UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
______________________
FORM
10-Q
(Mark
One)
|
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the quarterly period ended September 30, 2007
OR
|
o
|
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 333-75899
______________________
TRANSOCEAN
INC.
(Exact
name of registrant as specified in its charter)
______________________
|
CaymanIslands
|
66-0582307
|
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
|
4
Greenway Plaza
|
|
|
Houston,
Texas
|
77046
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code: (713)
232-7500
______________________
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 x No ¨
Indicate
by check mark whether the
registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer. See definition of “accelerated filer and large
accelerated filer” in Rule 12b-2 of the Exchange Act.
|
Large
Accelerated Filer x
|
Accelerated
Filer ¨
|
Non-accelerated
Filer ¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
As
of
October 26, 2007, 291,860,905 ordinary shares, par value $0.01 per share, were
outstanding.
TRANSOCEAN
INC.
INDEX
TO FORM 10-Q
QUARTER
ENDED SEPTEMBER 30, 2007
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Page
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|||
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PART
I - FINANCIAL INFORMATION
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|||
|
Item
1.
|
Financial
Statements (Unaudited)
|
||
|
1
|
|||
|
2
|
|||
|
|
|
||
|
3
|
|||
|
4
|
|||
|
Item
2.
|
19
|
||
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Item
3.
|
38
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||
|
Item
4.
|
38
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||
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PART
II - OTHER INFORMATION
|
|||
|
Item
1.
|
39
|
||
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Item
1A.
|
40
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||
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Item
2.
|
43
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||
|
Item
6.
|
44
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||
PART
I - FINANCIAL INFORMATION
Item
1. Financial Statements
TRANSOCEAN
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In
millions, except per share data)
(Unaudited)
|
Three
months ended
September
30,
|
Nine
months ended
September
30,
|
|||||||||||||||
|
2007
|
2006
|
2007
|
2006
|
|||||||||||||
|
Operating
revenues
|
||||||||||||||||
|
Contract
drilling revenues
|
$ |
1,455
|
$ |
991
|
$ |
4,088
|
$ |
2,598
|
||||||||
|
Other
revenues
|
83
|
34
|
212
|
98
|
||||||||||||
|
1,538
|
1,025
|
4,300
|
2,696
|
|||||||||||||
|
Costs
and expenses
|
||||||||||||||||
|
Operating
and maintenance
|
663
|
561
|
1,858
|
1,585
|
||||||||||||
|
Depreciation
|
103
|
99
|
304
|
303
|
||||||||||||
|
General
and administrative
|
27
|
22
|
82
|
67
|
||||||||||||
|
793
|
682
|
2,244
|
1,955
|
|||||||||||||
|
Gain
from disposal of assets, net
|
8
|
47
|
30
|
222
|
||||||||||||
|
Operating
income
|
753
|
390
|
2,086
|
963
|
||||||||||||
|
Other
income (expense), net
|
||||||||||||||||
|
Interest
income
|
7
|
4
|
17
|
14
|
||||||||||||
|
Interest
expense, net of amounts capitalized
|
(23 | ) | (28 | ) | (93 | ) | (72 | ) | ||||||||
|
Other,
net
|
287
|
7
|
295
|
9
|
||||||||||||
|
271
|
(17 | ) |
219
|
(49 | ) | |||||||||||
|
Income
before income taxes and minority interest
|
1,024
|
373
|
2,305
|
914
|
||||||||||||
|
Income
tax expense
|
52
|
64
|
230
|
150
|
||||||||||||
|
Minority
interest
|
(1 | ) |
–
|
–
|
–
|
|||||||||||
|
Net
income
|
$ |
973
|
$ |
309
|
$ |
2,075
|
$ |
764
|
||||||||
|
Earnings
per share
|
||||||||||||||||
|
Basic
|
$ |
3.36
|
$ |
0.99
|
$ |
7.17
|
$ |
2.39
|
||||||||
|
Diluted
|
$ |
3.24
|
$ |
0.96
|
$ |
6.91
|
$ |
2.31
|
||||||||
|
Weighted
average shares outstanding
|
||||||||||||||||
|
Basic
|
290
|
312
|
289
|
320
|
||||||||||||
|
Diluted
|
300
|
323
|
301
|
332
|
||||||||||||
See
accompanying notes.
TRANSOCEAN
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
millions, except share data)
|
September
30,
|
December
31,
|
|||||||
|
2007
|
2006
|
|||||||
|
(Unaudited)
|
||||||||
|
ASSETS
|
||||||||
|
Cash
and cash equivalents
|
$ |
618
|
$ |
467
|
||||
|
Accounts
receivable, net of allowance for doubtful accounts of $41 and
$26 at September 30, 2007 and December 31, 2006,
respectively
|
1,266
|
946
|
||||||
|
Materials
and supplies, net of allowance for obsolescence of $21 and $19
at
September 30, 2007 and December 31, 2006, respectively
|
179
|
160
|
||||||
|
Deferred
income taxes, net
|
28
|
16
|
||||||
|
Other
current assets
|
132
|
67
|
||||||
|
Total
current assets
|
2,223
|
1,656
|
||||||
|
Property
and equipment
|
11,460
|
10,539
|
||||||
|
Less
accumulated depreciation
|
3,489
|
3,213
|
||||||
|
Property
and equipment, net
|
7,971
|
7,326
|
||||||
|
Goodwill
|
2,187
|
2,195
|
||||||
|
Other
assets
|
319
|
299
|
||||||
|
Total
assets
|
$ |
12,700
|
$ |
11,476
|
||||
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
Accounts
payable
|
$ |
406
|
$ |
477
|
||||
|
Accrued
income taxes
|
156
|
98
|
||||||
|
Debt
due within one year
|
1,018
|
95
|
||||||
|
Other
current liabilities
|
419
|
369
|
||||||
|
Total
current liabilities
|
1,999
|
1,039
|
||||||
|
Long-term
debt
|
1,575
|
3,200
|
||||||
|
Deferred
income taxes, net
|
57
|
54
|
||||||
|
Other
long-term liabilities
|
566
|
343
|
||||||
|
Total
long-term liabilities
|
2,198
|
3,597
|
||||||
|
Commitments
and contingencies
|
||||||||
|
Minority
interest
|
1
|
4
|
||||||
|
Preference
shares, $0.10 par value; 50,000,000 shares authorized, none
issued and outstanding
|
–
|
–
|
||||||
|
Ordinary
shares, $0.01 par value; 800,000,000 shares authorized, 290,802,699
and 292,454,457 shares issued and outstanding at
September 30, 2007 and December 31, 2006, respectively
|
3
|
3
|
||||||
|
Additional
paid-in capital
|
7,780
|
8,044
|
||||||
|
Accumulated
other comprehensive loss
|
(31 | ) | (30 | ) | ||||
|
Retained
earnings (accumulated deficit)
|
750
|
(1,181 | ) | |||||
|
Total
shareholders’ equity
|
8,502
|
6,836
|
||||||
|
Total
liabilities and shareholders’ equity
|
$ |
12,700
|
$ |
11,476
|
See
accompanying notes.
TRANSOCEAN
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
millions)
(Unaudited)
|
Three
months ended
September
30,
|
Nine
months ended
September
30,
|
|||||||||||||||
|
2007
|
2006
|
2007
|
2006
|
|||||||||||||
|
Cash
flows from operating activities
|
||||||||||||||||
|
Net
income
|
$ |
973
|
$ |
309
|
$ |
2,075
|
$ |
764
|
||||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities
|
||||||||||||||||
|
Depreciation
|
103
|
99
|
304
|
303
|
||||||||||||
|
Share-based
compensation expense
|
11
|
5
|
30
|
13
|
||||||||||||
|
Gain
from disposal of assets, net
|
(8 | ) | (47 | ) | (30 | ) | (222 | ) | ||||||||
|
Deferred
income taxes
|
9
|
(7 | ) |
2
|
18
|
|||||||||||
|
Deferred
expenses, net
|
(4 | ) | (40 | ) | (17 | ) | (95 | ) | ||||||||
|
Deferred
revenues, net
|
(20 | ) |
12
|
18
|
32
|
|||||||||||
|
Other
long-term liabilities
|
19
|
(4 | ) |
31
|
17
|
|||||||||||
|
Other,
net
|
(7 | ) | (7 | ) | (3 | ) | (14 | ) | ||||||||
|
Changes
in operating assets and liabilities
|
||||||||||||||||
|
Accounts
receivable
|
(82 | ) | (169 | ) | (320 | ) | (273 | ) | ||||||||
|
Other
current assets
|
3
|
15
|
(29 | ) | (36 | ) | ||||||||||
|
Accounts
payable and other current liabilities
|
(75 | ) |
76
|
65
|
167
|
|||||||||||
|
Income
taxes receivable/payable, net
|
(25 | ) |
47
|
32
|
59
|
|||||||||||
|
Net
cash provided by operating activities
|
897
|
289
|
2,158
|
733
|
||||||||||||
|
Cash
flows from investing activities
|
||||||||||||||||
|
Capital
expenditures
|
(305 | ) | (434 | ) | (1,060 | ) | (710 | ) | ||||||||
|
Proceeds
from disposal of assets, net
|
21
|
95
|
62
|
298
|
||||||||||||
|
Joint
ventures and other investments, net
|
–
|
–
|
(3 | ) |
–
|
|||||||||||
|
Net
cash used in investing activities
|
(284 | ) | (339 | ) | (1,001 | ) | (412 | ) | ||||||||
|
Cash
flows from financing activities
|
||||||||||||||||
|
Borrowings
under the Revolving Credit Facility, net
|
–
|
900
|
–
|
900
|
||||||||||||
|
Proceeds
from issuance of debt, net
|
–
|
1,000
|
–
|
1,000
|
||||||||||||
|
Repayment
of borrowings under Term Credit Facility
|
(470 | ) |
–
|
(700 | ) |
–
|
||||||||||
|
Release
of escrow funds – Nautilus lease financing
|
–
|
30
|
–
|
30
|
||||||||||||
|
Repurchase
of ordinary shares
|
–
|
(1,751 | ) | (400 | ) | (2,351 | ) | |||||||||
|
Proceeds
from issuance of ordinary shares under share-based compensation plans,
net
|
1
|
1
|
56
|
67
|
||||||||||||
|
Tax
benefit from issuance of ordinary shares under share-based compensation
plans
|
23
|
–
|
33
|
–
|
||||||||||||
|
Other,
net
|
6
|
(5 | ) |
5
|
(5 | ) | ||||||||||
|
Net
cash provided by (used in) financing activities
|
(440 | ) |
175
|
(1,006 | ) | (359 | ) | |||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
173
|
125
|
151
|
(38 | ) | |||||||||||
|
Cash
and cash equivalents at beginning of period
|
445
|
282
|
467
|
445
|
||||||||||||
|
Cash
and cash equivalents at end of period
|
$ |
618
|
$ |
407
|
$ |
618
|
$ |
407
|
||||||||
TRANSOCEAN
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED STATEMENTS
(Unaudited)
Note
1―Nature
of Business and Principles of Consolidation
Transocean
Inc. (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 contract our drilling rigs, related equipment and work crews primarily
on a dayrate basis to drill oil and gas wells. We also provide additional
services, including integrated services. At September 30, 2007, we owned, had
partial ownership interests in or operated 82 mobile offshore drilling units.
As
of this date, our fleet consisted of 33 High-Specification semisubmersibles
and
drillships (“High-Specification Floaters”), 20 Other Floaters, 25 Jackups
and four Other Rigs. We also have four High-Specification Floaters under
construction. See Note 4—Drilling Fleet Expansion and Upgrades.
On
July
21, 2007, we entered into an Agreement and Plan of Merger (the “Merger
Agreement”) with GlobalSantaFe Corporation (“GlobalSantaFe”) and Transocean
Worldwide Inc., a direct wholly owned subsidiary of Transocean (“Merger Sub”).
We estimate that the closing of the transactions contemplated by the Merger
Agreement will take place on or before December 31, 2007. See Note 3—Merger with
GlobalSantaFe Corporation.
For
investments in joint ventures and other entities that do not meet the criteria
of a variable interest entity or where we are not deemed to be the primary
beneficiary for accounting purposes of those entities that meet the variable
interest entity criteria, we use the equity method of accounting where our
ownership is between 20 percent and 50 percent or where our ownership is
more than 50 percent and we do not have significant control over the
unconsolidated affiliate. We use the cost method of accounting for investments
in unconsolidated affiliates where our ownership is less than 20 percent and
where we do not have significant influence over the unconsolidated affiliate.
We
consolidate those investments that meet the criteria of a variable interest
entity where we are deemed to be the primary beneficiary for accounting purposes
and for entities in which we have a majority voting interest. Intercompany
transactions and accounts are eliminated.
Note
2―Summary
of Significant Accounting Policies
Basis
of Presentation—Our
accompanying condensed consolidated financial statements have been prepared
without audit in accordance with accounting principles generally accepted in
the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange
Commission (“SEC”). Pursuant to such rules and regulations, these financial
statements do not include all disclosures required by accounting principles
generally accepted in the U.S. for complete financial statements. The condensed
consolidated financial statements reflect all adjustments, which are, in the
opinion of management, necessary for a fair presentation of financial position,
results of operations and cash flows for the interim periods. Such adjustments
are considered to be of a normal recurring nature unless otherwise identified.
Operating results for the three and nine months ended September 30, 2007 are
not
necessarily indicative of the results that may be expected for the year ending
December 31, 2007 or for any future period. The accompanying condensed
consolidated financial statements and notes thereto should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in our Annual Report on Form 10-K for the year ended December 31,
2006.
Accounting
Estimates—The preparation of financial statements in conformity with
accounting principles generally accepted in the U.S. requires management to
make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, expenses and disclosure of contingent assets and
liabilities. On an ongoing basis, we evaluate our estimates, including those
related to bad debts, materials and supplies obsolescence, investments,
intangible assets and goodwill, property and equipment and other long-lived
assets, income taxes, workers’ insurance, share-based compensation, pensions and
other postretirement benefits, other employment benefits and contingent
liabilities. We base our estimates on historical experience and on various
other
assumptions we believe are reasonable under the circumstances, the results
of
which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results
could differ from such estimates.
TRANSOCEAN
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED STATEMENTS
(Unaudited)
Total
Comprehensive Income—Total comprehensive income for the three and nine
months ended September 30, 2007 was $971 million and $2,074 million,
respectively, while the total comprehensive income for the three and nine months
ended September 30, 2006 was $309 million and $764 million, respectively. There
were no other comprehensive income items that were material for any of the
periods presented.
Capitalized
Interest—We capitalize interest costs for qualifying construction and
upgrade projects. We capitalized interest costs on construction work in progress
of $19 million and $46 million for the three and nine months ended September
30,
2007, respectively. Capitalized interest for the three and nine months ended
September 30, 2006 was $5 million and $7 million, respectively.
Segments—We
operate in one business segment, which consists of floaters, jackups and other
rigs used in support of offshore drilling activities and offshore support
services. 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 build or upgrade rigs are determined by the activities and needs
of
our customers.
Share-Based
Compensation—On January 1, 2006, we adopted the Financial Accounting
Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”)
No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”) using the
modified prospective method. Share-based compensation expense for the three
and
nine months ended September 30, 2007 was $11 million ($10 million, or $0.03
per
diluted share, net of tax) and $30 million ($27 million, or $0.09 per diluted
share, net of tax), respectively. Share-based compensation expense for the
three
and nine months ended September 30, 2006 was $5 million or $0.02 per diluted
share, which had an immaterial tax effect, and $13 million ($12 million, or
$0.04 per diluted share, net of tax), respectively.
Income
Taxes—On January 1,
2007, we adopted the FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes—an interpretation of FASB Statement No. 109 (“FIN 48”). FIN
48 clarifies the accounting for income taxes recognized in an entity’s financial
statements in accordance with SFAS No. 109, Accounting for Income
Taxes. It prescribes a minimum recognition threshold and measurement
attribute for recognizing and measuring the benefit of tax positions taken
or
expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. The cumulative effect adjustment upon
adoption of FIN 48 resulted in a $146 million increase in our other long-term
liabilities and a corresponding increase in the beginning balance of our
accumulated deficit, primarily related to the ongoing dispute with Norway
regarding certain restructuring transactions undertaken in 2001 and 2002. See
Note 7―Income
Taxes.
On
January 1, 2007, we adopted the Emerging Issues Task Force (“EITF”) Issue No.
06-3, “How Taxes Collected From Customers and Remitted to Governmental
Authorities Should Be Presented in the Income Statement” (“EITF 06-3”). The
scope of EITF 06-3 includes any tax assessed by a governmental authority that
is
directly imposed on a revenue-producing transaction between a seller and a
customer, including sales, use, value added and excise taxes. EITF 06-3 provides
that a company may adopt a policy of presenting taxes in the consolidated
statement of operations on either a gross or net basis. If such taxes are
significant, and are presented on a gross basis, the amounts of those taxes
should be disclosed. We record taxes collected from our customers and remitted
to governmental authorities on a net basis in our consolidated statement of
operations and our adoption had no effect on our consolidated balance sheet,
statement of operations or cash flows.
New
Accounting
Pronouncements—In September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles,
and expands disclosures about fair value measurements. SFAS 157 applies under
other accounting pronouncements that require or permit fair value measurements
because the FASB previously concluded in those accounting pronouncements that
fair value is the relevant measurement attribute. Accordingly, SFAS 157 does
not
require any new fair value measurements. SFAS 157 is effective for fiscal years
beginning after November 15, 2007. We will be required to adopt SFAS 157 in
the
first quarter of fiscal year 2008. Management is currently evaluating the
requirements of SFAS 157 and has not yet determined the impact on the
consolidated financial statements.
TRANSOCEAN
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED STATEMENTS
(Unaudited)
In
February 2007, the FASB issued SFAS
No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities (“SFAS 159”). SFAS 159 provides companies with an option to
report selected financial assets and liabilities at fair value. It also
establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes
for
similar types of assets and liabilities. SFAS 159 is effective as of the
beginning of the first fiscal year beginning after November 15, 2007. We
will be required to adopt SFAS 159 in the first quarter of fiscal year 2008.
Management is currently evaluating the requirements of SFAS 159 and has not
yet
determined the impact on the consolidated financial statements.
Reclassifications—Certain
reclassifications have been made to prior period amounts to conform with the
current period’s presentation. These reclassifications did not have a material
effect on our condensed consolidated financial statements.
Note
3―Merger with GlobalSantaFe Corporation
On
July
21, 2007, we entered into the Merger Agreement with GlobalSantaFe. Under the
terms of the Merger Agreement, GlobalSantaFe will merge with Merger Sub by
way
of a scheme of arrangement qualifying as an amalgamation under Cayman Islands
law, with Merger Sub continuing as the surviving corporation (the “Merger”).
