Edgar Filing: Transocean Ltd.

form10_q2q2010.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 June 30, 2010

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

For the transition period from _____ to _____.

_________________________

Commission file number 000-53533

TRANSOCEAN LTD.

(Exact name of registrant as specified in its charter)

Zug, Switzerland	98-0599916
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

Chemin de Blandonnet 10 Vernier, Switzerland	1214
(Address of principal executive offices)	(Zip Code)

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

_________________________

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

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

Large accelerated filer þ Accelerated filer ¨ Non-accelerated filer (do not check if a smaller reporting company) ¨ Smaller reporting company ¨

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

As of July 27, 2010, 318,993,839 shares were outstanding.

TRANSOCEAN LTD.

INDEX TO FORM 10-Q

QUARTER ENDED JUNE 30, 2010

PART I. FINANCIAL INFORMATION		Page
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Statements of Operations	1
	Condensed Consolidated Statements of Comprehensive Income	2
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Equity	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	49
Item 4.	Controls and Procedures	50

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	51
Item 1A.	Risk Factors	51
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	55
Item 6.	Exhibits	55

PART I.

FINANCIAL INFORMATION

Item 1. Financial Statements

TRANSOCEAN LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share data)

(Unaudited)

	Three months ended June 30,						Six months ended June 30,
	2010			2009			2010			2009

Operating revenues
Contract drilling revenues	$	2,290		$	2,625		$	4,731		$	5,459
Contract drilling intangible revenues		29			75			62			179
Other revenues		186			182			314			362
		2,505			2,882			5,107			6,000
Costs and expenses
Operating and maintenance		1,358			1,277			2,554			2,448
Depreciation, depletion and amortization		400			360			801			715
General and administrative		58			53			121			109
		1,816			1,690			3,476			3,272
Loss on impairment		—			(67	)		(2	)		(288	)
Gain (loss) on disposal of assets, net		268			(4	)		254			—
Operating income		957			1,121			1,883			2,440

Other income (expense), net
Interest income		5			1			10			2
Interest expense, net of amounts capitalized		(141	)		(114	)		(273	)		(250	)
Gain (loss) on retirement of debt		—			(8	)		2			(10	)
Other, net		(3	)		(8	)		10			—
		(139	)		(129	)		(251	)		(258	)

Income before income tax expense		818			992			1,632			2,182
Income tax expense		98			184			227			435

Net income		720			808			1,405			1,747
Net income (loss) attributable to noncontrolling interest		5			2			13			(1	)

Net income attributable to controlling interest	$	715		$	806		$	1,392		$	1,748

Earnings per share
Basic	$	2.23		$	2.50		$	4.32		$	5.43
Diluted	$	2.22		$	2.49		$	4.31		$	5.42

Weighted average shares outstanding
Basic		319			320			320			320
Diluted		320			321			321			321

See accompanying notes.

- 1 -

TRANSOCEAN LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(Unaudited)

	Three months ended June 30,						Six months ended June 30,
	2010			2009			2010			2009

Net income	$	720		$	808		$	1,405		$	1,747

Other comprehensive income (loss) before income taxes
Unrecognized components of net periodic benefit cost		—			—			(10	)		(39	)
Recognized components of net periodic benefit cost		3			5			9			9
Unrealized gain (loss) on derivative instruments		(11	)		10			(17	)		9
Other, net		(3	)		1			(3	)		—

Other comprehensive income (loss) before income taxes		(11	)		16			(21	)		(21	)
Income taxes related to other comprehensive income (loss)		(1	)		(6	)		(1	)		3
Other comprehensive income (loss), net of income taxes		(12	)		10			(22	)		(18	)

Total comprehensive income		708			818			1,383			1,729
Total comprehensive income (loss) attributable to noncontrolling interest		(9	)		13			(8	)		10

Total comprehensive income attributable to controlling interest	$	717		$	805		$	1,391		$	1,719

See accompanying notes.

- 2 -

TRANSOCEAN LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except share data)

	June 30, 2010			December 31, 2009
	(Unaudited)
Assets
Cash and cash equivalents	$	2,888		$	1,130
Accounts receivable, net of allowance for doubtful accounts of $41 and $65 at June 30, 2010 and December 31, 2009, respectively		2,254			2,385
Materials and supplies, net of allowance for obsolescence of $66 at June 30, 2010 and December 31, 2009		467			462
Deferred income taxes, net		121			104
Assets held for sale		—			186
Other current assets		184			209
Total current assets		5,914			4,476

Property and equipment		27,377			27,383
Property and equipment of consolidated variable interest entities		2,179			1,968
Less accumulated depreciation		7,034			6,333
Property and equipment, net		22,522			23,018
Goodwill		8,132			8,134
Other assets		984			808
Total assets	$	37,552		$	36,436

Liabilities and equity
Accounts payable	$	968		$	780
Accrued income taxes		154			240
Debt due within one year		1,580			1,568
Debt of consolidated variable interest entities due within one year		82			300
Other current liabilities		1,884			730
Total current liabilities		4,668			3,618

Long-term debt		8,862			8,966
Long-term debt of consolidated variable interest entities		902			883
Deferred income taxes, net		710			726
Other long-term liabilities		1,683			1,684
Total long-term liabilities		12,157			12,259

Commitments and contingencies

Shares, CHF 15.00 par value, 502,852,947 authorized, 167,617,649 conditionally authorized, 335,235,298 issued at June 30, 2010 and December 31, 2009; 318,916,207 and 321,223,882 outstanding at June 30, 2010 and December 31, 2009, respectively		4,479			4,472
Additional paid-in capital		6,421			7,407
Treasury shares, at cost, 2,863,267 and none held at June 30, 2010 and December 31, 2009, respectively		(240	)		—
Retained earnings		10,400			9,008
Accumulated other comprehensive loss		(336	)		(335	)
Total controlling interest shareholders’ equity		20,724			20,552
Noncontrolling interest		3			7
Total equity		20,727			20,559
Total liabilities and equity	$	37,552		$	36,436

See accompanying notes.

