rig_Current_Folio_10Q

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10‑Q

(Mark one)

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

For the quarterly period ended June 30, 2016

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_color

 

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    No 

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, 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    Accelerated filer    Nonaccelerated 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 

 

As of July 26, 2016, 365,391,756 shares were outstanding.

 


 

Table of Contents

TRANSOCEAN LTD. AND SUBSIDIARIES

INDEX TO FORM 10‑Q

QUARTER ENDED JUNE 30, 2016

 

 

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

Item 1. 

Financial Statements (Unaudited)

 

 

Condensed Consolidated Statements of Operations

1

 

Condensed Consolidated Statements of Comprehensive Income

2

 

Condensed Consolidated Balance Sheets

3

 

Condensed Consolidated Statements of Equity

4

 

Condensed Consolidated Statements of Cash Flows

5

 

Notes to Condensed Consolidated Financial Statements

6

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

35

Item 4. 

Controls and Procedures

35

 

 

 

PART II. 

OTHER INFORMATION

 

Item 1. 

Legal Proceedings

36

Item 1A. 

Risk Factors

36

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

37

Item 4. 

Mine Safety Disclosures

37

Item 6. 

Exhibits

37

 

 

 

 

 


 

Table of Contents

PART I.FINANCIAL INFORMATION

Item I.Financial Statements

TRANSOCEAN LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Six months ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2016

    

2015

 

2016

    

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract drilling revenues

 

$

918

 

$

1,777

 

$

2,029

 

$

3,777

 

Other revenues

 

 

25

 

 

107

 

 

255

 

 

150

 

 

 

 

943

 

 

1,884

 

 

2,284

 

 

3,927

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating and maintenance

 

 

500

 

 

197

 

 

1,165

 

 

1,281

 

Depreciation

 

 

225

 

 

249

 

 

442

 

 

540

 

General and administrative

 

 

42

 

 

44

 

 

85

 

 

90

 

 

 

 

767

 

 

490

 

 

1,692

 

 

1,911

 

Loss on impairment

 

 

(20)

 

 

(890)

 

 

(23)

 

 

(1,826)

 

Gain (loss) on disposal of assets, net

 

 

(2)

 

 

2

 

 

(1)

 

 

(5)

 

Operating income

 

 

154

 

 

506

 

 

568

 

 

185

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

4

 

 

6

 

 

10

 

 

12

 

Interest expense, net of amounts capitalized

 

 

(95)

 

 

(120)

 

 

(184)

 

 

(236)

 

Gain on retirement of debt

 

 

38

 

 

 —

 

 

38

 

 

 —

 

Other, net

 

 

3

 

 

(5)

 

 

2

 

 

42

 

 

 

 

(50)

 

 

(119)

 

 

(134)

 

 

(182)

 

Income from continuing operations before income tax expense

 

 

104

 

 

387

 

 

434

 

 

3

 

Income tax expense

 

 

17

 

 

40

 

 

91

 

 

123

 

Income (loss) from continuing operations

 

 

87

 

 

347

 

 

343

 

 

(120)

 

Income (loss) from discontinued operations, net of tax

 

 

1

 

 

1

 

 

 —

 

 

(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

88

 

 

348

 

 

343

 

 

(121)

 

Net income attributable to noncontrolling interest

 

 

11

 

 

6

 

 

17

 

 

20

 

Net income (loss) attributable to controlling interest

 

$

77

 

$

342

 

$

326

 

$

(141)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share-basic

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) from continuing operations

 

$

0.21

 

$

0.93

 

$

0.88

 

$

(0.39)

 

Earnings (loss) from discontinued operations

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Earnings (loss) per share

 

$

0.21

 

$

0.93

 

$

0.88

 

$

(0.39)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share-diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) from continuing operations

 

$

0.21

 

$

0.93

 

$

0.88

 

$

(0.39)

 

Earnings (loss) from discontinued operations

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Earnings (loss) per share

 

$

0.21

 

$

0.93

 

$

0.88

 

$

(0.39)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

365

 

 

363

 

 

365

 

 

363

 

Diluted

 

 

365

 

 

363

 

 

365

 

 

363

 

 

 

 

See accompanying notes.

