ENSCO PLC, 10-Q filed on 10/22/2009
Quarterly Report
Document and Entity Information
Oct. 21, 2009
9 Months Ended
Sep. 30, 2009
Document Type
 
10-Q 
Amendment Flag
 
FALSE 
Document Period End Date
 
09/30/2009 
Entity Registrant Name
 
ENSCO International Incorporated 
Entity Central Index Key
 
0000314808 
Current Fiscal Year End Date
 
12/31 
Entity Well-known Seasoned Issuer
 
Yes 
Entity Voluntary Filers
 
No 
Entity Current Reporting Status
 
Yes 
Entity Filer Category
 
Large Accelerated Filer 
Entity Common Stock, Shares Outstanding
142,506,762 
 
Condensed Consolidated Statements of Income (USD $)
In Millions, except Per Share data
3 Months Ended
Sep. 30, 2009
9 Months Ended
Sep. 30, 2009
3 Months Ended
Sep. 30, 2008
9 Months Ended
Sep. 30, 2008
Operating revenues
$ 425.4 
$ 1,446.3 
$ 619.5 
$ 1,788.8 
Net Income (Loss) Attributable to Parent [Abstract]
 
 
 
 
Net Income (Loss), Including Portion Attributable to Noncontrolling Interest [Abstract]
 
 
 
 
Income (Loss) from Continuing Operations, Including Portion Attributable to Noncontrolling Interest [Abstract]
 
 
 
 
Income (Loss) from Continuing Operations before Equity Method Investments, Income Taxes, Extraordinary Items, Cumulative Effects of Changes in Accounting Principles, Noncontrolling Interest [Abstract]
 
 
 
 
Operating Income (Loss) [Abstract]
 
 
 
 
Costs and Expenses [Abstract]
 
 
 
 
Operating Expenses
 
 
 
 
Contract drilling (exclusive of depreciation)
183.3 
524.8 
185.2 
566.8 
Depreciation expense
53.3 
149.8 
47.0 
139.4 
General and administrative
13.6 
41.6 
15.2 
41.7 
Total operating expenses
250.2 
716.2 
247.4 
747.9 
Operating income
175.2 
730.1 
372.1 
1,040.9 
Other income (expense), net
3.6 
6.2 
(6.5)
4.8 
Income from continuing operations before income taxes
178.8 
736.3 
365.6 
1,045.7 
Provision For Income Taxes
 
 
 
 
Current income tax expense
17.3 
104.9 
59.1 
175.9 
Deferred income tax expense
11.1 
28.9 
9.7 
16.1 
Total provision for income taxes
28.4 
133.8 
68.8 
192.0 
Income from continuing operations
150.4 
602.5 
296.8 
853.7 
Discontinued Operations
 
 
 
 
Income (loss) from discontinued operations, net
0.4 
(16.4)
10.4 
25.1 
Loss on disposal of discontinued operations, net
0.0 
(11.8)
(23.5)
(23.5)
Total income (loss) from discontinued operations, net
0.4 
(28.2)
(13.1)
1.6 
Net income
150.8 
574.3 
283.7 
855.3 
Less: Net income attributable to noncontrolling interests
(1.1)
(3.6)
(1.4)
(4.3)
Net income attributable to Ensco
149.7 
570.7 
282.3 
851.0 
Earnings (Loss) Per Common Share - Basic
 
 
 
 
Continuing operations
1.05 
4.22 
2.07 
5.91 
Discontinued operations
0.00 
(0.20)
(0.09)
0.01 
Total earnings (loss) per common share - basic
1.05 
4.02 
1.98 
5.92 
Earnings (Loss) Per Common Share - Diluted
 
 
 
 
Continuing operations
1.05 
4.21 
2.06 
5.90 
Discontinued operations
0.00 
(0.20)
(0.09)
0.01 
Total earnings (loss) per common share - diluted
1.05 
4.01 
1.97 
5.91 
Net Income Attributable To Ensco Common Shares
 
 
 
 
Basic
147.8 
563.7 
278.8 
842.1 
Diluted
147.8 
563.7 
278.8 
842.1 
Weighted-Average Common Shares Outstanding
 
 
 
 
Basic
140.7 
140.3 
141.1 
142.2 
Diluted
140.7 
140.4 
141.4 
142.6 
Cash dividends per common share
$ 0.025 
$ 0.075 
$ 0.025 
$ 0.075 
Condensed Consolidated Balance Sheets (USD $)
In Millions
Sep. 30, 2009
Dec. 31, 2008
Assets [Abstract]
 
 
Current Assets
 
 
Cash and cash equivalents
$ 1,017.2 
$ 789.6 
Accounts receivable, net of allowance of $25.1 and $20.6
341.2 
482.7 
Other
192.4 
128.6 
Total current assets
1,550.8 
1,400.9 
Noncurrent Assets
 
 
Property and equipment, at cost
5,951.8 
5,376.3 
Less accumulated depreciation
1,621.3 
1,505.0 
Property and equipment, net
4,330.5 
3,871.3 
Goodwill
336.2 
336.2 
Long-term investments
60.9 
64.2 
Other assets, net
176.8 
157.5 
Total assets
6,455.2 
5,830.1 
Liabilities and Stockholders' Equity [Abstract]
 
