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Transocean 10-Q 2011
form10_q3q2011.htm
  


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM 10-Q
 (Mark one)
 
 þ 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2011
 
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)
 
Transocean Logo
 

 
Zug, Switzerland
98-0599916
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
   
Chemin de Blandonnet 10
Vernier, Switzerland
1214
(Address of principal executive offices)
(Zip Code)
   
+41 (22) 930-9000
(Registrant’s telephone number, including area code)
   
 
_________________________
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes þ   No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes þ   No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 Large accelerated filer þ    Accelerated filer ¨    Non-accelerated filer (do not check if a smaller reporting company) ¨    Smaller reporting company ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨   No þ
 
As of October 26, 2011, 319,855,270 shares were outstanding.
 




 
 

 

TRANSOCEAN LTD. AND SUBSIDIARIES
INDEX TO FORM 10-Q
UARTER ENDED SEPTEMBER 30, 2011

 
Page
 
 
 
 
 
 
 
 
     
 



 
 

 

PART I.         FINANCIAL INFORMATION
 
Item 1.
Financial Statements
 
TRANSOCEAN LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
(Unaudited)

 
Three months ended
September 30,
     
Nine months ended
September 30,
 
 
2011
   
2010
     
2011
   
2010
 
         
(As adjusted)
           
(As adjusted)
 
Operating revenues
                               
Contract drilling revenues
$
2,061
   
$
2,183
     
$
6,097
   
$
6,880
 
Contract drilling intangible revenues
 
12
     
23
       
32
     
85
 
Other revenues
 
169
     
75
       
591
     
374
 
   
2,242
     
2,281
       
6,720
     
7,339
 
Costs and expenses
                               
Operating and maintenance
 
1,540
     
1,202
       
4,391
     
3,735
 
Depreciation and amortization
 
362
     
388
       
1,075
     
1,155
 
General and administrative
 
67
     
59
       
200
     
180
 
   
1,969
     
1,649
       
5,666
     
5,070
 
Loss on impairment
 
(3
)
   
       
(28
)
   
 
Gain (loss) on disposal of assets, net
 
(2
)
   
2
       
5
     
256
 
Operating income
 
268
     
634
       
1,031
     
2,525
 
                                 
Other income (expense), net
                               
Interest income
 
7
     
7
       
27
     
17
 
Interest expense, net of amounts capitalized
 
(151
)
   
(142
)
     
(443
)
   
(415
)
Other, net
 
(77
)
   
(13
)
     
(79
)
   
(1
)
   
(221
)
   
(148
)
     
(495
)
   
(399
)
Income from continuing operations before income tax expense
 
47
     
486
       
536
     
2,126
 
Income tax expense
 
100
     
123
       
263
     
368
 
Income (loss) from continuing operations
 
(53
)
   
363
       
273
     
1,758
 
Income (loss) from discontinued operations, net of tax
 
(7
)
   
15
       
171
     
25
 
                                 
Net income (loss)
 
(60
)
   
378
       
444
     
1,783
 
Net income attributable to noncontrolling interest
 
11
     
10
       
50
     
23
 
Net income (loss) attributable to controlling interest
$
(71
)
 
$
368
     
$
394
   
$
1,760
 
                                 
Earnings (loss) per share-basic
                               
Earnings (loss) from continuing operations
$
(0.20
)
 
$
1.10
     
$
0.69
   
$
5.39
 
Earnings (loss) from discontinued operations
 
(0.02
)
   
0.05
       
0.53
     
0.08
 
Earnings (loss) per share
$
(0.22
)
 
$
1.15
     
$
1.22
   
$
5.47
 
                                 
Earnings (loss) per share-diluted
                               
Earnings (loss) from continuing operations
$
(0.20
)
 
$
1.10
     
$
0.69
   
$
5.39
 
Earnings (loss) from discontinued operations
 
(0.02
)
   
0.05
       
0.53
     
0.08
 
Earnings (loss) per share
$
(0.22
)
 
$
1.15
     
$
1.22
   
$
5.47
 
                                 
Weighted-average shares outstanding
                               
Basic
 
320
     
319
       
320
     
320
 
Diluted
 
320
     
319
       
320
     
320
 

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,
 
 
2011
   
2010
     
2011
   
2010
 
                           
Net income (loss)
$
(60
)
 
$
378
     
$
444
   
$
1,783
 
                                 
Other comprehensive income (loss) before income taxes
                               
Unrecognized components of net periodic benefit costs
 
(4
)
   
1
       
(10
)
   
(9
)
Recognized components of net periodic benefit costs
 
7
     
7
       
19
     
13
 
Unrecognized loss on derivative instruments
 
(7
)
   
(12
)
     
(14
)
   