 

-  1  -


 

Table of Contents

TRANSOCEAN LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In millions)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Six months ended

 

 

 

June 30, 

 

June 30, 

 

 

 

2016

    

2015

 

2016

    

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

88

 

$

348

 

$

343

 

$

(121)

 

Net income attributable to noncontrolling interest

 

 

11

 

 

6

 

 

17

 

 

20

 

Net income (loss) attributable to controlling interest

 

 

77

 

 

342

 

 

326

 

 

(141)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Components of net periodic benefit costs before reclassifications

 

 

 —

 

 

(1)

 

 

(7)

 

 

(14)

 

Components of net periodic benefit costs reclassified to net income

 

 

(1)

 

 

5

 

 

1

 

 

10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss) before income taxes

 

 

(1)

 

 

4

 

 

(6)

 

 

(4)

 

Income taxes related to other comprehensive income (loss)

 

 

(3)

 

 

 —

 

 

(3)

 

 

(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

 

(4)

 

 

4

 

 

(9)

 

 

(6)

 

Other comprehensive income attributable to noncontrolling interest

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Other comprehensive income (loss) attributable to controlling interest

 

 

(4)

 

 

4

 

 

(9)

 

 

(6)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income (loss)

 

 

84

 

 

352

 

 

334

 

 

(127)

 

Total comprehensive income attributable to noncontrolling interest

 

 

11

 

 

6

 

 

17

 

 

20

 

Total comprehensive income (loss) attributable to controlling interest

 

$

73

 

$

346

 

$

317

 

$

(147)

 

 

 

See accompanying notes.

 

-  2  -


 

Table of Contents

TRANSOCEAN LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

 

    

2016

    

2015

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

2,153

 

$

2,339

 

Accounts receivable, net of allowance for doubtful accounts
of less than $1 at June 30, 2016 and December 31, 2015

 

 

936

 

 

1,379

 

Materials and supplies, net of allowance for obsolescence
of $159 and $148 at June 30, 2016 and December 31, 2015, respectively

 

 

597

 

 

635

 

Assets held for sale

 

 

2

 

 

8

 

Restricted cash

 

 

360

 

 

340

 

Other current assets

 

 

81

 

 

84

 

Total current assets

 

 

4,129

 

 

4,785

 

 

 

 

 

 

 

 

 

Property and equipment

 

 

26,977

 

 

26,274

 

Less accumulated depreciation

 

 

(5,888)

 

 

(5,456)

 

Property and equipment, net

 

 

21,089

 

 

20,818

 

Deferred income taxes, net

 

 

256

 

 

316

 

Other assets

 

 

365

 

 

410

 

Total assets

 

$

25,839

 

$

26,329

 

 

 

 

 

 

 

 

 

Liabilities and equity

 

 

 

 

 

 

 

Accounts payable

 

$

279

 

$

448

 

Accrued income taxes

 

 

57

 

 

82

 

Debt due within one year

 

 

1,063

 

 

1,093

 

Other current liabilities

 

 

800

 

 

1,046

 

Total current liabilities

 

 

2,199

 

 

2,669

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

7,155

 

 

7,397

 

Deferred income taxes, net

 

 

300

 

 

339

 

Other long-term liabilities

 

 

1,027

 

 

1,108

 

Total long-term liabilities

 

 

8,482

 

 

8,844

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

Redeemable noncontrolling interest

 

 

18

 

 

8

 

 

 

 

 

 

 

 

 

Shares, CHF 0.10 par value, 393,397,220 authorized, 167,617,649 conditionally authorized, 370,967,382 issued and 365,389,695 outstanding at June 30, 2016 and CHF 15.00 par value, 396,260,487 authorized, 167,617,649 conditionally authorized, 373,830,649 issued and 364,035,397 outstanding at December 31, 2015

 

 

34

 

 

5,193

 

Additional paid-in capital

 

 

10,680

 

 

5,739

 

Treasury shares, at cost, 2,863,267 held at December 31, 2015

 

 

 

 

(240)

 

Retained earnings

 

 

4,466

 

 

4,140

 

Accumulated other comprehensive loss

 

 

(343)

 

 

(334)

 

Total controlling interest shareholders’ equity

 

 

14,837

 

 

14,498

 

Noncontrolling interest

 

 

303

 

 

310

 

Total equity

 

 

15,140

 

 

14,808

 

Total liabilities and equity

 

$

25,839

 

$

26,329

 

 

 

See accompanying notes.

