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Equity Method Investment in ARO | 12 Months Ended
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Dec. 31, 2023
Equity Method Investments and Joint Ventures [Abstract] |
Equity Method Investments 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 offshore drilling rigs in Saudi Arabia. As of December 31, 2023, ARO owned eight jackup rigs, had ordered one newbuild jackup rigs and leased eight rigs from us through bareboat charter arrangements (the "Lease Agreements") whereby substantially all operating costs are incurred by ARO. At December 31, 2023, the leased rigs were operating under three-year drilling contracts, or related extensions, with Saudi Aramco. The eight rigs owned by ARO are currently operating under contracts with Saudi Aramco, each with a minimum aggregate contract term of 15 years, provided that the rigs meet the technical and operational requirements of Saudi Aramco. The shareholder agreement governing the joint venture (the "Shareholder Agreement") specifies that ARO shall purchase 20 newbuild jackup rigs over an approximate 10-year period. The first two newbuild jackups were ordered in January 2020, the first of which, Kingdom 1, was delivered and commenced operations in the fourth quarter of 2023, and the second is expected to be delivered in the first half of 2024. ARO is expected to commit to 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 1 3 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 is 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. 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):
| Year Ended December 31, 2023 |  | Year Ended December 31, 2022 |  | Year Ended December 31, 2021
Revenues | $ | 496.6 |  |  | $ | 459.5 |  |  | $ | 470.6 |
Operating expenses |  |  |  |  |
Contract drilling (exclusive of depreciation) | 365.9 |  |  | 341.8 |  |  | 362.3 |
Depreciation | 65.9 |  |  | 63.4 |  |  | 65.2 |
General and administrative | 22.2 |  |  | 18.7 |  |  | 17.8 |
Operating income | 42.6 |  |  | 35.6 |  |  | 25.3 |
Other expense, net | 31.8 |  |  | 11.1 |  |  | 13.4 |
Provision for income taxes | 8.3 |  |  | 3.8 |  |  | 7.9 |
Net income | $ | 2.5 |  |  | $ | 20.7 |  |  | $ | 4.0 |
| December 31, 2023 |  | December 31, 2022
Cash and cash equivalents | $ | 92.9 |  |  | $ | 176.2 |
Other current assets | 184.0 |  |  | 140.6 |
Non-current assets | 1,081.0 |  |  | 818.1 |
Total assets | $ | 1,357.9 |  |  | $ | 1,134.9 |
Current liabilities | $ | 136.0 |  |  | $ | 86.3 |
Non-current liabilities | 1,056.8 |  |  | 884.6 |
Total liabilities | $ | 1,192.8 |  |  | $ | 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, which is included in Equity in earnings 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 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 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, 2023 |  | Year Ended December 31, 2022 |  | Eight Months Ended December 31, 2021 |  |  | Four Months Ended April 30, 2021
50% interest in ARO net income (loss) | $ | 1.3 |  |  | $ | 10.4 |  |  | $ | (4.0) |  |  |  | $ | 6.0 |
Amortization of basis differences | 12.0 |  |  | 14.1 |  |  | 10.1 |  |  |  | (2.9) |
Equity in earnings of ARO | $ | 13.3 |  |  | $ | 24.5 |  |  | $ | 6.1 |  |  |  | $ | 3.1 |
Related-Party Transactions During the years ended December 31, 2023 and 2022, and eight months ended December 31, 2021 (Successor) and four months ended April 30, 2021 (Predecessor), revenues recognized by us related to the Lease Agreements were $69.2 million, $56.7 million, $35.4 million and $21.7 million, respectively. Our balances related to the Lease Agreements were as follows (in millions):
| December 31, 2023 |  | December 31, 2022 |  |  |
Amounts receivable (1) | $ | 10.2 |  |  | $ | 12.0 |  |  |  |
Contract liabilities(2) | $ | 15.9 |  |  | $ | 16.7 |  |  |  |
Accounts payable(2) | $ | 57.7 |  |  | $ | 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 therefore, the corresponding contract liabilities are subject to adjustment during the lease term. Upon completion of the lease term, such amounts become a payable to or a receivable from ARO. During 2017 and 2018, the Company contributed assets to ARO in exchange for the 10-year Notes Receivable from ARO, and as amended in December 2023, bear interest based on a one-year term SOFR, set as of the end of the year prior to the year applicable, plus 2.10%. 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):
| December 31, 2023 |  | December 31, 2022 |  |  |
Principal amount | $ | 402.7 |  |  | $ | 402.7 |  |  |  |
Discount | (120.4) |  |  | (148.7) |  |  |  |
Carrying value | $ | 282.3 |  |  | $ | 254.0 |  |  |  |
We collected our 2023 and 2022 interest on the Notes Receivable from ARO from ARO in cash prior to December 31, 2023 and 2022, respectively, and as such, there was no interest receivable for the Notes Receivable from ARO as of December 31, 2023 and 2022. Interest income earned on the Notes Receivable from ARO was as follows (in millions):
| Successor |  |  | Predecessor
| Year Ended December 31, 2023 |  | Year Ended December 31, 2022 |  | Eight Months Ended December 31, 2021 |  |  | Four Months Ended April 30, 2021
Interest income | $ | 30.5 |  |  | $ | 11.3 |  |  | $ | 7.0 |  |  |  | $ | 3.5 |
Non-cash amortization (1) | 28.3 |  |  | 44.9 |  |  | 20.8 |  |  |  | — |
Total interest income on the Notes Receivable from ARO | $ | 58.8 |  |  | $ | 56.2 |  |  | $ | 27.8 |  |  |  | $ | 3.5 |
(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. In 2022, we recognized non-cash interest income of $14.8 million attributable to a $40.0 million early principal repayment of the Notes Receivable from ARO received in September 2022. 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, 2023 |  | December 31, 2022 |
Total assets | $ | 417.1 |  |  | $ | 377.8 |  |
Less: total liabilities | 73.6 |  |  | 59.9 |  |
Maximum exposure to loss | $ | 343.5 |  |  | $ | 317.9 |  |

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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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