(35
)
Recognized loss on derivative instruments
 
3
     
3
       
8
     
9
 
Unrealized loss on marketable securities
 
(14
)
   
       
(14
)
   
 
                                 
Other comprehensive loss before income taxes
 
(15
)
   
(1
)
     
(11
)
   
(22
)
Income taxes related to other comprehensive loss
 
     
       
(2
)
   
(1
)
Other comprehensive loss, net of income taxes
 
(15
)
   
(1
)
     
(13
)
   
(23
)
                                 
Total comprehensive income (loss)
 
(75
)
   
377
       
431
     
1,760
 
Total comprehensive income (loss) attributable to noncontrolling interest
 
6
     
       
43
     
(8
)
                                 
Total comprehensive income (loss) attributable to controlling interest
$
(81
)
 
$
377
     
$
388
   
$
1,768
 

See accompanying notes.
- 2 -
 
 

 
TRANSOCEAN LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
(Unaudited)


   
September 30,
2011
 
December 31,
2010
         
(As adjusted)
Assets
         
Cash and cash equivalents
 
$
3,286
   
$
3,394
 
Accounts receivable, net of allowance for doubtful accounts
of $28 and $38 at September 30, 2011 and December 31, 2010, respectively
   
2,046
     
1,843
 
Materials and supplies, net of allowance for obsolescence
of $76 and $70 at September 30, 2011 and December 31, 2010, respectively
   
578
     
514
 
Deferred income taxes, net
   
120
     
115
 
Assets held for sale
   
118
     
 
Other current assets
   
421
     
329
 
Total current assets
   
6,569
     
6,195
 
                 
Property and equipment
   
26,886
     
26,721
 
Property and equipment of consolidated variable interest entities
   
2,248
     
2,214
 
Less accumulated depreciation
   
8,413
     
7,616
 
Property and equipment, net
   
20,721
     
21,319
 
Goodwill
   
8,132
     
8,132
 
Other assets
   
1,223
     
1,165
 
Total assets
 
$
36,645
   
$
36,811
 
                 
Liabilities and equity
               
Accounts payable
 
$
755
   
$
832
 
Accrued income taxes
   
23
     
109
 
Debt due within one year
   
1,830
     
1,917
 
Debt of consolidated variable interest entities due within one year
   
96
     
95
 
Other current liabilities
   
1,566
     
883
 
Total current liabilities
   
4,270
     
3,836
 
                 
Long-term debt
   
8,402
     
8,354
 
Long-term debt of consolidated variable interest entities
   
772
     
855
 
Deferred income taxes, net
   
588
     
575
 
Other long-term liabilities
   
1,730
     
1,791
 
Total long-term liabilities
   
11,492
     
11,575
 
                 
Commitments and contingencies
               
Redeemable noncontrolling interest
   
71
     
25
 
                 
Shares, CHF 15.00 par value, 335,235,298 authorized, 167,617,649 conditionally authorized,
335,235,298 issued at September 30, 2011 and December 31, 2010;
319,853,371 and 319,080,678 outstanding at September 30, 2011 and December 31, 2010, respectively
   
4,493
     
4,482
 
Additional paid-in capital
   
6,545
     
7,504
 
Treasury shares, at cost, 2,863,267 held at September 30, 2011 and December 31, 2010
   
(240
)
   
(240
)
Retained earnings
   
10,363
     
9,969
 
Accumulated other comprehensive loss
   
(338
)
   
(332
)
Total controlling interest shareholders’ equity
   
20,823
     
21,383
 
Noncontrolling interest
   
(11
)
   
(8
)
Total equity
   
20,812
     
21,375
 
Total liabilities and equity
 
$
36,645
   
$
36,811
 


See accompanying notes.
- 3 -
 
 

 
TRANSOCEAN LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(In millions)
(Unaudited)


   
Nine months ended
September 30,
   
2011
 
2010
         
(As adjusted)
Shares outstanding
               
Balance, beginning of period
   
319
     
321
 
Issuance of shares under share-based compensation plans
   
1
     
1
 
Purchases of shares held in treasury
   
     
(3
)
Balance, end of period
   
320
     
319
 
Shares
               
Balance, beginning of period
 
$
4,482
   
$
4,472
 
Issuance of shares under share-based compensation plans
   
11
     
9
 
Balance, end of period
 
$
4,493
   
$
4,481
 
Additional paid-in capital
               
Balance, beginning of period
 
$
7,504
   
$
7,407
 
Share-based compensation
   
74
     
79
 
Issuance of shares under share-based compensation plans
   
(17
)
   
(13
)
Obligation for distribution of qualifying additional paid-in capital
   
(1,017
)
   
 
Other, net
   
1
     
4
 
Balance, end of period
 
$
6,545
   
$
7,477
 
Treasury shares, at cost
               
Balance, beginning of period
 
$
(240
)
 
