ENSCO PLC, 8-K filed on 9/22/2014
Current report filing
Document And Entity Information (USD $)
In Thousands, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2013
Feb. 10, 2014
Jun. 30, 2013
Document And Entity Information [Abstract]
 
 
 
Document Type
8-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Dec. 31, 2013 
 
 
Entity Registrant Name
Ensco plc 
 
 
Entity Central Index Key
0000314808 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Document Fiscal Year Focus
2013 
 
 
Document Fiscal Period Focus
FY 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Public Float
 
 
$ 11,730,723 
Entity Common Shares, Shares Outstanding
 
233,568,357 
 
Consolidated Statements Of Income (USD $)
In Millions, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2011
Income Statement [Abstract]
 
 
 
OPERATING REVENUES
$ 4,519.9 
$ 3,869.2 
$ 2,599.2 
OPERATING EXPENSES
 
 
 
Contract drilling (exclusive of depreciation)
2,080.1 
1,747.9 
1,286.1 
Depreciation
528.2 
476.1 
357.6 
General and administrative
146.8 
148.9 
158.6 
Total operating expenses
2,755.1 
2,372.9 
1,802.3 
OPERATING INCOME
1,764.8 
1,496.3 
796.9 
OTHER INCOME (EXPENSE)
 
 
 
Interest income
16.6 
22.8 
17.2 
Interest expense, net
(158.8)
(123.6)
(95.9)
Other, net
42.1 
2.2 
20.8 
Other income (expense), net
(100.1)
(98.6)
(57.9)
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
1,664.7 
1,397.7 
739.0 
PROVISION FOR INCOME TAXES
 
 
 
Current income tax expense
201.5 
211.0 
124.7 
Deferred income tax expense (benefit)
11.2 
27.1 
(13.1)
Total provision for income taxes
212.7 
238.1 
111.6 
INCOME FROM CONTINUING OPERATIONS
1,452.0 
1,159.6 
627.4 
DISCONTINUED OPERATIONS, NET
(24.1)
17.1 
(21.8)
NET INCOME
1,427.9 
1,176.7 
605.6 
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS
(9.7)
(7.0)
(5.2)
NET INCOME ATTRIBUTABLE TO ENSCO
1,418.2 
1,169.7 
600.4 
EARNINGS PER SHARE - BASIC
 
 
 
Continuing operations
$ 6.19 
$ 4.97 
$ 3.20 
Discontinued operations
$ (0.11)
$ 0.08 
$ (0.11)
Total earnings per share - basic
$ 6.08 
$ 5.05 
$ 3.09 
EARNINGS PER SHARE - DILUTED
 
 
 
Continuing operations
$ 6.18 
$ 4.97 
$ 3.19 
Discontinued operations
$ (0.11)
$ 0.07 
$ (0.11)
Total earnings per share - diluted
$ 6.07 
$ 5.04 
$ 3.08 
NET INCOME ATTRIBUTABLE TO ENSCO SHARES - BASIC AND DILUTED
$ 1,403.1 
$ 1,157.4 
$ 593.5 
WEIGHTED-AVERAGE SHARES OUTSTANDING
 
 
 
Basic
230.9 
229.4 
192.2 
Diluted
231.1 
229.7 
192.6 
CASH DIVIDENDS PER SHARE
$ 2.25 
$ 1.5 
$ 1.40 
Consolidated Statements of Comprehensive Income (USD $)
In Millions, unless otherwise specified
3 Months Ended 12 Months Ended
Dec. 31, 2013
Sep. 30, 2013
Jun. 30, 2013
Mar. 31, 2013
Dec. 31, 2012
Sep. 30, 2012
Jun. 30, 2012
Mar. 31, 2012
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2011
Statement of Comprehensive Income [Abstract]
 
 
 
 
 
 
 
 
 
 
 
NET INCOME
$ 364.0 
$ 381.4 
$ 362.6 
$ 319.9 
$ 221.2 
$ 345.4 
$ 342.7 
$ 267.4 
$ 1,427.9 
$ 1,176.7 
$ 605.6 
OTHER COMPREHENSIVE INCOME (LOSS), NET
 
 
 
 
 
 
 
 
 
 
 
Net change in fair value of derivatives
 
 
 
 
 
 
 
 
(5.8)
8.7 
0.1 
Reclassification of gains and losses on derivative instruments from other comprehensive (income) loss into net income
 
 
 
 
 
 
 
 
2.0 
(5.5)
Other
 
 
 
 
 
 
 
 
1.9 
2.8 
2.9 
NET OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
 
 
 
 
 
(1.9)
11.5 
(2.5)
COMPREHENSIVE INCOME
 
 
 
 
 
 
 
 
1,426.0 
1,188.2 
603.1 
COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS
 
 
 
 
 
 
 
 
(9.7)
(7.0)
(5.2)
COMPREHENSIVE INCOME ATTRIBUTABLE TO ENSCO
 
 
 
 
 
 
 
 
$ 1,416.3 
$ 1,181.2 
$ 597.9 
Consolidated Balance Sheets (USD $)
Dec. 31, 2013
Dec. 31, 2012
CURRENT ASSETS
 
 
Cash and cash equivalents
$ 165,600,000 
$ 487,100,000 
Accounts receivable, net
855,700,000 
811,400,000 
Other
513,900,000 
425,400,000 
Total current assets
1,535,200,000 
1,723,900,000 
PROPERTY AND EQUIPMENT, AT COST
17,498,500,000 
15,737,100,000 
Less accumulated depreciation
3,187,500,000 
2,591,500,000 
Property and equipment, net
14,311,000,000 
13,145,600,000 
GOODWILL
3,274,000,000 
3,274,000,000 
OTHER ASSETS, NET
352,700,000 
421,800,000 
TOTAL ASSETS
19,472,900,000 
18,565,300,000 
CURRENT LIABILITIES
 
 
Accounts payable - trade
341,100,000 
357,800,000 
Accrued liabilities and other
658,700,000 
584,400,000 
Short-term debt
 
Current maturities of long-term debt
47,500,000 
47,500,000 
Total current liabilities
1,047,300,000 
989,700,000 
LONG-TERM DEBT
4,718,900,000 
4,798,400,000 
DEFERRED INCOME TAXES
362,100,000 
351,700,000 
OTHER LIABILITIES
545,700,000 
573,400,000 
COMMITMENTS AND CONTINGENCIES
   
 
ENSCO SHAREHOLDERS' EQUITY
 
 
Additional paid-in capital
5,467,200,000 
5,398,700,000 
Retained earnings
7,327,300,000 
6,434,700,000 
Accumulated other comprehensive income
18,200,000 
20,100,000 
Treasury shares, at cost, 6.0 million shares and 5.3 million shares
(45,200,000)
(31,000,000)
Total Ensco shareholders' equity
12,791,600,000 
11,846,400,000 
NONCONTROLLING INTERESTS
7,300,000 
5,700,000 
Total equity
12,798,900,000 
11,852,100,000 
Total liabilities and shareholders' equity
19,472,900,000 
18,565,300,000 
Class A Ordinary Shares, U.S. [Member]
 
 
ENSCO SHAREHOLDERS' EQUITY
 
 
Common shares, value
24,000,000 
23,800,000 
Common Class B, Par Value In GBP [Member]
 
 
ENSCO SHAREHOLDERS' EQUITY
 
 
Common shares, value
$ 100,000 
$ 100,000 
Consolidated Balance Sheets (Parenthetical)
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2013
Class A Ordinary Shares, U.S. [Member]
USD ($)
Dec. 31, 2012
Class A Ordinary Shares, U.S. [Member]
USD ($)
Dec. 31, 2013
Common Class B, Par Value In GBP [Member]
GBP (£)
Dec. 31, 2012
Common Class B, Par Value In GBP [Member]
GBP (£)
Common shares, par value
 
 
$ 0.10 
$ 0.10 
£ 1 
£ 1 
Common shares, shares authorized
 
 
450,000,000 
450,000,000.0 
50,000 
50,000 
Common shares, shares issued
 
 
239,500,000 
237,700,000 
50,000 
50,000 
Treasury shares, shares held
6,000,000 
5,300,000 
 
 
 
 
Consolidated Statements Of Cash Flows (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2011
OPERATING ACTIVITIES
 
 
 
Net income
$ 1,427.9 
$ 1,176.7 
$ 605.6 
Adjustments to reconcile net income to net cash provided by operating activities of continuing operations:
 
 
 
Discontinued operations, net
24.1 
(17.1)
21.8 
Depreciation expense
528.2 
476.1 
357.6 
Settlement of warranty or other claims
(11.0)
(57.9)
Share-based compensation expense
50.3 
53.2 
47.7 
Amortization of intangibles and other, net
(20.7)
(16.4)
(18.2)
Deferred income tax expense (benefit)
11.2 
27.1 
(13.1)
Other
15.0 
6.0 
(0.9)
Changes in operating assets and liabilities
(138.3)
426.4 
(243.1)
Net cash provided by operating activities of continuing operations
1,886.7 
2,074.1 
757.4 
INVESTING ACTIVITIES
 
 
 
