Introductory Note Regarding Definitions The registrant, Aris Water Solutions, Inc. (“Aris”Aris Inc.”), was incorporated on May 26, 2021 as a Delaware corporation. Aris Inc. was formed to serve as the issuer in an initial public offering (“IPO” or the “Offering”) of equity, which was completed on October 26, 2021. Concurrent with the completion of the initial public offering,Offering, Aris Inc. became the new parent holding company of Solaris Midstream Holdings, LLC (“Solaris LLC”), a Delaware limited liability company. Except as otherwise indicated or required by the context, all references to “Solaris,” the “Company,” “we,” “our,” and “us” or similar terms refer to (i) Solaris Midstream Holdings, LLC (“Solaris LLC”) and its consolidated subsidiaries before the completion of the corporate reorganization in connection with the initial public offeringOffering and (ii) Aris Inc. and its consolidated subsidiaries as of the completion of the corporate reorganizationOffering and thereafter. Cautionary Note Regarding Forward-Looking Statements This Quarterly Report on Form 10‑Q (the(this “Quarterly Report”) includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact contained in this Quarterly Report, including, without limitation, statements regarding our future results of operations or financial condition, business strategy and plans and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “guidance,” “preliminary,” “project,” “estimate,” “outlook,” “expect,” “continue,” “will,” “intend,” “plan,” “targets,” “believe,” “forecast,” “future,” “potential,” “should,” “may,” “possible,” “could” and variations of such words or similar expressions. You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition and operating results. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section titled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 (our “2021 Annual Report”) and found elsewhere in this Quarterly Report, including, but not limited to, the following: | ● | the severityimpact of the current conflict between Russia and duration ofUkraine on the global adverse health events,economy, including its impacts on financial markets and the novel coronavirus (“COVID-19”) pandemic, which has caused reduced demand for oil and natural gas, economic slowdowns, governmental actions, stay-at-home orders, and interruptions to our operations or our exploration and our production (“E&P”) customers’ operations;energy industry; |
| ● | operational challenges relating to the COVID-19 pandemic and efforts to mitigate the spreadimpacts of the virus, including logistical challenges, protecting the health and well-being ofcost inflation on our employees, remote work arrangements, performance of contracts and supply chain disruptions;operating margins; |
| ● | the potential deterioration of our customers’ financial condition, including defaults resulting from actual or potential insolvencies; |
| ● | the level of capital spending and development by oil and gas companies, including significant recent reductions and potential additional reductions in capital expenditures by oil and gas producers in response to lower commodity prices and dramatically reduced demand; |
| ● | the impact of current and future laws, rulings and federal and state governmental regulations, including those related to hydraulic fracturing, accessing water, handling of produced water, carbon pricing, taxation of emissions, seismic activity, drilling and right-of-way access on federal lands, income taxes and various other matters; |
| ● | the degree to which consolidation among our customers may affect spending on U.S. drilling and completions in the near-term; |
| ● | our reliance on a limited number of customers and a particular region for substantially all of our revenues; |
| ● | our ability to successfully implement our business plan; |
| ● | regional impacts to our business, including our infrastructure assets within the Delaware Basin and Midland Basin formations of the Permian Basin; |
| ● | our access to capital to fund expansions, acquisitions and our working capital needs and our ability to obtain debt or equity financing on satisfactory terms; |
| ● | our ability to renew or replace expiring contracts on acceptable terms; |
| ● | our ability to comply with covenants contained in our debt instruments; |
| ● | changes in general economic conditions and commodity prices; |
| ● | our customers’ ability to complete and produce new wells; |
| ● | risks related to acquisitions and organic growth projects, including our ability to realize their expected benefits; |
| ● | capacity constraints on regional oil, natural gas and water gathering, processing and pipeline systems that result in a slowdown or delay in drilling and completion activity, and thus a slowdown or delay in the demand for our services; |
| ● | our ability to retain key management and employees and to hire and retain skilled labor; |
| ● | our health, safety and environmental performance; |
| ● | the impact of competition on our operations; |
| ● | the degree to which our E&P customers may elect to operate their water-management services in-house rather than outsource these services to companies like us; |
| ● | delays or restrictions in obtaining, utilizing or maintaining permits and/or rights-of-way by us or our customers; |
| ● | constraints in supply or availability of equipment used in our business; |
| ● | advances in technologies or practices that reduce the amount of water used or produced in the oil and gas production process, thereby reducing demand for our services; |
| ● | changes in global political or economic conditions, both generally, and in the specific markets we serve; |
| ● | physical, electronic and cybersecurity breaches; |
| ● | accidents, weather, seasonality or other events affecting our business; |
| ● | changes in tax laws, regulations or policies; and |
| ● | the effects of litigation;other risks described in our 2021 Annual Report filed with the United States Securities and |
| ● | plans, objectives, expectations and intentions contained in this report that are not historical. Exchange Commission (“SEC”). |
Many of the factors that will determine our future results are beyond the ability of management to control or predict. Should one or more of the risks or uncertainties described in this Quarterly Report or in our 2021 Annual Report occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements. All forward-looking statements, expressed or implied, included in this Quarterly Report are expressly qualified in their entirety by this cautionary statement. The forward-looking statements made in this Quarterly Report relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report to reflect events or circumstances after the date of this Quarterly Report or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments.
PART 11. FINANCIAL INFORMATION Item 1. Financial Statements Aris Water Solutions, Inc. Balance Sheet
(unaudited)
| | | | | (in whole dollars) | | September 30, 2021 | | June 30, 2021 | | | | | | Assets | $ | — | $ | — | Total Assets | $ | — | $ | — | Liabilities and Stockholder’s Equity | | | | | Total Liabilities | $ | — | $ | — | Commitments and Contingencies | $ | — | $ | — | Stockholder's Equity: | | | | | Receivable from Solaris Midstream Holdings, LLC | $ | (10) | $ | (10) | Common Stock, $0.01 Par Value; 1,000 Shares Authorized, Issued, and Outstanding at September 30 and June 30, 2021 | $ | 10 | $ | 10 | Total Stockholder’s Equity | $ | — | $ | — | Total Liabilities & Stockholder’s Equity | $ | — | $ | — |
The accompanying notes are an integral part of these balance sheets
Aris Water Solutions, Inc.
Notes to Balance Sheet
(Unaudited)
1.Organization and Background of Business
Aris Water Solutions, Inc. (“Aris”), was incorporated on May 26, 2021 as a Delaware corporation.
Aris was formed to serve as the issuer in an initial public offering of equity (“IPO” or the “Offering”). Concurrent with the completion of the IPO, Aris became the new parent holding company of Solaris Midstream Holdings, LLC, a Delaware limited liability company (“Solaris LLC”).
As described in more detail in Note 4 – Subsequent Events, on October 26, 2021, Aris completed the Offering of 20,297,500 shares of its Class A common stock, par value $0.01 per share (“Class A common stock”), which includes 2,647,500 shares of Class A common stock issued and sold pursuant to the underwriters’ exercise of their option in full to purchase additional shares of Class A common stock, at a price to the public of $13.00 per share ($12.22 net of underwriting discounts and commissions). After deducting underwriting discounts and commissions and offering expenses payable by Aris, Aris received net proceeds of approximately $246.1 million. Aris contributed all of the net proceeds of the IPO received to Solaris LLC in exchange for Solaris LLC Units. Solaris LLC distributed approximately $213.3 million of the net proceeds to the existing owners of Solaris LLC and retained the remaining $32.8 million of the net proceeds for general corporate purposes, which may include capital expenditures, working capital and potential acquisitions and strategic transactions.
Aris is a holding company and its principal asset is a membership interest in Solaris LLC. As the managing member of Solaris LLC, Aris operates and controls all of the business and affairs of Solaris LLC, and through Solaris LLC and its subsidiaries, conducts its business. As a result, beginning in the fourth quarter of 2021, Aris will consolidate the financial results of Solaris LLC and report noncontrolling interest related to the portion of Solaris LLC Units not owned by Aris, which will reduce net income attributable to Aris’ Class A common stockholders.
As a company with less than $1.07 billion in revenue during our last fiscal year, Aris qualifies as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). The JOBS Act provides that an emerging growth company may take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an emerging growth company to delay the adoption of accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of this extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption is required for private companies.
2.Summary of Significant Accounting Policies
Basis of Presentation
The balance sheet has been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Separate Statements of Operations, Changes in Stockholder’s Equity and Statements of Cash Flows have not been presented because we have not had any business transactions or activities since May 26, 2021, other than our initial capitalization, which was funded by an affiliate. In this regard, we have determined that general and administrative costs associated with the formation and daily management of Aris is not significant.
Estimates
The preparation of the balance sheet, in accordance with GAAP, requires management to make estimates and assumptions that affect the amounts reported in the balance sheet and accompanying notes. Actual results could differ from those estimates.
Income Taxes
Aris is a corporation and is subject to U.S. federal and state income taxes. We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts and income tax basis of assets and liabilities and the expected benefits of utilizing net operating loss and tax credit carryforwards, using enacted tax rates in effect for the taxing jurisdiction in which we operate for the year in which those temporary differences are expected to be recovered or settled. As of September 30, 2021 and June 30, 2021, there are 0 income tax related balances reflected in our balance sheets.
3.Stockholders’ Equity
As of September 30, 2021, Aris had an authorized share capital of 1,000 common shares with a $0.01 par value. On May 26, 2021, all 1,000 shares were issued and acquired by an affiliate for consideration of a $10.00 note receivable from that affiliate. Each share has 1 voting right.
On October 16, 2021, Aris’ certificate of incorporation was amended and restated under which Aris is authorized to issue up to 830,000,000 shares of stock, classified as follows:
| ● | 50,000,000 shares of preferred stock, par value of $0.01 per share |
| ● | 600,000,000 shares of Class A common stock, par value $0.01 per share, and |
| ● | 180,000,000 shares of Class B common stock, par value $0.01 per share. |
The Class A common stock and Class B common stock each provide holders with 1 vote on all matters submitted to a vote of stockholders.
4.Subsequent Events
Initial Public Offering
On October 26, 2021, we closed the Offering of 20,297,500 shares of Class A common stock (including 2,647,500 shares of Class A common stock issued and sold pursuant to the underwriters’ exercise of their option in full to purchase additional shares of Class A common stock), at a price to the public of $13.00 per share ($12.22 per share net of underwriting discounts and commissions), resulting in gross proceeds of $263.9 million, or net proceeds of $246.1 million after deducting underwriting discounts and commissions pursuant to the Offering.
We contributed all the net proceeds of the IPO, including the net proceeds from the underwriters’ exercise of their option in full to purchase additional shares of Class A common stock, to Solaris LLC in exchange for 20,297,500 units of Solaris LLC.
Equity Incentive Plan
Effective October 26, 2021, our Board of Directors adopted the Aris Water Solutions, Inc. 2021 Equity Incentive Plan. The 2021 Plan will allow for the grant of stock options, both incentive stock options and “non-qualified” stock options; stock appreciation rights, restricted stock and restricted stock units; incentive bonuses, which may be paid in cash, stock, or a combination thereof; and other stock-based awards. A total of 5,350,000 shares of Class A common stock are issuable under our 2021 Equity Incentive Plan.
Tax Receivable Agreement
On October 26, 2021, in connection with the initial public offering, we entered into a Tax Receivable Agreement (“TRA”) with the existing owners of Solaris LLC. The TRA generally provides that we pay 85% of the net cash savings, if any, in U.S. federal, state and local income tax and franchise tax that we realize from certain increases in tax basis that occur as a result of our acquisition of the existing owners’ tax attributes. Additionally, the TRA contains terms that in the event we experience a change of control or there is an early termination under the TRA, we could be required to make an immediate payment to the existing owners.
Solaris Midstream Holdings, LLC and Subsidiaries
Condensed Consolidated Balance Sheets (unaudited) | | | | | | | | | | | | | (in thousands, except units) | | September 30, | | December 31, | | (in thousands, except for share and per share amounts) | | | September 30, | | December 31, | | | 2021 | | 2020 | | 2022 | | 2021 | Assets | | | | | | | | | | | | | Cash and Cash Equivalents | | $ | 36,389 | | $ | 24,932 | | Cash | | | $ | 25,180 | | $ | 60,055 | Accounts Receivable, Net | | | 32,576 | | | 21,561 | | | 76,273 | | | 41,973 | Accounts Receivable from Affiliate | | | 21,584 | | | 11,538 | | | 25,772 | | | 20,191 | Other Receivables | | | 3,649 | | | 3,722 | | | 6,287 | | | 4,126 | Prepaids, Deposits and Other Current Assets | | | 1,349 | | | 4,315 | | Prepaids and Deposits | | | | 1,828 | | | 6,043 | Total Current Assets | | | 95,547 | | | 66,068 | | | 135,340 | | | 132,388 | Fixed Assets | | | | | | | | | | | | | Property, Plant and Equipment | | | 692,231 | | | 661,446 | | | 881,003 | | | 700,756 | Accumulated Depreciation | | | (60,757) | | | (43,258) | | | (81,019) | | | (67,749) | Total Property, Plant and Equipment, Net | | | 631,474 | | | 618,188 | | | 799,984 | | | 633,007 | Intangible Assets, Net | | | 313,081 | | | 337,535 | | | 277,379 | | | 304,930 | Goodwill | | | 34,585 | | | 34,585 | | | 34,585 | | | 34,585 | Deferred Income Tax Assets, Net | | | | 24,377 | | | 19,933 | Right-of-Use Assets | | | | 7,635 | | | — | Other Assets | | | 2,848 | | | 1,429 | | | 1,422 | | | 1,850 | Total Assets | | $ | 1,077,535 | | $ | 1,057,805 | | $ | 1,280,722 | | $ | 1,126,693 | | | | | | | | | Liabilities, Mezzanine and Members' Equity | | | | | | | | Liabilities and Stockholders' Equity | | | | | | | | Accounts Payable | | $ | 10,067 | | $ | 16,067 | | $ | 35,823 | | $ | 7,082 | Payables to Affiliate | | | 1,169 | | | 1,884 | | | 2,412 | | | 1,499 | Accrued and Other Current Liabilities | | | 46,774 | | | 27,838 | | | 85,089 | | | 40,464 | Total Current Liabilities | | | 58,010 | | | 45,789 | | | 123,324 | | | 49,045 | Deferred Revenue and Other Long-Term Liabilities | | | 1,336 | | | 1,432 | | Long-Term Debt, Net of Debt Issuance Costs | | | 391,583 | | | 297,000 | | | 393,453 | | | 392,051 | Asset Retirement Obligation | | | 6,032 | | | 5,291 | | | 8,148 | | | 6,158 | Tax Receivable Agreement Liability | | | | 80,009 | | | 75,564 | Other Long-Term Liabilities | | | | 8,966 | | | 1,336 | Total Liabilities | | | 456,961 | | | 349,512 | | | 613,900 | | | 524,154 | Commitments and Contingencies (see Note. 11) | | | | | | | | Mezzanine Equity: | | | | | | | | Redeemable Preferred Units, $10,000 par value, NaN issued or outstanding as of September 30, 2021 and 7,307 outstanding as of December 31, 2020 | | | — | | | 74,378 | | Members' Equity: | | | | | | | | Class A units, $10 par value, 27,797,658 and 27,797,207 issued and outstanding as of September 30, 2021 and December 31, 2020, respectively | | | 308,638 | | | 318,394 | | Class B units, $10 par value, 3,556,051 issued and outstanding as of September 30, 2021 and December 31, 2020 | | | 35,773 | | | 37,023 | | Class C units, $0 par value, 878,850 and 806,350 issued and outstanding as of September 30, 2021 and December 31, 2020, respectively | | | — | | | — | | Class D units, $10 par value, 6,651,100 issued and outstanding as of September 30, 2021 and December 31, 2020 | | | 276,163 | | | 278,498 | | Total Members' Equity | | | 620,574 | | | 633,915 | | Total Liabilities, Mezzanine and Members' Equity | | $ | 1,077,535 | | $ | 1,057,805 | | Commitments and Contingencies (see Note 10) | | | | | | | | Stockholders' Equity | | | | | | | | Preferred Stock $0.01 par value, 50,000,000 authorized. None issued or outstanding as of September 30, 2022 and December 31, 2021 | | | | — | | | — | Class A Common Stock $0.01 par value, 600,000,000 authorized, 26,166,400 issued and 26,156,209 outstanding as of September 30, 2022; 21,858,022 issued and 21,847,831 outstanding as of December 31, 2021 | | | | 261 | | | 218 | Class B Common Stock $0.01 par value, 180,000,000 authorized, 30,811,322 issued and outstanding as of September 30, 2022; 31,716,104 issued and outstanding as of December 31, 2021 | | | | 308 | | | 317 | Treasury Stock (at Cost), 10,191 shares as of September 30, 2022 and December 31, 2021 | | | | (135) | | | (135) | Additional Paid-in-Capital | | | | 282,917 | | | 212,926 | Accumulated Deficit | | | | (7,094) | | | (457) | Total Stockholders' Equity Attributable to Aris Water Solutions, Inc. | | | | 276,257 | | | 212,869 | Noncontrolling Interests | | | | 390,565 | | | 389,670 | Total Stockholders' Equity | | | | 666,822 | | | 602,539 | Total Liabilities and Stockholders' Equity | | | $ | 1,280,722 | | $ | 1,126,693 |
The accompanying notes are an integral part of these condensed consolidated financial statements Solaris Midstream Holdings, LLC and SubsidiariesAris Water Solutions, Inc.
