| Significant Accounting Policies | Note 2—Significant Accounting Policies
Presentation —For periods prior to August 5, 2014, the combined financial information of the Predecessor was derived from Transocean’s accounting records. The combined financial information reflects the combined results of operations, financial position and cash flows of the Predecessor Business as if such operations and assets had been combined for all periods presented. All transactions among the Predecessor Business within the Predecessor have been eliminated.
For the periods following August 5, 2014, the consolidated financial statements reflect our consolidated results of operations, financial position and cash flows. We have presented our assets and liabilities at historical cost because the Predecessor transferred to us such assets and liabilities in formation transactions completed under common control within the Transocean consolidated group. We present in our consolidated financial statements 100 percent of our consolidated results of operations, assets, liabilities and cash flows, and we present Transocean’s partial ownership interest in each of the RigCos as noncontrolling interest.
Transocean uses a centralized approach to treasury services to perform cash management for the operations of its affiliates. Under the Master Services Agreement, Transocean provides its treasury services to manage our cash and cash equivalents. The Predecessor had no bank accounts, and Transocean did not allocate its cash and cash equivalents to the Predecessor. The Predecessor transferred the cash generated and used by its operations to Transocean, and Transocean funded the Predecessor’s operating and investing activities as needed. Accordingly, the Predecessor’s transfers of cash to and from Transocean’s treasury were presented as net distributions to the Predecessor’s parent on our consolidated statements of equity and in our financing activities on our consolidated statements of cash flows. The Predecessor’s results of operations do not include any interest expense for intercompany cash advances from Transocean, since Transocean did not historically allocate interest expense for intercompany advances to the Predecessor.
Accordingly, we have prepared our consolidated financial statements on the following basis:
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Our consolidated statement of operations for the year ended December 31, 2015 consists of the consolidated results of operations of Transocean Partners. Our consolidated statement of operations for the year ended December 31, 2014 consists of the consolidated results of operations of Transocean Partners for the period from August 5, 2014 through December 31, 2014 and the combined results of operations of the Predecessor for the beginning of the period through August 4, 2014. Our consolidated statement of operations for the year ended December 31, 2013 consists entirely of the combined results of operations of the Predecessor.
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Our consolidated balance sheets at December 31, 2015 and 2014 consist of the consolidated balances of Transocean Partners.
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Our consolidated statement of equity for the year ended December 31, 2015 consists of the consolidated activity of Transocean Partners. Our consolidated statement of equity for the year ended December 31, 2014 consists of the consolidated activity of Transocean Partners during and following the formation on August 5, 2014 and the combined activity of the Predecessor through August 4, 2014. Our consolidated statement of equity for the year ended December 31, 2013 consists entirely of the combined activity of the Predecessor.
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Our consolidated statement of cash flows for the year ended December 31, 2015 consists of the consolidated cash flows of Transocean Partners. Our consolidated statement of cash flows for the year ended December 31, 2014 consists of the consolidated cash flows of Transocean Partners for the period from August 5, 2014 through December 31, 2014 and the combined cash flows of the Predecessor for the beginning of the respective period through August 4, 2014. Our consolidated statement of cash flows for the year ended December 31, 2013 consists entirely of the combined cash flows of the Predecessor.
Accounting estimates —To prepare financial statements in accordance with accounting principles generally accepted in the U.S., we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and assumptions, including those related to our allocated costs and related party transactions, materials and supplies obsolescence, property and equipment, goodwill and drilling contract intangible liability, income taxes and equity ‑based compensation. We base our estimates and assumptions on historical experience and on various other factors we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amounts of assets and liabilities that are not readily apparent from other sources. Actual results could differ from such estimates.
