form10_q3q2009.htm
 
 
 


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________

FORM 10-Q
     (Mark one)
 
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

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
(I.R.S. Employer
of incorporation or organization)
Identification No.)
Blandonnet International Business Center
Chemin de Blandonnet 2
Building F, 7th Floor
Vernier, Switzerland
(Address of principal executive offices)
 
 
 
1214
(Zip Code)

Registrant’s telephone number, including area code: +41 (22) 930-9000
______________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ   No  ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ   No  ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
þ
    
Accelerated filer
¨
Non-accelerated filer
¨ (do not check if a smaller reporting company)
    
Smaller reporting company
¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨   No  þ
 
As of October 27, 2009, 321,145,301 shares were outstanding.
 





 
 
 

TRANSOCEAN LTD.
INDEX TO FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2009



PART I.  FINANCIAL INFORMATION
Page
Item 1.
Financial Statements (Unaudited)
  
 
1
 
2
 
3
 
4
 
5
Item 2.
23
Item 3.
41
Item 4.
41
     
PART II.  OTHER INFORMATION
  
Item 1.
42
Item 1A.
42
Item 2.
42
Item 6.
43


 


 
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
September 30,
      
Nine months ended
September 30,
  
   
2009
      
2008
      
2009
      
2008
  
           
(As adjusted)
              
(As adjusted)
  
Operating revenues
                                    
Contract drilling revenues
$
2,602
      
$
2,699
      
$
8,061
      
$
7,926
  
Contract drilling intangible revenues
  
58
        
143
        
237
        
557
  
Other revenues
  
163
        
350
        
525
        
921
  
   
2,823
        
3,192
        
8,823
        
9,404
  
Costs and expenses
                                    
Operating and maintenance
  
1,396
        
1,426
        
3,844
        
3,947
  
Depreciation, depletion and amortization
  
367
        
336
        
1,082
        
1,040
  
General and administrative
  
54
        
46
        
163
        
140
  
   
1,817
        
1,808
        
5,089
        
5,127
  
Impairment loss
  
(46
)
      
—
        
(334
)
      
—
  
Loss from disposal of assets, net
  
(3
)
      
(1
)
      
(3
)
      
(4
)
Operating income
  
957
        
1,383
        
3,397
        
4,273
  
                                     
Other income (expense), net
                                    
Interest income
  
—
        
7
        
2
        
30
  
Interest expense, net of amounts capitalized
  
(115
)
      
(143
)
      
(365
)
      
(473
)
Loss on retirement of debt
  
(7
)
      
—
        
(17
)
      
(3
)
Other, net
  
9
        
(12
)
      
9
        
(20
)
   
(113
)
      
(148
)
      
(371
)
      
(466
)
                                     
Income before income tax expense
  
844
        
1,235
        
3,026
        
3,807
  
Income tax expense
  
138
        
175
        
573
        
533
  
                                     
Net income
  
706
        
1,060
        
2,453
        
3,274
  
Net loss attributable to noncontrolling interest
  
(4
)
      
(3
)
      
(5
)
      
(3
)
                                     
Net income attributable to controlling interest
$
710
      
$
1,063
      
$
2,458
      
$
3,277
  
                                     
Earnings per share
                                    
Basic
$
2.20
      
$
3.32
      
$
7.63
      
$
10.27
  
Diluted
$
2.19
      
$
3.30
      
$
7.61
      
$
10.19
  
                                     
Weighted average shares outstanding
                                    
Basic
  
321
        
319
        
320
        
318
  
Diluted
  
322
        
321
        
321
        
321
  

See accompanying notes.
- 1 -
 
TRANSOCEAN LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)


   
Three months ended
September 30,
      
Nine months ended
September 30,
  
   
2009
      
2008
      
2009
      
2008
  
           
(As adjusted)
                
(As adjusted)
  
                                 
Net income
$
706
      
$
1,060
      
$
2,453
      
$
3,274
  
                                     
Other comprehensive income (loss) before income taxes
                                    
Unrecognized components of net periodic benefit cost
  
—
        
—
        
(39
)
      
(7
)
Recognized components of net periodic benefit cost
  
4
        
2
        
13
        
3
  
Unrealized gain (loss) on derivative instruments
  
(8
)
      
—
        
1
        
—
  
Other, net
  
—
        
(1
)
      
—
        
(3
)
                                     
Other comprehensive income (loss) before income taxes
  
(4
)
      
1
        
(25
)
      
(7
)
Income taxes related to other comprehensive income (loss)
  
—
        
—
        
3
        
3
  
Other comprehensive income (loss), net of income taxes
  
(4
)
      
1
        
(22
)
      
(4
)
                                     
Total comprehensive income
  
702
        
1,061
        
2,431
        
3,270
  
Total comprehensive loss attributable to noncontrolling interest
  
(14
)
      
—
        
(4
)
      
—
  
                                     
Total comprehensive income attributable to controlling interest
$
716
      
$
1,061
      
$
2,435
      
$
3,270
  




See accompanying notes.
- 2 -
 
TRANSOCEAN LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
(Unaudited)


   
September 30, 2009
  
December 31, 2008
  
   
       
(As adjusted)
  
Assets
          
Cash and cash equivalents
  
$
886
    
$
963
  
Short-term investments
    
180
      
333
  
Accounts receivable, net of allowance for doubtful accounts
of $76 and $114 at September 30, 2009 and December 31, 2008, respectively
    
2,614
      
2,864
  
Materials and supplies, net of allowance for obsolescence
of $57 and $49 at September 30, 2009 and December 31, 2008, respectively
    
457
      
432
  
Deferred income taxes, net
    
87
      
63
  
Assets held for sale
    
186
      
464
  
Other current assets
    
193
      
230
  
Total current assets
    
4,603
      
5,349
  
                 
Property and equipment
    
28,513
      
25,836
  
Less accumulated depreciation
    
5,983
      
4,975
  
Property and equipment, net
    
22,530
      
20,861
  
Goodwill
    
8,134
      
8,128
  
Other assets
    
751
      
844
  
Total assets
  
$
36,018
    
$
35,182
  
                 
Liabilities and equity
                
Accounts payable
  
$
827
    
$
914
  
Accrued income taxes
    
136
      
317
  
Debt due within one year
    
702
      
664
  
Other current liabilities
    
919
      
806
  
Total current liabilities
    
2,584
      
2,701
  
                 
Long-term debt
    
11,220
      
12,893
  
Deferred income taxes, net
    
772
      
666
  
Other long-term liabilities
    
1,736
      
1,755
  
Total long-term liabilities
    
13,728
      
15,314
  
                 
Commitments and contingencies
                
                 
Shares, CHF 15.00 par value, 502,852,947 authorized, 167,617,649 contingently authorized, 335,235,298 issued and 321,139,451 outstanding at September 30, 2009; 502,852,947 authorized, 167,617,649 contingently authorized, 335,235,298 issued and 319,262,113 outstanding at December 31, 2008
    
4,470
      
4,444
  
Additional paid-in capital
    
7,394
      
7,313
  
Retained earnings
    
8,285
      
5,827
  
Accumulated other comprehensive loss
    
(442
)
    
(420
)
Total controlling interest shareholders’ equity
    
19,707
      
17,164
  
Noncontrolling interest
    
(1
)
    
3
  
Total equity
    
19,706
      
17,167
  
Total liabilities and equity
  
$
36,018
    
$
35,182
  

See accompanying notes.
- 3 -
 
TRANSOCEAN LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)


   
Three months ended
September 30,
  
Nine months ended
September 30,
   
2009
    
2008
  
2009
    
2008
           
(As adjusted)
          
(As adjusted)
Cash flows from operating activities
                                
Net income
  
$
706
      
$
1,060
    
$
2,453
      
$
3,274
  
Adjustments to reconcile net income
to net cash provided by operating activities
                                    
Amortization of drilling contract intangibles
    
(58
)
      
(143
)
    
(237
)
      
(557
)
Depreciation, depletion and amortization
    
367
        
336
      
1,082
        
1,040
  
Share-based compensation expense
    
23
        
16
      
66
        
49
  
Excess tax benefit from share-based compensation plans
    
(9
)
      
—
      
(10
)
      
(11
)
Impairment loss
    
46
        
16
      
334
        
16
  
Loss from disposal of assets, net
    
3
        
1
      
3
        
4
  
Loss on retirement of debt
    
7
        
—
      
17
        
3
  
Amortization of debt issue costs, discounts and premiums, net
    
51
        
44
      
160
        
129
  
Deferred revenue, net
    
29
        
(3
)
    
72
        
22
  
Deferred expenses, net
    
(3
)
      
(3
)
    
(38
)
      
(132
)
Deferred income taxes
    
24
        
60
      
50
        
4
  
Other, net
    
7
        
7
      
30
        
(1
)
Changes in operating assets and liabilities
    
213
        
(121
)
    
441
        
(77
)
Net cash provided by operating activities
    
1,406
        
1,270
      
4,423
        
3,763
  
                                     
Cash flows from investing activities
                                    
Capital expenditures
    
(540
)
      
(514
)
    
(2,195
)
      
(1,703
)
Proceeds from disposal of assets, net
    
2
        
5
      
10
        
352
  
Proceeds from short-term investments
    
29
        
14
      
422
        
14
  
Purchases of short-term investments
    
(34
)
      
(408
)
    
(268
)
      
(408
)
Joint ventures and other investments, net
    
5
        
—
      
5
        
(3
)
Net cash used in investing activities
    
(538
)
      
(903
)
    
(2,026
)
      
(1,748
)
                                     
Cash flows from financing activities
                                    
Change in short-term borrowings, net
    
254
        
202
      
(246
)
      
(153
)
Proceeds from debt
    
26
        
303
      
345
        
2,354
  
Repayments of debt
    
(1,173
)
      
