Transocean Proxy Statement and 2010 Annual Report

TRANSOCEAN LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
Debt—The fair value of our fixed-rate debt is measured using direct or indirect observable inputs, including quoted prices or
other market data, for similar assets or liabilities in active markets or identical assets or liabilities in less active markets. Our variable-rate
debt is included in the fair values stated below at its carrying amount since the short-term interest rates cause the face value to
approximate its fair value. The TPDI Notes and ODL Loan Facility are included in the fair values stated below at their aggregate carrying
amount of $158 million at December 31, 2010 and December 31, 2009, since there is no available market price for such related-party debt
(see Note 23—Related Party Transactions). The carrying amounts and estimated fair values of our long-term debt, including debt due
within one year, were as follows (in millions):
AR-114
December 31, 2010 December 31, 2009
Long-term debt, including current maturities $ 10,271 $ 10,562 $ 10,534 $ 11,218
Long-term debt of consolidated variable interest entities, including current maturities 950 964 1,183 1,178
Derivative instruments—The carrying amount of our derivative instruments represents the estimated fair value, measured
using direct or indirect observable inputs, including quoted prices or other market data for similar assets or liabilities in active markets or
identical assets or liabilities in less active markets. At December 31, 2010, the carrying amounts of our derivative instruments were
$17 million and $13 million, recorded in other assets and other long-term liabilities, respectively, on our consolidated balance sheets. At
December 31, 2009, the carrying amounts of our derivative instruments were $5 million and $5 million, recorded in other assets and other
long-term liabilities, respectively, on our consolidated balance sheets.
Note 20—Financial Instruments and Risk Concentration
Interest rate risk—Financial instruments that potentially subject us to concentrations of interest rate risk include our cash
equivalents, short-term investments, debt and capital lease obligations. We are exposed to interest rate risk related to our cash
equivalents and short-term investments, as the interest income earned on these investments changes with market interest rates. Floating
rate debt, where the interest rate can be adjusted every year or less over the life of the instrument, exposes us to short-term changes in
market interest rates. Fixed rate debt, where the interest rate is fixed over the life of the instrument and the instrument’s maturity is greater
than one year, exposes us to changes in market interest rates when we refinance maturing debt with new debt.
From time to time, we may use interest rate swap agreements to manage the effect of interest rate changes on future income.
These derivatives are used as hedges and are not used for speculative or trading purposes. Interest rate swaps are designated as a
hedge of underlying future interest payments. These agreements involve the exchange of amounts based on variable interest rates and
amounts based on a fixed interest rate over the life of the agreement without an exchange of the notional amount upon which the
payments are based. The interest rate differential to be received or paid on the swaps is recognized over the lives of the swaps as an
adjustment to interest expense. Gains and losses on terminations of interest rate swap agreements are deferred and recognized as an
adjustment to interest expense over the remaining life of the underlying debt. In the event of the early retirement of a designated debt
obligation, any realized or unrealized gain or loss from the swap would be recognized in income.
Foreign exchange risk—Our international operations expose us to foreign exchange risk. This risk is primarily associated with
compensation costs denominated in currencies other than the U.S. dollar, which is our functional currency, and with purchases from
foreign suppliers. We use a variety of techniques to minimize the exposure to foreign exchange risk, including customer contract payment
terms and, from time to time, the use of foreign exchange derivative instruments.
Our primary foreign exchange risk management strategy involves structuring customer contracts to provide for payment in both
U.S. dollars and local currency. The payment portion denominated in local currency is based on anticipated local currency requirements
over the contract term. Due to various factors, including customer acceptance, local banking laws, other statutory requirements, local
currency convertibility and the impact of inflation on local costs, actual foreign exchange needs may vary from those anticipated in the
customer contracts, resulting in partial exposure to foreign exchange risk. Fluctuations in foreign currencies typically have not had a
material impact on overall results. In situations where payments of local currency do not equal local currency requirements, we may use
foreign exchange derivative instruments, specifically foreign exchange forward contracts, or spot purchases, to mitigate foreign currency
risk. A foreign exchange forward contract obligates us to exchange predetermined amounts of specified foreign currencies at specified
exchange rates on specified dates or to make an equivalent U.S. dollar payment equal to the value of such exchange.
We do not enter into derivative transactions for speculative purposes. Gains and losses on foreign exchange derivative
instruments that qualify as accounting hedges are deferred as other comprehensive income and recognized when the underlying foreign
exchange exposure is realized. Gains and losses on foreign exchange derivative instruments that do not qualify as hedges for accounting
purposes are recognized currently based on the change in market value of the derivative instruments. At December 31, 2010 and 2009,
we had no outstanding foreign exchange derivative instruments.
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