Edgar Filing: Transocean Ltd.

rig_Current_Folio_10Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10‑Q

(Mark one)

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

For the quarterly period ended June 30, 2017

☐ 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.)

Turmstrasse 30 Zug, Switzerland	6300
(Address of principal executive offices)	(Zip Code)


+41 (41) 749-0500
(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 ☑ 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 ☑ No ◻

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

Large accelerated filer ☑ Accelerated filer ☐ Non‑accelerated filer (do not check if a smaller reporting company) ☐
Smaller reporting company ☐ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of July 25, 2017, 391,184,607 shares were outstanding.

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TRANSOCEAN LTD. AND SUBSIDIARIES

INDEX TO QUARTERLY REPORT ON FORM 10‑Q

QUARTER ENDED JUNE 30, 2017


		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Statements of Operations	1
	Condensed Consolidated Statements of Comprehensive Income	2
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Equity	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	32

PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	33
Item 1A.	Risk Factors	33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 4.	Mine Safety Disclosures	33
Item 6.	Exhibits	34

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PART I.FINANCIAL INFORMATION

Item I.Financial Statements

TRANSOCEAN LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share data)

(Unaudited)


	Three months ended				Six months ended
	June 30,				June 30,
	2017		2016		2017		2016

Operating revenues
Contract drilling revenues	$	705	$	915	$	1,443	$	2,026
Other revenues		46		25		93		255
		751		940		1,536		2,281
Costs and expenses
Operating and maintenance		333		497		676		1,152
Depreciation		219		225		451		442
General and administrative		35		41		74		84
		587		763		1,201		1,678
Loss on impairment		(113)		(12)		(113)		(15)
Loss on disposal of assets, net		(1,595)		(2)		(1,593)		(1)
Operating income (loss)		(1,544)		163		(1,371)		587

Other income (expense), net
Interest income		7		4		13		10
Interest expense, net of amounts capitalized		(129)		(98)		(256)		(187)
Gain (loss) on retirement of debt		(48)		38		(48)		38
Other, net		(2)		3		1		2
		(172)		(53)		(290)		(137)
Income (loss) from continuing operations before income tax expense		(1,716)		110		(1,661)		450
Income tax expense (benefit)		(37)		18		(77)		116
Income (loss) from continuing operations		(1,679)		92		(1,584)		334
Income from discontinued operations, net of tax		—		1		—		—

Net income (loss)		(1,679)		93		(1,584)		334
Net income attributable to noncontrolling interest		11		11		15		17
Net income (loss) attributable to controlling interest	$	(1,690)	$	82	$	(1,599)	$	317

Earnings (loss) per share—basic
Earnings (loss) from continuing operations	$	(4.32)	$	0.22	$	(4.09)	$	0.86
Earnings (loss) from discontinued operations		—		—		—		—
Earnings (loss) per share	$	(4.32)	$	0.22	$	(4.09)	$	0.86

Earnings (loss) per share—diluted
Earnings (loss) from continuing operations	$	(4.32)	$	0.22	$	(4.09)	$	0.86
Earnings (loss) from discontinued operations		—		—		—		—
Earnings (loss) per share	$	(4.32)	$	0.22	$	(4.09)	$	0.86

Weighted-average shares outstanding
Basic		391		365		391		365
Diluted		391		365		391		365

See accompanying notes.

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TRANSOCEAN LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In millions)

(Unaudited)


	Three months ended				Six months ended
	June 30,				June 30,
	2017		2016		2017		2016

Net income (loss)	$	(1,679)	$	93	$	(1,584)	$	334
Net income attributable to noncontrolling interest		11		11		15		17
Net income (loss) attributable to controlling interest		(1,690)		82		(1,599)		317

Components of net periodic benefit costs before reclassifications		—		—		(2)		(7)
Components of net periodic benefit costs reclassified to net income		7		(1)		8		1

Other comprehensive income (loss) before income taxes		7		(1)		6		(6)
Income taxes		(23)		(3)		(23)		(3)
Other comprehensive loss		(16)		(4)		(17)		(9)
Other comprehensive income attributable to noncontrolling interest		—		—		—		—
Other comprehensive loss attributable to controlling interest		(16)		(4)		(17)		(9)

Total comprehensive income (loss)		(1,695)		89		(1,601)		325
Total comprehensive income attributable to noncontrolling interest		11		11		15		17
Total comprehensive income (loss) attributable to controlling interest	$	(1,706)	$	78	$	(1,616)	$	308

See accompanying notes.