(1,000
)
    
(2,583
)
      
(4,673
)
Payments for warrant exercises, net
    
—
        
—
      
(13
)
      
(4
)
Proceeds from (taxes paid for) share-based compensation plans, net
    
(6
)
      
(12
)
    
16
        
49
  
Excess tax benefit from share-based compensation plans
    
9
        
—
      
10
        
11
  
Other, net
    
1
        
(7
)
    
(3
)
      
(11
)
Net cash used in financing activities
    
(889
)
      
(514
)
    
(2,474
)
      
(2,427
)
                                     
Net decrease in cash and cash equivalents
    
(21
)
      
(147
)
    
(77
)
      
(412
)
Cash and cash equivalents at beginning of period
    
907
        
976
      
963
        
1,241
  
Cash and cash equivalents at end of period
  
$
886
      
$
829
    
$
886
      
$
829
  



See accompanying notes.
- 4 -
 
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)



 
Note 1—Nature of Business and Principles of Consolidation
 
Nature of business—Transocean Ltd. (together with its subsidiaries and predecessors, unless the context requires otherwise, “Transocean,” the “Company,” “we,” “us” or “our”) is a leading international provider of offshore contract drilling services for oil and gas wells.  Our mobile offshore drilling fleet is considered one of the most modern and versatile fleets in the world.  Specializing in technically demanding sectors of the offshore drilling business with a particular focus on deepwater and harsh environment drilling services, we contract our drilling rigs, related equipment and work crews primarily on a dayrate basis to drill oil and gas wells.  At September 30, 2009, we owned, had partial ownership interests in or operated 135 mobile offshore drilling units.  As of this date, our fleet consisted of 41 High-Specification Floaters (Ultra-Deepwater, Deepwater and Harsh Environment semisubmersibles and drillships), 26 Midwater Floaters, 10 High-Specification Jackups, 55 Standard Jackups and three Other Rigs.  We also have eight Ultra-Deepwater Floaters under construction (see Note 7—Drilling Fleet Expansion and Dispositions).
 
We also provide oil and gas drilling management services, drilling engineering and drilling project management services, and we participate in oil and gas exploration and production activities.  Drilling management services are provided through Applied Drilling Technology Inc., our wholly owned subsidiary, and through ADT International, a division of one of our U.K. subsidiaries (together, “ADTI”).  ADTI conducts drilling management services primarily on either a dayrate or a completed-project, fixed-price (or “turnkey”) basis.  Oil and gas properties consist of exploration, development and production activities performed by Challenger Minerals Inc. and Challenger Minerals (North Sea) Limited (together, “CMI”), our oil and gas subsidiaries.
 
In December 2008, Transocean Ltd. completed a transaction pursuant to an Agreement and Plan of Merger among Transocean Ltd., Transocean Inc., which was our former parent holding company, and Transocean Cayman Ltd., a company organized under the laws of the Cayman Islands that was a wholly owned subsidiary of Transocean Ltd., pursuant to which Transocean Inc. merged by way of schemes of arrangement under Cayman Islands law with Transocean Cayman Ltd., with Transocean Inc. as the surviving company (the “Redomestication Transaction”).  In the Redomestication Transaction, Transocean Ltd. issued one of its shares in exchange for each ordinary share of Transocean Inc.  In addition, Transocean Ltd. issued 16 million of its shares to Transocean Inc. for future use to satisfy Transocean Ltd.’s obligations to deliver shares in connection with awards granted under our incentive plans, warrants or other rights to acquire shares of Transocean Ltd.  The Redomestication Transaction effectively changed the place of incorporation of our parent holding company from the Cayman Islands to Switzerland.  As a result of the Redomestication Transaction, Transocean Inc. became a direct, wholly owned subsidiary of Transocean Ltd.  In connection with the Redomestication Transaction, we relocated our principal executive offices to Vernier, Switzerland.
 
Principles of consolidation—We consolidate those investments that meet the criteria of a variable interest entity where we are deemed to be the primary beneficiary for accounting purposes and for entities in which we have a majority voting interest.  Intercompany transactions and accounts are eliminated in consolidation.  For investments in joint ventures and other entities that do not meet the criteria of a variable interest entity or where we are not deemed to be the primary beneficiary for accounting purposes of those entities that meet the variable interest entity criteria, we use the equity method of accounting if we have the ability to exercise significant influence over the unconsolidated affiliate.  We use the cost method of accounting for investments in joint ventures and other entities if we do not have the ability to exercise significant influence over the unconsolidated affiliate.
 
Transocean Pacific Drilling Inc. (“TPDI”) and Angola Deepwater Drilling Company Limited (“ADDCL”), two joint venture companies in which we hold interests, were formed to commission the construction, ownership and operation of certain ultra-deepwater drillships.  We have determined that each of these joint venture companies meets the criteria of a variable interest entity for which we are the primary beneficiary for accounting purposes because its equity at risk is insufficient to permit it to carry on its activities without additional subordinated financial support from us.  As a result, we consolidate TPDI and ADDCL in our consolidated financial statements, we eliminate intercompany transactions, and we present the interests that are not owned by us as noncontrolling interest on our condensed consolidated balance sheets.  The carrying values associated with these two joint ventures, after eliminating the effect of intercompany transactions, were as follows (in millions):
 

 
September 30, 2009
    
December 31, 2008
  
 
Assets
    
Liabilities
    
Net carrying value
    
Assets
    
Liabilities
    
Net carrying value
  
Variable interest entity
                                              
TPDI
$
1,175
    
$
609
    
$
566
    
$
803
    
$
413
    
$
390
  
ADDCL
  
558
      
484
      
74
      
354
      
307
      
47
  
Total
$
1,733
    
$
1,093
    
$
640
    
$
1,157
    
$
720
    
$
437
  


 


- 5 -
 
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (Unaudited)



 
Note 2—Summary of Significant Accounting Policies
 
Basis of presentation—Our accompanying condensed consolidated financial statements have been prepared without audit in accordance with accounting principles generally accepted in the United States (“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 identified.  Operating results for the three and nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009 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 included in our Annual Report on Form 10-K for the year ended December 31, 2008.
 
Accounting estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and disclosures of contingent assets and liabilities.  On an ongoing basis, we evaluate our estimates and assumptions, including those related to bad debts, materials and supplies obsolescence, investments, goodwill and other intangible assets, property and equipment and other long-lived assets, income taxes, share-based compensation, pensions and other postretirement benefits, other employment benefits and contingent liabilities.  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 values of assets and liabilities that are not readily apparent from other sources.  Actual results could differ from such estimates.
 
Capitalized interest—We capitalize interest costs for qualifying construction and upgrade projects.  We capitalized interest costs on construction work in progress of $48 million and $143 million for the three and nine months ended September 30, 2009, respectively.  Capitalized interest costs for the three and nine months ended September 30, 2008 were $41 million and $117 million, respectively, as adjusted for the adoption of the accounting standards update regarding convertible debt instruments that may be settled in cash upon conversion.  See Note 3—New Accounting Pronouncements and Note 8—Debt.
 
Share-based compensation—Share-based compensation expense for the three and nine months ended September 30, 2009 was $23 million ($21 million, or $.07 per diluted share, net of tax) and $66 million ($60 million, or $0.19 per diluted share, net of tax), respectively.   Share-based compensation expense for the three and nine months ended September 30, 2008 was $16 million ($15 million, or $0.05 per diluted share, net of tax) and $49 million ($43 million, or $0.13 per diluted share, net of tax), respectively.
 
Reclassifications—Certain reclassifications have been made to prior period amounts to conform with the current period’s presentation.  Except for certain reclassifications associated with our adoption of the accounting standards update regarding convertible debt instruments that may be settled in cash upon conversion (see Note 3—New Accounting Pronouncements and Note 8—Debt), these reclassifications did not have a material effect on our consolidated statement of financial position, results of operations or cash flows.
 
 
Note 3—New Accounting Pronouncements
 
 
Recently Adopted Accounting Standards
 
Generally accepted accounting principles—Effective July 1, 2009, we adopted the accounting principles established by The FASB Accounting Standards Codification™, declared by the Financial Accounting Standards Board (“FASB”) as the source of authoritative accounting principles to be applied by nongovernmental entities in the preparation of financial statements in conformity with accounting standards generally accepted in the U.S.  Our adoption did not have an effect on our condensed consolidated statement of financial position, results of operations or cash flows or on the disclosures contained within the notes thereto.
 
Earnings per share—Effective January 1, 2009, we adopted the accounting standards update relating to participating securities, which clarifies that all outstanding unvested share-based payment awards containing rights to nonforfeitable dividends are considered participating securities and the holders of the unvested awards, therefore, participate in undistributed earnings with common shareholders.  Accordingly, the two-class method of computing basic and diluted earnings per share must be applied to the unvested awards.  The update is effective for fiscal years beginning after December 15, 2008, and for interim periods within those years.  As a result of our adoption, we have adjusted our earnings per share for each period presented by deducting the proportionate amount of our undistributed earnings allocable to the participating securities from net income to arrive at net income attributable to shareholders.  Our adoption did not have a material effect on basic or diluted earnings per share for the three and nine months ended September 30, 2008.  See Note 6—Earnings per Share.
 
Investments – debt and equity securities—Effective April 1, 2009, we adopted the accounting standards update related to other-than-temporary impairments of investments in debt and equity securities, which modified the recognition requirements for


- 6 -
 
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (Unaudited)


and enhanced the presentation and disclosure of such impairments in the financial statements.  The update was effective for interim and annual reporting periods ending after June 15, 2009.  Our adoption did not have a material effect on our condensed consolidated statement of financial position, results of operations or cash flows.
 
