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, 2013
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
_________________________
Commission file number 000-53533
TRANSOCEAN LTD.
(Exact name of registrant as specified in its charter)
|
Zug, Switzerland
|
98-0599916
|
|
(State or other jurisdiction of incorporation or organization)
|
(I.R.S. Employer Identification No.)
|
|
10 Chemin de Blandonnet
Vernier, Switzerland
|
1214
|
|
(Address of principal executive offices)
|
(Zip Code)
|
|
+41 (22) 930-9000
|
|
|
(Registrant’s telephone number, including area code)
|
|
_________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T 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 29, 2013, 360,590,539 shares were outstanding.
TRANSOCEAN LTD. AND SUBSIDIARIES
INDEX TO FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2013
|
Page
|
||
|
PART I.
|
FINANCIAL INFORMATION
|
|
|
Financial Statements (Unaudited)
|
||
|
PART II.
|
OTHER INFORMATION
|
|
PART I. FINANCIAL INFORMATION
|
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,
|
||||||||||||||||
|
2013
|
2012
|
2013
|
2012
|
||||||||||||||
|
Operating revenues
|
|||||||||||||||||
|
Contract drilling revenues
|
$
|
2,402
|
$
|
2,310
|
$
|
6,868
|
$
|
6,498
|
|||||||||
|
Other revenues
|
156
|
121
|
284
|
372
|
|||||||||||||
|
2,558
|
2,431
|
7,152
|
6,870
|
||||||||||||||
|
Costs and expenses
|
|||||||||||||||||
|
Operating and maintenance
|
1,491
|
1,321
|
4,259
|
4,668
|
|||||||||||||
|
Depreciation
|
273
|
280
|
834
|
845
|
|||||||||||||
|
General and administrative
|
67
|
69
|
211
|
217
|
|||||||||||||
|
1,831
|
1,670
|
5,304
|
5,730
|
||||||||||||||
|
Loss on impairment
|
(17
|
)
|
—
|
(54
|
)
|
(140
|
)
|
||||||||||
|
Gain on disposal of assets, net
|
32
|
50
|
23
|
40
|
|||||||||||||
|
Operating income
|
742
|
811
|
1,817
|
1,040
|
|||||||||||||
|
Other income (expense), net
|
|||||||||||||||||
|
Interest income
|
11
|
15
|
39
|
43
|
|||||||||||||
|
Interest expense, net of amounts capitalized
|
(142
|
)
|
(180
|
)
|
(445
|
)
|
(543
|
)
|
|||||||||
|
Other, net
|
(4
|
)
|
(8
|
)
|
(21
|
)
|
(32
|
)
|
|||||||||
|
(135
|
)
|
(173
|
)
|
(427
|
)
|
(532
|
)
|
||||||||||
|
Income from continuing operations before income tax expense
|
607
|
638
|
1,390
|
508
|
|||||||||||||
|
Income tax expense
|
63
|
105
|
212
|
124
|
|||||||||||||
|
Income from continuing operations
|
544
|
533
|
1,178
|
384
|
|||||||||||||
|
Income (loss) from discontinued operations, net of tax
|
4
|
(916
|
)
|
(6
|
)
|
(1,052
|
)
|
||||||||||
|
Net income (loss)
|
548
|
(383
|
)
|
1,172
|
(668
|
)
|
|||||||||||
|
Net income (loss) attributable to noncontrolling interest
|
2
|
(2
|
)
|
(2
|
)
|
7
|
|||||||||||
|
Net income (loss) attributable to controlling interest
|
$
|
546
|
$
|
(381
|
)
|
$
|
1,174
|
$
|
(675
|
)
|
|||||||
|
Earnings (loss) per share-basic
|
|||||||||||||||||
|
Earnings from continuing operations
|
$
|
1.49
|
$
|
1.49
|
$
|
3.25
|
$
|
1.06
|
|||||||||
|
Earnings (loss) from discontinued operations
|
0.01
|
(2.55
|
)
|
(0.02
|
)
|
(2.96
|
)
|
||||||||||
|
Earnings (loss) per share
|
$
|
1.50
|
$
|
(1.06
|
)
|
$
|
3.23
|
$
|
(1.90
|
)
|
|||||||
|
Earnings (loss) per share-diluted
|
|||||||||||||||||
|
Earnings from continuing operations
|
$
|
1.49
|
$
|
1.49
|
$
|
3.25
|
$
|
1.06
|
|||||||||
|
Earnings (loss) from discontinued operations
|
0.01
|
(2.55
|
)
|
(0.02
|
)
|
(2.96
|
)
|
||||||||||
|
Earnings (loss) per share
|
$
|
1.50
|
$
|
(1.06
|
)
|
$
|
3.23
|
$
|
(1.90
|
)
|
|||||||
|
Weighted-average shares outstanding
|
|||||||||||||||||
|
Basic
|
360
|
359
|
360
|
354
|
|||||||||||||
|
Diluted
|
361
|
359
|
360
|
354
|
|||||||||||||
See accompanying notes.
- 1 -
TRANSOCEAN LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
(Unaudited)
|
Three months ended
September 30,
|
Nine months ended
September 30,
|
||||||||||||||||
|
2013
|
2012
|
2013
|
2012
|
||||||||||||||
|
Net income (loss)
|
$
|
548
|
$
|
(383
|
)
|
$
|
1,172
|
$
|
(668
|
)
|
|||||||
|
Other comprehensive income (loss) before reclassifications
|
|||||||||||||||||
|
Components of net periodic benefit costs
|
(1
|
)
|
(5
|
)
|
47
|
(32
|
)
|
||||||||||
|
Loss on derivative instruments
|
—
|
—
|
(5
|
)
|
—
|
||||||||||||
|
Reclassifications to net income
|
|||||||||||||||||
|
Components of net periodic benefit costs
|
12
|
11
|
39
|
34
|
|||||||||||||
|
(Gain) loss on derivative instruments
|
—
|
(3
|
)
|
18
|
—
|
||||||||||||
|
Other comprehensive income before income taxes
|
11
|
3
|
99
|
2
|
|||||||||||||
|
Income taxes related to other comprehensive income
|
(2
|
)
|
1
|
(2
|
)
|
(1
|
)
|
||||||||||
|
Other comprehensive income, net of income taxes
|
9
|
4
|
97
|
1
|
|||||||||||||
|
Total comprehensive income (loss)
|
557
|
(379
|
)
|
1,269
|
(667
|
)
|
|||||||||||
|
Total comprehensive income (loss) attributable to noncontrolling interest
|
3
|
(2
|
)
|
—
|
7
|
||||||||||||
|
Total comprehensive income (loss) attributable to controlling interest
|
$
|
554
|
$
|
(377
|
)
|
$
|
1,269
|
$
|
(674
|
)
|
|||||||
|
September 30,
2013
|
December 31,
2012
|
|||||||
|
Assets
|
||||||||
|
Cash and cash equivalents
|
$
|
3,559
|
$
|
5,134
|
||||
|
Accounts receivable, net of allowance for doubtful accounts
of $20 at September 30, 2013 and December 31, 2012
|
2,367
|
2,200
|
||||||
|
Materials and supplies, net of allowance for obsolescence
of $71 and $66 at September 30, 2013 and December 31, 2012, respectively
|
729
|
610
|
||||||
|
Assets held for sale
|
131
|
179
|
||||||
|
Deferred income taxes, net
|
173
|
142
|
||||||
|
Other current assets
|
414
|
382
|
||||||
|
Total current assets
|
7,373
|
8,647
|
||||||
|
Property and equipment
|
27,707
|
26,967
|
||||||
|
Less accumulated depreciation
|
(7,596
|
)
|
(7,118
|
)
|
||||
|
Property and equipment of consolidated variable interest entities, net of accumulated depreciation
|
985
|
1,031
|
||||||
|
Property and equipment, net
|
21,096
|
20,880
|
||||||
|
Goodwill
|
2,987
|
2,987
|
||||||
|
Other assets
|
1,145
|
1,741
|
||||||
|
Total assets
|
$
|
32,601
|
$
|
34,255
|
||||
|
Liabilities and equity
|
||||||||
|
Accounts payable
|
$
|
962
|
$
|
1,047
|
||||
|
Accrued income taxes
|
176
|
116
|
||||||
|
Debt due within one year
|
162
|
1,339
|
||||||
|
Debt of consolidated variable interest entities due within one year
|
58
|
28
|
||||||
|
Other current liabilities
|
2,418
|
2,933
|
||||||
|
Total current liabilities
|
3,776
|
5,463
|
||||||
|
Long-term debt
|
10,388
|
10,929
|
||||||
|
Long-term debt of consolidated variable interest entities
|
120
|
163
|
||||||
|
Deferred income taxes, net
|
341
|
366
|
||||||
|
Other long-term liabilities
|
1,717
|
1,604
|
||||||
|
Total long-term liabilities
|
12,566
|
13,062
|
||||||
|
Commitments and contingencies
|
||||||||
|
Shares, CHF 15.00 par value, 373,830,649 authorized, 167,617,649 conditionally authorized, 373,830,649 issued and 360,559,090 outstanding at September 30, 2013 and 402,282,355 authorized, 167,617,649 conditionally authorized, 373,830,649 issued and 359,505,251 outstanding at December 31, 2012
|
5,145
|
5,130
|
||||||
|
Additional paid-in capital
|
6,766
|
7,521
|
||||||
|
Treasury shares, at cost, 2,863,267 held at September 30, 2013 and December 31, 2012
|
(240)
|
(240
|
)
|
|||||
|
Retained earnings
|
5,029
|
3,855
|
||||||
|
Accumulated other comprehensive loss
|
(426)
|
(521