Fair value measurements —We estimate fair value at a price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market for the asset or liability. Our valuation techniques require inputs that we categorize using a three ‑level hierarchy, from highest to lowest level of observable inputs, as follows: (1) significant observable inputs, including unadjusted quoted prices for identical assets or liabilities in active markets (“Level 1”), (2) significant other observable inputs, including direct or indirect market data for similar assets or liabilities in active markets or identical assets or liabilities in less active markets (“Level 2”) and (3) significant unobservable inputs, including those that require considerable judgment for which there is little or no market data (“Level 3”). When multiple input levels are required for a valuation, we categorize the entire fair value measurement according to the lowest level of input that is significant to the measurement even though we may have also utilized significant inputs that are more readily observable.
Consolidation —We consolidate entities in which we have a majority voting interest and entities that meet the criteria for variable interest entities for which we are deemed to be the primary beneficiary for accounting purposes. We eliminate intercompany transactions and accounts in consolidation. We separately present within equity on our consolidated balance sheets the ownership interests attributable to parties with noncontrolling interests in our consolidated subsidiaries, and we separately present net income attributable to such parties on our consolidated statements of operations.
Operating revenues and expenses —We recognize operating revenues as they are realized and earned and can be reasonably measured, based on contractual dayrates, and when collectability is reasonably assured. In connection with drilling contracts, we may receive revenues for preparation and mobilization of equipment and personnel or for capital improvements to rigs. We defer the revenues earned and incremental costs incurred that are directly related to contract preparation and mobilization and recognize such revenues and costs over the primary contract term of the drilling project using the straight ‑line method. We amortize, in operating and maintenance costs and expenses, the fees related to contract preparation and mobilization on a straight ‑line basis over the estimated firm period of drilling, which is consistent with the general pace of activity, level of services being provided and dayrates being earned over the life of the contract. For contractual daily rate contracts, we recognize the losses for loss contracts as such losses are incurred. We recognize the costs of relocating drilling units without contracts as such costs are incurred. Upon completion of drilling contracts, we recognize in earnings any demobilization fees received and expenses incurred. We defer capital upgrade revenues received and recognize such revenues over the primary contract term of the drilling project. We depreciate the actual costs incurred for the capital upgrade on a straight ‑line basis over the estimated useful life of the asset. We defer the periodic survey and drydock costs incurred in connection with obtaining regulatory certification to operate our rigs and well control systems on an ongoing basis, and we recognize such costs over the period until expiration of certification using the straight ‑line method. We defer costs associated with the license fee that we paid for the use of Transocean’s patented dual ‑activity and recognize such amortized costs using the straight ‑line method through the license and patent expiration in May 2016 (see Note 12—Related Party Transactions).
Included in our contract drilling revenues, we recognize amortization associated with our drilling contract intangible liability attributed to the drilling contract for Development Driller III . We amortize drilling contract intangible revenues based on the cash flows projected over the contract period and include such revenues in contract drilling revenues on our consolidated statements of operations. See Note 5—Goodwill and Intangible Liability.
Our other revenues represent those derived from customer reimbursable revenues. We recognize customer reimbursable revenues as we bill our customers for reimbursement of costs associated with certain equipment, materials and supplies, subcontracted services, employee bonuses and other expenditures, resulting in little or no net effect on operating income since such recognition is concurrent with the recognition of the respective reimbursable costs in operating and maintenance expense.
Allocated indirect and overhead costs —Our results of operations include allocations of costs and expenses based on services performed and products provided by Transocean under master service and support agreements. In connection with such agreements, Transocean allocates to us costs and expenses related to the services performed and products provided to us under the master service and support agreements. The allocations require significant judgment and subjectivity in applying estimates and assumptions used to determine the amount of such allocations, including the amount of time, services and resources provided to us relative to that provided to other Transocean affiliates. Altering the assumptions used in our cost allocation estimates could result in significantly different results. In the years ended December 31, 2015 and 2014, costs and expenses allocated to us by Transocean were $146 million and $62 million, respectively (see Note 12—Related Party Transactions).
