ENSCO PLC, 10-K filed on 2/24/2012
Annual Report
Document And Entity Information (USD $)
12 Months Ended
Dec. 31, 2011
Feb. 17, 2012
Jun. 30, 2011
Document And Entity Information [Abstract]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Dec. 31, 2011 
 
 
Entity Registrant Name
Ensco plc 
 
 
Entity Central Index Key
0000314808 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Document Fiscal Year Focus
2011 
 
 
Document Fiscal Period Focus
FY 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Public Float
 
 
$ 10,436,891,000 
Entity Common Shares, Shares Outstanding
 
231,049,272 
 
Consolidated Statements Of Income (USD $)
In Millions, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2011
Dec. 31, 2010
Dec. 31, 2009
Consolidated Statements Of Income [Abstract]
 
 
 
OPERATING REVENUES
$ 2,842.7 
$ 1,696.8 
$ 1,888.9 
OPERATING EXPENSES
 
 
 
Contract drilling (exclusive of depreciation)
1,470.9 
768.1 
709.0 
Depreciation
418.9 
216.3 
189.5 
General and administrative
158.6 
86.1 
64.0 
Total operating expenses
2,048.4 
1,070.5 
962.5 
OPERATING INCOME
794.3 
626.3 
926.4 
OTHER INCOME (EXPENSE)
 
 
 
Interest income
17.2 
0.7 
2.2 
Interest expense, net
(95.9)
 
 
Other, net
21.0 
17.5 
6.6 
Other income (expense), net
(57.7)
18.2 
8.8 
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
736.6 
644.5 
935.2 
PROVISION FOR INCOME TAXES
 
 
 
Current income tax expense
150.6 
81.7 
159.5 
Deferred income tax (benefit) expense
(19.6)
14.3 
20.5 
Total provision for income taxes
131.0 
96.0 
180.0 
INCOME FROM CONTINUING OPERATIONS
605.6 
548.5 
755.2 
INCOME FROM DISCONTINUED OPERATIONS
 
 
 
DISCONTINUED OPERATIONS, NET
   
37.4 
29.3 
NET INCOME
605.6 
585.9 
784.5 
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS
(5.2)
(6.4)
(5.1)
NET INCOME ATTRIBUTABLE TO ENSCO
600.4 
579.5 
779.4 
EARNINGS PER SHARE - BASIC
 
 
 
Continuing operations
$ 3.09 
$ 3.80 
$ 5.28 
Discontinued operations
 
$ 0.26 
$ 0.20 
Total earnings per share - basic
$ 3.09 
$ 4.06 
$ 5.48 
EARNINGS PER SHARE - DILUTED
 
 
 
Continuing operations
$ 3.08 
$ 3.80 
$ 5.28 
Discontinued operations
 
$ 0.26 
$ 0.20 
Total earnings per share - diluted
$ 3.08 
$ 4.06 
$ 5.48 
NET INCOME ATTRIBUTABLE TO ENSCO SHARES
 
 
 
Basic
593.5 
572.1 
769.7 
Diluted
$ 593.5 
$ 572.1 
$ 769.7 
WEIGHTED-AVERAGE SHARES OUTSTANDING
 
 
 
Basic
192.2 
141.0 
140.4 
Diluted
192.6 
141.0 
140.5 
CASH DIVIDENDS PER SHARE
$ 1.40 
$ 1.075 
$ 0.10 
Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Dec. 31, 2011
Dec. 31, 2010
CURRENT ASSETS
 
 
Cash and cash equivalents
$ 430.7 
$ 1,050.7 
Accounts receivable, net
838.3 
214.6 
Other
375.7 
171.4 
Total current assets
1,644.7 
1,436.7 
PROPERTY AND EQUIPMENT, AT COST
14,485.7 
6,744.6 
Less accumulated depreciation
2,061.5 
1,694.7 
Property and equipment, net
12,424.2 
5,049.9 
GOODWILL
3,288.8 
336.2 
OTHER ASSETS, NET
513.5 
228.7 
TOTAL ASSETS
17,871.2 
7,051.5 
CURRENT LIABILITIES
 
 
Accounts payable - trade
643.5 
163.5 
Accrued liabilities and other
507.4 
168.3 
Short-term debt
125.0 
 
Current maturities of long-term debt
47.5 
17.2 
Total current liabilities
1,323.4 
349.0 
LONG-TERM DEBT
4,877.6 
240.1 
DEFERRED INCOME TAXES
339.5 
358.0 
OTHER LIABILITIES
446.2 
139.4 
COMMITMENTS AND CONTINGENCIES
   
   
ENSCO SHAREHOLDERS' EQUITY
 
 
Additional paid-in capital
5,253.0 
637.1 
Retained earnings
5,613.1 
5,305.0 
Accumulated other comprehensive income
8.6 
11.1 
Treasury shares, at cost, 4.9 million shares and 7.1 million shares
(19.1)
(8.8)
Total Ensco shareholders' equity
10,879.3 
5,959.5 
NONCONTROLLING INTERESTS
5.2 
5.5 
Total equity
10,884.5 
5,965.0 
Total liabilities and shareholders' equity
17,871.2 
7,051.5 
Class A Ordinary Shares, U.S. [Member]
 
 
ENSCO SHAREHOLDERS' EQUITY
 
 
Common shares, value
23.6 
15.0 
Common Class B, Par Value In GBP [Member]
 
 
ENSCO SHAREHOLDERS' EQUITY
 
 
Common shares, value
$ 0.1 
$ 0.1 
Consolidated Balance Sheets (Parenthetical)
Dec. 31, 2011
Class A Ordinary Shares, U.S. [Member]
USD ($)
Dec. 31, 2010
Class A Ordinary Shares, U.S. [Member]
USD ($)
Dec. 31, 2011
Common Class B, Par Value In GBP [Member]
GBP (£)
Dec. 31, 2010
Common Class B, Par Value In GBP [Member]
GBP (£)
Common shares, par value
$ 0.1 
$ 0.1 
£ 1 
£ 1 
Common shares, shares authorized
450,000,000 
450,000,000 
50,000 
50,000 
Common shares, shares issued
235,800,000 
150,000,000 
50,000 
50,000 
Consolidated Statements Of Cash Flows (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2011
Dec. 31, 2010
Dec. 31, 2009
OPERATING ACTIVITIES
 
 
 
Net income
$ 605.6 
$ 585.9 
$ 784.5 
Adjustments to reconcile net income to net cash provided by operating activities of continuing operations:
 
 
 
Depreciation expense
418.9 
216.3 
189.5 
Share-based compensation expense
47.7 
44.5 
35.5 
Amortization of intangibles and other, net
(42.4)
31.4 
31.0 
Deferred income tax (benefit) expense
(19.6)
14.3 
20.5 
Loss on asset impairment
 
12.2 
17.3 
Discontinued operations, net
   
(37.4)
(29.3)
Other
(13.5)
6.6 
7.5 
Changes in operating assets and liabilities:
 
 
 
(Increase) decrease in accounts receivable
(247.6)
110.9 
167.4 
Increase in other assets
(14.5)
(10.6)
(67.6)
(Decrease) increase in liabilities
(2.3)
(157.4)
29.3 
Net cash provided by operating activities of continuing operations
732.3 
816.7 
1,185.6 
INVESTING ACTIVITIES
 
 
 
Acquisition of Pride International, Inc., net of cash acquired
(2,656.0)
 
 
Additions to property and equipment
(741.6)
(875.3)
(857.2)
Proceeds from disposal of discontinued operations
 
158.1 
14.3 
Proceeds from disposition of assets
46.5 
1.5 
2.6 
Other
(4.5)
   
   
Net cash used in investing activities
(3,355.6)
(715.7)
(840.3)
FINANCING ACTIVITIES
 
 
 
Proceeds from issuance of senior notes
2,462.8 
 
 
Cash dividends paid
(292.3)
(153.7)
(14.2)
Reduction of long-term borrowings
(213.3)
(17.2)
(17.2)
Commercial paper borrowings, net
125.0 
 
 
Equity financing costs
(70.5)
 
 
Proceeds from exercise of share options
39.9 
1.4 
9.6 
Debt financing costs
(31.8)
(6.2)
 
Other
(15.7)
(16.9)
(12.4)
Net cash provided by (used in) financing activities
2,004.1 
(192.6)
(34.2)
Effect of exchange rate changes on cash and cash equivalents
(0.8)
(0.5)
0.5 
Net cash provided by operating activities of discontinued operations
 
1.4 
40.2 
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
(620.0)
(90.7)
351.8 
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
1,050.7 
1,141.4 
789.6 
CASH AND CASH EQUIVALENTS, END OF YEAR
$ 430.7 
$ 1,050.7 
$ 1,141.4 
Description Of The Business And Summary Of Significant Accounting Policies
Description Of The Business And Summary Of Significant Accounting Policies

1.  DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

    Business

 

   We are one of the leading providers of offshore contract drilling services to the international oil and gas industry. We own and operate an offshore drilling rig fleet of 77 rigs, including rigs under construction, spanning most of the strategic, high-growth markets around the globe.  Our rig fleet includes seven drillships, 13 dynamically positioned semisubmersible rigs, seven moored semisubmersible rigs, 49 jackup rigs and one barge rig.  Our fleet is the world's second largest amongst competitive rigs, our ultra-deepwater fleet is the newest in the industry and our active premium jackup fleet is the largest of any offshore drilling company.  We currently have a technologically-advanced drillship, a semisubmersible rig and three ultra-premium harsh environment jackup rigs under construction as part of our ongoing strategy to continually expand and high-grade our fleet.

 

    Our customers include most of the leading national and international oil companies, in addition to many independent operators. We are among the most geographically diverse offshore drilling companies, with current operations and drilling contracts spanning more than 20 countries on six continents in nearly every major deepwater and shallow-water basin around the world. The regions in which we operate include major markets in Southeast Asia, Australia, the North Sea, Mediterranean, U.S. Gulf of Mexico, Mexico and Middle East, as well as the fastest-growing deepwater markets in Brazil and West Africa, where some of the world's most prolific geology resides.

 

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

 

    Acquisition of Pride International, Inc.

 

    On May 31, 2011 (the "Merger Date"), Ensco plc completed a merger transaction (the "Merger") with Pride International, Inc., a Delaware corporation ("Pride"), ENSCO International Incorporated, a Delaware corporation and an indirect, wholly-owned subsidiary and predecessor of Ensco plc ("Ensco Delaware"), and ENSCO Ventures LLC, a Delaware limited liability company and an indirect, wholly-owned subsidiary of Ensco plc ("Merger Sub"). Pursuant to the merger agreement and subject to the conditions set forth therein, Merger Sub merged with and into Pride, with Pride as the surviving entity and an indirect, wholly-owned subsidiary of Ensco plc.  The total consideration delivered in the Merger was $7.4 billion, consisting of $2.8 billion of cash, 85.8 million Ensco ADSs with an aggregate value of $4.6 billion based on the closing price of Ensco ADSs of $53.32 on the Merger Date and the estimated fair value of $35.4 million of vested Pride employee stock options assumed by Ensco.  The results of Pride were included in our consolidated financial statements from the Merger Date.

 

    In connection with the Merger, we acquired seven drillships, including rigs under construction, 12 semisubmersible rigs and seven jackup rigs. As a result, we evaluated our then-current core assets and operations, and organized them into three segments based on water depth operating capabilities. Accordingly, we now consider our business to consist of three reportable segments: (1) Deepwater, which consists of our drillships and semisubmersible rigs capable of drilling in water depths of 4,500 feet or greater, (2) Midwater, which consists of our semisubmersible rigs capable of drilling in water depths of 4,499 feet or less and (3) Jackup, which consists of our jackup rigs capable of drilling in water depths up to 400 feet.  Each of our three reportable segments provides one service, contract drilling.  We also manage the drilling operations for two deepwater rigs and own one barge rig, which are included in "Other."