 
Current Liabilities
 
 
Accounts payable
28.8 
30.0 
Accrued liabilities and other
357.0 
380.7 
Current maturities of long-term debt
17.2 
17.2 
Total current liabilities
403.0 
427.9 
Noncurrent Liabilities
 
 
Long-term debt
265.8 
274.3 
Deferred income taxes
372.0 
340.5 
Other liabilities
122.9 
103.8 
Commitments and contingencies
 
 
Stockholders' Equity, Including Portion Attributable to Noncontrolling Interest [Abstract]
 
 
Ensco Stockholders' Equity
 
 
Preferred stock, $1 par value, 20.0 shares authorized and none issued
0.0 
0.0 
Common stock, $.10 par value, 250.0 shares authorized, 142.6 and 181.9 shares issued
14.3 
18.2 
Additional paid-in capital
594.0 
1,761.2 
Retained earnings
4,674.0 
4,114.0 
Accumulated other comprehensive income (loss)
4.1 
(17.0)
Treasury stock, at cost, .1 and 40.1 shares
(2.2)
(1,199.5)
Total Ensco stockholders' equity
5,284.2 
4,676.9 
Noncontrolling interests
7.3 
6.7 
Total equity
5,291.5 
4,683.6 
Total liabilities and equity
$ 6,455.2 
$ 5,830.1 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Millions, except Per Share data
Sep. 30, 2009
Dec. 31, 2008
Accounts Receivable
 
 
Allowance for doubtful accounts
$ 25.1 
$ 20.6 
Preferred Stock
 
 
Preferred stock, par value
1.00 
1.00 
Preferred stock, shares authorized
20.0 
20.0 
Preferred stock, shares issued
0.0 
0.0 
Common Stock
 
 
Common stock, par value
0.10 
0.10 
Common stock, shares authorized
250.0 
250.0 
Common stock, shares issued
142.6 
181.9 
Treasury Stock
 
 
Treasury stock, shares
0.1 
40.1 
Condensed Consolidated Statements of Cash Flows (USD $)
In Millions
9 Months Ended
Sep. 30,
2009
2008
Cash and Cash Equivalents, Period Increase (Decrease) [Abstract]
 
 
Operating Activities
 
 
Net income
$ 574.3 
$ 855.3 
Adjustments to reconcile net income to net cash provided by operating activities of continuing operations:
 
 
Depreciation expense
149.8 
139.4 
Deferred income tax expense
28.9 
16.1 
Share-based compensation expense
25.1 
21.1 
Amortization expense
23.5 
24.6 
Loss (income) from discontinued operations, net
16.4 
(25.1)
Loss on disposal of discontinued operations, net
11.8 
23.5 
Other
2.9 
(2.2)
Changes in operating assets and liabilities:
 
 
Decrease (increase) in accounts receivable
154.4 
(86.6)
Decrease (increase) in trading securities
3.6 
(73.2)
Increase in other assets
(76.0)
(31.2)
Increase (decrease) in accounts payable and other liabilities
23.5 
(127.9)
Net cash provided by operating activities of continuing operations
938.2 
733.8 
Investing Activities
 
 
Additions to property and equipment
(684.7)
(653.9)
Proceeds from disposal of discontinued operations
4.9 
0.0 
Proceeds from disposition of assets
1.9 
5.1 
Purchase of short-term investments
0.0 
(38.4)
Net cash used in investing activities
(677.9)
(687.2)
Financing Activities
 
 
Cash dividends paid
(10.7)
(10.7)
Proceeds from exercise of stock options
9.0 
27.3 
Reduction of long-term borrowings
(8.6)
(10.5)
Repurchase of common stock
(6.3)
(259.5)
Other
(5.1)
2.1 
Net cash used in financing activities
(21.7)
(251.3)
Effect of exchange rate changes on cash and cash equivalents
0.3 
(7.6)
Net cash (used in) provided by operating activities of discontinued operations
(11.3)
30.4 
Increase (decrease) in cash and cash equivalents
227.6 
(181.9)
Cash and cash equivalents, beginning of period
789.6 
629.5 
Cash and cash equivalents, end of period
$ 1,017.2 
$ 447.6 
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 International Incorporated 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, 2008 condensed consolidated balance sheet data were derived from our 2008 audited consolidated financial statements, as updated in the Current Report on Form 8-K dated October 13, 2009, 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 condensed 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 three-month and nine-month periods ended September 30, 2009 and 2008 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 three-month and nine-month periods ended September 30, 2009 are not necessarily indicative of the results of operations that will be realized for the year ending December 31, 2009. 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, 2008 included in our Annual Report on Form 10-K dated February 26, 2009, as updated in the Current Report on Form 8-K dated October 13, 2009.
Noncontrolling Interests
Noncontrolling Interests

Note 2 - Noncontrolling Interests

       On January 1, 2009, we adopted certain provisions of FASB ASC 810-10 (previously SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements"). This standard clarifies that a noncontrolling interest should be reported as equity in the consolidated financial statements and requires net income attributable to both the parent and the noncontrolling interest to be disclosed separately on the face of the consolidated statement of income. These presentation and disclosure provisions require retrospective application to all prior periods presented.

       Noncontrolling interests were classified as equity on our condensed consolidated balance sheets as of September 30, 2009 and December 31, 2008, and net income attributable to noncontrolling interests was presented separately on our condensed consolidated statements of income for the three-month and nine-month periods ended September 30, 2009 and 2008. Local third parties hold a noncontrolling ownership interest in three of our international subsidiaries. No changes in the ownership interests of these subsidiaries occurred during the nine-month period ended September 30, 2009.

