Derivative Financial Instruments

12 Months Ended

Dec. 31, 2012

Derivative Financial Instruments

6. Derivative Financial Instruments

Foreign Currency Forward Exchange Contracts

Our international operations expose us to foreign exchange risk associated with our costs payable in foreign currencies for employee compensation, foreign income tax payments and purchases from foreign suppliers. We may utilize FOREX contracts to manage our foreign exchange risk. Our FOREX contracts generally require us to net settle the spread between the contracted foreign currency exchange rate and the spot rate on the contract settlement date, which, for most of our contracts, is the average spot rate for the contract period.

We enter into FOREX contracts when we believe market conditions are favorable to purchase contracts for future settlement with the expectation that such contracts, when settled, will reduce our exposure to foreign currency gains and losses on future foreign currency expenditures. The amount and duration of such contracts is based on our monthly forecast of expenditures in the significant currencies in which we do business and for which there is a financial market (i.e., Australian dollars, Brazilian reais, British pounds sterling, Mexican pesos and Norwegian kroner). These forward contracts are derivatives as defined by GAAP.

During the years ended December 31, 2012, 2011 and 2010, we settled FOREX contracts with aggregate notional values of approximately $305.6 million, $318.9 million and $332.5 million, respectively, of which the entire aggregate amounts were designated as an accounting hedge. During the years ended December 31, 2012, 2011 and 2010, we did not enter into or settle any FOREX contracts that were not designated as accounting hedges.

The following table presents the amounts recognized in our Consolidated Statements of Operations related to our FOREX contracts designated as hedging instruments for the years ended December 31, 2012, 2011 and 2010.

	Amount of (Loss) Gain Recognized in Income
	For the Years Ended December 31,
Location of (Loss) Gain Recognized in Income	2012			2011		2010
	(In thousands)
Contract drilling expense	$	(4,302	)	$	7,206	$	3,307

As of December 31, 2012, we had FOREX contracts outstanding in the aggregate notional amount of $144.2 million, consisting of $12.2 million in Australian dollars, $72.9 million in Brazilian reais, $42.2 million in British pounds sterling and $16.9 million in Mexican pesos. These contracts generally settle monthly through September 2013. As of December 31, 2012, all outstanding derivative contracts had been designated as cash flow hedges.

The following table presents the fair values of our derivative financial instruments at December 31, 2012 and 2011.

Balance Sheet Location	Fair Value				Balance Sheet Location	Fair Value
	December 31, 2012		December 31, 2011			December 31, 2012			December 31, 2011
	(In thousands)					(In thousands)
Prepaid expenses and other current assets	$	3,627	$	1,262	Accrued liabilities	$	(29	)	$	(8,454)

The following table presents the amounts recognized in our Consolidated Balance Sheets and Consolidated Statements of Operations related to our FOREX contracts designated as cash flow hedges for the years ended December 31, 2012, 2011 and 2010.

	For the years ended December 31,
	2012			2011			2010
	(In thousands)
Amount of gain (loss) recognized in AOCGL on derivative (effective portion)	$	6,519		$	(962	)	$	3,591
Location of (loss) gain reclassified from AOCGL into income (effective portion)		Contract drilling, excluding depreciation			Contract drilling, excluding depreciation			Contract drilling, excluding depreciation
Amount of (loss) gain reclassified from AOCGL into income (effective portion)	$	(4,205	)	$	10,351		$	1,790
Location of loss recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing)		Foreign currency transaction gain (loss)			Foreign currency transaction gain (loss)			Foreign currency transaction gain (loss)
Amount of loss recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing)	$	(17	)	$	(85	)	$	--

As of December 31, 2012, the estimated amount of net unrealized gains associated with our FOREX contracts that will be reclassified to earnings during the next twelve months was $3.6 million. The net unrealized gains associated with these derivative financial instruments will be reclassified to contract drilling expense to the extent fully effective.