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TRANSOCEAN LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(In millions)

(Unaudited)

	Six months ended June 30,
	2010			2009
Shares outstanding
Balance, beginning of period		321			319
Issuance of shares under share-based compensation plans		1			2
Purchases of shares held in treasury		(3	)		—
Balance, end of period		319			321
Shares
Balance, beginning of period	$	4,472		$	4,444
Issuance of shares under share-based compensation plans		7			24
Balance, end of period	$	4,479		$	4,468
Additional paid-in capital
Balance, beginning of period	$	7,407		$	7,313
Share-based compensation expense		53			43
Issuance of shares under share-based compensation plans		(9	)		16
Obligation for cash distribution		(1,024	)		—
Repurchases of convertible senior notes		—			16
Changes in ownership of noncontrolling interest and other, net		(6	)		—
Balance, end of period	$	6,421		$	7,388
Treasury shares, at cost
Balance, beginning of period	$	—		$	—
Purchases of shares held in treasury		(240	)		—
Balance, end of period	$	(240	)	$	—
Retained earnings
Balance, beginning of period	$	9,008		$	5,827
Net income attributable to controlling interest		1,392			1,748
Balance, end of period	$	10,400		$	7,575
Accumulated other comprehensive loss
Balance, beginning of period	$	(335	)	$	(420	)
Other comprehensive loss attributable to controlling interest		(1	)		(29	)
Balance, end of period	$	(336	)	$	(449	)
Total controlling interest shareholders’ equity
Balance, beginning of period	$	20,552		$	17,164
Total comprehensive income attributable to controlling interest		1,391			1,719
Share-based compensation expense		53			43
Issuance of shares under share-based compensation plans		(2	)		40
Purchases of shares held in treasury		(240	)		—
Obligation for cash distribution		(1,024	)		—
Repurchases of convertible senior notes		—			16
Changes in ownership of noncontrolling interest and other, net		(6	)		—
Balance, end of period	$	20,724		$	18,982
Total noncontrolling interest
Balance, beginning of period	$	7		$	3
Net income (loss) attributable to noncontrolling interest		13			(1	)
Other comprehensive income (loss) attributable to noncontrolling interest		(21	)		11
Changes in ownership of noncontrolling interest		4			—
Balance, end of period	$	3		$	13
Total equity
Balance, beginning of period	$	20,559		$	17,167
Total comprehensive income		1,383			1,729
Share-based compensation expense		53			43
Issuance of shares under share-based compensation plans		(2	)		40
Purchases of shares held in treasury		(240	)		—
Obligation for cash distribution		(1,024	)		—
Repurchases of convertible notes		—			16
Changes in ownership of noncontrolling interest and other, net		(2	)		—
Balance, end of period	$	20,727		$	18,995

See accompanying notes.

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TRANSOCEAN LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

	Three months ended June 30,						Six months ended June 30,
	2010			2009			2010			2009

Cash flows from operating activities
Net income	$	720		$	808		$	1,405		$	1,747
Adjustments to reconcile net income to net cash provided by operating activities
Amortization of drilling contract intangibles		(29	)		(75	)		(62	)		(179	)
Depreciation, depletion and amortization		400			360			801			715
Share-based compensation expense		18			24			53			43
Excess tax benefit from share-based compensation plans		(1	)		—			(1	)		(1	)
(Gain) loss on disposal of assets, net		(268	)		4			(254	)		—
Loss on impairment		—			67			2			288
(Gain) loss on retirement of debt		—			8			(2	)		10
Amortization of debt issue costs, discounts and premiums, net		51			57			100			109
Deferred income taxes		(12	)		20			(34	)		26
Other, net		(6	)		14			(1	)		23
Deferred revenue, net		7			49			158			43
Deferred expenses, net		(23	)		(37	)		(37	)		(35	)
Changes in operating assets and liabilities		412			277			313			228
Net cash provided by operating activities		1,269			1,576			2,441			3,017

Cash flows from investing activities
Capital expenditures		(300	)		(947	)		(679	)		(1,655	)
Proceeds from disposal of assets, net		10			—			51			8
Proceeds from insurance recoveries for loss of drilling unit		560			—			560			—
Proceeds from payments on notes receivable		11			—			21			—
Proceeds from short-term investments		—			172			5			393
Purchases of short-term investments		—			(234	)		—			(234	)
Joint ventures and other investments, net		(1	)		—			(1	)		—
Net cash provided by (used in) investing activities		280			(1,009	)		(43	)		(1,488	)

Cash flows from financing activities
Change in short-term borrowings, net		(46	)		(476	)		(177	)		(500	)
Proceeds from debt		—			231			54			319
Repayments of debt		(22	)		(708	)		(275	)		(1,410	)
Payments for warrant exercises, net		—			(13	)		—			(13	)
Purchases of shares held in treasury		(180	)		—			(240	)		—
Proceeds from (taxes paid for) share-based compensation plans, net		3			5			(1	)		22
Excess tax benefit from share-based compensation plans		1			—			1			1
Other, net		(3	)		(1	)		(2	)		(4	)
Net cash used in financing activities		(247	)		(962	)		(640	)		(1,585	)

Net increase (decrease) in cash and cash equivalents		1,302			(395	)		1,758			(56	)
Cash and cash equivalents at beginning of period		1,586			1,302			1,130			963
Cash and cash equivalents at end of period	$	2,888		$	907		$	2,888		$	907

See accompanying notes.

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TRANSOCEAN LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1—Nature of Business

Transocean Ltd. (together with its subsidiaries and predecessors, unless the context requires otherwise, “Transocean,” the “Company,” “we,” “us” or “our”) is a leading international provider of offshore contract drilling services for oil and gas wells. Our mobile offshore drilling fleet is considered one of the most modern and versatile fleets in the world. Specializing in technically demanding sectors of the offshore drilling business with a particular focus on deepwater and harsh environment drilling services, we contract our drilling rigs, related equipment and work crews predominantly on a dayrate basis to drill oil and gas wells. At June 30, 2010, we owned, had partial ownership interests in or operated 139 mobile offshore drilling units. As of this date, our fleet consisted of 45 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 three Ultra-Deepwater Floaters under construction (see Note 8—Drilling Fleet).

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.