|
)
|
|||||
|
Total controlling interest shareholders’ equity
|
16,274
|
15,745
|
||||||
|
Noncontrolling interest
|
(15)
|
(15
|
)
|
|||||
|
Total equity
|
16,259
|
15,730
|
||||||
|
Total liabilities and equity
|
$
|
32,601
|
$
|
34,255
|
||||
|
Nine months ended
September 30,
|
Nine months ended
September 30,
|
|||||||||||||||
|
2013
|
2012
|
2013
|
2012
|
|||||||||||||
|
Shares
|
Amount
|
|||||||||||||||
|
Shares
|
||||||||||||||||
|
Balance, beginning of period
|
360
|
350
|
$
|
5,130
|
$
|
4,982
|
||||||||||
|
Issuance of shares under share-based compensation plans
|
1
|
—
|
15
|
13
|
||||||||||||
|
Issuance of shares in exchange for noncontrolling interest
|
—
|
9
|
—
|
134
|
||||||||||||
|
Balance, end of period
|
361
|
359
|
$
|
5,145
|
$
|
5,129
|
||||||||||
|
Additional paid-in capital
|
||||||||||||||||
|
Balance, beginning of period
|
$
|
7,521
|
$
|
7,211
|
||||||||||||
|
Share-based compensation
|
85
|
72
|
||||||||||||||
|
Issuance of shares under share-based compensation plans
|
(30
|
)
|
(16
|
)
|
||||||||||||
|
Issuance of shares in exchange for noncontrolling interest
|
—
|
233
|
||||||||||||||
|
Reclassification of obligation for distribution of qualifying additional paid-in capital
|
(808
|
)
|
—
|
|||||||||||||
|
Other, net
|
(2
|
)
|
(4
|
)
|
||||||||||||
|
Balance, end of period
|
$
|
6,766
|
$
|
7,496
|
||||||||||||
|
Treasury shares, at cost
|
||||||||||||||||
|
Balance, beginning of period
|
$
|
(240
|
)
|
$
|
(240
|
)
|
||||||||||
|
Balance, end of period
|
$
|
(240
|
)
|
$
|
(240
|
)
|
||||||||||
|
Retained earnings
|
||||||||||||||||
|
Balance, beginning of period
|
$
|
3,855
|
$
|
4,180
|
||||||||||||
|
Net income (loss) attributable to controlling interest
|
1,174
|
(675
|
)
|
|||||||||||||
|
Fair value adjustment of redeemable noncontrolling interest
|
—
|
(106
|
)
|
|||||||||||||
|
Balance, end of period
|
$
|
5,029
|
$
|
3,399
|
||||||||||||
|
Accumulated other comprehensive loss
|
||||||||||||||||
|
Balance, beginning of period
|
$
|
(521
|
)
|
$
|
(496
|
)
|
||||||||||
|
Other comprehensive income attributable to controlling interest
|
95
|
1
|
||||||||||||||
|
Reclassification from redeemable noncontrolling interest
|
—
|
(17
|
)
|
|||||||||||||
|
Balance, end of period
|
$
|
(426
|
)
|
$
|
(512
|
)
|
||||||||||
|
Total controlling interest shareholders’ equity
|
||||||||||||||||
|
Balance, beginning of period
|
$
|
15,745
|
$
|
15,637
|
||||||||||||
|
Total comprehensive income (loss) attributable to controlling interest
|
1,269
|
(674
|
)
|
|||||||||||||
|
Share-based compensation
|
85
|
72
|
||||||||||||||
|
Issuance of shares under share-based compensation plans
|
(15
|
)
|
(3
|
)
|
||||||||||||
|
Issuance of shares in exchange for noncontrolling interest
|
—
|
367
|
||||||||||||||
|
Fair value adjustment of redeemable noncontrolling interest
|
—
|
(106
|
)
|
|||||||||||||
|
Reclassification from redeemable noncontrolling interest
|
—
|
(17
|
)
|
|||||||||||||
|
Reclassification of obligation for distribution of qualifying additional paid-in capital
|
(808
|
)
|
—
|
|||||||||||||
|
Other, net
|
(2
|
)
|
(4
|
)
|
||||||||||||
|
Balance, end of period
|
$
|
16,274
|
$
|
15,272
|
||||||||||||
|
Noncontrolling interest
|
||||||||||||||||
|
Balance, beginning of period
|
$
|
(15
|
)
|
$
|
(10
|
)
|
||||||||||
|
Total comprehensive loss attributable to noncontrolling interest
|
—
|
(6
|
)
|
|||||||||||||
|
Balance, end of period
|
$
|
(15
|
)
|
$
|
(16
|
)
|
||||||||||
|
Total equity
|
||||||||||||||||
|
Balance, beginning of period
|
$
|
15,730
|
$
|
15,627
|
||||||||||||
|
Total comprehensive income (loss)
|
1,269
|
(680
|
)
|
|||||||||||||
|
Share-based compensation
|
85
|
72
|
||||||||||||||
|
Issuance of shares under share-based compensation plans
|
(15
|
)
|
(3
|
)
|
||||||||||||
|
Issuance of shares in exchange for noncontrolling interest
|
—
|
367
|
||||||||||||||
|
Fair value adjustment of redeemable noncontrolling interest
|
—
|
(106
|
)
|
|||||||||||||
|
Reclassification from redeemable noncontrolling interest
|
—
|
(17
|
)
|
|||||||||||||
|
Reclassification of obligation for distribution of qualifying additional paid-in capital
|
(808
|
)
|
—
|
|||||||||||||
|
Other, net
|
(2
|
)
|
(4
|
)
|
||||||||||||
|
Balance, end of period
|
$
|
16,259
|
$
|
15,256
|
||||||||||||
|
Three months ended
September 30,
|
Nine months ended
September 30,
|
||||||||||||||||
|
2013
|
2012
|
2013
|
2012
|
||||||||||||||
|
Cash flows from operating activities
|
|||||||||||||||||
|
Net income (loss)
|
$
|
548
|
$
|
(383
|
)
|
$
|
1,172
|
$
|
(668
|
)
|
|||||||
|
Adjustments to reconcile to net cash provided by operating activities
|
|||||||||||||||||
|
Amortization of drilling contract intangibles
|
(5
|
)
|
(9
|
)
|
(21
|
)
|
(32
|
)
|
|||||||||
|
Depreciation
|
273
|
280
|
834
|
845
|
|||||||||||||
|
Depreciation and amortization of assets in discontinued operations
|
—
|
48
|
—
|
183
|
|||||||||||||
|
Share-based compensation expense
|
36
|
24
|
85
|
72
|
|||||||||||||
|
Loss on impairment
|
17
|
—
|
54
|
140
|
|||||||||||||
|
Loss on impairment of assets in discontinued operations
|
14
|
878
|
14
|
983
|
|||||||||||||
|
Gain on disposal of assets, net
|
(32
|
)
|
(50
|
)
|
(23
|
)
|
(40
|
)
|
|||||||||
|
(Gain) loss on disposal of assets in discontinued operations, net
|
(31
|
)
|
1
|
(49
|
)
|
(70
|
)
|
||||||||||
|
Amortization of debt issue costs, discounts and premiums, net
|
2
|
17
|
4
|
52
|
|||||||||||||
|
Deferred income taxes
|
(28
|
)
|
(61
|
)
|
(64
|
)
|
(104
|
)
|
|||||||||
|
Other, net
|
25
|
12
|
73
|
47
|
|||||||||||||
|
Changes in deferred revenue, net
|
(33
|
)
|
(64
|
)
|
(68
|
)
|
(69
|
)
|
|||||||||
|
Changes in deferred expenses, net
|
30
|
51
|
38
|
30
|
|||||||||||||
|
Changes in operating assets and liabilities
|
(193
|
)
|
42
|
(904
|
)
|
416
|
|||||||||||
|
Net cash provided by operating activities
|
623
|
786
|
1,145
|
1,785
|
|||||||||||||
|
Cash flows from investing activities
|
|||||||||||||||||
|
Capital expenditures
|
(450
|
)
|
(201
|
)
|
(1,290
|
)
|
(646
|
)
|
|||||||||
|
Capital expenditures for discontinued operations
|
—
|
(24
|
)
|
—
|
(75
|
)
|
|||||||||||
|
Proceeds from disposal of assets, net
|
170
|
181
|
174
|
189
|
|||||||||||||
|
Proceeds from disposal of assets in discontinued operations, net
|
68
|
2
|
131
|
196
|
|||||||||||||
|
Proceeds from sale of preference shares
|
—
|
—
|
185
|
—
|
|||||||||||||
|
Other, net
|
2
|
7
|
14
|
32
|
|||||||||||||
|
Net cash used in investing activities
|
(210
|
)
|
(35
|
)
|
(786
|
)
|
(304
|
)
|
|||||||||
|
Cash flows from financing activities
|
|||||||||||||||||
|
Changes in short-term borrowings, net
|
—
|
—
|
—
|
(260
|
)
|
||||||||||||
|
Proceeds from debt
|
—
|
1,493
|
—
|
1,493
|
|||||||||||||
|
Repayments of debt
|
(77
|
)
|
(264
|
)
|
(1,673
|
)
|
(584
|
)
|
|||||||||
|
Proceeds from restricted cash investments
|
77
|
106
|
283
|
298
|
|||||||||||||
|
Deposits to restricted cash investments
|
(8
|
)
|
(42
|
)
|
(112
|
)
|
(158
|
)
|
|||||||||
|
Distribution of qualifying additional paid-in capital
|
(202
|
)
|
—
|
(404
|
)
|
(278
|
)
|
||||||||||
|
Other, net
|
(1
|
)
|
(7
|
)
|
(28
|
)
|
(8
|
)
|
|||||||||
|
Net cash provided by (used in) financing activities
|
(211
|
)
|
1,286
|
(1,934
|
)
|
503
|
|||||||||||
|
Net increase (decrease) in cash and cash equivalents
|
202
|
2,037
|
