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 September 30, 20172018

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 000-53533001-38373

Picture 1

 

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.)

 

 

Turmstrasse 30

Zug,Steinhausen, Switzerland

63006312

(Address of principal executive offices)

(Zip Code)

 

 

 

+41 (41) 749-0500

(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 (§232.405 of this chapter) 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, a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and ”emerging“emerging growth 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 ☐   Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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 October 24, 2017, 391,213,32422, 2018, 461,906,035 shares were outstanding.

 


 

Table of Contents

TRANSOCEAN LTD. AND SUBSIDIARIES

INDEX TO QUARTERLY REPORT ON FORM 10‑Q

QUARTER ENDED SEPTEMBER 30, 20172018

 

 

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

Item 1. 

Financial Statements (Unaudited)

 

 

Condensed Consolidated Statements of Operations

1

 

Condensed Consolidated Statements of Comprehensive IncomeLoss

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

1923

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

3438

Item 4. 

Controls and Procedures

3439

 

 

 

PART II. 

OTHER INFORMATION

 

Item 1. 

Legal Proceedings

3639

Item 1A. 

Risk Factors

3639

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

38

Item 4.

Mine Safety Disclosures

3841

Item 6. 

Exhibits

3841

 

 

 

 

 


 

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 

 

Nine months ended

 

 

Three months ended

 

Nine months ended

 

 

September 30, 

 

September 30, 

 

 

September 30, 

 

September 30, 

 

 

2017

    

2016

 

2017

    

2016

 

 

2018

    

2017

 

2018

    

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

 

 

 

 

 

 

 

 

 

 

 

 

Contract drilling revenues

 

$

699

 

$

886

 

$

2,142

 

$

2,912

 

 

$

816

 

$

699

 

$

2,270

 

$

2,142

 

Other revenues

 

 

109

 

 

20

 

202

 

 

275

 

 

 —

 

 

109

 

 —

 

 

202

 

 

 

808

 

 

906

 

2,344

 

 

3,187

 

 

816

 

 

808

 

2,270

 

 

2,344

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating and maintenance

 

 

323

 

 

409

 

999

 

 

1,561

 

 

447

 

 

325

 

1,302

 

 

1,003

 

Depreciation

 

 

197

 

 

225

 

648

 

 

667

 

 

201

 

 

197

 

614

 

 

648

 

General and administrative

 

 

39

 

 

41

 

113

 

 

125

 

 

35

 

 

39

 

134

 

 

113

 

 

 

559

 

 

675

 

1,760

 

 

2,353

 

 

683

 

 

561

 

2,050

 

 

1,764

 

Loss on impairment

 

 

(1,385)

 

 

(11)

 

(1,498)

 

 

(26)

 

 

(432)

 

 

(1,385)

 

(1,446)

 

 

(1,498)

 

Gain (loss) on disposal of assets, net

 

 

(9)

 

 

 9

 

(1,602)

 

 

 8

 

Operating income (loss)

 

 

(1,145)

 

 

229

 

(2,516)

 

 

816

 

Loss on disposal of assets, net

 

(6)

 

 

(9)

 

 —

 

 

(1,602)

 

Operating loss

 

(305)

 

 

(1,147)

 

(1,226)

 

 

(2,520)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

21

 

 

 5

 

34

 

 

15

 

 

11

 

 

21

 

36

 

 

34

 

Interest expense, net of amounts capitalized

 

 

(112)

 

 

(109)

 

(368)

 

 

(296)

 

 

(160)

 

 

(112)

 

(455)

 

 

(368)

 

Gain (loss) on retirement of debt

 

 

(1)

 

 

110

 

(49)

 

 

148

 

Loss on retirement of debt

 

(1)

 

 

(1)

 

(3)

 

 

(49)

 

Other, net

 

 

 6

 

 

 7

 

 7

 

 

 9

 

 

16

 

 

 8

 

 6

 

 

11

 

 

 

(86)

 

 

13

 

(376)

 

 

(124)

 

 

(134)

 

 

(84)

 

(416)

 

 

(372)

 

Income (loss) before income tax expense

 

 

(1,231)

 

 

242

 

(2,892)

 

 

692

 

Income tax expense

 

 

180

 

 

 6

 

103

 

 

122

 

Loss before income tax expense (benefit)

 

(439)

 

 

(1,231)

 

(1,642)

 

 

(2,892)

 

Income tax expense (benefit)

 

(30)

 

 

180

 

118

 

 

103

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

(1,411)

 

 

236

 

(2,995)

 

 

570

 

Net income attributable to noncontrolling interest

 

 

 6

 

 

18

 

21

 

 

35

 

Net income (loss) attributable to controlling interest

 

$

(1,417)

 

$

218

 

$

(3,016)

 

$

535

 

Net loss

 

(409)

 

 

(1,411)

 

(1,760)

 

 

(2,995)

 

Net income (loss) attributable to noncontrolling interest

 

 —

 

 

 6

 

(6)

 

 

21

 

Net loss attributable to controlling interest

 

$

(409)

 

$

(1,417)

 

$

(1,754)

 

$

(3,016)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share—basic

 

$

(3.62)

 

$

0.59

 

$

(7.72)

 

$

1.44

 

Earnings (loss) per share—diluted

 

$

(3.62)

 

$

0.59

 

$

(7.72)

 

$

1.44

 

Loss per share

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.88)

 

$

(3.62)

 

$

(3.86)

 

$

(7.72)

 

Diluted

 

$

(0.88)

 

$

(3.62)

 

$

(3.86)

 

$

(7.72)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

391

 

 

365

 

391

 

 

365

 

 

463

 

 

391

 

454

 

 

391

 

Diluted

 

 

391

 

 

365

 

391

 

 

365

 

 

463

 

 

391

 

454

 

 

391

 

 

 

 

See accompanying notes.

 

-  1  -


 

Table of Contents

TRANSOCEAN LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)LOSS

(In millions)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

 

Nine months ended

 

 

 

September 30, 

 

 

September 30, 

 

 

 

2017

    

2016

 

 

2017

    

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(1,411)

 

$

236

 

 

$

(2,995)

 

$

570

 

Net income attributable to noncontrolling interest

 

 

 6

 

 

18

 

 

 

21

 

 

35

 

Net income (loss) attributable to controlling interest

 

 

(1,417)

 

 

218

 

 

 

(3,016)

 

 

535

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Components of net periodic benefit costs before reclassifications

 

 

 —

 

 

 8

 

 

 

(2)

 

 

 1

 

Components of net periodic benefit costs reclassified to net income

 

 

 4

 

 

 8

 

 

 

12

 

 

 9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income before income taxes

 

 

 4

 

 

16

 

 

 

10

 

 

10

 

Income taxes

 

 

(2)

 

 

 —

 

 

 

(25)

 

 

(3)

 

Other comprehensive income (loss)

 

 

 2

 

 

16

 

 

 

(15)

 

 

 7

 

Other comprehensive income attributable to noncontrolling interest

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

Other comprehensive income (loss) attributable to controlling interest

 

 

 2

 

 

16

 

 

 

(15)

 

 

 7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income (loss)

 

 

(1,409)

 

 

252

 

 

 

(3,010)

 

 

577

 

Total comprehensive income attributable to noncontrolling interest

 

 

 6

 

 

18

 

 

 

21

 

 

35

 

Total comprehensive income (loss) attributable to controlling interest

 

$

(1,415)

 

$

234

 

 

$

(3,031)

 

$

542

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30, 

 

September 30, 

 

 

 

2018

    

2017

 

2018

    

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(409)

 

$

(1,411)

 

$

(1,760)

 

$

(2,995)

 

Net income (loss) attributable to noncontrolling interest

 

 

 —

 

 

 6

 

 

(6)

 

 

21

 

Net loss attributable to controlling interest

 

 

(409)

 

 

(1,417)

 

 

(1,754)

 

 

(3,016)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Components of net periodic benefit costs before reclassifications

 

 

(1)

 

 

 —

 

 

(4)

 

 

(2)

 

Components of net periodic benefit costs reclassified to net income

 

 

 2

 

 

 4

 

 

 4

 

 

12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss) before income taxes

 

 

 1

 

 

 4

 

 

 —

 

 

10

 

Income taxes related to other comprehensive income (loss)

 

 

 —

 

 

(2)

 

 

 —

 

 

(25)

 

Other comprehensive income (loss)

 

 

 1

 

 

 2

 

 

 —

 

 

(15)

 

Other comprehensive income attributable to noncontrolling interest

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Other comprehensive income (loss) attributable to controlling interest

 

 

 1

 

 

 2

 

 

 —

 

 

(15)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive loss

 

 

(408)

 

 

(1,409)

 

 

(1,760)

 

 

(3,010)

 

Total comprehensive income (loss) attributable to noncontrolling interest

 

 

 —

 

 

 6

 

 

(6)

 

 

21

 

Total comprehensive loss attributable to controlling interest

 

$

(408)

 

$

(1,415)

 

$

(1,754)

 

$

(3,031)

 

 

 

See accompanying notes.

 

-  2  -


 

Table of Contents

TRANSOCEAN LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

September 30, 

 

December 31, 

 

    

2017

    

2016

 

    

2018

    

2017

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

2,717

 

$

3,052

 

 

$

2,307

 

$

2,519

 

Accounts receivable, net of allowance for doubtful accounts
of less than $1 at September 30, 2017 and December 31, 2016

 

663

 

898

 

Materials and supplies, net of allowance for obsolescence
of $154 and $153 at September 30, 2017 and December 31, 2016, respectively

 

437

 

561

 

Restricted cash

 

480

 

466

 

Short-term investments

 

 —

 

450

 

Accounts receivable, net of allowance for doubtful accounts

 

 

 

 

 

of less than $1 at September 30, 2018 and December 31, 2017

 

627

 

596

 

Materials and supplies, net of allowance for obsolescence

 

 

 

 

 

of $139 and $141 at September 30, 2018 and December 31, 2017, respectively

 

401

 

418

 

Restricted cash accounts and investments

 

561

 

466

 

Other current assets

 

154

 

121

 

 

169

 

157

 

Total current assets

 

4,451

 

5,098

 

 

4,065

 

4,606

 

 

 

 

 

 

 

 

 

 

 

Property and equipment

 

22,599

 

27,372

 

 

23,565

 

22,693

 

Less accumulated depreciation

 

(5,117)

 

(6,279)

 

 

(5,206)

 

(5,291)

 

Property and equipment, net

 

17,482

 

21,093

 

 

18,359

 

17,402

 

Contract intangible assets

 

554

 

 —

 

Deferred income taxes, net

 

167

 

298

 

 

40

 

47

 

Other assets

 

341

 

400

 

 

444

 

355

 

Total assets

 

$

22,441

 

$

26,889

 

 

$

23,462

 

$

22,410

 

 

 

 

 

 

 

 

 

 

 

Liabilities and equity

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

172

 

$

206

 

 

$

172

 

$

201

 

Accrued income taxes

 

159

 

 

95

 

 

26

 

 

79

 

Debt due within one year

 

799

 

724

 

 

372

 

250

 

Other current liabilities

 

755

 

960

 

 

752

 

839

 

Total current liabilities

 

1,885

 

1,985

 

 

1,322

 

1,369

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

6,501

 

7,740

 

 

8,955

 

7,146

 

Deferred income taxes, net

 

106

 

178

 

 

75

 

44

 

Other long-term liabilities

 

1,098

 

1,153

 

 

1,149

 

1,082

 

Total long-term liabilities

 

7,705

 

9,071

 

 

10,179

 

8,272

 

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interest

 

48

 

28

 

 

 —

 

58

 

 

 

 

 

 

 

 

 

 

 

Shares, CHF 0.10 par value, 417,060,033 authorized, 143,783,041 conditionally authorized and 394,801,990 issued at September 30, 2017 and December 31, 2016 and 391,211,739 and 389,366,241 outstanding at September 30, 2017 and December 31, 2016, respectively

 

37

 

36

 

Shares, CHF 0.10 par value, 490,584,698 authorized, 143,754,927 conditionally authorized, 462,880,809 issued

 

 

 

 

 

and 461,903,386 outstanding at September 30, 2018, and 417,060,033 authorized, 143,783,041 conditionally

 

 

 

 

 

authorized, 394,801,990 issued and 391,237,308 outstanding at December 31, 2017

 

44

 

37

 

Additional paid-in capital

 

11,020

 

10,993

 

 

12,033

 

11,031

 

Retained earnings

 

2,040

 

5,056

 

 

175

 

1,929

 

Accumulated other comprehensive loss

 

(298)

 

(283)

 

 

(290)

 

(290)

 

Total controlling interest shareholders’ equity

 

12,799

 

15,802

 

 

11,962

 

12,707

 

Noncontrolling interest

 

 4

 

 3

 

 

(1)

 

 4

 

Total equity

 

12,803

 

15,805

 

 

11,961

 

12,711

 

Total liabilities and equity

 

$

22,441

 

$

26,889

 

 

$

23,462

 

$

22,410

 

 

 

See accompanying notes.

 

-  3  -


 

Table of Contents

TRANSOCEAN LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(In millions)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

Nine months ended

 

 

Nine months ended

 

Nine months ended

 

 

September 30, 

 

September 30, 

 

 

September 30, 

 

September 30, 

 

    

2017

    

2016

    

2017

    

2016

 

    

2018

    

2017

    

2018

    

2017

 

 

Quantity

 

Amount

 

 

Quantity

 

Amount

 

Shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

389

 

 

364

 

$

36

 

$

5,193

 

 

 

391

 

 

389

 

$

37

 

$

36

 

Issuance of shares under share-based compensation plans

 

 2

 

 

 1

 

 

 1

 

 

 —

 

 

 

 3

 

 

 2

 

 

 —

 

 

 1

 

Reduction of par value

 

 —

 

 

 

 

 —

 

 

(5,159)

 

Issuance of shares in acquisition transactions

 

 

68

 

 

 —

 

 

 7

 

 

 —

 

Balance, end of period

 

391

 

 

365

 

$

37

 

$

34

 

 

 

462

 

 

391

 

$

44

 

$

37

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional paid-in capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

 

 

 

 

$

10,993

 

$

5,736

 

 

 

 

 

 

 

 

$

11,031

 

$

10,993

 

Share-based compensation

 

 

 

 

 

 

 

30

 

 

31

 

 

 

 

 

 

 

 

 

36

 

 

30

 

Issuance of shares under share-based compensation plans

 

 

 

 

 

 

 

(1)

 

 

 —

 

 

 

 

 

 

 

 

 

 —

 

 

(1)

 

Reduction of par value

 

 

 

 

 

 

 

 —

 

 

5,159

 

Cancellation of shares held in treasury

 

 

 

 

 

 

 

 —

 

 

(240)

 

Issuance of shares in acquisition transactions

 

 

 

 

 

 

 

 

739

 

 

 —

 

Equity component of convertible debt instruments

 

 

 

 

 

 

 

 

172

 

 

 —

 

Acquisition of redeemable noncontrolling interest

 

 

 

 

 

 

 

 

53

 

 

 —

 

Allocated capital for transactions with holders of noncontrolling interest

 

 

 

 

 

 

 

 —

 

 

(7)

 

 

 

 

 

 

 

 

 

 5

 

 

 —

 

Other, net

 

 

 

 

 

 

 

(2)

 

 

 3

 

 

 

 

 

 

 

 

 

(3)

 

 

(2)

 

Balance, end of period

 

 

 

 

 

 

$

11,020

 

$

10,682

 

 

 

 

 

 

 

 

$

12,033

 

$

11,020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury shares, at cost

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

 

 

 

 

$

 —

 

$

(240)

 

Cancellation of shares held in treasury

 

 

 

 

 

 

 

 —

 

 

240

 

Balance, end of period

 

 

 

 

 

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

 

 

 

 

$

5,056

 

$

4,278

 

 

 

 

 

 

 

 

$

1,929

 

$

5,056

 

Net income (loss) attributable to controlling interest

 

 

 

 

 

 

 

(3,016)

 

 

535

 

Net loss attributable to controlling interest

 

 

 

 

 

 

 

 

(1,754)

 

 

(3,016)

 

Balance, end of period

 

 

 

 

 

 

$

2,040

 

$

4,813

 

 

 

 

 

 

 

 

$

175

 

$

2,040

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

 

 

 

 

$

(283)

 

$

(277)

 

 

 

 

 

 

 

 

$

(290)

 

$

(283)

 

Other comprehensive income (loss) attributable to controlling interest

 

 

 

 

 

 

 

(15)

 

 

 7

 

Other comprehensive loss attributable to controlling interest

 

 

 

 

 

 

 

 

 —

 

 

(15)

 

Balance, end of period

 

 

 

 

 

 

$

(298)

 

$

(270)

 

 

 

 

 

 

 

 

$

(290)

 

$

(298)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total controlling interest shareholders’ equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

 

 

 

 

$

15,802

 

$

14,690

 

 

 

 

 

 

 

 

$

12,707

 

$

15,802

 

Total comprehensive income (loss) attributable to controlling interest

 

 

 

 

 

 

 

(3,031)

 

 

542

 

Total comprehensive loss attributable to controlling interest

 

 

 

 

 

 

 

 

(1,754)

 

 

(3,031)

 

Share-based compensation

 

 

 

 

 

 

 

30

 

 

31

 

 

 

 

 

 

 

 

 

36

 

 

30

 

Issuance of shares in acquisition transactions

 

 

 

 

 

 

 

 

746

 

 

 —

 

Equity component of convertible debt instruments

 

 

 

 

 

 

 

 

172

 

 

 —

 

Acquisition of redeemable noncontrolling interest

 

 

 

 

 

 

 

 

53

 

 

 —

 

Allocated capital for transactions with holders of noncontrolling interest

 

 

 

 

 

 

 

 —

 

 

(7)

 

 

 

 

 

 

 

 

 

 5

 

 

 —

 

Other, net

 

 

 

 

 

 

 

(2)

 

 

 3

 

 

 

 

 

 

 

 

 

(3)

 

 

(2)

 

Balance, end of period

 

 

 

 

 

 

$

12,799

 

$

15,259

 

 

 

 

 

 

 

 

$

11,962

 

$

12,799

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

 

 

 

 

$

 3

 

$

310

 

 

 

 

 

 

 

 

$

 4

 

$

 3

 

Total comprehensive income attributable to noncontrolling interest

 

 

 

 

 

 

 

 1

 

 

19

 

Distributions to holders of noncontrolling interest

 

 

 

 

 

 

 

 —

 

 

(23)

 

Total comprehensive income (loss) attributable to noncontrolling interest

 

 

 

 

 

 

 

 

(2)

 

 

 1

 

Recognition of noncontrolling interest in business combination

 

 

 

 

 

 

 

 

33

 

 

 —

 

Acquisition of noncontrolling interest

 

 

 

 

 

 

 

 —

 

 

(5)

 

 

 

 

 

 

 

 

 

(31)

 

 

 —

 

Allocated capital for transactions with holders of noncontrolling interest

 

 

 

 

 

 

 

 —

 

 

 7

 

 

 

 

 

 

 

 

 

(5)

 

 

 —

 

Balance, end of period

 

 

 

 

 

 

$

 4

 

$

308

 

 

 

 

 

 

 

 

$

(1)

 

$

 4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

 

 

 

 

$

15,805

 

$

15,000

 

 

 

 

 

 

 

 

$

12,711

 

$

15,805

 

Total comprehensive income (loss)

 

 

 

 

 

 

 

(3,030)

 

 

561

 

Total comprehensive loss

 

 

 

 

 

 

 

 

(1,756)

 

 

(3,030)

 

Share-based compensation

 

 

 

 

 

 

 

30

 

 

31

 

 

 

 

 

 

 

 

 

36

 

 

30

 

Distributions to holders of noncontrolling interest

 

 

 

 

 

 

 

 —

 

 

(23)

 

Issuance of shares in acquisition transactions

 

 

 

 

 

 

 

 

746

 

 

 —

 

Equity component of convertible debt instruments

 

 

 

 

 

 

 

 

172

 

 

 —

 

Recognition of noncontrolling interest in business combination

 

 

 

 

 

 

 

 

33

 

 

 —

 

Acquisition of noncontrolling interest

 

 

 

 

 

 

 

 —

 

 

(5)

 

 

 

 

 

 

 

 

 

(31)

 

 

 —

 

Acquisition of redeemable noncontrolling interest

 

 

 

 

 

 

 

 

53

 

 

 —

 

Other, net

 

 

 

 

 

 

 

(2)

 

 

 3

 

 

 

 

 

 

 

 

 

(3)

 

 

(2)

 

Balance, end of period

 

 

 

 

 

 

$

12,803

 

$

15,567

 

 

 

 

 

 

 

 

$

11,961

 

$

12,803

 

 

See accompanying notes.

 

-  4  -


 

Table of Contents

TRANSOCEAN LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

Nine months ended

 

 

September 30, 

 

 

September 30, 

 

    

2017

    

2016

 

 

2018

    

2017

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(2,995)

 

$

570

 

Net loss

 

$

(1,760)

 

$

(2,995)

 

Adjustments to reconcile to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

Contract intangible asset amortization

 

78

 

 —

 

Depreciation

 

648

 

667

 

 

614

 

648

 

Share-based compensation expense

 

30

 

31

 

 

36

 

30

 

Loss on impairment

 

1,498

 

26

 

 

1,446

 

1,498

 

(Gain) loss on disposal of assets, net

 

1,602

 

(8)

 

(Gain) loss on retirement of debt

 

49

 

(148)

 

Deferred income tax expense

 

32

 

44

 

Loss on disposal of assets, net

 

 —

 

1,602

 

Loss on retirement of debt

 

 3

 

49

 

Deferred income tax expense (benefit)

 

50

 

32

 

Other, net

 

29

 

11

 

 

12

 

29

 

Changes in deferred revenues, net

 

(109)

 

(30)

 

 

(127)

 

(109)

 

Changes in deferred costs, net

 

42

 

64

 

 

23

 

42

 

Changes in other operating assets and liabilities, net

 

61

 

51

 

 

(55)

 

100

 

Net cash provided by operating activities

 

887

 

1,278

 

 

320

 

926

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

(386)

 

(1,072)

 

 

(140)

 

(386)

 

Proceeds from disposal of assets, net

 

330

 

16

 

 

37

 

330

 

Unrestricted and restricted cash acquired in business combination

 

131

 

 —

 

Investment in unconsolidated affiliates

 

(107)

 

 —

 

Deposits into short-term investments

 

(50)

 

 —

 

Proceeds from maturities of short-term investments

 

500

 

 —

 

Other, net

 

10

 

 —

 

 

 —

 

10

 

Net cash used in investing activities

 

(46)

 

(1,056)

 

Net cash provided by (used in) investing activities

 

371

 

(46)

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

 

 

Proceeds from issuance of debt, net of discounts and issue costs

 

403

 

1,210

 

 

1,319

 

403

 

Repayments of debt

 

(1,629)

 

(1,316)

 

 

(2,015)

 

(1,629)

 

Deposits to cash accounts restricted for financing activities

 

(78)

 

(24)

 

Proceeds from cash accounts and investments restricted for financing activities

 

131

 

124

 

Distributions to holders of noncontrolling interest

 

 —

 

(23)

 

Proceeds from investments restricted for financing activities

 

26

 

102

 

Payments to terminate derivative instruments

 

(92)

 

 —

 

Other, net

 

(3)

 

 2

 

 

(29)

 

(3)

 

Net cash used in financing activities

 

(1,176)

 

(27)

 

 

(791)

 

(1,127)

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(335)

 

195

 

Cash and cash equivalents at beginning of period

 

3,052

 

2,339

 

Cash and cash equivalents at end of period

 

$

2,717

 

$

2,534

 

Net decrease in unrestricted and restricted cash and cash equivalents

 

(100)

 

(247)

 

Unrestricted and restricted cash and cash equivalents, beginning of period

 

2,975

 

3,433

 

Unrestricted and restricted cash and cash equivalents, end of period

 

$

2,875

 

$

3,186

 

 

 

 

 

See accompanying notes.

 

-  5  -


 

Table of Contents

TRANSOCEAN LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1—Business

OverviewTransocean 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 ultra‑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.  AtAs of September 30, 2017,2018, we owned or had partial ownership interests in and operated 3841 mobile offshore drilling units, including 2523 ultra‑deepwater floaters, seven12 harsh environment floaters, two deepwater floaters and four midwater floaters.  AtAs of September 30, 2017,2018, we also had fourwere constructing (i) two additional ultra‑deepwater drillships and (ii) one harsh environment semisubmersible, in which we hold a partial ownership interest.  We also operated one high‑specification jackup that was under constructiona drilling contract when the rig was sold, and we continue to operate the rig until completion or under contract to be constructed.novation of the drilling contract.  See Note 6—Drilling Fleet.

Merger agreementOn August 13, 2017,September 4, 2018, we announced that we entered into a transactiondefinitive merger agreement (the “Transaction“Merger Agreement”) with Ocean Rig UDW Inc., a Cayman Islands exempted company with limited liability (“Ocean Rig”), under which we agreed to acquire Ocean Rig in a cash and stock transaction.  The transaction consideration is comprised of 1.6128 newly issued shares of Transocean Ltd. plus $12.75 in cash for each common share of Ocean Rig.  As of September 30, 2018, Ocean Rig owned and operated 11 mobile offshore drilling units, including nine ultra‑deepwater floaters and two harsh environment floaters.  As of September 30, 2018, Ocean Rig was also constructing two ultra‑deepwater drillships.  See Note 4—Business Combinations, Note 13—Equity and Note 15—Subsequent Event.

Business combination—On January 30, 2018, we acquired an approximate 97.7 percent ownership interest in Songa Offshore SE, a European public company limited by shares, or societas Europaea, existing under the laws of Cyprus (“Songa”), pursuant to which.  On March 28, 2018, we will offer to acquire allacquired the remaining shares not owned by us through a compulsory acquisition under Cyprus law, and as a result, Songa became our wholly owned subsidiary.  In connection with these transactions, we issued an aggregate of 68.0 million shares and $863 million aggregate principal amount of 0.50% exchangeable senior bonds due January 30, 2023 (the “Exchangeable Bonds”).  As a result of the issued and outstanding shares of Songa, subject to certain conditions, through a public voluntary exchange offer (the “Offer”).  At September 30, 2017, Songa owned and operatedacquisition, we acquired seven mobile offshore drilling units, including fourfive harsh environment floaters and threetwo midwater floaters.  See Note 4—Business Combination.Combinations.

On May 31, 2017, we completedInvestment in unconsolidated affiliates—In the sale of 10 high‑specification jackups and novated the contracts relating to the construction of five high‑specification jackups, together with related assets.  Atnine months ended September 30, 20172018, we continuedmade an aggregate cash investment of $107 million in unconsolidated affiliates, including an initial investment of $91 million, representing a 33.0 percent interest, in Orion Holdings (Cayman) Limited, a Cayman Islands company formed to construct and own the newbuild harsh environment semisubmersible Transocean Norge.  We account for this investment, recorded in other assets, using the equity method of accounting.  The total purchase price for the rig, under construction at the Jurong Shipyard Pte Ltd. in Singapore, is $500 million.  We expect to make additional investments of $50 million and $33 million in January 2019 and January 2020, respectively.  We expect to operate two high‑specification jackupsthe rig, through one of our wholly owned subsidiaries, under a drilling contract that were under contract whenis expected to commence in July 2019.  Additionally, we soldinvested $16 million in other companies, recorded in other assets using the rigs,cost method of accounting, that are involved in researching and we will continuedeveloping technology to operate such rigs until completion or novation of the respectiveimprove automation in drilling contracts.  See Note 6—Drilling Fleet.and other activities.

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 nine months ended September 30, 20172018, are not necessarily indicative of the results that may be expected for the year ending December 31, 2017,2018, 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, 20162017 and 20152016, and for each of the three years in the period ended December 31, 2016,2017, included in our annual report on Form 10‑K filed on March 7, 2017.February 21, 2018.

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, goodwill, income taxes, contingencies, share‑based compensation definedand postemployment benefit pension plans and other postretirement benefits.plans.  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.

-  6  -


Table of Contents

TRANSOCEAN LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS─continued

(Unaudited)

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.

Business combination—In connection with the Songa acquisition, we applied the acquisition method of accounting.  Accordingly, we recorded the acquired assets and assumed liabilities at fair value and recognized goodwill to the extent the consideration transferred exceeded the fair value of the net assets acquired.  We estimated the fair values of the acquired assets and assumed liabilities as of the date of the acquisition, and our estimates are subject to adjustment based on our final assessments of the fair values of property and equipment, intangible assets, other assets and liabilities and our evaluation of tax positions and contingencies, which are ongoing.  We will complete our final assessments of the fair values of the acquired assets and assumed liabilities and our final evaluations of uncertain tax positions and contingencies within one year of the acquisition date.  See Note 4—Business Combinations.

Goodwill—We conduct impairment testing for our goodwill annually as of October 1 and more frequently, on an interim basis, when an event occurs or circumstances change that indicate that the fair value of our reporting unit may have declined below its carrying value.  We test goodwill at the reporting unit level, which is defined as an operating segment or one level below an operating segment that constitutes a business for which financial information is available and is regularly reviewed by management.  We determined that we have a single reporting unit for this purpose.  Before testing goodwill, we consider whether or not 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.  If, as the result of our qualitative assessment, we determine that an impairment test is required, or, alternatively, if we elect to forgo the qualitative assessment, we record an impairment to goodwill to the extent the carrying amount of the reporting unit, including goodwill, exceeds the fair value of the reporting unit.  In the nine months ended September 30, 2018, as a result of an interim goodwill test, we recognized an aggregate loss of $462 million, which had no tax effect, associated with the impairment of our goodwill.  See Note 3—Accounting Standards Updates, Note 4—Business Combinations and Note 7—Goodwill.

Contract intangible assets—In connection with the Songa acquisition, we recognized drilling contract intangible assets related to the acquired drilling contracts for future contract drilling services.  The drilling contract intangible assets represent the amount by which the fixed dayrates of the acquired contracts were above the market dayrates that were available or expected to be available during the term of the contract for similar contracts, measured as of the acquisition date.  We recognize the amortization on a straight‑line basis over the firm contract period as a reduction of contract drilling revenues.  At September 30, 2018, the carrying amount of our drilling contract intangible assets was $554 million.  See Note 4—Business Combinations.

Derivative instruments—We record derivatives on our consolidated balance sheet, measured at fair value.  We recognize the gains and losses associated with changes in the fair value of undesignated derivatives in current period earnings.  See Note 9—Derivative Instruments.

Capitalized interest—We capitalize interest costs for qualifying construction and upgrade projects and only capitalize interest costs during periods in which progress for the construction projects continues to be underway.  As ofIn the three and nine months ended September 30, 2017,2018, we had ceased capitalization ofcapitalized interest costs onof $8 million and $28 million, respectively, for our two uncontracted newbuilds due to a pauseconstruction work in construction progress.  In the three and nine months ended September 30, 2017, we capitalized interest costs of $31 million and $91 million, respectively, for construction work in progress.  In the three and nine months ended September 30, 2016, we capitalized interest costs of $41 million and $130 million, respectively, forour construction work in progress.

-  6  -


Table of Contents

TRANSOCEAN LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS─continued

(Unaudited)

Reclassifications—We have made certain reclassifications to prior period amounts to conform with the current period’s presentation.  In our condensed consolidated balance sheet as of December 31, 2017, we reclassified certain balances receivable from non‑customers, totaling $45 million, from accounts receivable, net, to other current assets.  Such reclassifications did not have a material effect on our condensed consolidated statement of financial position, results of operations or cash flows.

Note 3—New Accounting PronouncementsStandards Updates

Recently adopted accounting standards

Stock compensation—Effective January 1, 2017, we adopted 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 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods.  Our adoption did not have a material effect on our condensed consolidated statements of financial position, operations or cash flows or on the disclosures contained in our notes to condensed consolidated financial statements.

Recently issued accounting standards

Revenue from contracts with customers—Effective January 1, 2018, we will adoptadopted the accounting standards update that requires an entity to recognize revenue to depictin a manner that depicts 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 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period.  Given the interaction with the accounting standards update related to leases, we expect to adopt the updates concurrently, effective January 1, 2018.  We expect to apply the full retrospective approach toIn our adoption, which is consistent with the approach we expect to elect under the lease accounting standards update.  Our adoption, and the ultimate effect on our consolidated financial statements, will be based on an evaluation of the contract‑specific factsrequirements, we determined that reimbursement revenues and circumstances.  We havecontract early cancellation and termination fees were part of our single performance obligation, and we determined that reimbursement revenues should be recorded on a gross basis as the service is performed.  Our adoption, using the modified retrospective approach, for which we have one revenue stream.  Although we dowere not expect materialrequired to make any changes to the timingprior

-  7  -


Table of our revenue recognition relative to current accounting standards, we are still evaluating the allocation of lease and non‑lease components of our revenues and the disclosures that will be contained in our notes to condensed consolidated financial statements.  We are continuing to evaluate the requirements and the other effects such requirements mayContents

TRANSOCEAN LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS─continued

(Unaudited)

year presentation, did not have a material effect 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 after December 15, 2018, including interim periods within those annual periods.  Under the updated accounting standards, we have determined that our drilling contracts contain a lease component, and our adoption, therefore, will require that we separately recognize revenues associated with the lease and services components.  Given the interaction with the accounting standards update related to revenue from contracts with customers, we expect to adopt the updates concurrently, effective January 1, 2018We expect to apply the modified retrospective approach to our adoption, which is consistent with the approach we expect to elect under the revenue accounting standards update.  Our adoption, and the ultimate effect on our condensed consolidated financial statements, will be based on an evaluation of the contract‑specific facts and circumstances.  Although we do not expect material changes to the timing of our revenue recognition relative to current accounting standards, we are still evaluating the allocation of lease and non‑lease components of our revenues and the disclosures that will be contained in our notes to condensed consolidated financial statements.  Additionally, based on the lease arrangements under which we are the lessee as of September 30, 2017, we expect to recognize an aggregate lease liability and a corresponding right‑to‑use asset of between $50 million and $70 million.  We are continuing to evaluate the requirements with regard to arrangements under which we are the lessor and the other effects 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.flows.  See Note 5—Revenues.