The combined results of operations for the Predecessor include allocated indirect and overhead costs for certain functions historically performed by Transocean and not previously allocated to the Predecessor Business, including allocations of indirect operating and maintenance costs and expenses for onshore operational support services such as engineering, procurement and logistics and general and administrative costs and expenses related to executive oversight, accounting, treasury, tax, legal, and information technology. We have applied these allocations based on relative values of net property and equipment and operating and maintenance costs and expenses. We believe the assumptions underlying the consolidated financial statements, including the assumptions regarding allocation of costs from Transocean, are reasonable. Nevertheless, the combined results of operations of the Predecessor do not include all of the costs that the Predecessor would have incurred had it been a stand ‑alone company during the periods presented and may not reflect the combined results of operations, financial position and cash flows had the Predecessor been a stand ‑alone company during the periods presented. In the years ended December 31, 2014 and 2013, the Predecessor recognized such allocated operating and maintenance costs of $14 million and $28 million, respectively, including $11 million and $21 million, respectively, for personnel costs. In the years ended December 31, 2014 and 2013, we recognized such allocated general and administrative costs of $6 million and $10 million, respectively, including $4 million and $6 million, respectively, for personnel costs.
Equity-based compensation —For service awards, we recognize compensation expense on a straight ‑line basis over the service period through the date the employee is no longer required to provide service to earn the award. For performance awards, we recognize compensation expense on a straight ‑line basis fo r each separately vesting portion of the award as if the award was in substance, multiple awards . We have awarded to our employees and non ‑employee directors phantom units, and such phantom units are participating securities. A phantom unit is a notional unit that has no voting rights and entitles the grantee to receive a common unit upon the vesting. To measure fair values of granted or modified phantom units, we use the market price of our units on the grant date or modification date. To measure fair values of performance awards, we recognize compensation expense only to the extent the achievement of the performance condition is probable, and we remeasure the fair value of the award at each reporting date until the performance condition has been determined.
We recognize equity ‑based compensation expense in the same financial statement line item as cash compensation paid to the respective employees or non ‑employee directors. We recognize cash flows resulting from the tax deduction benefits for awards in excess of recognized compensation costs as financing cash flows. In the year ended December 31, 2015, equity ‑based compensation expense was less than $1 million, which had no tax impact. In the years ended December 31, 2014 and 2013 , we had no equity ‑based awards outstanding. See Note 11—Equity ‑Based Compensation.
Income taxes —We provide for income taxes based upon the tax laws and rates in effect in the countries in which operations are conducted and income is earned. We recognize deferred tax assets and liabilities for the anticipated future tax effects of temporary differences between the financial statement basis and the tax basis of our assets and liabilities using the applicable jurisdictional tax rates in effect at year end. We record a valuation allowance for deferred tax assets when it is more likely than not that some or all of the benefit from the deferred tax asset will not be realized. We also record a valuation allowance for deferred tax assets resulting from net operating losses incurred during the year in certain jurisdictions and for other deferred tax assets where, in our opinion, it is more likely than not that the financial statement benefit of these losses will not be realized. Additionally, we record a valuation allowance for foreign tax credit carryforwards , if applicable, to reflect the possible expiration of these benefits prior to their utilization.
We maintain liabilities for estimated tax exposures in our jurisdictions of operation, and we recognize the provisions and benefits resulting from changes to those liabilities in our income tax expense or benefit along with related interest and penalties. Tax exposure items may include potential challenges to qualification for treaty benefits, intercompany pricing, disposition transactions, and withholding tax rates and their applicability. These tax exposures are resolved primarily through the settlement of audits within these tax jurisdictions or by judicial means, but can also be affected by changes in applicable tax law or other factors, which could cause us to revise past estimates. The U.S. Internal Revenue Service (the “IRS”) has previously challenged and is currently challenging Transocean’s transfer pricing relating to certain bareboat charters. If the IRS successfully challenged our transfer pricing policies, it could result in a material increase in our U.S. federal income tax expense. See Note 5—Income Taxes.