Note 2—Significant Accounting Policies

Basis of presentation—We have prepared our accompanying condensed consolidated financial statements 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 six months ended June 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010 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, 2009.

Accounting estimates—The preparation of financial statements in accordance with accounting principles generally accepted in the U.S. requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and assumptions, including those related to our allowance for doubtful accounts, materials and supplies obsolescence, property and equipment, investments, notes receivable, goodwill and other intangible assets, income taxes, share-based compensation, defined benefit pension plans and other postretirement benefits and contingencies. We base our estimates and assumptions on historical experience and on various other factors we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amounts of assets and liabilities that are not readily apparent from other sources. Actual results could differ from such estimates.

Fair value measurements—We estimate fair value at a price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market for the asset or liability. Our valuation techniques require inputs that we categorize using a three-level hierarchy, from highest to lowest level of observable inputs, as follows: (1) unadjusted quoted prices for identical assets or liabilities in active markets (“Level 1”), (2) direct or indirect observable inputs, including quoted prices or other market data, for similar assets or liabilities in active markets or identical assets or liabilities in less active markets (“Level 2”) and (3) unobservable inputs that require significant judgment for which there is little or no market data (“Level 3”). When multiple input levels are required for a valuation, we categorize the entire fair value measurement according to the lowest level of input that is significant to the measurement even though we may have also utilized significant inputs that are more readily observable.

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. We apply the equity method of accounting for investments in joint ventures and other entities when we have the ability to exercise significant influence over an entity that (a) does not meet the variable interest entity criteria or (b) meets the variable interest entity criteria, but for which we are not deemed to be the primary beneficiary. We apply the cost method of accounting for investments in joint ventures and other entities if we do not have the ability to exercise significant influence over the unconsolidated affiliate. See Note 4—Variable Interest Entities.

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TRANSOCEAN LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Share-based compensation—Share-based compensation expense was $18 million and $53 million for the three and six months ended June 30, 2010, respectively. Share-based compensation expense was $24 million and $43 million for the three and six months ended June 30, 2009, respectively.

Capitalized interest—We capitalize interest costs for qualifying construction and upgrade projects. We capitalized interest costs on construction work in progress of $19 million and $47 million for the three and six months ended June 30, 2010, respectively. We capitalized interest costs on construction work in progress of $49 million and $95 million for the three and six months ended June 30, 2009, respectively.

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

Subsequent events—We evaluate subsequent events through the time of our filing on the date we issue our financial statements. See Note 15—Subsequent Events.

Note 3—New Accounting Pronouncements

Recently adopted accounting standards

Consolidation—Effective January 1, 2010, we adopted the accounting standards update that requires enhanced transparency of our involvement with variable interest entities, which (a) amends certain guidance for determining whether an enterprise is a variable interest entity, (b) requires a qualitative rather than a quantitative analysis to determine the primary beneficiary, and (c) requires continuous assessments of whether an enterprise is the primary beneficiary of a variable interest entity. We evaluated these requirements, particularly with regard to our interests in Transocean Pacific Drilling Inc. (“TPDI”) and Angola Deepwater Drilling Company Limited (“ADDCL”) and our adoption did not have a material effect on our condensed consolidated statement of financial position, results of operations or cash flows. See Note 4—Variable Interest Entities.

Fair value measurements and disclosures—Effective January 1, 2010, we adopted the effective provisions of the accounting standards update that clarifies existing disclosure requirements and introduces additional disclosure requirements for fair value measurements. The update requires entities to disclose the amounts of and reasons for significant transfers between Level 1 and Level 2, the reasons for any transfers into or out of Level 3, and information about recurring Level 3 measurements of purchases, sales, issuances and settlements on a gross basis. The update also clarifies that entities must provide (a) fair value measurement disclosures for each class of assets and liabilities and (b) information about both the valuation techniques and inputs used in estimating Level 2 and Level 3 fair value measurements. We have applied the effective provisions of this accounting standards update in preparing the disclosures in our notes to condensed consolidated financial statements and our adoption did not have a material effect on such disclosures. See Note 2—Significant Accounting Policies.

Subsequent events—Effective for financial statements issued after February 2010, we adopted the accounting standards update regarding subsequent events, which clarifies that SEC filers are not required to disclose the date through which management evaluated subsequent events in the financial statements. Our adoption did not have a material effect on the disclosures contained within our notes to condensed consolidated financial statements. See Note 2—Significant Accounting Policies.

Recently issued accounting standards

Fair value measurements and disclosures—Effective January 1, 2011, we will adopt the remaining provisions of the accounting standards update that clarifies existing disclosure requirements and introduces additional disclosure requirements for fair value measurements. The update requires entities to separately disclose information about purchases, sales, issuances, and settlements in the reconciliation of recurring Level 3 measurements on a gross basis. The update is effective for interim and annual periods beginning after December 15, 2010. We do not expect that our adoption will have a material effect on the disclosures contained in our notes to consolidated financial statements.

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TRANSOCEAN LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 4—Variable Interest Entities

Consolidated variable interest entities—TPDI and ADDCL, two joint venture companies in which we hold interests, were formed to own and operate certain ultra-deepwater drillships. We have determined that each of these joint venture companies meets the criteria of a variable interest entity for accounting purposes because their equity at risk is insufficient to permit them to carry on their activities without additional subordinated financial support from us. We have also determined, in each case, that we are the primary beneficiary for accounting purposes since (a) we have the power to direct the construction, marketing and operating activities, which are the activities that most significantly impact each entity’s economic performance, and (b) we have the obligation to absorb a majority of the losses or receive a majority of the benefits that could be potentially significant to the variable interest entity. As a result, we consolidate TPDI and ADDCL in our condensed 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 amounts associated with these two joint venture companies, after eliminating the effect of intercompany transactions, were as follows (in millions):

	June 30, 2010						December 31, 2009
	Assets		Liabilities		Net carrying amount		Assets		Liabilities		Net carrying amount
Variable interest entity
TPDI	$	1,600	$	806	$	794	$	1,500	$	763	$	737
ADDCL		825		319		506		582		482		100
Total	$	2,425	$	1,125	$	1,300	$	2,082	$	1,245	$	837

Unconsolidated variable interest entities—In January 2010, we completed the sale of two Midwater Floaters, GSF Arctic II and GSF Arctic IV, to subsidiaries of Awilco Drilling Limited, a U.K. company (“ADL”). See Note 8—Drilling Fleet. We have determined that ADL meets the criteria of a variable interest entity for accounting purposes because their equity at risk is insufficient to permit them to carry on their activities without additional subordinated financial support. We have also determined that we are not the primary beneficiary for accounting purposes since, although we hold a significant financial interest in the variable interest entity and have the obligation to absorb losses or receive benefits that could be potentially significant to the variable interest entity, we do not have the power to direct the marketing and operating activities that most significantly impact the entity’s economic performance.

