Note 7—Discontinued Operations

Summarized results of discontinued operations

The summarized results of operations included in income from discontinued operations were as follows (in millions):

	Three months ended June 30,						Six months ended June 30,
	2013			2012			2013			2012
Operating revenues	$	229		$	248		$	469		$	478
Operating and maintenance expense		(233	)		(255	)		(482	)		(478	)
Depreciation and amortization expense		—			(65	)		—			(135	)
Loss on impairment of assets in discontinued operations, net		—			(12	)		—			(105	)
Gain on disposal of assets in discontinued operations, net		3			72			18			71
Income (loss) from discontinued operations before income tax expense		(1	)		(12	)		5			(169	)
Income tax benefit (expense)		(9	)		12			(15	)		33
Income (loss) from discontinued operations, net of tax	$	(10	)	$	—		$	(10	)	$	(136	)

Assets and liabilities of discontinued operations

The carrying amounts of the major classes of assets and liabilities associated with our discontinued operations were classified as follows (in millions):

	June 30, 2013		December 31, 2012
Assets
Rigs and related equipment, net	$	59	$	104
Materials and supplies, net		68		71
Other related assets		7		4
Assets held for sale	$	134	$	179

Liabilities
Deferred revenues	$	57	$	32
Other liabilities		—		3
Other current liabilities	$	57	$	35

Standard Jackup and swamp barge contract drilling operations

Overview—In September 2012, in connection with our efforts to dispose of non-strategic assets and to reduce our exposure to low-specification drilling units, we committed to a plan to discontinue operations associated with the Standard Jackup and swamp barge asset groups, components of our contract drilling services operating segment. At June 30, 2013, the remaining Standard Jackups, which were not sold in the sale transactions with Shelf Drilling, including GSF Rig 127, GSF Rig 134, Trident IV-A and Trident VI, and related equipment, were classified as held for sale with an aggregate carrying amount of $63 million, including $4 million in materials and supplies. At December 31, 2012, the remaining Standard Jackups, which were not sold in the sale transactions with Shelf Drilling, including D.R. Stewart, GSF Adriatic VIII, GSF Rig 127, GSF Rig 134, Interocean III, Trident IV-A and Trident VI, and related equipment, were classified as held for sale with an aggregate carrying amount of $112 million, including $8 million in materials and supplies.

Impairments—In the three and six months ended June 30, 2012, we recognized aggregate losses of $12 million ($0.03 per diluted share) and $29 million ($0.08 per diluted share), respectively, which had no tax effect in either period, associated with the impairment of GSF Adriatic II and GSF Rig 136, which were classified as assets held for sale at the time of impairment. We measured the impairment of the drilling unit and related equipment as the amount by which the carrying amount exceeded the estimated fair value less costs to sell. We estimated the fair value of the assets using significant other observable inputs, representative of Level 2 fair value measurements, including a binding sale and purchase agreement for the drilling unit and related equipment.

Sale transactions with Shelf Drilling—In November 2012, we completed the sale of 38 drilling units to Shelf Drilling in exchange for cash proceeds of $568 million, subject to post-closing adjustments, and non-cash proceeds in the form of preference shares that had a stated value of $196 million and an estimated fair value of $194 million, including the fair value associated with embedded derivatives. In June 2013, we sold the preference shares to an unaffiliated party for cash proceeds of $185 million and, in the three and six months ended June 30, 2013, we recognized a loss of $10 million ($0.03 per diluted share), recorded in other expense, net, which had no tax effect, associated with the sale.

For a transition period following the completion of the sale transactions with Shelf Drilling, we agreed to continue to operate a substantial portion of the Standard Jackups under operating agreements with Shelf Drilling and to provide certain other transition services to Shelf Drilling. Under the operating agreements, we have agreed to remit the collections from our customers under the associated drilling contracts to Shelf Drilling, and Shelf Drilling has agreed to reimburse us for our direct costs and expenses incurred while operating the Standard Jackups on behalf of Shelf Drilling with certain exceptions. Amounts due to Shelf Drilling under the operating agreements and transition services agreement may be contractually offset against amounts due from Shelf Drilling. The costs to us for providing such operating and transition services, including allocated indirect costs, may exceed the amounts we receive from Shelf Drilling for providing such services.

Under the operating agreements, we agreed to continue to operate these Standard Jackups on behalf of Shelf Drilling for periods ranging from nine months to 27 months or until expiration or novation of the underlying drilling contracts by Shelf Drilling. As of June 30, 2013, we operated 24 Standard Jackups under operating agreements with Shelf Drilling. Until the expiration or novation of such drilling contracts, we retain possession of the materials and supplies associated with the Standard Jackups that we operate under the operating agreement. At June 30, 2013 and December 31, 2012, the materials and supplies associated with the drilling units that we operated under operating agreements with Shelf Drilling had an aggregate carrying amount of $64 million and $63 million, respectively. Under a transition services agreement, we agreed to provide certain transition services for a period of up to 18 months following the completion of the sale transactions.