Additions to property and equipment
(1,768.5)
(1,715.0)
(645.7)
Acquisition of Pride International, Inc., net of cash acquired
(2,656.0)
Purchases of short-term investments
(50.0)
(90.0)
(4.5)
Maturities of short-term investments
50.0 
44.5 
Other
6.0 
3.2 
5.3 
Net cash used in investing activities of continuing operations
(1,762.5)
(1,757.3)
(3,300.9)
FINANCING ACTIVITIES
 
 
 
Cash dividends paid
(525.6)
(348.1)
(292.3)
Reduction of long-term borrowings
(47.5)
(47.5)
(213.3)
Proceeds from exercise of share options
22.3 
35.8 
39.9 
Debt financing costs
(4.6)
(31.8)
Commercial paper borrowings, net
(125.0)
125.0 
Equity financing costs
66.7 
(70.5)
Proceeds from issuance of senior notes
2,462.8 
Other
(21.7)
(17.4)
(15.7)
Net cash (used in) provided by financing activities of continuing operations
(577.1)
(435.5)
2,004.1 
DISCONTINUED OPERATIONS
 
 
 
Operating activities
93.8 
113.0 
(25.2)
Investing activities
37.8 
60.1 
(54.6)
Net cash provided by discontinued operations
131.6 
173.1 
(79.8)
Effect of exchange rate changes on cash and cash equivalents
(0.2)
2.0 
(0.8)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(321.5)
56.4 
(620.0)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
487.1 
430.7 
1,050.7 
CASH AND CASH EQUIVALENTS, END OF YEAR
$ 165.6 
$ 487.1 
$ 430.7 
Description Of The Business And Summary Of Significant Accounting Policies
Description Of The Business And Summary Of Significant Accounting Policies
DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
    Business
 
We are one of the leading providers of offshore contract drilling services to the international oil and gas industry. We own an offshore drilling rig fleet of 74 rigs, including six rigs under construction, spanning most of the strategic, high-growth markets around the globe. Our rig fleet includes ten drillships, 13 dynamically positioned semisubmersible rigs, six moored semisubmersible rigs and 45 jackup rigs.  Our fleet is the world's second largest amongst competitive rigs, our ultra-deepwater fleet is the newest in the industry, and our premium jackup fleet is the largest of any offshore drilling company.  

Our customers include most of the leading national and international oil companies, in addition to many independent operators. We are among the most geographically diverse offshore drilling companies, with current operations and drilling contracts spanning approximately 20 countries on six continents in nearly every major offshore basin around the world. The markets in which we operate include the U.S. Gulf of Mexico, Mexico, Brazil, the Mediterranean, the North Sea, the Middle East, West Africa, Australia and Southeast Asia.

We provide drilling services on a "day rate" contract basis. Under day rate contracts, we provide a drilling rig and rig crews and receive a fixed amount per day for drilling a well. Our customers bear substantially all of the ancillary costs of constructing the well and supporting drilling operations, as well as the economic risk relative to the success of the well. In addition, our customers may pay all or a portion of the cost of moving our equipment and personnel to and from the well site. We do not provide "turnkey" or other risk-based drilling services.

Redomestication

During 2009, we completed a reorganization of the corporate structure of the group of companies controlled by our predecessor, ENSCO International Incorporated ("Ensco Delaware"), pursuant to which an indirect, wholly-owned subsidiary merged with Ensco Delaware, and Ensco plc became our publicly-held parent company incorporated under English law (the "redomestication").
 
The redomestication was accounted for as an internal reorganization of entities under common control and, therefore, Ensco Delaware's assets and liabilities were accounted for at their historical cost basis and not revalued in the transaction. We remain subject to the U.S. Securities and Exchange Commission (the "SEC") reporting requirements, the mandates of the Sarbanes-Oxley Act of 2002, as amended, and the applicable corporate governance rules of the New York Stock Exchange ("NYSE"), and we will continue to report our consolidated financial results in U.S. dollars and in accordance with U.S. generally accepted accounting principles ("GAAP"). We also must comply with additional reporting requirements of English law.

Basis of Presentation—U.K. Companies Act 2006 Section 435 Statement

The accompanying consolidated financial statements have been prepared in accordance with GAAP, which the directors consider to be the most meaningful presentation of our results of operations and financial position.  The accompanying consolidated financial statements do not constitute statutory accounts required by the U.K. Companies Act 2006, which for the year ended December 31, 2013 will be prepared in accordance with generally accepted accounting principles in the U.K. and delivered to the Registrar of Companies in the U.K. following the annual general meeting of shareholders.  The U.K. statutory accounts are expected to include an unqualified auditor’s report, which is not expected to contain any references to matters on which the auditors drew attention by way of emphasis without qualifying the report or any statements under Sections 498(2) or 498(3) of the U.K. Companies Act 2006.
 
Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Ensco plc and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Certain previously reported amounts have been reclassified to conform to the current year presentation.

Pervasiveness of Estimates

The preparation of financial statements in conformity with GAAP requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the related revenues and expenses and disclosures of gain and loss contingencies as of the date of the financial statements. Actual results could differ from those estimates.

Foreign Currency Remeasurement and Translation

Our functional currency is the U.S. dollar. As is customary in the oil and gas industry, a majority of our revenues and expenses 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 ("foreign currencies"). These transactions are remeasured in U.S. dollars based on a combination of both current and historical exchange rates. Most transaction gains and losses, including certain gains and losses on our derivative instruments, are included in other, net, in our consolidated statement of income.  Certain gains and losses from the translation of foreign currency balances of our non-U.S. dollar functional currency subsidiaries are included in accumulated other comprehensive income on our consolidated balance sheet.  We incurred net foreign currency exchange gains of $6.4 million, net foreign currency exchange losses of $3.5 million and net foreign currency exchange gains of $16.9 million for the years ended December 31, 2013, 2012 and 2011, respectively.

Cash Equivalents and Short-Term Investments

Highly liquid investments with maturities of three months or less at the date of purchase are considered cash equivalents. Highly liquid investments with maturities of greater than three months but less than one year at the date of purchase are classified as short-term investments.

Short-term investments, consisting of time deposits with initial maturities in excess of three months but less than one year, were included in other current assets on our consolidated balance sheets and totaled $50.0 million as of December 31, 2013 and 2012. Cash flows from purchases and maturities of short-term investments were classified as investing activities in our consolidated statements of cash flows for the years ended December 31, 2013, 2012 and 2011.
    
Property and Equipment

All costs incurred in connection with the acquisition, construction, major enhancement and improvement of assets are capitalized, including allocations of interest incurred during periods that our drilling rigs are under construction or undergoing major enhancements and improvements. Repair and maintenance costs are charged to contract drilling expense in the period in which they occur. Upon sale or retirement of assets, the related cost and accumulated depreciation are removed from the balance sheet, and the resulting gain or loss is included in contract drilling expense, unless reclassified to discontinued operations.

Our property and equipment is depreciated on a straight-line basis, after allowing for salvage values, over the estimated useful lives of our assets. Drilling rigs and related equipment are depreciated over estimated useful lives ranging from four to 35 years.  Buildings and improvements are depreciated over estimated useful lives ranging from two to 30 years. Other equipment, including computer and communications hardware and software costs, is depreciated over estimated useful lives ranging from two to six years.
 
We evaluate the carrying value of our property and equipment for impairment when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. For property and equipment used in our operations, recoverability generally is determined by comparing the carrying value of an asset to the expected undiscounted future cash flows of the asset. If the carrying value of an asset is not recoverable, the amount of impairment loss is measured as the difference between the carrying value of the asset and its estimated fair value. Property and equipment held for sale is recorded at the lower of net book value or net realizable value.
    
If the global economy were to deteriorate and/or the offshore drilling industry were to incur a significant prolonged downturn, it is reasonably possible that impairment charges may occur with respect to specific individual rigs, groups of rigs, such as a specific type of drilling rig, or rigs in a certain geographic location.

Goodwill
Our business consists of three operating segments: (1) Floaters, which includes our drillships and semisubmersible rigs, (2) Jackups and (3) Other, which consists of management services on rigs owned by third-parties. Our two reportable segments, Floaters and Jackups, provide one service, contract drilling.
We test goodwill for impairment on an annual basis as of December 31 of each year or when events or changes in circumstances indicate that a potential impairment exists.  When testing goodwill for impairment, we perform a qualitative assessment to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount.

If we conclude that the fair value of one or both of our reporting units has more-likely-than-not declined below its carrying amount after qualitatively assessing existing facts and circumstances, we perform a quantitative assessment whereby we estimate the fair value of each reporting unit.  In most instances, our calculation of the fair value of our reporting units is based on estimates of future discounted cash flows to be generated by our drilling rigs in the reporting unit.

Based on a qualitative assessment performed as of December 31, 2013, we concluded it was more-likely-than-not that the fair value of our reporting units exceeded their carrying amount, and there was no impairment of goodwill. However, if the market value of our shares declines for a prolonged period, and if management's judgments and assumptions regarding future industry conditions and operations diminish, it is reasonably possible that our expectations of future cash flows may decline and ultimately result in goodwill impairment for our Floaters reporting unit. See "Note 9 - Goodwill and Other Intangible Assets and Liabilities" for additional information on our goodwill.
 
