What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-03-01 compared with 2020-02-18 · 234 added, 213 removed, 278 unchanged (62% of the section changed)

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Risk Factors” and the audited consolidated financial statements and the notes thereto included under “Item 8.

Financial Statements and Supplementary Data” elsewhere in this annual report.

Financial Statements and Supplementary Data” elsewhere in this annual report on Form 10-K.

The following discussion of our results of operations and liquidity and capital resources includes comparisons for the years ended December 31, 2020 and 2019.

For a discussion of comparisons for our results of operations and liquidity and capital resources for the years ended 2018 and 2017, see “Part II.

For a discussion, including comparisons, of our results of operations and liquidity and capital resources for the years ended December 31, 2019 and 2018, see “Part II.

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, 2019, filed with the United States (“U.S.”) Securities and Exchange Commission on February 18, 2020.

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(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 February 12, 2020, we owned or had partial ownership interests in and operated 45 mobile offshore drilling units, including 28 ultra-deepwater floaters, 14 harsh environment floaters and three midwater floaters.

As of February 16, 2021, we owned or had partial ownership interests in and operated 37 mobile offshore drilling units, including 27 ultra-deepwater floaters and 10 harsh environment floaters.

As of February 16, 2021, we were constructing two ultra-deepwater drillships.

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Significant Events

Debt issuances —On February 1, 2019, we issued $550 million aggregate principal amount of 6.875% senior secured notes due February 2027 (the “6.875% Senior Secured Notes”), and we received $539 million aggregate cash proceeds, net of discount and issue costs.

On May 24, 2019, we issued $525 million aggregate principal amount of 5.375% senior secured notes due May 2023 (the “5.375% Senior Secured Notes”), and we received $517 million aggregate cash proceeds, net of discount and issue costs.

On January 17, 2020, we issued $750 million aggregate principal amount of 8.00% senior unsecured notes due February 2027 (the “8.00% Senior Notes”), and we received $743 million aggregate cash proceeds, net of issue costs.

See “—Liquidity and Capital Resources—Sources and uses of liquidity.”

Early debt retirement —During the year ended December 31, 2019, we completed cash tender offers to purchase certain notes (the “2019 Tendered Notes”).

In the year ended December 31, 2019, we made an aggregate cash payment of $522 million to settle the validly tendered 2019 Tendered Notes and recognized a loss of $18 million associated with the retirement of debt.

Debt exchanges —On August 14, 2020, we issued $238 million aggregate principal amount of 2.50% senior guaranteed exchangeable bonds due January 2027 (the “Senior Guaranteed Exchangeable Bonds”) in non-cash private exchanges for $397 million aggregate principal amount of the 0.50% exchangeable senior bonds due January 2023 (the “Exchangeable Senior Bonds”) (collectively, the “Private Exchange”).

In the year ended December 31, 2020, as a result of the Private Exchange, we recognized a gain of $72 million associated with the restructuring of debt.

See “—Operating Results” and “—Liquidity and Capital Resources—Sources and uses of liquidity.”

On September 11, 2020, we issued $687 million aggregate principal amount of 11.50% senior guaranteed notes due January 2027 (the “11.50% Senior Guaranteed Notes”) in non-cash exchange transactions with the respective holders for $1.5 billion aggregate principal amount of several series of our existing debt securities that were validly tendered and accepted for purchase (the “Exchange Offers” and, together with the Private Exchange, the “Exchange Transactions”), associated with the restructuring of debt.

In the year ended December 31, 2020, as a result of the Exchange Offers, we recognized a gain of $355 million associated with the restructuring of debt.

See “—Operating Results” and “—Liquidity and Capital Resources—Sources and uses of liquidity.”

On February 26, 2021, we completed privately negotiated transactions to exchange $323 million aggregate principal amount of outstanding Exchangeable Senior Bonds for $294 million aggregate principal amount of new 4.00% Senior Guaranteed Exchangeable Bonds due 2025 (the “New Senior Guaranteed Exchangeable Bonds”) and an aggregate cash payment of $11 million.

See “—Liquidity and Capital Resources—Sources and uses of liquidity.”

During the year ended December 31, 2019, we repurchased in the open market $434 million aggregate principal amount of certain of our debt securities.

We made an aggregate cash payment of $449 million and recognized an aggregate net loss of $23 million associated with the retirement of such debt.

Early debt retirement —On February 18, 2020, we made an aggregate cash payment of $767 million, including the make-whole premium, to redeem the outstanding 9.00% senior notes due July 2023 (the “9.00% Senior Notes”).

In the year ended December 31, 2020, we recognized a loss of $65 million associated with the retirement of redeemed debt.

See “—Operating Results” and “—Liquidity and Capital Resources—Sources and uses of liquidity.”

Debt redemption —On January 17, 2020, we provided a notice to redeem in full our outstanding 9.00% senior notes due July 2023 (the “9.00% Senior Notes”), and on February 18, 2020, we made a payment of $767 million, including the make-whole provision, to redeem the notes and in the three months ending March 31, 2020, we expect to recognize a loss of approximately $66 million associated with the retirement of debt.

During the year ended December 31, 2020, we repurchased in the open market $147 million aggregate principal amount of certain of our debt securities and made an aggregate cash payment of $110 million.

In the year ended December 31, 2020, we recognized an aggregate net gain of $36 million, associated with the retirement of repurchased debt.

See “—Operating Results” and “—Liquidity and Capital Resources—Sources and uses of liquidity.”

On November 9, 2020, we completed cash tender offers (the “2020 Tender Offers”) to purchase (i) any and all of the outstanding 6.50% senior notes due November 2020 and (ii) up to $200 million in aggregate purchase price of the 6.375% senior notes due December 2021, 3.80% senior notes due October 2022, the 5.375% senior secured notes due May 2023 (“5.375% Senior Secured Notes”) and the 7.25% senior notes due November 2025 (the “7.25% Guaranteed Notes”), subject to certain conditions specified in the related offer

In the year ended December 31, 2020, as a result of the 2020 Tender Offers, we made an aggregate cash payment of $222 million and recognized a gain of $135 million associated with the retirement of such notes.

See “—Operating Results” and “—Liquidity and Capital Resources—Sources and uses of liquidity.”

Debt issuances —On January 17, 2020, we issued $750 million aggregate principal amount of 8.00% senior notes due February 2027 (the “8.00% Guaranteed Notes”), and we received aggregate cash proceeds of $743 million, net of issue costs.

See “—Liquidity and Capital Resources—Sources and uses of liquidity.”

Impairments —In the year ended December 31, 2019, we recognized an aggregate loss of $583 million primarily associated with the impairment of three ultra-deepwater floaters, along with related assets, which we determined were impaired at the time we classified the assets as held for sale.

See “—Operating Results.”

Fleet expansion —We hold a 33.0 percent interest in Orion Holdings (Cayman) Limited (together with its subsidiary, “Orion”), the company that, through its wholly owned subsidiary, owns the harsh environment floater Transocean Norge .

In August 2019, Orion completed construction of the rig and placed it into service.

One of our subsidiaries operates the rig under a short-term bareboat charter to complete a six-well drilling contract for one of our customers.

See “—Liquidity and Capital Resources—Drilling fleet.”

In October 2019, we agreed with Samsung Heavy Industries Co., Ltd.

(“SHI”) to cancel the construction contracts for two ultra-deepwater drillships in exchange for the parties terminating their respective obligations and liabilities under the contracts and our subsidiaries releasing to SHI their respective interests in the rigs.

See “—Liquidity and Capital Resources—Drilling fleet.”

Dispositions —During the year ended December 31, 2019, we completed the sale of six ultra-deepwater floaters, one harsh environment floater, two deepwater floaters and two midwater floaters, along with related assets, and we received $64 million in aggregate net cash proceeds.

See “—Operating Results” and “—Liquidity and Capital Resources—Drilling fleet.”

Secured Credit Facility —In June 2018, we entered into a bank credit agreement, which established a $1.0 billion secured revolving credit facility (the “Secured Credit Facility”), and in the year ended December 31, 2019, we amended the terms of the agreement to, among other changes, increase the borrowing capacity to $1.3 billion.

Debt exchange litigation and purported notice of default —In September 2020, funds managed by, or affiliated with, Whitebox Advisors LLC (“Whitebox”) as holders of certain series of our notes subject to the Exchange Offers, filed a claim (the “Claim”) in the U.S.

District Court for the Southern District of New York (the “Court”) related to certain internal reorganization transactions (the “Internal Reorganization”) and the Exchange Offers.

Additionally, in September and October 2020, Whitebox and funds managed by, or affiliated with, Pacific Investment Management Company LLC (“PIMCO”) as debtholders, together with certain other advisors and debtholders, provided purported notices of alleged default with respect to the indentures governing, respectively, the 8.00% Guaranteed Notes and the 7.25% Guaranteed Notes.

Following our amendment of certain of our financing documents and certain internal reorganization transactions, we do not expect the liability, if any, resulting from these matters to have a material adverse effect on our consolidated financial statements.

See “—Liquidity and Capital Resources—Sources and uses of liquidity.”

Drilling market —Our view of the offshore drilling floater market is positive and continues to improve, especially for the highest specification vessels.

Contracting activity has strengthened, as both fixture durations and dayrates are increasing.

In the past five years, the offshore oil and gas industry has achieved structural efficiency gains that have substantially improved the economics of offshore development projects.

These efficiency gains have resulted in project break-even oil prices in the range of $40 per barrel or below in many operating basins, which compares increasingly favorably to onshore shale prospects, and positively impacts our customers’ investment decisions.

Markets requiring high-specification harsh environment floating drilling rigs continue to see high utilization of the active fleet.

Over the past year, opportunities have steadily increased for our drilling services, and we have recently observed escalating dayrates in almost all jurisdictions.

In particular, we have seen a marked tightening in global demand for ultra-deepwater drilling rigs, especially in the Americas and Australia where dayrates continue to climb.

As utilization for ultra-deepwater floaters grows, active supply is approaching full utilization in many regions, and tender activity has increased.

As a result, we are seeing some of the highest dayrates since the beginning of the downturn in 2014, particularly for the latest generation and highest capability units.