$
 
Purchases of shares held in treasury
   
     
(240
)
Balance, end of period
 
$
(240
)
 
$
(240
)
Retained earnings
               
Balance, beginning of period
 
$
9,969
   
$
9,008
 
Net income attributable to controlling interest
   
394
     
1,760
 
Balance, end of period
 
$
10,363
   
$
10,768
 
Accumulated other comprehensive loss
               
Balance, beginning of period
 
$
(332
)
 
$
(335
)
Other comprehensive income (loss) attributable to controlling interest
   
(6
)
   
8
 
Balance, end of period
 
$
(338
)
 
$
(327
)
Total controlling interest shareholders’ equity
               
Balance, beginning of period
 
$
21,383
   
$
20,552
 
Total comprehensive income attributable to controlling interest
   
388
     
1,768
 
Share-based compensation
   
74
     
79
 
Issuance of shares under share-based compensation plans
   
(6
)
   
(4
)
Purchases of shares held in treasury
   
     
(240
)
Obligation for distribution of qualifying additional paid-in capital
   
(1,017
)
   
 
Other, net
   
1
     
4
 
Balance, end of period
 
$
20,823
   
$
22,159
 
Noncontrolling interest
               
Balance, beginning of period
 
$
(8
)
 
$
7
 
Total comprehensive loss attributable to noncontrolling interest
   
(3
)
   
(8
)
Other, net
   
     
4
 
Balance, end of period
 
$
(11
)
 
$
3
 
Total equity
               
Balance, beginning of period
 
$
21,375
   
$
20,559
 
Total comprehensive income
   
385
     
1,760
 
Share-based compensation
   
74
     
79
 
Issuance of shares under share-based compensation plans
   
(6
)
   
(4
)
Purchases of shares held in treasury
   
     
(240
)
Obligation for distribution of qualifying additional paid-in capital
   
(1,017
)
   
 
Other, net
   
1
     
8
 
Balance, end of period
 
$
20,812
   
$
22,162
 


See accompanying notes.
- 4 -
 
 

 
TRANSOCEAN LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)


   
Three months ended
September 30,
     
Nine months ended
September 30,
 
   
2011
   
2010
     
2011
   
2010
 
                           
Cash flows from operating activities
                             
Net income (loss)
 
$
(60
)
 
$
378
     
$
444
   
$
1,783
 
Adjustments to reconcile to net cash provided by operating activities
                                 
Amortization of drilling contract intangibles
   
(12
)
   
(23
)
     
(32
)
   
(85
)
Depreciation and amortization
   
362
     
388
       
1,075
     
1,155
 
Share-based compensation expense
   
20
     
26
       
74
     
79
 
Loss on impairment
   
3
     
       
28
     
 
(Gain) loss on disposal of discontinued operations, net
   
4
     
       
(169
)
   
 
(Gain) loss on disposal of assets, net
   
2
     
(2
)
     
(5
)
   
(256
)
Amortization of debt issue costs, discounts and premiums, net
   
33
     
48
       
95
     
148
 
Deferred income taxes
   
(14
)
   
(40
)
     
2
     
(74
)
Other, net
   
82
     
30
       
93
     
62
 
Changes in deferred revenue, net
   
(36
)
   
47
       
7
     
205
 
Changes in deferred expenses, net
   
18
     
(18
)
     
(66
)
   
(55
)
Changes in operating assets and liabilities
   
90
     
(125
)
     
(324
)
   
188
 
Net cash provided by operating activities
   
492
     
709
       
1,222
     
3,150
 
                                   
Cash flows from investing activities
                                 
Capital expenditures
   
(137
)
   
(300
)
     
(670
)
   
(969
)
Investment in marketable security
   
(199
)
   
       
(199
)
   
 
Proceeds from disposal of assets, net
   
88
     
       
106
     
51
 
Proceeds from disposal of discontinued operations, net
   
     
       
259
     
 
Proceeds from insurance recoveries for loss of drilling unit
   
     
       
     
560
 
Payment for settlement of forward exchange contract, net
   
(78
)
   
       
(78
)
   
 
Other, net
   
6
     
2
       
(27
)
   
17
 
Net cash used in investing activities
   
(320
)
   
(298
)
     
(609
)
   
(341
)
                                   
Cash flows from financing activities
                                 
Change in short-term borrowings, net
   
2
     
46
       
58
     
(131
)
Proceeds from debt
   
     
2,000
       
5
     
2,054
 
Repayments of debt
   
(23
)
   
(691
)
     
(272
)
   
(966
)
Distribution of qualifying additional paid-in capital
   
(254
)
   
       
(508
)
   
 
Purchases of shares held in treasury
   
     
       
     
(240
)
Other, net
   
     
(18
)
     