Operating Revenues and Expenses

Substantially all of our drilling contracts ("contracts") are performed on a day rate basis, and the terms of such contracts are typically for a specific period of time or the period of time required to complete a specific task, such as drill a well. Contract revenues and expenses are recognized on a per day basis, as the work is performed. Day rate revenues are typically earned, and contract drilling expense is typically incurred, on a uniform basis over the terms of our contracts.

In connection with some contracts, we receive lump-sum fees or similar compensation for the mobilization of equipment and personnel prior to the commencement of drilling services or the demobilization of equipment and personnel upon contract completion. Fees received for the mobilization or demobilization of equipment and personnel are included in operating revenues. The costs incurred in connection with the mobilization and demobilization of equipment and personnel are included in contract drilling expense.

Mobilization fees received and costs incurred prior to commencement of drilling operations are deferred and recognized on a straight-line basis over the period that the related drilling services are performed. Demobilization fees and related costs are recognized as incurred upon contract completion. Costs associated with the mobilization of equipment and personnel to more promising market areas without contracts are expensed as incurred.

Deferred mobilization costs were included in other current assets and other assets, net, on our consolidated balance sheets and totaled $66.6 million and $54.5 million as of December 31, 2013 and 2012, respectively. Deferred mobilization revenue was included in accrued liabilities and other, and other liabilities on our consolidated balance sheets and totaled $76.8 million and $52.6 million as of December 31, 2013 and 2012, respectively.

In connection with some contracts, we receive up-front lump-sum fees or similar compensation for capital improvements to our drilling rigs. Such compensation is deferred and recognized as revenue over the period that the related drilling services are performed. The cost of such capital improvements is capitalized and depreciated over the useful life of the asset. Deferred revenue associated with capital improvements was included in accrued liabilities and other, and other liabilities on our consolidated balance sheets and totaled $273.6 million and $301.9 million as of December 31, 2013 and 2012, respectively.

We must obtain certifications from various regulatory bodies in order to operate our drilling rigs and must maintain such certifications through periodic inspections and surveys. The costs incurred in connection with maintaining such certifications, including inspections, tests, surveys and drydock, as well as remedial structural work and other compliance costs, are deferred and amortized over the corresponding certification periods. Deferred regulatory certification and compliance costs were included in other current assets and other assets, net, on our consolidated balance sheets and totaled $18.3 million and $14.4 million as of December 31, 2013 and 2012, respectively.

In certain countries in which we operate, taxes such as sales, use, value-added, gross receipts and excise may be assessed by the local government on our revenues. We generally record our tax-assessed revenue transactions on a net basis in our consolidated statement of income.

Derivative Instruments

We use derivatives to reduce our exposure to various market risks, primarily foreign currency exchange rate risk. See "Note 6 - Derivative Instruments" for additional information on how and why we use derivatives.

All derivatives are recorded on our consolidated balance sheet at fair value. Derivatives subject to legally enforceable master netting agreements are not offset on our consolidated balance sheet. 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. Derivatives qualify for hedge accounting when they are formally designated as hedges and are effective in reducing the risk exposure that they are designated to hedge. Our assessment of hedge effectiveness is formally documented at hedge inception, and we review hedge effectiveness and measure any ineffectiveness throughout the designated hedge period on at least a quarterly basis.

Changes in the fair value of derivatives that are designated as hedges of the variability in expected future cash flows associated with existing recognized assets or liabilities or forecasted transactions ("cash flow hedges") are recorded in accumulated other comprehensive income ("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 transactions.

Gains and losses on a cash flow hedge, or a portion of a cash flow hedge, that no longer qualifies as effective due to an unanticipated change in the forecasted transaction are recognized currently in earnings and included in other, net, in our consolidated statement of income based on the change in the fair value of the derivative. When a forecasted transaction is no longer probable of occurring, gains and losses on the derivative previously recorded in AOCI are reclassified currently into earnings and included in other, net, in our consolidated statement of income.

We occasionally enter into derivatives that hedge the fair value of recognized assets or liabilities, but do not designate such derivatives as hedges or the derivatives otherwise do not qualify for hedge accounting. In these situations, there generally is a natural hedging relationship where changes in the fair value of the derivatives offset changes in the fair value of the underlying hedged items. Changes in the fair value of these derivatives are recognized currently in earnings in other, net, in our consolidated statement of income.

Derivatives with asset fair values are reported in other current assets or other assets, net, on our consolidated balance sheet depending on maturity date. Derivatives with liability fair values are reported in accrued liabilities and other or other liabilities on our consolidated balance sheet depending on maturity date.

Income Taxes

We conduct operations and earn income in numerous countries. Current income taxes are recognized for the amount of taxes payable or refundable based on the laws and income tax rates in the taxing jurisdictions in which operations are conducted and income is earned.
 
Deferred tax assets and liabilities are recognized for the anticipated future tax effects of temporary differences between the financial statement basis and the tax basis of our assets and liabilities using the enacted tax rates in effect at year-end. A valuation allowance for deferred tax assets is recorded when it is more-likely-than-not that the benefit from the deferred tax asset will not be realized. We do not offset deferred tax assets and deferred tax liabilities attributable to different tax paying jurisdictions.
    
We operate in certain jurisdictions where tax laws relating to the offshore drilling industry are not well developed and change frequently. Furthermore, we may enter into transactions with affiliates or employ other tax planning strategies that generally are subject to complex tax regulations. As a result of the foregoing, the tax liabilities and assets we recognize in our financial statements may differ from the tax positions taken, or expected to be taken, in our tax returns. Our tax positions are evaluated for recognition using a more-likely-than-not threshold, and those tax positions requiring recognition are measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon effective settlement with a taxing authority that has full knowledge of all relevant information. Interest and penalties relating to income taxes are included in current income tax expense in our consolidated statement of income.

Our drilling rigs frequently move from one taxing jurisdiction to another based on where they are contracted to perform drilling services. The movement of drilling rigs among taxing jurisdictions may involve a transfer of drilling rig ownership among our subsidiaries (“intercompany rig sale”). The pre-tax profit resulting from an intercompany rig sale is eliminated from our consolidated financial statements and the carrying value of a rig sold in an intercompany transaction remains at historical net depreciated cost prior to the transaction. Our consolidated financial statements do not reflect the asset disposition transaction of the selling subsidiary or the asset acquisition transaction of the acquiring subsidiary. Income taxes resulting from an intercompany rig sale, as well as the tax effect of any reversing temporary differences resulting from the sale, are deferred and amortized on a straight-line basis over the remaining useful life of the rig.

In some instances, we may determine that certain temporary differences will not result in a taxable or deductible amount in future years; as it is more-likely-than-not we will commence operations and depart from a given taxing jurisdiction without such temporary differences being recovered or settled. Under these circumstances, no future tax consequences are expected and no deferred taxes are recognized in connection with such operations. We evaluate these determinations on a periodic basis and, in the event our expectations relative to future tax consequences change, the applicable deferred taxes are recognized or derecognized.
   
We do not provide deferred taxes on the undistributed earnings of certain subsidiaries because our policy and intention is to reinvest such earnings indefinitely. See "Note 10 - Income Taxes" for additional information on our deferred taxes, unrecognized tax benefits, intercompany transfers of drilling rigs and undistributed earnings.
 
Share-Based Compensation

We sponsor share-based compensation plans that provide equity compensation to our key employees, officers and non-employee directors. Share-based compensation cost is measured at fair value on the date of grant and recognized on a straight-line basis over the requisite service period (usually the vesting period). The amount of compensation cost recognized in our consolidated statement of income is based on the awards ultimately expected to vest and, therefore, reduced for estimated forfeitures. All changes in estimated forfeitures are based on historical experience and are recognized as a cumulative adjustment to compensation cost in the period in which they occur. See "Note 8 - Benefit Plans" for additional information on our share-based compensation.

Fair Value Measurements

We measure certain of our assets and liabilities based on a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy assigns the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities ("Level 1") and the lowest priority to unobservable inputs ("Level 3").  Level 2 measurements represent inputs that are observable for similar assets or liabilities, either directly or indirectly, other than quoted prices included within Level 1.  See "Note 3 - Fair Value Measurements" for additional information on the fair value measurement of certain of our assets and liabilities.

Earnings Per Share
    
We compute basic and diluted earnings per share ("EPS") in accordance with the two-class method. Net income attributable to Ensco used in our computations of basic and diluted EPS is adjusted to exclude net income allocated to non-vested shares granted to our employees and non-employee directors. Weighted-average shares outstanding used in our computation of diluted EPS is calculated using the treasury stock method and excludes non-vested shares.
 
The following table is a reconciliation of net income attributable to Ensco shares used in our basic and diluted EPS computations for each of the years in the three-year period ended December 31, 2013 (in millions):

 
2013
 
2012
 
2011
Net income attributable to Ensco

$1,418.2

 

$1,169.7

 

$600.4

Net income allocated to non-vested share awards
(15.1
)
 
(12.3
)
 
(6.9
)
Net income attributable to Ensco shares

$1,403.1

 

$1,157.4

 

$593.5



The following table is a reconciliation of the weighted-average shares used in our basic and diluted earnings per share computations for each of the years in the three-year period ended December 31, 2013 (in millions):

 
2013
 
2012
 
2011
Weighted-average shares - basic
230.9

 
229.4

 
192.2

Potentially dilutive shares
.2

 
.3

 
.4

Weighted-average shares - diluted
231.1

 
229.7

 
192.6



Antidilutive share options totaling 300,000 for the year ended December 31, 2013 and 400,000 for the years ended December 31, 2012 and 2011 were excluded from the computation of diluted EPS.
 