Condensed Consolidated Statements of Operations (unaudited)
| | | | | | | | | | | | | | | Three Months Ended | | Nine Months Ended | (in thousands) | | September 30, | | September 30, | | | 2021 | | 2020 | | 2021 | | 2020 | Revenue | | | | | | | | | | | | | Produced Water Handling | | $ | 24,639 | | $ | 23,323 | | $ | 71,368 | | $ | 70,382 | Produced Water Handling—Affiliates | | | 23,135 | | | 13,312 | | | 62,216 | | | 35,284 | Water Solutions | | | 7,666 | | | 1,149 | | | 11,824 | | | 10,410 | Water Solutions—Affiliates | | | 4,059 | | | 4,672 | | | 16,864 | | | 10,472 | Total Revenue | | | 59,499 | | | 42,456 | | | 162,272 | | | 126,548 | Cost of Revenue | | | | | | | | | | | | | Direct Operating Costs | | | 23,497 | | | 22,207 | | | 66,703 | | | 71,640 | Depreciation, Amortization and Accretion | | | 15,378 | | | 11,751 | | | 45,550 | | | 31,529 | Total Cost of Revenue | | | 38,875 | | | 33,958 | | | 112,253 | | | 103,169 | Operating Costs and Expenses | | | | | | | | | | | | | Abandoned Well Costs | | | 27,402 | | | — | | | 27,402 | | | — | General and Administrative | | | 5,228 | | | 4,773 | | | 15,240 | | | 13,421 | Other Operating Expenses | | | 940 | | | 555 | | | 2,590 | | | 4,854 | Total Operating Expenses | | | 33,570 | | | 5,328 | | | 45,232 | | | 18,275 | Operating (Loss) Income | | | (12,946) | | | 3,170 | | | 4,787 | | | 5,104 | Other Expense | | | | | | | | | | | | | Interest Expense, Net | | | 7,880 | | | 2,099 | | | 17,855 | | | 5,364 | Loss on Debt Modification | | | — | | | — | | | 380 | | | — | Total Other Expense | | | 7,880 | | | 2,099 | | | 18,235 | | | 5,364 | (Loss) Income Before Taxes | | | (20,826) | | | 1,071 | | | (13,448) | | | (260) | Income Tax Expense (Benefit) | | | (83) | | | 9 | | | (81) | | | 15 | Net (Loss) Income | | $ | (20,743) | | $ | 1,062 | | $ | (13,367) | | $ | (275) | Equity Accretion and Dividend Related to Redeemable Preferred Units | | | — | | | (1,511) | | | 21 | | | (1,928) | Net Loss Attributable to Members' Equity | | $ | (20,743) | | $ | (449) | | $ | (13,346) | | $ | (2,203) |
| | | | | | | | | | | | | | | Three Months Ended | | Nine Months Ended | (in thousands, except for share and per share amounts) | | September 30, | | September 30, | | | 2022 | | 2021 | | 2022 | | 2021 | Revenue | | | | | | | | | | | | | Produced Water Handling | | $ | 39,674 | | $ | 24,639 | | $ | 110,299 | | $ | 71,368 | Produced Water Handling — Affiliates | | | 24,796 | | | 23,135 | | | 69,084 | | | 62,216 | Water Solutions | | | 20,392 | | | 7,666 | | | 46,744 | | | 11,824 | Water Solutions — Affiliates | | | 5,668 | | | 4,059 | | | 11,640 | | | 16,864 | Other Revenue | | | 246 | | | — | | | 364 | | | — | Total Revenue | | | 90,776 | | | 59,499 | | | 238,131 | | | 162,272 | Cost of Revenue | | | | | | | | | | | | | Direct Operating Costs | | | 43,885 | | | 23,497 | | | 101,337 | | | 66,703 | Depreciation, Amortization and Accretion | | | 16,942 | | | 15,378 | | | 49,724 | | | 45,550 | Total Cost of Revenue | | | 60,827 | | | 38,875 | | | 151,061 | | | 112,253 | Operating Costs and Expenses | | | | | | | | | | | | | Abandoned Well Costs | | | 9,222 | | | 27,402 | | | 14,637 | | | 27,402 | General and Administrative | | | 11,482 | | | 5,228 | | | 33,860 | | | 15,240 | Impairment of Long-Lived Assets | | | — | | | — | | | 15,597 | | | — | Loss on Asset Disposal and Other | | | 239 | | | 940 | | | 1,816 | | | 2,590 | Total Operating Expenses | | | 20,943 | | | 33,570 | | | 65,910 | | | 45,232 | Operating Income (Loss) | | | 9,006 | | | (12,946) | | | 21,160 | | | 4,787 | Other Expense | | | | | | | | | | | | | Interest Expense, Net | | | 6,763 | | | 7,880 | | | 21,863 | | | 17,855 | Other | | | — | | | — | | | — | | | 380 | Total Other Expense | | | 6,763 | | | 7,880 | | | 21,863 | | | 18,235 | Income (Loss) Before Income Taxes | | | 2,243 | | | (20,826) | | | (703) | | | (13,448) | Income Tax Expense (Benefit) | | | 287 | | | (83) | | | (81) | | | (81) | Net Income (Loss) | | | 1,956 | | | (20,743) | | | (622) | | | (13,367) | Equity Accretion and Dividend — Redeemable Preferred Units | | | — | | | — | | | — | | | 21 | Net Income (Loss) Attributable to Stockholders'/Members' Equity | | | 1,956 | | $ | (20,743) | | | (622) | | $ | (13,346) | Net Income (Loss) Attributable to Noncontrolling Interest | | | 1,257 | | | | | | (493) | | | | Net Income (Loss) Attributable to Aris Water Solutions, Inc. | | $ | 699 | | | | | $ | (129) | | | | | | | | | | | | | | | | | Net Income (Loss) Per Share of Class A Common Stock | | | | | | | | | | | | | Basic | | $ | 0.02 | | | | | $ | (0.03) | | | | Diluted | | $ | 0.02 | | | | | $ | (0.03) | | | | Weighted Average Shares of Class A Common Stock Outstanding | | | | | | | | | | | | | Basic | 24,499,953 | | | | 22,779,077 | | | | Diluted | 24,546,632 | | | | 22,779,077 | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements Solaris Midstream Holdings, LLC and SubsidiariesAris Water Solutions, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited)
| | | | | | | (in thousands) | | Nine Months Ended September 30, | | | 2021 | | 2020 | Cash Flow from Operating Activities | | | | | | | Net Loss | | $ | (13,367) | | $ | (275) | Adjustments to reconcile Net Loss to Net Cash provided by Operating Activities | | | | | | | Depreciation, Amortization and Accretion | | | 45,550 | | | 31,529 | Abandoned Well Costs | | | 27,402 | | | — | Loss on Disposal of Asset, Net | | | 225 | | | 82 | Abandoned Projects | | | 2,035 | | | 1,501 | Amortization of Deferred Financing Costs | | | 1,320 | | | 570 | Loss on Debt Modification | | | 380 | | | — | Bad Debt Expense | | | 216 | | | 83 | Changes in operating assets and liabilities: | | | | | | | Accounts Receivable | | | (11,231) | | | 9,387 | Accounts Receivable from Affiliate | | | (10,046) | | | 2,475 | Other Receivables | | | 231 | | | 56 | Prepaids, Deposits and Other Current Assets | | | 2,516 | | | 1,522 | Accounts Payable | | | (3,284) | | | 1,793 | Payables to Affiliate | | | (715) | | | 390 | Adjustment in Deferred Revenue | | | (46) | | | 975 | Accrued Liabilities and Other | | | 16,000 | | | 462 | Net Cash Provided by Operating Activities | | | 57,186 | | | 50,550 | | | | | | | | Cash Flow from Investing Activities | | | | | | | Property, Plant and Equipment Expenditures | | | (62,728) | | | (121,835) | Net Cash Used in Investing Activities | | | (62,728) | | | (121,835) | | | | | | | | Cash Flow from Financing Activities | | | | | | | Proceeds from Senior-Sustainability Linked Notes | | | 400,000 | | | — | Payments for Initial Public Offering Costs | | | (855) | | | — | Payments of Financing Costs Related to Issuance of Senior- Sustainability Linked Notes | | | (9,352) | | | — | Repayment of Credit Facility | | | (297,000) | | | — | Proceeds from Credit Facility | | | — | | | 73,000 | Redemption of Redeemable Preferred Units | | | (74,357) | | | — | Payments of Financing Costs related to Credit Facility | | | (1,442) | | | (491) | Members' Contributions | | | 5 | | | — | Net Cash Provided by Financing Activities | | | 16,999 | | | 72,509 | | | | | | | | Net Increase in Cash and Cash Equivalents | | | 11,457 | | | 1,224 | Cash and Cash Equivalents, Beginning of Period | | | 24,932 | | | 7,083 | Cash and Cash Equivalents, End of Period | | $ | 36,389 | | $ | 8,307 |
The accompanying notes are an integral part of these condensed consolidated financial statements
Solaris Midstream Holdings, LLC and Subsidiaries
Condensed Consolidated Statements of Members’ Equity
(unaudited) | | | | | | | (in thousands) | | Nine Months Ended September 30, | | | 2022 | | 2021 | Cash Flow from Operating Activities | | | | | | | Net Loss | | $ | (622) | | $ | (13,367) | Adjustments to reconcile Net Loss to Net Cash provided by Operating Activities: | | | | | | | Deferred Income Tax Benefit | | | (96) | | | — | Depreciation, Amortization and Accretion | | | 49,724 | | | 45,550 | Stock-Based Compensation | | | 9,134 | | | — | Impairment of Long-Lived Assets | | | 15,597 | | | — | Abandoned Well Costs | | | 14,637 | | | 27,402 | Loss on Disposal of Asset, Net | | | 481 | | | 225 | Abandoned Projects | | | 66 | | | 2,035 | Amortization of Debt Issuance Costs, Net | | | 1,563 | | | 1,320 | Loss on Debt Modification | | | — | | | 380 | Other | | | 311 | | | 216 | Changes in Operating Assets and Liabilities: | | | | | | | Accounts Receivable | | | (33,683) | | | (11,231) | Accounts Receivable from Affiliate | | | (5,581) | | | (10,046) | Other Receivables | | | (2,139) | | | 231 | Prepaids, Deposits and Other Current Assets | | | 4,215 | | | 2,516 | Accounts Payable | | | 3,233 | | | (3,284) | Payables to Affiliate | | | 913 | | | (715) | Deferred Revenue | | | 14 | | | (46) | Accrued Liabilities and Other | | | 19,418 | | | 16,000 | Net Cash Provided by Operating Activities | | | 77,185 | | | 57,186 | | | | | | | | Cash Flow from Investing Activities | | | | | | | Property, Plant and Equipment Expenditures | | | (96,991) | | | (62,728) | Cash Paid for Acquisitions | | | (3,353) | | | — | Proceeds from the Sale of Property, Plant and Equipment | | | 7,441 | | | — | Net Cash Used in Investing Activities | | | (92,903) | | | (62,728) | | | | | | | | Cash Flow from Financing Activities | | | | | | | Dividends and Distributions Paid | | | (19,157) | | | — | Proceeds from Senior-Sustainability Linked Notes | | | — | | | 400,000 | Payments for Initial Public Offering Costs | | | — | | | (855) | Payments of Debt Issuance Costs Related to Issuance of Senior- Sustainability Linked Notes | | | — | | | (9,352) | Repayment of Credit Facility | | | — | | | (297,000) | Redemption of Redeemable Preferred Units | | | — | | | (74,357) | Payments of Debt Issuance Costs Related to Credit Facility | | | — | | | (1,442) | Members' Contributions | | | — | | | 5 | Net Cash (Used In) Provided by Financing Activities | | | (19,157) | | | 16,999 | | | | | | | | Net (Decrease) Increase in Cash | | | (34,875) | | | 11,457 | Cash, Beginning of Period | | | 60,055 | | | 24,932 | Cash, End of Period | | $ | 25,180 | | $ | 36,389 |
The accompanying notes are an integral part of these condensed consolidated financial statements Aris Water Solutions, Inc. | | | | | | | | | | | | | | | | | | | | | | | | (in thousands) | | Three, Six and Nine Months Ended September 30, 2021 | | | | | | | | | | | | | | | | | | | | | | | Total | | | Class A | | Class B | | Class C | | Class D | | Members' | | | Amount | | Units | | Amount | | Units | | Amount | | Units | | Amount | | Units | | Equity | Balance at January 1, 2021 | | $ | 318,394 | | 27,797 | | $ | 37,023 | | 3,556 | | $ | — | | 807 | | $ | 278,498 | | 6,651 | | $ | 633,915 | Capital Contributions | | | 5 | | 1 | | | — | | — | | | — | | — | | | — | | — | | | 5 | Issuance of C Units | | | — | | — | | | — | | — | | | — | | 69 | | | — | | — | | | — | Equity Accretion and Dividend related to Redeemable Preferred Units | | | 5 | | — | | | 1 | | — | | | — | | — | | | 1 | | — | | | 7 | Net Income | | | 2,059 | | — | | | 263 | | — | | | — | | — | | | 493 | | — | | | 2,815 | Balance at March 31, 2021 | | | 320,463 | | 27,798 | | | 37,287 | | 3,556 | | | — | | 876 | | | 278,992 | | 6,651 | | | 636,742 | Issuance of C Units | | | — | | — | | | — | | — | | | — | | 3 | | | — | | — | | | — | Equity Accretion and Dividend related to Redeemable Preferred Units | | | 10 | | — | | | 1 | | — | | | — | | — | | | 3 | | — | | | 14 | Net Income | | | 3,336 | | — | | | 427 | | — | | | — | | — | | | 798 | | — | | | 4,561 | Balance at June 30, 2021 | | | 323,809 | | 27,798 | | | 37,715 | | 3,556 | | | — | | 879 | | | 279,793 | | 6,651 | | | 641,317 | Net Loss | | | (15,171) | | — | | | (1,942) | | — | | | — | | — | | | (3,630) | | — | | | (20,743) | Balance at September 30, 2021 | | $ | 308,638 | | 27,798 | | $ | 35,773 | | 3,556 | | $ | — | | 879 | | $ | 276,163 | | 6,651 | | $ | 620,574 |
Condensed Consolidated Statements of Stockholders’/Members’ Equity (unaudited) | | | | | | | | | | | | | | | | | | | | | | | | | | Three, Six and Nine Months Ended September 30, 2020 | | | | | | | | | | | | | | | | | | | | | | | Total | | | Class A | | Class B | | Class C | | Class D | | Members' | | | Amount | | Units | | Amount | | Units | | Amount | | Units | | Amount | | Units | | Equity | Balance at January 1, 2020 | | $ | 232,945 | | 22,104 | | $ | 36,296 | | 3,440 | | $ | — | | 833 | | $ | 276,267 | | 6,386 | | $ | 545,508 | Forfeiture of C Units | | | — | | — | | | — | | — | | | — | | (26) | | | — | | — | | | — | Net Loss | | | (281) | | — | | | (44) | | — | | | — | | — | | | (81) | | — | | | (406) | Balance at March 31, 2020 | | | 232,664 | | 22,104 | | | 36,252 | | 3,440 | | | — | | 807 | | | 276,186 | | 6,386 | | | 545,102 | Forfeiture of C Units | | | — | | — | | | — | | — | | | — | | (1) | | | — | | — | | | — | Class A Units Issued for Concho Acquisition | | | 77,602 | | 4,561 | | | — | | — | | | — | | — | | | — | | — | | | 77,602 | Equity Accretion and Dividend related to Redeemable Preferred Units | | | (305) | | — | | | (39) | | — | | | — | | — | | | (73) | | — | | | (417) | Net Loss | | | (680) | | — | | | (88) | | — | | | — | | — | | | (163) | | — | | | (931) | Balance at June 30, 2020 | | | 309,281 | | 26,665 | | | 36,125 | | 3,440 | | | — | | 806 | | | 275,950 | | 6,386 | | | 621,356 | Accretion and Dividend Related to Redeemable Preferred Units | | | (1,104) | | — | | | (142) | | — | | | — | | — | | | (265) | | — | | | (1,511) | Issuance of C Units | | | — | | — | | | — | | — | | | — | | 16 | | | — | | — | | | — | Forfeiture of C Units | | | — | | — | | | — | | — | | | — | | (3) | | | — | | — | | | — | Net Income | | | 776 | | — | | | 100 | | — | | | — | | — | | | 186 | | — | | | 1,062 | Balance at September 30, 2020 | | $ | 308,953 | | 26,665 | | $ | 36,083 | | 3,440 | | $ | — | | 819 | | $ | 275,871 | | 6,386 | | $ | 620,907 |
The accompanying notes are an integral part of these condensed consolidated financial statements
Solaris Midstream Holdings, LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(unaudited)
1.Organization and Background of Business
Solaris Midstream Holdings, LLC, formed on November 19, 2015 (together with its subsidiaries, the “Company”, “we”, “our, or “us”), is an independent, environmentally-focused company headquartered in Houston, Texas, that provides sustainability-enhancing services to oil and natural gas operators. We strive to build long-term value through the development, construction and operation of integrated produced water handling and recycling infrastructure that provides high-capacity, comprehensive produced water management, recycling and supply solutions for many of the largest operators in the Permian Basin.
2.Significant Accounting Policies
Basis of Presentation
All dollar amounts, except per unit amounts, in the financial statements and tables in the notes are stated in thousands of dollars unless otherwise indicated.
On January 15, 2021, ConocoPhillips acquired Concho Resources, Inc. (“Concho”). We refer to Concho as ConocoPhillips, their successor, throughout these condensed consolidated financial statements (“financial statements”).
Interim Financial Statements
Our accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These financial statements have not been audited by our independent registered public accounting firm, except that the balance sheet as of December 31, 2020 is derived from audited financial statements.
These financial statements include the adjustments and accruals, all of which are of a normal recurring nature, necessary for a fair presentation of the results for the interim periods. These interim results are not necessarily indicative of results for a full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). These unaudited condensed financial statements should be read in conjunction with our annual financial statements for the year ended December 31, 2020, included in our Prospectus.
Consolidation
The financial statements include the accounts of the Company and its wholly owned subsidiaries, Aris Water Solutions Inc., Solaris Water Midstream, LLC, Solaris Midstream DB-TX, LLC, Solaris Midstream MB, LLC, Solaris Midstream DB-NM, LLC, 829 Martin County Pipeline, LLC and Clean H2O Technologies, LLC (collectively, the “subsidiaries”). All material intercompany transactions and balances have been eliminated upon consolidation.
Use of Estimates
Management has made certain estimates and assumptions that affect reported amounts in these financial statements and disclosures of contingencies. These critical estimates include, among others, determining the fair value of assets and liabilities acquired in acquisitions, the collectability of accounts receivable, useful lives of property, plant and equipment and amortizable intangible assets, the fair value of asset retirement obligations and accruals for environmental matters. Management evaluates estimates and assumptions on an
ongoing basis using historical experience and other factors, including current economic and industry conditions. Actual results could differ from management’s estimates as additional information or actual results become available in the future, and those differences could be material.
Reclassification of Prior Year Presentation
Certain 2020 amounts have been reclassified for consistency with the 2021 presentation. These reclassifications had no effect on the reported results of operations.
Cash and Cash Equivalents
Management considers all highly liquid investments with a maturity of three months or less, when purchased, to be cash equivalents. We place our cash and cash equivalents with financial institutions that are insured by the Federal Deposit Insurance Corporation, however we maintain deposits in banks which exceed the amount of deposit insurance available. Management routinely assesses the financial condition of the institutions and believes that any possible credit loss would be minimal.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable consists of trade receivables recorded at the invoice amount, plus accrued revenue that is earned but not yet billed, less an estimated allowance for doubtful accounts. Accounts receivable are generally due within 60 days or less. Management determines the allowance for doubtful accounts by considering several factors, including the length of time trade accounts receivable are past due, previous loss history, the customer’s current ability to pay its obligation, and macro level conditions of the U.S. economy and the energy industry. Accounts receivable are written off when they are deemed uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. As of September 30, 2021 and December 31, 2020, we had $0.2 million and $0.4 million of allowance for doubtful accounts, respectively.
Revenue Recognition
We generate revenue by providing services related to produced water handling and water solutions. The services related to produced water are fee-based arrangements and are based on the volume of water that flows through our systems and facilities while the sales of recycled produced water and groundwater are priced based on negotiated rates with the customer.
We have customer contracts that contain minimum transportation and/or disposal volume delivery requirements and we are entitled to deficiency payments if such minimum contractual volumes are not delivered by the customer. These deficiency amounts are based on fixed, daily minimum volumes (measured over monthly, quarterly or annual periods depending on the contract) at a fixed rate per barrel.
In determining the appropriate amount of revenue to be recognized as we fulfill our obligations under contracts, the following steps must be performed at contract inception: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) we satisfy each performance obligation.
For all our produced water transfer and disposal contracts, revenue is recognized over time utilizing the output method based on the volume of wastewater accepted from the customer. We have determined that the performance obligation is satisfied over time as the customer simultaneously receives and consumes the benefits provided by performance of services, typically as customers’ wastewater is accepted. We typically charge customers a disposal and transportation fee on a per barrel basis according to the applicable contract.
For some contracts, we are entitled to shortfall payments if a customer does not deliver a contractually minimum volume of water for handling over a certain period. In these cases, we recognize volumes and the revenues for the difference between the physical volumes handled and the contractual minimum. Moreover, some contracts also have a mechanism that allows for shortfalls to be made up over a limited period of time. As of September 30, 2021 and December 31, 2020, the Company had long-term deferred revenue liabilities of $1.3 million and $1.4 million, respectively, related to these contracts.
For contracts that involve sales of recycled produced water and groundwater, revenue is recognized at a point in time, based on when control of the product is transferred to the customer.
Property, Plant and Equipment
Property, plant and equipment is stated at cost, or at fair value for assets acquired in a business combination, less accumulated depreciation. Depreciation is provided on the straight-line method over the estimated useful service lives of the assets.
All costs necessary to place an asset into operation are capitalized. Maintenance and repairs are expensed when incurred. Upgrades and enhancements that substantially extend the useful lives of the assets are capitalized. When property is abandoned, retired or otherwise disposed of, the cost and accumulated depreciation are removed from appropriate accounts and any gain or loss is included in earnings. Costs incurred for construction of facilities and related equipment and pipelines are included in construction in progress. Direct project costs on potential future projects are capitalized and included in construction in progress. These costs generally relate to acquiring the appropriate permits, rights-of-way and other related expenditures necessary prior to construction. No depreciation is recorded for these assets as they have not been placed in operations. See Note 5—Property, Plant and Equipment for discussion regarding abandoned well costs incurred during the third quarter of 2021.
Capitalization of Interest
We capitalize interest costs associated with significant projects undergoing construction that is necessary to bring them to their intended use. Interest is capitalized using an interest rate equivalent to the weighted average interest rate we pay on long-term debt, including our Senior Sustainability Linked Notes and Credit Facility. Capitalized interest is included in the cost of property, plant and equipment and depreciated with other costs on a straight-line basis.
Asset Retirement Obligations
The fair value of a liability for an asset retirement obligation is recognized in the period in which it is incurred. These obligations are those that the Company has a legal obligation for settlement. The fair value of the liability is added to the carrying amount of the associated asset. The significant unobservable inputs to this fair value measurement include estimates of plugging, abandonment and remediation costs, inflation rates, credit-adjusted risk-free rate, and facilities lives. This additional carrying amount is then depreciated over the life of the asset. The liability increases due to the passage of time based on the time value of money until the obligation is settled. Our asset retirement obligations relate primarily to the dismantlement, removal, site reclamation and similar activities of our pipelines, water handling facilities and associated operations.
Definite-Lived Intangible Assets
Our intangible assets are related to customer contracts that were acquired in connection with acquisitions occurring in 2020, 2019 and 2017. Amortization of these assets is primarily based on the percentage of discounted cash flows expected to occur over the lives of the contract.
Goodwill
Goodwill represents the excess of the purchase price of a business over the estimated fair value of the identifiable assets acquired and liabilities assumed. Goodwill is not amortized and is tested for impairment on an annual basis, or when events or changes in circumstances indicate the fair value may have been reduced below its carrying value. Before employing detailed impairment testing methodologies, management may first evaluate the likelihood of impairment by considering qualitative indicators relevant to the business, such as macroeconomic, industry, market or any other factors that have a significant bearing on fair value. If management, after considering qualitative impairment indicators, determines that it is more likely than not that goodwill is impaired, detailed testing methodologies are then applied. Otherwise, management concludes that 0 impairment has occurred. Management may also choose to bypass a qualitative approach and opt instead to employ detailed testing methodologies.
If management determines through the qualitative approach that detailed testing methodologies are required, or if the qualitative approach is bypassed, the Company compares the fair value of a reporting unit with its carrying amount under Step 1 of the impairment test. If the carrying amount exceeds the fair value of a reporting unit, the Company performs Step 2 and compares the fair value of reporting unit goodwill with the carrying amount of that goodwill and recognizes an impairment charge for the amount by which the carrying amount exceeds the implied fair value; however, the loss recognized may not exceed the total amount of goodwill allocated to that reporting unit. We have not recognized any goodwill impairment associated with any of our acquisitions.
Impairment of Long-Lived Assets
Long-lived assets, such as property, plant, equipment and definite-lived intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Individual assets are first grouped based on the lowest level for which identifiable cash flows are largely independent of the cash flows from other assets. Management then compares estimated future undiscounted cash flows expected to result from the use and eventual disposition of the asset group to its carrying amount. If the carrying amount is not recoverable, we would recognize an impairment loss equal to the amount by which the carrying amount exceeds fair value. Management estimates fair value based on projected future discounted cash flows. Fair value calculations for long-lived assets and intangible assets contain uncertainties because they require us to apply judgment and estimates concerning future cash flows, strategic plans, useful lives and market performance. The Company also applies judgment in the selection of a discount rate that reflects the risk inherent in the current business model.
Fair Value Measurements
Our financial assets and liabilities are to be measured using inputs from the three levels of the fair value hierarchy, of which the first two are considered observable and the last unobservable, which are as follows:
Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that management has the ability to access at the measurement date;
Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active or other inputs corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level 3—Unobservable inputs that reflect management’s assumptions that market participants would use in pricing assets or liabilities based on the best information available.
Fair Value on a Non-Recurring Basis
Nonfinancial assets and liabilities measured at fair value on a non-recurring basis include certain nonfinancial assets acquired and liabilities assumed in a business combination, units granted in acquisitions, and the initial recognition of asset retirement obligations, for which fair value is used. These assets and liabilities are recorded at fair value when acquired/incurred but not re-measured at fair value in subsequent periods.
Asset retirement obligation estimates are derived from historical data as well as management’s expectation of future cost environments and other unobservable inputs. As there is no corroborating market activity to support the assumptions used, management has designated these measurements as Level 3.
Additional Fair Value Disclosures
The fair value of fixed-rate debt is estimated based on the published market prices for the same or similar issues. Management has designated these measurements as Level 2 for the Senior Sustainability-Linked Notes and Level 3 for the Credit Facility.
Fair value information regarding our debt is as follows (in thousands):
| | | | | | | | | | | | | September 30, 2021 | | December 31, 2020 | | | Carrying | | Fair | | Carrying | | Fair | | | Amount | | Value | | Amount | | Value | Senior Sustainability-Linked Notes (1) | | $ | 400,000 | $ | 429,500 | | $ | — | $ | — | Credit Facility | | $ | — | $ | — | | $ | 297,000 | $ | 297,000 | (1) See Note 8—Long-Term Debt | | | | | | | | | | |
The carrying value of the Company’s financial instruments, consisting of cash and cash equivalents, accounts receivable, and accounts payable, approximates their fair value due to the short maturity of such instruments. Financial instruments also consist of a credit facility, for which fair value approximates carrying value as the debt bears interest at a variable rate which is reflective of current rates otherwise available to the Company.
Transaction Costs
Transaction costs are comprised of acquisition related expenses and/or expenses incurred as part of our capital restructuring activities and are included in Other Operating Expenses.
Income Taxes
We are a Delaware limited liability company treated as a partnership for tax purposes, therefore, 0 federal or state income tax provision is included in the accompanying financial statements, other than Texas franchise tax as discussed below. Except for Texas franchise tax, any taxable income of the Company is reported in the respective tax returns of the Company members.
Management evaluates uncertain tax positions for recognition and measurement in the financial statements. To recognize a tax position, the Company determines whether it is more likely than not that the tax position will be sustained upon examination, including resolution of any related appeals or litigation, based on the technical merits of the position. A tax position that meets the more likely than not threshold is measured to determine the amount of benefit to be recognized in the financial statements. The Company has 0 significant uncertain tax positions.
The Company files income tax returns in the U.S. federal jurisdiction and various states. There are currently no federal or state income tax examinations underway for these jurisdictions. The Company’s federal and state returns remain open to examination for tax years 2017 through 2020.
The Company is subject to a franchise tax imposed by the State of Texas. The franchise tax rate is 1%, calculated on taxable margin. Taxable margin is defined as total revenue less deductions for cost of goods sold or compensation and benefits in which the total calculated taxable margin cannot exceed 70% of total revenue.
Acquisitions
To determine if a transaction should be accounted for as a business combination or an acquisition of assets, the Company first calculates the relative fair values of the assets acquired. If substantially all of the relative fair value is concentrated in a single asset or group of similar assets, or if not but the transaction does not include a significant process (does not meet the definition of a business), the transaction is recorded as an acquisition of assets. For acquisitions of assets, the purchase price is allocated based on the relative fair values and no goodwill is recorded. All other transactions are recorded as business combinations. The Company records the assets acquired and liabilities assumed in a business combination at their acquisition date fair values. Transactions in which the Company acquires control of a business are accounted for under the acquisition method. The identifiable assets, liabilities and any non-controlling interests are recorded at the estimated fair value as of the acquisition date. The purchase price in excess of the fair value of assets and liabilities acquired is recorded as goodwill.
Environmental Matters
The Company is subject to various federal, state and local laws and regulations relating to the protection of the environment. Management has established procedures for the ongoing evaluation of the Company’s operations to identify potential environmental exposures and to comply with regulatory policies and procedures. Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations and do not contribute to current or future revenue generation are expensed as incurred. Liabilities are recorded when environmental costs are probable, and the costs can be reasonably estimated. The Company maintains insurance which may cover in whole or in part certain environmental expenditures. See further discussion at Note 11 – Commitments and Contingencies.
