Europe/Africa
Our Europe/Africa offshore drilling operations are mainly conducted in northern Europe where moderate duration jackup rig contracts generally are prevalent. During 2008, shortfalls in rig availability in this region led to sustained high utilization levels and a slight increase in day rates. Although utilization and day rates remained high during the first quarter of 2009, the decline in oil and natural gas prices during the latter half of 2008 resulted in several cancelled tenders and unexercised contract extension options. We anticipate this market may experience excess rig availability in the near to intermediate term which could result in a decline in utilization and day rates during the latter half of 2009.
North and South America
Our North and South America offshore drilling operations have historically been conducted primarily in the Gulf of Mexico where jackup rig contracts are normally entered into for relatively short durations and day rates are adjusted to current market rates upon contract renewal. Therefore, day rates in this region are more volatile than in regions where longer duration contracts are more prevalent. Demand for jackup rigs in the Gulf of Mexico stabilized during 2008, and jackup rig supply continued to decline as rigs were relocated to more economically attractive regions. As a result, utilization levels and day rates began to improve during the first half of the year. In September 2008, Hurricanes Gustav and Ike forced more than two weeks of work stoppages and damaged or destroyed several rigs and platforms in the Gulf of Mexico, including the total loss of ENSCO 74, thereby reducing the supply of available jackup rigs. However, the reduction in rig supply was more than offset by a decrease in demand resulting from the global economic crisis and decline in oil and natural gas prices. As a result, utilization declined significantly during the first quarter of 2009. Reduced levels of jackup rig demand are expected to continue for the foreseeable future as several operators have announced their intention to postpone drilling activity until oil and natural gas prices recover. Furthermore, we expect an incremental decline in jackup rig demand during the upcoming hurricane season.
Commencing in mid-2009, a substantial portion of our North and South America offshore drilling operations will be conducted in Mexico, where demand for rigs increased during 2008 as the national oil company in Mexico accelerated its drilling activities in an attempt to offset continued depletion of its major oil and natural gas fields. Demand for jackup rigs in Mexico remains high and day rates are comparable with international rates despite the global economic crisis and decline in oil and natural gas prices. However, future day rates in Mexico will face pressure, as drilling contractors with idle rigs in other geographic regions pursue contract opportunities in Mexico.

RESULTS OF OPERATIONS
    The following table summarizes our condensed consolidated operating results
for the quarters ended March 31, 2009 and 2008 (in millions):


                                                           2009             2008

Revenues                                                 $514.1           $568.5
Operating expenses
  Contract drilling (exclusive of depreciation)           173.2            186.0
  Depreciation                                             48.0             46.4
  General and administrative                               12.0             12.7
---------------------------------------------------------------------------------
Operating income                                          280.9            323.4
Other income (expense)                                     (4.3)             4.5
Provision for income taxes                                 54.5             59.2
---------------------------------------------------------------------------------
Income from continuing operations                         222.1            268.7
Income from discontinued operations, net                     --              5.0
---------------------------------------------------------------------------------
Net income                                                222.1            273.7
Net income attributable to noncontrolling interests        (1.4)            (1.7)
---------------------------------------------------------------------------------
Net income attributable to Ensco                         $220.7           $272.0
---------------------------------------------------------------------------------


         22
---------------------

For the quarter ended March 31, 2009, revenues declined by $54.4 million, or 10 %, and operating income declined by $42.5 million, or 13%, as compared to the prior year quarter. These declines were primarily due to decreased utilization of our Asia Pacific and North and South America jackup fleets and the deferral of ENSCO 7500 mobilization revenues during the first quarter of 2009, partially offset by improved average day rates earned by our contracted jackup rigs in all geographic regions as compared to the prior year quarter.
Oil and natural gas prices have declined substantially from their record highs in July 2008. As a result, our current and prospective customers continue to defer and/or curtail drilling programs, which will likely result in a reduction in demand for drilling rigs and a decline in utilization and day rates. If current economic conditions persist, we believe it is unlikely the operating results achieved during recent years will be sustained. Rig Locations, Utilization and Average Day Rates We manage our business through four operating segments. Our jackup rigs are mobile and occasionally move between operating segments in response to market conditions and contract opportunities. The following table summarizes our offshore drilling rigs by segment and rigs under construction as of March 31, 2009 and 2008:

                           2009         2008

Deepwater(1)                  2          1
Asia Pacific                 20         20
Europe/Africa                10         10
North and South America      14         14
Under construction(1)(2)      6          4
---------------------------------------------
    Total(3)                 52         49
---------------------------------------------

(1) During the third quarter of 2008, we accepted delivery of ENSCO 8500 and mobilized the rig to the Gulf of Mexico. The rig is currently undergoing final outfitting and preparing for deepwater sea trials and is expected to commence operations in the Gulf of Mexico under a four-year contract in June 2009.