We expect this trend to continue through 2020 and beyond.

Customer settlement —In June 2020, we entered into a settlement and mutual release agreement with a customer, which provided for the final settlement of disputes.

In connection with the settlement, among other things, our customer agreed to pay us $185 million in four equal installments through January 15, 2023.

See “—Operating Results.”

Impairments —In the year ended December 31, 2020, we recognized an aggregate loss of $556 million primarily associated with the impairment of one ultra-deepwater floater, two harsh environment floaters and three midwater floaters, along with related assets, which we determined were impaired at the time we classified the assets as held for sale.

In the year ended December 31, 2020, we recognized a loss of $59 million, which had no tax effect, recorded in other, net, associated with the impairment of our investment in Orion Holdings (Cayman) Limited (together with its subsidiary, “Orion”).

In the year ended December 31, 2020, we recognized a loss of $31 million associated with the impairment of our midwater asset group.

See “—Operating Results.”

Dispositions —During the year ended December 31, 2020, we completed the sale of one ultra-deepwater floater, three harsh environment floaters and three midwater floaters, along with related assets, and we received $20 million in aggregate net cash proceeds.

See “—Operating Results” and “—Liquidity and Capital Resources.”

Drilling market —Since 2014, the industry has experienced a severe cyclical downturn of considerably longer duration than those previously observed.

Multiple years of volatile and generally weak commodity prices, exacerbated in 2020 by the effects of the coronavirus (“COVID-19”) pandemic and production disputes among major oil producing countries, have resulted in our customers repeatedly delaying offshore investment decisions and postponing exploration and development programs.

Some of our customers have also recently committed to invest or increase investment in low carbon and renewable energy resources, potentially reducing their expenditures in the development and production of hydrocarbons over the coming decades.

However, even in the context of some diversion of investment away from traditional sources of energy, the structural efficiency gains achieved by the offshore oil and gas segment in the past six years have materially improved the economics of deepwater offshore development projects, making the segment a competitive source of new supply.

We anticipate that the subdued level of contract activity will continue for at least the first half of 2021, although we believe that by the second half of 2021, our customers will again focus on favorable deepwater offshore economics and begin increasing their exploration, production and reserve replacement activities by restarting delayed projects and commencing new campaigns.

This depends on many variables, including global amelioration of the COVID-19 pandemic, and the effects of actions by some governments and regulators intended to curtail existing and future drilling activities, and other factors.

Ultimately, as the hydrocarbon supply-demand balance improves, including as the result of a post-pandemic global economic recovery, we expect a sustained improvement of oil prices, which will result in greater demand for our high-specification fleet of assets, resulting in further improvement of dayrates.

In markets requiring harsh environment floating drilling rigs, the limited supply of these specialized high-specification rigs has continued to result in strong utilization and dayrates.

In the ultra-deepwater markets, we have seen accelerated retirement of idle rigs, and with the anticipated consolidation of distressed drilling contractors, we expect additional retirements will reduce supply and improve utilization and dayrate metrics for high-specification assets.

As of February 12, 2021, our contract backlog was $7.8 billion compared to $8.2 billion as of October 14, 2020.

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The uncommitted fleet rate is defined as the number of uncommitted days divided by the total number of rig calendar days in the measurement period, expressed as a percentage.

An uncommitted day is defined as a calendar day during which a rig is idle or stacked, is not contracted to a customer and is not committed to a shipyard.

An uncommitted day is defined as a calendar day during which a rig is idle or stacked, is not contracted to a customer or is not committed to

The uncommitted fleet rates exclude the effect of priced options.

As of February 14, 2020, the uncommitted fleet rates for each of the five years in the period ending December 31, 2024 were as follows:

As of February 12, 2021, uncommitted fleet rates for each of the five years in the period ending December 31, 2025 were as follows:

Uncommitted fleet rate

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Harsh environment floaters

Midwater floaters

Performance and Other Key Indicators

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Total contract backlog

We believe our industry leading contract backlog sets us apart from the competition.

Our contract backlog includes only firm commitments, which are represented by signed drilling contracts or, in some cases, by other definitive agreements awaiting contract execution.

Our contract backlog includes amounts associated with our contracted newbuild unit that is currently under construction.

It does not include conditional agreements and options to extend firm commitments.

Our contract backlog includes amounts associated with our contracted newbuild unit that is currently under construction but excludes amounts related to the conditional agreement we have for our second newbuild unit under construction.

The contractual operating dayrate may be higher than the actual dayrate we ultimately receive or an alternative contractual dayrate, such as a waiting-on-weather rate, repair rate, standby rate or force majeure rate, may apply under certain circumstances.

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Harsh environment floaters

Midwater floaters

Total contract backlog

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Harsh environment floaters

Midwater floaters

Total fleet average

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Additional factors that could affect the amount and timing of actual revenue to be recognized include customer liquidity issues and contract terminations, which may be available to our customers under certain circumstances.

The COVID-19 pandemic and the volatility in oil prices in the year ended December 31, 2020, which have included precipitous drops in oil prices, could have significant adverse consequences for the financial condition of our customers.

This could result in contract cancellations, early terminations, customers seeking price reductions or more favorable economic terms, a reduced ability to ultimately collect receivables, or entry into lower dayrate contracts or having to idle, stack or retire more of our rigs.

Risk Factors—Risks related to our business—Our current backlog of contract drilling revenues may not be fully realized.”

Average daily revenue —Average daily revenue is defined as contract drilling revenues, excluding revenues for contract terminations, reimbursements and contract intangible amortization, earned per operating day.

An operating day is defined as a calendar day during which a rig is contracted to earn a dayrate during the firm contract period after commencement of operations.

An operating day is defined as a calendar day

during which a rig is contracted to earn a dayrate during the firm contract period after commencement of operations.

The average daily revenue for our fleet was as follows:

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Our total fleet average daily revenue is also affected by the mix of rig classes being operated, as deepwater floaters, midwater floaters and high-specification jackups are typically contracted at lower dayrates compared to ultra-deepwater floaters and harsh environment floaters.

We no longer operate deepwater floaters or high-specification jackups.

We no longer operate deepwater floaters, midwater floaters or high-specification jackups.

We include newbuilds in the calculation when the rigs commence operations upon acceptance by the customer.

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Total fleet average revenue efficiency

Revenue efficiency measures our ability to ultimately convert our contractual opportunities into revenues.

Our revenue efficiency rate varies due to revenues earned under alternative contractual dayrates, such as a waiting-on-weather rate, repair rate, standby rate, force majeure rate or zero rate, that may apply under certain circumstances.

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Interest expense, net of amounts capitalized

Loss on retirement of debt

Gain (loss) on restructuring and retirement of debt

Loss before income tax expense

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Contract drilling revenues —Contract drilling revenues increased for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to the following:

(a) approximately $265 million resulting from operations acquired in the Ocean Rig UDW Inc.

(“Ocean Rig”), a Cayman Islands exempted company with limited liability and Songa Offshore SE (“Songa”), a European public company limited by shares, or societas Europaea, existing under the laws of Cyprus acquisitions, (b) approximately $95 million resulting from the reactivation of two rigs, (c) approximately $65 million resulting from higher revenue efficiency and (d) approximately $65 million resulting from the operations of a newbuild ultra-deepwater drillship and a harsh environment semisubmersible placed into service in 2018 and 2019, respectively.

These increases were partially offset by the following:

(a) approximately $190 million resulting from rigs sold or classified as held for sale, (b) approximately $125 million resulting from contract early terminations and cancellations recognized in the year ended December 31, 2018, (c) approximately $65 million resulting from reduced activity and (d) approximately $45 million resulting from lower dayrates.

Costs and expenses —Operating and maintenance expense increased for the year ended December 31, 2019 compared to the year ended December 31, 2018, primarily due to the following:

(a) approximately $265 million resulting from operations acquired in the Ocean Rig acquisition, including the reactivation of two rigs, (b) approximately $90 million resulting from shipyard activities, (c) approximately $45 million resulting from operations of a newbuild ultra-deepwater drillship and a harsh environment semisubmersible placed into service in 2018 and 2019, respectively and (d) approximately $40 million resulting from the reactivation of two rigs.

These increases were partially offset by a decrease of approximately $95 million resulting from rigs sold or classified as held for sale.

Depreciation and amortization expense increased for the year ended December 31, 2019, compared to the year ended December 31, 2018, primarily due to approximately $80 million resulting from the rigs acquired in the Songa and Ocean Rig acquisitions, partially offset by approximately $43 million resulting from rigs sold or classified as held for sale.

General and administrative expense increased for the year ended December 31, 2019, compared to the year ended December 31, 2018, primarily due to the following:

(a) approximately $10 million resulting from personnel and other costs related to Ocean Rig recognized in the year ended December 31, 2019, (b) approximately $9 million resulting from increased legal and professional fees (c) approximately $7 million resulting from increased rent expense and (d) approximately $4 million resulting from recovery of legal fees recognized in the year ended December 31, 2018.

(a) $177 million resulting from the settlement of disputes in the year ended December 31, 2020, (b) approximately $110 million resulting from the reactivations of two ultra-deepwater floaters in Brazil in the year ended December 31, 2019, (c) approximately $55 million resulting from higher dayrates on our comparable active fleet, (d) approximately $50 million resulting from the operations of the harsh environment floater that we operate under a bareboat charter that commenced in August 2019, (e) approximately $37 million resulting from reimbursement revenues related to COVID-19, (f) approximately $30 million resulting from the early termination of a contract for the convenience of our customers and (g) approximately $25 million resulting from higher revenue efficiency on the comparable active fleet.

These increases were partially offset by the following decreases:

(a) approximately $24 million resulting from acquisition costs recognized in the year ended December 31, 2018 and (b) approximately $4 million resulting from reduced personnel costs, primarily related to the early retirement of certain personnel in the year ended December 31, 2018.

Loss on impairment or disposal of assets —In the year ended December 31, 2019, we recognized an aggregate loss of $583 million, primarily associated with certain assets that we determined were impaired at the time we classified them as held for sale, and

an aggregate loss of $26 million associated with the impairment of right-of-use assets and leasehold improvements.