Segment Information
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions on how to allocate resources and assess performance. Our chief operating decision maker is the Chief Executive Officer. We view our operations and manage the business as 1 operating segment. All assets of the Company reside in the United States.
Recent Accounting Pronouncements
The Company is an “emerging growth company”, as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that it (i) is no longer an emerging growth company or (ii) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. As a result, the financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.
Leases In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2016-02 (ASU 2016-02): Leases. The standard requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by leases with terms of more than 12
months. ASU 2016-02 also requires disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases.
In the normal course of business, we enter into operating lease agreements to support our operations and lease assets such as ponds, storage yards, office space and other assets. We will adopt the new standard with an effective date of January 1, 2022.
Although we continue to assess the impact of the standard on our financial statements, we believe adoption and implementation will result in an increase in assets and liabilities as well as additional disclosures. We do not expect a material impact on our statement of operations. We have developed and are executing a project plan, which includes contract review and assessment, as well as evaluation of our systems, processes and internal controls. In addition, we plan to implement new lease accounting software.
Goodwill In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. This pronouncement removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The pronouncement was effective for public business entities for annual reporting periods beginning after December 15, 2019. The ASU is effective for private companies for fiscal years beginning after December 15, 2021. We will adopt the standard effective January 1, 2022 and we are currently evaluating the impact this new standard may have on our financial statements.
Financial Instruments – Credit Losses On June 16, 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses, which requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. The ASU was effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The ASU is effective for private companies for fiscal years beginning after December 15, 2022. We will adopt this standard effective January 1, 2022 and we are currently evaluating the impact this new standard may have on our financial statements.
COVID 19 Pandemic
COVID 19 contributed to a significant downturn in oil and gas commodity prices in 2020 and continues to cause significant volatility in 2021. Although we cannot predict future commodity prices, we are not currently experiencing significant disruptions with our workforce or supply chain activities. Moreover, we continue to maintain our focus on safe and reliable performance of our systems, while ensuring the safety of our employees and other stakeholders. However, we are unable to predict the future impact of COVID 19, and it is possible that such impact could be negative.
3.Additional Financial Statement Information
Balance Sheet
Other Balance Sheet information is as follows:
| | | | | | | (in thousands) | | September 30, | | December 31, | | | 2021 | | 2020 | Other Receivables | | | | | | | Insurance and Third Party Receivables for Remediation Expenses | | $ | 3,624 | | $ | 2,543 | Capital Call Receivable | | | — | | | 1,160 | Other | | | 25 | | | 19 | Total Other Receivables | | $ | 3,649 | | $ | 3,722 | | | | | | | | Prepaids, Deposits and Other Current Assets | | | | | | | Prepaid Insurance and Other | | $ | 1,007 | | $ | 4,067 | Prepaid Groundwater | | | 294 | | | 176 | Deposits and Other | | | 48 | | | 72 | Total Prepaids, Deposits and Other Current Assets | | $ | 1,349 | | $ | 4,315 | | | | | | | | Accrued and Other Current Liabilities | | | | | | | Accrued Operating Expense | | $ | 17,314 | | $ | 14,367 | Accrued Capital Costs | | | 9,177 | | | 6,292 | Accrued Interest | | | 15,443 | | | 2,661 | Other | | | 4,840 | | | 4,518 | Total Accrued and Other Current Liabilities | | $ | 46,774 | | $ | 27,838 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Three and Nine Months Ended September 30, 2022 | (in thousands, except for share and per share amounts) | | Class A | | Class B | | Additional | | | | | | | | Non- | | Total | | | Common Stock | | Common Stock | | Paid-in | | Treasury Stock | Accumulated | controlling | Stockholders' | | Amount | | Shares | | Amount | Shares | | Capital | | Amount | Shares | | Deficit | | Interest | | Equity | Balance at January 1, 2022 | | $ | 218 | | 21,858,022 | | $ | 317 | | 31,716,104 | | $ | 212,926 | | $ | (135) | | 10,191 | | $ | (457) | | $ | 389,670 | | $ | 602,539 | Redemption of Class B Shares for Class A Shares | | | 1 | | 148,087 | | | (1) | | (148,087) | | | 1,786 | | | - | | - | | | - | | | (1,786) | | | - | Stock-based Compensation Expense | | | - | | 515 | | | - | | - | | | 958 | | | - | | - | | | - | | | 1,379 | | | 2,337 | Increase in TRA Liability Related to Share Redemption | | | - | | - | | | - | | - | | | (1,531) | | | - | | - | | | - | | | - | | | (1,531) | Deferred Tax Assets Acquired | | | - | | - | | | - | | - | | | 1,666 | | | - | | - | | | - | | | - | | | 1,666 | Dividends and Distributions ($0.09 per share) | | | - | | - | | | - | | - | | | - | | | - | | - | | | (2,062) | | | (2,947) | | | (5,009) | Net Loss | | | - | | - | | | - | | - | | | - | | | - | | - | | | (2,222) | | | (4,395) | | | (6,617) | Balance at March 31, 2022 | | | 219 | | 22,006,624 | | | 316 | | 31,568,017 | | | 215,805 | | | (135) | | 10,191 | | | (4,741) | | | 381,921 | | | 593,385 | Redemption of Class B Shares for Class A Shares | | | 1 | | 107,914 | | | (1) | | (107,914) | | | 1,315 | | | - | | - | | | - | | | (1,315) | | | - | Stock-based Compensation Expense | | | - | | - | | | - | | - | | | 1,318 | | | - | | - | | | - | | | 1,884 | | | 3,202 | Increase in TRA Liability Related to Share Redemption | | | - | | - | | | - | | - | | | (1,021) | | | - | | - | | | - | | | - | | | (1,021) | Deferred Tax Assets Acquired | | | - | | - | | | - | | - | | | 422 | | | - | | - | | | - | | | - | | | 422 | Dividends and Distributions ($0.09 per share) | | | - | | - | | | - | | - | | | - | | | - | | - | | | (2,068) | | | (2,966) | | | (5,034) | Net Income | | | - | | - | | | - | | - | | | - | | | - | | - | | | 1,394 | | | 2,645 | | | 4,039 | Balance at June 30, 2022 | | $ | 220 | | 22,114,538 | | $ | 315 | | 31,460,103 | | $ | 217,839 | | $ | (135) | | 10,191 | | $ | (5,415) | | $ | 382,169 | | $ | 594,993 | Class A Shares issued for Acquisition | | | 34 | | 3,365,907 | | | - | | - | | | 54,588 | | | - | | - | | | - | | | 16,601 | | | 71,223 | Redemption of Class B Shares for Class A Shares | | | 7 | | 648,781 | | | (7) | | (648,781) | | | 8,275 | | | - | | - | | | - | | | (8,275) | | | - | Stock-based Compensation Expense | | | - | | 37,174 | | | - | | - | | | 1,848 | | | - | | - | | | - | | | 1,747 | | | 3,595 | Increase in TRA Liability Related to Share Redemption | | | - | | - | | | - | | - | | | (3,446) | | | - | | - | | | - | | | - | | | (3,446) | Deferred Tax Assets Acquired | | | - | | - | | | - | | - | | | 3,813 | | | - | | - | | | - | | | - | | | 3,813 | Dividends and Distributions ($0.09 per share) | | | - | | - | | | - | | - | | | - | | | - | | - | | | (2,378) | | | (2,934) | | | (5,312) | Net Income | | | - | | - | | | - | | - | | | - | | | - | | - | | | 699 | | | 1,257 | | | 1,956 | Balance at September 30, 2022 | | $ | 261 | | 26,166,400 | | $ | 308 | | 30,811,322 | | $ | 282,917 | | $ | (135) | | 10,191 | | $ | (7,094) | | $ | 390,565 | | $ | 666,822 |
Statement
| | | | | | Three and Nine Months
Ended
September 30, 2021 | | | Members' | | | Equity | Balance at January 1, 2021 | | $ | 633,915 | Capital Contributions | | | 5 | Accretion and Dividend—Redeemable Preferred Units | | | 7 | Net Income | | | 2,815 | Balance at March 31, 2021 | | | 636,742 | Accretion and Dividend—Redeemable Preferred Units | | | 14 | Net Income | | | 4,561 | Balance at June 30, 2021 | | | 641,317 | Net Loss | | | (20,743) | Balance at September 30, 2021 | | $ | 620,574 |
The accompanying notes are an integral part of Operationsthese condensed consolidated financial statements Aris Water Solutions, Inc. Notes to Unaudited Condensed Consolidated Financial Statements (unaudited) 1.Organization and Background of Business Aris Water Solutions, Inc. (“Aris Inc.”, the “Company”, “we”, “our, or “us”) is an independent, environmentally-focused company headquartered in Houston, Texas, that, through its controlling interest in Solaris Midstream Holdings, LLC, a Delaware limited liability company (“Solaris LLC”), provides sustainability-enhancing services to oil and natural gas operators. We strive to build long-term value through the development, construction and operation of integrated produced water handling and recycling infrastructure that provides high-capacity, comprehensive produced water management, recycling and supply solutions for operators in the Permian Basin. We were incorporated on May 26, 2021 as a Delaware corporation and were formed to serve as the issuer in an initial public offering of equity (the “IPO” or “Offering”) that closed on October 26, 2021. Concurrent with the completion of the IPO, we became the new parent holding company of Solaris LLC. As the sole managing member of Solaris LLC, we operate and control the business and affairs of Solaris LLC, and through Solaris LLC and its subsidiaries, conduct our business. We consolidate the financial results of Solaris LLC and report noncontrolling interest related to the portion of Solaris LLC units not owned by us. In these condensed consolidated financial statements, periods prior to IPO closing reflect the financial statements of Solaris LLC and its subsidiaries. Periods subsequent to IPO closing on October 26, 2021 reflect the financial statements of the consolidated Company including Aris Inc., Solaris LLC and Solaris LLC’s subsidiaries. 2.Basis of Presentation and Significant Accounting Policies Basis of Presentation All dollar amounts, except per share amounts, in the condensed consolidated financial statements and tables in the notes are stated in thousands of dollars unless otherwise indicated. Interim Financial Statements These condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These financial statements have not been audited by our independent registered public accounting firm. These condensed consolidated financial statements include the adjustments and accruals, all of which are of a normal recurring nature, necessary for a fair presentation of the results for the interim periods. These interim results are not necessarily indicative of results for a full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2021. Consolidation We have determined that the members with equity at risk in Solaris LLC lack the authority, through voting rights or similar rights, to direct the activities that most significantly impact Solaris LLC’s economic performance; therefore, Solaris LLC is considered a variable interest entity (“VIE”). As the managing member of Solaris LLC, we operate and control the business and affairs of Solaris LLC as well as have the obligation to absorb losses or the right to receive benefits that could be potentially significant to us. Therefore, we are considered the primary beneficiary and consolidate Solaris LLC. Noncontrolling Interests As of September 30, 2022, we own approximately 46% of Solaris LLC. Our consolidated financial statements include noncontrolling interests representing the percentage of Solaris LLC units not held by us. Use of Estimates Management has made certain estimates and assumptions that affect reported amounts in these condensed consolidated financial statements and disclosures of contingencies. These critical estimates include, among others, determining the fair values of assets acquired, liabilities assumed, and/or contingent consideration paid in acquisitions or nonmonetary exchanges or disposed through sale, determining the fair value and related impairment of assets held for sale, determining the fair value of performance-based restricted stock units (“PSUs”), useful lives of property, plant and equipment and amortizable intangible assets, the fair value of asset retirement obligations (“ARO”), accruals for environmental matters, the income tax provision, valuation allowances for deferred tax assets, and the liability associated with our Tax Receivable Agreement (the “TRA liability”). Management evaluates estimates and assumptions on an ongoing basis using historical experience and other factors, including current economic and industry conditions. Actual results could differ from management’s estimates as additional information or actual results become available in the future, and those differences could be material. Significant Accounting Policies See Note 2. Significant Accounting Policies to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2021 for the discussion of our significant accounting policies. Other Statementthan the updates noted below in Recently Adopted Accounting Pronouncements, there were no significant updates or revisions to our accounting policies during the nine months ended September 30, 2022. Fair Value Information The fair value of Operationsour 7.625% Senior Sustainability-Linked Notes (the “Notes”), which are fixed-rate debt, is estimated based on the published market prices for the same or similar issues. Management has designated this measurement as a Level 2 fair value measurement. Fair value information regarding our debt is as follows: | | | | | | | | | | | | | | | Three Months Ended | | Nine Months Ended | (in thousands) | | September 30, | | September 30, | | | 2021 | | 2020 | | 2021 | | 2020 | Depreciation, Amortization and Accretion Expense | | | | | | | | | | | | | Depreciation - Property, Plant and Equipment | | $ | 7,152 | | $ | 6,231 | | $ | 20,888 | | $ | 16,393 | Amortization - Intangible Assets | | | 8,151 | | | 5,455 | | | 24,454 | | | 14,957 | Accretion of Asset Retirement Obligations | | | 75 | | | 65 | | | 208 | | | 179 | Total Depreciation, Amortization and Accretion Expense | | $ | 15,378 | | $ | 11,751 | | $ | 45,550 | | $ | 31,529 | | | | | | | | | | | | | | Other Operating Expenses | | | | | | | | | | | | | Loss on Disposal of Asset, Net | | $ | 8 | | $ | 15 | | $ | 225 | | $ | 82 | Transaction Costs | | | 253 | | | 172 | | | 330 | | | 3,271 | Abandoned Projects (1) | | | 679 | | | 368 | | | 2,035 | | | 1,501 | Total Other Operating Expense | | $ | 940 | | $ | 555 | | $ | 2,590 | | $ | 4,854 | | | | | | | | | | | | | | Interest Expense | | | | | | | | | | | | | Interest on Debt Instruments | | $ | 8,034 | | $ | 2,686 | | $ | 18,402 | | $ | 7,877 | Less: Capitalized Interest | | | (765) | | | (795) | | | (1,981) | | | (3,083) | Interest on Debt Less Capitalized Interest | | | 7,269 | | | 1,891 | | | 16,421 | | | 4,794 | Amortization of Financing Costs | | | 611 | | | 208 | | | 1,434 | | | 570 | Interest Expense, Net | | $ | 7,880 | | $ | 2,099 | | $ | 17,855 | | $ | 5,364 |
| | | | | | | | | | | | | (in thousands) | | September 30, 2022 | | December 31, 2021 | | | Carrying | | Fair | | Carrying | | Fair | | | Amount | | Value | | Amount | | Value | Senior Sustainability-Linked Notes | | $ | 400,000 | | $ | 377,076 | | $ | 400,000 | | $ | 424,000 |
(1) Abandoned Projects expense is primarily related to expirations of legacy permits and rights-of-way for projects that were not ultimately constructed.
Significant Customers
Customers that comprised more than 10%The carrying values of our total revenuesfinancial instruments, consisting of cash, accounts receivable, and accounts payable, approximate their fair values due to the short maturity of such instruments.
Intangible Assets Intangible assets are as follows:
| | | | | | | | | | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | | 2021 | | 2020 | | 2021 | | 2020 | | ConocoPhillips | | 46 | % | 42 | % | 49 | % | 36 | % | Oxy USA | | ** | | 17 | % | 10 | % | 16 | % | XTO Energy Inc. | | ** | | 10 | % | ** | | 11 | % |
** Revenues were less than 10%
Asnet of accumulated amortization of $87.7 million and $60.1 million at September 30, 2022 and December 31, 2021, ConocoPhillips accounted for 42% and Oxy USA Inc. accounted for 11% of accounts receivable.respectively.
Supplemental Non-Cash DisclosureRelated Parties
Significant non-cash activityWe and ConocoPhillips, one of our principal owners, are parties to a long-term water gathering and handling agreement, pursuant to which ConocoPhillips dedicates all the produced water generated from its current and future acreage in a defined area of mutual interest in New Mexico and Texas. As of September 30, 2022 and December 31, 2021, we had accounts receivable from ConocoPhillips of $25.8 million and $20.2 million, respectively, that were recorded in accounts receivable from affiliate. As of September 30, 2022 and December 31, 2021, we had payables to ConocoPhillips of $2.4 million and $1.5 million, respectively, that were recorded in payables to affiliate. Revenues and expenses related to ConocoPhillips were as follows:
| | | | | | | | | | | | | (in thousands) | | Three Months Ended | | Nine Months Ended | | | September 30, | | September 30, | | | 2022 | | 2021 | | 2022 | | 2021 | Revenues from ConocoPhillips | | $ | 30,464 | | $ | 27,194 | | $ | 80,724 | | $ | 79,080 | Operating Expenses Reimbursed to ConocoPhillips | | | 403 | | | 191 | | | 1,163 | | | 919 |
Operating expenses reimbursed to ConocoPhillips are related to ConocoPhillips’ costs for operating certain assets on our behalf between closing and the transfer of the acquired assets and other ongoing operating expenses. Recently Adopted Accounting Pronouncements Leases. Effective January 1, 2022, we adopted Accounting Standards Update (“ASU”) No. 2016-02: Leases and its subsequent amendments (collectively, “ASC Topic 842”). ASC Topic 842 supersedes prior accounting guidance for leases and requires, among other things, lessees to recognize substantially all right-of-use (“ROU”) assets and lease liabilities on the balance sheet. Certain practical expedients are allowed for leases with terms of 12 months or less. ASC Topic 842 also requires disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. Our adoption and implementation of ASC Topic 842 as of January 1, 2022 resulted in the recognition of right-of-use assets of $7.9 million and lease liabilities of $7.3 million. We made policy elections not to capitalize short-term leases for all asset classes and not to separate non-lease components from lease components for all asset classes, except for real estate leases. We also did not elect the package of practical expedients that allowed for certain considerations under the original “Leases (Topic 840)” accounting standard to be carried forward upon adoption of ASU 2016-02. ASU No. 2018-11, “Targeted Improvements,” provides a transition election not to restate comparative periods for the nine months ended September 30, 2021effects of applying the new lease standard. This transition election permits entities to change the date of initial application to the beginning of the year of adoption and 2020to recognize the effects of applying the new standard as a cumulative-effect adjustment to the opening balance of retained earnings. We elected this transition approach; however, the cumulative impact of adoption in the opening balance of retained earnings as of January 1, 2022 was zero. Our accounting policy for leases is as follows: | | | | | | | (in thousands) | | Nine Months Ended September 30, | | | 2021 | | 2020 | Cash Paid for Interest (1) | | $ | 5,636 | | $ | 5,894 | Class A Units Issued for Concho Acquisition | | | — | | | 77,602 | Redeemable Preferred Units Issued in Concho Acquisition | | | — | | | 71,974 | Additions to Asset Retirement Obligations | | | 533 | | | 738 | Accrued Additions to Property, Plant and Equipment | | | 13,352 | | | 12,422 | | | | | | | | (1) We paid interest of $15.3 million on October 1, 2021 related to our Senior Sustainability-Linked Notes. |
We determine whether an arrangement contains a lease based on the conveyed rights and obligations at the inception date. If an agreement contains an operating or financing lease, at the commencement date, we record a right-of-use asset and a corresponding lease liability based on the present value of the minimum lease payments. As most of our leases do not provide an implicit borrowing rate, to determine the present value of lease payments, we use our hypothetical secured borrowing rate based on information available at lease commencement. Further, we make a number of estimates and judgments regarding the lease term and lease payments. Lease Term ─ Leases with an initial term of 12 months or less are not recorded on the balance sheet and we recognize lease expense for these leases on a straight-line basis over the lease term. Most leases include one or more options to renew, with renewal terms that can extend the lease term from one month to one year or more. Additionally, some of our leases include an option for early termination. We include renewal periods and exclude termination periods from our lease term if, at commencement, it is reasonably likely that we will exercise the option. Lease Payments ─ Certain of our lease agreements include rental payments that are adjusted periodically for inflation or passage of time. These step payments are included within our present value calculation as they are known adjustments at commencement. Some of our lease agreements include variable payments that are excluded from our present value calculation. Additionally, we have lease agreements that include lease and non-lease components, such as equipment maintenance, which are generally accounted for as a single lease component. For these leases, lease payments include all fixed payments stated within the contract. For real estate lease agreements, we account for lease and non-lease components separately. Our lease agreements do not contain any material residual value guarantees that would impact our lease payments. See Note 7. Leases. Financial Instruments – Credit Losses. Effective January 1, 2022, we adopted ASU 2016-13, Financial Instruments – Credit Losses and its subsequent amendments (collectively, “ASC Topic 326”). ASC Topic 326 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The adoption of ASC Topic 326 did not have a material impact on our financial statements. 3.Additional Financial Statement Information Balance Sheet Other balance sheet information is as follows: | | | | | | | (in thousands) | | September 30, | | December 31, | | | 2022 | | 2021 | Other Receivables | | | | | | | Insurance and Third Party Receivables for Remediation Expenses | | $ | 4,578 | | $ | 3,099 | Reimbursable Projects and Other | | | 1,709 | | | 1,027 | Total Other Receivables | | $ | 6,287 | | $ | 4,126 | | | | | | | | Prepaids and Deposits | | | | | | | Prepaid Insurance and Other | | $ | 1,787 | | $ | 5,953 | Deposits | | | 41 | | | 90 | Total Prepaids and Deposits | | $ | 1,828 | | $ | 6,043 | | | | | | | | Accrued and Other Current Liabilities | | | | | | | Accrued Operating Expense | | $ | 27,085 | | $ | 17,774 | Accrued Capital Costs | | | 30,680 | | | 4,603 | Accrued Interest | | | 15,250 | | | 7,625 | Accrued Compensation | | | 4,878 | | | 4,551 | Dividends and Distributions Payable | | | 44 | | | 3,847 | Lease Liabilities | | | 1,025 | | | — | Other | | | 6,127 | | | 2,064 | Total Accrued and Other Current Liabilities | | $ | 85,089 | | $ | 40,464 |
Statement of Operations Other statement of operations information is as follows: | | | | | | | | | | | | | (in thousands) | | Three Months Ended | | Nine Months Ended | | | September 30, | | September 30, | | | 2022 | | 2021 | | 2022 | | 2021 | Depreciation, Amortization and Accretion Expense | | | | | | | | | | | | | Depreciation - Property, Plant and Equipment | | $ | 7,658 | | $ | 7,152 | | $ | 21,755 | | $ | 20,888 | Amortization - Intangible Assets | | | 9,183 | | | 8,151 | | | 27,551 | | | 24,454 | Accretion of Asset Retirement Obligations | | | 101 | | | 75 | | | 418 | | | 208 | Total Depreciation, Amortization and Accretion Expense | | $ | 16,942 | | $ | 15,378 | | $ | 49,724 | | $ | 45,550 | | | | | | | | | | | | | | Loss on Asset Disposal and Other | | | | | | | | | | | | | (Gain) Loss on Asset Disposal, Net | | $ | (97) | | $ | 8 | | $ | 481 | | $ | 225 | Transaction Costs | | | 336 | | | 253 | | | 1,269 | | | 330 | Abandoned Projects (1) | | | — | | | 679 | | | 66 | | | 2,035 | Total Loss on Asset Disposal and Other | | $ | 239 | | $ | 940 | | $ | 1,816 | | $ | 2,590 | | | | | | | | | | | | | | Interest Expense | | | | | | | | | | | | | Interest on Debt Instruments | | $ | 7,759 | | $ | 8,034 | | $ | 23,365 | | $ | 18,402 | Amortization of Debt Issuance Costs | | | 610 | | | 611 | | | 1,830 | | | 1,434 | Total Interest Expense | | | 8,369 | | | 8,645 | | | 25,195 | | | 19,836 | Less: Amounts Capitalized | | | (1,606) | | | (765) | | | (3,332) | | | (1,981) | Interest Expense, Net | | $ | 6,763 | | $ | 7,880 | | $ | 21,863 | | $ | 17,855 |
| (1) | Abandoned Projects expense is primarily related to expirations of legacy permits and rights-of-way for projects that were not ultimately constructed. |
4.Acquisitions
On June 11, 2020, we acquired certain produced water handling, transportation and water disposal assets in Lea County, New Mexico of a wholly-owned subsidiary of Concho. This acquisition further expanded our water infrastructure system in the Delaware basin and further extended and expanded our water management agreement with Concho.
