Note 9— Derivative Instruments and Hedging Activities

We periodically enter into derivative instruments to manage our exposure to fluctuations in interest rates and foreign currency exchange rates. We have documented policies and procedures to monitor and control the use of derivative instruments. We do not engage in derivative transactions for speculative or trading purposes, nor are we a party to leveraged derivatives.

For foreign currency forward contracts, hedge effectiveness is evaluated at inception based on the matching of critical terms between derivative contracts and the hedged item. Any change in fair value resulting from ineffectiveness is recognized immediately in earnings.

On May 10, 2016, Freeport-McMoRan Inc. (“Freeport”), Freeport-McMoRan Oil & Gas LLC and one of our subsidiaries entered into an agreement terminating the contracts on the Noble Sam Croft and the Noble Tom Madden (“FCX Settlement”), which were scheduled to end in July 2017 and November 2017, respectively. The FCX Settlement included two contingent payments, which are further discussed below. We accounted for these contingent payments as derivative instruments that did not qualify under the Financial Accounting Standards Board (“FASB”) standards for hedge accounting treatment, and therefore, changes in fair values were recognized as a loss in the accompanying Condensed Consolidated Statements of Operations.

Cash Flow Hedges

Several of our regional shorebases, including our North Sea operations, have a significant amount of their cash operating expenses payable in local currencies. To limit the potential risk of currency fluctuations, we periodically enter into forward contracts, which settle monthly in the operations’ respective local currencies. All of these contracts have a maturity of less than 12 months. The forward contract settlements in the remainder of 2017 represent approximately 70 percent of these forecasted local currency requirements. The notional amount of the forward contracts outstanding, expressed in U.S. Dollars, was approximately $10.1 million at September 30, 2017. Total unrealized gains related to these forward contracts were approximately $0.7 million as of September 30, 2017 and were recorded as part of “Accumulated other comprehensive income (loss)” (“AOCL”).

FCX Settlement

Pursuant to the FCX Settlement, Noble could have received contingent payments from the FCX Settlement on September 30, 2017, depending on the average price of oil over a 12-month period from June 30, 2016 through June 30, 2017. The average price of oil was calculated using the daily closing price of West Texas Intermediate crude oil (“WTI”) (CL1) on the New York Mercantile Exchange for the period of June 30, 2016 through June 30, 2017. If the price of WTI averaged more than $50 per barrel during such period, Freeport would have paid $25.0 million to Noble. In addition to the $25.0 million contingent payment, if the price of WTI averaged more than $65 per barrel during such period, Freeport would have paid an additional $50.0 million to Noble. These contingent payments did not qualify for hedge accounting treatment under FASB standards, and therefore, the change in fair value was recognized as a loss in the accompanying Condensed Consolidated Statements of Operations. These contingent payments are referred to as non-designated derivatives in the following tables.

The price of WTI did not average more than $50 per barrel during the 12-month period. As of June 30, 2017, the fair value of these contingent payments was reduced to zero, as the period for earning the contingent payments had ended.

Financial Statement Presentation

The following table, together with Note 10— Fair Value of Financial Instruments, summarizes the financial statement presentation and fair value of our derivative positions as of September 30, 2017 and December 31, 2016:



		Estimated fair value
	Balance sheet classification	September 30, 2017		December 31, 2016
Asset derivatives
Cash flow hedges
Foreign currency forward contracts	Prepaid expenses and other current assets	$	674	$	—
Non-designated derivatives
FCX Settlement	Prepaid expenses and other current assets	$	—	$	14,400

The following table, together with Note 10— Fair Value of Financial Instruments, summarizes the recognized gains and losses of cash flow hedges and non-designated derivatives through AOCL or as “Contract drilling services” revenue or costs for the three and nine months ended September 30, 2017 and 2016:



	Three Months Ended September 30,
	2017			2016		2017		2016			2017		2016
	Unrealized gain/(loss) recognized through AOCL					Gain/(loss) reclassified from AOCL to "Contract drilling services" costs					Gain/(loss) recognized through "Contract drilling services" revenue
Cash flow hedges
Foreign currency forward contracts	$	(65	)	$	463	$	542	$	(540	)	$	—	$	—
Non-designated derivatives
FCX Settlement	$	—		$	—	$	—	$	—		$	—	$	(5,194	)



	Nine Months Ended September 30,
	2017		2016			2017		2016		2017			2016
	Unrealized gain/(loss) recognized through AOCL					Gain/(loss) reclassified from AOCL to "Contract drilling services" costs				Gain/(loss) recognized through "Contract drilling services" revenue
Cash flow hedges
Foreign currency forward contracts	$	674	$	(605	)	$	—	$	—	$	679		$	(158	)
Non-designated derivatives
FCX Settlement	$	—	$	—		$	—	$	—	$	(14,400	)	$	12,406