| Related Party Transactions | Note 11—Related Party Transactions
Master services and support agreements
Secondment agreements —On August 5, 2014, we entered into secondment agreements with certain Transocean affiliates to provide the services of certain executives, including our chief executive officer, rig crews and other personnel. On June 30, 2015, we amended one of the secondment agreements to add additional parties to the agreement and to add personnel covered by the agreement. All persons provided to us pursuant to the secondment agreements remain on the payroll and benefit plans of Transocean but are under our day-to-day control and management. We reimburse Transocean for the pro rata gross payroll costs of each seconded employee in proportion to the time allocated to us by the seconded employee, including base pay, any incentive compensation and any benefits costs. We also reimburse Transocean for any applicable unemployment taxes, social security taxes, workers compensation coverage and severance costs, and any foreign equivalents of such taxes, in the amount allocable to the secondment. The secondment agreements may be terminated by Transocean or us upon 90 days written notice. In the three and six months ended June 30, 2015, we recognized costs of $23 million and $47 million, respectively, recorded in operating and maintenance costs and expenses, and $1 million and $2 million, respectively, recorded in general and administrative costs and expenses, for personnel costs under the secondment agreements.
Support agreement —On August 5, 2014, we entered into a support agreement with certain Transocean affiliates to provide the services of certain administrative professionals, including our chief financial officer. The persons providing such services to us pursuant to the support agreement remain on Transocean’s payroll and perform their services on or at Transocean’s facilities. Transocean is solely responsible for all matters pertaining to their employment, compensation and discharge. Such persons may spend only a portion of their time providing services to us and they may be engaged in other work separate from support services on our behalf. We reimburse Transocean for the pro rata expenses associated with the compensation and benefits of all persons covered by the support agreement according to the time spent by each person in providing us support services as well as certain direct costs and expenses incurred in offering the services. The support agreement may be terminated by mutual agreement of Transocean and us. In the three and six months ended June 30, 2015, we recognized costs of less than $1 million, recorded in general and administrative costs and expenses, for services under the support agreement.
Master services agreements —On August 5, 2014, we entered into master services agreements with certain Transocean affiliates, pursuant to which Transocean affiliates provide certain administrative, technical and non-executive management services to us. The agreements have initial terms of five years. Each month, we reimburse Transocean for the cost of all direct labor, materials and expenses incurred in connection with the provision of these services, plus an allocated portion of Transocean’s shared and pooled direct costs, indirect costs and general and administrative costs as determined by Transocean’s internal accounting procedures. In addition, we pay Transocean a fee equal to the greater of (i) five percent of its costs and expenses incurred in connection with providing services to us for the month or, in the case of the provision of capital spares or inventory, a four percent markup on the capital spare or inventory plus a four percent markup on the allocable share of the costs of providing such services and (ii) the markup required by applicable transfer pricing rules. If Transocean incurs costs and expenses from unaffiliated parties in the course of subcontracting the performance of services, we reimburse Transocean at cost and are not required to pay a service fee, unless required by applicable transfer pricing rules. Each of the master services agreements may be terminated prior to the end of its term by either Transocean or us within 90 days written notice under certain circumstances. In the three and six months ended June 30, 2015, we recognized costs of $27 million and $51 million, respectively, recorded in operating and maintenance costs and expenses, and $5 million and $9 million, respectively, recorded in general and administrative costs and expenses, for services under the master services agreements. In the three and six months ended June 30, 2015, we recognized insurance costs of $3 million and $6 million, respectively, recorded in operating and maintenance costs and expenses. In the three and six months ended June 30, 2015, we acquired $6 million and $15 million, respectively, of materials and supplies purchased through the procurement services of Transocean Offshore Deepwater Drilling Inc. (“TODDI”), a U.S. company and a wholly owned subsidiary of Transocean.
Former master services agreement —Under the former master services agreement, TODDI and its affiliates charged the Predecessor for crew personnel provided to the Predecessor to operate its drilling rigs. In the three and six months ended June 30, 2014, the Predecessor recognized costs of $24 million and $48 million, respectively, recorded in operating and maintenance costs and expenses, for such personnel costs. In the three and six months ended June 30, 2014, the Predecessor recognized costs of $1 million and $2 million, respectively, recorded in operating and maintenance costs and expenses, for the proportion of the benefit costs that covered the personnel supporting the Predecessor’s operations.
TODDI also charged the Predecessor obtained services and assistance for certain activities, including accounting, legal, finance, marketing, tax, treasury, insurance, global procurement and technical services. In the three and six months ended June 30, 2014, the Predecessor recognized costs of $11 million and $19 million, respectively, recorded in operating and maintenance costs and expenses, for such services and assistance.
TODDI also administered insurance coverage with and processed claims through Transocean’s commercial market and captive insurance policies (see Note 8—Contingencies). In the three and six months ended June 30, 2014, the Predecessor recognized allocated insurance costs of $3 million and $6 million, respectively, recorded in operating and maintenance costs and expenses.
Additionally, TODDI purchased materials and supplies for the Predecessor’s drilling operations through its procurement services. In the three and six months ended June 30, 2014, the Predecessor paid $9 million and $22 million, respectively, settled through its net investment, for materials and supplies purchased through TODDI’s procurement services.