 

       The following table is a reconciliation of income from continuing operations attributable to Ensco during the three-month and nine-month periods ended September 30, 2009 and 2008 (in millions):

 

 

           Three Months

           Nine Months

 

     Ended September 30,

    Ended September 30,

 

      2009 

 2008         

      2009 

        2008 

 

 

 

 

 

Income from continuing operations

 

$150.4

 

$296.8

 

$602.5

 

$853.7

 

Income from continuing operations attributable to
     noncontrolling interests

 

(1.1

)

(1.4

)

(3.6

)

(4.3

)


Income from continuing operations attributable to Ensco

 

$149.3

 

$295.4

 

$598.9

 

$849.4

 


 

       Income (loss) from discontinued operations, net, for the three-month and nine-month periods ended September 30, 2009 and 2008 was attributable to Ensco.
Earnings Per Share
Earnings Per Share

Note 3 - Earnings Per Share

       On January 1, 2009, we adopted certain provisions of FASB ASC 260-10-45 (previously FASB Staff Position EITF 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities"). This standard addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share ("EPS") under the two-class method. Non-vested share awards granted to our employees and non-employee directors contain nonforfeitable dividend rights and, therefore, are now considered participating securities. We have prepared our current period basic and diluted EPS computations and retrospectively revised our comparative prior period computations to exclude net income allocated to non-vested share awards.

       The following table is a reconciliation of net income attributable to Ensco common shares used in our basic and diluted EPS computations for the three-month and nine-month periods ended September 30, 2009 and 2008 (in millions):

 

 

            Three Months

           Nine Months

 

     Ended September 30,

    Ended September 30,

 

      2009 

      2008 

      2009 

        2008 

 

 

 

 

 

Net income attributable to Ensco

 

$149.7

 

$282.3

 

$570.7

 

$851.0

 

Net income allocated to non-vested share awards

 

(1.9

)

(3.5

)

(7.0

)

(8.9

)


Net income attributable to Ensco common shares

 

$147.8

 

$278.8

 

$563.7

 

$842.1

 


 

       The following table is a reconciliation of the weighted-average common shares used in our basic and diluted EPS computations for the three-month and nine-month periods ended September 30, 2009 and 2008 (in millions):

 

 

            Three Months

             Nine Months

 

      Ended September 30,

     Ended September 30,

 

       2009 

       2008 

       2009 

        2008 

 

 

 

 

 

Weighted-average common shares - basic

 

140.7

 

141.1

 

140.3

 

142.2 

 

Potentially dilutive share options

 

.0

 

.3

 

.1

 

.4 

 


Weighted-average common shares - diluted

 

140.7

 

141.4

 

140.4

 

142.6 

 


 

       Antidilutive share options totaling 1.1 million and 361,000 were excluded from the computation of diluted EPS during the three-month periods ended September 30, 2009 and 2008, respectively. Antidilutive share options totaling 1.3 million and 546,000 were excluded from the computation of diluted EPS during the nine-month periods ended September 30, 2009 and 2008, respectively.
Derivative Financial Instruments
Derivative Financial Instruments

 

Note 4 - Derivative Financial Instruments

       On January 1, 2009, we adopted certain disclosure provisions of FASB ASC 815-10-50 (previously SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities"). These provisions require enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under FASB ASC 815 (previously SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities") and its related interpretations and (c) how derivative instruments and related hedged items affect an entity's financial position, operating results and cash flows.

       We use derivative financial instruments ("derivatives") to reduce our exposure to various market risks, primarily foreign currency risk. We maintain a foreign currency risk management strategy that utilizes derivatives to reduce our exposure to unanticipated fluctuations in earnings and cash flows caused by changes in foreign currency exchange rates. Although no interest rate related derivatives were outstanding as of September 30, 2009 and December 31, 2008, 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 our derivative counterparties 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 September 30, 2009 and December 31, 2008, our condensed consolidated balance sheets included net foreign currency derivative assets of $12.5 million and net foreign currency derivative liabilities of $20.3 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 September 30, 2009 and December 31, 2008 consisted of the following (in millions):

 

 

            Derivative Assets          

            Derivative Liabilities        

 

 

 

September 30,

 

December 31,

 

September 30,

 

December 31,

 

 

 

        2009       

 

      2008      

 

        2009       

 

      2008      

 

Derivatives Designated as Hedging Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts - current(1)

 

 

 

 

 

 

$12.2        

 

 

 

$  .3         

 

 

 

$3.2         

 

 

 

$25.8      

 

Foreign currency forward contracts - non-current(2)

 

 

 

 

 

 

3.3        

 

 

 

5.1         

 

 

 

--         

 

 

 

.0      

 


 

 

 

 

 

 

 

15.5        

 

 

 

5.4         

 

 

 

3.2         

 

 

 

25.8      

 


 

Derivatives not Designated as Hedging Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts - current(1)

 

 

 

 

 

 

  .2        

 

 

 

  .1         

 

 

 

  --         

 

 

 

    .0      

 


 

 

 

 

 

 

 

  .2        

 

 

 

  .1         

 

 

 

  --         

 

 

 

    .0      

 


Total

 

 

 

 

 

 

$15.7        

 

 

 

$5.5         

 

 

 

$3.2         

 

 

 

$25.8      

 


 

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

 

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

 

       We utilize derivatives to hedge forecasted foreign currency denominated transactions ("cash flow hedges"), primarily to reduce our exposure to foreign currency risk associated with the portion of our remaining ENSCO 8500 Series® construction obligations denominated in Singapore dollars and contract drilling expenses denominated in various other currencies. As of September 30, 2009, we had cash flow hedges outstanding to exchange an aggregate $339.3 million for foreign currencies, including $237.3 million for Singapore dollars, $58.7 million for British pounds, $23.1 million for Australian dollars and $20.2 million for various other foreign currencies.