Intangibles – goodwill and other—Effective January 1, 2009, we adopted the accounting standards update related to intangible assets, which amends factors that should  be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible on an interim basis.  Because of the prospective application requirement, our adoption did not have an effect on our historical condensed consolidated statement of financial position, results of operations or cash flows.
 
Debt—Effective January 1, 2009, we adopted the accounting standards update regarding convertible debt instruments that may be settled in cash upon conversion, which requires the issuer of certain convertible debt instruments to separately account for the liability and equity components of the instrument and reflect interest expense at the issuer’s market rate of borrowing for non-convertible debt instruments.  As a result of our adoption, we retrospectively restated all periods presented with the cumulative effect of the change in accounting principles on prior periods being recognized in retained earnings as of the beginning of the first period presented.  We have applied these provisions in accounting and reporting for our convertible senior notes.  In addition to the reduction of debt balances and increase of shareholders’ equity on our condensed consolidated balance sheets for each period presented, the retrospective application resulted in a non-cash increase to our annual historical interest expense, net of amounts capitalized, of $171 million and $9 million for the years ended December 31, 2008 and 2007, respectively.  See Note 8—Debt.
 
Business combinations—Effective January 1, 2009, we adopted the accounting standards update regarding business combinations, which requires (a) primarily all acquired assets, liabilities, noncontrolling interest and certain contingencies be measured at fair value, (b) broader scope of business combinations to include all transactions in which one entity gains control over one or more other businesses and (c) acquisition-related costs and anticipated restructuring costs of the acquired company to be recognized separately from the acquisition.  Assets and liabilities arising from contingencies related to a business combination must be recognized at their acquisition-date fair values if the fair values can be determined during the measurement period.  If the fair values of such contingencies cannot be determined during the measurement period, they must be recognized at the acquisition date if the contingencies are probable and an amount can be reasonably estimated.  We will apply such principles with respect to any business combinations occurring after January 1, 2009 and with respect to certain income tax matters related to business combinations that occurred prior to our adoption.  Because of the prospective application requirement, our adoption did not have an effect on our historical condensed consolidated statement of financial position, results of operations or cash flows.
 
Consolidation—Effective January 1, 2009, we adopted the accounting standards update related to noncontrolling interests that established accounting and reporting requirements for (a) noncontrolling interests in a subsidiary and (b) the deconsolidation of a subsidiary.  The update requires that noncontrolling interests be reported as equity in the consolidated balance sheet and requires that net income attributable to controlling interest and to noncontrolling interests be shown separately on the face of the statement of operations.  As a result of our adoption, we modified our condensed consolidated statements of operations to separately present net income (loss) attributable to noncontrolling interest and net income attributable to controlling interest.  Additionally, on our condensed consolidated balance sheet, presented as of December 31, 2008, we reclassified to equity the balance of $3 million associated with noncontrolling interests.
 
Derivatives and hedging—Effective January 1, 2009, we adopted the accounting standards update related to derivative instruments and hedging activities, which required enhanced disclosures about (1) how and why an entity uses derivative instruments, (2) how derivative instruments and related hedged items are accounted for and (3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows.  Because of our limited use of derivative instruments, our adoption did not have a significant impact on the disclosures contained in our notes to condensed consolidated financial statements.
 
Effective January 1, 2009, we adopted the accounting standards update related to stock-indexed instruments, which provided guidance in determining whether an instrument or embedded feature is indexed to an entity’s own stock.  An instrument or embedded feature that is both indexed to an entity’s own stock and potentially settled in shares may be exempt, if certain other criteria are met, from mark-to-market accounting of derivative financial instruments.  The update also addressed instruments with contingent and other adjustment features that may change the exercise price or notional amount or otherwise alter the payoff at settlement.  We have convertible notes outstanding that are convertible into our shares.  Our adoption did not have a material effect on our condensed consolidated statement of financial position, results of operations or cash flows.
 
Fair value measurements and disclosures—Effective January 1, 2008, we adopted the accounting standards update related to fair value measurement of financial instruments that (a) defines fair value, thereby offering a single source of guidance for the application of fair value measurement, (b) establishes a framework for measuring fair value that contains a three-level hierarchy for the inputs to valuation techniques, and (c) expands disclosure requirements about fair value measurements.  To estimate fair value, we use various generally accepted valuation methodologies.  Our valuation techniques require inputs that we categorize using a three-level hierarchy as follows: (1) unadjusted quoted prices for identical assets or liabilities in active markets (“Level 1”), (2) direct or indirect observable inputs, including quoted prices or other market data, for similar assets or liabilities in active markets or identical assets or liabilities in less active markets (“Level 2”) and (3) unobservable inputs that require significant judgment for which there is little or no market data (“Level 3”).  Our adoption did not have a material effect on our consolidated statement of financial position, results of operations or cash flows.
 


- 7 -
 
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (Unaudited)


 
Effective January 1, 2009, we adopted the remaining provisions of the accounting standards update for fair value measurement of nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis, which we have applied in estimating the fair value of our intangible assets and assets held for sale (see Note 4—Impairment Loss).  Our adoption did not have a material effect on our condensed consolidated statement of financial position, results of operations or cash flows.
 
Effective April 1, 2009, we adopted the accounting standards update related to measuring fair value when the volume and level of activity for the assets or liability have significantly decreased and identifying transactions that are not orderly, which provides additional guidance for estimating fair value when there is no active market or where the activity represents distressed sales on an interim and annual reporting basis.  Our adoption did not have a material effect on our condensed consolidated statement of financial position, results of operations or cash flows.
 
Financial instruments—Effective for the quarter ended June 30, 2009, we adopted the accounting standards update that requires disclosures about fair value of financial instruments for interim and annual reporting periods of publicly traded companies.  The update was effective for interim reporting periods ending after June 15, 2009.  We have included the additional disclosures in our notes to condensed consolidated financial statements.  See Note 10—Fair Value of Financial Instruments.
 
Subsequent events—Effective for events occurring subsequent to June 30, 2009, we adopted the accounting standards update regarding subsequent events, which (a) establishes the period after the balance sheet date during which management should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (b) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and (c) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date.  Adoption was effective for interim or annual financial periods ending after June 15, 2009.  Our adoption did not have a material impact on the disclosures contained in our notes to condensed consolidated financial statements.  See Note 14—Subsequent Events.
 
 
Recently Issued Accounting Standards Not Yet Adopted
 
Compensation – retirement benefits—Effective for the year ending December 31, 2009, we will adopt the accounting standards update regarding employers’ disclosures about postretirement benefit plan assets, which provides additional guidance for required disclosures related to plan assets of a defined benefit pension or other postretirement plan.  The update is effective for fiscal years ending after December 15, 2009.  We will include the additional disclosures in the notes to our financial statements for the year ending December 31, 2009 and do not expect the adoption to have a material effect on the disclosures contained therein.
 
Consolidation—Effective January 1, 2010, we will adopt the accounting standards update requiring enhanced transparency of our involvement with variable interest entities.  The update is effective as of the first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter.  We are evaluating these requirements, particularly with regard to our interests in TPDI and ADDCL, and have not yet determined the effect that our adoption will have on our condensed consolidated statement of financial position, results of operations or cash flows.  See Note 1—Nature of Business and Principles of Consolidation.
 
Fair value measurements and disclosures—Effective October 1, 2009, we will adopt the accounting standards update related to measuring liabilities at fair value, which requires that, if a quoted price for an identical liability is not available, then fair value should be measured using a valuation technique that considers either (a) the quoted price of an identical liability when traded as an asset or the quoted prices of similar liabilities or similar liabilities when traded as assets or (b) an income approach or a market approach.  This update also clarifies that a reporting entity is not required to include inputs relating to the existence of a restriction that prevents the transfer of a liability.  We do not expect our adoption to have a material effect on our condensed consolidated statement of financial position, results of operations or cash flows.
 
 
Note 4—Impairment Loss
 
Assets held for sale—During the nine months ended September 30, 2009, we determined that GSF Arctic II and GSF Arctic IV, both classified as assets held for sale, were impaired due to the continued global economic downturn and continued pressure on commodity prices, both of which have had an adverse effect on our industry.  We estimated the fair values of these rigs based on an exchange price that would be received for the assets in the principal or most advantageous market for the assets in an orderly transaction between market participants as of the measurement date and considering our undertakings to the Office of Fair Trading in the U.K. (“OFT”) that require the sale of the rigs with certain limitations and in a limited amount of time.  We based our estimates on unobservable inputs that require significant judgment, for which there is little or no market data, including non-binding price quotes from unaffiliated parties with consideration of the current market conditions and restrictions imposed by the OFT.  As a result of our evaluation, we recognized an impairment loss of $279 million (or $0.87 per diluted share), which had no tax effect, for the nine months ended September 30, 2009.  We did not recognize an impairment loss related to our assets held for sale during the three months ended September 30, 2009.
 


- 8 -
 
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (Unaudited)



 
Intangible assets—During the three and nine months ended September 30, 2009, we determined that the customer relationships and trade name intangible assets associated with our drilling management services reporting unit were impaired due to market conditions resulting from the continued global economic downturn and continued pressure on commodity prices.  We estimated the fair value of the customer relationships intangible asset using the multi-period excess earnings method, and we estimated the fair value of the trade name using the relief from royalty method, both generally accepted valuation methodologies that apply the income approach.  Our valuations were based on projections of the future performance of the drilling management services reporting unit using unobservable inputs that require significant judgment, for which there is little or no market data, including assumptions for future commodity prices, projected demand for our services, rig availability and dayrates.  As a result of our impairment testing, we determined that the carrying amount of the customer relationships intangible asset exceeded its fair value, and we recognized impairment losses of $40 million and $49 million (or $0.12 and $0.15 per diluted share), respectively, for the three months and nine months ended September 30, 2009, which had no tax effect in either period.  Additionally, we determined that the carrying amount of the trade name intangible asset exceeded its fair value, and we recognized an impairment loss of $6 million (or $0.02 per diluted share), which had no tax effect, during the three months and nine months ended September 30, 2009.  The carrying amounts of the customer relationships and the trade name intangible assets, recorded in other assets, were $65 million and $39 million at September 30, 2009 and $121 million and $45 million at December 31, 2008, respectively.
 
