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Equity Method Investment in ARO | 12 Months Ended
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Dec. 31, 2022
Equity Method Investments and Joint Ventures [Abstract] |
Equity Method Investments in ARO | Background ARO is a 50/50 unconsolidated joint venture between the Company and Saudi Aramco that owns and operates offshore drilling rigs in Saudi Arabia. As of December 31, 2022, ARO owns seven jackup rigs, has ordered two newbuild jackup rigs and leases eight rigs from us through bareboat charter arrangements (the "Lease Agreements") whereby substantially all operating costs are incurred by ARO. At December 31, 2022, the leased rigs were operating under three-year drilling contracts, or related extensions, with Saudi Aramco. The seven rigs owned by ARO are currently operating under contracts with Saudi Aramco, each with an aggregate contract term of 15 years, provided that the rigs meet the technical and operational requirements of Saudi Aramco. The Lease Agreements with ARO originally provided for a fixed per day bareboat charter amount over the term of the lease, calculated based on a split of projected earnings over the lease term. However, in December 2020, the shareholder agreement governing the joint venture (the "Shareholder Agreement") was amended (the "December Amendment") such that the per day bareboat charter amount in the associated lease agreements is subject to adjustment based on actual performance of the respective rig and that a cash payment based on actual results will be due at the end of the lease term or, if sooner, termination. The Company, as lessor, accounts for these arrangements as operating leases. The December Amendment resulted in a modification of the leases and as a result we began accounting for lease revenue using the variable rate as opposed to a fixed rental amount. Our results of operations for the year ended December 31, 2020 (Predecessor) include the impact of the lease modification on our rental revenues to reflect cumulative results through that period. ARO has plans to purchase 20 newbuild jackup rigs over an approximate 10-year period. In January 2020, ARO ordered the first two newbuild jackups, each with a shipyard price of $176.0 million. While the shipyard contract contemplated delivery of these newbuild rigs in 2022, the delivery of these rigs has been delayed into 2023. ARO is expected to place orders for two additional newbuild jackups in the near term. In connection with these plans, we have a potential obligation to fund ARO for newbuild jackup rigs. See “Note 14 Commitments and Contingencies" for additional information. The joint venture partners agreed in the Shareholder Agreement that Saudi Aramco, as a customer, will provide drilling contracts to ARO in connection with the acquisition of the newbuild rigs. The initial contracts provided by Saudi Aramco for each of the newbuild rigs will be for an eight-year term. The day rate for the initial contracts for each newbuild rig will be determined using a pricing mechanism that targets a six-year payback period for construction costs on an EBITDA basis. The initial eight-year contracts will be followed by a minimum of another eight years of term, re-priced in three-year intervals based on a market pricing mechanism. Upon establishment of ARO, we entered into an agreement to provide certain employees through secondment arrangements to assist with various onshore and offshore services for the benefit of ARO (the "Secondment Agreement"). Pursuant to this agreement, our seconded employees provide various services to ARO, and in return, ARO provides remuneration for those services. From time to time, we may also sell equipment or supplies to ARO. During the quarter ended June 30, 2020, almost all remaining employees seconded to ARO became employees of ARO. Summarized Financial Information The operating revenues of ARO presented below reflect revenues earned under drilling contracts with Saudi Aramco for the ARO-owned jackup rigs as well as the rigs leased from us. Contract drilling expense is inclusive of the bareboat charter fees for the rigs leased from us. Cost incurred under the Secondment Agreement are included in Contract drilling expense and General and administrative, depending on the function to which the seconded employee's service related. See additional discussion below regarding these related-party transactions. Summarized financial information for ARO is as follows (in millions):
