
)
|
(6
|
)
|
||||||||||||||||
|
Income from continuing operations available to shareholders
|
$
|
590
|
$
|
590
|
$
|
315
|
$
|
315
|
$
|
1,049
|
$
|
1,049
|
$
|
636
|
$
|
636
|
||||||||||||||||
|
Denominator for earnings (loss) per share
|
||||||||||||||||||||||||||||||||
|
Weighted-average shares outstanding
|
362
|
362
|
360
|
360
|
362
|
362
|
360
|
360
|
||||||||||||||||||||||||
|
Effect of stock options and other share-based awards
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||||||||
|
Weighted-average shares for per share calculation
|
362
|
362
|
360
|
360
|
362
|
362
|
360
|
360
|
||||||||||||||||||||||||
|
Per share earnings from continuing operations
|
$
|
1.63
|
$
|
1.63
|
$
|
0.87
|
$
|
0.87
|
$
|
2.90
|
$
|
2.90
|
$
|
1.77
|
$
|
1.77
|
||||||||||||||||
In the three and six months ended June 30, 2014, we excluded 2.9 million and 2.3 million share-based awards, respectively, from the calculation since the effect would have been anti-dilutive. In the three and six months ended June 30, 2013, we excluded 2.4 million and 2.3 million share-based awards, respectively, from the calculation since the effect would have been anti-dilutive.
- 11 -
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—continued
(Unaudited)
Note 9—Drilling Fleet
Construction work in progress—For the six months ended June 30, 2014 and 2013, the changes in our construction work in progress, including capital expenditures and capitalized interest, were as follows (in millions):
|
Six months ended June 30,
|
||||||||
|
2014
|
2013
|
|||||||
|
Construction work in progress, at beginning of period
|
$
|
2,710
|
$
|
2,010
|
||||
|
Newbuild construction program
|
||||||||
|
Transocean Siam Driller (a) (b)
|
—
|
74
|
||||||
|
Transocean Andaman (a) (b)
|
—
|
82
|
||||||
|
Transocean Ao Thai (a) (b)
|
—
|
13
|
||||||
|
Deepwater Asgard (c)
|
272
|
24
|
||||||
|
Deepwater Invictus (c)
|
477
|
25
|
||||||
|
Deepwater Thalassa (d)
|
58
|
84
|
||||||
|
Deepwater Proteus (d)
|
21
|
82
|
||||||
|
Deepwater Conqueror (e)
|
109
|
—
|
||||||
|
Deepwater Pontus (d)
|
83
|
4
|
||||||
|
Deepwater Poseidon (d)
|
80
|
3
|
||||||
|
High-Specification Jackup TBN1 (f)
|
3
|
—
|
||||||
|
High-Specification Jackup TBN2 (f)
|
2
|
—
|
||||||
|
High-Specification Jackup TBN3 (f)
|
2
|
—
|
||||||
|
High-Specification Jackup TBN4 (f)
|
2
|
—
|
||||||
|
Ultra-Deepwater drillship TBN1 (g)
|
28
|
—
|
||||||
|
High-Specification Jackup TBN5 (f)
|
2
|
—
|
||||||
|
Ultra-Deepwater drillship TBN2 (g)
|
27
|
—
|
||||||
|
Other construction projects and capital additions
|
316
|
449
|
||||||
|
Total capital expenditures
|
1,482
|
840
|
||||||
|
Changes in accrued capital expenditures
|
(76
|
)
|
(29
|
)
|
||||
|
Property and equipment placed into service
|
||||||||
|
Transocean Siam Driller (a) (b)
|
—
|
(236
|
)
|
|||||
|
Transocean Andaman (a) (b)
|
—
|
(242
|
)
|
|||||
|
Other property and equipment
|
(350
|
)
|
(506
|
)
|
||||
|
Construction work in progress, at end of period
|
$
|
3,766
|
$
|
1,837
|
||||
_____________________________
|
(a)
|
The accumulated construction costs of this rig are no longer included in construction work in progress, as the construction project had been completed as of June 30, 2014.
|
|
(b)
|
The High-Specification Jackups Transocean Siam Driller, Transocean Andaman and Transocean Ao Thai commenced operations in March 2013, May 2013 and October 2013, respectively.