In connection with the sale, we accepted payment in the form of cash and two notes receivable, which are secured by the drilling units, with an aggregate principal amount of $165 million. The notes receivable have stated interest rates of 9 percent and are payable in scheduled quarterly installments of principal and interest through maturity in January 2015. We have also committed to provide ADL with a working capital loan, which is also secured by the drilling units, with a maximum borrowing amount of $35 million. Additionally, we continue to operate GSF Arctic IV under a short-term bareboat charter with ADL through October 2010. At June 30, 2010, the notes receivable and working capital loan receivable represented aggregate carrying amounts of $120 million and $1 million, respectively, which together represents our maximum exposure to loss.

Note 5—Impairments

Goodwill—During the six months ended June 30, 2010, we recognized a loss on impairment of goodwill associated with our oil and gas properties in the amount of $2 million ($0.01 per diluted share), which had no tax effect. The carrying amount of goodwill associated with our oil and gas properties reporting unit was $2 million at December 31, 2009.

Definite-lived intangible assets—During the six months ended June 30, 2009, we determined that the customer relationships intangible asset associated with our drilling management services was impaired due to market conditions in that reporting unit resulting from the global economic downturn and continued pressure on commodity prices. We estimated the fair value of the customer relationships intangible asset using the excess earnings method, a generally accepted valuation methodology that applies the income approach. Our valuation required us to project the future performance of the drilling management services unit based on 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 asset exceeded its fair value and recognized a loss on impairment of $9 million ($0.03 per diluted share), which had no tax effect, during the three and six months ended June 30, 2009. The carrying amount of the customer relationship intangible asset associated with our drilling management services, recorded in other assets on our condensed consolidated balance sheets, was $62 million and $64 million at June 30, 2010 and December 31, 2009, respectively.

Assets held for sale—During the six months ended June 30, 2009, we determined that GSF Arctic II and GSF Arctic IV, both previously classified as assets held for sale, were impaired due to the global economic downturn and 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 required 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, considering the then-current market conditions and restrictions imposed by the OFT. As a result of our evaluation, we recognized losses on impairment of $58 million ($0.18 per diluted share) and $279 million ($0.87 per diluted share), which had no tax effect, for the three and six months ended June 30, 2009, respectively. The carrying amount of assets held for sale was $186 million at December 31, 2009, and these assets were sold in the six months ended June 30, 2010. See Note 8—Drilling Fleet.

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TRANSOCEAN LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 6—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.

Tax provision—We conduct operations through our various subsidiaries in a number of countries throughout the world, all of which have taxation regimes with varying nominal rates, deductions, credits and other tax attributes. Our provision for income taxes is based on the tax laws and rates applicable in the jurisdictions in which we operate and earn income. There is little to no expected relationship between the provision for or benefit from income taxes and income or loss before income taxes considering, among other factors, (a) changes in the blend of income that is taxed based on gross revenues versus income before taxes, (b) rig movements between taxing jurisdictions and (c) our rig operating structures.

Our estimated annual effective tax rates for the six months ended June 30, 2010 and June 30, 2009 were 15.5 percent and 15.4 percent, respectively. These rates were based on projected annual income before income taxes for each period after adjusting for certain items, such as impairment losses, the gain resulting from the insurance recoveries on the loss of Deepwater Horizon and various other discrete items.

We record a valuation allowance for deferred tax assets, including those resulting from net operating losses, when it is more likely than not that we will not realize some or all of the benefit from the deferred tax assets. At June 30, 2010 and December 31, 2009, the valuation allowance for non-current deferred tax assets was $70 million and $69 million, respectively.

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. For the six months ended June 30, 2010 and June 30, 2009, the amount of current tax benefit recognized from the settlement of disputes with tax authorities and from the expiration of statutes of limitations was insignificant.

The liabilities related to our unrecognized tax benefits, including related interest and penalties that we recognize as a component of income tax expense, were as follows (in millions):

	June 30, 2010		December 31, 2009
Unrecognized tax benefits, excluding interest and penalties	$	457	$	460
Interest and penalties		209		200
Unrecognized tax benefits, including interest and penalties	$	666	$	660

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 three major jurisdictions for up to 15 years. Tax authorities in certain jurisdictions are examining our tax returns and in some cases have issued assessments. We are defending our tax positions in those jurisdictions. While we cannot predict or provide assurance as to the final outcome of these proceedings, we do not expect the ultimate liability to have a material adverse effect on our consolidated statement of financial position, or results of operations, although it may have a material adverse effect on our consolidated cash flows.

Tax positions—With respect to our 2004 and 2005 U.S. federal income tax returns, the U.S. tax authorities have withdrawn all of their previously proposed tax adjustments, except a claim regarding transfer pricing for certain charters of drilling rigs between our subsidiaries, reducing the total proposed adjustment to approximately $79 million, exclusive of interest. We believe an unfavorable outcome on this assessment with respect to 2004 and 2005 activities would not result in a material adverse effect on our consolidated financial position, results of operations or cash flows. Although we believe the transfer pricing for these charters is materially correct, we have been unable to reach a resolution with the tax authorities and we expect the matter to proceed to litigation.