 

-  3  -


 

Table of Contents

TRANSOCEAN LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(In millions)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended

 

Six months ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2016

    

2015

    

2016

    

2015

 

 

 

Quantity

 

Amount

 

Shares

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

364

 

 

362

 

$

5,193

 

$

5,169

 

Reduction of par value

 

 

 —

 

 

 

 

(5,159)

 

 

 

Issuance of shares under share-based compensation plans

 

 

1

 

 

2

 

 

 

 

17

 

Balance, end of period

 

 

365

 

 

364

 

$

34

 

$

5,186

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional paid-in capital

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

 

 

 

 

 

$

5,739

 

$

5,797

 

Share-based compensation

 

 

 

 

 

 

 

 

26

 

 

33

 

Reduction of par value

 

 

 

 

 

 

 

 

5,159

 

 

 

Cancellation of shares held in treasury

 

 

 

 

 

 

 

 

(240)

 

 

 —

 

Issuance of shares under share-based compensation plans

 

 

 

 

 

 

 

 

 —

 

 

(18)

 

Reclassification of obligation for distribution of qualifying additional paid-in capital

 

 

 

 

 

 

 

 

 —

 

 

(218)

 

Allocated capital for transactions with holders of noncontrolling interest

 

 

 

 

 

 

 

 

(7)

 

 

9

 

Other, net

 

 

 

 

 

 

 

 

3

 

 

(7)

 

Balance, end of period

 

 

 

 

 

 

 

$

10,680

 

$

5,596

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury shares, at cost

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

 

 

 

 

 

$

240

 

$

(240)

 

Cancellation of shares held in treasury

 

 

 

 

 

 

 

 

(240)

 

 

 —

 

Balance, end of period

 

 

 

 

 

 

 

$

 —

 

$

(240)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

 

 

 

 

 

$

4,140

 

$

3,349

 

Net income (loss) attributable to controlling interest

 

 

 

 

 

 

 

 

326

 

 

(141)

 

Balance, end of period

 

 

 

 

 

 

 

$

4,466

 

$

3,208

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

 

 

 

 

 

$

(334)

 

$

(404)

 

Other comprehensive loss attributable to controlling interest

 

 

 

 

 

 

 

 

(9)

 

 

(6)

 

Balance, end of period

 

 

 

 

 

 

 

$

(343)

 

$

(410)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total controlling interest shareholders’ equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

 

 

 

 

 

$

14,498

 

$

13,671

 

Total comprehensive income (loss) attributable to controlling interest

 

 

 

 

 

 

 

 

317

 

 

(147)

 

Share-based compensation

 

 

 

 

 

 

 

 

26

 

 

33

 

Issuance of shares under share-based compensation plans

 

 

 

 

 

 

 

 

 —

 

 

(1)

 

Reclassification of obligation for distribution of qualifying additional paid-in capital

 

 

 

 

 

 

 

 

 —

 

 

(218)

 

Allocated capital for transactions with holders of noncontrolling interest

 

 

 

 

 

 

 

 

(7)

 

 

9

 

Other, net

 

 

 

 

 

 

 

 

3

 

 

(7)

 

Balance, end of period

 

 

 

 

 

 

 

$

14,837

 

$

13,340

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

 

 

 

 

 

$

310

 

$

311

 

Total comprehensive income attributable to noncontrolling interest

 

 

 

 

 

 

 

 

7

 

 

20

 

Reacquired noncontrolling interest

 

 

 

 

 

 

 

 

(5)

 

 