In the year ended December 31, 2018, we recognized an aggregate loss of $999 million associated with certain assets that we determined were impaired at the time we classified them as held for sale and a loss of $462 million associated with the impairment of goodwill.

(a) approximately $170 million resulting from rigs stacked, (b) approximately $140 million resulting from decreased activity on the comparable active fleet, (c) approximately $60 million resulting from rigs sold or classified as held for sale and (d) approximately $45 million resulting from lower reimbursement revenues unrelated to COVID-19.

Costs and expenses —Operating and maintenance costs and expenses decreased for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to the following:

(a) approximately $80 million resulting from rigs stacked, (b) approximately $75 million resulting from reduced shipyard, personnel and in-service maintenance costs on the comparable active fleet, (c) approximately $65 million resulting from rigs sold or classified as held for sale, (d) approximately $45 million resulting from resulting from lower customer reimbursable costs unrelated to COVID-19 and (e) approximately $40 million resulting from optimized onshore personnel costs.

These decreases were partially offset by the following increases:

(a) approximately $70 million resulting from the operations of the harsh environment floater that we operate under a bareboat charter that commenced in August 2019, (b) approximately $65 million resulting from personnel and related costs associated with mitigating the effect of the COVID-19 pandemic and (c) approximately $30 million resulting from the reactivations of two ultra-deepwater floaters in Brazil in the year ended December 31, 2019.

Depreciation and amortization expense decreased for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to approximately $65 million resulting from rigs sold or classified as held for sale and approximately $20 million resulting from assets that had reached the end of their useful lives or had been retired, partially offset by approximately $20 million resulting from assets placed into service.

General and administrative expense decreased for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to the following:

(a) approximately $7 million resulting from personnel and other costs related to the integration of Ocean Rig UDW Inc.

(“Ocean Rig”) in the year ended December 31, 2019, (b) approximately $5 million resulting from reduced legal and professional fees and (c) approximately $5 million resulting from reduced office rent expense.

These decreases were partially offset by the following

(a) approximately $5 million resulting from increased insurance costs and (b) approximately $3 million resulting from increased software licensing and subscription arrangements.

Loss on impairment or disposal of assets —In the year ended December 31, 2020, we recognized a loss on the impairment of assets, including an aggregate net loss of $556 million associated with assets that we determined were impaired at the time we classified them as held for sale, a loss of $31 million associated with the impairment of our midwater floater asset group and a loss of $10 million associated with the impairment of other assets .

In the year ended December 31, 2019, we recognized an aggregate loss of $583 million, primarily associated with certain assets that we determined were impaired at the time we classified them as held for sale, and an aggregate loss of $26 million associated with the impairment of right-of-use assets and leasehold improvements.

In the year ended December 31, 2020, we recognized an aggregate loss of $61 million associated with the sale of one ultra-deepwater floater, three harsh environment floaters and three midwater floaters, along with related assets.

In the year ended December 31, 2019, we recognized an aggregate gain of $4 million associated with the sale of six ultra-deepwater floaters, one harsh environment floater, two deepwater floaters and two midwater floaters, along with related assets.

In the year ended December 31, 2018, we recognized an aggregate gain of $7 million associated with the sale of six ultra-deepwater floaters, one deepwater floater and one midwater floater, along with related assets.

In the year ended December 31, 2019 and 2018, we recognized an aggregate loss of $16 million and $7 million, respectively, associated with the disposal of assets unrelated to rig sales.

Other income and expense —Interest expense, net of amounts capitalized, increased in the year ended December 31, 2019, compared to the year ended December 31, 2018, primarily due to an increase of approximately $147 million primarily resulting from debt issued subsequent to January 1, 2018, partially offset by a decrease of approximately $104 million resulting from the retirement of debt as a result of scheduled maturities, the purchase of the 2019 Tendered Notes and our open market repurchases.

In the year ended December 31, 2019, we recognized a net loss on retirement of debt as follows:

(a) $18 million resulting from retirement of the validly tendered 2019 Tendered Notes and (b) $23 million resulting from open market repurchases of $434 million aggregate principal amount of our debt securities.

Other income, net, increased in the year ended December 31, 2019, compared to the year ended December 31, 2018, primarily due to the following:

(a) a gain of $132 million resulting from termination of construction contracts in the year ended December 31, 2019 and (b) an net increase of $41 million resulting from currency exchange rate changes, $18 million of which resulted from reduced losses recognized on undesignated currency derivative instruments.

Partially offsetting these increases was (a) reduced income of $34 million from our dual-activity patent and (b) reduced income of $6 million from non-service components of net periodic benefit costs.

In the years ended December 31, 2020 and 2019, we recognized an aggregate loss of $23 million and $16 million, respectively, associated with the disposal of assets unrelated to rig sales.

Other income and expense —Interest expense, net of amounts capitalized, decreased in the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to a decrease of $155 million resulting from the debt retired, repaid or restructured, partially offset by an increase of $78 million primarily resulting from debt issued.

In the year ended December 31, 2020, we recognized a net gain on restructuring and retirement of debt, primarily due to the following:

(a) an aggregate gain of $427 million associated with the restructuring of debt in the Exchange Transactions, (b) an aggregate gain of $135 million associated with the retirement of $360 million aggregate principal amount of our debt securities in the 2020 Tender Offers, (c) an aggregate gain of $36 million associated with the retirement of $147 million aggregate principal amount of our debt securities repurchased in the open market, partially offset by (d) a loss of $65 million associated with the full redemption of the 9.00% Senior Notes due July 2023.

In the year ended December 31, 2019, we recognized a net loss on retirement of debt, including a loss of $23 million resulting from the retirement of $434 million aggregate principal amount of our debt securities repurchased in the open market and a loss of $18 million resulting from retirement of validly tendered notes (the “2019 Tendered Notes”).

Other expense, net, increased in the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to the following:

(a) a gain of $132 million recognized in the prior year resulting from the termination of construction contracts, (b) a loss of $59 million recognized in the year ended December 31, 2020, associated with the impairment of our equity-method investment in Orion, (c) increased net periodic benefit costs of $14 million primarily from settlement of certain defined benefit plans in Norway, (d) increased loss of $10 million resulting from net changes in currency exchange rates and (e) a gain of $11 million recognized in the prior year resulting from the bargain purchase of Ocean Rig completed in the year ended December 31, 2018, partially offset by (f) increased income of $9 million related to our investment in Orion and (g) increased income of $5 million related to our dual-activity patent.

Income tax expense —In the years ended December 31, 2020 and 2019, our effective tax rate was (5.1) percent and (4.9) percent, respectively, based on loss before income tax expense.

In the years ended December 31, 2019 and 2018, the effect of the various discrete period tax items represented a net tax benefit of $150 million and a net tax expense of $143 million, respectively.

In the year ended December 31, 2019, such discrete items included a U.S.

tax law change, settlements and expirations of various uncertain tax positions and adjustments to our deferred taxes for operating structural changes made in the U.S.

In the year ended December 31, 2018, such discrete items were primarily related to the U.S.

transition tax on non-U.S.

In the years ended December 31, 2020 and 2019, discrete period tax items represented a net tax benefit of $91 million and $150 million, respectively.

In the year ended December 31, 2020, we identified certain discrete items, such as losses on impairment and disposal of assets, gain on restructuring and retirement of debt, revenues recognized for the settlement of disputes, the loss on impairment of an investment in an unconsolidated affiliate, the carryback of net operating losses in the U.S.

as a result of the Coronavirus Aid, Relief, and Economic Security Act, which included the release of valuation allowances previously recorded, settlements and expirations of various uncertain tax positions and accruals for withholding taxes.

In the year ended December 31, 2019, we identified certain discrete items, such as losses on impairment and disposal of assets, settlements and expirations of various uncertain tax positions and adjustments to our deferred taxes for operating structural changes made in the U.S.

In the years ended December 31, 2020 and 2019, our effective tax rate, excluding discrete items, was (23.4) percent and (30.7) percent, respectively, based on loss before income tax expense.

Our effective tax rate decreased in the year ended December 31, 2019 compared to the year ended December 31, 2018, primarily due to the recognition of significant uncertain tax benefits, partially offset by increased tax expense related to the adoption of a new operating structure, which will reduce our exposure to the U.S.

base erosion and anti-abuse tax and other cash taxes in the U.S.

To a lesser extent, our effective tax rate decreased due to changes in the relative blend of income from operations in certain jurisdictions.

Due to factors related to our operating activities and organizational structure, our income tax expense does not change proportionally with our income before income taxes.

Our effective tax rate increased in the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily due to a decreased loss before income taxes, partially offset by tax benefits for the carryback of net operating losses in the U.S.

as a result of the Coronavirus Aid, Relief, and Economic Security Act, which included the release of previously recorded valuation allowances, settlements and expirations of uncertain tax positions, and adjustments to our deferred taxes for operating structural changes in the U.S., offset by tax expense for an increase in the withholding tax rate in Angola and an increase in loss before income tax expense.

Due to our operating activities and organizational structure, our income tax expense does not change proportionally with our income before income taxes.

Significant decreases in our income before income taxes typically lead to higher effective tax rates, while significant increases in income before income taxes can lead to lower effective tax rates, subject to the other factors impacting income tax expense noted above.

With respect to the effective tax rate calculation for the year ended December 31, 2020, a significant portion of our income tax expense was generated in countries in which income taxes are imposed on gross revenues, with the most significant of these countries being Angola and India.

Conversely, the countries in which we incurred the most significant income taxes during this period that were based on income before income tax include the U.S., Switzerland, the United Kingdom (“U.K.”) and Norway.

Our rig operating structures further complicate our tax calculations, especially in instances where we have more than one operating structure for the taxing jurisdiction and, thus, more than one method of calculating taxes depending on the operating structure utilized by the rig under the contract.

For example, two rigs operating in the same country could generate significantly different provisions for income taxes if they are owned by two different subsidiaries that are subject to differing tax laws and regulations in the respective country of incorporation.

See Notes to Consolidated Financial Statements—Note 12—Income Taxes.