(1,575
|
)
|
1,984
|
||||||||||||
|
Cash and cash equivalents at beginning of period
|
3,357
|
3,964
|
5,134
|
4,017
|
|||||||||||||
|
Cash and cash equivalents at end of period
|
$
|
3,559
|
$
|
6,001
|
$
|
3,559
|
$
|
6,001
|
|||||||||
Note 1—Nature of Business
Transocean Ltd. (together with its subsidiaries and predecessors, unless the context requires otherwise, “Transocean,” the “Company,” “we,” “us” or “our”) is a leading international provider of offshore contract drilling services for oil and gas wells. We specialize in technically demanding sectors of the offshore drilling business with a particular focus on deepwater and harsh environment drilling services. Our mobile offshore drilling fleet is considered one of the most versatile fleets in the world. We contract our drilling rigs, related equipment and work crews predominantly on a dayrate basis to drill oil and gas wells. At September 30, 2013, we owned or had partial ownership interests in and operated 80 mobile offshore drilling units associated with our continuing operations. At September 30, 2013, our fleet consisted of 46 High-Specification Floaters (Ultra-Deepwater, Deepwater and Harsh Environment semisubmersibles and drillships), 23 Midwater Floaters, and 11 High-Specification Jackups. At September 30, 2013, we also had six Ultra-Deepwater drillships and one High-Specification Jackup under construction or under contract to be constructed. See Note 9—Drilling Fleet.
We also provide oil and gas drilling management services, drilling engineering and drilling project management services outside the United States (“U.S.”) through Applied Drilling Technology Inc., our wholly owned subsidiary, and through ADT International, a division of one of our United Kingdom (“U.K.”) subsidiaries (together, “ADTI”). ADTI conducts drilling management services primarily either on a dayrate or on a completed-project, fixed-price or turnkey basis.
In November 2012, in connection with our efforts to dispose of non-strategic assets and to reduce our exposure to low-specification drilling units, we completed the sale of 38 drilling units to Shelf Drilling Holdings, Ltd. (together with its affiliates, “Shelf Drilling”). See Note 7—Discontinued Operations.
Note 2—Significant Accounting Policies
Presentation—We have prepared our accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the U.S. for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the U.S. Securities and Exchange Commission (“SEC”). Pursuant to such rules and regulations, these financial statements do not include all disclosures required by accounting principles generally accepted in the U.S. for complete financial statements. The condensed consolidated financial statements reflect all adjustments, which are, in the opinion of management, necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods. Such adjustments are considered to be of a normal recurring nature unless otherwise noted. Operating results for the three and nine months ended September 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013 or for any future period. The accompanying condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto as of December 31, 2012 and 2011 and for each of the three years in the period ended December 31, 2012 included in our annual report on Form 10-K filed on March 1, 2013.
Accounting estimates—To prepare financial statements in accordance with accounting principles generally accepted in the U.S., we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and assumptions, including those related to our discontinued operations, allowance for doubtful accounts, materials and supplies obsolescence, property and equipment, investments, notes receivable, goodwill, income taxes, contingencies, share-based compensation, defined benefit pension plans and other postretirement benefits. We base our estimates and assumptions on historical experience and on various other factors we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amounts of assets and liabilities that are not readily apparent from other sources. Actual results could differ from such estimates.
Fair value measurements—We estimate fair value at a price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market for the asset or liability. Our valuation techniques require inputs that we categorize using a three-level hierarchy, from highest to lowest level of observable inputs, as follows: (1) significant observable inputs, including unadjusted quoted prices for identical assets or liabilities in active markets (“Level 1”), (2) significant other observable inputs, including direct or indirect market data for similar assets or liabilities in active markets or identical assets or liabilities in less active markets (“Level 2”) and (3) significant unobservable inputs, including those that require considerable judgment for which there is little or no market data (“Level 3”). When multiple input levels are required for a valuation, we categorize the entire fair value measurement according to the lowest level of input that is significant to the measurement even though we may have also utilized significant inputs that are more readily observable.
Consolidation—We consolidate entities in which we have a majority voting interest and entities that meet the criteria for variable interest entities for which we are deemed to be the primary beneficiary for accounting purposes. We eliminate intercompany transactions and accounts in consolidation. We apply the equity method of accounting for an investment in an entity if we have the ability to exercise significant influence over the entity that (a) does not meet the variable interest entity criteria or (b) meets the variable interest entity criteria, but for which we are not deemed to be the primary beneficiary. We apply the cost method of accounting for an investment in an entity if we do not have the ability to exercise significant influence over the unconsolidated entity. See Note 4—Variable Interest Entities.
- 6 -
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—continued
(Unaudited)
Share-based compensation—In the three and nine months ended September 30, 2013, we recognized share-based compensation expense of $36 million and $85 million, respectively. In the three and nine months ended September 30, 2012, we recognized share-based compensation expense of $24 million and $72 million, respectively.
Capitalized interest—We capitalize interest costs for qualifying construction and upgrade projects. In the three and nine months ended September 30, 2013, we capitalized interest costs on construction work in progress of $19 million and $56 million, respectively. In the three and nine months ended September 30, 2012, we capitalized interest costs on construction work in progress of $12 million and $37 million, respectively.
Reclassifications—We have made certain reclassifications, which did not have an effect on net income, to prior period amounts to conform with the current period’s presentation, including certain reclassifications to our consolidated statements of operations and cash flows to present discontinued operations (see Note 7—Discontinued Operations). Other reclassifications did not have a material effect on our condensed consolidated statement of financial position, results of operations or cash flows.