Earnings per unit —We apply the two ‑class method of calculating earnings per unit for our participating securities, including our common units, subordinated units and our incentive distribution rights.
Under our limited liability company agreement, we established a cash distribution policy that requires the distribution of our available cash, which is determined by our board of directors (see Note 9—Cash Distributions). To calculate the earnings per unit for our common and subordinated unitholders, we allocate our net income or loss attributable to controlling interest for the quarterly or annual period in proportion to the respective ownership interest or, if the application of our cash distribution policy results in disproportionate distribution, in accordance with such policy. We present earnings per unit regardless of whether such earnings would or could be distributed under the terms of our limited liability company agreement. Accordingly, the reported earnings per unit is not indicative of potential cash distributions that may be made based on historical or future earnings.
See Note 6—Earnings Per Unit.
Cash and cash equivalents —We consider cash equivalents to include highly liquid debt instruments with original maturities of three months or less, such as time deposits with commercial banks that have high credit ratings, U.S. Treasury and government securities, Eurodollar time deposits, certificates of deposit and commercial paper. We may also invest excess funds in no ‑load, open ‑ended, management investment trusts. Such management trusts invest exclusively in high ‑quality money market instruments.
Accounts receivable —We earn our revenues by providing our drilling services to international oil companies. We evaluate the credit quality of our customers on an ongoing basis, and we do not generally require collateral or other security to support customer receivables. We establish an allowance for doubtful accounts on a case ‑by ‑case basis, considering changes in the financial position of a customer, when we believe the required payment of specific amounts owed to us is unlikely to occur. At December 31, 2015 and 2014, we had no allowance for doubtful accounts.
We record long ‑term accounts receivable at their present value and recognize interest income using the effective interest method through the date of payment. At December 31, 2015 and 2014, the aggre gate face value of such accounts receivable was $15 million and $24 million, respectively. At December 31, 2015, the aggregate carr ying amount of such accounts receivable was $15 million, recorded in accounts receivable. At December 31, 2014, the aggregate carrying amount of such accounts receivable was $22 million, including $12 million and $10 million, respectively, recorded in accounts receivable and other assets, respectively. At December 31, 2015 and 2014, our long ‑term accounts receivable had a weighted average effective interest rate of 11 percent.
Materials and supplies —We record materials and supplies at their average cost less an allowance for obsolescence. We estimate the allowance for obsolescence based on historical experience and expectations for future use of the materials and supplies. At December 31, 2015 and 2014, the allowance for obsolescence was $6 million and $3 million, respectively.
Property and equipment —The carrying amounts of our property and equipment, consisting primarily of offshore drilling rigs and related equipment, are based on our estimates, assumptions and judgments relative to capitalized costs, useful lives and salvage values of our rigs. These estimates, assumptions and judgments reflect both historical experience and expectations regarding future industry conditions and operations. At December 31, 2015, the aggregate carrying amount of our property and equipment represented approximately 85 percent of our total assets.
We capitalize expenditures for newbuilds, renewals, replacements and improvements, including capitalized interest, if applicable, and we recognize the expense for maintenance and repair costs as incurred. Upon sale or other disposition of an asset, we recognize a net gain or loss on disposal of the asset, which is measured as the difference between the net carrying amount of the asset and the net proceeds received. We compute depreciation using the straight ‑line method after allowing for salvage values. As of December 31, 2014, we reduced the salvage values of our drilling units due to existing market conditions. For the year ended December 31, 2015, this change in estimate resulted in an increase of approximately $1 million to depreciation expense.
The estimated original useful life of each of our drilling units is 35 years. We reevaluate the remaining useful lives and salvage values of our rigs when certain events occur that directly impact the useful lives and salvage values of the rigs, including changes in operating condition, functional capability and market and economic factors. When evaluating the remaining useful lives of rigs, we also consider major capital upgrades required to perform certain contracts and the long ‑term impact of those upgrades on future marketability.