 —

 

Distributions to holders of noncontrolling interest

 

 

 

 

 

 

 

 

(16)

 

 

(14)

 

Allocated capital for transactions with holders of noncontrolling interest

 

 

 

 

 

 

 

 

7

 

 

(9)

 

Balance, end of period

 

 

 

 

 

 

 

$

303

 

$

308

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

 

 

 

 

 

$

14,808

 

$

13,982

 

Total comprehensive income (loss)

 

 

 

 

 

 

 

 

324

 

 

(127)

 

Share-based compensation

 

 

 

 

 

 

 

 

26

 

 

33

 

Issuance of shares under share-based compensation plans

 

 

 

 

 

 

 

 

 —

 

 

(1)

 

Reacquired noncontrolling interest

 

 

 

 

 

 

 

 

(5)

 

 

 —

 

Reclassification of obligation for distribution of qualifying additional paid-in capital

 

 

 

 

 

 

 

 

 —

 

 

(218)

 

Distributions to holders of noncontrolling interest

 

 

 

 

 

 

 

 

(16)

 

 

(14)

 

Other, net

 

 

 

 

 

 

 

 

3

 

 

(7)

 

Balance, end of period

 

 

 

 

 

 

 

$

15,140

 

$

13,648

 

 

See accompanying notes.

 

-  4  -


 

Table of Contents

TRANSOCEAN LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

 

 

 

 

 

 

 

 

 

Six months ended

 

 

June 30, 

 

 

2016

    

2015

 

 

 

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

 

Net income (loss)

$

343

 

$

(121)

 

Adjustments to reconcile to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation

 

442

 

 

540

 

Share-based compensation expense

 

26

 

 

33

 

Loss on impairment

 

23

 

 

1,826

 

Loss on disposal of assets, net

 

1

 

 

5

 

Gain on retirement of debt

 

(38)

 

 

 —

 

Deferred income tax expense (benefit)

 

14

 

 

(90)

 

Other, net

 

7

 

 

21

 

Changes in deferred revenues, net

 

(28)

 

 

(107)

 

Changes in deferred costs, net

 

54

 

 

116

 

Changes in operating assets and liabilities

 

(6)

 

 

(386)

 

Net cash provided by operating activities

 

838

 

 

1,837

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

Capital expenditures

 

(826)

 

 

(396)

 

Proceeds from disposal of assets, net

 

15

 

 

33

 

Proceeds from repayment of loans receivable

 

 —

 

 

15

 

Net cash used in investing activities

 

(811)

 

 

(348)

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

Repayments of debt

 

(251)

 

 

(69)

 

Deposit to cash account restricted for financing activities

 

(24)

 

 

 —

 

Proceeds from cash investments restricted for financing activities

 

73

 

 

57

 

Distributions of qualifying additional paid-in capital

 

 —

 

 

(327)

 

Distributions to holders of noncontrolling interest

 

(16)

 

 

(14)

 

Other, net

 

5

 

 

(2)

 

Net cash used in financing activities

 

(213)

 

 

(355)

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(186)

 

 

1,134

 

Cash and cash equivalents at beginning of period

 

2,339

 

 

2,635

 

Cash and cash equivalents at end of period

$

2,153

 

$

3,769

 

 

 

 

 

See accompanying notes.

 

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Table of Contents

TRANSOCEAN LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1—Business

Transocean Ltd. (together with its subsidiaries and predecessors, unless the context requires otherwise, “Transocean,” “we,” “us” or “our”) is a leading international provider of offshore contract drilling services for oil and gas wells.  We specialize in technically demanding sectors of the offshore drilling business with a particular focus on deepwater and harsh environment drilling services.  Our mobile offshore drilling fleet is considered one of the most versatile fleets in the world.  We contract our drilling rigs, related equipment and work crews predominantly on a dayrate basis to drill oil and gas wells.  At June 30, 2016, we owned or had partial ownership interests in and operated 60 mobile offshore drilling units, including 29 ultra‑deepwater floaters, seven harsh environment floaters, four deepwater floaters, 10 midwater floaters and 10 high‑specification jackups.  At June 30, 2016, we also had five ultra‑deepwater drillships and five high‑specification jackups under construction or under contract to be constructed.  See Note 8—Drilling Fleet.

