ENSCO PLC, 10-Q filed on 10/26/2017
Quarterly Report
Document And Entity Information
9 Months Ended
Sep. 30, 2017
Oct. 23, 2017
Document And Entity Information [Abstract]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Sep. 30, 2017 
 
Document Fiscal Year Focus
2017 
 
Document Fiscal Period Focus
Q3 
 
Entity Registrant Name
Ensco plc 
 
Entity Central Index Key
0000314808 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Large Accelerated Filer 
 
Entity Common Shares, Shares Outstanding
 
436,019,178 
Condensed Consolidated Statements Of Operations (USD $)
In Millions, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Sep. 30, 2017
Sep. 30, 2016
Income Statement [Abstract]
 
 
 
 
OPERATING REVENUES
$ 460.2 
$ 548.2 
$ 1,388.8 
$ 2,271.8 
OPERATING EXPENSES
 
 
 
 
Contract drilling (exclusive of depreciation)
285.8 
298.1 
855.2 
1,012.0 
Depreciation
108.2 
109.4 
325.3 
335.1 
General and administrative
30.4 
25.3 
86.9 
76.1 
Total operating expenses
424.4 
432.8 
1,267.4 
1,423.2 
OPERATING INCOME
35.8 
115.4 
121.4 
848.6 
OTHER INCOME (EXPENSE)
 
 
 
 
Interest income
7.5 
3.8 
22.3 
8.6 
Interest expense, net
(48.1)
(53.4)
(167.0)
(172.5)
Other, net
0.2 
18.7 
(6.6)
278.3 
Other income (expense), net
(40.4)
(30.9)
(151.3)
114.4 
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
(4.6)
84.5 
(29.9)
963.0 
PROVISION FOR INCOME TAXES
 
 
 
 
Current income tax expense
14.9 
(5.7)
32.3 
81.0 
Deferred income tax expense
8.5 
2.2 
34.5 
23.6 
Total provision for income taxes
23.4 
(3.5)
66.8 
104.6 
(LOSS) INCOME FROM CONTINUING OPERATIONS
(28.0)
88.0 
(96.7)
858.4 
LOSS FROM DISCONTINUED OPERATIONS, NET
(0.2)
(0.7)
(0.4)
(1.8)
NET (LOSS) INCOME
(28.2)
87.3 
(97.1)
856.6 
NET LOSS (INCOME) ATTRIBUTABLE TO NONCONTROLLING INTERESTS
2.8 
(2.0)
0.5 
(5.4)
NET (LOSS) INCOME ATTRIBUTABLE TO ENSCO
(25.4)
85.3 
(96.6)
851.2 
(LOSS) EARNINGS PER SHARE - BASIC AND DILUTED
 
 
 
 
Continuing operations (in dollars per share)
$ (0.08)
$ 0.28 
$ (0.32)
$ 3.07 
Discontinued operations (in dollars per share)
$ 0.00 
$ 0.00 
$ 0.00 
$ 0.00 
(Loss) earnings per share - basic and diluted (in dollars per share)
$ (0.08)
$ 0.28 
$ (0.32)
$ 3.07 
NET (LOSS) INCOME ATTRIBUTABLE TO ENSCO SHARES - BASIC AND DILUTED
$ (25.5)
$ 83.5 
$ (96.9)
$ 836.1 
WEIGHTED-AVERAGE SHARES OUTSTANDING
 
 
 
 
Basic and Diluted (in shares)
301.2 
298.6 
300.9 
272.0 
CASH DIVIDENDS PER SHARE (in dollars per share)
$ 0.01 
$ 0.01 
$ 0.03 
$ 0.03 
Condensed Consolidated Statements of Comprehensive (Loss) Income (USD $)
In Millions, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Sep. 30, 2017
Sep. 30, 2016
Statement of Comprehensive Income [Abstract]
 
 
 
 
NET (LOSS) INCOME
$ (28.2)
$ 87.3 
$ (97.1)
$ 856.6 
OTHER COMPREHENSIVE INCOME (LOSS), NET
 
 
 
 
Net change in derivative fair value
1.7 
7.7 
(0.6)
Reclassification of net (income) losses on derivative instruments from other comprehensive income into net (loss) income
(0.1)
2.2 
1.1 
10.1 
Other
0.1 
(0.5)
0.8 
(0.5)
NET OTHER COMPREHENSIVE INCOME
1.7 
1.7 
9.6 
9.0 
COMPREHENSIVE (LOSS) INCOME
(26.5)
89.0 
(87.5)
865.6 
COMPREHENSIVE LOSS (INCOME) ATTRIBUTABLE TO NONCONTROLLING INTERESTS
2.8 
(2.0)
0.5 
(5.4)
COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO ENSCO
$ (23.7)
$ 87.0 
$ (87.0)
$ 860.2 
Condensed Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Sep. 30, 2017
Dec. 31, 2016
CURRENT ASSETS
 
 
Cash and cash equivalents
$ 724.4 
$ 1,159.7 
Short-term investments
1,069.8 
1,442.6 
Accounts receivable, net
349.0 
361.0 
Other
318.3 
316.0 
Total current assets
2,461.5 
3,279.3 
PROPERTY AND EQUIPMENT, AT COST
13,492.6 
12,992.5 
Less accumulated depreciation
2,396.2 
2,073.2 
Property and equipment, net
11,096.4 
10,919.3 
OTHER ASSETS, NET
125.0 
175.9 
TOTAL ASSETS
13,682.9 
14,374.5 
CURRENT LIABILITIES
 
 
Accounts payable - trade
187.9 
145.9 
Accrued liabilities and other
300.8 
376.6 
Current maturities of long-term debt
331.9 
Total current liabilities
488.7 
854.4 
LONG-TERM DEBT
4,747.7 
4,942.6 
OTHER LIABILITIES
279.2 
322.5 
COMMITMENTS AND CONTINGENCIES
   
   
ENSCO SHAREHOLDERS' EQUITY
 
 
Additional paid-in capital
6,429.8 
6,402.2 
Retained earnings
1,744.2 
1,864.1 
Accumulated other comprehensive income
28.6 
19.0 
Treasury shares, at cost
(69.0)
(65.8)
Total Ensco shareholders' equity
8,165.2 
8,250.6 
NONCONTROLLING INTERESTS
2.1 
4.4 
Total equity
8,167.3 
8,255.0 
Total liabilities and shareholders' equity
13,682.9 
14,374.5 
Class A ordinary shares, U.S.
 
 
ENSCO SHAREHOLDERS' EQUITY
 
 
Common shares, value
31.5 
31.0 
Common Class B, Par Value In GBP [Member]
 
 
ENSCO SHAREHOLDERS' EQUITY
 
 
Common shares, value
$ 0.1 
$ 0.1 
Condensed Consolidated Balance Sheets (Parenthetical)
Sep. 30, 2017
Dec. 31, 2016
Sep. 30, 2017
Class A ordinary shares, U.S.
USD ($)
Dec. 31, 2016
Class A ordinary shares, U.S.
USD ($)
Sep. 30, 2017
Common Class B, Par Value In GBP [Member]
GBP (£)
Dec. 31, 2016
Common Class B, Par Value In GBP [Member]
GBP (£)
Common stock, par value per share (in dollars per share or pounds sterling per share)
 
 
$ 0.1 
$ 0.10 
£ 1 
£ 1 
Common shares, shares issued (in shares)
 
 
314,900,000 
310,300,000 
50,000 
50,000 
Common shares, shares authorized (in shares)
 
 
 
 
50,000 
50,000 
Treasury shares, shares held (in shares)
11,000,000 
7,300,000 
 
 
 
 
Condensed Consolidated Statements Of Cash Flows (USD $)
In Millions, unless otherwise specified
9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
OPERATING ACTIVITIES
 
 
Net (loss) income
$ (97.1)
$ 856.6 
Adjustments to reconcile net (loss) income to net cash provided by operating activities of continuing operations:
 
 
Depreciation expense
325.3 
335.1 
Deferred income tax expense
34.5 
23.6 
Share-based compensation expense
31.3 
28.7 
Amortization of intangibles and other, net
(8.7)
(16.2)
Loss (gain) on debt extinguishment
2.6 
(279.0)
Other
(0.3)
(2.9)
Changes in operating assets and liabilities
(68.0)
48.9 
Net cash provided by operating activities of continuing operations
219.6 
994.8 
INVESTING ACTIVITIES
 