|
|
(c)
|
Deepwater Asgard and Deepwater Invictus, two newbuild Ultra-Deepwater drillships under construction at the Daewoo Shipbuilding & Marine Engineering Co. Ltd. shipyard in Korea, are expected to commence operations in the third quarter of 2014. The total carrying amount included capitalized costs of $272 million, representing the estimated fair value of construction in progress acquired in connection with our acquisition of Aker Drilling ASA in October 2011.
|
|
(d)
|
Deepwater Thalassa, Deepwater Proteus, Deepwater Pontus and Deepwater Poseidon, four newbuild Ultra-Deepwater drillships under construction at the Daewoo Shipbuilding & Marine Engineering Co. Ltd. shipyard in Korea, are expected to commence operations in the first quarter of 2016, the third quarter of 2016, the first quarter of 2017 and the second quarter of 2017, respectively.
|
|
(e)
|
Deepwater Conqueror, a newbuild Ultra-Deepwater drillship under construction at the Daewoo Shipbuilding & Marine Engineering Co. Ltd. shipyard in Korea, is expected to commence operations in the fourth quarter of 2016.
|
|
(f)
|
Our five unnamed Keppel FELS Super B 400 Bigfoot class design newbuild High-Specification Jackups under construction at Keppel FELS’ shipyard in Singapore do not yet have drilling contracts and are expected to be delivered in the first quarter of 2016, the third quarter of 2016, the fourth quarter of 2016, the first quarter of 2017 and the third quarter of 2017, respectively.
|
|
(g)
|
Our two unnamed dynamically positioned Ultra-Deepwater drillships under construction at the Jurong Shipyard PTE Ltd. in Singapore do not yet have drilling contracts and are expected to be delivered in the second quarter of 2017 and the first quarter of 2018, respectively.
|
- 12 -
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—continued
(Unaudited)
Dispositions—During the six months ended June 30, 2014, in connection with our efforts to dispose of non-strategic assets, we completed the sale of the High-Specification Jackup GSF Monitor along with related equipment. In the six months ended June 30, 2014, in connection with the disposal of these assets, we received net cash proceeds of $83 million. In the three and six months ended June 30, 2014, we received cash proceeds of $9 million and $17 million, respectively, and recognized an aggregate net gain of $1 million and an aggregate net loss of $2 million, respectively, associated with the disposal of assets unrelated to rig sales. In the three and six months ended June 30, 2013, we received cash proceeds of $3 million and recognized an aggregate net loss of $2 million and $9 million, respectively, associated with the disposal of assets unrelated to rig sales.
During the six months ended June 30, 2014, in connection with our efforts to dispose of non-strategic assets, we committed to plans to sell the Midwater Floater Sedneth 701 and the High-Specification Jackup GSF Magellan, along with related equipment. At June 30, 2014, in addition to the remaining assets associated with our discontinued operations, the Deepwater Floater Sedco 709 and the Midwater Floaters C. Kirk Rhein, Jr., Falcon 100, Sedco 703 and Sedneth 701 and the High-Specification Jackup GSF Magellan, along with related equipment, were classified as assets held for sale with an aggregate carrying amount of $148 million. At December 31, 2013, in addition to the remaining assets associated with our discontinued operations, the Deepwater Floater Sedco 709, the Midwater Floaters C. Kirk Rhein, Jr., Falcon 100 and Sedco 703 and the High-Specification Jackup GSF Monitor along with related equipment, were classified as assets held for sale with an aggregate carrying amount of $129 million. See Note 5—Impairments and Note 7—Discontinued Operations.