In May 2010, we received an assessment from the U.S. tax authorities related to our 2006 and 2007 U.S. federal income tax returns. The significant issues raised in the assessment relate to transfer pricing for certain charters of drilling rigs between our subsidiaries and the creation of intangible assets resulting from the performance of engineering services between our subsidiaries. These two items would result in net adjustments of approximately $278 million of additional taxes, exclusive of interest. An unfavorable outcome on these adjustments could result in a material adverse effect on our consolidated financial position, results of operations or cash flows. We believe our returns are materially correct as filed, and we intend to continue to vigorously defend against all such claims.

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TRANSOCEAN LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

In addition, the assessment included adjustments related to a series of restructuring transactions that occurred between 2001 and 2004. These restructuring transactions ultimately resulted in the disposition of our interests in our former subsidiary TODCO in 2004 and 2005. The authorities are disputing the amount of capital losses resulting from the disposition of TODCO. We utilized a portion of the capital losses to offset capital gains on the 2006, 2007, 2008 and 2009 tax returns. The majority of the capital losses expired on December 31, 2009. The adjustments would also impact the amount of certain net operating losses and other carryovers into 2006 and later years. The authorities are also contesting the characterization of certain amounts of income received in 2006 and 2007 as capital gain and thus the availability of the capital gain for offset by the capital loss. Claims with respect to our U.S. federal income tax returns for 2006 through 2009 could result in net tax adjustments of approximately $320 million. An unfavorable outcome on these potential adjustments could result in a material adverse effect on our consolidated financial position, results of operations or cash flows. We believe that our tax returns are materially correct as filed, and we intend to vigorously defend against any potential claims.

The assessment also included certain claims with respect to withholding taxes and certain other items resulting in net tax adjustments of approximately $182 million, exclusive of interest. In addition, the tax authorities assessed penalties associated with the various tax adjustments in the aggregate amount of approximately $92 million, exclusive of interest. We believe that our tax returns are materially correct as filed, and we intend to vigorously defend against any potential claims.

Norwegian civil tax and criminal authorities are investigating various transactions undertaken by our subsidiaries in 2001 and 2002 as well as the actions of certain of our former external advisors on these transactions. The authorities issued tax assessments of (a) approximately $241 million plus interest, related to certain restructuring transactions, (b) approximately $105 million plus interest, related to the migration of a subsidiary that was previously subject to tax in Norway, (c) approximately $63 million plus interest, related to a 2001 dividend payment and (d) approximately $6 million plus interest, related to certain foreign exchange deductions and dividend withholding tax. We have filed or expect to file appeals to these tax assessments. We may be required to provide some form of financial security, in an amount up to $898 million, including interest and penalties, for these assessed amounts as this dispute is appealed and addressed by the Norwegian courts. The authorities have indicated that they plan to seek penalties of 60 percent on all matters. For these matters, we believe our returns are materially correct as filed, and we have and will continue to respond to all information requests from the Norwegian authorities. We intend to vigorously contest any assertions by the Norwegian authorities in connection with the various transactions being investigated.

During the six months ended June 30, 2010, our long-term liability for unrecognized tax benefits related to these Norwegian tax issues decreased $12 million to $169 million due to the accrual of interest being offset by favorable exchange rate fluctuations. An unfavorable outcome on these Norwegian civil tax matters could result in a material adverse effect on our consolidated financial position, results of operations or cash flows. 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.

The Norwegian authorities issued notification of criminal charges against Transocean Ltd. and certain of its subsidiaries related to disclosures included in one of our Norwegian tax returns. This notification, however, does not itself constitute an indictment under Norwegian law nor does it initiate legal proceedings but represents a formal expression of suspicion and continued investigation. All income taxes, interest charges and penalties related to this Norwegian tax return have previously been settled. We believe that these charges are without merit and plan to vigorously defend Transocean Ltd. and its subsidiaries to the fullest extent.

Certain of our Brazilian income tax returns for the years 2000 through 2004 are currently under examination. The Brazilian tax authorities have issued tax assessments totaling $109 million, plus a 75 percent penalty of $82 million and $102 million of interest through June 30, 2010. An unfavorable outcome on these proposed assessments could result in a material adverse effect on our consolidated financial position, results of operations or cash flows. 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.

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TRANSOCEAN LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 7—Earnings Per Share

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

	Three months ended June 30,												Six months ended June 30,
	2010						2009						2010						2009
	Basic			Diluted			Basic			Diluted			Basic			Diluted			Basic			Diluted
Numerator for earnings per share
Net income attributable to controlling interest	$	715		$	715		$	806		$	806		$	1,392		$	1,392		$	1,748		$	1,748
Undistributed earnings allocable to participating securities		(4	)		(5	)		(5	)		(5	)		(8	)		(8	)		(10	)		(10	)
Net income available to shareholders	$	711		$	710		$	801		$	801		$	1,384		$	1,384		$	1,738		$	1,738

Denominator for earnings per share
Weighted-average shares outstanding		319			319			320			320			320			320			320			320
Effect of stock options and other share-based awards		—			1			—			1			—			1			—			1
Weighted-average shares for per share calculation		319			320			320			321			320			321			320			321

Earnings per share	$	2.23		$	2.22		$	2.50		$	2.49		$	4.32		$	4.31		$	5.43		$	5.42

For the three and six months ended June 30, 2010, 2.3 million and 1.6 million share-based awards, respectively, were excluded from the calculation since the effect would have been anti-dilutive. For the three and six months ended June 30, 2009, 1.9 million and 2.9 million share-based awards, respectively, were excluded from the calculation since the effect would have been anti-dilutive.

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. See Note 9—Debt.

Note 8—Drilling Fleet

Expansion—Construction work in progress, recorded in property and equipment, was $2.6 billion and $3.7 billion at June 30, 2010 and December 31, 2009, respectively. The following table presents actual capital expenditures and other capital additions, including capitalized interest, for our remaining major construction projects (in millions):

	Six months ended June 30, 2010		Through December 31, 2009		Total costs

Discoverer Luanda (a)	$	160	$	535	$	695
Deepwater Champion (b)		56		527		583
Discoverer India		50		541		591
Dhirubhai Deepwater KG2 (c) (d)		33		641		674
Discover Inspiration (c)		7		667		674
Capitalized interest		47		183		230
Mobilization costs		36		19		55
Total	$	389	$	3,113	$	3,502

__________________________

(a)	The costs for Discoverer Luanda represent 100 percent of expenditures incurred since inception. ADDCL is responsible for all of these costs. We hold a 65 percent interest in ADDCL, and Angco Cayman Limited holds the remaining 35 percent interest.