Conversely, the countries in which we incurred the most significant income taxes during this period that were based on income before income tax include the U.S., Switzerland, Brazil, the United Kingdom and Norway.

Our rig operating structures further

complicate our tax calculations, especially in instances where we have more than one operating structure for the taxing jurisdiction and, thus, more than one method of calculating taxes depending on the operating structure utilized by the rig under the contract.

Liquidity and Capital Resources

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At December 31, 2020, we had $1.2 billion in unrestricted cash and cash equivalents and $406 million in restricted cash and cash equivalents.

In the year ended December 31, 2019, our primary sources of cash were as follows:

(1) net cash proceeds from the issuance of debt, (2) net cash provided by operating activities and (3) proceeds from maturities of short-term investments.

Our primary uses of cash were as follows:

(a) repayments of debt, (b) capital expenditures and (c) investments in unconsolidated affiliates.

In the year ended December 31, 2020, our primary sources of cash were net cash proceeds from the issuance of debt and net cash provided by operating activities.

Our primary uses of cash were repayments of debt and capital expenditures.

(In millions)

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Changes in operating assets and liabilities, net

Net cash provided by operating activities decreased primarily due to increased operating costs resulting from rig reactivations and increased cash interest payments.

Net cash provided by operating activities increased primarily due to reduced operating activities and reduced cash paid for interest and taxes, partially offset by an aggregate cash payment of $125 million released from restricted cash accounts in June 2020 to satisfy our remaining obligations under the Plaintiff Steering Committee settlement agreement (the “PSC Settlement Agreement”).

(In millions)

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Proceeds from disposal of assets, net

Cash paid in business combinations, net of unrestricted and restricted cash acquired

Investments in unconsolidated affiliates

Proceeds from unrestricted and restricted short-term investments, net of deposits

Net cash used in investing activities decreased primarily due to (a) net cash paid to acquire Songa and Ocean Rig in the year ended December 31, 2018 with no comparable activity in the current year, (b) reduced investments in unconsolidated affiliates, partially offset by (c) reduced proceeds from maturities of unrestricted and restricted investments, net of deposits, and (d) increased capital expenditures.

Proceeds from maturities of unrestricted and restricted investments

Net cash used in investing activities decreased primarily due to (a) reduced capital expenditures and (b) reduced investments in unconsolidated affiliates, including Orion and certain companies involved in, among other things, researching and developing technology to improve efficiency and reliability and to increase automation, sustainability and safety, partially offset by (c) reduced proceeds from maturities of restricted and unrestricted investments and (d) reduced proceeds from disposal of assets, net of costs to sell.

(In millions)

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Repayments of debt

Proceeds from investments restricted for financing activities

Payments to terminate derivative instruments

Net cash used in financing activities increased primarily due to (a) reduced cash proceeds from the issuance of the 6.875% Senior Secured Notes and the 5.375% Senior Secured Notes in the year ended December 31, 2019 compared to net cash proceeds from the issuance of the 5.875% senior secured notes due January 2024 (the “5.875% Senior Secured Notes”), the 6.125% senior secured notes due August 2025 (the “6.125% Senior Secured Notes”) and the 7.25% senior notes due November 2025 (the “7.25% Senior Notes”) in the year ended December 31, 2018, partially offset by (b) decreased cash used to repay debt and (c) cash paid to terminate certain derivative instruments assumed in the Songa acquisition in the year ended December 31, 2018 with no comparable activity in the current year.

Net cash used in financing activities increased primarily due to (a) reduced net cash proceeds from the issuance of the 8.00% Guaranteed Notes in the year ended December 31, 2020 compared to the net cash proceeds from the issuance of the 5.375% Senior Secured Notes and the 6.875% senior secured notes due February 2027 (“6.875% Senior Secured Notes”) in the prior year and (b) increased cash used to repay debt as a result of the full redemption of the 9.00% Senior Notes, the 2020 Tender Offers and our open market repurchases in the year ended December 31, 2020 compared to the cash used to repay debt related to the 2019 Tendered Notes and our open market repurchases in the prior year.

Sources and uses of liquidity

Overview —We expect to use existing unrestricted cash balances, internally generated cash flows, borrowings under the Secured Credit Facility, proceeds from the disposal of assets or proceeds from the issuance of additional debt to fulfill anticipated obligations, which may include capital expenditures, working capital and other operational requirements, scheduled debt maturities or other payments.

We may also consider establishing additional financing arrangements with banks or other capital providers.

Subject to market conditions and other factors, we may also be required to provide collateral for future financing arrangements.

In each case subject to then existing market conditions and to our then expected liquidity needs, among other factors, we may continue to use a portion of our internally generated cash flows and proceeds from asset sales to reduce debt prior to scheduled maturities through debt repurchases, either in the open market or in privately negotiated transactions, or through debt redemptions or tender offers.

Our access to debt and equity markets may be limited due to a variety of events, including, among others, credit rating agency downgrades of our debt ratings, industry conditions, general economic conditions, market conditions and market perceptions of us and our industry.

The rating of our non-credit enhanced senior unsecured long-term debt (“Debt Rating”) is below investment grade.

Such Debt Rating has caused us to experience increased fees and interest rates under agreements governing certain of our senior notes.

Further downgrades may affect or limit our ability to access debt markets in the future.

Our ability to access such markets may be severely restricted at a time when we would like, or need, to access such markets, which could have an impact on our flexibility to react to changing economic and business conditions.

An economic downturn could have an impact on the lenders participating in our credit facilities or on our customers, causing them to fail to meet their obligations to us.

Overview —We expect to use existing unrestricted cash balances, internally generated cash flows, borrowings under the Secured Credit Facility, proceeds from the disposal of assets or proceeds from the issuance of additional debt or equity to fulfill anticipated obligations, which may include capital expenditures, working capital and other operational requirements, scheduled debt maturities or other payments.

We may consider establishing additional financing arrangements with banks or other capital providers or issuing shares from our authorized share capital.

Subject to market conditions and other factors, we may be required to provide collateral for any future financing arrangements.

We continue to evaluate additional potential liability management transactions in connection with our ongoing efforts to prudently manage our capital structure and improve our liquidity.

In each case subject to then existing market conditions and our expected liquidity needs, among other factors, we may continue to use existing unrestricted cash balances, internally generated cash flows and proceeds from asset sales to pursue liability management transactions, including among others, purchasing or exchanging one or more existing series of our debt securities in the open market, in privately negotiated transactions, through tender offers or exchange offers.

Any future purchases, exchanges or other transactions may be on the same terms or on terms that are more or less favorable to holders than the terms of any prior transaction, including the Exchange Transactions.

There can be no assurance as to which, if any, of these alternatives, or combinations thereof, we may choose to pursue in the future, if at all, or as to the timing with respect to any future transactions.

The effects of the COVID-19 pandemic and the volatility in oil prices could have significant adverse consequences for general economic, financial and business conditions, as well as for our business and financial position and the business and financial position of our customers and suppliers and may, among other things, impact our ability to generate cash flows from operations, access the capital markets on acceptable terms or at all, and affect our future need or ability to borrow under our Secured Credit Facility.

In addition to our potential sources of funding, the effects of such global events may impact our liquidity or need to alter our allocation or sources of capital, implement further cost reduction measures and change our financial strategy.

Although the COVID-19 pandemic and the volatility in oil prices could have a broad range of effects on our sources and uses of liquidity, the ultimate effect thereon, if any, will depend on future developments, which cannot be predicted at this time.

Our internally generated cash flows are directly related to our business and the market sectors in which we operate.

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However, among other factors, if the drilling market deteriorates, or if we experience poor operating results, or if we incur expenses to, for example, reactivate, stack or otherwise assure the marketability of our fleet, cash flows from operations may be reduced or negative.

Secured Credit Facility —In June 2018, we entered into a bank credit agreement, which established our $1.0 billion Secured Credit Facility, and in the year ended December 31, 2019, we amended the terms of the agreement to, among other changes, increase the borrowing capacity to $1.3 billion and add to and clarify the lender parties and their respective commitments under the facility.

The Secured Credit Facility is scheduled to expire on the earlier of (i) June 22, 2023 and (ii) if greater than $300 million aggregate principal amount of our 9.00% Senior Notes due July 2023 remain outstanding in April 2023, such date.

Our access to debt and equity markets is currently limited due to a variety of events, including, among others, general economic conditions, industry conditions, market conditions and market perceptions of us and our industry and credit rating agencies’ views of our debt.

The rating of the majority of our long-term debt (“Debt Rating”) is below investment grade.

The Debt Rating is causing us to experience increased fees and interest rates under our Secured Credit Facility and agreements governing certain of our senior notes.

Future downgrades may further restrict our ability to access the debt market for sources of capital and may negatively impact the cost of such capital at a time when we would like, or need, to access such markets, which could have an impact on our flexibility to react to changing economic and business conditions.

An economic downturn like the one we are currently experiencing could have an impact on the lenders participating in our credit facilities or on our customers, causing them to fail to meet their obligations to us.

Debt exchange litigation and purported notice of default— Prior to the consummation of the Exchange Transactions, we completed the Internal Reorganization.

In September 2020, funds managed by, or affiliated with Whitebox as holders of certain series of our notes subject to the Exchange Offers, filed the Claim in the Court related to the Internal Reorganization and the Exchange Offers.

Additionally, in September and October 2020, Whitebox and funds managed by, or affiliated with, PIMCO as debtholders, together with certain other advisors and debtholders, provided purported notices of alleged default with respect to the indentures governing, respectively, the 8.00% Guaranteed Notes and the 7.25% Guaranteed Notes.

On September 23, 2020, we filed an answer to the Claim with the Court and asserted counterclaims seeking a declaratory judgment that, among other matters, the Internal Reorganization did not cause a default under the indenture governing the 8.00% Guaranteed Notes.

Concurrently, with our answer and counterclaims, we also submitted a motion for summary judgment seeking an expedited judgment on our request for declaratory judgment.

Whitebox subsequently submitted a cross-motion for summary judgment seeking dismissal of our counterclaims.

On November 30, 2020, while awaiting the Court’s ruling on our motion for summary judgment, we amended certain of our financing documents and implemented certain internal reorganization transactions, which resolved the allegations contained in the purported notices of default.