The net purchase consideration was $149.6 million, which comprised $77.6 million of Class A Units (4,561,391 units) and $72.0 million of Redeemable Preferred Units with a face value of $75.0 million. (See Note 9 – Redeemable Preferred Units). We incurred $1.6 million of acquisition-related costs, which are included in Transaction Costs in 2020.
The following table sets forth our purchase price allocation:
| | | | Fair Value of Consideration | | | | Class A Units Issued to Seller | | $ | 77,602 | Redeemable Preferred Units Issued to Seller | | | 71,974 | Total Consideration | | | 149,576 | | | | | Fair Value of Assets and Liabilities Acquired | | | | Property, Plant and Equipment - Water Handling Facilities | | | 18,566 | Property, Plant and Equipment - Pipelines (including right of way) | | | 33,897 | Intangible Assets - Contracts | | | 90,300 | Asset Retirement Obligations | | | (776) | Total Assets Acquired | | $ | 141,987 | Goodwill | | | 7,589 |
The unaudited pro forma results presented below have been prepared to give effect to the acquisition discussed above on our results of operations for the nine months ended September 30, 2020 as if the Concho Lea County acquisition had been consummated on January 1, 2020. The unaudited pro forma results do not purport to represent what our actual results of operations would have been if the acquisition had been completed on such date or to project its results of operation for any future date or period.
| | | | | | Nine Months | (in thousands) | | Ended | | | September 30, 2020 | Pro Forma (unaudited) | | | | Total Revenues | | $ | 129,749 | Net Income | | $ | 924 |
5.4.Property, Plant and Equipment
Property, plant and equipment (“PP&E”) is stated at cost, less accumulated depreciation. Depreciation is calculated on a straight-line basis over the estimated useful service life of the asset. PP&E consists of the following: | | | | | | | | | | | | | (in thousands) | | September 30, | | December 31, | | September 30, | | December 31, | | | 2021 | | 2020 | | 2022 | | 2021 | Wells, Facilities and Related Equipment (1) | | $ | 321,983 | | $ | 331,322 | | Wells, Facilities, Water Ponds, and Related Equipment | | | $ | 407,608 | | $ | 329,935 | Pipelines | | | 314,178 | | | 276,433 | | | 340,817 | | | 327,140 | Water Ponds | | | 4,795 | | | 3,774 | | Land | | | 2,063 | | | 2,063 | | | 2,063 | | | 2,063 | Vehicles | | | 6,023 | | | 5,123 | | Computer and Other Equipment | | | 10,104 | | | 8,994 | | Office Furniture, Equipment and Improvements | | | 625 | | | 609 | | Vehicles, Equipment, Computers and Office Furniture | | | | 18,196 | | | 17,359 | Assets Subject to Depreciation | | | 659,771 | | | 628,318 | | | 768,684 | | | 676,497 | Projects and Construction in Progress | | | 32,460 | | | 33,128 | | | 112,319 | | | 24,259 | Total Property, Plant and Equipment | | | 692,231 | | | 661,446 | | | 881,003 | | | 700,756 | Accumulated Depreciation (1) | | | (60,757) | | | (43,258) | | Accumulated Depreciation | | | | (81,019) | | | (67,749) | Total Property, Plant and Equipment, Net | | $ | 631,474 | | $ | 618,188 | | $ | 799,984 | | $ | 633,007 |
Asset Exchanges During the nine months ended September 30, 2022, we completed multiple nonmonetary transactions. The transactions included exchanges of wells, facilities, permits and other assets. The total net book value of the divested assets and liabilities was $3.8 million. The acquired assets were recorded at a total fair value of $3.2 million, which resulted in a total pre-tax loss of $0.6 million. Assets Sold During the first quarter of 2022, management committed to a plan to sell certain of our assets located in the Midland Basin and determined that these assets met all the criteria for classification as assets held for sale. These assets were re-measured at their fair values less costs to sell, which resulted in the recognition of pre-tax impairment expense of $15.6 million during the first quarter of 2022. We estimated the fair value of the assets using indicative bids, which were representative of a Level 2 fair value measurement, and we ceased recording depreciation on the assets. During the third quarter 2021,of 2022, we closed the sale of these assets for proceeds of $7.4 million and recorded a gain of $0.1 million. Abandoned Assets In June 2022, management completed its evaluationdetermined that two previously acquired saltwater disposal wells (“SWD wells”) were no longer economically beneficial to the operations of the performance of a saltwater disposal asset, located in Eddy County, New MexicoCompany due to required workover costs and concludeddetermined that the wellSWD wells should be shut-in and taken out of service. We drilled thisAccordingly, we removed the cost and the associated accumulated depreciation and recognized a charge of $4.2 million for the remaining book value of the SWD wells. The charge has been reflected in abandoned well costs in the condensed consolidated statements of operations for the nine months ended September 30, 2022. In late second quarter 2022, management removed the cost of 2017 anda SWD well that was under construction in Texas. The well had encountered technical difficulties requiring significant incremental capital expenditure. Theduring the drilling phase and progress on the well was stopped. Management’s evaluation of the well determined that abandoning the asset was put into servicethe most prudent course of action. Accordingly, we removed the cost of the asset and recognized a charge of $1.6 million, which is reflected in Mayabandoned well costs in the condensed consolidated statements of 2018. operations for the nine months ended September 30, 2022. In the third quarter of 2022, we recognized a charge of $9.2 million related to a stand-alone SWD well that has been taken out of service. The charge is reflected in abandoned well costs in the condensed consolidated statements of operations for the three and nine months ended September 30, 2022. During Julythe first nine months of 2021, we re-entered thea SWD well bore to address anomalies. After technical testing, management concluded that it was probable that abandoning the asset was the most prudent course of action as the well iswas unable to remain in service in its current condition. Accordingly,condition, and we have removedrecognized abandoned well cost of $27.4. Delaware Energy Asset Acquisition On August 1, 2022, we acquired from Delaware Energy, LLC certain saltwater gathering and disposal facilities, disposal wells and other related assets and rights in Lea County and Eddy County, New Mexico. In connection with the costclosing and the associated accumulated depreciation and recognized a charge of $27.4 millionas consideration for the remaining net bookassets, we issued to the seller 3,365,907 shares of our Class A common stock and included volumetric-based contingent consideration. We estimated the fair value of the well. The charge has been reflected in Abandoned Well Costs in the Statements of Operations.contingent consideration using a discounted cash flow model based on estimated royalty
6.Intangible Assets
All our intangible assets are subjected to amortization and are related to customer contracts acquired through acquisitions. The components of the intangible assets are as follows:
| | | | | | | (in thousands) | | September 30, | | December 31, | | | 2021 | | 2020 | Gross Value | | $ | 365,032 | | $ | 365,032 | Accumulated Amortization | | | (51,951) | | | (27,497) | Net Carrying Value | | $ | 313,081 | | $ | 337,535 |
Substantially all the net carrying value of our intangible assets is attributable to contracts that expire in 2035. The table below shows the expected amortization of intangibles as of September 30, 2021:
| | | | (in thousands) | | Amount | Remaining 2021 | | $ | 8,151 | 2022 | | | 36,735 | 2023 | | | 37,404 | 2024 | | | 36,888 | 2025 | | | 35,050 | Thereafter | | | 158,853 |
7.Asset Retirement Obligations
Our asset retirement obligations are primarily relatedpayments to be made over a five-year contractual period. Allocation of the purchase price to the dismantlement, removal, site reclamation and similar activities ofacquired assets was based on relative fair values.
The following table sets forth our pipelines, water handling facilities and associated operations. A reconciliation of the changes in asset retirement obligations is as follows:purchase price allocation. | | | | | | | (in thousands) | | 2021 | | 2020 | Asset Retirement Obligations at January 1, | | $ | 5,291 | | $ | 3,375 | Liabilities Incurred | | | 533 | | | 738 | Liabilities Incurred on Acquisition | | | — | | | 776 | Reduction for Assets Sold | | | — | | | (22) | Accretion Expense | | | 208 | | | 179 | Asset Retirement Obligations at September 30 | | $ | 6,032 | | $ | 5,046 |
| | | | (in thousands, except share and per share amounts) | | | | Equity Consideration | | | | Number of Class A Shares Issued | | | 3,365,907 | Fair Value Per Share on Transaction Closing Date | | $ | 21.16 | Total Fair Value of Equity Consideration | | $ | 71,223 | Fair Value of Contingent Consideration (1) | | | 3,899 | Total Fair Value of Consideration | | $ | 75,122 | | | | | Purchase Price Allocation | | | | Saltwater Disposal Wells | | $ | 72,620 | Gathering Systems and Pipelines | | | 2,716 | Total Fair Value of Property Acquired | | | 75,336 | Less: ARO Liabilities Assumed | | | (214) | Total Purchase Price Allocation | | $ | 75,122 |
| (1) | As of September 30, 2022, liabilities for contingent consideration of $1.1 million and $2.8 million are included in Accrued and Other Current Liabilities and Other Long-Term Liabilities, respectively. |
Contemporaneously with the issuance of such shares of Class A common stock, Solaris LLC issued 3,365,907 Solaris LLC units to Aris Inc. Other Asset Acquisition During the third quarter of 2022, we purchased five ponds from ConocoPhillips, a related party, for a cash purchase price of $3.4 million. 5.Tax Receivable Agreement Liability Our tax receivable agreement (“TRA”) with the legacy owners of Solaris LLC units (each such person, a “TRA Holder,” and together, the “TRA Holders”) generally provides for the payment by us to each TRA Holder of 85% of the net cash savings, if any, in U.S. federal, state and local income tax and franchise tax that we actually realize or, are deemed to realize in certain circumstances, in periods after the IPO as a result of certain increases in tax basis that occur as a result of our acquisition or Solaris LLC’s redemption, respectively, of all or a portion of such TRA Holder’s Solaris LLC units in connection with the IPO or pursuant to the exercise of a redemption right or call right. We retain the remaining 15% of these cash savings. The future benefit of these cash savings is included, alongside other tax attributes, in our total deferred income tax asset balance at September 30, 2022. The TRA liability totaled $80.0 million at September 30, 2022. The liability increased $6.0 million during the nine months ended September 30, 2022 due to the redemption of Class B shares to Class A shares. The increase was offset by a reduction of $1.6 million related to adjustments to the estimated tax basis of the tangible and intangible assets of Solaris LLC reflected in the 2021 federal income tax return. See Note 9. Stockholders’/Members’ Equity. As of September 30, 2022, we estimated that if all the remaining Solaris LLC units were redeemed for shares of our Class A common stock, the TRA liability would be approximately $257.5 million. If we experience a change of control (as defined under the TRA, which includes certain mergers, asset sales and other forms of business combinations and change of control events) or the TRA terminates early (at our election or as a result of our breach), we could be required to make an immediate lump-sum payment under the terms of the TRA. As of September 30, 2022, we estimated the liability associated with this lump-sum payment (or “early termination payment”) would be approximately $171.5 million, discounted. These amounts can be significantly impacted by the closing price of our Class A shares on the applicable redemption date. We currently do not anticipate experiencing a change of control or an early termination of the TRA. 8.6.Long-Term Debt
Our Long-Term Debtlong-term debt consists of the following: | | | | | | | | | | | | | (in thousands) | | September 30, | | December 31, | | September 30, | | December 31, | | | 2021 | | 2020 | | 2022 | | 2021 | 7.625% Senior Sustainability-Linked Notes | | $ | 400,000 | | $ | — | | $ | 400,000 | | $ | 400,000 | Revolving Credit Facility | | | — | | | 297,000 | | | — | | | — | Total Long-Term Debt | | | 400,000 | | | 297,000 | | | 400,000 | | | 400,000 | Less: Unamortized Deferred Financing Costs | | | (8,417) | | | — | | Total Long-Term Debt, Net of Unamortized Financing Costs | | $ | 391,583 | | $ | 297,000 | | Less: Unamortized Debt Issuance Costs | | | | (6,547) | | | (7,949) | Total Long-Term Debt, Net of Debt Issuance Costs | | | $ | 393,453 | | $ | 392,051 |
Senior Sustainability-Linked Notes In April 2021, we issued $400.0 million aggregate principal amount ofOur 7.625% Senior Sustainability- LinkedSustainability-Linked Notes (the “Notes”) are due April 1, 2026. Proceeds from the offering were $390.6 million, net of $9.4 million of debt issuance costs, and were used to repay $297.0 million of borrowings under the Credit Facility, redeem outstanding redeemable preferred units for $74.4 million, and for general corporate purposes.
The Notes are unsecured and effectively subordinated to the Credit Facility to the extent of the value of the collateral securing the Credit Facility.Facility (see below). The Notes are guaranteed on a senior unsecured basis by the Company’s wholly- ownedour wholly-owned subsidiaries. Interest on the Notes is payable on April 1 and October 1 of each year. The CompanyWe may redeem all or part of the Notes at any time on or after April 1, 2023 at redemption prices ranging from 103.8125% on or after April 1, 2023 to 100% on or after April 1, 2025. In addition, on or before April 1, 2023, the Companywe may redeem up to 40% of the aggregate principal amount of the Notes with the net cash proceeds of certain equity offerings, if certain conditions are met, at a redemption price of 107.625% of the principal amount of the Notes, plus accrued interest. At any time prior to April 1, 2023, the Companywe may also redeem the Notes, in whole or in part, at a price equal to 100% of the principal amount of the Notes plus a “make-whole” premium. If the Company undergoeswe undergo a change of control, itwe may be required to repurchase all or a portion of the Notes at a price equal to 101% of the principal amount of the Notes, plus accrued interest.
Certain of these redemption prices are subject to increase if the Company failswe fail to satisfy the Sustainability Performance Target (as defined in the indenture governing the Notes and referred to herein as “SPT”) and provide notice of such satisfaction to the trustee. From and including the interest period ending on October 1, 2023, the interest rate shallwill be increased by 25 basis points to 7.875% per annum unless the Company notifieswe notify the trustee for the Notes at least 30 days prior to April 1, 2023 that, for the year ending December 31, 2022: (i) the SPT has been satisfied and (ii) the satisfaction of the SPT has been confirmed in accordance with customary procedures. The indenture that governs the Notes contains covenants that, among other things, limit our ability and the ability of our restricted subsidiaries to:
•incur or guarantee additional indebtedness or issue certain preferred stock;
pay dividends on capital stock or redeem, repurchase or retire our capital stock or subordinated indebtedness;
•transfer or sell assets;
•make investments;
•create certain liens;
•enter into agreements that restrict dividends or other payments from our restricted subsidiaries to us;
•consolidate, merge or transfer all or substantially all of our assets;
•engage in transactions with affiliates; and
•create unrestricted subsidiaries.
Credit Facility Concurrent with the Notes offering in April 2021, the Company entered into a Restated Credit Agreement to,Our amended and restated credit agreement provides for, among other things, (i) decrease the commitments under the Credit Facility toof $200.0 million, (ii) extend thea maturity date toof April 1, 2025, (iii) reprice the loans made under the Credit Facilityour revolving credit facility (the “Credit Facility”) and unused commitment fees to be determined based on a leverage ratio ranging from 3.00:1.00 to 4.50:1.00, (iv) provide for a $75.0 million incremental revolving facility, which shallwill be on the same terms as under the Credit Facility, (v) annualize EBITDA for 2021 for the purpose of covenant calculations, (vi) amend thea leverage ratio covenant to comprise ofwhich comprises a maximum total funded debt to EBITDA ratio, net of $40.0 million of unrestricted cash and cash equivalents if the facility is drawn, and net of all unrestricted cash and cash equivalents if the facility is undrawn, (vii) increase the(vi) a leverage ratio covenant test level for the first two fiscal quarters of 2021which is currently 4.50 to 5.00: 1.00, for the third quarter of 2021 to 4.75:1.00 and thereafter to 4.50:1.00 and (viii) add(vii) a secured leverage covenant of 2.50 to 1.00.
The Company incurred $1.4 million of expenses to refinance the Credit Facility that is included in other long-term assets. We accounted for the Restated Credit Agreement as a debt modification and recognized a loss of $0.4 million in April 2021.
As of September 30, 2022 and December 31, 2021, the Companywe had no outstanding borrowings under its Restatedthe Credit Facility, $0.15 million in letters of credit outstanding and $200.0 million in revolving commitments available. As of December 31, 2020, the Company had $297.0 million of outstanding borrowings under its Credit Facility, $0.15 million in letters of credit outstanding and $5.5$199.85 million in revolving commitments available.
The Credit Facility is secured by all the real and material personal property owned by Solaris LLC or any of its subsidiaries, other than certain excluded assets. At September 30, 2021, the Company was2022, we were in compliance with all covenants contained in the Credit Facility. 7.Leases In the normal course of business, we enter into operating lease agreements to support our operations. Our leased assets include right-of-way easements for our wells and facilities, office space and other assets. We currently have no finance leases. Balance Sheet Information The following table provides supplemental consolidated balance sheet information related to leases: | | | | | | (in thousands) | Classification | | September 30, 2022 | Assets | | | | | | Right-of-Use Assets | Consolidated Balance Sheet | | $ | 7,635 | | | | | | | Liabilities | | | | | | Current Lease Liabilities | Accrued and Other Current Liabilities | | $ | 1,025 | Noncurrent Lease Liabilities | Other Long-Term Liabilities | | | 6,202 |
Statement of Operations Information The following table provides the components of lease cost, excluding lease cost related to short-term leases: | | | | | | | | | | | | | Three Months Ended | | Nine Months Ended | | | | | September 30, | | September 30, | (in thousands) | | | | 2022 | | 2022 | Direct Operating Costs | | | | $ | 244 | | $ | 690 | General and Administrative | | | | | 166 | | | 498 | Total Lease Cost | | | | $ | 410 | | $ | 1,188 |
Short-Term Leases Our short-term lease cost, which consisted primarily of field equipment rentals, totaled $3.9 million and $7.7 million for the three and nine months ended September 30, 2022. Cash Flow Information The following table summarizes supplemental cash flow information related to leases: | | | | | | Nine Months Ended | | | September 30, | (in thousands) | | 2022 | Cash Paid for Amounts Included in Lease Liabilities | | $ | 969 | Right-of-Use Assets Obtained in Exchange for Operating Lease Liabilities, net | | | 723 |
Lease Terms and Discount Rates The following table provides lease terms and discount rates related to leases: | | | | | | | | | | | | Weighted Average Remaining Lease Term (Years) | | | | 6.7 | Weighted Average Discount Rate | | | | 2.85% |
Annual Lease Maturities The following table provides maturities of lease liabilities at September 30, 2022: | | | | | | (in thousands) | | | | | | 2022 remaining | | | | $ | 277 | 2023 | | | | | 1,073 | 2024 | | | | | 984 | 2025 | | | | | 746 | 2026 | | | | | 671 | Thereafter | | | | | 4,347 | Total Lease Payments | | | | | 8,098 | Less: Interest | | | | | (871) | Present Value of Lease Liabilities | | | | $ | 7,227 |
Future Minimum Lease Commitments Future minimum lease commitments under non-cancellable leases at December 31, 2021 were as follows: | | | | | | (in thousands) | | | | | | 2022 | | | | $ | 824 | 2023 | | | | | 638 | 2024 | | | | | 622 | 2025 | | | | | 514 | 2026 | | | | | 438 | Thereafter | | | | | 816 | Total | | | | $ | 3,852 |
Leases That Have Not Yet Commenced During the third quarter of 2022, we entered into an additional operating lease for office space. The lease will commence during the fourth quarter of 2022. Undiscounted future lease payments of $0.7 million will be included in the determination of the right-of-use asset and lease liability upon lease commencement. 8.Income Taxes Our predecessor, Solaris LLC, is a Delaware limited liability company treated as a partnership for federal income tax purposes and, therefore, has not been subject to U.S. federal income tax at an entity level. As a result, the consolidated net (loss) income in our historical financial statements does not reflect the tax (benefit) expense we would have incurred if we were subject to U.S. federal income tax at an entity level during periods prior to the IPO. Solaris LLC continues to be treated as a partnership for U.S. federal income tax purposes and, as such, is not subject to U.S. federal income tax. Instead, taxable income is allocated to members, including Aris Inc., and except for Texas franchise tax, any taxable income of Solaris LLC is reported in the respective tax returns of its members. Income Tax Expense (Benefit) We recorded income tax expense (benefit) of $0.3 million and $(0.1) million for the three and nine months ended September 30, 2022, respectively, substantially all of which was deferred. Effective Tax Rate We record our income tax (benefit) expense using an estimated annual effective tax rate (“ETR”) and recognize specific events discretely as they occur. The ETR for the nine months ended September 30, 2022 was 11%. The difference between the federal statutory rate and our estimated annual ETR is due primarily to the impact of the noncontrolling interest. Deferred Tax Assets We regularly evaluate the realizable tax benefits of deferred tax assets and record a valuation allowance, if required, based on an estimate of the amount of deferred tax assets that we believe does not meet the more-likely-than-not criteria of being realized. The balance of our deferred income tax assets, net increased $4.4 million during the nine months ended September 30, 2022. Tax Examinations Solaris LLC files income tax returns in the U.S. federal jurisdiction and various states. There are currently no federal or state income tax examinations underway for these jurisdictions. We are no longer subject to tax examinations for tax years prior to 2018 for federal income taxes and prior to 2017 for state income taxes. 9.Redeemable Preferred UnitsStockholders’/Members’ Equity Redemptions During the nine months ended September 30, 2022, Solaris LLC units, together with an equal number of shares of our Class B common stock, were redeemed for shares of our Class A common stock on a one-for-one basis as follows: | ● | 148,087 shares were redeemed on February 28, 2022; and |
| ● | 107,914 shares were redeemed on June 1, 2022; and |
| ● | 648,781 shares were redeemed on September 1, 2022. |
Dividends and Distributions On June 11, 2020,February 25, 2022, May 6, 2022, and August 3, 2022, our Board of Directors declared quarterly dividends of $0.09 per share for the Company issued 7,500 Redeemable Preferred Units (the “Preferred Units”)first, second and third quarters of 2022, respectively, on our Class A common stock. In conjunction with the dividend payments, a distribution of $0.09 per unit was paid to ConocoPhillips as partunit holders of Solaris LLC for each of the consideration to acquire certain produced water handling, transportationfirst, second and water disposal assets in Lea County, New Mexico. The Preferred Units were initially recorded at $72.0 million, their issuance-date fair value.third quarters of 2022. On November 9, 2020,4, 2022, our Board of Directors declared a quarterly dividend of $0.09 per share for the Company issued a capital call to ConocoPhillips for $1.9 million. ConocoPhillips elected to redeem 193 Preferred Units in exchange for 192,981fourth quarter of 2022 on our Class A Unitscommon stock. The dividend will be paid on November 30, 2022, to satisfy this call. Since the Preferred Units would have become redeemable by ConocoPhillips following the fifth anniversaryholders of record of our Class A common stock as of the issuance and were redeemable byclose of business on November 17, 2022. In conjunction with the Company at any time, the Company has electeddividend payment, a distribution of $0.09 per unit will be paid to accrete changes in the redemption value over the period from the dateunit holders of issuanceSolaris LLC subject to the date that the instrument would have been redeemable, using the effective interest method.same payment and record dates.
Concurrent with the closing20
10.Equity The Company’s operations are governed by the provisions of a limited liability company agreement (the “LLC Agreement”). The LLC Agreement sets forth the rights and obligations of each class of membership interest. The Company currently has 4 classes of membership units outstanding – Class A, B, C, and D. Allocations of net income and loss are made to the members based on a hypothetical liquidation. The Class C units receive a share of distributions that would otherwise be payable to the Class A unitholders after the Class A unitholders achieve certain target returns on their invested capital (the “Class C Unit Waterfall”). Class B and Class D units are not burdened by the Class C Unit Waterfall.