 
Note 5—Income Taxes
 
Overview—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 operations are conducted through our various subsidiaries in a number of countries throughout the world.  We have provided for income taxes based upon the tax laws and rates in the countries in which operations are conducted and income is earned.  The countries in which we operate have taxation regimes with varying nominal rates, deductions, credits and other tax attributes.  Consequently, there is little to no expected relationship between the provision for or benefit from income taxes and income or loss before income taxes.
 
Tax provision—Our estimated annual effective tax rates for the nine months ended September 30, 2009 and September 30, 2008 were 15.7 percent and 13.8 percent, respectively.  These rates were based on estimated annual income before income taxes for each period after adjusting for certain items, such as the 2008 net tax gains on rig sales, impairment losses and various other discrete items.
 
During the nine months ended September 30, 2009, our liability for unrecognized tax benefits increased by $127 million to a total of $648 million, including $193 million of interest and penalties and net of foreign exchange rate fluctuations.  We accrue interest and penalties related to our liabilities for unrecognized tax benefits as a component of income tax expense.  For the nine months ended September 30, 2009, we increased the liability related to interest and penalties on our unrecognized tax benefits by $44 million.
 
A valuation allowance for deferred tax assets is recorded when it is more likely than not that some or all of the benefit from the deferred tax asset will not be realized.  We provide a valuation allowance to offset deferred tax assets for net operating losses incurred during the year in certain jurisdictions and for other deferred tax assets where, in the opinion of management, it is more likely than not that the financial statement benefit of these losses will not be realized.  As of September 30, 2009, the valuation allowance for non-current deferred tax assets was $41 million.
 
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 1999.  The amount of current tax benefit recognized in the nine months ended September 30, 2009 from the settlement of disputes with tax authorities and the expiration of statutes of limitations was insignificant.
 
Our tax returns in the other major jurisdictions in which we operate are generally subject to examination for periods ranging from three to six years.  We have agreed to extensions beyond the statute of limitations in two jurisdictions for up to 12 years.  Tax authorities in certain jurisdictions are examining our tax returns and in some cases have issued assessments.  We are defending our tax positions in those jurisdictions.  While we cannot predict or provide assurance as to the final outcome of these proceedings, we do not expect the ultimate liability to have a material adverse effect on our consolidated financial position, results of operations or cash flows.
 
Tax positions—With respect to our 2004 and 2005 U.S. federal income tax returns, the U.S. taxing authorities have withdrawn all of their previously proposed tax adjustments, except a claim regarding transfer pricing for certain charters of drilling rigs between our subsidiaries, reducing the total proposed adjustments to approximately $79 million, exclusive of interest.  An unfavorable outcome on this assessment with respect to 2004 and 2005 activities would not result in a material adverse effect on our consolidated financial position, results of operations or cash flows.  We believe the transfer pricing for these charters is materially correct as filed and intend to defend against such claims vigorously.
 


- 9 -
 
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (Unaudited)


 
The U.S. tax authorities’ original assessment also asserted that one of our key subsidiaries maintains a permanent establishment in the U.S. and is, therefore, subject to U.S. taxation on certain earnings effectively connected to such U.S. business.  In March 2009, we received verbal indications that this position may be withdrawn by the U.S. tax authorities.  We believe the tax treatment asserted in the original assessment with respect to the 2004 and 2005 activity would not result in a material tax liability.  We believe our returns are materially correct as filed, and we will continue to vigorously defend against any such claim.
 
Norwegian civil tax and criminal authorities are investigating various transactions undertaken by our subsidiaries in 2001 and 2002.  The authorities issued tax assessments of approximately $271 million, plus interest, related to certain restructuring transactions, approximately $71 million, plus interest, related to a 2001 dividend payment, approximately $5 million, plus interest, related to foreign exchange deductions and approximately $2 million, plus interest, related to dividend withholding tax.  We plan to appeal these tax assessments.  We may be required to provide some form of financial security, in an amount up to $740 million, including interest and penalties, for these assessed amounts as this dispute is appealed and addressed by the Norwegian courts.  Furthermore, the authorities have also issued notification of their intent to issue a tax assessment of approximately $174 million, plus interest, related to the migration of a subsidiary that was previously subject to tax in Norway.  The authorities have indicated that they plan to seek penalties of 60 percent on all matters.  We have and will continue to respond to all information requests from the Norwegian authorities.  We plan to vigorously contest any assertions by the Norwegian authorities in connection with the various transactions being investigated.
 
During the nine months ended September 30, 2009, our long-term liability for unrecognized tax benefits related to these Norwegian tax issues increased by $33 million to $179 million due to the accrual of interest and exchange rate fluctuations.  While we cannot predict or provide assurance as to the final outcome of these proceedings, we do not expect the ultimate resolution of these matters to have a material adverse effect on our consolidated financial position or results of operations, although it may have a material adverse effect on our consolidated cash flows.
 
Certain of our Brazilian income tax returns for the years 2000 through 2004 are currently under examination.  The Brazil tax authorities have issued tax assessments totaling $110 million, plus a 75 percent penalty of $83 million and interest of $93 million through September 30, 2009.  We believe our returns are materially correct as filed, and we are vigorously contesting these assessments.  We filed a protest letter with the Brazilian tax authorities on January 25, 2008, and we are currently engaged in the appeals process.
 
See also Note 14—Subsequent Events.
 
 
Note 6—Earnings per Share
 
The reconciliation of the numerator and denominator used for the computation of basic and diluted earnings per share is as follows (in millions, except per share data):
 
   
Three months ended September 30,
    
Nine months ended September 30,
  
   
2009
    
2008
    
2009
    
2008
  
   
Basic
    
Diluted
    
Basic
    
Diluted
    
Basic
    
Diluted
    
Basic
  
Diluted
  
Numerator for earnings per share
                  
(As adjusted)
                    
(As adjusted)
  
Net income attributable to controlling interest
  
$
710
    
$
710
    
$
1,063
    
$
1,063
    
$
2,458
    
$
2,458
    
$
3,277
    
$
3,277
  
Undistributed net income
allocable to participating securities
    
(4
)
    
(4
)
    
(3
)
    
(3
)
    
(14
)
    
(14
)
    
(8
)
    
(8
)
Net income attributable to shareholders
  
$
706
    
$
706
    
$
1,060
    
$
1,060
    
$
2,444
    
$
2,444
    
$
3,269
    
$
3,269
  
                                                                 
Denominator for earnings per share
                                                                
Weighted-average shares outstanding
    
321
      
321
      
319
      
319
      
320
      
320
      
318
      
318
  
Effect of dilutive securities:
                                                                
Stock options and other share-based awards
    
—
      
1
      
—
      
2
      
—
      
1
      
—
      
2
  
Stock warrants
    
—
      
—
      
—
      
—
      
—
      
—
      
—
      
1
  
Weighted-average shares for per share calculation
    
321
      
322
      
319
      
321
      
320
      
321
      
318
      
321
  
                                                                 
Earnings per share
  
$
2.20
    
$
2.19
    
$
3.32
    
$
3.30
    
$
7.63
    
$
7.61
    
$
10.27
    
$
10.19
  

 
Shares subject to issuance pursuant to the conversion features of the 1.625% Series A, 1.50% Series B and 1.50% Series C Convertible Senior Notes did not have an effect on the calculation for the periods presented.
 


- 10 -
 
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (Unaudited)



 
Historical amounts have been adjusted to reflect our retrospective application of the accounting standards updates related to (a) convertible debt instruments that may be settled in cash upon conversion and (b) earnings per share calculations considering participating securities.  See Note 3—New Accounting Pronouncements and Note 8—Debt.
 
 
Note 7—Drilling Fleet Expansion and Dispositions
 
Drilling fleet expansion—Construction work in progress, recorded in property and equipment, was $5.9 billion and $4.5 billion at September 30, 2009 and December 31, 2008, respectively.  The following table summarizes actual capital expenditures, including capitalized interest, for our major construction and conversion projects (in millions):
 
   
Nine months ended
September 30,
2009
    
Through
December 31, 2008
    
Total
costs
    
           
(As adjusted)
          
Petrobras 10000 (a)
  
$
735
      
$
—
      
$
735
    
Dhirubhai Deepwater KG1 (b) (c)
    
295
        
384
        
679
    
Discoverer India
    
223
        
250
        
473
    
Discoverer Luanda (d)
    
184
        
315
        
499
    
Discoverer Americas
    
146
        
478
        
624
    
Deepwater Champion (e)
    
143
        
264
        
407
    
Discoverer Clear Leader (b)
    
110
        
516
        
626
    
Discoverer Inspiration
    
108
        
443
        
551
    
Dhirubhai Deepwater KG2 (c)
    
106
        
270
        
376
    
Development Driller III (e)
    
101
        
483
        
584
    
Sedco 700-series upgrades (b)
    
50
        
520
        
570
    
Capitalized interest
    
143
        
240
        
383
    
Mobilization costs
    
118
        
—
        
118
    
Total
  
$
2,462
      
$
4,163
      
$
6,625
    
____________________
(a)
In June 2008, we reached an agreement with a joint venture formed by subsidiaries of Petrobras and Mitsui to acquire Petrobras 10000 under a capital lease contract.  In connection with the agreement, we agreed to provide assistance and advisory services for the construction of the rig and operating management services once the rig commenced operations.  On August 4, 2009, we accepted delivery of Petrobras 10000 and recorded non-cash additions of $716 million to property and equipment, net along with a corresponding increase to long-term debt.  Total capital additions include $716 million in capital costs incurred by Petrobras and Mitsui for the construction of the drillship and $19 million of other capital expenditures.  The capital lease agreement has a 20-year term, after which we will have the right and obligation to acquire the drillship for one dollar.  See Note 8—Debt and Note 12—Commitments and Contingencies.
 
