Derivative Instruments

9 Months Ended

Sep. 30, 2020

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 previously used derivatives to reduce our exposure to various market risks, primarily foreign currency exchange rate risk.

The commencement of the Chapter 11 Cases constituted a termination event with respect to the Company’s derivative instruments, which permits the counterparties of our derivative instruments to terminate their outstanding contracts. The exercise of these termination rights are not stayed under the Bankruptcy Code. During September 2020, the counterparties to the Company’s derivative instruments elected to terminate their outstanding derivatives with us for an aggregate settlement of $3.6 million which was recorded as a gain in contract drilling expense in our Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2020 related to this termination.

All derivatives were recorded on our condensed consolidated balance sheets at fair value. Derivatives subject to legally enforceable master netting agreements were not offset on our Condensed Consolidated Balance Sheets. Accounting for the gains and losses resulting from changes in the fair value of derivatives depended on the use of the derivative and whether it qualified for hedge accounting. As of December 31, 2019, our condensed consolidated balance sheets included net foreign currency derivative assets of $5.4 million. See "Note 6- Fair Value Measurements" 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
	December 31, 2019		December 31, 2019
Derivatives Designated as Hedging Instruments
Foreign currency forward contracts - current(1)	$	4.2	$	.7
Foreign currency forward contracts - non-current(2)	.8		—
	$	5.0	$	.7

Derivatives not Designated as Hedging Instruments
Foreign currency forward contracts - current(1)	$	1.3	$	.2
Total	$	6.3	$	.9

(1)Derivative assets and liabilities that had maturity dates equal to or less than 12 months from the respective balance sheet dates were included in other current assets and accrued liabilities and other, respectively, on our condensed consolidated balance sheets.

(2)Derivative assets and liabilities that had maturity dates greater than 12 months from the respective balance sheet dates were included in other assets and other liabilities, respectively, on our condensed consolidated balance sheets.

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, 2020 and 2019


	Gain (Loss) Recognized in Other Comprehensive Loss ("OCI") on Derivatives (Effective Portion)				(Gain) Loss Reclassified from ("AOCI") into Income (Effective Portion)(1)
	2020		2019		2020		2019
Interest rate lock contracts(2)	$	—	$	—	$	—	$	1.7
Foreign currency forward contracts(3)	$	2.7	$	(5.7)	$	(.5)	$	3.2
Total	$	2.7	$	(5.7)	$	(.5)	$	4.9

Nine Months Ended September 30, 2020 and 2019


	Loss Recognized in Other Comprehensive Loss ("OCI") on Derivatives (Effective Portion)				(Gain) Loss Reclassified from ("AOCI") into Income (Effective Portion)(1)
	2020		2019		2020		2019
Interest rate lock contracts(2)	$	—	$	—	$	—	$	1.8
Foreign currency forward contracts(4)	(5.4)		(7.3)		(11.5)		6.5
Total	$	(5.4)	$	(7.3)	$	(11.5)	$	8.3

(1)Changes in the fair value of cash flow hedges 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)Losses on interest rate lock derivatives reclassified from AOCI into income were included in interest expense, net, in our condensed consolidated statements of operations.

(3)During the three months ended September 30, 2020, $0.5 million of gains were reclassified from AOCI into contract drilling expense and no gain or loss were reclassified from AOCI into depreciation expense in our condensed consolidated statement of operations. During the three months 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.

(4)During the nine months ended September 30, 2020, $2.0 million of losses were reclassified from AOCI into contract drilling expense and $13.5 million of gains were reclassified from AOCI into depreciation expense in our condensed consolidated statement of operations. During the nine months 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.

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 entered into derivatives that hedge the fair value of recognized foreign currency denominated assets or liabilities but did not designate such derivatives as hedging instruments. In these situations, a natural hedging relationship generally existed whereby changes in the fair value of the derivatives offset changes in the fair value of the underlying hedged items. As of September 30, 2020, we did not have open derivative contracts to hedge against this risk.

Net losses of $1.5 million and $2.3 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 months ended September 30, 2020 and 2019. Net losses of $0.2 million and $7.6 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 months ended September 30, 2020 and 2019, respectively.