In connection with the issuance of Class C units by the Company to Solaris Midstream Investment, LLC (“Solaris Investment”), Solaris Investment issued a corresponding number of Class C units (“Solaris Investment Profits Units”) to the members of Solaris Investment as specified in the limited liability company agreement of Solaris Investment. Each such member of Solaris Investment then entered into a grant agreement (“Grant Agreement”), as set forth in the LLC Agreement, with the Company and Solaris Investment. The Solaris Investment Profits Units are subject to various vesting requirements as specified in the Grant Agreement. The value assigned to the units as of their respective dates of grant was de minimis.
See Note 13-Subsequent Events— Amended and Restated LLC Agreement
11.Commitments and Contingencies
In the normal course of business, we are subjectedsubject to various claims, legal actions, contract negotiations and disputes. We provide for losses, if any, in the period in which they become probable and can be reasonably estimated. In management’s opinion, there are currently no such matters outstanding that would have a material effect on the accompanying financial statements. Additionally,Other Commitments
In the Company is party to a guaranteenormal course of business, we enter into short-term purchase obligations for products and services, primarily related to a lease agreement with Solaris Energy Management, LLC (“SEM”), a related partypurchases of the Company, for the rental of office space at the Company’s corporate headquarters.pipe, pumps and other components. As of September 30, 2022, we have purchase obligations and commitments of approximately $39.7 million due in the next twelve months. We are a party to various surface use and compensation agreements by which we have committed to make minimum royalty payments in exchange for rights to access and use the land for purposes that are generally limited to conducting our water operations. These agreements do not meet the definition of a lease under ASC Topic 842. Minimum royalty payments associated with these contracts are as follows: $0.1 million for the remainder of 2022, $8.9 million for 2023, $9.8 million for 2024, $10.6 million for 2025, $11.3 million for 2026, and $4.5 million thereafter. We are party to a fixed price power purchase contract to manage the volatility of the price of power needed for ongoing operations. We have elected the normal purchase and normal sale accounting treatment for this contract and therefore record it at cost. The contract has a term that ends in May 2025 and the remaining minimum commitment under the contract is $7.1 million as of September 30, 2022. Environmental We are also subject to various federal, state and local laws and regulations relating to the protection of the environment. For the three and nine months ended September 30, 2022, we recognized $0.9 million and $1.9 million of expense, respectively, related to environmental matters that were recorded in Direct Operating Cost. For the three and nine months ended September 30, 2021, the Company’s share of SEM’s future commitmentexpense related to this lease agreementenvironmental matters was $0.5 million for both periods. We also have insurance proceeds receivable of $4.6 million at September 30, 2022 that we believe are probable to collect and are reasonably estimable. Although we believe these estimates are reasonable, actual results could differ from these estimates. 11.Earnings Per Share Net Income (Loss) Per Share Basic and diluted net income (loss) per share attributable to our Class A common stock is $3.1 million. See Note 12—Related Party Transactions.computed by dividing net income (loss) attributable to Aris Water Solutions, Inc. for periods subsequent to the IPO by the weighted average number of shares of Class A common stock outstanding for the same period, including shares of restricted stock and restricted stock units (collectively “RSUs”), which receive nonforfeitable dividends. Shares issued during the period are weighted for the portion of the period in which the shares were outstanding. Prior to the IPO, Solaris LLC’s capital structure included Class A, Class B, Class C, and Class D units. We determined that the presentation of net income (loss) per unit for the period prior to the IPO would not be meaningful due to the significant nature of the corporate reorganization transactions on the capital structure at IPO date. Therefore, net income (loss) per unit information has not been presented for periods prior to the IPO. Other Commitments
InThe following table sets forth the normal coursecomputation of business, we enter short-term purchase obligations for productsbasic and services, primarily relateddiluted net income (loss) per share attributable to purchases of long-lead materials. As of September 30, 2021, we have purchase obligations and commitments of approximately $7.4 million due in the next twelve months.
We are party to a surface use and compensation agreement by which the Company has agreed to a minimum annual payment for each of the first ten years beginning in 2020, in exchange for certain rights to access and use the land for the limited purposes of conducting water operations for a period of thirteen years. As of September 30, 2021, there are 0 minimum annual payments due until 2022.
The table below provides estimates of the timing of future payments that the Company is contractually obligated to make based on agreements in place as of September 30, 2021:our Class A common stock:
| | | | | | | | | | | | | | | | | | | | | | (in thousands) | | Remaining | | | | | | | | | | | | | | | | | | | | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | Thereafter | | Total | Purchase Commitments | | $ | 7,356 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 7,356 | Surface Use and Compensation | | | — | | | 816 | | | 1,150 | | | 1,200 | | | 1,250 | | | 5,750 | | | 10,166 | Operating Leases | | | 188 | | | 765 | | | 631 | | | 622 | | | 514 | | | 1,255 | | | 3,975 | Total | | $ | 7,544 | | $ | 1,581 | | $ | 1,781 | | $ | 1,822 | | $ | 1,764 | | $ | 7,005 | | $ | 21,497 |
| | | | | | | | | Three Months Ended | Nine Months Ended | | | September 30, | September 30, | (in thousands, except for share and per share amounts) | | 2022 | | 2022 | Net Income (Loss) Attributable to Stockholders' Equity | | $ | 1,956 | | $ | (622) | Less: Net Income (Loss) Attributable to Noncontrolling Interest | | | 1,257 | | | (493) | Net Income (Loss) Attributable to Aris Water Solutions, Inc. | | | 699 | | | (129) | Dividends for Participating Securities (1) | | | (179) | | | (539) | Basic Net Income (Loss) Attributable to Aris Water Solutions, Inc. | | $ | 520 | | $ | (668) | Reallocation of Participating Net Income (Loss) | | | - | | | - | Diluted Net Income (Loss) Attributable to Aris Water Solutions, Inc. | | $ | 520 | | $ | (668) | | | | | | | | Basic Weighted Average Outstanding Shares | | | 24,499,953 | | | 22,779,077 | Dilutive Performance-Based Stock Units | | | 46,679 | | | - | Dilutive Weighted Average Outstanding Shares | | | 24,546,632 | | | 22,779,077 | | | | | | | | Basic Net Income (Loss) Per Share of Class A Common Stock | | $ | 0.02 | | $ | (0.03) | Diluted Net Income (Loss) Per Share of Class A Common Stock | | $ | 0.02 | | $ | (0.03) |
| (1) | Unvested shares of restricted stock and RSUs represent participating securities because they participate in nonforfeitable dividends or distributions with the common equity holders of the Company. Participating earnings represent the distributed and undistributed earnings of the Company attributable to participating securities. Unvested RSUs do not participate in undistributed net losses as they are not contractually obligated to do so. |
12.Related Party Transactions
Solaris Energy Management, LLC
On September 14, 2016, we entered into an administrative services arrangement with Solaris Energy Management, LLC (“SEM”),Shares of Class B common stock are considered potentially dilutive shares of Class A common stock because they may be redeemed for shares of Class A common stock on a company owned by William A. Zartler, our Founderone-for-one basis. A total of 31,248,544 shares and Executive Chairman,31,481,479 shares of Class B common stock outstanding for the provision of certain personnelthree and administrative services at cost. Beginning in 2020, services provided by SEM are administrative only. In addition, SEM provides office space, equipment and supplies to us under the administrative service agreement.
For the three months ended September 30, 2021 and 2020, we incurred $0.2 million and $0.1 million, respectively, for these services, included in general and administrative expenses. For the nine months ended September 30, 20212022, respectively, were determined to be antidilutive and 2020, we incurred $0.6 millionwere excluded from the computation of diluted earnings per share of Class A common stock. In addition, 19,086 and $0.4 million, respectively,all PSUs were determined to be antidilutive for these services, included in generalthe three and administrative expenses.
The Company had $0.05 million outstanding payables to SEM atnine months ended September 30, 2022, respectively, and have been excluded from the computation of diluted earnings per share for those periods.
12.Stock-Based Compensation Our 2021 and 0 outstanding balance at December 31, 2020. As of September 30, 2021 and December 31, 2020, the Company had a prepaid balance to SEM of $0.2 million to cover future rent and other expenses. Solaris Energy Capital, LLC
There are certain de minimis general and administrative expenses that are paid on our behalf by Solaris Energy Capital, LLC, a company owned by William A. Zartler, and are recorded in general and administrative expenses. As of September 30, 2021 and December 31, 2020, we had 0 outstanding payables to Solaris Energy Capital, LLC.
Blanco Aviation, LLC
We are a party to an aircraft “dry” lease arrangement with Blanco Air Services, LLC, a company owned by William A. Zartler,Equity Incentive Plan (the “2021 Plan”) allows for the usegrant of, certain aircrafts billed at an hourly rate. We incurred certain generalamong other types of awards, stock options; RSUs; and administrative expenses for services provided by Blanco Aviation, LLC which are recorded in generalPSUs.
Restricted Stock and administrative expenses. We had 0 outstanding balance payable to Blanco Aviation, LLC at September 30, 2021 andRestricted Stock Units RSU activity during the balance outstanding at December 31, 2020period was de minimis.as follows: | | | | | | | | RSUs | | Weighted-Average Grant Date Fair Value | Outstanding at December 31, 2021 | | 1,439,029 | | $ | 12.68 | Granted | | 678,241 | | | 14.98 | Forfeited | | (115,535) | | | 13.75 | Vested | | (515) | | | 14.61 | Outstanding at September 30, 2022 | | 2,001,220 | | $ | 13.64 |
ConocoPhillips
WeThe RSUs granted during the nine months ended September 30, 2022 generally vest in the following installments: (i) one-third at the first anniversary of the award date, (ii) one-third at the second anniversary of the award date, and ConocoPhillips, one(iii) one-third at the third anniversary of our principal owners, entered a 13-year water gathering and handling agreement, pursuant to which ConocoPhillips agreed to dedicate all the produced water generated from its current and future acreage in a defined area of mutual interest (“AMI”) in New Mexico and Texas.award date. As of September 30, 2022, approximately $17.8 million of compensation cost related to unvested shares of restricted stock and RSUs remained to be recognized. The cost is expected to be recognized over a weighted-average period of 2.1 years.
Performance-Based Restricted Stock Units During the nine months ended September 30, 2022, we granted 167,228 PSUs, with a weighted average grant date fair value of $25.36, to management under the 2021 Plan. The performance criteria for the PSUs are split as follows: | ● | Relative PSUs: 50% of the PSUs are based on total shareholder return relative to the total shareholder return of a predetermined group of peer companies. This relative total shareholder return is calculated at the end of the performance periods stipulated in the PSU agreement. |
| ● | Absolute PSUs: 50% of the PSUs have a performance criteria of absolute total shareholder return calculated at the end of the performance period stipulated in the PSU agreement. |
The vesting and December 31, 2020,payout of the Company had a receivablePSUs occur when the related service condition is completed, which is approximately three years after the grant date regardless of $21.6 million and $11.5 million, respectively, from ConocoPhillips that was recordedthe duration of the stipulated performance period. The PSUs can be paid out in Accounts Receivable from Affiliate.either Class A common stock or cash, at our election. As of September 30, 20212022, approximately $3.2 million of compensation cost related to unvested PSUs remained to be recognized. The cost is expected to be recognized over a weighted-average period of 2.3 years. The grant date fair value was determined using the Monte Carlo simulation method and December 31, 2020,is expensed ratably over the Company hadservice period. Expected volatilities used in the fair value simulation were estimated using historical periods consistent with the remaining performance periods. The risk-free rate was based on the U.S. Treasury rate for a payableterm commensurate with the expected life of $1.2 million and $1.9 million, respectively,the grant. We used the following assumptions to ConocoPhillips that was recorded in Payables to Affiliate. The following table shows revenue and expenses from ConocoPhillips:estimate the fair value of PSUs granted during the nine months ended September 30, 2022: | | | | | | | | | | | | | | | Three Months Ended | | Nine Months Ended | (in thousands) | | September 30, | | September 30, | | | 2021 | | 2020 | | 2021 | | 2020 | Revenues from ConocoPhillips | | $ | 27,194 | | $ | 17,984 | | $ | 79,080 | | $ | 45,756 | Operating Expense Reimbursed to ConocoPhillips | | $ | 191 | | $ | 785 | | $ | 919 | | $ | 2,758 |
| | | | | Assumptions | Risk-free Interest Rate | | 1.44% | Volatility Range | | 35.95% - 154.23% |
Operating expenses reimbursed to ConocoPhillips are related toPSU activity during the Company’s reimbursement of ConocoPhillips’ costs for operating certain assets on the Company’s behalf between closing and the transfer of the acquired assets.period was as follows:
13.Subsequent Events
Initial Public Offering and Corporate Reorganization
On October 21, 2021, Aris announced the pricing of its initial public offering of 17,650,000 shares of its Class A common stock at a price to the public of $13.00 per share. In addition, Aris granted the underwriters a 30-day option to purchase up to an additional 2,647,500 shares of its Class A common stock at the public offering price, less underwriting discounts and commissions. On October 22, 2021, the underwriters fully exercised such option to purchase an additional 2,647,500 shares of Class A common stock. The offering, including the underwriters’ option, closed on October 26, 2021.
The closing of the initial public offering, including the underwriters’ option, resulted in net proceeds of approximately $246.1 million, after deducting underwriting discounts and commissions and estimated expenses payable by Aris. Aris contributed all of the net proceeds of the initial public offering to Solaris LLC in exchange for a single class of units in Solaris LLC and shares of the Company’s Class B common stock. Solaris LLC distributed approximately $213.3 million of the net proceeds to the existing owners of Solaris LLC and retained the remaining $32.8 million of the net proceeds for general corporate purposes, which may include capital expenditures, working capital and potential acquisitions and strategic transactions.
Amended and Restated LLC Agreement
On October 26, 2021, in connection with Aris’ IPO, the Company amended and restated the LLC Agreement. The amendments to the LLC Agreement, include among other things,
(i) provisions to convert all of the membership interests in Solaris LLC into (a) a single class of units in Solaris LLC representing in the aggregate 33,202,500 Solaris LLC Units and (b) the right to receive the distributions of proceeds described above and an aggregate of 33,202,500 shares of Aris’ Class B Common Stock and
(ii) admitted Aris as the sole managing member of Solaris LLC.
In accordance with the terms of the amended and restated LLC Agreement, the holders of Solaris LLC Units will generally have the right to exchange their Solaris LLC Units (and a corresponding number of shares of the Class B Common Stock), for an aggregate of 33,202,500 shares of the Class A Common Stock at an exchange ratio of 1 share of Class A Common Stock for each Solaris LLC Unit (and corresponding share of
Class B Common Stock) exchanged, subject to conversion rate adjustments for stock splits, stock dividends and reclassifications.
| | | | | | | | PSUs | | Weighted-Average Grant Date Fair Value | Outstanding at December 31, 2021 | | - | | $ | - | Granted | | 167,228 | | | 25.36 | Forfeited | | (6,274) | | | 25.36 | Outstanding at September 30, 2022 | | 160,954 | | $ | 25.36 |
13. Subsequent Event On October 31, 2022, we entered into an additional operating lease for office space. Undiscounted future lease payments of $10.1 million will be included in the determination of the right-of-use asset and lease liability upon lease commencement. Item 22. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion of our historical performance, financial condition and prospects in conjunction with our unaudited condensed consolidated financial statements, and notes thereto, as of and for the three and nine months ended September 30, 2021. 2022, included elsewhere in this report, as well as our Annual Report on Form 10-K for the year ended December 31, 2021, which includes disclosures regarding our critical accounting policies as part of “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The information provided below supplements, but does not form part of, our historical financial statements. This discussion includes forward-looking statements that are based on the views and beliefs of our management, as well as assumptions and estimates made by our management. The financial data discussed below reflect the historical results of operations and financial position of Solaris LLC, Aris’ predecessor for accounting purposes prior to the initial public offering. Actual results could differ materially from such forward-looking statements because of various risk factors, including those that may not be in the control of management. See Cautionary Note Regarding Forward-Looking Statements. Initial Public OfferingOur Predecessor and Aris Inc.
On October 21,Aris Inc. was incorporated on May 26, 2021 Aris announcedand does not have historical financial operating results prior to the pricingclosing date of its initial public offeringIPO. For purposes of 17,650,000 sharesthis Quarterly Report, our accounting predecessor is Solaris LLC. The financial data discussed below reflect the historical results of its Class A common stock at a priceoperations and financial position of Solaris LLC, our predecessor for accounting purposes, prior to the publicdate of $13.00 per share. In addition, Aris granted the underwriters a 30-day option to purchase up to an additional 2,647,500 shares of its Class A common stock at the public offering price, less underwriting discounts and commissions. On October 22, 2021, the underwriters fully exercised such option to purchase an additional 2,647,500 shares of Class A common stock. The Class A common stock began trading on the New York Stock Exchange under the ticker symbol “ARIS” on October 22, 2021, and the offering, including the underwriters’ option, closedour IPO closing on October 26, 2021. See Item 1. Financial Statements ─ Note 1. Organization and Background of Business.
The closing of the initial public offering, including the underwriters’ option, resulted in net proceeds of approximately $246.1 million, after deducting underwriting discounts and commissions and estimated expenses payable by Aris. Aris contributed all the net proceeds of the initial public offering to Solaris LLC in exchange for a single class of units in Solaris LLC and shares of the Company’s Class B common stock. Solaris LLC distributed approximately $213.3 million of the net proceeds to the existing owners of Solaris LLC and retained the remaining $32.8 million of the net proceeds for general corporate purposes, which may include capital expenditures, working capital and potential acquisitions and strategic transactions.
Business Overview We are a leading, growth orientedgrowth-oriented environmental infrastructure and solutions company that directly helps our customers reduce their water and carbon footprints. We deliver full cyclefull-cycle water handling and recycling solutions that are proven to increase the sustainability of energy companies.company operations. Our integrated pipelines and related infrastructure creates long termcreate long-term value by delivering high capacity,high-capacity, comprehensive produced water management, recycling and supply solutions to operators in the core areas of the Permian Basin. Third Quarter 2022 Results Significant financial and operating highlights for the third quarter of 2021three months ended September 30, 2022 include: | ● | Four new long-term acreage dedications, increasing our dedicated acres by 20,000 acresTotal water volumes handled or sold of 1,416 thousand barrels of water per day (“kbwpd”), an increase of 47% as compared with the third quarter of 2021 |
| ● | Record totalRecycled produced water volumes sold of 960,000 barrels345 kbwpd, an increase of water per day165% as compared with the third quarter of 2021 |
| ● | ConsolidatedTotal revenue of $59.5$90.8 million, an increase of 53% as compared with the third quarter of 2021 |
| ● | Consolidated adjusted EBITDA (as defined and reconciled below)Abandoned well costs of $30.8$9.2 million as compared with $27.4 million for the third quarter of 2021 |
| ● | Consolidated netNet income of $2.0 million, as compared with a loss of $20.7 million which includes a non-cash chargefor the third quarter of $27.42021 |
| ● | Adjusted EBITDA (non-GAAP financial measure) of $39.3 million, associatedan increase of 28% as compared with the abandonmentthird quarter of an SWD2021 |
| ● | Dividend paid on our Class A common stock for the third quarter of 2022 of $0.09 per share, along with a distribution of $0.09 per unit paid to unit holders of Solaris LLC |
| ● | Closed the Delaware Energy asset acquisition |
Delaware Energy Asset Acquisition On August 1, 2022, we acquired from Delaware Energy, LLC certain saltwater gathering and disposal facilities, disposal wells and other related assets and rights in Lea County and Eddy County, New Mexico. In connection with the closing of the acquisition and as consideration for the assets, we issued to the seller 3,365,907 shares of our Class A common stock and included a small, volumetric-based contingent consideration. Contemporaneously with the issuance of such shares of Class A common stock, Solaris LLC issued 3,365,907 Solaris LLC units to Aris Inc. See Item 1. Financial Statements ─ Note 4. Property, Plant and Equipment. Water Standard Acquisition In October 2022, we acquired certain intellectual property rights and related proprietary treatment technologies and assets from Water Standard Management (US), Inc. (“Water Standard”) that support and accelerate the advanced treatment and beneficial reuse of produced water in the Permian Basin. Additionally, we agreed with Water Standard to collaborate in the future on certain advanced water treatment projects which draw on each party’s demonstrated expertise and capabilities. For additional information regarding our non-GAAP financial measures, see Non-GAAP Financial Measures below. General Trends and Outlook Market Dynamics The current conflict between Russia and Ukraine is having significant global economic implications and may result in higher inflation, weaker real GDP growth and disruption to global financial markets. The extent of these impacts will depend on the length of the conflict and whether the conflict spreads beyond Ukraine’s borders. In addition, there are particular impacts on commodity prices due to supply disruptions which are resulting in significantly higher West Texas Intermediate (“WTI”) crude oil prices. As the U.S. economy began recovering from the COVID-19 pandemic in the latter half of 2021, domestic crude oil prices began to increase. During the three andmonths ended September 30, 2022, the average WTI spot price was $93.06 as compared with $70.58 for the three months ended September 30, 2021. During the nine months ended September 30, 2021,2022, the average West Texas Intermediate (“WTI”)WTI spot price was $70.58 and$98.96 as compared with $65.05 respectively, representing a significant rebound from $39.16 for the yearnine months ended December 31,September 30, 2021. The continuing impact on commodity prices will also depend on the responses of the Organization of Petroleum Exporting Countries and other oil exporting nations (“OPEC+”) to supply disruptions and higher prices. On October 5, 2022, OPEC+ announced that it would reduce oil production by 2 million barrels per day, the largest cut since April 2020. With the increase in WTI spot prices, the production curtailment activities experienced in 2020 have stopped and investment in new production activities has resumed. We believe that the activity levelsThe reduction is equivalent to approximately 2% of our customers will continue to increase above 2020 levels.global demand. We believe there are several industry trends that continue to provide meaningful support for future growth. Our key customers are allocating newcustomers’ capital allocation to the Permian Basin remains consistent and significant, including on acreage where the water sourcing and production is dedicated to Aris.us. Additionally, operators continue to increaseaverage longer horizontal lateral lengths which corresponds to increased water sourcing and produced water handling volumes. Many industry trends such as simultaneous multi-well pad developmentoperations and the trend towards reuse applications of produced water, particularly in the areas of the Permian Basin where we operate, are improving efficiencies and returns and provide us with significant opportunities for both our Produced Water Handling and Water Solutions businesses. COVID-19 PandemicCost Inflation
COVID-19 contributedDuring 2021, the U.S. began experiencing increased wage and price inflation, as evidenced by increases in the Consumer Price Index (“CPI”), and the annual rate of inflation in the U.S. reached 8.2% in September 2022. Through October 2022, the Federal Reserve has approved five interest rate hikes that total a 3.00 percentage point increase, which are the first increases since December 2018. The Federal Reserve has indicated additional rate increases may be approved during the remainder of the year. The members of the Federal Reserve also expressed reduced expectations for economic growth this year and raised their outlook for inflation. The degree of inflation, and length of time it continues, will be impacted by any further steps the U.S. Federal Reserve Bank takes to a significant downturn in oilcombat inflationary pressures, such as by continuing to adjust interest rates.
During the second and gas commodity prices in 2020 and continues to cause significant volatility in 2021. Although we cannot predict future commodity prices, we are not currently experiencing significant disruptions withthird quarters of 2022, our workforce or supply chain activities. Moreover, we continue to maintain our focus on safe and reliable performance of our systems, while ensuring the safety of our employees and other stakeholders. However, we are unable to predict the future impact of COVID-19, and it is possible that such impact could be negative. How We Generate Revenue
We manage our business through a single operating segment comprising two primary revenue streams, Produced Water Handling and Water Solutions. growth was partially offset by higher than anticipated cost inflation.Our Produced Water Handling revenues are driven by the volumes oflong-term, fee-based produced water we gather from our customers, and our Water Solutions revenues are driven by the quantities of recycled produced water and groundwater delivered to our customers to support their well completion operations.