 
Maturities of short-term investments
1,412.7 
1,582.0 
Purchases of short-term investments
(1,040.0)
(1,704.0)
Additions to property and equipment
(474.1)
(255.5)
Other
2.6 
7.7 
Net cash used in investing activities of continuing operations
(98.8)
(369.8)
FINANCING ACTIVITIES
 
 
Reduction of long-term borrowings
(537.0)
(862.4)
Cash dividends paid
(9.4)
(8.5)
Debt issuance costs
(5.5)
Proceeds from equity issuance
585.5 
Other
(4.5)
(2.3)
Net cash used in financing activities
(556.4)
(287.7)
Net cash (used in) provided by discontinued operations
(0.4)
7.4 
Effect of exchange rate changes on cash and cash equivalents
0.7 
(0.6)
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
(435.3)
344.1 
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
1,159.7 
121.3 
CASH AND CASH EQUIVALENTS, END OF PERIOD
$ 724.4 
$ 465.4 
Unaudited Condensed Consolidated Financial Statements
Unaudited Condensed Consolidated Financial Statements
Unaudited Condensed Consolidated Financial Statements
 
We prepared the accompanying condensed consolidated financial statements of Ensco plc and subsidiaries (the "Company," "Ensco," "our," "we" or "us") in accordance with accounting principles generally accepted in the United States of America ("GAAP"), pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC") included in the instructions to Form 10-Q and Article 10 of Regulation S-X. The financial information included in this report is unaudited but, in our opinion, includes all adjustments (consisting of normal recurring adjustments) that are necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods presented. The December 31, 2016 condensed consolidated balance sheet data were derived from our 2016 audited consolidated financial statements, but do not include all disclosures required by GAAP. The preparation of our condensed consolidated financial statements requires us to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the related revenues and expenses and disclosures of gain and loss contingencies as of the date of the financial statements. Actual results could differ from those estimates.
 
The financial data for the three-month and nine-month periods ended September 30, 2017 and 2016 included herein have been subjected to a limited review by KPMG LLP, our independent registered public accounting firm. The accompanying independent registered public accounting firm's review report is not a report within the meaning of Sections 7 and 11 of the Securities Act, and the independent registered public accounting firm's liability under Section 11 does not extend to it.
 
Results of operations for the three-month and nine-month periods ended September 30, 2017 are not necessarily indicative of the results of operations that will be realized for the year ending December 31, 2017.  We recommend these condensed consolidated financial statements be read in conjunction with our annual report on Form 10-K for the year ended December 31, 2016 filed with the SEC on February 28, 2017 and our quarterly reports on Form 10-Q filed with the SEC on April 27, 2017 and July 27, 2017.

Operating Revenues and Expenses

During the nine-month period ended September 30, 2016, operating revenues included $185.0 million for the lump-sum consideration received in settlement and release of the ENSCO DS-9 customer's ongoing early termination obligations and $20.0 million for the lump-sum consideration received in settlement of the ENSCO 8503 customer's remaining obligations under the contract. The ENSCO DS-9 contract was terminated for convenience by the customer in July 2015, whereby our customer was obligated to pay us monthly termination fees for two years under the termination provisions of the contract. The ENSCO 8503 contract was originally scheduled to expire in August 2017.

New Accounting Pronouncements

In August 2017, the Financial Accounting Standards Board (the "FASB") issued Update 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities ("Update 2017-12"), which will make more hedging strategies eligible for hedge accounting. It also amends presentation and disclosure requirements and changes how companies assess effectiveness. This update is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted. We are currently evaluating the effect that Update 2017-12 will have on our consolidated financial statements and related disclosures.

In October 2016, the FASB issued Accounting Standards Update 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (“Update 2016-16”), which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transaction occurs as opposed to deferring tax consequences and amortizing them into future periods. We adopted Update 2016-16 on a modified retrospective basis effective January 1, 2017. As a result of modified retrospective application, we reduced prepaid taxes on intercompany transfers of property and related deferred tax liabilities resulting in the recognition of a cumulative-effect reduction in retained earnings of $14.1 million on our condensed consolidated balance sheet as of January 1, 2017. We do not expect a material impact to our 2017 operating results as a result of the adoption of Update 2016-16.
    
In March 2016, the FASB issued Accounting Standards Update 2016-09, Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting ("Update 2016-09"), which simplifies several aspects of accounting for share-based payment transactions including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. We adopted Update 2016-09 effective January 1, 2017. Our adoption of Update 2016-09 did not result in any cumulative effect on retained earnings and no adjustments have been made to prior periods. The new standard will cause volatility in our effective tax rates primarily due to the new requirement to recognize additional tax benefits or expenses in earnings related to the vesting or settlement of employee share-based awards, rather than in additional paid-in capital, during the period in which they occur. Furthermore, forfeitures are now recorded as they occur as opposed to estimating an allowance for future forfeitures.

During 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606) ("Update 2014-09"), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. Update 2014-09 is effective for annual and interim periods for fiscal years beginning after December 15, 2017. Subsequent to the issuance of Update 2014-09, the FASB issued several additional Accounting Standards Updates to clarify implementation guidance, provide narrow-scope improvements and provide additional disclosure guidance. Update 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP and may be adopted using a retrospective, modified retrospective or prospective with a cumulative catch-up approach. Due to the significant interaction between Update 2014-09 and Accounting Standards Update 2016-02, Leases (Topic 842): Amendments to the FASB Accounting Standards Codification ("Update 2016-02"), we expect to adopt Update 2014-09 and Update 2016-02 concurrently with an effective date of January 1, 2018. We expect to apply the modified retrospective approach to our adoption. We are currently evaluating the effect that Update 2014-09 and Update 2016-02 will have on our consolidated financial statements and related disclosures.

In February 2016, the FASB issued Update 2016-02, which requires an entity to recognize lease assets and lease liabilities on the balance sheet and to disclose key qualitative and quantitative information about the entity's leasing arrangements. This update is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted. A modified retrospective approach is required. During our evaluation of Update 2016-02, we have concluded that our drilling contracts contain a lease component, and upon adoption, we will be required to separately recognize revenues associated with the lease of our drilling rigs and the provision of contract drilling services. Due to the significant interaction between Update 2016-02 and Update 2014-09, we expect to adopt both updates concurrently with an effective date of January 1, 2018. Adoption will result in increased disclosure of the nature of our leasing arrangements and may result in variability in our revenue recognition patterns relative to current U.S. GAAP based on the provisions in each of our drilling contracts. With respect to leases whereby we are the lessee, we expect to recognize lease liabilities and offsetting "right of use" assets ranging from approximately $70 million to $90 million. We are currently evaluating the other impacts that Update 2016-02 and Update 2014-09 will have on our consolidated financial statements and related disclosures.
Atwood Merger
Atwood Merger
Atwood Merger

On May 29, 2017, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Atwood Oceanics, Inc. (“Atwood”) and Echo Merger Sub, LLC, our wholly-owned subsidiary, and on October 6, 2017 (the "Merger Date"), we completed our acquisition of Atwood pursuant to the Merger Agreement (the “Merger”). Atwood’s financial results will be included in our consolidated results beginning on the Merger Date.

The Merger is expected to strengthen our position as the leader in offshore drilling across a wide range of water depths around the world. The Merger significantly enhances the capabilities of our rig fleet and improves our ability to meet future customer demand with the highest-specification assets.

Consideration

    As a result of the Merger, Atwood shareholders received 1.60 Ensco Class A Ordinary shares for each share of Atwood common stock, representing a value of $9.33 per share of Atwood common stock based on a closing price of $5.83 per Class A ordinary share on October 5, 2017, the last trading day before the Merger Date. Total consideration delivered in the Merger consisted of 134.1 million Class A ordinary shares with an aggregate value of $782.0 million.

Assets Acquired and Liabilities Assumed
    
Assets acquired and liabilities assumed in the Merger will be recorded at their estimated fair values as of the Merger Date under the acquisition method of accounting. When the fair value of the net assets acquired exceeds the consideration transferred in an acquisition, the difference is recorded as a bargain purchase gain in the period in which the transaction occurs. We have not finalized the fair values of assets acquired and liabilities assumed; therefore, the fair value estimates set forth below are subject to adjustment during a one year measurement period subsequent to the Merger Date. The estimated fair values of certain assets and liabilities including inventory, long-lived assets and contingencies require judgments and assumptions that increase the likelihood that adjustments may be made to these estimates during the measurement period, and those adjustments could be material.