Income taxes—Effective no later than January 1, 2018, we will adoptadopted the accounting standards update that requires an entity to recognize the income tax consequences of an intra‑intra entity transfer of an asset other than inventory when the transaction occurs as opposed to deferring such recognition into future periods.  The update, which permits earlyOur adoption is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual periods.  We dodid not expect that our adoption will have a material effect on our condensed consolidated statements of financial position, operations or cash flows or on the disclosures contained in our notes to condensed consolidated financial statements.

Statement of cash flows—Effective no later than January 1, 2018, we will adoptadopted the accounting standards update that requires amounts generally described as restricted cash or restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning and end of period total amounts presented on the statement of cash flows.  The update, which permits early adoption, is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods.  Aside from presenting the restricted cash and restricted cash equivalents as a component of the beginning and ending cash balances on our condensed consolidated statements of cash flows, we will removeremoved the effect of proceeds from and deposits to restricted accounts from our

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(Unaudited)

cash flows provided by or used in operating and financing activities, as applicable.  For the nine months ended September 30, 20172018 and 2016,2017, such changes woulddid not have had a material effect on our condensed consolidated statements of financial position, operations or cash flows.flows or on the disclosures contained in our notes to condensed consolidated financial statements.

Retirement benefits—Effective no later than January 1, 2018, we will adoptadopted the accounting standards update that requires an employer to disaggregate the service cost component from the other components of net benefit cost related to defined benefit retirement plans and other postemployment benefit plans.  The update requires that the service cost component be presented in the same line item as other compensation costs for employees and the other components of net benefit cost in other income and expense on our condensed consolidated statements of operations.  The update also allows only the service cost component of net benefit cost to be eligible for capitalization.  The update, which permits earlyOur adoption is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods.  We dodid not expect that our adoption will have a material effect on our condensed consolidated statements of financial position, operations or cash flows or on the disclosures contained in our notes to condensed consolidated financial statements.

Goodwill—Effective January 1, 2018, we early adopted the accounting standards update that simplifies the method for measuring the implied value of goodwill when performing a goodwill impairment test by performing a one‑step test, comparing the fair value of the reporting unit with its carrying amount.  The update eliminates the two‑step requirement to perform procedures to determine the fair value of assets and liabilities on the same basis as required in a business combination.  The update, which permits early adoption, is effective for interim and annual periods beginning after December 15, 2019, including interim periods within those annual periods.  Our adoption did not have an effect on our condensed consolidated statements of financial position, operations or cash flows or on the disclosures contained in our notes to condensed consolidated financial statements.

Recently issued accounting standards

Leases—Effective 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.  Under the updated definition of a lease, we have determined that our drilling contracts could contain a lease component.  In a recent update, targeted improvements were made to the accounting standards that provide for (a) an optional new transition method for adoption that results in initial recognition of a cumulative effect adjustment to retained earnings in the year of adoption and (b) a practical expedient for lessors, under certain circumstances, to combine the lease and non‑lease components of revenues for presentation purposes.  We expect to elect the new optional transition method of adoption.  Our adoption, and the ultimate effect on our consolidated financial statements, will be based on an evaluation of the contract‑specific facts and circumstances.  Based on the lease arrangements under which we are the lessee as of September 30, 2018, we expect to recognize an aggregate lease liability and a corresponding right-to-use asset of between $65 million and $75 million.  Additionally, as of September 30, 2018, we have entered into a lease arrangement that is expected to commence prior to December 31, 2018, for which we expect to recognize an incremental lease liability of between $60 million and $65 million.  We do not expect our adoption to have a material effect on our condensed consolidated statements of financial position, operations or cash flows.  We continue to evaluate the requirements with regard to arrangements under which we are the lessor, the targeted updates and the effects such requirements may have on the disclosures contained in our notes to condensed consolidated financial statements.

Other comprehensive income—Effective January 1, 2019, we will adopt the accounting standards update that allows for reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”).  We continue to evaluate the requirements and do not expect our adoption to have a material effect on our condensed consolidated statements of financial position, operations or cash flows or on the disclosures contained in our notes to condensed consolidated financial statements.

Financial instruments – credit losses—Effective no later than January 1, 2020, we will adopt the accounting standards update that requires entities to estimate an expected lifetime credit loss on financial assets ranging from short-term trade accounts receivable to long-term financings.  The update, which permits early adoption, is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years.  We continue to evaluate the requirements and do not expect our adoption to have

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(Unaudited)

a material effect on our condensed consolidated statements of financial position, operations or cash flows or on the disclosures contained in our notes to condensed consolidated financial statements.

Note 4—Business CombinationCombinations

Ocean Rig UDW Inc.

On August 13, 2017,September 4, 2018, we announced that we entered into the TransactionMerger Agreement with Songa pursuant toOcean Rig, under which we will offer to acquire all of the issued and outstanding shares of Songa.  As part of the Offer, we agreed to offer to exchange eachacquire Ocean Rig in a cash and stock transaction.  The transaction consideration is comprised of the issued and outstanding shares in Songa for consideration, based on a value of NOK 47.50 per Songa share, consisting of (i) 68.6 million1.6128 newly issued shares of Transocean Ltd., par value CHF 0.10 per plus $12.75 in cash for each common share of Ocean Rig.  Based on the number of Ocean Rig shares outstanding, we expect to issue approximately 147.7 million shares and (ii) approximately $575 millionmake an aggregate principal amount of 0.5% Senior Unsecured Exchangeable Bonds to be issued by Transocean Inc. (the “Exchangeable Bonds”) exchangeable into shares of Transocean Ltd.  Additionally, each Songa shareholder may elect to receive a cash payment of NOK 47.50 per Songa share upapproximately $1.17 billion pursuant to a maximum of NOK 125,000 per shareholder in lieu of some or all ofthe Merger Agreement.  We expect to fund the consideration such shareholder would otherwise be entitled to receive inthrough a combination of proceeds from the Offer.issuance of debt and unrestricted cash balances.  As of September 30, 2018, Ocean Rig owned and operated 11 mobile offshore drilling units, including nine ultra‑deepwater floaters and two harsh environment floaters.  As of September 30, 2018, Ocean Rig was also constructing two ultra‑deepwater drillships.  The consideration, as presented in the Offer, is based on an equity value of Songa on a fully diluted basis of approximately NOK 9.1 billion and an enterprise value of approximately NOK 26.4 billion, equivalent to approximately $1.2 billion and $3.4 billion, respectively, measured as of the date of the Offer using a currency exchange ratio of NOK 7.9239 to $1.00.  We also expect to (i) acquire certain outstanding bonds issued by Songa in exchange for Exchangeable Bonds, and (ii) acquire a $50 million loan made to Songa by one of its shareholders in exchange for Exchangeable Bonds.  The consummation of the OfferMerger Agreement is subject to the satisfaction of customary closing conditions for transactionsa transaction of this type.

The Exchangeable Bonds will have an exchange ratio equal to 0.7145 times, determined as of the date of the Offer, based on the market price of $8.39 per Transocean Ltd. share and a currency exchange ratio of NOK 7.9239 to $1.00 .  The Exchangeable Bonds will mature five years from the date of issuance.  Interest is expected to be paid semiannually at 0.5% per annum.

We expect to complete the transaction before December 31, 2017.2018.  If completed, we will account for the transaction using the acquisition method of accounting, pursuant to which we will record the consideration transferred, the assets acquired and the liabilities assumed at fair value, measured as of the acquisition date.  See Note 13—Equity and Note 15—Subsequent Event.

Note 5—Variable Interest EntitiesSonga Offshore SE

Angola Deepwater Drilling Company Limited (“ADDCL”),Overview—On January 30, 2018, we acquired an approximate 97.7 percent ownership interest in Songa.  We believe the Songa acquisition strengthens our position as a consolidated Cayman Islands company, isleader in harsh environment and ultra‑deepwater drilling services by adding high value assets, including four high‑specification harsh environment floaters, supported by significant contract backlog.  Additionally, the acquisition strengthens our footprint in harsh environment operating areas.  The goodwill resulting from the business combination was attributed to synergies and intangible assets that did not qualify for separate recognition.  In the nine months ended September 30, 2018 and 2017, we incurred acquisition costs of $7 million and $3 million, respectively, recorded in general and administrative costs and expenses.

Consideration—In connection with the acquisition, we issued 66.9 million shares with a variable interest entity for which we aremarket value of $10.99 per share, based on the primary beneficiary.  The carryingmarket value of our shares on the acquisition date.  We also issued $854 million aggregate principal amount of ADDCL, after eliminatingExchangeable Bonds, including $562 million aggregate principal amount as partial consideration to Songa shareholders and $292 million aggregate principal amount as settlement for certain Songa indebtedness.  The aggregate fair value of the effect of intercompany transactions,consideration transferred in the business combination was as follows (in millions):

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

    

2017

    

2016

 

Assets

 

$

764

 

$

787

 

Liabilities

 

 

14

 

 

25

 

Net carrying amount

 

$

750

 

$

762

 

Total

Consideration transferred

Aggregate fair value of shares issued as partial consideration for Songa shares

$

735

Aggregate fair value of Exchangeable Bonds issued as partial consideration for Songa shares

675

Consideration transferred to Songa shareholders

1,410

Aggregate fair value of Exchangeable Bonds issued for settlement of certain Songa indebtedness

351

Total consideration transferred in business combination

$

1,761

Assets and liabilities—We estimated the fair value of assets acquired, liabilities assumed and noncontrolling interest, measured as of January 30, 2018, as follows (in millions):

 

 

 

 

 

 

    

Total

 

Assets acquired

 

 

 

 

Cash and cash equivalents

 

$

113

 

Accounts receivable

 

 

115

 

Other current assets

 

 

80

 

Property and equipment

 

 

2,414

 

Goodwill

 

 

462

 

Contract intangible assets

 

 

632

 

 

 

 

 

 

Liabilities assumed

 

 

 

 

Accounts payable and other current liabilities

 

 

178

 

Debt

 

 

1,768

 

Other long-term liabilities

 

 

76

 

Net assets acquired

 

 

1,794

 

 

 

 

 

 

Noncontrolling interest in business combination

 

 

33

 

Controlling interest acquired in business combination

 

$

1,761

 

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We estimated the fair value of the rigs and related equipment by applying a combination of income and market 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 markets for the assets in an orderly transaction between participants as of the acquisition date.  Additionally, we estimated the fair value of the drilling contracts by comparing the contractual dayrates over the remaining firm contract term and option periods relative to the projected market dayrates as of the acquisition date.  Our estimates of fair value for these assets 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.  We estimated the fair value of the debt using significant other observable inputs, representative of a Level 2 fair value measurement, including the terms and credit spreads for the instruments.

We have not completed our estimates of the fair values of assets acquired and liabilities assumed.  We continue to review the estimated fair values of property and equipment, intangible assets, and other assets and liabilities, and to evaluate the assumed tax positions and contingencies.  Estimating fair value for such assets and liabilities requires significant assumptions and judgment, which increases the likelihood that the estimates may require adjustment, and such adjustments could be material.

Noncontrolling interest—On March 28, 2018, we acquired the remaining Songa shares not owned by us through a compulsory acquisition under Cyprus law, and as a result, Songa became our wholly owned subsidiary.  As consideration for the remaining Songa shares, we issued 1.1 million shares and $9 million aggregate principal amount of Exchangeable Bonds and we made an aggregate cash payment of $8 million to Songa shareholders who elected to receive a cash payment or failed to make an election, for an aggregate fair value of $30 million.

Contract intangible assets—In the three and nine months ended September 30, 2018, we recognized contract intangible amortization of $29 million and $78 million, respectively, recorded as a reduction of contract drilling revenues.  At September 30, 2018, the aggregate carrying amount of contract intangible assets was $554 million, which we expect to amortize over the remaining contract periods, through March 2024.  As of September 30, 2018, the estimated future amortization of contract intangible assets was as follows (in millions):

 

 

 

 

 

 

    

Total

 

Twelve months ending September 30,

 

 

 

 

2019

 

$

117

 

2020

 

 

117

 

2021

 

 

117

 

2022

 

 

117

 

2023

 

 

74

 

Thereafter

 

 

12

 

Total carrying amount of contract intangible assets

 

$

554

 

Pro forma combined operating results—We have included the operating results of Songa in our condensed consolidated results of operations, commencing on the acquisition date, January 30, 2018.  In the three and nine months ended September 30, 2018, our condensed consolidated statement of operations includes revenues of $137 million and $356 million, respectively, and net income of $16 million and $36 million, respectively, associated with the operations of Songa.  Pro forma combined operating results, assuming the acquisition was completed as of January 1, 2017, were as follows (in millions, except per share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

September 30, 

 

 

September 30, 

 

 

    

2018

    

2017

 

    

2018

    

2017

 

Contract drilling revenues

 

$

816

 

$

954

 

 

$

2,319

 

$

2,749

 

Net loss

 

 

(409)

 

 

(1,417)

 

 

 

(1,753)

 

 

(2,977)

 

Per share loss - basic and diluted

 

 

(0.88)

 

 

(3.11)

 

 

 

(3.79)

 

 

(6.55)

 

The pro forma financial information includes various adjustments, primarily related to additional depreciation resulting from the fair value adjustments to the acquired property and equipment and amortization resulting from the contract intangible assets.  The pro forma information is not necessarily indicative of the results of operations had the Songa acquisition been completed on the assumed dates or the results of operations for any future periods.

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(Unaudited)

Note 5—Revenues

Overview—The services we perform represent a single performance obligation under our drilling contracts with customers that is satisfied over time.  We earn revenues primarily by performing the following activities: (i) providing our drilling rig, work crews, related equipment and services necessary to operate the rig (ii) delivering the drilling rig by mobilizing to and demobilizing from the drill location, and (iii) performing certain pre‑operating activities, including rig preparation activities or equipment modifications required for the contract.

We recognize revenues earned under our drilling contracts based on variable dayrates, which range from a full operating dayrate to lower rates or zero rates for periods when drilling operations are interrupted or restricted, based on the specific activities we perform during the contract on an hourly, or more frequent, basis.  Such dayrate consideration is attributed to the distinct time period to which it relates within the contract term, and therefore, is recognized as we perform the services.  We recognize reimbursement revenues and the corresponding costs as we provide the customer‑requested goods and services, when such reimbursable costs are incurred while performing drilling operations.  Prior to performing drilling operations, we may receive pre‑operating revenues, on either a fixed lump‑sum or variable dayrate basis, for mobilization, contract preparation, customer‑requested goods and services or capital upgrades, which we recognize on a straight‑line basis over the estimated firm contract period.  We recognize losses for loss contracts as such losses are incurred.  We recognize revenues for demobilization or from contract terminations as we fulfill our obligations and all contingencies have been resolved.

The duration of our performance obligation varies by contract.  At September 30, 2018, the expected remaining duration of our drilling contracts extends through February 2028, excluding unexercised options.  In the three and nine months ended September 30, 2018, we recognized revenues of $54 million and $147 million, respectively, for performance obligations satisfied in previous periods, primarily related to our customer’s termination of the contract for Discoverer Clear Leader, effective November 2017, and certain revenues recognized on a cash basis.

We have taken the optional exemption that permits us to exclude disclosure of the estimated transaction price related to the variable portion of unsatisfied performance obligations at the end of the reporting period, as our transaction price is based on a single performance obligation consisting of a series of distinct hourly, or more frequent, periods, the variability of which will be resolved at the time of the future services.

To obtain contracts with our customers, we incur costs to prepare a rig for contract and deliver or mobilize a rig to the drilling location.  We defer pre‑operating costs, such as contract preparation and mobilization costs, and recognize such costs on a straight‑line basis, consistent with the general pace of activity, in operating and maintenance costs over the estimated firm period of drilling.  In the three and nine months ended September 30, 2018, we recognized costs of $14 million and $36 million, respectively, associated with pre‑operating costs for contracts with customers.  In the three and nine months ended September 30, 2017, we recognized costs of $11 million and $35 million, respectively, associated with pre‑operating costs for contracts with customers.  At September 30, 2018 and December 31, 2017, the unrecognized pre‑operating costs to obtain contracts was $10 million and $18 million, respectively, recorded in other assets.

Disaggregation—In the three and nine months ended September 30, 2018 and 2017, we recognized revenues as follows (in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2018

 

 

Three months ended September 30, 2017

 

 

    

U.S.

 

U.K.

 

Norway

 

Brazil

 

Other

 

Total

    

 

U.S.

 

U.K.

 

Norway

 

Brazil

 

Other

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ultra-deepwater floaters

 

$

396

 

$

 —

 

$

 —

 

$

 1

 

$

86

 

$

483

 

 

$

368

 

$

 —

 

$

 —

 

$

39

 

$

116

 

$

523

 

Harsh environment floaters

 

 

 —

 

 

37

 

 

174

 

 

 —

 

 

54

 

 

265

 

 

 

 8

 

 

62

 

 

15

 

 

 —

 

 

33

 

 

118

 

Deepwater floaters

 

 

 —

 

 

 —

 

 

 —

 

 

25

 

 

11

 

 

36

 

 

 

 —

 

 

 —

 

 

 —

 

 

24

 

 

11

 

 

35

 

Midwater floaters

 

 

 —

 

 

10

 

 

 —

 

 

 —

 

 

 9

 

 

19

 

 

 

 —

 

 

 8

 

 

 —

 

 

 —

 

 

96

 

 

104

 

High-specification jackups

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

13

 

 

13

 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

28

 

 

28

 

Total revenues

 

$

396

 

$

47

 

$

174

 

$

26

 

$

173

 

$

816

 

 

$

376

 

$

70

 

$

15

 

$

63

 

$

284

 

$

808

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2018

 

 

Nine months ended September 30, 2017

 

 

    

U.S.

 

U.K.

 

Norway

 

Brazil

 

Other

 

Total

    

 

U.S.

 

U.K.

 

Norway

 

Brazil

 

Other

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ultra-deepwater floaters

 

$

1,162

 

$

 —

 

$

 —

 

$

 1

 

$

168

 

$

1,331

 

 

$

1,167

 

$

 —

 

$

 —

 

$

198

 

$

244

 

$

1,609

 

Harsh environment floaters

 

 

 —

 

 

88

 

 

467

 

 

 —

 

 

166

 

 

721

 

 

 

 8

 

 

197

 

 

54

 

 

 —

 

 

89

 

 

348

 

Deepwater floaters

 

 

 —

 

 

 —

 

 

 —

 

 

74

 

 

32

 

 

106

 

 

 

 —

 

 

 —

 

 

 —

 

 

73

 

 

33

 

 

106

 

Midwater floaters

 

 

 —

 

 

30

 

 

 —

 

 

 —

 

 

27

 

 

57

 

 

 

 —

 

 

22

 

 

 —

 

 

 —

 

 

114

 

 

136

 

High-specification jackups

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

55

 

 

55

 

 

 

 —

 

 

33

 

 

 —

 

 

 —

 

 

112

 

 

145

 

Total revenues

 

$

1,162

 

$

118

 

$

467

 

$

75

 

$

448

 

$

2,270

 

 

$

1,175

 

$

252

 

$

54

 

$

271

 

$

592

 

$

2,344

 

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(Unaudited)

Contract liabilities—We recognize contract liabilities, recorded in other current liabilities and other long-term liabilities, for mobilization, contract preparation and capital upgrades using the straight‑line method over the remaining contract term.  Contract liabilities for our contracts with customers were as follows (in millions):

 

 

 

 

 

 

 

 

 

 

September 30, 

 

January 1,

 

 

    

2018

    

2018

 

Deferred contract revenues, recorded in other current liabilities

 

$

90

 

$

203

 

Deferred contract revenues, recorded in other long-term liabilities

 

 

408

 

 

422

 

Total contract liabilities

 

$

498

 

$

625

 

Significant changes in contract liabilities were as follows (in millions):

 

 

 

 

 

 

 

Nine months

 

 

 

ended

 

 

    

September 30, 2018

 

Total contract liabilities, beginning of period

 

 

625

 

Decrease due to recognition of revenues for goods and services

 

 

(192)

 

Increase due to goods and services transferred over time

 

 

65

 

Total contract liabilities, end of period

 

$

498

 

Note 6—Drilling Fleet

Construction work in progress—For the nine months ended September 30, 20172018 and 2016,2017, the changes in our construction work in progress, including capital expenditures and other capital additions, were as follows (in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

Nine months ended

 

 

September 30, 

 

 

September 30, 

 

    

2017

    

2016

 

    

2018

    

2017

 

Construction work in progress, at beginning of period

 

$

2,171

 

$

3,735

 

Construction work in progress, beginning of period

 

$

1,392

 

$

2,171

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Newbuild construction program

 

 

299

 

 

959

 

 

 

64

 

 

299

 

Other equipment and construction projects

 

 

87

 

 

113

 

 

 

76

 

 

87

 

Total capital expenditures

 

 

386

 

 

1,072

 

 

 

140

 

 

386

 

Changes in accrued capital additions

 

 

(22)

 

 

(90)

 

 

 

(6)

 

 

(22)

 

Construction work in progress acquired in business combination

 

 

26

 

 

 —

 

Construction work in progress sold

 

 

 —

 

 

(289)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction in progress sold

 

 

(289)

 

 

 —

 

Property and equipment placed into service

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Newbuild construction program

 

 

 —

 

 

(1,672)

 

 

 

(903)

 

 

 —

 

Other property and equipment

 

 

(66)

 

 

(203)

 

 

 

(61)

 

 

(66)

 

Construction work in progress, at end of period

 

$

2,180

 

$

2,842

 

Construction work in progress, end of period

 

$

588

 

$

2,180

 

Impairments of assets held and used—During the three months ended June 30, 2017, we identified indicators that the asset groups in our contract drilling services reporting unit may not be recoverable.  Such indicators included recent significant declines in commodity prices and the market value of our stock, a reduction of projected dayrates and a further extension of currently low utilization rates.  As a result of our testing, we determined that the carrying amount of the midwater floater asset group was impaired.  In the nine months ended September 30, 2017, we recognized a loss of $94 million ($95 million after taxes, or $0.25 per diluted share), associated with the impairment of the midwater floater asset group.  We measured the fair value of this asset group by applying a combination of income and market 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 markets for the assets in an orderly transaction between participants as of the measurement date.  Our estimate of fair value required us to use significant unobservable inputs, representative of a Level 3 fair value measurement, including assumptions related to the future performance of our contract drilling services reporting unit, such as future commodity prices, projected demand for our services, rig availability and dayrates.

Impairments of assets held for saleInDuring the threenine months ended September 30, 2017,2018, we announced our intent to retire in an environmentally responsible way, the ultra‑deepwater floaters Deepwater Discovery,  Deepwater Frontier,  Deepwater Millennium and GSF C.R. Luigs and the midwater floaters Songa Delta and Songa Trym, along with related assets.  In the three and nine months ended September 30, 2018, we recognized an aggregate loss of $1.4 billion$433 million ($3.540.93 per diluted share) and $981 million ($2.15 per diluted share), respectively, which had no tax effect, associated with the impairment of these assets, which we determined were impaired at the ultra‑deepwatertime we classified the assets as held for sale.

During the nine months ended September 30, 2017, we announced our intent to retire in an environmentally responsible way, the ultra-deepwater floaters Cajun Express, Deepwater Pathfinder, GSF Jack Ryan,  Sedco Energyand Sedco Expressand and the deepwater floater Transocean Marianas, along with related assets, which were classified as held for sale at the time of impairment.  In the nine months ended September 30, 2017, we recognized an aggregate loss of $1.4 billion ($3.60 per diluted share), which had no tax effect, associated with the impairment of the ultra‑deepwater floaters Cajun Express, Deepwater Pathfinder, GSF Jack Ryan, Sedco Energy andSedco Express and the deepwater

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floater Transocean Marianas and the midwater floaters Transocean Prospect and Transocean Searcher, along with related assets, which were classified as held for sale at the time of impairment.

assets.  In the three months and nine months ended September 30, 2016,2017, we recognized an aggregate loss of $11 million$1.4 billion ($0.033.54 per diluted share) and $1.4 billion ($3.60 per diluted share), respectively, which had no tax effect, associated with the impairment of the midwater floaters Transocean Driller and Transocean Winner, along with relatedthese assets, which we determined were held for saleimpaired at the time of impairment.  Inwe classified the nine months ended September 30, 2016, we recognized an aggregate loss of $26 million ($25 million, net of tax, or $0.06 per diluted share) associated with the impairment of the deepwater floater Sedco 702 and the midwater floaters Transocean Driller,  Transocean John Shaw and Transocean Winner, along with related assets which were classified as held for sale at the time of impairment.sale.

We measured the impairment of the drilling units and related assetsequipment 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 a Level 2 fair value measurements,measurement, including indicative market values for the drilling units and related assets to be sold for scrap value or alternative use.  If we commit to plans to sell additional rigs for values below the respective carrying amounts or commit to plans to recycle additional rigs and sell them for scrap value, we may be required to recognize additional losses associated with the impairment of such assets.  Such losses could be material.value.

DispositionsOn May 31, 2017,During the nine months ended September 30, 2018, in connection with our efforts to dispose of non‑strategic assets, we completed the sale of the ultra‑deepwater floaters Cajun Express,  Deepwater Discovery,  Deepwater Pathfinder,  Sedco Energy and Sedco Express, the deepwater floater Transocean Marianas and the midwater floater Songa Trym, along with related assets.  In the nine months ended September 30, 2018, we received aggregate net cash proceeds of $31 million and recognized an aggregate net gain of $6 million ($0.02 per diluted share), which had no tax effect, associated with the disposal of these assets.  In the nine months ended September 30, 2018, we received aggregate net cash proceeds of $6 million and recognized an aggregate net loss of $6 million associated with the disposal of assets unrelated to rig sales.

On May 31, 2017, we completed the sale of 10 high‑specification jackups, includingGSF Constellation I, GSF Constellation II, GSF Galaxy I, GSF Galaxy II, GSF Galaxy III, GSF Monarch, Transocean Andaman, Transocean Ao Thai, Transocean Honorand Transocean Siam Driller, along with related assets, and novated the contracts relating to the construction of five high‑specification jackups, together with related assets.  In the nine months ended September 30, 2017, we received aggregate net cash proceeds of $319 million and recognized an aggregate net loss of $1.6 billion

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(Unaudited)

($ ($4.08 per diluted share), which had no tax effect, associated with the disposal of these assets.  Following the completion of the sale, we agreed to continue to operate three of these high‑specification jackups through completion or novation of the respective drilling contracts, one of which was completedwe continue to operate as of September 30, 2017.2018.  In the three and nine months ended September 30, 2018, our operating results included income of $10 million and $42 million, respectively, before taxes, associated with the high specification jackups that we continued to operate during the period.  In the three and nine months ended September 30, 2017, excluding our loss on the disposal of these assets, our operating results included income of $19 million and $46 million, respectively, before taxes, associated with the high‑specification jackup asset group.  In the three and nine months ended September 30, 2016, our operating results included income of $25 million and $47 million, respectively, before taxes, associated with the high‑specification jackup asset group.

During the nine months ended September 30, 2017, we also completed the sale of the midwater floater GSF Rig 140, along with related assets.  In the nine months ended September 30, 2017, we received aggregate net cash proceeds of $3 million and recognized an aggregate net gain of $2 million associated with the disposal of these assets.this asset.  In the three and nine months ended September 30, 2017, we received aggregate net cash proceeds of $1 million and $8 million, respectively, and recognized an aggregate net loss of $9 million and $8 million, respectively, associated with the disposal of assets unrelated to rig sales.

During the nine months ended September 30, 2016, in connection with our efforts to dispose of non‑strategic assets, we completed the sale of the deepwater floater Deepwater Navigator and the midwater floaters Falcon 100, GSF Grand Banks, GSF Rig 135,Sedneth 701 and Transocean John Shaw, along with related assets.  In the nine months ended September 30, 2016, we received aggregate net cash proceeds of $11 million, and in the three and nine months ended September 30, 2016, we recognized an aggregate net gain of $3 million and $8 million, respectively, associated with the disposal of these assets.  In the three and nine months ended September 30, 2016, we received aggregate net cash proceeds of $1 million and $5 million, respectively, and recognized an aggregate net gain of $6 million and less than $1 million, respectively, associated with the disposal of assets unrelated to rig sales.

Assets held for sale—At September 30, 2018, the aggregate carrying amount of our assets held for sale, including the ultra‑deepwater floaters Deepwater Frontier,  Deepwater Millennium and GSF C.R. Luigs and the midwater floater Songa Delta, along with related assets, was $26 million, recorded in other current assets.  At December 31, 2017, the aggregate carrying amount of our assets held for sale, including the ultra‑deepwater floaters Cajun Express,Deepwater Pathfinder, GSF Jack Ryan, Sedco Energy andSedco Express and the deepwater floater Transocean Marianas and the midwater floaters Transocean Prospect and Transocean Searcher, along with related assets, was $39 million, recorded in other current assets.  At December 31, 2016, the aggregate carrying amount of our assets held for sale, including the midwater floater GSF Rig 140, along with related assets and certain corporate assets, was $6$22 million, recorded in other current assets.

Note 7—Goodwill

Impairment—We conduct goodwill impairment testing annually and when events occur or circumstances change that would more likely than not reduce the fair value of our reporting unit below its carrying amount.  During the three months ended June 30, 2018, we classified as held for sale and impaired three ultra‑deepwater floaters (see Note 6—Drilling Fleet).  We identified the impairment of these assets included in our single contract drilling services reporting unit as a trigger to test the recoverability of goodwill.  As a result, we performed an interim goodwill impairment test as of June 30, 2018, and we determined that the goodwill associated with our contract drilling services reporting unit was fully impaired.  In the nine months ended September 30, 2018, we recognized a loss of $462 million ($1.02 per diluted share), which had no tax effect, associated with the impairment of the full balance of our goodwill.  We estimated the fair value of the contract drilling services reporting unit using the income approach.  Our estimate of fair value required us to use significant unobservable inputs, representative of a Level 3 fair value measurement, including assumptions related to the future performance of the reporting unit, such as future commodity prices, projected demand for our services, rig availability and dayrates.