Under ourhandling contracts with our customers, which are generally subject to annual CPI-basedCPI based adjustments. However, many of our contractual CPI based adjustments are capped at a maximum annual increase and, therefore, our costs may increase more rapidly than the fees that we receivecharge to customers pursuant to our contracts with them. If inflation in the CPI were to remain significantly higher than our contractually allowed fee increases, we could experience negative impacts to our operating margins.
Seismicity In New Mexico, we operate one well located within the Hat Mesa Seismic Response Area (“SRA”). As there has been no further seismic activity within the Hat Mesa SRA in 2022, the New Mexico Oil Conservation Division reduced curtailment requirements. We continue to operate our partially curtailed well. In Texas, during the third quarter of 2022, we sold one deep injection well along with the permit to recomplete the deep well to a fixed feeshallow injector. The well was located within the Gardendale SRA where the Texas Railroad Commission suspended all active permits to inject oil and gas waste into deep strata. We continue to own a second well within the Gardendale SRA, which we plan to plug and abandon. Due to the integrated nature of our pipeline network and our system-wide redundancy, we have been able to comply with regulator responses to seismic activity, while continuing to provide service to our customers without significant disruption in our operations. In addition, our compliance with state regulator seismic response actions has not resulted in any material volumetric, revenue or cash flow decreases. Factors Affecting the Comparability of our Results of Operations Temporary Power Costs In the past, we constructed assets in advance of permanent grid power infrastructure availability in order to secure long-term produced water handling contracts. As a result, we rented temporary power generation equipment that would not have been necessary if grid power connections had been available. We estimate temporary power costs by taking temporary power and rental expenses incurred during the period and subtracting estimated expenses that would have been incurred during such period had permanent grid power been available. Power infrastructure and permanent power availability rapidly expanded in the Permian Basin in 2020 and the first half of 2021, and, accordingly, we were able to make significant progress in reducing these expenses over that period. By the end of September 2021, all of our significant facilities were being supported by permanent power. Beginning in the third quarter of 2021, we were no longer adjusting for temporary power costs. We remove temporary power costs when calculating Adjusted Operating Margin to accurately assess long-term profitability and cash flow on a basis consistent with our long-term projections and current operating cost profile. Results of Operations Results of operations were as follows for the periods indicated: | | | | | | | | | | | | | (in thousands) | | Three Months Ended September 30, | | | | | | | | | 2022 | | 2021 | | 2022 vs. 2021 | Revenue | | | | | | | | | | | | | Produced Water Handling | | $ | 39,674 | | $ | 24,639 | | $ | 15,035 | | | 61% | Produced Water Handling—Affiliates | | | 24,796 | | | 23,135 | | | 1,661 | | | 7% | Water Solutions | | | 20,392 | | | 7,666 | | | 12,726 | | | 166% | Water Solutions—Affiliates | | | 5,668 | | | 4,059 | | | 1,609 | | | 40% | Other Revenue | | | 246 | | | — | | | 246 | | | N/M | Total Revenue | | | 90,776 | | | 59,499 | | | 31,277 | | | 53% | Cost of Revenue | | | | | | | | | | | | | Direct Operating Costs | | | 43,885 | | | 23,497 | | | 20,388 | | | 87% | Depreciation, Amortization and Accretion | | | 16,942 | | | 15,378 | | | 1,564 | | | 10% | Total Cost of Revenue | | | 60,827 | | | 38,875 | | | 21,952 | | | 56% | Operating Costs and Expenses | | | | | | | | | | | | | Abandoned Well Costs | | | 9,222 | | | 27,402 | | | (18,180) | | | (66)% | General and Administrative | | | 11,482 | | | 5,228 | | | 6,254 | | | 120% | Loss on Asset Disposal and Other | | | 239 | | | 940 | | | (701) | | | (75)% | Total Operating Expenses | | | 20,943 | | | 33,570 | | | (12,627) | | | (38)% | Operating Income (Loss) | | | 9,006 | | | (12,946) | | | 21,952 | | | (170)% | Interest Expense, Net | | | 6,763 | | | 7,880 | | | (1,117) | | | (14)% | Other | | | — | | | — | | | — | | | N/M | Income (Loss) Before Income Taxes | | | 2,243 | | | (20,826) | | | 23,069 | | | (111)% | Income Tax Expense (Benefit) | | | 287 | | | (83) | | | 370 | | | (446)% | Net Income (Loss) | | $ | 1,956 | | $ | (20,743) | | $ | 22,699 | | | (109)% |
N/M Not Meaningful Results of operations were as follows for the periods indicated: | | | | | | | | | | | | | (in thousands) | | Nine Months Ended September 30, | | | | | | | | | 2022 | | 2021 | | 2022 vs. 2021 | Revenue | | | | | | | | | | | | | Produced Water Handling | | $ | 110,299 | | $ | 71,368 | | $ | 38,931 | | | 55% | Produced Water Handling—Affiliates | | | 69,084 | | | 62,216 | | | 6,868 | | | 11% | Water Solutions | | | 46,744 | | | 11,824 | | | 34,920 | | | 295% | Water Solutions—Affiliates | | | 11,640 | | | 16,864 | | | (5,224) | | | (31)% | Other Revenue | | | 364 | | | — | | | 364 | | | N/M | Total Revenue | | | 238,131 | | | 162,272 | | | 75,859 | | | 47% | Cost of Revenue | | | | | | | | | | | | | Direct Operating Costs | | | 101,337 | | | 66,703 | | | 34,634 | | | 52% | Depreciation, Amortization and Accretion | | | 49,724 | | | 45,550 | | | 4,174 | | | 9% | Total Cost of Revenue | | | 151,061 | | | 112,253 | | | 38,808 | | | 35% | Operating Costs and Expenses | | | | | | | | | | | | | Abandoned Well Costs | | | 14,637 | | | 27,402 | | | (12,765) | | | (47)% | General and Administrative | | | 33,860 | | | 15,240 | | | 18,620 | | | 122% | Impairment of Long-Lived Assets | | | 15,597 | | | — | | | 15,597 | | | N/M | Loss on Asset Disposal and Other | | | 1,816 | | | 2,590 | | | (774) | | | (30)% | Total Operating Expenses | | | 65,910 | | | 45,232 | | | 20,678 | | | 46% | Operating Income | | | 21,160 | | | 4,787 | | | 16,373 | | | 342% | Interest Expense, Net | | | 21,863 | | | 17,855 | | | 4,008 | | | 22% | Other | | | — | | | 380 | | | (380) | | | (100)% | Loss Before Income Taxes | | | (703) | | | (13,448) | | | 12,745 | | | (95)% | Income Tax Benefit | | | (81) | | | (81) | | | — | | | 0% | Net Loss | | $ | (622) | | $ | (13,367) | | $ | 12,745 | | | (95)% |
N/M Not Meaningful Operating Metrics The amount of revenue we generate primarily depends on the volumes of water which we handle for, sell to, or transfer for our customers. Volumes were as follows for the three-month periods: | | | | | | | | | | | | | | Three Months Ended | | | | | | | | September 30, | | | | | | | | 2022 | | 2021 | | | 2022 vs. 2021 | Thousand barrels water per day | | | | | | | | | | | | Produced Water Handling Volumes | | | 905 | | | 708 | | | 197 | | 28% | Water Solutions Volumes: | | | | | | | | | | | | Recycled Produced Water Volumes Sold | | | 345 | | | 130 | | | 215 | | 165% | Groundwater Volumes Sold | | | 166 | | | 82 | | | 84 | | 102% | Groundwater Volumes Transferred | | | — | | | 41 | | | (41) | | (100)% | Total Water Solutions Volumes | | | 511 | | | 253 | | | 258 | | 102% | Total Volumes | | | 1,416 | | | 961 | | | 455 | | 47% | | | | | | | | | | | | | Per Barrel Operating Metrics (1) | | | | | | | | | | | | Produced Water Handling Revenue/Barrel | | $ | 0.77 | | $ | 0.73 | | $ | 0.04 | | 5% | Water Solutions Revenue/Barrel | | $ | 0.55 | | $ | 0.50 | | $ | 0.05 | | 10% | Revenue/Barrel of Total Volumes | | $ | 0.69 | | $ | 0.67 | | $ | 0.02 | | 3% | Direct Operating Costs/Barrel | | $ | 0.34 | | $ | 0.27 | | $ | 0.07 | | 26% | Adjusted Operating Margin/Barrel (2) | | $ | 0.36 | | $ | 0.41 | | $ | (0.05) | | (12)% |
| (1) | Per barrel operating metrics are calculated independently. Therefore, the sum of individual amounts may not equal the total presented. |
| (2) | See Non-GAAP Financial Measures below. |
Volumes were as follows for the nine-month periods: | | | | | | | | | | | | | | Nine Months Ended | | | | | | | | September 30, | | | | | | | | 2022 | | 2021 | | | 2022 vs. 2021 | Thousand barrels water per day | | | | | | | | | | | | Produced Water Handling Volumes | | | 850 | | | 692 | | | 158 | | 23% | Water Solutions Volumes: | | | | | | | | | | | | Recycled Produced Water Volumes Sold | | | 306 | | | 102 | | | 204 | | 200% | Groundwater Volumes Sold | | | 112 | | | 61 | | | 51 | | 84% | Groundwater Volumes Transferred | | | 8 | | | 42 | | | (34) | | (81)% | Total Water Solutions Volumes | | | 426 | | | 205 | | | 221 | | 108% | Total Volumes | | | 1,276 | | | 897 | | | 379 | | 42% | | | | | | | | | | | | | Per Barrel Operating Metrics (1) | | | | | | | | | | | | Produced Water Handling Revenue/Barrel | | $ | 0.77 | | $ | 0.71 | | $ | 0.06 | | 8% | Water Solutions Revenue/Barrel | | $ | 0.50 | | $ | 0.51 | | $ | (0.01) | | (2)% | Revenue/Barrel of Total Volumes | | $ | 0.68 | | $ | 0.66 | | $ | 0.02 | | 3% | Direct Operating Costs/Barrel | | $ | 0.29 | | $ | 0.27 | | $ | 0.02 | | 7% | Adjusted Operating Margin/Barrel (2) | | $ | 0.39 | | $ | 0.41 | | $ | (0.02) | | (5)% |
| (1) | Per barrel operating metrics are calculated independently. Therefore, the sum of individual amounts may not equal the total presented. |
| (2) | See Non-GAAP Financial Measures below. |
Revenues An analysis of revenues is as follows: Produced Water Handling Revenues Total produced water handling revenues and produced water handling revenues per barrel are as follows: | | | | | | | | | | | | | | | | Three Months Ended | Nine Months Ended | (in thousands, except per unit amounts) | | | September 30, | | September 30, | | | | 2022 | | 2021 | | 2022 | | | 2021 | Produced Water Handling Fees | | $ | 57,486 | | $ | 45,617 | | $ | 160,083 | | $ | 127,966 | Skim Oil Sales Revenue | | | 6,984 | | | 2,157 | | | 19,300 | | | 5,618 | Total Produced Water Handling Revenue | | $ | 64,470 | | $ | 47,774 | | $ | 179,383 | | $ | 133,584 | | | | | | | | | | | | | | Produced Water Handling Fees/Bbl | | $ | 0.69 | | $ | 0.70 | | $ | 0.69 | | $ | 0.68 | Skim Oil Sales Revenue/Bbl | | | 0.08 | | | 0.03 | | | 0.08 | | | 0.03 | Total Produced Water Handling Revenue/Bbl | | $ | 0.77 | | $ | 0.73 | | $ | 0.77 | | $ | 0.71 |
Produced water handling revenues for the three months ended September 30, 2022 as compared with the three months ended September 30, 2021 increased primarily due to: | ● | an increase of $12.5 million due to a 197 kbwpd volume increase driven by activity associated with our long-term acreage dedication agreements, and |
| ● | an increase of $4.8 million in skim oil sales revenue due to higher crude oil prices and increased volumes on the system. |
Produced water handling revenues for the nine months ended September 30, 2022 as compared with the nine months ended September 30, 2021 increased primarily due to: | ● | an increase of $29.7 million due to a 158 kbwpd volume increase driven by activity associated with our long-term acreage dedication agreements, |
| ● | an increase of $2.4 million due to customer mix and contractual price adjustments, and |
| ● | an increase of $13.7 million in skim oil sales revenue due to higher crude oil prices and increased volumes on the system. |
Water Solutions Revenue Water solutions revenues for the three months ended September 30, 2022 as compared with the three months ended September 30, 2021 increased primarily due to: | ● | an increase of $13.2 million due to a 258 kbwpd volume increase driven by higher recycling volumes on higher completion activities across the Permian Basin in response to recovering commodity prices. |
Water solutions revenues for the nine months ended September 30, 2022 as compared with the nine months ended September 30, 2021 increased primarily due to: | ● | an increase of $30.2 million due to a 221 kbwpd volume increase driven by higher recycling volumes on higher completion activities across the Permian Basin in response to recovering commodity prices. |
Expenses An analysis of expenses is either handled or recycled,as follows: Direct Operating Costs Direct operating costs for the three months ended September 30, 2022 as compared with the three months ended September 30, 2021 increased due to higher volumes as well as cost inflation in labor, chemical treatment, rental equipment and fuel expenses. On a fixed fee per barrel of recycled water or groundwater sold to our customers. Costs of Conducting Our Business
Operating Expenses
We incurbasis, direct operating costs increased for the three months ended September 30, 2022 as compared with the three months ended September 30, 2021 due to operating cost inflation in labor, chemical treatment, rental equipment and fuel expenses.
Direct operating costs for the nine months ended September 30, 2022 as compared with the nine months ended September 30, 2021 increased due to higher volumes, offset by the absence of temporary power generation expenses. On a per barrel basis, direct operating costs increased due to higher labor, chemical treatment, rental equipment and fuel expenses, partially offset by reduced temporary power generation expenses. All our significant facilities have been on permanent power since the end of June 2021. For the nine months ended September 30, 2021, the estimated incremental impact of temporary power expenses was $4.3 million or approximately $0.02 per barrel. See Factors Affecting the Comparability of our Results of Operations — Temporary Power Costs for additional information. Depreciation, Amortization and Accretion Expenses Depreciation, amortization and accretion expense for the three and nine months ended September 30, 2022 as compared with the three and nine months ended September 30, 2021 increased primarily due to higher amortization expense related to a previously acquired customer contract, as well as depreciation expense related to new assets placed in service. Abandoned Well Costs Abandoned well costs for the three months ended September 30, 2022 included $9.2 million related to a functionstand-alone SWD well that has been taken out of service. Abandoned well costs for the nine months ended September 30, 2022 related to the abandonment of SWD wells which were no longer economically beneficial to the operations of the numberCompany, as well as the abandonment of barrels of water received, handleda well under construction. See Item 1. Financial Statements ─ Note 4. Property, Plant and treated. The major categories of operating costs are landowner royalties, power expenses for handling and treatment facilities, direct labor, chemicals for water treatment, water filtration expenses and repair and maintenance of facilities. We seek to minimize, to the extent appropriate for safe and reliable operations, expenses directly tied to operating and maintaining our assets.Equipment. General and Administrative Expenses General and administrative (“G&A”) expenses are costs incurred for overhead, including payrollthe three and nine months ended September 30, 2022 as compared with the three and nine months ended September 30, 2021 increased primarily due to increased compensation and benefits expenses, travel, and insurance costs corresponding with the increased head count required for our corporate staff, larger asset footprint, as well as incremental expenses that we now incur related to our becoming a public company. G&A expenses for the three and nine months ended September 30, 2022 included stock-based compensation expense of $3.6 million and $9.1 million, respectively. No stock-based compensation expense was recorded for the three or nine months ended September 30, 2021. Impairment Expense Impairment expense for the nine months ended September 30, 2022 related to Midland Basin assets reclassified to assets held for sale during the first quarter of 2022. The assets were re-measured at their fair values less costs to sell, which resulted in the recognition of maintaining our offices, costs of managing our permitting operations, information technology expenses, auditpre-tax impairment expense. See Item 1. Financial Statements ─ Note 4. Property, Plant and Equipment. Loss on Asset Disposal and Other Loss on asset disposal and other feesrepresents net gains and losses, and other expenses related to, the abandonment, disposal or exchange of assets. See Item 1. Financial Statements ─ Note 4. Property, Plant and Equipment. Interest Expense, Net Components of interest expense, net are as follows for professional services.the periods indicated: | | | | | | | | | | | | | | | Three Months Ended | | Nine Months Ended | (in thousands) | | September 30, | | September 30, | | | 2022 | | 2021 | | | 2022 | | | 2021 | Interest on Debt Instruments | | $ | 7,759 | | $ | 8,034 | | $ | 23,365 | | $ | 18,402 | Amortization of Debt Issuance Costs | | | 610 | | | 611 | | | 1,830 | | | 1,434 | Total Interest Expense | | | 8,369 | | | 8,645 | | | 25,195 | | | 19,836 | Less: Amounts Capitalized | | | (1,606) | | | (765) | | | (3,332) | | | (1,981) | Interest Expense, Net | | $ | 6,763 | | $ | 7,880 | | $ | 21,863 | | $ | 17,855 |
How We Evaluate Our Results of Operations
We use a variety of financial and operational metrics to evaluate our performance. These metrics help us identify factors and trends that impact our operating results, cash flows and financial condition. The key metrics we use to evaluate our business are provided below.
Produced Water Handling Volumes
We continually seek to bring additional produced water volumes onto our system to maintain or increase throughput on our systems. These volumes are a primary revenue driver and serveInterest expense, net for the three months ended September 30, 2022 decreased as compared with the three months ended September 30, 2021 as a water sourceresult of a higher amount capitalized.
Interest expense, net for our Water Solutions business. Changes in produced water handling throughput are driven primarily by the level of production and pace of completions activity on our contracted acreage. We define Produced Water Handling Volumesnine months ended September 30, 2022 as all produced water barrels received from customers and any barrels that are deficient under minimum volume commitment agreements. Water Solutions Barrels Sold and Transferred
Our recycled water and groundwater sales are primarily driven by our customers’ completion activities. We continually seekcompared with the nine months ended September 30, 2021 increased due to gain market share and expand our customer base for recycled water and groundwater salesan increase in the Permian Basin. Our accesstotal debt outstanding and an increase in the interest rate related to abundant produced water volumes and the scale of our systems allows us to distribute recycled water for our customers’ completion activities in an efficient, cost effective, and environmentally conscious manner. We define Water Solutions Barrels Sold and Transferreddebt instruments, as the total of all recycled water and groundwater barrels sold plus groundwater barrels transferredCredit Facility was repaid with proceeds from the Notes issuance on behalf of third parties.
Revenue
We analyze our revenue and assess our performance by comparing actual revenue to our internal projections and across periods. We examine revenue per barrel of water handled or sold to evaluate pricing trends and customer mix impacts. We also assess incremental changes in revenue compared to incremental changes in direct operating costs and selling, general and administrative expenses to identify potential areas for improvement and to determine whether our performance is meeting our expectations.
We generate revenue by providing fee-based services related to produced water handling and water solutions.
April 1, 2021. The services related to produced water are fee-based arrangements which are based on the volume of water that flows through our systems and facilities. Revenues from produced water handling consist primarily of per barrel fees charged to our customersaverage outstanding debt balance for the usenine months ended September 30, 2022 was $400 million compared with $366 million for the nine months ended September 30, 2021. Capitalized interest for the three and nine months ended September 30, 2022 increased as a result of our transportationa higher average interest rate and water handling services. For our produced water handling contracts, revenue is recognized over time utilizingan increase in the output method based on the volumeamount of produced water accepted from the customer. The sale of recycled produced water and groundwater are priced based on negotiated rates with our customers. For contracts that involve recycled produced water and groundwater, revenue is recognized at a point in time when control of the product is transferred to the customer.assets under construction.
Non-GAAP Financial Measures Adjusted EBITDA, Adjusted Operating Margin and Adjusted Operating Margin Per Barrel are supplemental non-GAAP measures that we use to evaluate current, past and expected future performance. Although these non-GAAP financial measures are important factors in assessing our operating results and cash flows, they should not be considered in isolation or as a substitute for net income or gross margin or any other measures prepared under GAAP. We believe this presentation is used by investors and professional research analysts for the valuation, comparison, rating, and investment recommendations of companies within our industry. Additionally, we use this information for comparative purposes within our industry. Adjusted EBITDA, Adjusted Operating Margin and Adjusted Operating Margin per Barrel are not measures of financial performance under GAAP and should not be considered as measures of liquidity or as alternatives to net income or gross margin. Adjusted EBITDA, Adjusted Operating Margin and Adjusted Operating Margin per Barrel as defined by us may not be comparable to similarly titled measures used by other companies and should be considered in conjunction with net income and other measures prepared in accordance with GAAP, such as gross margin, operating income or cash flows from operating activities. Adjusted EBITDA We use Adjusted EBITDA as a performance measure to assess the ability of our assets to generate sufficient cash to pay interest costs, support indebtedness and, at the discretion of our Board of Directors, return capital to equity holders. We also use Adjusted EBITDA isas a Non-GAAP financial measure.performance measure under our short-term incentive plan. We define Adjusted EBITDA as net income (loss) plus: interest expense; income taxes; depreciation, amortization and accretion expense; abandoned well costs, asset impairment and abandoned project charges; losses on the sale of assets; loss on debt modification; stock-based compensation expense; non-recurring litigation and settlement expenses; and other non-recurring or unusual expenses or charges (including temporary power costs, discussed below)above), less any gains on sale of assets. (See Non-GAAP Measures discussed below for more information regarding this financial measure, including a reconciliation to its most directly comparable GAAP measure.) Adjusted Operating Margin and Adjusted Operating Margin per Barrel Our Adjusted Operating Margin and Adjusted Operating Margin per Barrel are dependent upon the volume of produced water we gather and handle, the volume of recycled water and groundwater we sell and transfer, the fees we charge for such services, and the recurring operating expenses we incur to perform such services. We define Adjusted Operating Margin as Gross Margin plus depreciation, amortization and accretion and temporary power costs. We define Adjusted Operating Margin per Barrel as Adjusted Operating Margin divided by total volumes handled, sold or transferred. Adjusted Operating Margin and Adjusted Operating Margin per Barrel are non-GAAP financial measures. (See Non-GAAP Measures discussed below for more information regarding this financial measure, including a reconciliation to its most directly comparable GAAP measures for eachmeasure.) We seek to maximize our Adjusted Operating Margin in part by minimizing, to the extent appropriate, expenses directly tied to operating our assets. Landowner royalties, utilities, direct labor costs, chemical costs, workover and repair and maintenance costs, and contract services comprise the most significant portion of our expenses. Our operating expenses are largely variable and as such, generally fluctuate in correlation with throughput volumes. Our Adjusted Operating Margin is incrementally benefited from increased Water Solutions recyclingrecycled water sales. When produced water is recycled, we recognize cost savings from reduced landowner royalties, reduced pumping costs, lower chemical treatment and filtration costs, and reduced power consumption. Temporary Power Costs
In the past, we constructed assets in advance of permanent grid power infrastructure availability in order to secure long- term produced water handling contracts. As a result, we rented temporary power generation equipment that would not have been necessary if grid power connections had been available. We estimate temporary power costs by taking temporary power and rental expenses incurred during the period and subtracting estimated expenses that would have been incurred during such period had permanent grid power been available. Power infrastructure and permanent power availability rapidly expanded in the Permian Basin in 2020 and the first half of 2021, and accordingly, we were able to make significant progress in reducing these expenses over that period. By the end of June 2021, all our significant facilities were being supported by permanent power.
We remove temporary power costs when calculating Adjusted Operating Margin to accurately assess long-term profitability and cash flow on a basis consistent with our long-term projections and current operating cost profile.
Factors Affecting the Comparability of Our Results of Operations
Concho Acquisitions
On June 11, 2020, we acquired certain produced water handling and transportation assets in Lea County, New Mexico from a wholly owned subsidiary of Concho, which was acquired by ConocoPhillips in January 2021 (the “Lea County Acquisition”). See Note 4 – Acquisitions.
