ENSCO PLC, 10-K filed on 2/25/2010
Annual Report
Document and Entity Information (USD $)
In Thousands, except Share data
Feb. 24, 2010
Year Ended
Dec. 31, 2009
Jun. 30, 2009
Document Type
 
10-K 
 
Amendment Flag
 
FALSE 
 
Document Period End Date
 
12/31/2009 
 
Entity Registrant Name
 
Ensco International plc 
 
Entity Central Index Key
 
0000314808 
 
Current Fiscal Year End Date
 
12/31 
 
Entity Well-known Seasoned Issuer
 
Yes 
 
Entity Voluntary Filers
 
No 
 
Entity Current Reporting Status
 
Yes 
 
Entity Filer Category
 
Large Accelerated Filer 
 
Entity Public Float
 
 
$ 4,339,487 
Entity Common Shares, Shares Outstanding
142,522,784 
 
 
Consolidated Statements of Income (USD $)
In Millions, except Per Share data
Year Ended
Dec. 31,
2009
2008
2007
Operating revenues
$ 1,945.9 
$ 2,393.6 
$ 2,058.2 
Net Income (Loss) Attributable to Parent [Abstract]
 
 
 
Net Income (Loss), Including Portion Attributable to Noncontrolling Interest [Abstract]
 
 
 
Income (Loss) from Continuing Operations, Including Portion Attributable to Noncontrolling Interest [Abstract]
 
 
 
Income (Loss) from Continuing Operations before Equity Method Investments, Income Taxes, Extraordinary Items, Cumulative Effects of Changes in Accounting Principles, Noncontrolling Interest [Abstract]
 
 
 
Operating Income (Loss) [Abstract]
 
 
 
Costs and Expenses [Abstract]
 
 
 
Operating Expenses
 
 
 
Contract drilling (exclusive of depreciation)
725.5 
752.0 
644.1 
Depreciation expense
205.9 
186.5 
177.5 
General and administrative
64.0 
53.8 
59.5 
Total operating expenses
995.4 
992.3 
881.1 
Operating income
950.5 
1,401.3 
1,177.1 
Other income (expense), net
8.8 
(4.2)
37.8 
Income from continuing operations before income taxes
959.3 
1,397.1 
1,214.9 
Provision For Income Taxes
 
 
 
Current income tax expense
158.6 
230.9 
243.7 
Deferred income tax expense
19.8 
6.4 
1.1 
Total provision for income taxes
178.4 
237.3 
244.8 
Income from continuing operations
780.9 
1,159.8 
970.1 
Discontinued Operations
 
 
 
Income from discontinued operations, net
15.4 
20.4 
28.8 
Loss on disposal of discontinued operations, net
(11.8)
(23.5)
0.0 
Total income (loss) from discontinued operations, net
3.6 
(3.1)
28.8 
Net income
784.5 
1,156.7 
998.9 
Net income attributable to noncontrolling interests
(5.1)
(5.9)
(6.9)
Net income attributable to Ensco
779.4 
1,150.8 
992.0 
Earnings (Loss) Per Share - Basic
 
 
 
Continuing operations
5.45 
8.06 
6.52 
Discontinued operations
0.03 
(0.02)
0.19 
Total earnings per share - basic
5.48 
8.04 
6.71 
Earnings (Loss) Per Share - Diluted
 
 
 
Continuing operations
5.45 
8.04 
6.50 
Discontinued operations
0.03 
(0.02)
0.19 
Total earnings per share - diluted
5.48 
8.02 
6.69 
Net Income Attributable To Ensco Shares
 
 
 
Basic
769.7 
1,138.2 
984.7 
Diluted
769.7 
1,138.2 
984.7 
Weighted-Average Shares Outstanding
 
 
 
Basic
140.4 
141.6 
146.7 
Diluted
140.5 
141.9 
147.2 
Cash dividends per share
$ 0.10 
$ 0.10 
$ 0.10 
Consolidated Balance Sheets (USD $)
In Millions
Dec. 31, 2009
Dec. 31, 2008
Assets [Abstract]
 
 
Current Assets
 
 
Cash and cash equivalents
$ 1,141.4 
$ 789.6 
Accounts receivable, net
324.6 
482.7 
Other
186.8 
128.6 
Total current assets
1,652.8 
1,400.9 
Noncurrent Assets
 
 
Property and equipment, at cost
6,151.2 
5,376.3 
Less accumulated depreciation
1,673.9 
1,505.0 
Property and equipment, net
4,477.3 
3,871.3 
Goodwill
336.2 
336.2 
Long-term investments
60.5 
64.2 
Other assets, net
220.4 
157.5 
Total assets
6,747.2 
5,830.1 
Liabilities and Stockholders' Equity [Abstract]
 
 
Current Liabilities
 
 
Accounts payable - trade
159.1 
195.8 
Accrued liabilities and other
308.6 
214.9 
Current maturities of long-term debt
17.2 
17.2 
Total current liabilities
484.9 
427.9 
Noncurrent Liabilities
 
 
Long-term debt
257.2 
274.3 
Deferred income taxes
377.3 
340.5 
Other liabilities
120.7 
103.8 
Commitments and contingencies
 
 
Stockholders' Equity, Including Portion Attributable to Noncontrolling Interest [Abstract]
 
 
Shareholders' Equity
 
 
Common shares, value
0.0 
18.2 
Additional paid-in capital
602.6 
1,761.2 
Retained earnings
4,879.2 
4,114.0 
Accumulated other comprehensive income (loss)
5.2 
(17.0)
Treasury shares, at cost, 7.5 million shares and 40.1 million shares
(2.9)
(1,199.5)
Total Ensco shareholders' equity
5,499.2 
4,676.9 
Noncontrolling interests
7.9 
6.7 
Total equity
5,507.1 
4,683.6 
Total liabilities and equity
6,747.2 
5,830.1 
Common Class A [Member]
 
 
Shareholders' Equity
 
 
Common shares, value
15.0 
0.0 
Common Class B [Member]
 