Noncontrolling Interests

Third parties hold a noncontrolling ownership interest in certain of our non-U.S. subsidiaries. Noncontrolling interests are classified as equity on our consolidated balance sheet and net income attributable to noncontrolling interests is presented separately in our consolidated statement of income. 

Income from continuing operations attributable to Ensco for each of the years in the three-year period ended December 31, 2013 was as follows (in millions):

 
2013
 
2012
 
2011
Income from continuing operations
$
1,452.0

 
$
1,159.6

 
$
627.4

Income from continuing operations attributable to noncontrolling interests
(8.9
)
 
(7.0
)
 
(5.2
)
Income from continuing operations attributable to Ensco
$
1,443.1

 
$
1,152.6

 
$
622.2


    
(Loss) income from discontinued operations attributable to Ensco for each of the years in the three-year period ended December 31, 2013 was as follows (in millions):

 
2013
 
2012
 
2011
(Loss) income from discontinued operations
$
(24.1
)
 
$
17.1

 
$
(21.8
)
Income from discontinued operations attributable to noncontrolling interests
(.8
)
 

 

(Loss) income from discontinued operations attributable to Ensco
$
(24.9
)
 
$
17.1

 
$
(21.8
)
Acquisition Of Pride International, Inc.
Acquisition Of Pride International, Inc.
ACQUISITION OF PRIDE INTERNATIONAL, INC.
 
On May 31, 2011 (the "Merger Date"), Ensco plc completed a merger transaction (the "Merger") with Pride International, Inc., a Delaware corporation ("Pride"), pursuant to which Pride became an indirect, wholly-owned subsidiary of Ensco plc.

The Merger  added drillships to our asset base, increased our presence in Angola and Brazil as well as various other major offshore drilling markets and established our fleet as the world's second largest competitive offshore drilling rig fleet.  

Pro Forma Impact of the Merger
 
The following unaudited supplemental pro forma results for the year ended December 31, 2011 includes pro forma results for the period prior to the closing date of May 31, 2011 and actual results for the period from May 31, 2011 through December 31, 2011. The pro forma results include, among others, (i) the amortization associated with the acquired intangible assets and liabilities; (ii) interest expense associated with debt used to fund a portion of the Merger; and (iii) the impact of certain fair value adjustments such as additional depreciation expense for adjustments to property and equipment and reductions to interest expense for adjustments to debt.  The pro forma results do not include any potential synergies, non-recurring charges resulting directly from the Merger, cost savings or other expected benefits of the Merger. The pro forma results should not be considered indicative of future results. 
(In millions, except per share amounts) 
 
 
2011*

Revenues
$
3,094.6

Net income
604.8

Earnings per share - basic
2.61

Earnings per share - diluted
2.60


* 
Supplemental pro forma earnings were adjusted to exclude an aggregate $157.6 million of merger-related costs incurred by Ensco and Pride during 2011.
Fair Value Measurements
Fair Value Measurements
FAIR VALUE MEASUREMENTS

The following fair value hierarchy table categorizes information regarding our net financial assets measured at fair value on a recurring basis as of December 31, 2013 and 2012 (in millions):

 
Quoted Prices in
Active Markets
for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
  (Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
As of December 31, 2013
 

 
 

 
 

 
 

Supplemental executive retirement plan assets
$
37.7

 
$

 
$

 
$
37.7

Derivatives, net

 
1.8

 

 
1.8

Total financial assets
$
37.7

 
$
1.8

 
$

 
$
39.5

As of December 31, 2012
 

 
 

 
 

 
 

Supplemental executive retirement plan assets
$
29.8

 
$

 
$

 
$
29.8

Derivatives, net

 
5.2

 

 
5.2

Total financial assets
$
29.8

 
$
5.2

 
$

 
$
35.0



Supplemental Executive Retirement Plans

Our Ensco supplemental executive retirement plans (the "SERP") are non-qualified plans that provide for eligible employees to defer a portion of their compensation for use after retirement. Assets held in the SERP were marketable securities measured at fair value on a recurring basis using Level 1 inputs and were included in other assets, net, on our consolidated balance sheets as of December 31, 2013 and 2012.  The fair value measurements of assets held in the SERP were based on quoted market prices. Net unrealized gains of $6.2 million and $2.8 million and net unrealized losses of $300,000 from marketable securities held in our SERP were included in other, net, in our consolidated statements of income for the years ended December 31, 2013, 2012 and 2011, respectively.
 
Derivatives

Our derivatives were measured at fair value on a recurring basis using Level 2 inputs as of December 31, 2013 and 2012.  See "Note 6 - Derivative Instruments" for additional information on our derivatives, including a description of our foreign currency hedging activities and related methodologies used to manage foreign currency exchange rate risk. The fair value measurements of our derivatives were based on market prices that are generally observable for similar assets or liabilities at commonly quoted intervals.

Other Financial Instruments

The carrying values and estimated fair values of our debt instruments as of December 31, 2013 and 2012 were as follows (in millions):
 
 
December 31, 2013
 
December 31, 2012
 
 
Carrying
Value
 
Estimated
  Fair
Value
 
Carrying
Value
 
Estimated
  Fair
Value
 
 
 
 
 
 
 
 
 
4.70% Senior notes due 2021
 
$
1,477.2

 
$
1,596.9

 
$
1,474.7

 
$
1,715.6

6.875% Senior notes due 2020
 
1,024.8

 
1,086.7

 
1,040.6

 
1,138.3

3.25% Senior notes due 2016
 
996.5

 
1,045.8

 
995.1

 
1,068.9

8.50% Senior notes due 2019
 
600.5

 
635.8

 
616.4

 
661.7

7.875% Senior notes due 2040
 
382.6

 
410.5

 
383.8

 
423.9

7.20% Debentures due 2027
 
149.1

 
178.6

 
149.0

 
193.2

4.33% MARAD bonds, including current maturities, due 2016
 
78.9

 
79.7

 
112.3

 
121.6

6.36% MARAD bonds, including current maturities, due 2015
 
25.3

 
27.1

 
38.0

 
48.7

4.65% MARAD bonds, including current maturities, due 2020
 
31.5

 
35.2

 
36.0

 
43.9

Total 
 
$
4,766.4

 
$
5,096.3

 
$
4,845.9

 
$
5,415.8


 
The estimated fair values of our senior notes and debentures were determined using quoted market prices. The estimated fair values of our U.S. Maritime Administration ("MARAD") bonds were determined using an income approach valuation model. The estimated fair values of our cash and cash equivalents, short-term investments, receivables, trade payables and other liabilities approximated their carrying values as of December 31, 2013 and 2012.
Property And Equipment
Property And Equipment
PROPERTY AND EQUIPMENT

Property and equipment as of December 31, 2013 and 2012 consisted of the following (in millions):
 
 
2013
 
2012
Drilling rigs and equipment
 
$
15,839.0

 
$
13,499.4

Other
 
101.0

 
89.1

Work in progress
 
1,558.5

 
2,148.6

 
 
$
17,498.5

 
$
15,737.1


 
Drilling rigs and equipment increased $2.3 billion primarily due to ENSCO 8506, ENSCO DS-6 and ENSCO DS-7, which were placed into service during 2013, and capital upgrades to the rig fleet.
 
Work in progress decreased $590.1 million during 2013 primarily due to the aforementioned rigs that were placed into service, partially offset by the construction of four ultra-premium harsh environment jackup rigs, three ultra-deepwater drillships and one premium jackup rig. Work in progress as of December 31, 2013 primarily consisted of $627.2 million related to the construction of the ENSCO 120 Series ultra-premium harsh environment jackup rigs, $513.4 million related to the construction of ENSCO DS-8, ENSCO DS-9 and ENSCO DS-10 ultra-deepwater drillships, $43.7 million related to the construction of ENSCO 110 premium jackup rig and costs associated with various modification and enhancement projects.

Work in progress as of December 31, 2012 primarily consisted of $1.1 billion related to the construction of ENSCO DS-6, ENSCO DS-7, ENSCO DS-8 and ENSCO DS-9 ultra-deepwater drillships, $603.9 million related to the construction of ENSCO 8506 ultra-deepwater semisubmersible rig, $157.4 million related to the construction of the ENSCO 120 Series ultra-premium harsh environment jackup rigs and costs associated with various modification and enhancement projects.
Debt
Debt
DEBT

The carrying value of long-term debt as of December 31, 2013 and 2012 consisted of the following (in millions):
 
 
2013
 
2012
4.70% Senior notes due 2021
 
$
1,477.2

 
$
1,474.7

6.875% Senior notes due 2020
 
1,024.8

 
1,040.6

3.25% Senior notes due 2016
 
996.5

 
995.1

8.50% Senior notes due 2019
 
600.5

 
616.4

7.875% Senior notes due 2040
 
382.6

 
383.8

7.20% Debentures due 2027
 
149.1

 
149.0

4.33% MARAD bonds due 2016
 
78.9

 
112.3

6.36% MARAD bonds due 2015
 
25.3

 
38.0

4.65% MARAD bonds due 2020
 
31.5

 
36.0

Total debt
 
4,766.4

 
4,845.9

Less current maturities
 
(47.5
)
 
(47.5
)
Total long-term debt
 
$
4,718.9

 
$
4,798.4



Senior Notes
 
During 2011, we issued $1.0 billion aggregate principal amount of unsecured 3.25% senior notes due 2016 at a discount of $7.6 million and $1.5 billion aggregate principal amount of unsecured 4.70% senior notes due 2021 at a discount of $29.6 million (collectively the "Notes") in a public offering. Interest on the Notes is payable semiannually in March and September of each year.  The Notes were issued pursuant to an indenture between us and Deutsche Bank Trust Company Americas, as trustee (the "Trustee"), dated March 17, 2011, and a supplemental indenture between us and the Trustee, dated March 17, 2011. The proceeds from the sale of the Notes were used to fund a portion of the cash consideration payable in connection with the Merger.