We processed 119,000 and 19,000 barrels per day of produced water volumes associated with the Lea County Acquisition for the nine months ended September 30, 2021 and 2020, respectively.
Results of Operations
Results of operations were as follows:
| | | | | | | | | | | | | | | Three Months Ended | | Nine Months Ended | (in thousands) | | September 30, | | September 30, | | | 2021 | | 2020 | | 2021 | | 2020 | Revenue | | | | | | | | | | | | | Produced Water Handling | | $ | 24,639 | | $ | 23,323 | | $ | 71,368 | | $ | 70,382 | Produced Water Handling—Affiliates | | | 23,135 | | | 13,312 | | | 62,216 | | | 35,284 | Water Solutions | | | 7,666 | | | 1,149 | | | 11,824 | | | 10,410 | Water Solutions—Affiliates | | | 4,059 | | | 4,672 | | | 16,864 | | | 10,472 | Total Revenue | | | 59,499 | | | 42,456 | | | 162,272 | | | 126,548 | Cost of Revenues | | | | | | | | | | | | | Direct Operating Costs | | | 23,497 | | | 22,207 | | | 66,703 | | | 71,640 | Depreciation, Amortization and Accretion | | | 15,378 | | | 11,751 | | | 45,550 | | | 31,529 | Total Cost of Revenue | | | 38,875 | | | 33,958 | | | 112,253 | | | 103,169 | Operating Costs and Expenses | | | | | | | | | | | | | Abandoned Well Costs | | | 27,402 | | | — | | | 27,402 | | | — | General and Administrative | | | 5,228 | | | 4,773 | | | 15,240 | | | 13,421 | Other Operating Expenses | | | 940 | | | 555 | | | 2,590 | | | 4,854 | Total Operating Expenses | | | 33,570 | | | 5,328 | | | 45,232 | | | 18,275 | Operating (Loss) Income | | | (12,946) | | | 3,170 | | | 4,787 | | | 5,104 | Other Expense | | | | | | | | | | | | | Interest Expense, Net | | | 7,880 | | | 2,099 | | | 17,855 | | | 5,364 | Loss on Debt Modification | | | — | | | — | | | 380 | | | — | Total Other Expense | | | 7,880 | | | 2,099 | | | 18,235 | | | 5,364 | (Loss) Income Before Taxes | | | (20,826) | | | 1,071 | | | (13,448) | | | (260) | Income Taxes | | | (83) | | | 9 | | | (81) | | | 15 | Net (Loss) Income | | $ | (20,743) | | $ | 1,062 | | $ | (13,367) | | $ | (275) | Equity Accretion and Dividend Related to Redeemable Preferred Units | | | — | | | (1,511) | | | 21 | | | (1,928) | Net Loss Attributable to Members' Equity | | $ | (20,743) | | $ | (449) | | $ | (13,346) | | $ | (2,203) |
Operating Metrics
The amount of revenue we generate primarily depends on the volumes of water for which we handle, sale or transfer for our customers. Our volumes for the periods indicated were as follows:
| | | | | | | | | | | | | | | Three Months Ended | | Nine Months Ended | | | September 30, | | September 30, | | | 2021 | | 2020 | | 2021 | | 2020 | Thousands barrel water per day | | | | | | | | | | | | | Produced Water Handling Volumes | | | 708 | | | 574 | | | 692 | | | 566 | Water Solutions Volumes: | | | | | | | | | | | | | Recycled Produced Water Volumes Sold | | | 130 | | | 44 | | | 102 | | | 34 | Groundwater Volumes Sold | | | 82 | | | 45 | | | 61 | | | 58 | Groundwater Volumes Transferred | | | 41 | | | 12 | | | 42 | | | 11 | Total Water Solutions Volumes | | | 253 | | | 101 | | | 205 | | | 103 | Total Volumes | | | 961 | | | 675 | | | 897 | | | 669 | | | | | | | | | | | | | | Per Barrel Operating Metrics | | | | | | | | | | | | | Produced Water Handling Revenue/Barrel | | $ | 0.73 | | $ | 0.69 | | $ | 0.71 | | $ | 0.68 | Water Solutions Revenue/Barrel | | $ | 0.50 | | $ | 0.63 | | $ | 0.51 | | $ | 0.74 | Revenue/Barrel of Total Volumes | | $ | 0.67 | | $ | 0.68 | | $ | 0.66 | | $ | 0.69 | Direct Operating Expense/Barrel | | $ | 0.27 | | $ | 0.36 | | $ | 0.27 | | $ | 0.39 | Adjusted Operating Margin/Barrel (1) | | $ | 0.41 | | $ | 0.38 | | $ | 0.41 | | $ | 0.37 |
(1)See Non-GAAP Financial Measures below
Revenues
An analysis of revenues is as follows:
| | | | | | | | | | | | Produced | | | | | | | | | Water | | Water | | Total | (in thousands) | | Handling | | Solutions | | Revenues | Three Months Ended September 30, 2020 | | $ | 36,635 | | $ | 5,821 | | $ | 42,456 | Changes due to: | | | | | | | | | | Increase in Volumes | | | 8,545 | | | 8,731 | | | 17,276 | Increase (Decrease) in Prices | | | 2,594 | | | (2,827) | | | (233) | Three Months Ended September 30, 2021 | | $ | 47,774 | | $ | 11,725 | | $ | 59,499 | | | | | | | | | | | Nine Months Ended September 30, 2020 | | $ | 105,666 | | $ | 20,882 | | $ | 126,548 | Changes due to: | | | | | | | | | | Increase in Volumes | | | 23,064 | | | 20,440 | | | 43,504 | Increase (Decrease) in Prices | | | 4,854 | | | (12,634) | | | (7,780) | Nine Months Ended September 30, 2021 | | $ | 133,584 | | $ | 28,688 | | $ | 162,272 |
Produced Water Handling Revenues
Total produced water handling revenues increased for third quarter 2021 compared to third quarter 2020 by $11.1 million, or 30%. For the nine months ended September 30, 2021, total produced water handling revenues increased $27.9 million, or 26%, compared to the nine months ended September 30, 2020. These increases are primarily due to:
| ● | an overall increase of 134 kbwpd and 126 kbwpd for the comparative three- and nine-month periods, respectively, due to an increase of activity associated with our new and previously contracted long-term acreage dedication agreements, including the ramp up of activities on the Lea County acreage dedication acquired by us in June of 2020, and |
| ● | an increase in the weighted average produced water handling price per barrel due to contractual price adjustments. |
Water Solutions Revenue
Water solutions revenues increased for third quarter 2021 compared to third quarter 2020, by $5.9 million, or 101%. For the nine months ended September 30, 2021, water solutions revenues increased $7.8 million, or 37%, compared to the nine months ended September 30, 2020. These increases in water solutions revenue are primarily due to:
| ● | an overall increase of 152 kbwpd and 102 kbwpd for the comparative three- and nine-month periods, respectively, principally due to higher recycling volumes. The increase in water solutions volumes is due to the increase in completion activities across the Permian basin in response to recovering commodity prices, partially offset by, |
| ● | a decrease in the weighted average price for water sold. The decrease in price is attributable to the increase of the amount of recycled water, versus ground water, sold. Although recycled water sales improve our overall profitability, we contract recycled water volumes at lower prices relative to ground water volumes. |
Direct Operating Costs
For the third quarter in 2021, direct operating costs were $23.5 million compared to $22.2 million for the third quarter of 2020, an increase of $1.3 million, or 6%. The increase is primarily due to increased Water Solutions volumes.
On a per barrel basis, direct operating costs per barrel were $0.27 per barrel compared to $0.36 per barrel for the third quarter of 2021 and 2020, respectively. Direct operating costs per barrel improved primarily due to reduced temporary power generation expenses and increased recycled volumes sold, which have a lower operating cost per barrel.
All our significant facilities were on permanent power during the third quarter of 2021, and therefore we did not adjust for any temporary power expenses. For third quarter 2020, the estimated incremental impact of temporary power expenses was $3.5 million, or approximately $0.06 per barrel.
For the nine months ended September 30, 2021, direct operating costs were $66.7 million compared to $71.6 million for the nine months ended September 30, 2020, a decrease of $4.9 million, or 7%. The decrease in direct operating costs is primarily due to reduced temporary power generation expenses. As a result, for the nine months ended September 30, 2021, direct operating costs was $0.27 per barrel for the nine months ended September 30, 2021 compared to $0.39 per barrel for the nine months ended September 30, 2020.
Estimated incremental impacts of temporary power expenses were $4.3 million and $12.7 million for the nine months ended September 30, 2021 and 2020, respectively. See “How We Evaluate Our Results of Operations—Temporary Power Costs” for additional information.
Depreciation, Amortization and Accretion Expenses
For the three months ended September 30, 2021, depreciation, amortization and accretion expense was $15.4 million compared to $11.8 million for the three months ended September 30, 2020, an increase of $3.6 million, or 31%. For the nine months ended September 30, 2021, depreciation, amortization and accretion expenses were $45.6 million compared to $31.5 million for the nine months ended September 30, 2020, an increase of $14.1 million, or 45%. These increases are primarily due to the amortization of customer contracts related to the Lea County Acquisition, incremental assets from the Lea County Acquisition, and continued asset construction.
Abandoned Well Costs
In late third quarter 2021, management completed its evaluation of the performance of a saltwater disposal asset, located in Eddy County, New Mexico and concluded that the well should be shut-in and taken out of service. We drilled this well in the second quarter of 2017 and encountered technical difficulties requiring significant incremental capital expenditure. The asset was put into service in May of 2018. During July 2021, we re-entered the well bore to address anomalies. After technical testing, management concluded that it was probable that abandoning the asset was the most prudent course of action. Accordingly, we have recognized a charge of $27.4 million, included in abandoned well costs for the remaining net book value of the well. The abandonment did not impact our revenues.
General and Administrative Expenses
For the three months ended September 30, 2021, general and administrative expenses were $5.2 million compared to $4.8 million for the three months ended September 30, 2020, an increase of $0.4 million, or 8%.
For the nine months ended September 30, 2021, general and administrative expenses were $15.2 million compared to $13.4 million for the nine months ended September 30, 2020, an increase of $1.8 million, or 13%. These increases are mainly due to increased compensation and benefits expenses, travel, and insurance costs corresponding with a larger asset footprint.
Other Operating Expenses
Other operating expenses were $0.9 million for the three months ended September 30, 2021, compared to $0.6 million for third quarter 2020. The increase is mainly due to increased expirations of legacy permits and rights-of-way that were ultimately not constructed. On a quarterly basis, we review the status of projects to ensure our commitment and ability to complete the project as planned. If we identify a project where completion is no longer probable, we recognize a charge to earnings for the total costs incurred for that project.
For the nine months ended September 30, 2021, other operating expenses were $2.6 million, compared to $4.9 million for third quarter 2020. The decrease of $2.3 million is primarily due to the non-recurrence of advisory and legal expenses associated with the Lea County Acquisition and non-recurrence of advisory and legal expenses associated with an uncompleted transaction that was terminated in first quarter 2020. This was partially offset by an increase in the expiration of legacy permits and rights-of-way as discussed above.
Interest Expense
Interest expense is as follows:
| | | | | | | | | | | | | | | Three Months Ended | | Nine Months Ended | (in thousands) | | September 30, | | September 30, | Interest on Debt Instruments | | $ | 8,034 | | $ | 2,686 | | $ | 18,402 | | $ | 7,877 | Less: Capitalized Interest | | | (765) | | | (795) | | | (1,981) | | | (3,083) | Interest on Debt Less Capitalized Interest | | | 7,269 | | | 1,891 | | | 16,421 | | | 4,794 | Amortization of Financing Costs | | | 611 | | | 208 | | | 1,434 | | | 570 | Interest Expense, Net | | $ | 7,880 | | $ | 2,099 | | $ | 17,855 | | $ | 5,364 |
Net interest expense increased $5.8 million in third quarter 2021 compared to third quarter 2020. The increase is primarily due to an increase in the total debt outstanding and an increase in the interest rate related to our debt instruments. For third quarter 2021, our outstanding debt balance was $400 million, all of which is attributable to our sustainability linked notes, compared to the third quarter 2020 balance of $286.7 million related to our credit facility. The interest rate on our sustainability-linked notes is 7.625%, whereas the third quarter 2020 rate on the credit facility was 3.67%. Net interest expense also increased $0.4 million due to higher amortization of financing costs.
Net interest expense increased $12.5 million for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020. The increase is primarily due to increases in the outstanding debt balance, interest rates and amortization of financing costs as discussed above. The increase is also due to less capitalized interest a result of the reduction in our capital projects and related capital expenditures.
Non-GAAP Financial Measures
Adjusted EBITDA, Adjusted Operating Margin and Adjusted Operating Margin Per Barrel are supplemental non- GAAP measures that we use to evaluate current, past and expected future performance. Although these non-GAAP financial measures are important factors in assessing our operating results and cash flows, they should not be considered in isolation or as a substitute for net income or gross margin or any other measures prepared under GAAP.
Reconciliation of GAAP “Net income” to Non-GAAP “Adjusted EBITDA”
We define Adjusted EBITDA as net income (loss) plus: interest expense; income taxes; depreciation, amortization and accretion expense; abandoned well costs, asset impairment and abandoned project charges; losses on the sale of assets; loss on debt modification; and non-recurring or unusual expenses or charges (including temporary power costs), less any gains on sale of assets.
Reconciliation of GAAP “Gross Margin” to Non-GAAP “Adjusted Operating Margin” and “Adjusted Operating Margin per Barrel”
We define Adjusted Operating Margin as Gross Margin plus depreciation, amortization and accretion and temporary power costs. We define Adjusted Operating Margin per Barrel as Adjusted Operating Margin divided by total volumes.
We believe this presentation is used by investors and professional research analysts for the valuation, comparison, rating, and investment recommendations of companies within our industry. Additionally, we use this information for comparative purposes within our industry. Adjusted EBITDA, Adjusted Operating Margin and Adjusted Operating Margin per Barrel are not measures of financial performance under GAAP and should not be considered as measures of liquidity or as alternatives to net income (loss) or gross margin. Adjusted EBITDA, Adjusted Operating Margin and Adjusted Operating Margin per Barrel as defined by us
may not be comparable to similarly titled measures used by other companies and should be considered in conjunction with net income (loss) and other measures prepared in accordance with GAAP, such as gross margin, operating income or cash flows from operating activities.
The following table sets forth a reconciliation of net income (loss) as determined in accordance with GAAP to Adjusted EBITDA and Adjusted Operating Margin for the periods indicated: | | | | | | | | | | | | | | | Three Months Ended | | Nine Months Ended | (in thousands) | | September 30, | | September 30, | | | 2021 | | 2020 | | 2021 | | 2020 | Net Income (Loss) | | $ | (20,743) | | $ | 1,062 | | $ | (13,367) | | $ | (275) | Interest Expense, Net | | | 7,880 | | | 2,099 | | | 17,855 | | | 5,364 | Income Tax (Benefit) Expense | | | (83) | | | 9 | | | (81) | | | 15 | Depreciation, Amortization and Accretion | | | 15,378 | | | 11,751 | | | 45,550 | | | 31,529 | Abandoned Well Costs | | | 27,402 | | | — | | | 27,402 | | | — | Abandoned Projects | | | 679 | | | 368 | | | 2,035 | | | 1,501 | Temporary Power Costs (1) | | | — | | | 3,548 | | | 4,253 | | | 12,669 | Loss on Disposal of Asset, Net | | | 8 | | | 15 | | | 225 | | | 82 | Loss on Debt Modification | | | — | | | — | | | 380 | | | — | Settled Litigation (2) | | | — | | | 714 | | | — | | | 1,311 | Transaction Costs (3) | | | 253 | | | 172 | | | 330 | | | 3,271 | Severance and Other | | | — | | | — | | | 221 | | | 190 | Adjusted EBITDA | | $ | 30,774 | | $ | 19,738 | | $ | 84,803 | | $ | 55,657 | | | | | | | | | | | | | | Total Revenue | | $ | 59,499 | | $ | 42,456 | | $ | 162,272 | | $ | 126,548 | Cost of Revenue | | | (38,875) | | | (33,958) | | | (112,253) | | | (103,169) | Gross Margin | | | 20,624 | | | 8,498 | | | 50,019 | | | 23,379 | Depreciation, Amortization and Accretion | | | 15,378 | | | 11,751 | | | 45,550 | | | 31,529 | Temporary Power Costs | | | — | | | 3,548 | | | 4,253 | | | 12,669 | Adjusted Operating Margin | | $ | 36,002 | | $ | 23,797 | | $ | 99,822 | | $ | 67,577 | Total Volumes (Thousands of BBLs) | | | 88,357 | | | 62,103 | | | 245,048 | | | 183,438 | Adjusted Operating Margin/BBL | | $ | 0.41 | | $ | 0.38 | | $ | 0.41 | | $ | 0.37 |
| | | | | | | | | | | | | | | Three Months Ended | | Nine Months Ended | (in thousands) | | September 30, | | September 30, | | | 2022 | | 2021 | | 2022 | | 2021 | Net Income (Loss) | | $ | 1,956 | | $ | (20,743) | | $ | (622) | | $ | (13,367) | Interest Expense, Net | | | 6,763 | | | 7,880 | | | 21,863 | | | 17,855 | Income Tax Expense (Benefit) | | | 287 | | | (83) | | | (81) | | | (81) | Depreciation, Amortization and Accretion | | | 16,942 | | | 15,378 | | | 49,724 | | | 45,550 | Abandoned Well Costs | | | 9,222 | | | 27,402 | | | 14,637 | | | 27,402 | Impairment of Long-Lived Assets | | | — | | | — | | | 15,597 | | | — | Stock-Based Compensation | | | 3,595 | | | — | | | 9,134 | | | — | Abandoned Projects | | | — | | | 679 | | | 66 | | | 2,035 | Temporary Power Costs (1) | | | — | | | — | | | — | | | 4,253 | (Gain) Loss on Disposal of Asset, Net | | | (97) | | | 8 | | | 481 | | | 225 | Loss on Debt Modification | | | — | | | — | | | — | | | 380 | Transaction Costs | | | 336 | | | 253 | | | 1,269 | | | 330 | Other | | | 325 | | | — | | | 325 | | | 221 | Adjusted EBITDA | | $ | 39,329 | | $ | 30,774 | | $ | 112,393 | | $ | 84,803 | | | | | | | | | | | | | | Total Revenue | | $ | 90,776 | | $ | 59,499 | | $ | 238,131 | | $ | 162,272 | Cost of Revenue | | | (60,827) | | | (38,875) | | | (151,061) | | | (112,253) | Gross Margin | | | 29,949 | | | 20,624 | | | 87,070 | | | 50,019 | Depreciation, Amortization and Accretion | | | 16,942 | | | 15,378 | | | 49,724 | | | 45,550 | Temporary Power Costs (1) | | | — | | | — | | | — | | | 4,253 | Adjusted Operating Margin | | $ | 46,891 | | $ | 36,002 | | $ | 136,794 | | $ | 99,822 | Total Volumes (Thousands of BBLs) | | | 130,267 | | | 88,357 | | | 348,315 | �� | | 245,048 | Adjusted Operating Margin/BBL | | $ | 0.36 | | $ | 0.41 | | $ | 0.39 | | $ | 0.41 |
| (1) | See discussion above under "Temporary Power Costs". |
(2) | Settled Litigation is primarily related to legal expenses associated with a right-of-way dispute that was successfully settled in arbitration. |
(3) | Transaction Costs are primarily related to certain advisory and legal expense associated with a recapitalization process that was terminated in first quarter 2020 and acquisition expenses associated with the Concho Lea Country Acquisition in June 2020. |
Liquidity and Capital Resources Overview Our primary needs for cash are permitting, development and construction of water handling and recycling assets to meet customers’ needs, payment of contractual obligations including debt, and working capital obligations. When appropriate, we enhance shareholder returns by returning capital to shareholders, such as through dividend payments and share buybacks (to the extent determined by our Board). Funding for these cash needs may be provided by any combination of internally generated cash flow, borrowings under the Credit Facility, or accessing the capital markets. In April 2021, we repaid $297.0 million of total outstanding borrowings under We believe that our cash flows, undrawn Credit Facility and redeemed all outstanding redeemable preferred units for $74.4 millionleverage profile provide us with the proceeds fromfinancial flexibility to fund attractive growth opportunities in the issuance of $400.0 million of our Senior Sustainability-Linked Notes. We also amended and restated our Credit Facility to provide $200.0 million of committed funds that were undrawn as of September 30, 2021.future.
As of September 30, 2021,2022, we had a cash balance of $25.2 million and working capital, defined as current assets less current liabilities, of $37.5$12.0 million. We had $400.0 million and $200.0face value of Notes outstanding, with $199.85 million of availability under the Credit Facility. As of September 30, 2022, we were in compliance with all the covenants under our Credit Facility and the indenture governing the Notes. See Item 1. Financial Statements ─ Note 6. Long-Term Debt for descriptions of the Credit Facility and Notes. In addition, we are on track to achieve our SPT, as defined in the indenture governing the Notes, which is to increase our annual Recycling Key Performance Indicator (“KPI”) to 60% by 2022 from a 2020 baseline of 42.1%, with an observation date of December 31, 2022. The KPI is designed to reduce groundwater withdrawal for water intensive industrial operations in the Permian Basin by increasing our sales of recycled produced water. On October 1, 2022, we made an interest payment of $15.3 million on the Notes. As of November 10, 2022, we had an outstanding balance of $35.0 million on our Credit Facility at an average interest rate of 6.97%. The borrowings are primarily being used to fund our capital program. Dividends and Distributions On February 25, 2022, May 6, 2022, and August 3, 2022, our Board of Directors declared quarterly dividends on our Class A common stock of $0.09 per share for first, second, and third quarter 2022, respectively. In conjunction with the dividend payments, distributions of $0.09 per unit per quarter were paid to unit holders of Solaris LLC. Dividends were also paid on unvested shares of restricted stock and RSUs. Dividends accrue on PSUs and are paid upon vesting. The total amount paid on such dividends and distributions was $19.2 million for the nine months ended September 30, 2022. On November 4, 2022, our Board of Directors declared a dividend on our Class A common stock for the fourth quarter of 2022 of $0.09 per share. The dividend will be paid on November 30, 2022, to holders of record of our Class A common stock as of the close of business on November 17, 2022. In conjunction with the dividend payment, a distribution of $0.09 per unit will be paid to unit holders of Solaris LLC, subject to the same payment and record dates. Cash FlowFlows from Operating Activities For the nine months ended September 30, 2021, we had2022, Net Cash Flow Provided by Operating Activities oftotaled $77.2 million as compared with $57.2 million compared to $50.6 million for the nine months ended September 30, 2020.2021. The net increase is primarily driven bydue to the $75.9 million increase in revenue as well as changestotal revenues offset by increases in working capital drivendirect operating costs and general and administrative expenses. Net Cash Provided by timingOperating Activities also included reductions of collections of accounts receivable$13.6 million and payments of trade accounts payable and interest payable. Cash Flow Used in Investing Activities
For the nine months ended September 30, 2021, we had Cash Flow Used in Investing Activities of $62.7 million compared to $121.8$6.6 million for the nine months ended September 30, 2020. We incurred lower2022 and 2021, respectively, associated with changes in working capital expendituresitems. Changes in 2021 comparedworking capital items adjust for the timing of receipts and payment of actual cash. The reductions in working capital are generally linked to 2020 due to lowerincreases in accounts receivable from increased revenues, particularly in our water sourcing services, and overall slower payment by customers as they manage their working capital expenditure requirements to meet produced water handling capacity needs.in a rising cost environment.