Immediately prior to the effective time of the Merger, each of our outstanding
ordinary shares (the “Transocean Ordinary Shares”) will be reclassified by way
of a scheme of arrangement under Cayman Islands law into (1) 0.6996 Transocean
Ordinary Shares and (2) $33.03 in cash (the “Reclassification” and, together
with the Merger, the “Transactions”). At the effective time of the Merger, each
outstanding ordinary share of GlobalSantaFe (the “GlobalSantaFe Ordinary
Shares”) will be exchanged for (1) 0.4757 Transocean Ordinary Shares (after
giving effect to the Reclassification) and (2) $22.46 in cash.
The
Transactions have been approved by
our board of directors and the Merger has been approved by GlobalSantaFe’s board
of directors. Consummation of the Transactions is subject to various conditions,
including, among others, (1) approval by the shareholders of GlobalSantaFe
of
the Merger and approval by our shareholders of the Reclassification, the
issuance of our ordinary shares in the Merger and certain amendments to our
charter documents, in each case pursuant to the requirements specified in the
Merger Agreement, (2) the receipt of required regulatory clearances,
including the expiration of the Hart-Scott-Rodino waiting period and foreign
competition clearances, (3) the receipt of financing sufficient to enable us
to
deliver the cash consideration in connection with the Transactions, (4) the
accuracy of representations and warranties as of the closing date, including
the
absence of any material adverse effect with respect to our or GlobalSantaFe’s
business, as applicable, and (5) other customary closing conditions. The closing
of the Transactions will occur on the first business day immediately following
the day on which all of the conditions to the Transactions contained in the
Merger Agreement have been fulfilled or waived or on such other date as we
and
GlobalSantaFe may agree. We intend to complete the Transactions on or before
December 31, 2007.
On
September 19, 2007, the Premerger
Notification Office of the Federal Trade Commission and the Department of
Justice granted early termination of the Hart-Scott Rodino waiting period.
On
September 18, 2007, we made an informal submission to the Office of Fair
Trading for the United Kingdom (the “OFT”). Although there is no statutorily
prescribed deadline for a decision, we currently expect the OFT to announce
its
decision in November 2007 as to whether the proposed Merger will be referred
to
the Competition Commission of the United Kingdom (the “Competition Commission”)
for further review. The Merger Agreement provides that, in the event the
proposed Merger is referred to the Competition Commission for further review,
the receipt of indications reasonably satisfactory to each of us and
GlobalSantaFe that the proposed Merger can proceed is a condition to the
obligation of each such party to complete the Transactions. A review by the
Competition Commission may take up to six months to complete although we may
request and receive permission to close under certain conditions pending the
completion of such review.
TRANSOCEAN
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED STATEMENTS
(Unaudited)
In
connection with the Transactions, on July 21, 2007, we and GlobalSantaFe entered
into a commitment letter (the “Commitment Letter”), pursuant to which Goldman
Sachs Credit Partners L.P. (“GSCP”), Lehman Commercial Paper Inc., Lehman
Brothers Commercial Bank, Lehman Brothers Inc. and Lehman Brothers Holdings
Inc.
(collectively, the “Lehman Lenders”) committed to provide financing for the
Transactions. The Commitment Letter provides for a $15 billion senior unsecured
bridge loan facility due one year after closing, $10 billion of which is to
be
provided by GSCP and $5 billion of which is to be provided by the Lehman
Lenders.
On
September 28, 2007, we, GSCP, the Lehman Lenders and other lenders entered
into
a $15.0 billion, one-year senior unsecured bridge loan facility (the
“Bridge Loan Facility”). See Note 8—Debt.
Upon
exercise following the Reclassification, we currently intend to allow warrant
holders (see Note 11—Stock Warrants) to receive 0.6996 of our ordinary
shares and $33.03 (i.e., the same consideration that a warrant holder would
have
owned immediately after the Reclassification if the warrant holder had exercised
its warrant immediately before the Reclassification) for each ordinary share
for
which the warrants were previously exercisable, at an exercise price of $19
per
ordinary share for which the warrants were exercisable prior to the
Reclassification.
Note
4―Drilling Fleet Expansion and Upgrades
Capital
expenditures, including capitalized interest, totaled $1.1 billion during the
nine months ended September 30, 2007. The following table summarizes actual
capital expenditures, including capitalized interest, for our major construction
and conversion projects (in millions):
|
Total
costs
through
December 31,
2006
|
Nine
months
ended
September 30,
2007
|
Total
costs
through
September 30,
2007
|
||||||||||
|
Discoverer
Americas
|
$ |
108
|
$ |
193
|
$ |
301
|
||||||
|
Discoverer
Clear Leader
|
221
|
176
|
397
|
|||||||||
|
Discoverer
Inspiration
|
130
|
128
|
258
|
|||||||||
|
Newbuild
IV
|
–
|
104
|
104
|
|||||||||
|
Sedco
700-series upgrades
|
149
|
152
|
301
|
|||||||||
|
Total
|
$ |
608
|
$ |
753
|
$ |
1,361
|
||||||
Construction
work in progress, recorded in property and equipment, was $1.8 billion and
$1.0
billion at September 30, 2007 and December 31, 2006, respectively.
In
June
2007, we were awarded a drilling contract for a fourth enhanced Enterprise-class
drillship. We estimate total capital expenditure for the construction of this
rig to be approximately $640 million, excluding capitalized interest. We expect
the rig to be contributed to a joint venture in which we will retain a
65 percent ownership interest. This rig is expected to be operational in
the third quarter of 2010.
TRANSOCEAN
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED STATEMENTS
(Unaudited)
Capital
expenditures, including capitalized interest, totaled $710 million during the
nine months ended September 30, 2006 and included $422 million spent on the
construction of three enhanced Enterprise-class drillships and $95 million
on
two Sedco 700-series rig upgrades. See Note 14―Subsequent
Events.
Note
5―Asset
Dispositions
During
the nine months ended September
30, 2007, we completed the sales of the tender rig Charley Graves and
the swamp barge Searex VI for net proceeds of $44 million and
recognized a gain on the sales of $31 million ($28 million, or $0.09 per
diluted share, net of tax).
During
the nine months ended September
30, 2006, we sold two of our Other Floaters (Peregrine III and
Transocean Explorer), two of our tender rigs (Searex X and
W.D. Kent), a swamp barge (Searex XII) and a platform rig. We
received net proceeds from these sales of $260 million and recognized a gain
on
the sales of $219 million ($194 million, or $0.58 per diluted share, net of
tax).
Any
sale,
lease or other disposal of assets which is material individually or in the
aggregate to us except for sales of surplus equipment, sales of other assets
in
the ordinary course of business, or sales, leases or other transfers between
us
and our wholly owned subsidiaries or between those subsidiaries would require
the consent of GlobalSantaFe pursuant to the Merger Agreement (see Note 3―Merger
with
GlobalSantaFe Corporation).
Note
6―Repurchase
of Ordinary Shares
In
May
2006, our board of directors authorized an increase in the overall amount of
ordinary shares that may be repurchased under our share repurchase program
to
$4.0 billion from $2.0 billion, which was previously authorized and announced
in
October 2005. The repurchase program does not have an established expiration
date and may be suspended or discontinued at any time. Under the program,
repurchased shares are constructively retired and returned to unissued
status.
A
summary of the aggregate ordinary
shares repurchased and retired for the three and nine months ended September
30,
2007 and 2006 is as follows (in millions, except per share data):
|
Three
months ended
September 30,
|
Nine months ended
September 30,
|
|||||||||||||||
|
2007
|
2006
|
2007
|
2006
|
|||||||||||||
|
Value
of shares
|
$ |
–
|
$ |
1,750
|
$ |
400
|
$ |
2,350
|
||||||||
|
Number
of shares
|
–
|
24.4
|
5.2
|
32.2
|
||||||||||||
|
Average
purchase price per share
|
$ |
–
|
$ |
71.67
|
$ |
77.39
|
$ |
72.88
|
||||||||
Total
consideration paid to repurchase
the shares was recorded in shareholders’ equity as a reduction in ordinary
shares and additional paid-in capital. Such consideration was funded with
existing cash balances and borrowings under our Revolving Credit Facility.
At
September 30, 2007, we still had authority to repurchase $600 million of
our ordinary shares under our share repurchase program; however, any such
repurchases would require the consent of GlobalSantaFe pursuant to the Merger
Agreement (see Note 3―Merger
with GlobalSantaFe Corporation).
Note
7―Income
Taxes
We
are a
Cayman Islands company and we are not subject to income tax in the Cayman
Islands. We operate through our various subsidiaries in a number of countries
throughout the world. Income taxes have been provided based upon the tax laws
and rates in the countries in which operations are conducted and income is
earned. There is no expected relationship between the provision for or benefit
from income taxes and income or loss before income taxes because the countries
in which we operate have taxation regimes that vary not only with respect to
nominal rate, but also in terms of the availability of deductions, credits
and
other benefits. Variations also arise when income earned and taxed in a
particular country or countries fluctuates from year to year.
TRANSOCEAN
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED STATEMENTS
(Unaudited)
The
estimated annual effective tax rate for the nine months ended September 30,
2007 and September 30, 2006 was based on estimated annual income before
income taxes for each period after adjusting for certain items such as net
gains
on rig sales and discrete items. The company recognizes interest and penalties
related to unrecognized tax benefits as income tax expense.
At
January 1, 2007, the total unrecognized tax benefit related to uncertain tax
positions was $303 million, of which $294 million would affect the
effective tax rate if recognized. These amounts included $84 million and
$83 million of interest and penalties, respectively. During the quarter
ended September 30, 2007, the total unrecognized tax benefit resulting from
positions taken during the period increased by $11 million, including
$4 million of interest and penalties. As a result of tax positions taken
during a prior period, the total unrecognized tax benefit increased by
$21 million and decreased by $7 million resulting in a net increase of
$14 million. The increase was primarily related to exchange losses. The
total unrecognized tax benefit at September 30, 2007 was $353 million, of
which $344 million would affect the effective tax rate if
recognized.
Our
income tax returns are subject to review and examination in the many various
jurisdictions in which we operate. It is reasonably possible that the
unrecognized tax benefits related to uncertain tax positions will materially
change within the next 12 months although it is not possible to estimate the
impact of such a change.
Our
2004
and 2005 U.S. federal income tax returns are currently under examination by
the
U.S. Internal Revenue Service (“IRS”). In October 2007, we received from the IRS
examination reports setting forth proposed changes to the U.S. federal taxable
income reported for the years 2004 and 2005. The proposed changes are primarily
related to intercompany pricing and certain 2004 restructuring transactions,
and
would result in a cash tax payment of approximately $413 million, exclusive
of
interest. We believe our returns are materially correct as filed, and we intend
to vigorously defend against these proposed changes.
Our
2006
U.S. federal income tax returns and certain net operating losses generated
in
2000 through 2003 are subject to examination. We believe our returns are
materially correct as filed, and we intend to vigorously defend against any
proposed changes.
Certain
of our Brazilian income tax returns for the years 2000 through 2003 are
currently under examination. The Brazil tax authorities have issued
tax assessments totaling $40 million, plus a 75 percent penalty and
$32 million of interest through September 30, 2007. We believe
our returns are materially correct as filed, and we intend to vigorously contest
these assessments.
While
we
cannot predict or provide assurance as to the final outcome, we do not expect
the ultimate liability resulting from any examination to have a material adverse
effect on our consolidated financial position, results of operations or cash
flows.
A
valuation allowance for deferred tax assets is recorded when it is more likely
than not that some or all of the benefit from the deferred tax asset will not
be
realized. We provide a valuation allowance to offset deferred tax assets where,
in the opinion of management, it is more likely than not that the financial
statement benefit of these losses will not be realized, including the possible
expiration of these benefits prior to their utilization. During the three months
ended September 30, 2007, the valuation allowance for non-current deferred
tax
assets decreased $58 million, which resulted from a change in estimate related
to the expected utilization of our U.S. foreign tax credits.
Norwegian
civil tax and criminal authorities are investigating certain transactions
undertaken in 2001 and 2002. In the second quarter of 2007, the Norwegian
authorities expanded the investigation and during the third quarter of 2007
secured certain records located in the United Kingdom related to a separate
Norway subsidiary that was previously subject to tax in Norway. In June 2006,
we
filed a formal protest with respect to a notification from the Norwegian tax
authorities regarding their intent to propose adjustments to taxable income
related to the 2001 and 2002 restructuring. These proposed assessments would
result in an increase in tax of approximately $290 million, plus interest,
and
the authorities further indicated they intend to impose penalties, which could
range from 15 to 60 percent of the assessments. We believe the Norwegian
authorities are contemplating a separate tax assessment of approximately $121
million related to a 2001 dividend payment, plus interest and a penalty, which
could range from 15 to 60 percent of the assessment. The Norwegian tax
authorities initiated inquiries in September 2004 and in March 2005 took action
to obtain additional information regarding these transactions pursuant to a
Norwegian court order. We have continued to respond to information requests
from
the authorities. We plan to vigorously contest any assertions by the Norwegian
authorities in connection with the restructuring transactions or dividend and
any increase in the scope of the current investigation. On January 1, 2007,
as
part of our implementation of FIN 48, we recorded a long-term liability of
$142
million related to these issues. Since January 1, 2007, the long-term liability
has increased to $168 million due to the accrual of interest and exchange rate
fluctuations. While we cannot predict or provide assurance as to the final
outcome of these proceedings, we do not expect the ultimate resolution of these
matters to have a material adverse effect on our consolidated financial position
or results of operations although it may have a material adverse effect on
our
consolidated cash flows.
TRANSOCEAN
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED STATEMENTS
(Unaudited)
Our
tax
returns in the other major jurisdictions in which we operate are generally
subject to examination for periods ranging from three to six years. We have
agreed to extensions beyond the statute of limitations in two jurisdictions
for
up to 12 years. Tax authorities in certain jurisdictions are examining our
tax
returns and in some cases have issued assessments. We are defending our tax
positions in those jurisdictions. While we cannot predict or provide assurance
as to the final outcome of these proceedings, we do not expect the ultimate
liability to have a material adverse effect on our consolidated financial
position, results of operations or cash flows.
TODCO
Tax Sharing Agreement (“TSA”)—On July 11, 2007, Hercules Offshore, Inc.
(“Hercules”) completed the acquisition of TODCO (the “TODCO Acquisition”). The
TSA requires Hercules to make an accelerated change of control payment to our
wholly owned subsidiary, Transocean Holdings Inc. (“Transocean Holdings”),
within 30 days of the date of the acquisition as a result of the deemed
utilization of TODCO’s remaining pre-IPO tax benefits. The amount of the
accelerated payment owed to Transocean Holdings is calculated by multiplying
80
percent by the then remaining pre-IPO tax benefits at the July 11, 2007
effective date of the TODCO Acquisition. In August 2007, Hercules made a change
of control payment of approximately $118 million to Transocean Holdings. We
believe Hercules owes an additional amount of approximately $10 million
related to the change of control of TODCO.
The
TSA
also requires Hercules to make additional payments to Transocean Holdings based
on a portion of the tax benefit from the exercise of certain compensatory stock
options to acquire our ordinary shares by TODCO’s current and former employees
and directors, when and if those options are exercised. We estimate that the
amount of payments to Transocean Holdings related to compensatory options that
remain outstanding at September 30, 2007, assuming a Transocean share price
of
$113.05 per share at the time of exercise of the compensatory options (the
actual price of our ordinary shares at the close of trading on September 28,
2007), will be approximately $23 million. However, there can be no assurance
as
to the amount and timing of any payment which Transocean Holdings may receive.
In addition, any future reduction of the pre-IPO tax benefits by the U.S. taxing
authorities upon examination of the TODCO tax returns may require Transocean
Holdings to reimburse TODCO for some of the amounts previously paid. We
recognized $276 million as other income in the third quarter of 2007 for
the change of control payment discussed above and payments received in prior
periods related to TODCO's 2006 and 2007 tax years.
TRANSOCEAN
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED STATEMENTS
(Unaudited)
Note
8―Debt
Debt,
net
of unamortized discounts, premiums and fair value adjustments, is comprised
of
the following (in millions):
|
September 30,
|
December 31,
|
|||||||
|
2007
|
2006
|
|||||||
|
Term
Credit Facility due August 2008
|
$ |
–
|
$ |
700
|
||||
|
Floating
Rate Notes due September 2008 (a)
|
1,000
|
1,000
|
||||||
|
6.625%
Notes due April 2011
|
178
|
180
|
||||||
|
7.375%
Senior Notes due April 2018
|
247
|
247
|
||||||
|
Zero
Coupon Convertible Debentures due May 2020 (put options exercisable
May 2008 and May 2013) (b)
|
18
|
18
|
||||||
|
1.5%
Convertible Debentures due May 2021 (put options exercisable May 2011
and May 2016)
|
400
|
400
|
||||||
|
8%
Debentures due April 2027
|
57
|
57
|
||||||
|
7.45%
Notes due April 2027 (c)
|
95
|
95
|
||||||
|
7.5%
Notes due April 2031
|
598
|
598
|
||||||
|
Total
debt
|
2,593
|
3,295
|
||||||
|
Less
debt due within one year (a)(b)(c)
|
1,018
|
95
|
||||||
|
Total
long-term debt
|
$ |
1,575
|
$ |
3,200
|
||||
______________________
|
(a)
|
The
Floating Rate Notes due September 2008 were classified as debt due
within
one year at September 30, 2007.
|
|
(b)
|
The
Zero Coupon Convertible Debentures were classified as debt due within
one
year at September 30, 2007 since the bondholders have the right to
require us to repurchase the debentures in May
2008.
|
|
(c)
|
The
7.45% Notes were classified as debt due within one year at
December 31, 2006 since holders had the option to require us to
repurchase the notes in April 2007. As of March 31, 2007, we
reclassified these notes as long-term debt, as no holders had notified
us
of their intent to exercise their option by the required notification
date
of March 15, 2007.
|
The
scheduled maturity of our debt assumes the bondholders exercise their options
to
require us to repurchase the Zero Coupon Convertible Debentures and 1.5%
Convertible Debentures in May 2008 and May 2011, respectively. All
amounts are stated at face value, except for the Zero Coupon Convertible
Debentures, which are included at the price we would be required to pay should
the bondholders exercise their right to require us to repurchase the debentures
in May 2008.
The
scheduled maturities are as follows (in millions):
|
Twelve
months ending September 30,
|
||||
|
2008
|
$ |
1,019
|
||
|
2009
|
–
|
|||
|
2010
|
–
|
|||
|
2011
|
565
|
|||
|
2012
|
–
|
|||
|
Thereafter
|
1,004
|
|||
|
Total
|
$ |
2,588
|
||
Revolving
Credit Facility—In July 2005, we entered into a $500 million, five-year
revolving credit agreement (“Revolving Credit Facility”). In May 2006, we
increased the credit limit on the facility from $500 million to $1.0
billion and extended the maturity date by one year from July 2010 to July 2011.
