Derivative Instruments

9 Months Ended

Sep. 30, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

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 certain of our subsidiaries are denominated in currencies other than the U.S. dollar. 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 to reduce our exposure to various market risks, primarily foreign currency exchange rate risk.

All of our derivatives were recorded on our condensed consolidated balance sheets at fair value. Derivatives subject to legally enforceable master netting agreements were not offset in our condensed consolidated balance sheets. 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 $7.9 million and $10.7 million associated with our derivatives were included on our condensed consolidated balance sheets as of September 30, 2019 and December 31, 2018, respectively. All of our derivative instruments mature during the next 18 months. See Note 5 for additional information on the fair value measurement of our derivatives.

Derivatives recorded at fair value on our condensed consolidated balance sheets consisted of the following (in millions):


	Derivative Assets						Derivative Liabilities
	September 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018
Derivatives Designated as Hedging Instruments
Foreign currency forward contracts - current⁽¹⁾	$	—	$	.2	$	7.0	$	8.3
Foreign currency forward contracts - non-current⁽²⁾	—		—		.4		.4
	$	—	$	.2	$	7.4	$	8.7

Derivatives Not Designated as Hedging Instruments
Foreign currency forward contracts - current⁽¹⁾	$	.3	$	.4	$	.8	$	2.6
Total	$	.3	$	.6	$	8.2	$	11.3

⁽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 and other liabilities, respectively, on our condensed consolidated balance sheets.

We utilize cash flow hedges to hedge forecasted foreign currency denominated transactions, primarily to reduce our exposure to foreign currency exchange rate risk associated with contract drilling expenses and capital expenditures denominated in various currencies. As of September 30, 2019, we had cash flow hedges outstanding to exchange an aggregate $212.6 million for various foreign currencies, including $116.7 million for British pounds, $44.6 million for Australian dollars, $18.2 million for euros, $9.5 million for Singapore dollars, $16.5 million for Norwegian krone and $7.1 million for Brazilian reals.

Gains and losses, net of tax, on derivatives designated as cash flow hedges included in our condensed consolidated statements of operations and comprehensive income (loss) were as follows (in millions):

Three Months Ended September 30, 2019 and 2018


	Gain (Loss) Recognized in Other Comprehensive Income (Loss) ("OCI") (Effective Portion)						(Gain) Loss Reclassified from Accumulated Other Comprehensive Income ("AOCI") into Income (Effective Portion)⁽¹⁾						Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing)⁽²⁾
	2019		2018		2019		2018		2019		2018
Interest rate lock contracts⁽³⁾	$	—	$	—	$	1.7	$	(.1)	$	—	$	—
Foreign currency forward contracts⁽⁴⁾	(5.7)		(1.9)		3.2		(.6)		—		(.3)
Total	$	(5.7)	$	(1.9)	$	4.9	$	(.7)	$	—	$	(.3)

Nine Months Ended September 30, 2019 and 2018


	Gain (Loss) Recognized in Other Comprehensive Income (Loss) ("OCI") (Effective Portion)						(Gain) Loss Reclassified from Accumulated Other Comprehensive Income ("AOCI") into Income (Effective Portion)⁽¹⁾						Loss Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing)⁽²⁾
	2019		2018		2019		2018		2019		2018
Interest rate lock contracts⁽³⁾	$	—	$	—	$	1.8	$	(.2)	$	—	$	—
Foreign currency forward contracts⁽⁵⁾	(7.3)		(7.6)		6.5		2.4		—		(1.5)
Total	$	(7.3)	$	(7.6)	$	8.3	$	2.2	$	—	$	(1.5)

⁽¹⁾Changes in the fair value of cash flow hedge derivatives are recorded in AOCI. Amounts recorded in AOCI associated with cash flow hedges are subsequently reclassified into contract drilling, depreciation or interest expense as earnings are affected by the underlying hedged forecasted transaction.

⁽²⁾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 operations. As a result of our adoption of Update 2017-12 on January 1, 2019, ineffectiveness is no longer separately measured and recognized. See additional information in Note 1.

⁽³⁾Losses on interest rate lock derivatives reclassified from AOCI into income (effective portion) were included in interest expense, net, in our condensed consolidated statements of operations.

⁽⁴⁾During the three-month period ended September 30, 2019, $3.4 million of losses were reclassified from AOCI into contract drilling expense and $0.2 million of gains were reclassified from AOCI into depreciation expense in our condensed consolidated statement of operations. During the three-month period ended September 30, 2018, $0.8 million of losses were reclassified from AOCI into contract drilling expense and $0.2 million of gains were reclassified from AOCI into depreciation expense in our condensed consolidated statement of operations.

⁽⁵⁾During the nine-month period ended September 30, 2019, $7.1 million of losses were reclassified from AOCI into contract drilling expense and $0.6 million of gains were reclassified from AOCI into depreciation expense in our condensed consolidated statement of operations. During the nine-month period ended September 30, 2018, $1.8 million of gains were reclassified from AOCI into contract drilling expense and $0.6 million of gains were reclassified from AOCI into depreciation expense in our condensed consolidated statement of operations.

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, 2019, we held derivatives not designated as hedging instruments to exchange an aggregate $27.1 million for various foreign currencies, including $7.8 million for British pounds, $9.6 million for Nigerian Naira, $6.6 million for Israeli New Shekel and $3.1 million for Mexican pesos.

Net losses of $2.3 million and net gains of $2.2 million associated with our derivatives not designated as hedging instruments were included in other, net, in our condensed consolidated statements of operations for the three-month periods ended September 30, 2019 and 2018, respectively. Net losses of $7.6 million and net gains of $9.7 million associated with our derivatives not designated as hedging instruments were included in other, net, in our condensed consolidated statements of operations for the nine-month periods ended September 30, 2019 and 2018, respectively.

As of September 30, 2019, the estimated amount of net losses associated with derivative instruments, net of tax, that would be reclassified into earnings during the next twelve months totaled $5.0 million.