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Derivative Financial Instruments
 6 Months Ended
Mar. 31, 2014
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments
DERIVATIVE FINANCIAL INSTRUMENTS

Interest Rate Swap Contracts

Our credit facility exposes us to short-term changes in market interest rates as our interest obligations on these instruments are periodically re-determined based on the prevailing Eurodollar rate. We enter into interest rate swaps to limit our exposure to fluctuations and volatility in interest rates.

During the six months ended March 31, 2014, we had interest rate swaps that effectively fixed the interest rate on $250 million of borrowings under the credit facility at a weighted average interest rate of 3.4%. As a result of the Restatement Agreement, these interest rate swaps will fix the interest rate on $250 million of borrowings under the credit facility at a weighted average interest rate of 2.9% through September 2014. In December 2013, we entered into additional interest rate swaps which extend the Company's current hedging program and effectively fix the interest rate on $250 million of borrowings at a weighted average interest rate of 2.6% from September 2014 to March 2016. As of March 31, 2014, these interest rate swaps are designated as cash flow hedging instruments.

Foreign Currency Forward Exchange Contracts

We conduct business in numerous foreign countries. Our functional currency is the U.S. dollar and thus our international operations expose us to foreign currency risk associated with cash flows from transactions denominated in currencies other than our functional currency. As needed, we enter into foreign currency forward exchange contracts to limit our exposure to fluctuations and volatility in foreign currency exchange rates.

In December 2013, we executed foreign currency forward exchange contracts for a portion of our anticipated euro receipts associated with revenues earned on a drilling contract from December 2013 through November 2015. These forward contracts effectively fix the euro/U.S. dollar exchange rate at 1.3659 on an aggregate notional amount of 69 million euro and settle monthly from April 2014 through February 2016. As of March 31, 2014, these forward contracts are designated as cash flow hedging instruments.

We do not engage in derivative transactions for speculative or trading purposes and we are not a party to leveraged derivatives.

Condensed Consolidated Balance Sheets

We record our derivative contracts at fair value on our consolidated balance sheets. See Note 7. The following table presents the fair value of our derivative contracts designated as cash flow hedging instruments included in our Condensed Consolidated Balance Sheets as of March 31, 2014 and September 30, 2013:
 
 
Asset Derivatives
 
Liability Derivatives
(In thousands)
 
 
March 31, 2014
 
September 30, 2013
 
 
 
March 31, 2014
 
September 30, 2013
Derivative contracts designated as cash flow hedging instruments
Balance Sheet Location
 
Fair Value
 
Fair Value
 
Balance Sheet Location
 
Fair Value
 
Fair Value
Short-term interest rate swaps
Prepaid expenses and deferred costs
 
$
—

 
$
—

 
Accrued liabilities
 
$
1,303

 
$
1,586

Long-term interest rate swaps
Deferred costs and other assets
 
191

 
—

 
Other long-term liabilities
 
—

 
—

Short-term foreign exchange forward currency contracts
Prepaid expenses and deferred costs
 
—

 
—

 
Accrued liabilities
 
453

 
—

Long-term foreign exchange forward currency contracts
Deferred costs and other assets
 
—

 
—

 
Other long-term liabilities
 
437

 
—

Total derivatives designated as cash flow hedging instruments
 
 
$
191

 
$
—

 
 
 
$
2,193

 
$
1,586



We do not have any derivative contracts not designated as hedging instruments.