(b)
The accumulated construction costs of these rigs are no longer included in construction work in progress, as their construction or conversion projects had been completed as of September 30, 2009.
 
(c)
The costs for Dhirubhai Deepwater KG1 and Dhirubhai Deepwater KG2 represent 100 percent of expenditures incurred prior to our investment in the joint venture ($277 million and $178 million, respectively) and 100 percent of expenditures incurred since our investment in the joint venture.  TPDI is responsible for these costs.  We hold a 50 percent interest in TPDI, and Pacific Drilling Limited holds the remaining 50 percent interest.
 
(d)
The costs for Discoverer Luanda represent 100 percent of expenditures incurred since inception.  ADDCL is responsible for these costs.  We hold a 65 percent interest in ADDCL, and Angco Cayman Limited holds the remaining 35 percent interest.
 
(e)
These costs include our initial investments in Development Driller III and Deepwater Champion of $356 million and $109 million, respectively, representing the estimated fair values of the rigs at the time of our merger with GlobalSantaFe Corporation (“GlobalSantaFe”) in November 2007.
 

 
Dispositions—During the nine months ended September 30, 2009, we completed the sale of Sedco 135-D.  We received net proceeds from the sale of $4 million and recognized a gain of $2 million, which had no tax effect and an immaterial effect on diluted earnings per share.  Additionally, we recognized a net loss of $5 million on other property and equipment disposed of during the nine months ended September 30, 2009.  See Note 14—Subsequent Events.
 
In July 2009, we received net sale proceeds of $4 million in exchange for our 45 percent ownership interest in Caspian Drilling Company Limited, which operates Dada Gorgud and Istiglal under long-term bareboat charters with the owner and our former partner.
 


- 11 -
 
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (Unaudited)



 
During the nine months ended September 30, 2008, we completed the sale of three of our Standard Jackups (GSF High Island VIII, GSF Adriatic III and GSF High Island I).  We received cash proceeds of $320 million associated with the sales, which had no effect on earnings.
 
 
Note 8—Debt
 
Debt, net of unamortized discounts, premiums and fair value adjustments, is comprised of the following (in millions):
 
   
September 30,
    
December 31,
  
   
2009
    
2008
  
           
(As adjusted)
  
Commercial paper program (a) (b)
  
$
417
    
$
663
  
Term Loan due March 2010 (b)
    
―
      
2,000
  
6.625% Notes due April 2011 (b)
    
171
      
174
  
5% Notes due February 2013
    
248
      
248
  
5.25% Senior Notes due March 2013 (b)
    
497
      
499
  
TPDI Credit Facilities due June 2015 (a)
    
453
      
288
  
TPDI Notes due October 2017
    
121
      
111
  
ADDCL Credit Facilities due December 2017 (a)
    
450
      
280
  
6.00% Senior Notes due March 2018 (b)
    
997
      
997
  
7.375% Senior Notes due April 2018 (b)
    
247
      
247
  
GSF Explorer capital lease obligation due July 2026 (a)
    
15
      
16
  
8% Debentures due April 2027 (b)
    
57
      
57
  
7.45% Notes due April 2027 (b)
    
96
      
96
  
7% Senior Notes due June 2028
    
312
      
313
  
Petrobras 10000 capital lease obligation due August 2029 (a)
    
715
      
―
  
7.5% Notes due April 2031 (b)
    
598
      
598
  
1.625% Series A Convertible Senior Notes due December 2037 (b)
    
1,527
      
2,070
  
1.50% Series B Convertible Senior Notes due December 2037 (b)
    
2,040
      
1,990
  
1.50% Series C Convertible Senior Notes due December 2037 (b)
    
1,962
      
1,911
  
6.80% Senior Notes due March 2038 (b)
    
999
      
999
  
Total debt
    
11,922
      
13,557
  
Less debt due within one year (a)
    
702
      
664
  
Total long-term debt
  
$
11,220
    
$
12,893
  
____________________
(a)
The commercial paper program is classified as debt due within one year at September 30, 2009 and December 31, 2008.  The TPDI Credit Facilities and the ADDCL Credit Facilities had $35 million and $234 million, respectively, classified as debt due within one year at September 30, 2009.  The GSF Explorer capital lease obligation had less than $1 million classified as debt due within one year at both September 30, 2009 and December 31, 2008.  The Petrobras 10000 capital lease obligation had $16 million classified as debt due within one year at September 30, 2009.
 
(b)
Transocean Inc., a wholly owned subsidiary and the principal asset of Transocean Ltd., is the issuer of the notes and debentures, which have been guaranteed by Transocean Ltd.  Transocean Ltd. has also guaranteed borrowings under the commercial paper program, the Term Loan, the 364-Day Revolving Credit Facility and the Five-Year Revolving Credit Facility.  Transocean Ltd. has no independent assets or operations, its guarantee of debt securities of Transocean Inc. is full and unconditional and its only other subsidiaries not owned indirectly through Transocean Inc. are minor.  Transocean Ltd. is not subject to any significant restrictions on its ability to obtain funds from its consolidated subsidiaries or entities accounted for under the equity method by dividends, loans or return of capital distributions.
 


- 12 -
 
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (Unaudited)



 
Scheduled maturities—In preparing the scheduled maturities of our debt, we assume the bondholders exercise their options to require us to repurchase the 1.625% Series A, 1.50% Series B and 1.50% Series C Convertible Senior Notes in December 2010, 2011 and 2012, respectively.  At September 30, 2009, the scheduled maturities of our debt were as follows (in millions):
 
Twelve months ending September 30,
      
2010
  
$
702
  
2011
    
1,863
  
2012
    
2,315
  
2013
    
3,069
  
2014
    
103
  
Thereafter
    
4,323
  
Total debt, excluding unamortized discounts, premiums and fair value adjustments
    
12,375
  
Total unamortized discounts, premiums and fair value adjustments
    
(453
)
Total debt
  
$
11,922
  

 
Commercial paper program—We maintain a commercial paper program (the “Program”) under which we may issue unsecured commercial paper notes on a private placement basis from time to time up to a maximum aggregate amount outstanding of $1.5 billion.  The 364-Day Revolving Credit Facility and the Five-Year Revolving Credit Facility provide liquidity for the Program.  The proceeds from the commercial paper issuance may be used for general corporate purposes.  At September 30, 2009, $417 million was outstanding.  The weighted-average interest rate on September 30, 2009 was 0.4 percent.
 
364-Day Revolving Credit Facility—We have a 364-day, $1.08 billion revolving credit facility under the 364-Day Revolving Credit Agreement dated November 25, 2008 (the “364-Day Revolving Credit Facility”).  At September 30, 2009, no amounts were outstanding under the 364-Day Revolving Credit Facility.
 
Term Loan—We repaid the outstanding borrowings under the $2.0 billion term credit facility subject to the Term Credit Agreement dated March 13, 2008, as amended (the “Term Loan”), during the nine months ended September 30, 2009.  As a result, we terminated the Term Loan and recognized a loss on retirement of debt in the amount of $1 million during the nine months ended September 30, 2009.  See Note 9—Derivatives and Hedging.
 
Five-Year Revolving Credit Facility—We have a $2.0 billion, five-year revolving credit facility under the Five-Year Revolving Credit Facility Agreement dated November 27, 2007, as amended (the “Five-Year Revolving Credit Facility”).  Throughout the term of the Five-Year Revolving Credit Facility, we pay a facility fee on the daily amount of the underlying commitment, whether used or unused, which ranges from 0.10 percent to 0.30 percent and was 0.15 percent at September 30, 2009.  At September 30, 2009, we had $152 million in letters of credit issued and outstanding and no borrowings outstanding under the Five-Year Revolving Credit Facility.
 
TPDI Credit Facilities—In October 2008, TPDI entered into a credit agreement for a $1.190 billion secured term loan and a $75 million revolving credit facility (together, the “TPDI Credit Facilities”).  The TPDI Credit Facilities will finance the construction of Dhirubhai Deepwater KG1 and Dhirubhai Deepwater KG2.  One of our subsidiaries participates in the secured term loan with an aggregate commitment of $595 million.  At September 30, 2009, $889 million was outstanding, of which $436 million was due to one of our subsidiaries and was eliminated in consolidation.  The weighted-average interest rate on September 30, 2009 was 3.9 percent.  See Note 9—Derivatives and Hedging.
 
TPDI Notes—As of September 30, 2009, the TPDI Notes due October 2017 were outstanding in the principal amount of $242 million, $121 million of which was due to one of our subsidiaries and has been eliminated in consolidation.  The debt bears interest at the adjusted London Interbank Offered Rate (“LIBOR”) plus an applicable spread, and the weighted-average interest rate was 3.0 percent at September 30, 2009.
 
ADDCL Credit Facilities—ADDCL has a senior credit agreement for a credit facility comprised of Tranche A, Tranche B and Tranche C for $215 million, $270 million and $399 million, respectively (collectively, the “ADDCL Primary Loan Facility”).  Tranche A and Tranche B are provided by external lenders.  One of our subsidiaries is the lender for Tranche C and has agreed to provide financial security for borrowings under Tranche A and Tranche B until customer acceptance of Discoverer Luanda, the newbuild for which the facility was established.  At September 30, 2009, $191 million and $234 million were outstanding under Tranche A and Tranche B, respectively.  The weighted-average interest rate on September 30, 2009 was 1.6 percent.  At September 30, 2009, no amounts were outstanding under Tranche C.
 