(4
)
   
(20
)
Net cash provided by (used in) financing activities
   
(275
)
   
1,337
       
(721
)
   
697
 
                                   
Net increase (decrease) in cash and cash equivalents
   
(103
)
   
1,748
       
(108
)
   
3,506
 
Cash and cash equivalents at beginning of period
   
3,389
     
2,888
       
3,394
     
1,130
 
Cash and cash equivalents at end of period
 
$
3,286
   
$
4,636
     
$
3,286
   
$
4,636
 


See accompanying notes.
- 5 -
 
 

 
TRANSOCEAN LTD. AND SUBSIDIARIES
(Unaudited)



 
Note 1—Nature of Business
 
 
Transocean Ltd. (together with its subsidiaries and predecessors, unless the context requires otherwise, “Transocean,” the “Company,” “we,” “us” or “our”) is a leading international provider of offshore contract drilling services for oil and gas wells.  Our mobile offshore drilling fleet is considered one of the most modern and versatile fleets in the world.  Specializing in technically demanding sectors of the offshore drilling business with a particular focus on deepwater and harsh environment drilling services, we contract our drilling rigs, related equipment and work crews predominantly on a dayrate basis to drill oil and gas wells.  At September 30, 2011, we owned or had partial ownership interests in and operated 133 mobile offshore drilling units.  As of this date, our fleet consisted of 48 High-Specification Floaters (Ultra-Deepwater, Deepwater and Harsh Environment semisubmersibles and drillships), 25 Midwater Floaters, nine High-Specification Jackups, 5Standard Jackups and one Other Rig.  We also have four High-Specification Jackups under construction.  See Note 10—Drilling Fleet.
 
    On August 26, 2011, we commenced an all cash voluntary offer (the “Offer”) for 100 percent of the shares of Aker Drilling ASA (“Aker Drilling”), a Norwegian company listed on the Oslo Stock Exchange, for NOK 26.50 per share.  Aker Drilling operates two Harsh Environment, Ultra-Deepwater semi-submersibles currently on long-term contracts to Statoil ASA and Det norske oljeselskap ASA in Norway.  In 2014, we expect to take delivery of two Ultra-Deepwater drillships currently under construction at the Daewoo Shipbuilding & Marine Engineering Co. Ltd. shipyard in Korea.  The Offer price represented an equity market capitalization of approximately NOK 7.93 billion, or $1.43 billion based on an exchange rate of NOK 5.53 to USD 1.00.  See Note 4—Marketable Security and Note 18—Subsequent Events.
 
We also provide oil and gas drilling management services, drilling engineering and drilling project management services through Applied Drilling Technology Inc., our wholly owned subsidiary, and through ADT International, a division of one of our U.K. subsidiaries (together, “ADTI”).  ADTI conducts drilling management services primarily on either a dayrate or a completed-project, fixed-price (or “turnkey”) basis.  We also participated in oil and gas exploration, development and production activities through our oil and gas subsidiaries, Challenger Minerals Inc. and Challenger Minerals (North Sea) Limited (together, “CMI”), which were classified as discontinued operations as of September 30, 2011.  See Note 8—Discontinued Operations and Note 18—Subsequent Events.
 
Note 2—Significant Accounting Policies
 
Basis of 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 (“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, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011 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, 2010 and 2009 and for each of the three years in the period ended December 31, 2010 included in our annual report on Form 10-K filed on February 28, 2011.
 
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, investments, notes receivable, goodwill and other intangible assets, income taxes, defined benefit pension plans and other postretirement benefits, contingencies and share-based compensation.  We base our estimates and assumptions on historical experience and on various other factors we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amounts of assets and liabilities that are not readily apparent from other sources.  Actual results could differ from such estimates.
 
Fair value measurements>—We estimate fair value at a price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market for the asset or liability.  Our valuation techniques require inputs that we categorize using a three-level hierarchy, from highest to lowest level of observable inputs, as follows: (1) unadjusted quoted prices for identical assets or liabilities in active markets (“Level 1”), (2) direct or indirect observable inputs, including quoted prices or other market data, for similar assets or liabilities in active markets or identical assets or liabilities in less active markets (“Level 2”) and (3) unobservable inputs that require significant judgment for which there is little or no market data (“Level 3”).  When multiple input levels are required for a valuation, we categorize the entire fair value measurement according to the lowest level of input that is significant to the measurement even though we may have also utilized significant inputs that are more readily observable.
 

- 6 -
 
 

 
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


 
Principles of 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 investments in entities if we have the ability to exercise significant influence over the entity, which either (a) does not meet the variable interest entity criteria or (b) meets the variable interest entity criteria, but for which we are not deemed to be the primary beneficiary.  We apply the cost method of accounting for investments in other entities if we do not have the ability to exercise significant influence over the entity.  See Note 5—Variable Interest Entities.
 