Condensed Consolidated Statements of Operation and Statements of Comprehensive Income

The following table presents the gains and losses on our derivative contracts designated as cash flow hedging instruments on our Condensed Consolidated Statements of Operations and Condensed Statements of Comprehensive Income for three and six months ended March 31, 2014 and the three and six months ended March 31, 2013:
Derivative contracts designated as cash flow hedging instruments
Amount of Gain or (Loss) Recognized in AOCI on Derivative
 
(Effective Portion)
 
Location of Gain or (Loss) Reclassified from AOCI in Income

 
Amount of Gain or (Loss) Reclassified from AOCI into Income

(Effective Portion)
(In thousands)
Three Months Ended March 31,
 
 
 
Three Months Ended March 31,
 
2014

2013
 
 
 
2014
 
2013
Interest rate swaps
$
(457
)
 
$
18

 
Interest expense, net of capitalized interest
 
$
(451
)
 
$
(436
)
Foreign exchange forward currency contracts
(123
)
 
—

 
Contract drilling revenues & costs
 
(88
)
 
—

Total
$
(580
)
 
$
18

 
 
 
$
(539
)
 
$
(436
)
 
 
 
 
 
 
 
 
 
 
Derivative contracts designated as cash flow hedging instruments
Amount of Gain or (Loss) Recognized in AOCI on Derivative
 
(Effective Portion)
 
Location of Gain or (Loss) Reclassified from AOCI in Income

 
Amount of Gain or (Loss) Reclassified from AOCI into Income

(Effective Portion)
(In thousands)
Six Months Ended March 31,
 
 
 
Six Months Ended March 31,
 
2014
 
2013
 
 
 
2014
 
2013
Interest rate swaps
$
(435
)
 
$
(48
)
 
Interest expense, net of capitalized interest
 
$
(805
)
 
$
(874
)
Foreign exchange forward currency contracts
(889
)
 
—

 
Contract drilling revenues & costs
 
(116
)
 
—

Total
$
(1,324
)
 
$
(48
)
 
 
 
$
(921
)
 
$
(874
)


Each quarter, changes in the fair values of our derivative instruments designated as cash flow hedging instruments will adjust the balance sheet asset or liability, with an offset to Accumulated Other Comprehensive Income (“AOCI”) for the effective portion of the hedge. The effective portion of the cash flow hedge will remain in AOCI until it is reclassified into earnings in the period or periods during which the hedged transaction affects earnings or when it is probable that the hedged forecasted transaction will not occur by the end of the originally specified time period.

Any change in fair value resulting from ineffectiveness is recognized immediately in earnings. For the three and six months ended March 31, 2014, a $2,000 loss was recognized on our Consolidated Statement of Operations due to hedge ineffectiveness. We recognized no loss due to hedge ineffectiveness for the three and six months ended March 31, 2013. Additionally, there were no gains or losses recognized in income for the three and six months ended March 31, 2014 and 2013 as a result of excluding amounts from the assessment of hedge effectiveness or as a result of reclassifications to earnings following the discontinuance of any cash flow hedges.

As of March 31, 2014, the estimated amount of unrealized losses associated with our interest rate derivative contracts that will be reclassified to earnings during the next twelve months totals $1.3 million. As of March 31, 2014, the estimated amount of unrealized losses associated with our foreign exchange forward currency contracts that will be reclassified to earnings during the next twelve months is approximately $0.5 million.

Derivative Contract Agreements

None of our derivative contracts contain credit-risk related contingent features, and no amounts of cash collateral were posted by us related to net liability positions as of March 31, 2014. Our interest rate swaps are secured by the collateral package of our revolving credit facility.

We report the fair value of our derivative contracts on our Consolidated Balance Sheets on a gross basis by type of contract as either short-term or long-term. We determine the short-term and long-term classification based on the timing of expected future cash flows. The following table represents our gross and net derivative assets and liabilities:

(In thousands)
Gross Amount Presented on the Consolidated Balance Sheets
 
Netting Adjustments (a)
 
Net Amount
March 31, 2014
 
 
 
 
 
Derivative assets
$
191

 
$
(191
)
 
$
—

Derivative liabilities
(2,193
)
 
191

 
(2,002
)
 
 
 
 
 
 
September 30, 2013
 
 
 
 
 
Derivative assets
$
—

 
$
—

 
$
—

Derivative liabilities
(1,586
)
 
—

 
(1,586
)

(a) We have agreements in place with some of our financial trading counterparties that allow for the financial right of offset for derivative assets and derivative liabilities under the agreements.