 

    Redomestication

 

    In December 2009, we completed a reorganization of the corporate structure of the group of companies controlled by our predecessor, ENSCO International Incorporated ("Ensco Delaware"), pursuant to which an indirect, wholly-owned subsidiary merged with Ensco Delaware, and Ensco plc became our publicly-held parent company incorporated under English law (the "redomestication"). In connection with the redomestication, each issued and outstanding share of common stock of Ensco Delaware was converted into the right to receive one American depositary share ("ADS" or "share"), each representing one Class A ordinary share, par value U.S. $0.10 per share, of Ensco plc. The ADSs are governed by a deposit agreement with Citibank, N.A. as depositary and trade on the New York Stock Exchange (the "NYSE") under the symbol "ESV," the symbol for Ensco Delaware common stock before the redomestication. We are now incorporated under English law as a public limited company and have relocated our principal executive offices to London, England. Unless the context requires otherwise, the terms "Ensco," "Company," "we," "us" and "our" refer to Ensco plc together with all subsidiaries and predecessors.

 

    The redomestication was accounted for as an internal reorganization of entities under common control and, therefore, Ensco Delaware's assets and liabilities were accounted for at their historical cost basis and not revalued in the transaction. We remain subject to the U.S. Securities and Exchange Commission (the "SEC") reporting requirements, the mandates of the Sarbanes-Oxley Act and the applicable corporate governance rules of the NYSE, and we will continue to report our consolidated financial results in U.S. dollars and in accordance with U.S. generally accepted accounting principles ("GAAP"). We also must comply with additional reporting requirements of English law.

 

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

 

    The accompanying consolidated financial statements have been prepared in accordance with GAAP, which the directors consider to be the most meaningful presentation of our results of operations and financial position.  The accompanying consolidated financial statements do not constitute statutory accounts required by the U.K. Companies Act 2006, which for year ended December 31, 2011 will be prepared in accordance with generally accepted accounting principles in the U.K. and delivered to the Registrar of Companies in the U.K. following the annual general meeting of shareholders.  The U.K. statutory accounts are expected to include an unqualified auditor's report, which is not expected to contain any references to matters on which the auditors drew attention by way of emphasis without qualifying the report or any statements under Sections 498(2) or 498(3) of the U.K. Companies Act 2006.

 

Principles of Consolidation

 

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

 

    Pervasiveness of Estimates

 

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

 

    Foreign Currency Remeasurement and Translation

 

    Our functional currency is the U.S. dollar. As is customary in the oil and gas industry, a majority of our revenues and expenses are denominated in U.S. dollars; however, a portion of the revenues earned and expenses incurred by certain of our subsidiaries are denominated in currencies other than the U.S. dollar ("foreign currencies"). These transactions are remeasured in U.S. dollars based on a combination of both current and historical exchange rates. Most transaction gains and losses, including certain gains and losses on our derivative instruments, are included in other, net, in our consolidated statement of income.  Certain gains and losses from the translation of foreign currency balances of our non-U.S. dollar functional currency subsidiaries are included in accumulated other comprehensive income on our consolidated balance sheet.  We incurred net foreign currency exchange gains of $16.9 million, $3.5 million and $2.6 million for the years ended December 31, 2011, 2010 and 2009, respectively.

 

Cash Equivalents and Short-Term Investments

 

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

 

    Property and Equipment

 

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

 

    Our property and equipment is depreciated on a straight-line basis, after allowing for salvage values, over the estimated useful lives of our assets. Drilling rigs and related equipment are depreciated over estimated useful lives ranging from 4 to 35 years.  Buildings and improvements are depreciated over estimated useful lives ranging from 2 to 30 years. Other equipment, including computer and communications hardware and software costs, is depreciated over estimated useful lives ranging from 2 to 6 years.

 

    We evaluate the carrying value of our property and equipment for impairment when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. For property and equipment used in our operations, recoverability generally is determined by comparing the carrying value of an asset to the expected undiscounted future cash flows of the asset. If the carrying value of an asset is not recoverable, the amount of impairment loss is measured as the difference between the carrying value of the asset and its estimated fair value. Property and equipment held for sale is recorded at the lower of net book value or net realizable value.

 

    We recorded a $12.2 million impairment charge on ENSCO I during 2010.  If the global economy were to deteriorate and/or the offshore drilling industry were to incur a significant prolonged downturn, it is reasonably possible that impairment charges may occur with respect to specific individual rigs, groups of rigs, such as a specific type of drilling rig, or rigs in a certain geographic location.

 

Goodwill

 

    On May 31, 2011, we completed the acquisition of Pride resulting in the recognition of a preliminary amount of $2.95 billion in goodwill, including measurement period adjustments.  See "Note 2 - Acquisition of Pride International, Inc." for additional information on the Merger.   In connection with the Merger, we evaluated our then-current core assets and operations, which consisted of drillships, semisubmersible rigs and jackup rigs and organized them into three segments based on water depth operating capabilities. Accordingly, we now consider our business to consist of three reportable segments: (1) Deepwater, (2) Midwater and (3) Jackup.  Our three reportable segments represent our reporting units.  The carrying amount of goodwill as of December 31, 2011 is detailed below by reporting unit (in millions):

 

Deepwater

 

 

 

 

$2,623.5

Midwater

 

 

 

 

472.7

Jackup

 

 

 

 

192.6

Total

 

 

 

 

$3,288.8

 

    We test goodwill for impairment on an annual basis as of December 31 of each year or when events or changes in circumstances indicate that a potential impairment exists.  When testing goodwill for impairment, we perform a qualitative assessment to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount.

 

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

 

 

   We determined there was no impairment of goodwill as of December 31, 2011.  However, if the global economy deteriorates and the offshore drilling industry were to incur a significant prolonged downturn, it is reasonably possible that our expectations of future cash flows may decline and ultimately result in a goodwill impairment.  Additionally, a significant decline in the market value of our shares could result in a goodwill impairment.

 

Operating Revenues and Expenses

 

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

 

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

 

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

 

    Deferred mobilization costs were included in other current assets and other assets, net, on our consolidated balance sheets and totaled $82.1 million and $51.0 million as of December 31, 2011 and 2010, respectively. Deferred mobilization revenue was included in accrued liabilities and other, and other liabilities on our consolidated balance sheets and totaled $104.3 million and $82.8 million as of December 31, 2011 and 2010, respectively.

 

    In connection with some contracts, we receive up-front lump-sum fees or similar compensation for capital improvements to our drilling rigs. Such compensation is deferred and recognized as revenue over the period that the related drilling services are performed. The cost of such capital improvements is capitalized and depreciated over the useful life of the asset. Deferred revenue associated with capital improvements was included in accrued liabilities and other, and other liabilities on our consolidated balance sheets and totaled $37.9 million and $27.4 million as of December 31, 2011 and 2010, respectively.

 

    We must obtain certifications from various regulatory bodies in order to operate our drilling rigs and must maintain such certifications through periodic inspections and surveys. The costs incurred in connection with maintaining such certifications, including inspections, tests, surveys and drydock, as well as remedial structural work and other compliance costs, are deferred and amortized over the corresponding certification periods. Deferred regulatory certification and compliance costs were included in other current assets and other assets, net, on our consolidated balance sheets and totaled $9.1 million and $7.0 million as of December 31, 2011 and 2010, respectively.

 

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

 

Derivative Instruments

 

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

 

    All derivatives are recorded on our consolidated balance sheet at fair value. Accounting for the gains and losses resulting from changes in the fair value of derivatives depends on the use of the derivative and whether it qualifies for hedge accounting. Derivatives qualify for hedge accounting when they are formally designated as hedges and are effective in reducing the risk exposure that they are designated to hedge. Our assessment of hedge effectiveness is formally documented at hedge inception, and we review hedge effectiveness and measure any ineffectiveness throughout the designated hedge period on at least a quarterly basis.

 

    Changes in the fair value of derivatives that are designated as hedges of the variability in expected future cash flows associated with existing recognized assets or liabilities or forecasted transactions ("cash flow hedges") are recorded in accumulated other comprehensive income ("AOCI").  Amounts recorded in AOCI associated with cash flow hedges are subsequently reclassified into contract drilling, depreciation or interest expense as earnings are affected by the underlying hedged forecasted transactions.

 

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

 

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

 

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

 

    Income Taxes

 

    We conduct operations and earn income in numerous countries and are subject to the laws of taxing jurisdictions within those countries, including U.K. and U.S. tax laws. Current income taxes are recognized for the amount of taxes payable or refundable based on the laws and income tax rates in the taxing jurisdictions in which operations are conducted and income is earned.

 

    Deferred tax assets and liabilities are recognized for the anticipated future tax effects of temporary differences between the financial statement basis and the tax basis of our assets and liabilities using the enacted tax rates in effect at year-end. A valuation allowance for deferred tax assets is recorded when it is more-likely-than-not that the benefit from the deferred tax asset will not be realized.

 

 

    In many of the jurisdictions in which we operate, tax laws relating to the offshore drilling industry are not well developed and change frequently. Furthermore, we may enter into transactions with affiliates or employ other tax planning strategies that generally are subject to complex tax regulations. As a result of the foregoing, the tax liabilities and assets we recognize in our financial statements may differ from the tax positions taken, or expected to be taken, in our tax returns. Our tax positions are evaluated for recognition using a more-likely-than-not threshold, and those tax positions requiring recognition are measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon effective settlement with a taxing authority that has full knowledge of all relevant information. Interest and penalties relating to income taxes are included in current income tax expense in our consolidated statement of income.

 

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

 

    In some instances, we may determine that certain temporary differences will not result in a taxable or deductible amount in future years, as it is more-likely-than-not we will commence operations and depart from a given taxing jurisdiction without such temporary differences being recovered or settled. Under these circumstances, no future tax consequences are expected and no deferred taxes are recognized in connection with such operations. We evaluate these determinations on a periodic basis and, in the event our expectations relative to future tax consequences change, the applicable deferred taxes are recognized or derecognized.

   

    We do not provide deferred taxes on the undistributed earnings of Ensco Delaware or Ensco United Incorporated, an indirect wholly-owned subsidiary of Ensco and immediate parent company of Pride,because our policy and intention is to reinvest such earnings indefinitely or until such time that they can be distributed in a tax-free manner. We do not provide deferred taxes on the undistributed earnings of Ensco Delaware's or Ensco United Incorporated's non-U.S. subsidiaries because our policy and intention is to reinvest such earnings indefinitely.See "Note 11 - Income Taxes" for additional information on our deferred taxes, unrecognized tax benefits, intercompany rig sales and reinvestments of certain undistributed earnings.

 

 Share-Based Compensation

 

    We sponsor share-based compensation plans that provide equity compensation to our employees, officers and non-employee directors. Share-based compensation cost is measured at fair value on the date of grant and recognized on a straight-line basis over the requisite service period (usually the vesting period). The amount of compensation cost recognized in our consolidated statement of income is based on the awards ultimately expected to vest and, therefore, reduced for estimated forfeitures. All changes in estimated forfeitures are based on historical experience and are recognized as a cumulative adjustment to compensation cost in the period in which they occur. See "Note 10 - Benefit Plans" for additional information on our share-based compensation.

 

 

Fair Value Measurements

 

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

 

Earnings Per Share

    

    We compute basic and diluted earnings per share ("EPS") in accordance with the two-class method. Net income attributable to Ensco used in our computations of basic and diluted EPS is adjusted to exclude net income allocated to non-vested shares granted to our employees and non-employee directors. Weighted-average shares outstanding used in our computation of diluted EPS 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 each of the years in the three-year period ended December 31, 2011 (in millions):

 

 

   2011

       2010

     2009   

 

 

 

 

 

 

 

 

Net income attributable to Ensco

 

$600.4

 

$579.5

 

$779.4

 

Net income allocated to non-vested share awards

 

(6.9

)

(7.4

)

(9.7

)

Net income attributable to Ensco shares

 

$593.5

 

$572.1

 

$769.7

 


    The following table is a reconciliation of the weighted-average shares used in our basic and diluted earnings per share computations for each of the years in the three-year period ended December 31, 2011 (in millions):

 

 

    2011

        2010

     2009  

 

 

 

 

 

 

 

 

Weighted-average shares - basic

 

192.2

 

141.0

 

140.4

 

Potentially dilutive share options

 

.4

 

.0

 

.1

 

Weighted-average shares - diluted

 

192.6

 

141.0

 

140.5

 

 

    Antidilutive share options totaling 400,000 for the year ended December 31, 2011 and 1.1 million for each of the years ended December 31, 2010 and 2009 were excluded from the computation of diluted EPS.