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TRANSOCEAN LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except share data)

(Unaudited)


	June 30,		December 31,
	2017		2016

Assets
Cash and cash equivalents	$	2,471	$	3,052
Accounts receivable, net of allowance for doubtful accounts of less than $1 at June 30, 2017 and December 31, 2016		624		898
Materials and supplies, net of allowance for obsolescence of $150 and $153 at June 30, 2017 and December 31, 2016, respectively		517		561
Restricted cash		537		466
Other current assets		137		121
Total current assets		4,286		5,098

Property and equipment		24,717		27,372
Less accumulated depreciation		(5,816)		(6,279)
Property and equipment, net		18,901		21,093
Deferred income taxes, net		301		298
Other assets		359		400
Total assets	$	23,847	$	26,889

Liabilities and equity
Accounts payable	$	173	$	206
Accrued income taxes		69		95
Debt due within one year		865		724
Other current liabilities		751		960
Total current liabilities		1,858		1,985

Long-term debt		6,525		7,740
Deferred income taxes, net		155		178
Other long-term liabilities		1,058		1,153
Total long-term liabilities		7,738		9,071

Commitments and contingencies
Redeemable noncontrolling interest		42		28

Shares, CHF 0.10 par value, 417,060,033 authorized, 143,783,041 conditionally authorized and 394,801,990 issued at June 30, 2017 and December 31, 2016 and 391,181,430 and 389,366,241 outstanding at June 30, 2017 and December 31, 2016, respectively		37		36
Additional paid-in capital		11,011		10,993
Retained earnings		3,457		5,056
Accumulated other comprehensive loss		(300)		(283)
Total controlling interest shareholders’ equity		14,205		15,802
Noncontrolling interest		4		3
Total equity		14,209		15,805
Total liabilities and equity	$	23,847	$	26,889

See accompanying notes.

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TRANSOCEAN LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(In millions)

(Unaudited)


	Six months ended				Six months ended
	June 30,				June 30,
	2017		2016		2017		2016
	Quantity				Amount
Shares
Balance, beginning of period		389		364	$	36	$	5,193
Issuance of shares under share-based compensation plans		2		1		1		—
Reduction of par value		—		—		—		(5,159)
Balance, end of period		391		365	$	37	$	34

Additional paid-in capital
Balance, beginning of period					$	10,993	$	5,736
Share-based compensation						21		23
Issuance of shares under share-based compensation plans						(1)		—
Reduction of par value						—		5,159
Cancellation of shares held in treasury						—		(240)
Allocated capital for transactions with holders of noncontrolling interest						—		(7)
Other, net						(2)		3
Balance, end of period					$	11,011	$	10,674

Treasury shares, at cost
Balance, beginning of period					$	—	$	(240)
Cancellation of shares held in treasury						—		240
Balance, end of period					$	—	$	—

Retained earnings
Balance, beginning of period					$	5,056	$	4,278
Net income (loss) attributable to controlling interest						(1,599)		317
Balance, end of period					$	3,457	$	4,595

Accumulated other comprehensive loss
Balance, beginning of period					$	(283)	$	(277)
Other comprehensive loss attributable to controlling interest						(17)		(9)
Balance, end of period					$	(300)	$	(286)

Total controlling interest shareholders’ equity
Balance, beginning of period					$	15,802	$	14,690
Total comprehensive income (loss) attributable to controlling interest						(1,616)		308
Share-based compensation						21		23
Allocated capital for transactions with holders of noncontrolling interest						—		(7)
Other, net						(2)		3
Balance, end of period					$	14,205	$	15,017

Noncontrolling interest
Balance, beginning of period					$	3	$	310
Total comprehensive income attributable to noncontrolling interest						1		7
Distributions to holders of noncontrolling interest						—		(16)
Acquisition of noncontrolling interest						—		(5)
Allocated capital for transactions with holders of noncontrolling interest						—		7
Balance, end of period					$	4	$	303

Total equity
Balance, beginning of period					$	15,805	$	15,000
Total comprehensive income (loss)						(1,615)		315
Share-based compensation						21		23
Distributions to holders of noncontrolling interest						—		(16)
Acquisition of noncontrolling interest						—		(5)
Other, net						(2)		3
Balance, end of period					$	14,209	$	15,320

See accompanying notes.