Subsequent events—We evaluate subsequent events through the time of our filing on the date we issue our financial statements.
Note 3—New Accounting Pronouncements
Recently adopted accounting standards
Balance sheet—Effective January 1, 2013, we adopted the accounting standards update that expands the disclosure requirements for the offsetting of assets and liabilities related to certain financial instruments and derivative instruments. The update requires disclosures to present both gross information and net information for financial instruments and derivative instruments that are eligible for net presentation due to a right of offset, an enforceable master netting arrangement or similar agreement. Our adoption did not have a material effect on our disclosures contained in our notes to condensed consolidated financial statements.
Accumulated other comprehensive income—Effective January 1, 2013, we adopted the accounting standards update that requires disclosure of additional information about reclassifications out of accumulated other comprehensive income and to present reclassifications by component when reporting changes in accumulated other comprehensive income balances. For significant amounts that are reclassified out of accumulated other comprehensive income to net income in their entirety during the reporting period, the update requires disclosure, either on the face of the statement or in the notes, of the effect on the line items in the statement where net income is presented. For significant amounts that are not required to be reclassified in their entirety to net income during the reporting period, the update requires cross-references in the notes to other disclosures that provide additional information about those amounts. Our adoption did not have a material effect on our condensed consolidated statements of other comprehensive income or the disclosures contained in our notes to condensed consolidated financial statements.
Recently issued accounting standards
Income taxes—Effective January 1, 2014, we will adopt the accounting standards update that requires an unrecognized tax benefit to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward if net settlement is required or expected. The update is effective for interim and annual periods beginning on or after December 15, 2013. We are evaluating the potential effect of this accounting standards update. However, we do not expect that our adoption will have a material effect on our condensed consolidated balance sheets or the disclosures contained in our notes to consolidated financial statements.
- 7 -
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—continued
(Unaudited)
Note 4—Variable Interest Entities
Consolidated variable interest entities—The carrying amounts associated with our consolidated variable interest entities, after eliminating the effect of intercompany transactions, were as follows (in millions):
|
September 30, 2013
|
December 31, 2012
|
||||||
|
Assets
|
$
|
1,271
|
$
|
1,231
|
|||
|
Liabilities
|
282
|
311
|
|||||
|
Net carrying amount
|
$
|
989
|
$
|
920
|
|||
Angola Deepwater Drilling Company Limited (“ADDCL”), a consolidated Cayman Islands company, and Transocean Drilling Services Offshore Inc. (“TDSOI”), a consolidated British Virgin Islands company, are variable interest entities for which we are the primary beneficiary. Accordingly, we consolidate the operating results, assets and liabilities of ADDCL and TDSOI.
Unconsolidated variable interest entities—As holder of two notes receivable, we hold a variable interest in Awilco Drilling plc (“Awilco”), a U.K. company listed on the Oslo Stock Exchange. The notes receivable were originally accepted in exchange for, and are secured by, two drilling units. The notes receivable have stated interest rates of nine percent and are payable in scheduled quarterly installments of principal and interest through maturity in January 2015. We evaluate the credit quality and financial condition of Awilco quarterly. At September 30, 2013 and December 31, 2012, the aggregate carrying amount of the notes receivable was $95 million and $105 million, respectively. At September 30, 2013, our aggregate exposure to loss on the notes receivable was $95 million.
Note 5—Impairments
Assets held for sale—In the nine months ended September 30, 2013, we recognized a loss of $37 million ($0.10 per diluted share from continuing operations), which had no tax effect, associated with the impairment of the Deepwater Floater Sedco 709 and the Midwater Floaters C. Kirk Rhein, Jr. and Sedco 703, all of which were classified as assets held for sale at the time of impairment. We measured the impairments of the drilling units and related equipment as the amount by which the carrying amounts exceeded the estimated fair values less costs to sell. We estimated the fair values of the assets using significant other observable inputs, representative of Level 2 fair value measurements, including nonbinding sale and purchase agreements for the drilling units and related equipment to be sold for scrap value.
Property and equipment—In the three and nine months ended September 30, 2013, we recognized a loss of $17 million associated with the impairment of certain corporate assets. We estimated the fair value of the assets using significant other observable inputs, representative of a Level 2 fair value measurement, including comparable market data for the corporate assets.
Goodwill—During the nine months ended September 30, 2012, we completed the measurement of the impairment that resulted from our annual goodwill impairment test for our contract drilling services reporting unit, performed as of October 1, 2011. In the nine months ended September 30, 2012, we recognized an incremental adjustment to our original estimate in the amount of $118 million ($0.33 per diluted share from continuing operations), which had no tax effect. We estimated the implied fair value of the goodwill using a variety of valuation methods, including cost, income and market approaches. Our estimate of fair value required us to use significant unobservable inputs, representative of a Level 3 fair value measurement, including assumptions related to the future performance of our contract drilling services reporting unit, such as future commodity prices, projected demand for our services, rig availability and dayrates.
Definite-lived intangible assets—During the nine months ended September 30, 2012, we determined that the customer relationships intangible asset associated with the U.K. operations of our drilling management services reporting unit was impaired due to the diminishing demand for our drilling management services. We estimated the fair value of the customer relationships intangible asset using the multiperiod excess earnings method, a valuation methodology that applies the income approach. We estimated fair value using significant unobservable inputs, representative of a Level 3 fair value measurement, including assumptions related to the future performance of the drilling management services reporting unit, such as future commodity prices, projected demand for our services, rig availability and dayrates. In the nine months ended September 30, 2012, as a result of our valuation, we determined that the carrying amount of the customer relationships intangible asset exceeded its fair value, and we recognized a loss on impairment of $22 million ($17 million, or $0.05 per diluted share from continuing operations, net of tax).
- 8 -
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—continued
(Unaudited)
Note 6—Income Taxes
Tax rate—Transocean Ltd., a holding company and Swiss resident, is exempt from cantonal and communal income tax in Switzerland, but is subject to Swiss federal income tax. At the federal level, qualifying net dividend income and net capital gains on the sale of qualifying investments in subsidiaries are exempt from Swiss federal income tax. Consequently, Transocean Ltd. expects dividends from its subsidiaries and capital gains from sales of investments in its subsidiaries to be exempt from Swiss federal income tax.
Our provision for income taxes is based on the tax laws and rates applicable in the jurisdictions in which we operate and earn income. The relationship between our provision for or benefit from income taxes and our income or loss before income taxes can vary significantly from period to period considering, among other factors, (a) the overall level of income before income taxes, (b) changes in the blend of income that is taxed based on gross revenues rather than income before taxes, (c) rig movements between taxing jurisdictions and (d) our rig operating structures. Generally, our annual marginal tax rate is lower than our annual effective tax rate.
In the nine months ended September 30, 2013 and 2012, our estimated annual effective tax rates were 20.6 percent and 20.5 percent, respectively. These rates were based on estimated annual income before income taxes for each period after adjusting for various discrete items, including certain immaterial adjustments to prior period tax expense.
Unrecognized tax benefits—The liabilities related to our unrecognized tax benefits, including related interest and penalties that we recognize as a component of income tax expense, were as follows (in millions):
|
September 30,
2013
|
December 31,
2012
|
|||||||
|
Unrecognized tax benefits, excluding interest and penalties
|
$
|
327
|
$
|
382
|
||||
|
Interest and penalties
|
186
|
199
|
||||||
|
Unrecognized tax benefits, including interest and penalties
|
$
|
513
|
$
|
581
|
||||
In the year ending December 31, 2013, it is reasonably possible that our existing liabilities for unrecognized tax benefits may increase or decrease, primarily due to the progression of open audits or the expiration of statutes of limitation. However, we cannot reasonably estimate a range of potential changes in our existing liabilities for unrecognized tax benefits due to various uncertainties, such as the unresolved nature of various audits. In the nine months ended September 30, 2013, we recognized a current tax benefit of $87 million, including penalties and interest, associated with the settlement of disputes with tax authorities and the expiration of statutes of limitations.
Tax returns—We file federal and local tax returns in several jurisdictions throughout the world. With few exceptions, such as those noted below, we are no longer subject to examinations of our U.S. and non-U.S. tax matters for years prior to 2006.
