Derivative Instruments
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Mar. 31, 2013
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Derivative Instruments and Hedging Activities Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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 some of our subsidiaries are denominated in currencies other than the U.S. dollar ("foreign currencies"). These transactions are remeasured in U.S. dollars based on a combination of both current and historical exchange rates. We use foreign currency forward contracts ("derivatives") 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 the fair value of derivatives depends on the use of the derivative and whether it qualifies for hedge accounting. Net liabilities of $3.3 million and net assets of $5.2 million associated with our foreign currency derivatives were included in our condensed consolidated balance sheets as of March 31, 2013 and December 31, 2012, respectively. All of our derivatives mature during the next 18 months. See "Note 2 - Fair Value Measurements" for additional information on the fair value measurement of our derivatives. Derivatives recorded at fair value in our condensed consolidated balance sheets consisted of the following (in millions):
We utilize cash flow hedges to hedge forecasted foreign currency denominated transactions, primarily to reduce our exposure to foreign currency exchange rate risk associated with contract drilling expenses denominated in various currencies. As of March 31, 2013, we had cash flow hedges outstanding to exchange an aggregate $368.3 million for various foreign currencies, including $140.0 million for British pounds, $138.8 million for Brazilian reais, $35.1 million for Singapore dollars, $23.4 million for Australian dollars, $21.9 million for euros and $9.1 million for other currencies. Gains and losses, net of tax, on derivatives designated as cash flow hedges included in our condensed consolidated statements of income and our condensed consolidated statements of comprehensive income for the three-month periods ended March 31, 2013 and 2012 were as follows (in millions):
We have net assets and liabilities denominated in numerous foreign currencies and use various methods to manage our exposure to foreign currency exchange rate risk. We predominantly structure our drilling contracts in U.S. dollars, which significantly reduces the portion of our cash flows and assets denominated in foreign currencies. We occasionally enter into derivatives that hedge the fair value of recognized foreign currency denominated assets or liabilities but do not designate such derivatives as hedging instruments. In these situations, a natural hedging relationship generally exists whereby changes in the fair value of the derivatives offset changes in the fair value of the underlying hedged items. As of March 31, 2013, we held derivatives not designated as hedging instruments to exchange an aggregate $175.8 million for various foreign currencies, including $86.1 million for euros, $23.1 million for British pounds, $17.2 million for Swiss francs, $14.2 million for Australian dollars and $35.2 million for other currencies. Net losses of $4.4 million and net gains of $900,000 associated with our derivatives not designated as hedging instruments were included in other, net, in our condensed consolidated statements of income for the three-month periods ended March 31, 2013 and 2012, respectively. As of March 31, 2013, the estimated amount of net gains associated with derivative instruments, net of tax, that would be reclassified to earnings during the next twelve months totaled $200,000. |