In June 2007, we extended the maturity on the facility by one year from
July 2011 to July 2012 and clarified the method pursuant to which we may insure
our fleet (see Note 10―Contingencies–Retained
Risk). The Revolving Credit Facility bears interest, at our option, at a base
rate or at the London Interbank Offered Rate (“LIBOR”) plus a margin that can
vary from 0.19 percent to 0.58 percent depending on our non-credit enhanced
senior unsecured public debt rating (“Debt Rating”). A facility fee, varying
from 0.06 percent to 0.17 percent depending on our Debt Rating, is incurred
on
the daily amount of the underlying commitment, whether used or unused,
throughout the term of the facility. A utilization fee, varying from 0.05
percent to 0.10 percent depending on our Debt Rating, is payable if amounts
outstanding under the Revolving Credit Facility are greater than or equal to
50 percent of the total underlying commitment. At September 30, 2007, the
applicable margin, facility fee and utilization fee were 0.26 percent, 0.09
percent and 0.100 percent, respectively. The Revolving Credit Facility requires
compliance with various covenants and provisions customary for agreements of
this nature, including a debt to total tangible capitalization ratio, as defined
by the Revolving Credit Facility, of not greater than 60 percent. At
September 30, 2007, we had no borrowings outstanding and $1.0 billion remained
available under this facility.
TRANSOCEAN
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED STATEMENTS
(Unaudited)
Bridge
Loan Facility—In
September 2007, we entered into the Bridge Loan Facility. The terms of the
Bridge Loan Facility contemplate a one-time loan of up to $15 billion at either
(1) a base rate, determined as the greater of (A) the prime loan rate
quoted in The Wall Street Journal Money Rates Section as the prime rate or
(B) the federal funds effective rate plus 0.5 percent, or (2) the reserve
adjusted LIBOR plus the applicable margin, which is based upon our Debt Rating.
As of October 30, 2007, the applicable margin was 0.4 percent.
The
obligation of each lender to make a loan under the Bridge Loan Facility is
subject to the satisfaction of certain conditions, including the execution
of
satisfactory documentation and the consummation, or substantially concurrent
consummation, of the Transactions.
We
may
prepay the Bridge Loan Facility in whole or in part without premium or penalty.
In addition, this facility requires mandatory prepayments of outstanding
borrowings in an amount equal to 100 percent of the net cash proceeds
resulting from any of the following (in each case subject to certain agreed
exceptions): (1) the sale or other disposition of any of our property or
assets above a predetermined threshold; (2) the receipt of certain net
insurance or condemnation proceeds; (3) certain issuances of our equity
securities; and (4) the incurrence of indebtedness for borrowed money by
us.
The
Bridge Loan Facility also contains certain covenants that are applicable during
the period in which any borrowings are outstanding, including a maximum leverage
ratio and covenants restricting our ability to pay dividends. Borrowings under
the Bridge Loan Facility are subject to acceleration upon the occurrence of
events of default.
Debt
Repayments—On
August 13, 2007, we terminated our existing $1.0 billion,
two-year term credit facility that we originally entered into on August 30,
2006
with the lenders party thereto and JPMorgan Chase Bank, N.A. as Administrative
Agent, Citibank, N.A. as Syndication Agent, and The Bank of Tokyo-Mitsubishi
UFJ, Ltd., Calyon New York Branch and The Royal Bank of Scotland plc (the “Term
Credit Facility”) and recognized a loss on the termination of this agreement of
approximately $1 million, in the third quarter of 2007. Under the terms of
the
Term Credit Facility, we were able to request borrowings up to $1.0 billion
over
the first six months of the term. After six months, any unused capacity was
cancelled. Once repaid, the funds could not be reborrowed. At our election,
borrowings could be made under the Term Credit Facility at either (1) the
base rate, determined as the greater of (a) the prime loan rate and
(b) the sum of the weighted average overnight federal funds rate plus 0.50
percent, or (2) LIBOR plus 0.30 percent, based on current credit ratings.
We paid a fee of 0.065 percent per annum on the daily amount of the unused
commitments under the Term Credit Facility through October 3, 2006. In
October 2006, we borrowed the full $1.0 billion in capacity. In
connection with the termination, we repaid $70 million of the outstanding
borrowings on August 6, 2007 and the remaining $400 million on August
13, 2007.
TRANSOCEAN
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED STATEMENTS
(Unaudited)
The
Term
Credit Facility contained specified covenants, including a debt to total
tangible capitalization covenant. Borrowings under the Term Credit Facility
were
subject to acceleration upon the occurrence of events of default.
Debt
Conversions—Holders of our Zero Coupon Convertible Debentures have the
option to require us to convert their debentures into our ordinary shares at
a
rate of 8.1566 ordinary shares per $1,000 debenture any time prior to maturity.
During the three and nine months ended September 30, 2007, we issued 203 and
1,426 ordinary shares in exchange for $25,000 and $175,000 aggregate principal
amount of debentures, respectively. See Note 14—Subsequent Events.
Holders
of our 1.5% Convertible Debentures have the option to require us to convert
their debentures into our ordinary shares at a rate of 13.8627 ordinary shares
per $1,000 debenture any time prior to maturity. During the three and nine
months ended September 30, 2007, we issued 623 ordinary shares in exchange
for
$45,000 aggregate principal amount of debentures. See Note 14—Subsequent
Events.
Note
9―Earnings
Per Share
The
reconciliation of the numerator and
denominator used for the computation of basic and diluted earnings per share
is
as follows (in millions, except per share data):
|
Three months ended
September 30,
|
Nine months ended
September 30,
|
|||||||||||||||
|
2007
|
2006
|
2007
|
2006
|
|||||||||||||
|
Numerator
for basic earnings per share
|
||||||||||||||||
|
Net
income for basic earnings per share
|
$ |
973
|
$ |
309
|
$ |
2,075
|
$ |
764
|
||||||||
|
Numerator
for diluted earnings per share
|
||||||||||||||||
|
Net
income
|
$ |
973
|
$ |
309
|
$ |
2,075
|
$ |
764
|
||||||||
|
Add
back interest expense on the 1.5% convertible debentures
|
1
|
2
|
5
|
5
|
||||||||||||
|
Net
income for diluted earnings per share
|
$ |
974
|
$ |
311
|
$ |
2,080
|
$ |
769
|
||||||||
|
Denominator
for diluted earnings per share
|
||||||||||||||||
|
Weighted-average
shares outstanding for basic earnings per share
|
289
|
312
|
289
|
320
|
||||||||||||
|
Effect
of dilutive securities:
|
||||||||||||||||
|
Employee
stock options and unvested stock grants
|
3
|
3
|
3
|
4
|
||||||||||||
|
Warrants
to purchase ordinary shares
|
2
|
3
|
3
|
3
|
||||||||||||
|
1.5%
convertible debentures
|
6
|
5
|
6
|
5
|
||||||||||||
|
Adjusted
weighted-average shares and assumed conversions for diluted earnings
per
share
|
300
|
323
|
301
|
332
|
||||||||||||
|
Basic
earnings per share
|
||||||||||||||||
|
Net
income
|
$ |
3.36
|
$ |
0.99
|
$ |
7.17
|
$ |
2.39
|
||||||||
|
Diluted
earnings per share
|
||||||||||||||||
|
Net
income
|
$ |
3.24
|
$ |
0.96
|
$ |
6.91
|
$ |
2.31
|
||||||||
The
effect of the Zero Coupon Convertible Debentures on the calculation of net
income for diluted earnings per share and adjusted weighted-average shares
and
assumed conversions for diluted earnings per share is not presented, as it
is
not material for any of the periods presented.
TRANSOCEAN
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED STATEMENTS
(Unaudited)
Note
10―Contingencies
Legal
Proceedings—Several of our subsidiaries have been named, along with
numerous unaffiliated defendants, in several complaints that have been filed
in
the Circuit Courts of the State of Mississippi involving over 700 persons that
allege personal injury arising out of asbestos exposure in the course of their
employment by some of these defendants between 1965 and 1986. The complaints
also name as defendants certain of TODCO's subsidiaries to whom we may owe
indemnity. Further, the complaints name other unaffiliated defendant companies,
including companies that allegedly manufactured drilling related products
containing asbestos. The complaints allege that the defendant drilling
contractors used those asbestos-containing products in offshore drilling
operations, land based drilling operations and in drilling structures, drilling
rigs, vessels and other equipment and assert claims based on, among other
things, negligence and strict liability, and claims authorized under the Jones
Act. The plaintiffs generally seek awards of unspecified compensatory and
punitive damages. We have not yet been able to conduct extensive discovery
nor
determine the number of plaintiffs that were employed by our subsidiaries or
otherwise have any connection with our drilling operations. We intend to defend
ourselves vigorously and, based on the limited information available to us
at
this time, we do not expect the liability, if any, resulting from these matters
to have a material adverse effect on our consolidated financial position,
results of operations or cash flows.
In
1990
and 1991, two of our subsidiaries were served with various assessments
collectively valued at approximately $14 million from the municipality of Rio
de
Janeiro, Brazil to collect a municipal tax on services. We believe that neither
subsidiary is liable for the taxes and have contested the assessments in the
Brazilian administrative and court systems. We have received several adverse
rulings by various courts with respect to a June 1991 assessment, which is
valued at approximately $13 million. We initially tried to challenge the
assessment by means of a writ of mandamus. However, we did not receive an
injunction in the above-mentioned writ and the government is attempting to
enforce the judgment on this assessment (the amount claimed is approximately
$27
million, which exceeds the amount we believe is at issue). In response, we
have
presented a specific motion to stay the execution based on a $27 million
guarantee in the form of oil barrels provided on our behalf by the Brazilian
government-controlled oil company, Petrobras. We received a favorable ruling
in
connection with a disputed August 1990 assessment, and the government has lost
what is expected to be its final appeal with respect to that ruling. We also
are
awaiting a ruling from the Taxpayer's Council in connection with an October
1990
assessment. If our defenses are ultimately unsuccessful, we believe that
Petrobras has a contractual obligation to reimburse us for municipal tax
payments. We do not expect the liability, if any, resulting from these
assessments to have a material adverse effect on our consolidated financial
position, results of operations or cash flows.
The
Indian Customs Department, Mumbai alleged in July 1999 that the initial entry
into India in 1988 and other subsequent movements of the Trident II
jackup rig operated by the subsidiary constituted imports and exports for which
proper customs procedures were not followed and sought payment of customs duties
of approximately $31 million based on an alleged 1998 rig value of $49 million,
plus interest and penalties, and confiscation of the rig. In January 2000,
the
Customs Department found that we had imported the rig improperly and
intentionally concealed the import from the authorities, and directed us to
pay
certain other fees and penalties in addition to the amount of customs duties
owed. We appealed the Customs Department ruling and an appellate tribunal
granted our request that the confiscation be stayed pending the appeal. The
appellate tribunal also found that the rig was imported without proper
documentation or payment of duties and sustained our position regarding the
value of the rig at the time of import as $13 million and ruled that subsequent
movements of the rig were not liable to import documentation or duties, thus
limiting our exposure as to custom duties to approximately $6 million. The
Mumbai High Court’s decision in 2006, together with the Supreme Court of India’s
decision in February 2007 to dismiss the leave to appeal petition filed by
the
Customs Department, have effectively affirmed the appellate ruling. We and
our
customer agreed to pursue and obtained the issuance of the required
documentation from the Ministry of Petroleum that, if accepted by the Customs
Department, would reduce the duty to nil. The Customs Department did not accept
the documentation or agree to refund the duties already paid. We are pursuing
our remedies against the Customs Department and our customer. We do not expect
the liability, if any, resulting from this matter to have a material adverse
effect on our consolidated financial position, results of operations or cash
flows.
TRANSOCEAN
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED STATEMENTS
(Unaudited)
One
of
our subsidiaries is involved in an action with respect to a customs matter
relating to the Sedco 710 semisubmersible drilling rig. Prior to
our merger with Sedco Forex, this drilling rig, which was working for Petrobras
in Brazil at the time, had been admitted into the country on a temporary basis
under authority granted to a Schlumberger entity. Prior to the Sedco Forex
merger, the drilling contract with Petrobras was transferred from the
Schlumberger entity to an entity that would become one of our subsidiaries,
but
Schlumberger did not transfer the temporary import permit to any of our
subsidiaries. In early 2000, the drilling contract was extended for another
year. On January 10, 2000, the temporary import permit granted to the
Schlumberger entity expired, and renewal filings were not made until later
that
January. In April 2000, the Brazilian customs authorities cancelled the
temporary import permit. The Schlumberger entity filed an action in the
Brazilian federal court of Campos for the purpose of extending the temporary
admission. Other proceedings were also initiated in order to secure the transfer
of the temporary admission to our subsidiary. Ultimately, the court permitted
the transfer of the temporary admission from Schlumberger to our subsidiary
but
did not rule on whether the temporary admission could be extended without the
payment of a financial penalty. During the first quarter of 2004, the Brazilian
customs authorities issued an assessment totaling approximately
$125 million at that time against our subsidiary.
The
first
level Brazilian court ruled in April 2007 that the temporary admission granted
to our subsidiary had expired which allowed the Brazilian customs authorities
to
execute on their assessment. Following this ruling, the Brazilian customs
authorities issued a revised assessment against our subsidiary. As of
October 30, 2007, the U.S. dollar equivalent of this assessment was
approximately $210 million in aggregate, including interest, which we contest.
We are not certain as to the basis for the increase in the amount of the
assessment, and in September 2007, we received a temporary ruling in our favor
from a Brazilian federal court that the valuation method used by the Brazilian
customs authorities was incorrect. We intend to continue to aggressively contest
this matter and we have appealed the first level Brazilian court’s ruling to a
higher level court in Brazil. There may be further judicial or administrative
proceedings that result from this matter. While the court has granted us the
right to continue our appeal without the posting of a bond, it is possible
that
we may be required to post a bond for up to the full amount of the assessment
in
connection with these proceedings. We have also put Schlumberger on notice
that
we consider any assessment to be solely the responsibility of Schlumberger,
not
our subsidiary. Nevertheless, we expect that the Brazilian customs authorities
will continue to seek to recover the assessment solely from our subsidiary,
not
Schlumberger. Schlumberger has denied any responsibility for this matter, but
remains a party to the proceedings. We do not expect the liability, if any,
resulting from this matter to have a material adverse effect on our consolidated
financial position, results of operations or cash flows.
In
the third quarter of 2006, we
received tax assessments of approximately $122 million from the state tax
authorities of Rio de Janeiro in Brazil against one of our Brazilian
subsidiaries for customs taxes on equipment imported into the state in
connection with our operations. The assessments resulted from a preliminary
finding by these authorities that our subsidiary’s record keeping practices were
deficient. We continue to review documents related to the assessments, and
while
our review is not complete, we currently believe that the substantial majority
of these assessments are without merit. We filed an initial response with the
Rio de Janeiro tax authorities on September 9, 2006 refuting these
additional tax assessments. In September 2007, we received confirmation
from the state tax authorities that they believe the additional tax assessments
are valid, and then we filed an appeal on September 27, 2007 to the state
taxpayers council contesting these 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 consolidated financial position,
results of operations or cash flows.
TRANSOCEAN
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED STATEMENTS
(Unaudited)
We
are
involved in a number of other lawsuits, all of which have arisen in the ordinary
course of our business. We do not expect the liability, if any, resulting from
these matters to have a material adverse effect on our consolidated financial
position, results of operations or cash flows. We are also involved in various
tax matters (see Note 7―Income
Taxes).
Retained
Risk—We have renewed our insurance coverages for the 12-month period
beginning May 1, 2007. Under the new program, we generally maintain a $125
million per occurrence deductible on our hull and machinery, which is subject
to
an aggregate deductible of $250 million. In addition, we maintain a $10 million
per occurrence deductible on crew personal injury liability and $5 million
per
occurrence deductible on third-party property claims, which together are subject
to an aggregate deductible of $50 million that is applied to any occurrence
in
excess of the per occurrence deductible until the aggregate deductible is
exhausted.
At
present, the insured value of our drilling rig fleet is approximately $22
billion in aggregate. We also carry $950 million of third-party liability
coverage exclusive of the personal injury liability deductibles, third-party
property liability deductibles and retention amounts described above. We retain
the risk through self-insurance for any losses in excess of the $950 million
limit. We do not generally have commercial market insurance coverage for
physical damage losses to the Transocean fleet due to hurricanes in the U.S.
Gulf of Mexico and war perils worldwide. We do not carry insurance for loss
of
revenue. In the opinion of management, adequate accruals have been made based
on
known and estimated losses related to such exposures.
Letters
of Credit and Surety Bonds—We had letters of credit outstanding totaling
$404 million and $405 million at September 30, 2007 and December 31, 2006,
respectively. These letters of credit guarantee various contract bidding and
performance activities under various uncommitted lines provided by several
banks.
As
is
customary in the contract drilling business, we also have various surety bonds
in place that secure customs obligations relating to the importation of our
rigs
and certain performance and other obligations. Surety bonds outstanding totaled
$8 million and $6 million at September 30, 2007 and December 31, 2006,
respectively.
Note
11―Stock
Warrants
On
July 26, 2007, we issued 861,700
ordinary shares and we received $16 million in cash related to the exercise
of
49,240 warrants. At September 30, 2007, 154,660 warrants were outstanding to
purchase 2,706,550 ordinary shares at an exercise price of $19.00 per share.
The
warrants expire on May 1, 2009. See Note 3—Merger with GlobalSantaFe
Corporation.
Note
12―Retirement
Plans and Other Postemployment Benefits
Defined
Benefit Pension Plans—We have several defined benefit pension plans, both
funded and unfunded, covering substantially all of our U.S. employees. We also
have various defined benefit plans in Norway, Nigeria, Egypt and Indonesia
that
cover our employees and certain frozen plans acquired in connection with the
R&B Falcon merger that cover certain current and former
employees.
TRANSOCEAN
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED STATEMENTS
(Unaudited)
Net
periodic benefit cost for these defined benefit pension plans includes the
following components (in millions):
|
Three months ended
September 30,
|
Nine months ended
September 30,
|
|||||||||||||||
|
2007
|
2006
|
2007
|
2006
|
|||||||||||||
|
Components
of net periodic benefit cost (a)
|
||||||||||||||||
|
Service
cost
|
$ |
5
|
$ |
5
|
$ |
16
|
$ |
15
|
||||||||
|
Interest
cost
|
6
|
5
|
16
|
15
|
||||||||||||
|
Expected
return on plan assets
|
(5 | ) | (5 | ) | (16 | ) | (15 | ) | ||||||||
|
Amortization
of prior period service cost
|
–
|
–
|
1
|
1
|
||||||||||||
|
Recognized
net actuarial losses
|
1
|
1
|
3
|
3
|
||||||||||||
|
Net
periodic benefit cost
|
$ |
7
|
$ |
6
|
$ |
20
|
$ |
19
|
||||||||
______________
|
|
(a)
|
Amounts
are before income tax effect.
|
We
contributed approximately $17 million to the defined benefit pension plans
during the nine months ended September 30, 2007. We expect to make an additional
contribution of approximately $6 million to our defined benefit pension plans
in
the remaining three months of 2007, which we expect will be funded from cash
flow from operations.