 
 
 
Subsequent events>—We evaluate subsequent events through the time of our filing on the date we issue our financial statements.  See Note 18—Subsequent Events.
 
Note 3—New Accounting Pronouncements
 
Comprehensive income>—Effective January 1, 2012, we will adopt the accounting standards update that amends the presentation requirements for comprehensive income and requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  Additionally, the update requires presentation of reclassification adjustments from other comprehensive income to net income on the face of the financial statements where the components of net income and the components of other comprehensive income are presented regardless of whether an entity chooses to present total comprehensive income in a single continuous statement or in two separate but consecutive statements.  The update is effective for interim and annual periods beginning after December 15, 2011.  We do not expect that our adoption will have a material effect on our consolidated financial statements.
 
 
Intangibles-goodwill and other>—Effective January 1, 2012, we will adopt the accounting standards update that amends the goodwill impairment testing requirements by giving an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount and whether the two-step impairment test is required.  The update is effective for goodwill impairment tests performed for annual and interim periods beginning after December 15, 2011.  Early adoption is permitted.  We do not expect that our adoption will have a material effect on our consolidated financial statements.
 

- 7 -
 
 

 
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

 
Note 4—Marketable Security
 
 
On August 14, 2011, we entered into an irrevocable agreement with Aker Capital AS to acquire its 41 percent interest in Aker Drilling through (a) the purchase of 15 million shares, representing approximately 5.0 percent of the outstanding shares of Aker Drilling, and (b) a pre-commitment agreement for the remaining 108 million shares, representing 36.percent of the outstanding shares, to be purchased by us pursuant to the Offer.  In addition, we received irrevocable pre-commitments from other shareholders to purchase 19.5 percent of the outstanding shares of Aker Drilling, bringing the total irrevocable commitments to 60.5 percent of the Aker Drilling outstanding shares.
 
After receiving clearance by the Oslo Stock Exchange on August 26, 2011, we launched an all cash offer for 100 percent of the shares of Aker Drilling for NOK 26.50 per share.  The Offer commenced on August 26, 2011 and ended on September 23, 2011.
 
At September 30, 2011, we held a 13.7 percent interest in Aker Drilling, a marketable security recorded in other assets with an aggregate carrying amount of $185 million.  During the three months ended September 30, 2011, we incurred acquisition costs of $5 million related to the offer, recognized in general and administrative expense.  See Note 18—Subsequent Events.
 
Note 5—Variable Interest Entities
 
Consolidated variable interest entities>—We consolidate the assets and liabilities of Transocean Pacific Drilling Inc. (“TPDI”), a consolidated British Virgin Islands joint venture company, and Angola Deepwater Drilling Company Limited (“ADDCL”), a consolidated Cayman Islands joint venture company, which are two variable interest entities for which we are the primary beneficiary.  The carrying amounts associated with our consolidated variable interest entities, after eliminating the effect of intercompany transactions, were as follows (in millions):
 
 
September 30, 2011
   
December 31, 2010
 
 
Assets
   
Liabilities
   
Net carrying amount
   
Assets
   
Liabilities
   
Net carrying amount
 
Variable interest entity
                                             
TPDI
$
1,575
   
$
692
   
$
883
   
$
1,598
   
$
763
   
$
835
 
ADDCL
 
889
     
330
     
559
     
864
     
345
     
519
 
Total
$
2,464
   
$
1,022
   
$
1,442
   
$
2,462
   
$
1,108
   
$
1,354
 
 
 
Unconsolidated variable interest entity>—As holder of two notes receivable and a lender under a working capital loan, we hold a variable interest in Awilco Drilling plc (“Awilco”), a U.K. company (see Note 10—Drilling Fleet).  The notes receivable, originally issued in exchange for and secured by two drilling units, have stated interest rates of nine percent and are payable in scheduled quarterly installments of principal and interest through maturity in January 2015.  Additionally, we provide Awilco with a working capital loan, also secured by the drilling units, that has a stated interest rate of 10 percent and a maximum borrowing amount of $35 million.  We evaluate the credit quality and financial condition of Awilco quarterly.  The aggregate carrying amount of the notes receivable was $109 million at both September 30, 2011 and December 31, 2010.  The aggregate carrying amount of the working capital loan receivable was $35 million and $6 million at September 30, 2011 and December 31, 2010, respectively.
 
In the three months ended September 30, 2011, we determined that Awilco no longer met the definition of a variable interest entity following its private placement and list of shares on the Oslo Stock Exchange and the successful marketing of its two drilling units.
 