On October 29, 2015, shareholders at our extraordinary general meeting approved the reduction of the par value of each of our shares to CHF 0.10 from the original par value of CHF 15.00.  Following formal notification to creditors and establishment of a public deed of compliance, the reduction of par value became effective as of January 7, 2016, upon registration in the commercial register.  See Note 12—Shareholders’ Equity.

See Note 15—Subsequent Events.

Note 2—Significant Accounting Policies

Presentation—We have prepared our accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States (“U.S.”) for interim financial information and with the instructions to Form 10‑Q and Article 10 of Regulation S‑X of the U.S. Securities and Exchange Commission.  Pursuant to such rules and regulations, these financial statements do not include all disclosures required by accounting principles generally accepted in the U.S. for complete financial statements.  The condensed consolidated financial statements reflect all adjustments, which are, in the opinion of management, necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods.  Such adjustments are considered to be of a normal recurring nature unless otherwise noted.  Operating results for the three and six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016 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, 2015 and 2014 and for each of the three years in the period ended December 31, 2015 included in our annual report on Form 10‑K filed on February 25, 2016.

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

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

Capitalized interest—We capitalize interest costs for qualifying construction and upgrade projects.  In the three and six months ended June 30, 2016, we capitalized interest costs of $40 million and $89 million, respectively, for construction work in progress.  In the three and six months ended June 30, 2015, we capitalized interest costs of $29 million and $55 million, respectively, for construction work in progress.

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

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.

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TRANSOCEAN LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—continued

(Unaudited)

Note 3—New Accounting Pronouncements

Recently issued accounting standards

Presentation of financial statements—Effective with our annual report for the year ending December 31, 2016, we will adopt the accounting standards update that requires us to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued.  The update is effective for the annual period ending after December 15, 2016 and for interim and annual periods thereafter.  We do not expect that our adoption will have a material effect on the disclosures contained in our notes to condensed consolidated financial statements.

Stock compensation—Effective no later than our annual report for the year ending December 31, 2016, we will adopt the accounting standards update that allows for simplification of the accounting for share‑based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows.  The update, which permits early adoption, is effective for the annual period ending after December 15, 2016 and for interim and annual periods thereafter do not expect that our adoption will have a material effect on our condensed consolidated statements of financial position, operations and cash flows or the notes thereto.

Revenue from contracts with customers—Effective January 1, 2018, we will adopt the accounting standards update that requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  The update, which permits early adoption, is effective for interim and annual periods beginning on or after December 15, 2017.  We are evaluating the requirements to determine the effect such requirements may have on our condensed consolidated statements of financial position, operations and cash flows and on the disclosures contained in our notes to condensed consolidated financial statements.

Leases—Effective no later than January 1, 2019, we will adopt the accounting standards update that (a) requires lessees to recognize a right‑to‑use asset and a lease liability for virtually all leases, and (b) updates previous accounting standards for lessors to align certain requirements with the updates to lessee accounting standards and the revenue recognition accounting standards.  The update, which permits early adoption, is effective for interim and annual periods beginning on or after December 15, 2018.  We are evaluating the requirements to determine the effect such requirements may have on our condensed consolidated statements of financial position, operations and cash flows and on the disclosures contained in our notes to condensed consolidated financial statements.

Note 4—Variable Interest Entities

Angola Deepwater Drilling Company Limited (“ADDCL”), a consolidated Cayman Islands company, and Transocean Drilling Services Offshore Inc. (“TDSOI”), a consolidated British Virgin Islands company, are variable interest entities for which we are the primary beneficiary.  Accordingly, we consolidate the operating results, assets and liabilities of ADDCL and TDSOI.  The carrying amounts associated with our consolidated variable interest entities, after eliminating the effect of intercompany transactions, were as follows (in millions):

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

 

    

2016

    

2015

 

Assets

 

$

1,089

 

$

1,157

 

Liabilities

 

 

42

 

 

49

 

Net carrying amount

 

$

1,047

 

$

1,108

 

 

See Note 13—Noncontrolling interest and Note 15—Subsequent Events.