 
Shareholders' Equity
 
 
Common shares, value
$ 0.1 
$ 0.0 
Consolidated Balance Sheets (Parenthetical) (USD $)
Share data in Millions, except Per Share data
Dec. 31, 2009
Dec. 31, 2008
Common Shares
 
 
Common shares, par value
$ 0.00 
$ 0.10 
Common shares, shares authorized
250 
Common shares, shares issued
181.9 
Treasury Shares
 
 
Treasury shares, shares held
7.5 
40.1 
Consolidated Statements of Cash Flows (USD $)
In Millions
Year Ended
Dec. 31,
2009
2008
2007
Cash and Cash Equivalents, Period Increase (Decrease) [Abstract]
 
 
 
Operating Activities
 
 
 
Net income
$ 784.5 
$ 1,156.7 
$ 998.9 
Adjustments to reconcile net income to net cash provided by operating activities of continuing operations:
 
 
 
Depreciation expense
205.9 
186.5 
177.5 
Share-based compensation expense
35.5 
27.3 
36.9 
Amortization expense
31.5 
32.5 
10.9 
Deferred income tax expense
19.8 
6.4 
1.1 
Income from discontinued operations, net
(15.4)
(20.4)
(28.8)
Loss on disposal of discontinued operations, net
11.8 
23.5 
0.0 
Other
0.3 
4.3 
(6.2)
Changes in operating assets and liabilities:
 
 
 
Decrease (increase) in accounts receivable
185.0 
(110.7)
(45.8)
Decrease (increase) in trading securities
5.5 
(72.3)
0.0 
Increase in other assets
(72.6)
(40.5)
(133.6)
Increase (decrease) in liabilities
29.9 
(67.9)
200.3 
Net cash provided by operating activities of continuing operations
1,221.7 
1,125.4 
1,211.2 
Investing Activities
 
 
 
Additions to property and equipment
(861.3)
(771.9)
(519.4)
Proceeds from disposal of discontinued operations
4.9 
45.1 
0.0 
Proceeds from disposition of assets
2.7 
5.2 
7.6 
Net cash used in investing activities
(853.7)
(721.6)
(511.8)
Financing Activities
 
 
 
Reduction of long-term borrowings
(17.2)
(19.0)
(165.3)
Cash dividends paid
(14.2)
(14.3)
(14.8)
Proceeds from exercise of share options
9.6 
27.3 
35.8 
Repurchase of shares
(6.5)
(259.7)
(527.6)
Other
(5.9)
1.5 
0.9 
Net cash used in financing activities
(34.2)
(264.2)
(671.0)
Effect of exchange rate changes on cash and cash equivalents
0.5 
(15.0)
(0.8)
Net cash provided by operating activities of discontinued operations
17.5 
35.5 
36.1 
Increase in cash and cash equivalents
351.8 
160.1 
63.7 
Cash and cash equivalents, beginning of period
789.6 
629.5 
565.8 
Cash and cash equivalents, end of period
$ 1,141.4 
$ 789.6 
$ 629.5 
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 have one of the largest and most capable offshore drilling rig fleets in the world comprised of 47 drilling rigs, including 42 jackup rigs, four ultra-deepwater semisubmersible rigs and one barge rig. Additionally, we have four ultra-deepwater semisubmersible rigs under construction. We drill and complete offshore oil and natural gas wells for major international, government-owned and independent oil and gas companies on a "day rate" contract basis, under which we provide our drilling rigs and rig crews and receive a fixed amount per day for drilling the 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.

       Our contract drilling operations are integral to the exploration, development and production of oil and natural gas. Our business levels and corresponding operating results are significantly affected by worldwide levels of offshore exploration and development spending by oil and gas companies. Such spending may fluctuate substantially from year-to-year and from region-to-region based on various social, political, economic and environmental factors. See "Note 13 - Segment Information" for additional information on our operations by segment and geographic region.

   Redomestication

       On December 23, 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 International 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 International 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 International 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.

   Principles of Consolidation

       The accompanying consolidated financial statements include the accounts of Ensco International 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

       Our functional currency is the U.S. dollar. As is customary in the oil and gas industry, a majority of our revenues are denominated in U.S. dollars, however, a portion of the expenses incurred by our non-U.S. 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. Transaction gains and losses, including certain gains and losses on our derivative instruments, are included in other income (expense), net, in our consolidated statement of income. We incurred net foreign currency exchange gains of $2.6 million for the year ended December 31, 2009, net foreign currency exchange losses of $10.4 million for the year ended December 31, 2008 and net foreign currency exchange gains of $9.2 million for the year ended December 31, 2007.

   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 the straight-line method, 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 30 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 is generally determined by comparing the net 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 net book 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 no impairment charges during the three-year period ended December 31, 2009. However, 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

       We are in the process of developing a fleet of ultra-deepwater semisubmersible rigs and established a separate business unit to manage our deepwater operations during 2008. Our jackup rigs and barge rig are managed by major geographic region. Accordingly, our business consists of four operating segments: (1) Deepwater, (2) Asia Pacific, (3) Europe and Africa and (4) North and South America. Each of our four operating segments provides one service, contract drilling.

       Our four operating segments represent our reporting units. As a result of our 2008 reorganization to four operating segments and reporting units, we reassigned goodwill to our reporting units based on a relative fair value allocation approach as follows (in millions):

Deepwater

 

 

 

$

143.6

Asia Pacific

 

 

 

 

84.6

Europe and Africa

 

 

 

 

61.4

North and South America

 

 

 

 

46.6


Total

 

 

 

$

336.2


       Goodwill is not allocated to operating segments in the measure of segment assets regularly reported to and used by management. No goodwill was acquired or disposed of during the three-year period ended December 31, 2009.