The provisional amounts for assets acquired and liabilities assumed are based on preliminary estimates of their fair values as of the Merger Date and are as follows (in millions):
 
Estimated Fair Value
Assets:
 
Cash and cash equivalents(1)
$
445.4

Accounts receivable(2)
59.4

Other current assets
115.9

Property and equipment
1,776.1

Other assets
26.0

Liabilities:
 
Debt(1)
1,305.9

Other liabilities
167.1

Net assets acquired
949.8

Less: merger consideration
(782.0
)
Bargain purchase gain
$
167.8


(1) Upon closing of the Merger, we utilized acquired cash of $445.4 million and cash on hand from the liquidation of short-term investments to repay Atwood's debt and accrued interest of $1.3 billion.

(2) Gross contractual amounts receivable totaled $61.8 million as of the Merger Date.
Bargain Purchase Gain

The estimated fair values assigned to assets acquired net of liabilities assumed exceeded the consideration transferred, resulting in a bargain purchase gain primarily due to depressed offshore drilling company valuations. Market capitalizations across the offshore drilling industry have declined significantly since mid-2014 due to the decline in commodity prices and the related imbalance of supply and demand for drilling rigs. The resulting bargain purchase gain was further driven by the decline in our share price from $6.70 to $5.83 between the last trading day prior to the announcement of the Merger and the Merger Date. The estimated gain will be reflected in other, net, in our consolidated statement of operations during the fourth quarter.

Merger-Related Costs

Merger-related costs were expensed as incurred and consisted of various advisory, legal, accounting, valuation and other professional or consulting fees totaling $3.8 million and $8.0 million during the three-month and nine-month periods ended September 30, 2017, respectively. These costs were included in general and administrative expense in our condensed consolidated statements of operations. Upon closing of the Merger, we incurred additional Merger-related costs of $11.8 million.

Pro Forma Impact of the Merger

The following unaudited supplemental pro forma results present consolidated information as if the Merger was completed on January 1, 2016. The pro forma results include, among others, (i) the amortization associated with acquired intangible assets and liabilities, (ii) a reduction in depreciation expense for adjustments to property and equipment and (iii) a reduction to interest expense resulting from the retirement of Atwood's revolving credit facility and 6.50% senior notes due 2020. The pro forma results do not include any potential synergies or non-recurring charges that may result directly from the Merger.

(in millions, except per share amounts)
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
2016
 
2017
2016
Revenues

$
561.2

$
732.2

 
$
1,769.8

$
2,960.8

Net income

(14.3
)
136.0

 
(24.0
)
1,196.9

Earnings per share - basic and diluted

(0.03
)
0.31

 
(0.06
)
2.95

Fair Value Measurements
Fair Value Measurements
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 (in millions):
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total
As of September 30, 2017
 
 
 

 
 

 
 

Supplemental executive retirement plan assets 
$
30.0

 
$

 
$

 
$
30.0

Derivatives, net

 
6.0

 

 
6.0

Total financial assets
$
30.0

 
$
6.0

 
$

 
$
36.0

 
 
 
 
 
 
 
 
As of December 31, 2016
 
 
 

 
 

 
 

Supplemental executive retirement plan assets
$
27.7

 
$

 
$

 
$
27.7

Total financial assets
$
27.7

 
$

 
$

 
$
27.7

Derivatives, net 
$

 
$
(8.8
)
 
$

 
$
(8.8
)
Total financial liabilities
$

 
$
(8.8
)
 
$

 
$
(8.8
)


Supplemental Executive Retirement Plan Assets
 
Our supplemental executive retirement plans (the "SERP") are non-qualified plans that provide eligible employees an opportunity to defer a portion of their compensation for use after retirement. Assets held in the SERP were marketable securities measured at fair value on a recurring basis using Level 1 inputs and were included in other assets, net, on our condensed consolidated balance sheets. 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. See "Note 4 - Derivative Instruments" for additional information on our derivatives, including a description of our foreign currency hedging activities and related methodologies used to manage foreign currency exchange rate risk. The fair value measurement of our derivatives was based on market prices that are generally observable for similar assets or liabilities at commonly-quoted intervals.
 
Other Financial Instruments
 
The carrying values and estimated fair values of our long-term debt instruments were as follows (in millions):
 
September 30,
2017
 
December 31,
2016
 
Carrying Value  
 
Estimated Fair Value  
 
Carrying Value  
 
Estimated Fair Value  
8.50% Senior notes due 2019
$
253.7

 
$
252.3

 
$
480.2

 
$
485.0

6.875% Senior notes due 2020
480.3

 
465.2

 
735.9

 
727.5

4.70% Senior notes due 2021
266.9

 
264.6

 
674.4

 
658.9

3.00% Exchangeable senior notes due 2024(1)
628.2

 
726.8

 
604.3

 
874.7

4.50% Senior notes due 2024
619.1

 
520.2

 
618.6

 
536.0

8.00% Senior notes due 2024
338.2

 
330.2

 

 

5.20% Senior notes due 2025
663.4

 
564.0

 
662.8

 
582.3

7.20% Debentures due 2027
149.2

 
139.2

 
149.2

 
138.7

7.875% Senior notes due 2040
377.1

 
256.6

 
378.3

 
270.6

5.75% Senior notes due 2044
971.6

 
731.9

 
970.8

 
728.0

Total
$
4,747.7

 
$
4,251.0

 
$
5,274.5

 
$
5,001.7



(1)  
Our exchangeable senior notes due 2024 (the "2024 Convertible Notes") were issued with a conversion feature. The 2024 Convertible Notes were separated into their liability and equity components on our condensed consolidated balance sheet. The equity component was initially recorded to additional paid-in capital and as a debt discount that will be amortized to interest expense over the life of the instrument. Excluding the unamortized discount, the carrying amount of the 2024 Convertible Notes was $833.5 million and $830.1 million as of September 30, 2017 and December 31, 2016, respectively.

The estimated fair values of our senior notes and debentures were determined using quoted market prices. The decline in the carrying value of long-term debt instruments from December 31, 2016 to September 30, 2017 is primarily due to the January 2017 debt exchange and debt repurchases as discussed in "Note 7 - Debt."

The estimated fair values of our cash and cash equivalents, short-term investments, receivables, trade payables and other liabilities approximated their carrying values as of September 30, 2017 and December 31, 2016. Our short-term investments consisted of time deposits with initial maturities in excess of three months but less than one year as of each respective balance sheet date.
Derivative Instruments
Derivative Instruments
Derivative Instruments
    
Our functional currency is the U.S. dollar. As is customary in the oil and gas industry, a majority of our revenues are denominated in U.S. dollars; however, a portion of the revenues earned and expenses incurred by certain of our subsidiaries are denominated in currencies other than the U.S. dollar. These transactions are remeasured in U.S. dollars based on a combination of both current and historical exchange rates. We use foreign currency forward contracts to reduce our exposure to various market risks, primarily foreign currency exchange rate risk.
 
All derivatives were recorded on our condensed consolidated balance sheets at fair value. Derivatives subject to legally enforceable master netting agreements were not offset in our condensed consolidated balance sheets. Accounting for the gains and losses resulting from changes in derivative fair value depends on the use of the derivative and whether it qualifies for hedge accounting.  Net assets of $6.0 million and net liabilities of $8.8 million associated with our foreign currency forward contracts were included on our condensed consolidated balance sheets as of September 30, 2017 and December 31, 2016, respectively.  All of our derivatives mature during the next 18 months.  See "Note 3 - Fair Value Measurements" for additional information on the fair value measurement of our derivatives.
 
Derivatives recorded at fair value on our condensed consolidated balance sheets consisted of the following (in millions):
 
Derivative Assets
 
Derivative Liabilities
 
September 30,
2017
 
December 31,
2016
 
September 30,
2017
 
December 31,
2016
Derivatives Designated as Hedging Instruments
 
 
 

 
 

 
 

Foreign currency forward contracts - current(1)
$
6.4

 
$
4.1

 
$
.7

 
$
11.4

Foreign currency forward contracts - non-current(2)
.7

 
.2

 
.1

 
.8

 
7.1

 
4.3

 
.8

 
12.2

 
 
 
 
 
 
 
 
Derivatives Not Designated as Hedging Instruments
 
 
 

 
 

 
 

Foreign currency forward contracts - current(1)
.8

 
.4

 
1.1

 
1.3

 
.8

 
.4

 
1.1

 
1.3

Total
$
7.9

 
$
4.7

 
$
1.9

 
$
13.5

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

(2) 
Derivative assets and liabilities with maturity dates greater than twelve months from the respective balance sheet date were included in other assets, net, and other liabilities, respectively, on our condensed consolidated balance sheets.
 