Note 6—Impairments
 
Assets held for sale>—In the three and nine months ended September 30, 2011, we recognized aggregate losses of $3 million ($0.01 per diluted share from continuing operations), which had no tax effect, and $28 million ($0.09 per diluted share from continuing operations),which had a tax effect of less than $1 million, respectively, associated with the impairment of GSF Britannia, George H. Galloway, GSF Labrador and Searex IV, which were each classified as an asset held for sale at the time of impairment.  We measured the impairment as the amount by which the carrying amounts of these rigs and related assets exceeded the estimated fair values less costs to sell the rigs and related assets.  We estimated the fair values of the rigs and related assets using significant observable inputs, including binding sale and purchase agreements for the assets.
 

- 8 -
 
 

 
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

 
Note 7—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.  There is little to no expected relationship between the provision for or benefit from income taxes and income or loss before income taxes considering, among other factors, (a) changes in the blend of income that is taxed based on gross revenues rather than income before taxes, (b) rig movements between taxing jurisdictions and (c) our rig operating structures.
 
Our estimated annual effective tax rates were 34.1 percent and 17.6 percent for the nine months ended September 30, 2011 and September 30, 2010, 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.
 
Deferred taxes>—The valuation allowance for our non-current deferred tax assets was as follows (in millions):
 
   
September 30,
2011
   
December 31,
2010
 
Valuation allowance for non-current deferred tax assets
 
$
170
   
$
164
 
 
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,
2011
   
December 31,
2010
 
Unrecognized tax benefits, excluding interest and penalties
 
$
507
   
$
485
 
Interest and penalties
   
259
     
235
 
Unrecognized tax benefits, including interest and penalties
 
$
766
   
$
720
 
 
 
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 2000.  For the nine months ended September 30, 2011 and September 30, 2010, the amount of current tax benefit recognized from the settlement of disputes with tax authorities and from the expiration of statutes of limitations was insignificant.
 
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 four major jurisdictions for up to 16 years.  Tax authorities in certain jurisdictions are examining our tax returns and in some cases have issued assessments.  We are defending our tax positions in those jurisdictions.  While we cannot predict or provide assurance as to the final outcome of these proceedings, we do not expect the ultimate liability to have a material adverse effect on our consolidated statement of financial position or results of operations, although it may have a material adverse effect on our consolidated cash flows.
 
U.S. tax investigations—With respect to our 2004 and 2005 U.S. federal income tax returns, the U.S. tax authorities have withdrawn all of their previously proposed tax adjustments, except a claim regarding transfer pricing for certain charters of drilling rigs between our subsidiaries, resulting in a total proposed adjustment of approximately $79 million, exclusive of interest.  We believe an unfavorable outcome on this assessment with respect to 2004 and 2005 activities would not result in a material adverse effect on our consolidated statement of financial position, results of operations or cash flows.  Although we believe the transfer pricing for these charters is materially correct, we have been unable to reach a resolution with the tax authorities.  This matter is scheduled to be heard in U.S. Tax Court in February 2012.
 
In May 2010, we received an assessment from the U.S. tax authorities related to our 2006 and 2007 U.S. federal income tax returns.  In July 2010, we filed a protest letter with the U.S. tax authorities responding to this assessment.  The significant issues raised in the assessment relate to transfer pricing for certain charters of drilling rigs between our subsidiaries and the creation of intangible assets resulting from the performance of engineering services between our subsidiaries.  These two items would result in net adjustments of approximately $278 million of additional taxes, excluding interest.  An unfavorable outcome on these adjustments could result in a material adverse effect on our consolidated statement of financial position, results of operations or cash flows.  We believe our returns are materially correct as filed, and we intend to continue to vigorously defend against all such claims.
 
In addition, the May 2010 assessment included adjustments related to a series of restructuring transactions that occurred between 2001 and 2004.  These restructuring transactions impacted our basis in our former subsidiary, TODCO, which we disposed of in 2004 and 2005.  The authorities are disputing the amount of capital losses that resulted from the disposition of TODCO.  We utilized a portion of the capital losses to offset capital gains on our 2006, 2007, 2008 and 2009 tax returns.  The majority of the capital losses were unutilized and expired on December 31, 2009.  The adjustments would also impact the amount of certain net operating losses and other carryovers into 2006 and later years.  The authorities are also contesting the characterization of certain amounts of income received in 2006 and 2007 as capital gain and thus the availability of the capital gain for offset by the capital loss.  These claims with respect to our U.S. federal income tax returns for 2006 through 2009 could result in net tax adjustments of approximately $295 million.  An unfavorable outcome on these potential adjustments could result in a material adverse effect on our consolidated statement of financial position, results of operations or cash flows.  We believe that our tax returns are materially correct as filed, and we intend to vigorously defend against any potential claims.