       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. The goodwill impairment test requires us to identify reporting units and estimate each unit's fair value as of the testing date. 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, 2009. 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 impairment of our goodwill. 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, and totaled $52.7 million and $47.5 million as of December 31, 2009 and 2008, respectively. Deferred mobilization revenue was included in accrued liabilities and other, and other liabilities and totaled $99.3 million and $88.0 million as of December 31, 2009 and 2008, 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 and totaled $22.5 million and $2.2 million as of December 31, 2009 and 2008, 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, and totaled $9.7 million and $6.5 million as of December 31, 2009 and 2008, 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 5 - 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 fair value of recognized assets or liabilities or unrecognized firm commitments ("fair value hedges") are recorded currently in earnings and included in other income (expense), net, in our consolidated statement of income. 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 (loss) ("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 income (expense), 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 income (expense), 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 income (expense), net, in our consolidated statement of income.

       Derivatives with asset fair values are reported in other current assets or other assets, net, depending on maturity date. Derivatives with liability fair values are reported in accrued liabilities and other, or other liabilities 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. See "Note 10 - Income Taxes" for additional information on our unrecognized tax benefits.

       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.

       It is our policy and intention to indefinitely reinvest all remaining and future undistributed earnings of Ensco Delaware's non-U.S. subsidiaries in such subsidiaries. Accordingly, no U.S. deferred taxes are provided on the undistributed earnings of Ensco Delaware's non-U.S. subsidiaries. See "Note 10 - Income Taxes" for additional information on the undistributed earnings of Ensco Delaware's non-U.S. subsidiaries.

   Share-Based Compensation

       We sponsor several share-based compensation plans that provide equity compensation to our employees, officers and 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 9 - Benefit Plans" for additional information on our share-based compensation.

   Fair Value Measurements

       On January 1, 2008, we adopted certain provisions of FASB ASC 820-10 (previously SFAS No. 157, "Fair Value Measurements"). This standard establishes 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 are inputs that are observable for assets or liabilities, either directly or indirectly, other than quoted prices included within Level 1.

       Our auction rate securities, marketable securities held in our supplemental executive retirement plans ("SERP") and derivatives are measured at fair value. Our auction rate securities are measured at fair value using an income approach valuation model (Level 3 inputs) to estimate the price that will be received in exchange for our auction rate securities in an orderly transaction between market participants ("exit price"). The exit price is derived as the weighted-average present value of expected cash flows over various periods of illiquidity, using a risk-adjusted discount rate that is based on the credit risk and liquidity risk of our auction rate securities. See "Note 3 - Long-Term Investments" for additional information on our auction rate securities, including a description of the securities and underlying collateral, a discussion of the uncertainties relating to their liquidity and our accounting treatment.

       Assets held in our SERP are measured at fair value based on quoted market prices (Level 1 inputs). Our derivatives are measured at fair value based on market prices that are generally observable for similar assets and liabilities at commonly quoted intervals (Level 2 inputs). See "Note 5 - Derivative Instruments" for additional information on our derivative instruments, including a description of our foreign currency hedging activities and related methods used to manage foreign currency exchange rate risk.

       See "Note 8 - Fair Value Measurements" for additional information on the fair value measurement of our financial assets and liabilities.

   Earnings Per Share

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

       The following table is a reconciliation of net income attributable to Ensco shares used in our basic and diluted EPS computations for each of the years in the three-year period ended December 31, 2009 (in millions):

 

  2009

     2008

 2007

 

Net income attributable to Ensco

 

$779.4

 

$1,150.8

 

$992.0

 

Net income allocated to non-vested share awards

 

(9.7

)

(12.6

)

(7.3

)


Net income attributable to Ensco shares

 

$769.7

 

$1,138.2

 

$984.7

 


       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, 2009 (in millions):

 

2009 

2008 

2007 

 

 

 

 

 

 

 

 

Weighted-average shares - basic

 

140.4

 

141.6

 

146.7

 

Potentially dilutive share options

 

.1

 

.3

 

.5

 


Weighted-average shares - diluted

 

140.5

 

141.9

 

147.2

 


       Antidilutive share options totaling 1.1 million, 746,000 and 503,000 were excluded from the computation of diluted EPS for the years ended December 31, 2009, 2008 and 2007, respectively.

   Noncontrolling Interests

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

       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. In our Asia Pacific operating segment, local third parties hold a noncontrolling ownership interest in three of our subsidiaries. No changes in the ownership interests of these subsidiaries occurred during the three-year period ended December 31, 2009.

       Income from continuing operations attributable to Ensco for each of the years in the three-year period ended December 31, 2009 was as follows (in millions):

 

2009 

  2008 

2007 

 

Income from continuing operations

 

$780.9

 

$1,159.8

 

$970.1

 

Income from continuing operations attributable to
   noncontrolling interests

 

(5.1

)

(5.9

)

(6.9

)


Income from continuing operations attributable to Ensco

 

$775.8

 

$1,153.9

 

$963.2

 


       Income (loss) from discontinued operations, net, for each of the years in the three-year period ended December 31, 2009 was attributable to Ensco.
Property and Equipment
Property and Equipment

2.  PROPERTY AND EQUIPMENT

       Property and equipment as of December 31, 2009 and 2008 consisted of the following (in millions):

 

 2009   

 2008 

 

Drilling rigs and equipment

$

4,801.1

$

3,829.8

 

Other

 

47.0

 

45.5

 

Work in progress

 

1,303.1

 

1,501.0

 


 

$

6,151.2

$

5,376.3

 


       Work in progress as of December 31, 2009 primarily consisted of $1,262.5 million related to the construction of our ENSCO 8500 Series® ultra-deepwater semisubmersible rigs and costs associated with various modification and enhancement projects. ENSCO 8502 was delivered in January 2010 and the related construction costs will remain classified as work in progress until the rig is placed into service during the third quarter of 2010. Work in progress as of December 31, 2008 primarily consisted of $1,445.2 million related to the construction of our ENSCO 8500 Series® rigs and costs associated with various modification and enhancement projects.
Long-Term Investments
Long-Term Investments

3.  LONG-TERM INVESTMENTS

       As of December 31, 2009 and 2008, we held $66.8 million and $72.3 million (par value), respectively, of long-term debt instruments with variable interest rates that periodically reset through an auction process ("auction rate securities"). Our auction rate securities were originally acquired in January 2008 and have final maturity dates ranging from 2025 to 2047.