       Gains and losses on derivatives designated as cash flow hedges included in our condensed consolidated statements of income for the three-month and nine-month periods ended September 30, 2009 and 2008 were as follows (in millions):

 

Three Months Ended September 30, 2009 and 2008

Derivatives Designated   
    as Cash Flow Hedges       

Gain (Loss)
Recognized in
Other Comprehensive
Income ("OCI")
on Derivatives
   (Effective Portion)   

 

Gain (Loss)
Reclassified
from Accumulated
OCI into Income
 (Effective Portion) 

 

Loss Recognized
in Income on
Derivatives (Ineffective
Portion and Amount
Excluded from
Effectiveness Testing)
(1)

 

 

   2009  

 

  2008   

 

 

 

  2009  

 

  2008  

 

 

 

   2009  

 

  2008   

 

Foreign currency forward contracts(2)

 

$7.8     

 

$(11.7)  

 

 

 

$ .8   

 

$(.1)  

 

 

 

$(.6)   

 

$(.9)    

 

Interest rate lock contracts(3)

 

    --     

 

  --   

 

 

 

  (.2)  

 

 (.1)  

 

 

 

   --    

 

  --     

 


Total

 

$7.8     

 

$(11.7)  

 

 

 

$ .6   

 

$(.2)  

 

 

 

$(.6)   

 

$(.9)    

 


 

Nine Months Ended September 30, 2009 and 2008

Derivatives Designated   
    as Cash Flow Hedges       

Gain (Loss)
Recognized in
OCI on Derivatives
 (Effective Portion) 

 

(Loss) Gain
Reclassified
from Accumulated
OCI into Income
 (Effective Portion) 

 

Loss Recognized
in Income on
Derivatives (Ineffective
Portion and Amount
Excluded from
Effectiveness Testing)
(1)

 

 

    2009  

 

  2008  

 

 

 

  2009  

 

  2008   

 

 

 

    2009  

 

  2008  

 

Foreign currency forward contracts(2)

 

$6.6    

 

$(6.3)  

 

 

 

$(14.0)

 

$4.5   

 

 

 

$(3.0) 

 

$(.8)   

 

Interest rate lock contracts(3)

 

--    

 

  --   

 

 

 

    (.5)

 

 (.5)  

 

 

 

   --   

 

 --    

 


Total

 

$6.6    

 

$(6.3)  

 

 

 

$(14.5)

 

$4.0   

 

 

 

$(3.0) 

 

$(.8)   

 


 

(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)     Gains and losses on derivatives reclassified from accumulated other comprehensive income ("AOCI") into income

 

(3)     Losses on derivatives reclassified from AOCI into income (effective portion) were included in other income (expense), net, 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 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, or the derivatives otherwise do not qualify for hedge accounting. In these situations, a natural hedging relationship generally exists whereby changes in the fair value of the derivatives offset changes in the fair value of the underlying hedged items. As of September 30, 2009, we had derivatives not designated as hedging instruments outstanding to exchange an aggregate $31.7 million for foreign currencies, including $9.5 million for Australian dollars, $7.6 million for British pounds, $6.2 million for Mexican pesos, $3.6 million for Danish kroner and $4.8 million for various other foreign currencies.

       Net gains of $1.6 million and net losses of $4.6 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 September 30, 2009 and 2008, respectively. Net gains of $3.8 million and $100,000 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 nine-month periods ended September 30, 2009 and 2008, respectively.

       If we were to incur a hypothetical 10% adverse change in foreign currency exchange rates, net unrealized losses associated with our foreign currency denominated assets and liabilities and related derivatives as of September 30, 2009 would approximate $32.5 million, including $24.2 million related to our Singapore dollar exposures. All of our outstanding derivatives mature during the next three years.

       As of September 30, 2009, the estimated amount of net gains associated with derivatives, net of tax, that will be reclassified to earnings during the next twelve months was as follows (in millions):

 

Net gains to be reclassified to contract drilling expense

 

 

 

$3.7

 

Net losses to be reclassified to other income (expense), net

 

 

 

(.6

)


Net gains to be reclassified to earnings

 

 

 

$3.1

 


Stockholders' Equity
Stockholders' Equity

Note 5 - Stockholders' Equity

       In August 2009, under authorization from our Board of Directors, 40.2 million treasury shares with a historical cost totaling $1,203.7 million were retired. As of September 30, 2009 and December 31, 2008, our treasury stock balance totaled $2.2 million and $1,199.5 million, respectively, our additional paid-in capital balance totaled $594.0 million and $1,761.2 million, respectively, and our common stock balance totaled $14.3 million and $18.2 million, respectively.
Comprehensive Income
Comprehensive Income

