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Derivative Instruments | 9 Months Ended
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Sep. 30, 2011
Derivative Instruments [Abstract] |
Derivative Instruments | Note 6 - Derivative Instruments Our functional currency is the U.S. dollar. As is customary in the oil and gas industry, a majority of our revenues are denominated in U.S. dollars; however, a portion of the revenues earned and expenses incurred by some of our subsidiaries are denominated in currencies other than the U.S. dollar ("foreign currencies"). These transactions are remeasured in U.S. dollars based on a combination of both current and historical exchange rates. We use foreign currency forward contracts ("derivatives") to reduce our exposure to various market risks, primarily foreign currency exchange rate risk. We maintain a foreign currency exchange rate risk management strategy that utilizes derivatives to reduce our exposure to unanticipated fluctuations in earnings and cash flows caused by changes in foreign currency exchange rates. Although no interest rate related derivatives were outstanding as of September 30, 2011 and December 31, 2010, we occasionally employ an interest rate risk management strategy that utilizes derivatives to minimize or eliminate unanticipated fluctuations in earnings and cash flows arising from changes in, and volatility of, interest rates. We minimize our credit risk relating to the counterparties of our derivatives by transacting with multiple, high-quality financial institutions, thereby limiting exposure to individual counterparties, and by monitoring the financial condition of our counterparties. We do not enter into derivatives for trading or other speculative purposes. All derivatives were recorded on our condensed consolidated balance sheets at fair value. Accounting for the gains and losses resulting from changes in the fair value of derivatives depends on the use of the derivative and whether it qualifies for hedge accounting. Net liabilities of $7.1 million and net assets of $16.4 million associated with our foreign currency derivatives were included in our condensed consolidated balance sheets as of September 30, 2011 and December 31, 2010, respectively. All of our derivatives mature during the next 17 months. See "Note 3 - Fair Value Measurements" for additional information on the fair value measurement of our derivatives. Derivatives recorded at fair value in our condensed consolidated balance sheets as of September 30, 2011 and December 31, 2010 consisted of the following (in millions):
| Derivative Assets | Derivative Liabilities
| September 30, 2011 | December 31, 2010 | September 30, 2011 | December 31, 2010
Derivatives Designated as Hedging Instruments |  |  |
Foreign currency forward contracts - current(1) | $1.3 | $16.8 | $7.8 | $0.6
Foreign currency forward contracts - non-current(2) | -- | 0.1 | 0.5 | 0.1
| 1.3 | 16.9 | 8.3 | 0.7
Derivatives Not Designated as Hedging Instruments |  |  |
Foreign currency forward contracts - current(1) | -- | 0.2 | 0.1 | --
| -- | 0.2 | 0.1 | --
Total | $1.3 | $17.1 | $8.4 | $0.7
| (1) | Derivative assets and liabilities that have maturity dates equal to or less than twelve months from the respective balance sheet date were included in other current assets and accrued liabilities and other, respectively, on our condensed consolidated balance sheets.
| (2) | Derivative assets and liabilities that have maturity dates greater than twelve months from the respective balance sheet date were included in other assets, net, and other liabilities, respectively, on our condensed consolidated balance sheets.