Postretirement
Benefits Other Than
Pensions (“OPEB”)—We have several unfunded contributory and noncontributory
OPEB plans covering substantially all of our U.S. employees. Net periodic
benefit costs for these other postretirement plans and their components,
including service cost, interest cost, amortization of prior service cost and
recognized net actuarial losses, were less than $1 million and $2 million for
each of the three and nine months ended September 30, 2007 and 2006,
respectively.
We
contributed approximately $2 million to the other postretirement benefit plans
during the nine months ended September 30, 2007. We expect to make less than
$1
million in additional contributions to other postretirement benefit plans in
the
remaining three months of 2007, which we expect to fund using cash flows from
operations.
Note
13—Supplementary Cash Flow Information
Non-cash
investing activities for the nine months ended September 30, 2007 and 2006
included $80 million and $51 million, respectively, related to
accruals of capital expenditures. The accruals have been reflected in the
consolidated balance sheet as an increase in property and equipment, net and
in
accounts payable.
Cash
payments for interest were $116 million and $52 million for the nine months
ended September 30, 2007 and 2006, respectively. Cash payments for income
taxes, net, were $163 million and $74 million for the nine months ended
September 30, 2007 and 2006, respectively.
Note
14―SubsequentEvents
Pacific
Drilling— In April 2007, we entered into a marketing and purchase option
agreement with Pacific Drilling Limited that provided us with the exclusive
marketing right for two newbuild Ultra-Deepwater Floaters as well as an option
to purchase a 50 percent interest in a joint venture company through which
we
and Pacific Drilling would own the drillships. In October 2007, we obtained
a firm commitment for one of the drillships, and we exercised the
option to acquire a 50 percent interest in the joint venture in exchange for
approximately $238 million, representing 50 percent of the documented costs
of
the drillships at the time of exercise. We are providing construction management
services and have agreed to provide operating management services once the
drillships begin operations. Beginning in October 2010, Pacific Drilling will
have the right to exchange its interest in the joint venture for our ordinary
shares or cash.
TRANSOCEAN
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED STATEMENTS
(Unaudited)
We
have
evaluated our interest in the joint venture company and have determined that
the
joint venture company meets the definition of a variable interest entity. We
have identified our company as the primary beneficiary under FASB Interpretation
No. 46 (revised December 2003), Consolidation of Variable Interest
Entities. As a result, we will consolidate the joint venture company in our
financial statements and the interest that is not owned by us will be reflected
as minority interest on our consolidated balance sheets.
Debt
Conversion—As of October 26, 2007, we issued 146,818 ordinary shares
subsequent to September 30, 2007 upon conversion of $18,000,000 aggregate
principal amount of our Zero Convertible Debentures at a rate of 8.1566 ordinary
shares per $1,000 debenture.
As
of
October 26, 2007, we issued 886,684 ordinary shares subsequent to
September 30, 2007 upon conversion of $63,962,000 aggregate principal amount
of
our 1.5% Convertible Debentures at a rate of 13.8627 ordinary shares per
$1,000
debenture.
On
October 19, 2007, we called for redemption our Zero Coupon Convertible
Debentures due May 2020 and our 1.5% Convertible Debentures due 2021 that
were outstanding on that date.
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 Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements in this quarterly report include, but are not limited
to, statements about the following subjects:
|
·
|
contract
commencements,
|
·
|
income
related to and any payments to
|
|
| · | contract option exercises, | be received under the TODCO tax | ||
| · | revenues, | sharing agreement, | ||
|
·
|
expenses,
|
·
|
uses
of excess cash, including ordinary
|
|
| · | results of operations, | share repurchases, | ||
|
·
|
commodity
prices,
|
·
|
the
timing and funding of share
|
|
| · | customer drilling programs, | repurchases, | ||
|
·
|
supply
and demand,
|
·
|
issuance
of new debt,
|
|
|
·
|
utilization
rates,
|
·
|
debt
reduction,
|
|
|
·
|
dayrates,
|
·
|
planned
asset sales,
|
|
|
·
|
contract
backlog,
|
·
|
timing
of asset sales,
|
|
|
·
|
the
timing and closing of the
|
·
|
proceeds
from asset sales,
|
|
|
GlobalSantaFe
merger and related
|
·
|
our
effective tax rate,
|
||
|
transactions,
|
·
|
changes
in tax laws, treaties and
|
||
| · | consideration payable in connection | regulations, | ||
|
with
the GlobalSantaFe merger
and
|
·
|
tax
assessments,
|
||
|
|
related
transactions,
|
·
|
our
other expectations with regard to
|
|
| · | effects and results of the GlobalSantaFe | market outlook, | ||
|
|
merger
and related transactions,
|
·
|
operations
in international markets,
|
|
|
·
|
planned
shipyard projects and rig
|
·
|
the
level of expected capital
|
|
| mobilizations and their effects, | expenditures, | |||
|
·
|
newbuild
projects and opportunities,
|
·
|
results
and effects of legal proceedings
|
|
| · | the upgrade projects for the Sedco 700– | and governmental audits and | ||
| series semisubmersible rigs, | assessments, | |||
|
·
|
other
major upgrades,
|
·
|
adequacy
of insurance,
|
|
|
·
|
the
potential purchase of an ownership
|
·
|
liabilities
for tax issues, including those
|
|
| interest in a joint venture that will own | associated with our activities in Brazil, | |||
| the fourth Enterprise-class drillship, | Norway and the United States, | |||
|
·
|
contract
awards,
|
·
|
liquidity,
|
|
|
·
|
drillship
delivery dates,
|
·
|
cash
flow from operations,
|
|
|
·
|
expected
downtime,
|
·
|
adequacy
of cash flow for our
|
|
| · | insurance proceeds, | obligations, | ||
|
·
|
cash
investments of our wholly-owned
|
·
|
effects
of accounting changes,
|
|
|
|
captive
insurance company,
|
·
|
adoption
of accounting policies,
|
|
|
·
|
future
activity in the deepwater, mid-
|
·
|
pension
plan and other postretirement
|
|
| water and the jackup market sectors, | benefit plan contributions, | |||
|
·
|
market
outlook for our various
|
·
|
benefit
payments, and
|
|
|
|
geographical
operating sectors,
|
·
|
the
timing and cost of completion of
|
|
|
·
|
capacity
constraints for ultra-deepwater
|
capital projects. | ||
|
|
rigs
and other rig classes,
|
|||
|
·
|
effects
of new rigs on the market,
|
Forward-looking
statements in this
quarterly report are identifiable by use of the following words and other
similar expressions among others:
|
·
|
“anticipates”
|
·
|
“may”
|
|
|
·
|
“believes”
|
·
|
“might”
|
|
|
·
|
“budgets”
|
·
|
“plans”
|
|
|
·
|
“could”
|
·
|
“predicts”
|
|
|
·
|
“estimates”
|
·
|
“projects”
|
|
|
·
|
“expects”
|
·
|
“scheduled”
|
|
|
·
|
“forecasts”
|
·
|
“should”
|
|
|
·
|
“intends”
|
|
Such
statements are subject to numerous risks, uncertainties and assumptions,
including, but not limited to:
|
|
·
|
those
described under “Item 1A. Risk Factors” included herein and in our Annual
Report on Form 10–K for the year ended December 31, 2006, our Quarterly
Reports on Form 10-Q for the quarterly periods ended March 31, 2007
and
June 30, 2007, and the definitive joint proxy statement filed by
GlobalSantaFe and us on October 3,
2007,
|
|
|
·
|
the
adequacy of sources of liquidity,
|
|
|
·
|
costs,
delays and other difficulties related to the proposed merger and
related
transactions with GlobalSantaFe (including the satisfaction of closing
conditions),
|
|
|
·
|
our
inability to obtain regulatory clearances and shareholder approval
and
satisfy closing conditions for the GlobalSantaFe merger and related
transactions,
|
|
|
·
|
our
inability to obtain a drilling contract for the second drillship
acquired
through our purchase of a 50 percent interest in our joint venture
with
Pacific Drilling
|
|
|
·
|
the
effect and results of litigation, tax audits and contingencies,
and
|
|
|
·
|
other
factors discussed in this quarterly report and in our other filings
with
the SEC, which are available free of charge on the SEC’s website at
www.sec.gov.
|
Should
one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from 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, and we undertake no obligation to publicly update or
revise any forward-looking statements.
The
following information should be read in conjunction with the unaudited condensed
consolidated financial statements included under “Item 1. Financial Statements”
herein and the audited consolidated financial statements and the notes thereto
and “Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations” included in our Annual Report on Form 10-K for the year
ended December 31, 2006.
Overview
Transocean
Inc. (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. As of October 30, 2007, we owned, had partial ownership interests in
or
operated 82 mobile offshore drilling units. As of this date, our fleet
consisted of 34 High-Specification semisubmersibles and drillships
(“High-Specification Floaters”), 19 Other Floaters, 25 Jackups and four
Other Rigs. We also have six High-Specification Floaters under
construction.
Our
mobile offshore drilling fleet is considered one of the most modern and
versatile fleets in the world. Our primary business is to contract these
drilling rigs, related equipment and work crews primarily on a dayrate basis
to
drill oil and gas wells. We specialize in technically demanding segments of
the
offshore drilling business with a particular focus on deepwater and harsh
environment drilling services. We also provide additional services, including
integrated services.
Key
measures of our total company results of operations and financial condition
are
as follows (in millions, except average daily revenue and
percentages):
|
Three
months ended
September
30,
|
Nine
months ended September 30,
|
|||||||||||||||||||||||
|
2007
|
2006
|
Change
|
2007
|
2006
|
Change
|
|||||||||||||||||||
|
Average
daily revenue (a)(b)
|
$ |
219,710
|
$ |
146,900
|
$ |
72,810
|
$ |
206,760
|
$ |
132,000
|
$ |
74,760
|
||||||||||||
|
Utilization
(b)(c)
|
89 | % | 87 | % |
n/a
|
89 | % | 83 | % |
n/a
|
||||||||||||||
|
Statement
of Operations
|
||||||||||||||||||||||||
|
Operating
revenues
|
$ |
1,538
|
$ |
1,025
|
$ |
513
|
$ |
4,300
|
$ |
2,696
|
$ |
1,604
|
||||||||||||
|
Operating
and maintenance expense
|
663
|
561
|
102
|
1,858
|
1,585
|
273
|
||||||||||||||||||
|
Operating
income
|
753
|
390
|
363
|
2,086
|
963
|
1,123
|
||||||||||||||||||
|
Net
income
|
973
|
309
|
664
|
2,075
|
764
|
1,311
|
||||||||||||||||||
|
September
30,
2007
|
December 31,
2006
|
Change
|
||||||||||
|
Balance
Sheet (at end of period)
|
||||||||||||
|
Cash
and cash equivalents
|
$ |
618
|
$ |
467
|
$ |
151
|
||||||
|
Total
assets
|
12,700
|
11,476
|
1,224
|
|||||||||
|
Total
debt
|
2,593
|
3,295
|
(702 | ) | ||||||||
_____________________
“n/a”
means not applicable
|
|
(a)
|
Average
daily revenue is defined as contract drilling revenue earned per
revenue
earning day. A revenue earning day is defined as a day for which
a rig
earns dayrate after commencement of
operations.
|
|
|
(b)
|
Excludes
a drillship engaged in scientific geological coring activities, the
Joides Resolution, that is owned by a joint venture in which we
have a 50 percent interest and is accounted for under the equity
method of
accounting.
|
|
|
(c)
|
Utilization
is the total actual number of revenue earning days as a percentage
of the
total number of calendar days in the
period.
|
We
continue to experience strong demand
for all of our asset classes, which has resulted in high utilization and
historically high dayrates. We are seeing leading dayrates at or near record
levels for most rig classes and customer interest for multi-year contracts.
Interest in High-Specification Floaters remains particularly
strong.
A
shortage of qualified personnel in
our industry is driving up compensation costs and suppliers are increasing
prices as their backlogs grow. These labor and vendor cost increases, while
meaningful, are not expected to be significant in comparison with our expected
increase in revenue in 2007 and beyond.
Our
revenues for the nine months ended September 30, 2007 increased from the prior
year period primarily as a result of increased activity and higher dayrates.
Our
operating and maintenance expenses for the same period increased primarily
as a
result of higher labor and rig maintenance costs in connection with such
increased activity (see “—Operating Results”). In addition, our financial
results for the nine months ended September 30, 2007 included the recognition
of
gains on the sales of the tender rig Charley Graves and a swamp barge
Searex VI. Cash increased during the nine months ended September
30,
2007 primarily as a result of cash provided by operating activities, proceeds
received from the sale of assets and exercises of stock options, partially
offset by increased capital expenditures, repayments on our Term Credit Facility
and repurchases of our ordinary shares.
We
operate in one business segment, which consists of floaters, jackups and other
rigs used in support of offshore drilling activities and offshore support
services on a worldwide basis. 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 build or upgrade rigs are determined by the
activities and needs of our customers.
We
categorize our fleet as follows: (1) “High-Specification Floaters,”
consisting of our “Ultra-Deepwater Floaters,” “Other Deepwater Floaters” and
“Other High-Specification Floaters,” (2) “Other Floaters,”
(3) “Jackups” and (4) “Other Rigs.” Within our High-Specification
Floaters category, we consider our Ultra-Deepwater Floaters to be the
semisubmersibles Deepwater Horizon, Cajun Express,
Deepwater Nautilus, Sedco Energy and Sedco Express
and the drillships Deepwater Discovery, Deepwater Expedition,
Deepwater Frontier, Deepwater Millennium, Deepwater
Pathfinder, Discoverer Deep Seas, Discoverer Enterprise
and Discoverer Spirit. These rigs have high-pressure mud pumps and a
water depth capability of 7,500 feet or greater. The Other Deepwater Floaters
are generally those other semisubmersible rigs and drillships that have a water
depth capacity of at least 4,500 feet. The Other High-Specification Floaters,
built as fourth-generation rigs in the mid to late 1980s, are capable of
drilling in harsh environments and have greater displacement than previously
constructed rigs resulting in larger variable load capacity, more useable deck
space and better motion characteristics. The Other Floaters category is
generally comprised of those non-high-specification floaters with a water depth
capacity of less than 4,500 feet. The Jackups category consists of our jackup
fleet, and the Other Rigs category consists of other rigs that are of a
different type or use. These categories reflect how we view, and how we believe
our investors and the industry generally view, our fleet.
Significant
Events
Merger
with GlobalSantaFe Corporation—On July 21, 2007, we entered into an
Agreement and Plan of Merger (the “Merger Agreement”) with GlobalSantaFe
Corporation (“GlobalSantaFe”) and Transocean Worldwide Inc., our direct wholly
owned subsidiary. Subject to obtaining regulatory clearances, shareholder
approval and satisfying or waiving all other closing conditions, we intend
to
complete the transactions contemplated by the Merger Agreement (the
“Transactions”) on or before December 31, 2007. See Notes to Condensed
Consolidated Statements Note 3—Merger with GlobalSantaFe
Corporation.
TODCO
Tax Sharing Agreement (“TSA”)—On July 11, 2007, Hercules Offshore, Inc.
(“Hercules”) completed the acquisition of TODCO. The TSA requires Hercules to
make an accelerated change of control payment to Transocean Holdings within
30
days of the date of the acquisition as a result of the deemed utilization of
TODCO’s pre-IPO tax benefits. We received a $118 million change of control
payment from Hercules in August 2007. We recognized $276 million as other income
in the third quarter of 2007 for this accelerated payment and payments received
in prior periods related to TODCO's 2006 and 2007 tax years. See Notes to
Condensed Consolidated Statements Note 7—Income Taxes.
Construction
Program—In June 2007, we were awarded a drilling contract requiring the
construction of a fourth enhanced Enterprise-class drillship. We expect the
rig
to be contributed to a joint venture in which we expect to retain a 65 percent
ownership interest. The newbuild is expected to commence operations during
the
third quarter of 2010. See “—Outlook–Drilling Market.”
Pacific
Drilling— In April 2007, we entered into a marketing and purchase option
agreement with Pacific Drilling Limited that provided us with the exclusive
marketing right for two newbuild Ultra-Deepwater Floaters as well as an option
to purchase a 50 percent interest in a joint venture company through which
we
and Pacific Drilling would own the drillships. In October 2007, we obtained
a firm commitment for one of the drillships, and we exercised the
option to acquire a 50 percent interest in the joint venture in
exchange for approximately $238 million, representing 50 percent of the
documented costs of the drillships at the time of exercise. We are providing
construction management services and have agreed to provide operating management
services once the drillships begin operations. Beginning on October 18, 2010,
Pacific Drilling will have the right to exchange its interest in the joint
venture for our ordinary shares or cash.
Repurchase
of Ordinary Shares—During the nine months ended September 30, 2007, we
repurchased and retired 5.2 million of our ordinary shares at a total cost
of
$400 million. See “—Liquidity and Capital Resources–Sources and Uses of
Liquidity.”
Debt
Repayments—On August 13, 2007, we terminated our existing
$1.0 billion, two-year term credit facility, having repaid the
$470 million balance which was outstanding at June 30, 2007 and recognized
a loss on the termination of approximately $1 million in the third quarter
of 2007.
Outlook
For
purposes of the following discussion, we have focused solely on our outlook
for
Transocean on a consolidated basis and have not included the impact, if any,
that the completion of our proposed merger with GlobalSantaFe would have on
our
outlook.
Drilling
Market—Demand for offshore drilling capacity continues to be strong,
particularly for rigs capable of drilling in deepwater. Our High-Specification
Floater fleet is fully committed in 2007 and 2008. None of our Other
Floater rigs have uncommitted time for the remainder of 2007, and there are
only five rigs remaining in this fleet that have any available uncommitted
time
in 2008. We have one jackup rig that has uncommitted time in 2007,
and 9 jackup rigs that have uncommitted time in 2008.