We utilize cash flow hedges to hedge forecasted foreign currency denominated transactions, primarily to reduce our exposure to foreign currency exchange rate risk associated with contract drilling expenses and capital expenditures denominated in various currencies. As of September 30, 2017, we had cash flow hedges outstanding to exchange an aggregate $164.0 million for various foreign currencies, including $74.4 million for British pounds, $33.8 million for Australian dollars, $23.3 million for euros, $20.3 million for Brazilian reals and $12.2 million for other currencies.

Gains and losses, net of tax, on derivatives designated as cash flow hedges included in our condensed consolidated statements of operations and comprehensive (loss) income were as follows (in millions):

Three Months Ended September 30, 2017 and 2016
 
Gain (Loss) Recognized in Other Comprehensive (Loss) Income (Effective Portion)  
 
(Loss) Gain Reclassified from Accumulated Other Comprehensive Income ("AOCI") into Income (Effective Portion)(1)
 
Gain Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing)(2)
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Interest rate lock contracts(3)
$

 
$

 
$
(.1
)
 
$
(.1
)
 
$

 
$

Foreign currency forward contracts(4)
1.7

 

 
.2

 
(2.1
)
 
.3

 
.2

Total
$
1.7

 
$

 
$
.1

 
$
(2.2
)
 
$
.3

 
$
.2


Nine Months Ended September 30, 2017 and 2016
 
Gain (Loss) Recognized in Other Comprehensive (Loss) Income (Effective Portion)  
 
Loss Reclassified from AOCI into Income (Effective Portion)(1)
 
(Loss) Gain Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing)(2)
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Interest rate lock contracts(3)
$

 
$

 
$
(.3
)
 
$
(.2
)
 
$

 
$

Foreign currency forward contracts(5)
7.7

 
(.6
)
 
(.8
)
 
(9.9
)
 
(.1
)
 
2.1

Total
$
7.7

 
$
(.6
)
 
$
(1.1
)
 
$
(10.1
)
 
$
(.1
)
 
$
2.1



(1)
Changes in the effective portion of cash flow hedge fair values are recorded in AOCI.  Amounts recorded in AOCI associated with cash flow hedges are subsequently reclassified into contract drilling, depreciation or interest expense as earnings are affected by the underlying hedged forecasted transaction.

(2)
Gains and losses recognized in income for ineffectiveness and amounts excluded from effectiveness testing were included in other, net, in our condensed consolidated statements of operations.

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

(4) 
During the three-month period ended September 30, 2017, there were no net amounts reclassified from AOCI into contract drilling expense and $200,000 of gains were reclassified from AOCI into depreciation expense in our condensed consolidated statement of operations. During the three-month period ended September 30, 2016, $2.3 million of losses were reclassified from AOCI into contract drilling expense and $200,000 of gains were reclassified from AOCI into depreciation expense in our condensed consolidated statement of operations.

(5) 
During the nine-month period ended September 30, 2017, $1.4 million of losses were reclassified from AOCI into contract drilling expense and $600,000 of gains were reclassified from AOCI into depreciation expense in our condensed consolidated statement of operations. During the nine-month period ended September 30, 2016, $10.5 million of losses were reclassified from AOCI into contract drilling expense and $600,000 of gains were reclassified from AOCI into depreciation expense in our condensed consolidated statement of operations.

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 September 30, 2017, we held derivatives not designated as hedging instruments to exchange an aggregate $137.1 million for various foreign currencies, including $94.4 million for euros, $12.3 million for British pounds, $10.1 million for Brazilian reals, $7.7 million for Australian dollars and $12.6 million for other currencies.
     
Net gains of $2.7 million and net losses of $400,000 associated with our derivatives not designated as hedging instruments were included in other, net, in our condensed consolidated statements of operations for the three-month periods ended September 30, 2017 and 2016, respectively. Net gains of $8.9 million and $500,000 associated with our derivatives not designated as hedging instruments were included in other, net, in our condensed consolidated statements of operations for the nine-month periods ended September 30, 2017 and 2016, respectively. These gains and losses were largely offset by net foreign currency exchange gains and losses during the respective periods.
As of September 30, 2017, the estimated amount of net gains associated with derivative instruments, net of tax, that would be reclassified into earnings during the next twelve months totaled $3.3 million.
Noncontrolling Interests
Noncontrolling Interests
Noncontrolling Interests

Third parties hold a noncontrolling ownership interest in certain of our non-U.S. subsidiaries. Noncontrolling interests are classified as equity on our condensed consolidated balance sheets, and net income attributable to noncontrolling interests is presented separately in our condensed consolidated statements of operations.
    
(Loss) income from continuing operations attributable to Ensco for the three-month and nine-month periods ended September 30, 2017 and 2016 was as follows (in millions):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
(Loss) income from continuing operations
$
(28.0
)
 
$
88.0

 
$
(96.7
)
 
$
858.4

Loss (income) from continuing operations attributable to noncontrolling interests
2.8

 
(2.0
)
 
.5

 
(5.4
)
(Loss) income from continuing operations attributable to Ensco
$
(25.2
)
 
$
86.0

 
$
(96.2
)
 
$
853.0

Earnings Per Share
Earnings Per Share
Earnings Per Share
 
We compute basic and diluted earnings per share ("EPS") in accordance with the two-class method. Net (loss) income attributable to Ensco used in our computations of basic and diluted EPS is adjusted to exclude net income allocated to non-vested shares granted to our employees and non-employee directors. Weighted-average shares outstanding used in our computation of diluted EPS is calculated using the treasury stock method and excludes non-vested shares.

The following table is a reconciliation of (loss) income from continuing operations attributable to Ensco shares used in our basic and diluted EPS computations for the three-month and nine-month periods ended September 30, 2017 and 2016 (in millions):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
(Loss) income from continuing operations attributable to Ensco
$
(25.2
)
 
$
86.0

 
$
(96.2
)
 
$
853.0

Income from continuing operations allocated to non-vested share awards(1)
(.1
)
 
(1.8
)
 
(.3
)
 
(15.1
)
(Loss) income from continuing operations attributable to Ensco shares
$
(25.3
)
 
$
84.2

 
$
(96.5
)
 
$
837.9



(1) 
Losses are not allocated to non-vested share awards. Therefore, only dividends attributable to our non-vested share awards are included in the three-month and nine-month periods ended September 30, 2017.

Antidilutive share awards totaling 1.3 million and 1.2 million were excluded from the computation of diluted EPS for the three-month and nine-month periods ended September 30, 2017 and 2016, respectively.

We have the option to settle our 2024 Convertible Notes in cash, shares or a combination thereof for the aggregate amount due upon conversion. Our intent is to settle the principal amount of the 2024 Convertible Notes in cash upon conversion. If the conversion value exceeds the principal amount (i.e., our share price exceeds the exchange price on the date of conversion), we expect to deliver shares equal to the remainder of our conversion obligation in excess of the principal amount.

During each reporting period that our average share price exceeds the exchange price, an assumed number of shares required to settle the conversion obligation in excess of the principal amount will be included in our denominator for the computation of diluted EPS using the treasury stock method. Our average share price did not exceed the exchange price during the three-month or nine-month periods ended September 30, 2017.
Debt
Debt
Debt

Exchange Offers

In January 2017, we completed exchange offers (the "Exchange Offers") to exchange our outstanding 8.50% senior notes due 2019, 6.875% senior notes due 2020 and 4.70% senior notes due 2021 for 8.00% senior notes due 2024 and cash. The Exchange Offers resulted in the tender of $649.5 million aggregate principal amount of our outstanding senior notes that were settled and exchanged as follows (in millions):

 
 
Aggregate Principal Amount Repurchased
 
8.00% Senior notes due 2024 Consideration
 
Cash Consideration(1)
 
Total Consideration
8.50% Senior notes due 2019
 
$
145.8

 
$
81.6

 
$
81.7

 
$
163.3

6.875% Senior notes due 2020
 
129.8

 
69.3

 
69.4

 
138.7

4.70% Senior notes due 2021
 
373.9

 
181.1

 
181.4

 
362.5

Total
 
$
649.5

 
$
332.0

 
$
332.5

 
$
664.5

(1)  
As of December 31, 2016, the aggregate amount of principal repurchased with cash of $332.5 million, along with associated premiums, was classified as current maturities of long-term debt on our condensed consolidated balance sheet.
    
During the first quarter, we recognized a net pre-tax loss on the Exchange Offers of $6.2 million, consisting of a loss of $3.5 million that includes the write-off of premiums on tendered debt and $2.7 million of transaction costs.