Note 5—Impairments

Assets held for sale—In the three months ended June 30, 2016, we recognized an aggregate loss of $20 million ($18 million, or $0.04 per diluted share, net of tax) associated with the impairment of the deepwater floater Sedco 702, along with related and other equipment.  In the six months ended June 30, 2016, we recognized an aggregate loss of $23 million ($20 million, or 0.05 per diluted share, net of tax), associated with the impairment of the deepwater floater Sedco 702 and the midwater floater Transocean John Shaw, along with related and other equipment, which were classified as assets held for sale at the time of impairment.

In the three months ended June 30, 2015, we recognized an aggregate loss of $222 million ($144 million, or $0.39 per diluted share, net of tax), associated with the impairment of the ultra‑deepwater floater GSF Explorer, the deepwater floater GSF Celtic Sea and the midwater floater Transocean Amirante along with related equipment, which were classified as held for sale at the time of impairment.  In the six months ended June 30, 2015, we recognized an aggregate loss of $651 million ($537 million, or $1.48 per diluted share, net of tax), associated with the impairment of the ultra‑deepwater floaters Deepwater Expedition and GSF Explorer, the deepwater floaters GSF Celtic Sea,  Sedco 707 and Transocean Rather and the midwater floaters GSF Aleutian Key,  GSF Arctic III,  Transocean Amirante and Transocean Legend, along with related equipment, which were classified as assets held for sale at the time of impairment.

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TRANSOCEAN LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—continued

(Unaudited)

We measured the impairment of the drilling units and related equipment as the amount by which the carrying amount exceeded the estimated fair value less costs to sell.  We estimated the fair value of the assets using significant other observable inputs, representative of Level 2 fair value measurements, including indicative market values for the drilling units and related equipment to be sold for scrap value.  If we commit to plans to sell additional rigs for values below the respective carrying amounts, we may be required to recognize additional losses in future periods associated with the impairment of such assets.

Assets held and used—During the three months ended March 31, 2015, we identified indicators that the asset groups in our contract drilling services reporting unit may not be recoverable.  During the three months ended June 30, 2015, we identified additional indicators that the asset groups in our contract drilling services reporting unit may not be recoverable.  Such indicators included a reduction in the number of new contract opportunities, customer suspensions of drilling programs, early contract terminations and cancellations and low dayrate fixtures.  Our deepwater and midwater asset groups, in particular, experienced significant declines in projected dayrates and utilization caused by increased competition and marginalization of some of the less capable drilling units.  As a result of our testing, we determined that the carrying amounts of the deepwater floater and midwater floater asset groups were impaired.  In the three months ended March 31, 2015, we recognized a loss of $507 million ($481 million, or $1.34 per diluted share, net of tax) associated with the impairment of our deepwater floater asset group, including a loss of $41 million associated with construction in progress for the asset group.  In the three and six months ended June 30, 2015, we recognized a loss of $668 million ($653 million, or $1.79 per diluted share, net of tax) associated with the impairment of our midwater floater asset group, including a loss of $11 million associated with construction in progress for the asset group.

We estimated the fair value of the asset groups by applying a combination of income and cost approaches, using projected discounted cash flows and estimates of the exchange price that would be received for the assets in the principal or most advantageous market for the assets in an orderly transaction between market participants as of the measurement date.  Our estimates 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.  If we experience increasingly unfavorable changes to actual or anticipated dayrates or other impairment indicators, or if we are unable to secure new or extended contracts for our active units or the reactivation of any of our stacked units, we may be required to recognize additional losses in future periods as a result of impairments of the carrying amount of one or more of our asset groups.