We
have been successful in building contract backlog within our High-Specification
Floater fleet with 30 of our 40 current and future High-Specification
Floaters, including the six newbuilds and the two Sedco 700-series
upgrades, contracted into or beyond 2010 as of October 30, 2007. These 30
units include 11 of our 13 current Ultra-Deepwater Floaters and five of
our six new rigs currently under construction with long term contracts upon
delivery. Our total contract backlog of approximately $23 billion as of October
30, 2007 includes approximately $16 billion of backlog represented by our
High-Specification Floaters. We believe the long-term outlook for deepwater
capable rigs continues to be strong.
On
October 18, 2007, the Deepwater Pacific 1 was awarded a firm commitment
for a four-year contract which may be converted on or prior to October 31,
2008
to a five-year drilling contract. The Deepwater Pacific 1 is under
construction and will be owned 50 percent by us through our joint venture with
Pacific Drilling. The drilling contract is expected to commence in the third
quarter of 2009 following shipyard construction, sea trials, mobilization to
location and customer acceptance. The joint venture is also constructing a
second deepwater newbuild rig, the Deepwater Pacific 2, which is
expected to be completed in the fourth quarter of 2009. We are
currently in active discussions with several customers regarding the award
of a
long-term contract for the rig. We estimate total capital expenditures for
the
construction of these rigs to be approximately $685 million and
$665 million, excluding capitalized interest, respectively. As of October
18, 2007, we and Pacific Drilling had each paid $238 million in documented
costs for the two rigs.
In
June 2007, we were awarded a
five-year drilling contract for a fourth enhanced Enterprise-class drillship.
The enhanced Enterprise-class drillship is expected to be owned and operated
by
a joint venture which is expected to be 65 percent owned by us and 35 percent
owned by an Angolan partner. We estimate total capital expenditure for the
construction of this rig to be approximately $640 million, excluding
capitalized interest. We currently expect this rig to begin operations in Angola
during the third quarter of 2010, after construction in South Korea followed
by
sea trials, mobilization to Angola and customer acceptance.
Future
demand for deepwater capable rigs should benefit from successful drilling
efforts in the lower tertiary trend of the U.S. Gulf of Mexico; the discovery
of
light oil and non-associated gas in the deepwaters of Brazil; continued
exploration success in the deepwaters offshore India; the recent discovery
in
the deepwaters of the South China Sea; and the exploration activity in the
Orphan Basin offshore Eastern Canada. Additionally, the continued exploration
success in the deepwaters of West Africa, the opening of additional deepwater
acreage in the U.S. Gulf of Mexico and the announced plans by Pemex for ultra
deepwater drilling in Mexican waters of the Gulf of Mexico support our
optimistic outlook for long term contracts and favorable dayrates in the
deepwater drilling market sector. As of October 30, 2007, none of our
High-Specification Floater fleet contract days are uncommitted for the remainder
of 2007 and 2008, while approximately 10 percent and 36 percent are
uncommitted in2009 and 2010, respectively.
Our
Other
Floater fleet, comprised of 19 semisubmersible rigs, is largely committed
to contracts that extend through 2007, and we continue to see customer demand
for both short term and multi-year contracts for these units. As of October
30,
2007, none of our Other Floater fleet contract days are uncommitted for the
remainder of 2007, while approximately 12 percent, 48 percent and 74 percent
are
uncommitted in 2008, 2009 and 2010, respectively.
We
expect
to remain at or above current utilization for our Jackup fleet for the remainder
of 2007. While we have one Jackup rig that is currently idle, we are
in advanced discussions with several customers regarding the award of drilling
contracts for this rig. We believe that Asia, India and the Middle East will
remain the primary sources of incremental demand for jackup rigs in the near
to
intermediate term, but there are a large number of new jackup rigs under
construction without drilling contracts that are scheduled to be delivered
in
2008 and 2009. We expect to remain at or near full utilization with dayrates
remaining relatively flat through the first half of 2008; beyond that, we do
not
know what impact, if any, that this increase in supply will have on this market
sector. As of October 30, 2007, four percent of our Jackup fleet contract
days are uncommitted for the remainder of 2007, while approximately 22 percent,
46 percent and 73 percent are uncommitted in 2008, 2009 and 2010,
respectively.
We
expect
our out-of-service time for the fourth quarter of 2007 to be in line with the
out-of-service time we incurred during the third quarter of 2007.
We
expect
each of the following items to contribute to a continued increase in our
revenues for the fourth quarter of 2007:
|
|
·
|
a
continuing improvement of dayrates primarily on our High-Specification
Floaters and Other Floaters; and
|
|
|
·
|
the
return to operations of certain of our High-Specification Floaters
and
Other Floaters that had been out of service during the third
quarter.
|
We
expect
each of the following items to contribute to a continued increase in our
operating and maintenance costs for the fourth quarter of 2007:
|
|
·
|
ongoing
industry inflation with respect to our shipyard projects, maintenance
programs and labor costs; and
|
|
|
·
|
the
return to operations of certain of our High-Specification Floaters
and
Other Floaters that had been out of service during the third
quarter.
|
We
have seven existing contracts with fixed-priced or capped options for dayrates
that we believe are less than current market dayrates. We expect that three
of
these fixed-price contract options will be exercised by our customers either
in
the fourth quarter of 2007 or during 2008, which would preclude us from taking
full advantage of any increased market rates for rigs subject to these contract
options. Well-in-progress or similar provisions in our existing contracts may
delay the start of higher dayrates in subsequent contracts, and some of the
delays have been and could be significant.
Our
operations are geographically dispersed in oil and gas exploration and
development areas throughout the world. Rigs can be moved from one region to
another, but the cost of moving a rig and the availability of rig-moving vessels
may cause the supply and demand balance to vary somewhat between regions.
However, significant variations between regions do not tend to persist long-term
because of rig mobility. Consequently, we operate in a single, global offshore
drilling market.
Insurance
Matters—We periodically evaluate our hull and machinery and third-party
liability insurance limits and self-insured retentions. Effective May 1, 2007,
we renewed our hull and machinery and third-party liability insurance coverages.
Subject to large self-insured retentions, we carry hull and machinery insurance
covering physical damage to the rigs for operational risks worldwide, and we
carry liability insurance covering damage to third parties. However, we do
not
generally have commercial market insurance coverage for physical damage losses
to the Transocean fleet due to hurricanes in the U.S. Gulf of Mexico and war
perils worldwide. Additionally, we do not carry insurance for loss of revenue.
In the opinion of management, adequate accruals have been made based on known
and estimated losses related to such exposures. See Notes to Condensed
Consolidated Statements Note 10―Contingencies–Retained
Risk.
Tax
Matters—We are a Cayman Islands company and we operate through our various
subsidiaries in a number of countries throughout the world. Consequently, we
are
subject to changes in tax laws, treaties and regulations in and between the
countries in which we operate. A material change in these tax laws, treaties
or
regulations in any of the countries in which we operate could result in a higher
or lower effective tax rate on our worldwide earnings.
Our
tax
returns in the major jurisdictions in which we operate worldwide 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 jurisdictions
for
up to 12 years. Tax authorities in certain jurisdictions are examining our
tax
returns and in some cases have issued assessments. We are defending our tax
positions in those jurisdictions. While we cannot predict or provide assurance
as to the final outcome of these proceedings, we do not expect the ultimate
liability to have a material adverse effect on our consolidated financial
position, results of operations or cash flows.
Our
2004
and 2005 U.S. federal income tax returns are currently under examination by
the
U.S. Internal Revenue Service (“IRS”). In October 2007, we received from the IRS
examination reports setting forth proposed changes to the U.S. federal taxable
income reported for the years 2004 and 2005. The proposed changes would result
in a cash tax payment of approximately $413 million, exclusive of interest.
We
believe our returns are materially correct as filed, and we intend to vigorously
defend against these proposed changes.
Certain
of our Brazilian income tax returns for the years 2000 through 2003 are
currently under examination. The Brazil tax authorities have issued
tax assessments totaling $40 million, plus a 75 percent penalty and $32 million
of interest through September 30, 2007. We believe our returns are
materially correct as filed, and we intend to vigorously contest these
assessments.
Norwegian
civil tax and criminal authorities are investigating certain transactions
undertaken in 2001 and 2002. In the second quarter of 2007, the Norwegian
authorities expanded the investigation and during the third quarter of 2007
secured certain records located in the United Kingdom related to a separate
Norway subsidiary that was previously subject to tax in Norway. In June 2006,
we
filed a formal protest with respect to a notification by the Norwegian tax
authorities of their intent to propose assessments that would result in an
increase in tax of approximately $290 million, plus interest related to the
2001
and 2002 restructuring transactions. The authorities also indicated they intend
to impose penalties which could range from 15 to 60 percent of the assessment.
We believe the authorities are contemplating a separate assessment of
approximately $121 million related to a 2001 dividend payment, plus interest
and
a penalty, which could range from 15 to 60 percent of the assessment. The
authorities initiated inquiries in September 2004 and in March 2005 obtained
additional information pursuant to a Norwegian court order. We have continued
to
respond to information requests from the authorities. We plan to vigorously
contest any assertions by the Norwegian authorities in connection with the
restructuring transactions or dividend and any increase in the scope of the
current investigation. On January 1, 2007, as part of our implementation of
FIN
48, we recorded a long-term liability of $142 million related to these issues.
Since January 1, 2007, the long-term liability has increased to $168
million due to the accrual of interest and exchange rate fluctuations. While
we
cannot predict or provide assurance as to the final outcome of these
proceedings, we do not expect the ultimate resolution of these matters to have
a
material adverse effect on our consolidated financial position or results of
operations although it may have a material adverse effect on our consolidated
cash flows. See Notes to Condensed Consolidated Statements Note 7—Income
Taxes.
TODCO
Tax Sharing Agreement—Our wholly owned subsidiary, Transocean Holdings Inc.
(“Transocean Holdings”), entered into a tax sharing agreement with TODCO dated
February 4, 2004 in connection with the initial public offering of TODCO’s
ordinary shares on February 10, 2004 (the “TODCO IPO”). The tax sharing
agreement was amended and restated on November 27, 2006 (the “TSA”) as part of a
negotiated settlement of disputes between Transocean Holdings and TODCO over
the
terms of the original tax sharing agreement. The TSA governs Transocean
Holdings’ and TODCO’s respective rights, responsibilities and obligations with
respect to taxes and tax benefits, the filing of tax returns, the control of
tax
audits and other tax matters. Under the TSA, most U.S. federal, state, local
and
foreign income taxes and income tax benefits that accrued on or before the
closing of the TODCO IPO (including income taxes and income tax benefits
attributable to the TODCO business) are for the account of Transocean Holdings.
Accordingly, Transocean Holdings generally is liable for any income taxes that
accrued on or before the closing of the TODCO IPO, but TODCO generally must
pay
Transocean Holdings for the amount of any income tax benefits created on or
before the closing of the TODCO IPO (“pre-IPO tax benefits”) that it uses or
absorbs on a return with respect to a period after the closing of the TODCO
IPO.
Pursuant
to the terms of the TSA, if there is a change of control of TODCO, as described
in the TSA, all remaining unused pre-IPO tax benefits are deemed to have been
utilized immediately before the change of control. As a result, an accelerated
payment for the value of such tax benefits, less a specified discount, would
become due from TODCO or the surviving company to Transocean Holdings 30 days
after the change of control. However, payments relating to the tax benefit
from
exercises by current and former TODCO employees and directors of options to
acquire Transocean shares are excluded from the change of control provisions
and
continue to be due under the terms of the TSA without regard to the change
of
control.
On
July
11, 2007, Hercules Offshore, Inc. (“Hercules”) completed the acquisition of
TODCO (the “TODCO Acquisition”). The TSA requires Hercules to make an
accelerated change of control payment to Transocean Holdings within 30 days
of
the date of the acquisition as a result of the deemed utilization of TODCO’s
pre-IPO tax benefits. In August 2007, Hercules made a change of control payment
of approximately $118 million to Transocean Holdings. We believe Hercules
owes an additional amount of approximately $10 million related to the
change of control of TODCO. We recognized $276 million as other income in the
third quarter of 2007 for this change of control payment and payments received
in prior periods related to TODCO's 2006 and 2007 tax years.
Regulatory
Matters—On July 25, 2007, our legal representatives met with the U.S.
Department of Justice (the “DOJ”) in response to a notice we received requesting
such a meeting regarding our engagement of Panalpina Inc. for freight forwarding
and other services in the United States and abroad. The DOJ has informed us
that
it is conducting an investigation of alleged Foreign Corrupt Practices Act
(“FCPA”) violations by oil service companies who used Panalpina Inc. and other
brokers in Nigeria and other parts of the world. We began developing an
investigative plan which would allow us to promptly review and produce relevant
and responsive information requested by the DOJ. Subsequently, we expanded
the
investigation to include one of our agents for Nigeria. The investigation is
being conducted by outside counsel who reports directly to the audit committee
of our board of directors. The investigation has focused on whether the customs
brokers and agent have fully complied with the terms of their respective
agreements, the FCPA and local laws. We prepared and presented an investigative
plan to the DOJ and have informed the SEC of the ongoing investigation. We
have
begun implementing the investigative plan, but we cannot predict the ultimate
outcome of the investigation, the effect of implementing any further measures
that may be necessary to ensure full compliance with applicable laws or to
what
extent, if at all, we could be subject to fines, sanctions or other
penalties.
Performance
and Other Key Indicators
Contract
Backlog—The following table reflects our contract backlog as of September
30, 2007, June 30, 2007 and September 30, 2006 and reflects firm
commitments only, typically represented by signed drilling contracts. Backlog
is
indicative of the full contractual dayrate. The amount of actual revenue earned
and the actual periods during which revenues are earned will be different than
the amounts and periods shown in the tables below due to various factors,
including shipyard and maintenance projects, other downtime and other factors
that result in lower applicable dayrates than the full contractual operating
dayrate, as well as the ability of our customers to terminate contracts under
certain circumstances. Our contract backlog is calculated by multiplying the
contracted operating dayrate by the number of days remaining in the firm
contract period, excluding revenues for mobilization, demobilization, client
recharges and contract preparation and such amounts are not expected to be
significant to our contract drilling revenues.
|
September
30,
2007
|
June
30,
2007
|
September
30,
2006
|
||||||||||
|
(In
millions)
|
||||||||||||
|
Contract
Backlog
|
||||||||||||
|
High-Specification
Floaters
|
$ |
15,174
|
$ |
15,296
|
$ |
14,869
|
||||||
|
Other
Floaters
|
4,108
|
4,000
|
2,938
|
|||||||||
|
Jackups
|
2,272
|
1,834
|
2,067
|
|||||||||
|
Other
Rigs
|
171
|
57
|
79
|
|||||||||
|
Total
|
$ |
21,725
|
$ |
21,187
|
$ |
19,953
|
||||||
Fleet
Utilization and Average Daily Revenue—The following table shows our average
daily revenue and utilization for each of the three months ended on September
30, 2007, June 30, 2007 and September 30, 2006. See “—Overview” for a definition
of average daily revenue, revenue earning day and utilization.
|
Three
months ended
|
||||||||||||
|
September
30,
2007
|
June
30,
2007
|
September
30,
2006
|
||||||||||
|
Average
Daily Revenue
|
||||||||||||
|
High-Specification
Floaters
|
||||||||||||
|
Ultra-Deepwater
Floaters
|
$ |
323,200
|
$ |
288,900
|
$ |
246,000
|
||||||
|
Other
Deepwater Floaters
|
$ |
257,700
|
$ |
228,400
|
$ |
222,300
|
||||||
|
Other
High-Specification Floaters
|
$ |
316,400
|
$ |
286,900
|
$ |
181,500
|
||||||
|
Total
High-Specification Floaters
|
$ |
293,900
|
$ |
262,100
|
$ |
226,700
|
||||||
|
Other
Floaters
|
$ |
251,400
|
$ |
226,300
|
$ |
136,800
|
||||||
|
Jackups
|
$ |
120,500
|
$ |
117,900
|
$ |
83,400
|
||||||
|
Other
Rigs
|
$ |
54,900
|
$ |
57,200
|
$ |
52,400
|
||||||
|
Weighted
Average - Drilling Fleet
|
$ |
219,700
|
$ |
202,400
|
$ |
146,900
|
||||||
|
Utilization
|
||||||||||||
|
High-Specification
Floaters
|
||||||||||||
|
Ultra-Deepwater
Floaters
|
99 | % | 98 | % | 88 | % | ||||||
|
Other
Deepwater Floaters
|
79 | % | 82 | % | 75 | % | ||||||
|
Other
High-Specification Floaters
|
87 | % | 99 | % | 93 | % | ||||||
|
Total
High-Specification Floaters
|
87 | % | 90 | % | 82 | % | ||||||
|
Other
Floaters
|
89 | % | 98 | % | 86 | % | ||||||
|
Jackups
|
90 | % | 86 | % | 96 | % | ||||||
|
Other
Rigs
|
98 | % | 100 | % | 76 | % | ||||||
|
Weighted
Average - Drilling Fleet
|
89 | % | 91 | % | 87 | % | ||||||
Liquidity
and Capital Resources
Sources
and Uses of Cash
Our
primary source of cash during the first nine months of 2007 was our cash flows
from operations. Our primary uses of cash were capital expenditures, repayments
of borrowings under our Term Credit Facility and repurchases of our ordinary
shares. At September 30, 2007, we had $618 million in cash and cash
equivalents.
|
Nine
months ended
September
30,
|
||||||||||||
|
2007
|
2006
|
Change
|
||||||||||
|
(In
millions)
|
||||||||||||
|
Net
cash from operating activities
|
||||||||||||
|
Net
income
|
$ |
2,075
|
$ |
764
|
$ |
1,311
|
||||||
|
Depreciation
|
304
|
303
|
1
|
|||||||||
|
Other
non-cash items
|
31
|
(251 | ) |
282
|
||||||||
|
Working
capital
|
(252 | ) | (83 | ) | (169 | ) | ||||||
| $ |
2,158
|
$ |
733
|
$ |
1,425
|
|||||||
Net
cash
provided by operating activities increased due to more cash generated from
net
income, partially offset by higher use of cash for working capital
items.
|
Nine
months ended
September
30,
|
||||||||||||
|
2007
|
2006
|
Change
|
||||||||||
|
(In
millions)
|
||||||||||||
|
Net
cash from investing activities
|
||||||||||||
|
Capital
expenditures
|
$ | (1,060 | ) | $ | (710 | ) | $ | (350 | ) | |||
|
Proceeds
from disposal of assets, net
|
62
|
298
|
(236 | ) | ||||||||
|
Joint
ventures and other investments, net
|
(3 | ) |
–
|
(3 | ) | |||||||
| $ | (1,001 | ) | $ | (412 | ) | $ | (589 | ) | ||||
Capital
expenditures increased by $350 million over the corresponding prior year period,
primarily due to the construction of four enhanced Enterprise-class drillships,
the two Sedco 700-series upgrades and other equipment replaced and
upgraded on our existing rigs. In addition, proceeds from asset sales were
lower
in the first nine months of 2007 during which only one drilling unit was sold
as
compared to the same period in 2006 during which six drilling units were
sold.
|
Nine
months ended
September
30,
|
||||||||||||
|
2007
|
2006
|
Change
|
||||||||||
|
(In
millions)
|
||||||||||||
|
Net
cash from financing activities
|
||||||||||||
|
Net
proceeds from issuance of debt and borrowings under credit
facilities
|
$ |
–
|
$ |
1,900
|
$ | (1,900 | ) | |||||
|
Repayment
of borrowings under Term Credit Facility
|
(700 | ) |
–
|
(700 | ) | |||||||
|
Release
of escrow funds – Nautilus lease financing
|
–
|
30
|
(30 | ) | ||||||||
|
Repurchase
of ordinary shares
|
(400 | ) | (2,351 | ) |
1,951
|
|||||||
|
Net
proceeds from issuance of ordinary shares under share-based compensation
plans
|
56
|
67
|
(11 | ) | ||||||||
|
Tax
benefit from issuance of ordinary shares under share-based compensation
plans
|
33
|
–
|
33
|
|||||||||
|
Other,
net
|
5
|
(5 | ) |
10
|
||||||||
| $ | (1,006 | ) | $ | (359 | ) | $ | (647 | ) | ||||
Net
cash
used in financing activities increased primarily due to the repayment of
borrowings under our Term Credit Facility in the first nine months of 2007
compared to the borrowing under our Term Credit Facility and the issuance of
our
Floating Rate Notes in the first nine months of 2006. Additionally, we used
less
cash to purchase our ordinary shares during the nine months ended September
30,
2007 compared to the same period in 2006. See “—Sources and Uses of
Liquidity.”