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Note 8—Debt

Overview

Outstanding debt—The aggregate principal amounts and aggregate carrying amounts, net of debt‑related balances, including unamortized discounts, premiums, issue costs and fair value adjustments of our debt, were as follows (in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal amount

 

 

Carrying amount

 

 

 

September 30, 

 

December 31, 

 

 

September 30, 

 

December 31, 

 

 

 

2018

 

2017

 

 

2018

 

2017

 

Eksportfinans Loan due January 2018

 

$

 —

 

$

26

 

 

$

 —

 

$

26

 

6.50% Senior Notes due November 2020

 

 

286

 

 

286

 

 

 

288

 

 

288

 

6.375% Senior Notes due December 2021

 

 

328

 

 

328

 

 

 

327

 

 

327

 

5.52% Senior Secured Notes due May 2022

 

 

303

 

 

362

 

 

 

299

 

 

356

 

3.80% Senior Notes due October 2022

 

 

411

 

 

506

 

 

 

408

 

 

502

 

0.50% Exchangeable Bonds due January 2023

 

 

863

 

 

 —

 

 

 

862

 

 

 —

 

9.00% Senior Notes due July 2023

 

 

1,250

 

 

1,250

 

 

 

1,220

 

 

1,216

 

5.875% Senior Secured Notes due January 2024

 

 

750

 

 

 —

 

 

 

734

 

 

 —

 

7.75% Senior Secured Notes due October 2024

 

 

510

 

 

540

 

 

 

498

 

 

526

 

6.25% Senior Secured Notes due December 2024

 

 

531

 

 

562

 

 

 

520

 

 

549

 

6.125% Senior Secured Notes due August 2025

 

 

600

 

 

 —

 

 

 

587

 

 

 —

 

7.50% Senior Notes due January 2026

 

 

750

 

 

750

 

 

 

742

 

 

742

 

7.45% Notes due April 2027

 

 

88

 

 

88

 

 

 

86

 

 

86

 

8.00% Debentures due April 2027

 

 

57

 

 

57

 

 

 

57

 

 

57

 

7.00% Notes due June 2028

 

 

300

 

 

300

 

 

 

307

 

 

307

 

Capital lease contract due August 2029

 

 

519

 

 

541

 

 

 

519

 

 

541

 

7.50% Notes due April 2031

 

 

588

 

 

588

 

 

 

585

 

 

585

 

6.80% Senior Notes due March 2038

 

 

1,000

 

 

1,000

 

 

 

991

 

 

991

 

7.35% Senior Notes due December 2041

 

 

300

 

 

300

 

 

 

297

 

 

297

 

Total debt

 

 

9,434

 

 

7,484

 

 

 

9,327

 

 

7,396

 

Less debt due within one year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Eksportfinans Loan due January 2018

 

 

 —

 

 

26

 

 

 

 —

 

 

26

 

5.52% Senior Secured Notes due May 2022

 

 

83

 

 

79

 

 

 

81

 

 

77

 

5.875% Senior Secured Notes due January 2024

 

 

83

 

 

 —

 

 

 

79

 

 

 —

 

7.75% Senior Secured Notes due October 2024

 

 

60

 

 

60

 

 

 

58

 

 

57

 

6.25% Senior Secured Notes due December 2024

 

 

62

 

 

62

 

 

 

60

 

 

60

 

6.125% Senior Secured Notes due August 2025

 

 

66

 

 

 —

 

 

 

63

 

 

 —

 

Capital lease contract due August 2029

 

 

31

 

 

30

 

 

 

31

 

 

30

 

Total debt due within one year

 

 

385

 

 

257

 

 

 

372

 

 

250

 

Total long-term debt

 

$

9,049

 

$

7,227

 

 

$

8,955

 

$

7,146

 

Scheduled maturities—At September 30, 2018, the scheduled maturities of our debt were as follows (in millions):

 

 

 

 

 

 

    

Total

 

Twelve months ending September 30,

 

 

 

 

2019

 

$

385

 

2020

 

 

392

 

2021

 

 

685

 

2022

 

 

681

 

2023

 

 

2,838

 

Thereafter

 

 

4,453

 

Total principal amount of debt

 

 

9,434

 

Total debt-related balances, net

 

 

(107)

 

Total carrying amount of debt

 

$

9,327

 

Interest rate adjustments—The interest rates for certain of our notes are subject to adjustment from time to time upon a change to the credit rating of our non‑credit enhanced senior unsecured long‑term debt.  As of September 30, 2018, the interest rate in effect for the 6.375% senior notes due December 2021, 3.80% senior notes due October 2022 and the 7.35% senior notes due December 2041 was 8.375 percent, 5.80 percent and 9.35 percent, respectively.

Secured Credit Facility—In June 2018, we entered into a bank credit agreement, which established a $1.0 billion secured revolving credit facility (the “Secured Credit Facility”), which is scheduled to expire on the earlier of (i) June 22, 2023 and (ii) if greater than $300 million aggregate principal amount of our 9.00% Senior Notes due July 2023 remain outstanding in April 2023, such date.  The Secured Credit Facility is guaranteed by Transocean Ltd. and certain subsidiaries.  The Secured Credit Facility is initially secured by, among other things, a lien on the ultra‑deepwater floaters Deepwater Asgard, Deepwater Invictus and Discoverer Inspiration and the harsh environment floaters Transocean Barents and Transocean Spitsbergen.  The Secured Credit Facility contains covenants that, among other

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things, include maintenance of certain guarantee and collateral coverage ratios, a maximum debt to capitalization ratio of 0.60 to 1.00 and minimum liquidity of $500 million.  The Secured Credit Facility also restricts the ability of Transocean Ltd. and certain of our subsidiaries to, among other things, merge, consolidate or otherwise make changes to the corporate structure, incur liens, incur additional indebtedness, enter into transactions with affiliates and pay dividends and other distributions.

We may borrow under the Secured Credit Facility at either (1) the reserve adjusted London interbank offered rate plus a margin (the “Secured Credit Facility Margin”), which ranges from 2.625 percent to 3.25 percent based on the credit rating of the Secured Credit Facility, or (2) the base rate specified in the credit agreement plus the Secured Credit Facility Margin, minus one percent per annum.  Throughout the term of the Secured Credit Facility, we pay a facility fee on the amount of the underlying commitment which ranges from 0.375 percent to 1.00 percent based on the credit rating of the Secured Credit Facility.  At September 30, 2018, based on the credit rating of the Secured Credit Facility on that date, the Secured Credit Facility Margin was 2.75 percent and the facility fee was 0.50 percent.  At September 30, 2018, we had no borrowings outstanding, $24 million of letters of credit issued, and we had $1.0 billion of available borrowing capacity under the Secured Credit Facility.  See Note 12—Commitments and Contingencies—Global Marine litigation.

Former Credit Facility—In June 2014, we entered into an amended and restated bank credit agreement, which established a $3.0 billion unsecured five‑year revolving credit facility, which was scheduled to expire on June 28, 2019 (the “Former Credit Facility”).  In June 2018, we terminated the Former Credit Facility and recognized a loss of $1 million associated with the termination.

Debt issuances

Senior secured notes—On July 13, 2018, we issued $750 million aggregate principal amount of 5.875% senior secured notes due January 2024 (the “5.875% Senior Secured Notes”) and received aggregate cash proceeds of $733 million, net of discount and issue costs.  In connection with the issuance of such notes, we were required to deposit $63 million in restricted cash accounts to satisfy debt service and reserve requirements.  We are required to pay semiannual installments of principal and interest on the 5.875% Senior Secured Notes, beginning January 15, 2019.  The 5.875% Senior Secured Notes are secured by the assets and earnings associated with the harsh environment floaters Transocean Enabler and Transocean Encourage and the equity of the wholly owned subsidiaries that own or operate the collateral rigs.

On July 20, 2018, we issued $600 million aggregate principal amount of 6.125% senior secured notes due August 2025 (the “6.125% Senior Secured Notes” and, together with the 5.875% Senior Secured Notes, the “2018 Senior Secured Notes”), and we received aggregate cash proceeds of $586 million, net of discount and issue costs.  In connection with the issuance of such notes, we were required to deposit $51 million in restricted cash accounts to satisfy debt service and reserve requirements.  We are required to pay semiannual installments of principal and interest on the 6.125% Senior Secured Notes, beginning February 1, 2019.  The 6.125% Senior Secured Notes are secured by the assets and earnings associated with the ultra‑deepwater floater Deepwater Pontus and the equity of the wholly owned subsidiaries that own or operate the collateral rig.

We may redeem all or a portion of the 2018 Senior Secured Notes at a price equal to 100 percent of the aggregate principal amount plus a make‑whole provision.  We will be required to redeem the notes at a price equal to 100 percent of the aggregate principal amount without a make‑whole provision, upon the occurrence of certain events related to the collateral rigs and the related drilling contracts.  The indentures that govern the 2018 Senior Secured Notes each contain covenants that, among other things, limit the ability of our subsidiaries that own or operate the collateral rigs to declare or pay dividends to their affiliates.  The indentures also impose a maximum collateral rig leverage ratio (the “Maximum Collateral Ratio”), represented by the net earnings of the respective collateral rigs relative to the respective debt balance, that changes over the term of the notes.  Through March 31, 2020, the Maximum Collateral Ratio under the indenture for the 6.125% Senior Secured Notes is 5.75 to 1.00.  Through March 31, 2019, the Maximum Collateral Ratio under the indenture for the 5.875% Senior Secured Notes is 6.00 to 1.00.

Exchangeable bonds—In connection with the Songa acquisition transactions, we issued $863 million aggregate principal amount of Exchangeable Bonds, as partial consideration for the Songa shares and as consideration for refinancing certain Songa indebtedness.  Transocean Inc., our wholly owned direct subsidiary, is the issuer of the Exchangeable Bonds, for which Transocean Ltd. has provided a full and unconditional guarantee.  We are required to pay interest on the Exchangeable Bonds semiannually, beginning on July 30, 2018.  The Exchangeable Bonds may be converted at any time prior to the maturity date at an exchange rate of 97.29756 shares per $1,000 note, equivalent to a conversion price of $10.28 per share, subject to adjustment upon the occurrence of certain events.  Holders of Exchangeable Bonds may require us to repurchase all or a portion of such holder’s Exchangeable Bonds upon the occurrence of certain events.  The aggregate fair value of the Exchangeable Bonds, measured as of the issuance date, was $1.04 billion, which represented a substantial premium of $172 million above par, and we recorded such premium to additional paid‑in capital.  We estimated the fair value using significant other observable inputs, representative of a Level 2 fair value measurement, including the terms and credit spreads for the instruments.

5.52% Senior Secured Notes—On May 5, 2017, we issued $410 million aggregate principal amount of 5.52% senior secured notes due May 2022, and in the nine months ended September 30, 2017, we received aggregate cash proceeds of $403 million, net of issue costs.

See Note 15—Subsequent Event.

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Debt assumptions and repayments

Senior Secured Term Loans—In connection with the Songa acquisition, we assumed the rights and obligations under credit agreements establishing two senior secured term loan facilities (the “Senior Secured Term Loans”).  The credit agreements contained change of control clauses, for which we received waivers from the lenders that were scheduled to expire on August 31, 2018.  In the three months ended September 30, 2018, we made an aggregate cash payment of $1.4 billion to repay the borrowings under the Senior Secured Term Loans and recognized an aggregate loss of $1 million associated with the termination of the underlying credit agreements of such loans.

Junior Secured Bonds—In connection with the Songa acquisition, we assumed the rights and obligations under a subscription agreement establishing a junior secured bond facility (the “Junior Secured Bonds”).  The subscription agreement contained a change of control clause, for which we received waivers from the lenders that were scheduled to expire on August 31, 2018.  On February 12, 2018, we served notice of our intent to call the Junior Secured Bonds.  On August 20, 2018, we made an aggregate cash payment of $171 million to repay the borrowings under the Junior Secured Bonds and terminated the underlying subscription agreement.

Other debt—In connection with the Songa acquisition, we assumed the indebtedness related to two bond loans (together, the “Bond Loans”), previously publicly traded on the Oslo stock exchange.  On the acquisition date, the Bond Loans had an aggregate principal amount of NOK 337 million, equivalent to $44 million.  On March 14, 2018, we made a cash payment of NOK 345 million, equivalent to $44 million, to repay the Bond Loans.

We also assumed the rights and obligations under a credit agreement, which was due to expire March 31, 2018, for a secured borrowing facility.  On February 2, 2018, we made a cash payment of $23 million to repay the borrowings outstanding under the secured borrowing facility and terminated the underlying credit agreement.

Debt retirements

Repurchases and repayments—During the nine months ended September 30, 2018 and 2017, we repurchased in the open market debt securities with aggregate principal amounts as follows (in millions):

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

 

September 30, 

 

 

    

 

2018

    

 

2017

 

2.50% Senior Notes due October 2017

 

$

 —

 

$

62

 

6.00% Senior Notes due March 2018

 

 

 —

 

 

35

 

7.375% Senior Notes due April 2018

 

 

 —

 

 

 1

 

6.50% Senior Notes due November 2020

 

 

 —

 

 

 9

 

6.375% Senior Notes due December 2021

 

 

 —

 

 

 7

 

3.80% Senior Notes due October 2022

 

 

95

 

 

33

 

Aggregate principal amount retired

 

$

95

 

$

147

 

 

 

 

 

 

 

 

 

Aggregate cash payment

 

$

95

 

$

147

 

In the three and nine months ended September 30, 2018, we recognized an aggregate net loss of less than $1 million associated with the retirement of repurchased or repaid debt.  In the nine months ended September 30, 2017, we recognized an aggregate net loss of $1 million associated with the retirement of such repurchased debt.

Tender offers—In July 2017, we completed cash tender offers to purchase up to $1.5 billion aggregate principal amount of certain notes (the “2017 Tendered Notes”).  We received valid tenders from holders of aggregate principal amounts of the 2017 Tendered Notes as follows (in million):

 

 

 

 

 

 

Nine months

 

 

ended

 

 

September 30, 

 

 

2017

2.50% Senior Notes due October 2017

 

$

271

6.00% Senior Notes due March 2018

 

 

400

7.375% Senior Notes due April 2018

 

 

128

6.50% Senior Notes due November 2020

 

 

207

6.375% Senior Notes due December 2021

 

 

213

Aggregate principal amount retired

 

$

1,219

 

 

 

 

Aggregate cash payment

 

$

1,269

In the three and nine months ended September 30, 2017, we recognized an aggregate net loss of $1 million and $48 million, respectively, associated with the retirement of such validly tendered debt.

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TRANSOCEAN LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS─continued

(Unaudited)

Note 9—Derivative Instruments

Forward exchange contracts—At September 30, 2018, we held undesignated forward exchange contracts, extending through June 2019, with an aggregate notional payment amount of $113 million and an aggregate notional receive amount of NOK 900 million, representing a weighted average exchange rate of NOK 7.96 to $1.  In the three and nine months ended September 30, 2018, we recognized a loss of $3 million, recorded in other, net, associated with the forward exchange contracts.  At September 30, 2018, the undesignated forward exchange contracts represented a liability with a carrying amount of $2 million, recorded in other current liabilities.

In connection with the Songa acquisition, we acquired certain undesignated forward exchange contracts that extended through May 2018 and represented an economic hedge to reduce the variability of cash expenditures denominated in Norwegian kroner.  On the acquisition date, the aggregate fair value of the forward exchange contracts represented an asset of $4 million.  During the nine months ended September 30, 2018, we settled the remaining forward exchange contracts upon expiration.  In the nine months ended September 30, 2018, we recognized a loss of $1 million, recorded in other, net, associated with the forward exchange contracts.

Interest rate swaps—In connection with the Songa acquisition, we acquired interest rate swaps, which were previously designated but no longer qualified as a cash flow hedge, to reduce the variability of cash interest payments associated with the variable rate borrowings under the Senior Secured Term Loans, which we repaid in the three months ended September 30, 2018.  On the acquisition date, the aggregate fair value of the interest rate swaps represented an asset of $14 million.  In July and August 2018, we received aggregate cash proceeds of $18 million in connection with the settlement and termination of the interest rate swaps.  In the three and nine months ended September 30, 2018, we recognized a loss of $1 million and a gain of $4 million, respectively, recorded in other, net, associated the interest rate swaps.

Currency swaps—In connection with the Songa acquisition, we acquired currency swaps, which were previously designated as a cash flow hedge, to reduce the variability of cash interest payments and the final cash principal payment associated with the Bond Loans resulting from the changes in the U.S. dollar to Norwegian krone exchange rate.  On the acquisition date, the aggregate fair value of the currency swaps represented a liability of $81 million.  In February 2018, we made an aggregate cash payment of $92 million in connection with the settlement and termination of the currency swaps.  In the nine months ended September 30, 2018, we recognized a loss of $11 million, recorded in other, net., associated with the currency swaps.

Note 10—Income Taxes

Tax provision and 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.  Our provision for income taxes is based on the tax laws and rates applicable in the jurisdictions in which we operate and earn income.  In the nine months ended September 30, 20172018 and 2016,2017, our estimated effective tax rate, excluding discrete items, was 64.2(15.6) percent and 25.964.2 percent, respectively, based on estimated annual income from continuing operationsor loss before income taxes.  Our effective tax rate increased inIn the nine months ended September 30, 2017,2018, compared to the nine months ended September 30, 2016,2017, our effective tax rate decreased primarily due to (a) changes in the relative blend of income from operations in certain jurisdictions and (b) valuation allowances on deferredthe loss before income taxes and the increased tax assets not expected to be realized.expense as a result of the U.S. base erosion and anti‑abuse tax (“BEAT”).

We consider the tax effect, if any, of the excluded items noted, as well as settlements of prior year tax estimates to be discrete period tax expenses or benefits.  In the nine months ended September 30, 20172018 and 2016,2017, the effect of the various discrete period tax items was a net tax expense of $91 million and a net tax benefit of $57 million, and $24 million, respectively.  In the nine months ended September 30, 2018, such discrete items were primarily related to the U. S. transition tax on non‑U.S. earnings.  In the nine months ended September 30, 2017, such discrete items were primarilylargely related to the tax benefit of changes in unrecognized tax benefitbenefits associated with tax positions taken in prior years, valuation allowances on deferred tax assets for foreign tax credits not expected to be realized and deductions related to resolution of certain litigation matters related to the Macondo well incident.  In the nine months ended September 30, 2016, such discrete items were primarily related to tax benefit of changes in unrecognized tax benefit associated with tax positions taken in prior years and valuation allowances on deferred tax assets for losses not expected to be realized.  For the nine months ended September 30, 20172018 and 2016,2017, these discrete tax items, coupled with the excluded income and expense items noted above, resulted in an effective tax rate of (3.6) percent(7.2) percent and 17.8(3.6) percent, respectively, based on income from continuing operationsor loss before income tax expense.

In evaluating  During the three months ended September 30, 2018, our abilityU.S. valuation allowance increased by $91 million due to realizethe deferred tax assets,benefit recognized from the impairment of GSF C.R. Luigs.

U.S. tax reform—In December 2017, the U.S. enacted the 2017 Tax Act, which included prospective changes beginning in 2018, including a BEAT, a global intangible low‑taxed income (“GILTI”) tax, additional limitations on the deductibility of executive compensation, limitations on the deductibility of interest and repeal of the domestic manufacturing deduction.  Effective January 1, 2018, we consider all available positiveelected to treat any potential GILTI inclusions as a period cost, and negative evidence, including projected future taxable incomewe have also evaluated our bareboat charter structure and have concluded that the existencecurrent structure of cumulative lossesour U.S. operations is subject to BEAT.  We have reflected the estimated impact of this tax in recent years.  As ofour provision for the nine months ended September 30, 2017, our consolidated cumulative loss incurred over the recent three‑year period, primarily due to losses on impairment and disposal of assets, represented2018.  A significant objective negative evidence for our evaluation.  Such evidence, together with potential organizational changes that could alter our ability to realize certain deferred tax assets, has limited our ability to consider other subjective evidence, such as projected future contract activity.  As a result, we recorded a valuation allowance of $144 million to recognize only a portion of our BEAT liability is contractually protected due to a change in law provision in certain drilling contracts.

Transition tax on non‑U.S. deferredearnings—The 2017 Tax Act imposes a one‑time transition tax on certain unremitted earnings and profits of our non‑U.S. subsidiaries.  At December 31, 2017, we did not have the necessary information available, prepared and analyzed to develop a reasonable estimate of the transition tax.  In the nine months ended September 30, 2018, we recorded income tax expense of $104 million for estimated transition taxes and an income tax benefit of $17 million for the estimated effect on the utilization of foreign tax

-  17  -


Table of Contents

TRANSOCEAN LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS─continued

(Unaudited)

credits.  Due to the number of years and complexity of determining amounts and composition of earnings and profits held in cash and other assets by the non‑U.S. subsidiaries of our U.S. subsidiaries subject to the transition tax, the determination of the transition tax requires further analysis.  The ultimate effect of our analysis may result in changes to our current estimate.  We have not yet made any changes to our assertion that are more likely than not tothe unremitted earnings of our non‑U.S. subsidiaries will be recognized.  If estimated future taxable income changes duringindefinitely reinvested.  We will complete our evaluation within the carryforward periods or if the cumulative loss is no longer present, we may adjust the amount of deferred tax assets that we expect to realize.measurement period provided by Staff Accounting Bulletin No. 118.

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 Brazil, as 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

-  10  -


Table of Contents

TRANSOCEAN LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS─continued

(Unaudited)

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.

Brazil tax investigations—In December 2005, the Brazilian tax authorities issued abegan issuing tax assessmentassessments with respect to our tax returns for the years 2000 through 2004, which is currently for an aggregate amount of BRL 846 million, equivalent to approximately $267 million, including penalties and interest.  On2004.  In January 25, 2008, we filed a protest letter with the Brazilian tax authorities for thisthese tax assessment,assessments, and we are currently engaged in the appeals process.  OnIn May 19, 2014, the Brazilian tax authorities issued aan additional tax assessment with respect to our Brazilian incomefor tax returns for the years 2009 and 2010, which is currently for an aggregate amount of BRL 144 million, equivalent to approximately $46 million, including penalties and interest.  Onin June 18, 2014, we filed a protest letterprotests with the Brazilian tax authorities for thisthese tax assessment.assessments.  In September 2018, a portion of one of the cases was favorably closed.  As of September 30, 2018, the remaining aggregate tax assessment was for BRL 946 million, equivalent to $234 million, including penalties and interest.  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 8—Earnings (Loss)11—Loss Per Share

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  September 30, 

 

Nine months ended September 30, 

 

 

 

2017

 

2016

 

2017

 

2016

 

 

    

Basic

 

Diluted

    

Basic

    

Diluted

 

Basic

    

Diluted

    

Basic

    

Diluted

 

Numerator for earnings (loss) per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations attributable to controlling interest

 

$

(1,417)

 

$

(1,417)

 

$

218

 

$

218

 

$

(3,016)

 

$

(3,016)

 

$

535

 

$

535

 

Undistributed earnings allocable to participating securities

 

 

 —

 

 

 —

 

 

(3)

 

 

(3)

 

 

 —

 

 

 —

 

 

(8)

 

 

(9)

 

Income (loss) from continuing operations available to shareholders

 

$

(1,417)

 

$

(1,417)

 

$

215

 

$

215

 

$

(3,016)

 

$

(3,016)

 

$

527

 

$

526

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for earnings (loss) per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding

 

 

391

 

 

391

 

 

365

 

 

365

 

 

391

 

 

391

 

 

365

 

 

365

 

Effect of stock options and other share-based awards

 

 

 

 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Weighted-average shares for per share calculation

 

 

391

 

 

391

 

 

365

 

 

365

 

 

391

 

 

391

 

 

365

 

 

365

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per share earnings (loss) from continuing operations

 

$

(3.62)

 

$

(3.62)

 

$

0.59

 

$

0.59

 

$

(7.72)

 

$

(7.72)

 

$

1.44

 

$

1.44

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

Nine months ended September 30, 

 

 

 

2018

 

2017

 

2018

 

2017

 

 

    

Basic

 

Diluted

    

Basic

    

Diluted

 

Basic

    

Diluted

    

Basic

    

Diluted

 

Numerator for loss per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to controlling interest

 

$

(409)

 

$

(409)

 

$

(1,417)

 

$

(1,417)

 

$

(1,754)

 

$

(1,754)

 

$

(3,016)

 

$

(3,016)

 

Undistributed earnings allocable to participating securities

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Net loss available to shareholders

 

$

(409)

 

$

(409)

 

$

(1,417)

 

$

(1,417)

 

$

(1,754)

 

$

(1,754)

 

$

(3,016)

 

$

(3,016)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for loss per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding

 

 

463

 

 

463

 

 

391

 

 

391

 

 

454

 

 

454

 

 

391

 

 

391

 

Effect of share-based awards and other equity instruments

 

 

 

 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Weighted-average shares for per share calculation

 

 

463

 

 

463

 

 

391

 

 

391

 

 

454

 

 

454

 

 

391

 

 

391

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per share loss

 

$

(0.88)

 

$

(0.88)

 

$

(3.62)

 

$

(3.62)

 

$

(3.86)

 

$

(3.86)

 

$

(7.72)

 

$

(7.72)

 

In the three and nine months ended September 30, 2018, we excluded from the calculation 10.7 million share‑based awards since the effect would have been anti‑dilutive.  In the three and nine months ended September 30, 2017, we excluded from the calculation 5.6 million and 4.7 million share‑based awards, respectively, since the effect would have been anti‑dilutive.  In the three and nine months ended September 30, 2016,2018, we excluded from the calculation 3.684.0 million and 2.974.9 million share‑based awards,shares issuable upon conversion of the Exchangeable Bonds, respectively, since the effect would have been anti‑dilutive.

-  1118  -


 

Table of Contents

TRANSOCEAN LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS─continued

(Unaudited)

Note 9—Debt

Outstanding debt—The aggregate principal amounts and aggregate carrying amounts, net of debt‑related balances, including unamortized discounts, premiums and issue costs, of our debt were as follows (in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal amount

 

 

Carrying amount

 

 

 

September 30, 

 

December 31, 

 

 

September 30, 

 

December 31, 

 

 

 

2017

 

2016

 

 

2017

 

2016

 

2.50% Senior Notes due October 2017

 

$

152

 

$

485

 

 

$

152

 

$

484

 

Eksportfinans Loans due January 2018

 

 

27

 

 

123

 

 

 

27

 

 

123

 

6.00% Senior Notes due March 2018

 

 

319

 

 

754

 

 

 

319

 

 

757

 

7.375% Senior Notes due April 2018

 

 

82

 

 

211

 

 

 

82

 

 

211

 

6.50% Senior Notes due November 2020

 

 

292

 

 

508

 

 

 

295

 

 

513

 

6.375% Senior Notes due December 2021

 

 

332

 

 

552

 

 

 

330

 

 

549

 

5.52% Senior Secured Notes due May 2022

 

 

381

 

 

 —

 

 

 

375

 

 

 —

 

3.80% Senior Notes due October 2022

 

 

506

 

 

539

 

 

 

501

 

 

534

 

9.00% Senior Notes due July 2023

 

 

1,250

 

 

1,250

 

 

 

1,215

 

 

1,211

 

7.75% Senior Secured Notes due October 2024

 

 

570

 

 

600

 

 

 

556

 

 

583

 

6.25% Senior Secured Notes due December 2024

 

 

594

 

 

625

 

 

 

580

 

 

609

 

7.45% Notes due April 2027

 

 

88

 

 

88

 

 

 

86

 

 

86

 

8.00% Debentures due April 2027

 

 

57

 

 

57

 

 

 

57

 

 

57

 

7.00% Notes due June 2028

 

 

300

 

 

300

 

 

 

307

 

 

308

 

Capital lease contract due August 2029

 

 

545

 

 

566

 

 

 

545

 

 

566

 

7.50% Notes due April 2031

 

 

588

 

 

588

 

 

 

585

 

 

585

 

6.80% Senior Notes due March 2038

 

 

1,000

 

 

1,000

 

 

 

991

 

 

991

 

7.35% Senior Notes due December 2041

 

 

300

 

 

300

 

 

 

297

 

 

297

 

Total debt

 

 

7,383

 

 

8,546

 

 

 

7,300

 

 

8,464

 

Less debt due within one year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2.50% Senior Notes due October 2017

 

 

152

 

 

485

 

 

 

152

 

 

484

 

Eksportfinans Loans due January 2018

 

 

27

 

 

98

 

 

 

27

 

 

98

 

6.00% Senior Notes due March 2018

 

 

319

 

 

 —

 

 

 

319

 

 

 —

 

7.375% Senior Notes due April 2018

 

 

82

 

 

 —

 

 

 

82

 

 

 —

 

5.52% Senior Secured Notes due May 2022

 

 

77

 

 

 —

 

 

 

75

 

 

 —

 

7.75% Senior Secured Notes due October 2024

 

 

60

 

 

60

 

 

 

57

 

 

57

 

6.25% Senior Secured Notes due December 2024

 

 

63

 

 

63

 

 

 

60

 

 

60

 

Capital lease contract due August 2029

 

 

27

 

 

25

 

 

 

27

 

 

25

 

Total debt due within one year

 

 

807

 

 

731

 

 

 

799

 

 

724

 

Total long-term debt

 

$

6,576

 

$

7,815

 

 

$

6,501

 

$

7,740

 

Interest rate adjustments—The interest rates for certain of our notes are subject to adjustment from time to time upon a change to our credit rating of our non‑credit enhanced senior unsecured long‑term debt (“Debt Rating”).  As of September 30, 2017, based on the Debt Rating in effect on that date, the interest rate in effect for the 2.50% Senior Notes due October 2017 and the 3.80% Senior Notes due October 2022 was 4.50 percent and 5.80 percent, respectively, and the interest rate in effect for the 6.375% Senior Notes due December 2021 and the 7.35% Senior Notes due December 2041 was 8.375 percent and 9.35 percent, respectively.

Five‑Year Revolving Credit Facility—In June 2014, we entered into an amended and restated bank credit agreement, which established a $3.0 billion unsecured five‑year revolving credit facility, which is scheduled to expire on June 28, 2019 (the “Five‑Year Revolving Credit Facility”).  Among other things, the Five‑Year Revolving Credit Facility includes limitations on creating liens, incurring subsidiary debt, transactions with affiliates, sale/leaseback transactions, mergers and the sale of substantially all assets.  The Five‑Year Revolving Credit Facility also includes a covenant imposing a maximum debt to tangible capitalization ratio of 0.6 to 1.0.  Borrowings under the Five‑Year Revolving Credit Facility are subject to acceleration upon the occurrence of an event of default.  Additionally, such borrowings are guaranteed by Transocean Ltd. and may be prepaid in whole or in part without premium or penalty.

We may borrow under the Five‑Year Revolving Credit Facility at either (1) the adjusted London Interbank Offered Rate plus a margin (the “Five‑Year Revolving Credit Facility Margin”), which ranges from 1.125 percent to 2.0 percent based on the Debt Rating, or (2) the base rate specified in the credit agreement plus the Five‑Year Revolving Credit Facility Margin, less one percent per annum.  Throughout the term of the Five‑Year Revolving Credit Facility, we pay a facility fee on the daily unused amount of the underlying commitment which ranges from 0.15 percent to 0.35 percent based on our Debt Rating.  At September 30, 2017, based on our Debt Rating on that date, the Five‑Year Revolving Credit Facility Margin was 2.0 percent and the facility fee was 0.35 percent.  At September 30, 2017, we had no borrowings outstanding or letters of credit issued, and we had $3.0 billion of available borrowing capacity under the Five‑Year Revolving Credit Facility.

-  12  -


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TRANSOCEAN LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS─continued

(Unaudited)

Issuance—On May 5, 2017, one of our wholly owned subsidiaries completed an offering of an aggregate principal amount of $410 million of 5.52% senior secured notes due May 2022 (the “5.52% Senior Secured Notes”), and our subsidiary received aggregate cash proceeds of $403 million, net of issue costs.  On September 29, 2017, our subsidiary made the first of the required quarterly installments of principal and interest.  The 5.52% Senior Secured Notes are secured by the assets and earnings associated with the ultra‑deepwater floater Deepwater Conqueror, the equity of the wholly owned subsidiaries that own and operate the collateral rig, and certain related assets.  Additionally, our subsidiary is required to maintain certain balances in restricted cash accounts.  At September 30, 2017, our subsidiary had $95 million deposited in cash accounts restricted for debt service and working capital requirements.  Our subsidiary may redeem all or a portion of the 5.52% Senior Secured Notes at any time on or prior to December 31, 2021 at a price equal to 100 percent of the aggregate principal amount plus, subject to certain exceptions related to the drilling contract for Deepwater Conqueror, a make‑whole amount.  Our subsidiary will be required to redeem or to offer to redeem the notes at a price equal to 100 percent of the aggregate principal amount, and, under certain circumstances, the payment of a make‑whole amount, upon the occurrence of certain events related to Deepwater Conqueror and the related drilling contract.

See Note 14—Subsequent Events.

Tender offers—On July 11, 2017, we completed cash tender offers to purchase up to $1.5 billion aggregate principal amount of certain notes (the “2017 Tendered Notes”).  On August 1, 2016, we completed cash tender offers to purchase up to $1.0 billion aggregate principal amount of certain notes (the “2016 Tendered Notes”).  During the nine months ended September 30, 2017 and 2016, we received valid tenders from holders of aggregate principal amounts of the 2017 Tendered Notes and 2016 Tendered Notes as follows (in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

 

September 30, 

 

 

    

2017

 

 

2016

    

 

 

 

 

 

 

 

 

2.50% Senior Notes due October 2017

 

$

271

 

$

 —

 

6.00% Senior Notes due March 2018

 

 

400

 

 

 —

 

7.375% Senior Notes due April 2018

 

 

128

 

 

 —

 

6.50% Senior Notes due November 2020

 

 

207

 

 

348

 

6.375% Senior Notes due December 2021

 

 

213

 

 

476

 

3.80% Senior Notes due October 2022

 

 

 —

 

 

157

 

Aggregate principal amount retired

 

$

1,219

 

$

981

 

 

 

 

 

 

 

 

 

Aggregate cash payment

 

$

1,269

 

$

876

 

 

 

 

 

 

 

 

 

In the three and nine months ended September 30, 2017, we recognized an aggregate net loss of $1 million and $48 million, respectively, associated with the retirement of such validly tendered debt.  In the three and nine months ended September 30, 2016, we recognized an aggregate net gain of $104 million associated with the retirement of such validly tendered debt.

Repurchases—During the nine months ended September 30, 2017 and 2016, we repurchased in the open market debt securities with aggregate principal amounts as follows (in millions):

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

September 30, 

 

    

 

2017

    

 

2016

    

 

 

 

 

 

 

 

 

5.05% Senior Notes due December 2016

 

$

 —

 

$

36

 

2.50% Senior Notes due October 2017

 

 

62

 

 

65

 

6.00% Senior Notes due March 2018

 

 

35

 

 

35

 

7.375% Senior Notes due April 2018

 

 

 1

 

 

26

 

6.50% Senior Notes due November 2020

 

 

 9

 

 

32

 

6.375% Senior Notes due December 2021

 

 

 7

 

 

120

 

3.80% Senior Notes due October 2022

 

 

33

 

 

38

 

7.45% Notes due April 2027

 

 

 —

 

 

 8

 

7.50% Notes due April 2031

 

 

 —

 

 

 5

 

Aggregate principal amount retired

 

$

147

 

$

365

 

 

 

 

 

 

 

 

 

Aggregate cash payment

 

$

147

 

$

320

 

 

 

 

 

 

 

 

 

In the nine months ended September 30, 2017, we recognized an aggregate net loss of $1 million associated with the retirement of such repurchased debt.  In the three and nine months ended September 30, 2016, we recognized an aggregate net gain of $6 million and $44 million, respectively, associated with the retirement of such repurchased debt.