Other agreements
Omnibus agreement —On August 5, 2014, we entered into an omnibus agreement with Transocean and certain of its affiliates (the “Omnibus Agreement”). Under the Omnibus Agreement, Transocean granted us a right of first offer for its remaining ownership interests in each of the RigCos should Transocean decide to sell such interests. Transocean also will be required to offer us within five years of the effective date of the Omnibus Agreement, the opportunity to purchase, subject to requisite government and other third-party consents, not less than a 51 percent interest in any four of the following six ultra-deepwater drillships: Deepwater Invictus , Deepwater Thalassa , Deepwater Proteus , Deepwater Pontus , Deepwater Poseidon and Deepwater Conqueror . The purchase price for each drillship will be equal to the greater of the fair market value, taking into account the anticipated cash flows under the associated drilling contracts, or the all-in construction cost, plus transaction costs. Transocean will select which of these drillships it will offer to us, the timing of the offers and whether it will offer us the opportunity to purchase a greater than 51 percent interest in any offered drillship. In addition, Transocean agreed not to acquire, own or operate any new drilling rig or contract for any drilling rig, in each case that was constructed in 2009 or later and is operating under a contract for five or more years (“Five-Year Drilling Rigs”), subject to certain exceptions, without offering us the opportunity to purchase such rig. We also agreed not to acquire, own, operate, or contract for any drilling rig that is not a Five-Year Drilling Rig, subject to certain exceptions, without first offering the contract to Transocean.
Transocean agreed to indemnify us for a period of five years through August 5, 2019 against certain environmental and human health and safety liabilities with respect to the assets contributed or sold to us to the extent arising prior to the time they were contributed or sold to us. Liabilities resulting from a change in law after the closing of the offering are excluded from the environmental indemnity. The indemnity coverage provided by Transocean for such environmental and human health and safety liabilities will not exceed the aggregate amount of $10 million. No claim for indemnification may be made unless the aggregate dollar amount of all claims exceeds $500,000, in which case Transocean is liable for claims only to the extent such aggregate amount exceeds $500,000.
In addition, Transocean agreed to indemnify us against any liabilities arising out of the Macondo well incident occurring prior to our initial public offering and any liabilities, other than taxes, arising from Transocean’s or its subsidiaries’ failure to comply with the Consent Decree or the EPA Agreement, each as it is defined in the Omnibus Agreement, or any similar decree or agreement. The indemnity coverage provided by Transocean related to the Macondo well incident, the Consent Decree, the EPA Agreement or any similar decree or agreement is unlimited. However, these indemnities do not cover or include any amount of consequential damages, including lost profits or revenues.
Transocean also agreed to indemnify us to the full extent of any liabilities related to:
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certain defects in title to Transocean’s assets contributed or sold to the RigCos and any failure to obtain, prior to the time they were contributed, certain consents and permits necessary to conduct, own and operate such assets, which liabilities arise within three years after the closing of the offering;
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any judicial determination substantially to the effect that the Transocean affiliate that transferred any of our initial assets to us pursuant to the Contribution Agreement did not receive reasonably equivalent value in exchange therefor or was rendered insolvent by such transfer;
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tax liabilities attributable to the operation of the assets contributed or sold to the RigCos prior to the closing of the offering; and
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any lost revenue, up to $100 million, arising out of the failure to receive an operating dayrate from Chevron for Discoverer Clear Leader , for the period commencing on the closing date of the offering through the completion of the rig’s 2014 special periodic survey, which occurred during the three months ending December 31, 2014.
In the year ended December 31, 2014, we submitted indemnification claims under the Omnibus Agreement for an aggregate amount of $19 million associated with lost revenues. At December 31, 2014, the indemnification claim receivable was $10 million, which we collected in January 2015.
Dual-activity license agreements —All three of our drilling units are equipped with Transocean’s patented dual-activity technology. Dual-activity technology employs structures, equipment and techniques using two drilling stations within a dual derrick to perform drilling tasks. Dual-activity technology allows our rigs to perform simultaneous drilling tasks in a parallel rather than sequential manner and reduces critical path activity, improving efficiency in both exploration and development drilling. The Predecessor entered into license agreements with TODDI for the use of the patented technology through the expiration of the patents in May 2016. Under the license agreements, the Predecessor paid to TODDI an aggregate original license cost of $20 million, recorded in other assets. In the three and six months ended June 30, 2015, we recognized amortization of the license costs of less than $1 million and $1 million, respectively, recorded in operating and maintenance costs and expenses. In the three and six months ended June 30, 2014, the Predecessor recognized amortization of the license costs of $1 million and $2 million, respectively, recorded in operating and maintenance costs and expenses. At June 30, 2015 and December 31, 2014, the carrying amount of the deferred license cost was $3 million and $4 million, respectively.
Also, under the license agreements, we are and the Predecessor was required to pay to TODDI quarterly patent royalty fees of between 3 percent and 5 percent of revenues. Under the Contribution Agreement, Transocean retained the obligation for the payment of the quarterly patent royalty fees. In the three and six months ended June 30, 2015, we recognized patent royalty expense of $7 million and $12 million, respectively, recorded in operating and maintenance costs and expenses with corresponding entries to members’ equity, representing the fees paid by Transocean on our behalf. In the three and six months ended June 30, 2014, the Predecessor recognized patent royalty expense of $9 million and $14 million, respectively, recorded in operating and maintenance costs and expenses.
Credit agreements —On July 29, 2014, we entered into agreements with a Transocean affiliate to establish a working capital note payable in the principal amount and for cash proceeds of $43 million. On August 5, 2014, we entered into the Five-Year Revolving Credit Facility with a Transocean affiliate. See Note 7—Credit Agreements and Note 14—Subsequent Events. |