(2) During 2008, we entered into agreements to construct ENSCO 8504, ENSCO 8505 and ENSCO 8506 with deliveries expected during the second half of 2011 and the first and second half of 2012, respectively.

(3) The total number of rigs for each period excludes rigs reclassified as discontinued operations.

The following table summarizes our rig utilization and average day rates from continuing operations by operating segment for the quarters ended March 31, 2009 and 2008:

                                2009       2008

Rig utilization(1)
     Deepwater                 100%        96%
     Asia Pacific(3)            78%        97%
     Europe/Africa              99%        99%
     North and South America    69%        91%
----------------------------------------------------
       Total                    80%        95%
----------------------------------------------------

Average day rates(2)
     Deepwater                 $     --       $279,962
     Asia Pacific(3)            161,538        143,303
     Europe/Africa              218,947        213,123
     North and South America    121,341         85,955
------------------------------------------------------------
       Total                   $168,176       $146,010
------------------------------------------------------------

(1) Rig utilization is derived by dividing the number of days under contract, including days associated with compensated mobilizations, by the number of days in the period.

(2) Average day rates are derived by dividing contract drilling revenues, adjusted to exclude certain types of non-recurring reimbursable revenues and lump sum revenues, by the aggregate number of contract days, adjusted to exclude contract days associated with certain mobilizations, demobilizations, shipyard contracts and standby contracts.

(3) Rig utilization and average day rates for the Asia Pacific operating segment include our jackup rigs only. The ENSCO I barge rig has been excluded.

Detailed explanations of our operating results, including discussions of revenues, contract drilling expense and depreciation expense by operating segment, are provided below.

Operating Income
Our business consists of four operating segments: (1) Deepwater, (2) Asia Pacific, (3) Europe/Africa and (4) North and South America. Each of our four operating segments provides one service, contract drilling. Segment information for the quarters ended March 31, 2009 and 2008 is presented below. 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 were included in "Reconciling Items."

Three Months Ended March 31, 2009
(in millions)


                                                           North
                                                            and     Operating
                                      Asia     Europe/     South    Segments    Reconciling    Consolidated
                        Deepwater   Pacific     Africa    America     Total        Items          Total

Revenue                  $ --      $220.9     $196.4     $96.8      $514.1       $   --          $514.1
Operating expenses
  Contract
drilling
(exclusive
   of
depreciation)              4.8       66.3       53.5      48.6       173.2           --           173.2
  Depreciation             2.3       21.7       10.9      12.8        47.7           .3            48.0
  General and
administrative              --         --         --        --          --         12.0            12.0
------------------------------------------------------------------------------------------------------------
Operating (loss)
income                   $(7.1 )   $132.9     $132.0     $35.4      $293.2      $(12.3)          $280.9
------------------------------------------------------------------------------------------------------------

Three Months Ended March 31, 2008
(in millions)


                                                           North
                                                            and     Operating
                                      Asia     Europe/     South    Segments    Reconciling    Consolidated
                        Deepwater   Pacific     Africa    America     Total        Items          Total

Revenue                  $24.6     $255.2     $191.8     $96.9      $568.5       $   --          $568.5
Operating expenses
  Contract
drilling
(exclusive
   of
depreciation)              8.5       74.8       57.9      44.8       186.0           --           186.0
  Depreciation             2.2       21.1       10.5      12.2        46.0           .4            46.4
  General and
administrative              --         --         --        --          --         12.7            12.7
------------------------------------------------------------------------------------------------------------
Operating income
(loss)                   $13.9     $159.3     $123.4     $39.9      $336.5      $(13.1)          $323.4
------------------------------------------------------------------------------------------------------------

Deepwater
Deepwater revenues for the quarter ended March 31, 2009 declined by $24.6 million as compared to the prior year quarter. The decline in revenues was due to the deferral of ENSCO 7500 revenues during the rig's mobilization to Australia. In October 2008, we amended our existing drilling contract and agreed to relocate the rig to Australia where we commenced drilling operations under a new contract in April 2009 at a day rate of approximately $550,000. Revenues earned during the mobilization period totaled $89.0 million as of March 31, 2009 and will be recognized ratably over the firm commitment period of the contract (April 2009 through September 2010). Deferred revenue was included in accrued liabilities and other and other liabilities on our March 31, 2009 condensed consolidated balance sheet. Contract drilling expense declined by $3.7 million, or 44%, primarily due to the deferral of certain costs associated with the ENSCO 7500 mobilization. These costs will also be recognized ratably over the aforementioned contract period.