On December 17, 2020, the Court issued its ruling granting our motion for summary judgment and denying the plaintiff’s cross-motion for summary judgment, holding, among other matters, that the allegations contained in the purported notice of default did not constitute a default under the indenture governing the 8.00% Guaranteed Notes.

Whitebox has appealed the Court’s ruling.

The facts alleged in the purported notice of default under the 8.00% Guaranteed Notes were the same as the facts underlying the Claim and the purported notice of default under the 7.25% Guaranteed Notes.

Accordingly, following the amendment and internal reorganization transactions on November 30, 2020, and the subsequent ruling from the Court granting our motion for summary judgment, we do not expect the liability, if any, resulting from these matters to have a material adverse effect on our consolidated statement of financial position, results of operations or cash flows.

Debt exchanges —On August 14, 2020, we issued $238 million aggregate principal amount of Senior Guaranteed Exchangeable Bonds in the Private Exchange for $397 million aggregate principal amount of the Exchangeable Senior Bonds.

The Senior Guaranteed Exchangeable Bonds are fully and unconditionally guaranteed by Transocean Ltd.

and certain wholly owned indirect subsidiaries of Transocean Inc.

We may redeem all or a portion of the Senior Guaranteed Exchangeable Bonds (i) on or after August 14, 2022, if certain conditions related to the price of our shares have been satisfied, at a price equal to 100 percent of the aggregate principal amount and (ii) on or after August 14, 2023, at specified redemption prices.

The indenture that governs the Senior Guaranteed Exchangeable Bonds contains covenants that, among other things, limit our ability to incur certain liens on our drilling units without equally and ratably securing the notes,

engage in certain sale and lease back transactions covering any of our drilling units, allow our subsidiaries to incur certain additional debt, and consolidate, merge or enter into a scheme of arrangement qualifying as an amalgamation.

The indenture that governs the Senior Guaranteed Exchangeable Bonds also requires such bonds to be repurchased upon the occurrence of certain fundamental changes and events, at specified prices depending on the particular fundamental change or event, which include changes and events related to certain (i) change of control events applicable to Transocean Ltd.

or Transocean Inc., (ii) the failure of our shares to be listed or quoted on a national securities exchange and (iii) specified tax matters.

The Senior Guaranteed Exchangeable Bonds may be converted at any time prior to the close of business on the second business day immediately preceding the maturity date or the redemption date at a current exchange rate of 162.1626 Transocean Ltd.

shares per $1,000 note, which implies an initial conversion price of $6.17 per share, subject to adjustment upon the occurrence of certain events.

On September 11, 2020, we issued $687 million aggregate principal amount of the 11.50% Senior Guaranteed Notes in the Exchange Offers, pursuant to an exchange offer memorandum, dated August 10, 2020, as supplemented, for an aggregate principal amount of $1.5 billion of several series of our existing debt securities that were validly tendered and accepted for purchase.

The 11.50% Senior Guaranteed Notes are fully and unconditionally guaranteed by Transocean Ltd.

and certain wholly owned indirect subsidiaries of Transocean Inc.

We may redeem all or a portion of the 11.50% Senior Guaranteed Notes prior to July 30, 2023 at a price equal to 100 percent of the aggregate principal amount plus a make-whole premium, and subsequently, at specified redemption prices.

We may also use the net cash proceeds of certain equity offerings by Transocean Ltd.

to redeem, on one or more occasions prior to July 30, 2023, up to a maximum of 40 percent of the original aggregate principal amount of the 11.50% Senior Guaranteed Notes, subject to certain adjustments, at a redemption price equal to 111.50 percent of the aggregate principal amount.

The indenture that governs the 11.50% Senior Guaranteed Notes contains covenants that, among other things, limit our ability to incur certain liens on our drilling units without equally and ratably securing the notes, engage in certain sale and lease back transactions covering any of our drilling units, allow our subsidiaries to incur certain additional debt, make certain internal transfers of our drilling units and consolidate, merge or enter into a scheme of arrangement qualifying as an amalgamation.

On February 26, 2021, we completed privately negotiated transactions to exchange $323 million aggregate principal amount of outstanding Exchangeable Senior Bonds for $294 million aggregate principal amount of the New Senior Guaranteed Exchangeable Bonds and an aggregate cash payment of $11 million.

The New Senior Guaranteed Exchangeable Bonds are guaranteed by Transocean Ltd.

and the same subsidiaries of Transocean Inc.

that guarantee the Senior Guaranteed Exchangeable Bonds and 11.50% Senior Guaranteed Notes.

In addition, the New Senior Guaranteed Exchangeable Bonds have an initial exchange rate of 190.4762 Transocean Ltd.

shares per $1,000 note, which implies a conversion price of $5.25 per share, subject to adjustment upon the occurrence of certain events.

Secured Credit Facility —As of December 31, 2020, we have a bank credit agreement, as amended from time to time, that established our $1.3 billion secured revolving credit facility (“Secured Credit Facility”), which is scheduled to expire on June 22, 2023.

The Secured Credit Facility is guaranteed by Transocean Ltd.

and certain subsidiaries.

The Secured Credit Facility is secured by, among other things, a lien on the ultra-deepwater floaters Deepwater Asgard, Deepwater Invictus , Deepwater Orion , Deepwater Skyros , Dhirubhai Deepwater KG2 and Discoverer Inspiration and the harsh environment floaters Transocean Barents and Transocean Spitsbergen .

The Secured Credit Facility is secured by, among other things, a lien on the ultra-deepwater floaters Deepwater Asgard , Deepwater Corcovado , Deepwater Invictus , Deepwater Mykonos , Deepwater Orion , Deepwater Skyros , Development Driller III , Dhirubhai Deepwater KG2 and Discoverer Inspiration and the harsh environment floaters Transocean Barents and Transocean Spitsbergen .

The maximum borrowing capacity will be reduced to $1.0 billion if, and so long as, our leverage ratio, measured as the aggregate principal amount of debt outstanding to earnings before interest, taxes, depreciation and amortization, exceeds 10.00 to 1.00.

The Secured Credit Facility contains covenants that, among other things, include maintenance of certain guarantee and collateral coverage ratios, a maximum debt to capitalization ratio of 0.60 to 1.00 and minimum liquidity of $500 million.

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At February 16, 2021, we had no borrowings outstanding, $24 million of letters of credit issued, and we had $1.3 billion of available borrowing capacity under the Secured Credit Facility.

Debt issuances —On January 17, 2020, we issued $750 million aggregate principal amount of our 8.00% Senior Notes, and we received aggregate cash proceeds of $743 million, net of issue costs.

We may redeem all or a portion of the 8.00% Senior Notes on or prior to February 1, 2023 at a price equal to 100 percent of the aggregate principal amount plus a make-whole provision, and subsequently, at specified redemption prices.

In February 2019, we issued $550 million aggregate principal amount of 6.875% Senior Secured Notes, and we received aggregate cash proceeds of $539 million, net of discount and issue costs.

Debt issuances —On January 17, 2020, we issued $750 million aggregate principal amount of our 8.00% Guaranteed Notes, and we received aggregate cash proceeds of $743 million, net of issue costs.

We may redeem all or a portion of the 8.00% Guaranteed Notes on or prior to February 1, 2023 at a price equal to 100 percent of the aggregate principal amount plus a make-whole premium, and subsequently, at specified redemption prices.

On February 1, 2019, we issued $550 million aggregate principal amount of 6.875% Senior Secured Notes, and we received aggregate cash proceeds of $539 million, net of discount and issue costs.

The indenture that governs the 6.875% Senior Secured Notes contains covenants that, among other things, limit the ability of our subsidiaries that own or operate the collateral rig Deepwater Poseidon to declare or pay dividends to their affiliates.

We may redeem all or a portion of the 6.875% Senior Secured Notes on or prior to February 1, 2022 at a price equal to 100 percent of the aggregate principal amount plus a make-whole provision, and subsequently, at specified redemption prices.

In May 2019, we issued $525 million aggregate principal amount of 5.375% Senior Secured Notes, and we received aggregate cash proceeds of $517 million, net of discount and issue costs.

We may redeem all or a portion of the 6.875% Senior Secured Notes on or prior to February 1,

2022 at a price equal to 100 percent of the aggregate principal amount plus a make-whole premium, and subsequently, at specified redemption prices.

On May 24, 2019, we issued $525 million aggregate principal amount of 5.375% Senior Secured Notes, and we received aggregate cash proceeds of $517 million, net of discount and issue costs.

The indenture that governs the 5.375% Senior Secured Notes contains covenants that, among other things, limit the ability of our subsidiaries that own or operate the collateral rigs Transocean Endurance and Transocean Equinox to declare or pay dividends to their affiliates.

We may redeem all or a portion of the 5.375% Senior Secured Notes on

or prior to May 15, 2021 at a price equal to 100 percent of the aggregate principal amount plus a make-whole provision, and subsequently, at specified redemption prices.

In July 2018, we issued $750 million aggregate principal amount of the 5.875% Senior Secured Notes and $600 million aggregate principal amount of 6.125% Senior Secured Notes (together with the 5.875% Senior Secured Notes, the “2018 Senior Secured Notes”), and we received aggregate cash proceeds of $733 million and $586 million, respectively, net of discount and issue costs.

The indentures that govern the 2018 Senior Secured Notes contain covenants that, among other things, limit the ability of our subsidiaries that own or operate the collateral rigs Transocean Enabler , Transocean Encourage and Deepwater Pontus to declare or pay dividends to their affiliates.

We may redeem all or a portion of the 2018 Senior Secured Notes on or prior to July 15, 2021 and August 1, 2021, respectively, at a price equal to 100 percent of the aggregate principal amount plus a make-whole provision and subsequently, at specified redemption prices.

In October 2018, we issued $750 million aggregate principal amount of 7.25% Senior Notes, and we received aggregate cash proceeds of $735 million, net of issue costs.

We may redeem all or a portion of the 7.25% Senior Notes on or prior to November 1, 2021 at a price equal to 100 percent of the aggregate principal amount plus a make-whole provision, and subsequently, at specified redemption prices.