Note 10—Debt
Debt, net of unamortized discounts, premiums and fair value adjustments, was comprised of the following (in millions):
|
June 30,
2014
|
December 31, 2013
|
||||||||||||||||||||||
|
4.95% Senior Notes due November 2015 (a)
|
$
|
1,109
|
$
|
1,113
|
|||||||||||||||||||
|
5.05% Senior Notes due December 2016 (a)
|
999
|
999
|
|||||||||||||||||||||
|
2.5% Senior Notes due October 2017 (a)
|
748
|
748
|
|||||||||||||||||||||
|
ADDCL Credit Facilities due December 2017
|
—
|
163
|
|||||||||||||||||||||
|
Eksportfinans Loans due January 2018
|
517
|
591
|
|||||||||||||||||||||
|
6.00% Senior Notes due March 2018 (a)
|
1,002
|
998
|
|||||||||||||||||||||
|
7.375% Senior Notes due April 2018 (a)
|
247
|
247
|
|||||||||||||||||||||
|
6.50% Senior Notes due November 2020 (a)
|
903
|
900
|
|||||||||||||||||||||
|
6.375% Senior Notes due December 2021 (a)
|
1,199
|
1,199
|
|||||||||||||||||||||
|
3.8% Senior Notes due October 2022 (a)
|
746
|
745
|
|||||||||||||||||||||
|
7.45% Notes due April 2027 (a)
|
97
|
97
|
|||||||||||||||||||||
|
8% Debentures due April 2027 (a)
|
57
|
57
|
|||||||||||||||||||||
|
7% Notes due June 2028
|
310
|
311
|
|||||||||||||||||||||
|
Capital lease contract due August 2029
|
626
|
637
|
|||||||||||||||||||||
|
7.5% Notes due April 2031 (a)
|
598
|
598
|
|||||||||||||||||||||
|
6.80% Senior Notes due March 2038 (a)
|
999
|
999
|
|||||||||||||||||||||
|
7.35% Senior Notes due December 2041 (a)
|
300
|
300
|
|||||||||||||||||||||
|
Total debt
|
10,457
|
10,702
|
|||||||||||||||||||||
|
Less debt due within one year
|
|||||||||||||||||||||||
|
ADDCL Credit Facilities due December 2017
|
—
|
163
|
|||||||||||||||||||||
|
Eksportfinans Loans due January 2018
|
138
|
140
|
|||||||||||||||||||||
|
Capital lease contract due August 2029
|
21
|
20
|
|||||||||||||||||||||
|
Total debt due within one year
|
159
|
323
|
|||||||||||||||||||||
|
Total long-term debt
|
$
|
10,298
|
$
|
10,379
|
|||||||||||||||||||
_____________________________
|
(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 New Five-Year Revolving Credit Facility. Transocean Ltd. and Transocean Inc. are not subject to any significant restrictions on their ability to obtain funds from their consolidated subsidiaries by dividends, loans or return of capital distributions. See Note 16—Condensed Consolidating Financial Information.
|
- 13 -
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—continued
(Unaudited)
Scheduled maturities—At June 30, 2014, the scheduled maturities of our debt were as follows (in millions):
|
Twelve months ending June 30,
|
Total
|
|||
|
2015
|
$
|
159
|
||
|
2016
|
1,262
|
|||
|
2017
|
1,164
|
|||
|
2018
|
2,130
|
|||
|
2019
|
31
|
|||
|
Thereafter
|
5,703
|
|||
|
Total debt, excluding unamortized discounts, premiums and fair value adjustments
|
10,449
|
|||
|
Total unamortized discounts, premiums and fair value adjustments, net
|
8
|
|||
|
Total debt
|
$
|
10,457
|
||
New Five-Year Revolving Credit Facility—In June 2014, we entered into an amended and restated bank credit agreement, which established a $3.0 billion unsecured five-year revolving credit facility, that is scheduled to expire on June 28, 2019 (the “New Five-Year Revolving Credit Facility”). Among other things, the New Five-Year Revolving Credit Facility includes limitations on creating liens, incurring subsidiary debt, transactions with affiliates, sale/leaseback transactions, mergers and the sale of substantially all assets. The New Five-Year Revolving Credit Facility also includes a covenant imposing a maximum debt to tangible capitalization ratio of 0.6 to 1.0. Borrowings under the Five-Year Revolving Credit Facility are subject to acceleration upon the occurrence of an event of default, Borrowings are guaranteed by Transocean Ltd. and may be prepaid in whole or in part without premium or penalty.
We may borrow under the New Five-Year Revolving Credit Facility at either (1) the adjusted London Interbank Offered Rate (“LIBOR”) plus a margin (the “New Five-Year Revolving Credit Facility Margin”), which ranges from 1.125 percent to 2.0 percent based on the credit rating of our non-credit enhanced senior unsecured long-term debt (“Debt Rating”), or (2) the base rate specified in the credit agreement plus the Five-Year Revolving Credit Facility Margin, less one percent per annum. Throughout the term of the New Five-Year Revolving Credit Facility, we pay a facility fee on the daily unused amount of the underlying commitment which ranges from 0.15 percent to 0.35 percent depending on our Debt Rating. At June 30, 2014, based on our Debt Rating on that date, the New Five-Year Revolving Credit Facility Margin was 1.5 percent and the facility fee was 0.225 percent. At June 30, 2014, we had no borrowings outstanding, we had $20 million in letters of credit issued, and we had $3.0 billion of available borrowing capacity under the New Five-Year Revolving Credit Facility.