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TRANSOCEAN LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)


	Six months ended
	June 30,
	2017		2016
Cash flows from operating activities
Net income (loss)	$	(1,584)	$	334
Adjustments to reconcile to net cash provided by operating activities:
Depreciation		451		442
Share-based compensation expense		21		23
Loss on impairment		113		15
Loss on disposal of assets, net		1,593		1
(Gain) loss on retirement of debt		48		(38)
Deferred income tax expense (benefit)		(39)		39
Other, net		18		7
Changes in deferred revenues, net		(104)		(26)
Changes in deferred costs, net		28		52
Changes in other operating assets and liabilities, net		(42)		(11)
Net cash provided by operating activities		503		838

Cash flows from investing activities
Capital expenditures		(258)		(826)
Proceeds from disposal of assets, net		329		15
Other, net		(15)		—
Net cash provided by (used in) investing activities		56		(811)

Cash flows from financing activities
Proceeds from issuance of debt, net of issue costs		403		—
Repayments of debt		(1,533)		(251)
Deposits to cash accounts restricted for financing activities		(57)		(24)
Proceeds from cash accounts and investments restricted for financing activities		50		73
Distributions to holders of noncontrolling interest		—		(16)
Other, net		(3)		5
Net cash used in financing activities		(1,140)		(213)

Net decrease in cash and cash equivalents		(581)		(186)
Cash and cash equivalents at beginning of period		3,052		2,339
Cash and cash equivalents at end of period	$	2,471	$	2,153

See accompanying notes.

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TRANSOCEAN LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1—Business

Transocean Ltd. (together with its subsidiaries and predecessors, unless the context requires otherwise, “Transocean,” “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, 2017, we owned or had partial ownership interests in and operated 44 mobile offshore drilling units, including 30 ultra‑deepwater floaters, seven harsh environment floaters, three deepwater floaters and four midwater floaters. At June 30, 2017, we also had four ultra‑deepwater drillships under construction or under contract to be constructed.

On May 31, 2017, we completed the sale of 10 high‑specification jackups and novated the contracts relating to the construction of five high‑specification jackups, together with related assets. At June 30, 2017 we operated two high‑specification jackups that were under contract when we sold the rigs, and we continue to operate such rigs until completion or novation of the drilling contracts (see Note 5—Drilling Fleet).

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 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. 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, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017, 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, 2016 and 2015 and for each of the three years in the period ended December 31, 2016, included in our annual report on Form 10‑K filed on March 7, 2017.

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, assets held for sale, 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.

Capitalized interest—We capitalize interest costs for qualifying construction and upgrade projects and only capitalize interest costs during periods in which progress for the construction projects continues to be underway. As of June 30, 2017, we had ceased capitalization of interest costs on our two uncontracted newbuilds due to a pause in construction progress. In the three and six months ended June 30, 2017, we capitalized interest costs of $30 million and $60 million, respectively, for construction work in progress. In the three and six months ended June 30, 2016, we capitalized interest costs of $40 million and $89 million, respectively, for construction work in progress.

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

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TRANSOCEAN LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS─continued

(Unaudited)

Note 3—New Accounting Pronouncements

Recently adopted accounting standards

Stock compensation—Effective January 1, 2017, we adopted the accounting standards update that allows for simplification of the accounting for share‑based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The update is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Our adoption did not have a material effect on our condensed consolidated statements of financial position, operations or cash flows or on the disclosures contained in our notes to condensed consolidated financial statements.

Recently issued accounting standards

Revenue from contracts with customers—Effective January 1, 2018, we will adopt the 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 annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Given the interaction with the accounting standards update related to leases, we expect to adopt the updates concurrently, effective January 1, 2018, and we expect to apply the full retrospective approach to our adoption. Our adoption, and the ultimate effect on our consolidated financial statements, will be based on an evaluation of the contract‑specific facts and circumstances, and such effect could introduce variability to the timing of our revenue recognition relative to current accounting standards. We are evaluating the requirements to determine the effect such requirements may have on our condensed consolidated statements of financial position, operations and cash flows and on the disclosures contained in our notes to condensed consolidated financial statements.