Asia Pacific
Asia Pacific revenues for the quarter ended March 31, 2009 declined by $34.3 million, or 13%, as compared to the prior year quarter. The decline in revenues was primarily due to a decline in utilization to 78% from 97% in the prior year quarter, partially offset by a 13% increase in average day rates. The decline in utilization occurred due to lower levels of spending by oil and gas companies in response to the significant decline in oil and natural gas prices during the latter half of 2008 coupled with excess rig availability in the region. The increase in average day rates resulted from higher levels of spending by oil and gas companies during 2008 prior to the recent decline in oil and natural gas prices. Contract drilling expense declined by $8.5 million, or 11%, as compared to the prior year quarter, primarily due to the impact of decreased utilization. Depreciation expense increased by 3% due to depreciation on minor upgrades and improvements completed during 2008 and the first quarter of 2009.
Europe/Africa
Europe/Africa revenues for the quarter ended March 31, 2009 increased by $4.6 million, or 2%, compared to the prior year quarter. The increase was primarily due to a 3% increase in average day rates attributable to limited rig availability in the region during 2008. Contract drilling expense declined by $4.4 million, or 8%, as compared to the prior year quarter, primarily due to decreased mobilization expense and personnel costs, partially offset by increased repair and maintenance expense. Depreciation expense increased by 4% due to depreciation on minor upgrades and improvements to our Europe/Africa fleet completed during 2008 and the first quarter of 2009.
North and South America
North and South America revenues for the quarter ended March 31, 2009 were comparable to the prior year quarter. The decline in utilization to 69% from 91% in the prior year quarter was offset by a 41% increase in average day rates. The decline in utilization occurred due to lower levels of spending by oil and gas companies in response to the significant decline in oil and natural gas prices during the latter half of 2008. The increase in average day rates resulted from the reduced supply of available jackup rigs in the Gulf of Mexico during the majority of 2008. Contract drilling expense increased by $3.8 million, or 8%, as compared to the prior year quarter, primarily due to increased repair and maintenance and bad debt expense, partially offset by the impact of decreased utilization. During the first quarter of 2009, we recorded a $2.7 million bad debt provision associated with ENSCO 69 operations in Venezuela. Depreciation expense increased by 5% primarily due to the ENSCO 93 capital enhancement project completed during the first quarter of 2008 and depreciation on minor upgrades and improvements to our North and South America fleet completed during 2008 and the first quarter of 2009.
Other
General and administrative expense for the quarter ended March 31, 2009 declined by $700,000, or 6%, as compared to the prior year quarter. The decline was primarily attributable to decreased personnel costs.

Other Income (Expense)
    Other income (expense) for the quarter ended March 31, 2009 and 2008 was as
follows (in millions):



                            2009          2008

Interest income                 $ 0.7    $ 5.0
Interest expense, net:
    Interest expense             (5.3 )   (5.7 )
    Capitalized interest          5.3      5.7
------------------------------------------------
                                   --       --
Other, net                       (5.0 )    (.5 )
------------------------------------------------
                                $(4.3 )  $ 4.5
------------------------------------------------