       Auctions for our auction rate securities began to fail in February 2008 as there were more sellers than buyers at the scheduled interest rate auctions and parties desiring to sell their auction rate securities were unable to do so. When an auction fails, the interest rate is adjusted according to the provisions of the associated security agreement. Through December 31, 2009, auctions for our auction rate securities continued to fail with the exception of the successful auction of $4.7 million of our securities during June 2008. Auction rate securities totaling $5.5 million and $6.0 million were redeemed at par during the years ended December 31, 2009 and 2008, respectively. Additionally, $2.5 million of our auction rate securities were redeemed at par in January 2010.

       Our investments in auction rate securities as of December 31, 2009 were diversified across fifteen separate issues and each issue maintains scheduled interest rate auctions in either 28-day or 35-day intervals. The majority of our auction rate securities are currently rated Aaa by Moody's, AAA by Standard & Poor's and/or AAA by Fitch. An aggregate $64.3 million (par value), or 96%, of our auction rate securities were issued by state agencies and are supported by student loans for which repayment is substantially guaranteed by the U.S. government under the Federal Family Education Loan Program ("FFELP").

       Upon acquisition in January 2008, we designated our auction rate securities as trading securities as it was our intent to sell them in the near-term. Due to illiquidity in the auction rate securities market, we intend to hold our auction rate securities until they can be redeemed by issuers, repurchased by brokerage firms or sold in a market that facilitates orderly transactions. Although we will hold our auction rate securities longer than originally anticipated, we continue to designate them as trading securities.

       Our auction rate securities were measured at fair value as of December 31, 2009 and 2008, and net unrealized gains of $1.8 million and unrealized losses of $8.1 million were included in other income (expense), net, in our consolidated statements of income for the years ended December 31, 2009 and 2008, respectively. See "Note 8 - Fair Value Measurements" for additional information on the fair value measurement of our auction rate securities.

       The carrying value of our auction rate securities was $60.5 million and $64.2 million as of December 31, 2009 and 2008, respectively. We are currently unable to determine whether issuers of our auction rate securities will attempt and/or be able to refinance them and have classified our auction rate securities as long-term investments on our consolidated balance sheets. Cash flows from purchases and sales of our auction rate securities are classified as operating activities in our consolidated statement of cash flows.
Long-Term Debt
Long-Term Debt

4.  LONG-TERM DEBT

       Long-term debt as of December 31, 2009 and 2008 consisted of the following (in millions):

 

        2009 

 2008  

 

 

 

 

 

 

7.20% Debentures due 2027

 

$148.9

 

$148.8

 

6.36% Bonds due 2015

 

76.0

 

88.7

 

4.65% Bonds due 2020

 

49.5

 

54.0

 


 

 

274.4

 

291.5

 

Less current maturities

 

(17.2

)

(17.2

)


Total long-term debt

 

$257.2

 

$274.3

 


    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. On December 22, 2009, in connection with the redomestication, Ensco International 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 the United States of America, acting by and through the United States Department of Transportation, Maritime Administration ("MARAD"), and Ensco Delaware issued separate guaranties to MARAD, guaranteeing the performance of obligations under the bonds. On February 19, 2010, the documents governing MARAD's guarantee commitments were amended to address certain changes arising from the redomestication and to include Ensco International plc as an additional guarantor of the debt obligations.

    Revolving Credit Facility

       In June 2005, Ensco Delaware executed a $350.0 million unsecured revolving credit facility (the "Credit Facility") with a syndicate of lenders for a five-year term, expiring in June 2010. The Credit Facility was amended on December 22, 2009 to address certain changes arising from the redomestication and to include Ensco International plc as an additional guarantor.

       Advances under the Credit Facility bear interest at LIBOR plus an applicable margin rate (currently .35% per annum), depending on our credit rating. We pay a facility fee (currently .10% per annum) on the total $350.0 million commitment, which is also based on our credit rating, and pay an additional utilization fee on outstanding advances if such advances equal or exceed 50% of the total $350.0 million commitment. We had no amounts outstanding under the Credit Facility as of December 31, 2009 and 2008.

    Maturities

       The aggregate maturities of our long-term debt, excluding unamortized discounts of $1.1 million, as of December 31, 2009 were as follows (in millions):

2010

 

 

 

$

17.2

2011

 

 

 

 

17.2

2012

 

 

 

 

17.2

2013

 

 

 

 

17.2

2014

 

 

 

 

17.2

Thereafter

 

 

 

 

189.5


Total

 

 

 

$

275.5


       Interest expense totaled $20.9 million, $21.6 million and $32.3 million for the years ended December 31, 2009, 2008 and 2007, respectively. All interest expense incurred during the years ended December 31, 2009 and 2008 was capitalized in connection with the construction of our ENSCO 8500 Series® rigs. During the year ended December 31, 2007, $30.4 million of interest expense was capitalized.
Derivative Instruments
Derivative Instruments

5.  DERIVATIVE INSTRUMENTS

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

       We use derivatives to reduce our exposure to various market risks, primarily foreign currency exchange rate risk. We maintain a foreign currency risk management strategy that utilizes derivatives to reduce our exposure to unanticipated fluctuations in earnings and cash flows caused by changes in foreign currency exchange rates. Although no interest rate related derivative instruments were outstanding as of December 31, 2009 and 2008, we occasionally employ an interest rate risk management strategy that utilizes derivative instruments to minimize or eliminate unanticipated fluctuations in earnings and cash flows arising from changes in, and volatility of, interest rates. We minimize our credit risk relating to the counterparties of our derivatives by transacting with multiple, high-quality financial institutions, thereby limiting exposure to individual counterparties, and by monitoring the financial condition of our counterparties. We do not enter into derivatives for trading or other speculative purposes.

       All derivatives were recorded on our 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 how derivatives are accounted for under FASB ASC 815.