Upon consummation of the Merger, we assumed the acquired company's outstanding debt comprised of $900.0 million aggregate principal amount of 6.875% senior notes due 2020, $500.0 million aggregate principal amount of 8.5% senior notes due 2019 and $300.0 million aggregate principal amount of 7.875% senior notes due 2040 (the "Acquired Notes"). Under a supplemental indenture, Ensco plc has fully and unconditionally guaranteed the performance of all obligations of Pride with respect to the Acquired Notes.  See "Note 15 - Guarantee of Registered Securities" for additional information on the guarantee of the Acquired Notes. 
   
We may redeem each series of the Notes and Acquired Notes, in whole or in part, at any time, at a price equal to 100% of their principal amount, plus accrued and unpaid interest and a "make-whole" premium. The indentures governing both the Notes and Acquired Notes contain customary events of default, including failure to pay principal or interest on the Notes and Acquired Notes when due, among others. The indentures governing both the Notes and Acquired Notes also contain certain restrictions, including, among others, restrictions on our ability and the ability of our subsidiaries to create or incur secured indebtedness, enter into certain sale/leaseback transactions and enter into certain merger or consolidation transactions.

Debentures Due 2027

During 1997, Ensco Delaware issued $150.0 million of unsecured 7.20% Debentures due November 15, 2027 (the "Debentures") in a public offering. Interest on the Debentures is payable semiannually in May and November. We may redeem the Debentures, in whole or in part, at any time prior to maturity, at a price equal to 100% of their principal amount, plus accrued and unpaid interest and a "make-whole" premium. The indenture under which the Debentures were issued contains limitations on the incurrence of indebtedness secured by certain liens and limitations on engaging in certain sale/leaseback transactions and certain merger, consolidation or reorganization transactions. The Debentures are not subject to any sinking fund requirements. During 2009, in connection with the redomestication, Ensco plc entered into a supplemental indenture to unconditionally guarantee the principal and interest payments on the Debentures.

The Debentures, the indenture and the supplemental indenture also contain customary events of default, including failure to pay principal or interest on the Debentures when due, among others. The supplemental indenture contains certain restrictions, including, among others, restrictions on our ability and the ability of our subsidiaries to create or incur secured indebtedness, enter into certain sale/leaseback transactions and enter into certain merger or consolidation transactions.

MARAD Bonds Due 2015, 2016 and 2020

During 2001, a subsidiary of Ensco Delaware issued $190.0 million of 15-year bonds which are guaranteed by MARAD to provide long-term financing for ENSCO 7500. The bonds will be repaid in 30 equal semiannual principal installments of $6.3 million ending in December 2015. Interest on the bonds is payable semiannually, in June and December, at a fixed rate of 6.36%.

During 2003, a subsidiary of Ensco Delaware issued $76.5 million of 17-year bonds which are guaranteed by MARAD to provide long-term financing for ENSCO 105. The bonds will be repaid in 34 equal semiannual principal installments of $2.3 million ending in October 2020. Interest on the bonds is payable semiannually, in April and October, at a fixed rate of 4.65%.

Ensco Delaware issued separate guaranties to MARAD, guaranteeing the performance of obligations under the bonds.  In February 2010, the documents governing MARAD's guarantee commitments were amended to address certain changes arising from the redomestication and to include Ensco plc as an additional guarantor of the debt obligations of Ensco Delaware and its subsidiaries.

Upon consummation of the Merger, we assumed $151.5 million of MARAD bonds issued to provide long-term financing for ENSCO 6003 and ENSCO 6004. The bonds are guaranteed by MARAD and will be repaid in semiannual principal installments ending in 2016. Interest on the bonds is payable semiannually at a weighted average fixed rate of 4.33%.

Commercial Paper
 
We participate in a commercial paper program with four commercial paper dealers pursuant to which we may issue, on a private placement basis, unsecured commercial paper notes up to a maximum aggregate amount outstanding at any time of $1.0 billion.  Amounts issued under the commercial paper program are supported by the available and unused committed capacity under our Five-Year Credit Facility. As a result, amounts issued under the commercial paper program will be limited by the amount of our available and unused committed capacity under our Five-Year Credit Facility. The proceeds of such financings may be used for capital expenditures and other general corporate purposes.  The commercial paper will bear interest at rates that will vary based on market conditions and the ratings assigned by credit rating agencies at the time of issuance.  The weighted-average interest rate on our commercial paper borrowings was 0.35% and 0.44% during 2013 and 2012, respectively.  The maturities of the commercial paper will vary, but may not exceed 364 days from the date of issue. The commercial paper is not redeemable or subject to voluntary prepayment by us prior to maturity.  We had no amounts outstanding under our commercial paper program as of December 31, 2013 and 2012.
 
Revolving Credit Facility
 
On May 7, 2013, we entered into the Fourth Amended and Restated Credit Agreement (the "Five-Year Credit Facility"), among Ensco, a subsidiary of Ensco, Citibank, N.A., as Administrative Agent, DNB Bank ASA, as Syndication Agent, and a syndicate of banks party thereto. The Five-Year Credit Facility provides for a $2.0 billion senior unsecured revolving credit facility to be used for general corporate purposes with a five-year term expiring on May 7, 2018. The Five-Year Credit Facility amends and restates our $1.45 billion credit agreement which was scheduled to mature on May 12, 2016. Advances under the Five-Year Credit Facility bear interest at Base Rate or LIBOR plus an applicable margin rate (currently 0.125% per annum for Base Rate advances and 1.125% per annum for LIBOR advances) depending on our credit rating. Amounts repaid may be re-borrowed during the term. We are required to pay a quarterly undrawn facility fee (currently 0.125% per annum) on the total $2.0 billion commitment, which is also based on our credit rating. In addition to other customary restrictive covenants, the Five-Year Credit Facility requires us to maintain a total debt to total capitalization ratio less than or equal to 50%. We have the right, subject to lender consent, to increase the commitments under the Five-Year Credit Facility to an aggregate amount of up to $2.5 billion. We had no amounts outstanding under the Five-Year Credit Facility as of December 31, 2013 and 2012.

In connection with the amendment of our Five-Year Credit Facility, we terminated our $450.0 million 364-day revolving unsecured credit facility dated as of May 12, 2011. We had no amounts outstanding under the 364-Day Credit Facility as of December 31, 2012.

Maturities

The aggregate maturities of our debt, excluding net unamortized premiums of $283.7 million, as of December 31, 2013 were as follows (in millions):
2014
 
$
47.5

2015
 
47.5

2016
 
1,019.7

2017
 
4.5

2018
 
4.5

Thereafter
 
3,359.0

Total
 
$
4,482.7


    
Interest expense totaled $158.8 million, $123.6 million and $95.9 million for the years ended December 31, 2013, 2012 and 2011, respectively, which was net of interest amounts capitalized of $67.7 million, $105.8 million and $80.2 million in connection with our newbuild rig construction and other capital projects.
Derivative Instruments
Derivative Instruments
DERIVATIVE INSTRUMENTS
   
We use 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. We mitigate 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 entering into International Swaps and Derivatives Association, Inc. (“ISDA”) Master Agreements, which include provisions for a legally enforceable master netting agreement, with almost all of our derivative counterparties. See "Note 14 - Supplemental Financial Information" for additional information on the mitigation of credit risk relating to counterparties of our derivatives. We do not enter into derivatives for trading or other speculative purposes.
 
All derivatives were recorded on our consolidated balance sheets at fair value. Derivatives subject to legally enforceable master netting agreements were not offset on our 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. See "Note 1 - Description of the Business and Summary of Significant Accounting Policies" for additional information on our accounting policy for derivatives and "Note 3 - Fair Value Measurements" for additional information on the fair value measurement of our derivatives.
 
As of December 31, 2013 and 2012, our consolidated balance sheets included net foreign currency derivative assets of $1.8 million and $5.2 million, respectively.  All of our derivatives mature during the next 18 months.  Derivatives recorded at fair value on our consolidated balance sheets as of December 31, 2013 and 2012 consisted of the following (in millions):
 
Derivative Assets
 
Derivative Liabilities
 
2013
 
2012
 
2013
 
2012
Derivatives Designated as Hedging Instruments
 

 
 

 
 

 
 

Foreign currency forward contracts - current(1)
$
9.1

 
$
5.0

 
$
9.8

 
$
.3

Foreign currency forward contracts - non-current(2)
1.2

 
.5

 
.6

 

 
10.3

 
5.5

 
10.4

 
.3

Derivatives not Designated as Hedging Instruments
 

 
 

 
 

 
 

Foreign currency forward contracts - current(1)
2.5

 
.2

 
.6

 
.2

 
2.5

 
.2

 
.6

 
.2

Total
$
12.8

 
$
5.7

 
$
11.0

 
$
.5


(1) 
Derivative assets and liabilities that have 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 consolidated balance sheets. 