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Note 10—Postemployment Benefit Plans

The components of net periodic benefit costs, before tax, and funding contributions for our postemployment benefit plans were as follows (in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  September 30, 2017

 

Three months ended  September 30, 2016

 

 

 

U.S.

 

Non-U.S.

 

OPEB

 

 

 

 

U.S.

 

Non-U.S.

 

OPEB

 

 

 

 

 

    

Plans

    

Plans

    

Plans

 

Total

    

Plans

    

Plans

    

Plans

 

Total

 

Net periodic benefit costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

 1

 

$

 1

 

$

 —

 

$

 2

 

$

 —

 

$

 3

 

$

 —

 

$

 3

 

Interest cost

 

 

15

 

 

 3

 

 

 1

 

 

19

 

 

18

 

 

 4

 

 

(1)

 

 

21

 

Expected return on plan assets

 

 

(19)

 

 

(4)

 

 

 —

 

 

(23)

 

 

(20)

 

 

(6)

 

 

 —

 

 

(26)

 

Settlements and curtailments

 

 

 —

 

 

 1

 

 

 —

 

 

 1

 

 

 —

 

 

(5)

 

 

 2

 

 

(3)

 

Actuarial loss, net

 

 

 1

 

 

 1

 

 

 —

 

 

 2

 

 

 1

 

 

 —

 

 

 —

 

 

 1

 

Prior service cost, net

 

 

 —

 

 

 —

 

 

(1)

 

 

(1)

 

 

 —

 

 

 —

 

 

(2)

 

 

(2)

 

Net periodic benefit costs

 

$

(2)

 

$

 2

 

$

 —

 

$

 —

 

$

(1)

 

$

(4)

 

$

(1)

 

$

(6)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Funding contributions

 

$

 —

 

$

 —

 

$

 1

 

$

 1

 

$

 1

 

$

 1

 

$

 —

 

$

 2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2017

 

Nine months ended September 30, 2016

 

 

 

U.S.

 

Non-U.S.

 

OPEB

 

 

 

 

U.S.

 

Non-U.S.

 

OPEB

 

 

 

 

 

    

Plans

    

Plans

    

Plans

 

Total

    

Plans

    

Plans

    

Plans

 

Total

 

Net periodic benefit costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

 3

 

$

 2

 

$

 —

 

$

 5

 

$

 2

 

$

11

 

$

 —

 

$

13

 

Interest cost

 

 

48

 

 

 8

 

 

 1

 

 

57

 

 

52

 

 

12

 

 

 —

 

 

64

 

Expected return on plan assets

 

 

(56)

 

 

(14)

 

 

 —

 

 

(70)

 

 

(60)

 

 

(18)

 

 

 —

 

 

(78)

 

Settlements and curtailments

 

 

 —

 

 

 6

 

 

 —

 

 

 6

 

 

 1

 

 

(6)

 

 

 —

 

 

(5)

 

Actuarial loss, net

 

 

 4

 

 

 1

 

 

 —

 

 

 5

 

 

 3

 

 

 2

 

 

 —

 

 

 5

 

Prior service cost, net

 

 

 —

 

 

 —

 

 

(2)

 

 

(2)

 

 

 —

 

 

 —

 

 

(4)

 

 

(4)

 

Net periodic benefit costs

 

$

(1)

 

$

 3

 

$

(1)

 

$

 1

 

$

(2)

 

$

 1

 

$

(4)

 

$

(5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Funding contributions

 

$

 1

 

$

 7

 

$

 2

 

$

10

 

$

 3

 

$

41

 

$

 1

 

$

45

 

Note 11—12—Commitments and Contingencies

Macondo well incident commitments and contingencies

Overview—On April 22, 2010, the ultra‑deepwater floater Deepwater Horizon sank after a blowout of the Macondo well caused a fire and explosion on the rig off the coast of Louisiana.  At the time of the explosion, Deepwater Horizon was contracted to an affiliate of BP plc (together with its affiliates, “BP”).  Following the incident, we have been subject to civil and criminal claims, as well as causes of action, fines and penalties by local, state and federal governments.  Litigation commenced shortly after the incident, and most claims against us were consolidated by the U.S. Judicial Panel on Multidistrict Litigation and transferred to the U.S. District Court for the Eastern District of Louisiana (the “MDL Court”).  A significant portion of the contingencies arising from the Macondo well incident has now been resolved as a resultor is pending release of funds from escrow (see “—PSC Settlement Agreement”).  As for any actions not resolved by our previous settlements, withincluding any claims by individuals who opted out of the U.S. Department of Justice (the “DOJ”), BP and the states of Alabama, Florida, Louisiana, Mississippi, and Texas.  Additionally,settlement agreement that we and the Plaintiff Steering Committee (the “PSC”) entered into a settlement agreementfiled with the MDL Court in May 2015 (the “PSC Settlement Agreement”), which was approved by the MDL Court on February 15, 2017.we will vigorously defend those claims and pursue any and all defenses available.

We have recognized a liability for the remaining estimated loss contingencies associated with litigation resulting from the Macondo well incident that we believe are probable and for which a reasonable estimate can be made.  At September 30, 20172018 and December 31, 2016,2017, the liability for estimated loss contingencies that we believe are probable and for which a reasonable estimate can be made was $244$217 million and $250$219 million, respectively, recorded in other current liabilities.  The remaining litigation could result in certain loss contingencies that we believe are reasonably possible.  Although we have not recognized a liability for such loss contingencies, these contingencies could result in liabilities, that we ultimately recognize.

We recognize an asset associatedthe majority of which is related to our settlement with the portion of our estimated losses that we believe is probable of recovery from insurance and for which we have received from underwriters’ confirmation of expected payment.  Although we have available policy limits that could result in additional amounts recoverable from insurance, recovery of such additional amounts is not probable and we are not currently able to estimate such amounts (see “—Insurance coverage”).  Our estimates involve a significant amount of judgment.PSC.

Plea Agreement—Pursuant to the plea agreement (the “Plea Agreement”), one of our subsidiaries pled guilty to one misdemeanor count of negligently discharging oil into the U.S. Gulf of Mexico, in violation of the Clean Water Act, and agreed to befor which our subsidiary is no longer subject to probation through February 2018.  The DOJ agreed, subject to the provisions of the Plea Agreement, not to further prosecute us

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for certain matters arising from the Macondo well incident.probation.  We also agreed to make an aggregate cash payment of $400 million, including a criminal fine and certain cash contributions to the National Fish & Wildlife Foundation and the National Academy of Sciences.  At December 31, 2016, the carrying amount of our liability for such settlement obligations was $60 million, recordedpayable in other current liabilities.scheduled installments.  In the nine months ended September 30, 2017, and 2016, we made a cash paymentspayment of $60 million, in each period, representing the final installmentsinstallment for our obligations under the Plea Agreement.

PSC Settlement Agreement—On May 29, 2015, together with the PSC, we filed the PSC Settlement Agreement with the MDL Court for approval.  Through the PSC Settlement Agreement, we agreed to pay a total of $212 million, plus up to $25 million for partial reimbursement of attorneys’ fees, to be allocated between two classes of plaintiffs as follows: (1) 72.8 percent to private plaintiffs, businesses, and local governments who could have asserted punitive damages claims against us under general maritime law (the “Punitive Damages Class”); and (2) 27.2 percent to private plaintiffs who previously settled economic damages claims against BP and were assigned certain claims BP had made against us (the “Assigned Claims Class”).  A court‑appointed neutral representative established the allocation of the settlement payment to be 72.8 percent paid to the Punitive Damages Class and 27.2 percent paid to the Assigned Claims Class.us.  In exchange for these payments, each of the classes agreed to release all respective claims it has against us.  Members of the Punitive Damages Class were given the opportunity to opt out, and 30Thirty claimants have elected to opt out of the PSC Settlement Agreement.  In June 2016 and August 2015, we made a cash deposit of $25 million and $212 million, respectively, into escrow accounts pending approval of the settlementestablished by the MDL Court.Court for the settlement.  On February 15, 2017, the MDL Court entered a final order and judgement approving the PSC Settlement Agreement, which is no longer subject to appeal.  In November 2017, the MDL Court released $25 million from the escrow accounts for payment of attorneys’ fees.  We expect the remaining funds to be released in three installments, the last of which is scheduled to be in March 2019.  At September 30, 20172018 and December 31, 2016,2017, the aggregate cash balance in escrow accounts was $237$214 million and $212 million, respectively, recorded in restricted cash.cash accounts and investments.

Pending claims—As of September 30, 2017, numerous complaints remain pending against us, along with other unaffiliated defendants in the MDL Court.  We believe our settlement with the PSC resolves many of these pending actions.  As for any actions not resolved by these settlements, including any claims by individuals who opted out of the PSC Settlement Agreement, claims by the Mexican government under the Oil Pollution Act of 1990 and maritime law and federal securities law, we are vigorously defending those claims and pursuing any and all defenses available.  See “—PSC Settlement Agreement.”

Insurance coverage—At the time of the Macondo well incident, our excess liability insurance program offered aggregate insurance coverage of $950 million, excluding a $15 million deductible and a $50 million self-insured layer through our wholly owned captive insurance subsidiary.  This excess liability insurance coverage consisted of a first and a second layer of $150 million each, a third and fourth layer of $200 million each and a fifth layer of $250 million.  We recovered costs under the first four excess layers, the limits of which are now fully exhausted.  We submitted claims to the $250 million fifth layer, which is comprised of four Bermuda market insurers (the “Bermuda Insurers”).  In the nine months ended September 30, 2017 and the year ended December 31, 2016, we received cash proceeds of $10 million and $20 million, respectively, associated with settlements with two of the Bermuda Insurers.  We are in the early stages of arbitration with one of the Bermuda Insurers.  We cannot provide assurance that we will successfully recover additional proceeds under the policy limits with the Bermuda Insurers.

Other legal proceedings

Asbestos litigation—In 2004, several of our subsidiaries were named, along with numerous other unaffiliated defendants in 21 complaints filed on behalf of 769 plaintiffs in the Circuit Courts of the State of Mississippi, and in 2014, a group of similar complaints were filed in Louisiana.  The plaintiffs, former employees of some of the defendants, generally allege that the defendants used or manufactured asbestos containing drilling mud additives for use in connection with drilling operations, claiming negligence, products liability, strict liability and claims allowed under the Jones Act and general maritime law.  The plaintiffs generally seek awards of unspecified compensatory and punitive damages, but the court‑appointed special master has ruled that a Jones Act employer defendant, such as us, cannot be sued for punitive damages.  At September 30, 2017, 15 plaintiffs have claims pending in Mississippi and eight2018, nine plaintiffs have claims pending in Louisiana, in which we have or may have an interest.    We intend to defend these lawsuits vigorously, although we can provide no assurance as to the outcome.  We historically have maintained broad liability insurance, although we are not certain whether insurance will cover the liabilities, if any, arising out of these claims.  Based on our evaluation of the exposure to date, we do not expect the liability, if any, resulting from these claims to have a material adverse effect on our condensed consolidated statement of financial position, results of operations or cash flows.

One of our subsidiaries has been named as a defendant, along with numerous other companies, in lawsuits arising out of the subsidiary’s manufacture and sale of heat exchangers, and involvement in the construction and refurbishment of major industrial complexes alleging bodily injury or personal injury as a result of exposure to asbestos.  As of September 30, 2017,2018, the subsidiary was a defendant in approximately 123141 lawsuits with a corresponding number of plaintiffs.  For many of these lawsuits, we have not been provided with sufficient information from the plaintiffs to determine whether all or some of the plaintiffs have claims against the subsidiary, the basis of any such claims, or the nature of their alleged injuries.  The operating assets of the subsidiary were sold and its operations were discontinued in 1989, and1989.  In September 2018, the subsidiary has no remaining assets other than insurance policies, rights and proceeds, including (i) certain policies subject to litigation and (ii) certain rights and proceeds held directly or indirectly through a qualified settlement fund.  The subsidiary has in excess of $1.0 billion in insurance limits potentially available to the subsidiary.  Although not all of the policies may be fully available due to the insolvency of certain insurers agreed to a settlement of outstanding disputes that leaves the subsidiary with funding, including cash, annuities and coverage in place settlement, that we believe thatwill be sufficient to respond to both the subsidiary will have sufficient funding directly or indirectly,current lawsuits as well as future

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including from settlements and payments from insurers, assigned rights from insurers and coverage‑in‑place settlement agreements with insurers to respond to these claims.lawsuits of a similar nature.  While we cannot predict or provide assurance as to the outcome of these matters, we do not expect the ultimate liability, if any, resulting from these claims to have a material adverse effect on our condensed consolidated statement of financial position, results of operations or cash flows.

Rio de Janeiro tax assessment—In the year ended December 31, 2006, the state tax authorities of Rio de Janeiro in Brazil issued to one of our subsidiaries tax assessments on equipment imported into the state in connection with our operations, resulting from a preliminary finding by these authorities that our record keeping practices were deficient.  At September 30, 2017, the aggregate tax assessment was for BRL 525 million, equivalent to approximately $166 million, including interest and penalties.  In September 2006, we filed an initial response refuting these tax assessments, and, in September 2007, the state tax authorities confirmed that they believe the tax assessments are valid.  On September 27, 2007, we filed an appeal with the state Taxpayer’s Council contesting the assessments.  While we cannot predict or provide assurance as to the final outcome of these proceedings, we do not expect it to have a material adverse effect on our condensed consolidated statement of financial position, results of operations or cash flows.

Nigerian Cabotage Act litigation—In October 2007, three of our subsidiaries were each served a Notice and Demand from the Nigeria Maritime Administration and Safety Agency, imposing a two percent surcharge on the value of all contracts performed by us in Nigeria pursuant to the Coastal and Inland Shipping (Cabotage) Act 2003 (the “Cabotage Act”).  Our subsidiaries each filed an originating summons in the Federal High Court in Lagos challenging the imposition of this surcharge on the basis that the Cabotage Act and associated levy is not applicable to drilling rigs.  The respondents challenged the competence of the suits on several procedural grounds.  The court upheld the objections and dismissed the suits.  In December 2010, our subsidiaries filed a new joint Cabotage Act suit.  While we cannot predict or provide assurance as to the outcome of these proceedings, we do not expect the proceedings to have a material adverse effect on our condensed consolidated statement of financial position, results of operations or cash flows.

Global Marine litigation—On November 28, 2017, Wilmington Trust Company, in its capacity as trustee, filed a lawsuit in the Supreme Court of the State of New York, County of New York, against Global Marine Inc. (“Global Marine”), one of our wholly owned, indirect subsidiaries, seeking a declaratory judgment that Global Marine is in default under the indenture governing its $300 million of outstanding 7.00% Notes due June 2028.  We disagree with the assertions in the lawsuit and believe that Global Marine is in compliance with the indenture and has meritorious defenses against these allegations, although it can make no assurance regarding the outcome of the lawsuit, including the actual amount that would be due in the event that the lawsuit is successful.  The notes are neither guaranteed by, nor recourse to, Transocean Ltd. or our other subsidiaries.  The claimants seek payment prior to the scheduled maturity of the principal amount of notes outstanding and accrued but unpaid interest as well as make‑whole amounts under the indenture.  In addition, the acceleration of the amounts due under the indenture could, absent our payment of the amounts due or otherwise staying any judgment therefrom, result in an event of default under our currently undrawn Secured Credit Facility.  We intend to vigorously defend the lawsuit.  While we cannot predict or provide assurance as to the outcome of these proceedings, we do not expect the proceedings to have a material adverse effect on our condensed consolidated statement of financial position, results of operations or cash flows.

Nigerian customer arbitration—One of our customers in Nigeria owes us approximately $80 million for drilling services performed in 2014 and 2015.  The customer has not disputed the services rendered and we have remained engaged in discussions with the customer about collection of this overdue balance.  In September 2018, we notified the customer of our intentions to enter into arbitration.  We intend to vigorously pursue full recovery of this receivable.  While we cannot predict or provide assurance as to its outcome, we do not expect it to have a material adverse effect on our condensed consolidated statement of financial position, results of operations or cash flows.

Other matters—We are involved in various tax matters, including certain tax assessments originally issued in 2006 on equipment imported into Rio de Janeiro, Brazil, various regulatory matters, and a number of claims and lawsuits, asserted and unasserted, all of which have arisen in the ordinary course of our business.  We do not expect the liability, if any, resulting from these other matters to have a material adverse effect on our condensed consolidated statement of financial position, results of operations or cash flows.  We cannot predict with certainty the outcome or effect of any of the litigation matters specifically described above or of any such other pending, threatened, or possible litigation or liability.  We can provide no assurance that our beliefs or expectations as to the outcome or effect of any tax, regulatory, lawsuit or other litigation matter will prove correct and the eventual outcome of these matters could materially differ from management’s current estimates.

Other environmental matters

Hazardous waste disposal sites—We have certain potential liabilities under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) and similar state acts regulating cleanup of various hazardous waste disposal sites, including those described below.  CERCLA is intended to expedite the remediation of hazardous substances without regard to fault.  Potentially responsible parties (“PRPs”) for each site include present and former owners and operators of, transporters to and generators of the substances at the site.  Liability is strict and can be joint and several.

We have been named as a PRP in connection with a site located in Santa Fe Springs, California, known as the Waste Disposal, Inc. site.  We and other PRPs have agreed with the Environmental Protection Agency (the “EPA”) and the DOJDepartment of Justice to settle our potential liabilities for this site by agreeing to perform the remaining remediation required by the EPA.  The parties to the settlement have entered into a participation agreement, which makes us liable for approximately eight percent of the remediation and related costs.  The remediation is complete, and we believe our share of the future operation and maintenance costs of the site is not material.  There are additional potential liabilities related to the site, but these cannot be quantified, and we have no reason at this time to believe that they will be material.

One of our subsidiaries has been ordered by the California Regional Water Quality Control Board (“CRWQCB”) to develop a testing plan for a site known as Campus 1000 Fremont in Alhambra, California, which is now a part of the San Gabriel Valley, Area 3, Superfund site.  We were also advised that one or more of our subsidiaries that formerly owned and operated the site would likely be named by the EPA as PRPs.  The current property owner, an unrelated party, performed the required testing and detected no

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contaminants.  In discussions with CRWQCB staff, we were advised of their intent to issue us a “no further action” letter, but it has not yet been received.  Based on the test results, we would contest any potential liability.  We have no knowledge at this time of the potential cost of any remediation, who else will be named as PRPs, and whether in fact any of our subsidiaries is a responsible party.  The subsidiaries in question do not own any operating assets and have limited ability to respond to any liabilities.

Resolutions of other claims by the EPA, the involved state agency or PRPs are at various stages of investigation.  These investigations involve determinations of (a) the actual responsibility attributed to us and the other PRPs at the site, (b) appropriate investigatory or remedial actions and (c) allocation of the costs of such activities among the PRPs and other site users.  Our ultimate financial responsibility in connection with those sites may depend on many factors, including (i) the volume and nature of material, if any, contributed to the site for which we are responsible, (ii) the number of other PRPs and their financial viability and (iii) the remediation methods and technology to be used.

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It is difficult to quantify with certainty the potential cost of these environmental matters, particularly in respect of remediation obligations.  Nevertheless, based upon the information currently available, we believe that our ultimate liability arising from all environmental matters, including the liability for all other related pending legal proceedings, asserted legal claims and known potential legal claims that are likely to be asserted, is adequately accrued and should not have a material effect on our condensed consolidated statement of financial position, or results of operations.operations or cash flows.

Note 12—Shareholders’ 13—Equity

Par value reductionRedeemable noncontrolling interest—Until June 11, 2018, we owned a 65 percent interest in Angola Deepwater Drilling Company Ltd. (“ADDCL”), a Cayman Islands company and variable interest entity for which we concluded that we were the primary beneficiary.  Angco Cayman Limited (“Angco Cayman”) owned the remaining a 35 percent interest in ADDCL.  Under the terms of ADDCL’s governing documents, Angco Cayman had the right to require us to purchase its interest in ADDCL for cash, and accordingly, we presented the carrying amount of Angco Cayman’s ownership interest as redeemable noncontrolling interest on our consolidated balance sheets.  We also had the right under ADDCL’s governing documents to require Angco Cayman to sell us its interest, and we exercised that right.  On June 11, 2018, pursuant to a settlement requiring no cash payment, we acquired the interests in ADDCL not previously owned by us, and ADDCL became our wholly owned subsidiary.  In connection with the acquisition, we reclassified the $53 million aggregate carrying amount of the redeemable noncontrolling interest to additional paid‑in capital.  At December 31, 2017, the carrying amount of the assets and liabilities of ADDCL, after eliminating the effect of intercompany transactions, was $716 million and $7 million, respectively.

Extraordinary general meetings—On October 29, 2015,January 16, 2018, in connection with the Songa acquisition, shareholders at our extraordinary general meeting our shareholders approvedapproved: (1) the reductionissuance of the par value of eachup to 68.6 million Transocean Ltd. shares, (2) an amendment of our sharesarticles of association to CHF 0.10 fromcreate additional authorized share capital, (3) the original par valueelection of CHF 15.00.  The reduction of par value became effective as of January 7, 2016, upon registration in the commercial register.

Shares held in treasury—In May 2009, at our annual general meeting, our shareholders approved and authorizeda new director to our board of directors at its discretion,and (4) the issuance of consideration shares from our authorized share capital and shares issuable upon exchange of the Exchangeable Bonds.

Pursuant to repurchase an amountthe Merger Agreement, we agreed to acquire all issued and outstanding shares of our shares for cancellationOcean Rig.  In connection with an aggregate purchase price of up to CHF 3.5 billion, equivalent to approximately $3.6 billion.  On February 12, 2010, our board of directors authorized our management to implement the share repurchase program.  During the nine months ended September 30, 2017 and 2016, we did not purchase any shares under our share repurchase program.  On October 29, 2015,acquisition, shareholders at our extraordinary general meeting, scheduled for November 29, 2018, will be asked to consider the following: (1) an amendment of our shareholders approvedarticles of association to create additional authorized share capital, (2) the cancellationissuance of up to 147.7 million Transocean Ltd. shares and (3) the deletion of the 2.9 million shares previously purchased under theapproved special purpose authorized share repurchase program and held in treasury. The cancellation of such shares became effective as of January 7, 2016, upon registration in the commercial register.

Shares held by subsidiaries—Two of our subsidiaries hold our shares for future use to satisfy our obligations to deliver shares in connection with awards granted under our incentive plans or other rights to acquire our shares.  At September 30, 2017 and December 31, 2016, our subsidiaries held 3.6 million shares and 5.4 million shares, respectively.capital.

Note 13—14—Financial Instruments

OverviewThe carrying amounts and fair values of our financial instruments were as follows (in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

December 31, 2016

 

 

September 30, 2018

 

December 31, 2017

 

 

Carrying

 

Fair

 

Carrying

 

Fair

 

 

Carrying

 

Fair

 

Carrying

 

Fair

 

    

amount

    

value

    

amount

    

value

 

    

amount

    

value

    

amount

    

value

 

Cash and cash equivalents

 

$

2,717

 

$

2,717

 

$

3,052

 

$

3,052

 

 

$

2,307

 

$

2,307

 

$

2,519

 

$

2,519

 

Restricted cash accounts and investments

 

 

503

 

503

 

 

510

 

511

 

Short-term investments

 

 

 —

 

 —

 

 

450

 

450

 

Restricted cash and cash equivalents

 

 

568

 

568

 

 

456

 

456

 

Restricted investments

 

 

 7

 

 7

 

 

33

 

33

 

Long-term debt, including current maturities

 

 

7,300

 

7,415

 

 

8,464

 

8,218

 

 

 

9,327

 

9,949

 

 

7,396

 

7,538

 

Derivative instruments, liabilities

 

 

 2

 

 2

 

 

 —

 

 —

 

We estimated the fair value of each class of financial instruments, for which estimating fair value is practicable, by applying the following methods and assumptions:

Cash and cash equivalents—The carrying amount of our cash and cash equivalents represents the historical cost, plus accrued interest, whichinterest.  Our cash equivalents are primarily invested in short‑term time deposits and money market funds.  The carrying amount of our cash and cash equivalents approximates fair value because of the short maturities of those instruments.  We measured the estimated fair value of our cash equivalents using significant other observable inputs, representative of a Level 2 fair value measurement, including the net asset values of the investments.  At September 30, 2017 and December 31, 2016, the aggregate carrying amount of our cash equivalents was $2.2 billion and $2.6 billion, respectively.

Restricted cash accounts and investments—The carrying amount of the cash and cash equivalents that are subject to restrictions due to collateral requirements, legislation, regulation or court order approximates fair value due to the short term nature of the instruments in which the restricted cash balances are held.  At September 30, 2017, the aggregate carrying amount of such restricted cash and cash equivalents was $476 million, including $453 million and $23 million recorded in current assets and other long‑term assets, respectively.  At December 31, 2016, the aggregate carrying amount of such restricted cash and cash equivalents was $387 million, including $368 million and $19 million recorded in current assets and other long‑term assets, respectively.

The carrying amount of the restricted cash investments pledged for debt service of the Eksportfinans Loans due January 2018 and for security of certain other credit arrangements represents the amortized historical cost of the investment.  We measured the estimated fair value of such restricted cash investments using significant other observable inputs, representative of a Level 2 fair value measurement, including the terms and credit spreads of the instruments.  At September 30, 2017 and December 31, 2016, the aggregate carrying amount of the restricted cash investments was $27 million and $123 million, respectively.  At September 30, 2017 and December 31, 2016, the estimated fair value of such restricted cash investments was $27 million and $124 million, respectively.

Debt—We measured the estimated fair value of our debt, all of which was fixed‑rate debt, using significant other observable inputs, representative of a Level 2 fair value measurement, including the terms and credit spreads for the instruments.

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TRANSOCEAN LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS─continued

(Unaudited)

Short‑term investments—The carrying amount of our unrestricted short‑term investments represents the historical cost of the time deposits in which they are invested.  The carrying amount of such short‑term investments approximates fair value because of the near‑term maturities of the instruments.

Restricted cash and cash equivalents—The carrying amount of our restricted cash and cash equivalents, which are subject to restrictions due to collateral requirements, legislation, regulation or court order, approximates fair value due to the near‑term maturities of the instruments in which the restricted balances are held.  At September 30, 2018, the aggregate carrying amount of such restricted cash and cash equivalents was $568 million, including $561 million and $7 million recorded in current assets and other assets, respectively.  At December 31, 2017, the aggregate carrying amount of such restricted cash and cash equivalents was $456 million, including $440 million and $16 million recorded in current assets and other assets, respectively.

Restricted investments—The carrying amount of our restricted investments, which are pledged for security of certain other credit arrangements, represents the amortized historical cost of the investment.  The carrying amount of such restricted investments approximates fair value because of the near‑term maturities of the instruments.  At September 30, 2018, the aggregate carrying amount of the restricted cash investments was $7 million, recorded in other assets.  At December 31, 2017, the aggregate carrying amount of the restricted cash investments was $33 million, including $26 million and $7 million, recorded in current assets and other assets, respectively.

Debt—The carrying amount of our debt represents the principal amount, net of unamortized discounts, premiums, debt issue costs and fair value adjustments.  We measured the estimated fair value of our debt using significant other observable inputs, representative of a Level 2 fair value measurement, including the terms and credit spreads for the instruments.

Derivative instruments—The carrying amount of our derivative instruments represents the estimated fair value of such instruments.  We measured the estimated fair value of our derivative instruments using significant other observable inputs, representative of a Level 2 fair value measurement, including the terms and credit spreads for the instruments.

Note 14—15—Subsequent eventsEvent

Debt issuance—On October 17, 2017,25, 2018, we completed an offering of anissued $750 million aggregate principal amount of $750 million of 7.50%7.25% senior unsecured notes due January 15, 2026November 2025 (the “7.50%“7.25% Senior Notes”), and we received aggregate cash proceeds of $742$735 million, net of issue costs.  We intend to use the majority of the net proceeds from the debtthis offering to repaypay a portion of the cash consideration for the Ocean Rig acquisition and for related fees and expenses, or redeem certain maturing debt.for general corporate purposes.  The 7.50%7.25% Senior Notes are fully and unconditionally guaranteed by Transocean Ltd. and certain wholly owned subsidiaries of Transocean Inc.  Such notes rank equal in right of payment to all of our existing and future unsecured unsubordinated obligations and rank structurally senior to the extent of the value of the assets of the subsidiaries guaranteeing the notes.  We will pay interest on the 7.50% Senior Notes semiannually on January 15 and July 15 of each year, beginning on July 15, 2018.  We may redeem all or a portion of the 7.50%7.25% Senior Notes at any time prior to January 15,November 1, 2021 at a price equal to 100 percent of the aggregate principal amount plus a make‑whole provision, and on or after January 15,November 1, 2021, at specified redemption prices.  The indenture that governs the 7.50%7.25% Senior Notes contains covenants that, among other things, limit our ability to incur certain liens on our drilling units without equally and ratably securing the notes, engage in certain sale and lease‑back transactions covering any of our drilling units, allow our subsidiaries to incur certain additional debt, and consolidate, merge or enter into a scheme of arrangement qualifying as an amalgamation.

 

 

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward‑Looking Information

The statements included in this quarterly report regarding future financial performance and results of operations and other statements that are not historical facts are forward‑looking statements within the meaning of Section 27A of the United States (“U.S.”) Securities Act of 1933 and Section 21E of the U.S. Securities Exchange Act of 1934.  Forward‑looking statements in this quarterly report include, but are not limited to, statements about the following subjects:

§

our results of operations, our revenue efficiency and other performance indicators and our cash flow from operations, including revenues, revenue efficiency, costs and expenses;operations;

§

the offshore drilling market, including the effects of declines in commodity prices, supply and demand, utilization rates, dayrates, customer drilling programs, stacking of rigs,and reactivation of rigs, effects of new rigs on the market, the impact of enhancedchanges to regulations in the jurisdictions in which we operate and changes in the global economy or market outlook for our various geographical operating sectors and classes of rigs;

§

customer drilling contracts, including contract backlog, force majeure provisions, contract awards, commencements, contract extensions, contract terminations, contract option exercises, contract revenues, early termination payments, indemnity provisions contract awards and rig mobilizations;

§

liquidity, including availability under our bank credit agreement, and adequacy of cash flows for our obligations;

§

the expected timing and likelihood of completion of the proposed acquisition of Songa Offshore SE,Ocean Rig UDW Inc., a European publicCayman Islands exempted company with limited by shares, or societas Europaea, existing under the laws of Cyprusliability (“Songa”Ocean Rig”), including the timing, receipt and terms and conditions of any required governmental and regulatory approvals of the contemplated transaction that could reduce anticipated benefits or cause the parties to abandon the transaction, the possibility that our shareholders may not approve certain matters that are conditions to the offer to acquire all of the issued and outstanding shares of Songa through a public voluntary exchange offer (the “Offer”)merger or that the requisite number of Songa shares may not be exchanged in the public Offer and the risk that the parties may not be able to satisfy the conditions to closing of the Offermerger in a timely manner or at all;

§

the occurrence of any event, change or other circumstances that could give rise to the termination of the transactionmerger agreement (the “Transaction Agreement”) for the SongaOcean Rig acquisition;

§

our ability to successfully complete the Songa acquisition, including the related exchange offers;Ocean Rig acquisition;

§

regulatory or other limitations imposed as a result of the acquisition of Songa acquisition;Offshore SE, a European public company limited by shares, or societas Europaea, existing under the laws of Cyprus (“Songa”) or Ocean Rig;

§

the success of our business following completion of the acquisition of Songa acquisition;or Ocean Rig;

§

the ability to successfully integrate our business with the Songa business;

§

risks related to diversion of management time and attention from ongoing business operations due to the purposed Songa acquisition;

§

the risk that the announcement of completion of the Songa acquisition could have adverse effects on the market price of our or Songa’s  shares or the ability of us or Songa to retain customers, retain or hire key personnel, maintain relationships with their respective suppliers and customers, and on their operating results and businesses generally;Ocean Rig businesses;

§

the risk that we may be unable to achieve expected synergies from ourthe Songa acquisition of Songaor the Ocean Rig acquisition or that it may take longer or be more costly than expected to achieve those synergies;

§

debt levels, including impacts of a financial and economic downturn, and interest rates;

§

newbuild, upgrade, shipyard and other capital projects, including completion, delivery and commencement of operation dates, expected downtime and lost revenue, the level of expected capital expenditures and the timing and cost of completion of capital projects;

§

effects of remediation efforts to address the material weakness discussed in “Item 4. Controls and Procedures”;

§

the cost and timing of acquisitions and the proceeds and timing of dispositions;

§

the optimization of rig‑based spending;

§

tax matters, including our effective tax rate, changes in tax laws, treaties and regulations, tax assessments and liabilities for tax issues, including those associated with our activities in Brazil, Nigeria, Norway, the United Kingdom (“U.K.”) and the U.S.;

§

legal and regulatory matters, including results and effects of legal proceedings and governmental audits and assessments, outcomes and effects of internal and governmental investigations, customs and environmental matters;

§

insurance matters, including adequacy of insurance, renewal of insurance, insurance proceeds and cash investments of our wholly owned captive insurance company;

§

effects of accounting changes and adoption of accounting policies; and

§

investment in recruitment, retention and personnel development initiatives, defined benefit pension plan and other postretirement benefit plan contributions, the timing of severance payments and benefit payments.