(b)	These costs include our initial investment in Deepwater Champion of $109 million, representing the estimated fair value of the rig at the time of our merger with GlobalSantaFe Corporation (“GlobalSantaFe”) in November 2007.

(c)	The accumulated construction costs of these rigs are no longer included in construction work in progress, as their construction projects had been completed as of June 30, 2010.

(d)

The cost for Dhirubhai Deepwater KG2 represents 100 percent of TPDI’s expenditures, including those incurred prior to our investment in the joint venture. TPDI is responsible for all of these costs. We hold a 50 percent interest in TPDI, and Pacific Drilling Limited (“Pacific Drilling”) holds the remaining 50 percent interest.

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TRANSOCEAN LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

During the six months ended June 30, 2010, we acquired GSF Explorer, an asset formerly held under capital lease, in exchange for a cash payment in the amount of $15 million, terminating the capital lease obligation. See Note 9—Debt.

Dispositions—During the six months ended June 30, 2010, we completed the sale of two Midwater Floaters, GSF Arctic II and GSF Arctic IV. In connection with the sale, we received net cash proceeds of $38 million and non-cash proceeds in the form of two notes receivable in the aggregate amount of $165 million. The notes receivable, which are secured by the drilling units, have stated interest rates of 9 percent and are payable in scheduled quarterly installments of principal and interest through maturity in January 2015. We estimated the fair values of the notes receivable based on unobservable inputs that require significant judgment, for which there is little or no market data, including the credit rating of the buyer. We continue to operate GSF Arctic IV under a short-term bareboat charter with the new owner of the vessel through October 2010. As a result of the sale, we recognized a loss on disposal of assets in the amount of $15 million ($0.04 per diluted share), which had no tax effect for the six months ended June 30, 2010. For the three and six months ended June 30, 2010, we recognized gains on disposal of other unrelated assets in the amounts of $1 million and $2 million, respectively.

During the six months ended June 30, 2009, we received net proceeds of $8 million in connection with our sale of Sedco 135-D and disposals of other unrelated property and equipment, and these disposals had no net effect on income taxes or net income. During the three months ended June 30, 2009, we recognized a loss on disposal of assets of $4 million ($0.01 per diluted share), which had no tax effect.

Deepwater Horizon—On April 22, 2010, the Ultra-Deepwater Floater Deepwater Horizon sank after a blowout of the Macondo well caused a fire and explosion on the rig. The rig had an insured value of $560 million, which was not subject to a deductible, and our insurance underwriters have declared the vessel a total loss. During the three months ended June 30, 2010, we received $560 million in cash proceeds from insurance recoveries related to the loss of the drilling unit and, for the three and six months ended June 30, 2010, we recognized a gain on the loss of the rig in the amount of $267 million ($0.83 per diluted share), which had no tax effect. See Note 12—Contingencies.

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TRANSOCEAN LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 9—Debt

Our debt, net of unamortized discounts, premiums and fair value adjustments, was comprised of the following (in millions):

	June 30, 2010						December 31, 2009
	Transocean Ltd. and subsidiaries		Consolidated variable interest entities		Consolidated total		Transocean Ltd. and subsidiaries		Consolidated variable interest entities		Consolidated total

ODL Loan Facility	$	10	$	—	$	10	$	10	$	—	$	10
Commercial paper program (a)		104		—		104		281		—		281
6.625% Notes due April 2011 (a)		168		—		168		170		—		170
5% Notes due February 2013		254		—		254		247		—		247
5.25% Senior Notes due March 2013 (a)		509		—		509		496		—		496
TPDI Credit Facilities due March 2015		—		595		595		—		581		581
ADDCL Credit Facilities due August 2017		—		241		241		—		454		454
TPDI Notes due October 2019		—		148		148		—		148		148
6.00% Senior Notes due March 2018 (a)		997		—		997		997		—		997
7.375% Senior Notes due April 2018 (a)		247		—		247		247		—		247
Capital lease obligation due July 2026		—		—		—		15		—		15
8% Debentures due April 2027 (a)		57		—		57		57		—		57
7.45% Notes due April 2027 (a)		96		—		96		96		—		96
7% Senior Notes due June 2028		312		—		312		313		—		313
Capital lease contract due August 2029		703		—		703		711		—		711
7.5% Notes due April 2031 (a)		598		—		598		598		—		598
1.625% Series A Convertible Senior Notes due December 2037 (a)		1,281		—		1,281		1,261		—		1,261
1.50% Series B Convertible Senior Notes due December 2037 (a)		2,093		—		2,093		2,057		—		2,057
1.50% Series C Convertible Senior Notes due December 2037 (a)		2,014		—		2,014		1,979		—		1,979
6.80% Senior Notes due March 2038 (a)		999		—		999		999		—		999
Total debt		10,442		984		11,426		10,534		1,183		11,717
Less debt due within one year
ODL Loan Facility		10		—		10		10		—		10
Commercial paper program (a)		104		—		104		281		—		281
6.625% Notes due April 2011 (a)		168		—		168		—		—		—
TPDI Credit Facilities due March 2015		—		70		70		—		52		52
ADDCL Credit Facilities due August 2017		—		12		12		—		248		248
Capital lease contract due August 2029		17		—		17		16		—		16
1.625% Series A Convertible Senior Notes due December 2037 (a)		1,281		—		1,281		1,261		—		1,261
Total debt due within one year		1,580		82		1,662		1,568		300		1,868
Total long-term debt	$	8,862	$	902	$	9,764	$	8,966	$	883	$	9,849

__________________________

(a)

Transocean Inc., a wholly owned subsidiary of Transocean Ltd., is the issuer of the notes and debentures, which have been guaranteed by Transocean Ltd. Transocean Ltd. has also guaranteed borrowings under the commercial paper program and the Five-Year Revolving Credit Facility. Transocean Ltd. has no independent assets or operations, its guarantee of debt securities of Transocean Inc. is full and unconditional and 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.