Additionally, ADDCL has a secondary loan agreement for a $90 million credit facility (the “ADDCL Secondary Loan Facility”), for which one of our subsidiaries provides 65 percent of the total commitment and an external lender provides the remaining 35 percent.  At September 30, 2009, the borrowings under ADDCL Secondary Loan Facility were $73 million, of which $47 million was provided by one of our subsidiaries and has been eliminated in consolidation.  The weighted-average interest rate on September 30, 2009 was 4.3 percent.
 


- 13 -
 
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (Unaudited)


 
Petrobras 10000 capital lease obligation—On August 4, 2009, we accepted delivery of Petrobras 10000 and recorded non-cash additions of $716 million to property and equipment, net along with a corresponding increase to long-term debt.  Total capital costs incurred by the lessor for the construction of the drillship were $716 million.  The capital lease agreement has an implicit interest rate of 7.8 percent and a 20-year term, after which we will have the right and obligation to acquire the drillship from the lessor for one dollar. See Note 7—Drilling Fleet Expansion and Dispositions and Note 12—Commitments and Contingencies.
 
1.625% Series A, 1.50% Series B and 1.50% Series C Convertible Senior Notes—Holders may convert their notes under certain circumstances at a rate of 5.9310 shares per $1,000 note, subject to adjustment upon the occurrence of certain events and increase upon the occurrence of certain fundamental changes.  Upon conversion, we are required to deliver, in lieu of shares, cash up to the aggregate principal amount of notes to be converted and shares in respect of the remainder, if any, of our conversion obligation in excess of the aggregate principal amount of the notes being converted.  The Redomestication Transaction triggered the right of holders to convert the convertible notes at any time from December 3, 2008 through February 3, 2009.  During the conversion period, we received conversion notices with respect to $490,000 principal amount of convertible notes.  During the nine months ended September 30, 2009, as a result of these conversions, we paid an aggregate amount of $150,000 and recognized a gain on the retirement of debt of $247,000.
 
During the nine months ended September 30, 2009, we repurchased an aggregate principal amount of $615 million of the 1.625% Series A Convertible Senior Notes for an aggregate cash payment of $581 million.  We recognized a loss of $16 million associated with the debt component of the instrument and recorded additional paid-in capital of $18 million associated with the equity component of the instrument.  See Note 14—Subsequent Events.
 
Accounting standards update—The following presents the incremental effect of our adoption of an accounting standards update, effective January 1, 2009 (see Note 3—New Accounting Pronouncements), related to convertible debt instruments that may be settled in cash upon conversion on our condensed consolidated statement of operations for the three and nine months ended September 30, 2008 (in millions, except per share data):
 
   
Three months ended September 30, 2008
    
Nine months ended September 30, 2008
  
     
Prior to adoption
      
Effect of adoption
      
As
adjusted
      
Prior to adoption
      
Effect of adoption
      
As
adjusted
  
Interest expense, net of amounts capitalized
  
$
(100
)
  
$
(43
)
  
$
(143
)
  
$
(348
)
  
$
(125
)
  
$
(473
)
Income before income tax expense
    
1,278
      
(43
)
    
1,235
      
3,932
      
(125
)
    
3,807
  
Net income (a)
    
1,103
      
(43
)
    
1,060
      
3,399
      
(125
)
    
3,274
  
Net income attributable to controlling interest (a)
  
$
1,106
    
$
(43
)
  
$
1,063
    
$
3,402
    
$
(125
)
  
$
3,277
  
Earnings per share (b)
                                                
Basic
  
$
3.47
    
$
(0.14
)
  
$
3.33
    
$
10.69
    
$
(0.39
)
  
$
10.30
  
Diluted
  
$
3.44
    
$
(0.13
)
  
$
3.31
    
$
10.59
    
$
(0.39
)
  
$
10.20
  
____________________
(a)
As adjusted for our adoption of the accounting standards update related to noncontrolling interest.  See Note 3—New Accounting Pronouncements.
 
(b)
Excludes the effect of our adoption of the accounting standards update relating to participating securities.  See Note 3—New Accounting Pronouncements.
 

 


- 14 -
 
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (Unaudited)


The following table presents the incremental effect of our adoption on our condensed consolidated balance sheet as of December 31, 2008 (in millions):
 
   
December 31, 2008
  
   
Prior to adoption
    
Effect of adoption
    
As
adjusted
  
Property and equipment
  
$
25,802
    
$
34
    
$
25,836
  
Property and equipment, net
    
20,827
      
34
      
20,861
  
Other assets
    
867
      
(23
)
    
844
  
Total assets
  
$
35,171
    
$
11
    
$
35,182
  
                         
Long-term debt
  
$
13,522
    
$
(629
)
  
$
12,893
  
Total long-term liabilities
    
15,943
      
(629
)
    
15,314
  
Additional paid-in capital
    
6,492
      
821
      
7,313
  
Retained earnings
    
6,008
      
(181
)
    
5,827
  
Total controlling interest shareholders’ equity (a)
    
16,524
      
640
      
17,164
  
Total equity (a)
    
16,527
      
640
      
17,167
  
Total liabilities and equity
  
$
35,171
    
$
11
    
$
35,182
  
____________________
(a)
As adjusted for our adoption of the accounting standards update related to noncontrolling interest.  See Note 3—New Accounting Pronouncements.
 

 
Property and equipment increased $34 million due to increased capitalization of interest related to our construction in progress, which resulted from the higher effective interest rates on the Convertible Senior Notes following our adoption of the accounting standards update regarding convertible debt instruments.
 
Debt issue costs, recorded in other assets, decreased $23 million, representing the cumulative adjustment caused by increased amortization recognized in interest expense for the two years ended December 31, 2008 due to the reduced recognition period required by the accounting standards update regarding convertible debt instruments and the portion of debt issue costs reclassified to additional paid-in capital.
 
The cumulative effect of the change in accounting principles was $9 million, recorded as an adjustment to retained earnings as of January 1, 2008, from the retrospective increase in interest expense for the year ended December 31, 2007.
 
The carrying amounts of the liability components of the Convertible Senior Notes were as follows (in millions):
 
 
September 30, 2009
    
December 31, 2008
  
 
Principal amount
    
Unamortized discount
    
Carrying amount
    
Principal amount
    
Unamortized discount
    
Carrying amount
  
Carrying amount of liability component
                                              
Series A Convertible Senior Notes due 2037
$
1,585
    
$
(58
)
  
$
1,527
    
$
2,200
    
$
(130
)
  
$
2,070
  
Series B Convertible Senior Notes due 2037
  
2,200
      
(160
)
    
2,040
      
2,200
      
(210
)
    
1,990
  
Series C Convertible Senior Notes due 2037
  
2,200
      
(238
)
    
1,962
      
2,200
      
(289
)
    
1,911
  

 
Upon adoption, we reclassified to additional paid-in capital $193 million for the Series A Convertible Senior Notes, $275 million for the Series B Convertible Senior Notes and $352 million for the Series C Convertible Senior Notes, representing the carrying amounts of the equity components.  As of September 30, 2009, no shares were issuable upon conversion of any series of the Convertible Senior Notes since the closing price per share did not exceed the conversion price of $168.61 during the previous 30 trading days.
 


- 15 -
 
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (Unaudited)


Following our adoption of the accounting standards update regarding convertible debt instruments, the effective interest rates were 4.88% for the Series A Convertible Senior Notes, 5.08% for the Series B Convertible Senior Notes, and 5.28% for the Series C Convertible Senior Notes.  The remaining period over which the discount will be amortized is 1.2 years for the Series A Convertible Senior Notes, 2.2 years for the Series B Convertible Senior Notes and 3.2 years for the Series C Convertible Senior Notes.  Interest expense, excluding amortization of debt issue costs, was as follows (in millions):
 
   
Three months ended September 30,
    
Nine months ended September 30,
  
   
2009
    
2008
    
2009
    
2008
  
Interest expense
                        
Series A Convertible Senior Notes due 2037
  
$
19
    
$
24
    
$
66
    
$
72
  
Series B Convertible Senior Notes due 2037
    
25
      
25
      
75
      
72
  
Series C Convertible Senior Notes due 2037
    
25
      
25
      
75
      
72
  
 
Note 9—Derivatives and Hedging
 
Cash flow hedges—For derivative instruments that are designated and qualify as cash flow hedges, we initially recognize the gains and losses associated with the effective portions of the hedges as a component of other comprehensive income and subsequently reclassify such gains and losses into interest expense in the same period or periods during which the hedged transaction affects earnings.  We recognize the gains and losses associated with the ineffective portion of the hedges in interest expense in the period in which they are realized.
 
During the nine months ended September 30, 2009, TPDI entered into interest rate swaps, which are designated and have qualified as a cash flow hedge, to reduce the variability of cash interest payments associated with the variable rate borrowings under the TPDI Credit Facilities.  The notional value increases proportionately with the forecasted borrowings under the TPDI Credit Facilities to a maximum amount of $1.190 billion, of which $595 million will be attributable to one of our subsidiaries.  As of September 30, 2009, the aggregate notional value of these swaps was $972 million, $486 million of which was attributed to one of our subsidiaries and the related balances for this intercompany portion have been eliminated in consolidation.  Under the interest rate swaps, TPDI receives interest at three-month LIBOR and pays interest at a weighted-average fixed rate of 2.34 percent during the expected term of the TPDI Credit Facilities.  At September 30, 2009, the weighted-average variable interest rate was 3.94 percent, and the carrying value represented an asset measured at a fair value of $1 million, with $2 million recorded in other long-term assets and $1 million recorded in other long-term liabilities on our condensed consolidated balance sheet, with a corresponding decrease to other comprehensive loss for the nine-month period then ended.
 