Capital
Expenditures, Acquisitions and Dispositions
From
time
to time, we review possible acquisitions of businesses and drilling rigs and
may
in the future make significant capital commitments for such purposes. We may
also consider investments related to major rig upgrades or new rig construction.
Any such 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 ordinary shares or other securities.
On
October 18, 2007, the Deepwater Pacific 1 was awarded a firm commitment
for a four-year contract which may be converted on or prior to October 31,
2008
to a five-year drilling contract. The Deepwater Pacific 1 is under
construction and will be owned 50 percent by us through our joint venture with
Pacific Drilling. The drilling contract is expected to commence in the third
quarter of 2009 following shipyard construction, sea trials, mobilization to
location and customer acceptance. The joint venture is also constructing a
second deepwater newbuild rig, the Deepwater Pacific 2, which is
expected to be completed in the fourth quarter of 2009. We estimate total
capital expenditures for the construction of these rigs to be approximately
$685 million and $665 million, excluding capitalized interest,
respectively. As of October 18, 2007, we and Pacific Drilling had each paid
$238 million in documented costs for the two
rigs.
In
July
2007, we entered into the Merger Agreement with GlobalSantaFe. During 2006
and
the first nine months of 2007, we were awarded drilling
contracts for four newbuild deepwater drilling rigs and are currently in
discussions with various clients for potential other deepwater drilling
contracts related to new deepwater drilling rigs. In addition, from time to
time, we review possible dispositions of drilling units.
Capital
expenditures—Capital expenditures, including capitalized interest of
$46 million, totaled $1.1 billion during the nine months ended
September 30, 2007, including $601 million for the construction of
four enhanced Enterprise-class drillships and $152 million for the upgrade
of two of our Sedco 700-series rigs.
During
2007, we expect capital expenditures to be approximately $1.5 billion, including
approximately $770 million for the construction of six deepwater
drillships, and approximately $365 million for the deepwater upgrades of two
of
our Sedco 700-series rigs. The level of our capital expenditures is
partly dependent upon the actual level of operational and contracting activity.
These expected capital expenditures do not include amounts that would be
incurred in connection with any of our other possible newbuild opportunities,
or
the proposed merger with GlobalSantaFe.
As
with
any major shipyard project that takes place over an extended period of time,
the
actual costs, timing of expenditures and project completion date may vary from
our estimates based on numerous factors, including actual contract terms,
weather, exchange rates, shipyard labor conditions 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
existing cash balances, cash generated from operations and asset sales. We
also
have available credit under our Revolving Credit Facility (see “—Sources and
Uses of Liquidity”) and may utilize other commercial bank or capital market
financings.
Dispositions—During
the nine months ended September 30, 2007, we completed the sales of the tender
rig Charley Graves and the swamp barge Searex VI for net
proceeds of $44 million and recognized a gain on the sales of $31
million.
Sources
and Uses of Liquidity
We
expect
to use existing cash balances, cash flows from operations, proceeds from the
issuance of debt and proceeds from asset sales to fulfill anticipated
obligations such as scheduled debt maturities, capital expenditures and working
capital needs. From time to time, we may also use bank lines of credit to
maintain liquidity for short-term cash needs.
When
cash
on hand, cash flows from operations and proceeds from asset sales exceed our
expected liquidity needs, including major upgrades, new rig construction and/or
asset acquisitions, we may use a portion of such cash to reduce debt prior
to
scheduled maturities.
Our
access to debt and equity markets may be reduced or closed to us due to a
variety of events, including, among others, credit rating agency downgrades
of
our debt, industry conditions, general economic conditions, market conditions
and market perceptions of us and our industry.
After
the
completion of the Transactions, we expect to focus on the repayment of debt.
Nevertheless, we could consider the acquisition of additional rigs, depending
on
price, market conditions, available cash and other factors.
Bank
Credit Agreements—We have access to a bank line of credit under a $1.0
billion, five-year revolving credit agreement expiring July 2012 (the “Revolving
Credit Facility”). At October 30, 2007, we had no outstanding borrowings under
this facility.
The
Revolving Credit Facility requires
compliance with various covenants and provisions customary for agreements of
this nature, including a debt to total tangible capitalization ratio, as defined
by the Revolving Credit Facility, not greater than 60 percent. Other provisions
of the Revolving Credit Facility include limitations on creating liens,
incurring subsidiary debt, transactions with affiliates, sale/leaseback
transactions and mergers and sale of substantially all assets. Should we fail
to
comply with these covenants, we would be in default and may lose access to
this
facility. 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
could trigger a default under the Revolving Credit Facility and, if not waived
by the lenders, could cause us to lose access to this facility.
In
September 2007, we entered into a
credit agreement for a $15.0 billion one-year, senior unsecured bridge loan
facility (the “Bridge Loan Facility”) with several lenders. Under the terms of
the Bridge Loan Facility, we may make borrowings under the Bridge Loan Facility
at either (1) a base rate, determined as the greater of (A) the prime loan
rate quoted in The Wall Street Journal Money Rates Section as the prime rate
or
(B) the federal funds effective rate plus 0.5 percent, or (2) the reserve
adjusted LIBOR plus the applicable margin, which is based upon our non-credit
enhanced senior unsecured long-term debt rating. As of October 30, 2007, the
applicable margin was 0.4 percent.
The
obligation of each lender to make loans under the Bridge Loan Facility is
subject to the satisfaction of certain conditions, including the execution
of
satisfactory documentation, and the consummation, or substantially concurrent
consummation, of the Transactions.
We
may
prepay the Bridge Loan Facility in whole or in part without premium or penalty.
In addition, the Bridge Loan Facility requires mandatory prepayments of
outstanding borrowings in an amount equal to 100 percent of the net cash
proceeds resulting from any of the following (in each case subject to certain
exceptions): (1) the sale or other disposition of any of our property or assets
above a predetermined threshold; (2) the receipt of certain net insurance
or condemnation proceeds; (3) certain issuances of our equity securities; and
(4) the incurrence of indebtedness for borrowed money by us.
The
Bridge Loan Facility contains certain covenants that are applicable during
the
period in which any borrowings are outstanding, including a maximum leverage
ratio. The Bridge Loan Facility does not have a covenant restricting our ability
to pay dividends, although the maximum leverage ratio could have implications
for the payment of dividends. Borrowings under the facility are subject to
acceleration upon the occurrence of events of default.
On
completion of the Transactions, we expect to terminate the existing Revolving
Credit Facility and enter into a new $2.0 billion 5-year revolving credit
facility. Shortly after the completion of the Transactions, we also expect
to
enter into a separate $1.5 billion 364-day credit facility. The revolving
credit facilities are expected to have covenants similar to the covenants in
the
Bridge Loan Facility. We may not be able to enter into the proposed 5-year
revolving credit facility or the proposed 364-day credit facility on the terms
described, or at all.
We
will
likely seek to refinance the Bridge Loan Facility in whole or in part prior
to
the expiration of its one-year term. Such refinancing may be effected through
borrowings under new bank credit facilities, issuance of debt securities,
including convertible debt securities, or through other financing transactions.
We currently expect that such effort could begin soon after closing of the
Transactions, subject to market conditions and other factors.
Shelf
Registration—In April 2001, the SEC declared effective our shelf
registration statement on Form S-3 for the proposed offering from time to
time of up to $2.0 billion in gross proceeds of senior or subordinated debt
securities, preference shares, ordinary shares and warrants to purchase debt
securities, preference shares, ordinary shares or other securities. At October
30, 2007, $600 million in gross proceeds of securities remained unissued under
the shelf registration statement.
Debt
Repayments—On August 13, 2007, we terminated our existing $1.0 billion,
two-year term credit facility that we originally entered into on August 30,
2006
with the lenders party thereto and JPMorgan Chase Bank, N.A. as Administrative
Agent, Citibank, N.A. as Syndication Agent, and The Bank of Tokyo-Mitsubishi
UFJ, Ltd., Calyon New York Branch and The Royal Bank of Scotland plc (the “Term
Credit Facility”) and recognized a loss on the termination of approximately $1
million in the third quarter of 2007. Under the terms of the Term Credit
Facility, we were able to request borrowings up to $1.0 billion over the first
six months of the term. After six months, any unused capacity was cancelled.
Once repaid, the funds could not be reborrowed. At our election, borrowings
could be made under the Term Credit Facility at either (1) the base rate,
determined as the greater of (a) the prime loan rate and (b) the sum
of the weighted average overnight federal funds rate plus 0.50 percent, or
(2) LIBOR plus 0.30 percent, based on current credit ratings. We paid a fee
of 0.065 percent per annum on the daily amount of the unused commitments under
the Term Credit Facility through October 3, 2006. In October 2006, we borrowed
the full $1.0 billion in capacity. In connection with the termination, we repaid
$70 million of the outstanding borrowings on August 6, 2007 and the
remaining $400 million on August 13, 2007.
The
Term
Credit Facility contained specified covenants, including a debt to total
tangible capitalization covenant. Borrowings under the Term Credit Facility
were
subject to acceleration upon the occurrence of events of default.
Debt
Conversions—Holders of our Zero Coupon Convertible Debentures have the
option to require us to convert their debentures into our ordinary shares at
a
rate of 8.1566 ordinary shares per $1,000 debenture any time prior to maturity.
During the three and nine months ended September 30, 2007, we issued 203 and
1,426 ordinary shares upon conversion of $25,000 and $175,000 aggregate
principal amount of debentures, respectively. As of October 26, 2007,
we issued 146,818 ordinary shares subsequent to September 30, 2007 upon
conversion of $18,000,000 aggregate principal amount of debentures.
Holders
of our 1.5% Convertible Debentures have the option to require us to convert
their debentures into our ordinary shares at a rate of 13.8627 ordinary shares
per $1,000 debenture any time prior to maturity. During the three and nine
months ended September 30, 2007, we issued 623 ordinary shares upon conversion
of $45,000 aggregate principal amount of debentures. As of October 26,
2007, we issued 886,684 ordinary shares subsequent to September 30, 2007
upon conversion of $63,962,000 aggregate principal amount of
debentures.
On
October 19, 2007, we called our Zero Coupon Convertible Debentures due
May 2020 and our 1.5% Convertible Debentures due 2021 for redemption
on November 15, 2007. As of September 30, 2007, the aggregate face
value of the debentures was $426 million. Because the current conversion
prices of both series of debentures are below the current market price of
our
ordinary shares, we currently expect that the holders will convert substantially
all of the debentures into ordinary shares prior to the redemption date.
If all
holders convert before the redemption date, we expect to issue 5,756,702
ordinary shares upon conversion based on the debentures outstanding as of
September 30, 2007. Assuming none of the debentures are converted before
the
redemption date, we expect the aggregate cost to redeem the debentures will
be
approximately $421 million, including accrued and unpaid interest, and we
expect to recognize a loss on retirement of the notes during the fourth quarter
of 2007 of approximately $5 million. We plan to use existing cash balances
and borrowings under our existing Revolving Credit Facility to fund the
redemption.
Repurchase
of Ordinary
Shares—In May 2006, our board of directors authorized an increase in the
amount of ordinary shares which we may repurchase pursuant to our share
repurchase program to $4.0 billion from $2.0 billion, which was
previously authorized and announced in October 2005. The ordinary shares may
be
repurchased from time to time in open market or private transactions. Decisions
to repurchase shares are based upon our ongoing capital requirements, the price
of our shares, regulatory considerations, cash flow generation, general market
conditions and other factors. We plan to fund any future share repurchases
under
the program from current and future cash balances and we could also use debt
to
fund those share repurchases. The repurchase program does not have an
established expiration date and may be suspended or discontinued at any time.
There can be no assurance regarding the number of shares that will be
repurchased under the program. Under the program, repurchased shares are retired
and returned to unissued status.
During
the nine months ended September
30, 2007, we repurchased and retired $400 million of our ordinary shares, which
amounted to approximately 5.2 million ordinary shares at an average
purchase price of $77.39 per share. Total consideration paid to repurchase
the
shares was recorded in shareholders’ equity as a reduction in ordinary shares
and additional paid-in capital. Such consideration was funded with existing
cash
balances and borrowings under our Revolving Credit Facility. At October 30,
2007, after prior repurchases, we had authority to repurchase an additional
$600
million of our ordinary shares under the program; however, any such repurchases
would require the prior written consent of GlobalSantaFe Corporation pursuant
to
the Merger Agreement. We do not currently expect to make any additional share
repurchases under the program in the near future if we complete the
Transactions.
Contractual
Obligations—Other than with respect to the contractual obligations set
forth below, there have been no material changes from the contractual
obligations as previously disclosed in “Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations” of our Annual Report
on Form 10-K for the year ended December 31, 2006.
Our
contractual obligations included in the table below are at face value (in
millions).
|
For
the years ending December 31,
|
||||||||||||||||||||
|
Total
|
2007
|
2008-2009
|
2010-2011
|
Thereafter
|
||||||||||||||||
|
Purchase
obligations
|
$ |
2,255
|
$ |
839
|
$ |
1,294
|
$ |
122
|
$ |
–
|
||||||||||
As
of
September 30, 2007, the total unrecognized tax benefit related to uncertain
tax
positions, net of prepayments was $316 million. Due to the high degree of
uncertainty regarding the timing of future cash outflows associated with the
liabilities recognized in this balance, we are unable to make reasonably
reliable estimates of the period of cash settlement with the respective taxing
authorities.
Commercial
Commitments—As is customary in the contract drilling business, we also have
various surety bonds in place that secure customs obligations relating to the
importation of our rigs and certain performance and other
obligations.
We
have
established a wholly-owned captive insurance company which insures various
risks
of our operating subsidiaries. Access to the cash investments of the captive
insurance company may be limited due to local regulatory restrictions. These
cash investments are expected to rise to approximately $45 million by the
end of 2007 as the level of premiums paid to the captive insurance company
continues to increase.
Operating
Results
Quarter
ended September 30, 2007
compared to quarter ended September 30, 2006
Following
is an analysis of our operating results. See “—Overview” for a definition of
revenue earning days, utilization and average daily revenue.
|
Three months ended
|
||||||||||||||||
|
September 30,
|
||||||||||||||||
|
2007
|
2006
|
Change
|
%
Change
|
|||||||||||||
|
(In
millions, except day amounts and percentages)
|
||||||||||||||||
|
Revenue
earning days
|
6,620
|
6,750
|
(130 | ) | (2 | )% | ||||||||||
|
Utilization
|
89 | % | 87 | % |
n/a
|
2 | % | |||||||||
|
Average
daily revenue
|
$ |
219,700
|
$ |
146,900
|
$ |
72,800
|
50 | % | ||||||||
|
Contract
drilling revenues
|
$ |
1,455
|
$ |
991
|
$ |
464
|
47 | % | ||||||||
|
Other
revenues
|
83
|
34
|
49
|
n/m
|
||||||||||||
|
1,538
|
1,025
|
513
|
50 | % | ||||||||||||
|
Operating
and maintenance expense
|
(663 | ) | (561 | ) | (102 | ) | (18 | )% | ||||||||
|
Depreciation
|
(103 | ) | (99 | ) | (4 | ) | (4 | )% | ||||||||
|
General
and administrative expense
|
(27 | ) | (22 | ) | (5 | ) | (23 | )% | ||||||||
|
Gain
from disposal of assets, net
|
8
|
47
|
(39 | ) | (83 | )% | ||||||||||
|
Operating
income
|
753
|
390
|
363
|
93 | % | |||||||||||
|
Other
income (expense), net
|
||||||||||||||||
|
Interest
income
|
7
|
4
|
3
|
75 | % | |||||||||||
|
Interest
expense, net of amounts capitalized
|
(23 | ) | (28 | ) |
5
|
18 | % | |||||||||
|
Other,
net
|
287
|
7
|
280
|
n/m
|
||||||||||||
|
Income
tax expense
|
(52 | ) | (64 | ) |
12
|
19 | % | |||||||||
|
Minority
interest
|
1
|
−
|
1
|
100 | % | |||||||||||
|
Net
income
|
$ |
973
|
$ |
309
|
$ |
664
|
n/m
|
|||||||||
_________________
“n/a”
means not applicable
“n/m”
means not meaningful
Contract
drilling revenues increased primarily due to higher average daily revenue across
the fleet. Revenues from nine rigs that were out of service for all or part
of
the period in 2006 contributed $135 million and the reactivation of three Other
Floaters during or subsequent to the third quarter of 2006 contributed to higher
utilization in those asset classes and increased revenue by $59 million.
Partially offsetting these increases were lower revenues of $43 million due
to six rigs that were out of service for a portion of 2007 for shipyard,
mobilization or maintenance projects.
Other
revenues for the three months ended September 30, 2007 increased
$49 million primarily due to a $47 million increase in integrated
services revenue offshore India.
Operating
and maintenance expenses increased by $102 million primarily from expenses
related to higher labor costs, vendor price increases, reactivated rigs and
increased integrated service activity. These increases were partially offset
by
$31 million of reactivation costs in the third quarter of 2006, with no
comparable amounts in the third quarter of 2007.
During
the three months ended September 30, 2007, we recognized a net gain of
$8 million related to the sale of one rig and the disposal of other assets.