We will be required to redeem our senior secured notes at a price equal to 100 percent of the aggregate principal amount without a make-whole provision, upon the occurrence of certain events related to the collateral rigs and the related drilling contracts.

We may redeem all or a portion of the 5.375% Senior Secured Notes on or prior to May 15, 2021 at a price equal to 100 percent of the aggregate principal amount plus a make-whole premium, and subsequently, at specified redemption prices.

Early debt retirement —On January 17, 2020, we provided a notice to redeem in full our outstanding 9.00% Senior Notes.

On February 18, 2020, we made a payment of $767 million, including the make-whole provision, to redeem the 9.00% Senior Notes, and in the three months ending March 31, 2020, we expect to recognize a loss of approximately $66 million associated with the retirement of debt.

On February 5, 2019, we completed the 2019 Tender Offers to purchase for cash up to $700 million aggregate purchase price of the 2019 Tendered Notes, subject to the terms and conditions specified in the related offer to purchase.

On February 18, 2020, we made a payment of $767 million, including the make-whole premium, to redeem the 9.00% Senior Notes, and in the three months ending March 31, 2020, we recognized a loss of $65 million associated with the retirement of redeemed debt.

On November 9, 2020, we completed the 2020 Tender Offers.

In the year ended December 31, 2020, as a result of the 2020 Tender Offers, we made an aggregate cash payment of $222 million to settle the validly tendered notes.

On February 5, 2019, we completed the cash tender offers (“2019 Tender Offers”) to purchase for cash up to $700 million aggregate purchase price of the 2019 Tendered Notes, subject to the terms and conditions specified in the related offer to purchase.

In the year ended December 31, 2019, as a result of the 2019 Tender Offers, we made an aggregate cash payment of $522 million to settle the validly tendered 2019 Tendered Notes.

In the years ended December 31, 2019 and 2018, we repurchased in the open market $434 million and $95 million aggregate principal amount of our debt securities, respectively, for an aggregate cash payment of $449 million and $95 million, respectively.

In connection with the Songa acquisition, we assumed rights and obligations under certain credit agreements and a subscription agreement establishing two term loan facilities and a bond facility.

In the year ended December 31, 2018, we made an aggregate cash payment of $1.59 billion to repay the borrowings under the facilities and terminated the underlying credit agreements and subscription agreement.

We also assumed the indebtedness related to two bond loans and we assumed the rights and obligations under a credit agreement for a secured borrowing facility.

In the year ended December 31, 2018, we made an aggregate cash payment equivalent to $67 million to repay the two bond loans and the borrowings outstanding under the secured borrowing facility, and we terminated the underlying credit agreement.

Business combinations —On December 5, 2018, we acquired Ocean Rig in a merger transaction, and as a result, Ocean Rig became our wholly owned subsidiary.

To complete the acquisition, we issued 147.7 million shares and made an aggregate cash payment of $1.2 billion.

On January 30, 2018, we acquired an approximate 97.7 percent ownership interest in Songa.

On March 28, 2018, we acquired the remaining shares not owned by us through a compulsory acquisition under Cyprus law, and as a result, Songa became our wholly owned subsidiary.

To complete these transactions, we issued 68.0 million shares as partial consideration for the acquisition of Songa shares.

Additionally, we issued $863 million aggregate principal amount of 0.50% exchangeable senior bonds due January 30, 2023 (the “Exchangeable Bonds”) as partial consideration for the acquisition of Songa shares and partial settlement of certain Songa indebtedness.

Holders of the Exchangeable Bonds may convert the notes into shares of Transocean Ltd.

at any time prior to maturity at a rate of 97.29756 shares per $1,000 note, equivalent to a conversion price of $10.28 per share, subject to adjustment upon the occurrence of certain events.

Holders of Exchangeable Bonds may require us to repurchase all or a portion of such holder’s Exchangeable Bonds upon the occurrence of certain events.

Investments in unconsolidated affiliates —We hold a 33.0 percent ownership interest in Orion, the company that owns the harsh environment floater Transocean Norge .

In the years ended December 2019 and 2018, we made an aggregate cash contribution of $74 million and $91 million, respectively, to Orion.

Additionally, in the years ended December 31, 2019 and 2018, we made an aggregate cash contribution of $3 million and $16 million, respectively, in certain companies that are involved in researching and developing technology to improve efficiency and reliability and to increase automation, sustainability and safety in drilling and other activities.

Derivative instruments —In connection with the Songa acquisition, we acquired certain currency swaps that were denominated in Norwegian kroner.

In February 2018, we made an aggregate cash payment of $92 million in connection with the settlement and termination of the currency swaps.

Litigation settlements —On May 29, 2015, together with the Plaintiff Steering Committee, we filed a settlement agreement (the “PSC Settlement Agreement”) in which we agreed to pay to two classes of plaintiffs a total of $212 million in exchange for a release from all claims against us for damages related to the Macondo well incident.

Equity investments —In the years ended December 31, 2020 and 2019, we made an aggregate cash investment of $19 million and $77 million, respectively, in noncontrolling ownership interests in certain unconsolidated affiliates.

The most significant of our equity investments is a 33.0 percent ownership interest in Orion, the company that, through its wholly owned subsidiary, owns the harsh environment floater Transocean Norge .

We expect to make an additional $33 million cash contribution to Orion in the first half of 2021.

We also hold equity investments in certain companies that are involved in researching and developing technology to improve efficiency and reliability and to increase automation, sustainability and safety in drilling and other activities.

Litigation settlements —On May 29, 2015, together with the Plaintiff Steering Committee, we filed the PSC Settlement Agreement in which we agreed to deposit $212 million into an escrow account established to be allocated to two classes of plaintiffs in exchange for a release from all claims against us for damages related to the Macondo well incident.

On February 15, 2017, the U.S.

District Court for the Eastern District of Louisiana (the “MDL Court”) entered a final order and judgment approving the PSC Settlement Agreement, which is no longer subject to

appeal, and we subsequently made the required cash deposits into escrow accounts established for settlement.

In the years ended December 31, 2019 and 2018, the MDL Court released $33 million and $58 million, respectively, from the escrow account to make payments to plaintiffs.

At December 31, 2019, the aggregate balance of our escrow account was $125 million.

District Court for the Eastern District of Louisiana (the “MDL Court”) entered a final order and judgment approving the PSC Settlement Agreement, pursuant to which we made the required cash deposits into escrow accounts established for settlement.

In the years ended December 31, 2020 and 2019, the MDL Court released $125 million and $33 million, respectively, from the escrow account to satisfy our remaining obligations under the PSC Settlement Agreement.

Share repurchase program —In May 2009, at our annual general meeting, our shareholders approved and authorized our board of directors, at its discretion, to repurchase an amount of our shares for cancellation with an aggregate purchase price of up to CHF 3.5 billion.

On February 12, 2010, our board of directors authorized our management to implement the share repurchase program.

At February 12, 2020, the authorization remaining under the share repurchase program was for the repurchase of up to CHF 3.2 billion, equivalent to approximately $3.3 billion, of our outstanding shares.

At December 31, 2020, the authorization remaining under the share repurchase program was for the repurchase of up to CHF 3.2 billion, equivalent to approximately $3.7 billion, of our outstanding shares.

We intend to fund any repurchases using available cash balances and cash from operating activities.

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(in millions)

Contractual obligations

Interest on debt

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(a) As of December 31, 2020, our defined benefit pension and other postemployment plans represented an aggregate liability of $277 million, representing the aggregate projected benefit obligation, net of the aggregate fair value of plan assets.

The carrying amount of this liability is affected by net periodic benefit costs, funding contributions, participant demographics, plan amendments, significant current and future assumptions, and returns on plan assets.

Due to the uncertainties resulting from these factors and since the carrying amount is not representative of future liquidity requirements, we have excluded this amount from the contractual obligations presented in the table above.

The carrying amount of this liability is influenced by, among others, significant current and future assumptions, funding contributions, returns on plan assets, participant demographics, and plan amendments.

We excluded this amount from our contractual obligations presented above due to the uncertainties resulting from these factors and because the amount is not representative of future liquidity requirements.

See Notes to Consolidated Financial Statements—Note 12—Postemployment Benefit Plans.

As of December 31, 2019, our unrecognized tax benefits related to uncertain tax positions represented a liability of $175 million.

As of December 31, 2020, we have unrecognized tax benefits of $419 million, including interest and penalties, of which $261 million are netted against net operating loss deferred tax assets resulting in net unrecognized tax benefits of $158 million, including interest and penalties, that upon reversal would favorably impact our effective tax rate.

Although a portion of these might settle or reverse in the coming year, there is a 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, and we excluded this amount from the contractual obligations presented in the table above.

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These commercial commitments include standby letters of credit and surety bonds that guarantee our performance as it relates to our drilling contracts, insurance, customs, tax and other obligations in various jurisdictions.

The obligations under these standby letters of credit and surety bonds are primarily geographically concentrated in Brazil.

Such obligations are not normally called, as we typically comply with the underlying performance requirement.

Standby letters of credit are issued under various committed and uncommitted credit lines, some of which require cash collateral.

At December 31, 2020, the aggregate cash collateral held by banks for letters of credit and surety bonds was $8 million.

The obligations that are the subject of these standby letters of credit and surety bonds are primarily geographically concentrated in Brazil, India and Spain.

Obligations under these standby letters of credit and surety bonds are not normally called, as we typically comply with the underlying performance requirement.

At December 31, 2020, these obligations stated in U.S.

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(in millions)

Other commercial commitments

Standby letters of credit

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At December 31, 2020, the captive insurance company held cash and cash equivalents of $34 million, and such balance is expected to range from $30 million to $55 million through December 31, 2021.

The balance of actual cash and cash equivalents held by the captive insurance company varies,

depending on the premiums paid to the captive insurance company and the timing and number of claims or dividends paid by the captive insurance company.

The balance of the cash and cash equivalents held by the captive insurance company varies, depending on (i) premiums received and (ii) the timing and magnitude of claims and dividends paid by the captive insurance company.

Drilling fleet

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Our failure to secure drilling contracts for rigs under construction could have an adverse effect on our results of operations or cash flows.