| Year Ended December 31, 2022 | Year Ended December 31, 2021 | Year Ended December 31, 2020
Revenues | $ | 459.5 |  | $ | 470.6 |  | $ | 549.4 |
Operating expenses |  |  |
Contract drilling (exclusive of depreciation) | 341.8 |  | 362.3 |  | 388.2 |
Depreciation | 63.4 |  | 65.2 |  | 54.8 |
General and administrative | 18.7 |  | 17.8 |  | 24.2 |
Operating income | 35.6 |  | 25.3 |  | 82.2 |
Other expense, net | 11.1 |  | 13.4 |  | 26.7 |
Provision for income taxes | 3.8 |  | 7.9 |  | 14.2 |
Net income | $ | 20.7 |  | $ | 4.0 |  | $ | 41.3 |
| December 31, 2022 | December 31, 2021 |
Cash and cash equivalents | $ | 176.2 |  | $ | 270.8 |  |
Other current assets | 140.6 |  | 135.0 |  |
Non-current assets | 818.1 |  | 775.8 |  |
Total assets | $ | 1,134.9 |  | $ | 1,181.6 |  |
Current liabilities | $ | 86.3 |  | $ | 79.9 |  |
Non-current liabilities | 884.6 |  | 956.7 |  |
Total liabilities | $ | 970.9 |  | $ | 1,036.6 |  |
Equity in Earnings of ARO We account for our interest in ARO using the equity method of accounting and only recognize our portion of ARO's net income, adjusted for basis differences as discussed below, which is included in Equity in earnings (losses) of ARO in our Consolidated Statements of Operations. ARO is a variable interest entity; however, we are not the primary beneficiary and therefore do not consolidate ARO. Judgments regarding our level of influence over ARO included considering key factors such as each partner's ownership interest, representation on the board of managers of ARO and ability to direct activities that most significantly impact ARO's economic performance, including the ability to influence policy-making decisions. Our investment in ARO would be assessed for impairment if there are changes in facts and circumstances that indicate a loss in value may have occurred. If a loss were deemed to have occurred and this loss was determined to be other than temporary, the carrying value of our investment would be written down to fair value and an impairment recorded. We have an equity method investment in ARO that was recorded at its estimated fair value at both the Effective Date and the date of our 2019 transaction where we acquired the subsidiary that held the joint venture interest. We computed the difference between the fair value of ARO's net assets and the carrying value of those net assets in ARO's U.S. GAAP financial statements ("basis differences") on each of these dates. These basis differences primarily related to ARO's long-lived assets and the recognition of intangible assets associated with certain of ARO's drilling contracts that were determined to have favorable terms as of the measurement dates. Basis differences are amortized over the remaining life of the assets or liabilities to which they relate and are recognized as an adjustment to the Equity in earnings (losses) of ARO in our Consolidated Statements of Operations. The amortization of those basis differences is combined with our 50% interest in ARO's net income. A reconciliation of those components is presented below (in millions):
| Successor |  |  | Predecessor
| Year Ended December 31, 2022 |  | Eight Months Ended December 31, 2021 |  |  | Four Months Ended April 30, 2021 |  | Year Ended December 31, 2020
50% interest in ARO net income (loss) | $ | 10.4 |  |  | $ | (4.0) |  |  |  | $ | 6.0 |  |  | $ | 20.7 |
Amortization of basis differences | 14.1 |  |  | 10.1 |  |  |  | (2.9) |  |  | (28.5) |
Equity in earnings (losses) of ARO | $ | 24.5 |  |  | $ | 6.1 |  |  |  | $ | 3.1 |  |  | $ | (7.8) |
Related-Party Transactions Revenues recognized by us related to the Lease Agreements and Secondment Agreement are as follows (in millions):
| Successor |  |  | Predecessor
| Year Ended December 31, 2022 |  | Eight Months Ended December 31, 2021 |  |  | Four Months Ended April 30, 2021 |  | Year Ended December 31, 2020
Lease revenue | $ | 56.7 |  |  | $ | 35.4 |  |  |  | $ | 21.7 |  |  | $ | 52.2 |
Secondment revenue | 2.0 |  |  | 1.5 |  |  |  | 1.1 |  |  | 21.6 |
Total revenue from ARO (1) | $ | 58.7 |  |  | $ | 36.9 |  |  |  | $ | 22.8 |  |  | $ | 73.8 |
