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Equity Method Investment In ARO Equity Method Investment In ARO | 9 Months Ended
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Sep. 30, 2023
Equity Method Investments and Joint Ventures [Abstract] |
Equity Method Investment In ARO | Equity Method Investment in ARO Background ARO is a 50/50 unconsolidated joint venture between the Company and Saudi Aramco that owns and operates jackup drilling rigs in Saudi Arabia. As of September 30, 2023, ARO owns seven jackup rigs, has two newbuild jackup rigs on order, and leases eight rigs from us through bareboat charter arrangements (the "Lease Agreements") whereby substantially all operating costs are incurred by ARO. 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, the first of which was delivered in October 2023 and the second is expected to be delivered in the first quarter of 2024. 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 11 - Contingencies" for additional information. 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. See additional discussion below regarding these related-party transactions. Summarized financial information for ARO is as follows (in millions):
| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2023 |  | 2022 |  | 2023 |  | 2022
Revenues | $ | 121.5 |  |  | $ | 111.4 |  |  | $ | 362.9 |  |  | $ | 339.1 |
Operating expenses |  |  |  |  |  |  |
Contract drilling (exclusive of depreciation) | 92.0 |  |  | 90.0 |  |  | 277.9 |  |  | 256.3 |
Depreciation | 15.8 |  |  | 15.4 |  |  | 46.4 |  |  | 47.3 |
General and administrative | 5.6 |  |  | 4.7 |  |  | 15.9 |  |  | 13.1 |
Operating income | 8.1 |  |  | 1.3 |  |  | 22.7 |  |  | 22.4 |
Other expense, net | 9.0 |  |  | 2.7 |  |  | 28.2 |  |  | 9.3 |
Provision (benefit) for income taxes | 0.4 |  |  | (0.1) |  |  | 2.3 |  |  | 3.1 |
Net income (loss) | $ | (1.3) |  |  | $ | (1.3) |  |  | $ | (7.8) |  |  | $ | 10.0 |
| September 30, 2023 |  | December 31, 2022 |  |
Cash and cash equivalents | $ | 110.3 |  |  | $ | 176.2 |  |  |
Other current assets | 191.2 |  |  | 140.6 |  |  |
Non-current assets | 915.3 |  |  | 818.1 |  |  |
Total assets | $ | 1,216.8 |  |  | $ | 1,134.9 |  |  |
Current liabilities | $ | 173.6 |  |  | $ | 86.3 |  |  |
Non-current liabilities | 886.2 |  |  | 884.6 |  |  |
Total liabilities | $ | 1,059.8 |  |  | $ | 970.9 |  |  |
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, in Equity in earnings of ARO in our Condensed Consolidated Statements of Operations. Our equity method investment in ARO was recorded at its estimated fair value in fresh start accounting upon emergence from the chapter 11 cases on April 30, 2021 (the "Effective Date") and also on 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 relative to market 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 of ARO in our Condensed 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):
| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2023 |  | 2022 |  | 2023 |  | 2022
50% interest in ARO net income (loss) | $ | (0.6) |  |  | $ | (0.7) |  |  | $ | (3.9) |  |  | $ | 5.0 |
Amortization of basis differences | 3.0 |  |  | 3.6 |  |  | 8.9 |  |  | 10.9 |
Equity in earnings of ARO | $ | 2.4 |  |  | $ | 2.9 |  |  | $ | 5.0 |  |  | $ | 15.9 |
Related-Party Transactions During the three and nine months ended September 30, 2023, revenues recognized by us related to the Lease Agreements were $19.1 million and $54.7 million, respectively. During the three and nine months ended September 30, 2022, revenues recognized by us related to the Lease Agreements were $13.8 million and $42.6 million, respectively. Our balances related to the ARO lease agreements were as follows (in millions):
| September 30, 2023 |  | December 31, 2022 |  |  |
Amounts receivable (1) | $ | 17.6 |  |  | $ | 12.0 |  |  |  |
Contract liabilities(2) | $ | 13.1 |  |  | $ | 16.7 |  |  |  |
Accounts payable(2) | $ | 54.9 |  |  | $ | 43.2 |  |  |  |
(1)Amounts receivable from ARO is included in Accounts receivable, net in our Condensed Consolidated Balance Sheets. (2)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 Notes Receivable from ARO were adjusted to the estimated fair value as of the Effective Date and the resulting discount to the principal amount is being amortized using the effective interest method to interest income over the remaining terms of the notes. The principal amount and discount of the Notes Receivable from ARO were as follows (in millions):
| September 30, 2023 |  | December 31, 2022 |  |  |
Principal amount | $ | 402.7 |  |  | $ | 402.7 |  |  |  |
Discount | (127.5) |  |  | (148.7) |  |  |  |
Carrying value | $ | 275.2 |  |  | $ | 254.0 |  |  |  |
Interest receivable(1)(2) | $ | 22.8 |  |  | $ | — |  |  |  |
(1)Our interest receivable from ARO is included in Accounts receivable, net in our Condensed Consolidated Balance Sheets. (2)We collected our 2022 interest on the Notes Receivable from ARO in cash prior to December 31, 2022, and as such, there was no interest receivable from ARO as of December 31, 2022. Interest income earned on the Notes Receivable from ARO was as follows (in millions):
| Three Months Ended September 30, |  | Nine Months Ended September 30, |  |  |
| 2023 |  | 2022 |  | 2023 |  | 2022 |  |  |
Interest income | $ | 7.7 |  |  | $ | 2.8 |  |  | $ | 22.8 |  |  | $ | 8.6 |  |  |  |
Non-cash amortization (1)(2) | 7.2 |  |  | 22.4 |  |  | 21.2 |  |  | 37.8 |  |  |  |
Total interest income on the Notes Receivable from ARO | $ | 14.9 |  |  | $ | 25.2 |  |  | $ | 44.0 |  |  | $ | 46.4 |  |  |  |
(1)Represents the amortization of the discount on the Notes Receivable from ARO using the effective interest method to interest income over the term of the notes. (2)We recognized non-cash interest income of $14.8 million in the third quarter of 2022 attributable to a $40.0 million early principal repayment of the Notes Receivable from ARO received in September 2022.

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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 -Topic 323 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 3 -Subparagraph (a)(3) -Publisher FASB -URI https://asc.fasb.org//1943274/2147481687/323-10-50-3 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Topic 323 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 3 -Subparagraph (d) -Publisher FASB -URI https://asc.fasb.org//1943274/2147481687/323-10-50-3 Reference 3: http://www.xbrl.org/2003/role/recommendedDisclosureRef -Topic 323 -SubTopic 740 -Name Accounting Standards Codification -Section 50 -Paragraph 2 -Subparagraph (f) -Publisher FASB -URI https://asc.fasb.org//1943274/2147481543/323-740-50-2 Reference 4: http://www.xbrl.org/2003/role/disclosureRef -Name Accounting Standards Codification -Topic 323 -Publisher FASB -URI https://asc.fasb.org//323/tableOfContent + Details
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