Note 6—Income Taxes

Tax rate—Transocean Ltd., a holding company and Swiss resident, is exempt from cantonal and communal income tax in Switzerland, but is subject to Swiss federal income tax.  At the federal level, qualifying net dividend income and net capital gains on the sale of qualifying investments in subsidiaries are exempt from Swiss federal income tax.  Consequently, Transocean Ltd. expects dividends from its subsidiaries and capital gains from sales of investments in its subsidiaries to be exempt from Swiss federal income tax.

Our provision for income taxes is based on the tax laws and rates applicable in the jurisdictions in which we operate and earn income.  The relationship between our provision for or benefit from income taxes and our income or loss before income taxes can vary significantly from period to period considering, among other factors, (a) the overall level of income before income taxes, (b) changes in the blend of income that is taxed based on gross revenues rather than income before taxes, (c) rig movements between taxing jurisdictions and (d) our rig operating structures.  Generally, our annual marginal tax rate is lower than our annual effective tax rate.

In the six months ended June 30, 2016 and 2015, our estimated effective tax rate, excluding discrete items, was 21.5 percent and 21.6 percent, respectively, based on estimated annual income from continuing operations before income taxes.  In the six months ended June 30, 2016, such discrete items were primarily related to the tax expense or benefits of changes in unrecognized tax benefits associated with tax positions taken in prior years and valuation allowances for losses not expected to be realized.  In the six months ended June 30, 2015, such discrete items were primarily related to the tax effect of insurance recoveries that resulted from the resolution of certain matters associated with the Macondo well incident and losses on impairment of certain assets.

Tax returns—We file federal and local tax returns in several jurisdictions throughout the world.  With few exceptions, we are no longer subject to examinations of our U.S. and non‑U.S. tax matters for years prior to 2010.  Our tax returns in the major jurisdictions in which we operate, other than the U.S., Norway and Brazil, which are mentioned below, are generally subject to examination for periods ranging from three to six years.  We have agreed to extensions beyond the statute of limitations in two major jurisdictions for up to 20 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 timing or the outcome of these proceedings, we do not expect the ultimate liability to have a material adverse effect on our condensed consolidated statement of financial position or results of operations, although it may have a material adverse effect on our condensed consolidated statement of cash flows.

U.S. tax investigationsIn January 2014, we received a draft assessment from the U.S. tax authorities related to our 2010 and 2011 U.S. federal income tax returns.  The significant issue raised in the assessment was related to transfer pricing for certain charters of drilling rigs between our subsidiaries.  In April 2016, we entered into a final settlement with the U.S. tax authorities for $31 million, excluding interest and penalties, related to our 2010 and 2011 U.S. federal income tax returns.  The terms of this settlement are not

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TRANSOCEAN LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—continued

(Unaudited)

necessarily indicative of positions that the U.S. tax authorities may take on transfer pricing or other matters with respect to our tax returns for the years following 2011.  Such positions, if sustained, could substantially increase our effective tax rate on worldwide earnings and have a material adverse effect on our condensed consolidated results of operations or cash flows.

Norway tax investigations and trial—Norwegian civil tax authorities are investigating certain 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.  At June 30, 2016, the remaining outstanding civil tax assessment was for NOK 412 million, equivalent to approximately $49 million, plus interest, related to a 2001 dividend payment.  On June 26, 2014, the Norwegian district court in Oslo ruled that our subsidiary was liable for the civil tax assessment but waived all penalties and interest.  On September 12, 2014, we and the tax authorities each appealed the ruling.  On June 27, 2016, the tax authorities withdrew their appeal of penalties and dropped all penalty claims.  We intend to take all other appropriate action to continue to support our position that our Norwegian tax returns are materially correct as filed.

We had previously also received a tax assessment for NOK 43 million, equivalent to approximately $5 million, plus interest, related to certain foreign exchange deductions and dividend withholding tax.  On June 3, 2016, the Norwegian Supreme Court ruled that we were required to pay NOK 15 million, equivalent to approximately $2 million, excluding interest, with regard to the tax assessments for foreign exchange deductions and dividend withholding tax, and dismissed any interest and penalties.