- 13 -

TRANSOCEAN LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Scheduled maturities—In preparing the scheduled maturities of our debt, we assume the noteholders will exercise their options to require us to repurchase the 1.625% Series A, 1.50% Series B and 1.50% Series C Convertible Senior Notes (collectively, the “Convertible Senior Notes”) in December 2010, 2011 and 2012, respectively. At June 30, 2010, the scheduled maturities of our debt were as follows (in millions):

	Transocean Ltd. and subsidiaries			Consolidated variable interest entities		Consolidated total
Twelve months ending June 30,
2011	$	1,595		$	82	$	1,677
2012		2,218			96		2,314
2013		2,969			98		3,067
2014		21			99		120
2015		23			346		369
Thereafter		3,909			263		4,172
Total debt, excluding unamortized discounts, premiums and fair value adjustments		10,735			984		11,719
Total unamortized discounts, premiums and fair value adjustments		(293	)		—		(293	)
Total debt	$	10,442		$	984	$	11,426

Commercial paper program—We maintain a commercial paper program, which is supported by the Five-Year Revolving Credit Facility, under which we may issue privately placed, unsecured commercial paper notes for general corporate purposes up to a maximum aggregate outstanding amount of $1.5 billion. At June 30, 2010, $104 million in commercial paper was outstanding at a weighted-average interest rate of 0.5 percent, excluding commissions.

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 June 30, 2010. At June 30, 2010, we had $81 million in letters of credit issued and outstanding and no borrowings outstanding under the Five-Year Revolving Credit Facility.

TPDI Credit Facilities—TPDI has a bank credit agreement for a $1.265 billion secured credit facility (the “TPDI Credit Facilities”) comprised of a $1.0 billion senior term loan, a $190 million junior term loan and a $75 million revolving credit facility, which was established to finance the construction of and is secured by Dhirubhai Deepwater KG1 and Dhirubhai Deepwater KG2. One of our subsidiaries participates in the secured term loan with an aggregate commitment of $595 million. At June 30, 2010, $1.2 billion was outstanding under the TPDI Credit Facilities, of which $577 million was due to one of our subsidiaries and was eliminated in consolidation. The weighted-average interest rate on June 30, 2010 was 2.1 percent. See Note 10—Derivatives and Hedging.

In April 2010, we had a letter of credit issued in the amount of $60 million on behalf of TPDI to satisfy its liquidity requirements under the TPDI Credit Facilities.

TPDI Notes—TPDI has issued promissory notes (the “TPDI Notes”) payable to its two shareholders, Pacific Drilling and one of our subsidiaries, which have maturities through October 2019. At June 30, 2010, the aggregate outstanding principal amount was $296 million, of which $148 million was due to one of our subsidiaries and has been eliminated in consolidation. The weighted-average interest rate on June 30, 2010 was 2.4 percent.

ADDCL Credit Facilities—ADDCL has a senior secured bank credit agreement for a credit facility (the “ADDCL Primary Loan Facility”) comprised of Tranche A, Tranche B and Tranche C for $215 million, $270 million and $399 million, respectively, which was established to finance the construction of and is secured by Discoverer Luanda. Unaffiliated financial institutions provide the commitment for and the borrowings under Tranche A. One of our subsidiaries provides the commitment for and the borrowings under Tranche C. In March 2010, ADDCL terminated Tranche B, having repaid borrowings of $235 million under Tranche B using borrowings under Tranche C. At June 30, 2010, $215 million was outstanding under Tranche A at a weighted-average interest rate of 0.8 percent. At June 30, 2010, $399 million was outstanding under Tranche C, which was eliminated in consolidation.

Additionally, ADDCL has a secondary bank credit agreement for a $90 million credit facility (the “ADDCL Secondary Loan Facility”), for which one of our subsidiaries provides 65 percent of the total commitment. At June 30, 2010, $75 million was outstanding under the ADDCL Secondary Loan Facility, of which $49 million was provided by one of our subsidiaries and has been eliminated in consolidation. The weighted-average interest rate on June 30, 2010 was 3.7 percent.

- 14 -

TRANSOCEAN LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Capital lease obligation—During the six months ended June 30, 2010, we acquired GSF Explorer, an asset formerly held under a capital lease, in exchange for a cash payment of $15 million, thereby terminating the capital lease obligation. In connection with the termination of the capital lease obligation, we recognized a gain on debt retirement of $2 million, which had no per diluted share or tax effect. See Note 8—Drilling Fleet.

1.625% Series A, 1.50% Series B and 1.50% Series C Convertible Senior Notes—The carrying amounts of the liability components of the Convertible Senior Notes were as follows (in millions):

	June 30, 2010							December 31, 2009
	Principal amount		Unamortized discount			Carrying amount		Principal amount		Unamortized discount			Carrying amount
Carrying amount of liability component
Series A Convertible Senior Notes due 2037	$	1,299	$	(18	)	$	1,281	$	1,299	$	(38	)	$	1,261
Series B Convertible Senior Notes due 2037		2,200		(107	)		2,093		2,200		(143	)		2,057
Series C Convertible Senior Notes due 2037		2,200		(186	)		2,014		2,200		(221	)		1,979

The carrying amounts of the equity components of the Convertible Senior Notes were as follows (in millions):

	June 30, 2010		December 31, 2009
Carrying amount of equity component
Series A Convertible Senior Notes due 2037	$	215	$	215
Series B Convertible Senior Notes due 2037		275		275
Series C Convertible Senior Notes due 2037		352		352

Including the amortization of the unamortized discount, the effective interest rates were 4.88 percent for the Series A Notes, 5.08 percent for the Series B Notes, and 5.28 percent for the Series C Notes. At June 30, 2010, the remaining period over which the discount will be amortized was less than a year for the Series A Notes, 1.5 years for the Series B Notes and 2.5 years for the Series C Notes. Interest expense, excluding amortization of debt issue costs, was as follows (in millions):

	Three months ended June 30,				Six months ended June 30,
	2010		2009		2010		2009
Interest expense
Series A Convertible Senior Notes due 2037	$	15	$	22	$	30	$	47
Series B Convertible Senior Notes due 2037		26		25		52		50
Series C Convertible Senior Notes due 2037		26		25		52		50

Under certain conditions, holders have the right to convert the Convertible Senior Notes at the applicable conversion rate. As of June 30, 2010, the applicable conversion rate was 5.9310 shares per $1,000 note, equivalent to a conversion price of $168.61 per share. The conversion rate is subject to increase upon the occurrence of certain fundamental changes and adjustment for other corporate events, such as the distribution of cash to our shareholders (see Note 13—Equity).