We utilize derivatives designated as hedging instruments to hedge forecasted foreign currency denominated transactions ("cash flow hedges"), primarily to reduce our exposure to foreign currency exchange rate risk associated with the portion of our remaining ENSCO 8500 Series® construction obligations denominated in Singapore dollars and contract drilling expenses denominated in various other currencies. As of September 30, 2011, we had cash flow hedges outstanding to exchange an aggregate $249.1 million for various foreign currencies, including $112.9 million for Singapore dollars, $80.6 million for British pounds, $27.4 million for Australian dollars, $22.0 million for euros and $6.2 million for other currencies. Gains and losses, net of tax, on derivatives designated as cash flow hedges included in our condensed consolidated statements of income for the three-month and nine-month periods ended September 30, 2011 and 2010 were as follows (in millions): Three Months Ended September 30, 2011 and 2010
Derivatives Designated as Cash Flow Hedges | Gain (Loss) Recognized in Other Comprehensive Income ("OCI") (Effective Portion) | Gain (Loss) Reclassified from Accumulated Other Comprehensive Income ("AOCI") into Income (Effective Portion) |  | Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing)(1)
|  | 2011 |  | 2010 |  |  | 2011 |  | 2010 |  |  | 2011 |  | 2010
Interest rate lock contracts(2) |  | $ -- |  | $ -- |  |  | $(.1) |  | $(.2) |  |  | $ -- |  | $ --
Foreign currency forward contracts(3) |  | (7.6 | ) | 8.7 |  |  | .6 |  | -- |  |  | (.2) |  | .1
Total |  | $(7.6 | ) | $8.7 |  |  | $ .5 |  | $(.2) |  |  | $(.2) |  | $ .1
Nine Months Ended September 30, 2011 and 2010
Derivatives Designated as Cash Flow Hedges | Gain (Loss) Recognized in OCI (Effective Portion) | Gain (Loss) Reclassified from AOCI into Income (Effective Portion) |  | Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing)(1)
|  | 2011 |  | 2010 |  |  | 2011 |  | 2010 |  |  | 2011 |  | 2010
Interest rate lock contracts(2) |  | $ -- |  | $ -- |  |  | $(.4) |  | $(.5) |  |  | $ -- |  | $ --
Foreign currency forward contracts(3) |  | (1.6 | ) | 5.7 |  |  | 3.2 |  | 1.8 |  |  | .5 |  | (.1)
Total |  | $(1.6 | ) | $5.7 |  |  | $2.8 |  | $1.3 |  |  | $ .5 |  | $(.1)
| (1) | Gains and losses recognized in income for ineffectiveness and amounts excluded from effectiveness testing were included in other, net, in our condensed consolidated statements of income.
| (2) | Losses on derivatives reclassified from AOCI into income (effective portion) were included in interest expense in our condensed consolidated statements of income.
| (3) | Gains and losses on derivatives reclassified from AOCI into income (effective portion) were included in contract drilling expense in our condensed consolidated statements of income.
We have net assets and liabilities denominated in numerous foreign currencies and use various methods to manage our exposure to foreign currency exchange rate risk. We predominantly structure our drilling contracts in U.S. dollars, which significantly reduces the portion of our cash flows and assets denominated in foreign currencies. We occasionally enter into derivatives that hedge the fair value of recognized foreign currency denominated assets or liabilities but do not designate such derivatives as hedging instruments. In these situations, a natural hedging relationship generally exists whereby changes in the fair value of the derivatives offset changes in the fair value of the underlying hedged items. As of September 30, 2011, we had derivatives not designated as hedging instruments outstanding to exchange an aggregate $38.9 million for various foreign currencies, including $10.3 million for Swiss francs, $9.6 million for Australian dollars, $8.0 million for Indonesian rupiahs, $3.8 million for Singapore dollars and $7.2 million for other currencies. A net loss of $800,000 and a gain of $3.6 million associated with our derivatives not designated as hedging instruments were included in other income, net, in our condensed consolidated statements of income for the three-month periods ended September 30, 2011 and 2010, respectively. A net loss of $300,000 and a gain of $2.5 million associated with our derivatives not designated as hedging instruments were included in other income in our condensed consolidated statements of income for the nine-month periods ended September 30, 2011 and 2010, respectively. As of September 30, 2011, the estimated amount of net losses associated with derivative instruments, net of tax, that will be reclassified to earnings during the next twelve months totaled $3.3 million.

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- Definition The entire disclosure for the entity's entire derivative instruments and hedging activities. Describes an entity's risk management strategies, derivatives in hedging activities and non-hedging derivative instruments, the assets, obligations, liabilities, revenues and expenses arising therefrom, and the amounts of and methodologies and assumptions used in determining the amounts of such items. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 133 -Paragraph 44 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. 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