Interest income for the quarter ended March 31, 2009 declined as compared to the prior year quarter due to lower average interest rates, partially offset by an increase in amounts invested. Interest expense declined over the same periods due to a reduction in outstanding debt.
Other, net, for the quarter ended March 31, 2009 included net foreign currency exchange losses of $6.0 million. Other, net, for the quarter ended March 31, 2008 included $3.1 million of unrealized losses associated with the fair value measurement of our auction rate securities and net foreign currency exchange gains of $2.5 million. See Note 6 to our condensed consolidated financial statements for additional information on our fair value measurements. Provision for Income Taxes
The provision for income taxes for the quarter ended March 31, 2009 declined by $4.7 million as compared to the prior year quarter. The decline was primarily attributable to a reduction in our operating results as compared to the prior year quarter, partially offset by an increase in our effective income tax rate from 18.1% for the quarter ended March 31, 2008 to 19.7% for the quarter ended March 31, 2009. The increase in our effective tax rate was primarily due to a decline in the portion of earnings generated by our international subsidiaries whose earnings are being permanently reinvested and taxed at lower rates. Fair Value Measurements
On January 1, 2008, we adopted SFAS 157 as it relates to financial assets and liabilities. SFAS 157 refines the definition of fair value, provides a framework for measuring fair value and expands disclosures about fair value measurements. Our auction rate securities were measured at fair value as of March 31, 2009 and December 31, 2008 using significant Level 3 inputs as defined by SFAS 157. See Note 6 to our condensed consolidated financial statements for additional information on the fair value hierarchy under SFAS 157. As a result of continued auction failures, quoted prices for our auction rate securities did not exist as of March 31, 2009 and, accordingly, we concluded that Level 1 inputs were not available.
We determined that use of a valuation model was the best available technique for measuring the fair value of our auction rate securities. We used an income approach valuation model to estimate the price that would be received in exchange for our auction rate securities in an orderly transaction between market participants ("exit price") as of March 31, 2009. The exit price was derived as the weighted-average present value of expected cash flow over various periods of illiquidity, using a risk-adjusted discount rate that was based on the credit risk and liquidity risk of our auction rate securities.

While our valuation model was based on both Level 2 (credit quality and interest rates) and Level 3 inputs, we determined that the Level 3 inputs were most significant to the overall fair value measurement, particularly the estimates of risk-adjusted discount rates and ranges of expected periods of illiquidity. The valuation model also reflected our intention to hold our auction rate securities until they can be redeemed by issuers, repurchased by brokerage firms or sold in a market that facilitates orderly transactions and our belief that we have the ability to maintain our investment in these securities indefinitely. We reviewed these inputs to our valuation model, evaluated the results and performed sensitivity analysis on key assumptions. Based on our review, we concluded that the fair value measurement of our auction rate securities as of March 31, 2009 was appropriate.
Based on the results of our March 31, 2009 fair value measurement, we recognized unrealized losses of $200,000, which were offset by the reversal of unrealized losses associated with $2.3 million (par value) of auction rate securities redeemed at par during the quarter. Net unrealized losses on our auction rate securities were included in other income (expense) in our condensed consolidated statements of income.
The carrying value of our auction rate securities, classified as long-term investments on our condensed consolidated balance sheets, was $61.9 and $64.2 million as of March 31, 2009 and December 31, 2008, respectively. We anticipate realizing the $70.0 million par value of our auction rate securities because we intend to hold them until they are redeemed, repurchased or sold in a market that facilitates orderly transactions.
Assets measured at fair value using significant Level 3 inputs constituted 1% of our total assets as of March 31, 2009 and December 31, 2008.
LIQUIDITY AND CAPITAL RESOURCES
Although our business has historically been very cyclical, we have relied on our cash flow from continuing operations to meet liquidity needs and fund the majority of our cash requirements. We have maintained a strong financial position through the disciplined and conservative use of debt. A substantial portion of our cash flow is invested in the expansion and enhancement of our fleet of drilling rigs in general and construction of our ENSCO 8500 Series® rigs in particular.
We believe the current global economic crisis and recent decline in oil and natural gas prices will lead to a continued decline in jackup rig utilization and day rates during the remainder of 2009, the extent of which is currently unknown. It is likely that this will result in a decline in our cash flow from operations during the remainder of 2009 and, possibly, beyond. Based on our $927.3 million of cash and cash equivalents as of March 31, 2009 and our current contractual backlog, we believe our remaining $1,520.0 million of contractual obligations associated with the construction of our ENSCO 8500 Series® rigs will be fully or substantially funded from existing cash and cash equivalents and future operating cash flow. We may decide to access debt markets to raise additional capital or increase liquidity as necessary.
During the quarter ended March 31, 2009, our primary source of cash was $321.9 million generated from continuing operations. Our primary use of cash for the same period was $184.6 million for the construction, enhancement and other improvement of our drilling rigs, including $118.8 million invested in the construction of our ENSCO 8500 Series® rigs.
During the quarter ended March 31, 2008, our primary source of cash was $146.6 million generated from continuing operations. Our primary use of cash was . . .