Open Market Repurchases

During the nine-month period ended September 30, 2017, we repurchased certain of our outstanding senior notes with cash on hand and recognized an insignificant pre-tax gain, net of discounts, premiums and debt issuance costs. The aggregate repurchases were as follows (in millions):
 
Aggregate Principal Amount Repurchased
 
Aggregate Repurchase Price(1)
8.50% Senior notes due 2019
$
54.6

 
$
60.1

6.875% Senior notes due 2020
100.1

 
105.1

4.70% Senior notes due 2021
39.4

 
39.3

Total
$
194.1

 
$
204.5


(1)  
Excludes accrued interest paid to holders of the repurchased senior notes.

Maturities

Our next debt maturity is $237.6 million during 2019, followed by $450.9 million and $269.7 million during 2020 and 2021, respectively.

Revolving Credit Facility

In October 2017, we amended our revolving credit facility ("Credit Facility") to extend the final maturity date by two years. Previously, our Credit Facility had a borrowing capacity of $2.25 billion through September 2019 that declined to $1.13 billion through September 2020. Subsequent to the amendment, our borrowing capacity is $2.0 billion through September 2019 and declines to $1.2 billion through September 2022. The credit agreement governing our revolving credit facility includes an accordion feature allowing us to increase the commitments expiring in September 2022 up to an aggregate amount not to exceed $1.5 billion.

Also in October, Moody's downgraded our credit rating from B1 to B2 and Standard & Poor's downgraded our credit rating from BB to B+. The Credit Facility amendment and the rating actions resulted in increases to the interest rates applicable to our borrowings. The applicable margin rates are 2.50% per annum for Base Rate advances and 3.50% per annum for LIBOR advances. In addition, our quarterly commitment fee increased as a result of the amendment and rating actions to 0.625% per annum on the undrawn portion of the $2.0 billion commitment. 
    
The Credit Facility requires us to maintain a total debt to total capitalization ratio that is less than or equal to 60% and to provide guarantees from certain of our rig-owning subsidiaries sufficient to meet certain guarantee coverage ratios. The Credit Facility also contains customary restrictive covenants, including, among others, prohibitions on creating, incurring or assuming certain debt and liens (subject to customary exceptions, including a permitted lien basket that permits us to raise secured debt up to the lesser of $750 million or 10% of consolidated tangible net worth (as defined in the Credit Facility)); entering into certain merger arrangements; selling, leasing, transferring or otherwise disposing of all or substantially all of our assets; making a material change in the nature of the business; paying or distributing dividends on our ordinary shares (subject to certain exceptions, including the ability to continue paying a quarterly dividend of $0.01 per share); borrowings, if after giving effect to any such borrowings and the application of the proceeds thereof, the aggregate amount of available cash (as defined in the Credit Facility) would exceed $150 million; and entering into certain transactions with affiliates.

The Credit Facility also includes a covenant restricting our ability to repay indebtedness maturing after September 2022, which is the final maturity date of our Credit Facility. This covenant is subject to certain exceptions that permit us to manage our balance sheet, including the ability to make repayments of indebtedness (i) of acquired companies within 90 days of the completion of the acquisition or (ii) if, after giving effect to such repayments, available cash is greater than $250 million and there are no amounts outstanding under the Credit Facility.

As of September 30, 2017, we were in compliance in all material respects with our covenants under the Credit Facility. We had no amounts outstanding under the Credit Facility as of September 30, 2017 and December 31, 2016.

Our access to credit and capital markets depends on the credit ratings assigned to our debt. We no longer maintain an investment-grade status. Our current credit ratings, and any additional actual or anticipated downgrades in our credit ratings, could limit our available options when accessing credit and capital markets, or when restructuring or refinancing our debt. In addition, future financings or refinancings may result in higher borrowing costs and require more restrictive terms and covenants, which may further restrict our operations. With a credit rating below investment grade, we have no access to the commercial paper market.
Shareholders' Equity
Stockholders' Equity
Shareholders' Equity

As a U.K. company governed in part by the Companies Act, we cannot issue new shares (other than in limited circumstances) without being authorized by our shareholders. At our last annual general meeting held on May 22, 2017, our shareholders authorized the allotment of 101.1 million Class A ordinary shares (or 202.2 million Class A ordinary shares in connection with an offer by way of a rights issue or other similar issue) for a period up to the conclusion of our 2018 annual general meeting (or, if earlier, at the close of business on August 22, 2018).

On October 5, 2017 in conjunction with the approval of the Merger, our shareholders authorized an increase in our allotment to reflect our expected enlarged share capital immediately following the completion of the Merger. As a result of the authorization, our share allotment increased to 146.1 million Class A ordinary shares (or 292.2 million Class A ordinary shares in connection with an offer by way of a rights issue or other similar issue).

In connection with the Merger on October 6, 2017, we issued 134.1 million Ensco Class A ordinary shares to Atwood shareholders.
Income Taxes
Income Taxes
Income Taxes
 
We have historically calculated our provision for income taxes during interim reporting periods by applying the estimated annual effective tax rate for the full fiscal year to pre-tax income or loss, excluding discrete items, for the reporting period. We determined that since small changes in estimated pre-tax income or loss would result in significant changes in our estimated annual effective tax rate, the historical method utilized would not provide a reliable estimate of income taxes for the three-month and nine-month periods ended September 30, 2017. We used a discrete effective tax rate method to calculate income taxes for the three-month and nine-month periods ended September 30, 2017. We will continue to evaluate income tax estimates under the historical method in subsequent quarters and employ a discrete effective tax rate method if warranted.

Discrete income tax expense for the three-month period ended September 30, 2017 was $3.2 million and resulted primarily from a rig sale and resolutions of prior year tax matters. Discrete income tax expense for the nine-month period ended September 30, 2017 was $13.0 million and resulted primarily from the Exchange Offers and debt repurchases, rig sales, a restructuring transaction, settlement of a previously disclosed legal contingency, the effective settlement of a liability for unrecognized tax benefits associated with a tax position taken in prior years and other resolutions of prior year tax matters.

Our consolidated effective income tax rate for the three-month and nine-month periods ended September 30, 2016, excluding the impact of discrete tax items, was 6.0% and 21.9%, respectively. Net discrete income tax benefits for the three-month and nine-month periods ended September 30, 2016 of $6.0 million and $1.6 million, respectively, were primarily attributable to the gain on debt extinguishment, changes in liabilities for unrecognized tax benefits associated with tax positions taken in prior years and other resolutions of prior year matters. Discrete tax items for the nine-month period ended September 30, 2016 also resulted from restructuring transactions involving certain of our subsidiaries.
Contingencies
Contingencies
Contingencies

Brazil Internal Investigation

Pride International LLC, formerly Pride International, Inc. (“Pride”), a company we acquired in 2011, commenced drilling operations in Brazil in 2001. In 2008, Pride entered into a drilling services agreement with Petrobras (the "DSA") for ENSCO DS-5, a drillship ordered from Samsung Heavy Industries, a shipyard in South Korea ("SHI"). Beginning in 2006, Pride conducted periodic compliance reviews of its business with Petrobras, and, after the acquisition of Pride, Ensco conducted similar compliance reviews.

We commenced a compliance review in early 2015 after media reports were released regarding ongoing investigations of various kickback and bribery schemes in Brazil involving Petrobras. While conducting our compliance review, we became aware of an internal audit report by Petrobras alleging irregularities in relation to the DSA. Upon learning of the Petrobras internal audit report, our Audit Committee appointed independent counsel to lead an investigation into the alleged irregularities. Further, in June and July 2015, we voluntarily contacted the SEC and the U.S. Department of Justice ("DOJ"), respectively, to advise them of this matter and of our Audit Committee’s investigation. Independent counsel, under the direction of our Audit Committee, has substantially completed its investigation by reviewing and analyzing available documents and correspondence and interviewing current and former employees involved in the DSA negotiations and the negotiation of the ENSCO DS-5 construction contract with SHI (the "DS-5 Construction Contract").

To date, our Audit Committee has found no credible evidence that Pride or Ensco or any of their current or former employees were aware of or involved in any wrongdoing, and our Audit Committee has found no credible evidence linking Ensco or Pride to any illegal acts committed by our former marketing consultant who provided services to Pride and Ensco in connection with the DSA. Independent counsel has continued to provide the SEC and DOJ with updates throughout the investigation, including detailed briefings regarding its investigation and findings. We entered into a one-year tolling agreement with the DOJ that expired in December 2016. We extended our tolling agreement with the SEC for 12 months until March 2018.