Note 6 - Comprehensive Income

       Accumulated other comprehensive income (loss) as of September 30, 2009 and December 31, 2008 was comprised of net gains and losses on derivative instruments, net of tax. The components of comprehensive income, net of tax, for the three-month and nine-month periods ended September 30, 2009 and 2008 were as follows (in millions):

 

 

 Three Months Ended

  Nine Months Ended

 

        September 30,      

          September 30,      

 

  2009      

  2008  

    2009  

    2008  

 

Net income

 

$150.8

 

$283.7

 

$574.3

 

$855.3

 

Other comprehensive income:

 

    Net change in fair value of derivatives

 

7.8

 

(11.7

)

6.6

 

(6.3

)

    Reclassification of gains and losses on

 

 

 

 

 

 

 

 

 

      derivatives from other comprehensive (income)

 

 

 

 

 

 

 

 

 

      loss into net income

 

(.6

)

.2

 

14.5

 

(4.0

)


            Net other comprehensive income (loss)

 

7.2

 

(11.5

)

21.1

 

(10.3

)


Comprehensive income

 

158.0

 

272.2

 

595.4

 

845.0

 

Comprehensive income attributable to
  noncontrolling interests

 

(1.1

)

(1.4

)

(3.6

)

(4.3

)


Comprehensive income attributable to Ensco

 

$156.9

 

$270.8

 

$591.8

 

$840.7

 


Fair Value Measurements
Fair Value Measurements

Note 7 - Fair Value Measurements

       The following fair value hierarchy table categorizes information regarding our assets and liabilities measured at fair value on a recurring basis as of September 30, 2009 and December 31, 2008 (in millions):

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

 

Quoted Prices in

Significant

 

 

 

Active Markets

Other

Significant

 

 

for

Observable

Unobservable

 

 

Identical Assets

Inputs

Inputs

 

 

    (Level 1)    

    (Level 2)    

    (Level 3)    

   Total     

 

As of September 30, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

 

 

$    --    

 

 

$    --  

 

 

$60.9      

 

 

$60.9

 

Supplemental executive retirement plan assets

 

 

 

17.6    

 

 

--  

 

 

--      

 

 

17.6

 

Derivative instruments, net

 

 

 

--    

 

 

12.5  

 

 

--      

 

 

12.5

 


Total financial assets

 

 

 

$17.6    

 

 

$12.5  

 

 

$60.9      

 

 

$91.0

 


 

As of December 31, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

 

 

$    --    

 

 

$    --  

 

 

$64.2      

 

 

$64.2

 

Supplemental executive retirement plan assets

 

 

 

12.7    

 

 

--  

 

 

--      

 

 

12.7

 


Total financial assets

 

 

 

$12.7    

 

 

$    --  

 

 

$64.2      

 

 

$76.9

 


 

Derivative instruments, net

 

 

 

$    --    

 

 

$20.3  

 

 

$   --       

 

 

$20.3

 


Total financial liabilities

 

 

 

$    --    

 

 

$20.3  

 

 

$   --       

 

 

$20.3

 


    Auction Rate Securities

       As of September 30, 2009 and December 31, 2008, we held long-term debt instruments with variable interest rates that periodically reset through an auction process ("auction rate securities") totaling $68.7 million and $72.3 million (par value), respectively. 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 September 30, 2009 and December 31, 2008. The following table summarizes the fair value measurements of our auction rate securities using significant Level 3 inputs, and changes therein, for the three-month and nine-month periods ended September 30, 2009 and 2008 (in millions):

 

 

   Three Months Ended

  Nine Months Ended

 

         September 30,      

          September 30,      

 

  2009     

    2008  

   2009  

      2008  

 

Beginning Balance

 

$61.6 

 

$70.0

 

$64.2  

 

$     -- 

 

    (Sales) purchases, net

 

(1.0)

 

(.1

)

(3.6) 

 

73.2 

 

    Unrealized gains (losses)*

 

.3 

 

.3

 

.3  

 

(3.0)

 

    Realized losses

 

-- 

 

--

 

--  

 

-- 

 

    Transfers in and/or out of Level 3

 

-- 

 

--

 

--  

 

-- 

 


Ending balance

 

$60.9 

 

$70.2 

 

$60.9  

 

$70.2 

 


 

*

Unrealized gains (losses) are included in other (expense), net, in the 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 September 30, 2009. Accordingly, we concluded that Level 1 inputs were not available. Brokerage statements received from the five broker/dealers that held our auction rate securities included their estimated market value as of September 30, 2009. Four broker/dealers valued our auction rate securities at par and the fifth valued our auction rate securities at 93% of par. Due to the lack of transparency into the methodologies used to determine the estimated market values, we have 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 September 30, 2009. 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 that was 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 most 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 believe that 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 Plans

       The ENSCO Supplemental Executive Retirement Plans (the "SERP") are non-qualified plans where eligible employees and non-employee directors may 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 September 30, 2009 and December 31, 2008. The fair value measurement of assets held in the SERP was based on quoted market prices.