 

Noncontrolling Interests

 

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

 

    Income from continuing operations attributable to Ensco for each of the years in the three-year period ended December 31, 2011 was as follows (in millions):

 

 

2011  

2010  

2009  

 

 

 

 

Income from continuing operations

$605.6 

$548.5 

$755.2 

Income from continuing operations attributable to

   noncontrolling interests

 

(5.2)

 

(6.2)

 

(4.2)

Income from continuing operations attributable to Ensco

$600.4 

$542.3 

$751.0 

 

    Income from discontinued operations attributable to Ensco for each of the years in the three-year period ended December 31, 2011 was as follows:

 

 

2011

2010 

2009 

 

 

 

 

Income from discontinued operations

$    -- 

$37.4 

$29.3 

Income from discontinued operations attributable to

   noncontrolling interests

 

-- 

 

(.2)

 

(.9)

Income from discontinued operations attributable to Ensco

$    -- 

$37.2 

$28.4 

Acquisition Of Pride International, Inc.
Acquisition Of Pride International, Inc.
2.  ACQUISITION OF PRIDE INTERNATIONAL, INC.
 
    On May 31, 2011, Ensco plc completed a merger transaction with Pride, Ensco Delaware and Merger Sub.  Pursuant to the Merger Agreement, among Ensco plc, Pride, Ensco Delaware and Merger Sub, and subject to the conditions set forth therein, Merger Sub merged with and into Pride, with Pride as the surviving entity and an indirect, wholly-owned subsidiary of Ensco plc.

    
The Merger expands our deepwater fleet with drillship assets, increases our presence in the floater markets as well as various major offshore drilling markets and establishes Ensco with the world's second largest competitive offshore drilling rig fleet.  Revenues and net income of Pride from the Merger Date included in our consolidated statements of income were $1.1 billion and $121.0 million, respectively, for the year ended December 31, 2011.
    Consideration

    As a result of the Merger, each outstanding share of Pride's common stock (other than shares of common stock held directly or indirectly by Ensco, Pride or any wholly-owned subsidiary of Ensco or Pride (which were cancelled as a result of the Merger) and those shares held by certain U.K. residents if determined by Ensco) were converted into the right to receive $15.60 in cash and 0.4778 Ensco ADSs.  Under certain circumstances, U.K. residents received all cash consideration as a result of compliance with legal requirements. The total consideration delivered in the Merger was $7.4 billion, consisting of $2.8 billion of cash, 85.8 million Ensco ADSs with an aggregate value of $4.6 billion based on the closing price of Ensco ADSs of $53.32 on the Merger Date and the estimated fair value of $35.4 million of vested Pride employee stock options assumed by Ensco.
 
    The following table summarizes the components of the merger consideration (dollars in millions, except per share amounts):

Share consideration paid:
     
179.7 million outstanding shares of Pride common stock converted to 85.8 million Ensco ADSs
   using the exchange ratio of 0.4778 and valued at $53.32 per share
 
$4,577.5
 
       
Cash and other consideration paid:
     
179.7 million outstanding shares of Pride common stock at $15.60 per share
 
2,803.0
 
Estimated fair value of 2.5 million vested Pride employee stock options assumed by Ensco
 
35.4
 
Merger consideration
 
$7,415.9
 

    Assets Acquired and Liabilities Assumed

    The transaction has been accounted for using the acquisition method of accounting which requires that assets acquired and liabilities assumed be recorded at their estimated fair values as of the Merger Date. The excess of the consideration transferred over the estimated fair values of the net assets acquired was recorded as goodwill. We have not finalized the determination of the fair values of the assets acquired and liabilities assumed and, therefore, the fair value estimates set forth below are subject to adjustment during a measurement period not to exceed one year subsequent to the acquisition date as permitted under GAAP.  The estimated fair values of certain assets and liabilities, including inventory, taxes and contingencies require judgments and assumptions that increase the likelihood that adjustments may be made to these estimates during the measurement period.  The provisional amounts and respective measurement period adjustments recorded for assets acquired and liabilities assumed were based on preliminary estimates of their fair values as of the Merger Date and were as follows:
 
    Property and Equipment

    Property and equipment acquired in connection with the Merger consisted primarily of drilling rigs and related equipment, including seven drillships (two of which were under construction), 12 semisubmersible rigs and seven jackup rigs.  We recorded step-up adjustments in the aggregate of $278.3 million to record the estimated fair value of Pride's drilling rigs and related equipment, which were primarily based on an income approach valuation model.  We estimated remaining useful lives for Pride's drilling rigs, which ranged from 10 to 35 years based on original estimated useful lives of 30 to 35 years.

 
    In connection with the integration of Pride's operations, we are in the process of changing the names of most of Pride's fleet in accordance with our naming convention.  For purposes of the notes to the consolidated financial statements, we used the new names whether or not the name change had been legally completed.

    Goodwill

    Goodwill recognized as a result of the Merger was calculated as the excess of the consideration transferred over the net assets acquired and represents the future economic benefits arising from other intangible assets acquired that could not be individually identified and separately recognized.  Goodwill specifically includes the expected synergies and other benefits that we believe will result from combining the operations of Pride with the operations of Ensco and other intangible assets that do not qualify for separate recognition, such as assembled workforce in place at the Merger Date.  Goodwill is not expected to be tax deductible.

    Goodwill recognized as a result of the Merger preliminarily was allocated to our reporting units as follows (in millions):
 
Deepwater
       
$2,479.9
Midwater
       
472.7
Jackup
       
--
Total
       
$2,952.6

    Other Intangible Assets and Liabilities

    We recorded intangible assets and liabilities in the aggregate of $209.0 million and $278.0 million, respectively, representing the estimated fair values of Pride's firm drilling contracts in place at the Merger Date with favorable or unfavorable contract terms as compared to then-current market day rates for comparable drilling rigs.  The various factors considered in the determination of these fair values were (1) the contracted day rate for each contract, (2) the remaining term of each contract, (3) the rig class and (4) the market conditions for each respective rig class at the Merger Date.  The intangible assets and liabilities were calculated based on the present value of the difference in cash inflows over the remaining contract term as compared to a hypothetical contract with the same remaining term at an estimated then-current market day rate using a risk-adjusted discount rate and an estimated effective income tax rate.  After amortizing income of $55.4 million to operating revenues during the year ended December 31, 2011, the remaining balances were $172.6 million of intangible assets included in other current assets and other assets, net, and $186.2 million of intangible liabilities included in accrued liabilities and other and other liabilities on our consolidated balance sheet as of December 31, 2011.  These balances will be amortized to operating revenues over the respective remaining drilling contract terms on a straight-line basis.  Amortization income (expense) for these intangible assets and liabilities is estimated to be $17.1 million for 2012, $7.9 million for 2013, ($4.3) million for 2014, ($6.7) million for 2015, ($800,000) for 2016 and $400,000 thereafter.
 
    We recorded an intangible liability of $36.0 million for the estimated fair value of an unfavorable drillship construction contract which was determined by comparing the firm obligations for the remaining construction of the ENSCO DS-6 as of May 31, 2011 to then-current market rates for the construction of a similar design drilling rig. The unfavorable construction contract liability was calculated based on the present value of the difference in cash outflows for the remaining contractual payments as compared to a hypothetical contract with the same remaining contractual payments at then-current market rates using a risk-adjusted discount rate and estimated effective income tax rate.  This liability will be amortized over the estimated useful life of ENSCO DS-6 as a reduction of depreciation expense beginning on the date the rig is placed into service.
 
    Debt

    We assumed Pride's outstanding debt comprised of $900.0 million aggregate principal amount of 6.875% senior notes due 2020, $500.0 million aggregate principal amount of 8.500% senior notes due 2019, $300.0 million aggregate principal amount of 7.875% senior notes due 2040 (collectively the "Pride Notes") and $151.5 million aggregate principal amount of Maritime Administration ("MARAD") bonds due 2016.  Under a supplemental indenture, Ensco plc has fully and unconditionally guaranteed the performance of all obligations of Pride with respect to the Pride Notes.  See "Note 16 - Guarantee of Registered Securities" for additional information on the guarantee of the Pride Notes.  A step-up adjustment of $406.2 million was recorded to adjust the Pride Notes and the MARAD bonds to their aggregate estimated fair value. The adjustment was based on quoted market prices for Pride's publicly traded debt and an income approach valuation model for Pride's non-publicly traded debt.  This step-up will be amortized over the remaining lives of the respective debt instruments as a reduction of interest expense.  In addition, we assumed debt outstanding with respect to Pride's senior unsecured revolving credit facility totaling $181.0 million, which was repaid in full and the facility terminated upon completion of the Merger.

    Merger-Related Costs

    Merger-related transaction costs consisted of various advisory, legal, accounting, valuation and other professional or consulting fees totaling $23.8 million for the year ended December 31, 2011 and were expensed as incurred and included in general and administrative expense on our consolidated statement of income.  Debt issuance costs of $27.2 million associated with our senior notes issued in March 2011 and bridge term facility issued in February 2011 were deferred and are amortized to interest expense over the lives of the respective debt arrangements.  The costs of $70.5 million associated with the Ensco ADSs issued to effect the Merger were recorded as a reduction to additional paid-in capital.

    Deferred Taxes

    The acquisition of a business through the purchase of its common stock generally is treated as a "nontaxable" transaction.  The acquisition of Pride was executed through the acquisition of its outstanding common stock and, therefore, the historical tax bases of the acquired assets and assumed liabilities, net operating losses and other tax attributes of Pride were assumed as of the Merger Date.  However, adjustments were recorded to recognize deferred tax assets and liabilities for the tax effects of differences between acquisition date fair values and tax bases of assets acquired and liabilities assumed.  As of the Merger Date, a decrease of $31.1 million to Pride's net deferred tax liability was recognized.

    Deferred tax assets and liabilities recognized in connection with the Merger were measured at rates enacted as of the Merger Date.  Tax rate changes, or any deferred tax adjustments for new tax legislation, following the Merger Date will be reflected in our operating results in the period in which the change in tax laws or rate is enacted.

    Contingencies

    In connection with the Merger, we recognized contingent liabilities resulting from certain lawsuits, claims or proceedings existing as of the Merger Date. These matters existed as of the Merger Date as Pride was involved from time to time as party to governmental or other 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. See "Note 13 – Commitments and Contingencies" for additional information on contingencies.
 
    Pro Forma Impact of the Merger

    The following unaudited supplemental pro forma results present consolidated information as if the Merger had been completed on January 1, 2010.  The pro forma results include, among others,  (i) the amortization associated with the acquired intangible assets and liabilities, (ii) interest expense associated with debt used to fund a portion of the Merger and (iii) the impact of certain fair value adjustments such as additional depreciation expense for adjustments to property and equipment and reduction to interest expense for adjustments to debt.  The pro forma results do not include any potential synergies, non-recurring charges which result directly from the Merger, cost savings or other expected benefits of the Merger.  Accordingly, the pro forma results should not be considered indicative of the results that would have occurred if the Merger and related borrowings had occurred on January 1, 2010, nor are they indicative of future results.

Fair Value Measurements
Fair Value Measurements
3.  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 December 31, 2011 and 2010 (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 December 31, 2011
                       
Hercules Offshore, Inc. common stock
 
$32.2    
   
$    --  
   
$    --           
   
$32.2
 
Supplemental executive retirement plan assets
 
25.6    
   
--  
   
--           
   
25.6
 
Total financial assets
 
$57.8    
   
$    --  
   
$    --           
   
$57.8
 
Derivatives, net   $    --         $  7.1       $    --                $  7.1  
Total financial liabilities    $    --          $  7.1        $    --                 $  7.1  
                         
As of December 31, 2010
                       
Auction rate securities
 
$    --    
   
$    --  
   
$44.5           
   
$44.5
 
Supplemental executive retirement plan assets
 
23.0    
   
--  
   
--           
   
23.0
 
Derivatives, net
 
    --    
   
16.4  
   
   --           
   
16.4
 
Total financial assets
 
$23.0    
   
$16.4  
   
$44.5           
   
$83.9
 
 
    Hercules Offshore, Inc. Common Stock
 
    In December 2011, we received 10.3 million shares of Hercules Offshore, Inc. ("HERO") common stock in connection with the resolution of certain litigation in respect of the previously reported Seahawk Drilling, Inc. bankruptcy claims.  Subsequently, we sold 3.0 million shares for $13.4 million of net proceeds in December 2011 and sold the remaining 7.3 million shares for $31.4 million of net proceeds in January 2012.  In connection with the bankruptcy, we received an additional 540,000 shares of HERO during 2012, which we sold for $2.4 million.  For additional information regarding Seahawk's bankruptcy, see "Seahawk Drilling, Inc. Bankruptcy" in Part I, Item 3. Legal Proceedings of this annual report on Form 10-K.  