For a period of up to three years following the closing of the sale transactions, we have agreed to provide to Shelf Drilling up to $125 million of financial support by maintaining letters of credit, surety bonds and guarantees for various contract bidding and performance activities associated with the drilling units sold to Shelf Drilling and in effect at the closing of the sale transactions. At the time of the sale transactions, we had $113 million of outstanding letters of credit, issued under our committed and uncommitted credit lines, in support of rigs sold to Shelf Drilling. Included within the $125 million maximum amount, we agreed to provide up to $65 million of additional financial support in connection with any new drilling contracts related to such drilling units. Shelf Drilling is required to reimburse us in the event that any of these instruments are called. At June 30, 2013 and December 31, 2012, we had $102 million and $113 million, respectively, of outstanding letters of credit, issued under our committed and uncommitted credit lines, in support of drilling units sold to Shelf Drilling. See Note 13—Commitments and Contingencies.

Other dispositions—During the six months ended June 30, 2013, we completed the sale of the Standard Jackups D.R. Stewart, Interocean III and GSF Adriatic VIII along with related equipment. In the six months ended June 30, 2013, in connection with the disposal of these assets, we received aggregate net cash proceeds of $63 million, and we recognized an aggregate net gain of $15 million ($0.04 per diluted share), which had no tax effect. In the three and six months ended June 30, 2013, we recognized an aggregate net gain of $3 million associated with the disposal of unrelated assets. In June 2013, we entered into an agreement to sell the Standard Jackup Trident IV-A and related equipment.

During the six months ended June 30, 2012, we completed the sales of the Standard Jackups GSF Adriatic II, GSF Rig 136, Roger W. Mowell, Transocean Nordic and Transocean Shelf Explorer and related equipment. In the three and six months ended June 30, 2012, in connection with the disposal of these assets, we received aggregate net cash proceeds of $145 million and $179 million, respectively, and we recognized an aggregate net gain of $64 million ($0.18 per diluted share from continuing operations), which had no tax effect. In the three and six months ended June 30, 2012, we recognized aggregate net losses of $2 million and $3 million, respectively, associated with the disposal of unrelated assets.

U.S. Gulf of Mexico drilling management services

Overview—In March 2012, we announced our intent to discontinue drilling management operations in the shallow waters of the U.S. Gulf of Mexico, a component of our drilling management services operating segment, upon completion of our then existing contracts. We elected to exit this market based on the declining market outlook for these services in the shallow waters of the U.S. Gulf of Mexico as well as the more difficult regulatory environment for obtaining drilling permits. In December 2012, we completed the final drilling management project and discontinued offering our drilling management services in this region.

Impairments—During the six months ended June 30, 2012, we determined that the customer relationships intangible asset associated with the U.S. operations of our drilling management services reporting unit was impaired due to the declining market outlook for these services in the shallow waters of the U.S. Gulf of Mexico as well as the increased regulatory environment for obtaining drilling permits and the diminishing demand for our drilling management services. We estimated the fair value of the customer relationships intangible asset using the multiperiod excess earnings method, a valuation methodology that applies the income approach. We estimated fair value using significant unobservable inputs, representative of a Level 3 fair value measurement, including assumptions related to the future performance of the drilling management services reporting unit, such as future commodity prices, projected demand for our services, rig availability and dayrates. As a result of our valuation, we determined that the carrying amount of the customer relationships intangible asset exceeded its fair value, and in the six months ended June 30, 2012, we recognized a loss on impairment of $31 million ($20 million or $0.06 per diluted share, net of tax).

During the six months ended June 30, 2012, we determined that the trade name intangible asset associated with our drilling management services reporting unit was impaired due to the declining market outlook for these services in the shallow waters of the U.S. Gulf of Mexico as well as the increased regulatory environment for obtaining drilling permits and the diminishing demand for drilling management services. We estimated the fair value of the trade name intangible asset using the relief from royalty method, a valuation methodology that applies the income approach. We estimated fair value using significant unobservable inputs, representative of a Level 3 fair value measurement, including assumptions related to the future performance of the drilling management services reporting unit, such as future commodity prices, projected demand for drilling management services, rig availability and dayrates. As a result of our valuation, we determined that the carrying amount of the trade name intangible asset exceeded its fair value, and in the six months ended June 30, 2012, we recognized a loss on impairment of $39 million ($25 million or $0.07 per diluted share, net of tax).

Oil and gas properties

Overview—In March 2011, in connection with our efforts to dispose of non-strategic assets, we engaged an unaffiliated advisor to coordinate the sale of the assets of our oil and gas properties reporting unit, formerly a component of our other operations segment, which comprised the exploration, development and production activities performed by Challenger Minerals Inc., Challenger Minerals (North Sea) Limited and Challenger Minerals (Ghana) Limited, our wholly owned oil and gas subsidiaries. During the year ended December 31, 2012, we completed the sale of these assets.

Impairment—In the six months ended June 30, 2012, we recognized a loss of $6 million ($4 million or $0.01 per diluted share, net of tax) associated with the impairment of our oil and gas properties, which were classified as assets held for sale at the time of impairment, since the carrying amount of the properties exceeded the estimated fair value less costs to sell the properties. We estimated fair value based on significant other observable inputs, representative of a Level 2 fair value measurement, including a binding sale and purchase agreement for the properties.

Dispositions—In April 2012, we completed the sale of the assets of Challenger Minerals Inc. for net cash proceeds of $7 million. In May 2012, we received additional cash proceeds of $10 million from the buyer of Challenger Minerals (North Sea) Limited, and in the three and six months ended June 30, 2012, we recognized a gain of $10 million associated with the disposal of assets in discontinued operations.