Note 2 — Asset Impairment

During the fourth quarter of 2011, in accordance with the Impairment or disposal of long-lived assets subsections of ASC 360-10, Property, Plant and Equipment, we evaluated our major asset grouping as well as the ongoing construction related value of our Arctic Alaska Drilling Units (AADU). The AADU rigs evaluation identified that an impairment existed which resulted in recording a non-cash pretax charge of $170.0 million in the 2011 fourth quarter. The evaluation was performed as a result of the delay in completion of the AADUs to allow the Company to modify the rigs to meet their design and functional requirements and an increase in the cost of the rigs. The need for the modifications was determined as a result of comprehensive safety, technical and operational reviews during recent commissioning activities of these prototype drilling rigs. The modification work will extend the commissioning activities and increase the rigs’ total costs. As a result of the extended construction and commissioning schedule and related increased costs, the two rigs’ cost at completion is currently estimated to be $385 million, which includes capitalized interest estimates of approximately $50.7 million. This cost exceeds the estimated fair value of the rigs based on their projected cash flows. Based on this evaluation, the Company determined that the long-lived assets with a carrying amount of $339.5 million as of December 31, 2011, were no longer recoverable and were in fact impaired and recorded a charge of $170.0 million ($109.1 million, net of taxes) to reflect their current estimated fair value of $169.5 million. Fair value was based on expected future cash flows using Level 3 inputs under the fair value measurement requirements. The cash flows are those expected to be generated by the market participants, discounted at the 10 percent rate of interest. The AADUs are reported as part of the U.S. Drilling segment.