Former Five-Year Revolving Credit Facility—We had a $2.0 billion five-year revolving credit facility, established under a bank credit agreement dated November 1, 2011, as amended, that was scheduled to expire on November 1, 2016 (the “Former Five-Year Revolving Credit Facility”). In June 2014, we replaced the Former Five-Year Revolving Credit Facility with the New Five-Year Revolving Credit Facility.
Former Three-Year Secured Revolving Credit Facility—We had a $900 million three-year secured revolving credit facility, established under a bank credit agreement dated October 25, 2012, that was scheduled to expire on October 25, 2015 (the “Former Three-Year Secured Revolving Credit Facility”). Borrowings under the Former Three-Year Secured Revolving Credit Facility were secured by the Ultra-Deepwater Floaters Deepwater Champion, Discoverer Americas and Discoverer Inspiration. At December 31, 2013, the aggregate carrying amount of Deepwater Champion, Discoverer Americas and Discoverer Inspiration was $2.2 billion. In June 2014, we terminated the Former Three-Year Secured Revolving Credit Facility and the related security agreements. No borrowings were outstanding under the Former Three-Year Secured Revolving Credit Facility at the time of its termination. In the three and six months ended June 30, 2014, we recognized a loss of $4 million associated with the early termination of the Former Three-Year Secured Revolving Credit Facility.
ADDCL Credit Facilities—ADDCL had a senior secured credit facility, comprised of Tranche A for $215 million and Tranche C for $399 million, established under a bank credit agreement dated June 2, 2008 that was scheduled to expire in December 2017 (the “ADDCL Primary Loan Facility”). Unaffiliated financial institutions provided the commitment for and borrowings under Tranche A, and one of our subsidiaries provided the commitment for Tranche C. ADDCL also had a $90 million secondary credit facility, established under a bank credit agreement dated June 2, 2008 that was scheduled to expire in December 2015 (the “ADDCL Secondary Loan Facility” and together with the ADDCL Primary Loan Facility, the “ADDCL Credit Facilities”). One of our subsidiaries provided 65 percent of the total commitment under the ADDCL Secondary Loan Facility. At December 31, 2013, borrowings of $534 million and $80 million were outstanding under the ADDCL Primary Loan Facility and the ADDCL Secondary Loan Facility, respectively, of which $399 million and $52 million were provided by one of our subsidiaries and were eliminated in consolidation. In February 2014, we repaid the outstanding borrowings under the ADDCL Credit Facilities and terminated the bank credit agreements under which the credit facilities were established.
ADDCL was required to maintain certain cash balances in restricted accounts for the payment of the scheduled installments on the ADDCL Credit Facilities. At December 31, 2013, ADDCL had restricted cash investments of $20 million. The restricted cash investments were released as a result of our repayment of borrowings under the ADDCL Credit Facilities.
- 14 -
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—continued
(Unaudited)
Eksportfinans Loans—We have borrowings under the Loan Agreement dated September 12, 2008 and the Loan Agreement dated November 18, 2008 (together, the “Eksportfinans Loans”). At June 30, 2014 and December 31, 2013, aggregate borrowings of NOK 3.2 billion and NOK 3.6 billion, equivalent to approximately $519 million and $594 million, respectively, were outstanding under the Eksportfinans Loans.
The Eksportfinans Loans require collateral to be held by a financial institution through expiration (the “Aker Restricted Cash Investments”). At June 30, 2014 and December 31, 2013, the aggregate principal amount of the Aker Restricted Cash Investments was NOK 3.2 billion and NOK 3.6 billion, equivalent to approximately $519 million and $594 million, respectively.
Note 11—Derivatives and Hedging
Derivatives designated as hedging instruments—During the six months ended June 30, 2014, we entered into interest rate swaps, which are designated and qualify as a fair value hedge, to reduce our exposure to changes in the fair value of the 6.0% Senior Notes due March 2018 and the 6.5% Senior Notes due November 2020. 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 offset the changes in the fair value of the hedged fixed-rate notes.