    Our investments in HERO common stock were measured at fair value on a recurring basis using Level 1 inputs and were included in other current assets on our consolidated balance sheet as of December 31, 2011.  The fair value measurement of HERO common stock was based on quoted market prices of identical assets.  Net unrealized losses of $400,000 were included in other, net, in our consolidated statement of income for the year ended December 31, 2011.  We designated our investments in HERO common stock as trading securities as it was our intent to sell them in the near-term.  Proceeds from sales of HERO common stock and realized losses recorded during the year ended December 31, 2011 were as follows (in millions):
 
 
  
2011
 
       
 Proceeds from sales of HERO common stock
  
$13.4
  
 Realized losses
  
  .2
  
 
    Auction Rate Securities
 
    As of December 31, 2010, we held long-term debt instruments with variable interest rates that periodically reset through an auction process ("auction rate securities") totaling $50.1 million (par value) and were included in other assets, net, on our consolidated balance sheet. During the quarter ended March 31, 2011, $42.0 million (par value) of our auction rate securities were repurchased at par and $8.1 million (par value) were sold at 90% of par. Our auction rate securities were measured at fair value on a recurring basis using significant Level 3 inputs as of December 31, 2010.  The following table summarizes the fair value measurements of our auction rate securities using significant Level 3 inputs, and changes therein, for each of the years in the three-year period ended December 31, 2011 (in millions):
 
 
    Supplemental Executive Retirement Plans

    Our Ensco supplemental executive retirement plans (the "SERP") are non-qualified plans that provide for eligible employees to defer a portion of their compensation for use after retirement. Assets held in the SERP were marketable securities measured at fair value on a recurring basis using Level 1 inputs and were included in other assets, net, on our consolidated balance sheets as of December 31, 2011 and 2010.  The fair value measurements of assets held in the SERP were based on quoted market prices.
 
    Derivatives

    Our derivatives were measured at fair value on a recurring basis using Level 2 inputs as of December 31, 2011 and 2010.  See "Note 6 - Derivative Instruments" for additional information on our derivatives, including a description of our foreign currency hedging activities and related methodologies used to manage foreign currency exchange rate risk. The fair value measurements of our derivatives were based on market prices that generally are observable for similar assets or liabilities at commonly quoted intervals.

    Other Financial Instruments

    The carrying values and estimated fair values of our debt instruments as of December 31, 2011 and 2010 were as follows (in millions):

                   
 
December 31,
December 31,
 
                 2011                
                2010                
   
   Estimated
 
Estimated
 
Carrying
     Fair
Carrying
  Fair
 
  Value  
        Value   
  Value  
   Value  
         
4.70% Senior notes due 2021
 
$1,472.2 
 
$1,565.8  
 
$     --     
 
$     --     
 
6.875% Senior notes due 2020
 
1,055.8 
 
1,042.7  
 
--     
 
--     
 
3.25% Senior notes due 2016
 
993.5 
 
1,016.5  
 
--     
 
--     
 
8.50% Senior notes due 2019   631.7    615.3     --        --       
7.875% Senior notes due 2040   385.0    381.9     --        --       
7.20% Debentures due 2027   149.0    167.2     148.9        165.0       
4.33% MARAD bonds, including current maturities, due 2016   146.7    156.4     --        --       
6.36% MARAD bonds, including current maturities, due 2015   50.7    64.0     63.4        71.9       
4.65% MARAD bonds, including current maturities, due 2020   40.5      49.6     45.0        50.6       
Total    $4,925.1    $5,059.4     $257.3        $287.5       
 
    The estimated fair values of our senior notes and debentures were determined using quoted market prices. The estimated fair values of our MARAD 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 December 31, 2011 and December 31, 2010.

Property And Equipment
Property And Equipment
4.  PROPERTY AND EQUIPMENT

    Property and equipment as of December 31, 2011 and 2010 consisted of the following (in millions):

 
    2011    
    2010 
           
Drilling rigs and equipment
 
$12,672.6
 
$5,175.2
 
Other
 
92.7
 
50.4
 
Work in progress
 
1,720.4
 
1,519.0
 
 
 
$14,485.7
 
$6,744.6
 
 
    Drilling rigs and equipment increased $7.5 billion during 2011 primarily due to the Merger.  The estimated fair values recorded for Pride's drilling rigs and equipment as of the Merger Date totaled $5.5 billion, which included five drillships, 12 semisubmersible rigs and seven jackup rigs.
 
    Work in progress increased $201.4 million during 2011 primarily related to the Merger, mostly offset by ENSCO 8503 and ENSCO 8504, which were placed into service during 2011. The estimated fair value recorded for Pride's work in progress as of the Merger Date was $1.3 billion.  Work in progress as of December 31, 2011 primarily consisted of $803.4 million related to the construction of ENSCO 8505 and ENSCO 8506 ultra-deepwater semisubmersible rigs, $487.8 million related to the construction of ENSCO DS-6 and ENSCO DS-7 ultra-deepwater drillships, which were acquired in connection with the Merger, $142.7 million related to the construction of three ultra-high specification harsh environment jackup rigs and costs associated with various modification and enhancement projects.
 
    Work in progress as of December 31, 2010 primarily consisted of $1.4 billion related to the construction of our ENSCO 8500 Series® ultra-deepwater semisubmersible rigs and costs associated with various modification and enhancement projects.
Debt
Debt
5.  DEBT

    The carrying value of long-term debt as of December 31, 2011 and 2010 consisted of the following (in millions):

           
 
             2011  
 2010
           
4.70% Senior notes due 2021
 
$1,472.2
 
$      --
 
6.875% Senior notes due 2020
 
1,055.8
 
--
 
3.25% Senior notes due 2016
 
993.5
 
--
 
8.50% Senior notes due 2019   631.7   --  
7.875% Senior notes due 2040   385.0   --  
7.20% Debentures due 2027   149.0    148.9  
4.33% MARAD bonds due 2016   146.7    --  
6.36% MARAD bonds due 2015   50.7    63.4  
4.65% MARAD bonds due 2020   40.5   45.0  
Commercial paper   125.0    --  
Total debt  
5,050.1
 
257.3
 
Less current maturities
 
(172.5
)
(17.2
)
Total long-term debt
 
$4,877.6
 
$240.1
 
 
    Acquired Debt

    In connection with the Merger, we assumed Pride's outstanding debt comprised of $900.0 million aggregate principal amount of 6.875% senior notes due 2020, $500.0 million aggregate principal amount of 8.500% senior notes due 2019, $300.0 million aggregate principal amount of 7.875% senior notes due 2040 and $151.5 million aggregate principal amount of MARAD bonds due 2016.  Under a supplemental indenture, Ensco plc has fully and unconditionally guaranteed the performance of all obligations of Pride with respect to the Pride Notes.  See "Note 16 - Guarantee of Registered Securities" for additional information on the guarantee of the Pride Notes.  In addition, we assumed debt outstanding with respect to Pride's senior unsecured revolving credit facility totaling $181.0 million, which was repaid in full and the facility terminated upon completion of the Merger.
 
    We may also redeem each series of the Pride Notes, in whole or in part, at any time, at a price equal to 100% of their principal amount, plus accrued and unpaid interest and a "make-whole" premium. The Pride Notes also contain customary events of default, including failure to pay principal or interest on the Pride Notes when due, among others. The Pride Notes contain certain restrictions, including, among others, restrictions on our ability and the ability of our subsidiaries to create or incur secured indebtedness, enter into certain sale/leaseback transactions and enter into certain merger or consolidation transactions.
 
    Senior Notes

    On March 17, 2011, we issued $1.0 billion aggregate principal amount of unsecured 3.25% senior notes due 2016 at a discount of $7.6 million and $1.5 billion aggregate principal amount of unsecured 4.70% senior notes due 2021 at a discount of $29.6 million (collectively the "Notes") in a public offering. Interest on the Notes is payable semiannually in March and September of each year.  The Notes were issued pursuant to an indenture between us and Deutsche Bank Trust Company Americas, as trustee (the "Trustee"), dated March 17, 2011 (the "Indenture"), and a supplemental indenture between us and the Trustee, dated March 17, 2011 (the "Supplemental Indenture"). The proceeds from the sale of the Notes were used to fund a portion of the cash consideration payable in connection with the Merger.
 
    We may also redeem each series of the Notes, in whole or in part, at any time, at a price equal to 100% of their principal amount, plus accrued and unpaid interest and a "make-whole" premium. The Notes, the Indenture and the Supplemental Indenture also contain customary events of default, including failure to pay principal or interest on the Notes when due, among others. The Supplemental Indenture contains certain restrictions, including, among others, restrictions on our ability and the ability of our subsidiaries to create or incur secured indebtedness, enter into certain sale/leaseback transactions and enter into certain merger or consolidation transactions.
 
    Debentures Due 2027

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

    Bonds Due 2015 and 2020

    In January 2001, a subsidiary of Ensco Delaware issued $190.0 million of 15-year bonds to provide long-term financing for ENSCO 7500. The bonds will be repaid in 30 equal semiannual principal installments of $6.3 million ending in December 2015. Interest on the bonds is payable semiannually, in June and December, at a fixed rate of 6.36%. In October 2003, a subsidiary of Ensco Delaware issued $76.5 million of 17-year bonds to provide long-term financing for ENSCO 105. The bonds will be repaid in 34 equal semiannual principal installments of $2.3 million ending in October 2020. Interest on the bonds is payable semiannually, in April and October, at a fixed rate of 4.65%.

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

    Five-Year Credit Facility

    On May 12, 2011, we entered into an amended and restated agreement (the "Five-Year Credit Facility") with a syndicate of banks that provided for a $700.0 million unsecured revolving credit facility for general corporate purposes.  On May 31, 2011, upon the consummation of the Merger, and pursuant to the terms of the Five-Year Credit Facility, the commitment under the Five-Year Credit Facility increased from $700.0 million to $1.45 billion. In addition, certain of Ensco's subsidiaries became borrowers and/or guarantors of the Five-Year Credit Facility. The Five-Year Credit Facility has a five-year term, expiring in May 2016, and replaces our $700.0 million four-year credit agreement which was scheduled to mature in May 2014.  Advances under the Five-Year Credit Facility bear interest at LIBOR plus an applicable margin rate (currently 1.5% per annum), depending on our credit rating. We are required to pay a quarterly undrawn facility fee (currently 0.20% per annum) on the total $1.45 billion commitment, which is also based on our credit rating. We also are required to maintain a total debt to total capitalization ratio less than or equal to 50% under the Five-Year Credit Facility. We have the right, subject to lender consent, to increase the commitments under the Five-Year Credit Facility to an aggregate amount of up to $1.7 billion.  We had no amounts outstanding under the Five-Year Credit Facility or our prior credit agreement as of December 31, 2011 and December 31, 2010, respectively.

    364-Day Credit Facility

    On May 12, 2011, we entered into a 364-Day Credit Agreement (the "364-Day Credit Facility") with a syndicate of banks. The 364-Day Credit Facility provided for a $450.0 million unsecured revolving credit facility to be used for general corporate purposes, which would not be available for borrowing until certain conditions at the closing of the Merger were satisfied.  On May 31, 2011, upon the consummation of the Merger, the full commitment of $450.0 million under the 364-Day Credit Facility became available for Ensco to use for general corporate purposes. In addition, certain of Ensco's subsidiaries became borrowers and/or guarantors of the 364-Day Credit Facility. The 364-Day Credit Facility has a one-year term, expiring in May 2012, or the date of the termination of the lender commitments as set forth in the 364-Day Credit Facility.  Upon our election prior to maturity, amounts outstanding under the 364-Day Credit Facility may be converted into a term loan with a maturity date of May 11, 2013 after payment of a fee equal to 1% of the amounts converted. Advances under the 364-Day Credit Facility bear interest at LIBOR plus an applicable margin rate (currently 1.50% per annum) depending on our credit rating. We are required to pay a quarterly undrawn facility fee (currently 0.10% per annum) on the total $450.0 million commitment, which is also based on our credit rating. We also are required to maintain a total debt to total capitalization ratio less than or equal to 50% under the 364-Day Credit Facility. We have the right, subject to lender consent, to increase the commitments under the 364-Day Credit Facility to an aggregate amount of up to $550.0 million.  We had no amounts outstanding under the 364-Day Credit Facility as of December 31, 2011.
 