       As of December 31, 2009 and 2008, our consolidated balance sheets included net foreign currency derivative assets of $13.2 million and net foreign currency derivative liabilities of $20.3 million, respectively. See "Note 8 - Fair Value Measurements" for additional information on the fair value measurement of our derivatives. Derivatives recorded at fair value on our consolidated balance sheets as of December 31, 2009 and 2008 consisted of the following (in millions):

 

Assets

Liabilities

2009

2008

2009

2008

Derivatives Designated as Hedging Instruments

Foreign currency forward contracts - current(1)

 

$10.2        

 

$  .3         

$1.1         

 

$25.8      

Foreign currency forward contracts - non-current(2)

3.8        

5.1         

--         

.0      

 

 

14.0        

 

5.4         

1.1         

 

25.8      

Derivatives not Designated as Hedging Instruments

 

 

 

 

 

 

 

Foreign currency forward contracts - current(1)

  .3        

  .1         

  .0         

    .0      

 

 

  .3        

 

  .1         

  .0         

 

    .0      

Total

$14.3        

$5.5         

$1.1         

$25.8      

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

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

       We utilize derivatives to hedge forecasted foreign currency denominated transactions ("cash flow hedges"), primarily to reduce our exposure to foreign currency exchange rate risk associated with the portion of our remaining ENSCO 8500 Series® construction obligations denominated in Singapore dollars and contract drilling expenses denominated in various other currencies. As of December 31, 2009, we had cash flow hedges outstanding to exchange an aggregate $288.5 million for various currencies, including $195.9 million for Singapore dollars, $54.1 million for British pounds, $25.4 million for Australian dollars and $13.1 million for other currencies.

       Gains and losses 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, 2009 were as follows (in millions):

 

Gain (Loss)

(Loss) Gain Recognized

Recognized in

(Loss) Gain

in Income on

Other Comprehensive

Reclassified

Derivatives (Ineffective

Other Comprehensive

from AOCI

Portion and Amount

Income (Loss) ("OCI")

into Income

Excluded from

          (Effective Portion)          

        (Effective Portion)        

Effectiveness Testing)(1)

2009

2008

2007

2009

2008

2007

2009

2008

2007

Foreign currency forward contracts(2)

$13.5

 

($16.4)

 

$8.2   

 

$(8.0)  

 

$(2.9)  

 

$ 7.9   

 

 

($2.9)

 

$(1.0)  

 

$ .7   

Interest rate lock contracts(3)

--   

--   

--   

(.7)  

(.7)  

(1.0)  

--   

--   

--   

Total

$13.5 

 

($16.4)

 

$8.2   

 

$(8.7)  

 

$(3.6)  

 

$ 6.9   

 

 

($2.9)

 

$(1.0)  

 

$ .7   

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

(2) Gains and losses on derivative instruments reclassified from AOCI into income (effective portion) were included in contract drilling expense in our consolidated statements of income.

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

       We have net assets and liabilities denominated in numerous foreign currencies and use various methods to manage our exposure to foreign currency exchange rate risk. We predominantly structure our drilling contracts in U.S. dollars, which significantly reduces the portion of our cash flows and assets denominated in foreign currencies. We occasionally enter into derivatives that hedge the fair value of recognized foreign currency denominated assets or liabilities but do not designate such derivatives as hedging instruments. In these situations, a natural hedging relationship generally exists whereby changes in the fair value of the derivatives offset changes in the fair value of the underlying hedged items. As of December 31, 2009, we had derivatives not designated as hedging instruments outstanding to exchange an aggregate $61.5 million for various currencies, including $20.7 million for Singapore dollars, $17.7 million for Australian dollars, $9.6 million for British pounds and $13.5 million for other currencies.

       Net gains of $4.6 million, net losses of $3.5 million and net gains of $2.0 million associated with our derivatives not designated as hedging instruments were included in other income (expense), net, in our consolidated statements of income for the years ended December 31, 2009, 2008 and 2007, respectively.

       If we were to incur a hypothetical 10% adverse change in foreign currency exchange rates, net unrealized losses associated with our foreign currency denominated assets and liabilities and related derivatives as of December 31, 2009 would approximate $27.9 million, including $20.9 million related to our Singapore dollar exposures. All of our outstanding derivatives mature during the next two years.

       As of December 31, 2009, the estimated amount of net gains associated with derivative instruments, net of tax, that will be reclassified to earnings during the next twelve months was as follows (in millions):

Net gains to be reclassified to contract drilling expense

$

3.9

 

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

 

(.6

)


Net gains to be reclassified to earnings

$

3.3

 


Comprehensive Income
Comprehensive Income

6.  COMPREHENSIVE INCOME

       Accumulated other comprehensive income (loss) as of December 31, 2009, 2008 and 2007 was comprised of net gains and losses on derivative instruments, net of tax. The components of our comprehensive income, net of tax, for each of the years in the three-year period ended December 31, 2009 were as follows (in millions):

 

   2009

   2008

   2007

 

Net Income

 

$784.5   

 

$1,156.7 

 

$  998.9 

 

Other comprehensive income:

 

     Net change in fair value of derivatives

 

13.5   

 

(16.4)

 

8.2 

 

     Reclassification of unrealized gains and losses on
          derivative instruments from other comprehensive
           loss (income) into net income

 

8.7   

 

3.6 

 

(6.9)

 


              Net other comprehensive income (loss)

 

22.2   

 

(12.8)

 

1.3 

 


Comprehensive income

 

806.7   

 

1,143.9 

 

1,000.2 

 

Comprehensive income attributable to noncontrolling interests

 

(5.1)  

 

(5.9)

 

(6.9)

 


Comprehensive income attributable to Ensco

 

$801.6   

 

$1,138.0 

 

$  993.3 

 


Shareholders' Equity
Shareholders' Equity

7.  SHAREHOLDERS' EQUITY

       In conjunction with the redomestication in December 2009, each issued and outstanding share of common stock of Ensco Delaware was converted into the right to receive one American depositary share, each representing one Class A ordinary share, par value U.S. $0.10 per share, of Ensco International plc. In total, 150.0 million Class A ordinary shares were issued, with 142.6 million exchanged for shares of common stock of Ensco Delaware. The remaining 7.4 million Class A ordinary shares were held as treasury shares on our December 31, 2009 consolidated balance sheet. Prior to the redomestication, Ensco International plc also issued 50,000 Class B ordinary shares, par value £1 per share, to Ensco Delaware. The Class B ordinary shares have no voting rights or rights to dividends or distributions.