In the year ended December 31, 2018, we completed the Songa and Ocean Rig acquisitions to strengthen our position as a leader in the ultra-deepwater and harsh environment drilling services by adding high-value assets.

In the year ended December 31, 2018, we also invested in a 33.0 percent ownership interest in Orion, the company that owns the harsh environment floater Transocean Norge .

The Moss Maritime CS60 design is considered among the most capable semisubmersibles in the world.

In August 2019, Orion completed construction of the rig and placed it into service.

One of our subsidiaries operates the rig under a short-term bareboat charter to complete a multiple-well drilling contract for one of our customers.

See Notes to Consolidated Financial Statements—Note 4—Business Combinations and Note 5—Unconsolidated Affiliates.

In the years ended December 31, 2020 and 2019, we made capital expenditures of $265 million and $387 million, respectively, including $143 million and $129 million, respectively, for our major construction projects.

The historical and projected capital expenditures, capitalized interest and other cash or non-cash capital additions for our ongoing major construction projects were as follows:

The historical and projected capital expenditures and non-cash capital additions for our ongoing major construction projects were as follows:

For the years ending December 31,

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(a) Deepwater Atlas , an ultra-deepwater drillship under construction at the Jurong Shipyard Pte Ltd.

in Singapore does not yet have a drilling contract and is contracted to be delivered in the fourth quarter of 2020.

Following delivery of the ultra-deepwater drillship, we have included estimated costs of $40 million to mobilize the rig to a location where it may be placed in service.

in Singapore has received an agreement for drilling services, subject to a final investment decision by the customer and its partners.

If the conditions are satisfied, the newbuild unit is expected to commence operations under the drilling contract in the first half of 2022.

The projected capital additions include estimates for one 20,000 pounds per square inch blowout preventer and other equipment required by the customer, some of which will be delivered and commissioned in the year ending December 31, 2023, subsequent to placing the rig in service.

We will only commit to these incremental capital expenditures with the backing of a firm commitment by the customer.

(b) Deepwater Titan , an ultra-deepwater drillship under construction at the Jurong Shipyard Pte Ltd.

in Singapore, is expected to commence operations in the fourth quarter of 2021.

in Singapore, is expected to commence operations under its drilling contract in the first half of 2022.

The projected capital additions include estimates for an upgrade for two 20,000 pounds per square inch blowout preventers and other equipment required by our customer.

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As with any major shipyard project that takes place over an extended period of time, the actual costs, the timing of expenditures and the project completion date may vary from estimates based on numerous factors, including actual contract terms, weather, exchange rates, shipyard labor conditions, availability of suppliers to recertify equipment 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 available cash balances, cash generated from operations and asset sales and financing arrangements with banks or other capital providers.

We also have available credit under our Secured Credit Facility (see “—Sources and uses of liquidity”).

Economic conditions could impact the availability of these sources of funding.

Dispositions —From time to time, we may review the possible disposition of non-strategic drilling units.

Considering recent market conditions, we have committed to plans to sell certain lower-specification drilling units for scrap value.

During the years ended December 31, 2019 and 2018, we identified six and eight such drilling units, respectively, that we have sold for scrap value.

We continue to evaluate the drilling units in our fleet and may identify additional lower-specification drilling units to be sold for scrap value.

We intend to fund the cash requirements relating to our capital expenditures through available cash balances, cash generated from operations and asset sales, borrowings under our Secured Credit Facility and financing arrangements with banks or other capital providers.

Economic conditions and other factors could impact the availability of these sources of funding.

See “—Sources and uses of liquidity.”

Dispositions —From time to time, we may also review the possible disposition of non-strategic drilling assets.

Considering market conditions, we have committed to plans to sell certain lower specification drilling units for scrap value.

During the years ended December 31, 2020 and 2019, we identified seven and six such drilling units, respectively, that we have sold or intend to sell for scrap value or other purposes.

During the year ended December 31, 2020, we completed the sale of one ultra-deepwater floater, three harsh environment floaters and three midwater floaters, along with related assets, and we received net cash proceeds of $20 million.

During the year ended December 31, 2019, we completed the sale of six ultra-deepwater floaters, one harsh environment floater, two deepwater floaters and two midwater floaters, along with related assets, and we received net cash proceeds of $64 million.

During the year ended December 31, 2018, we completed the sale of six ultra-deepwater floaters, one deepwater floater and one midwater floater, along with related assets, and we received net cash proceeds of $36 million.

We continue to evaluate the drilling units in our fleet and may identify additional lower-specification drilling units to be sold for scrap value.

Off-Balance Sheet Arrangements

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Related Party Transactions

We engage in certain related party transactions with Orion under a management services agreement for the operation and maintenance of the harsh environment floater Transocean Norge and a shipyard care agreement for the construction of the rig.

In the year ended December 31, 2019, we received an aggregate cash payment of $96 million, primarily related to the commissioning, preparation and mobilization of Transocean Norge under the shipyard care agreement.

We also lease the rig under a short-term bareboat charter agreement, which is now expected to expire in late 2020.

In the year ended December 31, 2019, we recognized rent expense of $8 million, recorded in operating and maintenance costs, and made an aggregate cash payment of $6 million under the bareboat charter agreement.

In the year ended December 31, 2019, with other unconsolidated affiliates, we made an aggregate cash payment of $7 million for capital expenditures, primarily for equipment to improve reliability and reduce emissions, and $4 million for research and development, recorded in general and administrative costs.

We engage in certain related party transactions with our unconsolidated affiliates, the most significant of which are under agreements with Orion.

We have a management services agreement for the operation and maintenance of the harsh environment floater Transocean Norge and a marketing services agreement for the marketing of the rig.

We also lease the rig under a short-term bareboat charter agreement, which is expected to expire in mid-2021.

Prior to the rig’s placement into service, we also engaged in certain related party transactions with Orion under a shipyard care agreement for the construction of the rig and other matters related to its completion and delivery.

In the years ended December 31, 2020 and 2019, we received an aggregate cash payment of $46 million and $96 million, respectively, primarily related to the commissioning, preparation and mobilization of Transocean Norge under the shipyard care agreement.

In the years ended December 31, 2020 and 2019, we recognized rent expense of $22 million and $9 million, respectively, recorded in operating and maintenance costs, and made an aggregate cash payment of $22 million and $6 million, respectively, to charter the rig and equipment from Orion.

See Notes to Consolidated Financial Statements—Note 4—Unconsolidated Affiliates.

In the year ended December 31, 2020, Perestroika AS, an entity affiliated with one of our directors that beneficially owns approximately 10 percent of our shares, exchanged $356 million aggregate principal amount of the Exchangeable Senior Bonds for $213 million aggregate principal amount of Senior Guaranteed Exchangeable Bonds.

Perestroika AS has certain registration rights related to its shares and shares that may be issued in connection with any exchange of its Senior Guaranteed Exchangeable Bonds.

See Notes to Consolidated Financial Statements—Note 9—Debt.

Critical Accounting Policies and Estimates

Overview —We consider the following to be our critical accounting policies and estimates since they are very important to the portrayal of our financial condition and results and require our most subjective and complex judgments.

We have discussed the development, selection and disclosure of such policies and estimates with the audit committee of our board of directors.

For a discussion of our significant accounting policies, refer to our Notes to Consolidated Financial Statements—Note 2—Significant Accounting Policies.

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the U.S., which require us to make estimates that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures of contingent assets and liabilities.

Overview —We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the U.S., which require us to make estimates that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures of contingent assets and liabilities.

These estimates require significant judgments and assumptions.

On an ongoing basis, we evaluate our estimates, including those related to our income taxes, property and equipment, assets held for sale, goodwill, contingencies, postemployment benefit plans, allowance for excess and obsolete materials and supplies, share-based compensation and allowance for doubtful accounts.

On an ongoing basis, we evaluate our estimates, including those related to our income taxes, property and equipment, equity investments, contingencies, assets held for sale, intangibles, allowance for excess materials and supplies, allowance for credit losses, postemployment benefit plans, leases and share-based compensation.

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 amounts of assets and liabilities that are not readily apparent from other sources.

Actual results may differ from these estimates.

Income taxes —We are a Swiss corporation, operating through our various subsidiaries in a number of countries throughout the world.

Our annual tax provision is based on expected taxable income, statutory rates, tax laws and tax planning opportunities available to us in the various jurisdictions in which we operate.

The relationship between the provision for or benefit from income taxes and our income or loss before income taxes can vary significantly from period to period because the countries in which we operate have taxation regimes that vary with respect to the nominal tax rate and the availability of deductions, credits and other benefits.

Consequently, our income tax expense does not change proportionally with our income before income taxes.

We consider the following to be our critical accounting policies and estimates since they are very important to the portrayal of our financial condition and results and require our most subjective and complex judgments.

We have discussed the development, selection and disclosure of such policies and estimates with the audit committee of our board of directors.

For a discussion of our significant accounting policies, refer to our Notes to Consolidated Financial Statements—Note 2—Significant Accounting Policies.

Income taxes —Our annual tax provision is based on expected taxable income, statutory rates, tax laws and tax planning opportunities available to us in the various jurisdictions in which we operate or have a taxable presence.

The relationship between our provision for or benefit from income taxes and our income or loss before income taxes can vary significantly from period to period because the countries in which we operate have taxation regimes that vary with respect to the nominal tax rate and the availability of deductions, credits and other benefits.

Consequently, our income tax expense does not change proportionally with our income or loss before income taxes.

Variations also arise when income earned and taxed in a particular country or countries fluctuates from year to year.

The determination of our annual tax provision and evaluation of our tax positions involves interpretation of tax laws in the various jurisdictions and requires significant judgment and the use of estimates and assumptions regarding significant future events, such as the amount, timing and character of income, deductions and tax credits.

Our tax liability in any given year could be affected by changes in tax laws, regulations, agreements, and treaties, currency exchange restrictions or our level of operations or profitability in each jurisdiction.

Additionally, we operate in many jurisdictions where the tax laws relating to the offshore drilling industry are not well developed.