(2) 
Derivative assets and liabilities that have maturity dates greater than 12 months from the respective balance sheet dates were included in other assets, net, and other liabilities, respectively, on our 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 December 31, 2013, we had cash flow hedges outstanding to exchange an aggregate $376.1 million for various foreign currencies, including $175.1 million for British pounds, $110.8 million for Brazilian reais, $35.3 million for Singapore dollars, $23.6 million for Australian dollars, $22.3 million for Euros and $9.0 million for other currencies.

Gains and losses, net of tax, on derivatives designated as cash flow hedges included in our consolidated statements of income and comprehensive income for each of the years in the three-year period ended December 31, 2013 were as follows (in millions):
 
(Loss) Gain Recognized in Other Comprehensive
Income ("OCI")
on Derivatives
  (Effective Portion)  
 
(Loss) Gain
Reclassified from
 AOCI into Income
(Effective Portion)(1)
 
(Loss) Gain Recognized
in Income on
Derivatives (Ineffective
Portion and Amount
Excluded from
Effectiveness Testing)(2)
 
2013
 
2012
 
2011
 
2013
 
2012
 
2011
 
2013
 
2012
 
2011
Interest rate lock contracts(3) 
$

 
$

 
$

 
$
(.4
)
 
$
(.5
)
 
$
(.5
)
 
$

 
$

 
$

Foreign currency forward contracts(4)
(5.8
)
 
8.7

 
.1

 
(1.6
)
 
.5

 
6.0

 
(.3
)
 
(.3
)
 
.3

Total
$
(5.8
)
 
$
8.7

 
$
.1

 
$
(2.0
)
 
$

 
$
5.5

 
$
(.3
)
 
$
(.3
)
 
$
.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) 
Gains and losses recognized in income for ineffectiveness and amounts excluded from effectiveness testing were included in other, net, in our consolidated statements of income.

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

(4) 
During the year ended December 31, 2013, $2.5 million of losses were reclassified from AOCI into contract drilling expense and $900,000 of gains were reclassified from AOCI into depreciation expense in our consolidated statement 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 December 31, 2013, we held derivatives not designated as hedging instruments to exchange an aggregate $208.9 million for various foreign currencies, including $97.9 million for Euros, $25.8 million for British pounds, $21.4 million for Swiss francs, $20.8 million for Brazilian reais, $16.5 million for Australian dollars, $13.9 million for Indonesian Rupiah and $12.6 million for other currencies.

Net gains of $3.6 million, $1.5 million and $500,000 associated with our derivatives not designated as hedging instruments were included in other, net, in our consolidated statements of income for the years ended December 31, 2013, 2012 and 2011, respectively.

As of December 31, 2013, the estimated amount of net losses associated with derivatives, net of tax, that will be reclassified to earnings during the next 12 months was as follows (in millions):
Net unrealized (losses) to be reclassified to contract drilling expense
 
$
(1.7
)
Net realized gains to be reclassified to depreciation expense
 
.9

Net realized (losses) to be reclassified to interest expense
 
(.4
)
Net (losses) to be reclassified to earnings
 
$
(1.2
)
Shareholders' Equity
Shareholders' Equity
SHAREHOLDERS' EQUITY
 
Activity in our various shareholders' equity accounts for each of the years in the three-year period ended December 31, 2013 was as follows (in millions):
 
 Shares 
 
 
Par Value 
 
 
Additional
Paid-in
Capital

 
Retained
Earnings

 
AOCI 
 
 
Treasury
Shares  

 
Noncontrolling
Interest

BALANCE, December 31, 2010
150.1

 
$
15.1

 
$
637.1

 
$
5,305.0

 
$
11.1

 
$
(8.8
)
 
$
5.5

Net income

 

 

 
600.4

 

 

 
5.2

Cash dividends paid

 

 

 
(292.3
)
 

 

 

Distributions to noncontrolling interests

 

 

 

 

 

 
(5.5
)
Shares issued under share-based compensation plans, net

 

 
39.7

 

 

 
.2

 

Shares issued in connection with the Merger
85.8

 
8.6

 
4,568.9

 

 

 

 

Fair value of share options assumed in connection with the Merger

 

 
35.4

 

 

 

 

Equity issuance costs

 

 
(70.5
)
 

 

 

 

Tax benefit from share-based compensation

 

 
.5

 

 

 

 

Repurchase of shares

 

 

 

 

 
(10.5
)
 

Share-based compensation cost

 

 
41.9

 

 

 

 

Net other comprehensive loss

 

 

 

 
(2.5
)
 

 

BALANCE, December 31, 2011
235.9

 
23.7

 
5,253.0

 
5,613.1

 
8.6

 
(19.1
)
 
5.2

Net income

 

 

 
1,169.7

 

 

 
7.0

Cash dividends paid

 

 

 
(348.1
)
 

 

 

Distributions to noncontrolling interests

 

 

 

 

 

 
(6.5
)
Shares issued in connection with share-based compensation plans, net
1.8

 
.2

 
35.3

 

 

 
(.1
)
 

Equity issuance cost refunds

 

 
66.7

 

 

 

 

Tax deficiency from share-based compensation

 

 
(1.0
)
 

 

 

 

Repurchase of shares

 

 

 

 

 
(11.8
)
 

Share-based compensation cost

 

 
44.7

 

 

 

 

Net other comprehensive income

 

 

 

 
11.5

 

 

BALANCE, December 31, 2012
237.7

 
23.9

 
5,398.7

 
6,434.7

 
20.1

 
(31.0
)
 
5.7

Net income

 

 

 
1,418.2

 

 

 
9.7

Cash dividends paid

 

 

 
(525.6
)
 

 

 

Distributions to noncontrolling interests

 

 

 

 

 

 
(8.1
)
Shares issued in connection with share-based compensation plans, net
1.9

 
.2

 
21.8

 

 

 
(.1
)
 

Tax benefit from share-based compensation

 

 
.1

 

 

 

 

Repurchase of shares

 

 

 

 

 
(14.1
)
 

Share-based compensation cost

 

 
46.6

 

 

 

 

Net other comprehensive loss

 

 

 

 
(1.9
)
 

 

BALANCE, December 31, 2013
239.6

 
$
24.1

 
$
5,467.2

 
$
7,327.3

 
$
18.2

 
$
(45.2
)
 
$
7.3



In May 2013, our shareholders approved a new share repurchase program. Subject to certain provisions under English law, including the requirement of Ensco plc to have sufficient distributable reserves, we may purchase up to a maximum of $2.0 billion in the aggregate under the program, but in no case more than 35.0 million shares. The program terminates in May 2018. As of December 31, 2013, there had been no share repurchases under this program.
Benefit Plans
Benefit Plans
BENEFIT PLANS
 
During 2012, our shareholders approved the 2012 Long-Term Incentive Plan (the “2012 LTIP”) effective January 1, 2012, to provide for the issuance of non-vested share awards, share option awards and performance awards (collectively "awards"). The 2012 LTIP is similar to and replaces the Company's previously adopted 2005 Long-Term Incentive Plan. Under the 2012 LTIP, 14.0 million shares were reserved for issuance as awards to officers, non-employee directors and key employees who are in a position to contribute materially to our growth, development and long-term success. As of December 31, 2013, there were 9.8 million shares available for issuance as awards under the 2012 LTIP. Awards may be satisfied by newly issued shares, including shares held by a subsidiary or affiliated entity, or by delivery of shares held in an affiliated employee benefit trust at the Company's discretion.

Non-Vested Share Awards
 
Grants of non-vested share awards generally vest at rates of 20% or 33% per year, as determined by a committee or subcommittee of the Board of Directors at the time of grant. Our non-vested share awards have voting and dividend rights effective on the date of grant. Compensation expense is measured using the market value of our shares on the date of grant and is recognized on a straight-line basis over the requisite service period (usually the vesting period).

The following table summarizes non-vested share award related compensation expense recognized during each of the years in the three-year period ended December 31, 2013 (in millions):
 
2013
 
2012
 
2011
Contract drilling
$
21.3

 
$
17.1

 
$
17.0

General and administrative
21.6

 
24.8

 
21.5

Non-vested share award related compensation expense included in operating expenses
42.9

 
41.9

 
38.5

Tax benefit
(5.4
)
 
(7.0
)
 
(6.9
)
Total non-vested share award related compensation expense included in net income
$
37.5

 
$
34.9

 
$
31.6



The following table summarizes the value of non-vested share awards granted and vested during each of the years in the three-year period ended December 31, 2013:
 
2013
 
2012
 
2011
Weighted-average grant-date fair value of
  non-vested share awards granted (per share)
$
59.79

 
$
48.32

 
$
52.50

Total fair value of non-vested share awards
  vested during the period (in millions)
$
49.6

 
$
42.5

 
$
41.0


    
The following table summarizes non-vested share award activity for the year ended December 31, 2013 (shares in thousands): 
 
Shares
 
Weighted-Average
Grant-Date
Fair Value
Non-vested share awards as of December 31, 2012
2,491

 
$
46.52

Granted
1,018

 
59.79

Vested
(829
)
 
49.96

Forfeited
(184
)
 
49.16

Non-vested share awards as of December 31, 2013
2,496

 
$
52.95



As of December 31, 2013, there was $100.5 million of total unrecognized compensation cost related to non-vested share awards, which is expected to be recognized over a weighted-average period of 2.2 years.