Brazil tax investigations—Certain of our Brazilian income tax returns for the years 2000 through 2004 are currently under examination.  In December 2005, the Brazilian tax authorities issued an aggregate tax assessment of BRL 793 million, equivalent to approximately $247 million, including penalties and interest, measured as of June 30, 2016.  On January 25, 2008, we filed a protest letter with the Brazilian tax authorities, and we are currently engaged in the appeals process.  On May 19, 2014, with respect to our Brazilian income tax returns for the years 2009 and 2010, the Brazilian tax authorities issued an aggregate tax assessment of BRL 134 million, equivalent to approximately $42 million, including penalties and interest, measured as of June 30, 2016.  On June 18, 2014, we filed a protest letter with the Brazilian tax authorities.  We believe our returns are materially correct as filed, and we are vigorously contesting these assessments.  An unfavorable outcome on these proposed assessments could result in a material adverse effect on our condensed consolidated statement of financial position, results of operations or cash flows.

Other tax matters—We conduct operations through our various subsidiaries in a number of countries throughout the world.  Each country has its own tax regimes with varying nominal rates, deductions, employee contribution requirements and tax attributes.  From time to time, we may identify changes to previously evaluated tax positions that could result in adjustments to our recorded assets and liabilities.  Although we are unable to predict the outcome of these changes, we do not expect the effect, if any, resulting from these adjustments to have a material adverse effect on our condensed consolidated statement of financial position, results of operations or cash flows.

Note 7—Earnings (Loss) Per Share

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  June 30, 

 

Six months ended June 30, 

 

 

 

2016

 

2015

 

2016

 

2015

 

 

    

Basic

 

Diluted

    

Basic

    

Diluted

 

Basic

    

Diluted

    

Basic

    

Diluted

 

Numerator for earnings (loss) per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations attributable to controlling interest

 

$

76

 

$

76

 

$

341

 

$

341

 

$

326

 

$

326

 

$

(140)

 

$

(140)

 

Undistributed earnings allocable to participating securities

 

 

(1)

 

 

(1)

 

 

(3)

 

 

(3)

 

 

(3)

 

 

(4)

 

 

 —

 

 

 —

 

Income (loss) from continuing operations available to shareholders

 

$

75

 

$

75

 

$

338

 

$

338

 

$

323

 

$

322

 

$

(140)

 

$

(140)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for earnings (loss) per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding

 

 

365

 

 

365

 

 

363

 

 

363

 

 

365

 

 

365

 

 

363

 

 

363

 

Effect of stock options and other share-based awards

 

 

 

 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Weighted-average shares for per share calculation

 

 

365

 

 

365

 

 

363

 

 

363

 

 

365

 

 

365

 

 

363

 

 

363

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per share earnings (loss) from continuing operations

 

$

0.21

 

$

0.21

 

$

0.93

 

$

0.93

 

$

0.88

 

$

0.88

 

$

(0.39)

 

$

(0.39)

 

 

In the three and six months ended June 30, 2016, we excluded from the calculation 4.5 million and 4.0 million share‑based awards, respectively, since the effect would have been anti‑dilutive.  In the three and six months ended June 30, 2015, we excluded from the calculation 3.3 million and 5.3 million share‑based awards, respectively, since the effect would have been anti‑dilutive.

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Table of Contents

TRANSOCEAN LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—continued

(Unaudited)

Note 8—Drilling Fleet

Construction work in progress—For the six months ended June 30, 2016 and 2015, the changes in our construction work in progress, including capital expenditures and other capital additions, were as follows (in millions):

 

 

 

 

 

 

 

 

 

 

Six months ended

 

 

 

June 30, 

 

 

    

2016

    

2015

 

Construction work in progress, at beginning of period

 

$

3,736

 

$

2,451

 

 

 

 

 

 

 

 

 

Capital expenditures

 

 

 

 

 

 

 

Newbuild construction program

 

 

740

 

 

183

 

Other equipment and construction projects

 

 

86

 

 

213

 

Total capital expenditures

 

 

826

 

 

396

 

Changes in accrued capital additions

 

 

(90)

 

 

(43)

 

Impairment of construction work in progress

 

 

 —

 </