- 9 -
 
 

 
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

 
 
 
The May 2010 assessment also included certain claims with respect to withholding taxes and certain other items resulting in net tax adjustments of approximately $160 million, exclusive of interest.  In addition, the tax authorities assessed penalties associated with the various tax adjustments for the 2006 and 2007 audits in the aggregate amount of approximately $88 million, exclusive of interest.  We believe that our tax returns are materially correct as filed, and we intend to vigorously defend against any potential claims.
 
Norway tax investigations—Norwegian civil tax and criminal authorities are investigating various transactions undertaken by our subsidiaries in 2001 and 2002 as well as the actions of certain employees of our former external tax advisors on these transactions.  The authorities issued tax assessments of (a) approximately $268 million plus interest, related to certain restructuring transactions, (b) approximately $117 million plus interest, related to the migration of a subsidiary that was previously subject to tax in Norway, (c) approximately $71 million plus interest, related to a 2001 dividend payment and (d) approximately $7 million plus interest, related to certain foreign exchange deductions and dividend withholding tax.  We have filed or expect to file appeals to these tax assessments.  With respect to the tax assessment related to the migration of a subsidiary, we intend to provide a guarantee in the amount of approximately $120 million, plus interest, while this dispute is addressed by the Norwegian courts.  Furthermore, we may be required to provide some form of additional financial security, in an amount up to $794 million, including interest and penalties, for these other assessed amounts while these disputes are appealed and addressed by the Norwegian courts.  The authorities have indicated that they plan to seek penalties of 60 percent on most but not all matters.  For these matters, we believe our returns are materially correct as filed, and we have and will continue to respond to all information requests from the Norwegian authorities.  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.  Two employees of our former external tax advisors were also issued indictments with respect to the disclosures in our tax returns.  We believe these charges are without merit and plan to vigorously defend our subsidiaries to the fullest extent.  We intend to vigorously contest any assertions by the Norwegian civil and criminal authorities in connection with the various transactions being investigated.  An unfavorable outcome on these Norwegian civil and criminal tax matters could result in a material adverse effect on our consolidated statement of financial position, results of operations or cash flows.  However, while we cannot predict or provide assurance as to the final outcome of these proceedings, we do not expect the ultimate resolution of these matters to have a material adverse effect on our consolidated statement of financial position or results of operations, although it may have a material adverse effect on our consolidated cash flows.  See Note 18—Subsequent Events.
 
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 $125 million, plus a 75 percent penalty of $93 million and $165 million of interest through September 30, 2011.  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.  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.
 
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 assessments to have a material adverse effect on our consolidated statement of financial position, results of operations or cash flows.
 
Note 8—Discontinued Operations
 
 

- 10 -
 
 

 
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

 
Caspian Sea operations>—In February 2011, in connection with our efforts to dispose of non-strategic assets, we sold the subsidiary that owns the High-Specification Jackup Trident 20, located in the Caspian Sea.  The disposal of this subsidiary, a component of our contract drilling services segment, reflects our decision to discontinue operations in the Caspian Sea.  As a result of the sale, we received net cash proceeds of $259 million and recognized a gain on the disposal of the discontinued operations of $169 million ($0.53 per diluted share from discontinued operations), which had no tax effect.  Through June 2011, we continued to operate Trident 20 under a bareboat charter to perform services for the customer and the buyer reimbursed us for the approximate cost of providing these services.  Additionally, we provided certain transition services to the buyer through September 2011.
 
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,
 
   
2011
   
2010
   
2011
   
2010
 
Operating revenues
 
$
11
   
$
28
   
$
59
   
$
77
 
Costs and expenses
   
5
     
18
     
46
     
73
 
Loss on impairment (a)
   
4
     
     
4
     
2
 
Income from discontinued operations before income tax expense
   
2
     
10
     
9
     
2
 
Gain (loss) on disposal of discontinued operations, net
   
(4
)
   
     
169
     
 
Income tax benefit (expense)
   
(5
)
   
5
     
(7
)
   
23
 
                                 
Income (loss) from discontinued operations, net of tax
 
$
(7
)
 
$
15
   
$
171
   
$
25
 
 
_________________________
 
 (a)
In the three and nine months ended September 30, 2011, we recognized a loss on impairment of the oil and gas properties since the carrying amount of the properties exceeded the estimated fair value less costs to sell the properties.  We estimated fair value based on unobservable inputs that require significant judgment for which there is little or no market data, including non-binding price quotes from unaffiliated parties.  In the nine months ended September 30, 2010, we recognized a loss on impairment of goodwill associated with the oil and gas properties reporting unit.
 