Leases—Effective no later than January 1, 2019, we will adopt the accounting standards update that (a) requires lessees to recognize a right to use asset and a lease liability for virtually all leases, and (b) updates previous accounting standards for lessors to align certain requirements with the updates to lessee accounting standards and the revenue recognition accounting standards. The update, which permits early adoption, is effective for interim and annual periods beginning after December 15, 2018, including interim periods within those annual periods. Under the updated accounting standards, we have determined that our drilling contracts contain a lease component, and our adoption, therefore, will require that we separately recognize revenues associated with the lease and services components. Given the interaction with the accounting standards update related to revenue from contracts with customers, we expect to adopt the updates concurrently, effective January 1, 2018, and we expect to apply the modified retrospective approach to our adoption. Our adoption, and the ultimate effect on our condensed consolidated financial statements, will be based on an evaluation of the contract‑specific facts and circumstances, and such effect could introduce variability to the timing of our revenue recognition relative to current accounting standards. Additionally, based on the lease arrangements under which we are the lessee as of June 30, 2017, we expect to recognize an aggregate lease liability and a corresponding right‑to‑use asset of between $50 million and $70 million. We are continuing to evaluate the requirements with regard to arrangements under which we are the lessor to determine the effect such requirements may have on our condensed consolidated statements of financial position, operations and cash flows and on the disclosures contained in our notes to condensed consolidated financial statements.

Income taxes—Effective no later than January 1, 2018, we will adopt the accounting standards update that requires an entity to recognize the income tax consequences of an intra‑entity transfer of an asset other than inventory when the transaction occurs as opposed to deferring such recognition into future periods. The update, which permits early adoption, is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual periods. We do not expect that our adoption will have a material effect on our condensed consolidated statements of financial position, operations or cash flows or on the disclosures contained in our notes to condensed consolidated financial statements.

Statement of cash flows—Effective no later than January 1, 2018, we will adopt the accounting standards update that requires that amounts generally described as restricted cash or restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning and end of period total amounts presented on the statement of cash flows. The update, which permits early adoption, is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Aside from presenting the restricted cash and restricted cash equivalents as a component of the beginning and ending cash balances on our condensed consolidated statements of cash flows, we will remove the effect of proceeds from and deposits to restricted accounts from our cash flows provided by or used in operating and financing activities, as applicable. For the six months ended June 30, 2017 and 2016, such changes would not have had a material effect on our condensed consolidated statements of cash flows.

Retirement benefits—Effective no later than January 1, 2018, we will adopt the accounting standards update that requires an employer to disaggregate the service cost component from the other components of net benefit cost related to defined benefit retirement plans and other postemployment benefit plans. The update requires that the service cost component be presented in the same line item as other compensation costs for employees and the other components of net benefit cost in other income and expense on our condensed consolidated statements of operations. The update also allows only the service cost component of net benefit cost to be eligible for capitalization. The update, which permits early adoption, is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. We do not expect that our adoption will have a material effect on our condensed consolidated statements of cash flows or on the disclosures contained in our notes to condensed consolidated financial statements.

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TRANSOCEAN LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS─continued

(Unaudited)

Note 4—Variable Interest Entities

Angola Deepwater Drilling Company Limited (“ADDCL”), a consolidated Cayman Islands company, is a variable interest entity for which we are the primary beneficiary. The carrying amount of ADDCL, after eliminating the effect of intercompany transactions, was as follows (in millions):


	June 30,		December 31,
	2017		2016
Assets	$	747	$	787
Liabilities		20		25
Net carrying amount	$	727	$	762

Note 5—Drilling Fleet

Construction work in progress—For the six months ended June 30, 2017 and 2016, the changes in our construction work in progress, including capital expenditures and other capital additions, were as follows (in millions):


	Six months ended
	June 30,
	2017		2016
Construction work in progress, at beginning of period	$	2,171	$	3,735

Capital expenditures
Newbuild construction program		200		740
Other equipment and construction projects		58		86
Total capital expenditures		258		826
Changes in accrued capital additions		(23)		(90)

Construction in progress sold		(289)		—
Property and equipment placed into service
Newbuild construction program		—		(1,672)
Other property and equipment		(47)		(165)
Construction work in progress, at end of period	$	2,070	$	2,634