Although our annual tax provision is based on the best information available at the time, a number of years may elapse before the tax liabilities in the various jurisdictions are ultimately determined.

We establish liabilities for estimated tax exposures in our jurisdictions of operation, and the provisions and benefits resulting from changes to those liabilities are included in our annual tax provision along with related interest.

Such tax exposures include potential challenges to permanent establishment positions, intercompany pricing, disposition transactions, and withholding tax rates and their applicability.

These exposures may be affected by changes in applicable tax law or other factors, which could cause us to revise our prior estimates, and are generally resolved through the settlement of audits within these tax jurisdictions or by judicial means.

At December 31, 2019 and 2018, our unrecognized tax benefits were approximately $369 million and $514 million, respectively.

We are undergoing examinations in a number of taxing jurisdictions for various fiscal years.

Uncertain tax positions —We apply significant judgment to evaluate our tax positions based on the interpretation of tax laws in various jurisdictions and with the use of estimates and assumptions regarding significant future events, such as the amount, timing and character of income, deductions and tax credits.

Our tax liability in any given year could be affected by changes in tax laws, regulations, agreements, and treaties, currency exchange restrictions or our level or profitability of operations in each jurisdiction.

The tax laws relating to the offshore drilling industry in certain jurisdictions in which we operate are not well developed, requiring us to apply incremental judgment.

Although we employ the best information available at the time we prepare our annual tax provision, a number of years may elapse before the tax liabilities in the various jurisdictions are ultimately determined.

We are undergoing examinations of our tax returns in a number of taxing jurisdictions for various years.

We review our liabilities on an ongoing basis and, to the extent audits or other events cause us to adjust the liabilities accrued in prior periods, we recognize those adjustments in the period of the event.

We do not believe it is possible to reasonably estimate the future impact of changes to the assumptions and estimates related to our annual tax provision because changes to our tax liabilities are dependent on numerous factors that cannot be reasonably projected.

These factors include, among others, the amount and nature of additional taxes potentially asserted by local tax authorities;

Our tax liabilities are dependent on numerous factors that cannot be reasonably projected, including among others, the amount and nature of additional taxes potentially asserted by local tax authorities;

the willingness of local tax authorities to negotiate a fair settlement through an administrative process;

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and the potential for changes in the taxes paid to one country that either produce, or fail to produce, offsetting tax changes in other countries.

We do not provide for taxes on unremitted earnings of subsidiaries when we consider such earnings to be indefinitely reinvested.

We recognize deferred taxes related to the earnings of certain subsidiaries that we do not consider to be indefinitely reinvested or that will not be indefinitely reinvested in the future.

If we were to distribute from the unremitted earnings of these subsidiaries, we could be subject to taxes payable to various jurisdictions.

If facts and circumstances cause us to change our expectations regarding future tax consequences,

the resulting adjustments to our deferred tax balances could have a material effect on our consolidated statement of financial position, results of operations or cash flows.

Estimates, judgments and assumptions are required in determining whether deferred tax assets will be fully or partially realized.

In evaluating our ability to realize deferred tax assets, we consider all available positive and negative evidence, including projected future taxable income and the existence of cumulative losses in recent years.

Consequently, we cannot reasonably estimate the future impact of changes to the assumptions and estimates related to our annual tax provision.

Unrecognized tax benefits —We establish liabilities for estimated tax exposures, and the provisions and benefits resulting from changes to those liabilities are included in our annual tax provision along with related interest and penalties.

Such tax exposures include potential challenges to permanent establishment positions, intercompany pricing, disposition transactions, and withholding tax rates and their applicability.

At December 31, 2020 and 2019, our unrecognized tax benefits were approximately $419 million and $369 million, respectively.

Valuation allowance —We apply significant judgment to determine whether our deferred tax assets will be fully or partially realized.

Our evaluation requires us to consider all available positive and negative evidence, including projected future taxable income and the existence of cumulative losses in recent years.

We continually evaluate strategies that could allow for the future utilization of our deferred tax assets.

When it is estimated to be more likely than not that all or some portion of certain deferred tax assets, such as foreign tax credit carryovers or net operating loss carryforwards, will not be realized, we establish a valuation allowance for the amount of the deferred tax assets that is considered to be unrealizable.

During the years ended December 31, 2019 and 2018, in evaluating the projected realizability of our deferred tax assets, we considered our consolidated cumulative loss incurred over the recent three-year period, which has limited our ability to consider other subjective evidence, such as projected contract activity rather than contract backlog.

During the years ended December 31, 2020 and 2019, in connection with our evaluation of the projected realizability of our deferred tax assets, we determined that our consolidated cumulative loss incurred over the recent three-year period has limited our ability to consider other subjective evidence, such as projected contract activity rather than contract backlog.

Unremitted earnings —We recognize deferred taxes related to the earnings of certain subsidiaries that we do not consider to be indefinitely reinvested or do not expect to be indefinitely reinvested in the future.

We do not provide for taxes on unremitted earnings of subsidiaries when we consider such earnings to be indefinitely reinvested.

If we were to make a distribution from the unremitted earnings of subsidiaries with indefinitely reinvested earnings, we may be subject to taxes payable to various jurisdictions.

If we were to change our expectations about distributing earnings of these subsidiaries, we may be required to record additional deferred taxes that could have a material effect on our consolidated financial statements.

See Notes to Consolidated Financial Statements—Note 10—Income Taxes.

Property and equipment —The recognition of our property and equipment, consisting primarily of offshore drilling rigs and related equipment, requires us to apply judgment related to estimates and assumptions for cost capitalization, useful lives and salvage values of our rigs.

At December 31, 2019 and 2018, the carrying amount of our property and equipment was $18.8 billion and $20.4 billion, respectively, representing 78 percent and 80 percent, respectively, of our total assets.

Property and equipment —We apply significant judgment to account for our property and equipment, consisting primarily of offshore drilling rigs and related equipment, related to estimates and assumptions for cost capitalization, useful lives and salvage values.

December 31, 2020 and 2019, the carrying amount of our property and equipment was $17.7 billion and $18.8 billion, respectively, representing 81 percent and 78 percent, respectively, of our total assets.

Capitalized costs —We capitalize costs incurred to enhance, improve and extend the useful lives of our property and equipment and expense costs incurred to repair and maintain the existing condition of our rigs.

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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.

We may also consider major capital upgrades required to perform certain contracts and the long-term impact of those upgrades on future marketability.

At December 31, 2020, a hypothetical one-year increase in the useful lives of all of our rigs would cause a decrease in our annual depreciation expense of approximately $27 million and a hypothetical one-year decrease would cause an increase in our annual depreciation expense of approximately $35 million.

Long - lived asset impairment —We review our property and equipment for impairment when events or changes in circumstances indicate that the carrying amounts of our assets held and used may not be recoverable or when carrying amounts of assets held for sale exceed fair value less cost to sell.

Potential impairment indicators include rapid declines in commodity prices and related market conditions, declines in dayrates or utilization, cancellations of contracts or credit concerns of multiple customers.

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Accordingly, our rigs are considered to be interchangeable within classes or asset groups, and we evaluate impairment by asset group.

We consider our asset groups to be ultra-deepwater floaters, harsh environment floaters and midwater floaters.

We consider our asset groups to be ultra-deepwater floaters and harsh environment floaters.

We assess recoverability of assets held and used by projecting undiscounted cash flows for the asset group being evaluated.

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Given the nature of these evaluations and their application to specific asset groups and specific time periods, it is not possible to reasonably quantify the impact of changes in these assumptions.

In the years ended December 31, 2019, 2018 and 2017, we recognized a loss of $578 million, $999 million and $1.4 billion, respectively, associated with the impairment of assets that we determined were impaired at the time we classified such assets as held for sale.

In the year ended December 31, 2017, we recognized a loss of $94 million ($93 million, net of tax) associated with the impairment of the midwater floater asset group.

In the year ended December 31, 2020, we recognized a loss of $31 million, which had no tax effect, associated with the impairment of the midwater floater asset group.

See Notes to Consolidated Financial Statements—Note 6—Drilling Fleet.

Contingencies —We perform assessments of our contingencies on an ongoing basis to evaluate the appropriateness of our liabilities and disclosures for such contingencies.

Equity-method investments and impairment —We review our equity-method investments for potential impairment when events or changes in circumstances indicate that the carrying amount of the investment might not be recoverable in the near term.

Such circumstances include the following:

(a) evidence we are unable to recover the carrying amount of our investment, (b) evidence that the investee is unable to sustain earnings that would justify the carrying amount or (c) the current fair value of the investment is less than the carrying amount.

If an evaluation of such circumstances results in the determination that an impairment that is other than temporary exists, we recognize an impairment loss, measured as the amount by which the carrying amount of the investment exceeds its estimated fair value.

To estimate the fair value of the investment, we apply valuation methods that rely primarily on the income and market approaches.

Our estimate of fair value generally requires us to use significant unobservable inputs, representative of a Level 3 fair value measurement, including assumptions related to the estimated discount rate and the investee’s long-term future operational performance factors, such as projected revenues and costs and market factors, including demand for the investee’s industry, services and product lines.

Such projections involve significant uncertainties and require significant judgment.

In the year ended December 31, 2020, we recognized a loss of $59 million associated with an other-than-temporary impairment of the carrying amount of our equity-method investments.

See Notes to Consolidated Financial Statements—Note 4—Unconsolidated Affiliates.

Contingencies —We assess 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.

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Actual results may differ from our estimates.

We have recognized a liability for estimated loss contingencies associated with litigation and investigations resulting from the Macondo well incident that we believe are probable and for which a reasonable estimate can be made.

At December 31, 2019 and 2018, the remaining liability for estimated loss contingencies that we believe are probable and for which a reasonable estimate can be made was $124 million and $158 million, respectively, recorded in other current liabilities, the majority of which is related to our settlement with the PSC.

See Notes to Consolidated Financial Statements—Note 13—Commitments and Contingencies.

Accounting Standards Updates

For a discussion of the new accounting standards updates that have had or are expected to have an effect on our consolidated financial statements, see Notes to Consolidated Financial Statements—Note 3—Accounting Standards Updates.

Other Matters

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis