ENSCO PLC, 8-K filed on 11/29/2010
Current report filing
Document and Entity Information
3 Months Ended
Mar. 31, 2010
Document and Entity Information
 
Document Type
8-K 
Amendment Flag
FALSE 
Document Period End Date
2010-11-29 
Entity Registrant Name
Ensco plc 
Entity Central Index Key
0000314808 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (USD $)
In Millions, except Per Share data
3 Months Ended
Mar. 31,
2010
2009
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
 
OPERATING REVENUES
$ 449 
$ 485 
OPERATING EXPENSES
 
 
Contract drilling (exclusive of depreciation)
182 
162 
Depreciation
52 
44 
General and administrative
21 
12 
Total operating expenses
255 
217 
OPERATING INCOME
194 
268 
OTHER INCOME (EXPENSE), NET
(4)
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
197 
263 
PROVISION FOR INCOME TAXES
 
 
Current income tax expense
23 
45 
Deferred income tax expense
12 
Total provision for income taxes
35 
52 
INCOME FROM CONTINUING OPERATIONS
162 
211 
DISCONTINUED OPERATIONS
 
 
Income from discontinued operations, net
11 
Gain on disposal of discontinued operations, net
29 
 
Income from discontinued operations
30 
11 
NET INCOME
192 
222 
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS
(2)
(1)
NET INCOME ATTRIBUTABLE TO ENSCO
190 
221 
EARNINGS PER SHARE - BASIC
 
 
Continuing operations
1.12 
1.48 
Discontinued operations
0.21 
0.08 
Total earnings per share - basic
1.33 
1.56 
EARNINGS PER SHARE - DILUTED
 
 
Continuing operations
1.12 
1.48 
Discontinued operations
0.21 
0.08 
Total earnings per share - diluted
1.33 
1.56 
NET INCOME ATTRIBUTABLE TO ENSCO SHARES
 
 
Basic
187 
218 
Diluted
187 
218 
WEIGHTED-AVERAGE SHARES OUTSTANDING
 
 
Basic
141 
140 
Diluted
141 
140 
CASH DIVIDENDS PER SHARE
$ 0.025 
$ 0.025 
CONDENSED CONSOLIDATED BALANCE SHEETS (USD $)
In Millions
Mar. 31, 2010
Dec. 31, 2009
CURRENT ASSETS
 
 
Cash and cash equivalents
$ 1,229 
$ 1,141 
Accounts receivable, net
311 
325 
Other
161 
187 
Total current assets
1,701 
1,653 
PROPERTY AND EQUIPMENT, AT COST
6,133 
6,151 
Less accumulated depreciation
1,650 
1,674 
Property and equipment, net
4,483 
4,477 
GOODWILL
336 
336 
LONG-TERM INVESTMENTS
55 
61 
OTHER ASSETS, NET
208 
220 
Total assets
6,783 
6,747 
CURRENT LIABILITIES
 
 
Accounts payable - trade
98 
159 
Accrued liabilities and other
222 
309 
Current maturities of long-term debt
17 
17 
Total current liabilities
337 
485 
LONG-TERM DEBT
257 
257 
DEFERRED INCOME TAXES
379 
377 
OTHER LIABILITIES
110 
121 
COMMITMENTS AND CONTINGENCIES
 
 
ENSCO SHAREHOLDERS' EQUITY
 
 
Additional paid-in capital
611 
603 
Retained earnings
5,066 
4,879 
Accumulated other comprehensive income
Treasury shares, at cost, 7.5 million shares
(3)
(3)
Total Ensco shareholders' equity
5,691 
5,499 
NONCONTROLLING INTERESTS
Total equity
5,700 
5,507 
Total liabilities and shareholders' equity
6,783 
6,747 
Common Class A, par value in USD
 
 
ENSCO SHAREHOLDERS' EQUITY
 
 
Common shares, value
15 
15 
Common Class B, par value in GBP
 
 
ENSCO SHAREHOLDERS' EQUITY
 
 
Common shares, value
$ 0 
$ 0 
CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
Mar. 31, 2010
Dec. 31, 2009
Treasury shares, shares held
7,500,000 
7,500,000 
Common Class A, par value in USD
 
 
Common shares, par value
$ 0.1 
$ 0.1 
Common shares, shares authorized
450,000,000 
450,000,000 
Common shares, shares issued
150,000,000 
150,000,000 
Common Class B, par value in GBP
 
 
Common shares, par value
$ 1 
$ 1 
Common shares, shares authorized
50,000 
50,000 
Common shares, shares issued
50,000 
50,000 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Millions
3 Months Ended
Mar. 31,
2010
2009
OPERATING ACTIVITIES
 
 
Net income
$ 192 
$ 222 
Adjustments to reconcile net income to net cash provided by operating activities of continuing operations:
 
 
Depreciation expense
52 
44 
Deferred income tax expense
12 
Amortization expense
11 
Share-based compensation expense
11 
Income from discontinued operations, net
(0)
(11)
Gain on disposal of discontinued operations, net
(29)
 
Other
Changes in operating assets and liabilities:
 
 
Decrease in accounts receivable
15 
Decrease (increase) in other assets
10 
(25)
(Decrease) increase in liabilities
(112)
47 
Net cash provided by operating activities of continuing operations
160 
309 
INVESTING ACTIVITIES
 
 
Additions to property and equipment
(168)
(184)
Proceeds from disposal of discontinued operations
95 
Proceeds from disposition of assets
Net cash used in investing activities
(73)
(178)
FINANCING ACTIVITIES
 
 
Cash dividends paid
(4)
(4)
Other
(1)
(1)
Net cash used in financing activities
(5)
(5)
Effect of exchange rate changes on cash and cash equivalents
(1)
(0)
Net cash provided by operating activities of discontinued operations
11 
INCREASE IN CASH AND CASH EQUIVALENTS
88 
138 
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
1,141 
790 
CASH AND CASH EQUIVALENTS, END OF PERIOD
$ 1,229 
$ 927 
Unaudited Condensed Consolidated Financial Statements
Unaudited Condensed Consolidated Financial Statements
Note 1 - Unaudited Condensed Consolidated Financial Statements

       We prepared the accompanying condensed consolidated financial statements of Ensco plc and subsidiaries (the "Company", "Ensco", "we" or "us") in accordance with accounting principles generally accepted in the United States of America ("GAAP"), pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC") included in the instructions to Form 10-Q and Article 10 of Regulation S-X. The financial information included in this report is unaudited but, in our opinion, includes all adjustments (consisting of normal recurring adjustments) that are necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods presented. The December 31, 2009 condensed consolidated balance sheet data were derived from our 2009 audited consolidated financial statements but do not include all disclosures required by GAAP. Certain previously reported amounts have been reclassified to conform to the current year presentation. The preparation of our consolidated financial statements 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.

       The financial data for the quarters ended March 31, 2010 and 2009 included herein have been subjected to a limited review by KPMG LLP, our independent registered public accounting firm. The accompanying independent registered public accounting firm's review report is not a report within the meaning of Sections 7 and 11 of the Securities Act of 1933, and the independent registered public accounting firm's liability under Section 11 does not extend to it.

       Results of operations for the quarter ended March 31, 2010 are not necessarily indicative of the results of operations that will be realized for the year ending December 31, 2010. It is recommended that these condensed consolidated financial statements be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended December 31, 2009 included in our Annual Report on Form 10-K filed with the SEC on February 25, 2010, as updated by the Current Reports on Form 8-K dated June 8, 2010, August 13, 2010 and December 1, 2010.
Noncontrolling Interests
Noncontrolling Interests
Note 2 - Noncontrolling Interests

       Noncontrolling interests are classified as equity on our consolidated balance sheets, and net income attributable to noncontrolling interests is presented separately on our consolidated statements of income. In our Asia Pacific operating segment, local third parties hold a noncontrolling ownership interest in three of our subsidiaries. No changes in the ownership interests of these subsidiaries occurred during the quarters ended March 31, 2010 and 2009.

       The following table is a reconciliation of income from continuing operations attributable to Ensco for the quarters ended March 31, 2010 and 2009 (in millions):
 
 
  2010   
 
  2009    
               
Income from continuing operations
 
$162.0
   
               
$211.1
 
Income from continuing operations attributable to noncontrolling interests
 
(1.6
)
   
(1.2
)
Income from continuing operations attributable to Ensco
 
$160.4
     
$209.9
 
 
    The following table is a reconciliation of income from discontinued operations, net, attributable to Ensco for the quarters ended March 31, 2010 and 2009 (in millions):

 
                                    2010  
           2009   
         
Income from discontinued operations 
$29.6
 
$11.0
 
Income from discontinued operations attributable to
   noncontrolling interests 
(.2)
 
  (.2
)
Income from discontinued operations attributable to Ensco
$29.4
 
$10.8
 
Earnings Per Share
Earnings Per Share

Note 3 - 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 includes the dilutive effect of share options 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 the quarters ended March 31, 2010 and 2009 (in millions):

 
  2010   
 
  2009    
               
Net income attributable to Ensco
 
$189.8
     
$220.7
 
Net income allocated to non-vested share awards
 
(2.4
)
   
(2.7
)
Net income attributable to Ensco shares
 
$187.4
   
      
$218.0
 

       The following table is a reconciliation of the weighted-average shares used in our basic and diluted EPS computations for the quarters ended March 31, 2010 and 2009 (in millions):

 
  2010   
 
  2009    
               
Weighted-average shares - basic
 
140.7
     
140.1 
 
Potentially dilutive share options
 
.1
     
.0 
 
Weighted-average shares - diluted
 
140.8
     
140.1 
 

       Antidilutive share options totaling 1.0 million and 1.5 million were excluded from the computation of diluted EPS for the quarters ended March 31, 2010 and 2009, respectively.
Derivative Instruments
Derivative Instruments
Note 4 - Derivative Instruments
 
       Our functional currency is the U.S. dollar. As is customary in the oil and gas industry, a majority of our revenues are denominated in U.S. dollars, however, a portion of the revenues earned and expenses incurred by some of our subsidiaries are denominated in currencies other than the U.S. dollar ("foreign currencies"). These transactions are remeasured in U.S. dollars based on a combination of both current and historical exchange rates. We use foreign currency forward contracts ("derivatives") to reduce our exposure to various market risks, primarily foreign currency exchange rate risk. We maintain a foreign currency exchange rate risk management strategy that utilizes derivatives to reduce our exposure to unanticipated fluctuations in earnings and cash flows caused by changes in foreign currency exchange rates. Although no interest rate related derivatives were outstanding as of March 31, 2010 and December 31, 2009, we occasionally employ an interest rate risk management strategy that utilizes derivatives to minimize or eliminate unanticipated fluctuations in earnings and cash flows arising from changes in, and volatility of, interest rates. We minimize our credit risk relating to the counterparties of our derivatives by transacting with multiple, high-quality financial institutions, thereby limiting exposure to individual counterparties, and by monitoring the financial condition of our counterparties. We do not enter into derivatives for trading or other speculative purposes.
 
       All derivatives were recorded on our condensed consolidated balance sheets at fair value. Accounting for the gains and losses resulting from changes in the fair value of derivatives depends on the use of the derivative and whether it qualifies for hedge accounting. As of March 31, 2010 and December 31, 2009, our condensed consolidated balance sheets included net foreign currency derivative assets of $7.0 million and $13.2 million, respectively. See "Note 7 - Fair Value Measurements" for additional information on the fair value measurement of our derivatives.
 
       Derivatives recorded at fair value in our condensed consolidated balance sheets as of March 31, 2010 and December 31, 2009 consisted of the following (in millions):
 
 
        Derivative Assets       
        Derivative Liabilities     
     
March 31,
 
December 31,
 
March 31,
 
December 31,
     
    2010    
 
      2009      
 
    2010    
 
      2009      
                                         
Derivatives Designated as Hedging Instruments
                     
  Foreign currency forward contracts - current(1)
           
$  6.8       
     
$10.2         
     
$3.3        
     
$1.1        
 
  Foreign currency forward contracts - non-current(2)
           
3.4       
     
3.8         
     
--        
     
--         
 
             
10.2       
     
14.0         
     
3.3        
     
1.1        
 
                                         
Derivatives Not Designated as Hedging Instruments
                     
  Foreign currency forward contracts - current(1)
           
    .2       
     
    .3         
     
  .1        
     
  .0        
 
             
    .2       
     
    .3         
     
  .1        
     
  .0        
 
Total
           
$10.4       
     
$14.3         
     
$3.4        
     
$1.1        
 
 
(1)
 
Derivative assets and liabilities that have maturity dates equal to or less than twelve months from the respective balance sheet date were included in other current assets and accrued liabilities and other, respectively, on our condensed consolidated balance sheets.
 
(2)
 
Derivative assets and liabilities that have maturity dates greater than twelve months from the respective balance sheet date were included in other assets, net, and other liabilities, respectively, on our condensed consolidated balance sheets.
 
       We utilize derivatives designated as hedging instruments to hedge forecasted foreign currency denominated transactions ("cash flow hedges"), primarily to reduce our exposure to foreign currency exchange rate risk associated with the portion of our remaining ENSCO 8500 Series® construction obligations denominated in Singapore dollars and contract drilling expenses denominated in various foreign currencies. As of March 31, 2010, we had cash flow hedges outstanding to exchange an aggregate $241.6 million for various foreign currencies, including $160.7 million for Singapore dollars, $48.5 million for British pounds, $20.7 million for Australian dollars and $11.7 million for other currencies.
 
       Gains and losses on derivatives designated as cash flow hedges included in our condensed consolidated statements of income for the quarters ended March 31, 2010 and 2009 were as follows (in millions):
 
Derivatives Designated   
    as Cash Flow Hedges       
   Loss Recognized in
   Other Comprehensive
   Income ("OCI")
    (Effective Portion) 
 
(Loss) Gain
Reclassified from
Accumulated Other
Comprehensive Income
("AOCI") into Income
 (Effective Portion) 
 
   Gain (Loss)
   Recognized in Income on
   Derivatives (Ineffective
   Portion and Amount
   Excluded from
   Effectiveness Testing)(1)
   
  2010  
 
  2009  
     
  2010  
 
  2009  
     
    2010  
 
  2009  
 
                                   
Interest rate lock contracts(2)
 
$   --        
 
$     --    
     
$(.1)  
 
$    (.2)  
     
$ --      
 
$   --     
 
Foreign currency forward contracts(3)
 
(1.4)       
 
(15.4)  
     
1.4   
 
(9.8)  
     
.0      
 
(6.5)   
 
Total
 
$(1.4)       
 
$(15.4)  
     
$1.3   
 
$(10.0)  
     
$.0      
 
$(6.5)   
 
 
(1)
 
Gains and losses recognized in income for ineffectiveness and amounts excluded from effectiveness testing were included in other income (expense), net, in our condensed consolidated statements of income.
 
(2)
 
Losses on derivatives reclassified from AOCI into income (effective portion) were included in other income (expense), net, in our condensed consolidated statements of income.
 
(3)
 
Gains and losses on derivatives reclassified from AOCI into income (effective portion) were included in contract drilling expense in our condensed consolidated statements of income.
 
       We have net assets and liabilities denominated in numerous foreign currencies and use various methods to manage our exposure to foreign currency exchange rate risk. We predominantly structure our drilling contracts in U.S. dollars which significantly reduces the portion of our cash flows and assets denominated in foreign currencies. We occasionally enter into derivatives that hedge the fair value of recognized foreign currency denominated assets or liabilities but do not designate such derivatives as hedging instruments. In these situations, a natural hedging relationship generally exists whereby changes in the fair value of the derivatives offset changes in the fair value of the underlying hedged items. As of March 31, 2010, we had derivatives not designated as hedging instruments outstanding to exchange an aggregate $58.6 million for various foreign currencies, including $24.5 million for Singapore dollars, $15.5 million for Australian dollars, $7.5 million for British pounds and $11.1 million for other currencies.
 
       Net gains of $600,000 and net losses of $1.0 million associated with our derivatives not designated as hedging instruments were included in other income (expense), net, in our condensed consolidated statements of income for the quarters ended March 31, 2010 and 2009, respectively.
 
       As of March 31, 2010, the estimated amount of net gains associated with derivative instruments, net of tax, that will be reclassified to earnings during the next twelve months was as follows (in millions):

Net unrealized gains to be reclassified to contract drilling expense
   
$ .6
   
Net realized losses to be reclassified to other income (expense), net
   
(.4
)     
 
          Net gains to be reclassified to earnings
   
$ .2
 
Accrued Liabilities and Other
Accrued Liabilities and Other
Note 5 - Accrued Liabilities and Other

       Accrued liabilities and other as of March 31, 2010 and December 31, 2009 consisted of the following (in millions):

 
 2010         
 2009   
           
Deferred revenue
 
$  63.6
   
$  89.0  
Wreckage and debris removal
 
50.3
   
50.3  
Taxes
 
49.7
   
97.3  
Personnel costs
 
29.2
   
48.6  
Other
 
29.0
   
23.4  
   
$221.8
   
$308.6 
Comprehensive Income
Comprehensive Income
Note 6 - Comprehensive Income

       Accumulated other comprehensive income as of March 31, 2010 and December 31, 2009 was comprised of net gains and losses on derivative instruments, net of tax. The components of other comprehensive loss, net of tax, for the quarters ended March 31, 2010 and 2009 were as follows (in millions):

 
  2010      
        2009 
 
           
Net income
 
$191.6
 
$222.1
 
Other comprehensive (loss) income:
         
    Net change in fair value of derivatives
 
(1.4
)
(15.4
)
    Reclassification of gains and losses on
       derivative instruments from other comprehensive
       (income) loss into net income
 
(1.3
)
10.0
 
             Net other comprehensive loss
 
(2.7
)
(5.4
)
Comprehensive income
 
188.9
 
216.7
 
Comprehensive income attributable to noncontrolling interests
 
(1.8
)
(1.4
)
Comprehensive income attributable to Ensco
 
$187.1
 
$215.3
 
Fair Value Measurements
Fair Value Measurements
Note 7 - Fair Value Measurements

       The following fair value hierarchy table categorizes information regarding our financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2010 and December 31, 2009 (in millions):

 
Quoted Prices in
  Significant
     
 
Active Markets
  Other
Significant
   
 
for
  Observable
Unobservable
   
 
Identical Assets
  Inputs
Inputs
   
 
    (Level 1)    
      (Level 2)    
   (Level 3)   
     Total 
 
                             
As of March 31, 2010
                           
                             
Auction rate securities
     
$    --    
   
$    --  
   
$55.4         
   
$55.4
 
Supplemental executive retirement plan
   assets
     
20.4    
   
--  
   
--        
   
20.4
 
Derivatives, net
     
--    
   
7.0  
   
--        
   
7.0
 
Total financial assets
     
$20.4    
   
$  7.0  
   
$55.4         
   
$82.8
 
                             
As of December 31, 2009
                           
                             
Auction rate securities
     
$    --    
   
$    --  
   
$60.5         
   
$60.5
 
Supplemental executive retirement plan
   assets
     
18.7    
   
--  
   
--          
   
18.7
 
Derivatives, net
     
--    
   
13.2  
   
--          
   
13.2
 
Total financial assets
     
$18.7    
   
$13.2  
   
$60.5          
   
$92.4
 

    Auction Rate Securities

       As of March 31, 2010 and December 31, 2009, we held long-term debt instruments with variable interest rates that periodically reset through an auction process ("auction rate securities") totaling $61.4 million and $66.8 million (par value), respectively. These auction rate securities were classified as long-term investments on our condensed consolidated balance sheets. Our auction rate securities were originally acquired in January 2008 and have maturity dates ranging from 2025 to 2047. Our auction rate securities were measured at fair value on a recurring basis using significant Level 3 inputs as of March 31, 2010 and December 31, 2009. The following table summarizes the fair value measurements of our auction rate securities using significant Level 3 inputs, and changes therein, for the quarters ended March 31, 2010 and 2009 (in millions):

 
  2010    
              2009  
           
Beginning Balance
 
$60.5 
 
$64.2 
 
Sales
 
(5.4)
 
(2.3)
 
Unrealized gains*
 
.3 
 
.0 
 
Transfers in and/or out of Level 3
 
-- 
 
-- 
 
Ending balance
 
$55.4 
 
$61.9 
 

       *
Unrealized gains are included in other income (expense), net, in our condensed consolidated statements of income.
 
       Before utilizing Level 3 inputs in our fair value measurements, we considered whether observable inputs were available. As a result of continued auction failures, quoted prices for our auction rate securities did not exist as of March 31, 2010. Accordingly, we concluded that Level 1 inputs were not available. Brokerage statements received from the four broker/dealers that held our auction rate securities included their estimated market value as of March 31, 2010. Three broker/dealers valued our auction rate securities at par and the fourth valued our auction rate securities at 91% of par. Due to the lack of transparency into the methodologies used to determine the estimated market values, we concluded that estimated market values provided on our brokerage statements do not constitute valid inputs, and we do not utilize them in measuring the fair value of our auction rate securities.

       We determined that use of a valuation model was the best available technique for measuring the fair value of our auction rate securities. We used an income approach valuation model to estimate the price that would be received in exchange for our auction rate securities in an orderly transaction between market participants ("exit price") as of March 31, 2010. The exit price was derived as the weighted-average present value of expected cash flows over various periods of illiquidity, using a risk-adjusted discount rate based on the credit risk and liquidity risk of our auction rate securities.

       While our valuation model was based on both Level 2 (credit quality and interest rates) and Level 3 inputs, we determined that our Level 3 inputs were significant to the overall fair value measurement of our auction rate securities, particularly the estimates of risk-adjusted discount rates and ranges of expected periods of illiquidity. We have the ability to maintain our investment in these securities until they are redeemed, repurchased or sold in a market that facilitates orderly transactions.

    Supplemental Executive Retirement Plan Assets

       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 condensed consolidated balance sheets as of March 31, 2010 and December 31, 2009. The fair value measurement of assets held in the SERP was based on quoted market prices.

    Derivatives

       Our derivatives were measured at fair value on a recurring basis using Level 2 inputs as of March 31, 2010 and December 31, 2009. See "Note 4 - 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 measurement of our derivatives was 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 March 31, 2010 and December 31, 2009 were as follows (in millions):

 
March 31,
December 31,
 
                 2010                
                2009                
   
Estimated
 
Estimated
 
Carrying
  Fair
Carrying
  Fair
 
  Value  
   Value  
  Value  
   Value  
         
7.20% Debentures
 
$148.9     
 
$156.0     
 
$148.9     
 
$155.9     
 
6.36% Bonds, including current maturities
 
76.0     
 
85.2     
 
76.0     
 
85.8     
 
4.65% Bonds, including current maturities
 
49.5     
 
53.9     
 
49.5     
 
53.8     
 
 
 
       The estimated fair value of our 7.20% Debentures was determined using quoted market prices. The estimated fair values of our 6.36% Bonds and 4.65% Bonds were determined using an income approach valuation model. The estimated fair values of our cash and cash equivalents, receivables, trade payables and other liabilities approximated their carrying values as of March 31, 2010 and December 31, 2009.
Discontinued Operations
Discontinued Operations
Note 8 - Discontinued Operations
 
    ENSCO 60
 
    In September 2010, we executed a Memorandum of Agreement (the "MOA") to sell ENSCO 60 for $26.0 million. The MOA requires the sale to close in the near-term and the buyer to pay us a non-refundable deposit of $2.6 million. 
 
    Based on the facts and circumstances and our conclusion that it was probable the sale of the rig would occur within one year, we classified ENSCO 60 as held-for-sale as of September 30, 2010.  The rig's aggregate net book value and inventory totaled $21.8 million as of March 31, 2010.  ENSCO 60 operating results were reclassified as discontinued operations in our condensed consolidated statements of income for the quarters ended March 31, 2010 and 2009 and previously were included within our North and South America operating segment.
 
    Rig Sales
 
    In April 2010, we sold jackup rig ENSCO 57 for $47.1 million, of which two deposits of $4.7 million each were received in December 2009 and March 2010, respectively.   The rig's aggregate net book value and other assets as of March 31, 2010 totaled $29.5 million.
 
    In March 2010, we sold jackup rigs ENSCO 50 and ENSCO 51 for an aggregate $94.7 million, of which a deposit of $4.7 million was received in December 2009.  We recognized an aggregate pre-tax gain of $33.9 million in connection with the disposals of ENSCO 50 and ENSCO 51, which was included in gain on disposal of discontinued operations, net, in our condensed consolidated statement of income for the quarter ended March 31, 2010.  The rigs' aggregate net book value and other assets on the date of sale totaled $60.8 million.   ENSCO 50, ENSCO 51 and ENSCO 57 operating results were reclassified as discontinued operations in our condensed consolidated statements of income for the quarters ended March 31, 2010 and 2009.
 
    ENSCO 69
 
       From May 2007 to June 2009, ENSCO 69 was contracted to Petrosucre, a subsidiary of Petróleos de Venezuela S.A., the national oil company of Venezuela. In January 2009, we suspended drilling operations on ENSCO 69 after Petrosucre failed to satisfy its contractual obligations and meet commitments relative to the payment of past due invoices. Petrosucre then took over complete control of ENSCO 69 drilling operations utilizing Petrosucre employees and a portion of the Venezuelan rig crews we had utilized.
 
       On June 4, 2009, after Petrosucre's failure to satisfy its contractual payment obligations, failure to reach a mutually acceptable agreement with us and denial of our request to demobilize ENSCO 69 from Venezuela, Petrosucre advised that it would not return the rig and would continue to operate it without our consent. Petrosucre further advised that it would release ENSCO 69 after a six-month period, subject to a mutually agreed accord addressing the resolution of all remaining obligations under the ENSCO 69 drilling contract. On June 6, 2009, we terminated our contract with Petrosucre and removed all remaining Ensco employees from the rig.

       Due to Petrosucre's failure to satisfy its contractual obligations and meet payment commitments, and in consideration of the Venezuelan government's nationalization of assets owned by other international oil and gas companies and oilfield service companies, we concluded it was remote that ENSCO 69 would be returned to us by Petrosucre and operated again by Ensco. Therefore, we recorded the disposal of ENSCO 69 during the second quarter of 2009 and reclassified its operating results as discontinued operations.

       In November 2009, we executed an agreement with Petrosucre to mitigate our losses and resolve issues relative to outstanding amounts owed by Petrosucre for drilling operations performed by Ensco through the date of termination of the drilling contract in June 2009 (the "agreement").  The agreement also required Petrosucre to compensate us for its use of the rig, and we recognized $6.9 million of pre-tax income for the quarter ended March 31, 2010 associated with collections under the agreement.  Although the agreement obligates Petrosucre to make additional payments for its use of the rig through March 31, 2010, the associated income was not recognized in our condensed consolidated statement of income, as collectability was not reasonably assured.
 
    On August 24, 2010, possession of ENSCO 69 was returned to Ensco. Due to the return of ENSCO 69 from Petrosucre and our ability to significantly influence the future operations of the rig and to incur significant future cash flows related to those operations until the pending insurance claim is resolved and possibly thereafter, ENSCO 69 operating results were reclassified as continuing operations for the quarters ended March 31, 2010 and 2009.

       There can be no assurances relative to the recovery of outstanding contract entitlements, insurance recovery and related pending litigation or the imposition of customs duties in relation to the rig's recent presence in Venezuela. See "Note 9 - Contingencies" for additional information on insurance and legal remedies related to ENSCO 69.

       The following table summarizes income from discontinued operations for the quarters ended March 31, 2010 and 2009 (in millions)

 
 2010         
 2009  
           
Revenues
 
$12.6
   
$29.3  
Operating expenses
 
10.8
   
16.0  
Operating income before income taxes
 
1.8
   
13.3  
Income tax expense
 
1.4
   
2.3  
Gain on disposal of discontinued operations, net
 
29.2
   
--  
   Income from discontinued operations
 
$29.6
   
$11.0  

       Debt and interest expense are not allocated to our discontinued operations.
Contingencies
Contingencies
Note 9 - Contingencies

    FCPA Internal Investigation

       Following disclosures by other offshore service companies announcing internal investigations involving the legality of amounts paid to and by customs brokers in connection with temporary importation of rigs and vessels into Nigeria, the Audit Committee of our Board of Directors and management commenced an internal investigation in July 2007. The investigation initially focused on our payments to customs brokers relating to the temporary importation of ENSCO 100, our only rig that operated offshore Nigeria during the pertinent period.

       As is customary for companies operating offshore Nigeria, we had engaged independent customs brokers to process customs clearance of routine shipments of equipment, materials and supplies and to process the ENSCO 100 temporary importation permits, extensions and renewals. One or more of the customs brokers that our subsidiary in Nigeria used to obtain the ENSCO 100 temporary import permits, extensions and renewals also provided this service to other offshore service companies that have undertaken Foreign Corrupt Practices Act ("FCPA") compliance internal investigations.

       The principal purpose of our investigation was to determine whether any of the payments made to or by our customs brokers were inappropriate under the anti-bribery provisions of the FCPA or whether any violations of the recordkeeping or internal accounting control provisions of the FCPA occurred. Our Audit Committee engaged a Washington, D.C. law firm with significant experience in investigating and advising upon FCPA matters to assist in the internal investigation.

       Following notification to the Audit Committee and to KPMG LLP, our independent registered public accounting firm, in consultation with the Audit Committee's external legal counsel, we voluntarily notified the United States Department of Justice and the SEC that we had commenced an internal investigation. We expressed our intention to cooperate with both agencies, comply with their directives and fully disclose the results of the investigation. The internal investigation process has involved extensive reviews of documents and records, as well as production to the authorities, and interviews of relevant personnel. In addition to the temporary importation of ENSCO 100, the investigation has examined our customs clearance of routine shipments and immigration activities in Nigeria.

       Our internal investigation has essentially been concluded. Discussions were held with the authorities to review the results of the investigation and discuss associated matters during 2009 and the first quarter of 2010. We expect to discuss a possible disposition with the authorities in the near-term.

       Although we believe the U.S. authorities will take into account our voluntary disclosure, our cooperation with the agencies and the remediation and compliance enhancement activities that are underway, we are unable to predict the ultimate disposition of this matter, whether we will be charged with violation of the anti-bribery, recordkeeping or internal accounting control provisions of the FCPA or whether the scope of the investigation will be extended to other issues in Nigeria or to other countries. We also are unable to predict what potential corrective measures, fines, sanctions or other remedies, if any, the agencies may seek against us or any of our employees.
 
       In November 2008, our Board of Directors approved enhanced FCPA compliance recommendations issued by the Audit Committee's external legal counsel, and the Company embarked upon an enhanced compliance initiative that included appointment of a Chief Compliance Officer and a Director - Corporate Compliance. We engaged consultants to assist us in implementing the compliance recommendations approved by our Board of Directors, which include an enhanced compliance policy, increased training and testing, prescribed contractual provisions for our service providers that interface with foreign government officials, due diligence for the selection of such service providers and an increased Company-wide awareness initiative that includes periodic issuance of FCPA Alerts.

       Since ENSCO 100 completed its contract commitment and departed Nigeria in August 2007, this matter is not expected to have a material effect on or disrupt our current operations. As noted above, we are unable to predict the outcome of this matter or estimate the extent to which we may be exposed to any resulting potential liability, sanctions or significant additional expense.

    ENSCO 74 Loss

       In September 2008, ENSCO 74 was lost as a result of Hurricane Ike in the Gulf of Mexico. Portions of its legs remained underwater adjacent to the customer's platform, and we conducted extensive aerial and sonar reconnaissance but did not locate the rig hull. The rig was a total loss, as defined under the terms of our insurance policies.

       In March 2009, the sunken rig hull of ENSCO 74 was located approximately 95 miles from the original drilling location when it was struck by an oil tanker. Following discovery of the sunken rig hull, we removed the accessible hydrocarbons onboard the rig and began planning for removal of the wreckage. As an interim measure, the wreckage has been appropriately marked, and the U.S. Coast Guard has issued a Notice to Mariners. We recently commenced removal of the hull wreckage and related debris.

       Physical damage to our rigs caused by a hurricane, the associated "sue and labor" costs to mitigate the insured loss and removal, salvage and recovery costs are all covered by our property insurance policies subject to a $50.0 million per occurrence self-insured retention. The insured value of ENSCO 74 was $100.0 million, and we have received the net $50.0 million due under our policies for loss of the rig.

       Coverage for ENSCO 74 sue and labor costs and wreckage and debris removal costs under our property insurance policies is limited to $25.0 million and $50.0 million, respectively. Supplemental wreckage and debris removal coverage is provided under our liability insurance policies, subject to an annual aggregate limit of $500.0 million. We also have a customer contractual indemnification that provides for reimbursement of any ENSCO 74 wreckage and debris removal costs that are not recovered under our insurance policies.

       We believe it is probable that we are required to remove the leg sections of ENSCO 74 remaining adjacent to the customer's platform because they may interfere with the customer's future operations. We also believe it is probable that we are required to remove the ENSCO 74 rig hull and related debris from the seabed due to the navigational risk it imposes. We estimate the leg removal costs to range from $16.0 million to $30.0 million and the hull and related debris removal costs to range from $36.0 million to $55.0 million. We expect the cost of removal of the legs and the hull and related debris to be fully covered by our insurance without any additional retention.
 

       A $16.0 million liability, representing the low end of the range of estimated leg removal costs, and a corresponding receivable for recovery of those costs was recorded as of March 31, 2010. A $34.3 million liability, representing the low end of the range of estimated remaining hull and related debris removal costs, and a corresponding receivable for recovery of those costs was recorded as of March 31, 2010. As of March 31, 2010, $1.7 million of wreckage and debris removal costs had been incurred and paid, primarily related to removal of hydrocarbons from the rig. The remaining estimated aggregate $50.3 million liability for leg and hull and related debris removal costs was included in accrued liabilities and other on our March 31, 2010 condensed consolidated balance sheet. Of the aggregate $52.0 million receivable for recovery of those costs, $1.2 million was included in other current assets and $50.8 million was included in other assets, net, on our March 31, 2010 condensed consolidated balance sheet.

       In March 2009, we received notice from legal counsel representing certain underwriters in a subrogation claim alleging that ENSCO 74 caused a pipeline to rupture during Hurricane Ike. On September 4, 2009, civil litigation was filed seeking damages for the cost of repairs and business interruption in an amount in excess of $26.0 million. Based on information currently available, primarily the adequacy of available defenses, we have not concluded that it is probable a liability exists with respect to this matter.

       In March 2009, the owner of the oil tanker that struck the hull of ENSCO 74 commenced civil litigation against us seeking monetary damages of $10.0 million for losses incurred when the tanker struck the sunken hull of ENSCO 74. Based on information currently available, primarily the adequacy of available defenses, we have not concluded that it is probable a liability exists with respect to this matter.

       We filed a petition for exoneration or limitation of liability under U.S. admiralty and maritime law in September 2009. The petition seeks exoneration from or limitation of liability for any and all injury, loss or damage caused, occasioned or occurred in relation to the ENSCO 74 loss in September 2008. The owner of the tanker that struck the hull of ENSCO 74 and the owners of four subsea pipelines have presented claims in the exoneration/limitation proceedings.

       We have liability insurance policies that provide coverage for claims such as the tanker and pipeline claims as well as removal of wreckage and debris in excess of the property insurance policy sublimit, subject to a $10.0 million per occurrence self-insured retention for third-party claims and an annual aggregate limit of $500.0 million. We believe all liabilities associated with the ENSCO 74 loss during Hurricane Ike resulted from a single occurrence under the terms of the applicable insurance policies. However, legal counsel for certain liability underwriters have asserted that the liability claims arise from separate occurrences. In the event of multiple occurrences, the self-insured retention is $15.0 million for two occurrences and $1.0 million for each occurrence thereafter.

       Although we do not expect final disposition of the claims associated with the ENSCO 74 loss to have a material adverse effect upon our financial position, operating results or cash flows, there can be no assurances as to the ultimate outcome.

    ENSCO 69

       We have filed an insurance claim under our package policy, which includes coverage for certain political risks, and are evaluating legal remedies against Petrosucre for contractual and other ENSCO 69 related damages. ENSCO 69 has an insured value of $65.0 million under our package policy, subject to a $10.0 million deductible.

       By letter dated September 30, 2009, legal counsel acting for the package policy underwriters denied coverage under the package policy and reserved rights. On March 15, 2010, underwriters commenced litigation for purposes of enforcing mediation under the disputes clause of our package policy and precluding us from pursuing litigation in the United States. On that date, we commenced litigation to recover on our political risk package policy claim. Our lawsuit seeks recovery under the policy for the loss of ENSCO 69 and includes claims for wrongful denial of coverage, breach of contract, breach of the Texas insurance code, failure to timely respond to the claim and bad faith. Our lawsuit seeks actual damages in the amount of $55.0 million (insured value of $65.0 million less a $10.0 million deductible), punitive damages and attorneys' fees. On March 30, 2010, we obtained a temporary restraining order barring underwriters from pursuing the lawsuit in the U.K.
 
       We were unable to conclude that collection of insurance proceeds associated with the loss of ENSCO 69 was probable as of March 31, 2010. Accordingly, no ENSCO 69 related insurance receivables were recorded on our condensed consolidated balance sheet as of March 31, 2010. See "Note 8 - Discontinued Operations" for additional information on ENSCO 69.

    ENSCO 29 Wreck Removal

       A portion of the ENSCO 29 platform drilling rig was lost over the side of a customer's platform as a result of Hurricane Katrina during 2005. Although beneficial ownership of ENSCO 29 was transferred to our insurance underwriters when the rig was determined to be a total loss, management believes we may be legally required to remove ENSCO 29 wreckage and debris from the seabed and currently estimates the removal cost to range from $5.0 million to $15.0 million. Our property insurance policies include coverage for ENSCO 29 wreckage and debris removal costs up to $3.8 million. We also have liability insurance policies that provide specified coverage for wreckage and debris removal costs in excess of the $3.8 million coverage provided under our property insurance policies.

       Our liability insurance underwriters have issued letters reserving rights and effectively denying coverage by questioning the applicability of coverage for the potential ENSCO 29 wreckage and debris removal costs. During 2007, we commenced litigation against certain underwriters alleging breach of contract, wrongful denial, bad faith and other claims which seek a declaration that removal of wreckage and debris is covered under our liability insurance, monetary damages, attorneys' fees and other remedies. The matter is scheduled for trial in August 2010.

       While we anticipate that any ENSCO 29 wreckage and debris removal costs incurred will be largely or fully covered by insurance, a $1.2 million provision, representing the portion of the $5.0 million low end of the range of estimated removal cost we believe is subject to liability insurance coverage, was recognized during 2006.
    
    Asbestos Litigation

       During 2004, we and certain current and former subsidiaries were named as defendants, along with numerous other third-party companies as co-defendants, in three multi-party lawsuits filed in Mississippi. The lawsuits sought an unspecified amount of monetary damages on behalf of individuals alleging personal injury or death, primarily under the Jones Act, purportedly resulting from exposure to asbestos on drilling rigs and associated facilities during the period 1965 through 1986.

       In compliance with the Mississippi Rules of Civil Procedure, the individual claimants in the original multi-party lawsuits whose claims were not dismissed were ordered to file either new or amended single plaintiff complaints naming the specific defendant(s) against whom they intended to pursue claims. As a result, out of more than 600 initial multi-party claims, we have been named as a defendant by 65 individual plaintiffs. Of these claims, 62 claims or lawsuits are pending in Mississippi state courts and three are pending in the U.S. District Court as a result of their removal from state court.
 
       To date, written discovery and plaintiff depositions have taken place in eight cases involving us. While several cases have been selected for trial during 2010 and 2011, none of the cases pending against us in Mississippi state court are included within those selected cases.

       We intend to vigorously defend against these claims and have filed responsive pleadings preserving all defenses and challenges to jurisdiction and venue. However, discovery is still ongoing and, therefore, available information regarding the nature of all pending claims is limited. At present, we cannot reasonably determine how many of the claimants may have valid claims under the Jones Act or estimate a range of potential liability exposure, if any.

       In addition to the pending cases in Mississippi, we have three other asbestos or lung injury claims pending against us in litigation in various other jurisdictions. Although we do not expect the final disposition of the Mississippi and other asbestos or lung injury lawsuits to have a material adverse effect upon our financial position, operating results or cash flows, there can be no assurances as to the ultimate outcome of the lawsuits.

    Working Time Directive

       Legislation known as the U.K. Working Time Directive ("WTD") was introduced during 2003 and may be applicable to our employees and employees of other drilling contractors that work offshore in U.K. territorial waters or in the U.K. sector of the North Sea. Certain trade unions representing offshore employees have claimed that drilling contractors are not in compliance with the WTD in respect of paid time off (vacation time) for employees working offshore on a rotational basis (generally equal time working and off).

       A Labor Tribunal in Aberdeen, Scotland, rendered decisions in claims involving other offshore drilling contractors and offshore service companies in February 2008. The Tribunal decisions effectively held that employers of offshore workers in the U.K. sector employed on an equal time on/time off rotation are obligated to accord such rotating personnel two-weeks annual paid time off from their scheduled offshore work assignment period. Both sides of the matter, employee and employer groups, appealed the Tribunal decision. The appeals were heard by the Employment Appeal Tribunal ("EAT") in December 2008.

       In an opinion rendered in March 2009, the EAT determined that the time off work enjoyed by U.K. offshore oil and gas workers, typically 26 weeks per year, meets the amount of annual leave employers must provide to employees under the WTD. The employer group was successful in all arguments on appeal, as the EAT determined that the statutory entitlement to annual leave under the WTD can be discharged through normal field break arrangements for offshore workers. As a consequence of the EAT decision, an equal on/off time offshore rotation has been deemed to be fully compliant with the WTD. The employee group (led by a trade union) appealed the EAT decision to the highest court in Scotland (the Court of Session). A hearing on the appeal is expected in June 2010.

       Based on information currently available, we do not expect the ultimate resolution of these matters to have a material adverse effect on our financial position, operating results or cash flows.
 

    Other Matters
 
       In addition to the foregoing, we are named defendants or parties in certain other lawsuits, claims or proceedings incidental to our business and are involved from time to time as parties to governmental investigations or proceedings, including matters related to taxation, arising in the ordinary course of business. Although the outcome of such lawsuits or other proceedings cannot be predicted with certainty and the amount of any liability that could arise with respect to such lawsuits or other proceedings cannot be predicted accurately, we do not expect these matters to have a material adverse effect on our financial position, operating results or cash flows.
Segment Information
Segment Information
Note 10 - Segment Information
 
       Our business consists of four operating segments: (1) Deepwater, (2) Asia Pacific, (3) Europe and Africa and (4) North and South America. Each of our four operating segments provides one service, contract drilling. Segment information for the quarters ended March 31, 2010 and 2009 is presented below. General and administrative expense is not allocated to our operating segments for purposes of measuring segment operating income and is included in "Reconciling Items." Assets not allocated to our operating segments consisted primarily of cash and cash equivalents and goodwill and are also included in "Reconciling Items."
 
Three Months Ended March 31, 2010
(in millions)
 
       
North
     
     
Europe
and
Operating
   
   
Asia
and
South
Segments
Reconciling
  Consolidated
 
Deepwater
Pacific
 Africa 
America
    Total    
    Items    
     Total    
               
Revenues
   
$   130.4
   
$   132.0
   
$  87.6
   
$  98.6
   
$   448.6
   
$         --  
   
$   448.6  
   
Operating expenses
   Contract drilling (exclusive
      of depreciation)
   
45.0
   
51.8
   
47.1
   
38.5
   
182.4
   
--  
   
182.4  
   
   Depreciation
   
9.8
   
18.3
   
11.8
   
11.5
   
51.4
   
.3  
   
51.7  
   
   General and administrative
   
--
   
--
   
--
   
--
   
--
   
20.6  
   
20.6  
   
Operating income (loss)
   
$     75.6
   
$     61.9
   
$  28.7
   
$  48.6
   
$   214.8
   
$   (20.9) 
   
$   193.9  
   
Total assets
   
$2,551.0
   
$1,179.0
   
$755.1
   
$822.1
   
$5,307.2
   
$1,475.5  
   
$6,782.7  
   
 
Three Months Ended March 31, 2009
(in millions)
 
       
North
     
     
Europe
and
Operating
   
   
Asia
and
South
Segments
Reconciling
  Consolidated
 
Deepwater
Pacific
 Africa 
America
    Total    
    Items    
     Total    
               
Revenues
   
$       --  
   
$   195.8
   
$196.4
   
$  92.6
   
$   484.8
   
$      --  
   
$   484.8  
   
Operating expenses
   Contract drilling (exclusive
      of depreciation)
   
4.8
   
57.2
   
53.5
   
46.0
   
161.5
   
--  
   
161.5  
   
   Depreciation
   
2.3
   
18.3
   
10.9
   
11.9
   
43.4
   
.3  
   
43.7  
   
   General and administrative
   
--
   
--
   
--
   
--
   
--
   
12.0  
   
12.0  
   
Operating (loss) income
   
$     (7.1
)
 
$   120.3
   
$132.0
   
$  34.7
   
$   279.9
   
$ (12.3) 
   
$   267.6  
   
Total assets
   
$1,877.7
   
$1,338.4
   
$808.5
   
$807.1
   
$4,831.7
   
$1,253.2
   
$6,084.9