       Prior to the redomestication, Ensco Delaware retired 40.2 million treasury shares with a historical cost totaling $1,203.9 million under authorization from our Board of Directors. Pursuant to its certificate of incorporation in effect prior to the redomestication, Ensco Delaware had 20.0 million authorized shares of preferred stock, U.S. $1 par value, and none had been issued as of December 31, 2008.

       Activity in our various shareholders' equity accounts for each of the years in the three-year period ended December 31, 2009 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, 2006

 

178.7 

 

$17.9 

 

$1,621.3 

 

   $1,994.5

 

$  (5.5)    

 

$  (412.2) 

 

$ 3.4    

 

  Cumulative effect of adoption of FIN 48

 

-- 

 

-- 

 

-- 

 

5.8

 

--     

 

--  

 

--    

 

  Net income

 

-- 

 

-- 

 

-- 

 

992.0

 

--     

 

--  

 

6.9    

 

  Cash dividends paid

 

-- 

 

-- 

 

-- 

 

(14.8

)

--     

 

--  

 

--    

 

  Distributions to noncontrolling interests

 

-- 

 

-- 

 

-- 

 

--

 

--     

 

--  

 

(5.7)   

 

  Shares issued under share-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    plans, net

 

1.6 

 

.1 

 

35.7 

 

--

 

--     

 

--  

 

--    

 

  Tax benefit from share-based

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    compensation

 

-- 

 

-- 

 

6.6 

 

--

 

--     

 

--  

 

--    

 

  Repurchase of shares

 

-- 

 

-- 

 

-- 

 

--

 

--     

 

(527.6) 

 

--    

 

  Share-based compensation cost

 

-- 

 

-- 

 

36.9 

 

--

 

--     

 

--  

 

--    

 

  Net other comprehensive income

 

-- 

 

-- 

 

-- 

 

--

 

1.3     

 

--  

 

--    

 


BALANCE, December 31, 2007

 

180.3 

 

18.0 

 

1,700.5 

 

2,977.5

 

(4.2)    

 

(939.8) 

 

4.6    

 

  Net income

 

-- 

 

-- 

 

-- 

 

1,150.8

 

--     

 

--  

 

5.9    

 

  Cash dividends paid

 

-- 

 

-- 

 

-- 

 

(14.3

)

--     

 

--  

 

--    

 

  Distributions to noncontrolling interests

 

-- 

 

-- 

 

-- 

 

--

 

--     

 

--  

 

(3.8)   

 

  Shares issued under share-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    plans, net

 

1.6 

 

.2 

 

27.1 

 

--

 

--     

 

--  

 

--    

 

  Tax benefit from share-based

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    compensation

 

-- 

 

-- 

 

5.3 

 

--

 

--     

 

--  

 

--    

 

  Repurchase of shares

 

-- 

 

-- 

 

-- 

 

--

 

--     

 

(259.7) 

 

--    

 

  Share-based compensation cost

 

-- 

 

-- 

 

28.3 

 

--

 

--     

 

--  

 

--    

 

  Net other comprehensive loss

 

-- 

 

-- 

 

-- 

 

--

 

(12.8)    

 

--  

 

--    

 


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    

 


       The Board of Directors previously authorized the repurchase of up to $1,500.0 million of our shares. 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 2009. In December 2009, in conjunction with the redomestication, the remaining repurchase authorization was extended authorizing management to repurchase up to $562.4 million of ADSs from time to time pursuant to share repurchase agreements with two investment banks. Although such amount remained available for repurchase as of December 31, 2009, the Company will not repurchase any shares without further consultation with and approval by the Board of Directors of Ensco International plc.
Fair Value Measurements
Fair Value Measurements

8.  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, 2009 and 2008 (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, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

 

 

$    --    

 

 

$    --  

 

 

$60.5           

 

 

$60.5

 

Supplemental executive retirement plan assets

 

 

 

18.7    

 

 

--  

 

 

--           

 

 

18.7

 

Derivatives, net

 

 

 

--    

 

 

13.2  

 

 

--           

 

 

13.2

 


Total financial assets

 

 

 

$18.7    

 

 

$13.2  

 

 

$60.5           

 

 

$92.4

 


 

As of December 31, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

 

 

$    --    

 

 

$    --  

 

 

$64.2           

 

 

$64.2

 

Supplemental executive retirement plan assets

 

 

 

13.9    

 

 

--  

 

 

--           

 

 

13.9

 


Total financial assets

 

 

 

$13.9    

 

 

$    --  

 

 

$64.2           

 

 

$78.1

 


 

Derivatives, net

 

 

 

$    --    

 

 

$20.3  

 

 

$   --            

 

 

$20.3

 


Total financial liabilities

 

 

 

$    --    

 

 

$20.3  

 

 

$   --            

 

 

$20.3

 


    Auction Rate Securities

       As of December 31, 2009 and 2008, we held long-term debt instruments with variable interest rates that periodically reset through an auction process totaling $66.8 million and $72.3 million (par value), respectively. These auction rate securities were classified as long-term investments on our consolidated balance sheets. Our auction rate securities were originally acquired in January 2008 and have maturity dates ranging from 2025 to 2047. Our auction rate securities were measured at fair value on a recurring basis using significant Level 3 inputs as of December 31, 2009 and 2008. 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 two-year period ended December 31, 2009 (in millions):

 

  2009    

          2008  

 

Beginning Balance

 

$64.2 

 

$     -- 

 

    (Sales) purchases, net

 

(5.5)

 

72.3 

 

    Unrealized gains (losses)*

 

1.8 

 

(8.1)

 

    Realized losses

 

-- 

 

-- 

 

    Transfers in and/or out of Level 3

 

-- 

 

-- 

 


Ending balance

 

$60.5 

 

$64.2 

 


       *Unrealized gains (losses) are included in other income (expense), net, in our consolidated statement of income.