    Commercial Paper

    On April 26, 2011, we entered into a commercial paper program with four commercial paper dealers pursuant to which we may issue, on a private placement basis, unsecured commercial paper notes up to a maximum aggregate amount outstanding at any time of $700.0 million.  On May 31, 2011, following the consummation of the Merger, Ensco increased the maximum aggregate amount of the commercial paper program to $1.0 billion. Under the commercial paper program, we may issue commercial paper from time to time, and the proceeds of such financings will be used for capital expenditures and other general corporate purposes.  The commercial paper will bear interest at rates that will vary based on market conditions and the ratings assigned by credit rating agencies at the time of issuance.  The weighted-average interest rate on our commercial paper borrowings was 0.40% during 2011.  The maturities of the commercial paper will vary, but may not exceed 364 days from the date of issue. The commercial paper is not redeemable or subject to voluntary prepayment by us prior to maturity.  We had $125.0 million outstanding under our commercial paper program as of December 31, 2011, which was classified as short-term debt on our consolidated balance sheet.

    Bridge Term Facility

    On February 6, 2011, we entered into a bridge commitment letter (the "Commitment Letter") with Deutsche Bank AG Cayman Islands Branch ("DBCI"), Deutsche Bank Securities Inc. and Citigroup Global Markets Inc. ("Citi"). Pursuant to the Commitment Letter, DBCI and Citi committed to provide a $2.8 billion unsecured bridge term loan facility (the "Bridge Term Facility") to fund a portion of the cash consideration in the Merger.  Upon receipt of the proceeds from the issuance of the Notes, we determined that we had adequate cash resources to fund the cash component of the consideration payable in connection with the Merger and accordingly, the Bridge Term Facility was terminated in March 2011.

    Maturities

    The aggregate maturities of our debt, excluding net unamortized premiums of $347.4 million, as of December 31, 2011 were as follows (in millions):
 
2012
     
 
$  172.5
2013
       
47.5
2014
       
47.5
2015
       
47.5
2016         1,019.7
Thereafter
       
3,368.0
Total
     
 
$4,702.7
 
    Interest expense totaled $95.9 million for the year ended December 31, 2011 which was net of amounts capitalized of $80.2 million in connection with our newbuild rig construction.  All interest expense incurred during the years ended December 31, 2010 and 2009 of $21.3 million and $20.9 million, respectively, was capitalized in connection with our newbuild rig construction.
Derivative Instruments
Derivative Instruments
6.  DERIVATIVE INSTRUMENTS
   
    We use derivatives to reduce our exposure to various market risks, primarily foreign currency exchange rate risk. We maintain a foreign currency exchange rate risk management strategy that utilizes derivatives to reduce our exposure to unanticipated fluctuations in earnings and cash flows caused by changes in foreign currency exchange rates. Although no interest rate related derivatives were outstanding as of December 31, 2011 and 2010, we may employ an interest rate risk management strategy that utilizes derivatives to mitigate or eliminate unanticipated fluctuations in earnings and cash flows arising from changes in, and volatility of, interest rates. We mitigate our credit risk relating to the counterparties of our derivatives by transacting with multiple, high-quality financial institutions, thereby limiting exposure to individual counterparties, and by 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 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. See "Note 1 - Description of the Business and Summary of Significant Accounting Policies" for additional information on our accounting policy for derivatives and "Note 3 - Fair Value Measurements" for additional information on the fair value measurement of our derivatives.
 
    As of December 31, 2011 and 2010, our consolidated balance sheets included a net foreign currency derivative liability of $7.1 million and a net foreign currency derivative asset of  $16.4 million, respectively.  All of our derivatives mature during the next 17 months.  Derivatives recorded at fair value in our consolidated balance sheets as of December 31, 2011 and 2010 consisted of the following (in millions):

 
 
    We utilize cash flow hedges to hedge forecasted foreign currency denominated transactions, primarily to reduce our exposure to foreign currency exchange rate risk associated with contract drilling expenses denominated in various currencies.  As of December 31, 2011, we had cash flow hedges outstanding to exchange an aggregate $293.9 million for various foreign currencies, including $122.7 million for British pounds, $114.3 million for Singapore dollars, $27.6 million for Australian dollars, $24.2 million for Euros and $5.1 million for other currencies.
 
    Gains and losses, net of tax, on derivatives designated as cash flow hedges included in our consolidated statements of income for each of the years in the three-year period ended December 31, 2011 were as follows (in millions):

 
 
    We have net assets and liabilities denominated in numerous foreign currencies and use various methods to manage our exposure to foreign currency exchange rate risk. We predominantly structure our drilling contracts in U.S. dollars, which significantly reduces the portion of our cash flows and assets denominated in foreign currencies. We occasionally enter into derivatives that hedge the fair value of recognized foreign currency denominated assets or liabilities but do not designate such derivatives as hedging instruments. In these situations, a natural hedging relationship generally exists whereby changes in the fair value of the derivatives offset changes in the fair value of the underlying hedged items. As of December 31, 2011, we had derivatives not designated as hedging instruments outstanding to exchange an aggregate $43.4 million for various foreign currencies, including $12.7 million for Swiss francs, $11.6 million for Australian dollars and $19.1 million for other currencies.

    Net gains of $500,000, $2.9 million and $4.6 million associated with our derivatives not designated as hedging instruments were included in other, net, in our consolidated statements of income for the years ended December 31, 2011, 2010 and 2009, respectively.

    As of December 31, 2011, the estimated amount of net losses associated with derivatives, net of tax, that will be reclassified to earnings during the next twelve months was as follows (in millions):

Net unrealized losses to be reclassified to contract drilling expense
 
$2.7
 
Net realized losses to be reclassified to interest expense
 
.3
 
Net losses to be reclassified to earnings
 
$3.0
 
Goodwill
Goodwill
7.  GOODWILL
 
    On May 31, 2011, we completed the acquisition of Pride resulting in the recognition of a preliminary amount of $2.95 billion in goodwill, including measurement period adjustments.  See "Note 2 - Acquisition of Pride International, Inc." for additional information on the Merger.  Beginning and ending balances and the changes in the carrying amount of goodwill are as follows by reporting unit (in millions):
 
 
Deepwater  
 
    Midwater
       Jackup
   
 Total     
       
    
   
Balance as of December 31, 2010
$   143.6  
 
$      --   
 
$192.6
     
$   336.2 
 
Acquisition of Pride, including measurement
   period adjustments
2,479.9  
 
472.7   
 
--
     
2,952.6 
 
Balance as of December 31, 2011
$2,623.5  
 
$472.7   
 
$192.6
     
$3,288.8 
 
Shareholders' Equity
Shareholders' Equity
8.  SHAREHOLDERS' EQUITY
 
   Activity in our various shareholders' equity accounts for each of the years in the three-year period ended December 31, 2011 was as follows (in millions):
 
         
Accumulated
   
         
Other
   
     
Additional
 
Comprehensive
   
   
Paid-In
  Retained
Income
Treasury     
Noncontrolling
 
 Shares  
Par Value  
   Capital   
  Earnings
    (Loss)    
   Shares       
   Interest   
                               
BALANCE, December 31, 2008
 
 181.9 
 
$ 18.2 
 
$1,761.2 
 
$4,114.0
 
$(17.0)    
 
$(1,199.5) 
 
$ 6.7    
 
  Net income
 
-- 
 
-- 
 
-- 
 
779.4
 
--     
 
--  
 
5.1    
 
  Cash dividends paid
 
-- 
 
-- 
 
-- 
 
(14.2
)
--     
 
--  
 
--    
 
  Distributions to noncontrolling interests
 
-- 
 
-- 
 
-- 
 
--
 
--     
 
--  
 
(3.9)   
 
  Shares issued under share-based compensation
                             
    plans, net
 
.9 
 
.1 
 
9.5 
 
--
 
--     
 
--  
 
--    
 
  Tax deficiency from share-based
                             
    compensation
 
-- 
 
-- 
 
(2.4)
 
--
 
--     
 
--  
 
--    
 
  Repurchase of shares
 
-- 
 
-- 
 
-- 
 
--
 
--     
 
(6.5) 
 
--    
 
  Retirement of treasury shares
 
(40.2)
 
(4.0)
 
(1,200.0)
 
--
 
--     
 
1,203.9  
 
--    
 
  Share-based compensation cost
 
-- 
 
-- 
 
34.3 
 
--
 
--     
 
--  
 
--    
 
  Net other comprehensive income
 
-- 
 
-- 
 
-- 
 
--
 
22.2     
 
--  
 
--    
 
  Cancellation of shares of common stock
     during redomestication
 
(142.6)
 
(14.3)
 
-- 
 
--
 
--     
 
--  
 
--    
 
  Issuance of ordinary shares pursuant
     to the redomestication
 
150.1 
 
15.1 
 
-- 
 
--
 
--     
 
(.8) 
 
--    
 
BALANCE, December 31, 2009
 
150.1 
 
15.1 
 
602.6 
 
4,879.2
 
5.2    
 
(2.9) 
 
7.9    
 
  Net income
 
-- 
 
-- 
 
-- 
 
579.5
 
--     
 
--  
 
6.4    
 
  Cash dividends paid
 
-- 
 
-- 
 
-- 
 
(153.7
)
--     
 
--  
 
--    
 
  Distributions to noncontrolling interests
 
-- 
 
-- 
 
-- 
 
--
 
--     
 
--  
 
(8.8)   
 
  Shares issued under share-based compensation
                             
    plans, net
 
-- 
 
-- 
 
1.4 
 
--
 
--     
 
.1  
 
--    
 
  Tax deficiency from share-based
                             
    compensation
 
-- 
 
-- 
 
(2.2)
 
--
 
--     
 
--  
 
--    
 
  Repurchase of shares
 
-- 
 
-- 
 
-- 
 
--
 
--     
 
(6.0) 
 
--    
 
  Share-based compensation cost
 
-- 
 
-- 
 
35.3 
 
--
 
--     
 
--  
 
--    
 
  Net other comprehensive income
 
-- 
 
-- 
 
-- 
 
--
 
5.9     
 
--  
 
--    
 
BALANCE, December 31, 2010
 
150.1 
 
15.1 
 
   637.1 
 
5,305.0
 
11.1     
 
 (8.8) 
 
 5.5    
 
  Net income
  --    --    --    600.4   --        --     5.2      
  Cash dividends paid
  --    --    --    (292.3)   --        --     --      
  Distributions to noncontrolling interests
  --    --    --    --     --        --     (5.5)     
  Shares issued under share-based compensation
                             
    plans, net
  --    --    39.7    --    --        .2     --      
  Shares issued in connection with the Merger     85.8    8.6    4,568.9    --    --        --     --      
  Fair value of share options assumed in
    connection with the Merger
  --    --    35.4    --    --        --     --      
  Equity issuance costs   --    --    (70.5)   --    --        --     --      
  Tax benefit from share-based
                             
    compensation
  --    --    .5    --    --        --     --      
  Repurchase of shares
  --    --    --    --    --        (10.5)    --      
  Share-based compensation cost
  --    --    41.9    --    --        --     --      
  Net other comprehensive loss
  --    --    --    --    (2.5)      --     --      
BALANCE, December 31, 2011   235.9    $ 23.7    $5,253.0    $5,613.1    $    8.6        $     (19.1)    $  5.2     
 
 
    The Board of Directors of Ensco Delaware previously authorized the repurchase of up to $1.5 billion of our ADSs, representing our Class A ordinary shares. In December 2009, the then-Board of Directors of Ensco International Limited, a predecessor of Ensco plc, continued the prior authorization and, subject to shareholder approval, authorized management to repurchase up to $562.4 million of ADSs from time to time pursuant to share repurchase agreements with two investment banks. The then-sole shareholder of Ensco International Limited approved such share repurchase agreements for a five-year term.  From inception of our share repurchase programs during 2006 through December 31, 2008, we repurchased an aggregate 16.5 million shares at a cost of $937.6 million (an average cost of $56.79 per share). No shares were repurchased under the share repurchase programs during the years ended December 31, 2011 and 2010.  Although $562.4 million remained available for repurchase as of December 31, 2011, we will not repurchase any shares under our share repurchase program without further consultation with and approval by the Board of Directors of Ensco plc.
Comprehensive Income
Comprehensive Income
9.  COMPREHENSIVE INCOME