At June 30, 2014, 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):
|
Pay
|
Receive
|
||||||||||||||||||||
|
Aggregate
notional
amount
|
Fixed or variable rate
|
Weighted average
rate
|
Aggregate
notional
amount
|
Fixed or variable rate
|
Weighted average
rate
|
||||||||||||||||
|
Interest rate swaps, fair value hedge
|
$
|
1,050
|
Variable
|
4.71
|
%
|
$
|
1,050
|
Fixed
|
6.14
|
%
|
|||||||||||
At June 30, 2014, our derivatives designated as hedging instruments had an aggregate carrying amount of $6 million, measured at fair value, recorded in other assets.
Note 12—Postemployment Benefit Plans
We have several defined benefit pension plans, both funded and unfunded, covering substantially all of our U.S. employees, including certain frozen plans, assumed in connection with our mergers, that cover certain current employees and certain former employees and directors of our predecessors (the “U.S. Plans”). We also have various defined benefit plans in the U.K., Norway, Nigeria, Egypt and Indonesia that cover our employees in those areas (the “Non-U.S. Plans”). Additionally, we offer several unfunded contributory and noncontributory other postretirement employee benefit plans covering substantially all of our U.S. employees (the “OPEB Plans”).
The components of net periodic benefit costs, before tax, and funding contributions for these plans were as follows (in millions):
|
Three months ended June 30, 2014
|
Three months ended June 30, 2013
|
|||||||||||||||||||||||||||||||
|
U.S.
Plans
|
Non-U.S.
Plans
|
OPEB
Plans
|
Total
|
U.S.
Plans
|
Non-U.S.
Plans
|
OPEB
Plans
|
Total
|
|||||||||||||||||||||||||
|
Net periodic benefit costs
|
||||||||||||||||||||||||||||||||
|
Service cost
|
$
|
10
|
$
|
7
|
$
|
—
|
$
|
17
|
$
|
15
|
$
|
7
|
$
|
—
|
$
|
22
|
||||||||||||||||
|
Interest cost
|
17
|
8
|
—
|
25
|
16
|
5
|
—
|
21
|
||||||||||||||||||||||||
|
Expected return on plan assets
|
(18
|
)
|
(8
|
)
|
—
|
(26
|
)
|
(17
|
)
|
(5
|
)
|
—
|
(22
|
)
|
||||||||||||||||||
|
Settlements and curtailments
|
(6
|
)
|
1
|
—
|
(5
|
)
|
1
|
—
|
—
|
1
|
||||||||||||||||||||||
|
Actuarial losses, net
|
5
|
1
|
—
|
6
|
13
|
1
|
—
|
14
|
||||||||||||||||||||||||
|
Prior service cost, net
|
(1
|
)
|
—
|
—
|
(1
|
)
|
(1
|
)
|
—
|
—
|
(1
|
)
|
||||||||||||||||||||
|
Net periodic benefit costs
|
$
|
7
|
$
|
9
|
$
|
—
|
$
|
16
|
$
|
27
|
$
|
8
|
$
|
—
|
$
|
35
|
||||||||||||||||
|
Funding contributions
|
$
|
41
|
$
|
14
|
$
|
—
|
$
|
55
|
$
|
59
|
$
|
3
|
$
|
—
|
$
|
62
|
||||||||||||||||
- 15 -
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—continued
(Unaudited)
|
Six months ended June 30, 2014
|
Six months ended June 30, 2013
|
|||||||||||||||||||||||||||||||
|
U.S.
Plans
|
Non-U.S.
Plans
|
OPEB
Plans
|
Total
|
U.S.
Plans
|
Non-U.S.
Plans
|
OPEB
Plans
|
Total
|
|||||||||||||||||||||||||
|
Net periodic benefit costs
|
||||||||||||||||||||||||||||||||
|
Service cost
|
$
|
21
|
$
|
15
|
$
|
—
|
$
|
36
|
$
|
29
|
$
|
14
|
$
|
—
|
$
|
43
|
||||||||||||||||
|
Interest cost
|
34
|
14
|
1
|
49
|
31
|
11
|
1
|
43
|
||||||||||||||||||||||||
|
Expected return on plan assets
|
(37
|
)
|
(15
|
)
|
—
|
(52
|
)
|
(34
|
)
|
(11
|
)
|
—
|
(45
|
)
|
||||||||||||||||||
|
Settlements and curtailments
|
(6
|
)
|
1
|
—
|
(5
|
)
|
1
|
—
|
—
|
1
|
||||||||||||||||||||||
|
Actuarial losses, net
|
10
|
2
|
—
|
12
|
26
|
|||||||||||||||||||||||||||