During the three months ended September 30, 2006, we recognized a net gain
of
$47 million related to the sale of two rigs and the disposal of other
assets.
The
increase in interest expense included $11 million that was primarily
attributable to higher debt levels arising from the issuance of the Floating
Rate Notes and additional borrowings under credit facilities subsequent to
the
third quarter of 2006. Partially offsetting the effect of the higher debt levels
was a reduction of $14 million related to increased interest capitalized in
the third quarter of 2007 compared to the same period in 2006.
The
increase in other, net was primarily due to $276 million of income recognized
in
connection with the TODCO Tax Sharing Agreement and $11 million related to
settlements of patent litigation and royalties earned on our dual-activity
patents during the three months ended September 30, 2007.
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. There is no expected
relationship between the provision for income taxes and income before income
taxes. The estimated annual effective tax rates at September 30, 2007 and 2006
were 14.6 percent and 17.5 percent, respectively, based on estimated
2007 and 2006 annual income before income taxes after adjusting for certain
items such as a portion of net gains on sales of assets. The tax effect, if
any,
of the excluded items as well as settlements of prior year tax liabilities
and
changes in prior year tax estimates are all treated as discrete period tax
expenses or benefits. For the three months ended September 30, 2007, the impact
of the various discrete period tax items was a net benefit of $52 million,
consisting of changes in prior year estimates of $72 million primarily related
to the expected utilization of U.S. foreign tax credits, partially offset by
a
foreign exchange loss of $20 million related to unrecognized foreign tax
benefits, resulting in a tax rate of 5.1 percent on earnings before income
taxes. For the three months ended September 30, 2006, the impact of the various
discrete period tax items was a net expense of $7 million related to a net
gain
on rig sales and changes in prior year estimates, resulting in a tax rate of
17.1 percent on earnings before income taxes and minority
interest.
Nine
months ended September 30, 2007 compared to nine months ended September 30,
2006
Following
is an analysis of our operating results. See “—Overview” for a definition of
revenue earning days, utilization and average daily revenue.
|
Nine
months ended
|
||||||||||||||||
|
September
30,
|
||||||||||||||||
|
2007
|
2006
|
Change
|
%
Change
|
|||||||||||||
|
(In
millions, except day amounts and percentages)
|
||||||||||||||||
|
Revenue
earning days
|
19,769
|
19,681
|
88
|
n/m
|
||||||||||||
|
Utilization
|
89 | % | 83 | % |
n/a
|
6 | % | |||||||||
|
Average
daily revenue
|
$ |
206,800
|
$ |
132,000
|
$ |
74,800
|
57 | % | ||||||||
|
Contract
drilling revenues
|
$ |
4,088
|
$ |
2,598
|
$ |
1,490
|
57 | % | ||||||||
|
Other
revenues
|
212
|
98
|
114
|
n/m
|
||||||||||||
|
4,300
|
2,696
|
1,604
|
59 | % | ||||||||||||
|
Operating
and maintenance expense
|
(1,858 | ) | (1,585 | ) | (273 | ) | (17 | )% | ||||||||
|
Depreciation
|
(304 | ) | (303 | ) | (1 | ) |
–
|
|||||||||
|
General
and administrative expense
|
(82 | ) | (67 | ) | (15 | ) | (22 | )% | ||||||||
|
Gain
from disposal of assets, net
|
30
|
222
|
(192 | ) | (86 | )% | ||||||||||
|
Operating
income
|
2,086
|
963
|
1,123
|
n/m
|
||||||||||||
|
Other
income (expense), net
|
||||||||||||||||
|
Interest
income
|
17
|
14
|
3
|
21 | % | |||||||||||
|
Interest
expense, net of amounts capitalized
|
(93 | ) | (72 | ) | (21 | ) | (29 | )% | ||||||||
|
Other,
net
|
295
|
9
|
286
|
n/m
|
||||||||||||
|
Income
tax expense
|
(230 | ) | (150 | ) | (80 | ) | 53 | % | ||||||||
|
Net
income
|
$ |
2,075
|
$ |
764
|
$ |
1,311
|
n/m
|
|||||||||
_________________
“n/a”
means not applicable
“n/m”
means not meaningful
Contract
drilling revenues increased
primarily due to higher average daily revenue across the fleet. Revenues from
ten rigs that were out of service for a portion of 2006 contributed $473 million
and reactivation of one Other Deepwater Floater and three Other Floaters during
2006 contributed to higher utilization in those asset classes and increased
revenue by $219 million. Partially offsetting these increases were lower
revenues of $80 million on seven rigs that were out of service for a
portion of 2007 for shipyard, mobilization or maintenance projects and lower
revenues of $26 million from two rigs sold in 2006 and 2007.
Other
revenues for the nine months ended September 30, 2007 increased $114 million
primarily due to a $99 million increase in integrated services revenue and
a $15 million increase in client reimbursable revenue.
Operating
and maintenance expenses increased by $273 million. This increase was
primarily driven by expenses related to reactivated rigs, higher labor costs
and
vendor price increases. Also contributing to the increase were higher integrated
services costs of $95 million and higher reimbursable expenses, in line with
the
higher level of reimbursable revenue. These increases were partially offset
by
the costs incurred in 2006 of $88 million and $12 million, respectively,
for the reactivation of three of our rigs and the repair of two of our rigs
that
incurred hurricane damage.
The
increase of $15 million in general and administrative expense was primarily
attributable to increased personnel-related expenses.
During
the nine months ended September 30, 2007, we recognized a net gain of $30
million related to the sale of two rigs and disposal of other assets. During
the
nine months ended September 30, 2006, we recognized a net gain of $222 million
related to the sale of six rigs and disposal of other assets.
The
increase in interest expense included $61 million that was primarily
attributable to higher debt levels arising from the issuance of the Floating
Rate Notes and additional borrowings under credit facilities subsequent to
the
nine months ended September 30, 2006. Partially offsetting the effect of the
higher debt levels was a reduction of $39 million related to increased interest
capitalized during the nine months ended September 30, 2007 compared to the
same period in 2006.
The
increase in other, net was primarily due to $276 million of income recognized
in
connection with the TODCO Tax Sharing Agreement and $26 million related to
settlements of patent litigation and royalties earned on our dual-activity
patents during the nine months ended September 30, 2007.
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. There is no expected
relationship between the provision for income taxes and income before income
taxes. The estimated annual effective tax rates at September 30, 2007 and 2006
were 14.6 percent and 17.5 percent, respectively, based on estimated
2007 and 2006 annual income before income taxes after adjusting for certain
items such as a portion of net gains on sales of assets. The tax effect, if
any,
of the excluded items as well as settlements of prior year tax liabilities
and
changes in prior year tax estimates are all treated as discrete period tax
expenses or benefits. For the nine months ended September 30, 2007, the impact
of the various discrete period tax items was a net benefit of $62 million,
related to the net gains on rig sales and changes in prior year estimates of
$82
million primarily related to the expected utilization of U.S. foreign tax
credits and partially offset by a foreign exchange loss of $20 million
related to unrecognized foreign tax benefits, resulting in a tax rate of
10.0 percent on earnings before income taxes. For the nine months ended
September 30, 2006, the impact of the various discrete period tax items was
a net expense of $28 million, related to the net gains on rig sales and changes
in prior year estimates, resulting in a tax rate of 16.4 percent on earnings
before income taxes.
Critical
Accounting 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 new accounting pronouncements. Significant accounting policies are discussed
in Note 2 to our condensed consolidated financial statements included elsewhere
and in Note 2 to our consolidated financial statements in our Annual Report
on
Form 10-K for the year ended December 31, 2006.
The
preparation of our financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues,
expenses and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to bad debts,
materials and supplies obsolescence, investments, property and equipment,
intangible assets and goodwill, income taxes, workers’ insurance, share-based
compensation, pensions and other post-retirement and employment benefits and
contingent liabilities. We base our estimates on historical experience and
on
various other assumptions that we believe are reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent
from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
For
a
discussion of the critical accounting 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" in
our
Annual Report on Form 10-K for the year ended December 31, 2006. There have
been
no material changes to these estimates during the nine months ended September
30, 2007. These estimates require significant judgment in the preparation of
our
consolidated financial statements. Management has discussed each of these
critical accounting estimates with the audit committee of the board of
directors.
Share-Based
Compensation
On
January 1, 2006, we adopted FASB Statement of Financial Accounting Standards
(“SFAS”) 123 (revised 2004), Share-Based Payment (“SFAS 123R”) using
the modified prospective method. Adoption of the new standards did not have
a
material effect on our consolidated financial position, results of operations or
cash flows.
New
Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
SFAS 157 applies under other accounting pronouncements that require or
permit fair value measurements because the FASB previously concluded in those
accounting pronouncements that fair value is the relevant measurement attribute.
Accordingly, SFAS 157 does not require any new fair value measurements. SFAS
157
is effective for fiscal years beginning after November 15, 2007. We will be
required to adopt SFAS 157 in the first quarter of fiscal year 2008. Management
is currently evaluating the requirements of SFAS 157 and has not yet determined
the impact on the consolidated financial statements.
In
February 2007, the FASB issued SFAS
No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities (“SFAS 159”). SFAS 159 provides companies with an option to
report selected financial assets and liabilities at fair value. It also
establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes
for
similar types of assets and liabilities. SFAS 159 is effective as of the
beginning of the first fiscal year beginning after November 15, 2007. We will
be
required to adopt SFAS 159 in the first quarter of fiscal year 2008. Management
is currently evaluating the requirements of SFAS 159 and has not yet determined
the impact on the consolidated financial statements.
ITEM
3. Quantitative and Qualitative Disclosures About Market
Risk
Interest
Rate Risk
Our
exposure to market risk for changes
in interest rates relates primarily to our long-term and short-term debt. The
table below presents scheduled debt maturities in U.S. dollars and related
weighted-average interest rates for each of the 12-months ending September
30
relating to debt obligations as of September 30, 2007. Weighted-average variable
rates are based on London Interbank Offered Rate (“LIBOR”) rates at September
30, 2007, plus applicable margins.
At
September 30, 2007 (in millions,
except interest rate percentages):
|
Scheduled
Maturity Date (a) (b)
|
Fair
Value
|
|||||||||||||||||||||||||||||||
|
2008
|
2009
|
2010
|
2011
|
2012
|
Thereafter
|
Total
|
9/30/07
|
|||||||||||||||||||||||||
|
Total
debt
|
||||||||||||||||||||||||||||||||
|
Fixed
rate
|
$ |
19
|
$ |
–
|
$ |
–
|
$ |
565
|
$ |
–
|
$ |
1,004
|
$ |
1,588
|
$ |
1,931
|
||||||||||||||||
|
Average
interest rate
|
2.8 | % | – | % | – | % | 3.0 | % | – | % | 7.5 | % | 5.8 | % | ||||||||||||||||||
|
Variable
rate
|
$ |
1,000
|
$ |
–
|
$ |
–
|
$ |
–
|
$ |
–
|
$ |
–
|
$ |
1,000
|
$ |
1,000
|
||||||||||||||||
|
Average
interest rate
|
5.9 | % | – | % | – | % | – | % | – | % | – | % | 5.9 | % | ||||||||||||||||||
__________________________
|
(a)
|
Maturity
dates of the face value of our debt assume the put options on the
Zero
Coupon Convertible Debentures and the 1.5% Convertible Debentures
will be
exercised in May 2008 and May 2011,
respectively.
|
|
(b)
|
Expected
maturity amounts are based on the face value of
debt.
|
At
September 30, 2007, we had
approximately $1.0 billion of variable rate debt at face value
(38.6 percent of total debt at face value). This variable rate debt
represented the Floating Rate Notes issued during 2006. At December 31, 2006,
we
had approximately $1.7 billion of variable rate debt outstanding. Based upon
the
September 30, 2007 and December 31, 2006 variable rate debt outstanding amounts,
a one percentage point change in interest rates would result in a corresponding
change in interest expense of approximately $10 million and $17 million per
year, respectively. In addition, a large part of our cash investments would
earn
commensurately higher rates of return if interest rates increase. Using
September 30, 2007 and December 31, 2006 cash investment levels, a one
percentage point change in interest rates would result in a corresponding change
in interest income of approximately $3 million per year in each
case.
Foreign
Exchange Risk
Our
international operations expose us to foreign exchange risk. These matters
have
been previously discussed and reported in our Annual Report on Form 10-K for
the
year ended December 31, 2006. There have been no material changes to these
previously reported matters during the nine months ended September 30,
2007.
ITEM
4. Controls and Procedures
In
accordance with Exchange Act Rules 13a-15 and 15d-15, 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 of the end of the
period covered by this report. Based on that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls
and
procedures were effective as of September 30, 2007 to provide reasonable
assurance that information required to be disclosed in our reports filed or
submitted under the Exchange Act was (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 Securities
and
Exchange Commission’s rules and forms.
There
were no changes to our internal
controls during the three months ended September 30, 2007 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
PART
II - OTHER INFORMATION
Item
1. Legal Proceedings
One
of
our subsidiaries is involved in an action with respect to a customs matter
relating to the Sedco 710 semisubmersible drilling rig. Prior to our
merger with Sedco Forex, this drilling rig, which was working for Petrobras
in
Brazil at the time, had been admitted into the country on a temporary basis
under authority granted to a Schlumberger entity. Prior to the Sedco Forex
merger, the drilling contract with Petrobras was transferred from the
Schlumberger entity to an entity that would become one of our subsidiaries,
but
Schlumberger did not transfer the temporary import permit to any of our
subsidiaries. In early 2000, the drilling contract was extended for another
year. On January 10, 2000, the temporary import permit granted to the
Schlumberger entity expired, and renewal filings were not made until later
that
January. In April 2000, the Brazilian customs authorities cancelled the
temporary import permit. The Schlumberger entity filed an action in the
Brazilian federal court of Campos for the purpose of extending the temporary
admission. Other proceedings were also initiated in order to secure the transfer
of the temporary admission to our subsidiary. Ultimately, the court permitted
the transfer of the temporary admission from Schlumberger to our subsidiary
but
did not rule on whether the temporary admission could be extended without the
payment of a financial penalty. During the first quarter of 2004, the Brazilian
customs authorities issued an assessment totaling approximately $125 million
at
that time against our subsidiary.
The
first
level Brazilian court ruled in April 2007 that the temporary admission granted
to our subsidiary had expired which allowed the Brazilian customs authorities
to
execute on their assessment. Following this ruling, the Brazilian customs
authorities issued a revised assessment against our subsidiary. As of October
30, 2007, the U.S. dollar equivalent of this assessment was approximately $210
million in aggregate. We are not certain as to the basis for the increase in
the
amount of the assessment, and in September 2007, we received a temporary ruling
in our favor from a Brazilian federal court that the valuation method used
by
the Brazilian customs authorities was incorrect. We intend to continue to
aggressively contest this matter and we have appealed the first level Brazilian
court’s ruling to a higher level court in Brazil. There may be further judicial
or administrative proceedings that result from this matter. While the court
has
granted us the right to continue our appeal without the posting of a bond,
it is
possible that we may be required to post a bond for up to the full amount of
the
assessment in connection with these proceedings. We have also put Schlumberger
on notice that we consider any assessment to be solely the responsibility of
Schlumberger, not our subsidiary. Nevertheless, we expect that the Brazilian
customs authorities will continue to seek to recover the assessment solely
from
our subsidiary, not Schlumberger. Schlumberger has denied any responsibility
for
this matter, but remains a party to the proceedings. We do not expect the
liability, if any, resulting from this matter to have a material adverse effect
on our consolidated financial position, results of operations or cash
flows.
In
the third quarter of 2006, we
received tax assessments of approximately $122 million from the state tax
authorities of Rio de Janeiro in Brazil against one of our Brazilian
subsidiaries for customs taxes on equipment imported into the state in
connection with our operations. The assessments resulted from a preliminary
finding by these authorities that our subsidiary’s record keeping practices were
deficient. We continue to review documents related to the assessments, and
while
our review is not complete, we currently believe that the substantial majority
of these assessments are without merit. We filed an initial response with the
Rio de Janeiro tax authorities on September 9, 2006 refuting these
additional tax assessments. In September 2007, we received confirmation from
the
state tax authorities that they believe the additional tax assessments are
valid, and then we filed an appeal on September 27, 2007 to the state
taxpayers council contesting these 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 consolidated financial position,
results of operations or cash flows.
We
have certain other actions or claims
pending that have been previously discussed and reported in our Annual Report
on
Form 10-K for the year ended December 31, 2006 and our other reports filed
with
the Securities and Exchange Commission. There have been no material developments
in these previously reported matters. We are involved in a number of other
lawsuits, all of which have arisen in the ordinary course of our business.
We do
not expect the liability, if any, resulting from these other lawsuits to have
a
material adverse effect on our current consolidated financial position, results
of operations or cash flows. We are also involved in various tax matters as
described in “Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of
Operations
―Outlook–Tax Matters.” We cannot predict with certainty the outcome or effect of
any of the matters specifically described 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
other matters will prove correct and the eventual outcome of these matters
could
materially differ from management’s current estimates.
Item
1A. Risk Factors
Other
than with respect to the risk
factors set forth below, there have been no material changes from the risk
factors as previously disclosed in “Item 1A. Risk Factors” of our Annual Report
on Form 10-K for the year ended December 31, 2006, as updated by “Item 1A. Risk
Factors” of our Quarterly Reports on Form 10-Q for the quarterly periods ended
March 31, 2007 and June 30, 2007.See “Risk Factors” in the joint proxy statement
we and GlobalSantaFe filed with the Securities and Exchange Commission on
October 3, 2007 for more information regarding risk factors relating to the
Transactions and the combined business after giving effect to the
Transactions.
Risks
Relating to the Transactions
Failure
to complete, or delays in completing, the Transactions could negatively impact
the market price of our ordinary shares and financial
results.
Completion
of the proposed Transactions
is subject to various conditions, including, among others, approval by our
shareholders and GlobalSantaFe’s shareholders and obtaining regulatory
clearances and financing sufficient to enable us to deliver the cash
consideration to our shareholders and GlobalSantaFe’s shareholders payable by
virtue of the Transactions. If these or other conditions are not satisfied
or if
there is a delay in the satisfaction of such conditions, then we and
GlobalSantaFe may not be able to complete the Transactions timely or at all,
and
such failure or delay may have other adverse consequences. If the Transactions
are not completed or are delayed, we and GlobalSantaFe will be subject to
a
number of risks, including:
|
|
·
|
we
will not realize the expected benefits of the combined
company;
|
|
|
·
|
the
market price of our ordinary shares may decline to the extent that
the
current market price of our shares reflects a market assumption
that the
Transactions will be completed;
|
|
|
·
|
some
costs relating to the Transactions, such as certain financial advisor,
legal and financing fees, must be paid even if the Transactions
are not
completed; and
|
|
|
·
|
in
specified circumstances, if the Transactions are not completed,
we must
pay GlobalSantaFe either a termination fee of $300 million or up to
$30 million in expense reimbursement instead of the termination
fee.
|
While
the Transactions are pending, we may experience diminished productivity due
to
the impact of the Transactions on our current and prospective employees,
key
management, customers, suppliers and business
partners.