During the six months ended June 30, 2010, we did not repurchase any of the Convertible Senior Notes. During the six months ended June 30, 2009, we repurchased an aggregate principal amount of $440 million of the 1.625% Series A Notes for an aggregate cash payment of $410 million. During the three and six months ended June 30, 2009, respectively, we recognized a loss on retirement of $8 million ($0.03 per diluted share), with no tax effect, and $10 million ($0.03 per diluted share), with no tax effect, associated with the debt component of the 1.625% Series A Notes and recorded additional paid-in capital of $10 million and $16 million associated with the equity component of the 1.625% Series A Notes.

Note 10—Derivatives and Hedging

Cash flow hedges—TPDI has entered into interest rate swaps, which have been designated and have qualified as a cash flow hedge, to reduce the variability of cash interest payments associated with the variable-rate borrowings under the TPDI Credit Facilities. The aggregate notional amount corresponds with the aggregate outstanding amount of the borrowings under the TPDI Credit Facilities. As of June 30, 2010, the aggregate notional amount was $1.2 billion, of which $577 million was attributable to the intercompany borrowings provided by one of our subsidiaries and the related balances have been eliminated in consolidation. At June 30, 2010, the weighted-average variable interest rate associated with the interest rate swaps was 0.3 percent, and the weighted-average fixed interest rate was 2.3 percent. At June 30, 2010, the interest rate swaps represented a liability measured at a fair value of $13 million, recorded in other long-term liabilities, with a corresponding increase to accumulated other comprehensive loss. At December 31, 2009, the interest rate swaps represented an asset measured at a fair value of $5 million, recorded in other assets, and a liability measured at a fair value of less than $1 million, recorded in other long-term liabilities, with a corresponding net decrease to accumulated other comprehensive loss. The amount associated with the ineffective portion of the cash flow hedges was less than $1 million, recorded in interest expense for the three and six months ended June 30, 2010. There was no ineffectiveness for the three and six months ended June 30, 2009.

- 15 -

TRANSOCEAN LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Fair value hedges—Two of our wholly owned subsidiaries have entered into interest rate swaps, which are designated and have qualified as fair value hedges, to reduce our exposure to changes in the fair values of the 5.25% Senior Notes and the 5.00% Notes. The interest rate swaps have aggregate notional amounts of $500 million and $250 million, respectively, equal to the face values of the hedged instruments and have stated maturities that coincide with those of the hedged instruments. We have determined that the hedging relationships qualify for, and we have applied, the shortcut method of accounting, under which the interest rate swaps are considered to have no ineffectiveness and no ongoing assessment of effectiveness is required. At June 30, 2010, the weighted-average variable interest rate on the interest rate swaps was 3.7 percent, and the fixed interest rates matched those of the underlying debt instruments. At June 30, 2010, the interest rate swaps represented an asset measured at fair value of $14 million, recorded in other assets, with a corresponding increase to the carrying amounts of the underlying debt instruments. At December 31, 2009, the interest rate swaps represented a liability measured at a fair value of $4 million, recorded in other long-term liabilities, with a corresponding decrease to the carrying amount of the underlying debt instrument.

Note 11—Postemployment Benefit Plans

Defined benefit pension plans and other postretirement employee benefit plans—We have several defined benefit pension plans, both funded and unfunded, covering substantially all of our U.S. employees, including certain frozen plans, assumed in connection with our mergers, that cover certain current employees and certain former employees and directors of our predecessors (the “U.S. Plans”). We also have various defined benefit plans in the U.K., Norway, Nigeria, Egypt and Indonesia that cover our employees in those areas (the “Non-U.S. Plans”). Additionally, we offer several unfunded contributory and noncontributory other postretirement employee benefit plans (the “OPEB Plans”) covering substantially all of our U.S. employees. The components of net periodic benefit costs, before tax, and funding contributions were as follows (in millions):

	Three months ended June 30, 2010											Three months ended June 30, 2009
	U.S. Plans			Non-U.S. Plans			OPEB Plans		Total			U.S. Plans			Non-U.S. Plans			OPEB Plans		Total
Net periodic benefit costs
Service cost	$	11		$	4		$	1	$	16		$	11		$	4		$	1	$	16
Interest cost		14			5			—		19			13			4			—		17
Expected return on plan assets		(15	)		(3	)		—		(18	)		(14	)		(4	)		—		(18	)
Settlements and curtailments		2			—			—		2			—			—			—		—
Actuarial losses, net		3			1			—		4			5			—			—		5
Prior service cost, net		(1	)		—			—		(1	)		(1	)		1			—		—
Net periodic benefit costs	$	14		$	7		$	1	$	22		$	14		$	5		$	1	$	20

Funding contributions	$	49		$	4		$	1	$	54		$	45		$	—		$	1	$	46

	Six months ended June 30, 2010												Six months ended June 30, 2009
	U.S. Plans			Non-U.S. Plans			OPEB Plans			Total			U.S. Plans			Non-U.S. Plans			OPEB Plans		Total
Net periodic benefit costs
Service cost	$	21		$	10		$	1		$	32		$	22		$	8		$	1	$	31
Interest cost		27			8			1			36			25			8			1		34
Expected return on plan assets		(29	)		(8	)		—			(37	)		(27	)		(7	)		—		(34	)
Settlements and curtailments		2			1			—			3			2			—			—		2
Actuarial losses, net		7			4			—			11			9			—			—		9
Prior service cost, net		(1	)		—			(1	)		(2	)		(1	)		1			—		—
Net periodic benefit costs	$	27		$	15		$	1		$	43		$	30		$	10		$	2	$	42