Cash Flow Provided by FinancingFlows from Investing Activities For the nine months ended September 30, 2021, we had2022, Net Cash Flow Provided by FinancingUsed in Investing Activities of $17.0totaled $92.9 million as compared to $72.5with $62.7 million for the nine months ended September 30, 2020. 2021. Expenditures for property, plant and equipment were higher in 2022 as compared with 2021 due primarily to increased capital activity to support our growing operations, including the recently signed management agreement with Chevron. Cash FlowFlows from Financing Activities For the nine months ended September 30, 2022, Net Cash Used in Financing Activities totaled $19.2 million as compared with Net Cash Provided by Financing Activities of $17.0 million for the nine months ended September 30, 2021. Cash used in financing activities for the first nine months of 2022 related to dividends and distributions paid. Cash provided by financing activities for the first nine months of 2021 of $17.0 million was primarily due toincluded the issuance of our $400.0 million aggregate principal amount of our 7.625% Senior Sustainability-Linked Notes on April 1, 2021, that waswith net proceeds of $390.6 million used to pay down the outstanding Credit Facility balance of $297.0 million and redeem the Redeemable Preferred Units offor $74.4 million. We required less external financing for the nine months ended September 30, 2021 versus the nine months ended September 30, 2020 due to lower capital buildout requirements. Capital Requirements Our business is capital intensive, requiringFor the maintenanceyear of existing pipelines, pumps and handling and recycling facilities and the acquisition or construction and development of new assets and facilities.
Our current level2022, our estimate of capital expenditures is expected to remain withinbetween $140.0 and $150.0 million. Our capital expenditure forecast supports the full-cycle water management agreement with Chevron signed in May 2022 as well as incremental projected growth from our internally generated cash flow as we maintain significant flexibility around the timing of capital expenditures. However, we are subject to certain capital requirements to support our customers’ development plans associated with acreage dedication agreements.
Accordingly, we work proactively with our customers to anticipate their future needs for water handling and recycling assets to support their activities. For 2021, we expect our capital expenditures to range from $78-$83 million.
other long-term contracted customers. We intend to fund capital requirements through our primary sources of liquidity, which include cash on hand, and cash flows from operations and if needed, our borrowing capacity under the Credit Facility. Debt Agreements
Credit Facility
On April 1, 2021, we entered into our amended and restated credit agreement (the “Restated Credit Agreement”) to, among other things, (i) decrease the commitments under the Credit Facility to $200.0 million, (ii) extend the maturity date to April 1, 2025, (iii) reprice the loans made under the Credit Facility and unused commitment fees to be determined based on a leverage ratio ranging from 3.00:1.00 to 4.50:1.00, (iv) provide for a $75.0 million incremental revolving facility, which shall be on the same terms as under the Credit Facility, (v) annualize EBITDA for 2021 for the purpose of covenant calculations, (vi) amend the leverage ratio covenant to comprise of a maximum total funded debt to EBITDA ratio, net of $40.0 million of unrestricted cash and cash equivalents if the facility is drawn, and net of all unrestricted cash and cash equivalents if the facility is undrawn, (vii) increase the leverage ratio covenant test level for the first two fiscal quarters of 2021
to 5.00 to 1.00, for the third quarter of 2021 to 4.75 to 1.00, and thereafter to 4.50 to 1.00 and (viii) add a secured leverage covenant of 2.50 to 1.00. In April 2021, we repaid all borrowings under the prior Credit Facility upon entering into the Restated Credit Agreement. As of September 30, 2021, we were in compliance with all of our covenants under our Credit Facility.
Senior Sustainability-Linked Notes
We have $400.0 million aggregate principal amount of 7.625% Senior Sustainability-Linked Notes outstanding, which are due April 1, 2026. The Notes were issued by Solaris LLC on April 1, 2021 and are unsecured and effectively subordinated to the Credit Facility to the extent of the value of the collateral securing the Credit Facility. The Notes are guaranteed on a senior unsecured basis by all of Solaris LLC’s wholly owned subsidiaries. Interest on the Notes is payable on April 1 and October 1 of each year. We may redeem all or part of the Notes at any time on or after April 1, 2023 at redemption prices ranging from 103.8125% on or after April 1, 2023 to 100% on or after April 1, 2025. In addition, on or before April 1, 2023, we may redeem up to 40% of the aggregate principal amount of the Notes with the net cash proceeds of certain equity offerings, if certain conditions are met, at a redemption price of 107.625% of the principal amount of the notes, plus accrued interest. At any time prior to April 1, 2023, we may also redeem the Notes, in whole or in part, at a price equal to 100% of the principal amount of the notes plus a “make-whole” premium.
Certain of these redemption prices are subject to increase if we fail to satisfy the Sustainability Performance Target (as defined in the indenture governing the notes and referred herein as “SPT”) and provide notice of such satisfaction to the trustee. If we undergo a change of control, we may be required to repurchase all or a portion of the notes at a price equal to 101% of the principal amount of the notes, plus accrued interest.
We used the proceeds from the issuance of the Notes to repay all borrowings outstanding under our Credit Facility, to redeem our preferred units in full and for general corporate purposes.
The indenture that governs the Notes contains covenants that, among other things, limit our ability and the ability of our restricted subsidiaries to:
| ● | incur or guarantee additional indebtedness or issue certain preferred stock; |
| ● | pay dividends on capital stock or redeem, repurchase or retire our capital stock or subordinated indebtedness; |
| ● | transfer or sell assets; |
| ● | enter into agreements that restrict dividends or other payments from our restricted subsidiaries to us; |
| ● | consolidate, merge or transfer all or substantially all of our assets; |
| ● | engage in transactions with affiliates; and |
| ● | create unrestricted subsidiaries. |
Our key performance indicator under our Sustainability-Linked Bond Framework is to increase recycled produced water sold and reduce groundwater withdrawals sold expressed as a percentage of barrels of recycled produced water sold per year divided by total barrels of water sold per year (the “Recycling KPI”).
The Recycling KPI encompasses 100% of our sourcing operations in the Permian Basin. Our Recycling KPI is designed to reduce groundwater withdrawal for water intensive industrial operations in the water stressed Permian Basin by increasing our sales of recycled produced water. Our SPT is to increase our annual Recycling KPI to 60% by 2022 from a 2020 baseline of 42.1%, with an observation date of December 31, 2022.
To the extent the SPT has not been achieved and verified for the year ended December 31, 2022, the coupon on the Notes will increase to 7.875% beginning with the interest period ending on October 1, 2023 until maturity and there will also be an increase in applicable optional redemption prices.
We were in compliance with all covenants under the indenture governing the Notes as of September 30, 2021.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with GAAP requires the selection and application of appropriate accounting principles to the relevant facts and circumstances of our operations and the use of estimates made by management. We have identified the following accounting policies that are most important to the portrayal of our consolidated financial position and results of operations. The application of these accounting policies, which requires subjective or complex judgments regarding estimates and projected outcomes of future events, and changes in these accounting policies, could have a material effect on our financial statements.
Revenue Recognition
We generate revenue by providing services related to Produced Water Handling and Water Solutions. The services related to produced water are fee-based arrangements and are based on the volume of water that flows through our systems and facilities while the sale of recycled produced water and groundwater are priced based on negotiated rates with the customer.
We have customer contracts that contain minimum transportation and/or disposal volume delivery requirements and we are entitled to deficiency payments if such minimum contractual volumes are not delivered by the customer. These deficiency amounts are based on fixed, daily minimum volumes (measured over monthly, quarterly and annual periods depending on the contract) at a fixed rate per barrel. We are typically entitled to shortfall payments if such minimum contractual obligations are not maintained by our customers. We invoice the customer on either a monthly, quarterly or annual basis, as provided in the contract.
We account for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which was adopted effective January 1, 2019, using the modified retrospective approach. No cumulative adjustment to accumulated earnings was required as a result of this adoption.
In determining the appropriate amount of revenue to be recognized as we fulfill our obligations under the contracts, the following steps must be performed at contract inception: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) we satisfy each performance obligation.
Revenues from Produced Water Handling consist primarily of per barrel fees charged to customer for the use of our system and disposal services. For all of our produced water transfer and disposal contracts, revenue will be recognized over time utilizing the output method based on the volume of wastewater accepted from the customer. We typically charge our customers a disposal and transportation fee on a per barrel basis
under our contracts. In some contracts, we are entitled to shortfall payments if minimum contractual obligations are not satisfied by our customers. Minimum contractual obligations have not been maintained, and thus we have recognized revenues related to shortfalls on such take or pay contractual obligations to date. Some contracts also have a mechanism that allows for shortfalls to be made up over a limited period of time.
For contracts that involve recycled produced water and groundwater, revenue is recognized at a point in time, based on when control of the product is transferred to the purchaser or customer, as the case may be.
Acquisitions
To determine if a transaction should be accounted for as a business combination or an acquisition of assets, we first calculate the relative fair values of the assets acquired. If substantially all of the relative fair value is concentrated in a single asset or group of similar assets, or if not but the transaction does not include a significant process (does not meet the definition of a business), we record the transaction as an acquisition of assets. For acquisitions of assets, the purchase price is allocated based on the relative fair values. For an acquisition of assets, goodwill is not recorded. All other transactions are recorded as business combinations.
Fair values of assets acquired and liabilities assumed are based upon available information and may involve engaging an independent third party to perform an appraisal. Estimating fair values can be complex and subject to significant business judgment. We must also identify and include in the allocation all acquired tangible and intangible assets that meet certain criteria, including assets that were not previously recorded by the acquired entity. The estimates most commonly involve property, plant and equipment and intangible assets, including those with indefinite lives. The estimates also include the fair value of contracts. For a business combination, the excess of the purchase price over the net fair value of acquired assets and assumed liabilities is recorded as goodwill, which is not amortized but instead is evaluated for impairment at least annually. Pursuant to GAAP, an entity is allowed a reasonable period of time (not to exceed one year) to obtain the information necessary to identify and measure the fair value of the assets acquired and liabilities assumed in a business combination.
Impairment of Long-Lived Assets
We evaluate the carrying value of our long-lived assets (property, plant and equipment and amortizable intangible assets) for potential impairment when events and circumstances warrant such a review. A long-lived asset group is considered impaired when the anticipated undiscounted future cash flows from the use and eventual disposition of the asset group is less than its carrying value. We compare the carrying value of the long-lived asset to the estimated undiscounted future cash flows expected to be generated from that asset. Estimates of future net cash flows include estimating future volumes and margins, future operating costs and other estimates and assumptions consistent with our business plans. If we determine that an asset’s unamortized cost may not be recoverable due to impairment, we may be required to reduce the carrying value and the subsequent useful life of the asset. Any such write-down of the value and unfavorable change in the useful life of a long-lived asset would increase costs and expenses at that time. Fair value calculations for long-lived assets and intangible assets contain uncertainties because it requires the Company to apply judgment and estimates concerning future cash flows, strategic plans, useful lives and market performance. The Company also applies judgment in the selection of a discount rate that reflects the risk inherent in the current business model.
Impairment of Goodwill
Goodwill is subject to at least an annual assessment for impairment. We perform our annual assessment of impairment during the fourth quarter of our fiscal year, and more frequently if circumstances warrant. Before employing detailed impairment testing methodologies, we may first evaluate the likelihood of impairment by considering qualitative factors relevant to the business, such as macroeconomic, industry, market or any other factors that have a significant bearing on fair value. If we first utilize a qualitative approach and
determine that it is more likely than not that goodwill is impaired, detailed testing methodologies are then applied. Otherwise, we conclude that no impairment has occurred. We may also choose to bypass a qualitative approach and opt instead to employ detailed testing methodologies, regardless of a possible more likely than not outcome. If we determine through the qualitative approach that detailed testing methodologies are required, or if the qualitative approach is bypassed, we compare the fair value of a reporting unit with its carrying amount under Step 1 of the impairment test. The determination of a reporting unit’s fair value is predicated on our assumptions regarding the future economic prospects of the reporting unit. Such assumptions include (i) discrete financial forecasts for the assets contained within the reporting unit, which rely on our estimates of gross margins, (ii) long-term growth rates for cash flows beyond the discrete forecast period, (iii) appropriate discount rates and (iv) estimates of the cash flow multiples to apply in estimating the market value of our reporting units. If the carrying amount exceeds the fair value of a reporting unit, the Company performs Step 2 and compares the fair value of reporting unit goodwill with the carrying amount of that goodwill and recognizes an impairment charge for the amount by which the carrying amount exceeds the implied fair value; however, the loss recognized may not exceed the total amount of goodwill allocated to that reporting unit.
If future results are not consistent with our estimates, we could be exposed to future impairment losses that could be material to our results of operations. We monitor the markets for our products and services, in addition to the overall market, to determine if a triggering event occurs that would indicate that the fair value of a reporting unit is less than its carrying value.
Emerging Growth Company Status We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies.” We may take advantage of these exemptions until we are no longer an “emerging growth company.” Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards. We have elected to use the extended transition period for complying with new or revised accounting standards and as a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates. We may take advantage of these exemptions up until the last day of the fiscal year following the fifth anniversary of our initial public offering or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than $1.07 billion in annual revenue, we have more than $700.0 million in market value of our stock held by non-affiliates (and we have been a public company for at least 12 months and have filed one annual report on Form 10-K) or we issue more than $1.0 billion of non-convertible debt securities over a three-year period.
Item 3. Quantitative and Qualitative Disclosures about Market Risk Market risk is the risk of loss arising from adverse changes in market rates and prices. Currently, our market risks relate to potential changes in the fair value of our long-term debt due to fluctuations in applicable market interest rates. Going forward our market risk exposure generally will be limited to those risks that arise in the normal course of business, as we do not engage in speculative, non-operating transactions, nor do we utilize financial instruments or derivative instruments for trading purposes. We believe that our exposures to market risk have not changed materially since those reported under Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” included in our 2021 Annual Report. Commodity Price Risk The market for our services is indirectly exposed to fluctuations in the prices of crude oil and natural gas to the extent such fluctuations impact drilling and completion activity levels and thus impact the activity levels and timing of activity of our customers in the exploration and production and oilfield services industries. A portion of our revenue is directly exposed to fluctuations in the price of crude oil because one of our largest customer contracts provides for rates that periodically fluctuate within a defined range in response to changes in WTI. According to the terms of the contract, the per barrel fee increases when WTI exceeds a certain base price. In addition, revenue from skim oil sales is directly exposed to fluctuations in the price of crude oil. We do not currently intend to hedge our indirect exposure to commodity price risk. Interest Rate Risk We are subject to interest rate risk on a portion of our long-term debt under the Credit Facility. We do not currently have any borrowings underAs of November 10, 2022, we had an outstanding balance of $35.0 million on our Credit Facility.Facility at a weighted-average interest rate of 6.97%. Item 4. Controls and Procedures As required by Rule 13a‑15(b) under the SecuritiesIn accordance with Exchange Act of 1934 (the “Exchange Act”),Rules 13a-15 and 15d-15, we have evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a‑15(e)13a-15(e) and 15d‑15(e)15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10‑Q.
September 30, 2022. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Based upon thaton the evaluation of our disclosure controls and procedures as of September 30, 2022, our principal executive officer and principal financial officer have concluded that, as of such date, our disclosure controls and procedures were effective as of September 30, 2021.at the reasonable assurance level. Changes in Internal Control over Financial Reporting Except for the adoption of certain corporate governance policies and efforts to remediate our material weakness, each as described below, thereThere were no changes in our internal control over financial reporting that occurred duringidentified in the evaluation for the quarter ended September 30, 20212022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
In connection with the IPO, we adopted certain corporate governance policies in order to strengthen our corporate governance and comply with the requirements of the New York Stock Exchange. These changes included the appointment of five independent members of the Aris Board of Directors, the establishment of Corporate Governance Guidelines, the adoption of Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee Charters and the adoption of a Code of Business Conduct and Ethics.
As previously disclosed in our Prospectus, in connection with the preparation and review of our financial statements for the year ended December 31, 2020, we identified a material weakness in our internal controls over financial reporting caused by the misapplication of accounting principles related to the estimate of amortization in connection with our intangible assets. The corrected amount was reflected in our year-end 2020 financial statements, and this material weakness was remediated as of September 30, 2021.
PART II. OTHER INFORMATION Item 1. Legal Proceedings Due to the nature of our business, we may become, from time to time, involved in routine litigation or subject to disputes or claims related to our business activities. In the opinion of our management, there are no pending litigation, disputes or claims against us which, if decided adversely, will have a material adverse effect on our financial condition, cash flows or results of operations. Item 1A. Risk Factors FactorsThere have been no material changes or updates to our risk factors that could materially adversely affect our business, financial condition, operating results or liquidity and the trading pricewere previously disclosed in Part I, Item 1A of our Class A common stock are described under “Risk Factors,” included in our Prospectus. This information should be considered carefully, together with other information in this report and other reports and materials we file with the SEC.
2021 Annual Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Unregistered Sales of Equity Securities
In connection with our initial public offering, (a) all of the membership interests in Solaris LLC held by the Existing Owners were converted into (i) a single class of units in Solaris LLC, referred to as “Solaris LLC Units,” representing in the aggregate 33,202,500 Solaris LLC Units and (ii) the right to receive the distributions of cash and shares of Class B common stock described in clauses (c) and (d) below, (b) Aris Water issued and contributed 33,202,500 shares of its Class B common stock and all of the net proceeds of the IPO to Solaris LLC in exchange for a number of Solaris LLC Units equal to the number of shares of Class A common stock issued in the IPO, (c) Solaris LLC used a portion of the proceeds from the initial public offering to distribute to the Existing Owners, on a pro rata basis, an aggregate amount of cash equal to 14,705,882 times the initial public offering price per share of Class A common stock after underwriting discounts and commissions and (d) Aris distributed to Solaris LLC one share of Class B common stock for each Solaris LLC Unit such Existing Owner holds.
These securities were offered and sold by us in reliance upon the exemption from the registration requirements provided by Section 4(a)(2) of the Securities Act.
Use of Proceeds
On October 21, 2021 our registration statement on Form S‑1 (SEC Registration No. 333-259740), as amended through the time of its effectiveness, that Aris Water filed with the SEC relating to the initial public offering was declared effective. The offering did not terminate before all of the shares in the initial public offering that were registered in the registration statement were sold. On October 26, 2021, Aris Water closed the initial public offering of 20,297,500 shares of Class A common stock, at a price to the public of $13.00 per share ($12.22 per share net of underwriting discounts and commissions), which included 2,647,500 shares of Class A common stock issued and sold pursuant to the underwriters’ exercise of their option in full to purchase additional shares of Class A common stock, resulting in gross proceeds of $263.9 million, or net proceeds of $246.1 million after deducting underwriting discounts and commissions.
Aris Water contributed all of the net proceeds of the IPO to Solaris LLC in exchange for Solaris LLC Units. Solaris LLC distributed approximately $213.3 million of the net proceeds to the Existing Owners as part of the corporate reorganization undertaken in connection with the initial public offering. Solaris LLC retained the remaining $32.8 million of the net proceeds for general corporate purposes, which may include capital expenditures, working capital and potential acquisitions and strategic transactions.
Issuer Purchases of Equity Securities
Neither we nor any affiliated purchaser repurchased any of our equity securities during the period covered by this Quarterly Report on Form 10‑QNone.
(b)None.
(c)None. Item 3. Defaults upon Senior Securities None. Item 4. Mine Safety Disclosures None.Not Applicable.
Item 5. Other Information None.
Not Applicable.
Item 6. Exhibits The exhibits listed are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q. 3.1 | | Amended and Restated Certificate of Incorporation of Aris Water Solutions, Inc. (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-8 filed on October 26, 2021, File No. 333-260499). | | | | 3.2 | | Amended and Restated Bylaws of Aris Water Solutions, Inc. (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-8 filed on October 26, 2021, File No. 333-260499). | | | | 31.1* | | Certification of Amanda M. Brock pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | | | 31.2* | | Certification of Stephan E. Tompsett pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | | | 32.1** | | Certification of Amanda M. Brock pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | | | 32.2** | | Certification of Stephan E. Tompsett pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | | | 101.INS* | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | | | | 101.SCH* | | Inline XBRL Schema Document. | | | | 101.CAL* | | Inline XBRL Calculation Linkbase Document. | | | | 101.DEF* | | Inline XBRL Definition Linkbase Document. | | | | 101.LAB* | | Inline XBRL Label Linkbase Document. | | | | 101.PRE* | | Inline XBRL Presentation Linkbase Document. | | | | 104* | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
3.1Amended and Restated Certificate of Incorporation of Aris Water Solutions, Inc. (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-8 filed on October 26, 2021, File No. 333-260499).
3.2Amended and Restated Bylaws of Aris Water Solutions, Inc. (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-8 filed on October 26, 2021, File No. 333-260499).
4.1Registration Rights Agreement, dated October 26, 2021, by and among Aris Water Solutions, Inc., Solaris Midstream Holdings, LLC and the other parties thereto (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on October 27, 2021, File No. 333-260499).
10.1Fourth Amended and Restated Limited Liability Company Agreement of Solaris Midstream Holdings, LLC (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 27, 2021, File No. 333-260499).
10.2Indemnification Agreement (William A. Zartler) (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on October 27, 2021, File No. 333-260499).
10.3Indemnification Agreement (Amanda M. Brock) (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on October 27, 2021, File No. 333-260499).
10.4Indemnification Agreement (Brenda R. Schroer) (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on October 27, 2021, File No. 333-260499).
10.5Indemnification Agreement (Dustin A. Hatley) (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on October 27, 2021, File No. 333-260499).
10.6Indemnification Agreement (Joseph Colonnetta) (incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on October 27, 2021, File No. 333-260499).
10.7Indemnification Agreement (Debra Coy) (incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on October 27, 2021, File No. 333-260499).
10.8Indemnification Agreement (W. Howard Keenan, Jr.) (incorporated by reference to Exhibit 10.8 to the Company’s Current Report on Form 8-K filed on October 27, 2021, File No. 333-260499).
10.9Indemnification Agreement (Andrew O’Brien) (incorporated by reference to Exhibit 10.9 to the Company’s Current Report on Form 8-K filed on October 27, 2021, File No. 333-260499).
10.10Indemnification Agreement (Donald C. Templin) (incorporated by reference to Exhibit 10.10 to the Company’s Current Report on Form 8-K filed on October 27, 2021, File No. 333-260499).
10.11Indemnification Agreement (M. Max Yzaguirre) (incorporated by reference to Exhibit 10.11 to the Company’s Current Report on Form 8-K filed on October 27, 2021, File No. 333-260499).
10.12Director Nomination Agreement, dated October 26, 2021, by and among Aris Water Solutions, Inc., COG Operating LLC and Yorktown Energy Partners XI, L.P (incorporated by reference to Exhibit 10.12 to the Company’s Current Report on Form 8-K filed on October 27, 2021, File No. 333-260499).
10.13Tax Receivable Agreement, dated October 26, 2021, by and among Aris Water Solutions, Inc. and the other parties thereto (incorporated by reference to Exhibit 10.13 to the Company’s Current Report on Form 8-K filed on October 27, 2021, File No. 333-260499).
10.14†Aris Water Solutions, Inc. 2021 Equity Incentive Plan (incorporated by reference to Exhibit 99.1 to the Company’s Registration Statement on Form S-8 filed on October 26, 2021, File No. 333-260499).
31.1*Certification of Amanda M. Brock pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*Certification of Brenda R. Schroer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**Certification of Amanda M. Brock pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**Certification of Brenda R. Schroer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH*Inline XBRL Schema Document.
101.CAL*Inline XBRL Calculation Linkbase Document.
101.DEF*Inline XBRL Definition Linkbase Document.
101.LAB*Inline XBRL Label Linkbase Document.
101.PRE*Inline XBRL Presentation Linkbase Document.
104*Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
* Filed herewith.
**Furnished herewith and not deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended. †Management contract or compensatory plan or arrangement. * Filed herewith.
** Furnished herewith and not deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.
Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | Aris Water Solutions, Inc. | | | | | By: | | | | | | | President and Chief Executive Officer | | | | | | /s/ Brenda R. SchroerStephan E. Tompsett | | | Brenda Stephan E. Tompsett
R. Schroer | | | | | | | | | | | | | | | Chief Accounting Officer |
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