 
Assets and liabilities of discontinued operations—As of September 30, 2011, our oil and gas properties and related assets were classified as assets held for sale.  As a result of our decision to discontinue these operations and the operations of our Caspian Sea subsidiary, we also reclassified the assets and liabilities associated with our discontinued operations to other current assets, other assets, other current liabilities and other long-term liabilities as of December 31, 2010.  The carrying amounts of the major classes of assets and liabilities associated with these operations were classified as follows (in millions):
 
   
September 30,
2011
   
December 31,
2010
 
Assets
               
Oil and gas properties, net
 
$
54
   
$
 
Other related assets
   
9
     
 
Assets held for sale
 
$
63
   
$
 
                 
Accounts receivable
 
$
13
   
$
22
 
Other assets
   
1
     
17
 
Other current assets
 
$
14
   
$
39
 
                 
Rig and related equipment, net
 
$
   
$
86
 
Oil and gas properties, net
   
     
53
 
Other assets
 
$
   
$
139
 
                 
Liabilities
               
Accounts payable
 
$
13
   
$
15
 
Other liabilities
   
31
     
13
 
Other current liabilities
 
$
44
   
$
28
 
                 
Asset retirement obligation
 
$
   
$
9
 
Deferred taxes
   
     
19
 
Other long-term liabilities
 
$
   
$
28
 

- 11 -
 
 

 
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

 
Note 9—Earnings (Loss) Per Share
 
The reconciliation of the numerator and denominator used for the computation of basic and diluted per share earnings (losses) from continuing operations was as follows (in millions, except per share data):
 
   
Three months ended September 30,
   
Nine months ended September 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
Basic
   
Diluted
   
Basic
   
Diluted
   
Basic
   
Diluted
   
Basic
 
Diluted
 
Numerator for earnings (loss) per share
                   
(As adjusted)
                     
(As adjusted)
 
Income (loss) from continuing operations attributable to controlling interest
 
$
(64
)
 
$
(64
)
 
$
353
   
$
353
   
$
223
   
$
223
   
$
1,735
   
$
1,735
 
Undistributed earnings allocable to participating securities
   
     
     
(1
)
   
(1
)
   
(1
)
   
(1
)
   
(9
)
   
(9
)
Income (loss) from continuing operations available to shareholders
 
$
(64
)
 
$
(64
)
 
$
352
   
$
352
   
$
222
   
$
222
   
$
1,726
   
$
1,726
 
                                                                 
Denominator for earnings (loss) per share
                                                               
Weighted-average shares outstanding
   
320
     
320
     
319
     
319
     
320
     
320
     
320
     
320
 
Effect of stock options and other share-based awards
   
     
     
     
     
     
     
     
 
Weighted-average shares for per share calculation
   
320
     
320
     
319
     
319
     
320
     
320
     
320
     
320
 
                                                                 
Per share earnings (loss) from continuing operations
 
$
(0.20
)
   
(0.20
)
 
$
1.10
   
$
1.10
   
$
0.69
   
$
0.69
   
$
5.39
   
$
5.39
 
 
 
    For the three and nine months ended September 30, 2011, respectively, 2.9 million and 1.8 million share-based awards were excluded from the calculation since the effect would have been anti-dilutive.  For the three and nine months ended September 30, 2010, respectively, 2.3 million and 2.1 million share-based awards were excluded from the calculation since the effect would have been anti-dilutive.
 
The 1.625% Series A Convertible Senior Notes, 1.50% Series B Convertible Senior Notes and 1.50% Series C Convertible Senior Notes did not have an effect on the calculation for the periods presented.  See Note 11—Debt.
 

- 12 -
 
 

 
TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Note 10—Drilling Fleet
 
Expansion>—Construction work in progress, recorded in property and equipment, was $899 million and $1.5 billion at September 30, 2011 and December 31, 2010, respectively.  Capital expenditures and other capital additions, including capitalized interest, for our major construction projects that were ongoing during the nine months ended September 30, 2011 or during the year ended December 31, 2010 were as follows (in millions):
 
   
Nine months
ended
September 30,
2011
   
Through
December 31,
2010
   
Total
costs
 
Transocean Honor (a)
 
$
76
   
$
97
   
$
173
 
High-Specification Jackup TBN1 (b)
   
70
     
9
     
79
 
High-Specification Jackup TBN2 (b)
   
70
     
9
     
79
 
Deepwater Champion (c)(d)
   
43
     
733
     
776
 
Discoverer Luanda (d)(e)
   
11
     
709
     
720
 
High-Specification Jackup TBN3 (f)
   
10
     
     
10
 
Discoverer India (d)
   
6
     
744
     
750
 
Discoverer Inspiration (d)
   
     
679
     
679
 
Dhirubhai Deepwater KG2 (d)(g)
   
     
677
     
677
 
Capitalized interest
   
30
     
273
     
303
 
Mobilization costs
   
20
     
100
     
120
 
Total
 
$
336
   
$
4,030
   
$
4,366
 
 
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