Our tax returns in the major jurisdictions in which we operate, other than the U.S., Norway and Brazil, which are mentioned below, are generally subject to examination for periods ranging from three to six years. We have agreed to extensions beyond the statute of limitations in two major jurisdictions for up to 18 years. Tax authorities in certain jurisdictions are examining our tax returns and in some cases have issued assessments. We are defending our tax positions in those jurisdictions. While we cannot predict or provide assurance as to the outcome of these proceedings, we do not expect the ultimate liability to have a material adverse effect on our consolidated statement of financial position or results of operations, although it may have a material adverse effect on our consolidated cash flows.
U.S. tax investigations—In February 2012, we received an assessment from the U.S. tax authorities related to our 2008 and 2009 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. With respect to transfer pricing issues related to certain charters of drilling rigs in 2008 and 2009, we reached an agreement with the U.S. tax authorities in December 2012 to settle this issue and other issues raised during the audit for $36 million, excluding interest and penalties. The only remaining issue outstanding for these years related to an asserted creation of intangible assets resulting from the performance of engineering services between our subsidiaries for which a royalty is asserted. The initial assessment issued by the tax authorities on this item, if sustained, would have resulted in net adjustments of approximately $363 million of additional taxes, excluding interest and penalties. In September 2013, the U.S. tax authorities dropped the remaining open issue related to the intangible asset. Our 2008 and 2009 U.S. federal income tax returns are now settled.
Norway tax investigations and trial—Norwegian civil tax and criminal authorities are investigating various transactions undertaken by our subsidiaries in 1999, 2001 and 2002 as well as the actions of certain employees of our former external tax advisors on these transactions. The authorities issued tax assessments of approximately $112 million, plus interest, related to the migration of a subsidiary that was previously subject to tax in Norway, approximately $67 million, plus interest, related to a 2001 dividend payment, and approximately $7 million, plus interest, related to certain foreign exchange deductions and dividend withholding tax. We have provided a parent company guarantee in the amount of approximately $114 million with respect to one of these tax disputes. Furthermore, we may be required to provide some form of additional financial security, in an amount up to $210 million, including interest and penalties, for other assessed amounts as these disputes are appealed and addressed by the Norwegian courts. The authorities are seeking penalties of 60 percent on most but not all matters. In November 2012, the Norwegian district court in Oslo heard the case regarding the disputed tax assessment of approximately $112 million related to the migration of our subsidiary. On March 1, 2013, the Norwegian district court in Oslo overturned the tax assessment and ruled in our favor. The tax authorities have filed an appeal. We believe that our Norwegian tax returns are materially correct as filed, and we intend to continue to vigorously defend ourselves against all claims to the contrary.
- 9 -
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—continued
(Unaudited)
In June 2011, the Norwegian authorities issued criminal indictments against two of our subsidiaries alleging misleading or incomplete disclosures in Norwegian tax returns for the years 1999 through 2002, as well as inaccuracies in Norwegian statutory financial statements for the years ended December 31, 1996 through 2001. The criminal trial commenced in December 2012. Two employees of our former external tax advisors were also issued criminal indictments with respect to the disclosures in our tax returns, and our former external Norwegian tax attorney was issued criminal indictments related to certain of our restructuring transactions and the 2001 dividend payment. We believe the charges brought against us are without merit and do not alter our technical assessment of the underlying claims. In January 2012, the Norwegian authorities supplemented the previously issued criminal indictments by issuing a financial claim of approximately $300 million, jointly and severally, against our two subsidiaries, the two external tax advisors and the external tax attorney. In February 2012, the authorities dropped the previously existing civil tax claim related to a certain restructuring transaction. In April 2012, the Norwegian tax authorities supplemented the previously issued criminal indictments against our two subsidiaries by extending a criminal indictment against a third subsidiary, alleging misleading or incomplete disclosures in Norwegian tax returns for the years 2001 and 2002. In May 2013, the Norwegian authorities dropped the financial claim of approximately $300 million against one of our subsidiaries and the criminal case related to the migration case of another subsidiary. The criminal trial proceedings ended in September 2013, and the court has not yet ruled on the criminal issues. If we are found guilty, the Norwegian authorities have asked the court to assess criminal penalties in the amount of $38 million against three of our subsidiaries in addition to any civil tax penalties and the financial claim. We believe our Norwegian tax returns are materially correct as filed, and we intend to continue to vigorously contest any assertions to the contrary by the Norwegian civil and criminal authorities in connection with the various transactions being investigated. An unfavorable outcome on the Norwegian civil or criminal tax matters could result in a material adverse effect on our consolidated statement of financial position, results of operations or cash flows.
Brazil tax investigations—Certain of our Brazilian income tax returns for the years 2000 through 2004 are currently under examination. The Brazilian tax authorities have issued tax assessments totaling $90 million, plus a 75 percent penalty in the amount of $68 million and interest through December 31, 2011 in the amount of $146 million. We believe our returns are materially correct as filed, and we are vigorously contesting these assessments. On January 25, 2008, we filed a protest letter with the Brazilian tax authorities, and we are currently engaged in the appeals process. An unfavorable outcome on these proposed assessments could result in a material adverse effect on our consolidated statement of financial position, results of operations or cash flows.
Other tax matters—We conduct operations through our various subsidiaries in a number of countries throughout the world. Each country has its own tax regimes with varying nominal rates, deductions and tax attributes. From time to time, we may identify changes to previously evaluated tax positions that could result in adjustments to our recorded assets and liabilities. Although we are unable to predict the outcome of these changes, we do not expect the effect, if any, resulting from these adjustments to have a material adverse effect on our consolidated statement of financial position, results of operations or cash flows.
Note 7—Discontinued Operations
Summarized results of discontinued operations
The summarized results of operations included in income from discontinued operations were as follows (in millions):
|
Three months ended
September 30,
|
Nine months ended
September 30,
|
|||||||||||||||
|
2013
|
2012
|
2013
|
2012
|
|||||||||||||
|
Operating revenues
|
$
|
193
|
$
|
266
|
$
|
662
|
$
|
744
|
||||||||
|
Operating and maintenance expense
|
(188
|
)
|
(241
|
)
|
(672
|
)
|
(719
|
)
|
||||||||
|
Depreciation and amortization expense
|
—
|
(48
|
)
|
—
|
(183
|
)
|
||||||||||
|
Loss on impairment of assets in discontinued operations
|
(14
|
)
|
(878
|
)
|
(14
|
)
|
(983
|
)
|
||||||||
|
Gain (loss) on disposal of assets in discontinued operations, net
|
31
|
(1
|
)
|
49
|
70
|
|||||||||||
|
Other income, net
|
2
|
—
|
4
|
—
|
||||||||||||
|
Income (loss) from discontinued operations before income tax expense
|
24
|
(902
|
)
|
29
|
(1,071
|
)
|
||||||||||
|
Income tax benefit (expense)
|
(20
|
)
|
(14
|
)
|
(35
|
)
|
19
|
|||||||||
|
Income (loss) from discontinued operations, net of tax
|
$
|
4
|
$
|
(916
|
)
|
$
|
(6
|
)
|
$
|
(1,052
|
)
|
|||||
- 10 -
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—continued
(Unaudited)
Assets and liabilities of discontinued operations
The carrying amounts of the major classes of assets and liabilities associated with our discontinued operations were classified as follows (in millions):
|
September 30,
2013
|
December 31,
2012
|
|||||||
|
Assets
|
||||||||
|
Rigs and related equipment, net
|
$
|
35
|
$
|
104
|
||||
|
Materials and supplies, net
|
44
|
71
|
||||||
|
Other related assets
|
7
|
4
|
||||||
|
Assets held for sale
|
$
|
86
|
$
|
179
|
||||
|
Liabilities
|
||||||||
|
Deferred revenues
|
$
|
62
|
$
|
32
|
||||
|
Other liabilities
|
—
|
3
|
||||||
|
Other current liabilities
|
$
|
62
|
$
|
35
|
||||
Standard Jackup and swamp barge contract drilling services
Overview—In September 2012, in connection with our efforts to dispose of non-strategic assets and to reduce our exposure to low-specification drilling units, we committed to a plan to discontinue operations associated with the Standard Jackup and swamp barge asset groups, components of our contract drilling services operating segment. At September 30, 2013, the remaining Standard Jackups GSF Rig 127 and GSF Rig 134, along with related equipment, were classified as held for sale with an aggregate carrying amount of $37 million, including $2 million in materials and supplies. At December 31, 2012, the remaining Standard Jackups, which were not sold in the sale transactions with Shelf Drilling, including D.R. Stewart, GSF Adriatic VIII, GSF Rig 127, GSF Rig 134, Interocean III, Trident IV-A and Trident VI, along with related equipment, were classified as held for sale with an aggregate carrying amount of $112 million, including $8 million in materials and supplies.