Forward‑looking statements in this quarterly report are identifiable by use of the following words and other similar expressions:

§

 

“anticipates”anticipates

§

 

“could”budgets

§

 

“forecasts”estimates

§

 

“might”forecasts

§

 

“projects”may

§

plans

§

projects

§

should

§

 

“believes”believes

§

 

“estimates”could

§

 

“intends”expects

§

 

“plans”intends

§

 

“scheduled”

§

“budgets”might

§

 

“expects”predicts

§

 

“may”scheduled

§

“predicts”

§

“should”

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Such statements are subject to numerous risks, uncertainties and assumptions, including, but not limited to:

§

those described under “Item 1A. Risk Factors” included in Part I of our annual report on Form 10‑K for the year ended December 31, 2016 and in Part II of this quarterly report;2017;

§

the adequacy of and access to sources of liquidity;

§

our inability to obtain drilling contracts for our rigs that do not have contracts;

§

our inability to renew drilling contracts at comparable dayrates;

§

operational performance;

§

the cancellation of drilling contracts currently included in our reported contract backlog;

§

the effectiveness of our remediation efforts with respect to the material weakness discussed in “Item 4. Controls and Procedures”;

§

losses on impairment of long‑lived assets;

§

shipyard, construction and other delays;

§

the results of meetings of our shareholders;

§

changes in political, social and economic conditions;

§

the effect and results of litigation, regulatory matters, settlements, audits, assessments and contingencies; and

§

other factors discussed in this quarterly report and in our other filings with the U.S. Securities and Exchange Commission (“SEC”), which are available free of charge on the SEC website at www.sec.gov.

The foregoing risks and uncertainties are beyond our ability to control, and in many cases, we cannot predict the risks and uncertainties that could cause our actual results to differ materially from those indicated by the forward‑looking statements.  Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from

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those indicated.  All subsequent written and oral forward‑looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by reference to these risks and uncertainties.  You should not place undue reliance on forward‑looking statements.  Each forward‑looking statement speaks only as of the date of the particular statement.  We expressly disclaim any obligations or undertaking to release publicly any updates or revisions to any forward‑looking statement to reflect any change in our expectations or beliefs with regard to the statement or any change in events, conditions or circumstances on which any forward‑looking statement is based, except as required by law.

Business

Transocean Ltd. (together with its subsidiaries and predecessors, unless the context requires otherwise, “Transocean,“Transocean”, “we,” “us” or “our”) is a leading international provider of offshore contract drilling services for oil and gas wells.  As of October 24, 2017,22, 2018, we owned or had partial ownership interests in and operated 3941 mobile offshore drilling units, including 2623 ultra‑deepwater floaters, seven12 harsh environment floaters, two deepwater floaters and four midwater floaters.  Additionally,As of October 22, 2018, we operatedwere constructing (i) two high‑specification jackups that were under contract when we sold the rigs, and we continue to operate such rigs until completion or novation of the respective drilling contracts.  At October 24, 2017, we also had threeadditional ultra‑deepwater drillships under construction or under contract to be constructed.and (ii) one harsh environment semisubmersible, in which we hold a partial ownership interest.  See “—Significant Events.”

We provide contract drilling services in a single, global operating segment, which involves contracting our mobile offshore drilling fleet, related equipment and work crews primarily on a dayrate basis to drill oil and gas wells.  We specialize in technically demanding regions of the offshore drilling business with a particular focus on ultra‑deepwater and harsh environment drilling services.  We believe our drilling fleet is one of the most versatile fleets in the world, consisting of drillshipdrillships and semisubmersible floaters used in support of offshore drilling activities and offshore support services on a worldwide basis.

Our contract drilling services operations are geographically dispersed in oil and gas exploration and development areas throughout the world.  Although rigs can be moved from one region to another, the cost of moving rigs and the availability of rig‑moving vessels may cause the supply and demand balance to fluctuate somewhat between regions.  Still, significant variations between regions do not tend to persist long term because of rig mobility.  Our fleet operates in a single, global market for the provision of contract drilling services.  The location of our rigs and the allocation of resources to operate, build or upgrade our rigs are determined by the activities and needs of our customers.

Significant Events

Merger agreement—On September 4, 2018, we announced that we entered into a definitive merger agreement (the “Merger Agreement”) with Ocean Rig, under which we agreed to acquire Ocean Rig in a cash and stock transaction.  The transaction consideration is comprised of 1.6128 newly issued shares of Transocean Ltd. plus $12.75 in cash for each common share of Ocean Rig.  As of October 22, 2018, Ocean Rig owned and operated 11 mobile offshore drilling units, including nine ultra‑deepwater floaters and two harsh environment floaters.  As of October 22, 2018, Ocean Rig was also constructing two ultra‑deepwater drillships.  See “—Liquidity and Capital Resources—Sources and uses of liquidity.”

Business combination—On August 13, 2017,January 30, 2018, we entered intoacquired an approximate 97.7 percent ownership interest in Songa.  On March 28, 2018, we acquired the Transaction Agreementremaining shares not owned by us through a compulsory acquisition under Cyprus law, and as a result, Songa became our wholly owned subsidiary.  In connection with Songa pursuant to whichthese transactions, we will offer to acquire allissued 68.0 million shares and $863 million aggregate principal amount of 0.50% exchangeable senior bonds due January 30, 2023 (the “Exchangeable Bonds”).  As a result of the issued and outstanding shares of Songa, subject to certain conditions, through the Offer.  At October 24, 2017, Songa owned and operatedacquisition, we acquired seven mobile offshore drillingsdrilling units, including fourfive harsh environment floaters and threetwo midwater floaters.  See “—Liquidity and Capital Resources—Sources and uses of liquidity.”

Impairments—In the nine months ended September 30, 2018, we recognized an aggregate loss of $981 million associated with the impairment of four ultra‑deepwater floaters and one midwater floater, along with related assets, which we determined were impaired at the time we classified the assets as held for sale.  We performed an interim goodwill impairment test as of June 30, 2018 and determined that the goodwill associated with our contract drilling services reporting unit was impaired.  In the nine months ended September 30, 2018, we recognized a loss of $462 million, which had no tax effect, associated with the impairment of our goodwill.  See “—Operating Results.”

Secured Credit Facility—In June 2018, we entered into a bank credit agreement, which established a $1.0 billion secured revolving credit facility (the “Secured Credit Facility”), and we terminated the former bank credit agreement.  See “—Liquidity and Capital Resources—Sources and uses of liquidity.”

Debt issuances—On October 25, 2018, we issued $750 million aggregate principal amount of 7.25% senior unsecured notes due November 2025 (the “7.25% Senior Notes”), and we received aggregate cash proceeds of $735 million, net of issue costs.  On July 13, 2018, we issued $750 million aggregate principal amount of 5.875% senior secured notes due January 2024 (the “5.875% Senior Secured Notes”), and we received approximately $733 million of aggregate cash proceeds, net of discount and issue costs.  On July 20, 2018, we issued $600 million aggregate principal amount of 6.125% senior secured notes due August 2025 (the “6.125% Senior Secured Notes” and, together with the 5.875% Senior Secured Notes, the “2018 Senior Secured Notes”), and we received approximately $586 million of aggregate cash proceeds, net of discount and issue costs.  See “—Liquidity and Capital Resources—Sources and uses of liquidity.”

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Debt retirement—In the nine months ended September 30, 2018, we made an aggregate cash payment of $1.6 billion to Condensed Consolidated Financial Statements—Note 4—Business Combinationrepay debt assumed in the Songa acquisition.  In the nine months ended September 30, 2018, we repurchased in the open market $95 million aggregate principal amount of our debt securities for an aggregate cash payment of $95 million.  See “—Liquidity and Capital Resources—Sources and uses of liquidity.”

Investment in unconsolidated affiliates—In the nine months ended September 30, 2018, we made an aggregate cash investment of $107 million in unconsolidated affiliates, including an initial investment of $91 million, representing a 33.0 percent interest, in Orion Holdings (Cayman) Limited, a Cayman Islands company formed to construct and own the newbuild harsh environment semisubmersible Transocean Norge.  We expect to operate the rig, through one of our wholly owned subsidiaries, under a drilling contract that is expected to commence in July 2019.  See “—Liquidity and Capital Resources—Sources and uses of liquidity.”

Fleet expansion—In October 2017,February 2018, we completed the construction of and placed into service the ultra‑deepwater floater Deepwater PontusPoseidon.  See “—Liquidity and Capital Resources—Drilling fleet.”

Drilling contract termination—In September 2017, we received notice from one of our customers that it elected to exercise its contractual option to terminate the drilling contract for the ultra‑deepwater drillship Discoverer Clear Leader, effective November 2017, prior to its previously agreed expiration in October 2018.  As a result of the early termination, we expect to receive approximately $148 million in termination fees.  See “—Performance and Other Key Indicators.”

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DispositionsOn May 31, 2017, we completed the sale of 10 high‑specification jackups and novated the contracts relating to the construction of five high‑specification jackups, together with related assets.  InDuring the nine months ended September 30, 2017, as a result2018, we completed the sale of the transaction,five ultra‑deepwater floaters, one deepwater floater and one midwater floater, along with related equipment, for which we received aggregate net cash proceeds of $319 million and recognized an aggregate net loss of $1.6 billion associated with the disposal of these assets.$31 million.  See “—Operating Results” and “—Liquidity and Capital Resources—Drilling Fleet.fleet.

Impairments—During the nine months ended September 30, 2017, we recognized a loss of $1.4 billion associated with the impairment of five ultra‑deepwater floaters, one deepwater floater and two midwater floaters, along with related assets, which were classified as held for sale at the time of impairment.  See “—Operating Results” and “—Liquidity and Capital Resources—Drilling Fleet.”

During the three months ended June 30, 2017, we identified indicators that the asset groups in our contract drilling services reporting unit may not be recoverable.  As a result of our testing, we determined that the carrying amount of the midwater floater asset group was impaired.  In the nine months ended September 30, 2017, we recognized a loss of $94 million, associated with the impairment of the midwater floater asset group.  See “—Operating Results.”

Debt issuances—On October 17, 2017, we completed an offering of an aggregate principal amount of $750 million of 7.50% senior unsecured notes due January 2026 (the “7.50% Senior Notes”), and we received aggregate cash proceeds of $742 million, net of issue costs.  We intend to use the majority of the net proceeds from the debt offering to repay or redeem certain maturing debt.  See “—Liquidity and Capital Resources—Sources and uses of liquidity.”

On May 5, 2017, our wholly owned subsidiary completed an offering of an aggregate principal amount of $410 million of 5.52% senior secured notes due May 2022 (the “5.52% Senior Secured Notes”), and our subsidiary received aggregate cash proceeds of $403 million, net of issue costs.  See “—Liquidity and Capital Resources—Sources and uses of liquidity.”

Debt retirements—On July 11, 2017, we completed cash tender offers (the “2017 Tender Offers”) to purchase up to $1.5 billion aggregate principal amount of certain notes (the “2017 Tendered Notes”).  We received valid tenders from holders of $1.2 billion aggregate principal amount of the 2017 Tendered Notes.  As a result, we made an aggregate cash payment of $1.3 billion and recognized an aggregate net loss of $48 million associated with the retirement of such debt, validly tendered on or before the expiration date of the 2017 Tender Offers.  See “—Liquidity and Capital Resources—Sources and uses of liquidity.”

During the nine months ended September 30, 2017, we completed transactions to repurchase in the open market an aggregate principal amount of $147 million of our debt securities for an aggregate cash payment of $147 million.  As a result, in the nine months ended September 30, 2017, we recognized an aggregate net loss of $1 million associated with the retirement of such repurchased debt.  See “—Liquidity and Capital Resources—Sources and uses of liquidity.”

Outlook

Drilling market—Our long‑term view of the part of the offshore drilling market remainsin which we participate is positive and continues to improve, especially for harsh environment and ultra‑deepwater floaters.  In recent months,Brent oil prices have stabilized at about $50remained above $70 per barrel for most of 2018 and have approached $60recently exceeded $80 per barrel, improving our customers’ economics of drilling oil and gas wells.wells and supporting the budget cycle of our customers for 2019.  This is, in large part, due to favorable trends in the hydrodcarbonhydrocarbon supply‑demand balance:balance whereby oil supply has declined relative to demand.  We continue to see improved economics for offshore developments with a significant increase in our customers’ investment decisions over the past year.

Improved oil pricesOver the past year, opportunities have resulted in increased opportunities for our drilling services.  In markets requiring harsh environment floating drilling rigs, such as the Norwegian North Sea and eastern Canada, the limited supply of these specialized rigs has improved fleet utilization, which is resulting in increased dayrates on high‑specification rigs being tendered for new work in these regions.work.  Outside of harsh environment markets, and notwithstanding an increase in tendering activity, the excess supply of ultra‑deepwater floaters relative to demand continues to apply downward pressure on dayrates.has delayed improvement of dayrates despite the increase in contract activity.  However, as the hydrocarbon supply‑demand balance improves, we expect additional upward pressure onthat stability and sustained improvement of oil prices will ultimately resultingresult in greater demand for ultra‑deepwater drilling rigs and improvedimprovement of dayrates for our assets.as utilization tightens.

As of October 26, 2017,22, 2018, our contract backlog was $9.4 billion compared to $10.2 billion as of July 25, 2017.$11.5 billion.  The risks of drilling project delays, contract renegotiations and contract terminations and cancellations remain in the near term.have diminished as oil prices have improved and stabilized.

Fleet status—We refer to the availability of our rigs in terms of the uncommitted fleet rate.  The uncommitted fleet rate is defined as the number of uncommitted days divided by the total number of rig calendar days in the measurement period, expressed as a percentage.  An uncommitted day is defined as a calendar day during which a rig is idle or stacked, is not contracted to a customer and is not committed to a shipyard.  The uncommitted fleet rates exclude the effect of priced options.  As of October 26, 2017,22, 2018, the uncommitted fleet rates for the remainder of 20172018 and each of the four years in the period ending December 31, 20212022 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

2018

 

2019

 

2020

 

2021

 

 

2018

 

2019

 

2020

 

2021

 

2022

 

Uncommitted fleet rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ultra-deepwater floaters

 

60

%  

 

65

%  

 

69

%  

 

78

%  

 

79

%

 

 

88

%  

 

51

%  

 

69

%  

 

73

%  

 

84

%

 

Harsh environment floaters

 

19

%  

 

48

%�� 

 

93

%  

 

100

%  

 

100

%

 

 

85

%  

 

36

%  

 

56

%  

 

62

%  

 

67

%

 

Deepwater floaters

 

 —

%  

 

17

%  

 

100

%  

 

100

%  

 

100

%

 

 

97

%  

 

100

%  

 

100

%  

 

100

%  

 

100

%

 

Midwater floaters

 

50

%  

 

63

%  

 

90

%  

 

100

%  

 

100

%

 

 

90

%  

 

68

%  

 

81

%  

 

100

%  

 

100

%

 

-  2125  -


 

Table of Contents

Performance and Other Key Indicators

Contract backlog—Contract backlog is defined as the maximum contractual operating dayrate multiplied by the number of days remaining in the firm contract period, excluding revenues for mobilization, demobilization, and contract preparation, or other incentive provisions or reimbursement revenues, which are not expected to be significant to our contract drilling revenues.

The contract backlog represents the maximum contract drilling revenues that can be earned considering the contractual operating dayrate in effect during the firm contract period and represents the basis for the maximum revenues in our revenue efficiency measurement.  To determine maximum revenues for purposes of calculating revenue efficiency, however, we include the revenues earned for mobilization, demobilization and contract preparation, other incentive provisions or cost escalation provisions, which are excluded from the amounts presented for contract backlog.  The contract backlog for our fleet was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

October 26,

 

July 25,

 

February 9,

 

 

October 22,

 

July 23,

 

April 18,

 

    

2017

    

2017

    

2017

 

    

2018

    

2018

    

2018

 

Contract backlog

 

(In millions)

 

 

(In millions)

 

Ultra-deepwater floaters

 

$

8,664

 

$

9,234

 

$

10,070

 

 

$

7,435

 

$

7,562

 

$

8,142

 

Harsh environment floaters

 

 

450

 

 

540

 

 

623

 

 

 

3,974

 

 

3,985

 

 

4,163

 

Deepwater floaters

 

 

155

 

 

190

 

 

259

 

 

 

 4

 

 

41

 

 

81

 

Midwater floaters

 

 

83

 

 

100

 

 

127

 

 

 

102

 

 

119

 

 

48

 

High-specification jackups

 

 

71

 

 

96

 

 

172

 

 

 

 —

 

 

11

 

 

25

 

Total contract backlog

 

$

9,423

 

$

10,160

 

$

11,251

 

 

$

11,515

 

$

11,718

 

$

12,459

 

Our contract backlog includes only firm commitments, which are represented by signed drilling contracts or, in some cases, by other definitive agreements awaiting contract execution.  Our contract backlog includes amounts associated with our newbuild units that are currently under construction.  The contractual operating dayrate may be higher than the actual dayrate that we ultimately receive or an alternative contractual dayrate, such as a waiting‑on‑weather rate, repair rate, standby rate or force majeure rate, may apply under certain circumstances.  The contractual operating dayrate may also be higher than the actual dayrate that we ultimately receive because of a number of factors, including rig downtime or suspension of operations.  In certain contracts, the dayrate may be reduced to zero if, for example, repairs extend beyond a stated period of time.

In September 2017, one of our customers notified us of its election to early terminate the drilling contract for the ultra‑deepwater drillship Discoverer Clear Leader, effective November 2017, prior to its expiration in October 2018.  Our contract backlog for ultra‑deepwater floaters presented as of October 26, 2017, reflects a22, 2018, includes an aggregate reduction of approximately $206$350 million due to changes to contract dayrates for four of backlogour ultra‑deepwater drillships that are contracted with a subsidiary of Royal Dutch Shell plc related to the early termination of this contract.  During the year ended December 31, 2016, our customers early terminated or cancelled drilling contractscost reductions resulting from crew optimization and cost de-escalations.

The contract backlog forDeepwater Asgard,  Deepwater Champion,  Deepwater Millennium, Discoverer Deep Seas, Discoverer India, GSF Constellation II, GSF Development Driller I and Transocean John Shaw.

On May 31, 2017, we completed the sale of 10 high‑specification jackups and novatedrepresented the contracts relating to the construction of five high‑specification jackups, together with related assets.  At October 26, 2017, the contract backlog for the high‑specification jackups representsjackup that was under contract when we sold the contract backlog associated with the two high‑specification jackups thatrig, and we continuecontinued to operate followingsuch rig until October 2018, when we completed the sale.drilling contract.  See “—Operating Results” and “—Liquidity and Capital Resources—Drilling Fleet.fleet.

Average daily revenue—Average daily revenue is defined as contract drilling revenues, excluding revenues for contract terminations and reimbursements, earned per operating day.  An operating day is defined as a calendar day during which a rig is contracted to earn a dayrate during the firm contract period after commencement of operations.  The average daily revenue for our fleet was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

 

Three months ended

 

 

September 30, 

 

June 30, 

 

September 30, 

 

 

September 30, 

 

June 30

 

September 30, 

 

    

2017

    

2017

    

2016

 

    

2018

    

2018

    

2017

 

Average daily revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ultra-deepwater floaters

 

$

449,300

 

$

482,200

 

$

487,800

 

 

$

340,500

 

$

377,600

 

$

449,300

 

Harsh environment floaters

 

$

213,100

 

$

262,200

 

$

225,900

 

 

$

309,000

 

$

304,600

 

$

213,100

 

Deepwater floaters

 

$

187,300

 

$

199,000

 

$

234,100

 

 

$

195,700

 

$

189,800

 

$

187,300

 

Midwater floaters

 

$

98,900

 

$

100,300

 

$

240,400

 

 

$

98,500

 

$

99,100

 

$

98,900

 

High-specification jackups

 

$

151,200

 

$

142,800

 

$

143,100

 

 

$

145,700

 

$

150,600

 

$

151,200

 

Total fleet average daily revenue

 

$

319,000

 

$

329,900

 

$

332,100

 

 

$

295,000

 

$

308,300

 

$

319,000

 

Our average daily revenue fluctuates relative to market conditions and our revenue efficiency.  The average daily revenue may also be affected by revenues for lump sum bonuses or demobilization fees received from our customers.customers and is reduced by the amortization of the contract intangible assets acquired in the Songa acquisition.  Our total fleet average daily revenue is also affected by the mix of rig classes being operated, as deepwater floaters, midwater floaters and high‑specification jackups are typically contracted at lower dayrates compared to ultra‑deepwater floaters and harsh environment floaters.  We include newbuilds in the calculation when the rigs commence operations upon acceptance by the customer.  We remove rigs from the calculation upon disposal or classification as held for sale, except whenunless we continue to operate rigs subsequent to sale, as we dodid with twothree of the high‑specification jackups sold in May 2017.2017, in which case we remove the rigs at the time of completion or novation of the contract.

-  2226  -


 

Table of Contents

Revenue efficiency—Revenue efficiency is defined as actual contract drilling revenues, excluding revenues for contract terminations and reimbursements, for the measurement period divided by the maximum revenue calculated for the measurement period, expressed as a percentage.  Maximum revenue is defined as the greatest amount of contract drilling revenues, excluding revenues for contract terminations and reimbursements, the drilling unit could earn for the measurement period, excluding amounts related to incentive provisions.  The revenue efficiency rates for our fleet were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

 

 

Three months ended

 

September 30, 

 

June 30,

 

September 30, 

 

 

 

September 30, 

 

June 30

 

September 30, 

 

2017

 

2017

 

2016

 

 

 

2018

 

2018

 

2017

Revenue efficiency

    

 

 

 

 

 

 

 

 

 

 

    

 

 

 

 

 

 

 

 

Ultra-deepwater floaters

 

99

%  

 

97

%  

 

100

%

 

 

 

95

%  

 

100

%  

 

99

%

Harsh environment floaters

 

92

%  

 

98

%  

 

97

%

 

 

 

95

%  

 

95

%  

 

92

%

Deepwater floaters

 

90

%  

 

96

%  

 

96

%

 

 

 

96

%  

 

92

%  

 

90

%

Midwater floaters

 

97

%  

 

99

%  

 

103

%

 

 

 

98

%  

 

99

%  

 

97

%

High-specification jackups

 

99

%  

 

99

%  

 

114

%

 

 

 

99

%  

 

100

%  

 

99

%

Total fleet average revenue efficiency

 

97

%  

 

97

%  

 

100

%

 

 

 

95

%  

 

97

%  

 

97

%

Our revenue efficiency rate varies due to revenues earned under alternative contractual dayrates, such as a waiting‑on‑weather rate, repair rate, standby rate, force majeure rate or zero rate, that may apply under certain circumstances.  We include newbuilds in the calculation when the rigs commence operations upon acceptance by the customer.  We exclude rigs that are not operating under contract, such as those that are stacked.

In the three months ended September 30, 2016, revenue efficiency for our midwater floaters and high‑specification jackups exceeded maximum revenues primarily as a result of achieving higher performance, earning certain contractual incentive bonuses and collecting previously deferred revenues.

Rig utilization—Rig utilization is defined as the total number of operating days divided by the total number of rig calendar days in the measurement period, expressed as a percentage.  The rig utilization rates for our fleet were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

 

 

Three months ended

 

September 30, 

 

June 30,

 

September 30, 

 

 

 

September 30, 

 

June 30

 

September 30, 

 

2017

 

2017

 

2016

 

 

 

2018

 

2018

 

2017

Rig utilization

    

 

    

 

 

    

 

 

 

 

 

    

 

    

 

 

    

 

 

 

Ultra-deepwater floaters

 

42

%  

 

38

%  

 

45

%

 

 

 

56

%  

 

47

%  

 

42

%

Harsh environment floaters

 

77

%  

 

62

%  

 

71

%

 

 

 

83

%  

 

81

%  

 

77

%

Deepwater floaters

 

69

%  

 

67

%  

 

50

%

 

 

 

100

%  

 

100

%  

 

69

%

Midwater floaters

 

50

%  

 

33

%  

 

42

%

 

 

 

43

%  

 

35

%  

 

50

%

High-specification jackups

 

95

%  

 

54

%  

 

50

%

 

 

 

100

%  

 

95

%  

 

95

%

Total fleet average rig utilization

 

52

%  

 

44

%  

 

49

%

 

 

 

65

%  

 

57

%  

 

52

%

Our rig utilization rate declines as a result of idle and stacked rigs and during shipyard and mobilization periods to the extent these rigs are not earning revenues.  We include newbuilds in the calculation when the rigs commence operations upon acceptance by the customer.  We remove rigs from the calculation upon disposal, classification as held for sale or classification as discontinued operations.  Accordingly, our rig utilization can increase when idle or stacked units are removed from our drilling fleet.

-  2327  -


 

Table of Contents

Operating Results

Three months ended September 30, 20172018 compared to the three months ended September 30, 20162017

The following is an analysis of our operating results.  See “—Performance and Other Key Indicators” for definitions of operating days, average daily revenue, revenue efficiency and rig utilization.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

 

 

 

 

 

 

Three months ended

 

 

 

 

 

 

September 30, 

 

 

 

 

 

 

 

September 30, 

 

 

 

 

 

 

2017

 

2016

 

Change

 

% Change

 

 

2018

 

2017

 

Change

 

% Change

 

(In millions, except day amounts and percentages)

 

 

 

(In millions, except day amounts and percentages)

 

    

 

 

    

 

 

 

    

 

 

 

    

 

 

 

    

 

 

    

 

 

 

    

 

 

 

    

 

 

Operating days

 

 

2,189

 

 

2,657

 

 

(468)

 

(18)

%

 

 

 

2,592

 

 

2,189

 

 

403

 

18

%

Average daily revenue

 

$

319,000

 

 

$

332,100

 

 

$

(13,100)

 

(4)

%

 

 

$

295,000

 

 

$

319,000

 

 

$

(24,000)

 

(8)

%

Revenue efficiency

 

 

97

%  

 

100

%  

 

 

 

 

 

 

 

 

95

%  

 

97

%  

 

 

 

 

 

Rig utilization

 

 

52

%  

 

49

%  

 

 

 

 

 

 

 

 

65

%  

 

52

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract drilling revenues

 

$

699

 

 

$

886

 

 

$

(187)

 

(21)

%

 

 

$

816

 

 

$

699

 

 

$

117

 

17

%

Other revenues

 

 

109

 

 

 

20

 

 

 

89

 

nm

 

 

 

 

 —

 

 

 

109

 

 

 

(109)

 

nm

 

 

 

808

 

 

906

 

 

(98)

 

(11)

%

 

 

 

816

 

 

808

 

 

 8

 

 1

%

Operating and maintenance expense

 

 

(323)

 

 

(409)

 

 

86

 

21

%

 

 

 

(447)

 

 

(325)

 

 

(122)

 

(38)

%

Depreciation expense

 

 

(197)

 

 

(225)

 

 

28

 

12

%

 

 

 

(201)

 

 

(197)

 

 

(4)

 

(2)

%

General and administrative expense

 

 

(39)

 

 

(41)

 

 

 2

 

 5

%

 

 

 

(35)

 

 

(39)

 

 

 4

 

10

%

Loss on impairment

 

 

(1,385)

 

 

(11)

 

 

(1,374)

 

nm

 

 

 

 

(432)

 

 

(1,385)

 

 

953

 

69

%

Gain (loss) on disposal of assets, net

 

 

(9)

 

 

 

 9

 

 

 

(18)

 

nm

 

 

Operating income (loss)

 

 

(1,145)

 

 

229

 

 

(1,374)

 

nm

 

 

Loss on disposal of assets, net

 

 

(6)

 

 

 

(9)

 

 

 

 3

 

33

%

Operating loss

 

 

(305)

 

 

(1,147)

 

 

842

 

73

%

Other income (expense), net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

21

 

 

 5

 

 

16

 

nm

 

 

 

 

11

 

 

21

 

 

(10)

 

(48)

%

Interest expense, net of amounts capitalized

 

 

(112)

 

 

(109)

 

 

(3)

 

(3)

%

 

 

 

(160)

 

 

(112)

 

 

(48)

 

(43)

%

Gain (loss) on retirement of debt

 

 

(1)

 

 

110

 

 

(111)

 

nm

 

 

Loss on retirement of debt

 

 

(1)

 

 

(1)

 

 

 —

 

 —

%

Other, net

 

 

 6

 

 

 

 7

 

 

 

(1)

 

(14)

%

 

 

 

16

 

 

 

 8

 

 

 

 8

 

nm

 

Income (loss) before income tax expense

 

 

(1,231)

 

 

242

 

 

(1,473)

 

nm

 

 

Income tax expense

 

 

(180)

 

 

 

(6)

 

 

 

(174)

 

nm

 

 

Net income (loss)

 

$

(1,411)

 

 

$

236

 

 

$

(1,647)

 

nm

 

 

Loss before income tax (expense) benefit

 

 

(439)

 

 

(1,231)

 

 

792

 

64

%

Income tax (expense) benefit

 

 

30

 

 

 

(180)

 

 

 

210

 

nm

 

Net loss

 

$

(409)

 

 

$

(1,411)

 

 

$

1,002

 

71

%


“nm” means not meaningful.

OperatingContract drilling revenues—Contract drilling revenues decreasedincreased for the three months ended September 30, 2017,2018, compared to the three months ended September 30, 2016,2017, primarily due to the following: (a) approximately $100$135 million resulting from operations acquired in the Songa acquisition, (b) approximately $95 million resulting from our two newbuild ultra‑deepwater drillships that commenced operations subsequent to July 1, 2017, (c) $37 million resulting from contract early terminations and cancellations, (d) approximately $35 million resulting from the reactivation of two rigs in the prior year period, (e) approximately $30 million of reimbursement revenues and (f) approximately $10 million resulting from higher activity across the fleet.  These increases were partially offset by the following decreases: (a) approximately $105 million resulting from lower dayrates, (b) approximately $95$100 million resulting from a greater number of rigs idle or stacked, (c) approximately $15 million resulting from rigs sold or classified as held for sale (c)and (d) approximately $25$10 million resulting from lower revenue efficiency and (d) approximately $20 million resulting from lower activity across the fleet.  These decreases were partially offset by approximately $55 million of increased revenues associated with our newbuild ultra‑deepwater drillships that commenced operations during the year ended December 31, 2016.efficiency.

Other revenues increased for the three months ended September 30, 2017, compared toincluded revenues of $99 million resulting from contract early terminations and cancellations and $10 million of reimbursement revenues.  For the three months ended September 30, 2016, primarily due to the recognition2018, these activities are presented in contract drilling revenues as part of $87 million of revenues awarded to us in connection with a drilling contract terminated by a customer in the year ended December 31, 2015.our single performance obligation.

Costs and expenses—Operating and maintenance costs and expenses decreasedincreased for the three months ended September 30, 2017,2018, compared to the three months ended September 30, 2016, primarily due to the following: (a) approximately $60$75 million resulting from operations acquired in the Songa acquisition, (b) approximately $25 million resulting from our two newbuild ultra‑deepwater drillships that commenced operations subsequent to July 1, 2017, (c) approximately $15 million resulting from increased reimbursable costs and (d) approximately $15 million resulting from the reactivation of two rigs.  These increases were partially offset by approximately $5 million resulting from rigs sold or classified as held for sale.

Depreciation expense increased for the three months ended September 30, 2018, compared to the three months ended September 30, 2017, primarily due to the following: (a) approximately $20 million related to the harsh environment floaters acquired in the Songa acquisition and (b) approximately $14 million resulting from our newbuild ultra‑deepwater drillships placed into service subsequent to July 1, 2017.  These increases were partially offset by the following decreases (a) approximately $26 million resulting from rigs sold or classified as held for sale and (b) approximately $40$5 million resulting from decreased offshore coststhe retirement or full depreciation of certain assets.

General and (c) approximately $10 million resulting from reduced onshore costs.  These decreases were partially offset by increased costs and expenses as follows: (a) approximately $15 million resulting from our newbuild ultra‑deepwater drillships that commenced operations in the year ended December 31, 2016 and (b) approximately $10 million resulting from rig reactivations.

Depreciationadministrative expense decreased for the three months ended September 30, 2017,2018, compared to the three months ended September 30, 2016,2017, primarily resulting from rigs sold or classified as held for sale.