    Accumulated other comprehensive income as of December 31, 2011 and 2010 primarily was comprised of gains and losses on derivative instruments, net of tax. The components of comprehensive income, net of tax, for each of the years in the three-year period ended December 31, 2011 were as follows (in millions):

 
   2011       
  2010       
      2009    
               
Net income
 
$605.6
 
$585.9
 
$784.5
 
Other comprehensive income (loss):
             
     Net change in fair value of derivatives
 
.1
 
7.6
 
13.5
 
     Reclassification of gains and losses on derivative
           instruments from other comprehensive (income)
           loss into net income
 
(5.5
)
(1.7
)
8.7
 
     Other   2.9   --   --  
              Net other comprehensive (loss) income
 
(2.5
)
5.9
 
22.2
 
Comprehensive income
 
603.1
 
591.8
 
806.7
 
Comprehensive income attributable to noncontrolling interests
 
(5.2
)
(6.4
)
(5.1
)
Comprehensive income attributable to Ensco
 
$597.9
 
$585.4
 
$801.6
 
Benefit Plans
Benefit Plans
10.  BENEFIT PLANS
 
    Non-Vested Share Awards

    During 2005, our shareholders approved the 2005 Long-Term Incentive Plan (the "LTIP") to provide for the issuance of non-vested share awards, share option awards and performance awards. Under the LTIP, 10.0 million shares were reserved for issuance as awards to officers, non-employee directors and key employees who are in a position to contribute materially to our growth, development and long-term success. The LTIP originally provided for the issuance of non-vested share awards up to a maximum of 2.5 million new shares. In May 2009, our shareholders approved an amendment to the LTIP to increase the maximum number of non-vested share awards from 2.5 million to 6.0 million.  As of December 31, 2011, there were 1.6 million shares available for issuance of non-vested share awards under the LTIP. Non-vested share awards may be satisfied by delivery of share units, newly issued shares or by delivery of shares held by a subsidiary or affiliated entity at the Company's discretion.
 
    Under the LTIP, grants of non-vested share awards generally vest at rates of 20% or 33% per year, as determined by a committee or subcommittee of the Board of Directors. Prior to the adoption of the LTIP, non-vested share awards were issued under a predecessor plan and generally vested at a rate of 10% per year. All non-vested share awards have voting and dividend rights effective on the date of grant. Compensation expense is measured using the market value of our shares on the date of grant and is recognized on a straight-line basis over the requisite service period (usually the vesting period).

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

 
  2011
    2010
        2009 
               
Contract drilling
 
$17.0
   
$17.2
   
$16.8
   
General and administrative
 
21.5
 
13.9
 
11.4
 
Non-vested share award related compensation expense
             
   included in operating expenses
 
38.5
 
31.1
 
28.2
 
Tax benefit
 
(6.9
)
(6.3
)
(7.0
)
Total non-vested share award related compensation
                 
   expense included in net income
 
$31.6
 
$24.8
 
$21.2
 

    The following table summarizes the value of non-vested share awards granted and vested during each of the years in the three-year period ended December 31, 2011:

 
   2011      
 2010 
      2009 
               
Weighted-average grant-date fair value of
   
   
 
   
 
   
   non-vested share awards granted (per share)
 
$52.50
 
$35.81
 
$40.91
 
Total fair value of non-vested share awards
             
   vested during the period (in millions)
 
$41.0  
 
$22.1  
 
$18.6  
 
 
 
    The following table summarizes non-vested share award activity for the year ended December 31, 2011 (shares in thousands):
 
   
Weighted-
   
Average
   
Grant-Date
 
Shares
Fair Value
           
Non-vested as of December 31, 2010
 
1,791
 
$47.75  
 
   Granted
 
1,384
 
52.50  
 
   Vested
 
(678
)
50.50  
 
   Forfeited
 
(121
)
48.07  
 
Non-vested as of December 31, 2011
 
2,376
 
$49.69  
 

    As of December 31, 2011, there was $92.4 million of total unrecognized compensation cost related to non-vested share awards, which is expected to be recognized over a weighted-average period of 3.1 years.

    Share Option Awards

    Under the LTIP, share option awards ("options") may be issued to our officers, non-employee directors and key employees who are in a position to contribute materially to our growth, development and long-term success. A maximum 7.5 million shares were reserved for issuance as options under the LTIP. Options granted to officers and employees generally become exercisable in 25% increments over a four-year period or 33% increments over a three-year period and, to the extent not exercised, expire on the seventh anniversary of the date of grant. Options granted to non-employee directors are immediately exercisable and, to the extent not exercised, expire on the seventh anniversary of the date of grant. The exercise price of options granted under the LTIP equals the market value of the underlying shares on the date of grant. As of December 31, 2011, options to purchase 2.3 million shares were outstanding under the LTIP and 3.3 million shares were available for issuance as options. Upon option exercise, issuance of shares may be satisfied by delivery of newly issued shares or by delivery of shares held by a subsidiary or affiliated entity at the Company's discretion.

    The following table summarizes option related compensation expense recognized during each of the years in the three-year period ended December 31, 2011 (in millions):

               
 
 2011     
 2010   
     2009 
               
Contract drilling
 
$  --      
 
$   .7   
 
$  1.7  
   
General and administrative
 
2.5      
 
2.8   
 
3.7  
 
Option related compensation expense included in
             
   operating expenses
 
2.5      
 
3.5   
 
5.4  
 
Tax benefit
 
(.5)     
 
(.6)  
 
(1.6) 
 
Total option related compensation expense included
             
   in net income
  
$2.0      
  
$  2.9   
  
$  3.8  
 
 
 
    The fair value of each option is estimated on the date of grant using the Black-Scholes option valuation model.  The following weighted-average assumptions were utilized in the Black-Scholes model for each of the years in the three-year period ended December 31, 2011:

               
 
               2011  
             2010  
                2009  
               
Risk-free interest rate
 
1.4
%
1.8
1.8
%
Expected term (in years)
 
3.7
  4.0  
3.9
 
Expected volatility
 
50.2
%
53.1
53.3
%
Dividend yield
 
2.6
%
4.1
.2
%

    Expected volatility is based on the historical volatility in the market price of our shares over the period of time equivalent to the expected term of the options granted. The expected term of options granted is derived from historical exercise patterns over a period of time equivalent to the contractual term of the options granted. We have not experienced significant differences in the historical exercise patterns among officers, employees and non-employee directors for them to be considered separately for valuation purposes. The risk-free interest rate is based on the implied yield of U.S. Treasury zero-coupon issues on the date of grant with a remaining term approximating the expected term of the options granted.
 
    The following table summarizes option activity for the year ended December 31, 2011 (shares and intrinsic value in thousands, term in years):

                   
   
Weighted-
Weighted-
 
   
Average
Average
 
   
  Exercise
Contractual
Intrinsic
 
Shares
     Price     
     Term     
Value
                   
Outstanding as of December 31, 2010
 
1,321
 
 
$47.52
       
        Options assumed in the Merger   1,926   35.40        
        Granted
 
129
 
 
54.92
       
        Exercised
 
(1,083
)
 
36.91
       
        Forfeited
 
--
 
 
 --
       
        Expired
 
(4
)
 
50.17
       
Outstanding as of December 31, 2011
 
2,289
 
 
$42.78
4.2
 
$15,602   
 
Exercisable as of December 31, 2011
 
2,032
 
 
$42.49
4.0
 
$14,168   
 

    The following table summarizes the value of options granted and exercised during each of the years in the three-year period ended December 31, 2011:

               
 
                               2011  
        2010  
         2009  
               
Weighted-average grant-date fair value of
   
   
 
   
 
   
   options granted (per share)
 
$19.05
 
$11.05
 
$17.17
 
Intrinsic value of options exercised during
             
   the year (in millions)
 
$17.2  
 
$   .4  
 
$   3.6 
 
 
 
    The following table summarizes information about options outstanding as of December 31, 2011 (shares in thousands):
 
               
 
                            Options Outstanding                            
             Options Exercisable             
   
Weighted-Average
      
 
Number     
Remaining
Weighted-Average
Number
   Weighted-Average
Exercise Prices
Outstanding  
Contractual Life
  Exercise Price  
Exercisable
       Exercise Price    
             
$18.87  - $34.45 
556       
4.6 years                
$27.29        
458            
$25.76          
 
  35.12  -   41.29
448       
5.6 years                
39.31        
411            
39.13          
 
  42.25 -   50.09
560       
4.5 years                
44.72        
560            
44.72          
 
  50.28  -   60.74
725       
2.7 years                
55.33        
603            
55.42          
 
 
2,289       
4.2 years                
$42.78        
2,032            
 
$42.49          
 

    As of December 31, 2011, there was $2.7 million of total unrecognized compensation cost related to options, which is expected to be recognized over a weighted-average period of 1.7 years.

    Performance Awards

    In November 2009, our Board of Directors approved amendments to the LTIP which, among other things, provide for a type of performance award payable in Ensco shares, cash or a combination thereof upon attainment of specified performance goals based on relative total shareholder return and absolute and relative return on capital employed. The performance goals are determined by a committee or subcommittee of the Board of Directors. The LTIP provides for the issuance of up to a maximum of 2.5 million new shares for the payment of performance awards, all of which were available for the payment of performance awards as of December 31, 2011.  Performance awards that are paid in Ensco shares may be satisfied by delivery of newly issued shares or by delivery of shares held by a subsidiary or affiliated entity at the Company's discretion.

    Performance awards may be issued to certain of our officers who are in a position to contribute materially to our growth, development and long-term success. Performance awards generally vest at the end of a three-year measurement period based on attainment of performance goals. Our performance awards are classified as liability awards with compensation expense measured based on the estimated probability of attainment of the specified performance goals and recognized on a straight-line basis over the requisite service period. The estimated probable outcome of attainment of the specified performance goals is based on historical experience and any subsequent changes in this estimate are recognized as a cumulative adjustment to compensation cost in the period in which the change in estimate occurs. The aggregate grant-date fair value of performance awards granted during 2011, 2010 and 2009 totaled $3.1 million, $4.3 million and $12.1 million, respectively.  The aggregate fair value of performance awards vested during 2011 and 2010 totaled $5.6 million and $2.4 million, respectively, all of which was paid in cash.

    During the years ended December 31, 2011, 2010 and 2009, we recognized $6.7 million, $9.9 million and $1.9 million of compensation expense for performance awards, respectively, which was included in general and administrative expense in our consolidated statements of income.  As of December 31, 2011, there was $7.6 million of total unrecognized compensation cost related to unvested performance awards, which is expected to be recognized over a weighted-average period of 1.8 years.
 
 
    Savings Plans

    We have profit sharing plans (the "Ensco Savings Plan" and the "Ensco Multinational Savings Plan") which cover eligible employees, as defined.  The Ensco Savings Plan includes a 401(k) savings plan feature which allows eligible employees to make tax deferred contributions to the plan.  Contributions made to the Ensco Multinational Savings Plan may or may not qualify for tax deferral based on each plan participant's local tax requirements.
 
    We generally make matching cash contributions to the profit sharing plans.  We match 100% of the amount contributed by the employee up to a maximum of 5% of eligible salary. Matching contributions totaled $11.6 million, $5.0 million and $4.1 million for the years ended December 31, 2011, 2010 and 2009, respectively.  Profit sharing contributions made into the plans require Board of Directors approval and are generally paid in cash.  We recorded profit sharing contribution provisions of $18.1 million, $16.2 million and $14.2 million for the years ended December 31, 2011, 2010 and 2009, respectively.  Matching contributions and profit sharing contributions become vested in 33% increments upon completion of each initial year of service with all contributions becoming fully vested subsequent to achievement of three or more years of service.  We have 1.0 million shares reserved for issuance as matching contributions under the Ensco Savings Plan.
Income Taxes
Income Taxes
11.  INCOME TAXES

    Ensco Delaware, our predecessor company, was domiciled in the U.S. and subject to a statutory rate of 35% through December 23, 2009, the effective date of the redomestication. We were subject to the U.K. statutory rate of 26.5% during 2011 and 28% during 2010 and for eight days of 2009.  Our consolidated effective income tax rate information for the year ended December 31, 2009 has been presented from the perspective of an enterprise domiciled in the U.S.
 