Impairments of assets held and used—During the three months ended June 30, 2017, we identified indicators that the asset groups in our contract drilling services reporting unit may not be recoverable. Such indicators included recent significant declines in commodity prices and the market value of our stock, a reduction of projected dayrates and a further extension of currently low utilization rates. As a result of our testing, we determined that the carrying amount of the midwater floater asset group was impaired. In the three and six months ended June 30, 2017, we recognized a loss of $96 million ($0.25 per diluted share), which had no tax effect, associated with the impairment of the midwater floater asset group. We measured the fair value of this asset group by applying a combination of income and market approaches, using projected discounted cash flows and estimates of the exchange price that would be received for the assets in the principal or most advantageous markets for the assets in an orderly transaction between participants as of the measurement date. Our estimate of fair value required us to use significant unobservable inputs, representative of a Level 3 fair value measurement, including assumptions related to the future performance of our contract drilling services reporting unit, such as future commodity prices, projected demand for our services, rig availability and dayrates.

Impairments of assets held for sale—In the three and six months ended June 30, 2017, we recognized an aggregate loss of $17 million ($0.04 per diluted share), which had no tax effect, associated with the impairment of the midwater floaters Transocean Prospect and Transocean Searcher, along with related assets, which were classified as held for sale at the time of impairment. We measured the impairment 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 a Level 2 fair value measurement, including indicative market values for the drilling units and related assets to be sold for scrap value.

In the three months ended June 30, 2016, we recognized an aggregate loss of $12 million ($0.03 per diluted share), which had no tax effect, associated with the impairment of the deepwater floater Sedco 702, along with related assets, which were classified as held for sale at the time of impairment. In the six months ended June 30, 2016, we recognized an aggregate loss of $15 million ($14 million, net of tax, or $0.04 per diluted share) associated with the impairment of the deepwater floater Sedco 702 and the midwater floater Transocean John Shaw, along with related assets, which were classified as held for sale at the time of impairment. We measured the impairment of the drilling units and related assets as the amount by which the carrying amount exceeded the estimated fair value less

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TRANSOCEAN LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS─continued

(Unaudited)

costs to sell. We estimated the fair value of the assets using significant other observable inputs, representative of Level 2 fair value measurements, including indicative market values for the drilling units and related assets to be sold for scrap value.

If we commit to plans to sell additional rigs for values below the respective carrying amounts or commit to plans to recycle additional rigs and sell them for scrap value, we may be required to recognize additional losses associated with the impairment of such assets. Such losses could be material.

Dispositions—On May 31, 2017, in connection with our efforts to dispose of non‑strategic assets, we completed the sale of 10 high‑specification jackups, including GSF Constellation I, GSF Constellation II, GSF Galaxy I, GSF Galaxy II, GSF Galaxy III, GSF Monarch, Transocean Andaman, Transocean Ao Thai, Transocean Honor and Transocean Siam Driller, along with related assets, and novated the contracts relating to the construction of five high‑specification jackups, together with related assets. In the three and six months ended June 30, 2017, we received aggregate net cash proceeds of $319 million and recognized an aggregate net loss of $1.6 billion ($4.08 per diluted share), which had no tax effect, associated with the disposal of these assets. Following the completion of the sale, we agreed to continue to operate three of these high‑specification jackups through completion or novation of the drilling contracts, one of which was completed as of June 30, 2017. In the three and six months ended June 30, 2017, excluding our loss on the disposal of these assets, our operating results included income of $9 million and $27 million, respectively, before taxes, associated with the high‑specification jackup asset group. In the three and six months ended June 30, 2016, our operating results included income of $8 million and $22 million, respectively, before taxes, associated with the high‑specification jackup asset group.

During the six months ended June 30, 2017, we also completed the sale of the midwater floater GSF Rig 140, along with related assets. In the six months ended June 30, 2017, we received aggregate net cash proceeds of $3 million and recognized an aggregate net gain of $2 million associated with the disposal of these assets. In the three and six months ended June 30, 2017, we received aggregate net cash proceeds of $6 million and $7 million, respectively, and recognized an aggregate net gain of $1 million associated with the disposal of assets unrelated to rig sales.

During the six months ended June 30, 2016, in connection with our efforts to dispose of non‑strategic assets, we completed the sale of the deepwater floater Deepwater Navigator and the midwater floaters Falcon 100, GSF Grand Banks, GSF Rig 135, Sedneth 701 and Transocean John Shaw, along with related assets. In the three and six months ended June 30, 2016, we received aggregate net cash proceeds of $8 million and $11 million, respectively, and recognized an aggregate net gain of $4 million and $5 million, respectively, associated with the disposal of these assets. In the three and six months ended June 30, 2016, we received aggregate net cash proceeds of $3 million and $4 million, respectively, and recognized an aggregate net loss of $6 million associated with the disposal of assets unrelated to rig sales.