       Before utilizing Level 3 inputs in our fair value measurements, we considered whether observable inputs were available. As a result of continued auction failures, quoted prices for our auction rate securities did not exist as of December 31, 2009. Accordingly, we concluded that Level 1 inputs were not available. Brokerage statements received from the five broker/dealers that held our auction rate securities included their estimated market value as of December 31, 2009. Four broker/dealers valued our auction rate securities at par and the fifth valued our auction rate securities at 88% of par. Due to the lack of transparency into the methodologies used to determine the estimated market values, we have concluded that estimated market values provided on our brokerage statements do not constitute valid inputs, and we do not utilize them in measuring the fair value of our auction rate securities.

       We determined that use of a valuation model was the best available technique for measuring the fair value of our auction rate securities. We used an income approach valuation model to estimate the price that would be received in exchange for our auction rate securities in an orderly transaction between market participants ("exit price") as of December 31, 2009. The exit price was derived as the weighted-average present value of expected cash flows over various periods of illiquidity, using a risk-adjusted discount rate that was based on the credit risk and liquidity risk of our auction rate securities.

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

    Supplemental Executive Retirement Plan Assets and Liabilities

       The ENSCO Supplemental Executive Retirement Plans (the "SERP") are non-qualified plans where eligible employees and non-employee directors may defer a portion of their compensation for use after retirement. Assets held in the SERP were marketable securities measured at fair value on a recurring basis using Level 1 inputs and were included in other assets, net, on our consolidated balance sheets as of December 31, 2009 and 2008. The fair value measurement of assets held in the SERP was based on quoted market prices.

    Derivatives

       Our derivatives were measured at fair value on a recurring basis using Level 2 inputs as of December 31, 2009 and 2008. See "Note 5 - Derivative Instruments" for additional information on our derivatives, including a description of our foreign currency hedging activities and related methodologies used to manage foreign currency exchange rate risk. The fair value measurement of our derivatives was based on market prices that are generally observable for similar assets or liabilities at commonly quoted intervals.

    Other Financial Instruments

       The carrying values and estimated fair values of our debt instruments as of December 31, 2009 and 2008 were as follows (in millions):

 

December 31,

December 31,

 

                 2009                

                2008                

 

 

Estimated

 

Estimated

 

Carrying

  Fair

Carrying

  Fair

 

  Value  

   Value  

  Value  

   Value  

 

 

 

 

7.20% Debentures

 

$148.9     

 

$155.9     

 

$148.8     

 

$140.3     

 

6.36% Bonds, including current maturities

 

76.0     

 

85.8     

 

88.7     

 

103.9     

 

4.65% Bonds, including current maturities

 

49.5     

 

53.8     

 

54.0     

 

62.1     

 

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

9.  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, 2009, there were 3.3 million shares available for issuance of non-vested share awards under the LTIP. Non-vested share awards may be issued as new shares or issued out of treasury 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).

       During 2007, we entered into a retirement agreement with our former CEO and non-executive Chairman of our Board of Directors. The agreement provided that, upon retirement, he would receive a grant of 92,000 non-vested share awards which vest at a rate of one-third per year upon each of the first three anniversaries of his retirement date. Furthermore, the agreement modified the vesting term of 28,750 unvested share options and 105,000 non-vested share awards previously granted to him so that such awards vested upon his retirement. We recognized an additional $10.4 million of non-vested share award compensation expense during 2007 as a result of the retirement agreement, of which $5.0 million related to the modification of his previous awards.

       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, 2009 (in millions):

 

     2009   

      2008   

      2007  

 

Contract drilling

 

$16.8

 

$11.4

 

$  5.5

 

General and administrative

 

11.4

 

7.6

 

17.5

 


Non-vested share award related compensation expense

 

 

 

 

 

 

 

   included in operating expenses

 

28.2

 

19.0

 

23.0

 

Tax benefit

 

(7.0

)

(4.7

)

(7.1

)


Total non-vested share award related compensation

 

 

 

 

 

 

 

   expense included in net income

 

$21.2

 

$14.3

 

$15.9

 


       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, 2009:

 

  2009  

  2008  

  2007  

 

Weighted-average grant-date fair value of

 

 

 

 

 

 

 

   non-vested share awards granted (per share)

 

$40.91

 

$67.99

 

$60.18

 

Total fair value of non-vested share awards

 

 

 

 

 

 

 

   vested during the period (in millions)

 

$18.6  

 

$17.9  

 

$19.8  

 


       The following table summarizes non-vested share award activity for the year ended December 31, 2009 (shares in thousands):

 

 

Weighted-

 

 

Average

 

 

Grant-Date

 

Shares

Fair Value

 

Non-vested as of January 1, 2009

 

1,755

 

$60.27  

 

   Granted

 

613

 

40.91  

 

   Vested

 

(495

)

58.89  

 

   Forfeited

 

(62

)

56.94  

 


Non-vested as of December 31, 2009

 

1,811

 

$54.21  

 


       As of December 31, 2009, there was $78.0 million of total unrecognized compensation cost related to non-vested share awards, which is expected to be recognized over a weighted-average period of 3.2 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, 2009, options to purchase 1.2 million shares were outstanding under the LTIP and 5.3 million shares were available for issuance as options. Upon option exercise, new shares may be issued or shares may be issued out of treasury 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, 2009 (in millions):

 

 

  2009   

  2008   

  2007   

 

Contract drilling

 

$  1.7   

 

$  3.3   

 

$  5.8  

 

General and administrative

 

3.7   

 

5.0   

 

7.8  

 


Option related compensation expense included in

 

 

 

 

 

 

 

   operating expenses

 

5.4   

 

8.3   

 

13.6  

 

Tax benefit

 

(1.6)  

 

(2.3)  

 