Impairments—In the three and nine months ended September 30, 2013, we recognized an aggregate loss of $14 million ($0.04 per diluted share), which had no tax effect, associated with the impairment of Standard Jackups GSF Rig 127 and GSF Rig 134, which were classified as assets held for sale at the time of impairment. We measured the impairment of the drilling units and related equipment as the amount by which the carrying amounts exceeded the estimated fair values less costs to sell. We estimated the fair value of the assets using significant other observable inputs, representative of Level 2 fair value measurements, including a binding sale and purchase agreement for the drilling units and related equipment.
In September 2012, in connection with our reclassification of the Standard Jackup and swamp barge disposal group to assets held for sale, we determined that the disposal group was impaired since its aggregate carrying amount exceeded its aggregate fair value. We estimated the fair value of this disposal group by applying a variety of valuation methods, including cost, income and market approaches to estimate the exit 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. Although we based certain components of our valuation on significant other observable inputs, including binding sale and purchase agreements, a significant portion of our valuation required us to project the future performance of the disposal group based on significant unobservable inputs, representing a Level 3 fair value measurement, including assumptions regarding long-term projections for future revenues and costs, dayrates, rig utilization and idle time. We measured the impairments of the disposal group as the amount by which its carrying amount exceeded its estimated fair value less costs to sell. Included in our estimated loss on impairment as a reduction to the expected proceeds, approximately $60 million of costs for certain shipyard projects and other obligations required pursuant to the sale agreement and approximately $17 million of costs to sell the disposal group, including legal and financial advisory costs and expenses. In the three and nine months ended September 30, 2012, as a result of our valuation, we recognized losses of $744 million ($2.09 per diluted share) and $112 million ($0.31 per diluted share), which had no tax effect, associated with the impairment of long-lived assets and the goodwill, respectively.
In connection with our sale transactions with Shelf Drilling, we were, and continue to be, required to pay postemployment benefits to certain employees and contract labor for which employment was or will be terminated as a direct result of the sale transactions upon expiration of the operating agreements and transition services agreement. In the three and nine months ended September 30, 2012, we recognized a loss of $20 million, included in loss on impairment of assets in discontinued operations, associated with such postemployment benefits.
In the nine months ended September 30, 2012, we also recognized an aggregate loss of $29 million ($0.08 per diluted share), which had no tax effect, associated with the impairment of Standard Jackups GSF Adriatic II and GSF Rig 136, which were classified as assets held for sale at the time of impairment. We measured the impairment of the drilling units and related equipment as the amount by which the carrying amounts exceeded the estimated fair values less costs to sell. We estimated the fair value of the assets using significant other observable inputs, representative of Level 2 fair value measurements, including a binding sale and purchase agreement for the drilling units and related equipment.
- 11 -
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—continued
(Unaudited)
Sale transactions with Shelf Drilling—In November 2012, we completed the sale of 38 drilling units to Shelf Drilling in exchange for cash proceeds of $568 million, subject to post-closing adjustments, and non-cash proceeds in the form of preference shares that had a stated value of $195 million and an estimated fair value of $194 million, including the fair value associated with embedded derivatives. In June 2013, we sold the preference shares to an unaffiliated party for cash proceeds of $185 million and, in the nine months ended September 30, 2013, we recognized a loss of $10 million ($0.03 per diluted share), recorded in other expense, net, which had no tax effect, associated with the sale.
For a transition period following the completion of the sale transactions with Shelf Drilling, we agreed to continue to operate a substantial portion of the Standard Jackups under operating agreements with Shelf Drilling and to provide certain other transition services to Shelf Drilling. Under the operating agreements, we have agreed to remit the collections from our customers under the associated drilling contracts to Shelf Drilling, and Shelf Drilling has agreed to reimburse us for our direct costs and expenses incurred while operating the Standard Jackups on behalf of Shelf Drilling with certain exceptions. Amounts due to Shelf Drilling under the operating agreements and transition services agreement may be contractually offset against amounts due from Shelf Drilling. The costs to us for providing such operating and transition services, including allocated indirect costs, may exceed the amounts we receive from Shelf Drilling for providing such services.
Under the operating agreements, we agreed to continue to operate these Standard Jackups on behalf of Shelf Drilling for periods ranging from nine months to 27 months or until expiration or novation of the underlying drilling contracts by Shelf Drilling. As of September 30, 2013, we operated 15 Standard Jackups under operating agreements with Shelf Drilling. Until the expiration or novation of such drilling contracts, we retain possession of the materials and supplies associated with the Standard Jackups that we operate under the operating agreements. At September 30, 2013 and December 31, 2012, the materials and supplies associated with the drilling units that we operated under operating agreements with Shelf Drilling had an aggregate carrying amount of $42 million and $63 million, respectively. Under a transition services agreement, we agreed to provide certain transition services for a period of up to 18 months following the completion of the sale transactions.
For a period of up to three years following the closing of the sale transactions, we have agreed to provide to Shelf Drilling up to $125 million of financial support by maintaining letters of credit, surety bonds and guarantees for various contract bidding and performance activities associated with the drilling units sold to Shelf Drilling and in effect at the closing of the sale transactions. At the time of the sale transactions, we had $113 million of outstanding letters of credit, issued under our committed and uncommitted credit lines, in support of rigs sold to Shelf Drilling. Included within the $125 million maximum amount, we agreed to provide up to $65 million of additional financial support in connection with any new drilling contracts related to such drilling units. Shelf Drilling is required to reimburse us in the event that any of these instruments are called. At September 30, 2013 and December 31, 2012, we had $103 million and $113 million, respectively, of outstanding letters of credit, issued under our committed and uncommitted credit lines, in support of drilling units sold to Shelf Drilling. See Note 13—Commitments and Contingencies.
Other dispositions—During the three months ended September 30, 2013, we entered into agreements to sell the Standard Jackups GSF Rig 127 and GSF Rig 134 along with related equipment. During the nine months ended September 30, 2013, we completed the sale of the Standard Jackups D.R. Stewart, GSF Adriatic VIII, Interocean III, Trident IV-A and Trident VI along with related equipment. In the three and nine months ended September 30, 2013, in connection with the disposal of these assets, we received aggregate net cash proceeds of $41 million and $104 million, respectively, and we recognized aggregate net gains of $29 million ($0.08 per diluted share) and $44 million ($0.12 per diluted share), respectively, which had no tax effect. In the three and nine months ended September 30, 2013, we recognized aggregate net gains of $2 million and $5 million, respectively, associated with the disposal of unrelated assets.
During the nine months ended September 30, 2012, we completed the sales of the Standard Jackups GSF Adriatic II, GSF Rig 136, Roger W. Mowell, Transocean Nordic and Transocean Shelf Explorer along with related equipment. In the nine months ended September 30, 2012, in connection with the disposal of these assets, we received aggregate net cash proceeds of $179 million, and we recognized an aggregate net gain of $64 million ($0.18 per diluted share), which had no tax effect. In the three and nine months ended September 30, 2012, we recognized aggregate net losses of $1 million and $4 million, respectively, associated with the disposal of unrelated assets.
U.S. Gulf of Mexico drilling management services
Overview—In March 2012, we announced our intent to discontinue drilling management operations in the shallow waters of the U.S. Gulf of Mexico, a component of our drilling management services operating segment, upon completion of our then existing contracts. We elected to exit this market based on the declining market outlook for these services in the shallow waters of the U.S. Gulf of Mexico as well as the more difficult regulatory environment for obtaining drilling permits. In December 2012, we completed the final drilling management project and discontinued offering our drilling management services in this region.