Loss on impairment—In the three months ended September 30, 2017 and 2016, we recognized a lossdue to approximately $6 million of $1.4 billion and $11 million, respectively, associated with the impairment of certain assets to be sold for scrap value or for alternative use, which were classified as held for sale at the time of impairment.decreased personnel costs.

-  2428  -


 

Table of Contents

Loss on impairment of assets—In the three months ended September 30, 2018 and 2017, we recognized a loss of $433 million and $1.4 billion, respectively, associated with the impairment of certain assets classified as held for sale.

Other income and expense—Interest expense, net of amounts capitalized, increased in the three months ended September 30, 2017,2018, compared to the three months ended September 30, 2016,2017, primarily due to the following: (a) approximately $35$32 million of increased interest expense resulting from debt issued subsequent to September 30, 2016 andJuly 1, 2017, (b) approximately $12$31 million of increased interest expense resulting from reduced interest costs capitalized for our newbuild ultra‑deepwater drillships that commenced operations duringsubsequent to July 1, 2017 and (c) approximately $6 million of increased interest expense resulting from the year ended December 31, 2016.debt and related undesignated derivative instruments issued or assumed in connection with the Songa acquisition.  Partially offsetting these increases was approximately $45$12 million of decreased interest expense resulting from the retirement of debt.

Loss on retirement of debtOther income, net, increased in the three months ended September 30, 2017, resulted primarily from the retirement of notes validly tendered after the early tender date of the 2017 Tender Offers.  Gain on retirement of debt in2018, compared to the three months ended September 30, 2016, resulted2017, primarily related to the following: (a) an increase of $12 million associated with receipt of payments related to our dual‑activity patent, partially offset by (b) a decrease of $7 million associated with currency exchange, primarily resulting from undesignated derivative instruments acquired in the retirement of notes validly tendered in cash tender offers (the “2016 Tender Offers”).Songa acquisition.

Income tax expense—We operate internationally and provide for income taxes based on the tax laws and rates in the countries in which we operate and earn income.  In the three months ended September 30, 20172018 and 2016,2017, our effective tax rate excluding discrete items, was 56.56.7 percent and 26.6(14.7) percent, respectively, based on income from continuing operationsor loss before income tax expense, after excluding certain items, such as losses on impairment and gains and losses on certain asset disposals.  Our effective tax rate increased in the three months ended September 30, 2017, compared to the three months ended September 30, 2016, primarily due to (a) changes in the relative blend of income from operations in certain jurisdictions and (b) valuation allowances on deferred tax assets for losses not expected to be realized.  We consider the tax effect, if any, of the excluded items as well as settlements of prior year tax estimates to be discrete period tax expenses or benefits.expense.  In the three months ended September 30, 20172018 and 2016,2017, the effect of the various discrete period tax items was a net tax expense of $1 million and $90 million, respectively.  In the three months ended September 30, 2018, such discrete items were related to various items, including a decrease in the U.S. transition tax on non‑U.S. earnings, tax expense for unrecognized tax benefits associated with tax position taken in prior years and a net tax benefit of $32 million, respectively.return to provision adjustments.  In the three months ended September 30, 2017, such discrete items were primarily related to tax benefit of changes in unrecognized tax benefit associated with tax positions taken in prior years and valuation allowances on deferred tax assets for foreign tax credits not expected to be realized.  In the three months ended September 30, 2016, such2018 and 2017, our effective tax rate, excluding discrete items, were primarily relatedwas 2,757.6 percent and 56.5 percent, respectively, based on income or loss before income tax expense.  In the three months ended September 30, 2018 compared to tax benefit of changes in unrecognized tax benefit associated with tax positions taken in prior years and valuation allowances on deferred tax assets for losses not expected to be realized.  For the three months ended September 30, 2017, and 2016, these discrete tax items, coupled with the excluded income and expense items noted above, resulted in anour effective tax rate of (14.7) percent and 2.5 percent, respectively, based on income from continuing operations before income tax expense.  Our effective tax rate, after including discrete tax items noted above, excluding the income and expense items noted above, decreased mainly due to loss on impairment and disposal of assets with no tax benefit and valuation allowances recorded on U.S. deferred tax assets not expected to be realized.

In evaluating our ability to realize deferred tax assets, we consider all available positive and negative evidence, including projected future taxable income and the existence of cumulative losses in recent years.  As of September 30, 2017, our consolidated cumulative loss incurred over the recent three‑year period,increased primarily due to losses on impairmentchanges in the relative blend of income from operations in certain jurisdictions and disposal of assets, represented significant objective negative evidence for our evaluation.  Such evidence, together with potential organizational changes that could alter our ability to realize certain deferredthe loss before income taxes and the increased tax assets, has limited our ability to consider other subjective evidence, suchexpense as projected future contract activity.  As a result we recordedof the U.S. base erosion and anti‑abuse tax (“BEAT”).

In December 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “2017 Tax Act”), which includes changes to existing U.S. tax laws that have an impact on our income tax provision, most notably a valuation allowancereduction of $144 millionthe U.S. corporate income tax rate and the creation of a territorial tax system with a one‑time mandatory tax on certain unremitted earnings and profits of the non‑U.S. subsidiaries of our U.S. subsidiaries.  The 2017 Tax Act also makes prospective changes beginning in 2018, including a base erosion and anti‑abuse tax, a global intangible low‑taxed income tax, additional limitations on the deductibility of executive compensation, limitations on the deductibility of interest, and repeal of the domestic manufacturing deduction.  We have evaluated our bareboat charter structure and have concluded that the current structure of our U.S. operations is subject to recognize only aBEAT.  We have reflected the estimated impact of this tax in our provision for the three months ended September 30, 2018.  A significant portion of our U.S.BEAT liability is contractually protected due to a change in law provision in certain drilling contracts.  However, we are still analyzing certain aspects of the 2017 Tax Act and refining our calculations which could potentially affect the measurement of these balances or potentially give rise to new deferred tax assets that are more likely than notamounts.

Due to be recognized.  If estimated future taxable income changes during the carryforward periods or if the cumulative loss is no longer present, we may adjust the amount of deferred tax assets that we expectfactors related to realize.

The relationship between our provision for or benefit from income taxesoperating activities and our income 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 versus income before taxes, (c) rig movements between taxing jurisdictions and (d) our rig operating structures.  Generally, our marginal tax rate is lower than our effective tax rate.  Consequently,organizational structure, our income tax expense does not change proportionally with our income before income taxes.  Significant decreases in our income before income taxes typically lead to higher effective tax rates, while significant increases in income before income taxes can lead to lower effective tax rates, subject to the other factors impacting income tax expense noted above.  With respect to the effective tax rate calculation for the three months ended September 30, 2017,2018, a significant portion of our income tax expense was generated in countries in which income taxes are imposed on gross revenues, with the most significant of these countries being Angola and India.  Conversely, the countries in which we incurred the most significant income taxes during this period that were based on income before income tax include Brazil, Switzerland, Norway, the U.K. and the U.S.

Our rig operating structures further complicate our tax calculations, especially in instances where we have more than one operating structure for the particular taxing jurisdiction and, thus, more than one method of calculating taxes depending on the operating structure utilized by the rig under the contract.  For example, two rigs operating in the same country could generate significantly different provisions for income taxes if they are owned by two different subsidiaries that are subject to differing tax laws and regulations in the respective country of incorporation.

-  2529  -


 

Table of Contents

Nine months ended September 30, 20172018 compared to the nine months ended September 30, 20162017

The following is an analysis of our operating results.  See “—Performance and Other Key Indicators” for definitions of operating days, average daily revenue, revenue efficiency and rig utilization.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

 

 

 

 

 

Nine months ended

 

 

 

 

 

 

September 30, 

 

 

 

 

 

 

 

September 30, 

 

 

 

 

 

 

2017

 

2016

 

Change

 

% Change

 

 

2018

 

2017

 

Change

 

% Change

 

(In millions, except day amounts and percentages)

 

 

 

(In millions, except day amounts and percentages)

 

    

 

 

    

 

 

 

    

 

 

 

    

 

 

 

    

 

 

    

 

 

 

    

 

 

 

    

 

 

Operating days

 

 

6,513

 

 

8,042

 

 

(1,529)

 

(19)

%

 

 

 

7,203

 

 

6,513

 

 

690

 

11

%

Average daily revenue

 

$

328,800

 

 

$

360,700

 

 

$

(31,900)

 

(9)

%

 

 

$

297,300

 

 

$

328,800

 

 

$

(31,500)

 

(10)

%

Revenue efficiency

 

 

97

%  

 

98

%  

 

 

 

 

 

 

 

 

95

%  

 

97

%  

 

 

 

 

 

Rig utilization

 

 

46

%  

 

49

%  

 

 

 

 

 

 

 

 

58

%  

 

46

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract drilling revenues

 

$

2,142

 

 

$

2,912

 

 

$

(770)

 

(26)

%

 

 

$

2,270

 

 

$

2,142

 

 

$

128

 

 6

%

Other revenues

 

 

202

 

 

 

275

 

 

 

(73)

 

(27)

%

 

 

 

 —

 

 

 

202

 

 

 

(202)

 

nm

 

 

 

2,344

 

 

3,187

 

 

(843)

 

(26)

%

 

 

 

2,270

 

 

2,344

 

 

(74)

 

(3)

%

Operating and maintenance expense

 

 

(999)

 

 

(1,561)

 

 

562

 

36

%

 

 

 

(1,302)

 

 

(1,003)

 

 

(299)

 

(30)

%

Depreciation expense

 

 

(648)

 

 

(667)

 

 

19

 

 3

%

 

 

 

(614)

 

 

(648)

 

 

34

 

 5

%

General and administrative expense

 

 

(113)

 

 

(125)

 

 

12

 

10

%

 

 

 

(134)

 

 

(113)

 

 

(21)

 

(19)

%

Loss on impairment

 

 

(1,498)

 

 

(26)

 

 

(1,472)

 

nm

 

 

 

 

(1,446)

 

 

(1,498)

 

 

52

 

 3

%

(Gain) loss on disposal of assets, net

 

 

(1,602)

 

 

 

 8

 

 

 

(1,610)

 

nm

 

 

Operating income (loss)

 

 

(2,516)

 

 

816

 

 

(3,332)

 

nm

 

 

Loss on disposal of assets, net

 

 

 —

 

 

 

(1,602)

 

 

 

1,602

 

nm

 

Operating loss

 

 

(1,226)

 

 

(2,520)

 

 

1,294

 

51

%

Other income (expense), net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

34

 

 

15

 

 

19

 

nm

 

 

 

 

36

 

 

34

 

 

 2

 

 6

%

Interest expense, net of amounts capitalized

 

 

(368)

 

 

(296)

 

 

(72)

 

(24)

%

 

 

 

(455)

 

 

(368)

 

 

(87)

 

(24)

%

Gain (loss) on retirement of debt

 

 

(49)

 

 

148

 

 

(197)

 

nm

 

 

Loss on retirement of debt

 

 

(3)

 

 

(49)

 

 

46

 

94

%

Other, net

 

 

 7

 

 

 

 9

 

 

 

(2)

 

(22)

%

 

 

 

 6

 

 

 

11

 

 

 

(5)

 

(45)

%

Income (loss) before income tax expense

 

 

(2,892)

 

 

692

 

 

(3,584)

 

nm

 

 

Loss before income tax expense

 

 

(1,642)

 

 

(2,892)

 

 

1,250

 

43

%

Income tax expense

 

 

(103)

 

 

 

(122)

 

 

 

19

 

16

%

 

 

 

(118)

 

 

 

(103)

 

 

 

(15)

 

(15)

%

Net income (loss)

 

$

(2,995)

 

 

$

570

 

 

$

(3,565)

 

nm

 

 

Net loss

 

$

(1,760)

 

 

$

(2,995)

 

 

$

1,235

 

41

%


“nm” means not meaningful.

OperatingContract drilling revenues—Contract drilling revenues decreasedincreased for the nine months ended September 30, 2017,2018, compared to the nine months ended September 30, 2016,2017, primarily due to the following: (a) approximately $440$355 million resulting from additionaloperations acquired in the Songa acquisition, (b) approximately $265 million resulting from our two newbuild ultra‑deepwater drillships that commenced operations subsequent to January 1, 2017, (c) $112 million resulting from contract early terminations and cancellation, (d) approximately $105 million resulting from the reactivation of two rigs, (e) approximately $70 million of reimbursement revenues and (f) approximately $25 million resulting from higher activity across the fleet.  These increases were partially offset by the following decreases: (a) approximately $365 million resulting from lower dayrates, (b) approximately $300 million resulting from a greater number of rigs idle or stacked, (b)(c) approximately $395$90 million resulting from rigs sold or classified as held for sale and (c)(d) approximately $195$55 million resulting from lower dayrates.  These decreases were partially offset by increased revenues as follows: (a) approximately $235 million resulting from our three newbuild ultra‑deepwater drillships that commenced operations during the year ended December 31, 2016, and (b) approximately $40 million resulting from rigs reactivated since January 1, 2016.revenue efficiency.

Other revenues decreased for the nine months ended September 30, 2017, compared toincluded revenues of $176 million resulting from contract early terminations and cancellations and $26 million of reimbursement revenues.  For the nine months ended September 30, 2016, due to the recognition2018, these activities are presented in contract drilling revenues as part of $138 million resulting from drilling contracts early terminated or cancelled by our customers and approximately $21 million resulting from reimbursable items.  These decreases were partially offset by the recognition of $87 million of revenues awarded to us in connection with a drilling contract terminated by a customer in the year ended December 31, 2015.single performance obligation.

Costs and expenses—Operating and maintenance costs and expenses increased for the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017, primarily due to the following: (a) approximately $205 million resulting from operations acquired in the Songa acquisition, (b) approximately $65 million resulting from our newbuild ultra‑deepwater drillships that commenced operations subsequent to January 1, 2017, (c) approximately $50 million resulting from the reactivation of two rigs, (d) approximately $30 million resulting from increased reimbursable costs and (e) approximately $20 million resulting from increased personnel costs, primarily associated with the change of country of operation.  These increases were partially offset by the following decreases: (a) approximately $50 million resulting from a greater number of rigs sold or classified as held for sale and (b) approximately $15 million resulting from a greater number of rigs idle or stacked.

Depreciation expense decreased for the nine months ended September 30, 2017,2018, compared to the nine months ended September 30, 2016,2017, primarily due to the following: (a) approximately $230$106 million resulting from rigs sold or classified as held for sale, (b) approximately $225$17 million resulting from a greater numberthe retirement or full depreciation of rigs idle or stacked,certain assets and (c) approximately $85$6 million resulting from reduced onshore costs and (d) approximately $80 million resulting from reduced offshore costs.  These decreases were partially offset by approximately $55 million of increased costs resulting from our three newbuild ultra‑deepwater drillships that commenced operations in the year ended December 31, 2016.

Depreciation expense decreased for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, primarily due to the following: (a) approximately $39 million of decreased depreciation resulting from rigs sold or classified as held for sale and (b) approximately $15 million of decreased depreciation primarily resulting from the impairment of our midwater floater asset group andin the retirement of other assets subsequentnine months ended to September 30, 2016.2017.  These decreases were partially offset by the following increases: (a) approximately $35$55 million of increased depreciation associated withrelated to the harsh environment floaters acquired in the Songa acquisition and (b) approximately $40 million resulting from our newbuild ultra‑deepwater drillships placed into service in the year ended December 31, 2016.subsequent to January 1, 2017.

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General and administrative expense decreasedincreased for the nine months ended September 30, 2017,2018, compared to the nine months ended September 30, 2016,2017, primarily due to the following: (a) approximately $5$7 million of reducedincreased professional fees related to developing technology for improving fleet performance and reducing costs and (b) approximately $3$7 million of reduced personnel costs.increased acquisition costs related to the Songa acquisition and the proposed Ocean Rig acquisition.

Loss on impairment or disposal of assets—In the nine months ended September 30, 2017,2018, we recognized a loss on impairmentlosses related to the following: (a) a loss$981 million associated with the impairment of certain assets classified as held for sale and (b) $462 million associated with the impairment of our goodwill.  In the nine months ended September 30, 2017, we recognized losses related to the following: (a) $1.4 billion associated with the impairment of certain assets to be sold for scrap value or for alternative use, which were classified as held for sale at the time of impairment and (b) a loss of $94 million associated with the impairment of our midwater floater asset group.

In the nine months ended September 30, 2016, we recognized a2017, loss of $26 million associated with the impairment of certain assets classified as held for sale.

Loss on disposal of assets in the nine months ended September 30, 2017, was primarily the result ofdue to the completion of the sale of 10 high‑specification jackups and novation of the contracts relating tofor the construction of five high‑specification jackups, together with related assets.

Other income and expense—Interest expense, net of amounts capitalized, increased in the nine months ended September 30, 2017,2018, compared to the nine months ended September 30, 2016,2017, primarily due to the following: (a) approximately $142$78 million of increased interest expense resulting from debt issued subsequent to September 30, 2016, (b) approximately $50 million of increased interest expense resulting from reduced interest costs capitalized for our newbuild ultra‑deepwater drillships that commenced operations during the year ended December 31, 2016placed into service subsequent to January 1, 2017, (b) approximately $67 million resulting from debt issued subsequent to January 1, 2017 and (c) approximately $12$30 million of increased interest expense resulting from downgrades to the credit ratings for our senior unsecured long‑term debt.debt and related undesignated derivative instruments issued or assumed in connection with the Songa acquisition.  Partially offsetting these increases was approximately $120$75 million of decreased interest expense resulting from the retirement of debt.

LossIn the nine months ended September 30, 2017, loss on retirement of debt was primarily due to the retirement of notes validly tendered through the early tender date of the $1.5 billion aggregate principal amount of certain notes.

Other income, net, decreased in the nine months ended September 30, 2017, resulted primarily from the retirement of notes validly tendered in the 2017 Tender Offers.  Gain on retirement of debt in2018, compared to the nine months ended September 30, 2016, resulted2017, primarily fromrelated to the following: (a) a decrease of $26 million associated with currency exchange, $15 million of which resulted from undesignated derivative instruments in the current‑year period, partially offset by (b) an aggregate net gainincrease of $104$12 million associated with receipt of payments related to our dual‑activity patent, (c) an increase of $8 million associated with the retirementnon‑service component of notes validly tenderednet periodic benefit costs and (d) an increase of $4 million associated with undesignated interest rate swaps acquired in the 2016 Tender OffersSonga acquisition and (b) an aggregate gain of $44 million resulting from the retirement of notes repurchasedsubsequently terminated in the open market.current‑year period with no comparable activity in the prior‑year period.

Income tax expense—We operate internationally and provide for income taxes based on the tax laws and rates in the countries in which we operate and earn income.  In the nine months ended September 30, 20172018 and 2016,2017, our effective tax rate excluding discrete items, was 64.2(7.2) percent and 25.9(3.6) percent, respectively, based on income from continuing operationsor loss before income tax expense, after excluding certain items, such as losses on impairment and gains and losses on certain asset disposals.  Our effective tax rate increased in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, primarily due to (a) changes in the relative blend of income from operations in certain jurisdictions and (b) valuation allowances on deferred tax assets for losses not expected to be realized.  We consider the tax effect, if any, of the excluded items as well as settlements of prior year tax estimates to be discrete period tax expenses or benefits.expense.  In the nine months ended September 30, 20172018 and 2016,2017, the effect of the various discrete period tax items was a net tax expense of $91 million and a net tax benefit of $57 million, and $24 million, respectively.  In the nine months ended September 30, 2018, such discrete items were primarily related to the U.S. transition tax on non‑U.S. earnings.  In the nine months ended September 30, 2017, such discrete items were primarily related to the tax benefit of changes in unrecognized tax benefitbenefits associated with tax positions taken in prior years, valuation allowances on deferred tax assets for foreign tax credits not expected to be realized release of a valuation allowance on deferred tax assets for losses expected to be realized and deductions related to resolution of certain litigation matters related to the Macondo well incident.  In the nine months ended September 30, 2016, such discrete items were primarily related to tax benefit of changes in unrecognized tax benefit associated with tax positions taken in prior years2018 and valuation allowances on deferred tax assets for losses not expected to be realized.  For the nine months ended September 30, 2017, and 2016, these discrete tax items, coupled with the excluded income and expense items noted above, resulted in anour effective tax rate, of (3.6)excluding discrete items, was (15.6) percent and 17.864.2 percent, respectively, based on income from continuing operationsor loss before income tax expense.  Our effective tax rate after includingdecreased in the discrete tax items noted above, and excludingnine months ended September 30, 2018 compared to the income and expense items noted above, decreased mainly due to loss on impairment and disposal of assets with no tax benefit and valuation allowances recorded on U.S. deferred tax assets not expected to be realized.

In evaluating our ability to realize deferred tax assets, we consider all available positive and negative evidence, including projected future taxable income and the existence of cumulative losses in recent years.  As ofnine months ended September 30, 2017, our consolidated cumulative loss incurred over the recent three‑year period, primarily due to losses on impairmentchanges in the relative blend of income from operations in certain jurisdictions and disposal of assets, represented significant objective negative evidence for our evaluation.  Such evidence, together with potential organizational changes that could alter our ability to realize certain deferreda loss before income taxes and the increased tax assets, has limited our ability to consider other subjective evidence, suchexpense as projected future contract activity.  As a result we recorded a valuation allowance of $144 million to recognize only a portion of ourthe U.S. deferred tax assets that are more likely than not to be recognized.  If estimated future taxable income changes during the carryforward periods or if the cumulative loss is no longer present, we may adjust the amount of deferred tax assets that we expect to realize.BEAT.

For the nine months ended September 30, 2018 and 2017, to calculate our annual estimated effective income tax rate of (15.6) percent and 2016,64.2 percent, respectively, in accordance with accounting standards for the provision of income taxes, we calculated our annual estimated effective income tax rate of 64.2 percent and 25.9 percent, respectively, by excludingexcluded certain operating losses in taxable jurisdictions for which we do not expect to realize a tax benefit.  For the nine months ended September 30, 2018 and 2017, and 2016, if we had included all jurisdictions without regard to our expectations for such realization, ourannual estimated effective income tax rate would have been (32.8) percent and 89.3 percent, respectively, if we had included all jurisdictions in our calculations.

In December 2017, the U.S. enacted the 2017 Tax Act, which includes changes to existing U.S. tax laws that have an impact on our income tax provision, most notably a reduction of the U.S. corporate income tax rate and 22.7 percent, respectively.

the creation of a territorial tax system with a one‑time mandatory tax on certain unremitted earnings and profits of the non‑U.S. subsidiaries of our U.S. subsidiaries.  The relationship between2017 Tax Act also makes prospective changes beginning in 2018, including a base erosion and anti‑abuse tax, a global intangible low‑taxed income tax, additional limitations on the deductibility of executive compensation, limitations on the deductibility of interest and repeal of the domestic manufacturing deduction.  We have evaluated our bareboat charter structure and have concluded that the current structure of our U.S. operations is subject to BEAT.  We have reflected the estimated impact of this tax in our provision for the nine months ended September 30, 2018.  A significant portion of our BEAT liability is contractually protected due to a change in law provision in certain drilling contracts.  However, we are still analyzing certain aspects of the 2017 Tax Act and refining our calculations which could potentially affect the measurement of these balances or benefit from income taxespotentially give rise to new deferred tax amounts.

Due to factors related to our operating activities and our income 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 versus income before taxes, (c) rig movements between taxing jurisdictions and

-  27  -


Table of Contents

(d) our rig operating structures.  Generally, our marginal tax rate is lower than our effective tax rate.  Consequently,organizational structure, our income tax expense does not change proportionally with our income before income taxes.  Significant decreases in our income before income taxes typically lead to higher effective tax rates, while significant increases in income before income taxes can lead to lower effective tax rates, subject to the other factors impacting income tax expense noted above.  With respect to the effective tax rate calculation for the nine months ended

-  31  -


Table of Contents

September 30, 2017,2018, a significant portion of our income tax expense was generated in countries in which income taxes are imposed on gross revenues, with the most significant of these countries being Angola.India.  Conversely, the countries in which we incurred the most significant income taxes during this period that were based on income before income tax include Brazil, Switzerland, Norway, the U.K. and the U.S.

Our rig operating structures further complicate our tax calculations, especially in instances where we have more than one operating structure for the particular taxing jurisdiction and, thus, more than one method of calculating taxes depending on the operating structure utilized by the rig under the contract.  For example, two rigs operating in the same country could generate significantly different provisions for income taxes if they are owned by two different subsidiaries that are subject to differing tax laws and regulations in the respective country of incorporationincorporation.

Liquidity and Capital Resources

Sources and uses of cash

At September 30, 2017,2018, we had $2.7$2.3 billion in unrestricted cash and cash equivalents and $568 million in restricted cash and cash equivalents.  In the nine months ended September 30, 2017,2018, our primary sources of cash were ouras follows: (1) net cash flows from operating activities, including cash proceeds from customers for early terminations or cancellations of drilling contracts, net proceeds from the issuance of debt, and net(2) proceeds from maturities of short‑term investments, (3) cash flows from our operating activities and (4) unrestricted and restricted cash acquired in the sale of the high‑specification jackups.Songa acquisition.  Our primary uses of cash were the repaymentas follows: (a) repayments of debt, primarily related to the 2017 Tender Offers and repurchases of debt in the open market, and(b) capital expenditures, primarily associated with our newbuild construction projects.projects, (c) investments in unconsolidated affiliates, and (d) payments to terminate certain derivative instruments assumed in the Songa acquisition.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

 

 

Nine months ended

 

 

 

 

September 30, 

 

 

 

 

September 30, 

 

 

 

    

2017

    

2016

    

Change

 

    

2018

    

2017

    

Change

 

 

(In millions)

 

 

(In millions)

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

(2,995)

 

$

570

 

$

(3,565)

 

Net loss

 

$

(1,760)

 

$

(2,995)

 

$

1,235

 

Contract intangible asset amortization

 

78

 

 —

 

78

 

Depreciation

 

648

 

667

 

(19)

 

 

614

 

648

 

(34)

 

Loss on impairment

 

1,498

 

26

 

1,472

 

 

1,446

 

1,498

 

(52)

 

Loss on disposal of assets, net

 

1,602

 

(8)

 

1,610

 

(Gain) loss on retirement of debt

 

49

 

(148)

 

197

 

Deferred income tax expense

 

32

 

44

 

(12)

 

(Gain) loss on disposal of assets, net

 

 —

 

1,602

 

(1,602)

 

Loss on retirement of debt

 

 3

 

49

 

(46)

 

Deferred income tax expense (benefit)

 

50

 

32

 

18

 

Other non-cash items, net

 

59

 

42

 

17

 

 

48

 

59

 

(11)

 

Changes in deferred revenues and costs, net

 

(67)

 

34

 

(101)

 

 

(104)

 

(67)

 

(37)

 

Changes in other operating assets and liabilities, net

 

 

61

 

 

51

 

 

10

 

 

 

(55)

 

 

100

 

 

(155)

 

 

$

887

 

$

1,278

 

$

(391)

 

 

$

320

 

$

926

 

$

(606)

 

Net cash provided by operating activities decreased primarily due to a decreasethe following: (i) reduced operating activities and (ii) proceeds of $90$259 million cash received from customers for early terminations or cancellations of drilling contracts and reduced operating activities.in prior-year period with no comparable activity in current-year period.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

 

 

Nine months ended

 

 

 

 

September 30, 

 

 

 

 

September 30, 

 

 

 

    

2017

    

2016

    

Change

 

    

2018

    

2017

    

Change

 

 

(In millions)

 

 

(In millions)

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

$

(386)

 

$

(1,072)

 

$

686

 

 

$

(140)

 

$

(386)

 

$

246

 

Proceeds from disposal of assets, net

 

330

 

16

 

314

 

 

37

 

330

 

(293)

 

Unrestricted and restricted cash acquired in business combination

 

131

 

 —

 

131

 

Investment in unconsolidated affiliates

 

(107)

 

 —

 

(107)

 

Proceeds from maturities of short-term investments, net of deposits

 

450

 

 —

 

450

 

Other, net

 

 

10

 

 

 —

 

 

10

 

 

 

 —

 

 

10

 

 

(10)

 

 

$

(46)

 

$

(1,056)

 

$

1,010

 

 

$

371

 

$

(46)

 

$

417

 

Net cash used inprovided by investing activities decreasedincreased primarily due to the following: (i) proceeds from maturities of short‑term investments, net of deposits, (ii) unrestricted and restricted cash acquired in the Songa acquisition and (iii) reduced capital expenditures, primarily associated with our major construction projects, partially offset by increased proceeds from asset disposals, primarily related(iv) cash used to invest in unconsolidated joint venture companies, including one that was established to construct and own the sale of 10 high‑specification jackups and the novation of contracts relating to the construction of five high‑specification jackups, together with related assets, harsh environment semisubmersible Transocean Norge in the current‑yearcurrent-year period with no comparable activity in the prior‑yearprior-year period.

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Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

 

 

Nine months ended

 

 

 

 

September 30, 

 

 

 

 

September 30, 

 

 

 

    

2017

    

2016

    

Change

 

    

2018

    

2017

    

Change

 

 

(In millions)

 

 

(In millions)

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from debt issuance, net of issue costs

 

$

403

 

$

1,210

 

$

(807)

 

Proceeds from issuance of debt, net of discounts and issue costs

 

$

1,319

 

$

403

 

$

916

 

Repayments of debt

 

(1,629)

 

(1,316)

 

(313)

 

 

(2,015)

 

(1,629)

 

(386)

 

Proceeds from cash accounts and investments restricted for financing activities, net of deposits

 

53

 

100

 

(47)

 

Distributions to holders of noncontrolling interest

 

 —

 

(23)

 

23

 

Proceeds from investments restricted for financing activities

 

26

 

102

 

(76)

 

Payments to terminate derivative instruments

 

(92)

 

 —

 

(92)

 

Other, net

 

 

(3)

 

 

 2

 

 

(5)

 

 

 

(29)

 

 

(3)

 

 

(26)

 

 

$

(1,176)

 

$

(27)

 

$

(1,149)

 

 

$

(791)

 

$

(1,127)

 

$

336

 

Net cash used in financing activities increaseddecreased primarily due to (a) reducedthe following: (i) increased net cash proceeds from the issuance of the 5.52%2018 Senior Secured Notes in the current‑year period compared to the cash proceeds from the issuance of the 9.00% 5.52% senior secured notes due May 2022 (the “5.52%Senior Notes due July 2023Secured Notes”) in the prior‑year period, and (b)partially offset by (ii) increased cash used to repay debt, primarily relatedassociated with the repayment of debt assumed in the Songa acquisition, in the current-year period compared to ourcash used to repay debt, primarily associated with the 2017 cash tender offers, in eachthe prior-year period and (iii) cash used to settle and terminate certain derivative instruments acquired in the Songa acquisition in the current‑year period with no comparable activity in the prior-year period.

Sources and uses of liquidity

Overview—We expect to use existing unrestricted cash balances, internally generated cash flows, borrowings under our existing bank credit agreement,the Secured Credit Facility, proceeds from the disposal of assets or proceeds from the issuance of additional debt to fulfill anticipated obligations, which may include business combinations, capital expenditures, working capital and other operational requirements, scheduled debt maturities or other payments.  We may also consider establishing additional financing arrangements with banks or other capital providers.  Subject to market conditions and other factors, we may also be required to provide collateral for future financing arrangements.  In each case subject to then existing market conditions and to our then expected liquidity needs, among other factors, we may continue to use a portion of our internally generated cash flows and proceeds from asset sales to reduce debt prior to scheduled maturities through debt repurchases, either in the open market or in privately negotiated transactions, or through debt redemptions or tender offers.

Our access to debt and equity markets may be limited due to a variety of events, including, among others, credit rating agency downgrades of our debt ratings, industry conditions, general economic conditions, market conditions and market perceptions of us and our industry.  In January and October 2017 and during the year ended December 31, 2016, three creditThe rating agencies downgradedof our non‑credit enhanced senior unsecured long‑term debt (“Debt Rating”). are below investment grade.  Such downgrades haveDebt Rating has caused and will cause us to experience increased fees under our credit facility and interest rates under agreements governing certain of our senior notes.  Further downgrades may affect or limit our ability to access debt markets in the future.  Our ability to access such markets may be severely restricted at a time when we would like, or need, to access such markets, which could have an impact on our flexibility to react to changing economic and business conditions.  An economic downturn could have an impact on the lenders participating in our credit facilities or on our customers, causing them to fail to meet their obligations to us.

Our internally generated cash flow isflows are directly related to our business and the market sectors in which we operate.  Should the drilling market deteriorate, or should we experience poor results in our operations, cash flowflows from operations may be reduced.  We have, however, continued to generate positive cash flowflows from operating activities duringover recent years and expect that such cash flowflows will continue to be positive duringover the next year.