(1) All of the revenues presented above are included in our Other segment in our segment disclosures. See "Note 16- Segment Information" for additional information. Amounts receivable from ARO related to the Lease Agreements totaled $12.0 million and $12.1 million as of December 31, 2022 and 2021, respectively, and are included in Accounts receivable, net, on our Consolidated Balance Sheets. We had $16.7 million and $43.2 million of Contract liabilities and Accounts payable, respectively, related to the Lease Agreements as of December 31, 2022. As of December 31, 2021, we had $10.8 million and $38.3 million of Contract liabilities and Accounts payable, respectively, related to the Lease Agreements. The per day bareboat charter amount in the Lease Agreements is subject to adjustment based on actual performance of the respective rig and as such contract liabilities related to the Lease Agreements are subject to adjustment during the lease term. Upon completion of the lease term, such amount becomes a payable to or a receivable from ARO. During 2017 and 2018, the Company contributed cash to ARO in exchange for the 10-year Notes Receivable from ARO based on a one-year LIBOR rate, set as of the end of the year prior to the year applicable, plus two percent. The Shareholder Agreement prohibits the sale or transfer of the Notes Receivable from ARO to a third party, except in certain limited circumstances. The principal amount and discount of the Notes Receivable from ARO were as follows (in millions):
| December 31, 2022 |  | December 31, 2021 |  |  |
Principal amount | $ | 402.7 |  |  | $ | 442.7 |  |  |  |
Discount | (148.7) |  |  | (193.6) |  |  |  |
Carrying value | $ | 254.0 |  |  | $ | 249.1 |  |  |  |
We collected our 2022 and 2021 interest on the Notes Receivable from ARO from ARO in cash prior to December 31, 2022 and 2021, respectively, and as such, there was no interest receivable for the Notes Receivable from ARO as of December 31, 2022 and 2021. In September 2022, the Company received a principal payment of $40.0 million from ARO representing a partial early repayment of the Notes Receivable from ARO. In connection with this repayment, we recognized non-cash interest income of $14.8 million in the third quarter of 2022 for the discount attributable to this repayment. Non-cash interest income from the Notes Receivable from ARO is included in Interest income in our Consolidated Statement of Operations. Interest income earned on the Notes Receivable from ARO was as follows (in millions):
| Successor |  |  | Predecessor
| Year Ended December 31, 2022 |  | Eight Months Ended December 31, 2021 |  |  | Four Months Ended April 30, 2021 |  | Year Ended December 31, 2020
Interest income | $ | 11.3 |  |  | $ | 7.0 |  |  |  | $ | 3.5 |  |  | $ | 18.3 |
Non-cash amortization | 44.9 |  |  | 20.8 |  |  |  | — |  |  | — |
Total interest income on the Notes Receivable from ARO | $ | 56.2 |  |  | $ | 27.8 |  |  |  | $ | 3.5 |  |  | $ | 18.3 |
Maximum Exposure to Loss The following table summarizes the total assets and liabilities as reflected in our Consolidated Balance Sheets as well as our maximum exposure to loss related to ARO (in millions). Our maximum exposure to loss is limited to (1) our equity investment in ARO; (2) the carrying amount of our Notes Receivable from ARO; and (3) other receivables and contract assets from ARO, partially offset by contract liabilities as well as payables to ARO.
| December 31, 2022 |  | December 31, 2021 |
Total assets | $ | 377.8 |  |  | $ | 348.1 |  |
Less: total liabilities | 59.9 |  |  | 49.1 |  |
Maximum exposure to loss | $ | 317.9 |  |  | $ | 299.0 |  |

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- Definition The entire disclosure for equity method investments and joint ventures. Equity method investments are investments that give the investor the ability to exercise significant influence over the operating and financial policies of an investee. Joint ventures are entities owned and operated by a small group of businesses as a separate and specific business or project for the mutual benefit of the members of the group. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 323 -URI https://asc.fasb.org/topic&trid=2196965 + Details
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