    Derivative Instruments

       Our derivative instruments were measured at fair value on a recurring basis using Level 2 inputs as of September 30, 2009 and December 31, 2008. See "Note 4 - Derivative Financial Instruments" for additional information on our derivatives, including a description of our foreign currency hedging activities and related methodologies used to manage foreign currency 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 September 30, 2009 and December 31, 2008 were as follows (in millions):

 

 

September 30,

December 31,

 

                 2009                

                2008                

 

 

Estimated

 

Estimated

 

Carrying

  Fair

Carrying

  Fair

 

  Value  

   Value  

  Value  

   Value  

 

 

 

 

4.65% Bonds, including current maturities

 

$  51.8     

 

$  57.1     

 

$  54.0     

 

$  62.1     

 

6.36% Bonds, including current maturities

 

82.3     

 

93.4     

 

88.7     

 

103.9     

 

7.20% Debentures

 

148.8     

 

145.8     

 

148.8     

 

140.3     

 

 

       The estimated fair value of our 7.20% Debentures was determined using quoted market prices. The estimated fair values of our 4.65% Bonds and 6.36% Bonds were determined using an income approach valuation model. The estimated fair value of our cash and cash equivalents, receivables, trade payables and other liabilities approximated their carrying values as of September 30, 2009 and December 31, 2008.
Discontinued Operations
Discontinued Operations

Note 8 - Discontinued Operations

    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 ("PDVSA"). PDVSA subsidiaries reportedly lack funds and generally have not been paying their contractors and service providers since the latter portions of 2008. 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. When Petrosucre initially advised us that it temporarily was taking over operations on the rig, we placed our supervisory rig personnel on ENSCO 69 to observe Petrosucre's operations.

       On April 30, 2009, we submitted a notice of termination to Petrosucre for non-payment of past due invoices. The terms of the ENSCO 69 drilling contract provided for termination of the contract upon Petrosucre's failure to satisfy its contractual payment obligations during the 30-day period subsequent to our notice. 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. On July 17, 2009, we received an $11.5 million payment from Petrosucre, which represented less than 25% of the $47.9 million contractually due to us as of June 30, 2009.

       Due to Petrosucre's longstanding failure to satisfy its contractual obligations and meet payment commitments, and in consideration of the Venezuelan government's recent nationalization of assets owned by international oil and gas companies and oilfield service companies, we believe it is remote that ENSCO 69 will be returned to us by Petrosucre and operated again by Ensco. Therefore, we recorded the disposal of ENSCO 69 during the quarter ended June 30, 2009. ENSCO 69 results of operations have been reclassified as discontinued operations in our condensed consolidated statements of income for the three-month and nine-month periods ended September 30, 2009 and 2008.

       At the time of disposal, ENSCO 69 had a net book value of $17.3 million and inventory and other assets totaling $800,000. In connection with the disposal of ENSCO 69 during the quarter ended June 30, 2009, we recognized a pre-tax loss of $18.1 million, which was classified as loss on disposal of discontinued operations, net, in our condensed consolidated statements of income for the nine-month period ended September 30, 2009.

       Loss on discontinued operations, net, for the nine-month period ended September 30, 2009 included a bad debt provision totaling $8.0 million to fully reserve our net outstanding receivable from Petrosucre. We did not recognize revenue associated with ENSCO 69 drilling operations subsequent to January 2009 when Petrosucre initially assumed control of our rig.

       The ENSCO 69 drilling contract is governed by Venezuelan law and there can be no assurances relative to the recovery of outstanding contract entitlements. 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. We have retained coverage counsel who are reviewing the letter from underwriters' counsel. We were unable to conclude that collection of insurance proceeds associated with the loss of ENSCO 69 was probable as of September 30, 2009. Accordingly, no ENSCO 69 related insurance recoveries were recognized in our condensed consolidated statements of income for the three-month and nine-month periods ended September 30, 2009.

    ENSCO 74

       In September 2008, ENSCO 74 was lost as a result of Hurricane Ike. Portions of its legs remained underwater adjacent to the customer's platform, and we conducted extensive aerial and sonar reconnaissance but failed to locate the rig hull. In March 2009, the sunken hull of ENSCO 74 was located on the seabed approximately 95 miles from the original drilling location when it was struck by an oil tanker. The rig was a total loss, as defined under the terms of our insurance policies. The operating results of ENSCO 74 were reclassified as discontinued operations in our condensed consolidated statements of income for the three-month and nine-month periods ended September 30, 2008. See "Note 9 - Contingencies" for additional information on the loss of ENSCO 74 and associated contingencies.

 

       The following table summarizes our income (loss) from discontinued operations for the three-month and nine-month periods ended September 30, 2009 and 2008 (in millions):

 

 

Three Months Ended    

    Nine Months Ended

 

       September 30,          

           September 30,      

 

  2009   

   2008  

      2009  

    2008  

 

Revenues

 

$  -- 

 

$ 27.6

 

$   4.8 

 

$ 75.7 

 

Operating expenses

 

(.8)

 

11.7

 

18.8 

 

35.8 

 


Operating income (loss) before income taxes

 

.8 

 

15.9

 

(14.0)

 

39.9 

 

Income tax expense

 

.4 

 

5.5

 

2.4 

 

14.8 

 

Loss on disposal of discontinued operations, net

 

-- 

 

(23.5

)

(11.8)

 

(23.5)

 


Income (loss) from discontinued operations

 

$ .4 

 

$(13.1

)

$(28.2)

 

$  1.6 

 


 

       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 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. Meetings to review the results of the investigation with the authorities were held on February 24, 2009 and September 14, 2009. We expect to discuss a possible negotiated 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 failed to 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 on the seabed 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 are currently communicating with various government agencies to address removal of the 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 retention (deductible). 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 will be 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 will be 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 $30.0 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 September 30, 2009. A $30.0 million liability, representing the low end of the range of estimated hull and related debris removal costs, and a corresponding receivable for recovery of those costs, was recorded as of September 30, 2009. The aggregate $46.0 million liability and receivable for the leg and hull and related debris removal costs were included in accrued liabilities and other and other assets, net, on our September 30, 2009 condensed consolidated balance sheet.