    We generated $(30.5) million, $90.5 million and $292.2 million of (loss) income from continuing operations before income taxes in the U.S. and $767.1 million, $554.0 million and $643.0 million of income from continuing operations before income taxes in non-U.S. countries for the years ended December 31, 2011, 2010 and 2009, respectively.

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

               
 
     2011 
      2010 
     2009 
               
Current income tax expense:
             
      U.S.
 
$ 51.8
 
$ 9.8
 
$  71.9
 
      Non-U.S.
 
98.8
 
71.9
 
87.6
 
   
150.6
 
81.7
 
159.5
 
               
Deferred income tax expense (benefit):
             
      U.S.
 
(14.9
)
15.2
 
20.5
 
      Non-U.S.
 
(4.7
)
(.9
)
--
 
   
(19.6
)
14.3
 
20.5
 
               
Total income tax expense
 
$131.0
 
$96.0
 
$180.0
 
 
 
    The following table summarizes significant components of deferred income tax assets (liabilities) as of December 31, 2011 and 2010 (in millions):
 
           
 
 2011    
       2010  
Deferred tax assets:
         
      Net operating loss carryforwards
 
$ 193.1
 
$     9.9
 
      Premium on long-term debt
 
135.7
 
--
 
      Foreign tax credits
 
92.6
 
--
 
      Employee benefits, including share-based compensation
 
33.1
 
23.3
 
      Deferred revenue
 
32.0
 
28.9
 
      Other
 
30.1
 
9.8
 
      Total deferred tax assets
 
516.6
 
71.9
 
      Valuation allowance
 
(239.5
)
 (11.0
)
          Net deferred tax assets
 
277.1
 
60.9
 
Deferred tax liabilities:
         
      Property and equipment
 
(493.6
)
(335.6
)
      Deferred costs
 
(35.9
)
(24.5
)
      Intercompany transfers of property
 
(38.8
)
(35.2
)
      Other
 
(25.2
)
(14.3
)
      Total deferred tax liabilities
 
(593.5
)
(409.6
)
          Net deferred tax liability
 
$(316.4
)
$(348.7
)
           
Net current deferred tax asset
 
$     1.4
 
$     9.3
 
Net noncurrent deferred tax liability
 
(317.8
)
(358.0
)
          Net deferred tax liability
 
$(316.4
)
$(348.7
)
 
    The realization of substantially all of our deferred tax assets is dependent on generating sufficient taxable income during future periods in various jurisdictions in which we operate.  Realization of certain of our deferred tax assets is not assured. We recognize a valuation allowance for deferred tax assets when it is more-likely-than-not that the benefit from the deferred tax asset will not be realized.  The amount of deferred tax assets considered realizable could increase or decrease in the near-term if estimates of future taxable income change.

    As of December 31, 2011, we had deferred tax assets of $193.1 million related to $854.9 million of net operating loss ("NOL") carryforwards and $92.6 million of U.S. foreign tax credits ("FTC"), which can be used to reduce our income taxes payable in future years.  NOL carryforwards, which were generated in various jurisdictions worldwide, include $212.0 million of NOLs that do not expire and $642.9 million that will expire, if not utilized, beginning in 2012 through 2031.  The FTC expire between 2017 and 2021.  Due to the uncertainty of realization, we have a $235.6 million valuation allowance on NOL carryforwards and FTC, primarily relating to countries where we no longer operate or do not expect to generate future taxable income.
 

    Subsequent to our redomestication to the U.K. in December 2009, we reorganized our worldwide operations, which included, among others, the transfer of ownership of several of our drilling rigs among our subsidiaries.

 

    Our consolidated effective income tax rate for 2011 includes the impact of various discrete tax items, the majority of which is attributable to a gain on disposal of assets in a jurisdiction with a high tax rate and the recognition of a liability for unrecognized tax benefits associated with a tax position taken in a prior year.  Excluding the impact of the aforementioned discrete items, our consolidated effective income tax rate for the year ended December 31, 2011 was 16.0%.  The increase in our 2011 consolidated effective income tax rate, excluding discrete tax items, to 16.0% from 14.9% in the prior year was due to unrecognized benefits related to net operating losses and foreign tax credits of certain subsidiaries acquired in 2011, partially offset by the aforementioned transfer of drilling rig ownership in connection with the reorganization of our worldwide operations and other changes in taxing jurisdictions in which our drilling rigs are operated and/or owned that resulted in an increase in the relative components of our earnings generated in tax jurisdictions with lower tax rates.

 

    The decline in our 2010 consolidated effective income tax rate to 14.9% from 19.2% in the prior year was primarily due to the aforementioned transfer of drilling rig ownership in connection with the reorganization of our worldwide operations, which resulted in an increase in the relative components of our earnings generated in tax jurisdictions with lower tax rates, and an $8.8 million non-recurring current income tax expense incurred during 2009 in connection with certain restructuring activities undertaken immediately following our redomestication to the U.K.

 

    Our consolidated effective income tax rate on continuing operations for each of the years in the three-year period ended December 31, 2011, differs from the U.K. or U.S. statutory income tax rates as follows:

 

               

 

 2011       

 2010       

    2009 

 

 

 

 

 

 

 

 

Statutory income tax rate

 

26.5

%

28.0

%

35.0

%

Non-U.K./U.S. taxes

 

(17.9

)

(18.9

)

(17.7

)

Amortization of deferred charges

   associated with intercompany rig sales

 

1.3

 

2.7

 

1.8

 

Redomestication related income taxes

 

.0

 

.0

 

.9

 

Valuation allowance

 

6.7

 

1.7

 

.1

 

Net expense (benefit) in connection with resolutions

 

 

 

 

 

 

 

   of tax issues and adjustments relating to prior years

 

.8

 

(.5

)

(.9

)

Other

 

.4

 

1.9

 

.0

 

Effective income tax rate

 

17.8

%

14.9

%

19.2

%

 

    Unrecognized Tax Benefits

 

    Our tax positions are evaluated for recognition using a more-likely-than-not threshold, and those tax positions requiring recognition are measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon effective settlement with a taxing authority that has full knowledge of all relevant information.  As of December 31, 2011, we had $54.0 million of unrecognized tax benefits, of which $31.2 million would impact our consolidated effective income tax rate if recognized.  A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2011 and 2010 is as follows (in millions):

           

 

  2011

  2010

 

 

 

 

 

 

Balance, beginning of year

 

$13.7

 

$17.6

 

   Unrecognized tax benefits assumed in the Merger

 

35.2

 

--

 

   Increases in unrecognized tax benefits as a result

      of tax positions taken during the current year

 

1.9

 

1.0

 

   Increases in unrecognized tax benefits as a result

      of tax positions taken during prior years

 

6.1

 

--

 

   Decreases in unrecognized tax benefits as a result

      of tax positions taken during prior years

 

--

 

(.2

)

   Settlements with taxing authorities

 

--

 

--

 

   Lapse of applicable statutes of limitations

 

(2.0

)

(1.3

)

   Impact of foreign currency exchange rates

 

(.9

)

(3.4

)

Balance, end of year

 

$54.0

 

$13.7

 

 

 

    Accrued interest and penalties totaled $22.7 million and $12.0 million as of December 31, 2011 and 2010, respectively, and were included in other liabilities on our consolidated balance sheets. We recognized a net benefit of $400,000 and net expense of $1.5 million and $3.3 million associated with interest and penalties during the years ended December 31, 2011, 2010 and 2009, respectively. Interest and penalties are included in current income tax expense in our consolidated statement of income.

 

    Tax years as early as 2003 remain subject to examination in the major tax jurisdictions in which we operated.  Ensco Delaware participates in the U.S. Internal Revenue Service's Compliance Assurance Process ("IRS CAP") which, among others, provides for the resolution of tax issues in a timely manner and generally eliminates the need for lengthy post-filing examinations.  Our 2010 U.S federal tax return remains subject to examination under the IRS CAP.

 

    During 2011, statutes of limitations applicable to certain of our tax positions lapsed resulting in a $2.0 million decline in unrecognized tax benefits and a $4.2 million net income tax benefit, inclusive of interest and penalties.

 

    During 2010, statutes of limitations applicable to certain of our tax positions lapsed resulting in a $1.3 million decline in unrecognized tax benefits and a $2.5 million net income tax benefit, inclusive of interest and penalties.

 

    During 2009, in connection with the audit of prior year tax returns, we reached a settlement with the tax authority in one of our non-U.S. jurisdictions which resulted in an $8.7 million reduction in unrecognized tax benefits and a $4.4 million net income tax benefit, inclusive of interest and penalties.

 

    Statutes of limitations applicable to certain of our tax positions will lapse during 2012.  Therefore, it is reasonably possible that our unrecognized tax benefits will decline during the next twelve months by $30.3 million, inclusive of $6.9 million of accrued interest and penalties, of which $11.3 million would impact our consolidated effective income tax rate if recognized.

 

    Intercompany Transfer of Drilling Rigs

 

    Subsequent to the Merger, we transferred ownership of several acquired drilling rigs among our subsidiaries in June 2011.  Following our redomestication to the U.K. in December 2009, we reorganized our worldwide operations, which included, among others, the transfer of ownership of several of our drilling rigs among our subsidiaries during 2010 and 2009.  The drilling rigs transferred during 2010 were either transferred among subsidiaries that are not subject to income tax or transferred among subsidiaries that were resident in the same tax jurisdiction and included in a consolidated tax return.  Accordingly, the selling subsidiaries incurred no income tax liability or benefit on gains and losses, nor were there any reversing temporary differences, in connection with the transfer of drilling rigs during 2010.

 

    The income tax liability associated with gains on the intercompany transfers of drilling rigs totaled $10.3 million and $30.8 million in 2011 and 2009, respectively. The related income tax expense was deferred and is being amortized on a straight-line basis over the remaining useful lives of the associated rigs, which range from 29 to 35 years for the rigs transferred in 2011 and 29 to 30 years for the rigs transferred in 2009. Similarly, the tax effects of $29.6 million and $45.6 million of reversing temporary differences of the selling subsidiaries in 2011 and 2009, respectively, also were deferred and are being amortized on the same basis and over the same periods as described above.

 

 

    As of December 31, 2011 and 2010, the unamortized balance associated with deferred charges for income taxes incurred in connection with intercompany transfers of drilling rigs totaled $68.8 million and $74.6 million, respectively, and was included in other assets, net, on our consolidated balance sheets. Current income tax expense for the years ended December 31, 2011, 2010 and 2009 included $16.1 million, $23.5 million and $22.8 million, respectively, of amortization of income taxes incurred in connection with intercompany transfers of drilling rigs.


 

    As of December 31, 2011 and 2010, the deferred tax liability associated with temporary differences of transferred drilling rigs totaled $38.8 million and $35.2 million, respectively, and was included in deferred income taxes on our consolidated balance sheet.  Deferred income tax expense for the years ended December 31, 2011, 2010 and 2009 included benefits of $6.6 million, $6.4 million and $5.8 million, respectively, of amortization of deferred reversing temporary differences associated with intercompany transfers of drilling rigs.

 

    Undistributed Earnings

 

    We do not provide deferred taxes on the undistributed earnings of Ensco Delaware or Ensco United Incorporated, an indirect wholly-owned subsidiary of Ensco and immediate parent company of Pride, because our policy and intention is to reinvest such earnings indefinitely or until such time that they can be distributed in a tax-free manner. We do not provide deferred taxes on the undistributed earnings of Ensco Delaware's or Ensco United Incorporated's non-U.S. subsidiaries because our policy and intention is to reinvest such earnings indefinitely.  Furthermore, both our U.S. and non-U.S. subsidiaries have significant net assets, liquidity, contract backlog and/or other financial resources available to meet their operational and capital investment requirements and otherwise allow us to continue to maintain our policy of reinvesting the undistributed earnings of these companies indefinitely.

 

    As of December 31, 2011, the aggregate undistributed earnings of Ensco Delaware, Ensco United Incorporated and their non-U.S. subsidiaries totaled $3.8 billion and were indefinitely reinvested. Should we make a distribution in the form of dividends or otherwise, we may be subject to additional income taxes. The unrecognized deferred tax liability related to these undistributed earnings was not practicable to estimate as of December 31, 2011.