Assets held for sale—At June 30, 2017, the aggregate carrying amount of our assets held for sale, including the midwater floaters Transocean Prospect and Transocean Searcher, along with related assets, was $5 million, recorded in other current assets. At December 31, 2016, the aggregate carrying amount of our assets held for sale, including the midwater floater GSF Rig 140, along with related assets and certain corporate assets, was $6 million, recorded in other current assets.

Note 6—Income Taxes

Tax provision and 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. Our provision for income taxes is based on the tax laws and rates applicable in the jurisdictions in which we operate and earn income. In the six months ended June 30, 2017 and 2016, our estimated effective tax rate, excluding discrete items, was 78.0 percent and 25.7 percent, respectively, based on estimated annual income from continuing operations before income taxes. Our effective tax rate increased in the six months ended June 30, 2017, compared to the six months ended June 30, 2016, primarily due to (a) changes in the relative blend of income from operations in certain jurisdictions and (b) valuation allowances on deferred tax assets for losses not expected to be realized. We consider the tax effect, if any, of the excluded items as well as settlements of prior year tax estimates to be discrete period tax expenses or benefits. In the six months ended June 30, 2017 and 2016, the effect of the various discrete period tax items was a net tax benefit of $147 million and net tax expense of $8 million, respectively. In the six months ended June 30, 2017, such discrete items were primarily related to tax benefit of changes in unrecognized tax benefit associated with tax positions taken in prior years, valuation allowances on deferred tax assets for foreign tax credits not expected to be realized, release of a valuation allowance on deferred tax assets for losses expected to be realized and deductions related to resolution of certain litigation matters related to Macondo well incident. In the six months ended June 30, 2016, such discrete items were primarily related to tax benefit of changes in unrecognized tax benefit associated with tax positions taken in prior years and valuation allowances on deferred tax assets for losses not expected to be realized. For the six months ended June 30, 2017 and 2016, these discrete tax items, coupled with the excluded income and expense items noted above, resulted in an effective tax rate of 4.7 percent and 26.1 percent, respectively, based on income from continuing operations before income tax expense.

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 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 20 years. Tax

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TRANSOCEAN LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS─continued

(Unaudited)

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 timing or the outcome of these proceedings, we do not expect the ultimate liability to have a material adverse effect on our condensed consolidated statement of financial position or results of operations, although it may have a material adverse effect on our condensed consolidated statement of cash flows.

Norway tax investigations and trial—Norwegian civil tax authorities have challenged certain transactions undertaken by our subsidiaries in 1999, 2001 and 2002. On June 26, 2014, the Norwegian district court in Oslo ruled that our subsidiary was liable for the civil tax assessment but waived all penalties and penalty interest. On January 9, 2017, the Norwegian appeal court in Oslo ruled entirely in favor of our subsidiaries and overturned the district court with respect to the remaining question of principal tax obligations. On February 10, 2017, the tax authorities filed an appeal with the Norwegian Supreme Court. On June 16, 2017, the Norwegian Supreme Court rejected the appeal, formally closing the dispute in our favor. At June 30, 2017, we had no remaining outstanding tax assessments in Norway.

Brazil tax investigations—In December 2005, the Brazilian tax authorities issued a tax assessment with respect to our tax returns for the years 2000 through 2004, which is currently for an aggregate amount of BRL 839 million, equivalent to approximately $254 million, including penalties and interest. On January 25, 2008, we filed a protest letter with the Brazilian tax authorities for this tax assessment, and we are currently engaged in the appeals process. On May 19, 2014, the Brazilian tax authorities issued a tax assessment with respect to our Brazilian income tax returns for the years 2009 and 2010, which is currently for an aggregate amount of BRL 143 million, equivalent to approximately $43 million, including penalties and interest. On June 18, 2014, we filed a protest letter with the Brazilian tax authorities for this tax assessment. 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 condensed 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, employee contribution requirements 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 condensed consolidated statement of financial position, results of operations or cash flows.

Note 7—Earnings (Loss) Per Share

The numerator and denominator used for the computation of basic and diluted per share earnings (loss) from continuing operations were as follows (in millions, except per share data):

Three months ended June 30,