Business combinationMerger agreement—On August 13, 2017,September 4, 2018, we announced that we entered into the TransactionMerger Agreement with Songa pursuant toOcean Rig, under which we will offer to acquire all of the issued and outstanding shares of Songa.  As part of the Offer, we agreed to offer to exchange eachacquire Ocean Rig in a cash and stock transaction.  The transaction consideration is comprised of the issued and outstanding shares in Songa for consideration, based on a value of NOK 47.50 per Songa share, consisting of (i) 68.6 million1.6128 newly issued shares of Transocean Ltd., par value CHF 0.10 per plus $12.75 in cash for each common share of Ocean Rig.  Based on the number of Ocean Rig common shares outstanding, we expect to issue approximately 147.7 million Transocean Ltd. shares and make an aggregate cash payment of approximately $1.17 billion pursuant to the Merger Agreement.  We expect to fund the consideration through a combination of unrestricted cash balances and proceeds from the issuance of debt.  As of September 30, 2018, Ocean Rig owned and operated 11 mobile offshore drilling units, including nine ultra‑deepwater floaters and two harsh environment floaters.  As of September 30, 2018, Ocean Rig was also constructing two ultra‑deepwater drillships.

Secured Credit Facility—In June 2018, we entered into a bank credit agreement, which established a $1.0 billion Secured Credit Facility, which is scheduled to expire on the earlier of (i) June 22, 2023 and (ii) approximately $575if greater than $300 million aggregate principal amount of 0.5% Senior Unsecured Exchangeable Bonds to be issued by Transocean Inc. (the “Exchangeable Bonds”) exchangeable into shares of Transocean Ltd.  Additionally, each Songa shareholder may elect to receive a cash payment of NOK 47.50 per Songa share up to a maximum of NOK 125,000 per shareholder in lieu of some or all of the consideration such shareholder would otherwise be entitled to receive in the Offer.  The consideration, as presented in the Offer, is based on an equity value of Songa on a fully diluted basis of approximately NOK 9.1 billion and an enterprise value of approximately NOK 26.4 billion, equivalent to approximately $1.2 billion and $3.4 billion, respectively, measured as of the date of the Offer using a currency exchange ratio of NOK 7.9239 to $1.00.  We also expect to (i) acquire certain outstanding bonds issued by Songa in exchange for Exchangeable Bonds, and (ii) acquire a $50 million loan made to Songa by one of its shareholders in exchange for Exchangeable Bonds.  The consummation of the Offer is subject to the satisfaction of customary closing conditions for transactions of this type.

We expect to complete the transaction before December 31, 2017.  If completed, we will account for the transaction using the acquisition method of accounting, pursuant to which we will record the consideration transferred, the assets acquired and the liabilities assumed at fair value, measured as of the date of the acquisition.

Debt issuances—On October 17, 2017, we completed an offering of an aggregate principal amount of $750 million of the 7.50% Senior Notes, and we received aggregate cash proceeds of $742 million, net of issue costs.  We intend to use the majority of the net proceeds from the debt offering to repay or redeem certain maturing debt.

On May 5, 2017, one of our wholly owned subsidiaries completed an offering of an aggregate principal amount of $410 million of the 5.52% Senior Secured Notes, and our subsidiary received aggregate cash proceeds of $403 million, net of issue costs.  On

-  29  -


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September 29, 2017, our subsidiary made the first of the required quarterly payments of principal and interest.  Our subsidiary may redeem all or a portion of the 5.52% Senior Secured Notes at any time on or prior to December 31, 2021 at a price equal to 100 percent of the aggregate principal amount plus, subject to certain exceptions related to the drilling contract for Deepwater Conqueror, a make‑whole amount.  Our subsidiary will be required to redeem or to offer to redeem the notes at a price equal to 100 percent of the aggregate principal amount, and, under certain circumstances, the payment of a make‑whole amount, upon the occurrence of certain events related to Deepwater Conqueror and the related drilling contract.

On October 19, 2016 and December 8, 2016, we completed an offering of an aggregate principal amount of $600 million of the 7.75% Senior Secured Notes due October 2024 (the “7.75% Senior Secured Notes”) and $625 million of the 6.25% Senior Secured Notes due December 2024 (the “6.25% Senior Secured Notes”), respectively, and we received aggregate cash proceeds of $583 million and $609 million, respectively, net of initial discount and issue costs.  We are required to make semi‑annual payments of interest and principal on these notes.  The indentures that govern the 7.75% Senior Secured Notes and the 6.25% Senior Secured Notes contain covenants that limit the ability of our subsidiaries that own or operate the ultra‑deepwater floaters Deepwater Thalassa and Deepwater Proteus to declare or pay dividends and impose a maximum collateral rig leverage ratio (“Maximum Collateral Ratio”), represented by each rig’s earnings relative to the debt balance, which changes over the terms of the notes.  At September 30, 2017, the Maximum Collateral Ratio under both indentures was 5.75 to 1.00, and the collateral leverage ratio of each subsidiary was less than 5.00 to 1.00.

On July 21, 2016, we completed an offering of an aggregate principal amount of $1.25 billion of the 9.00% Senior Notes due July 2023 remain outstanding in April 2023, such date.  The Secured Credit Facility is guaranteed by Transocean Ltd. and we received aggregate cash proceeds of $1.21 billion, net of initial discountcertain subsidiaries.  The Secured Credit Facility is initially secured by, among other things, a lien on the ultra‑deepwater floaters Deepwater Asgard, Deepwater Invictus and issue costs.  We used Discoverer Inspiration and the majority of the net proceeds from the debt offering to complete the 2016 Tender Offers.

Debt tender offersharsh environment floaters—On July 11, 2017, we completed the 2017 Tender Offers to purchase for cash up to $1.5 billion aggregate principal amount of the 2017 Tendered Notes.  As a result, we received valid tenders from holders of an aggregate principal amount of $1.2 billion of the 2017 Tendered Notes, Transocean Barents and we made an aggregate cash payment of $1.3 billion to settle the 2017 Tendered Notes.

On August 1, 2016, we completed the 2016 Tender Offers to purchase for cash up to $1.0 billion aggregate principal amountTransocean Spitsbergen.  The Secured Credit Facility contains covenants that, among other things, include maintenance of certain of our outstanding senior notes (collectively, the “2016 Tendered Notes”).  As a result of the 2016 Tender Offers, we received valid tenders from holders of an aggregate principal amount of $981 million of the 2016 Tendered Notes,guarantee and in the year ended December 31, 2016, we made an aggregate cash payment of $876 million to settle the 2016 Tendered Notes.

Debt repurchases and redemptions—In November 2017, we expect to redeem the outstanding 6.00% Senior Notes due March 2018 and the 7.375% Senior Notes due April 2018 with aggregate principal amounts of $319 million and $82 million, respectively, by making an aggregate cash payment of approximately $410 million using proceeds from the issuance of the 7.50% Senior Notes.

In the nine months ended September 30, 2017, we repurchased in the open market an aggregate principal amount of $147 million of our debt securities for an aggregate cash payment of $147 million.  In the year ended December 31, 2016, we repurchased in the open market an aggregate principal amount of $399 million of our debt securities for an aggregate cash payment of $354 million.

Debt scheduled maturities—On the scheduled maturity date of October 16, 2017, we made a cash payment of $152 million to repay the outstanding 2.50% Senior Notes due October 2017, at a price equal to 100 percent of the aggregate principal amount.  On the scheduled maturity date of December 15, 2016, we made a cash payment of $938 million to repay the outstanding 5.05% Senior Notes due December 2016, at a price equal to 100 percent of the aggregate principal amount.

Revolving credit facility—In June 2014, we entered into an amended and restated bank credit agreement, which established a $3.0 billion unsecured five‑year revolving credit facility, which is scheduled to expire on June 28, 2019 (the “Five‑Year Revolving Credit Facility”).  Among other things, the Five‑Year Revolving Credit Facility includes limitations on creating liens, incurring subsidiary debt, transactions with affiliates, sale/leaseback transactions, mergers and the sale of substantially all assets.  The Five‑Year Revolving Credit Facility also includes a covenant imposingcollateral coverage ratios, a maximum debt to tangible capitalization ratio of 0.60.60 to 1.0.  At September 30, 2017,1.00 and minimum liquidity of $500 million.  The Secured Credit Facility also restricts the ability of Transocean Ltd. and certain of our debtsubsidiaries to, tangible capitalization ratio, as defined, was 0.36among other things, merge, consolidate or otherwise make changes to 1.0.the corporate structure, incur liens, incur additional indebtedness, enter into transactions with affiliates and pay dividends and other distributions.  In order to borrow or have letters of credit issued under the Five‑Year RevolvingSecured Credit Facility, we must, at the time of the borrowing request, not be in default under the bank credit agreements and make certain representations and warranties, including with respect to compliance with laws and solvency, to the lenders, but we are not required to make any representation to the lenders as to the absence of a material adverse effect.lenders.  Repayment of borrowings under the Five‑Year RevolvingSecured Credit Facility is

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are subject to acceleration upon the occurrence of an event of default.  We are also subject to various covenants under the indentures pursuant to which our public debt was issued, including restrictions on creating liens, engaging in sale/leaseback transactions and engaging in certain merger, consolidation or reorganization transactions.  A default under our public debt indentures, our capital lease contract or any other debt owed to unaffiliated entities that exceeds $125 million could trigger a default under the Five‑Year RevolvingSecured Credit Facility and, if not waived by the lenders, could cause us to lose access to the Five‑Year RevolvingSecured Credit Facility.

We may borrow  At October 22, 2018, we had no borrowings outstanding, $24 million of letters of credit issued, and we had $1.0 billion of available borrowing capacity under the Five‑Year RevolvingSecured Credit FacilityFacility.  See Notes to Condensed Consolidated Financial Statements—Note 8—Debt and Note 12—Commitments and Contingencies—Global Marine litigation.

Investment in unconsolidated affiliates—In the nine months ended September 30, 2018, we made an aggregate cash investment of $107 million in unconsolidated affiliates, including an initial investment of $91 million, representing a 33.0 percent interest, in Orion Holdings (Cayman) Limited, a Cayman Islands company formed to construct and own the newbuild harsh environment semisubmersible Transocean Norge.  The total purchase price for the rig, under construction at either (1) the adjusted London Interbank Offered Rate plusJurong Shipyard Pte Ltd. in Singapore, is $500 million.  We expect to make additional investments of $50 million and $33 million in January 2019 and January 2020, respectively.  The rig is expected to commence operations in July 2019.  Additionally, we invested $16 million in other companies involved in researching and developing technology to improve automation in drilling and other activities.

Share issuances—On January 30, 2018, we acquired an approximate 97.7 percent ownership interest in Songa.  On March 28, 2018, we acquired the remaining shares not owned by us through a margin (the “Five‑Year Revolving Credit Facility Margin”), which rangescompulsory acquisition under Cyprus law, and as a result, Songa became our wholly owned subsidiary.  In connection with these transactions, we issued 68.0 million shares.

Debt issuances—On October 25, 2018, we issued $750 million aggregate principal amount of 7.25% Senior Notes, and we received aggregate cash proceeds of $735 million, net of issue costs.  We intend to use the net proceeds from 1.125 percentthis offering to 2.0 percent based on the Debt Rating, or (2) the base rate specified in the credit agreement plus the Five‑Year Revolving Credit Facility Margin, less one percent per annum.  Throughout the termpay a portion of the Five‑Year Revolving Credit Facility,cash consideration for the Ocean Rig acquisition and for related fees and expenses, or for general corporate purposes.

On July 13, 2018, we pay a facility fee on the daily unusedissued $750 million aggregate principal amount of the underlying commitment which ranges from 0.155.875% Senior Secured Notes, and we received aggregate cash proceeds of $733 million, net of discount and issue costs.  On July 20, 2018, we issued $600 million aggregate principal amount of the 6.125% Senior Secured Notes, and we received aggregate cash proceeds of $586 million, net of discount and issue costs.  The indentures that govern the 2018 Senior Secured Notes contain covenants that, among other things, limit the ability of our subsidiaries that own or operate the collateral rigs to declare or pay dividends to their affiliates.  We may redeem all or a portion of the 2018 Senior Secured Notes at a price equal to 100 percent of the aggregate principal amount plus a make‑whole provision.  We will be required to 0.35redeem the notes at a price equal to 100 percent based on our Debt Rating.  At October 24, 2017, based on our Debt Rating on that date,of the Five‑Year Revolving Credit Facility Margin was 2.0 percentaggregate principal amount without a make‑whole provision, upon the occurrence of certain events related to the collateral rigs and the facility fee was 0.35 percent.  Atrelated drilling contracts.

In connection with the Songa acquisition transactions, we issued $863 million aggregate principal amount of Exchangeable Bonds as partial consideration for the acquisition of the acquired Songa shares and partial settlement of certain Songa indebtedness.  Holders of the Exchangeable Bonds may convert the notes into shares of Transocean Ltd. under certain circumstances at a rate of 97.29756 shares per $1,000 note, equivalent to a conversion price of $10.28 per share, subject to adjustment due to the occurrence of certain events.

On October 24,17, 2017, we issued $750 million aggregate principal amount of 7.50% senior unsecured notes due January 2026 (the “7.50% Senior Notes”), and we received aggregate cash proceeds of $742 million, net of issue costs.  We used the majority of the net proceeds from the debt offering to repay or redeem certain maturing debt.

On May 5, 2017, we issued $410 million aggregate principal amount of the 5.52% Senior Secured Notes, and we received aggregate cash proceeds of $403 million, net of issue costs.  The indenture that governs the 5.52% Senior Secured Notes contains covenants that limit the ability of our subsidiaries that own or operate Deepwater Conqueror to declare or pay dividends to affiliates.  We will be required to redeem or to offer to redeem the notes at a price equal to 100 percent of the aggregate principal amount, and, under certain circumstances, the payment of a make‑whole amount, upon the occurrence of certain events related to Deepwater Conqueror and the related drilling contract.

Debt assumptions and repayments—In connection with the Songa acquisition, we assumed rights and obligations under credit agreements establishing two senior secured term loan facilities (together, the “Senior Secured Term Loans”) and a subscription agreement establishing a junior secured bond facility (the “Junior Secured Bonds”).  The credit agreements and the subscription agreement for the assumed debt contained change of control clauses, for which we received waivers from the lenders that were scheduled to expire on August 31, 2018.  On February 12, 2018, we served notice of our intent to call the Junior Secured Bonds.  In the three months ended September 30, 2018, we made an aggregate cash payment of $1.4 billion to repay the borrowings under the Senior Secured Term Loans and terminated the underlying credit agreements.  On August 20, 2018, we made an aggregate cash payment of $171 million to repay the Junior Secured Bonds and terminated the underlying subscription agreement.

In connection with the Songa acquisition, we also assumed the indebtedness related to two bond loans (together, the “Bond Loans”), previously publicly traded on the Oslo stock exchange, and on March 14, 2018, we made a cash payment of NOK 345 million, equivalent to $44 million, to repay the Bond Loans.  We also assumed the rights and obligations under a credit agreement, which was due to expire on March 31, 2018, for a secured borrowing facility.  On February 2, 2018, we made a cash payment of $23 million to repay the borrowings outstanding under the secured borrowing facility and terminated the underlying credit agreement.

-  3034  -


 

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had no borrowings

Debt tender offers—In July 2017, we completed cash tender offers to purchase up to $1.5 billion aggregate principal amount of certain notes (the “2017 Tendered Notes”).  We received valid tenders from holders of $1.2 billion aggregate principal amount of the 2017 Tendered Notes, and we made an aggregate cash payment of $1.3 billion to settle the 2017 Tendered Notes.

Debt redemptions, repurchases and other repayments—In the nine months ended September 30, 2018, we repurchased in the open market $95 million aggregate principal amount of our debt securities for an aggregate cash payment of $95 million.  In the year ended December 31, 2017, we repurchased in the open market $156 million aggregate principal amount of our debt securities for an aggregate cash payment of $157 million.

In November 2017, we redeemed the outstanding no letters6.00% Senior Notes due March 2018 and the 7.375% Senior Notes due April 2018 with aggregate principal amounts of credit issued,$319 million and $3.0 billion$82 million, respectively, by making an aggregate cash payment of available borrowing capacity under$407 million using proceeds from the Five‑Year Revolving Credit Facility.issuance of the 7.50% Senior Notes.

Debt scheduled maturities—On the scheduled maturity date of October 16, 2017, we made a cash payment of $152 million to repay the outstanding 2.50% Senior Notes due October 2017, at a price equal to 100 percent of the aggregate principal amount.

Derivative instruments—In connection with the Songa acquisition, we acquired certain currency swaps, which were previously designated as a cash flow hedge associated with the Bond Loans, which were denominated in Norwegian kroner.  In February 2018, we made an aggregate cash payment of $92 million in connection with the settlement and termination of the currency swaps.

Litigation settlements—On May 29, 2015, together with the Plaintiff Steering Committee, (the “PSC”) we filed a settlement agreement (the “PSC Settlement Agreement”) in which we agreed to pay a total of $212 million, plus up to $25 million for partial reimbursement of attorneys’ fees,fees.  In exchange for these payments, the two classes of plaintiffs agreed to resolve (1) punitive damages claims of private plaintiffs, businesses, and local governments and (2) certain claims that BP plc. (together with its affiliates, “BP”) had made against us and had assigned to private plaintiffs who previously settled economic damagesrelease all respective claims against BP.us.  On February 15, 2017, the U.S. District Court for the Eastern District of Louisiana (the “MDL Court”) entered a final order and judgementjudgment approving the PSC Settlement Agreement, which is no longer subject to appeal.  In June 2016 and August 2015, we made a cash deposit of $25 million and $212 million, respectively, into an escrow account pending approval of the settlementestablished by the MDL Court.Court for the settlement.  In November 2017, the MDL Court released $25 million from the escrow accounts for payment of attorneys’ fees.  We expect the remaining funds to be released in three installments, the last of which is scheduled to be in March 2019.  As of October 24, 2017,22, 2018, the aggregate cash balance of our escrow accounts was $237$214 million.

Noncontrolling interestIn the year ended December 31, 2016, Transocean Partners LLC (“Transocean Partners”) declared and paid an aggregate distribution of $99 million, of which $28 million was paid to holders of noncontrolling interest.  On December 9, 2016, Transocean Partners completed a merger with one of our subsidiaries as contemplated under the Agreement and Plan of Merger, dated as of July 31, 2016.  Following the completion of the merger, Transocean Partners became a wholly owned indirect subsidiary of Transocean Ltd.  Each Transocean Partners common unit that was issued and outstanding immediately prior to the closing, other than units held by Transocean and its subsidiaries, was converted into the right to receive 1.20 of our shares.  To complete the merger, we issued 23.8 million shares from conditional capital.

Share repurchase program—In May 2009, at our annual general meeting, our shareholders approved and authorized our board of directors, at its discretion, to repurchase an amount of our shares for cancellation with an aggregate purchase price of up to CHF 3.5 billion.  On February 12, 2010, our board of directors authorized our management to implement the share repurchase program.  In the nine months ended September 30, 2018 and the year ended December 31, 2017, we did not purchase shares under our share repurchase program.  At October 22, 2018, the authorization remaining under the share repurchase program was for the repurchase of up to CHF 3.2 billion, equivalent to approximately $3.3 billion, of our outstanding shares.  We intend to fund any repurchases using available cash balances and cash from operating activities.  BasedThe share repurchase program could be suspended or discontinued by our board of directors or company management, as applicable, at any time.  We may decide, based upon our ongoing capital requirements, the price of our shares, regulatory and tax considerations, cash flow generation, the amount and duration of our contract backlog, general market conditions, debt ratingsrating considerations and other factors, that we may elect toshould retain cash, reduce debt, make capital investments or acquisitions or otherwise use cash for general corporate purposes, and consequently, we may elect not to repurchase any additional shares under this program.purposes.  Decisions regarding the amount, if any, and timing of any share repurchases will be made from time to time based upon these factors.  Any repurchased shares under the share repurchase program would be held by us for cancellation by the shareholders at a future general meeting of shareholders.  The share repurchase program could be suspended or discontinued by our board of directors or company management, as applicable, at any time.  In the nine months ended September 30, 2017 and the year ended December 31, 2016, we did not purchase shares under our share repurchase program.  At October 24, 2017, the authorization remaining under the share repurchase program was for the repurchase of up to CHF 3.2 billion, equivalent to approximately $3.3 billion, of our outstanding shares.

Contractual obligations—As of September 30, 2017,2018, with exception to the following, there have been no material changes to the contractual obligations as previously disclosed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10‑K for the year ended December 31, 2016:2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the twelve months ending September 30, 

 

 

 

 

 

    

Total

    

2018

    

2019 - 2020

    

2021 - 2022

    

Thereafter

 

 

 

(in millions)

 

Contractual obligations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt

 

$

6,838

 

$

780

 

$

415

 

$

1,003

 

$

4,640

 

Interest on debt

 

 

4,396

 

 

471

 

 

877

 

 

762

 

 

2,286

 

Purchase obligations

 

 

914

 

 

93

 

 

402

 

 

419

 

 

 —

 

Service agreement obligations (a)

 

 

805

 

 

54

 

 

144

 

 

163

 

 

444

 

Total

 

$

12,953

 

$

1,398

 

$

1,838

 

$

2,347

 

$

7,370

 


(a)

In the year ended December 31, 2016, we entered into long‑term service agreements with certain original equipment manufacturers to provide services and parts related to our pressure control systems.  In the nine months ended September 30, 2017, we entered into similar long‑term service agreements related to thrusters, top drives and other equipment.  The future payments required under our service agreements were estimated based on our projected operating activity and may vary based on actual operating activity.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the twelve months ending September 30, 

 

 

 

 

 

    

Total

    

2019

    

2020 - 2021

    

2022 - 2023

    

Thereafter

 

 

 

(in millions)

 

Contractual obligations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt

 

$

8,915

 

$

354

 

$

1,007

 

$

3,436

 

$

4,118

 

Interest on debt

 

 

4,668

 

 

591

 

 

1,066

 

 

862

 

 

2,149

 

Operating lease obligations

 

 

203

 

 

16

 

 

26

 

 

23

 

 

138

 

Total

 

$

13,786

 

$

961

 

$

2,099

 

$

4,321

 

$

6,405

 

 

Other commercial commitments—As of September 30, 2017,2018, there have been no material changes to the commercial commitments as previously disclosed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10‑K for the year ended December 31, 2016.2017.

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Drilling fleet

Expansion—From time to time, we review possible acquisitions of businesses and drilling rigs and may make significant future capital commitments for such purposes.  We may also consider investments related to major rig upgrades, new rig construction, or the acquisition of a rig under construction.  We may commit to such investment without first obtaining customer contracts.  Any acquisition, upgrade or new rig construction could involve the payment by us of a substantial amount of cash or the issuance of a substantial number of additional shares or other securities.  Our failure to secure drilling contracts for rigs under construction could have an adverse effect on our results of operations or cash flows.

On August 13, 2017,In connection with the Songa acquisition, we entered into the Transaction Agreement with Songa pursuant to which we will offer to acquire all of the issued and outstanding shares of Songa, subject to certain conditions, through the Offer.  At October 24, 2017, Songa owned and operatedacquired seven mobile offshore drilling units, including fourfive harsh environment floaters and threetwo midwater floaters.  In connection with the proposed acquisition of Ocean Rig, we will acquire 11 mobile offshore drilling units, including nine ultra‑deepwater floaters and two harsh environment floaters.  Ocean Rig also has two newbuild ultra‑deepwater drillships under construction at Samsung Heavy Industries Shipyard in South Korea.  See Notes to Condensed Consolidated Financial Statements—Note 4—Business CombinationCombinations.

In the nine months ended September 30, 2018, we made an initial cash investment of $91 million, representing a 33.0 percent interest, in Orion Holdings (Cayman) Limited, a Cayman Islands company formed to construct and “—Liquidity and Capital Resources—Sources and usesown the newbuild harsh environment semisubmersible Transocean Norge.  The total purchase price for the rig, under construction at the Jurong Shipyard Pte Ltd. in Singapore, is $500 million.  The Moss Maritime CS60 design is considered among the most capable newbuild semisubmersibles in the world.  We expect to operate the rig, through one of liquidity.”our wholly owned subsidiaries, under a six-well contract that is expected to commence in July 2019.  See Notes to Condensed Consolidated Financial Statements—Note 1—Business.

In the nine months ended September 30, 2017,2018, we made capital expenditures of $386$140 million, including capitalized interest of $91$28 million.  We only capitalize interest costs during periods in which progress for construction projects continues to be underway.  As of September 30, 2017, we had ceased capitalization of interest costs on our two uncontracted newbuilds due to a pause in construction.  The historical and projected capital expenditures and other capital additions, including capitalized interest, for our ongoing major construction projects were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total costs

 

Expected

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for the

 

costs for the

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total costs

 

nine months

 

three months

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

through

 

ended

 

ending

 

 

 

 

 

 

 

 

 

 

 estimated

 

 

 

December 31, 

 

September 30, 

 

December 31, 

 

For the years ending December 31,

 

costs

 

 

    

2016

    

2017

    

2017

 

2018

    

2019

    

2020

 

at completion

 

 

 

(In millions)

 

Deepwater Pontus (a)

 

$

745

 

$

134

 

$

21

 

$

 —

 

$

 —

 

$

 —

 

$

900

 

Deepwater Poseidon (b)

 

 

707

 

 

99

 

 

77

 

 

27

 

 

 —

 

 

 —

 

 

910

 

Ultra-Deepwater drillship TBN1 (c)

 

 

221

 

 

31

 

 

13

 

 

27

 

 

56

 

 

472

 

 

820

 

Ultra-Deepwater drillship TBN2 (c)

 

 

166

 

 

30

 

 

 4

 

 

19

 

 

38

 

 

513

 

 

770

 

Total

 

$

1,839

 

$

294

 

$

115

 

$

73

 

$

94

 

$

985

 

$

3,400

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total costs

 

Expected

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for the

 

costs for the

 

 

 

 

 

 

 

 

 

 

 

 

Total costs

 

nine months

 

three months

 

 

 

 

 

 

 

Total

 

 

 

through

 

ended

 

ending

 

 

 

 

 

 

 

 estimated

 

 

 

December 31, 

 

September 30, 

 

December 31, 

 

For the years ending December 31,

 

costs

 

 

    

2017

    

2018

    

2018

 

2019

    

2020

 

at completion

 

 

 

(In millions)

 

Deepwater Poseidon (a)

 

 

871

 

 

32

 

 

 —

 

 

 —

 

 

 —

 

 

903

 

Ultra-Deepwater drillship TBN1 (b)

 

 

266

 

 

21

 

 

 6

 

 

53

 

 

459

 

 

805

 

Ultra-Deepwater drillship TBN2 (b)

 

 

200

 

 

11

 

 

 5

 

 

33

 

 

506

 

 

755

 

Total

 

$

1,337

 

$

64

 

$

11

 

$

86

 

$

965

 

$

2,463

 


(a)

In October 2017,February 2018, the ultra‑deepwater floaterDeepwater PontusPoseidon was placed into service and commenced operations.

(b)

Deepwater Poseidon, a newbuild ultra‑deepwater drillship under construction at the Daewoo Shipbuilding & Marine Engineering Co. Ltd. shipyard in Korea, is expected to commence operations in the first quarter of 2018.

(c)

Our two unnamed ultra‑deepwater drillships under construction at the Jurong Shipyard Pte Ltd. in Singapore do not yet have drilling contracts and are expected to be delivered in the second quarter of 2020 and the fourth quarter of 2020, respectively.  The delivery expectations and the cost projections presented above reflect the terms of our construction agreements, as amended to delay delivery in consideration of current market conditions.

The ultimate amount of our capital expenditures is partly dependent upon financial market conditions, the actual level of operational and contracting activity, the costs associated with the current regulatory environment and customer requested capital improvements and equipment for which the customer agrees to reimburse us.  As with any major shipyard project that takes place over an extended period of time, the actual costs, the timing of expenditures and the project completion date may vary from estimates based on numerous factors, including actual contract terms, weather, exchange rates, shipyard labor conditions, availability of suppliers to recertify equipment and the market demand for components and resources required for drilling unit construction.  We intend to fund the cash requirements relating to our capital expenditures through available cash balances, cash generated from operations and asset sales and commercial bankfinancing arrangements with banks or other capital markets financings.providers.  We also have available credit under the Five‑Year Revolvingour Secured Credit Facility, which is expected to be extended or replaced with another credit facility before the expiration of the underlying bank credit agreement.Facility.  Economic conditions could impact the availability of these sources of funding.

Dispositions—From time to time, we may also review the possible disposition of non‑strategic drilling units.  Considering recent market conditions, we have committed to plans to sell certain lower‑specification drilling units for scrap value.  During the nine months ended September 30, 2017,2018, we identified eightsix such drilling units that we have sold or intend to sell for scrap value.  During the year ended December 31, 2016,2017, we identified seven such drilling units that we have sold.sold or intend to sell for scrap value.  We continue to evaluate the drilling units in our fleet and may identify additional lower specification drilling units to be sold for scrap value.

On May 31, 2017, we completed the sale of 10 high‑specification jackups and novated the contracts relating to the construction of five high‑specification jackups, together with related assets.  In the nine months ended September 30, 2017, as a result of this transaction, we received aggregate net cash proceeds of $319 million.  During the nine months ended September 30, 2017,2018, we also completed the sale of five ultra‑deepwater floaters, one deepwater floater and one midwater floater, along with related assets, and we received net cash proceeds of $3$31 million.  During the year ended December 31, 2016,2017, we completed the sale of three one ultra‑deepwater floatersfloater and eightthree midwater floaters, along with related assets, and we received aggregate net cash proceeds of $22 million.

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Contingencies and UncertaintiesOther Matters

Macondo well incident

A significant portion of the contingencies arising from the Macondo well incident has now been resolved as a result of settlements with the Department of Justice (the “DOJ”), BP and the states of Alabama, Florida, Louisiana, Mississippi and Texas.  Additionally, we entered into the PSC Settlement Agreement, which has been approved by the MDL Court and is no longer subject to appeal.  We believe the remaining most notable claims against us arising from the Macondo well incident are the 30 settlement class opt‑outs from the PSC Settlement Agreement.  We can provide no assurance as to the outcome of the remaining claims arising from the Macondo well incident, the timing of any upcoming appeal or further rulings, or that we will not enter into additional settlements as to some or all of the remaining matters related to the Macondo well incident. See Notes to Condensed Consolidated Financial Statements—Note 11—Commitments and Contingencies.

Regulatory matters

Consent Decree—Under the civil consent decree (the “Consent Decree”), we agreed to undertake certain actions, including enhanced safety and compliance actions when operating in U.S. waters.  The Consent Decree also requires us to submit and make publicly available certain plans, reports and submissions and also requires us to makeother submissions.  One such submittals available publicly.  One of the required plansplan is a performance plan approved on January 2, 2014, that contains, among other things, interim milestones for actions in specified areas and schedules for reports required under the Consent Decree.  Additionally, in compliance with the requirements of the Consent Decree and upon approval by the DOJ,as required, we retained an independent auditor to review and report to the DOJDepartment of Justice our compliance with the Consent Decree and an independent process safety consultant to review, report and assist with the process safety requirements of the Consent Decree.  We may request termination of the Consent Decree after January 2, 2019, provided we meet certain conditions.  The Consent Decree resolved the claim by the U.S. for civil penalties under the Clean Water Act.  We also agreed to pay, and have satisfied our obligations to pay, civil penalties of $1.0 billion plus interest.

For a description of otherOther regulatory matters—In addition, from time to time, we receive inquiries from governmental regulatory agencies regarding our operations around the world, including inquiries with respect to various tax, environmental, regulatory and environmentalcompliance matters.  To the extent appropriate under the circumstances, we investigate such matters, relatingrespond to such inquiries and cooperate with the Macondo well incident, please see “—Macondo well incident.”  regulatory agencies.

See also Notes to Condensed Consolidated Financial Statements—Note 11—12—Commitments and Contingencies.

Tax matters

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

We file federal and local tax returns in several jurisdictions throughout the world.  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 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.

See Notes to Condensed Consolidated Financial Statements—Note 7—10—Income Taxes.

Other matters

In addition, from time to time, we receive inquiries from governmental regulatory agencies regarding our operations around the world, including inquiries with respect to various tax, environmental, regulatory and compliance matters.  To the extent appropriate under the circumstances, we investigate such matters, respond to such inquiries and cooperate with the regulatory agencies.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements.  This discussion should be read in conjunction with disclosures included in the notes to our condensed consolidated financial statements related to estimates, contingencies and other accounting policies.  We disclose our significant accounting policies in Note 2 to our condensed consolidated financial statements in this quarterly report on Form 10‑Q and in Note 2 to our consolidated financial statements in our annual report on Form 10‑K for the year ended December 31, 2016.2017.

We prepare our condensed consolidated financial statements in accordance with accounting principles generally accepted in the U.S., which require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures of contingent assets and liabilities.  These estimates require significant judgments and assumptions.  On an ongoing basis, we evaluate our estimates, including those related to our allowanceincome taxes, property and equipment, assets held for doubtful accounts,sale, goodwill, contingencies, postemployment benefit plans, materials and supplies obsolescence, propertyshare‑based compensation and equipment, income taxes, defined benefit pension plans and other postretirement employee benefits and contingent liabilities.  These estimates require significant judgments and assumptions.allowance for doubtful accounts.  We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the

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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 may differ from these estimates.