       On March 17, 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 that a liability exists with respect to this matter.

       On March 18, 2009, the owner of the oil tanker that struck the hull of ENSCO 74 commenced civil litigation against us seeking monetary damages in the aggregate amount of $10.0 million for losses incurred. 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.

       On June 9, 2009, we received notice from legal counsel representing another pipeline owner which allegedly sustained damages to a subsea pipeline caused by ENSCO 74 in the aftermath of Hurricane Ike. On September 18, 2009, the owner of the pipeline commenced civil litigation against us seeking unspecified damages in relation to the cost of repairing damage to the pipeline, loss of revenue, survey and other damages. Based on information currently available, we have concluded that it is remote that a liability exists with respect to this matter.

       On July 23, 2009, we received notice from legal counsel representing another tanker owner alleging that the sunken hull of the ENSCO 74 caused hull damage to a tanker in January 2009 resulting in unspecified damages and losses. We presently are unable to determine whether the alleged damage to this tanker was caused by ENSCO 74 or the extent of the cost and losses associated with the damage. Based on information currently available, we have not concluded that it is probable that a liability exists with respect to this matter.

       Based on communications received by our external legal counsel, we understand that the owners of two other subsea pipelines may present claims alleging that their pipelines were damaged by the ENSCO 74 in the aftermath of Hurricane Ike. We presently are unable to determine whether any of these pipeline damages were caused by ENSCO 74 or the extent of the cost and losses associated with the damage. Based on information currently available, we have not concluded that it is probable that a liability exists with respect to these matters.

       We have liability insurance policies that provide coverage for third-party claims such as the tanker and pipeline claims, subject to a $10.0 million per occurrence self-insured retention 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.

       We plan to undertake all appropriate defensive measures and filed a petition for exoneration or limitation of liability under U.S. admiralty and maritime law on September 2, 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. 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 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 United States Court of Appeals recently upheld the United States District Court's order to remand the case back to the Texas District Court. The litigation is in an early stage.

       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 the Circuit Courts of Jones County (Second Judicial District) and Jasper County (First Judicial District), 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.

       The Mississippi state court cases are under an informal stay of discovery issued by a Special Master, while discovery is conducted for a select and limited group of plaintiffs, some of whom have cases pending against us. Currently, two discovery groups have been designated by the Special Master, with a third discovery group due to be formed in connection with a status conference called by the Special Master for October 26, 2009. To date, written discovery and plaintiff depositions have taken place in eight cases involving us. However, no further activity is expected in these cases until they are selected for trial. Currently, none of the cases pending against us in Mississippi have been set for trial.

       In addition to the pending state court cases, there are also three cases pending in Mississippi federal court. These three cases were recently consolidated with 441 other lawsuits and assigned to the Multi-District Litigation 875, which is currently before the U.S. District Court for the Eastern District of Pennsylvania. However, the Houston law firm representing these plaintiffs has filed a Motion to Remand, seeking to bring the cases back to Mississippi state court.

       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 eight 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 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 United Kingdom ("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 on March 9, 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 within the next twelve to eighteen months.

       We also received inquiries from and responded to the Danish and Dutch authorities regarding applicability of the WTD as adopted by Denmark and The Netherlands to employees on our rigs operating in the Danish and Dutch sectors of the North Sea.

       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 three-month and nine-month periods ended September 30, 2009 and 2008 is presented below. General and administrative expense and depreciation expense incurred by our corporate office are not allocated to our operating segments for purposes of measuring segment operating income and were included in "Reconciling Items." Assets not allocated to our operating segments consisted primarily of cash and cash equivalents and goodwill and were also included in "Reconciling Items."

 

Three Months Ended September 30, 2009
(in millions)

 

 

 

 

North

 

 

 

 

 

 

 

and

Operating

 

 

 

 

Asia

Europe

South

Segments

Reconciling

  Consolidated

 

Deepwater

Pacific

and Africa

America

    Total    

    Items    

     Total    

 

 

 

 

 

 

 

 

Revenues

 

 

$     62.5

 

 

$   161.6

 

 

$104.4 

 

 

$  96.9

 

 

$   425.4

 

 

$          --  

 

 

$   425.4 

 

 

Operating expenses
   Contract drilling (exclusive
      of depreciation)

 

 

34.7

 

 

61.1

 

 

46.5 

 

 

41.0

 

 

183.3

 

 

--  

 

 

183.3 

 

 

   Depreciation

 

 

6.5

 

 

22.3

 

 

11.1 

 

 

13.1

 

 

53.0

 

 

.3  

 

 

53.3 

 

 

   General and administrative

 

 

--

 

 

--

 

 

-- 

 

 

--

 

 

--

 

 

13.6  

 

 

13.6 

 

 


Operating income (loss)

 

 

$     21.3

 

 

$     78.2

 

 

$  46.8 

 

 

$  42.8

 

 

$   189.1

 

 

$   (13.9) 

 

 