- 12 -
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—continued
(Unaudited)
Impairments—During the nine months ended September 30, 2012, we determined that the customer relationships intangible asset and the trade name intangible asset associated with the U.S. operations of our drilling management services reporting unit was impaired due to the declining market outlook for these services in the shallow waters of the U.S. Gulf of Mexico as well as the increasingly difficult regulatory environment for obtaining drilling permits and the diminishing demand for our drilling management services. We estimated the fair value of the customer relationships intangible asset using the multiperiod excess earnings method, a valuation methodology that applies the income approach. We estimated fair value using significant unobservable inputs, representative of a Level 3 fair value measurement, including assumptions related to the future performance of the drilling management services reporting unit, such as future commodity prices, projected demand for our services, rig availability and dayrates. We estimated the fair value of the trade name intangible asset using the relief from royalty method, a valuation methodology that applies the income approach. We estimated fair value using significant unobservable inputs, representative of a Level 3 fair value measurement, including assumptions related to the future performance of the drilling management services reporting unit, such as future commodity prices, projected demand for drilling management services, rig availability and dayrates. In the nine months ended September 30, 2012, as a result of our valuations, we determined that the carrying amounts of these intangible assets exceeded their respective fair values, and we recognized losses of $31 million ($20 million or $0.06 per diluted share, net of tax) and $39 million ($25 million or $0.07 per diluted share, net of tax) associated with the impairment of the customer relationships intangible asset and the trade name intangible asset, respectively.
Oil and gas properties
Overview—In March 2011, in connection with our efforts to dispose of non-strategic assets, we engaged an unaffiliated advisor to coordinate the sale of the assets of our oil and gas properties reporting unit, formerly a component of our other operations segment, which comprised the exploration, development and production activities performed by Challenger Minerals Inc., Challenger Minerals (North Sea) Limited and Challenger Minerals (Ghana) Limited, our wholly owned oil and gas subsidiaries. During the year ended December 31, 2012, we completed the sale of these assets.
Impairment—In the three and nine months ended September 30, 2012, we recognized losses of $2 million, which had no tax effect, and $8 million ($7 million or $0.02 per diluted share, net of tax), respectively, associated with the impairment of our oil and gas properties, which were classified as assets held for sale at the time of impairment, since the carrying amount of the properties exceeded the estimated fair value less costs to sell the properties. We estimated fair value based on significant other observable inputs, representative of a Level 2 fair value measurement, including a binding sale and purchase agreement for the properties.
Dispositions—In April 2012, we completed the sale of the assets of Challenger Minerals Inc. for net cash proceeds of $7 million. In May 2012, we received additional cash proceeds of $10 million from the buyer of Challenger Minerals (North Sea) Limited. In the nine months ended September 30, 2012, we recognized a net gain of $10 million ($0.03 per diluted share), which had no tax effect, associated with the disposal of oil and gas properties.
Note 8—Earnings Per Share
The numerator and denominator used for the computation of basic and diluted per share earnings from continuing operations were as follows (in millions, except per share data):
|
Three months ended September 30,
|
Nine months ended September 30,
|
|||||||||||||||||||||||||||||||
|
2013
|
2012
|
2013
|
2012
|
|||||||||||||||||||||||||||||
|
Basic
|
Diluted
|
Basic
|
Diluted
|
Basic
|
Diluted
|
Basic
|
Diluted
|
|||||||||||||||||||||||||
|
Numerator for earnings per share
|
||||||||||||||||||||||||||||||||
|
Income from continuing operations attributable to controlling interest
|
$
|
542
|
$
|
542
|
$
|
535
|
$
|
535
|
$
|
1,180
|
$
|
1,180
|
$
|
377
|
$
|
377
|
||||||||||||||||
|
Undistributed earnings allocable to participating securities
|
(5
|
)
|
(5
|
)
|
—
|
—
|
(11
|
)
|
(11
|
)
|
—
|
—
|
||||||||||||||||||||
|
Income from continuing operations available to shareholders
|
$
|
537
|
$
|
537
|
$
|
535
|
$
|
535
|
$
|
1,169
|
$
|
1,169
|
$
|
377
|
$
|
377
|
||||||||||||||||
|
Denominator for earnings per share
|
||||||||||||||||||||||||||||||||
|
Weighted-average shares outstanding
|
360
|
361
|
359
|
359
|
360
|
360
|
354
|
354
|
||||||||||||||||||||||||
|
Effect of stock options and other share-based awards
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||||||||
|
Weighted-average shares for per share calculation
|
360
|
361
|
359
|
359
|
360
|
360
|
354
|
354
|
||||||||||||||||||||||||
|
Per share earnings from continuing operations
|
$
|
1.49
|
$
|
1.49
|
$
|
1.49
|
$
|
1.49
|
$
|
3.25
|
$
|
3.25
|
$
|
1.06
|
$
|
1.06
|
||||||||||||||||
In the three and nine months ended September 30, 2013, we excluded 2.2 million share-based awards from the calculation since the effect would have been anti-dilutive. In the three and nine months ended September 30, 2012, we excluded 1.9 million share-based awards from the calculation since the effect would have been anti-dilutive.
- 13 -
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—continued
(Unaudited)
Note 9—Drilling Fleet
Construction work in progress—Capital expenditures and other capital additions, including capitalized interest, for the nine months ended September 30, 2013 and 2012 were as follows (in millions):
|
Nine months ended September 30,
|
||||||||
|
2013
|
2012
|
|||||||
|
Construction work in progress, at beginning of period
|
$
|
1,972
|
$
|
1,360
|
||||
|
Newbuild construction program
|
||||||||
|
Transocean Honor (a) (b)
|
—
|
35
|
||||||
|
Transocean Siam Driller (a) (c)
|
74
|
32
|
||||||
|
Transocean Andaman (a) (c)
|
82
|
31
|
||||||
|
Transocean Ao Thai (d)
|
85
|
49
|
||||||
|
Deepwater Asgard (e)
|
56
|
40
|
||||||
|
Deepwater Invictus (e)
|
42
|
35
|
||||||
|
Ultra-Deepwater Floater TBN1 (f)
|
144
|
—
|
||||||
|
Ultra-Deepwater Floater TBN2 (f)
|
88
|
—
|
||||||
|
Ultra-Deepwater Floater TBN3 (f)
|
62
|
—
|
||||||
|
Ultra-Deepwater Floater TBN4 (f)
|
7
|
—
|
||||||
|
Other construction projects and capital additions
|
650
|
424
|
||||||
|
Total capital expenditures
|
1,290
|
646
|
||||||
|
Changes in accrued capital expenditures
|
(14
|
)
|
(10
|
)
|
||||
|
Impairment of certain corporate assets
|
(17
|
)
|
—
|
|||||
|
Property and equipment placed into service
|
||||||||
|
Transocean Honor (b)
|
—
|
(262
|
)
|
|||||
|
Transocean Siam Driller (c)
|
(236
|
)
|
—
|
|||||
|
Transocean Andaman (c)
|
(242
|
)
|
—
|
|||||
|
Other property and equipment
|
(643
|
)
|
(413
|
)
|
||||
|
Construction work in progress, at end of period
|
$
|
2,110
|
$
|
1,321
|
||||
_____________________________
|
(a)
|
The accumulated construction costs of this rig are no longer included in construction work in progress, as the construction project had been completed as of September 30, 2013.
|
|
(b)
|
Transocean Honor, a PPL Pacific Class 400 design High-Specification Jackup, owned through our 70 percent interest in TDSOI, commenced operations in May 2012. The costs presented above represent 100 percent of TDSOI’s expenditures in the construction of Transocean Honor.
|
|
(c)
|
Transocean Siam Driller and Transocean Andaman, two Keppel FELS Super B class design High-Specification Jackups, commenced operations in March 2013 and May 2013, respectively.
|
|
(d)
|
Transocean Ao Thai, a Keppel FELS Super B class design High-Specification Jackup under construction at Keppel FELS’ yard in Singapore, is expected to commence operations in October 2013.
|
|
(e)
|
Deepwater Asgard and Deepwater Invictus, two Ultra-Deepwater drillships under construction at the Daewoo Shipbuilding & Marine Engineering Co. Ltd. shipyard in Korea, are expected to commence operations in the first quarter of 2014 and third quarter of 2014, respectively.
|
|
(f)
|
Our four newbuild Ultra-Deepwater drillships, under construction at the Daewoo Shipbuilding & Marine Engineering Co. Ltd. shipyard in Korea, are expected to commence operations in the fourth quarter of 2015, the second quarter of 2016, the fourth quarter of 2016 and the second quarter of 2017.
|
Dispositions—During the three months ended September 30, 2013, in connection with our efforts to dispose of non-strategic assets, we completed the sale of the Deepwater Floater Transocean Richardson along with related equipment. In the three and nine months ended September 30, 2013, in connection with the disposal of Transocean Richardson and related assets, we received cash proceeds of $145 million and recognized a net gain of $34 million ($22 million or $0.06 per diluted share, net of tax). In the three and nine months ended September 30, 2013, we received $25 million and $29 million of cash proceeds, respectively, and recognized aggregate net losses of $2 million and $11 million, respectively, associated with the disposal of unrelated assets. During the nine months ended September 30, 2013, we also committed to plans to sell the Deepwater Floater Sedco 709 and the Midwater Floaters C. Kirk Rhein, Jr., Falcon 100 and Sedco 703. At September 30, 2013, in addition to the remaining assets of our discontinued operations, Sedco 709, C. Kirk Rhein, Jr., Falcon 100 and Sedco 703, along with related equipment, were classified as held for sale with an aggregate carrying amount of $45 million (see Note 7—Discontinued Operations).