 

Discontinued Operations
Discontinued Operations
12.  DISCONTINUED OPERATIONS
 
    During 2010, we sold jackup rigs ENSCO 50, ENSCO 51, ENSCO 57 and ENSCO 60 for an aggregate $167.5 million, of which deposits of $9.4 million were received in December 2009. We recognized an aggregate pre-tax gain of $57.5 million in connection with the disposals, which was included in gain on disposal of discontinued operations, net, in our consolidated statement of income for the year ended December 31, 2010. The rigs' aggregate net book value, inventory and other assets on the date of sale totaled $110.0 million.  The rigs' operating results were reclassified to discontinued operations in our consolidated statements of income for the years ended December 31, 2010 and 2009 and previously were included within our Jackup segment results.
 
    The following table summarizes income from discontinued operations for the years ended December 31, 2010 and 2009 (in millions):

 
 
    2010
2009   
               
Revenues
    
 
$12.5
      
 
$83.0
  
Operating expenses
   
17.1
   
54.2
 
Operating (loss) income before income taxes
   
(4.6
)  
28.8
 
Income tax benefit
   
(3.4
)  
(.5
)
Gain on disposal of discontinued operations, net
 
 
38.6
 
 
--
 
Income from discontinued operations
   
$37.4
   
$29.3
 

    Debt and interest expense are not allocated to our discontinued operations.
Commitments And Contingencies
Commitments And Contingencies
13.  COMMITMENTS AND CONTINGENCIES

    Leases

    We are obligated under leases for certain of our offices and equipment.  Rental expense relating to operating leases was $31.5 million, $15.9 million and $14.2 million during the years ended December 31, 2011, 2010 and 2009, respectively. Future minimum rental payments under our noncancellable operating lease obligations are as follows:  $15.8 million during 2012; $11.1 million during 2013; $7.7 million during 2014; $7.7 million during 2015, $8.5 million during 2016 and $17.7 million thereafter.

    Capital Commitments

    The following table summarizes the aggregate contractual commitments related to our two ENSCO 8500 Series® rigs, our two ultra-deepwater drillships and our three ultra-high specification harsh environment jackup rigs under construction as of December 31, 2011 (in millions):
 
2012
     
 
$  920.5
2013         698.7
2014
       
196.0
Total
     
 
$1,815.2
 
    The actual timing of these expenditures may vary based on the completion of various construction milestones, which are, to a large extent, beyond our control.
 
    Demand Letter, Derivative Cases and Shareholder Class Actions

    In June 2009, Pride received a demand letter from a purported shareholder that alleged certain of Pride's then-current and former officers and directors violated their fiduciary duties in regards to certain matters involving Pride's previously disclosed Foreign Corrupt Practices Act ("FCPA") investigation. The letter requested that Pride's board of directors take appropriate action against the individuals in question. In September 2009, Pride's board of directors formed a special committee, which retained independent legal counsel and commenced an evaluation of the issues raised by the letter in an effort to determine a course of action.
 
 
    In April 2010, two purported shareholders of Pride filed separate derivative actions against all of Pride's then-current directors and against Pride, as nominal defendant. The lawsuits were consolidated and alleged that the individual defendants breached their fiduciary duties in regards to certain matters involving Pride's previously disclosed FCPA investigation. Among other remedies, the lawsuit seeks damages in an unspecified amount and equitable relief against the individual defendants, along with an award of attorney fees and other costs and expenses to the plaintiff.  After the conclusion of Pride's investigation, the plaintiffs filed a consolidated amended petition in January 2011, raising allegations substantially similar to those made in the prior lawsuits.

    In December 2010, the special committee completed its evaluation of the issues surrounding Pride's FCPA investigation and again reviewed its conclusion in January 2011 in connection with the amended petition described above.  The committee concluded that it was not in the interest of Pride or its shareholders to pursue litigation related to the matter.

    Following the announcement of the Merger, a number of putative shareholder class action complaints or petitions were filed against various combinations of Pride, Pride's directors, Ensco and certain of our subsidiaries. These lawsuits challenged the proposed Merger and generally alleged, among other matters, that the individual members of the Pride board of directors breached their fiduciary duties by approving the proposed Merger, failing to take steps to maximize value to Pride's shareholders and failing to disclose material information concerning the proposed Merger in the registration statement on Form S-4; that Pride, Ensco and certain of our subsidiaries aided and abetted such breaches of fiduciary duties; and that the Merger Agreement improperly favored Ensco and unduly restricted Pride's ability to negotiate with other bidders. These lawsuits generally sought, among other remedies, compensatory damages, declaratory and injunctive relief concerning the alleged fiduciary breaches, and injunctive relief prohibiting the defendants from consummating the Merger.  In addition, the plaintiffs in the derivative class action lawsuits related to Pride's previously disclosed FCPA investigation amended their petition to add claims related to the Merger.

    In May 2011, Ensco and the other named defendants signed a memorandum of understanding with the plaintiffs to settle the previously disclosed shareholder class action lawsuits filed related to the Merger (collectively, the "Settled Claims").

    In August 2011, the parties to the memorandum of understanding entered into a stipulation of settlement, which provides for, among other matters, the release of the Settled Claims following notice by mailing, certification of a non-opt-out class for settlement purposes, a settlement hearing and final approval of the settlement.  Under the stipulation of settlement, Pride or its successor agreed not to oppose any application by attorneys for the class for fees and expenses not exceeding $1.1 million.  The stipulation of settlement was approved in November 2011.
 
    The plaintiffs in all but one of the remaining cases have filed motions to dismiss with prejudice, which currently are pending.  Our motion to dismiss in the remaining matter also currently is pending; however, at this time, we are unable to predict the outcome of these matters or estimate the extent to which we may be exposed to any resulting liability.  Although the outcome cannot be predicted, we do not expect these matters to have a material adverse effect on our financial position, operating results or cash flows.

 
    Seahawk

    In August 2009, Pride completed the spin-off of Seahawk Drilling, Inc. ("Seahawk"), which held the assets and liabilities that were associated with Pride's mat-supported jackup rig business.

    In 2006, 2007 and 2009, Seahawk received tax assessments from the Mexican government related to their operations.  Pursuant to local statutory requirements, Seahawk provided suitable collateral to contest these assessments. Pursuant to a tax support agreement between Pride and Seahawk, Pride agreed that in certain circumstances, at Seahawk's request, it would guarantee or indemnify the issuer of such collateral.  Also pursuant to the Agreement, Seahawk would indemnify Pride for the amount of any such guarantee. In September 2010, Seahawk requested that Pride provide credit support to a bank for four letters of credit issued for these tax assessments. The amount of the request totaled approximately $50.0 million. In October 2010, Pride provided credit support in satisfaction of this request.
 
    In November 2011, the Mexican tax authority drew the letters of credit, thereby triggering Pride's reimbursement obligation to the bank.  We believe the tax authority's draw on the letters of credit was illegal.  We made the required cash payment to the bank totaling $43.7 million. Pride's claim for reimbursement from Seahawk was allowed in full under the bankruptcy settlement with the Trustee; however, the Seahawk bankruptcy estate did not have sufficient funds to pay the reimbursement claim in full.

    The draw by Hacienda was a direct consequence of the contractual obligation created by the credit support originally provided by Pride previous to the Merger, and the cash payment made by us to the bank was the performance of that contractual obligation. The aforementioned events revealed new information about facts and circumstances in existence as of the Merger Date that, if known at the Merger Date, would have led to a different estimate of the assumed liability related to the credit support.  Therefore, the impact of the aforementioned payment, along with the applicable portions of our partial recovery of $45.0 million in Hercules Offshore, Inc. common stock from the Seahawk bankruptcy estate in December 2011, was recorded as an increase to goodwill of $24.9 million. This adjustment included a $49.6 million retrospective increase in the assumed liability related to the credit support and a $24.7 million retrospective increase in the acquired receivable from Seahawk as of the Merger Date.
 
    As part of the Seahawk bankruptcy settlement, we have the right, but not the obligation, to direct the management of the underlying court cases in respect of the aforementioned tax assessments in Mexico, as well as all other recovery efforts, in order to obtain recompense for its reimbursement of the bank.  Further, we are entitled to all recovery from such efforts. We intend to vigorously pursue recovery of these funds; however, there can be no assurances that all or any portion of these funds will be recovered. For additional information regarding Seahawk's bankruptcy proceedings and related settlements, see "Seahawk Drilling, Inc. Bankruptcy" in Part I, Item 3. Legal Proceedings of this annual report on Form 10-K.
 
    ENSCO 74 Loss

    In September 2008, ENSCO 74 was lost as a result of Hurricane Ike in the U.S. Gulf of Mexico.  Portions of its legs remained underwater adjacent to the customer's platform, and 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 in March 2009.  During 2010, wreck removal operations on the sunken rig hull of ENSCO 74 were completed.
 
    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, in addition to the removal of related debris.  We estimate the leg removal costs to range from $16.0 million to $30.0 million. We expect the cost of removal of the legs to be fully covered by our insurance.

    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.  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.

    A $16.0 million liability, representing the low end of the range of estimated leg and related debris removal costs, and a corresponding receivable for recovery of those costs under our insurance policy was recorded as of December 31, 2011 and included in accrued liabilities and other and other assets, net, on our 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.  In September 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 two subsea pipelines have presented claims in the exoneration/limitation proceedings.  The matter is scheduled for trial in March 2012.
 
    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 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 could 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 and seeking a declaration that removal of wreckage and debris is covered under our liability insurance, monetary damages, attorneys' fees and other remedies. The court heard several pretrial motions on May 25, 2011 and on July 31, 2011 issued an order compelling the matter to be submitted to arbitration.

    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 in 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. 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.
 
    We intend to continue 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 other asbestos or lung injury claims pending against us in litigation in 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.

    Environmental Matters

    We are currently subject to pending notices of assessment issued from 2008 to 2011 pursuant to which governmental authorities in Brazil are seeking fines in an aggregate amount of approximately $2.0 million for the release of drilling fluid from drilling rigs operating offshore Brazil. We are contesting these notices and intend to defend ourselves vigorously.  Although we do not expect the outcome of these assessments to have a material adverse effect on our financial position, operating results or cash flows, there can be no assurance as to the ultimate outcome of these assessments. A $2.0 million liability related to these matters was recorded as of December 31, 2011 and included in accrued liabilities and other on our consolidated balance sheet.

    We currently are subject to a pending administrative proceeding initiated in July 2009 by a governmental authority of Spain pursuant to which such governmental authority is seeking payment in an aggregate amount of approximately $4.0 million for an alleged environmental spill originating from the ENSCO 5006 while it was operating offshore Spain. We expect to be indemnified for any payments resulting from this incident by our customer under the terms of the drilling contract. Our customer has posted guarantees with the Spanish government to cover potential penalties. In addition, a criminal investigation of the incident was initiated in July 2010 by a prosecutor in Tarragona, Spain, and the administrative proceedings have been suspended pending the outcome of this investigation. We do not know at this time what, if any, involvement we may have in this investigation.

    We intend to defend ourselves vigorously in the administrative proceeding and any criminal investigation. At this time, we are unable to predict the outcome of these matters or estimate the extent to which we may be exposed to any resulting liability. Although we do not expect the outcome of the proceedings to have a material adverse effect on our financial position, operating results or cash flows, there can be no assurance as to the ultimate outcome of the proceedings.
 
    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
14.  SEGMENT INFORMATION
 
    In connection with the Merger, we evaluated our then-current core assets and operations, which consisted of seven drillships, 20 semisubmersible rigs and 48 jackup rigs, including rigs under construction, and organized them into three segments based on water depth operating capabilities. Accordingly, we now consider our business to consist of three reportable segments: (1) Deepwater, which consists of our drillships and semisubmersible rigs capable of drilling in water depths of 4,500 feet or greater, (2) Midwater, which consists of our semisubmersible rigs capable of drilling in water depths of 4,499 feet or less and (3) Jackup, which consists of our jackup rigs capable of drilling in water depths up to 400 feet. Each of our three reportable segments provides one service, contract drilling.  We also manage the drilling operations for two deepwater rigs and own one barge rig, which are included in "Other."

    Segment information for each of the years in the three-year period ended December 31, 2011 is presented below (in millions). 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."  We measure segment assets as property and equipment. Prior year information has been reclassified to conform to the current year presentation.