$   175.2 

 

 


Total assets

 

 

$2,225.6

 

 

$1,277.5

 

 

$785.5 

 

 

$821.9

 

 

$5,110.5

 

 

$1,344.7  

 

 

$6,455.2 

 

 

 

Three Months Ended September 30, 2008
(in millions)

 

 

 

 

North

 

 

 

 

 

 

 

and

Operating

 

 

 

 

Asia

Europe

South

Segments

Reconciling

  Consolidated

 

Deepwater

Pacific

and Africa

America

    Total    

    Items    

     Total    

 

 

 

 

 

 

 

 

Revenues

 

 

$     27.1

 

 

$   260.8

 

 

$209.3 

 

 

$122.3

 

 

$   619.5

 

 

$       --  

 

 

$   619.5 

 

 

Operating expenses
   Contract drilling (exclusive
      of depreciation)

 

 

8.3

 

 

75.3

 

 

62.8 

 

 

38.8

 

 

185.2

 

 

--  

 

 

185.2 

 

 

   Depreciation

 

 

2.3

 

 

21.4

 

 

10.8 

 

 

12.0

 

 

46.5

 

 

.5  

 

 

47.0 

 

 

   General and administrative

 

 

--

 

 

--

 

 

-- 

 

 

--

 

 

--

 

 

15.2  

 

 

15.2 

 

 


Operating income (loss)

 

 

$     16.5

 

 

$   164.1

 

 

$135.7 

 

 

$  71.5

 

 

$   387.8

 

 

$ (15.7) 

 

 

$   372.1 

 

 


Total assets

 

 

$1,602.0

 

 

$1,310.7

 

 

$747.2 

 

 

$801.3

 

 

$4,461.2

 

 

$996.0  

 

 

$5,457.2 

 

 

 

Nine Months Ended September 30, 2009
(in millions)

 

 

 

 

North

 

 

 

 

 

 

 

and

Operating

 

 

 

 

Asia

Europe

South

Segments

Reconciling

  Consolidated

 

Deepwater

Pacific

and Africa

America

    Total    

    Items    

     Total    

 

 

 

 

 

 

 

 

Revenues

 

 

$   130.2

 

 

$   544.0

 

 

$476.8 

 

 

$295.3

 

 

$1,446.3

 

 

$         --  

 

 

$1,446.3 

 

 

Operating expenses
   Contract drilling (exclusive
      of depreciation)

 

 

63.2

 

 

188.4

 

 

152.6 

 

 

120.6

 

 

524.8

 

 

--  

 

 

524.8 

 

 

   Depreciation

 

 

12.5

 

 

66.2

 

 

33.0 

 

 

37.2

 

 

148.9

 

 

.9  

 

 

149.8 

 

 

   General and administrative

 

 

--

 

 

--

 

 

-- 

 

 

--

 

 

--

 

 

41.6  

 

 

41.6 

 

 


Operating income (loss)

 

 

$     54.5

 

 

$   289.4

 

 

$291.2 

 

 

$137.5

 

 

$   772.6

 

 

$   (42.5) 

 

 

$   730.1 

 

 


Total assets

 

 

$2,225.6

 

 

$1,277.5

 

 

$785.5 

 

 

$821.9

 

 

$5,110.5

 

 

$1,344.7  

 

 

$6,455.2 

 

 

 

Nine Months Ended September 30, 2008
(in millions)

 

 

 

 

North

 

 

 

 

 

 

 

and

Operating

 

 

 

 

Asia

Europe

South

Segments

Reconciling

  Consolidated

 

Deepwater

Pacific

and Africa

America

    Total    

     Items    

     Total    

 

 

 

 

 

 

 

 

Revenues

 

 

$     84.3

 

 

$   779.5

 

 

$602.9 

 

 

$322.1

 

 

$1,788.8

 

 

$      --   

 

 

$1,788.8 

 

 

Operating expenses
   Contract drilling (exclusive
      of depreciation)

 

 

26.5

 

 

239.4

 

 

184.9 

 

 

116.0

 

 

566.8

 

 

--   

 

 

566.8 

 

 

   Depreciation

 

 

6.8

 

 

63.7

 

 

32.1 

 

 

35.4

 

 

138.0

 

 

1.4   

 

 

139.4 

 

 

   General and administrative

 

 

--

 

 

--

 

 

-- 

 

 

--

 

 

--

 

 

41.7   

 

 

41.7 

 

 


Operating income (loss)

 

 

$     51.0

 

 

$   476.4

 

 

$385.9 

 

 

$170.7

 

 

$1,084.0

 

 

$(43.1)  

 

 

$1,040.9 

 

 


Total assets

 

 

$1,602.0

 

 

$1,310.7

 

 

$747.2 

 

 

$801.3

 

 

$4,461.2

 

 

$996.0   

 

 

$5,457.2 

 

 

Subsequent Events
Subsequent Events

Note 11 - Subsequent Events

       During the second quarter of 2009, we adopted FASB ASC 855 (previously SFAS No. 165, "Subsequent Events") which establishes general standards regarding the accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Adoption of this standard did not result in significant changes in the subsequent events that we are required to recognize or disclosure in our financial statements.

       We account for and disclose events that occur after the balance sheet date but before financial statements are issued or are available to be issued. We evaluated subsequent events through October 22, 2009, the date these condensed consolidated financial statements were filed with the SEC.