During the nine months ended September 30, 2012, in connection with our efforts to dispose of non-strategic assets, we completed the sales of the Deepwater Floaters Discoverer 534 and Jim Cunningham. In the three and nine months ended September 30, 2012, in connection with the disposal of these assets, we received aggregate net cash proceeds of $178 million, and we recognized an aggregate net gain of $51 million ($48 million or $0.13 per diluted share, net of tax). In the three and nine months ended September 30, 2012, we recognized aggregate net losses of $1 million and $11 million, respectively, associated with the disposal of unrelated assets.
- 14 -
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—continued
(Unaudited)
Note 10—Debt
Debt, net of unamortized discounts, premiums and fair value adjustments, was comprised of the following (in millions):
|
September 30, 2013
|
December 31, 2012
|
||||||||||||||||||||||
|
Transocean
Ltd.
and
subsidiaries
|
Consolidated
variable
interest
entities
|
Consolidated
total
|
Transocean
Ltd.
and
subsidiaries
|
Consolidated
variable
interest
entities
|
Consolidated
total
|
||||||||||||||||||
|
5% Notes due February 2013
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
250
|
$
|
—
|
$
|
250
|
|||||||||||
|
5.25% Senior Notes due March 2013 (a)
|
—
|
—
|
—
|
502
|
—
|
502
|
|||||||||||||||||
|
TPDI Credit Facilities due March 2015
|
—
|
—
|
—
|
403
|
—
|
403
|
|||||||||||||||||
|
4.95% Senior Notes due November 2015 (a)
|
1,114
|
—
|
1,114
|
1,118
|
—
|
1,118
|
|||||||||||||||||
|
Callable Bonds due February 2016
|
—
|
—
|
—
|
282
|
—
|
282
|
|||||||||||||||||
|
5.05% Senior Notes due December 2016 (a)
|
999
|
—
|
999
|
999
|
—
|
999
|
|||||||||||||||||
|
2.5% Senior Notes due October 2017 (a)
|
748
|
—
|
748
|
748
|
—
|
748
|
|||||||||||||||||
|
ADDCL Credit Facilities due December 2017
|
—
|
178
|
178
|
—
|
191
|
191
|
|||||||||||||||||
|
Eksportfinans Loans due January 2018
|
597
|
—
|
597
|
797
|
—
|
797
|
|||||||||||||||||
|
6.00% Senior Notes due March 2018 (a)
|
998
|
—
|
998
|
998
|
—
|
998
|
|||||||||||||||||
|
7.375% Senior Notes due April 2018 (a)
|
247
|
—
|
247
|
247
|
—
|
247
|
|||||||||||||||||
|
6.50% Senior Notes due November 2020 (a)
|
900
|
—
|
900
|
899
|
—
|
899
|
|||||||||||||||||
|
6.375% Senior Notes due December 2021 (a)
|
1,199
|
—
|
1,199
|
1,199
|
—
|
1,199
|
|||||||||||||||||
|
3.8% Senior Notes due October 2022 (a)
|
745
|
—
|
745
|
745
|
—
|
745
|
|||||||||||||||||
|
7.45% Notes due April 2027 (a)
|
97
|
—
|
97
|
97
|
—
|
97
|
|||||||||||||||||
|
8% Debentures due April 2027 (a)
|
57
|
—
|
57
|
57
|
—
|
57
|
|||||||||||||||||
|
7% Notes due June 2028
|
310
|
—
|
310
|
311
|
—
|
311
|
|||||||||||||||||
|
Capital lease contract due August 2029
|
642
|
—
|
642
|
657
|
—
|
657
|
|||||||||||||||||
|
7.5% Notes due April 2031 (a)
|
598
|
—
|
598
|
598
|
—
|
598
|
|||||||||||||||||
|
1.50% Series C Convertible Senior Notes due December 2037 (a)
|
—
|
—
|
—
|
62
|
—
|
62
|
|||||||||||||||||
|
6.80% Senior Notes due March 2038 (a)
|
999
|
—
|
999
|
999
|
—
|
999
|
|||||||||||||||||
|
7.35% Senior Notes due December 2041 (a)
|
300
|
—
|
300
|
300
|
—
|
300
|
|||||||||||||||||
|
Total debt
|
10,550
|
178
|
10,728
|
12,268
|
191
|
12,459
|
|||||||||||||||||
|
Less debt due within one year
|
|||||||||||||||||||||||
|
5% Notes due February 2013
|
—
|
—
|
—
|
250
|
—
|
250
|
|||||||||||||||||
|
5.25% Senior Notes due March 2013 (a)
|
—
|
—
|
—
|
502
|
—
|
502
|
|||||||||||||||||
|
TPDI Credit Facilities due March 2015
|
—
|
—
|
—
|
70
|
—
|
70
|
|||||||||||||||||
|
Callable Bonds due February 2016
|
—
|
—
|
—
|
282
|
—
|
282
|
|||||||||||||||||
|
ADDCL Credit Facilities due December 2017
|
—
|
58
|
58
|
—
|
28
|
28
|
|||||||||||||||||
|
Eksportfinans Loans due January 2018
|
141
|
—
|
141
|
153
|
—
|
153
|
|||||||||||||||||
|
Capital lease contract due August 2029
|
21
|
—
|
21
|
20
|
—
|
20
|
|||||||||||||||||
|
1.50% Series C Convertible Senior Notes due December 2037 (a)
|
—
|
—
|
—
|
62
|
—
|
62
|
|||||||||||||||||
|
Total debt due within one year
|
162
|
58
|
220
|
1,339
|
28
|
1,367
|
|||||||||||||||||
|
Total long-term debt
|
$
|
10,388
|
$
|
120
|
$
|
10,508
|
$
|
10,929
|
$
|
163
|
$
|
11,092
|
|||||||||||
_____________________________
|
(a)
|
Transocean Inc., a 100 percent owned subsidiary of Transocean Ltd., is the issuer of certain notes and debentures, which have been guaranteed by Transocean Ltd. Transocean Ltd. has also guaranteed borrowings under the Five-Year Revolving Credit Facility and the Three-Year Secured Revolving Credit Facility. Transocean Ltd. and Transocean Inc. are not subject to any significant restrictions on their ability to obtain funds from their consolidated subsidiaries by dividends, loans or return of capital distributions. See Note 17—Condensed Consolidating Financial Information.
|
- 15 -
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—continued
(Unaudited)
Scheduled maturities—At September 30, 2013, the scheduled maturities of our debt were as follows (in millions):
|
Transocean
Ltd.
and subsidiaries
|
Consolidated
variable
interest
entities
|
Consolidated
total
|
||||||||||
|
Twelve months ending September 30,
|
||||||||||||
|
2014
|
$
|
163
|
$
|
58
|
$
|
221
|
||||||
|
2015
|
164
|
31
|
195
|
|||||||||
|
2016
|
1,266
|
34
|
1,300
|
|||||||||
|
2017
|
1,168
|
36
|
1,204
|
|||||||||
|
2018
|
2,061
|
19
|
2,080
|
|||||||||
|
Thereafter
|
5,723
|
—
|
5,723
|
|||||||||
|
Total debt, excluding unamortized discounts, premiums and fair value adjustments
|
10,545
|
178
|
10,723
|
|||||||||
|
Total unamortized discounts, premiums and fair value adjustments, net
|
5
|
—
|
5
|
|||||||||
|
Total debt
|
$
|
10,550
|
$
|
|||||||||