Long ‑lived asset impairment —We review the aggregate carrying amount of our long ‑lived assets, principally property and equipment, for potential impairment when events occur or circumstances change that indicate that the aggregate carrying amount of the drilling units and related equipment in our asset group may not be recoverable. We determine recoverability by evaluating the aggregate estimated undiscounted future net cash flows based on projected dayrates and utilization of our drilling units. When an impairment of our assets is indicated, we measure the impairment as the amount by which the aggregate carrying amount of the drilling units and related equipment in our asset group exceeds the aggregate estimated fair value. We measure the fair value of our drilling units and related equipment by applying a variety of valuation methods, incorporating a combination of income and market approaches, using projected discounted cash flows and estimates of the exchange price that would be received for the assets in the principal or most advantageous market for the assets in an orderly transaction between market participants as of the measurement date.
Goodwill impairment —Prior to the full impairment of our goodwill, we conducted impairment testing annually as of October 1 and more frequently, on an interim basis, when an event occured or circumstances changed that indicated that the fair value of our reporting unit may have declined below its carrying value. We tested goodwill at the reporting unit level, which is defined as an operating segment or one level below an operating segment that constitutes a business for which financial information is available and is regularly reviewed by management. We determined that we had a single reporting unit for this purpose.
We estimate the fair value of our reporting unit using projected discounted cash flows, publicly traded company multiples and acquisition multiples. To develop the projected cash flows associated with our reporting unit, which are based on estimated future dayrates and rig utilization, we consider key factors that include assumptions regarding future commodity prices, credit market conditions and the effect these factors may have on our contract drilling operations and the capital expenditure budgets of our customers. We discount the projected cash flows using a long ‑term, risk ‑adjusted weighted ‑average cost of capital, which is based on our estimate of the investment returns that market participants would require for each of our reporting units. We derive publicly traded company multiples for companies with operations similar to our reporting units using observable information related to shares traded on stock exchanges and, when available, observable information related to recent acquisitions. If the reporting unit’s carrying amount exceeds its fair value, we consider goodwill impaired and perform a second step to measure the amount of the impairment loss, if any.
In the year ended December 31, 2015, as a result of interim goodwill tests, we recognized an aggregate loss of $356 million, which had no tax effect, associated with the full impairment of the carrying amount of our goodwill, of which $ 182 million ($ 2.62 per diluted unit) was attributable to controlling interest and $174 million was attributable to noncontrolling interest. In the years ended December 31, 2014 and 2013, as a result of our annual impairment testing, we concluded that our goodwill was not impaired. See Note 4—Goodwill and Intangible Liability.
Contingencies —We perform assessments of our contingencies on an ongoing basis to evaluate the appropriateness of our liabilities and disclosures for such contingencies. We establish liabilities for estimated loss contingencies when we believe a loss is probable and the amount of the probable loss can be reasonably estimated. We recognize corresponding assets for those loss contingencies that we believe are probable of being recovered through insurance. Once established, we adjust the carrying amount of a contingent liability upon the occurrence of a recognizable event when facts and circumstances change, altering our previous assumptions with respect to the likelihood or amount of loss. We recognize expense for legal costs as they are incurred, and we recognize a corresponding asset for such legal costs only if we expect such legal costs to be recovered through insurance.
Net investment —Net investment on our consolidated balance sheets represents Transocean’s historical investment in the Predecessor, the Predecessor’s accumulated earnings and the net effect of cash transactions and allocations between Transocean and the Predecessor.
Reclassifications —We have made certain reclassifications, such as those related to our adoption of updates to accounting standards for income taxes, which did not have an effect on net income, to prior period amounts to conform with the current year’s presentation. These reclassifications did not have a material effect on our consolidated statement of financial position, results of operations or cash flows.
Subsequent events —We evaluate subsequent events through the time of our filing on the date we issue our financial statements. See Note 18—Subsequent Events. |