Share Option Awards

Share option awards ("options") granted to officers and employees generally become exercisable in 25% increments over a four-year period or 33% increments over a three-year period and, to the extent not exercised, expire on the seventh anniversary of the date of grant. Options granted to non-employee directors are immediately exercisable and, to the extent not exercised, expire on the seventh anniversary of the date of grant. The exercise price of options granted under the 2012 LTIP equals the market value of the underlying shares on the date of grant. As of December 31, 2013, options granted under predecessor or acquired plans to purchase 814,000 shares were outstanding under the 2012 LTIP.

The following table summarizes option related compensation expense recognized during each of the years in the three-year period ended December 31, 2013 (in millions):
 
2013
 
2012
 
2011
General and administrative
$
.8

 
$
1.6

 
$
2.5

Option related compensation expense included in operating expenses
.8

 
1.6

 
2.5

Tax benefit
(.1
)
 
(.3
)
 
(.5
)
Total option related compensation expense included in net income
$
.7

 
$
1.3

 
$
2.0


    
The fair value of each option is estimated on the date of grant using the Black-Scholes option valuation model.  We did not grant share option awards during the years ended December 31, 2013 and 2012. The following weighted-average assumptions were utilized in the Black-Scholes model for options granted during the year ended December 31, 2011:
 
 
2011
Risk-free interest rate
 
1.4
%
Expected term (in years)
 
3.7

Expected volatility
 
50.2
%
Dividend yield
 
2.6
%


Expected volatility is based on the historical volatility in the market price of our shares over the period of time equivalent to the expected term of the options granted. The expected term of options granted is derived from historical exercise patterns over a period of time equivalent to the contractual term of the options granted. We have not experienced significant differences in the historical exercise patterns among officers, employees and non-employee directors for them to be considered separately for valuation purposes. The risk-free interest rate is based on the implied yield of U.S. Treasury zero-coupon issues on the date of grant with a remaining term approximating the expected term of the options granted.
 
The following table summarizes option activity for the year ended December 31, 2013 (shares and intrinsic value in thousands, term in years):
 
Shares
 
Weighted-Average
Exercise Price
 
Weighted-Average
Contractual
Term
 
Intrinsic
Value
Outstanding as of December 31, 2012
1,346

 
$
46.05

 
 

 
 

Granted

 

 
 

 
 

Exercised
(506
)
 
43.96

 
 

 
 

Forfeited

 

 
 

 
 

Expired
(26
)
 
51.24

 
 

 
 

Outstanding as of December 31, 2013
814

 
$
47.18

 
2.5

 
$
9,065

Exercisable as of December 31, 2013
780

 
$
46.85

 
2.4

 
$
8,986



The following table summarizes the value of options granted and exercised during each of the years in the three-year period ended December 31, 2013:
 
2013
 
2012
 
2011
Weighted-average grant-date fair value of
options granted (per share)
$

 
$

 
$
19.05

Intrinsic value of options exercised during
the year (in millions)
$
8.7

 
$
17.8

 
$
17.2


   
The following table summarizes information about options outstanding as of December 31, 2013 (shares in thousands):
 
 
Options Outstanding

 
Options Exercisable

 
 
Number     
 
Weighted-Average
Remaining
 
Weighted-Average
 
Number
 
Weighted-Average
Exercise Prices

 
Outstanding
 
Contractual Life
 
Exercise Price  
 
Exercisable
 
Exercise Price
$21.54 - $40.99
 
247
 
3.1 years
 
$33.51
 
247
 
$33.51
41.18 - 54.30
 
229
 
3.5 years
 
43.77
 
217
 
43.22
55.34 - 60.74
 
338
 
1.3 years
 
59.50
 
316
 
59.79
 
 
814
 
2.5 years
 
$47.18
 
780
 
$46.85


As of December 31, 2013, there was $200,000 of total unrecognized compensation cost related to options, which is expected to be recognized over a weighted-average period of 0.3 years.

Performance Awards

Under the 2012 LTIP, performance awards may be issued to our senior executive officers. Performance awards granted prior to 2013 are payable in Ensco shares, cash or a combination thereof upon attainment of specified performance goals based on relative total shareholder return ("TSR") and absolute and relative return on capital employed ("ROCE"). Performance awards granted during 2013 are payable in Ensco shares upon attainment of specified performance goals based on relative TSR and relative ROCE. The performance goals are determined by a committee or subcommittee of the Board of Directors.

Performance awards generally vest at the end of a three-year measurement period based on attainment of performance goals. Our performance awards granted prior to 2013 are classified as liability awards with compensation expense measured based on the estimated probability of attainment of the specified performance goals and recognized on a straight-line basis over the requisite service period. The estimated probable outcome of attainment of the specified performance goals is based on historical experience, and any subsequent changes in this estimate are recognized as a cumulative adjustment to compensation cost in the period in which the change in estimate occurs. Our performance awards granted during 2013 are classified as equity awards with compensation expense recognized on a straight-line basis over the requisite service period. The estimated probable outcome of attainment of the specified performance goals is based on historical experience, and any subsequent changes in this estimate for the relative ROCE performance goal are recognized as a cumulative adjustment to compensation cost in the period in which the change in estimate occurs. The aggregate grant-date fair value of performance awards granted during 2013, 2012 and 2011 totaled $8.2 million, $7.2 million and $3.1 million, respectively. The aggregate fair value of performance awards vested during 2013, 2012 and 2011 totaled $7.4 million, $5.3 million and $5.6 million, respectively, all of which was paid in cash.

During the years ended December 31, 2013, 2012 and 2011, we recognized $6.6 million, $9.7 million and $6.7 million of compensation expense for performance awards, respectively, which was included in general and administrative expense in our consolidated statements of income.  As of December 31, 2013, there was $8.7 million of total unrecognized compensation cost related to unvested performance awards, which is expected to be recognized over a weighted-average period of 1.8 years.

Savings Plans

We have profit sharing plans (the "Ensco Savings Plan," the "Ensco Multinational Savings Plan" and the "Ensco Limited Retirement Plan"), which cover eligible employees, as defined within each plan.  The Ensco Savings Plan includes a 401(k) savings plan feature which allows eligible employees to make tax deferred contributions to the plan.  The Ensco Limited Retirement Plan also allows eligible employees to make tax deferred contributions to the plan. Contributions made to the Ensco Multinational Savings Plan may or may not qualify for tax deferral based on each plan participant's local tax requirements.
 
We generally make matching cash contributions to the plans.  We match 100% of the amount contributed by the employee up to a maximum of 5% of eligible salary. Matching contributions totaled $21.1 million, $16.5 million and $12.8 million for the years ended December 31, 2013, 2012 and 2011, respectively.  Profit sharing contributions made into the plans require approval of the Board of Directors and are generally paid in cash.  We recorded profit sharing contribution provisions of $55.3 million, $45.1 million and $21.1 million for the years ended December 31, 2013, 2012 and 2011, respectively.  Matching contributions and profit sharing contributions become vested in 33% increments upon completion of each initial year of service with all contributions becoming fully vested subsequent to achievement of three or more years of service.  We have 1.0 million shares reserved for issuance as matching contributions under the Ensco Savings Plan.
Goodwill and Other Intangible Assets and Liabilities
Goodwill and Other Intangible Assets and Liabilities
GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES

Goodwill

The carrying amount of goodwill as of December 31, 2013 is detailed below by reporting unit (in millions):
Floaters

$3,081.4

Jackups
192.6

Total

$3,274.0


    
Drilling Contract Intangibles
In connection with the Merger, we recorded intangible assets and liabilities representing the estimated fair values of the acquired company's firm drilling contracts in place at the Merger Date with favorable or unfavorable contract terms as compared to then-current market day rates for comparable drilling rigs. The gross carrying amounts of our drilling contract intangibles, which we consider to be definite-lived intangibles assets and intangible liabilities, and accumulated amortization as of December 31, 2013 and 2012 were as follows (in millions):
 
December 31, 2013
 
December 31, 2012
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Drilling contract intangible assets
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
209.0

 
$
(88.3
)
 
$
120.7

 
$
209.0

 
$
(36.4
)
 
$
172.6

Amortization

 
(42.3
)
 
(42.3
)
 

 
(51.9
)
 
(51.9
)
Balance, end of period
$
209.0

 
$
(130.6
)
 
$
78.4

 
$
209.0

 
$
(88.3
)
 
$
120.7

 
 
 
 
 
 
 
 
 
 
 
 
Drilling contract intangible liabilities
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
278.0

 
$
(160.0
)
 
$
118.0

 
$
278.0

 
$
(92.8
)
 
$
185.2

Amortization

 
(48.9
)
 
(48.9
)
 

 
(67.2
)
 
(67.2
)
Balance, end of period
$
278.0

 
$
(208.9
)
 
$
69.1

 
$
278.0

 
$
(160.0
)
 
$
118.0



The various factors considered in the determination of the fair values of our drilling contract intangibles were (1) the contracted day rate for each contract, (2) the remaining term of each contract, (3) the rig class and (4) the market conditions for each respective rig class at the Merger Date.  The intangible assets and liabilities were calculated based on the present value of the difference in cash inflows over the remaining contract term as compared to a hypothetical contract with the same remaining term at an estimated then-current market day rate using a risk-adjusted discount rate and an estimated effective income tax rate.  