Subsequent to initiating our Audit Committee investigation, Brazilian court documents connected to the prosecution of former Petrobras directors and employees as well as certain other third parties, including our former marketing consultant, referenced the alleged irregularities cited in the Petrobras internal audit report. Our former marketing consultant has entered into a plea agreement with the Brazilian authorities. On January 10, 2016, Brazilian authorities filed an indictment against a former Petrobras director. This indictment states that the former Petrobras director received bribes paid out of proceeds from a brokerage agreement entered into for purposes of intermediating a drillship construction contract between SHI and Pride, which we believe to be the DS-5 Construction Contract. The parties to the brokerage agreement were a company affiliated with a person acting on behalf of the former Petrobras director, a company affiliated with our former marketing consultant, and SHI. The indictment alleges that amounts paid by SHI under the brokerage agreement ultimately were used to pay bribes to the former Petrobras director. The indictment does not state that Pride or Ensco or any of their current or former employees were involved in the bribery scheme or had any knowledge of the bribery scheme.

On January 4, 2016, we received a notice from Petrobras declaring the DSA void effective immediately. Petrobras’ notice alleges that our former marketing consultant both received and procured improper payments from SHI for employees of Petrobras and that Pride had knowledge of this activity and assisted in the procurement of and/or facilitated these improper payments. We disagree with Petrobras’ allegations. See "DSA Dispute" below for additional information.

In August 2017, one of our Brazilian subsidiaries was contacted by the Office of the Attorney General for the Brazilian state of Paraná in connection with a criminal investigation procedure initiated against agents of both SHI and Pride in relation to the DSA.  The Brazilian authorities requested information regarding our compliance program and the findings of our internal investigations. We are cooperating with the Office of the Attorney General and have provided documents in response to their request.  We cannot predict the scope or ultimate outcome of this procedure or whether any other governmental authority will open an investigation into Pride’s involvement in this matter, or if a proceeding were opened, the scope or ultimate outcome of any such investigation. If the SEC or DOJ determines that violations of the FCPA have occurred, or if any governmental authority determines that we have violated applicable anti-bribery laws, they could seek civil and criminal sanctions, including monetary penalties, against us, as well as changes to our business practices and compliance programs, any of which could have a material adverse effect on our business and financial condition. Although our internal investigation is substantially complete, we cannot predict whether any additional allegations will be made or whether any additional facts relevant to the investigation will be uncovered during the course of the investigation and what impact those allegations and additional facts will have on the timing or conclusions of the investigation. Our Audit Committee will examine any such additional allegations and additional facts and the circumstances surrounding them.

DSA Dispute

As described above, on January 4, 2016, Petrobras sent a notice to us declaring the DSA void effective immediately, reserving its rights and stating its intention to seek any restitution to which it may be entitled. We disagree with Petrobras’ declaration that the DSA is void. We believe that Petrobras repudiated the DSA and have therefore accepted the DSA as terminated on April 8, 2016 (the "Termination Date"). At this time, we cannot reasonably determine the validity of Petrobras' claim or the range of our potential exposure, if any. As a result, there can be no assurance as to how this dispute will ultimately be resolved.

We did not recognize revenue for amounts owed to us under the DSA from the beginning of the fourth quarter of 2015 through the Termination Date, as we concluded that collectability of these amounts was not reasonably assured. Additionally, our receivables from Petrobras related to the DSA from prior to the fourth quarter of 2015 are fully reserved in our condensed consolidated balance sheet as of September 30, 2017. We have initiated arbitration proceedings in the U.K. against Petrobras seeking payment of all amounts owed to us under the DSA, in addition to any other amounts to which we are entitled, and intend to vigorously pursue our claims. Petrobras subsequently filed a counterclaim seeking restitution of certain sums paid under the DSA less value received by Petrobras under the DSA. We have also initiated separate arbitration proceedings in the U.K. against SHI for any losses we have incurred in connection with the foregoing. SHI subsequently filed a statement of defense disputing our claim. There can be no assurance as to how these arbitration proceedings will ultimately be resolved.

Customer Dispute

A customer filed a lawsuit in Texas federal court against one of our subsidiaries claiming damages based on allegations that our subsidiary breached and was negligent in the performance of a drilling contract during the period beginning in mid-2011 through May 2012. The customer's court documents alleged damages totaling approximately $40 million. During the second quarter, we settled the lawsuit and agreed to pay the customer $9.8 million, which was recognized in contract drilling expense in our condensed consolidated statements of operations for the nine-month period ended September 30, 2017.

Atwood Merger

On June 23, 2017, a putative class action captioned Bernard Stern v. Atwood Oceanics, Inc., et al, was filed in the U.S. District Court for the Southern District of Texas against Atwood, Atwood’s directors, Ensco and Merger Sub. The Stern complaint generally alleges that Atwood and the Atwood directors disseminated a false or misleading registration statement on Form S-4 (the “Registration Statement”) on June 16, 2017, which omitted material information regarding the proposed Merger, in violation of Section 14(a) of the Exchange Act. Specifically, the Stern complaint alleges that Atwood and the Atwood directors omitted material information regarding the parties’ financial projections, the analysis performed by Atwood’s financial advisor, Goldman Sachs & Co. LLC (“Goldman Sachs”), in support of its fairness opinion, the timing and nature of communications regarding post-transaction employment of Atwood's directors and officers, potential conflicts of interest of Goldman Sachs, and whether there were further discussions with another potential acquirer of Atwood following the May 30, 2017 announcement of the Merger. The Stern complaint further alleges that the Atwood directors, Ensco and Merger Sub are liable for these violations as “control persons” of Atwood under Section 20(a) of the Exchange Act. With respect to Ensco, the Stern complaint alleges that Ensco had direct supervisory control over the composition of the Registration Statement. The Stern complaint seeks injunctive relief, including to enjoin the Merger, rescissory damages, and an award of attorneys’ fees in addition to other relief.

On June 27, 2017, June 29, 2017 and June 30, 2017, additional putative class actions captioned Joseph Composto v. Atwood Oceanics, Inc., et al, Booth Family Trust v. Atwood Oceanics, Inc., et al and Mary Carter v. Atwood Oceanics, Inc.et al, respectively, were filed in the U.S. District Court for the Southern District of Texas against Atwood and Atwood’s directors. These actions allege violations of Sections 14(a) and 20(a) of the Exchange Act by Atwood and Atwood’s directors similar to those alleged in the Stern complaint; however, neither Ensco plc nor Merger Sub is named as a defendant in these actions. On October 2, 2017, the actions were consolidated and the Stern matter was designated as the lead case. The plaintiffs subsequently voluntarily dismissed the actions.

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.

In the ordinary course of business with customers and others, we have entered into letters of credit and surety bonds to guarantee our performance as it relates to our drilling contracts, contract bidding, customs duties, tax appeals and other obligations in various jurisdictions. Letters of credit and surety bonds outstanding as of September 30, 2017 totaled $83.5 million and were issued under facilities provided by various banks and other financial institutions. Obligations under these letters of credit and surety bonds are not normally called as we typically comply with the underlying performance requirement. As of September 30, 2017, we were not required to make collateral deposits with respect to these agreements.
Segment Information
Segment Information
Segment Information
 
Our business consists of three operating segments: (1) Floaters, which includes our drillships and semisubmersible rigs, (2) Jackups and (3) Other, which consists of management services on rigs owned by third-parties. Our two reportable segments, Floaters and Jackups, provide one service, contract drilling.
    
Segment information for the three-month and nine-month periods ended 2017 and 2016 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 are included in "Reconciling Items." We measure segment assets as property and equipment.