(3.8) 

 


Total option related compensation expense included

 

 

 

 

 

 

 

   in net income

 

$  3.8   

 

$  6.0   

 

$  9.8  

 



       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, 2009:
 

 

       2009  

       2008  

       2007  

 

Risk-free interest rate

 

1.8

%

--

4.8

%

Expected term (in years)

 

3.9

 

--

 

4.7

 

Expected volatility

 

53.3

%

--

 

29.8

%

Dividend yield

 

.2

%

--

 

.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, 2009 (shares and intrinsic value in thousands, term in years):

 

 

Weighted-

Weighted-

 

 

 

Average

Average

 

 

 

  Exercise

Contractual

Intrinsic

 

Shares

     Price     

     Term     

Value

 

Outstanding as of January 1, 2009

 

1,544

 

$45

.15

 

 

 

 

        Granted

 

115

 

41

.29

 

 

 

 

        Exercised

 

(344

)

28

.03

 

 

 

 

        Forfeited

 

(48

)

52

.06

 

 

 

 

        Expired

 

(54

)

53

.60

 

 

 

 


Outstanding as of December 31, 2009

 

1,213

 

$48

.98

3

.8

$1,043   

 


Exercisable as of December 31, 2009

 

794

 

$47

.87

3

.4

$1,043   

 


 

       The following table summarizes the value of options granted and exercised during each of the years in the three-year period ended December 31, 2009:

 

 

  2009    

  2008    

  2007    

 

Weighted-average grant-date fair value of

 

 

 

 

 

 

 

   options granted (per share)

 

$17.17

 

$   -- 

 

$20.44

 

Intrinsic value of options exercised during

 

 

 

 

 

 

 

   the year (in millions)

 

$  3.6  

 

$25.5

 

$30.0  

 


       The following table summarizes information about options outstanding as of December 31, 2009 (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   

 

 

 

 

 

 

 

 

 

 

 

 

 $23.12  - $33.55

 

163 

 

2.4 years   

$33.54

 

163   

 

$33.54   

 

   41.29  -   47.12

 

381 

 

4.2 years   

45.10

 

228   

 

46.48   

 

   50.09  -   52.82

 

369 

 

3.5 years   

50.31

 

243   

 

50.32   

 

   57.38  -   60.74

 

300 

 

4.4 years   

60.67

 

160   

 

60.69   

 


 

1,213 

 

3.8 years   

$48.98

 

794   

 

$47.87   

 


       As of December 31, 2009, there was $4.7 million of total unrecognized compensation cost related to options, which is expected to be recognized over a weighted-average period of 1.5 years.

Performance Awards

       On November 3, 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, 2009. Performance awards that are paid in Ensco shares may be issued as new shares or issued out of treasury at the Company's discretion.

       In November 2009, performance awards were 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 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.

       We recognized $1.9 million of compensation expense for performance awards during the year ended December 31, 2009, which was included in general and administrative expense in our consolidated statement of income. No performance award compensation expense was recognized during the years ended December 31, 2008 and 2007. As of December 31, 2009, there was $11.2 million of total unrecognized compensation cost related to unvested performance awards, which is expected to be recognized over a weighted-average period of 1.5 years.

    Savings Plan

       We have a profit sharing plan (the “ENSCO Savings Plan”) which covers eligible employees, as defined. Profit sharing contributions require Board of Directors approval and may be paid in cash or shares. We recorded profit sharing contribution provisions of $14.2 million, $16.6 million and $14.2 million for the years ended December 31, 2009, 2008 and 2007, respectively.

       The ENSCO Savings Plan includes a 401(k) savings plan feature which allows eligible employees to make tax deferred contributions to the plan. We generally make matching cash contributions that vest over a three-year period based on the amount of employee contributions and rates set by our Board of Directors. We match 100% of the amount contributed by the employee up to a maximum of 5% of eligible salary. Matching contributions totaled $4.1 million, $5.0 million and $5.0 million for the years ended December 31, 2009, 2008 and 2007, respectively. We have 1.0 million shares reserved for issuance as matching contributions under the ENSCO Savings Plan.
Income Taxes
Income Taxes

10.  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 28% for the remaining nine days of 2009. The income tax information for the years ended December 31, 2009, 2008 and 2007 has been presented from the perspective of an enterprise domiciled in the U.S.

       We generated $286.5 million, $383.2 million and $319.5 million of income from continuing operations before income taxes in the U.S. and $672.8 million, $1,013.9 million and $895.4 million of income from continuing operations before income taxes in non-U.S. countries for the years ended December 31, 2009, 2008 and 2007, 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, 2009 (in millions):

 

  2009 

   2008 

    2007 

 

 

 

 

 

 

 

 

Current income tax expense:

 

 

 

 

 

 

 

      U.S.

 

$  63.8

 

$113.8

 

$101.3

 

      Non-U.S.

 

94.8

 

117.1

 

142.4

 


 

 

158.6

 

230.9

 

243.7

 


 

Deferred income tax expense (benefit):

 

      U.S.

 

24.2

 

11.7

 

5.0

 

      Non-U.S.

 

(4.4

)

(5.3

)

(3.9

)


 

 

19.8

 

6.4

 

1.1

 


 

      Total income tax expense

 

$178.4

 

$237.3

 

$244.8

 


 

       The following table summarizes significant components of deferred income tax assets (liabilities) as of December 31, 2009 and 2008 (in millions):

 

 2009     

 2008   

 

 

 

 

 

 

Deferred tax assets:

 

 

 

 

 

      Deferred revenue

 

$   34.1

 

$     9.7

 

      Employee benefits, including share-based compensation

 

25.6

 

21.2

 

      Other

 

18.3

 

24.2

 


      Total deferred tax assets

 

78.0

 

55.1

 


Deferred tax liabilities:

 

      Property and equipment

 

(348.9

)

(320.2

)

      Intercompany transfers of property

 

(45.5

)

(36.6

)

      Deferred costs

 

(23.5

)

(18.5

)

      Other

 

(7.7

)

(.4