We amortize the drilling contract intangibles to operating revenues over the respective remaining drilling contract terms on a straight-line basis. The estimated net (reduction) increase to future operating revenues related to the amortization of these intangible assets and liabilities as of December 31, 2013, is as follows (in millions):
2014
 
$
(4.3
)
2015
 
(4.5
)
2016
 
(.8
)
2017
 
.3

Total
 
$
(9.3
)
Income Taxes
Income Taxes
INCOME TAXES

We generated income of $173.4 million, $101.1 million and loss of $24.2 million from continuing operations before income taxes in the U.S. and $1.5 billion, $1.3 billion and $763.2 million of income from continuing operations before income taxes in non-U.S. countries for the years ended December 31, 2013, 2012 and 2011, respectively.

The following table summarizes components of the provision for income taxes from continuing operations for each of the years in the three-year period ended December 31, 2013 (in millions):
 
2013
 
2012
 
2011
Current income tax expense:
 

 
 

 
 

U.S.
$
94.2

 
$
45.0

 
$
36.4

Non-U.S.
107.3

 
166.0

 
88.3

 
201.5

 
211.0

 
124.7

Deferred income tax expense (benefit):
 

 
 

 
 

U.S.
19.8

 
29.6

 
(9.7
)
Non-U.S.
(8.6
)
 
(2.5
)
 
(3.4
)
 
11.2

 
27.1

 
(13.1
)
Total income tax expense
$
212.7

 
$
238.1

 
$
111.6


    
Deferred Taxes

The following table summarizes significant components of deferred income tax assets (liabilities) as of December 31, 2013 and 2012 (in millions):
 
 
2013
 
2012
Deferred tax assets:
 
 
 
 

Foreign tax credits
 
$
159.0

 
$
173.4

Premium on long-term debt
 
111.9

 
124.0

Net operating loss carryforwards
 
104.0

 
87.8

Employee benefits, including share-based compensation
 
41.7

 
33.4

Deferred revenue
 
19.4

 
22.7

Other
 
19.8

 
24.5

Total deferred tax assets
 
455.8

 
465.8

Valuation allowance
 
(232.6
)
 
(227.1
)
Net deferred tax assets
 
223.2

 
238.7

Deferred tax liabilities:
 
 

 
 

Property and equipment
 
(453.6
)
 
(472.9
)
Intercompany transfers of property
 
(29.2
)
 
(32.2
)
Deferred costs
 
(11.4
)
 
(20.9
)
Other
 
(24.0
)
 
(31.3
)
Total deferred tax liabilities
 
(518.2
)
 
(557.3
)
Net deferred tax liability
 
$
(295.0
)
 
$
(318.6
)
Net current deferred tax asset
 
$
20.9

 
$
13.8

Net noncurrent deferred tax liability
 
(315.9
)
 
(332.4
)
Net deferred tax liability
 
$
(295.0
)
 
$
(318.6
)

 
Unrecognized tax benefits of $21.0 million associated with a tax position taken in tax years with NOL carryforwards were presented as a reduction of deferred tax assets in accordance with Financial Accounting Standards Board ("FASB") ASC Topic 740 Income Taxes.    

The realization of substantially all of our deferred tax assets is dependent on generating sufficient taxable income during future periods in various jurisdictions in which we operate. Realization of certain of our deferred tax assets is not assured. We recognize a valuation allowance for deferred tax assets when it is more-likely-than-not that the benefit from the deferred tax asset will not be realized. The amount of deferred tax assets considered realizable could increase or decrease in the near-term if our estimates of future taxable income change.

As of December 31, 2013, we had deferred tax assets of $159.0 million for U.S. foreign tax credits (“FTC”) and $104.0 million related to $375.6 million of net operating loss (“NOL”) carryforwards, which can be used to reduce our income taxes payable in future years.  The FTC expires between 2017 and 2023.  NOL carryforwards, which were generated in various jurisdictions worldwide, include $231.4 million that do not expire and $144.2 million that will expire, if not utilized, beginning in 2014 through 2020.  Due to the uncertainty of realization, we have a $228.8 million valuation allowance on FTC and NOL carryforwards, primarily relating to countries where we no longer operate or do not expect to generate future taxable income.
 
Effective Tax Rate

     Ensco plc, our parent company, is domiciled and resident in the U.K. Our subsidiaries conduct operations and earn income in numerous countries and are subject to the laws of taxing jurisdictions within those countries. The income of our non-U.K. subsidiaries is not subject to U.K. taxation. As a result of frequent changes in the taxing jurisdictions in which our drilling rigs are operated and/or owned, changes in the overall level of our income and changes in tax laws, our consolidated effective income tax rate may vary substantially from one reporting period to another. Our consolidated effective income tax rate on continuing operations for each of the years in the three-year period ended December 31, 2013, differs from the U.K. statutory income tax rate as follows:
 
2013
 
2012
 
2011
U.K. statutory income tax rate
23.3
 %
 
24.5
 %
 
26.5
 %
Non-U.K. taxes
(13.7
)
 
(17.3
)
 
(18.1
)
Valuation allowance
1.9

 
4.8

 
4.7

Net expense associated with uncertain tax positions and other adjustments relating to prior years
.6

 
1.0

 
.8

Amortization of net deferred charges
   associated with intercompany rig sales
.1

 
.4

 
.8

Income taxes associated with restructuring transactions

 
3.7

 

Other
.6

 
(.1
)
 
.4

Effective income tax rate
12.8
 %
 
17.0
 %
 
15.1
 %


In December 2012, we completed the restructuring of certain subsidiaries of the acquired company and recognized $51.2 million of income tax expense in connection therewith.

Our consolidated effective income tax rate for 2013 includes various discrete tax items. The majority of discrete tax expense recognized during 2013 was attributable to the recognition of a $7.4 million liability for taxes associated with a $30.6 million reimbursement from the resolution of a dispute with the Mexican tax authority and a $7.0 million increase in the valuation allowance on U.S. FTC resulting from a restructuring transaction in December 2013. Our consolidated effective income tax rate for 2012 also includes the impact of various discrete tax items. The majority of discrete tax expense recognized during 2012 was attributable to income tax expense associated with certain restructuring transactions in December 2012 and net income tax expense associated with liabilities for unrecognized tax benefits and other adjustments relating to prior years. Excluding the impact of the aforementioned discrete tax items, our consolidated effective income tax rate for the years ended December 31, 2013 and 2012 was 12.5% and 12.3%, respectively. The increase in our consolidated effective income tax rate, excluding discrete tax items, was due to the change in taxing jurisdictions in which our drilling rigs are operated and/or owned that resulted in an increase in the relative components of our earnings generated in taxing jurisdictions with higher tax rates.    

Our consolidated effective income tax rate for 2011 includes the impact of various discrete tax items. The majority of discrete tax expense recognized during 2011 was attributable to the recognition of a liability for unrecognized tax benefits associated with a tax position taken in a prior year. Excluding the impact of the aforementioned discrete tax items, our consolidated effective income tax rate for the year ended December 31, 2011 was 13.0%. The decrease in our 2012 consolidated effective income tax rate, excluding discrete tax items, to 12.3% from 13.0% in 2011 was due to unrecognized benefits related to net operating losses and foreign tax credits of certain acquired subsidiaries in 2011 and changes in taxing jurisdictions in which our drilling rigs are operated and/or owned that resulted in an increase in the relative components of our earnings generated in taxing jurisdictions with lower tax rates.

Unrecognized Tax Benefits

Our tax positions are evaluated for recognition using a more-likely-than-not threshold, and those tax positions requiring recognition are measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon effective settlement with a taxing authority that has full knowledge of all relevant information.  As of December 31, 2013, we had $151.7 million of unrecognized tax benefits, of which $130.7 million was included in other liabilities on our consolidated balance sheet. Unrecognized tax benefits of $21.0 million associated with a tax position taken in tax years with NOL carryforwards were presented as a reduction of deferred tax assets in accordance with FASB ASC Topic 740 Income Taxes. If recognized, $127.4 million of our unrecognized tax benefits would impact our consolidated effective income tax rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2013 and 2012 is as follows (in millions):
 
 
2013
 
2012
Balance, beginning of year
 
$
110.7

 
$
53.6

   Increases in unrecognized tax benefits as a result
      of tax positions taken during prior years
 
35.8

 
21.3

   Increases in unrecognized tax benefits as a result
      of tax positions taken during the current year
 
10.0

 
60.7

   Decreases in unrecognized tax benefits as a result
      of tax positions taken during prior years
 
(3.7
)
 
(.4
)
Settlements with taxing authorities
 

 
(4.1
)
Lapse of applicable statutes of limitations
 
(1.1
)
 
(20.8