In February 2009, we entered into interest rate swaps with an aggregate notional value of $1 billion, which were designated and qualified as a cash flow hedge, to reduce the variability of our cash interest payments on the borrowings under the Term Loan.  Under the interest rate swaps, we received interest at one-month LIBOR and paid interest at a fixed rate of 0.768 percent over the six-month period ended August 6, 2009.  Upon their stated maturity, we settled these interest rate swaps with no gain or loss recognized.
 
Fair value hedges—For derivative instruments that are designated and qualify as fair value hedges, we recognize the gains and losses on the derivative and the offsetting losses or gains on the underlying hedged item attributable to the hedged risk in current period earnings.
 
In September 2009, we entered into interest rate swaps, which are designated and have qualified as a fair value hedge, to reduce our exposure to changes in the fair values of our 5.25% Senior Notes and our 5.00% Notes.  The interest rate swaps have aggregate notional values of $500 million and $250 million, respectively, equal to the face values of the hedged instruments.  The hedging relationship qualifies 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.  Through the stated maturities of the interest rate swaps, which coincide with those of the hedged instruments, we receive interest at a fixed rate equal to that of the underlying debt instrument and pay interest at three-month LIBOR plus a margin.  At September 30, 2009, the weighted-average variable interest rate was 3.46 percent and the carrying value of the interest rate swaps represented a liability measured at a fair value of $3 million, recorded in other long-term liabilities on our condensed consolidated balance sheet, with a corresponding decrease in the carrying value of the underlying debt instrument.
 
 
Note 10—Fair Value of Financial Instruments
 
We estimate the fair value of each class of financial instruments, for which estimating fair value is practicable, by applying the following methods and assumptions:
 
Cash and cash equivalents—The carrying amount approximates fair value because of the short maturities of those instruments.
 


- 16 -
 
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (Unaudited)



 
Accounts receivable—The carrying amount, net of valuation allowance, approximates fair value because of the short maturities of those instruments.
 
Short-term investments—The carrying amount represents the estimated fair value, measured using (a) quoted prices for identical instruments in active markets and (b) pricing data that are representative of quoted prices for similar instruments in active markets or identical instruments in less active markets.  Our short-term investments include investments in The Reserve International Liquidity Fund Ltd., The Reserve Primary Fund and U.S. Treasury bills.  As of September 30, 2009, the carrying value of our short-term investments was $180 million, with scheduled maturities through December 31, 2009.
 
Debt—The fair value of our fixed-rate debt is measured using quoted prices for identical instruments in active markets.  Our variable-rate debt is included in the fair values stated below at its carrying value since the short-term interest rates cause the face value to approximate its fair value.  The TPDI Notes are included in the fair values stated below at their aggregate carrying value of $121 million and $111 million at September 30, 2009 and December 31, 2008, respectively, since there is no available market price for such related party debt.  The carrying values and estimated fair values of our long-term debt, including debt due within one year, were as follows (in millions):
 
   
September 30, 2009
      
December 31, 2008
  
 
Carrying value
      
Fair value
      
Carrying value
      
Fair value
  
                     
(As adjusted)
            
Long-term debt, including current maturities
$
11,922
      
$
12,640
      
$
13,557
      
$
12,838
  

 
Derivative Instruments—The carrying amount of our derivative instruments represents the estimated fair value, measured using pricing data, including quoted prices and other observable market data, for the instruments.  As of September 30, 2009, the carrying value of our derivative instruments was $2 million and $4 million, recorded in other assets and other long-term liabilities, respectively, on our condensed consolidated balance sheet.  We did not have any derivative instruments outstanding as of December 31, 2008.
 
Note 11—Retirement Plans and Other Postemployment Benefits
 
Defined benefit pension plans—We have several defined benefit pension plans, both funded and unfunded, covering substantially all of our U.S. employees.  We also have various defined benefit plans in the U.K., Norway, Nigeria, Egypt and Indonesia that cover our employees in those areas, and we have certain frozen plans assumed in connection with our mergers that cover certain of our current employees and former employees and directors of our predecessors.  Net periodic benefit cost for these defined benefit pension plans includes the following components (in millions):
 
   
Three months ended
September 30,
    
Nine months ended
September 30,
  
   
2009
    
2008
    
2009
    
2008
  
Components of net periodic benefit cost (a)
                        
Service cost
  
$
16
    
$
12
    
$
46
    
$
35
  
Interest cost
    
16
      
16
      
49
      
49
  
Expected return on plan assets
    
(16
)
    
(19
)
    
(50
)
    
(55
)
Recognized net actuarial losses
    
4
      
2
      
13
      
3
  
Settlements and curtailments
    
3
      
—
      
5
      
—
  
Benefit cost
  
$
23
    
$
11
    
$
63
    
$
32
  
____________________
 
(a)  Amounts are before income tax effect.
 

 
We expect to contribute approximately $71 million to our defined benefit pension plans in 2009, which we intend to fund from cash flow from operations.  We contributed approximately $64 million to the defined benefit pension plans in the nine months ended September 30, 2009.
 
Postretirement benefits other than pensions—We have several unfunded contributory and noncontributory other postretirement employee benefits (“OPEB”) plans covering substantially all of our U.S. employees.  Components of net periodic benefit cost for the OPEB plans, including service cost, interest cost, amortization of prior service cost and recognized net actuarial losses, were less than $1 million for each of the three months ended September 30, 2009 and 2008, and $2 million for each of the nine months ended September 30, 2009 and 2008, respectively.
 


- 17 -
 
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (Unaudited)



 
We contributed $3 million to the OPEB plans during the nine months ended September 30, 2009.  We expect to contribute an immaterial amount to the OPEB plans prior to December 31, 2009.
 
Severance plan—Following our merger with GlobalSantaFe in 2007, we established a plan to consolidate operations and administrative functions.  As of September 30, 2009, we had identified 309 employees who have been or will be involuntarily terminated pursuant to this plan.  We recognized $12 million and $4 million of severance expense for the nine months ended September 30, 2009 and September 30, 2008, respectively, in either operating and maintenance expense or general and administrative expense.  The liability associated with the severance plan, recorded in accrued liabilities, was $20 million and $21 million at September 30, 2009 and December 31, 2008, respectively.  Since the plan’s inception in 2007, we have paid $48 million in termination benefits under the plan, including $13 million paid during the nine months ended September 30, 2009.  We expect to accrue substantially all of the remaining amounts by December 31, 2009.
 
Note 12—Commitments and Contingencies
 
Lease obligations—We have operating lease commitments expiring at various dates, principally for real estate, office space and office equipment.  In August 2009, we accepted delivery of Petrobras 10000, an asset held under a capital lease through 2029.  Additionally, GSF Explorer is held under a capital lease through 2026.  As of September 30, 2009, future minimum rental payments related to noncancellable operating leases and our capital leases are as follows (in millions):
 
   
Capital
leases
    
Operating
leases
  
Years ending September 30,
            
2010
  
$
74
    
$
39
  
2011
    
74
      
33
  
2012
    
74
      
21
  
2013
    
74
      
18
  
2014
    
74
      
14
  
Thereafter
    
1,101
      
47
  
Total future minimum rental payment
  
$
1,471
    
$
172
  
Less amount representing imputed interest
    
(741
)
        
Present value of future minimum rental payments under capital leases
    
730
          
Less current portion included in debt due within one year
    
(16
)
        
Long-term capital lease obligation
  
$
714
          

 
Legal proceedings—In 2004, several of our subsidiaries were named, along with numerous other unaffiliated defendants, in 21 complaints filed on behalf of 769 plaintiffs in the Circuit Courts of the State of Mississippi and which claimed injuries arising out of exposure to asbestos allegedly contained in drilling mud during these plaintiffs’ employment in drilling activities between 1965 and 1986.  A Special Master, appointed to administer these cases pre-trial, subsequently required that each individual plaintiff file a separate lawsuit, and the original 21 multi-plaintiff complaints were then dismissed by the Circuit Courts.  The amended complaints resulted in one of our subsidiaries being named as a direct defendant in seven cases.  We have or may have an indirect interest in an additional 24 cases.  The complaints generally allege that the defendants used or manufactured asbestos-containing products in connection with drilling operations and have included allegations of negligence, products liability, strict liability and claims allowed under the Jones Act and general maritime law.  The plaintiffs generally seek awards of unspecified compensatory and punitive damages.  In each of these cases, the complaints have named other unaffiliated defendant companies, including companies that allegedly manufactured the drilling-related products that contained asbestos.  None of the cases in which one of our subsidiaries is a named defendant has been scheduled for trial in 2009 or 2010, and the preliminary information available on these claims is not sufficient to determine if there is an identifiable period for alleged exposure to asbestos, whether any asbestos exposure in fact occurred, the vessels potentially involved in the claims, or the basis on which the plaintiffs would support claims that their injuries were related to exposure to asbestos.  However, the initial evidence available would suggest that we would have significant defenses to liability and damages.  Earlier this year, two cases that were part of the original 2004 multi-plaintiff suits went to trial in Mississippi against unaffiliated defendant companies which allegedly manufactured drilling-related products containing asbestos.  We were not a defendant in either of these cases.  One of the cases resulted in a substantial jury verdict in favor of the plaintiff, although this case has not been reviewed on appeal.  The second case resulted in a verdict completely in favor of the defendants.  There have been no other trials involving any of the parties to the original 21 complaints.  We intend to defend these lawsuits vigorously, although there can be no assurance as to the ultimate outcome.  We historically have maintained broad liability insurance, although we are not certain whether insurance will cover the liabilities, if any, arising out of these claims.  Based on our evaluation of the exposure to date, we do not expect the liability, if any, resulting from these claims to have a material adverse effect on our consolidated statement of financial position, results of operations or cash flows.
 