Three Months Ended September 30, 2017
 
Floaters
 
Jackups
 
Other
 
Operating Segments Total
 
Reconciling Items
 
Consolidated Total
Revenues
$
291.9

 
$
153.1

 
$
15.2

 
$
460.2

 
$

 
$
460.2

Operating expenses
 
 
 
 
 
 
 
 
 
 
 
Contract drilling (exclusive of depreciation)
139.1

 
132.9

 
13.8

 
285.8

 

 
285.8

Depreciation
72.7

 
31.6

 

 
104.3

 
3.9

 
108.2

General and administrative

 

 

 

 
30.4

 
30.4

Operating income (loss)
$
80.1

 
$
(11.4
)
 
$
1.4

 
$
70.1

 
$
(34.3
)
 
$
35.8

Property and equipment, net
$
8,545.5

 
$
2,502.4

 
$

 
$
11,047.9

 
$
48.5

 
$
11,096.4


Three Months Ended September 30, 2016
 
Floaters
 
Jackups
 
Other
 
Operating Segments Total
 
Reconciling Items
 
Consolidated Total
Revenues
$
319.3

 
$
213.8

 
$
15.1

 
$
548.2

 
$

 
$
548.2

Operating expenses
 
 
 
 
 
 
 
 
 
 
 
Contract drilling (exclusive of depreciation)
153.7

 
133.2

 
11.2

 
298.1

 

 
298.1

Depreciation
72.9

 
32.1

 

 
105.0

 
4.4

 
109.4

General and administrative

 

 

 

 
25.3

 
25.3

Operating income
$
92.7

 
$
48.5

 
$
3.9

 
$
145.1

 
$
(29.7
)
 
$
115.4

Property and equipment, net
$
8,360.4

 
$
2,537.9

 
$

 
$
10,898.3

 
$
61.4

 
$
10,959.7


Nine Months Ended September 30, 2017
 
Floaters
 
Jackups
 
Other
 
Operating Segments Total
 
Reconciling Items
 
Consolidated Total
Revenues
$
840.7

 
$
503.8

 
$
44.3

 
$
1,388.8

 
$

 
$
1,388.8

Operating expenses
 
 
 
 
 
 
 
 
 
 
 
Contract drilling (exclusive of depreciation)
431.1

 
383.8

 
40.3

 
855.2

 

 
855.2

Depreciation
217.5

 
95.3

 

 
312.8

 
12.5

 
325.3

General and administrative

 

 

 

 
86.9

 
86.9

Operating income
$
192.1

 
$
24.7

 
$
4.0

 
$
220.8

 
$
(99.4
)
 
$
121.4

Property and equipment, net
$
8,545.5

 
$
2,502.4

 
$

 
$
11,047.9

 
$
48.5

 
$
11,096.4


Nine Months Ended September 30, 2016
 
Floaters
 
Jackups
 
Other
 
Operating Segments Total
 
Reconciling Items
 
Consolidated Total
Revenues
$
1,468.3

 
$
743.0

 
$
60.5

 
$
2,271.8

 
$

 
$
2,271.8

Operating expenses
 
 
 
 
 
 
 
 
 
 
 
Contract drilling (exclusive of depreciation)
573.6

 
390.0

 
48.4

 
1,012.0

 

 
1,012.0

Depreciation
231.0

 
90.8

 

 
321.8

 
13.3

 
335.1

General and administrative

 

 

 

 
76.1

 
76.1

Operating income
$
663.7

 
$
262.2

 
$
12.1

 
$
938.0

 
$
(89.4
)
 
$
848.6

Property and equipment, net
$
8,360.4

 
$
2,537.9

 
$

 
$
10,898.3

 
$
61.4

 
$
10,959.7



Information about Geographic Areas    

As of September 30, 2017, the geographic distribution of our drilling rigs by reportable segment was as follows:
 
Floaters
 
Jackups
 
Total(1)
North & South America
8
 
6
 
14
Europe & Mediterranean
4
 
10
 
14
Middle East & Africa
3
 
11
 
14
Asia & Pacific Rim
5
 
5
 
10
Asia & Pacific Rim (under construction)
 
1
 
1
Held-for-sale
1
 
 
1
Total
21
 
33
 
54

(1) 
We provide management services on two rigs owned by third-parties not included in the table above.
Supplemental Financial Information
Supplemental Financial Information
Supplemental Financial Information

Consolidated Balance Sheet Information

Accounts receivable, net, consisted of the following (in millions):
 
September 30,
2017
 
December 31,
2016
Trade
$
338.6

 
$
358.4

Other
31.2

 
24.5

 
369.8

 
382.9

Allowance for doubtful accounts
(20.8
)
 
(21.9
)
 
$
349.0

 
$
361.0



Other current assets consisted of the following (in millions):
 
September 30,
2017
 
December 31,
2016
Inventory
$
219.7

 
$
225.2

Prepaid taxes
35.8

 
30.7

Deferred costs
31.4

 
32.4

Prepaid expenses
14.1

 
7.9

Other
17.3

 
19.8

 
$
318.3

 
$
316.0

 
    
Other assets, net, consisted of the following (in millions):
 
September 30,
2017
 
December 31,
2016
Deferred tax assets
$
54.7

 
$
69.3

Deferred costs
30.8

 
35.7

Supplemental executive retirement plan assets
30.0

 
27.7

Prepaid taxes on intercompany transfers of property

 
33.0

Other
9.5

 
10.2

 
$
125.0

 
$
175.9


    
Accrued liabilities and other consisted of the following (in millions):
 
September 30,
2017
 
December 31,
2016
Personnel costs
$
95.2

 
$
124.0

Deferred revenue
88.0

 
116.7

Accrued interest
70.6

 
71.7

Taxes
36.9

 
40.7

Derivative liabilities
1.8

 
12.7

Other
8.3

 
10.8

 
$
300.8

 
$
376.6


        
Other liabilities consisted of the following (in millions):
 
September 30,
2017
 
December 31,
2016
Unrecognized tax benefits (inclusive of interest and penalties)
$
144.2

 
$
142.9

Deferred revenue
65.5

 
120.9

Supplemental executive retirement plan liabilities
31.2

 
28.9

Personnel costs
14.9

 
13.5

Other
23.4

 
16.3

 
$
279.2

 
$
322.5


    
Accumulated other comprehensive income consisted of the following (in millions):
 
September 30,
2017
 
December 31,
2016
Derivative instruments
$
22.4

 
$
13.6

Currency translation adjustment
7.8

 
7.6

Other
(1.6
)
 
(2.2
)
 
$
28.6

 
$
19.0



Concentration of Risk

We are exposed to credit risk relating to our receivables from customers, our cash and cash equivalents, our short-term investments and our use of derivatives in connection with the management of foreign currency exchange rate risk. We mitigate our credit risk relating to receivables from customers, which consist primarily of major international, government-owned and independent oil and gas companies, by performing ongoing credit evaluations. We also maintain reserves for potential credit losses, which generally have been within management's expectations. We mitigate our credit risk relating to cash and cash equivalents by focusing on diversification and quality of instruments. Cash equivalents consist of a portfolio of high-grade instruments. Custody of cash and cash equivalents is maintained at several well-capitalized financial institutions, and we monitor the financial condition of those financial institutions.  

We mitigate our credit risk relating to derivative counterparties through a variety of techniques, including transacting with multiple, high-quality financial institutions, thereby limiting our exposure to individual counterparties and by entering into International Swaps and Derivatives Association, Inc. (“ISDA”) Master Agreements, which include provisions for a legally enforceable master netting agreement, with our derivative counterparties. The terms of the ISDA agreements may also include credit support requirements, cross default provisions, termination events or set-off provisions.  Legally enforceable master netting agreements reduce credit risk by providing protection in bankruptcy in certain circumstances and generally permitting the closeout and netting of transactions with the same counterparty upon the occurrence of certain events.  See "Note 4 - Derivative Instruments" for additional information on our derivatives.

Consolidated revenues by customer for the three-month and nine-month periods ended September 30, 2017 and 2016 were as follows:

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Total(1)
24
%
 
23
%
 
23
%
 
16
%
BP (2)
15
%
 
13
%
 
15
%
 
12
%
Petrobras(1)
11
%
 
9
%
 
11
%
 
11
%
ConocoPhillips(3)
3
%
 
2
%
 
2
%
 
12
%
Other
47
%
 
53
%
 
49
%
 
49
%
 
100
%
 
100
%
 
100
%
 
100
%

(1) 
During the three-month and nine-month periods ended September 30, 2017 and 2016, all revenues were attributable to our Floater segment.

(2) 
During the three-month periods ended September 30, 2017 and 2016, 78% and 73% of the revenues provided by BP, respectively, were attributable to our Floaters segment and no revenue was attributable to our Jackups segment. During the nine-month periods ended September 30, 2017 and 2016, 78% and 75% of the revenues provided by BP, respectively, were attributable to our Floaters segment and no revenue was attributable to our Jackups segment.

(3) 
During the nine-month period ended September 30, 2016, excluding the impact of the lump-sum termination payment of $185.0 million for ENSCO DS-9, revenues from ConocoPhillips represented 3% of our consolidated revenues.