Our
management may be required to
devote substantial time to activities related to the Transactions, which
could
otherwise be devoted to pursuing other beneficial business opportunities.
Furthermore, our current and prospective employees may be uncertain about
their
future roles and relationships with us following the completion of the
Transactions. This focus of management on the Transactions and employee
uncertainty may also affect our productivity and this may adversely affect
our
ability to attract and retain key management and employees.
Our
customers and business partners may
not be as willing to continue to do business with us on the same or similar
terms or may delay or defer decisions relating to their business relationships
with us pending the completion of the Transactions, which could materially
and
adversely affect our business and results of operations.
Until
the Transactions are completed or
the Merger Agreement is terminated, under certain circumstances, we may not
be
able to enter into a merger or business combination with another party on
favorable terms because of restrictions in the Merger
Agreement.
Unless
and until the Merger Agreement
is terminated, subject to specified exceptions, we are restricted from
soliciting, initiating or knowingly encouraging any inquiry, proposal or
offer
for an alternative transaction with any person. We may terminate the Merger
Agreement and enter into an agreement with respect to a superior proposal
only
if specified conditions have been satisfied, including our compliance in
all
material respects with these non-solicitation provisions, allowing GlobalSantaFe
seven days (or five days with respect to any material revision) to propose
an
adjustment to the terms and conditions of the Merger Agreement and paying
a
$300 million termination fee. These restrictions could affect the
structure, pricing and other terms proposed by other parties seeking to enter
into an alternate transaction with us and, as a result of these restrictions,
we
may not be ableto enter into
an agreement with
respect to an alternative transaction on more favorable terms without incurring
potentially significant liability to GlobalSantaFe.
As
a result of the Transactions, our
overall debt level will increase, and we may lose the ability to obtain future
financing and lose our competitive advantage.
As
a result of the Transactions, our
overall debt level will increase from approximately $2.6 billion at September
30, 2007, to approximately $18.8 billion at such date on a pro forma basis
after
giving effect to the Transactions. After the completion of the Transactions,
our
level of debt and other obligations could have significant adverse consequences
on our business and future prospects, including the following:
|
|
·
|
we
may not be able to obtain financing in the future for working capital,
capital expenditures, acquisitions, debt service requirements or
other
purposes;
|
|
|
·
|
less
levered competitors could have a competitive advantage because they
have
lower debt service requirements;
and
|
|
|
·
|
we
may be less able to take advantage of significant business opportunities
and to react to changes in market or industry conditions than our
competitors.
|
We
may not be successful in refinancing
the Bridge Loan Facility, and the terms of any refinancing may not be favorable
to us.
The
Bridge Loan Facility has a maturity
of one year. Although we expect to refinance this debt on more favorable terms
after the Transactions, such refinancing is subject to conditions in the credit
markets, which are currently volatile, and there can be no assurance that we
will be successful in refinancing the debt or that the terms of the refinancing
will be favorable to us, which could adversely affect our results of operations
or financial condition.
Our
overall debt level following the
Transactions and/or our inability to refinance the Bridge Loan Facility on
favorable terms could lead the credit rating agencies to lower our corporate
credit ratings following the Transactions below currently expected levels and
possibly below investment grade.
Market
conditions could prohibit us
from refinancing the Bridge Loan Facility at favorable rates and terms, which
could limit our ability to efficiently repay debt and could cause us to maintain
a high level of leverage or issue debt with unfavorable terms and conditions.
This leverage level could lead the credit rating agencies to downgrade our
credit ratings following the Transactions below currently expected levels and
possibly to non-investment grade levels. Such ratings levels could negatively
impact current and prospective customers’ willingness to transact business with
us. Suppliers may lower or eliminate the level of credit provided through
payment terms when dealing with us thereby increasing the need for higher levels
of cash on hand, which would decrease our ability to repay the debt balances
as
we currently anticipate.
Risks
Relating to Our Business
Shipyard
projects and other operations are subject to delays and cost
overruns.
We
have
committed to four deepwater newbuild rig projects and two
Sedco 700-series rig upgrades. In addition, we own a 50 percent
interest in a joint venture that is constructing two deepwater newbuild rigs.
We
also are discussing other potential newbuild opportunities with several of
our
oil and gas company clients. We also have a variety of other more limited
shipyard projects at any given time. These shipyard projects are subject to
the
risks of delay or cost overruns inherent in any such construction project
resulting from numerous factors, including the following:
|
|
•
|
shipyard
unavailability;
|
|
|
•
|
shortages
of equipment, materials or skilled
labor;
|
|
|
•
|
unscheduled
delays in the delivery of ordered materials and
equipment;
|
|
|
•
|
engineering
problems, including those relating to the commissioning of newly
designed
equipment;
|
|
|
•
|
work
stoppages;
|
|
|
•
|
client
acceptance delays;
|
|
|
•
|
weather
interference or storm damage;
|
|
|
•
|
unanticipated
cost increases; and
|
|
|
•
|
difficulty
in obtaining necessary permits or
approvals.
|
These
factors may contribute to cost variations and delays in the delivery of our
upgraded and newbuild units and other rigs undergoing shipyard projects. Delays
in the delivery of these units would result in delay in contract commencement,
resulting in a loss of revenue to us, and may also cause customers to terminate
or shorten the term of the drilling contract for the rig pursuant to applicable
late delivery clauses. In the event of termination of one of these contracts,
we
may not be able to secure a replacement contract on as favorable
terms.
Our
operations also rely on a significant supply of capital and consumable spare
parts and equipment to maintain and repair our fleet. We also rely on the supply
of ancillary services, including supply boats and helicopters. Recently, we
have
experienced increased delivery times from vendors due to increased drilling
activity worldwide and the increase in construction and upgrade projects, and
have also experienced a tightening in the availability of ancillary services.
We
are in the process of replacing our primary global logistics provider, which
may
result in delays and disruptions, and potentially increased costs, in some
operations. Shortages in materials, delays in the delivery of necessary spare
parts, equipment or other materials, or the unavailability of ancillary services
could negatively impact our future operations and result in increases in rig
downtime, and delays in the repair and maintenance of our fleet.
Failure
to secure a drilling contract prior to deployment of the second newbuild
drillship under construction in which we own an interest through
our joint venture with Pacific Drilling could adversely affect our results
of
operations.
The
drillship Deepwater Pacific 2 that is being constructed by our joint
venture with Pacific Drilling is scheduled for delivery in the fourth quarter
of
2009. We have not yet secured a drilling contract for this drillship.
Historically, the industry has experienced prolonged periods of overcapacity,
during which many rigs were idle for long periods of time. Our failure to secure
a drilling contract for the rig prior to its deployment could adversely affect
our results of operations.
Failure
to comply with the U.S. Foreign Corrupt Practices Act could result in fines,
criminal penalties, drilling contract terminations and an adverse effect on
our
business.
On
July
25, 2007, our legal representatives met with the U.S. Department of Justice
(the
“DOJ”) in response to a notice we received requesting such a meeting regarding
our engagement of Panalpina Inc. for freight forwarding and other services
in
the United States and abroad. The DOJ has informed us that it is conducting
an
investigation of alleged U.S. Foreign Corrupt Practices Act (“FCPA”) violations
by oil service companies who used Panalpina Inc. and other brokers in Nigeria
and other parts of the world. We began developing an investigative plan which
would allow us to promptly review and produce relevant and responsive
information requested by the DOJ.
Subsequently,
we expanded the investigation to include one of our agents for Nigeria. The
investigation is being conducted by outside counsel who reports directly to the
audit committee of our board of directors. The investigation has focused on
whether the customs brokers and agent have fully complied with the terms of
their respective agreements, the FCPA and local laws. We prepared and presented
an investigative plan to the DOJ and have informed the SEC of the ongoing
investigation. We have begun implementing the investigative plan, but we cannot
predict the ultimate outcome of the investigation, the effect of implementing
any further measures that may be necessary to ensure full compliance with
applicable laws or to what extent, if at all, we could be subject to fines,
sanctions or other penalties.
Our
investigation includes a review of amounts paid to and by customs brokers in
connection with the obtaining of permits for the temporary importation of
vessels and the clearance of goods and materials. These permits and clearances
are necessary in order for us to operate our vessels in certain jurisdictions.
There is a risk that we may not be able to obtain import permits or renew
temporary importation permits in West African countries, including Nigeria,
in a
manner that complies with the FCPA. As a result, we may not have the means
to
renew temporary importation permits for rigs located in the relevant
jurisdictions as they expire or to send goods and equipment into those
jurisdictions, in which event we may be forced to terminate the pending drilling
contracts and relocate the rigs or leave the rigs in these countries and risk
permanent importation issues, either of which could have an adverse effect
on
our financial results. In addition, termination of drilling contracts could
result in damage claims by customers.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
Issuer
Purchases of Equity Securities
|
Period
|
(a) Total Number
of Shares
Purchased (1)
|
(b) Average Price
Paid Per Share
|
(c) Total Number
of Shares
Purchased as
Part of Publicly
Announced Plans
or Programs
|
(d) Maximum Number
(or Approximate
Dollar Value) of Shares that May Yet
Be Purchased Under the Plans or
Programs (2)
(in millions)
|
||||||||||||
|
July
2007
|
30,359
|
$ |
109.23
|
–
|
$ |
600
|
||||||||||
|
August
2007
|
119
|
$ |
103.82
|
–
|
$ |
600
|
||||||||||
|
September
2007
|
–
|
–
|
–
|
$ |
600
|
|||||||||||
|
Total
|
30,478
|
$ |
109.21
|
–
|
$ |
600
|
||||||||||
_________________
|
(1)
|
Total
number of shares purchased in the third quarter of 2007 consists
of shares
withheld by us in satisfaction of withholding taxes due upon the
vesting
of restricted shares granted to our employees under our Long-Term
Incentive Plan to pay withholding taxes due upon vesting of a restricted
share award.
|
|
(2)
|
In
May 2006, our board of directors authorized an increase in the amount
of
ordinary shares which may be repurchased pursuant to our share repurchase
program to $4.0 billion from $2.0 billion, which was previously authorized
and announced in October 2005. The shares may be repurchased from
time to
time in open market or private transactions. The repurchase program
does
not have an established expiration date and may be suspended or
discontinued at any time. Under the program, repurchased shares are
retired and returned to unissued status. From inception through September
30, 2007, we have repurchased a total of 46.9 million of our ordinary
shares at an aggregate cost of $3.4
billion.
|
Unregistered
Sales of Equity Securities
During
the three months ended September 30, 2007, we issued 203 ordinary shares upon
conversion of $25,000 aggregate principal amount of our Zero Coupon Convertible
Debentures and 623 ordinary shares upon conversion of $45,000 aggregate
principal amount of our 1.5% Convertible Debentures. Subsequent to September
30,
2007, we issued 146,818 ordinary shares upon conversion of $18,000,000
aggregate principal amount of our Zero Convertible Debentures, and we
issued 886,684 ordinary shares upon conversion of $63,962,000 aggregate
principal amount of our 1.5% Convertible Debentures through October 26, 2007.
All of these transactions were exempt from the registration requirements of
the
Securities Act of 1933, as amended, by virtue of Section 4(2) as transactions
not involving any public offering and by virtue of Section
3(a)(9).
Item
6. Exhibits
|
|
(a)
|
Exhibits
|
The
following exhibits are filed in connection with this Report:
Number Description
|
*2.1
|
Agreement
and Plan of Merger, dated as of July 21, 2007, among Transocean Inc.,
GlobalSantaFe Corporation and Transocean Worldwide Inc. (incorporated
by
reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed
on July 23, 2007)
|
|
*3.1
|
Memorandum
of Association of Transocean Inc., as amended (incorporated by reference
to Annex E to the Joint Proxy Statement/Prospectus dated October
30, 2000
included in a 424(b)(3) prospectus filed by us on November 1,
2000)
|
|
*3.2
|
Articles
of Association of Transocean Inc., as amended (incorporated by reference
to Annex F to the Joint Proxy Statement/Prospectus dated October
30, 2000
included in a 424(b)(3) prospectus filed by us on November 1,
2000)
|
|
*3.3
|
Certificate
of Incorporation on Change of Name to Transocean Inc. (incorporated
by
reference to Exhibit 3.3 to our Form 10-Q for the quarter ended June
30,
2002)
|
|
*4.1
|
Credit
Agreement dated as of September 28, 2007 among Transocean Inc., the
lenders party thereto and Goldman Sachs Credit Partners, L.P. as
Administrative Agent, Lehman Commercial Paper Inc. as Syndication
Agent,
Citibank, N.A., Calyon Corporate and Investment Bank and JPMorgan
Chase
Bank, N.A., as Co-Documentation Agents, and Goldman Sachs Credit
Partners,
L.P. and Lehman Brothers Inc. as Joint Lead Arrangers and Joint
Bookrunners (incorporated by reference to Exhibit 4.1 to the Company’s
Current Report on Form 8-K filed on October 1, 2007)
|
|
*10.1
|
Put
Option and Registration Rights Agreement, dated as of October 18,
2007,
among Pacific Drilling Limited, Transocean Pacific Drilling Inc.,
Transocean Inc. and Transocean Offshore International Ventures Limited
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report
on Form 8-K filed on October 24, 2007)
|
|
†31.1
|
CEO
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
†31.2
|
CFO
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
†32.1
|
CEO
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
†32.2
|
CFO
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
_________________________
*
Incorporated by reference as indicated.
†
Filed
herewith.
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 October 31, 2007.
TRANSOCEAN
INC.
|
By:
|
/s/
Gregory L. Cauthen
|
||
|
Gregory L. Cauthen
|
|||
|
Senior Vice President and Chief Financial Officer
|
|||
|
(Principal Financial Officer)
|
|||
|
By:
|
/s/
David A. Tonnel
|
||
|
David A. Tonnel
|
|||
|
Vice President and Controller
|
|||
|
(Principal Accounting Officer)
|
|||
Exhibit
31.1
CEO
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF
2002
I,
Robert
L. Long, certify that:
|
1.
|
I
have reviewed this quarterly report on Form 10-Q of Transocean
Inc.;
|
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement
of a
material fact or omit to state a material fact necessary to make
the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects
the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
|
4.
|
The
registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and we
have:
|
|
|
a)
|
designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to
ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being
prepared;
|
|
|
b)
|
designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision,
to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
and
|
|
|
c)
|
evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness
of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation;
and
|
|
|
d)
|
disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely
to
materially affect, the registrant’s internal control over financial
reporting; and
|
|
5.
|
The
registrant’s other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting,
to
the registrant’s auditors and the audit committee of registrant’s board of
directors (or persons performing the equivalent
function):
|
|
|
a)
|
all
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
|
b)
|
any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
|
|
Date: October
31, 2007
|
/s/
Robert L. Long
|
|
|
Robert
L. Long
|
||
|
Chief
Executive Officer
|
||
Exhibit
31.2
CFO
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF
2002
I,
Gregory L. Cauthen, certify that:
|
1.
|
I
have reviewed this quarterly report on Form 10-Q of Transocean
Inc.;
|
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement
of a
material fact or omit to state a material fact necessary to make
the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects
the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
|
4.
|
The
registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and we
have:
|
|
|
a)
|
designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to
ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being
prepared;
|
|
|
b)
|
designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision,
to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
and
|
|
|
c)
|
evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness
of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation;
and
|
|
|
d)
|
disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely
to
materially affect, the registrant’s internal control over financial
reporting; and
|
|
5.
|
The
registrant’s other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting,
to
the registrant’s auditors and the audit committee of registrant’s board of
directors (or persons performing the equivalent
function):
|
|
|
a)
|
all
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
|
|
b)
|
any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
|
|
Date: October
31, 2007
|
/s/
Gregory L. Cauthen
|
|
| Gregory L. Cauthen | ||
| Senior Vice President and Chief Financial Officer | ||
Exhibit
32.1
CERTIFICATION
PURSUANT TO SECTION 906 OF
THE
SARBANES-OXLEY ACT OF 2002 (SUBSECTIONS (a) AND (b)
OF
SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE)
Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of
Section 1350, Chapter 63 of Title 18, United States Code), I, Robert L. Long,
Chief Executive Officer of Transocean Inc., a Cayman Islands company (the
“Company”), hereby certify, to my knowledge, that:
|
|
(1)
|
the
Company’s Quarterly Report on Form 10-Q for the quarter ended September
30, 2007 (the “Report”) fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934;
and
|
|
|
(2)
|
information
contained in the Report fairly presents, in all material respects,
the
financial condition and results of operations of the
Company.
|
|
Dated: October
31, 2007
|
/s/
Robert L. Long
|
||
|
Name:
|
Robert
L. Long
|
||
|
Chief
Executive Officer
|
|||
The
foregoing certification is being furnished solely pursuant to Section 906 of
the
Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter
63
of Title 18, United States Code) and is not being filed as part of the Report
or
as a separate disclosure document.
A
signed
original of this written statement required by Section 906 has been provided
to
Transocean Inc. and will be retained by Transocean Inc. and furnished to the
Securities and Exchange Commission or its staff upon request.
Exhibit
32.2
CERTIFICATION
PURSUANT TO SECTION 906 OF
THE
SARBANES-OXLEY ACT OF 2002 (SUBSECTIONS (a) AND (b)
OF
SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE)
Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of
Section 1350, Chapter 63 of Title 18, United States Code), I, Gregory L.
Cauthen, Senior Vice President and Chief Financial Officer of Transocean Inc.,
a
Cayman Islands company (the “Company”), hereby certify, to my knowledge,
that:
|
|
(1)
|
the
Company’s Quarterly Report on Form 10-Q for the quarter ended September
30, 2007 (the “Report”) fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934;
and
|
|
|
(2)
|
information
contained in the Report fairly presents, in all material respects,
the
financial condition and results of operations of the
Company.
|
|
Dated: October
31, 2007
|
/s/
Gregory L. Cauthen
|
||
|
Name:
|
Gregory
L. Cauthen
|
||
|
Senior
Vice President and
|
|||
|
Chief
Financial Officer
|
|||
The
foregoing certification is being furnished solely pursuant to Section 906 of
the
Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter
63
of Title 18, United States Code) and is not being filed as part of the Report
or
as a separate disclosure document.
A
signed
original of this written statement required by Section 906 has been provided
to
Transocean Inc. and will be retained by Transocean Inc. and furnished to the
Securities and Exchange Commission or its staff upon request.