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (Unaudited)



 
One of our subsidiaries is involved in an action with respect to a customs matter relating to the Sedco 710 semisubmersible drilling rig.  Prior to our merger with Sedco Forex, this drilling rig, which was working for Petrobras in Brazil at the time, had been admitted into the country on a temporary basis under authority granted to a Schlumberger entity.  When the drilling contract with Petrobras was transferred from Schlumberger to us in the merger, the temporary import permit was not transferred.  When the temporary import permit granted to Schlumberger expired in 2000, renewal filings were not immediately made and the Brazilian authorities threatened to cancel the temporary import permit and to collect customs duties as if the rig had been nationalized in Brazil.  Together with Schlumberger, we jointly filed an action for the purpose of avoiding cancellation of, and extending, the temporary import permit and to avoid collection of any customs duty.  Other proceedings were also initiated to secure the transfer of the temporary import permit to us.  The court initially permitted the transfer of the temporary import permit but did not rule on whether the temporary admission could be extended without the payment of a financial penalty in the form of Brazilian customs duties.  In 2004, the Brazilian authorities issued an assessment totaling approximately $161 million against our subsidiary based on the expiration of the temporary import permit.
 
In April 2007, the trial court ruled that the temporary admission granted to Schlumberger and then later transferred to us had expired.  This ruling allowed the Brazilian authorities to execute on their assessment.  The assessment includes five separate elements of tax and penalty.  Following this ruling, the Brazilian authorities issued a revised assessment against our subsidiary and, as of September 30, 2009, we believe that the U.S. dollar equivalent of this assessment, including penalties and interest, was approximately $260 million in aggregate.  In September 2007, we received a temporary ruling in our favor from a Brazilian federal court that the valuation method used by the Brazilian authorities could be judged by the administrative courts, as requested.  This temporary ruling was confirmed in January 2008 by the same Brazilian federal court, but it is still subject to review at the administrative levels in Brazil.  As a result of this ruling, one of the elements of the assessment and the valuation method was sent to the administrative level for further proceedings.  These proceedings are ongoing.  We appealed the trial court’s ruling concerning expiration of the temporary admission and also filed for a renewed stay of execution, which was granted but recently has been revoked in light of the appellate decision set forth below.  In June 2009, we received an unfavorable ruling on the merits regarding our appeal of the trial court’s decision regarding expiration of the temporary admission at the first appellate court, which ruling remains subject to appeal.  Our motion for clarification of the appellate court’s adverse ruling has recently been denied and the government has now moved to collect the assessment by serving a notice of execution on us, and the government later filed another petition also requesting the inclusion of Schlumberger in such execution, which, as far as we are aware, has not yet received a similar notice of execution.  We expect that another order should nonetheless prevent enforcement of the whole amount in dispute, and it is likely that further judicial or administrative proceedings will result from this matter.  While the court had previously granted us the right to continue our appeal without the posting of a bond, it now is likely that we may be required to post a bond for up to the full amount of the assessment in connection with these proceedings.  In its ruling, the appellate court effectively reversed prior precedent supporting our position and refused all clarifications of its decision.  We are preparing an appeal to the next level but in light of the appellate court’s rulings we have a heightened risk that the appeal will be rejected on procedural grounds.  The first appellate court further found that Schlumberger is jointly and severally liable in this matter and has also rejected Schlumberger’s motion for clarification.  We previously put Schlumberger on notice that we consider any assessment to be solely the responsibility of Schlumberger, and we have initiated proceedings against Schlumberger seeking a declaratory judgment in this respect.  These proceedings may be put on hold pending resolution of the assessment.  At this point, we do not know whether the Brazilian authorities will continue to seek to recover the assessment solely from us or may now also seek recovery from Schlumberger.  Schlumberger has denied any responsibility for this matter, but remains a party to the proceedings.  Brazil currently has a tax amnesty program in effect which could eliminate various penalties and a portion of the accumulated interest for this assessment.  We are filing our motion for appeal and are evaluating whether to participate in the amnesty program while preserving our claim against Schlumberger.  This is complicated by discrepancies in the estimates provided by various authorities involved in the execution of the assessment.  Based on the facts currently available, we have accrued the amount of our estimated liability under the amnesty program in other current liabilities on our condensed consolidated balance sheet.  Due to the considerable uncertainties that exist, we are unable to predict the final outcome of this matter and, consequently, the ultimate liability to which we may be subject could differ from our estimate.
 
In the third quarter of 2006, we received tax assessments of approximately $158 million from the state tax authorities of Rio de Janeiro in Brazil against one of our Brazilian subsidiaries for customs taxes on equipment imported into the state in connection with our operations.  The assessments resulted from a preliminary finding by these authorities that our subsidiary’s record keeping practices were deficient.  We currently believe that the substantial majority of these assessments are without merit.  We filed an initial response with the Rio de Janeiro tax authorities on September 9, 2006 refuting these additional tax assessments.  In September 2007, we received confirmation from the state tax authorities that they believe the additional tax assessments are valid, and as a result, we filed an appeal on September 27, 2007 to the state Taxpayer’s Council contesting these assessments.  While we cannot predict or provide assurance as to the final outcome of these proceedings, we do not expect it to have a material adverse effect on our consolidated statement of financial position, results of operations or cash flows.
 
One of our subsidiaries is involved in lawsuits arising out of the subsidiary’s involvement in the design, construction and refurbishment of major industrial complexes.  The operating assets of the subsidiary were sold and its operations discontinued in 1989, and the subsidiary has no remaining assets other than the insurance policies involved in its litigation, fundings from settlements with the primary insurers and funds received from the cancellation of certain insurance policies.  The subsidiary has been named as a defendant, along with numerous other companies, in lawsuits alleging personal injury as a result of exposure to asbestos.  As of September 30, 2009, the subsidiary was a defendant in approximately 1,045 lawsuits.  Some of these lawsuits include multiple  plaintiffs
 


- 19 -
 
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (Unaudited)


and we estimate that there are approximately 2,736 plaintiffs in these lawsuits.  For many of these lawsuits, we have not been provided with sufficient information from the plaintiffs to determine whether all or some of the plaintiffs have claims against the subsidiary, the basis of any such claims, or the nature of their alleged injuries.  The first of the asbestos-related lawsuits was filed against this subsidiary in 1990.  Through September 30, 2009, the amounts expended to resolve claims (including both attorneys’ fees and expenses, and settlement costs) have not been material, and all deductibles with respect to the primary insurance have been satisfied.  The subsidiary continues to be named as a defendant in additional lawsuits and we cannot predict the number of additional cases in which it may be named a defendant nor can we predict the potential costs to resolve such additional cases or to resolve the pending cases.  However, the subsidiary has in excess of $1 billion in insurance limits potentially available to the subsidiary.  Although not all of the policies may be fully available due to the insolvency of certain insurers, we believe that the subsidiary will have sufficient insurance and funds from the settlements of litigation with insurance carriers available to respond to these claims.  While we cannot predict or provide assurance as to the final outcome of these matters, we do not believe that the current value of the claims where we have been identified will have a material impact on our consolidated statement of financial position, results of operations or cash flows.
 
We are involved in various tax matters and various regulatory matters.  We are involved in lawsuits relating to damage claims arising out of hurricanes Katrina and Rita, all of which are insured and which are not material to us.  We are also involved in a number of other lawsuits, including a dispute for municipal tax payments in Brazil and a dispute involving customs procedures in India, neither of which is material to us, and all of which have arisen in the ordinary course of our business.  We do not expect the liability, if any, resulting from these other matters to have a material adverse effect on our consolidated statement of financial position, results of operations or cash flows.  We cannot predict with certainty the outcome or effect of any of the litigation matters specifically described above or of any such other pending or threatened litigation.  There can be no assurance that our beliefs or expectations as to the outcome or effect of any lawsuit or other litigation matter will prove correct and the eventual outcome of these matters could materially differ from management’s current estimates.
 
Environmental matters—We have certain potential liabilities under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) and similar state acts regulating cleanup of various hazardous waste disposal sites, including those described below.  CERCLA is intended to expedite the remediation of hazardous substances without regard to fault.  Potentially responsible parties (“PRPs”) for each site include present and former owners and operators of, transporters to and generators of the substances at the site.  Liability is strict and can be joint and several.
 
We have been named as a PRP in connection with a site located in Santa Fe Springs, California, known as the Waste Disposal, Inc. site.  We and other PRPs have agreed with the U.S. Environmental Protection Agency (“EPA”) and the U.S. Department of Justice (“DOJ”) to settle our potential liabilities for this site by agreeing to perform the remaining remediation required by the EPA.  The form of the agreement is a consent decree, which has been entered by the court.  The parties to the settlement have entered into a participation agreement, which makes us liable for approximately eight percent of the remediation and related costs.  The remediation is complete, and we believe our share of the future operation and maintenance costs of the site is not material.  There are additional potential liabilities related to the site, but these cannot be quantified, and we have no reason at this time to believe that they will be material.
 
We have also been named as a PRP in connection with a site in California known as the Casmalia Resources Site.  We and other PRPs have entered into an agreement with the EPA and the DOJ to resolve potential liabilities.  Under the settlement, we are not likely to owe any substantial additional amounts for this site beyond what we have already paid.  There are additional potential liabilities related to this site, but these cannot be quantified at this time, and we have no reason at this time to believe that they will be material.