Consolidated revenues by region for the three-month and nine-month periods ended September 30, 2017 and 2016 were as follows:

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Angola(1)
$
118.9

 
$
142.7

 
$
356.5

 
$
411.3

Egypt(2)
53.8

 
50.5

 
160.4

 
87.0

Brazil(2)
51.1

 
48.6

 
147.6

 
251.3

United Kingdom(3)
49.1

 
60.5

 
117.0

 
204.0

Australia(4)
48.7

 
44.6

 
158.6

 
169.4

U.S. Gulf of Mexico(5)(6)
34.9

 
33.6

 
112.2

 
498.3

Other
103.7

 
167.7

 
336.5

 
650.5

 
$
460.2

 
$
548.2

 
$
1,388.8

 
$
2,271.8


(1) 
During the three-month periods ended September 30, 2017 and 2016, 85% and 87% of the revenues earned in Angola, respectively, were attributable to our Floaters segment. During the nine-month periods ended September 30, 2017 and 2016, 86% and 87% of the revenues earned in Angola, respectively, were attributable to our Floaters segment.

(2) 
During the three-month and nine-month periods ended September 30, 2017 and 2016, all revenues were attributable to our Floaters segment.

(3) 
During the three-month and nine-month periods ended September 30, 2017 and 2016, all revenues were attributable to our Jackups segment.

(4) 
During the three-month and nine-month periods ended September 30, 2017, 92% and 83% of the revenues earned in Australia were attributable to our Floaters segment. For the three-month and nine-month periods ended September 30, 2016, all revenues were attributable to our Floaters segment.

(5) 
During the three-month periods ended September 30, 2017 and 2016, 21% and 41% of the revenues earned, respectively, were attributable to our Floaters segment and 35% and 14% of the revenues earned, respectively, were attributable to our Jackups segment. During the nine-month period ended September 30, 2017 and 2016, 24% and 86% of the revenues earned, respectively, were attributable to our Floaters segment and 37% and 5% earned, respectively, were attributable to our Jackups segment.

(6) 
Revenue recognized during the nine-month period ended September 30, 2016 related to the U.S. Gulf of Mexico included termination fees totaling $205.0 million as discussed in "Note 1 - Unaudited Condensed Consolidated Financial Statements." ENSCO DS-9 termination revenues were attributed to the U.S. Gulf of Mexico as the related drilling contract was intended for operations in that region.
Guarantee Of Registered Securities
Guarantee Of Registered Securities
Guarantee of Registered Securities

In connection with the Pride acquisition, Ensco plc and Pride entered into a supplemental indenture to the indenture dated July 1, 2004 between Pride and New York Mellon, as indenture trustee, providing for, among other matters, the full and unconditional guarantee by Ensco plc of Pride's 8.5% unsecured senior notes due 2019, 6.875% unsecured senior notes due 2020 and 7.875% unsecured senior notes due 2040, which had an aggregate outstanding principal balance of $1.0 billion as of September 30, 2017. The Ensco plc guarantee provides for the unconditional and irrevocable guarantee of the prompt payment, when due, of any amount owed to the note holders.
 
Ensco plc is also a full and unconditional guarantor of the 7.2% debentures due 2027 issued by ENSCO International Incorporated, a wholly-owned subsidiary of Ensco plc, during 1997, which had an aggregate outstanding principal balance of $150.0 million as of September 30, 2017.
    
Pride International LLC (formerly Pride International, Inc.) and Ensco International Incorporated are 100% owned subsidiaries of Ensco plc. All guarantees are unsecured obligations of Ensco plc ranking equal in right of payment with all of its existing and future unsecured and unsubordinated indebtedness.
   
The following tables present the unaudited condensed consolidating statements of operations for the three-month and nine-month periods ended September 30, 2017 and 2016; the unaudited condensed consolidating statements of comprehensive (loss) income for the three-month and nine-month periods ended September 30, 2017 and 2016; the condensed consolidating balance sheets as of September 30, 2017 (unaudited) and December 31, 2016; and the unaudited condensed consolidating statements of cash flows for the nine-month periods ended September 30, 2017 and 2016, in accordance with Rule 3-10 of Regulation S-X.
ENSCO PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Three Months Ended September 30, 2017
(In millions)
(Unaudited)

 
Ensco plc
 
ENSCO International Incorporated
 
Pride International LLC
 
Other Non-Guarantor Subsidiaries of Ensco
 
Consolidating Adjustments
 
Total
OPERATING REVENUES
$
13.0

 
$
47.2

 
$

 
$
490.1

 
$
(90.1
)
 
$
460.2

OPERATING EXPENSES
 
 
 
 
 
 
 
 
 
 
 
Contract drilling (exclusive of depreciation)
11.3

 
43.0

 

 
321.6

 
(90.1
)
 
285.8

Depreciation

 
4.0

 

 
104.2

 

 
108.2

General and administrative
10.3

 
5.1

 

 
15.0

 

 
30.4

OPERATING (LOSS) INCOME
(8.6
)
 
(4.9
)



49.3




35.8

OTHER INCOME (EXPENSE), NET
3.4

 
(28.0
)
 
(17.4
)
 
(1.0
)
 
2.6

 
(40.4
)
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
(5.2
)
 
(32.9
)

(17.4
)

48.3


2.6


(4.6
)
INCOME TAX PROVISION

 
11.6

 

 
11.8

 

 
23.4

DISCONTINUED OPERATIONS, NET

 

 

 
(.2
)
 

 
(.2
)
EQUITY (LOSSES) EARNINGS IN AFFILIATES, NET OF TAX
(20.2
)
 
29.9

 
23.2

 

 
(32.9
)
 

NET (LOSS) INCOME
(25.4
)

(14.6
)

5.8


36.3


(30.3
)

(28.2
)
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS

 

 

 
2.8

 

 
2.8

NET (LOSS) INCOME ATTRIBUTABLE TO ENSCO
$
(25.4
)
 
$
(14.6
)

$
5.8


$
39.1


$
(30.3
)

$
(25.4
)
ENSCO PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Three Months Ended September 30, 2016
(In millions)
(Unaudited)

 
Ensco plc
 
ENSCO International Incorporated
 
Pride International LLC
 
Other Non-Guarantor Subsidiaries of Ensco
 
Consolidating Adjustments
 
Total
OPERATING REVENUES
$
6.7

 
$
36.1

 
$

 
$
581.0

 
$
(75.6
)
 
$
548.2

OPERATING EXPENSES
 

 
 

 
 

 
 

 
 

 


Contract drilling (exclusive of depreciation)
6.7

 
36.5

 

 
330.5

 
(75.6
)
 
298.1

Depreciation

 
4.2

 

 
105.2

 

 
109.4

General and administrative
9.1

 
.1

 

 
16.1

 

 
25.3

OPERATING (LOSS) INCOME
(9.1
)

(4.7
)



129.2




115.4

OTHER INCOME (EXPENSE), NET
6.9

 
(32.5
)
 
(18.9
)
 
7.8

 
5.8

 
(30.9
)
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
(2.2
)

(37.2
)

(18.9
)

137.0


5.8


84.5

INCOME TAX PROVISION

 
(3.5
)
 
(.6
)
 
.6

 

 
(3.5
)
DISCONTINUED OPERATIONS, NET

 

 

 
(.7
)
 

 
(.7
)
EQUITY EARNINGS IN AFFILIATES, NET OF TAX
87.5

 
60.2

 
23.2

 

 
(170.9
)
 

NET INCOME
85.3

 
26.5


4.9


135.7


(165.1
)

87.3

NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS

 

 

 
(2.0
)
 

 
(2.0
)
NET INCOME ATTRIBUTABLE TO ENSCO
$
85.3


$
26.5


$
4.9


$
133.7


$
(165.1
)

$
85.3



ENSCO PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Nine Months Ended September 30, 2017
(In millions)
(Unaudited)

 
Ensco plc
 
ENSCO International Incorporated
 
Pride International LLC
 
Other Non-Guarantor Subsidiaries of Ensco
 
Consolidating Adjustments
 
Total
OPERATING REVENUES
$
38.5

 
$
137.1

 
$

 
$
1,477.3

 
$
(264.1
)
 
$
1,388.8

OPERATING EXPENSES
 
 
 
 
 
 
 
 
 
 
 
Contract drilling (exclusive of depreciation)
33.7

 
126.4

 

 
959.2

 
(264.1
)
 
855.2

Depreciation

 
12.5

 

 
312.8

 

 
325.3

General and administrative
33.9

 
9.4

 

 
43.6

 

 
86.9

OPERATING (LOSS) INCOME
(29.1
)
 
(11.2
)
 

 
161.7

 

 
121.4

OTHER EXPENSE, NET
(10.2
)
 
(86.2
)
 
(53.0
)
 
(13.6
)
 
11.7

 
(151.3
)
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
(39.3
)
 
(97.4
)
 
(53.0
)
 
148.1

 
11.7

 
(29.9
<