For a discussion of the critical accounting policies and estimates that we use in the preparation of our condensed consolidated financial statements, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our annual report on Form 10‑K for the year ended December 31, 2016.2017.  We have discussed the development, selection and disclosure of these critical accounting policies and estimates with the audit committee of our board of directors.  During the nine months endedAs of September 30, 2017,2018, with exception to the following, there have been no material changes to the types of judgments, assumptions and estimates upon which our critical accounting policies and estimates are based.

New Revenue recognition—Effective January 1, 2018, we adopted 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.  See Notes to Condensed Consolidated Financial Statements—Note 5—Revenues.

Goodwill impairment—We conduct impairment testing for our goodwill annually as of October 1 and more frequently, on an interim basis, when an event occurs or circumstances change that may indicate a reduction in the fair value of a reporting unit is below its

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carrying amount.  Before testing goodwill, we consider whether or not 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 an impairment test is required.  If, as the result of our qualitative assessment, we determine that an impairment test is required, or, alternatively, if we elect to forgo the qualitative assessment, we test goodwill for impairment by comparing the carrying amount of the reporting unit, including goodwill, to the fair value of the reporting unit.  We test goodwill at the reporting unit level, which is defined as an operating segment or a component of an operating segment that constitutes a business for which financial information is available and is regularly reviewed by management.  We have determined that contract drilling services is our single reporting unit for this purpose.

To estimate the fair value of our reporting unit, we apply a variety of valuation methods, incorporating the income, market and cost approaches.  We estimate fair value using discounted cash flows, publicly traded company multiples and acquisition multiples.  To develop the projected cash flows associated with our contract drilling services reporting unit, which are based on estimated future dayrates and rig utilization, we consider key factors, including assumptions regarding future commodity prices, credit market conditions and the effect these factors may have on our contract drilling operations and the capital expenditure budgets of our customers.  We discount projected cash flows using a long‑term weighted‑average cost of capital, which is based on our estimate of the investment returns that market participants would require for our reporting unit.  To develop the publicly traded company multiples, we gather available market data for companies with operations similar to our reporting unit and publicly available information for recent acquisitions in the marketplace.  We may weight the approaches, under certain circumstances, when a single approach produces inconclusive results or when results from multiple approaches deviate significantly.

Our estimates of fair value require 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 utilization and dayrates.  Because our business is cyclical in nature, the results of our impairment testing are expected to vary significantly depending on the timing of the assessment relative to the business cycle.  Altering either the timing of or the assumptions used in a reporting unit’s fair value calculations could result in an estimate that is significantly below its carrying amount, which may indicate its goodwill is impaired.  In the nine months ended September 30, 2018, as a result of an interim goodwill test, we recognized an aggregate loss of $462 million, which had no tax effect, associated with the impairment of the full balance of our goodwill.  See Notes to Condensed Consolidated Financial Statements—Note 3—Accounting PronouncementsStandards Updates, Note 4—Business Combinations and Note 7—Goodwill.

Accounting Standards Updates

For a discussion of the new accounting pronouncementsstandards updates that have had or are expected to have an effect on our condensed consolidated financial statements, see Notes to Condensed Consolidated Financial Statements—Note 3—New Accounting PronouncementsStandards Updates in this quarterly report on Form 10‑Q and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10‑K for the year ended December 31, 2016.2017.

Item 3.Quantitative and Qualitative Disclosures About Market Risk

We are exposed to interest rate risk, and currency exchange rate risk, primarily associated with our long‑term and short‑term debt, our restricted cash balances and investments andincluding current maturities.  Additionally, we are exposed to currency exchange rate risk related to our international operations.  For a complete discussion of our interest rate risk and currency exchange rate risk, see “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in our annual report on Form 10‑K for the year ended December 31, 2016.  With exception to the following there have been no material changes to these previously reported matters during the nine months ended September 30, 2017.

For our debt instruments, theThe following table presents the principal cash flowsnotional amounts and related weighted‑average interest rates of our long-term debt instruments by contractual maturity date.  The following table presents information as of September 30, 2018 for the 12‑month periods ending September 30 (in millions, except interest rate percentages):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Scheduled Maturity Date (a)

 

 

 

 

 

 

 

 

Scheduled Maturity Date (a)

 

 

 

 

 

 

 

    

2018

    

2019

    

2020

    

2021

    

2022

    

Thereafter

    

Total

    

Fair Value

 

    

2019

    

2020

    

2021

    

2022

    

2023

    

Thereafter

    

Total

    

Fair value

 

Debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed rate (USD)

 

$

780

 

$

236

 

$

244

 

$

543

 

$

537

 

$

5,016

 

$

7,356

 

$

7,388

 

 

$

385

 

$

392

 

$

685

 

$

681

 

$

2,838

 

$

4,453

 

$

9,434

 

$

9,949

 

Average interest rate

 

 

6.02

%  

 

6.57

%  

 

6.57

%  

 

6.53

%  

 

7.79

%  

 

7.61

%  

 

 

 

 

 

 

 

 

6.35

%  

 

6.35

%  

 

6.41

%  

 

7.39

%  

 

5.69

%  

 

7.20

%  

 

 

 

 

 

 

(a)

Expected maturity amounts are based on the face value of debt.

Interest rate risk—At September 30, 20172018 and December 31, 2016,2017, the fair value of our United States “(U.S.”) dollar‑denominated debt, presented above, was $7.4$9.9 billion and $8.1$7.5 billion, respectively.  During the nine months ended September 30, 2017,2018, the fair value of such debt decreasedincreased by $0.7$2.4 billion due to the following: (a) a decreasean increase of approximately $1.5$2.7 billion resulting from the retirement of $1.5 billion aggregate principal amount of debt due to cash tender offers, open market repurchasesthe issuance of Exchangeable Bonds and scheduled maturities, partially offset bythe 2018 Senior Secured Notes and (b) an increase of approximately $406$4 million resulting from the issuance of $410 million aggregate principal amount of the 5.52% Senior Secured Notes due May 2022, and (c) an increase of approximately $380 million resulting from the changeto changes in market prices for our outstanding U.S. dollar‑denominated debt.debt partially offset by (c) a decrease of approximately $267 million due to the repayment of debt at scheduled maturities.

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Item 4.Controls and Procedures

Disclosure controls and procedures—We carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as defined in the United States (“U.S.”) Securities Exchange Act of 1934 (the “Exchange Act”), Rules 13a‑15 and 15d‑15, as of the end of the period covered by this report.  Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is (1) accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosure and (2) recorded, processed, summarized and reported within the time periods specified in the United States (“U.S.”) Securities and Exchange Commission’s rules and forms.  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that due to the material weakness in internal control over financial reporting as set forth below, our disclosure controls and procedures were not effective as of September 30, 2017.2018.

Internal control over financial reporting—In the course of the external audit of the consolidated financial statements for the year ended December 31, 2016, and of our related control over financial reporting, errors resulting from the deficient controls described below were identified for which correction of the cumulative error would have been material to the 2016 financial statements, but which was not material to any of our previously issued consolidated financial statements.  The errors did not result in a material misstatement in our prior financial statements and therefore did not require our previously filed reports to be amended.  However, as a result of the significance of the cumulative accounting errors resulting from the deficient controls, we revised our financial statements for 2014 and 2015 and the

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interim financial statements in 2016 and 2015.  The corrections of prior year financial statements for 2014 and 2015 are included in the consolidated financial statements for the year ended December 31, 2016, that are included in our annual report on Form 10‑K, filed on March 7, 2017.

In connection with the errors, we evaluated the deficiencies in our internal controls over financial reporting and determined our internal control over financial reporting as of December 31, 2016, was not effective due to a material weakness in our controls over income tax accounting.  Specifically, the execution of the controls over the application of the accounting literature to the measurement of deferred taxes did not operate effectively in relation to: (1) the remeasurement of certain nonmonetary assets in Norway, (2) the analysis of our U.S. defined benefit pension plans and effect on other comprehensive income and (3) the assessment of the realizability of our deferred tax assets, and the need for valuation allowances.  The matters were discovered during the course of the 2016 external audit of the accounts and related controls.

Notwithstanding the material weakness described above and after having performed additional procedures, management has concluded that the condensed consolidated financial statements in this quarterly report on Form 10‑Q fairly present, in all material respects, our financial position, results of operations and cash flows for all periods and dates presented.

Remediation efforts to address material weakness—Management is committed to the planning and implementation of remediation efforts to address this material weakness.  These remediation efforts, summarized below, which are either implemented or in process, are intended to both address the identified material weakness and to enhance our overall financial control environment.  In this regard, our initiatives include:

§

Add additional personnel and resources with the appropriate level of tax accounting experience

§

Invest in additional technical tax accounting training

§

Enhance integration and documentation standards within and between tax and other key departments

We are in the process of remediating this material weakness by executing upon the above actions.  Management believes the ongoing efforts will effectively remediate the material weakness.  The actions that we are taking are subject to ongoing senior management review, as well as audit committee oversight.  As we continue to monitor the effectiveness of our internal control over financial reporting in the area affected by the material weakness, we are performing additional procedures, including the use of manual mitigating control procedures, where necessary, and have employed any additional resources deemed necessary to provide assurance that our financial statements continue to be fairly stated in all material respects.  As we continue to evaluate and work to improve our internal control over financial reporting, management may execute additional measures to address potential control deficiencies or modify the remediation plan described above.  Management will continue to review and may make necessary changes to the overall design of our internal controls.

Changes in internal control over financial reporting—There were no changes to our internal control over financial reporting during the quarter ended September 30, 2017,2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except the changes related to executing our ongoing remediation efforts as noted above.  We have not yet reached a conclusion as to the effectiveness of our remediation efforts enacted to date, as the effectiveness of such remediation efforts will be subject to internal controls testing and assessment for our evaluation of internal control over financial reporting as of December 31, 2017.reporting.

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PART II.OTHERII.OTHER INFORMATION

Item 1.Legal1.Legal Proceedings

Transocean Ltd. (together with its subsidiaries and predecessors, unless the context requires otherwise, “Transocean,” “we,” “us,” or “our”) has certain actions, claims and other matters pending as discussed and reported in “Part II. Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 13—10—Commitments and Contingencies” and “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contingencies and Uncertainties—Other Matters—Macondo well incident” in our annual report on Form 10‑K for the year ended December 31, 2016.2017.  We are also involved in various tax matters as described in “Part II. Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 7—6—Income Taxes” and in “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contingencies and Uncertainties—Other Matters—Tax matters” in our annual report on Form 10‑K for the year ended December 31, 2016.2017.  All such actions, claims, tax and other matters are incorporated herein by reference.

As of September 30, 2017,2018, we were also involved in a number of other lawsuits, claims and disputes, which have arisen in the ordinary course of our business and for which we do not expect the liability, if any, to have a material adverse effect on our condensed consolidated statement of financial position, results of operations or cash flows.  We cannot predict with certainty the outcome or effect of any of the matters referred to above or of any such other pending or threatened litigation or legal proceedings.  There can be no assurance that our beliefs or expectations as to the outcome or effect of any lawsuit or claim or dispute will prove correct and the eventual outcome of these matters could materially differ from management’s current estimates.

In addition to the legal proceedings described above, we may from time to time identify other matters that we monitor through our compliance program and in response to events arising generally within our industry and in the markets where we do business.  For example, in the year ended December 31, 2015, we began investigating statements made by a former employee of Petróleo Brasileiro S.A. (“Petrobras”) related to the award to us of a drilling services contract in Brazil.  These statements were made in connection with an ongoing criminal investigation by the Brazilian authorities into Petrobras and certain other companies and individuals.  We have completed our internal investigation, and we have not identified any wrongdoing by any of our employees or agents in connection with our business.  We have voluntarily met with governmental authorities in the United States to discuss the statements made by the former Petrobras employee and our internal investigation, as well as our findings.  We will continue to investigate these types of allegations and cooperate with governmental authorities.  Through the process of monitoring and proactive investigation, we strive to ensure no violation of our policies, Code of Integrity or law has, or will, occur; however, there can be no assurance as to the outcome of these matters.

Item 1A.Risk Factors

With exception to the following, there have been no material changes to the risk factors as previously disclosed in “Item“Part I. Item 1A. Risk Factors” in our annual report on Form 10‑K for the year ended December 31, 2016.2017.

§

We may not realize all of the anticipated benefits of the acquisition of Ocean Rig.

The expectedWe and Ocean Rig UDW Inc. (“Ocean Rig”) believe that the acquisition will provide benefits associated with a combinationto the combined company as described our other filings with the Songa may not be realized.

Following the completion of the voluntary offer (the “Offer”Securities Exchange Commission (“SEC”) to acquire Songa Offshore SE and its subsidiaries (collectively, “Songa”), we intend to integrate these companies into the Transocean group.  There can be no assurances.  However, there is a risk that we will not encounter difficulties in integrating Songa’s operationssome or that the benefits expected from the integration will be realized.  For example, certain of Songa’s existing indebtedness and agreements include change of control or acceleration provisions that are expected to be triggered in connection with the completion of the Offer, or otherwise permits Songa debt holders to receive Songa shares after the expiration of the Offer.  If we are unable to amend or obtain a waiver of these provisions from the relevant counterparties, we may be required to make payments under the terms of the indebtedness or agreements or otherwise be unable to include certain Songa shares in the Offer, which in each case may limit our ability to fully integrate Songa’s business on the timeline we currently anticipate or that may prevent us from fully realizing all of the expected benefits we currently anticipate from ourof the acquisition may fail to materialize, or may not occur within the time periods anticipated.  The realization of Songa.  Ifsuch benefits may be affected by a number of factors, many of which are beyond the benefits arecontrol of Transocean and Ocean Rig, including but not achieved,limited to the strength or only partly achieved, this could adversely affect ourweakness of the economy and competitive factors in the areas where Transocean and Ocean Rig do business, or our statement financial condition or resultsthe effects of operations.

The Offer is subject to conditionscompetition in the markets in which Transocean and Ocean Rig operate, and the Transaction Agreement may be terminated in accordance with its terms and the Combination may not be completed.

The Offer is subject to numerous conditions, as definedimpact of changes in the transaction agreement (the “Transaction Agreement”), includinglaws and regulations regulating the conditions related tooffshore drilling industry or affecting domestic or foreign operations.  The challenge of coordinating previously separate businesses makes evaluating the minimum number of Songa shares that must be validly tendered,business and not subsequently validly withdrawn asfuture financial prospects of the endcombined company following the acquisition difficult.  The success of the offer period,acquisition, including anticipated benefits and cost savings, will depend, in part, on the receiptability to successfully integrate the operations of regulatory approvalsboth companies in a manner that results in various benefits, including, among other things, an expanded market reach and the absence of material adverse changes with respectoperating efficiencies, and that does not materially disrupt existing relationships nor result in decreased revenues or dividends.  Failure to Songa.  No assurance can be given thatrealize all of the conditions to the Offer will be satisfied or, if they are, as to the timing of such satisfaction.  If the Offer has not become or been declared unconditional before 11:59 p.m. (central European time) on January 31, 2018, either party may terminate the Transaction Agreement, unless extended in accordance with the termsanticipated benefits of the agreement.

We must obtain governmental and regulatory approvals to consummateacquisition may impact the Offer, which, if delayed or not granted, may delay or jeopardize the Offer and the transactions contemplated by the Transaction Agreement.

The approvalfinancial performance of the Offer under merger control orcombined company.

§

We may not be successful in obtaining drilling contracts for its rigs and, following the completion of the acquisition, Ocean Rig’s uncontracted assets.

The offshore contract drilling industry is highly competitive with numerous industry participants, none of which has a dominant market share.  Drilling contracts are traditionally awarded on a competitive bid basis.  Although rig availability, service quality and technical capability are drivers of customer contract awards, bid pricing and intense price competition law regimes in any jurisdictions where the parties to the Transaction Agreement have mutually determined merger control or competition law filings or notices to be necessary must have beenare often key determinants for which a qualified contractor is awarded a job.

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obtained or any statutory waiting period, including any extension thereof, applicable to the Offer must have expired with the result that the Offer may be completed without the approval by any relevant antitrust authority.

The governmentaloffshore drilling industry has historically been cyclical and regulatory agencies from whichis impacted by oil and natural gas price levels and volatility.  There have been periods of high customer demand, limited rig supply and high dayrates, followed by periods of low customer demand, excess rig supply and low dayrates.  Changes in commodity prices can have a dramatic effect on rig demand, and periods of excess rig supply may intensify competition in the industry and result in the idling of older and less technologically advanced equipment.  As of October 11, 2018, we and Ocean Rig had 12 and 8 uncontracted rigs, respectively.  These rigs may be requiredremain out of service for extended periods of time.

If we are unable to seek these approvals have broad discretion in administering the applicable governing regulations.  As a condition to their approval of the transactions contemplated by the Transaction Agreement, those agencies may impose requirements, limitations or costs or require divestitures or place restrictions on the conduct of our business.  No assurance can be given that the approvals, if required, will be obtained or that any required conditions to the Offer will be satisfied,obtain drilling contracts for its rigs and, if any such required approvals are obtained and the conditions to the consummation of the Offer are satisfied, no assurance can be given as to the terms, conditions and timing of the approvals.  The Offer is subject to a regulatory condition that certain approvals are obtained.  This condition may only be waived with the prior written consent of Songa.

Any delay infollowing the completion of the transaction for regulatory reasons could diminishacquisition, Ocean Rig’s uncontracted rigs, whether due to a prolonged deepwater drilling market recovery or otherwise, we may not be able to realize the anticipatedexpected synergies and other benefits of the combination or result in additional transactions costs.  Any uncertainty over the ability to complete the transaction could make it more difficult for us or Songa to maintain or to pursue particular business strategies.  Conditions imposed by regulatory agencies in connection with their approval of the transaction may restrict our ability to modify the operations of our business in response to changing circumstances for a period of time after the closing of the Offer or its ability to expend cash for other uses or otherwise have an adverse effectacquisition on the anticipated benefits of the transaction, thereby adversely impacting the business,timeline currently expected or at all.  If this happens, our financial condition or results of operations may be adversely affected.

§

The Merger Agreement may be terminated in accordance with its terms and the acquisition of Ocean Rig may not be completed.

The definitive merger agreement with Ocean Rig (the “Merger Agreement”) is subject to a number of conditions that must be fulfilled in order to complete the acquisition of Ocean Rig.  Those conditions include: the approval of the combined company.

The announcement and pendencyMerger Agreement by Ocean Rig shareholders, the approval of the Offerissuance of the portion of the transaction consideration consisting of newly issued shares of Transocean Ltd. by its shareholders and the other transactions contemplated byregistration of such shares with the Transactioncompetent Swiss commercial register, the receipt of all required antitrust approvals and expiration or termination of all statutory waiting periods in respect thereof, the accuracy of representations and warranties under the Merger Agreement, during which we and Songa are subject to certain operating restrictions, could have an adverse effect on ourthe materiality standards set forth in the Merger Agreement, and Songa’s businessesTransocean’s and cash flows, financial condition and resultsOcean Rig’s performance of operations

The announcement and pendencytheir respective obligations under the Merger Agreement in all material respects.  These conditions to the closing of the transactions contemplatedacquisition of Ocean Rig may not be fulfilled in a timely manner or at all, and, accordingly, the acquisition may be delayed or may not be completed.

In addition, if the acquisition of Ocean Rig is not completed by March 31, 2019, or, provided that Transocean or Ocean Rig has exercised its extension rights as set forth in the TransactionMerger Agreement, including the Offer, could disrupt Songa’s and our businesses, and uncertainty about the effect of these transactionsSeptember 3, 2019, either Transocean or Ocean Rig may have an adverse effect on Songa and us.  These uncertainties could cause suppliers, vendors, partners and others that deal with us and Songachoose not to defer entering into contracts with, or making other decisions concerning, us and Songa or to seek to change or cancel existing business relationshipsproceed with the companies.  In addition, Songaacquisition, and our employees may experience uncertainty regarding their roles after the acquisition.  Employees may depart eitherparties can mutually decide to terminate the Merger Agreement at any time, before or after the completion of the acquisition because of uncertainty and issues relating to the difficulty of coordination or because of a desire not to remain following the acquisition.  Therefore, the pendency of the Offer may adversely affect Songa’s and our ability to retain, recruit and motivate key personnel.shareholder approval.  In addition, Transocean and Ocean Rig may elect to terminate the attention of Songa’s and our management may be directed towards the completion of the acquisition, including obtaining regulatory approvals, and may be diverted from the day‑to‑day business operations of us and Songa.  Matters related to the acquisition may require commitments of time and resources that could otherwise have been devoted toMerger Agreement in certain other opportunities that might have been beneficial to us and Songa.  In addition, the Transaction Agreement requires that we and Songa refrain from taking certain specified actions while the Offer and the acquisition are pending.  These restrictions may prevent us and Songa from pursuing otherwise attractive business opportunities or capital structure alternatives and from executing certain business strategies prior to the completion of the Offer.  Further, the acquisition may give rise to potential liabilities, including those that may result from future shareholder lawsuits.  Any of these matters could adversely affect the businesses of, or harm the results of operations, financial condition or cash flows of, us and Songa.circumstances.

Negative publicity related to the transactions contemplated by the Transaction Agreement may materially adversely affect us and Songa

From time to time, political and public sentiment in connection with a proposed combination may result in a significant amount of adverse press coverage and other adverse public statements affecting us and Songa.  Adverse press coverage and public statements, whether or not driven by political or popular sentiment, may also result in legal claims or in investigations by regulators, legislators and law enforcement officials.  Responding to these investigations and lawsuits, regardless of the ultimate outcome of the proceedings, can divert the time and effort of senior management from operating their businesses.  Addressing any adverse publicity, governmental scrutiny  or enforcement or other legal proceedings is time‑consuming and expensive and, regardless of the factual basis for the assertions being made, could have a negative impact on our reputation and that of Songa, on the morale of our or their employees and on our or their relationships with regulators.  It may also have a negative impact on their ability to take timely advantage of various business and market opportunities.  The direct and indirect effects of negative publicity, and the demands of responding to and addressing it, may have a material adverse effect on Songa’s and our respective business and cash flows, financial condition and results of operations.

Our share price may be adversely affected if the Offer is not completed

§

Our share price may be adversely affected if the acquisition is not completed.

If the Offerbusiness combination is not completed, then our share price may decline to the extent that the current market price of our shares reflectreflects a market premium based on the assumption that the Offerbusiness combination will be completed.

§

We will incur significant transaction and acquisition-related costs in connection with the acquisition.

We have incurred and will incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the Merger Agreement, including the costs and expenses of filing, printing and mailing a joint proxy statement/prospectus and all filing and other fees paid to the SEC in connection with the acquisition.

In addition, we have incurred and expect to incur additional material non-recurring expenses in connection with the acquisition and completion of the transactions contemplated by the Merger Agreement.  We have incurred significant legal, advisory and financial services fees in connection with the process of negotiating and evaluating the terms of the acquisition.  Additional significant unanticipated costs may be incurred in the course of combining the businesses of Transocean and Ocean Rig after completion of the acquisition.  Even if the acquisition is not completed, we will need to pay certain costs relating to the acquisition incurred prior to the date the acquisition was abandoned, such as legal, accounting, financial advisory, filing and printing fees.  Such costs may be significant and could have an adverse effect on the parties’ future financial condition, results of operations and cash flows.  We expect to incur additional, material non-recurring expenses prior to the effective time of the acquisition, excluding the repayment of Ocean Rig’s debt.  We also will incur transaction fees and costs related to formulating and implementing integration plans, including facilities and systems consolidation costs and employment-related costs.  We continue to assess the magnitude of these costs, and additional unanticipated costs may be incurred in the acquisition of Ocean Rig and the integration of the two companies’ businesses.  Although we expect that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, which should allow us to offset integration-related costs over time, this net benefit may not be achieved in the near term, or at all.  See the risk factor titled “We may not realize all of the anticipated benefits of the acquisition of Ocean Rig” above.

These costs described above, as well as other unanticipated costs and expenses, could have a material adverse effect on our financial condition, operating results and cash flows following the completion of our acquisition of Ocean Rig.

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Item 2.Unregistered2.Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

Maximum Number

 

 

 

 

 

 

 

 

Number of Shares

 

(or Approximate Dollar Value)

 

 

 

Total Number

 

Average

 

Purchased as Part

 

of Shares that May Yet Be Purchased

 

 

 

of Shares

 

Price Paid

 

of Publicly Announced

 

 Under the Plans or Programs

 

Period

    

Purchased  (a)

    

Per Share

    

Plans or Programs  (b)

    

(in millions)  (b)

 

July 2017

 

30

 

$

8.33

 

 

$

3,349

 

August 2017

 

 —

 

 

 —

 

 

 

3,349

 

September 2017

 

 —

 

 

 —

 

 

 

3,349

 

Total

 

30

 

$

8.33

 

 —

 

$

3,349

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

Maximum Number

 

 

 

 

 

 

 

 

Number of Shares

 

(or Approximate Dollar Value)

 

 

 

Total Number

 

Average

 

Purchased as Part

 

of Shares that May Yet Be Purchased

 

 

 

of Shares

 

Price Paid

 

of Publicly Announced

 

 Under the Plans or Programs

 

Period

    

Purchased

    

Per Share

    

Plans or Programs (a)

    

(in millions) (a)

 

July 2018

 

 —

 

$

 —

 

 

$

3,304

 

August 2018

 

 —

 

 

 —

 

 

 

3,304

 

September 2018

 

 —

 

 

 —

 

 

 

3,304

 

Total

 

 —

 

$

 —

 

 —

 

$

3,304

 


(a)

The total number of shares purchased in the third quarter of 2017 consists of 30 shares withheld by us through a broker arrangement and limited to statutory tax in satisfaction of withholding taxes due upon the vesting of restricted share units awarded to our employees under our long‑term incentive plan.

(b)

In May 2009, at our annual general meeting, our shareholders approved and authorized our board of directors, at its discretion, to repurchase anfor cancellation any amount of our shares for cancellation with an aggregate purchase price of up to CHF 3.5 billion.  At September 30, 2018, the authorization remaining under the share repurchase program was for the repurchase of our outstanding shares for an aggregate cost of up to CHF 3.2 billion, equivalent to approximately $3.6$3.3 billion.  On February 12, 2010,The share repurchase program could be suspended or discontinued by our board of directors authorized ouror company management, to implement the share repurchase program.  We may decide, based upon our ongoing capital requirements, the price of our shares, regulatory and tax considerations, cash flow generation, the amount and duration of our contract backlog, general market conditions, debt rating considerations and other factors, that we should retain cash, reduce debt, make capital investments or acquisitions or otherwise use cash for general corporate purposes.  Decisions regarding the amount, ifas applicable, at any and timing of any share repurchases would be made from time to time based upon these factors..  See “Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Sources and uses of liquidity.”

Item 4.Mine Safety Disclosures

Not applicable.

Item 6Exhibits

(a)

Exhibits

The following exhibits are filed in connection with this Report:

 

 

 

 

 

Number

 

Description

 

*Location

2.1

 

Transaction Agreement and Plan of Merger, dated August 13, 2017,September 3, 2018, by and among Transocean Ltd., Transocean Inc.Oceanus Holdings Limited, Transocean Oceanus Limited and Songa Offshore SE (incorporated by reference to Ocean Rig UDW Inc.

Exhibit 2.1 to Transocean Ltd.’s current reportCurrent Report on Form 8‑K (Commission File No. 000‑53533) filed on August 15, 2017)

2.2

Amendment No. 1 to Transaction Agreement, dated Stepember 15, 2017, among Transocean Ltd., Transocean Inc. and Songa Offshore SE (incorporated by reference to Exhibit 2.1 to Transocean Ltd.’s current report on Form 8‑K (Commission File No. 000‑53533)001‑38373) filed on September 15, 2017)4, 2018.

 

3.1

 

Articles of Association of Transocean Ltd. (incorporated by reference to

Exhibit 3.1 to Transocean Ltd.’s annual reportQuarterly Report on Form 10‑K10-Q (Commission File No. 000‑53533)001-38373) for the yearquarterly period ended December 31, 2016)June 30, 2018)

 

3.2

 

Organizational Regulations of Transocean Ltd. (incorporated by reference to , adopted November 18, 2016.

Exhibit 3.1 to Transocean Ltd.’s current reportCurrent Report on Form 8‑K (Commission File No. 000‑53533) filed on November 23, 2016)2016.

 

4.1

 

IndentureCredit Agreement dated as of October 17, 2017, by andJune 22, 2018, among Transocean Inc., the guarantors partylenders parties thereto and Wells Fargo Bank, National Association (incorporated by reference to Citibank, N.A., as administrative agent and collateral agent.

Exhibit 4.1 to Transocean Ltd.’s current reportCurrent Report on Form 8‑K (Commission File No. 000‑53533)001‑38373) filed on October 17, 2017)June 27, 2018.

 

4.2

Indenture, dated July 13, 2018, by and among Transocean Guardian Limited, the Guarantors and Wells Fargo Bank, National Association.

Exhibit 4.1 to Transocean Ltd’s Current Report on Form 8‑K (Commission File No. 001‑38373) filed on July 17, 2018.

4.3

Indenture, dated July 20, 2018, by and among Transocean Pontus Limited, the Guarantors and Wells Fargo Bank, National Association.

Exhibit 4.1 to Transocean Ltd.’s Current Report on Form 8‑K (Commission File No. 001‑38373) filed on July 24, 2018.

*

10.1

 

Pre‑acceptance, dated August 13, 2017, betweenFirst Amendment to Transocean Ltd. and Perestroika AS (incorporated by reference to Exhibit 10.12015 Long‑Term Incentive Plan.

Annex B to Transocean Ltd.’s current report on Form 8‑Kdefinitive proxy statement (Commission File No. 000‑53533)001‑38373) filed on August 15, 2017)March 20, 2018.

 

10.2

 

Pre‑acceptance, dated August 13, 2017, betweenForm of Voting and Support Agreement, by and among Transocean Ltd. an dand certain funds affiliated with Asia Research and Capital Management Ltd. (incorporated by reference to shareholders of Ocean Rig UDW Inc.

Exhibit 10.210.1 to Transocean Ltd.’s current reportCurrent Report on Form 8‑K (Commission File No. 000‑53533)001-38373) filed on August 15, 2017)September 4, 2018.

 

10.3

 

Form of Pre‑acceptanceVoting and Support Agreement, by and among Transocean Ltd.Ocean Rig UDW Inc. and certain shareholders of Songa Offshore SE (incorporated by reference to Transocean Ltd.

Exhibit 10.310.2 to Transocean Ltd.’s current reportCurrent Report on Form 8‑K (Commission File NO. 000‑53533)No. 001‑38373) filed on August 15, 2017)September 4, 2018.

*

10.4

 

Employment Agreement with Keelan Adamson dated August 10, 2018.

Form of Amendment No. 1 to Pre‑acceptance among Transocean Ltd. and certain shareholders of Songa Offshore SE (incorporated by reference to Exhibit 10.1 to Transocean Ltd.’s current reportCurrent Report on Form 8‑K (Commission File No. 000‑53533)001‑38373) filed on September 15, 2017)August 14, 2018.

31.1

Certification of Chief Executive Officer pursuant to Rule 13a‑14(a) of the Securities Exchange Act of 1934 and Section 302 of the Sarbanes‑Oxley Act of 2002.

Filed herewith.

31.2

Certification of Chief Financial Officer pursuant to Rule 13a‑14(a) of the Securities Exchange Act of 1934 and Section 302 of the Sarbanes‑Oxley Act of 2002.

Filed herewith.

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Number

 

Description

 

31.1

CEO Certification Pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002Location

31.2

CFO Certification Pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002

 

32.1

 

CEO Certification Pursuantof Chief Executive Officer pursuant to Section 906 of the Sarbanes‑Oxley Act of 20022002.

Furnished herewith.

 

32.2

 

CFO Certification Pursuantof Chief Financial Officer pursuant to Section 906 of the Sarbanes‑Oxley Act of 20022002.

Furnished herewith.

 

101

 

Interactive data filesfiles.

Filed herewith.


 

 

 

Filed herewith.

*

 

 

Certain of the appendices to this exhibit have been omitted pursuant to Item 601(b)(2) of Regulation S‑K.  We agree to furnish a copy of any schedule omitted from this exhibit to the SEC upon request.Compensatory plan or arrangement

 

Certain agreementsinstruments relating to our long‑term debt and our subsidiaries have not been filed as exhibits as permitted by paragraph (b)(4)(iii)(A) of Item 601 of Regulation S‑K since the total amount of securities authorized under any such agreements doinstrument does not exceed 10 percent of our total assets and our subsidiaries on a consolidated assets.  Upon request, we willbasis.  We agree to furnish a copy of each such instrument to the SEC all constituent agreements defining the rights of holders of our long‑term debt not filed herewith.

upon request.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned; thereunto duly authorized, on November 1, 2017.October 30, 2018.

 

 

TRANSOCEAN LTD.

 

 

 

 

 

 

By:

 /s/ Mark L. Mey

 

 

Mark L. Mey

 

Executive Vice President, Chief Financial Officer

 

(Principal Financial Officer)

 

 

 

 

 

 

By:

 /s/ David Tonnel

 

 

David Tonnel

 

Senior Vice President and Corporate Controller

 

(Principal Accounting Officer)

 

 

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